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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20192020
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-35522
BANC OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
04-3639825
(IRS Employer Identification No.)
3 MacArthur Place,, Santa Ana,, California
(Address of principal executive offices)
92707
(Zip Code)
(855) (855) 361-2262
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 (Section 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 ☒ No ☐
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 | | ☒ | | Accelerated filer | | ☐ |
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Large acceleratedNon-accelerated filer | | ☒☐ | | Accelerated filerSmaller reporting company | | ☐ |
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Non-accelerated filer | | ☐
| | Smaller reporting company | | ☐ |
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| | | | 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 Exchange Act.) Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | BANC | | New York Stock Exchange |
Depositary Shares each representing a 1/40th interest in a share of 7.375% Non-Cumulative Perpetual Preferred Stock, Series D | | BANC PRD | | New York Stock Exchange |
Depositary Shares each representing a 1/40th interest in a share of 7.00% Non-Cumulative Perpetual Preferred Stock, Series E | | BANC PRE | | New York Stock Exchange |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
As of August 5, 2019,3, 2020, the registrant had outstanding 50,402,77149,754,330 shares of voting common stock and 477,321 shares of Class B non-voting common stock.
BANC OF CALIFORNIA, INC.
FORM 10-Q QUARTERLY REPORT
June 30, 20192020
Table of Contents
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Forward-Looking Statements
When used in this report and in public stockholder communications, in other documents of Banc of California, Inc. (the Company, we, us and our) filed with or furnished to the Securities and Exchange Commission (the SEC), or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” “guidance” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenue, expense or earnings projections, or other financial items of Banc of California Inc. and its affiliates (the "Company", "we", "us" or "our")., as well as the continuing effects of the COVID-19 pandemic on the Company’s business, operations, financial performance and prospects. 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:
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i. | an ongoing investigation by the SEC as well as any related litigation or other 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; |
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ii. | the costs and effects of litigation generally, including legal fees and other expenses, settlements and judgments; |
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iii. | the risk that our performance may be adversely affected by the CEO transition we have recently undergone; |
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iv. | 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; |
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v. | 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; |
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vi. | i.the costs and effects of litigation, including legal fees and other expenses, settlements and judgments; ii.the effect of the novel coronavirus (COVID-19) pandemic and steps taken by governmental and other authorities to contain, mitigate, and combat the pandemic on our business, operations, loan portfolio, financial performance, and prospects; iii.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; iv.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; v.our ability to obtain regulatory approvals or non-objection to take various capital actions, including the payment of dividends by us or our bank subsidiary or repurchases of our common or preferred stock; vi.risks that any merger and acquisition transactions of the Company may disrupt current plans and operations and lead to difficulties in customer and employee retention, risks that the costs, fees, expenses and charges related to these transactions could be significantly higher than anticipated and risks that the expected revenues, cost savings, synergies and other benefits of these transactions might not be realized to the extent anticipated, within the anticipated timetables, or at all; |
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vii. | 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 and lease delinquencies, losses and nonperforming assets in our loan and lease 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 and lease loss reserves; |
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viii. | 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 loan losses; |
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ix. | the quality and composition of our securities portfolio; |
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x. | changes in general economic conditions, either nationally or in our market areas, or changes in financial markets; |
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xi. | 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; |
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xii. | 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; |
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xiii. | our ability to develop and maintain a strong core deposit base or other low cost funding sources necessary to fund our activities; |
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xiv. | 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; |
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xv. | 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; |
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xvi. | our ability to control operating costs and expenses; |
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xvii. | staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; |
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xviii. | the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses; |
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xix. | errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in valuation; |
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xx. | the network and computer systems on which we depend could fail or experience a security breach; |
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xxi. | our ability to attract and retain key members of our senior management team; |
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xxii. | increased competitive pressures among financial services companies; |
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xxiii. | changes in consumer spending, borrowing and saving habits; |
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xxiv. | the effects of severe weather, natural disasters, acts of war or terrorism and other external events on our business; |
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xxv. | the ability of key third-party providers to perform their obligations to us; |
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xxvi. | changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board or their application to our business, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; |
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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 |
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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” in our Annual Report on Form 10-K for the year ended December 31, 2018 and under “Part II. Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. |
The Company undertakesmay disrupt current plans and operations and lead to difficulties in customer and employee retention, risks that the costs, fees, expenses and charges related to these transactions could be significantly higher than anticipated and risks that the expected revenues, cost savings, synergies, and other benefits of these transactions might not be realized to the extent anticipated, within the anticipated timetables, or at all;
vii.fluctuations in the demand for loans and fluctuations in commercial and residential real estate values in our market area;
viii.the credit risks of lending activities, which may be affected by deterioration in real estate markets, 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 may lead to increased loan delinquencies, losses, and non-performing assets in our loan portfolio which may result in our allowance for credit losses not being adequate and require us to materially increase our credit loss reserves;
ix.the Financial Accounting Standards Board's Current Expected Credit Loss accounting standard, which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and provide for the expected credit losses as allowances for loan losses;
x.the quality and composition of our securities portfolio, particularly the credit risks within our collateralized loan obligation investment portfolio and other asset classes;
xi.errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in valuation;
xii.changes in general economic conditions, either nationally or in our market areas, or changes in financial markets;
xiii.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;
xiv.our ability to develop and maintain a strong core deposit base or other low cost funding sources necessary to fund our activities;
xv.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 credit losses, write-down asset values, 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;
xvi.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;
xvii.our ability to control operating costs and expenses;
xviii.staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
xix.the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses;
xx.failures or security breaches with respect to the network and computer systems on which we depend;
xxi.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.the effects of severe weather, natural disasters, pandemics, acts of war or terrorism and other external events on our business;
xxv.the ability of key third-party providers to perform their obligations to us;
xxvi.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” in our Annual Report on Form 10-K for the year ended December 31, 2019 and under Part II. Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Further, statements about the continuing effects of the COVID-19 pandemic on our business, operations, financial performance, and prospects may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable, and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our clients, third parties, and us.
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.
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share and per share data)
(Unaudited)
| | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
ASSETS | | | | ASSETS | | | |
Cash and due from banks | $ | 26,283 |
| | $ | 21,875 |
| Cash and due from banks | $ | 23,394 | | | $ | 28,890 | |
Interest-earning deposits in financial institutions | 287,567 |
| | 369,717 |
| Interest-earning deposits in financial institutions | 397,246 | | | 344,582 | |
Total cash and cash equivalents | 313,850 |
| | 391,592 |
| Total cash and cash equivalents | 420,640 | | | 373,472 | |
| Securities available-for-sale, at fair value | 1,167,687 |
| | 1,992,500 |
| Securities available-for-sale, at fair value | 1,176,029 | | | 912,580 | |
Loans held-for-sale, carried at fair value | 23,794 |
| | 7,690 |
| Loans held-for-sale, carried at fair value | 19,768 | | | 22,642 | |
Loans held-for-sale, carried at lower of cost or fair value | 573,926 |
| | 426 |
| |
| Loans receivable | 6,719,570 |
| | 7,700,873 |
| Loans receivable | 5,627,696 | | | 5,951,885 | |
Allowance for loan losses | (59,523 | ) | | (62,192 | ) | |
Allowance for credit losses - loans | | Allowance for credit losses - loans | (90,370) | | | (57,649) | |
Loans receivable, net | 6,660,047 |
| | 7,638,681 |
| Loans receivable, net | 5,537,326 | | | 5,894,236 | |
Federal Home Loan Bank and other bank stock, at cost | 76,373 |
| | 68,094 |
| Federal Home Loan Bank and other bank stock, at cost | 46,585 | | | 59,420 | |
Premises, equipment, and capital leases, net | 129,227 |
| | 129,394 |
| |
| Premises, equipment, net | | Premises, equipment, net | 125,247 | | | 128,021 | |
Bank owned life insurance | 108,132 |
| | 107,027 |
| Bank owned life insurance | 110,487 | | | 109,819 | |
Operating lease right of use assets | 24,118 |
| | — |
| |
Goodwill | 37,144 |
| | 37,144 |
| |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 19,408 | | | 22,540 | |
Investments in alternative energy partnerships, net | 26,633 |
| | 28,988 |
| Investments in alternative energy partnerships, net | 26,967 | | | 29,300 | |
Deferred income taxes, net | 42,798 |
| | 49,404 |
| Deferred income taxes, net | 48,288 | | | 44,906 | |
Income tax receivable | 2,547 |
| | 2,695 |
| Income tax receivable | 13,094 | | | 4,233 | |
Goodwill | | Goodwill | 37,144 | | | 37,144 | |
Other intangible assets, net | 5,105 |
| | 6,346 |
| Other intangible assets, net | 3,292 | | | 4,151 | |
| Other assets | 168,550 |
| | 150,596 |
| Other assets | 185,863 | | | 185,946 | |
Assets of discontinued operations | — |
| | 19,490 |
| |
Total assets | $ | 9,359,931 |
| | $ | 10,630,067 |
| Total assets | $ | 7,770,138 | | | $ | 7,828,410 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Noninterest-bearing deposits | $ | 993,745 |
| | $ | 1,023,360 |
| Noninterest-bearing deposits | $ | 1,391,504 | | | $ | 1,088,516 | |
Interest-bearing deposits | 5,298,545 |
| | 6,893,284 |
| Interest-bearing deposits | 4,645,961 | | | 4,338,651 | |
Total deposits | 6,292,290 |
| | 7,916,644 |
| Total deposits | 6,037,465 | | | 5,427,167 | |
Advances from Federal Home Loan Bank | 1,825,000 |
| | 1,520,000 |
| |
Long term debt, net | 173,257 |
| | 173,174 |
| |
Federal Home Loan Bank advances, net | | Federal Home Loan Bank advances, net | 617,170 | | | 1,195,000 | |
| Long-term debt, net | | Long-term debt, net | 173,537 | | | 173,421 | |
Reserve for loss on repurchased loans | | Reserve for loss on repurchased loans | 5,567 | | | 6,201 | |
| Operating lease liabilities | 25,457 |
| | — |
| Operating lease liabilities | 20,531 | | | 23,692 | |
| Accrued expenses and other liabilities | 80,383 |
| | 74,715 |
| Accrued expenses and other liabilities | 68,909 | | | 95,684 | |
Total liabilities | 8,396,387 |
| | 9,684,533 |
| Total liabilities | 6,923,179 | | | 6,921,165 | |
Commitments and contingent liabilities |
| |
| Commitments and contingent liabilities | |
Preferred stock | 231,128 |
| | 231,128 |
| Preferred stock | 185,037 | | | 189,825 | |
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 51,981,149 shares issued and 50,397,769 shares outstanding at June 30, 2019; 51,755,398 shares issued and 50,172,018 shares outstanding at December 31, 2018 | 520 |
| | 518 |
| |
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 June 30, 2019 and 477,321 shares issued and outstanding at December 31, 2018 | 5 |
| | 5 |
| |
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 52,161,922 shares issued and 49,750,958 shares outstanding at June 30, 2020; 51,997,061 shares issued and 50,413,681 shares outstanding at December 31, 2019 | | Common stock, $0.01 par value per share, 446,863,844 shares authorized; 52,161,922 shares issued and 49,750,958 shares outstanding at June 30, 2020; 51,997,061 shares issued and 50,413,681 shares outstanding at December 31, 2019 | 522 | | | 520 | |
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 June 30, 2020 and at December 31, 2019 | | 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 June 30, 2020 and at December 31, 2019 | 5 | | | 5 | |
Additional paid-in capital | 627,306 |
| | 625,834 |
| Additional paid-in capital | 632,117 | | | 629,848 | |
Retained earnings | 146,039 |
| | 140,952 |
| Retained earnings | 85,670 | | | 127,733 | |
Treasury stock, at cost (1,583,380 shares at June 30, 2019 and December 31, 2018) | (28,786 | ) | | (28,786 | ) | |
Treasury stock, at cost (2,410,964 and 1,583,380 shares at June 30, 2020 and December 31, 2019) | | Treasury stock, at cost (2,410,964 and 1,583,380 shares at June 30, 2020 and December 31, 2019) | (40,827) | | | (28,786) | |
Accumulated other comprehensive loss, net | (12,668 | ) | | (24,117 | ) | Accumulated other comprehensive loss, net | (15,565) | | | (11,900) | |
Total stockholders’ equity | 963,544 |
| | 945,534 |
| Total stockholders’ equity | 846,959 | | | 907,245 | |
Total liabilities and stockholders’ equity | $ | 9,359,931 |
| | $ | 10,630,067 |
| Total liabilities and stockholders’ equity | $ | 7,770,138 | | | $ | 7,828,410 | |
See Accompanying Notesaccompanying notes to Consolidated Financial Statements (Unaudited)consolidated financial statements (unaudited)
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
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| Three Months Ended | | Six Months Ended June 30, |
| June 30, 2019 | | March 31, 2019 | | June 30, 2018 | | 2019 | | 2018 |
Interest and dividend income | | | | | | | | | |
Loans, including fees | $ | 89,159 |
| | $ | 90,558 |
| | $ | 81,307 |
| | $ | 179,717 |
| | $ | 156,219 |
|
Securities | 12,457 |
| | 17,841 |
| | 21,455 |
| | 30,298 |
| | 43,086 |
|
Other interest-earning assets | 2,424 |
| | 2,313 |
| | 2,423 |
| | 4,737 |
| | 4,587 |
|
Total interest and dividend income | 104,040 |
| | 110,712 |
| | 105,185 |
| | 214,752 |
| | 203,892 |
|
Interest expense | | | | | | | | | |
Deposits | 28,598 |
| | 31,443 |
| | 20,315 |
| | 60,041 |
| | 37,110 |
|
Federal Home Loan Bank advances | 8,289 |
| | 9,081 |
| | 9,539 |
| | 17,370 |
| | 16,931 |
|
Securities sold under repurchase agreements | 16 |
| | 18 |
| | 211 |
| | 34 |
| | 961 |
|
Long term debt and other interest-bearing liabilities | 2,357 |
| | 2,362 |
| | 2,356 |
| | 4,719 |
| | 4,688 |
|
Total interest expense | 39,260 |
| | 42,904 |
| | 32,421 |
| | 82,164 |
| | 59,690 |
|
Net interest income | 64,780 |
| | 67,808 |
| | 72,764 |
| | 132,588 |
| | 144,202 |
|
(Reversal of) provision for loan losses | (1,987 | ) | | 2,512 |
| | 2,653 |
| | 525 |
| | 22,152 |
|
Net interest income after provision for loan losses | 66,767 |
| | 65,296 |
| | 70,111 |
| | 132,063 |
| | 122,050 |
|
Noninterest income | | | | | | | | | |
Customer service fees | 1,434 |
| | 1,515 |
| | 1,491 |
| | 2,949 |
| | 3,083 |
|
Loan servicing income | 121 |
| | 118 |
| | 948 |
| | 239 |
| | 3,259 |
|
Income from bank owned life insurance | 580 |
| | 525 |
| | 533 |
| | 1,105 |
| | 1,066 |
|
Net gain on sale of securities available-for-sale | — |
| | 208 |
| | 278 |
| | 208 |
| | 5,519 |
|
Net gain on sale of loans | 2,826 |
| | 1,553 |
| | 821 |
| | 4,379 |
| | 780 |
|
Net loss on sale of mortgage servicing rights | — |
| | — |
| | (155 | ) | | — |
| | (2,450 | ) |
Other (loss) income | (7,251 | ) | | 2,376 |
| | 4,145 |
| | (4,875 | ) | | 5,386 |
|
Total noninterest (loss) income | (2,290 | ) | | 6,295 |
| | 8,061 |
| | 4,005 |
| | 16,643 |
|
Noninterest expense | | | | | | | | | |
Salaries and employee benefits | 27,506 |
| | 28,439 |
| | 29,440 |
| | 55,945 |
| | 60,555 |
|
Occupancy and equipment | 7,955 |
| | 7,686 |
| | 7,883 |
| | 15,641 |
| | 15,570 |
|
Professional fees (reimbursement) | (2,903 | ) | | 11,041 |
| | 6,303 |
| | 8,138 |
| | 15,480 |
|
Outside service fees | 489 |
| | 403 |
| | 413 |
| | 892 |
| | 2,959 |
|
Data processing | 1,672 |
| | 1,496 |
| | 1,678 |
| | 3,168 |
| | 3,334 |
|
Advertising and promotion | 2,048 |
| | 2,057 |
| | 2,864 |
| | 4,105 |
| | 6,141 |
|
Regulatory assessments | 2,136 |
| | 2,482 |
| | 2,196 |
| | 4,618 |
| | 4,288 |
|
(Gain) loss on investments in alternative energy partnerships | (355 | ) | | 1,950 |
| | 1,808 |
| | 1,595 |
| | 1,774 |
|
Reversal of provision for loan repurchases | (61 | ) | | (116 | ) | | (218 | ) | | (177 | ) | | (2,006 | ) |
Amortization of intangible assets | 621 |
| | 620 |
| | 827 |
| | 1,241 |
| | 1,670 |
|
Restructuring (reversal) expense | (158 | ) | | 2,795 |
| | 3,983 |
| | 2,637 |
| | 3,983 |
|
All other expense | 4,637 |
| | 2,982 |
| | 5,362 |
| | 7,619 |
| | 8,591 |
|
Total noninterest expense | 43,587 |
| | 61,835 |
| | 62,539 |
| | 105,422 |
| | 122,339 |
|
Income from continuing operations before income taxes | 20,890 |
| | 9,756 |
| | 15,633 |
| | 30,646 |
| | 16,354 |
|
Income tax expense (benefit) | 4,308 |
| | 2,719 |
| | 1,779 |
| | 7,027 |
| | (4,574 | ) |
Income from continuing operations | 16,582 |
| | 7,037 |
| | 13,854 |
| | 23,619 |
| | 20,928 |
|
Income from discontinued operations before income taxes (including net gain on disposal of $0, $0 and $272 for the three months ended June 30, 2019, March 31, 2019 and 2018, respectively, and $0 and $1,275 for the six months ended June 30, 2019 and 2018, respectively) | — |
| | — |
| | 1,281 |
| | — |
| | 3,325 |
|
Income tax expense | — |
| | — |
| | 355 |
| | — |
| | 915 |
|
Income from discontinued operations | — |
| | — |
| | 926 |
| | — |
| | 2,410 |
|
Net income | 16,582 |
| | 7,037 |
| | 14,780 |
| | 23,619 |
| | 23,338 |
|
Preferred stock dividends | 4,308 |
| | 4,308 |
| | 5,113 |
| | 8,616 |
| | 10,226 |
|
Income allocated to participating securities | 271 |
| | — |
| | 86 |
| | 153 |
| | — |
|
Participating securities dividends | 94 |
| | 202 |
| | 203 |
| | 295 |
| | 406 |
|
Net income available to common stockholders | $ | 11,909 |
| | $ | 2,527 |
| | $ | 9,378 |
| | $ | 14,555 |
| | $ | 12,706 |
|
Basic earnings per common share | | | | | | | | | |
Income from continuing operations | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.20 |
|
Income from discontinued operations | — |
| | — |
| | 0.02 |
| | — |
| | 0.05 |
|
Net income | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.19 |
| | $ | 0.29 |
| | $ | 0.25 |
|
Diluted earnings per common share | | | | | | | | | |
Income from continuing operations | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.16 |
| | $ | 0.29 |
| | $ | 0.20 |
|
Income from discontinued operations | — |
| | — |
| | 0.02 |
| | — |
| | 0.05 |
|
Net income | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.18 |
| | $ | 0.29 |
| | $ | 0.25 |
|
Basic earnings per class B common share | | | | | | | | | |
Income from continuing operations | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.20 |
|
Income from discontinued operations | — |
| | — |
| | 0.02 |
| | — |
| | 0.05 |
|
Net income | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.19 |
| | $ | 0.29 |
| | $ | 0.25 |
|
Diluted earnings per class B common share | | | | | | | | | |
Income from continuing operations | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.17 |
| | $ | 0.29 |
| | $ | 0.20 |
|
Income from discontinued operations | — |
| | — |
| | 0.02 |
| | — |
| | 0.05 |
|
Net income | $ | 0.23 |
| | $ | 0.05 |
| | $ | 0.19 |
| | $ | 0.29 |
| | $ | 0.25 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Six Months Ended June 30, | | |
| June 30, 2020 | | March 31, 2020 | | June 30, 2019 | | 2020 | | 2019 |
Interest and dividend income | | | | | | | | | |
Loans, including fees | $ | 63,642 | | | $ | 65,534 | | | $ | 89,159 | | | $ | 129,176 | | | $ | 179,717 | |
Securities | 7,816 | | | 7,820 | | | 12,457 | | | 15,636 | | | 30,298 | |
Other interest-earning assets | 1,239 | | | 1,360 | | | 2,424 | | | 2,599 | | | 4,737 | |
Total interest and dividend income | 72,697 | | | 74,714 | | | 104,040 | | | 147,411 | | | 214,752 | |
Interest expense | | | | | | | | | |
Deposits | 10,205 | | | 14,611 | | | 28,598 | | | 24,816 | | | 60,041 | |
Federal Home Loan Bank advances | 4,818 | | | 5,883 | | | 8,289 | | | 10,701 | | | 17,370 | |
Securities sold under repurchase agreements | 2 | | | — | | | 16 | | | 2 | | | 34 | |
Long-term debt and other interest-bearing liabilities | 2,357 | | | 2,359 | | | 2,357 | | | 4,716 | | | 4,719 | |
Total interest expense | 17,382 | | | 22,853 | | | 39,260 | | | 40,235 | | | 82,164 | |
Net interest income | 55,315 | | | 51,861 | | | 64,780 | | | 107,176 | | | 132,588 | |
Provision for (reversal of) credit losses | 11,826 | | | 15,761 | | | (1,900) | | | 27,587 | | | 198 | |
Net interest income after provision for (reversal of) credit losses | 43,489 | | | 36,100 | | | 66,680 | | | 79,589 | | | 132,390 | |
Noninterest income | | | | | | | | | |
Customer service fees | 1,224 | | | 1,096 | | | 1,434 | | | 2,320 | | | 2,949 | |
Loan servicing income | 95 | | | 75 | | | 121 | | | 170 | | | 239 | |
Income from bank owned life insurance | 591 | | | 578 | | | 580 | | | 1,169 | | | 1,105 | |
| | | | | | | | | |
Net gain on sale of securities available-for-sale | 2,011 | | | — | | | — | | | 2,011 | | | 208 | |
Fair value adjustment for loans held-for-sale | 25 | | | (1,586) | | | 59 | | | (1,561) | | | 60 | |
Net (loss) gain on sale of loans | — | | | (27) | | | 2,767 | | | (27) | | | 4,319 | |
| | | | | | | | | |
Other income (loss) | 1,582 | | | 1,925 | | | (7,251) | | | 3,507 | | | (4,875) | |
Total noninterest income (loss) | 5,528 | | | 2,061 | | | (2,290) | | | 7,589 | | | 4,005 | |
Noninterest expense | | | | | | | | | |
Salaries and employee benefits | 24,260 | | | 23,436 | | | 27,506 | | | 47,696 | | | 55,945 | |
Naming rights termination | 26,769 | | | — | | | — | | | 26,769 | | | — | |
Occupancy and equipment | 7,090 | | | 7,243 | | | 7,955 | | | 14,333 | | | 15,641 | |
Professional fees | 4,596 | | | 5,964 | | | (2,903) | | | 10,560 | | | 8,138 | |
| | | | | | | | | |
Data processing | 1,536 | | | 1,773 | | | 1,672 | | | 3,309 | | | 3,168 | |
Advertising and promotion | 1,157 | | | 1,756 | | | 2,048 | | | 2,913 | | | 4,105 | |
Regulatory assessments | 725 | | | 484 | | | 2,136 | | | 1,209 | | | 4,618 | |
(Gain) loss on investments in alternative energy partnerships | (167) | | | 1,905 | | | (355) | | | 1,738 | | | 1,595 | |
Reversal of provision for loan repurchases | (34) | | | (600) | | | (61) | | | (634) | | | (177) | |
Amortization of intangible assets | 430 | | | 429 | | | 621 | | | 859 | | | 1,241 | |
| | | | | | | | | |
Restructuring (reversal) expense | — | | | — | | | (158) | | | — | | | 2,637 | |
All other expense | 6,408 | | | 4,529 | | | 5,039 | | | 10,937 | | | 8,838 | |
Total noninterest expense | 72,770 | | | 46,919 | | | 43,500 | | | 119,689 | | | 105,749 | |
(Loss) income from operations before income taxes | (23,753) | | | (8,758) | | | 20,890 | | | (32,511) | | | 30,646 | |
Income tax (benefit) expense | (5,304) | | | (2,165) | | | 4,308 | | | (7,469) | | | 7,027 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net (loss) income | (18,449) | | | (6,593) | | | 16,582 | | | (25,042) | | | 23,619 | |
Preferred stock dividends | 3,442 | | | 3,533 | | | 4,308 | | | 6,975 | | | 8,616 | |
Income allocated to participating securities | — | | | — | | | 271 | | | — | | | 153 | |
Participating securities dividends | 94 | | | 94 | | | 94 | | | 188 | | | 295 | |
Impact of preferred stock redemption | (49) | | | (526) | | | — | | | (575) | | | — | |
Net (loss) income available to common stockholders | $ | (21,936) | | | $ | (9,694) | | | $ | 11,909 | | | $ | (31,630) | | | $ | 14,555 | |
(Loss) earnings per common share: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Basic | $ | (0.44) | | | $ | (0.19) | | | $ | 0.23 | | | $ | (0.63) | | | $ | 0.29 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Diluted | $ | (0.44) | | | $ | (0.19) | | | $ | 0.23 | | | $ | (0.63) | | | $ | 0.29 | |
(Loss) earnings per class B common share: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Basic | $ | (0.44) | | | $ | (0.19) | | | $ | 0.23 | | | $ | (0.63) | | | $ | 0.29 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Diluted | $ | (0.44) | | | $ | (0.19) | | | $ | 0.23 | | | $ | (0.63) | | | $ | 0.29 | |
See Accompanying Notesaccompanying notes to Consolidated Financial Statements (Unaudited)consolidated financial statements (unaudited)
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Six Months Ended June 30, | | |
| June 30, 2020 | | March 31, 2020 | | June 30, 2019 | | 2020 | | 2019 |
Net (loss) income | $ | (18,449) | | | $ | (6,593) | | | $ | 16,582 | | | $ | (25,042) | | | $ | 23,619 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Unrealized gain (loss) on available-for-sale securities: | | | | | | | | | |
Unrealized gain (loss) arising during the period | 40,002 | | | (42,248) | | | 5,423 | | | (2,246) | | | 11,596 | |
| | | | | | | | | |
| | | | | | | | | |
Reclassification adjustment for (gain) loss included in net (loss) income | (1,419) | | | — | | | — | | | (1,419) | | | (147) | |
Total change in unrealized gain (loss) on available-for-sale securities | 38,583 | | | (42,248) | | | 5,423 | | | (3,665) | | | 11,449 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total other comprehensive income (loss) | 38,583 | | | (42,248) | | | 5,423 | | | (3,665) | | | 11,449 | |
Comprehensive income (loss) | $ | 20,134 | | | $ | (48,841) | | | $ | 22,005 | | | $ | (28,707) | | | $ | 35,068 | |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended June 30, |
| June 30, 2019 | | March 31, 2019 | | June 30, 2018 | | 2019 | | 2018 |
Net income | $ | 16,582 |
| | $ | 7,037 |
| | $ | 14,780 |
| | $ | 23,619 |
| | $ | 23,338 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Unrealized gain (loss) on available-for-sale securities: | | | | | | | | | |
Unrealized gain (loss) arising during the period | 5,423 |
| | 6,173 |
| | (7,631 | ) | | 11,596 |
| | (21,192 | ) |
Reclassification adjustment for gain included in net income | — |
| | (147 | ) | | (197 | ) | | (147 | ) | | (3,901 | ) |
Total change in unrealized gain (loss) on available-for-sale securities | 5,423 |
| | 6,026 |
| | (7,828 | ) | | 11,449 |
| | (25,093 | ) |
Total other comprehensive income (loss) | 5,423 |
| | 6,026 |
| | (7,828 | ) | | 11,449 |
| | (25,093 | ) |
Comprehensive income (loss) | $ | 22,005 |
| | $ | 13,063 |
| | $ | 6,952 |
| | $ | 35,068 |
| | $ | (1,755 | ) |
See Accompanying Notesaccompanying notes to Consolidated Financial Statements (Unaudited)consolidated financial statements (unaudited)
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | | Voting | | Class B Non-Voting | | | | | | | | | | |
Three Months Ended June 30, 2020 | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | $ | 187,687 | | | $ | 520 | | | $ | 5 | | | $ | 631,125 | | | $ | 110,640 | | | $ | (40,827) | | | $ | (54,148) | | | $ | 835,002 | |
| | | | | | | | | | | | | | | |
Comprehensive loss: | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | (18,449) | | | — | | | — | | | (18,449) | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | — | | | — | | | 38,583 | | | 38,583 | |
Issuance of common stock | — | | | 2 | | | — | | | (2) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Redemption of preferred stock | (2,650) | | | — | | | — | | | — | | | 49 | | | — | | | — | | | (2,601) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share-based compensation expense | — | | | — | | | — | | | 1,470 | | | — | | | — | | | — | | | 1,470 | |
| | | | | | | | | | | | | | | |
Restricted stock surrendered due to employee tax liability | — | | | — | | | — | | | (476) | | | — | | | — | | | — | | | (476) | |
| | | | | | | | | | | | | | | |
Shares purchased under the Dividend Reinvestment Plan | — | | | — | | | — | | | — | | | (28) | | | — | | | — | | | (28) | |
Stock appreciation right dividend equivalents | — | | | — | | | — | | | — | | | (94) | | | — | | | — | | | (94) | |
Dividends declared ($0.06 per common share) | — | | | — | | | — | | | — | | | (3,006) | | | — | | | — | | | (3,006) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | (3,442) | | | — | | | — | | | (3,442) | |
Balance at June 30, 2020 | $ | 185,037 | | | $ | 522 | | | $ | 5 | | | $ | 632,117 | | | $ | 85,670 | | | $ | (40,827) | | | $ | (15,565) | | | $ | 846,959 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | | | | | | | | | | | | | | | |
Balance at March 31, 2019 | $ | 231,128 | | | $ | 518 | | | $ | 5 | | | $ | 626,608 | | | $ | 136,943 | | | $ | (28,786) | | | $ | (18,091) | | | $ | 948,325 | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 16,582 | | | — | | | — | | | 16,582 | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | — | | | — | | | 5,423 | | | 5,423 | |
Issuance of common stock | — | | | 2 | | | — | | | (2) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share-based compensation expense | — | | | — | | | — | | | 1,497 | | | — | | | — | | | — | | | 1,497 | |
Restricted stock surrendered due to employee tax liability | — | | | — | | | — | | | (797) | | | — | | | — | | | — | | | (797) | |
| | | | | | | | | | | | | | | |
Shares purchased under the Dividend Reinvestment Plan | — | | | — | | | — | | | — | | | (26) | | | — | | | — | | | (26) | |
Stock appreciation right dividend equivalents | — | | | — | | | — | | | — | | | (94) | | | — | | | — | | | (94) | |
Dividends declared ($0.06 per common share) | — | | | — | | | — | | | — | | | (3,058) | | | — | | | — | | | (3,058) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | (4,308) | | | — | | | — | | | (4,308) | |
Balance at June 30, 2019 | $ | 231,128 | | | $ | 520 | | | $ | 5 | | | $ | 627,306 | | | $ | 146,039 | | | $ | (28,786) | | | $ | (12,668) | | | $ | 963,544 | |
Six Months Ended June 30, 2020 | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | $ | 189,825 | | | $ | 520 | | | $ | 5 | | | $ | 629,848 | | | $ | 127,733 | | | $ | (28,786) | | | $ | (11,900) | | | $ | 907,245 | |
Impact of adoption of ASU No. 2016-13 | — | | | — | | | — | | | — | | | (4,503) | | | — | | | — | | | (4,503) | |
Comprehensive loss: | | | | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | (25,042) | | | — | | | — | | | (25,042) | |
Other comprehensive loss, net | — | | | — | | | — | | | — | | | — | | | — | | | (3,665) | | | (3,665) | |
Issuance of common stock | — | | | 2 | | | — | | | (2) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Redemption of preferred stock | (4,788) | | | — | | | — | | | — | | | 575 | | | — | | | — | | | (4,213) | |
| | | | | | | | | | | | | | | |
Purchase of 827,584 shares of treasury stock | — | | | — | | | — | | | — | | | — | | | (12,041) | | | — | | | (12,041) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share-based compensation expense | — | | | — | | | — | | | 3,046 | | | — | | | — | | | — | | | 3,046 | |
| | | | | | | | | | | | | | | |
Restricted stock surrendered due to employee tax liability | — | | | — | | | — | | | (775) | | | — | | | — | | | — | | | (775) | |
| | | | | | | | | | | | | | | |
Shares purchased under the Dividend Reinvestment Plan | — | | | — | | | — | | | — | | | (47) | | | — | | | — | | | (47) | |
Stock appreciation right dividend equivalents | — | | | — | | | — | | | — | | | (188) | | | — | | | — | | | (188) | |
Dividends declared ($0.12 per common share) | — | | | — | | | — | | | — | | | (5,883) | | | — | | | — | | | (5,883) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | (6,975) | | | — | | | — | | | (6,975) | |
Balance at June 30, 2020 | $ | 185,037 | | | $ | 522 | | | $ | 5 | | | $ | 632,117 | | | $ | 85,670 | | | $ | (40,827) | | | $ | (15,565) | | | $ | 846,959 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | $ | 231,128 | | | $ | 518 | | | $ | 5 | | | $ | 625,834 | | | $ | 140,952 | | | $ | (28,786) | | | $ | (24,117) | | | $ | 945,534 | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 23,619 | | | — | | | — | | | 23,619 | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | — | | | — | | | 11,449 | | | 11,449 | |
Issuance of common stock | — | | | 2 | | | — | | | (2) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Share-based compensation expense | — | | | — | | | — | | | 2,350 | | | — | | | — | | | — | | | 2,350 | |
Restricted stock surrendered due to employee tax liability | — | | | — | | | — | | | (876) | | | — | | | — | | | — | | | (876) | |
| | | | | | | | | | | | | | | |
Shares purchased under the Dividend Reinvestment Plan | — | | | — | | | — | | | — | | | (76) | | | — | | | — | | | (76) | |
Stock appreciation right dividend equivalents | — | | | — | | | — | | | — | | | (296) | | | — | | | — | | | (296) | |
Dividends declared ($0.19 per common share) | — | | | — | | | — | | | — | | | (9,544) | | | — | | | — | | | (9,544) | |
Preferred stock dividends | — | | | — | | | — | | | — | | | (8,616) | | | — | | | — | | | (8,616) | |
Balance at June 30, 2019 | $ | 231,128 | | | $ | 520 | | | $ | 5 | | | $ | 627,306 | | | $ | 146,039 | | | $ | (28,786) | | | $ | (12,668) | | | $ | 963,544 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| | Voting | | Class B Non-Voting | | | | | |
Balance at December 31, 2017 | $ | 269,071 |
| | $ | 517 |
| | $ | 5 |
| | $ | 621,435 |
| | $ | 144,839 |
| | $ | (28,786 | ) | | $ | 5,227 |
| | $ | 1,012,308 |
|
Reclassification of stranded tax effects to retained earnings | — |
| | — |
| | — |
| | — |
| | (496 | ) | | — |
| | 496 |
| | — |
|
Adjusted Balance at December 31, 2017 | 269,071 |
| | 517 |
| | 5 |
| | 621,435 |
| | 144,343 |
| | (28,786 | ) | | 5,723 |
| | 1,012,308 |
|
Comprehensive income (loss): | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | 8,558 |
| | — |
| | — |
| | 8,558 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (17,265 | ) | | (17,265 | ) |
Share-based compensation expense | — |
| | — |
| | — |
| | 2,087 |
| | — |
| | — |
| | — |
| | 2,087 |
|
Restricted stock surrendered due to employee tax liability | — |
| | — |
| | — |
| | (97 | ) | | — |
| | — |
| | — |
| | (97 | ) |
Shares purchased under the Dividend Reinvestment Plan | — |
| | — |
| | — |
| | 58 |
| | (74 | ) | | — |
| | — |
| | (16 | ) |
Stock appreciation right dividend equivalents | — |
| | — |
| | — |
| | — |
| | (203 | ) | | — |
| | — |
| | (203 | ) |
Dividends declared ($0.13 per common share) | — |
| | — |
| | — |
| | — |
| | (6,503 | ) | | — |
| | — |
| | (6,503 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (5,113 | ) | | — |
| | — |
| | (5,113 | ) |
Balance at March 31, 2018 | $ | 269,071 |
| | $ | 517 |
| | $ | 5 |
| | $ | 623,483 |
| | $ | 141,008 |
| | $ | (28,786 | ) | | $ | (11,542 | ) | | $ | 993,756 |
|
| | | | | | | | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | 14,780 |
| | — |
| | — |
| | 14,780 |
|
Other comprehensive loss, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,828 | ) | | (7,828 | ) |
Issuance of common stock | — |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 1,788 |
| | — |
| | — |
| | — |
| | 1,788 |
|
Restricted stock surrendered due to employee tax liability | — |
| | (1 | ) | | — |
| | (1,973 | ) | | — |
| | — |
| | — |
| | (1,974 | ) |
Shares purchased under the Dividend Reinvestment Plan | — |
| | — |
| | — |
| | 74 |
| | (68 | ) | | — |
| | — |
| | 6 |
|
Stock appreciation right dividend equivalents | — |
| | — |
| | — |
| | — |
| | (203 | ) | | — |
| | — |
| | (203 | ) |
Dividends declared ($0.13 per common share) | — |
| | — |
| | — |
| | — |
| | (6,524 | ) | | — |
| | — |
| | (6,524 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (5,113 | ) | | — |
| | — |
| | (5,113 | ) |
Balance at June 30, 2018 | $ | 269,071 |
| | $ | 517 |
| | $ | 4 |
| | $ | 623,372 |
| | $ | 143,880 |
| | $ | (28,786 | ) | | $ | (19,370 | ) | — |
| $ | 988,688 |
|
| | | | | | | | | | | | | | | |
Balance at December 31, 2018 | $ | 231,128 |
| | $ | 518 |
| | $ | 5 |
| | $ | 625,834 |
| | $ | 140,952 |
| | $ | (28,786 | ) | | $ | (24,117 | ) | | $ | 945,534 |
|
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | 7,037 |
| | — |
| | — |
| | 7,037 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,026 |
| | 6,026 |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 853 |
| | — |
| | — |
| | — |
| | 853 |
|
Restricted stock surrendered due to employee tax liability | — |
| | — |
| | — |
| | (79 | ) | | — |
| | — |
| | — |
| | (79 | ) |
Shares purchased under the Dividend Reinvestment Plan | — |
| | — |
| | — |
| | — |
| | (50 | ) | | — |
| | — |
| | (50 | ) |
Stock appreciation right dividend equivalents | — |
| | — |
| | — |
| | — |
| | (202 | ) | | — |
| | — |
| | (202 | ) |
Dividends declared ($0.13 per common share) | — |
| | — |
| | — |
| | — |
| | (6,486 | ) | | — |
| | — |
| | (6,486 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (4,308 | ) | | — |
| | — |
| | (4,308 | ) |
Balance at March 31, 2019 | $ | 231,128 |
| | $ | 518 |
| | $ | 5 |
| | $ | 626,608 |
| | $ | 136,943 |
| | $ | (28,786 | ) | | $ | (18,091 | ) | | $ | 948,325 |
|
| | | | | | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | 16,582 |
| | — |
| | — |
| | 16,582 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,423 |
| | 5,423 |
|
Issuance of common stock | — |
| | 2 |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Share-based compensation expense | — |
| | — |
| | — |
| | 1,497 |
| | — |
| | — |
| | — |
| | 1,497 |
|
Restricted stock surrendered due to employee tax liability | — |
| | — |
| | — |
| | (797 | ) | | — |
| | — |
| | — |
| | (797 | ) |
Shares purchased under the Dividend Reinvestment Plan | — |
| | — |
| | — |
| | — |
| | (26 | ) | | — |
| | — |
| | (26 | ) |
Stock appreciation right dividend equivalents | — |
| | — |
| | — |
| | — |
| | (94 | ) | | — |
| | — |
| | (94 | ) |
Dividends declared ($0.06 per common share) | — |
| | — |
| | — |
| | — |
| | (3,058 | ) | | — |
| | — |
| | (3,058 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | (4,308 | ) | | — |
| | — |
| | (4,308 | ) |
Balance at June 30, 2019 | $ | 231,128 |
| | $ | 520 |
| | $ | 5 |
| | $ | 627,306 |
| | $ | 146,039 |
| | $ | (28,786 | ) | | $ | (12,668 | ) | | $ | 963,544 |
|
| | | | | | | | | | | | | | | |
See Accompanying Notesaccompanying notes to Consolidated Financial Statements (Unaudited)consolidated financial statements (unaudited)
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
Cash flows from operating activities: | | | |
Net (loss) income | $ | (25,042) | | | $ | 23,619 | |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | | | |
Provision for credit losses | 27,587 | | | 198 | |
| | | |
Reversal of provision for loan repurchases | (634) | | | (177) | |
Depreciation on premises and equipment | 8,404 | | | 5,290 | |
Amortization of intangible assets | 859 | | | 1,241 | |
Amortization of debt issuance costs | 139 | | | 83 | |
Net amortization of premium on securities | 258 | | | 649 | |
| | | |
Net amortization of deferred loan costs and fees | (553) | | | 83 | |
Accretion of discounts on purchased loans | (355) | | | (125) | |
Write-off of other assets related to naming rights termination, net | 6,669 | | | — | |
Debt extinguishment fee | 2,515 | | | — | |
Deferred income tax (benefit) expense | (71) | | | 1,841 | |
Bank owned life insurance income | (1,169) | | | (1,105) | |
Share-based compensation expense | 3,046 | | | 2,350 | |
Loss on interest rate swaps | 288 | | | 9,583 | |
Loss on investments in alternative energy partnerships and affordable housing investments | 4,033 | | | 2,785 | |
| | | |
Impairment on capitalized software projects | 157 | | | 835 | |
| | | |
| | | |
Fair value adjustment for loans held-for-sale | 1,561 | | | (60) | |
Net loss (gain) on sale of loans | 27 | | | (4,319) | |
Net gain on sale of securities available-for-sale | (2,011) | | | (208) | |
| | | |
Loss on sale or disposal of property and equipment | 106 | | | 9 | |
| | | |
| | | |
| | | |
Repurchase of mortgage loans | — | | | (699) | |
| | | |
| | | |
Proceeds from sales of and principal collected on loans held-for-sale | 613 | | | 3,849 | |
Proceeds from sales of and principal collected on other loans held-for-sale | — | | | 426 | |
| | | |
| | | |
Change in accrued interest receivable and other assets | 1,119 | | | (14,593) | |
| | | |
Change in accrued interest payable and other liabilities | (30,093) | | | (5,341) | |
Net cash (used in) provided by operating activities | (2,547) | | | 26,214 | |
| | | |
Cash flows from investing activities: | | | |
Proceeds from sales of securities available-for-sale | 22,728 | | | 782,019 | |
Proceeds from maturities and calls of securities available-for-sale | 30,000 | | | 38,029 | |
Proceeds from principal repayments of securities available-for-sale | 2,971 | | | 20,538 | |
| | | |
Purchases of securities available-for-sale | (322,590) | | | — | |
| | | |
| | | |
Cash received from bank-owned life insurance | 501 | | | — | |
| | | |
| | | |
| | | |
| | | |
Loan originations and principal collections, net | 349,818 | | | (149,182) | |
Purchase of loans and leases | (25,839) | | | — | |
Redemption of Federal Home Loan Bank stock | 22,171 | | | 29,760 | |
Purchase of Federal Home Loan Bank and other bank stock | (9,336) | | | (38,039) | |
Proceeds from sale of loans | — | | | 558,021 | |
| | | |
Proceeds from sale of other real estate owned | — | | | 551 | |
| | | |
| | | |
Purchases of premises and equipment | (3,467) | | | (5,967) | |
Payments of capital lease obligations | (266) | | | (259) | |
Funding of equity investment | (14,201) | | | (1,501) | |
(Increase) decrease in investments in alternative energy partnerships | (2,630) | | | 760 | |
Net cash provided by investing activities | 49,860 | | | 1,234,730 | |
| | | |
| | | |
Cash flows provided by (used in) financing activities: | | | |
Net increase (decrease) in deposits | 610,298 | | | (1,624,354) | |
Net (decrease) increase in short-term Federal Home Loan Bank advances | (447,000) | | | 305,000 | |
Repayment of long-term Federal Home Loan Bank advances | (235,000) | | | — | |
Proceeds from long-term Federal Home Loan Bank advances | 111,000 | | | — | |
Debt extinguishment and financing fees paid | (9,368) | | | — | |
| | | |
| | | |
| | | |
| | | |
Redemption of preferred stock | (4,213) | | | — | |
| | | |
| | | |
| | | |
| | | |
Purchase of treasury stock | (12,041) | | | — | |
| | | |
| | | |
Purchase of restricted stock surrendered due to employee tax liability | (775) | | | (876) | |
Dividend equivalents paid on stock appreciation rights | (188) | | | (296) | |
Dividends paid on preferred stock | (6,975) | | | (8,616) | |
Dividends paid on common stock | (5,883) | | | (9,544) | |
Net cash used in financing activities | (145) | | | (1,338,686) | |
Net change in cash and cash equivalents | 47,168 | | | (77,742) | |
Cash and cash equivalents at beginning of period | 373,472 | | | 391,592 | |
Cash and cash equivalents at end of period | $ | 420,640 | | | $ | 313,850 | |
| | | |
Supplemental cash flow information | | | |
Interest paid on deposits and borrowed funds | 40,626 | | | 85,733 | |
Income taxes paid | 62 | | | 2,822 | |
Income taxes refunds received | — | | | 7 | |
| | | |
Supplemental disclosure of non-cash activities | | | |
Transfer from loans to other real estate owned, net | — | | | 276 | |
Transfer of loans held-for-investment to loans held-for-sale | — | | | 1,127,339 | |
| | | |
| | | |
| | | |
Equipment acquired under capital leases | 30 | | | 40 | |
Operating lease right-of-use assets recognized | — | | | 27,421 | |
Operating lease liabilities recognized | — | | | 28,822 | |
Impact of adoption of ASU 2016-13 on retained earnings | (4,503) | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net income | $ | 23,619 |
| | $ | 23,338 |
|
Adjustments to reconcile net income to net cash provided by operating activities | | | |
Provision for loan losses | 525 |
| | 22,152 |
|
(Reversal of) provision for unfunded loan commitments | (327 | ) | | 315 |
|
Reversal of provision for loan repurchases | (177 | ) | | (2,006 | ) |
Depreciation on premises and equipment | 5,290 |
| | 5,212 |
|
Amortization of intangible assets | 1,241 |
| | 1,670 |
|
Amortization of debt issuance cost | 83 |
| | 76 |
|
Net amortization of premium and discount on securities | 649 |
| | 530 |
|
Net accretion of deferred loan costs and fees | 83 |
| | (228 | ) |
Accretion of discounts on purchased loans | (125 | ) | | (562 | ) |
Deferred income tax expense (benefit) | 1,841 |
| | (852 | ) |
Bank owned life insurance income | (1,105 | ) | | (1,066 | ) |
Share-based compensation expense | 2,350 |
| | 3,875 |
|
Loss on interest rate swaps | 9,583 |
| | — |
|
Loss on investments in alternative energy partnerships | 1,595 |
| | 1,774 |
|
Impairment on capitalized software projects | 835 |
| | 498 |
|
Net revenue from mortgage banking activities | — |
| | (288 | ) |
Net gain on sale of loans | (4,379 | ) | | (780 | ) |
Net gain on sale of securities available for sale | (208 | ) | | (5,519 | ) |
Loss from change of fair value of mortgage servicing rights | — |
| | 1,241 |
|
Loss on sale or disposal of property and equipment | 9 |
| | 61 |
|
Loss on sale of mortgage servicing rights | — |
| | 2,450 |
|
Net gain on disposal of discontinued operations | — |
| | (1,275 | ) |
Repurchase of mortgage loans | (699 | ) | | (11,091 | ) |
Originations of other loans held-for-sale | — |
| | (6,274 | ) |
Proceeds from sales of and principal collected on loans held-for-sale from mortgage banking | 3,849 |
| | 15,417 |
|
Proceeds from sales of and principal collected on other loans held-for-sale | 426 |
| | 5,751 |
|
Change in accrued interest receivable and other assets | (13,403 | ) | | 5,117 |
|
Change in accrued interest payable and other liabilities | (5,341 | ) | | (8,678 | ) |
Net cash provided by operating activities | 26,214 |
| | 50,858 |
|
Cash flows from investing activities: | | | |
Proceeds from sales of securities available-for-sale | 782,019 |
| | 392,556 |
|
Proceeds from maturities and calls of securities available-for-sale | 38,029 |
| | 220,400 |
|
Proceeds from principal repayments of securities available-for-sale | 20,538 |
| | 20,451 |
|
Purchases of securities available-for-sale | — |
| | (247,530 | ) |
Loan and lease originations and principal collections, net | (149,182 | ) | | (602,103 | ) |
Redemption of Federal Home Loan Bank stock | (38,039 | ) | | 13,642 |
|
Purchase of Federal Home Loan Bank and other bank stock | 29,760 |
| | (13,725 | ) |
Proceeds from sale of loans | 558,021 |
| | 211,459 |
|
Proceeds from sale of other real estate owned | 551 |
| | 1,484 |
|
Proceeds from sale of mortgage servicing rights | — |
| | 30,056 |
|
Proceeds from sale of premises and equipment | — |
| | 19 |
|
Purchases of premises and equipment | (5,967 | ) | | (5,569 | ) |
Payments of capital lease obligations | (259 | ) | | (253 | ) |
Funding of equity investment | (1,501 | ) | | (1,864 | ) |
Decrease in investments in alternative energy partnerships | 760 |
| | 1,027 |
|
Net cash provided by investing activities | 1,234,730 |
| | 20,050 |
|
Cash flows from financing activities: | | | |
Net decrease in deposits | (1,624,354 | ) | | (157,109 | ) |
Net increase (decrease) in short-term Federal Home Loan Bank advances | 305,000 |
| | (270,000 | ) |
Proceeds from long-term Federal Home Loan Bank advances | — |
| | 380,000 |
|
Purchase of restricted stock surrendered due to employee tax liability | (876 | ) | | (2,071 | ) |
Dividend equivalents paid on stock appreciation rights | (296 | ) | | (404 | ) |
Dividends paid on preferred stock | (8,616 | ) | | (10,226 | ) |
Dividends paid on common stock | (9,544 | ) | | (13,106 | ) |
Net cash used in financing activities | (1,338,686 | ) | | (72,916 | ) |
Net change in cash and cash equivalents | (77,742 | ) | | (2,008 | ) |
Cash and cash equivalents at beginning of period | 391,592 |
| | 387,699 |
|
Cash and cash equivalents at end of period | $ | 313,850 |
| | $ | 385,691 |
|
Supplemental cash flow information | | | |
Interest paid on deposits and borrowed funds | 85,733 |
| | 58,727 |
|
Income taxes paid | 2,822 |
| | 2,337 |
|
Income taxes refunds received | 7 |
| | 24 |
|
Supplemental disclosure of non-cash activities | | | |
Transfer from loans to other real estate owned, net | 276 |
| | 434 |
|
Transfer of loans held-for-investment to loans held-for-sale | 1,127,339 |
| | 211,824 |
|
Equipment acquired under capital leases | 40 |
| | 21 |
|
Operating lease right of use assets recognized | 27,421 |
| | — |
|
Operating lease liabilities recognized
| 28,822 |
| | |
Reclassification of stranded tax effects to retained earnings | — |
| | 496 |
|
Due on unsettled securities purchases | — |
| | 132,546 |
|
See Accompanying Notesaccompanying notes to Consolidated Financial Statements (Unaudited)consolidated financial statements (unaudited)
BANC OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 20192020
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Banc of California, Inc. (collectively, with its consolidated subsidiaries, the Company, we, us, and our) is a financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Santa Ana, California and incorporated under the laws of Maryland. Banc of California, Inc. is subject to regulation by the Board of Governors of the Federal Reserve System (FRB)(“FRB”) and its wholly ownedwholly-owned subsidiary, Banc of California, National Association (the Bank), operates under a national bank charter issued by the Office of the Comptroller of the Currency (OCC)(“OCC”), the Bank's primary regulator. The Bank is a member of the Federal Home Loan Bank (FHLB)(“FHLB”) system, and maintains insurance on deposit accounts with the Federal Deposit Insurance Corporation (FDIC)(“FDIC”).
The Bank offers a variety of financial services to meet the banking and financial needs of the communities it serves, with operations conducted through 32 banking offices, serving San Diego, Los Angeles, Santa Barbara, and Orange counties in31 full-service branches located throughout Southern California as of June 30, 2019.2020.
Basis of Presentation: The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (GAAP)(“GAAP”) are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 20182019 filed by the Companyus with the SEC. The December 31, 20182019 consolidated statements of financial condition presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC, but does not include allSEC. Certain prior period amounts have been reclassified to conform to current period presentation, including i) reclassification of the disclosures required by GAAPprovision for complete financial statements.losses on unfunded loan commitments from being included in other noninterest expense to being included within provision for credit losses, ii) showing the unrealized fair value adjustment for loans held-for-sale separate from the realized net (loss) gain on sale of loans, and iii) reclassification of outside services expense from "outside services fees" to "all other expense" in the consolidated statements of operations.
In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. The results of operations for the three and six months ended June 30, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
Principles of Consolidation: The accompanying unaudited consolidated financial statements include the accounts of the Company and its consolidated subsidiaries as of June 30, 20192020 and December 31, 20182019 and for the three and six months ended June 30, 20192020 and 2018.2019. Significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its then wholly ownedwholly-owned subsidiaries.
Adopted Accounting Pronouncements:
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326) (“ASU 2016-13”), which replaces the incurred loss impairment methodology with a methodology that reflects current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information to estimate expected credit losses. The measurement of expected credit losses under the CECL model is applicable to financial assets measured at amortized cost, including loan receivables, held-to-maturity debt securities and off-balance sheet credit exposures. ASU 2016-13 also requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. In addition, ASU 2016-13 modifies the other-than-temporary impairment (“OTTI”) model for available-for-sale (“AFS”) debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit quality.
We adopted ASU 2016-13 using the modified retrospective method for our financial assets measured at cost, including loans receivable and off-balance sheet credit exposures. Results for reporting periods beginning January 1, 2020 are reported under ASU 2016-13 (or Accounting Standards Codification 326), while prior period results continue to be reported under the previously applicable GAAP. The adoption of ASU 2016-13 on January 1, 2020 resulted in an increase of $6.4 million to our allowance for credit losses and an after-tax net decrease in retained earnings of $4.5 million. This transition adjustment reflects the development of our models to estimate lifetime expected credit losses on our loans, unfunded commitments, and other off-balance sheet credit exposure primarily using a lifetime loss methodology.
The following table presents the impact of adopting ASU 2016-13 on January 1, 2020:
| | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | As Reported Under ASC 326 | | Pre- ASC 326 Adoption | | Impact of ASC 326 Adoption |
Assets: | | | | | | |
Allowance for credit losses - loans | | | | | | |
Commercial: | | | | | | |
Commercial and industrial | | $ | 23,015 | | | $ | 22,353 | | | $ | 662 | |
Commercial real estate | | 10,788 | | | 5,941 | | | 4,847 | |
Multifamily | | 13,214 | | | 11,405 | | | 1,809 | |
SBA | | 3,508 | | | 3,120 | | | 388 | |
Construction | | 4,009 | | | 3,906 | | | 103 | |
Consumer: | | | | | | |
Single family residential mortgage | | 10,066 | | | 10,486 | | | (420) | |
Other consumer | | 658 | | | 438 | | | 220 | |
Total | | 65,258 | | | 57,649 | | | 7,609 | |
| | | | | | |
Liabilities: | | | | | | |
Allowance for credit losses - unfunded loan commitments | | $ | 2,838 | | | $ | 4,064 | | | $ | (1,226) | |
Significant Accounting Policies: The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. The Company hasWe have not made any significant changes in itsour critical accounting policies from those disclosed in itsour Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC, except for the accounting for leasesloans and the allowance for credit losses, the allowance for credit losses on unfunded loan commitments, troubled debt restructurings, and available-for-sale debt securities as described below.
Leases.Allowance for Credit Losses (ACL): The Company determines if an arrangementACL is a leasereserve established through a provision for credit loss expense and represents management’s best estimate of the net amount expected to be collected from loans receivable as of the date of the consolidated statements of financial condition. Confirmed losses are charged against the ACL. Subsequent recoveries, if any, are credited to the ACL. We perform an analysis of the adequacy of the ACL at inception.least quarterly. Management estimates the required ACL balance using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions, and other factors. The Company’s operating lease agreements are primarilyACL consists of; (i) a specific allowance established for real estate space and are included within right of use (ROU) assets and lease liabilitiesprobable losses on the June 30, 2019 consolidated balance sheet. The ROU asset isindividually identified impaired loans, (ii) a quantitative allowance for current expected loan losses based on the operating lease liabilitiesportfolio and expected economic conditions over a reasonable and supportable forecast period that reverts back to long-term trends to cover the life of loan; and (iii) a qualitative allowance to capture factors and trends that are not adequately reflected in the quantitative allowance, including an evaluation of our underwriting, other credit-related processes, and other credit risk factors such as concentration risk. Accrued interest is excluded from our expected credit loss estimates.
Expected credit losses are estimated over the contractual term of the loans, adjusted for any prepaidprepayments, as appropriate. The contractual term excludes expected extensions and renewals unless those extension or deferred rent.renewal options are included in the underlying contract and we do not have the ability to unconditionally cancel. The Companycontractual term also excludes expected modifications unless management has elected nota reasonable expectation, at the reporting period, that a troubled debt restructuring will be executed.
A loan is deemed impaired when, based on current information and events, it is probable that we will be unable to recognize on its consolidated balance sheet leases withcollect all amounts due according to the contractual terms of one-year or less.the loan agreement. We measure expected credit losses on all impaired loans individually under the guidance of ASC 326, 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 troubled debt restructurings (“TDRs”) and classified as impaired.
ROU assets represent our right to use an underlying assetFactors 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 lease termdelay, the borrower’s prior payment record, and lease liabilities represent our obligationthe amount of the shortfall in relation to make lease payments arising from the lease. ROU assetsprincipal and lease liabilitiesinterest owed. The impairment amount on a collateral dependent loan is generally charged-off to the ACL and the impairment amount on a loan, that is not collateral dependent, is set-up as a specific reserve. TDRs are recognizedalso measured at the commencement date based on the present value of leaseestimated 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 ACL.
At June 30, 2020, 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
•Small Business Administration (“SBA”)
•Construction
•SFR - 1st deeds of trust (generally SFR mortgage and other)
•Other consumer (HELOC and other)
We categorize loans into risk categories based on relevant information about the ability of 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, however, they have additional credit enhancement in the form of a guaranty 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. SBA loans originated as part of the Paycheck Protection Program (“PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) have additional credit enhancement provided by the U.S. Small Business Administration for up to 100% of the loan amount. As of June 30, 2020, we funded $240.7 million in PPP loans. During the three months ended June 30, 2020, we collected $7.5 million in fees on PPP loans funded during the quarter, which will be recognized over the lease term. As mosttheir estimated life of 9 months. The 9 months estimated life of PPP loans is based on our understanding of our leasesclients' cash use, expected forgiveness probability, and loan forgiveness process. The availability of funds for the repayment of financing may be substantially dependent on the success of the business itself which is often dependent, in part, upon general economic conditions. Consumer loans may have 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 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 loan to value (“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 interest only loans, we project future payment changes to determine if there will be a material increase in the required payment and then monitor 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 we would not otherwise consider. We have granted a concession when, as a result of the restructuring to a troubled borrower, we do not provideexpect 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 implicitextension 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 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, 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.
Troubled Debt Restructuring (TDR) Relief: Under U.S. GAAP, banks are required to assess modifications to a loan’s terms for potential classification as a TDR. A loan to a borrower experiencing financial difficulty is classified as a TDR when a lender grants a concession that it would otherwise not consider, such as a payment deferral or interest concession. In order to encourage banks to work with impacted borrowers, the CARES Act and U.S. banking regulatory agencies have provided relief from TDR accounting. The main benefits of TDR relief include 1) a capital benefit in the form of reduced risk-weighted assets, as TDRs are more heavily risk-weighted for capital purposes; 2) a delinquency status benefit, as the aging of loans are frozen, i.e., they will continue to be reported in the same delinquency bucket they were in at the time of modification; and 3) a non-accrual status benefit as the loans are generally not reported as non-accrual during the modification period.
Reserve for Unfunded Loan Commitments: The reserve for unfunded loan commitments provides for estimated credit losses for the unused portion of lending commitments expected to be funded, except for unconditionally cancellable commitments for which no reserve is required under ASC 326. The reserve for unfunded loan commitments includes factors that are consistent with ACL methodology for loans using the expected loss factors and a draw down factor applied to the underlying borrower risk and facility grades. Changes in the reserve for unfunded loan commitments are reported as a component of provision for credit losses in the consolidated statements of operations and the reserve for unfunded loan commitments is included in other liabilities in the consolidated statements of financial condition.
Available-for-Sale Debt Securities:Available-for-sale debt securities are analyzed for credit losses under ASC 326, which requires the Company uses its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment, at lease commencement date in determining the present value of lease payments. Manydetermine whether impairment exists as of the Company’s lessee agreements include optionsreporting date and whether that impairment is due to extendcredit losses. An allowance for credit losses is established for losses on available-for-sale debt securities due to credit losses and is reported as a component of provision for credit losses. Accrued interest is excluded from our expected credit loss estimates. Available-for-sale debt securities are typically classified as non-accrual when the lease, whichcontractual payment of principal or interest has become 90 days past due or management has serious doubts about the Company does not include in its minimum lease terms unless theyfurther collectability of principal or interest. When available-for-sale debt securities are reasonably certain to be exercised. The Company elected the practical expedient to combine its lease and related nonlease components for the Company’s building leases. Rental expense for lease payments related to operating leasesplaced on non-accrual status, unpaid interest recognized as interest income is recognized on a straight-line basis over the lease termreversed.
Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and disclosures provided, and actual results could differ. The allowance for loan losses (ALLL),ACL, reserve for loss on repurchased loans, reserve for unfunded loan commitments,
realization of deferred tax assets, the valuation of goodwill and other intangible assets, mortgage banking, and other derivatives, Hypothetical Liquidation at Book Value (HLBV)(“HLBV”) of investments in alternative energy partnerships, 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:Recent Accounting Guidance, Not Yet Effective: DuringIn December 2019, the three months ended March 31, 2017,FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Company completedAccounting for Income Taxes (“ASU 2019-12”). The amendments in this Update simplify the saleaccounting for income taxes by removing certain exceptions for investments, intra-period allocations, and interim calculations, and add guidance to reduce the complexity of its Banc Home Loans division, which largely represented the Company's Mortgage Banking segment. In accordance with Accounting Standards Codification (ASC) 205-20, the Company determinedapplying Topic 740. This ASU will be effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. We will adopt this guidance on January 1, 2021. We do not expect that the saleadoption of the Banc Home Loans division and certain other mortgage banking related assets and liabilities that would be sold or settled separately within one year met the criteria to be classified asthese amendments will have a discontinued operation and the related operating results and financial condition have been presented as discontinued operationsmaterial effect on theour consolidated financial statements. See Note 2 for additional information. Unless otherwise indicated, information included in these notes to the consolidated financial statements is presented on a consolidated operations basis, which includes results from both continuing and discontinued operations, as of December 31, 2018 and for the three and six months ended June 30, 2018. There were no material assets, liabilities or operating income as of and for the three and six months ended June 30, 2019 related to discontinued operations.
Restructuring Expense: During the three and six months ended June 30, 2019, the Company continued to implement its strategic objective to de-emphasize the production of low margin loan products through its exit from the third-party mortgage origination ("TPMO") and brokered single family lending business. The Company recognized a reversal of restructuring costs of $(158) thousand and restructuring costs of $2.6 million for the three and six months ended June 30, 2019, respectively, associated with the exit from the TPMO and brokered single family lending business and CEO transition.
Adopted Accounting Pronouncements: During the six months ended June 30, 2019, the following pronouncements applicable to the Company were adopted:
In February 2016,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-02 Topic 842, “Leases”ASU 2020-04, Reference Rate Reform (Topic 848), which increases transparencyprovides optional guidance, for a limited period of time, to ease the potential burden in accounting for (or recognizing the benefits of) reference rate reform on financial reporting. The amendments in ASU 2020-04 are elective and comparability among organizations by requiringapply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria. When elected, the recognitionoptional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions within the relevant topic or industry subtopic within the
codification that contains the guidance that otherwise would be required to be applied. The amendments in ASU 2020-04 are effective for all entities as of use (ROU) assets and lease liabilities on the balance sheet. Most prominent among the changesMarch 12, 2020 through December 31, 2022. We are in the standard isprocess of evaluating the recognitionpotential impact the discontinuation 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. The Company 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. The Company 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. The Company 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. The Company also has elected the short-term lease recognition exemption (leases with terms 12 months or less) for all leases that qualify, and thusLIBOR will not recognize ROU assets or lease liabilities for those leases. In addition, the Company elected the practical expedient to not separate lease and non-lease components for all of our leases. Upon adoption, the Company recognized on its consolidated balance sheet ROU assets of approximately $23.3 million (inclusive of an adjustment to remove the Company's 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 income. In addition,contracts and expect to elect the Company's accounting for finance leases remained substantially unchanged.
NOTE 2 – SALE OF BUSINESS UNIT (DISCONTINUED OPERATIONS)
Banc Home Loans Sale
On March 30, 2017, the Company completed the sale of specific assetsoptional expedients and activities related to its Banc Home Loans division to Caliber Home Loans, Inc. (Caliber). The Banc Home Loans division largely represented the Company's 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, was classified as discontinued operationsexceptions set forth in the accompanying Consolidated Statements of Financial Condition and Consolidated Statements of Income at December 31, 2018 and for the three and six months ended June 30, 2018. Certain components of the Company’s 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 the Company’s ongoing operations. Refer to Note 2 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for additional information related to this sale.amendments.
There were no gains related to the disposal during the three and six months ended June 30, 2019. For the three and six months ended June 30, 2018, the Company recognized gains related to the disposal of $272 thousand and $1.3 million, respectively.
During the three months ended June 30, 2019 and 2018, the Company recognized earn-out income of $755 thousand and $777 thousand, respectively, related to the sale to Caliber. During the six months ended June 30, 2019 and 2018, the Company recognized an earn-out of $1.2 million and $1.4 million, respectively. At June 30, 2019 there were no material assets or liabilities associated with discontinued operations. At December 31, 2018, assets and liabilities of discontinued operations totaled $19.5 million and zero, respectively.
NOTE 32 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Value Hierarchy
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:
•Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
•Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities Measured on a Recurring Basis
Securities Available-for-Sale: The fair values of securities available-for-sale are generally determined by quoted market prices in active markets, if available (Level 1). If quoted market prices are not available, the Companywe primarily employsemploy 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. The Company employsWe employ procedures to monitor the pricing service's assumptions and establishesestablish 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 U.S. Small Business Administration (SBA)SBA loan pool securities, U.S. government agency and U.S. government sponsored enterprise (GSE) 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 managementmanagement's judgment and evaluation for valuation. The CompanyWe had no0 securities available-for-sale classified as Level 3 at June 30, 20192020 or December 31, 2018.2019.
Loans Held-for-Sale, Carried at Fair Value: The fair value of loans held-for-sale is based on commitments outstanding from investors as well as whatand current offerings in the secondary market investors are currently offering 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 that estimates the expected loss the Company will incur on these loans. Loans previously sold to GNMA that are delinquent more than 90 days are subject to a repurchase option when that condition exists. These loans are re-recognized at fair value and offset by a secured borrowing, as the loans are still legally owned by GNMA but failed sale accounting treatment under GAAP due to the repurchase option.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 as well asand any accrued interest. As of June 30, 2019 and December 31, 2018, there were no loans that were delinquent more than 90 days and eligible to be repurchased out of GNMA loan pools.
Derivative Assets and LiabilitiesLiabilities::
Interest Rate Swaps and Caps.
The Company offers We offer interest rate swapsswap and capscap products to certain loan customersclients to allow them to hedge the risk of rising interest rates on their variable rate loans. The Company originatesWe originate a variable rate loan and entersenter into a variable-to-fixed interest rate swap with the customer. The Companyclient. We also entersenter into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow the Companyus to originate a variable rate loan while providing a contract for fixed interest payments for the customer.client. The net cash flow for the Companyus is equal to the interest income received from a variable rate loan originated with the customer.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. At June 30, 2019, derivative liabilities included interest rate swaps
related to the pending Freddie Mac multifamily securitization in which we also plan to sell the associated mortgage servicing rights.
Foreign Exchange Contracts.
The Company offersWe offer short-term foreign exchange contracts to its customers to purchase and/or sell foreign currencies at set rates in the future. These products allow customers to hedge the foreign exchange rate risk of their deposits and loans denominated in foreign currencies. In conjunction with these products, the Companywe also entersenter into offsetting contracts with institutional counterparties to hedge the Company’s foreign exchange rate risk. These back-to-back contracts allow the Companyus to offer itsour customers foreign exchange products while minimizing its exposure to foreign exchange rate fluctuations. The fair value of these instruments is determined at each reporting period based on the change in the foreign exchange rate. Given the short-term nature of the contracts, the counterparties’ credit risks are considered nominal and resultedresult in no adjustments to the valuation of the short-term foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of these contracts is classified as Level 2.
The following table presents the Company’sour financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Level | | | | |
($ in thousands) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
June 30, 2020 | | | | | | | | |
Assets | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
| | | | | | | | |
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 105,555 | | | $ | — | | | $ | 105,555 | | | $ | — | |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 201,136 | | | — | | | 201,136 | | | — | |
Municipal securities | | 57,174 | | | — | | | 57,174 | | | — | |
Non-agency residential mortgage-backed securities | | 164 | | | — | | | 164 | | | — | |
| | | | | | | | |
Collateralized loan obligations | | 668,353 | | | — | | | 668,353 | | | — | |
Corporate debt securities | | 143,647 | | | — | | | 143,647 | | | — | |
Loans held-for-sale, carried at fair value | | 19,768 | | | — | | | 3,083 | | | 16,685 | |
| | | | | | | | |
Derivative assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and caps (1) | | 8,598 | | | — | | | 8,598 | | | — | |
Foreign exchange contracts (1) | | 137 | | | — | | | 137 | | | — | |
Liabilities | | | | | | | | |
Derivative liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and caps (2) | | 9,239 | | | — | | | 9,239 | | | — | |
| | | | | | | | |
Foreign exchange contracts (2) | | 54 | | | — | | | 54 | | | — | |
| | | | | | | | |
December 31, 2019 | | | | | | | | |
Assets | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
| | | | | | | | |
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 36,456 | | | $ | — | | | $ | 36,456 | | | $ | — | |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 91,299 | | | — | | | 91,299 | | | — | |
Municipal securities | | 52,689 | | | — | | | 52,689 | | | — | |
Non-agency residential mortgage-backed securities | | 196 | | | — | | | 196 | | | — | |
| | | | | | | | |
Collateralized loan obligations | | 718,361 | | | — | | | 718,361 | | | — | |
Corporate debt securities | | 13,579 | | | — | | | 13,579 | | | — | |
Loans held-for-sale, carried at fair value | | 22,642 | | | — | | | 3,409 | | | 19,233 | |
| | | | | | | | |
Derivative assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and caps (1) | | 3,445 | | | — | | | 3,445 | | | — | |
Foreign exchange contracts (1) | | 138 | | | — | | | 138 | | | — | |
Liabilities | | | | | | | | |
Derivative liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and caps (2) | | 3,717 | | | — | | | 3,717 | | | — | |
Foreign exchange contracts (2) | | 136 | | | — | | | 136 | | | — | |
(1)Included in Other assets in the Consolidated Statements of Financial Condition.
(2)Included in Accrued expenses and Other liabilities in the Consolidated Statements of Financial Condition.
|
| | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Level |
($ in thousands) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
June 30, 2019 | | | | | | | | |
Assets | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
SBA loan pools securities | | $ | 853 |
| | $ | — |
| | $ | 853 |
| | $ | — |
|
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 429,347 |
| | — |
| | 429,347 |
| | — |
|
Non-agency residential mortgage-backed securities | | 285 |
| | — |
| | 285 |
| | — |
|
Collateralized loan obligations | | 737,202 |
| | — |
| | 737,202 |
| | — |
|
Loans held-for-sale, carried at fair value | | 23,794 |
| | — |
| | 2,719 |
| | 21,075 |
|
Derivative assets: | | | | | | | | |
Interest rate swaps and caps (1) | | 4,119 |
| | — |
| | 4,119 |
| | — |
|
Foreign exchange contracts (1) | | 30 |
| | — |
| | 30 |
| | — |
|
Liabilities | | | | | | | | |
Derivative liabilities: | | | | | | | | |
Interest rate swaps and caps (2) | | 14,041 |
| | — |
| | 14,041 |
| | — |
|
Foreign exchange contracts (2) | | 14 |
| | — |
| | 14 |
| | — |
|
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 | | 437,442 |
| | — |
| | 437,442 |
| | — |
|
Non-agency residential mortgage-backed securities | | 427 |
| | — |
| | 427 |
| | — |
|
Non-agency commercial mortgage-backed securities | | 132,199 |
| | — |
| | 132,199 |
| | — |
|
Collateralized loan obligations | | 1,421,522 |
| | — |
| | 1,421,522 |
| | — |
|
Loans held-for-sale, carried at fair value (3) | | 27,180 |
| | — |
| | 2,140 |
| | 25,040 |
|
Derivative assets: | | | | | | | | |
Interest rate swaps and caps (1) | | 1,534 |
| | — |
| | 1,534 |
| | — |
|
Liabilities | | | | | | | | |
Derivative liabilities: | | | | | | | | |
Interest rate swaps and caps (2) | | 1,600 |
| | — |
| | 1,600 |
| | — |
|
| |
(1) | Included in Other Assets in the Consolidated Statements of Financial Condition. |
| |
(2) | Included in Accrued Expenses and Other Liabilities in the Consolidated Statements of Financial Condition. |
| |
(3) | Includes loans held-for-sale carried at fair value of $19.5 million ($2.1 million at Level 2 and $17.4 million at Level 3) of discontinued operations, which are included in Assets of Discontinued Operations in the Consolidated Statements of Financial Condition. |
The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), on a consolidated operations basis, for the periods indicated: | | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
($ in thousands) | | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | |
Loans repurchased from GNMA Loan Pools (1) | | | | | | | | | |
| Loans repurchased from GNMA Loan Pools | | Loans repurchased from GNMA Loan Pools | | | | | | | | |
Balance at beginning of period | | $ | 23,069 |
| | $ | 42,962 |
| | $ | 25,040 |
| | $ | 98,940 |
| Balance at beginning of period | | $ | 17,127 | | | $ | 23,069 | | | $ | 19,233 | | | $ | 25,040 | |
Total gains or losses (realized/unrealized): | | | | | | | | | |
| Total gains (losses) (realized/unrealized): | | Total gains (losses) (realized/unrealized): | |
| Included in earnings—fair value adjustment | | (6 | ) | | (248 | ) | | (3 | ) | | (254 | ) | Included in earnings—fair value adjustment | | 22 | | | (6) | | | (1,369) | | | (3) | |
| Additions | | — |
| | 2,765 |
| | — |
| | 27,385 |
| Additions | | — | | | — | | | — | | | — | |
Sales, settlements, and other | | (1,988 | ) | | (12,245 | ) | | (3,962 | ) | | (92,837 | ) | Sales, settlements, and other | | (464) | | | (1,988) | | | (1,179) | | | (3,962) | |
Balance at end of period | | $ | 21,075 |
| | $ | 33,234 |
| | $ | 21,075 |
| | $ | 33,234 |
| Balance at end of period | | $ | 16,685 | | | $ | 21,075 | | | $ | 16,685 | | | $ | 21,075 | |
| |
(1) | Includes loans repurchased from GNMA Loan Pools of discontinued operations, which is included in Assets of Discontinued Operations in the Consolidated Statements of Financial Condition, of zero and $24.0 million, respectively, for the three months ended June 30, 2019 and 2018 and $17.3 million and $32.3 million for the six months ended June 30, 2019 and 2018 in balance at beginning of period, and zero and $20.9 million, respectively, for both the three and six months ended June 30, 2019 and 2018 in balance at end of period. |
Loans repurchased from GNMA loan pools had aggregate unpaid principal balances of $18.6 million and $19.8 million as of June 30, 2020 and December 31, 2019. The significant unobservable inputs used in the fair value measurement of the Company'sour loans repurchased from GNMA loan pools at June 30, 20192020 and December 31, 20182019 included an expected loss rate of 1.55 percent1.55% for insured loans and 20.00 percent20.00% for uninsured loans. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results.
Fair Value Option
Loans Held-for-Sale, Carried at Fair Value: The CompanyWe elected the fair value option for certain SFR mortgage loans held-for-sale. Electing to measure SFR mortgage loans held-for-sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. The CompanyWe also elected to record loans repurchased from GNMA at fair value, as the Company intendswe intend to sell them after curing any defects and, accordingly, they are classified as held-for-sale. Loans previously sold to GNMA that are delinquent more than 90 days are subject to a repurchase option when that condition exists. Theseexists and typically are repurchased by us. To the extent loans are subject to a repurchase option and not repurchased, the loans are re-recognized at fair value and offset by a secured borrowing, as the loans are still legally owned by GNMA. As of June 30, 2020 and December 31, 2019, there were 0 loans subject to such repurchase option and accordingly 0 related secured borrowings.
The following table presents the fair value and aggregate principal balance of certain assets, on a consolidated operations basis, under the fair value option: | | | | June 30, 2020 | | | December 31, 2019 | |
($ in thousands) | | ($ in thousands) | | Fair Value | | Unpaid Principal Balance | | Difference | | Fair Value | | Unpaid Principal Balance | | Difference |
Loans held-for-sale, carried at fair value: | | Loans held-for-sale, carried at fair value: | | | | | | | | | | | | |
Total loans | | Total loans | | $ | 19,768 | | | $ | 22,208 | | | $ | (2,440) | | | $ | 22,642 | | | $ | 23,455 | | | $ | (813) | |
Non-accrual loans (1) | | Non-accrual loans (1) | | 6,147 | | | 7,244 | | | (1,097) | | | 8,125 | | | 8,370 | | | (245) | |
| | | | June 30, 2019 | | December 31, 2018 | |
($ in thousands) | | Fair Value | | Unpaid Principal Balance | | Difference | | Fair Value | | Unpaid Principal Balance | | Difference | |
Loans held-for-sale, carried at fair value in continuing operations: | | | | | | | | | | | | | |
Total loans | | $ | 23,794 |
| | $ | 24,495 |
| | $ | (701 | ) | | $ | 7,690 |
| | $ | 7,906 |
| | $ | (216 | ) | |
Non-accrual loans (1) | | 6,594 |
| | 6,685 |
| | (91 | ) | | 2,427 |
| | 2,538 |
| | (111 | ) | |
Loans held-for-sale, carried at fair value in discontinued operations: | | | | | | | | | | | | | |
Total loans | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 19,490 |
| | $ | 20,027 |
| | $ | (537 | ) | |
Non-accrual loans (2) | | — |
| | — |
| | — |
| | 8,430 |
| | 8,496 |
| | (66 | ) | |
|
| |
(1) | Includes loans guaranteed by the U.S. government of $5.9 million and $1.6 million, respectively, at June 30, 2019 and December 31, 2018. |
| |
(2) | Includes loans guaranteed by the U.S. government of zero and $7.6 million, respectively, at June 30, 2019 and December 31, 2018. |
(1) Includes loans guaranteed by the U.S. government of $4.4 million and $6.7 million at June 30, 2020 and December 31, 2019.
There were no0 loans held-for-sale that were 90 days or more past due and still accruing interest as of June 30, 20192020 and December 31, 2018.2019.
The assets accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The following table presents changes in fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets measured at fair value for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Net gains (losses) from fair value changes | | | | | | | | |
Net gain (loss) on sale of loans (continuing operations) | | $ | 59 |
| | $ | 6 |
| | $ | 60 |
| | $ | (20 | ) |
Net revenue on mortgage banking activities (discontinued operations) | | — |
| | (247 | ) | | — |
| | (245 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net (losses) gains from fair value changes: | | | | | | | | |
Fair value adjustment for loans held-for-sale | | $ | 25 | | | $ | 59 | | | $ | (1,561) | | | $ | 60 | |
| | | | | | | | |
Changes in fair value due to instrument-specific credit risk were immaterial for the three and six months ended June 30, 2019 and 2018. Interest income on loans held-for-sale under the fair value option is measured based on the contractual interest rate and reported in interest income on loans, including fees and income from discontinued operations in the consolidated statements of income.operations.
Assets and Liabilities Measured on a Non-Recurring Basis
Impaired Loans: The fair value of impaired loans with specific allocations of the ALLLACL based on collateral is generally based on recent real estate appraisals and automated valuation models (AVMs)(“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.
The following table presents the Company’sour financial assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated:
| | | | Fair Value Measurement Level | |
($ in thousands) | | ($ in thousands) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
June 30, 2020 | | June 30, 2020 | | | | | | | | |
Assets | | Assets | |
| Impaired loans: | | Impaired loans: | |
| Commercial and industrial | | Commercial and industrial | | $ | 10,049 | | | $ | — | | | $ | — | | | $ | 10,049 | |
| | | | | | Fair Value Measurement Level | |
($ in thousands) | | Carrying Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
June 30, 2019 | | | | | | | | | |
SBA | | SBA | | 664 | | | — | | | — | | | 664 | |
| | December 31, 2019 | | December 31, 2019 | |
Assets | | | | | | | | | Assets | |
Impaired loans: | | | | | | | | | Impaired loans: | |
Single family residential mortgage | | Single family residential mortgage | | $ | 3,678 | | | $ | — | | | $ | — | | | $ | 3,678 | |
| Commercial and industrial | | $ | 486 |
| | $ | — |
| | $ | — |
| | $ | 486 |
| Commercial and industrial | | 15,409 | | | — | | | — | | | 15,409 | |
SBA | | 448 |
| | — |
| | — |
| | 448 |
| SBA | | 1,711 | | | — | | | — | | | 1,711 | |
December 31, 2018 | | | | | | | | | |
Assets | | | | | | | | | |
Impaired loans: | | | | | | | | | |
SBA | | $ | 226 |
| | — |
| | — |
| | $ | 226 |
| |
|
The following table presents the losses recognized on assets measured at fair value on a non-recurring basis for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Impaired loans: | | | | | | | | |
Single family residential mortgage | | $ | — | | | $ | — | | | $ | (531) | | | $ | (490) | |
Commercial and industrial | | (6,090) | | | — | | | (8,514) | | | — | |
SBA | | (670) | | | — | | | (1,544) | | | (46) | |
Other consumer | | — | | | — | | | (4) | | | (88) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Impaired loans: | | | | | | | | |
Single family residential mortgage | | $ | — |
| | $ | — |
| | $ | (490 | ) | | $ | (115 | ) |
Commercial and industrial | | — |
| | (231 | ) | | — |
| | (292 | ) |
SBA | | — |
| | — |
| | (46 | ) | | (380 | ) |
Other consumer | | — |
| | — |
| | (88 | ) | | (141 | ) |
17
Estimated Fair Values of Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities on a consolidated operations basis, as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value Measurement Level | | | | | | |
($ in thousands) | | | | Level 1 | | Level 2 | | Level 3 | | Total |
June 30, 2020 | | | | | | | | | | |
Financial assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 420,640 | | | $ | 420,640 | | | $ | — | | | $ | — | | | $ | 420,640 | |
| | | | | | | | | | |
Securities available-for-sale | | 1,176,029 | | | — | | | 1,176,029 | | | — | | | 1,176,029 | |
| | | | | | | | | | |
Federal Home Loan Bank and other bank stock | | 46,585 | | | — | | | 46,585 | | | — | | | 46,585 | |
Loans held-for-sale, carried at fair value | | 19,768 | | | — | | | 3,083 | | | 16,685 | | | 19,768 | |
| | | | | | | | | | |
Loans receivable, net of allowance for loan losses | | 5,537,326 | | | — | | | — | | | 5,642,634 | | | 5,642,634 | |
Accrued interest receivable | | 29,515 | | | 29,515 | | | — | | | — | | | 29,515 | |
Derivative assets | | 8,735 | | | — | | | 8,735 | | | — | | | 8,735 | |
Financial liabilities | | | | | | | | | | |
Deposits | | 6,037,465 | | | — | | | — | | | 6,042,349 | | | 6,042,349 | |
Advances from Federal Home Loan Bank | | 617,170 | | | — | | | 666,177 | | | — | | | 666,177 | |
| | | | | | | | | | |
| | | | | | | | | | |
Long-term debt | | 173,537 | | | — | | | 178,030 | | | — | | | 178,030 | |
Derivative liabilities | | 9,293 | | | — | | | 9,293 | | | — | | | 9,293 | |
Accrued interest payable | | 4,297 | | | 4,297 | | | — | | | — | | | 4,297 | |
| | | | | | | | | | |
December 31, 2019 | | | | | | | | | | |
Financial assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 373,472 | | | $ | 373,472 | | | $ | — | | | $ | — | | | $ | 373,472 | |
| | | | | | | | | | |
Securities available-for-sale | | 912,580 | | | — | | | 912,580 | | | — | | | 912,580 | |
| | | | | | | | | | |
Federal Home Loan Bank and other bank stock | | 59,420 | | | — | | | 59,420 | | | — | | | 59,420 | |
Loans held-for-sale | | 22,642 | | | — | | | 3,409 | | | 19,233 | | | 22,642 | |
Loans receivable, net of allowance for credit losses | | 5,894,236 | | | — | | | — | | | 5,894,732 | | | 5,894,732 | |
Accrued interest receivable | | 24,523 | | | 24,523 | | | — | | | — | | | 24,523 | |
Derivative assets | | 3,583 | | | — | | | 3,583 | | | — | | | 3,583 | |
Financial liabilities | | | | | | | | | | |
Deposits | | 5,427,167 | | | — | | | — | | | 5,430,536 | | | 5,430,536 | |
Advances from Federal Home Loan Bank | | 1,195,000 | | | — | | | 1,222,709 | | | — | | | 1,222,709 | |
| | | | | | | | | | |
Long-term debt | | 173,421 | | | — | | | 180,213 | | | — | | | 180,213 | |
Derivative liabilities | | 3,853 | | | — | | | 3,853 | | | — | | | 3,853 | |
Accrued interest payable | | 4,687 | | | 4,687 | | | — | | | — | | | 4,687 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount | | Fair Value Measurement Level |
($ in thousands) | | | Level 1 | | Level 2 | | Level 3 | | Total |
June 30, 2019 | | | | | | | | | | |
Financial assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 313,850 |
| | $ | 313,850 |
| | $ | — |
| | $ | — |
| | $ | 313,850 |
|
Securities available-for-sale | | 1,167,687 |
| | — |
| | 1,167,687 |
| | — |
| | 1,167,687 |
|
Federal Home Loan Bank and other bank stock | | 76,373 |
| | — |
| | 76,373 |
| | — |
| | 76,373 |
|
Loans held-for-sale, carried at fair value | | 23,794 |
| | — |
| | 2,719 |
| | 21,075 |
| | 23,794 |
|
Loans held-for-sale, carried at lower of cost or fair value | | 573,926 |
| | — |
| | — |
| | 578,911 |
| | 573,926 |
|
Loans receivable, net of ALLL | | 6,660,047 |
| | — |
| | — |
| | 6,550,673 |
| | 6,550,673 |
|
Accrued interest receivable | | 31,908 |
| | 31,908 |
| | — |
| | — |
| | 31,908 |
|
Derivative assets | | 4,149 |
| | — |
| | 4,149 |
| | — |
| | 4,149 |
|
Financial liabilities | | | | | | | | | | |
Deposits | | 6,292,290 |
| | — |
| | — |
| | 6,231,819 |
| | 6,231,819 |
|
Advances from Federal Home Loan Bank | | 1,825,000 |
| | — |
| | 1,850,016 |
| | — |
| | 1,850,016 |
|
Long term debt | | 173,257 |
| | — |
| | 177,693 |
| | — |
| | 177,693 |
|
Derivative liabilities | | 14,055 |
| | — |
| | 14,055 |
| | — |
| | 14,055 |
|
Accrued interest payable | | 9,681 |
| | 9,681 |
| | — |
| | — |
| | 9,681 |
|
December 31, 2018 | | | | | | | | | | |
Financial assets | | | | | | | | | | |
Cash and cash equivalents | | $ | 391,592 |
| | $ | 391,592 |
| | $ | — |
| | $ | — |
| | $ | 391,592 |
|
Securities available-for-sale | | 1,992,500 |
| | — |
| | 1,992,500 |
| | — |
| | 1,992,500 |
|
Federal Home Loan Bank and other bank stock | | 68,094 |
| | — |
| | 68,094 |
| | — |
| | 68,094 |
|
Loans held-for-sale (1) | | 27,606 |
| | — |
| | 2,566 |
| | 25,040 |
| | 27,606 |
|
Loans receivable, net of allowance | | 7,638,681 |
| | — |
| | — |
| | 7,513,910 |
| | 7,513,910 |
|
Accrued interest receivable | | 38,807 |
| | 38,807 |
| | — |
| | — |
| | 38,807 |
|
Derivative assets | | 1,534 |
| | — |
| | 1,534 |
| | — |
| | 1,534 |
|
Financial liabilities | | | | | | | | | | |
Deposits | | 7,916,644 |
| | — |
| | — |
| | 7,689,324 |
| | 7,689,324 |
|
Advances from Federal Home Loan Bank | | 1,520,000 |
| | — |
| | 1,517,761 |
| | — |
| | 1,517,761 |
|
Long-term debt | | 173,174 |
| | — |
| | 174,059 |
| | — |
| | 174,059 |
|
Derivative liabilities | | 1,600 |
| | — |
| | 1,600 |
| | — |
| | 1,600 |
|
Accrued interest payable | | 13,253 |
| | 13,253 |
| | — |
| | — |
| | 13,253 |
|
| |
(1) | Includes loans held-for-sale carried at fair value of $19.5 million ($2.1 million at Level 2 and $17.4 million at Level 3) of discontinued operations. |
NOTE 43 – INVESTMENT SECURITIES
The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:
| ($ in thousands) | | ($ in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | | Fair Value |
June 30, 2020 | | June 30, 2020 | | | | | | | | |
| | ($ in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
June 30, 2019 | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | Securities available-for-sale: | | | |
SBA loan pool securities | | $ | 831 |
| | $ | 22 |
| | $ | — |
| | $ | 853 |
| |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 436,049 |
| | 196 |
| | (6,898 | ) | | 429,347 |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 100,128 | | | $ | 5,427 | | | $ | — | | | | $ | 105,555 | |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 199,262 | | | 1,906 | | | (32) | | | | 201,136 | |
Municipal securities | | Municipal securities | | 52,973 | | | 4,201 | | | — | | | | 57,174 | |
Non-agency residential mortgage-backed securities | | 275 |
| | 10 |
| | — |
| | 285 |
| Non-agency residential mortgage-backed securities | | 161 | | | 3 | | | — | | | | 164 | |
| Collateralized loan obligations | | 748,502 |
| | — |
| | (11,300 | ) | | 737,202 |
| Collateralized loan obligations | | 703,605 | | | — | | | (35,252) | | | | 668,353 | |
Corporate debt securities | | Corporate debt securities | | 141,962 | | | 2,387 | | | (702) | | | | 143,647 | |
Total securities available-for-sale | | $ | 1,185,657 |
| | $ | 228 |
| | $ | (18,198 | ) | | $ | 1,167,687 |
| Total securities available-for-sale | | $ | 1,198,091 | | | $ | 13,924 | | | $ | (35,986) | | | | $ | 1,176,029 | |
December 31, 2018 | | | | | | | | | |
December 31, 2019 | | December 31, 2019 | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | Securities available-for-sale: | | | |
SBA loan pool securities | | $ | 911 |
| | $ | — |
| | $ | (1 | ) | | $ | 910 |
| |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 461,987 |
| | — |
| | (24,545 | ) | | 437,442 |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 37,613 | | | $ | — | | | $ | (1,157) | | | | $ | 36,456 | |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 91,543 | | | 16 | | | (260) | | | | 91,299 | |
Municipal securities | | Municipal securities | | 52,997 | | | 51 | | | (359) | | | | 52,689 | |
Non-agency residential mortgage-backed securities | | 418 |
| | 9 |
| | — |
| | 427 |
| Non-agency residential mortgage-backed securities | | 191 | | | 5 | | | — | | | | 196 | |
Non-agency commercial mortgage-backed securities | | 132,199 |
| | — |
| | — |
| | 132,199 |
| |
| Collateralized loan obligations | | 1,431,171 |
| | 141 |
| | (9,790 | ) | | 1,421,522 |
| Collateralized loan obligations | | 733,605 | | | — | | | (15,244) | | | | 718,361 | |
Corporate debt securities | | Corporate debt securities | | 13,500 | | | 79 | | | — | | | | 13,579 | |
Total securities available-for-sale | | $ | 2,026,686 |
| | $ | 150 |
| | $ | (34,336 | ) | | $ | 1,992,500 |
| Total securities available-for-sale | | $ | 929,449 | | | $ | 151 | | | $ | (17,020) | | | | $ | 912,580 | |
As of December 31, 2018, the Company changed its intent and decided to sell its non-agency commercial mortgage-backed securities in an unrealized loss position due to its strategy to reposition its securities profile and recognized $3.3 million of other-than-temporary impairment (OTTI) losses during the fourth quarter of 2018. During the first quarter of 2019, the Company completed the sale of all remaining non-agency commercial mortgage-backed securities totaling $132.2 million resulting in a gain of $9 thousand. Additionally, during the three and six months ended June 30, 2019, the Company sold $279.2 million and $644.5 million, respectively, in collateralized loan obligations resulting in a gain of zero and $143 thousand, respectively. During the first quarter of 2018, the Company completed the sale of all remaining corporate debt securities, totaling $76.8 million resulting in a gain of $4.9 million, to reposition its securities available-for-sale portfolio.
At June 30, 2019, the Company's2020, our investment securities portfolio consisted of SBA loan poolagency securities, municipal securities, mortgage-backed securities, and collateralized loan obligations.obligations, and corporate debt securities. The expected maturities of these types of securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There was 0 allowance for credit losses for debt securities as of June 30, 2020. Accrued interest receivable on debt securities available-for-sale totaled $5.5 million and $5.6 million at June 30, 2020 and December 31, 2019, and is included within other assets in the accompanying consolidated statements of financial condition. Accrued interest receivable is excluded from the estimate of expected credit losses.
At June 30, 20192020 and December 31, 2018,2019, there were no holdings of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10 percent of the Company'sour stockholders’ equity.
The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Gross realized gains on sales and calls of securities available-for-sale | | $ | — |
| | $ | 278 |
| | $ | 208 |
| | $ | 5,519 |
| Gross realized gains on sales and calls of securities available-for-sale | | $ | 2,011 | | | $ | — | | | $ | 2,011 | | | $ | 208 | |
Gross realized losses on sales and calls of securities available-for-sale | | — |
| | — |
| | — |
| | — |
| Gross realized losses on sales and calls of securities available-for-sale | | — | | | — | | | — | | | — | |
Net realized gains on sales and calls of securities available-for-sale | | $ | — |
| | $ | 278 |
| | $ | 208 |
| | $ | 5,519 |
| Net realized gains on sales and calls of securities available-for-sale | | $ | 2,011 | | | $ | — | | | $ | 2,011 | | | $ | 208 | |
Proceeds from sales and calls of securities available-for-sale | | $ | 298,156 |
| | $ | 325,439 |
| | $ | 820,048 |
| | $ | 612,956 |
| Proceeds from sales and calls of securities available-for-sale | | $ | 22,728 | | | $ | 298,156 | | | $ | 52,728 | | | $ | 820,048 | |
|
Investment securities with carrying values of $106.3$42.2 million and $163.0$44.0 million as of June 30, 20192020 and December 31, 2018, respectively,2019, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous, unrealized loss position as of the dates indicated:
| | | | Less Than 12 Months | | | 12 Months or Longer | | | Total | |
($ in thousands) | | ($ in thousands) | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
June 30, 2020 | | June 30, 2020 | | | | | | | | | | | | |
| | | | Less Than 12 Months | | 12 Months or Longer | | Total | |
($ in thousands) | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | |
June 30, 2019 | | | | | | | | | | | | | |
| Securities available-for-sale: | | | | | | | | | | | | | Securities available-for-sale: | |
SBA loan pool securities | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | $ | 9,416 | | | $ | (32) | | | $ | — | | | $ | — | | | $ | 9,416 | | | $ | (32) | |
| Collateralized loan obligations | | Collateralized loan obligations | | 63,040 | | | (1,960) | | | 605,313 | | | (33,292) | | | 668,353 | | | (35,252) | |
Corporate debt securities | | Corporate debt securities | | 31,798 | | | (702) | | | — | | | — | | | 31,798 | | | (702) | |
Total securities available-for-sale | | Total securities available-for-sale | | $ | 104,254 | | | $ | (2,694) | | | $ | 605,313 | | | $ | (33,292) | | | $ | 709,567 | | | $ | (35,986) | |
| December 31, 2019 | | December 31, 2019 | |
| Securities available-for-sale: | | Securities available-for-sale: | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | — |
| | — |
| | 370,676 |
| | (6,898 | ) | | 370,676 |
| | (6,898 | ) | U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 35,872 | | | $ | (1,157) | | | $ | — | | | $ | — | | | $ | 35,872 | | | $ | (1,157) | |
Non-agency residential mortgage-backed securities | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 73,379 | | | (260) | | | — | | | — | | | 73,379 | | | (260) | |
Municipal securities | | Municipal securities | | 31,723 | | | (359) | | | — | | | — | | | 31,723 | | | (359) | |
| Collateralized loan obligations | | 497,963 |
| | (6,664 | ) | | 239,239 |
| | (4,636 | ) | | 737,202 |
| | (11,300 | ) | Collateralized loan obligations | | 49,553 | | | (447) | | | 668,808 | | | (14,797) | | | 718,361 | | | (15,244) | |
| Total securities available-for-sale | | $ | 497,963 |
| | $ | (6,664 | ) | | $ | 609,915 |
| | $ | (11,534 | ) | | $ | 1,107,878 |
| | $ | (18,198 | ) | 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 | | 13,494 |
| | (133 | ) | | 423,916 |
| | (24,412 | ) | | 437,410 |
| | (24,545 | ) | |
Non-agency residential mortgage-backed securities | | 90 |
| | — |
| | 16 |
| | — |
| | 106 |
| | — |
| |
Collateralized loan obligations | | 1,364,317 |
| | (9,480 | ) | | 32,790 |
| | (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 | ) | |
The Company did not record OTTI for investment securities for the three and six months ended June 30, 2019 or 2018.
At June 30, 2019, the Company’s2020, our securities available-for-sale portfolio consisted of 82102 securities, 64 of which 50 securities were in an unrealized loss position. At December 31, 2018, the Company’s2019, our securities available-for-sale portfolio consisted of 14570 securities, 118 of which 60 securities were in an unrealized loss position.
The Company monitors itsWe monitor our securities portfolio to ensure it has adequate credit support. The majority of unrealized losses are related to the Company's mortgage-backed securities issued by U.S government sponsored entities and agencies. The Companyour collateralized loan obligations. We also considersconsider the lowest credit rating for identification of potential OTTIcredit impairment for other securities. As of June 30, 2019, nearly2020, all of the Company's non-agency mortgage-backed securities orour collateralized loan obligations investment securities in an unrealized loss position received an investment grade credit rating. The decline in fair value iswas attributable to a combination of changes in interest rates and general volatility in the credit market conditions in response to the economic uncertainty caused by the global pandemic. We do not credit quality. The Company believes there was no OTTI as of June 30, 2019 and does not have the intentcurrently intend to sell itsthese 50 securities in an unrealized loss position and further believesbelieve, it is more likely than not, likely that itwe will not be required to sell these securities before their anticipated recovery.
The following table presents maturities, based on the composition and theearlier of maturity dates or next repricing date, and yield information of the investment securities portfolio as of June 30, 2019:2020:
| | | | One year or less | | More than One Year through Five Years | | More than Five Years through Ten Years | | More than Ten Years | | Total | | One year or less | | | More than One Year through Five Years | | | More than Five Years through Ten Years | | | More than Ten Years | | | Total | |
($ in thousands) | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield | ($ in thousands) | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield | | Fair Value | | Weighted-Average Yield |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | | Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | |
SBA loan pool securities | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 853 |
| | 2.08 | % | | $ | 853 |
| | 2.08 | % | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 243 |
| | 2.36 | % | | 3,069 |
| | 2.67 | % | | — |
| | — | % | | 426,035 |
| | 2.74 | % | | 429,347 |
| | 2.74 | % | U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 30,413 | | | 2.20 | % | | $ | 75,142 | | | 2.35 | % | | $ | 105,555 | | | 2.31 | % |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 118,163 | | | 0.74 | % | | 11,608 | | | 2.02 | % | | 25,579 | | | 1.63 | % | | 45,786 | | | 0.93 | % | | 201,136 | | | 0.96 | % |
Municipal securities | | Municipal securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 57,174 | | | 2.79 | % | | 57,174 | | | 2.79 | % |
Non-agency residential mortgage-backed securities | | 66 |
| | 3.23 | % | | — |
| | — | % | | — |
| | — | % | | 219 |
| | 5.74 | % | | 285 |
| | 5.16 | % | Non-agency residential mortgage-backed securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 164 | | | 6.14 | % | | 164 | | | 6.14 | % |
| Collateralized loan obligations | | 737,202 |
| | 3.71 | % | | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | 737,202 |
| | 3.71 | % | Collateralized loan obligations | | 668,353 | | | 2.73 | % | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 668,353 | | | 2.73 | % |
Corporate debt securities | | Corporate debt securities | | — | | | — | % | | 122,301 | | | 4.99 | % | | 21,346 | | | 5.64 | % | | — | | | — | % | | 143,647 | | | 5.08 | % |
Total securities available-for-sale | | $ | 737,511 |
| | 3.71 | % | | $ | 3,069 |
| | 2.67 | % | | $ | — |
| | — | % | | $ | 427,107 |
| | 2.74 | % | | $ | 1,167,687 |
| | 3.35 | % | Total securities available-for-sale | | $ | 786,516 | | | 2.45 | % | | $ | 133,909 | | | 4.74 | % | | $ | 77,338 | | | 2.96 | % | | $ | 178,266 | | | 2.11 | % | | $ | 1,176,029 | | | 2.68 | % |
NOTE 54 – LOANS AND ALLOWANCE FOR LOANCREDIT LOSSES
The following table presents the balances in the Company’sour loan portfolios as of the dates indicated: |
| | | | | | | | |
($ in thousands) | | June 30, 2019 | | December 31, 2018 |
Commercial: | | | | |
Commercial and industrial | | $ | 1,951,707 |
| | $ | 1,944,142 |
|
Commercial real estate | | 856,497 |
| | 867,013 |
|
Multifamily | | 1,598,978 |
| | 2,241,246 |
|
SBA | | 80,929 |
| | 68,741 |
|
Construction | | 209,029 |
| | 203,976 |
|
Consumer: | | | | |
Single family residential mortgage | | 1,961,065 |
| | 2,305,490 |
|
Other consumer | | 61,365 |
| | 70,265 |
|
Total loans(1) | | $ | 6,719,570 |
| | $ | 7,700,873 |
|
Percentage to total loans | | 100.0 | % | | 100.0 | % |
Allowance for loan losses | | (59,523 | ) | | (62,192 | ) |
Loans receivable, net | | $ | 6,660,047 |
| | $ | 7,638,681 |
|
| |
(1) | Total loans include deferred loan origination costs/(fees) and premiums/(discounts), net of $16.1 million and $17.7 million, respectively, at June 30, 2019 and December 31, 2018. |
Non-Traditional Mortgage Loans ("NTM")
The following table presents the composition of the NTM portfolio as of the dates indicated: |
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
($ in thousands) | | Count | | Amount | | Percent | | Count | | Amount | | Percent |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage:
| | | | | | | | | | | | |
Green Loans (HELOC) - first liens(1) | | 78 |
| | $ | 61,439 |
| | 8.2 | % | | 88 |
| | $ | 67,729 |
| | 8.2 | % |
Interest-only - first liens(2) | | 444 |
| | 680,361 |
| | 91.0 | % | | 519 |
| | 753,061 |
| | 91.1 | % |
Negative amortization(3) | | 10 |
| | 3,219 |
| | 0.4 | % | | 11 |
| | 3,528 |
| | 0.4 | % |
Total NTM - first liens | | 532 |
| | 745,019 |
| | 99.7 | % | | 618 |
| | 824,318 |
| | 99.7 | % |
Other consumer: | | | | | | | | | | | | |
Green Loans (HELOC) - second liens(1) | | 7 |
| | 2,247 |
| | 0.3 | % | | 10 |
| | 2,413 |
| | 0.3 | % |
Total NTM - second liens | | 7 |
| | 2,247 |
| | 0.3 | % | | 10 |
| | 2,413 |
| | 0.3 | % |
Total NTM loans | | 539 |
| | $ | 747,266 |
| | 100.0 | % | | 628 |
| | $ | 826,731 |
| | 100.0 | % |
Total loans receivable | | | | $ | 6,719,570 |
| | | | | | $ | 7,700,873 |
| | |
% of total NTM loans to total loans receivable | | | | 11.1 | % | | | | | | 10.7 | % | | |
Green Loans | | | | | | | | | | | | | | | | | | |
($ in thousands) | | | | | | June 30, 2020 | | December 31, 2019 |
| | | | | | | | |
Commercial: | | | | | | | | |
Commercial and industrial | | | | | | $ | 1,436,990 | | | $ | 1,691,270 | |
Commercial real estate | | | | | | 822,694 | | | 818,817 | |
Multifamily | | | | | | 1,434,071 | | | 1,494,528 | |
SBA(1) | | | | | | 310,784 | | | 70,981 | |
Construction | | | | | | 212,979 | | | 231,350 | |
| | | | | | | | |
Consumer: | | | | | | | | |
Single family residential mortgage | | | | | | 1,370,785 | | | 1,590,774 | |
| | | | | | | | |
| | | | | | | | |
Other consumer | | | | | | 39,393 | | | 54,165 | |
Total loans(2) | | | | | | $ | 5,627,696 | | | $ | 5,951,885 | |
| | | | | | | | |
Allowance for loan losses | | | | | | (90,370) | | | (57,649) | |
Loans receivable, net | | | | | | $ | 5,537,326 | | | $ | 5,894,236 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Green Loans are single family residential first and second mortgage lines(1)Includes 1,069 PPP loans totaling $240.7 million, which included $5.6 million of credit with a linked checking account that allows all types of deposits and withdrawals to be performed. These loans are generally interest only for a 15-year term with a balloon payment duenet unamortized loan fees at maturity. At June 30, 20192020.
(2)Total loans include deferred loan origination costs/(fees) and premiums/(discounts), net, of $6.0 million and $14.3 million, respectively, at June 30, 2020 and December 31, 2018, $286 thousand and $0, respectively, of the Company's Green Loans were non-performing. As a result of their unique payment feature, Green Loans possess higher credit risk; however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on LTV ratios and the Company’s contractual ability to curtail loans when the value of the underlying collateral declines. The Company discontinued origination of Green Loans in 2011.2019.
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 June 30, 2019 and December 31, 2018, interest only loans totaled $680.4 million and $753.1 million, respectively. At June 30, 2019 and December 31, 2018, $827 thousand and $0, respectively, of the interest only loans were non-performing.
Loans with the Potential for Negative Amortization
Negative amortization loans totaled $3.2 million and $3.5 million at June 30, 2019 and December 31, 2018, respectively. The Company discontinued origination of negative amortization loans in 2007. At June 30, 2019 and December 31, 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 credit risk associated with these loans is mitigated through the loan terms and underwriting standards, including the Company’s policies on LTV ratios.
Allowance for Loan Losses
The Company has 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 may become aware of borrowers and lessees 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 or lease on non-accrual status, assessing the need for additional ALLL, and partial or full charge off the principal balance. The Company maintains the ALLL at a level that is considered adequate to cover the estimated incurred losses in the loan portfolio.
The Company also maintains 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 are determined based on outstanding loans that share similar credit risk exposure are used to determine the adequacy of the reserve. At June 30, 2019 and December 31, 2018, the reserve for unfunded loan commitments was $4.3 million and $4.6 million, respectively, which are included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition.
The credit risk monitoring system is designed to identify impaired and potential problem loans, and to perform periodic evaluation of impairment and the adequacy of the allowance for credit losses in a timely manner. In addition, the Board of Directors of the Bank has adopted a credit policy that includes a credit review and control system that it believes should be effective in ensuring that the Company maintains an adequate allowance for loan losses. The Board of Directors also provides oversight and guidance for management’s allowance evaluation process.
The following table presents a summary of activity in the ALLL for the periods indicated: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Balance at beginning of period | | $ | 63,885 |
| | $ | 54,763 |
| | $ | 62,192 |
| | $ | 49,333 |
|
Loans charged off | | (2,451 | ) | | (950 | ) | | (3,514 | ) | | (15,589 | ) |
Recoveries of loans previously charged off | | 76 |
| | 212 |
| | 320 |
| | 782 |
|
Net charge-offs | | (2,375 | ) | | (738 | ) | | (3,194 | ) | | (14,807 | ) |
(Reversal of) provision for loan losses | | (1,987 | ) | | 2,653 |
| | 525 |
| | 22,152 |
|
Balance at end of period | | $ | 59,523 |
| | $ | 56,678 |
| | $ | 59,523 |
| | $ | 56,678 |
|
During the three months ended March 31, 2018, the Company recorded a charge-off of $13.9 million, which reflected the outstanding balance under a $15.0 million line of credit that was originated during the three months ended March 31, 2018. Subsequent to the granting of the line of credit, representations from the borrower in applying for the line of credit were determined by the Bank to be false, and third party bank account statements provided by the borrower to secure the line of credit were found to be fraudulent. The line of credit was granted after the borrower appeared to have satisfied a pre-condition that the line of credit be fully cash collateralized and secured by a bank account at a third party financial institution pledged to the Bank. As part of the Bank’s credit review and portfolio management process, the line of credit and disbursements were reviewed subsequent to closing and compliance with the borrower’s covenants was monitored. As part of this process, on March 9, 2018, the Bank received information that caused it to believe the existence of the pledged bank account had been misrepresented by the borrower and that the account had previously been closed. The Bank filed an action in Federal court pursuing the borrower and other parties. That action was voluntarily dismissed by the Bank without prejudice, and a substantially similar action was filed in Los Angeles County Superior Court. The Bank is also considering other available sources of collection and other potential means of mitigating the loss; however, no assurance can be given that it will be successful in this regard. Upon extensive review of the underwriting process for this loan, the Bank determined that this loan was the result of an isolated event of external fraud.
The following table presents the activity and balance in the ALLL and the recorded investment, excluding accrued interest, in loans based on the impairment methodology as of or for the three and six months ended June 30, 2019: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Commercial and Industrial | | Commercial Real Estate | | Multifamily | | SBA | | Construction | | Lease Financing | | Single Family Residential Mortgage | | Other Consumer | | Total |
ALLL: | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2019 | | $ | 18,893 |
| | $ | 6,838 |
| | $ | 18,898 |
| | $ | 3,057 |
| | $ | 3,453 |
| | $ | — |
| | $ | 12,142 |
| | $ | 604 |
| | $ | 63,885 |
|
Charge-offs | | (2,022 | ) | | — |
| | (6 | ) | | 8 |
| | — |
| | — |
| | (425 | ) | | (6 | ) | | (2,451 | ) |
Recoveries | | 11 |
| | — |
| | — |
| | 60 |
| | — |
| | 3 |
| | — |
| | 2 |
| | 76 |
|
Net charge-offs | | (2,011 | ) | | — |
| | (6 | ) | | 68 |
| | — |
| | 3 |
| | (425 | ) | | (4 | ) | | (2,375 | ) |
Provision (reversal) | | 4,647 |
| | 39 |
| | (6,267 | ) | | (5 | ) | | 262 |
| | (3 | ) | | (645 | ) | | (15 | ) | | (1,987 | ) |
Balance at June 30, 2019 | | $ | 21,529 |
| | $ | 6,877 |
| | $ | 12,625 |
| | $ | 3,120 |
| | $ | 3,715 |
| | $ | — |
| | $ | 11,072 |
| | $ | 585 |
| | $ | 59,523 |
|
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | $ | 18,191 |
| | $ | 6,674 |
| | $ | 17,970 |
| | $ | 1,827 |
| | $ | 3,461 |
| | $ | — |
| | $ | 13,128 |
| | $ | 941 |
| | $ | 62,192 |
|
Charge-offs | | (2,115 | ) | | — |
| | (6 | ) | | (348 | ) | | — |
| | — |
| | (951 | ) | | (94 | ) | | (3,514 | ) |
Recoveries | | 44 |
| | — |
| | — |
| | 101 |
| | — |
| | 6 |
| | 150 |
| | 19 |
| | 320 |
|
Net charge-offs | | (2,071 | ) | | — |
| | (6 | ) | | (247 | ) | | — |
| | 6 |
| | (801 | ) | | (75 | ) | | (3,194 | ) |
Provision | | 5,409 |
| | 203 |
| | (5,339 | ) | | 1,540 |
| | 254 |
| | (6 | ) | | (1,255 | ) | | (281 | ) | | 525 |
|
Balance at June 30, 2019 | | $ | 21,529 |
| | $ | 6,877 |
| | $ | 12,625 |
| | $ | 3,120 |
| | $ | 3,715 |
| | $ | — |
| | $ | 11,072 |
| | $ | 585 |
| | $ | 59,523 |
|
| | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 1,239 |
| | $ | — |
| | $ | — |
| | $ | 1,563 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 22 |
| | $ | 2,824 |
|
Collectively evaluated for impairment | | 20,290 |
| | 6,877 |
| | 12,625 |
| | 1,557 |
| | 3,715 |
| | — |
| | 11,072 |
| | 563 |
| | 56,699 |
|
Total ending ALLL balance | | $ | 21,529 |
| | $ | 6,877 |
| | $ | 12,625 |
| | $ | 3,120 |
| | $ | 3,715 |
| | $ | — |
| | $ | 11,072 |
| | $ | 585 |
| | $ | 59,523 |
|
Loans: | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 20,429 |
| | $ | — |
| | $ | — |
| | $ | 3,262 |
| | $ | 2,519 |
| | $ | — |
| | $ | 21,021 |
| | $ | 1,169 |
| | $ | 48,400 |
|
Collectively evaluated for impairment | | 1,931,278 |
| | 856,497 |
| | 1,598,978 |
| | 77,667 |
| | 206,510 |
| | — |
| | 1,940,044 |
| | 60,196 |
| | 6,671,170 |
|
Total ending loan balances | | $ | 1,951,707 |
| | $ | 856,497 |
| | $ | 1,598,978 |
| | $ | 80,929 |
| | $ | 209,029 |
| | $ | — |
| | $ | 1,961,065 |
| | $ | 61,365 |
| | $ | 6,719,570 |
|
The following table presents the activity and balance in the ALLL and the recorded investment, excluding accrued interest, in loans based on the impairment methodology as of or for the three and six months ended June 30, 2018: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Commercial and Industrial | | Commercial Real Estate | | Multifamily | | SBA | | Construction | | Lease Financing | | Single Family Residential Mortgage | | Other Consumer | | Total |
ALLL: | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2018 | | $ | 17,571 |
| | $ | 5,417 |
| | $ | 14,219 |
| | $ | 1,577 |
| | $ | 3,220 |
| | $ | — |
| | $ | 11,969 |
| | $ | 790 |
| | $ | 54,763 |
|
Charge-offs | | (276 | ) | | — |
| | (8 | ) | | (302 | ) | | — |
| | — |
| | (364 | ) | | — |
| | (950 | ) |
Recoveries | | 36 |
| | — |
| | — |
| | 167 |
| | — |
| | 5 |
| | — |
| | 4 |
| | 212 |
|
Net charge-offs | | (240 | ) | | — |
| | (8 | ) | | (135 | ) | | — |
| | 5 |
| | (364 | ) | | 4 |
| | (738 | ) |
Provision (reversal) | | (467 | ) | | 315 |
| | 419 |
| | 398 |
| | 199 |
| | (5 | ) | | 1,631 |
| | 163 |
| | 2,653 |
|
Balance at June 30, 2018 | | $ | 16,864 |
| | $ | 5,732 |
| | $ | 14,630 |
| | $ | 1,840 |
| | $ | 3,419 |
| | $ | — |
| | $ | 13,236 |
| | $ | 957 |
| | $ | 56,678 |
|
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | $ | 14,280 |
| | $ | 4,971 |
| | $ | 13,265 |
| | $ | 1,701 |
| | $ | 3,318 |
| | $ | — |
| | $ | 10,996 |
| | $ | 802 |
| | $ | 49,333 |
|
Charge-offs | | (347 | ) | | — |
| | (8 | ) | | (683 | ) | | — |
| | — |
| | (479 | ) | | (14,072 | ) | | (15,589 | ) |
Recoveries | | 97 |
| | — |
| | — |
| | 232 |
| | — |
| | 9 |
| | 436 |
| | 8 |
| | 782 |
|
Net charge-offs | | (250 | ) | | — |
| | (8 | ) | | (451 | ) | | — |
| | 9 |
| | (43 | ) | | (14,064 | ) | | (14,807 | ) |
Provision | | 2,834 |
| | 761 |
| | 1,373 |
| | 590 |
| | 101 |
| | (9 | ) | | 2,283 |
| | 14,219 |
| | 22,152 |
|
Balance at June 30, 2018 | | $ | 16,864 |
| | $ | 5,732 |
| | $ | 14,630 |
| | $ | 1,840 |
| | $ | 3,419 |
| | $ | — |
| | $ | 13,236 |
| | $ | 957 |
| | $ | 56,678 |
|
| | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 595 |
| | $ | — |
| | $ | — |
| | $ | 124 |
| | $ | — |
| | $ | — |
| | $ | 461 |
| | $ | 8 |
| | $ | 1,188 |
|
Collectively evaluated for impairment | | 16,269 |
| | 5,732 |
| | 14,630 |
| | 1,716 |
| | 3,419 |
| | — |
| | 12,775 |
| | 949 |
| | 55,490 |
|
Total ending ALLL balance | | $ | 16,864 |
| | $ | 5,732 |
| | $ | 14,630 |
| | $ | 1,840 |
| | $ | 3,419 |
| | $ | — |
| | $ | 13,236 |
| | $ | 957 |
| | $ | 56,678 |
|
Loans: | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 5,829 |
| | $ | — |
| | $ | — |
| | $ | 646 |
| | $ | — |
| | $ | — |
| | $ | 20,140 |
| | $ | 750 |
| | $ | 27,365 |
|
Collectively evaluated for impairment | | 1,736,730 |
| | 793,855 |
| | 1,959,965 |
| | 77,446 |
| | 211,110 |
| | — |
| | 2,154,043 |
| | 75,490 |
| | 7,008,639 |
|
Total ending loan balances | | $ | 1,742,559 |
| | $ | 793,855 |
| | $ | 1,959,965 |
| | $ | 78,092 |
| | $ | 211,110 |
| | $ | — |
| | $ | 2,174,183 |
| | $ | 76,240 |
| | $ | 7,036,004 |
|
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 customer 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. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
($ in thousands) | | Unpaid Principal Balance | | Recorded Investment | | Allowance for Loan Losses | | Unpaid Principal Balance | | Recorded Investment | | Allowance for Loan Losses |
With no related ALLL recorded: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 18,434 |
| | $ | 18,404 |
| | $ | — |
| | $ | 5,491 |
| | $ | 5,455 |
| | $ | — |
|
Commercial real estate | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
SBA | | 1,320 |
| | 1,251 |
| | — |
| | 1,668 |
| | 1,588 |
| | — |
|
Construction | | 2,519 |
| | 2,519 |
| | — |
| | — |
| | — |
| | — |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 20,938 |
| | 21,021 |
| | — |
| | 12,115 |
| | 12,161 |
| | — |
|
Other consumer | | 1,167 |
| | 1,147 |
| | — |
| | 469 |
| | 469 |
| | — |
|
With an ALLL recorded: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 2,025 |
| | 2,025 |
| | 1,239 |
| | — |
| | — |
| | — |
|
SBA | | 2,107 |
| | 2,011 |
| | 1,563 |
| | 823 |
| | 788 |
| | 562 |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | — |
| | — |
| | — |
| | 5,993 |
| | 6,032 |
| | 161 |
|
Other consumer | | 22 |
| | 22 |
| | 22 |
| | 468 |
| | 452 |
| | 106 |
|
Total | | $ | 48,532 |
| | $ | 48,400 |
| | $ | 2,824 |
| | $ | 27,027 |
| | $ | 26,945 |
| | $ | 829 |
|
The following table presents information on impaired loans, disaggregated by class, for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Three Months Ended | | Six Months Ended |
($ in thousands) | | Average Recorded Investment | | Interest Income Recognized | | Cash Basis Interest Recognized | | Average Recorded Investment | | Interest Income Recognized | | Cash Basis Interest Recognized |
June 30, 2019 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 20,794 |
| | $ | 255 |
| | $ | 254 |
| | $ | 12,921 |
| | $ | 255 |
| | $ | 254 |
|
Commercial real estate | | — |
| | — |
| | — |
| | 289 |
| | — |
| | — |
|
SBA | | 3,297 |
| | 4 |
| | 4 |
| | 3,571 |
| | 8 |
| | 8 |
|
Construction | | 2,519 |
| | — |
| | — |
| | 2,519 |
| | — |
| | — |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 21,092 |
| | 58 |
| | 48 |
| | 20,208 |
| | 116 |
| | 97 |
|
Other consumer | | 1,177 |
| | 4 |
| | 3 |
| | 1,011 |
| | 7 |
| | 6 |
|
Total | | $ | 48,879 |
| | $ | 321 |
| | $ | 309 |
| | $ | 40,519 |
| | $ | 386 |
| | $ | 365 |
|
June 30, 2018 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 5,900 |
| | $ | 1 |
| | $ | 1 |
| | $ | 5,616 |
| | $ | 4 |
| | $ | 4 |
|
SBA | | 654 |
| | — |
| | — |
| | 514 |
| | — |
| | — |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 20,274 |
| | 58 |
| | 47 |
| | 19,994 |
| | 115 |
| | 96 |
|
Other consumer | | 760 |
| | 3 |
| | 3 |
| | 755 |
| | 6 |
| | 5 |
|
Total | | $ | 27,588 |
| | $ | 62 |
| | $ | 51 |
| | $ | 26,879 |
| | $ | 125 |
| | $ | 105 |
|
Past Due Loans
The following table presents the aging of the recorded investment in past due loans, excluding accrued interest receivable (which is not considered to be material), by class of loans as of dates indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | Greater than 89 Days Past due | | Total Past Due | | Current | | Total |
June 30, 2019 | | | | | | | | | | | | |
NTM loans: | | | | | | | | | | | | |
Single family residential mortgage | | $ | 19,960 |
| | $ | — |
| | $ | 827 |
| | $ | 20,787 |
| | $ | 724,232 |
| | $ | 745,019 |
|
Other consumer | | — |
| | — |
| | — |
| | — |
| | 2,247 |
| | 2,247 |
|
Total NTM loans | | 19,960 |
| | — |
| | 827 |
| | 20,787 |
| | 726,479 |
| | 747,266 |
|
Traditional loans: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 1,063 |
| | 997 |
| | 4,017 |
| | 6,077 |
| | 1,945,630 |
| | 1,951,707 |
|
Commercial real estate | | — |
| | — |
| | — |
| | — |
| | 856,497 |
| | 856,497 |
|
Multifamily | | — |
| | — |
| | — |
| | — |
| | 1,598,978 |
| | 1,598,978 |
|
SBA | | 944 |
| | 73 |
| | 2,672 |
| | 3,689 |
| | 77,240 |
| | 80,929 |
|
Construction | | — |
| | — |
| | 2,519 |
| | 2,519 |
| | 206,510 |
| | 209,029 |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 7,447 |
| | 3,645 |
| | 6,683 |
| | 17,775 |
| | 1,198,271 |
| | 1,216,046 |
|
Other consumer | | 514 |
| | 295 |
| | 554 |
| | 1,363 |
| | 57,755 |
| | 59,118 |
|
Total traditional loans | | 9,968 |
| | 5,010 |
| | 16,445 |
| | 31,423 |
| | 5,940,881 |
| | 5,972,304 |
|
Total | | $ | 29,928 |
| | $ | 5,010 |
| | $ | 17,272 |
| | $ | 52,210 |
| | $ | 6,667,360 |
| | $ | 6,719,570 |
|
December 31, 2018 | | | | | | | | | | | | |
NTM loans: | | | | | | | | | | | | |
Single family residential mortgage | | $ | 7,430 |
| | $ | 617 |
| | $ | — |
| | $ | 8,047 |
| | $ | 816,271 |
| | $ | 824,318 |
|
Other consumer | | — |
| | — |
| | — |
| | — |
| | 2,413 |
| | 2,413 |
|
Total NTM loans | | 7,430 |
| | 617 |
| | — |
| | 8,047 |
| | 818,684 |
| | 826,731 |
|
Traditional loans: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 350 |
| | 1,596 |
| | 3,340 |
| | 5,286 |
| | 1,938,856 |
| | 1,944,142 |
|
Commercial real estate | | — |
| | 582 |
| | — |
| | 582 |
| | 866,431 |
| | 867,013 |
|
Multifamily | | 356 |
| | — |
| | — |
| | 356 |
| | 2,240,890 |
| | 2,241,246 |
|
SBA | | 551 |
| | 77 |
| | 862 |
| | 1,490 |
| | 67,251 |
| | 68,741 |
|
Construction | | — |
| | 939 |
| | — |
| | 939 |
| | 203,037 |
| | 203,976 |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 7,321 |
| | 3,160 |
| | 9,198 |
| | 19,679 |
| | 1,461,493 |
| | 1,481,172 |
|
Other consumer | | 3,132 |
| | 573 |
| | 446 |
| | 4,151 |
| | 63,701 |
| | 67,852 |
|
Total traditional loans | | 11,710 |
| | 6,927 |
| | 13,846 |
| | 32,483 |
| | 6,841,659 |
| | 6,874,142 |
|
Total | | $ | 19,140 |
| | $ | 7,544 |
| | $ | 13,846 |
| | $ | 40,530 |
| | $ | 7,660,343 |
| | $ | 7,700,873 |
|
Non-accrual Loans
The following table presents non-accrual loans as of the dates indicated: |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
($ in thousands) | NTM Loans | | Traditional Loans | | Total | | NTM Loans | | Traditional Loans | | Total |
Non-accrual loans | | | | | | | | | | | |
Commercial: | | | | | | | | | | | |
Commercial and industrial | $ | — |
| | $ | 5,716 |
| | $ | 5,716 |
| | $ | — |
| | $ | 5,455 |
| | $ | 5,455 |
|
Commercial real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
SBA | — |
| | 3,440 |
| | 3,440 |
| | — |
| | 2,574 |
| | 2,574 |
|
Construction | — |
| | 2,519 |
| | 2,519 |
| | — |
| | — |
| | — |
|
Consumer: | | | | | | | | | | | |
Single family residential mortgage | 1,113 |
| | 14,836 |
| | 15,949 |
| | — |
| | 12,929 |
| | 12,929 |
|
Other consumer | — |
| | 875 |
| | 875 |
| | — |
| | 627 |
| | 627 |
|
Total non-accrual loans | $ | 1,113 |
| | $ | 27,386 |
| | $ | 28,499 |
| | $ | — |
| | $ | 21,585 |
| | $ | 21,585 |
|
At June 30, 2019 and December 31, 2018, $275 thousand and $470 thousand of loans were past due 90 days or more and still accruing.
Loans in Process of Foreclosure
At June 30, 2019 and December 31, 2018, consumer mortgage loans of $8.8 million and $5.1 million, respectively, were secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.
Troubled Debt Restructurings
A modification of a loan constitutes a troubled debt restructuring (TDR) when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of the loan balance or accrued interest, or extension of the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
Troubled debt restructured loans consisted of the following as of the dates indicated: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
($ in thousands) | | NTM Loans | | Traditional Loans | | Total | | NTM Loans | | Traditional Loans | | Total |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | — |
| | $ | 16,250 |
| | $ | 16,250 |
| | $ | — |
| | $ | 2,276 |
| | $ | 2,276 |
|
SBA | | — |
| | 1,057 |
| | 1,057 |
| | — |
| | 187 |
| | 187 |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 2,653 |
| | 2,419 |
| | 5,072 |
| | 2,668 |
| | 2,596 |
| | 5,264 |
|
Other consumer | | 294 |
| | — |
| | 294 |
| | 294 |
| | — |
| | 294 |
|
Total | | $ | 2,947 |
| | $ | 19,726 |
| | $ | 22,673 |
| | $ | 2,962 |
| | $ | 5,059 |
| | $ | 8,021 |
|
The Company did not have any commitments to lend to customers with outstanding loans that were classified as TDRs as of June 30, 2019 or December 31, 2018. Accruing TDRs were $20.2 million and non-accrual TDRs were $2.4 million at June 30, 2019 compared to accruing TDRs of $5.7 million and non-accrual TDRs of $2.3 million at December 31, 2018.
The following table summarizes the pre-modification and post-modification balances of the new TDRs for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
($ in thousands) | | Number of Loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
June 30, 2019 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 10 |
| | $ | 17,339 |
| | $ | 17,020 |
| | 10 |
| | $ | 17,339 |
| | $ | 17,020 |
|
SBA | | 2 |
| | 3,214 |
| | 869 |
| | 2 |
| | 3,214 |
| | 869 |
|
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Other consumer | | — |
| | $ | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | — |
|
Total | | 12 |
| | 20,553 |
| | 17,889 |
| | 12 |
| | $ | 20,553 |
| | $ | 17,889 |
|
June 30, 2018 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | — |
| | $ | — |
| | $ | — |
| | 2 |
| | $ | 171 |
| | $ | 163 |
|
Total | | — |
| | $ | — |
| | $ | — |
| | 2 |
| | $ | 171 |
| | $ | 163 |
|
The Company considers a TDR to be in payment default once it becomes 30 days or more past due following a modification.During the six months ended June 30, 2019 and 2018, there were no loans that were modified as TDRs during the past 12 months that had subsequent payment defaults during the periods.
The following table summarizes TDRs by modification type for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Modification Type |
| | Change in Principal Payments and Interest Rates | | Change in Principal Payments | | Total |
($ in thousands) | | Count | | Amount | | Count | | Amount | | Count | | Amount |
June 30, 2019 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 10 |
| | $ | 17,020 |
| | — |
| | $ | — |
| | 10 |
| | $ | 17,020 |
|
SBA | | 2 |
| | $ | 869 |
| | — |
| | $ | — |
| | 2 |
| | $ | 869 |
|
Total | | 12 |
| | $ | 17,889 |
| | — |
| | $ | — |
| | 12 |
| | $ | 17,889 |
|
| | | | | | | | | | | | |
June 30, 2018 | | | | | | | | | | | | |
Total | | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
| | Modification Type |
| | Change in Principal Payments and Interest Rates | | Change in Principal Payments | | Total |
($ in thousands) | | Count | | Amount | | Count | | Amount | | Count | | Amount |
June 30, 2019 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 10 |
| | $ | 17,020 |
| | — |
| | $ | — |
| | 10 |
| | $ | 17,020 |
|
SBA | | 2 |
| | $ | 869 |
| | — |
| | $ | — |
| | 2 |
| | $ | 869 |
|
Total | | 12 |
| | $ | 17,889 |
| | — |
| | $ | — |
| | 12 |
| | $ | 17,889 |
|
| | | | | | | | | | | | |
June 30, 2018 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | — |
| | $ | — |
| | 2 |
| | $ | 163 |
| | 2 |
| | $ | 163 |
|
Total | | — |
| | $ | — |
| | 2 |
| | $ | 163 |
| | 2 |
| | $ | 163 |
|
Credit Quality Indicators
The Company categorizesWe categorize loans into risk categories based on relevant information about the ability of borrowers to servicerepay their debt such as:as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company performsWe perform a historical loss analysis that is combined with a comprehensive loan or lease to value analysis to analyze the associated risks in the current loan and lease portfolio. The Company analyzesWe analyze loans individually by classifying the loans as toand grade each loan for credit risk. This analysis includes all loans delinquent over 60 days and non-homogeneous loans such as commercial and commercial real estate loans. The Company usesWe use the following definitions for credit risk ratings:
Pass: Loans classifiedrisk rated 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 classifiedrisk rated as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease or of the Company’sour credit position at some future date.
Substandard: Loans classifiedrisk rated 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 classifiedrisk rated have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Companywe 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.
The following table presents the risk categories for total loans by class of loans and origination year as of June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year | | | | | | | | | | | | | | | | |
($ in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Amortized Cost Basis Converted to Term | | Total |
June 30, 2020 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | | | | | | | | |
Pass | | $ | 59,122 | | | $ | 111,437 | | | $ | 104,299 | | | $ | 63,923 | | | $ | 41,163 | | | $ | 111,761 | | | $ | 851,369 | | | $ | 4,252 | | | $ | 1,347,326 | |
Special mention | | — | | | 6,382 | | | 5,988 | | | — | | | — | | | 1,379 | | | 812 | | | 189 | | | 14,750 | |
Substandard | | 2,117 | | | 16,658 | | | — | | | 4,864 | | | 20,677 | | | 9,632 | | | 10,752 | | | 10,214 | | | 74,914 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial and industrial | | 61,239 | | | 134,477 | | | 110,287 | | | 68,787 | | | 61,840 | | | 122,772 | | | 862,933 | | | 14,655 | | | 1,436,990 | |
Commercial real estate | | | | | | | | | | | | | | | | | | |
Pass | | 15,261 | | | 153,017 | | | 215,385 | | | 72,949 | | | 102,465 | | | 198,242 | | | 36,628 | | | 1,586 | | | 795,533 | |
Special mention | | — | | | 1,829 | | | 9,570 | | | — | | | — | | | 6,732 | | | — | | | — | | | 18,131 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 9,030 | | | — | | | — | | | 9,030 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial real estate | | 15,261 | | | 154,846 | | | 224,955 | | | 72,949 | | | 102,465 | | | 214,004 | | | 36,628 | | | 1,586 | | | 822,694 | |
Multifamily | | | | | | | | | | | | | | | | | | |
Pass | | 84,873 | | | 421,045 | | | 334,029 | | | 272,657 | | | 131,646 | | | 187,823 | | | — | | | — | | | 1,432,073 | |
Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 1,998 | | | — | | | — | | | 1,998 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Multifamily | | 84,873 | | | 421,045 | | | 334,029 | | | 272,657 | | | 131,646 | | | 189,821 | | | — | | | — | | | 1,434,071 | |
SBA | | | | | | | | | | | | | | | | | | |
Pass | | 241,305 | | | 16,021 | | | 1,359 | | | 5,195 | | | 14,975 | | | 19,479 | | | 3,238 | | | 797 | | | 302,369 | |
Special mention | | — | | | — | | | — | | | 226 | | | 417 | | | 948 | | | — | | | 6 | | | 1,597 | |
Substandard | | — | | | — | | | — | | | 1,009 | | | 1,513 | | | 1,440 | | | 320 | | | 1,126 | | | 5,408 | |
Doubtful | | — | | | — | | | 390 | | | — | | | — | | | 633 | | | — | | | 387 | | | 1,410 | |
SBA | | 241,305 | | | 16,021 | | | 1,749 | | | 6,430 | | | 16,905 | | | 22,500 | | | 3,558 | | | 2,316 | | | 310,784 | |
Construction | | | | | | | | | | | | | | | | | | |
Pass | | 14,139 | | | 33,423 | | | 63,217 | | | 86,787 | | | — | | | — | | | — | | | — | | | 197,566 | |
Special mention | | — | | | — | | | 10,526 | | | — | | | 4,887 | | | — | | | — | | | — | | | 15,413 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Construction | | 14,139 | | | 33,423 | | | 73,743 | | | 86,787 | | | 4,887 | | | — | | | — | | | — | | | 212,979 | |
Consumer: | | | | | | | | | | | | | | | | | | |
Single family residential mortgage | | | | | | | | | | | | | | | | | | |
Pass | | 31,007 | | | 166,668 | | | 329,175 | | | 204,392 | | | 297,182 | | | 281,160 | | | 20,844 | | | — | | | 1,330,428 | |
Special mention | | — | | | — | | | 1,152 | | | 668 | | | 4,416 | | | 3,503 | | | — | | | — | | | 9,739 | |
Substandard | | — | | | 1,064 | | | 1,697 | | | 3,414 | | | 3,900 | | | 20,543 | | | — | | | — | | | 30,618 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Single family residential mortgage | | 31,007 | | | 167,732 | | | 332,024 | �� | | 208,474 | | | 305,498 | | | 305,206 | | | 20,844 | | | — | | | 1,370,785 | |
Other consumer | | | | | | | | | | | | | | | | | | |
Pass | | 26 | | | 93 | | | 72 | | | — | | | 8 | | | 2,485 | | | 31,303 | | | 2,577 | | | 36,564 | |
Special mention | | — | | | — | | | 27 | | | — | | | — | | | 33 | | | 248 | | | 147 | | | 455 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 2,016 | | | 281 | | | 77 | | | 2,374 | |
Doubtful | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Other consumer | | 26 | | | 93 | | | 99 | | | — | | | 8 | | | 4,534 | | | 31,832 | | | 2,801 | | | 39,393 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total loans | | $ | 447,850 | | | $ | 927,637 | | | $ | 1,076,886 | | | $ | 716,084 | | | $ | 623,249 | | | $ | 858,837 | | | $ | 955,795 | | | $ | 21,358 | | | $ | 5,627,696 | |
The following table presents the risk categories for total loans by class of loans as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | | | Total |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 1,580,269 | | | 45,323 | | | 65,678 | | | — | | | | | 1,691,270 | |
Commercial real estate | | 813,846 | | | 2,532 | | | 2,439 | | | — | | | | | 818,817 | |
Multifamily | | 1,484,931 | | | 4,256 | | | 5,341 | | | — | | | | | 1,494,528 | |
SBA | | 60,982 | | | 2,760 | | | 5,621 | | | 1,618 | | | | | 70,981 | |
Construction | | 229,771 | | | 1,579 | | | — | | | — | | | | | 231,350 | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 1,559,253 | | | 10,735 | | | 20,269 | | | 517 | | | | | 1,590,774 | |
Other consumer | | 53,331 | | | 346 | | | 488 | | | — | | | | | 54,165 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | 5,782,383 | | | $ | 67,531 | | | $ | 99,836 | | | $ | 2,135 | | | | | $ | 5,951,885 | |
Past Due Loans
The following table presents the aging of the recorded investment in past due loans, excluding accrued interest receivable (which is not considered to be material), by class of loans as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | Greater than 89 Days Past due | | Total Past Due | | Current | | Total |
June 30, 2020 | | | | | | | | | | | | |
Non-Traditional Mortgage (NTM) loans: | | | | | | | | | | | | |
Single family residential mortgage | | $ | 9,262 | | | $ | 647 | | | $ | 18,552 | | | $ | 28,461 | | | $ | 481,144 | | | $ | 509,605 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other consumer | | — | | | — | | | — | | | — | | | 1,598 | | | 1,598 | |
Total NTM loans | | 9,262 | | | 647 | | | 18,552 | | | 28,461 | | | 482,742 | | | 511,203 | |
Traditional loans: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 891 | | | 28 | | | 13,072 | | | 13,991 | | | 1,422,999 | | | 1,436,990 | |
Commercial real estate | | — | | | 1,464 | | | 2,189 | | | 3,653 | | | 819,041 | | | 822,694 | |
Multifamily | | 664 | | | — | | | — | | | 664 | | | 1,433,407 | | | 1,434,071 | |
SBA | | 1,517 | | | — | | | 2,627 | | | 4,144 | | | 306,640 | | | 310,784 | |
Construction | | — | | | — | | | — | | | — | | | 212,979 | | | 212,979 | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 29,281 | | | 4,286 | | | 8,252 | | | 41,819 | | | 819,361 | | | 861,180 | |
Other consumer | | 285 | | | 1,485 | | | 692 | | | 2,462 | | | 35,333 | | | 37,795 | |
Total traditional loans | | 32,638 | | | 7,263 | | | 26,832 | | | 66,733 | | | 5,049,760 | | | 5,116,493 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | 41,900 | | | $ | 7,910 | | | $ | 45,384 | | | $ | 95,194 | | | $ | 5,532,502 | | | $ | 5,627,696 | |
| | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | |
NTM loans: | | | | | | | | | | | | |
Single family residential mortgage | | $ | 3,973 | | | $ | 3,535 | | | $ | 13,019 | | | $ | 20,527 | | | $ | 577,830 | | | $ | 598,357 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other consumer | | — | | | — | | | — | | | — | | | 2,299 | | | 2,299 | |
Total NTM loans | | 3,973 | | | 3,535 | | | 13,019 | | | 20,527 | | | 580,129 | | | 600,656 | |
Traditional loans: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 780 | | | 5,670 | | | 3,862 | | | 10,312 | | | 1,680,958 | | | 1,691,270 | |
Commercial real estate | | — | | | — | | | — | | | — | | | 818,817 | | | 818,817 | |
Multifamily | | — | | | — | | | — | | | — | | | 1,494,528 | | | 1,494,528 | |
SBA | | 586 | | | 842 | | | 2,152 | | | 3,580 | | | 67,401 | | | 70,981 | |
Construction | | — | | | — | | | — | | | — | | | 231,350 | | | 231,350 | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 13,752 | | | 3,496 | | | 5,606 | | | 22,854 | | | 969,563 | | | 992,417 | |
Other consumer | | 199 | | | 40 | | | 95 | | | 334 | | | 51,532 | | | 51,866 | |
Total traditional loans | | 15,317 | | | 10,048 | | | 11,715 | | | 37,080 | | | 5,314,149 | | | 5,351,229 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | $ | 19,290 | | | $ | 13,583 | | | $ | 24,734 | | | $ | 57,607 | | | $ | 5,894,278 | | | $ | 5,951,885 | |
In accordance with regulatory guidance, borrowers that received forbearance or deferment, which were current prior to becoming affected by the global pandemic, generally should not be reported as past due. At June 30, 2020, 0 loans that received forbearance or deferment were considered past due and, accordingly, are not included in the table above.
|
| | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
June 30, 2019 | | | | | | | | | | |
NTM loans: | | | | | | | | | | |
Single family residential mortgage | | $ | 729,845 |
| | $ | 12,751 |
| | $ | 2,423 |
| | $ | — |
| | $ | 745,019 |
|
Other consumer | | 2,247 |
| | — |
| | — |
| | — |
| | 2,247 |
|
Total NTM loans | | 732,092 |
| | 12,751 |
| | 2,423 |
| | — |
| | 747,266 |
|
Traditional loans: | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial and industrial | | 1,844,472 |
| | 50,702 |
| | 56,533 |
| | — |
| | 1,951,707 |
|
Commercial real estate | | 832,173 |
| | 14,519 |
| | 9,805 |
| | — |
| | 856,497 |
|
Multifamily | | 1,581,629 |
| | 11,488 |
| | 5,861 |
| | — |
| | 1,598,978 |
|
SBA | | 66,448 |
| | 4,074 |
| | 9,605 |
| | 802 |
| | 80,929 |
|
Construction | | 194,842 |
| | 9,172 |
| | 5,015 |
| | — |
| | 209,029 |
|
Consumer: | | | | | | | | | | |
Single family residential mortgage | | 1,193,532 |
| | 6,017 |
| | 15,980 |
| | 517 |
| | 1,216,046 |
|
Other consumer | | 57,177 |
| | 471 |
| | 1,470 |
| | — |
| | 59,118 |
|
Total traditional loans | | 5,770,273 |
| | 96,443 |
| | 104,269 |
| | 1,319 |
| | 5,972,304 |
|
Total | | $ | 6,502,365 |
| | $ | 109,194 |
| | $ | 106,692 |
| | $ | 1,319 |
| | $ | 6,719,570 |
|
| | | | | | | | | | |
December 31, 2018 | | | | | | | | | | |
NTM loans: | | | | | | | | | | |
Single family residential mortgage | | $ | 811,056 |
| | $ | 10,966 |
| | $ | 2,296 |
| | $ | — |
| | $ | 824,318 |
|
Other consumer | | 2,413 |
| | — |
| | — |
| | — |
| | 2,413 |
|
Total NTM loans | | 813,469 |
| | 10,966 |
| | 2,296 |
| | — |
| | 826,731 |
|
Traditional loans: | | | | | | | | | | |
Commercial: | | | | | | | | | | |
Commercial and industrial | | 1,859,569 |
| | 41,302 |
| | 43,271 |
| | — |
| | 1,944,142 |
|
Commercial real estate | | 851,604 |
| | 11,376 |
| | 4,033 |
| | — |
| | 867,013 |
|
Multifamily | | 2,239,301 |
| | — |
| | 1,945 |
| | — |
| | 2,241,246 |
|
SBA | | 53,433 |
| | 6,114 |
| | 8,340 |
| | 854 |
| | 68,741 |
|
Construction | | 197,851 |
| | 3,606 |
| | 2,519 |
| | — |
| | 203,976 |
|
Consumer: | | | | | | | | | | |
Single family residential mortgage | | 1,461,721 |
| | 2,602 |
| | 16,849 |
| | — |
| | 1,481,172 |
|
Other consumer | | 66,228 |
| | 979 |
| | 645 |
| | — |
| | 67,852 |
|
Total traditional loans | | 6,729,707 |
| | 65,979 |
| | 77,602 |
| | 854 |
| | 6,874,142 |
|
Total | | $ | 7,543,176 |
| | $ | 76,945 |
| | $ | 79,898 |
| | $ | 854 |
| | $ | 7,700,873 |
|
Non-accrual LoansThe following table presents non-accrual loans as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | December 31, 2019 | | | | | | |
($ in thousands) | NTM Loans | | Traditional Loans | | Total Non-accrual Loans | | Non-accrual Loans with no ACL | | NTM Loans | | Traditional Loans | | Total Non-accrual Loans | | Non-accrual Loans with no ACL |
Non-accrual loans | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | |
Commercial and industrial | $ | — | | | $ | 30,398 | | | $ | 30,398 | | | $ | 10,728 | | | $ | — | | | $ | 19,114 | | | $ | 19,114 | | | $ | 337 | |
Commercial real estate | — | | | 6,633 | | | 6,633 | | | 6,632 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
SBA | — | | | 5,026 | | | 5,026 | | | 1,485 | | | — | | | 5,230 | | | 5,230 | | | 1,474 | |
Construction | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | |
Single family residential mortgage | 19,199 | | | 9,271 | | | 28,470 | | | 28,470 | | | 13,019 | | | 5,606 | | | 18,625 | | | 14,373 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other consumer | — | | | 2,176 | | | 2,176 | | | 2,177 | | | — | | | 385 | | | 385 | | | 380 | |
Total non-accrual loans | $ | 19,199 | | | $ | 53,504 | | | $ | 72,703 | | | $ | 49,492 | | | $ | 13,019 | | | $ | 30,335 | | | $ | 43,354 | | | $ | 16,564 | |
| | | | | | | | | | | | | | | |
At June 30, 2020 and December 31, 2019, there were 0loans that were past due 90 days or more and still accruing.
The non-traditional mortgage (“NTM”) loans on non-accrual status included $4.6 million of Green Loans and $14.6 million of interest-only loans at June 30, 2020 compared to $1.5 million of Green Loans and $11.5 million of interest-only loans at December 31, 2019.
Loans in Process of Foreclosure
At June 30, 2020 and December 31, 2019, consumer mortgage loans of $6.3 million and $15.7 million, respectively, 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 Credit Losses
Our ACL is comprised of our allowance for loan losses (“ALL”) and reserve for unfunded loan commitments. Our ACL methodology and resulting provision continues to be impacted by the current economic uncertainty and volatility caused by the COVID-19 pandemic. Our ACL methodology uses a nationally recognized, third-party model that includes many assumptions based on our historical and peer loss data, our current loan portfolio risk profile including risk ratings, and economic forecasts including macroeconomic variables (“MEVs”). As of June 30, 2020, we used economic forecasts released by our model provider during June 2020. Similar to the late March 2020 forecasts, these June 2020 forecasts reflect the onset of the pandemic, its impact on MEVs and the future economic recovery. These forecasts published by our model provider have deteriorated since the end of the first quarter of 2020, with June baseline unemployment rate forecasts for 2020 and 2021 increasing and real gross domestic product growth rates decreasing. Similar to our methodology used in the first quarter of 2020, we incorporated qualitative factors to account for certain loan portfolio characteristics that are not taken into consideration by our third-party model, including underlying strengths and weaknesses in the loan portfolio. As is the case with all estimates, we expect the ACL to be impacted in future periods by economic volatility, changing economic forecasts, actual and projected credit experience, and underlying model assumptions; all of which may be better than or worse than our current estimate.
The ACL process involves subjective and complex judgments as well as adjustments for numerous factors including those described in the federal banking agencies' joint interagency policy statement on ALL, which include 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.
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 may become aware of borrowers who may not be able to fulfill their contractual payment requirements within the loan agreements. Such loans are subject to increased monitoring. Consideration is given to placing these loans on non-accrual status, assessing the need for additional allowance for loan loss, and partially or fully charging off the principal balance. We maintain the allowance for loan losses at a level that is considered adequate to cover the expected credit losses in the loan portfolio.
The reserve for unfunded loan commitments is established to cover the expected credit losses for the estimated level of funding of these loan commitments, except for unconditionally cancellable commitments for which no reserve is required under ASC 326. At June 30, 2020 and December 31, 2019, the reserve for unfunded loan commitments was $4.2 million and $4.1 million, respectively, and was included in accrued expenses and other liabilities on the consolidated statements of financial condition.
The credit risk monitoring system is designed to identify impaired and potential problem loans, perform periodic evaluation of impairment, and determine the adequacy of the allowance for credit losses in a timely manner. In addition, management has adopted a credit policy that includes a credit review and control system that it believes should be effective in ensuring that we maintain an adequate allowance for credit losses. Further, the Board of Directors provides oversight and guidance for management’s allowance evaluation process.
The following table presents a summary of activity in the ACL for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | | | | | | | |
($ in thousands) | | 2020 | | | | | | 2019 | | | | | | | | |
| | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | | | |
Balance at beginning of period | | $ | 78,243 | | | $ | 3,888 | | | $ | 82,131 | | | $ | 63,885 | | | $ | 4,208 | | | $ | 68,093 | | | | | |
| | | | | | | | | | | | | | | | |
Loans charged off | | — | | | — | | | — | | | (2,451) | | | — | | | (2,451) | | | | | |
Recoveries of loans previously charged off | | 608 | | | — | | | 608 | | | 76 | | | — | | | 76 | | | | | |
Net charge-offs | | 608 | | | — | | | 608 | | | (2,375) | | | — | | | (2,375) | | | | | |
| | | | | | | | | | | | | | | | |
Provision for (reversal of) credit losses | | 11,519 | | | 307 | | | 11,826 | | | (1,987) | | | 87 | | | (1,900) | | | | | |
Balance at end of period | | $ | 90,370 | | | $ | 4,195 | | | $ | 94,565 | | | $ | 59,523 | | | $ | 4,295 | | | $ | 63,818 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | | | | | | | | |
($ in thousands) | | 2020 | | | | | | 2019 | | | | | | | | |
| | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | | | |
Balance at beginning of period | | $ | 57,649 | | | $ | 4,064 | | | $ | 61,713 | | | $ | 62,192 | | | $ | 4,622 | | | $ | 66,814 | | | | | |
Impact of adopting ASU 2016-13 | | 7,609 | | | (1,226) | | | 6,383 | | | — | | | — | | | — | | | | | |
Loans charged off | | (2,076) | | | — | | | (2,076) | | | (3,514) | | | — | | | (3,514) | | | | | |
Recoveries of loans previously charged off | | 958 | | | — | | | 958 | | | 320 | | | — | | | 320 | | | | | |
Net charge-offs | | (1,118) | | | — | | | (1,118) | | | (3,194) | | | — | | | (3,194) | | | | | |
| | | | | | | | | | | | | | | | |
Provision for (reversal of) credit losses | | 26,230 | | | 1,357 | | | 27,587 | | | 525 | | | (327) | | | 198 | | | | | |
Balance at end of period | | $ | 90,370 | | | $ | 4,195 | | | $ | 94,565 | | | $ | 59,523 | | | $ | 4,295 | | | $ | 63,818 | | | | | |
| | | | | | | | | | | | | | | | |
Accrued interest receivable on loans receivable, net totaled $23.8 million and $18.9 million at June 30, 2020 and December 31, 2019, and is included within other assets in the accompanying consolidated statements of financial condition. Accrued interest receivable is excluded from the estimate of expected credit losses.
The following table presents the activity and balance in the ALL and the recorded investment, excluding accrued interest, in loans based on the impairment methodology as of or for the three and six months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Commercial and Industrial | | Commercial Real Estate | | Multifamily | | SBA | | Construction | | | | Single Family Residential Mortgage | | Other Consumer | | | | Total |
ALL: | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | | $ | 23,573 | | | $ | 13,620 | | | $ | 20,072 | | | $ | 3,652 | | | $ | 7,052 | | | | | $ | 9,593 | | | $ | 681 | | | | | $ | 78,243 | |
| | | | | | | | | | | | | | | | | | | | |
Charge-offs | | — | | | — | | | — | | | — | | | — | | | | | — | | | — | | | | | — | |
Recoveries | | 119 | | | — | | | — | | | — | | | — | | | | | 488 | | | 1 | | | | | 608 | |
Net recoveries (charge-offs) | | 119 | | | — | | | — | | | — | | | — | | | | | 488 | | | 1 | | | | | 608 | |
| | | | | | | | | | | | | | | | | | | | |
Provision for (reversal of) credit losses | | 2,926 | | | 3,752 | | | 5,033 | | | 532 | | | (377) | | | | | (416) | | | 69 | | | | | 11,519 | |
Balance at June 30, 2020 | | $ | 26,618 | | | $ | 17,372 | | | $ | 25,105 | | | $ | 4,184 | | | $ | 6,675 | | | | | $ | 9,665 | | | $ | 751 | | | | | $ | 90,370 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | $ | 22,353 | | | $ | 5,941 | | | $ | 11,405 | | | $ | 3,120 | | | $ | 3,906 | | | | | $ | 10,486 | | | $ | 438 | | | | | $ | 57,649 | |
Impact of adopting ASC 326 | | 662 | | | 4,847 | | | 1,809 | | | 388 | | | 103 | | | | | (420) | | | 220 | | | | | 7,609 | |
Charge-offs | | (1,164) | | | — | | | — | | | (356) | | | — | | | | | (552) | | | (4) | | | | | (2,076) | |
Recoveries | | 149 | | | — | | | — | | | 121 | | | — | | | | | 639 | | | 49 | | | | | 958 | |
Net (charge-offs) recoveries | | (1,015) | | | — | | | — | | | (235) | | | — | | | | | 87 | | | 45 | | | | | (1,118) | |
| | | | | | | | | | | | | | | | | | | | |
Provision (reversal) | | 4,618 | | | 6,584 | | | 11,891 | | | 911 | | | 2,666 | | | | | (488) | | | 48 | | | | | 26,230 | |
Balance at June 30, 2020 | | $ | 26,618 | | | $ | 17,372 | | | $ | 25,105 | | | $ | 4,184 | | | $ | 6,675 | | | | | $ | 9,665 | | | $ | 751 | | | | | $ | 90,370 | |
| | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 9,697 | | | $ | — | | | $ | — | | | $ | 2,878 | | | $ | — | | | | | $ | — | | | $ | — | | | | | $ | 12,575 | |
Collectively evaluated for impairment | | 16,921 | | | 17,372 | | | 25,105 | | | 1,306 | | | 6,675 | | | | | 9,665 | | | 751 | | | | | 77,795 | |
| | | | | | | | | | | | | | | | | | | | |
Total ending ALL balance | | $ | 26,618 | | | $ | 17,372 | | | $ | 25,105 | | | $ | 4,184 | | | $ | 6,675 | | | | | $ | 9,665 | | | $ | 751 | | | | | $ | 90,370 | |
Loans: | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 31,129 | | | $ | 5,168 | | | $ | — | | | $ | 4,959 | | | $ | — | | | | | $ | 32,999 | | | $ | 970 | | | | | $ | 75,225 | |
Collectively evaluated for impairment | | 1,405,861 | | | 817,526 | | | 1,434,071 | | | 305,825 | | | 212,979 | | | | | 1,337,786 | | | 38,423 | | | | | 5,552,471 | |
| | | | | | | | | | | | | | | | | | | | |
Total ending loan balances | | $ | 1,436,990 | | | $ | 822,694 | | | $ | 1,434,071 | | | $ | 310,784 | | | $ | 212,979 | | | | | $ | 1,370,785 | | | $ | 39,393 | | | | | $ | 5,627,696 | |
The following table presents the activity and balance in the ALL and the recorded investment, excluding accrued interest, in loans based on the impairment methodology as of or for the three and six months ended June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Commercial and Industrial | | Commercial Real Estate | | Multifamily | | SBA | | Construction | | Lease Financing | | Single Family Residential Mortgage | | Other Consumer | | | | Total |
ALL: | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2019 | | $ | 18,893 | | | $ | 6,838 | | | $ | 18,898 | | | $ | 3,057 | | | $ | 3,453 | | | $ | — | | | $ | 12,142 | | | $ | 604 | | | | | $ | 63,885 | |
Charge-offs | | (2,022) | | | — | | | (6) | | | 8 | | | — | | | — | | | (425) | | | (6) | | | | | (2,451) | |
Recoveries | | 11 | | | — | | | — | | | 60 | | | — | | | 3 | | | — | | | 2 | | | | | 76 | |
Net (charge-offs) recoveries | | (2,011) | | | — | | | (6) | | | 68 | | | — | | | 3 | | | (425) | | | (4) | | | | | (2,375) | |
| | | | | | | | | | | | | | | | | | | | |
Provision for (reversal of) credit losses | | 4,647 | | | 39 | | | (6,267) | | | (5) | | | 262 | | | (3) | | | (645) | | | (15) | | | | | (1,987) | |
Balance at June 30, 2019 | | $ | 21,529 | | | $ | 6,877 | | | $ | 12,625 | | | $ | 3,120 | | | $ | 3,715 | | | $ | — | | | $ | 11,072 | | | $ | 585 | | | | | $ | 59,523 | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | $ | 18,191 | | | $ | 6,674 | | | $ | 17,970 | | | $ | 1,827 | | | $ | 3,461 | | | $ | — | | | $ | 13,128 | | | $ | 941 | | | | | $ | 62,192 | |
Charge-offs | | (2,115) | | | — | | | (6) | | | (348) | | | — | | | — | | | (951) | | | (94) | | | | | (3,514) | |
Recoveries | | 44 | | | — | | | — | | | 101 | | | — | | | 6 | | | 150 | | | 19 | | | | | 320 | |
Net (charge-offs) recoveries | | (2,071) | | | — | | | (6) | | | (247) | | | — | | | 6 | | | (801) | | | (75) | | | | | (3,194) | |
| | | | | | | | | | | | | | | | | | | | |
Provision (reversal) | | 5,409 | | | 203 | | | (5,339) | | | 1,540 | | | 254 | | | (6) | | | (1,255) | | | (281) | | | | | 525 | |
Balance at June 30, 2019 | | $ | 21,529 | | | $ | 6,877 | | | $ | 12,625 | | | $ | 3,120 | | | $ | 3,715 | | | $ | — | | | $ | 11,072 | | | $ | 585 | | | | | $ | 59,523 | |
| | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 1,239 | | | $ | — | | | $ | — | | | $ | 1,563 | | | $ | — | | | $ | — | | | $ | — | | | $ | 22 | | | | | $ | 2,824 | |
Collectively evaluated for impairment | | 20,290 | | | 6,877 | | | 12,625 | | | 1,557 | | | 3,715 | | | — | | | 11,072 | | | 563 | | | | | 56,699 | |
| | | | | | | | | | | | | | | | | | | | |
Total ending ALL balance | | $ | 21,529 | | | $ | 6,877 | | | $ | 12,625 | | | $ | 3,120 | | | $ | 3,715 | | | $ | — | | | $ | 11,072 | | | $ | 585 | | | | | $ | 59,523 | |
Loans: | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | 20,429 | | | $ | — | | | $ | — | | | $ | 3,262 | | | $ | 2,519 | | | $ | — | | | $ | 21,021 | | | $ | 1,169 | | | | | $ | 48,400 | |
Collectively evaluated for impairment | | 1,931,278 | | | 856,497 | | | 1,598,978 | | | 77,667 | | | 206,510 | | | — | | | 1,940,044 | | | 60,196 | | | | | 6,671,170 | |
| | | | | | | | | | | | | | | | | | | | |
Total ending loan balances | | $ | 1,951,707 | | | $ | 856,497 | | | $ | 1,598,978 | | | $ | 80,929 | | | $ | 209,029 | | | $ | — | | | $ | 1,961,065 | | | $ | 61,365 | | | | | $ | 6,719,570 | |
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 customer 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | December 31, 2019 | | | | |
($ in thousands) | | Unpaid Principal Balance | | Recorded Investment | | Allowance for Loan Losses | | Unpaid Principal Balance | | Recorded Investment | | Allowance for Loan Losses |
With no related ALL recorded: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 11,455 | | | $ | 11,383 | | | $ | — | | | $ | 1,471 | | | $ | 1,460 | | | $ | — | |
Commercial real estate | | 5,418 | | | 5,168 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
SBA | | 1,474 | | | 1,417 | | | — | | | 1,439 | | | 1,379 | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 32,849 | | | 32,999 | | | — | | | 19,319 | | | 19,405 | | | — | |
Other consumer | | 1,431 | | | 970 | | | — | | | 671 | | | 675 | | | — | |
With an ALL recorded: | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 19,739 | | | 19,746 | | | 9,697 | | | 18,776 | | | 18,776 | | | 3,367 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
SBA | | 3,731 | | | 3,542 | | | 2,878 | | | 3,921 | | | 3,757 | | | 2,045 | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | — | | | — | | | — | | | 4,213 | | | 4,252 | | | 574 | |
Other consumer | | — | | | — | | | — | | | 4 | | | 4 | | | 4 | |
Total | | $ | 76,097 | | | $ | 75,225 | | | $ | 12,575 | | | $ | 49,814 | | | $ | 49,708 | | | $ | 5,990 | |
The following table presents information on impaired loans, disaggregated by class, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended | | | | | | Six Months Ended | | | | |
($ in thousands) | | Average Recorded Investment | | Interest Income Recognized | | Cash Basis Interest Recognized | | Average Recorded Investment | | Interest Income Recognized | | Cash Basis Interest Recognized |
June 30, 2020 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 29,992 | | | $ | 16 | | | $ | 18 | | | $ | 26,452 | | | $ | 37 | | | $ | 39 | |
Commercial real estate | | 5,210 | | | — | | | — | | | 3,992 | | | — | | | — | |
| | | | | | | | | | | | |
SBA | | 5,172 | | | 3 | | | 4 | | | 5,293 | | | 6 | | | 7 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 33,356 | | | 56 | | | 34 | | | 31,420 | | | 110 | | | 79 | |
Other consumer | | 2,084 | | | — | | | — | | | 1,351 | | | 3 | | | 3 | |
Total | | $ | 75,814 | | | $ | 75 | | | $ | 56 | | | $ | 68,508 | | | $ | 156 | | | $ | 128 | |
| | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 20,794 | | | $ | 255 | | | $ | 254 | | | $ | 12,921 | | | $ | 255 | | | $ | 254 | |
Commercial real estate | | — | | | — | | | — | | | 289 | | | — | | | — | |
| | | | | | | | | | | | |
SBA | | 3,297 | | | 4 | | | 4 | | | 3,571 | | | 8 | | | 8 | |
Construction | | 2,519 | | | — | | | — | | | 2,519 | | | — | | | — | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 21,092 | | | 58 | | | 48 | | | 20,208 | | | 116 | | | 97 | |
Other consumer | | 1,177 | | | 4 | | | 3 | | | 1,011 | | | 7 | | | 6 | |
Total | | $ | 48,879 | | | $ | 321 | | | $ | 309 | | | $ | 40,519 | | | $ | 386 | | | $ | 365 | |
Troubled Debt Restructurings
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. A concession or 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. 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.
TDR loans consisted of the following as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | December 31, 2019 | | | | |
($ in thousands) | | NTM Loans | | Traditional Loans | | Total | | NTM Loans | | Traditional Loans | | Total |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | — | | | $ | 20,808 | | | $ | 20,808 | | | $ | — | | | $ | 16,245 | | | $ | 16,245 | |
SBA | | — | | | 266 | | | 266 | | | — | | | 266 | | | 266 | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 2,628 | | | 2,170 | | | 4,798 | | | 2,638 | | | 2,394 | | | 5,032 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other consumer | | — | | | — | | | — | | | 294 | | | — | | | 294 | |
Total | | $ | 2,628 | | | $ | 23,244 | | | $ | 25,872 | | | $ | 2,932 | | | $ | 18,905 | | | $ | 21,837 | |
We had commitments to lend to customers with outstanding loans that were classified as TDRs of $135 thousand as of June 30, 2020 and December 31, 2019. Accruing TDRs were $5.6 million and non-accrual TDRs were $20.3 million at June 30, 2020 compared to accruing TDRs of $6.6 million and non-accrual TDRs of $15.2 million at December 31, 2019. The increase in TDRs during the six months ended June 30, 2020 was primarily due to one commercial and industrial relationship.
The following table summarizes the pre-modification and post-modification balances of the new TDRs for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended | | | | | | Six Months Ended | | | | |
($ in thousands) | | Number of Loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | | Number of Loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
June 30, 2020 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | — | | | $ | — | | | $ | — | | | 1 | | | $ | 5,000 | | | $ | 5,000 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | — | | | — | | | — | | | 1 | | | $ | 5,000 | | | $ | 5,000 | |
June 30, 2019 | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | 10 | | | $ | 17,339 | | | $ | 17,020 | | | 10 | | | $ | 17,339 | | | $ | 17,020 | |
SBA | | 2 | | | $ | 3,214 | | | $ | 869 | | | 2 | | | $ | 3,214 | | | $ | 869 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total | | 12 | | | $ | 20,553 | | | $ | 17,889 | | | 12 | | | $ | 20,553 | | | $ | 17,889 | |
We consider a TDR to be in payment default once it becomes 30 days or more past due following a modification. During each of the three and six months ended June 30, 2020, there was 1 loan that was modified as a TDR during the past 12 months that had subsequent payment defaults. During each of the three and six months ended June 30, 2019, there were 0 loans that were modified as TDRs during the past 12 months that had subsequent payment defaults.
The following table summarizes TDRs by modification type for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | | | | | |
| | Modification Type | | | | | | | | | | | | | | | | | | |
| | Change in Principal Payments and Interest Rates | | | | Change in Principal Payments | | | | | | | | | | | | Total | | |
($ in thousands) | | Count | | Amount | | Count | | Amount | | | | | | | | | | Count | | Amount |
June 30, 2020 | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | — | | | $ | — | | | — | | | $ | — | | | | | | | | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total | | — | | | $ | — | | | — | | | $ | — | | | | | | | | | | | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | 10 | | | $ | 17,020 | | | — | | | $ | — | | | | | | | | | | | 10 | | | $ | 17,020 | |
SBA | | 2 | | | $ | 869 | | | — | | | $ | — | | | | | | | | | | | 2 | | | $ | 869 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total | | 12 | | | $ | 17,889 | | | — | | | $ | — | | | | | | | | | | | 12 | | | $ | 17,889 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | | | | | | | | | | | | | | | |
| | Modification Type | | | | | | | | | | | | | | | | | | |
| | Change in Principal Payments and Interest Rates | | | | Change in Principal Payments | | | | | | | | | | | | Total | | |
($ in thousands) | | Count | | Amount | | Count | | Amount | | | | | | | | | | Count | | Amount |
June 30, 2020 | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | 1 | | | $ | 5,000 | | | — | | | $ | — | | | | | | | | | | | 1 | | | $ | 5,000 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Total | | 1 | | | $ | 5,000 | | | — | | | $ | — | | | | | | | | | | | 1 | | | $ | 5,000 | |
| | | | | | | | | | | | | | | | | | | | |
June 30, 2019 | | | | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | 10 | | | $ | 17,020 | | | — | | | $ | — | | | | | | | | | | | 10 | | | $ | 17,020 | |
SBA | | 2 | | | 869 | | | — | | | — | | | | | | | | | | | 2 | | | 869 | |
Consumer: | | | | | | | | | | | | | | | | | | | | |
Single family residential mortgage | | — | | | — | | | — | | | — | | | | | | | | | | | — | | | — | |
Total | | 12 | | | $ | 17,889 | | | — | | | $ | — | | | | | | | | | | | 12 | | | $ | 17,889 | |
Purchases, Sales, and Transfers
From time to time, the Company purchaseswe purchase and sellssell loans in the secondary market. Certain loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value and any reductions in value on transfer are reflected as write-downs to allowance for loancredit losses. The Company had no purchases of loans, excluding loans held-for-sale, forDuring the three and six months ended June 30, 20192020 we purchased $25.8 million of single family residential mortgage loans. There were 0 purchases of loans during the three and 2018.six months ended June 30, 2019. The following table presents loans transferred from (to) loans held-for-sale by portfolio segment for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
($ in thousands) | | Transfers from Held-For-Sale | | Transfers (to) Held-For-Sale | | Transfers from Held-For-Sale | | Transfers (to) Held-For-Sale |
June 30, 2019 | | | | | | | | |
Commercial: | | | | | | | | |
Commercial real estate | | $ | — |
| | $ | (573 | ) | | $ | — |
| | $ | (573 | ) |
Multifamily | | — |
| | (752,087 | ) | | — |
| | (752,087 | ) |
Consumer: | | | | | | | | |
Single family residential mortgage | | $ | — |
| | $ | (131,315 | ) | | $ | — |
| | $ | (374,679 | ) |
Total | | $ | — |
| | $ | (883,975 | ) | | $ | — |
| | $ | (1,127,339 | ) |
June 30, 2018 | | | | | | | | |
Commercial: | | | | | | | | |
Multifamily | | $ | — |
| | $ | (71,449 | ) | | $ | — |
| | $ | (71,449 | ) |
Consumer: | | | | | | | | |
Single family residential mortgage | | — |
| | (133,829 | ) | | — |
| | (136,013 | ) |
Other consumer | | — |
| | — |
| | — |
| | (4,362 | ) |
Total | | $ | — |
| | $ | (205,278 | ) | | $ | — |
| | $ | (211,824 | ) |
32
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Six Months Ended | | |
($ in thousands) | | Transfers from Held-For-Sale | | Transfers (to) Held-For-Sale | | Transfers from Held-For-Sale | | Transfers (to) Held-For-Sale |
June 30, 2020 | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | |
June 30, 2019 | | | | | | | | |
Commercial: | | | | | | | | |
| | | | | | | | |
Commercial real estate | | $ | — | | | $ | (573) | | | $ | — | | | $ | (573) | |
Multifamily | | — | | | (752,087) | | | — | | | (752,087) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Consumer: | | | | | | | | |
Single family residential mortgage | | — | | | (131,315) | | | — | | | (374,679) | |
| | | | | | | | |
Total | | $ | — | | | $ | (883,975) | | | $ | — | | | $ | (1,127,339) | |
Included in transfers toThere were 0 sales of loans held for sale is $573.9 million in multifamily loans from loans held-for-investment related to our pending Freddie Mac multifamily securitization which is expected to close during the third quarter of 2019. The loans included in the securitization have a weighted average coupon of 3.79%three and a weighted average term to initial reset of 3.5 years. The related mortgage servicing rights will also be sold.
In connection with the anticipated securitization, during the second quarter of 2019, the Company entered into interest rate swap agreements with a combined notional value of $543.4 million to offset variability in fair value of the related loans as a result of changes in market interest rates. During the threesix months ended June 30, 2019,2020. Loss on sale of loans during the Company recognized a $9.6 million unrealized loss. The $9.6 million unrealized loss on these interest rate swaps was due to a decline in interest rates since their executionthree and is expected to be primarily offset by the anticipated gain in fair value of the loans sold into the securitization in the third quarter. Subsequent tosix months ended June 30, 2019, this securitization was completed (refer2020 totaled 0 and $27 thousand and related to Note 20 — Subsequent Eventscertain adjustments for more information).previously sold loans.
During the three and six months ended June 30, 2019, the Companywe sold $131.5 million and $374.7 million respectively, in single family residential loans, resulting in a gaingains of $125 thousand and $1.8 million, respectively.million.
During the three and six months ended June 30, 2019, the Company sold $178.2 million and $178.2 million, respectively, in multifamily residential loans, resulting in a gain of $2.9 million and $2.9 million, respectively.
NOTE 6 – LEASES
The Company has operating leases for corporate offices, branches and loan production offices. The Company’s leases have remaining lease terms of one month to twenty years, some of which include options to extend the leases generally for periods of three years to five years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of lease expense were as follows: |
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2019 |
Operating Lease Expense | | $ | 1,720 |
| | $ | 3,496 |
|
Variable Lease Expense | | 89 |
| | 178 |
|
Sublease Income | | (15 | ) | | (250 | ) |
Total Lease Expense | | $ | 1,794 |
| | $ | 3,424 |
|
Supplemental cash flow information related to leases was as follows: |
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2019 |
Cash paid for amounts included in the measurement of lease liabilities for operating leases: | | | | |
Operating cash flows | | $ | 1,738 |
| | $ | 3,619 |
|
ROU assets obtained in the exchange for lease liabilities: | | | | |
ROU assets obtained in exchange for lease liabilities | | $ | 1,055 |
| | $ | 4,089 |
|
ROU assets recognized upon adoption of new lease standard | | $ | — |
| | $ | 23,332 |
|
Supplemental balance sheet information related
Non-Traditional Mortgage Loans (“NTM”)
Our NTM portfolio is comprised of 3 interest only products: Green Loans, Interest Only loans and a small number of additional loans with the potential for negative amortization. The initial credit guidelines for the NTM portfolio were established based on the borrower's Fair Isaac Corporation (“FICO”) score, LTV ratio, property type, occupancy type, loan amount, and geography. Additionally, from an ongoing credit risk management perspective, we have determined that the most significant performance indicators for NTMs are LTV ratios and FICO scores. We review the NTM loan portfolio periodically by refreshing FICO scores on the Green Loans and HELOCs and ordering third party automated valuation models (AVMs) to leases wasconfirm collateral values. We no longer originate NTM loans.
The following table presents the composition of the NTM portfolio, which are included in the single family residential mortgage portfolio, as
follows:of the dates indicated: |
| | | | |
($ in thousands) | | June 30, 2019 |
Operating Leases: | | |
Operating lease right-of-use assets | | $ | 24,118 |
|
Operating lease liabilities | | 25,457 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | December 31, 2019 | | | | |
($ in thousands) | | Count | | Amount | | Percent | | Count | | Amount | | Percent |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage: | | | | | | | | | | | | |
Green Loans (HELOC) - first liens | | 61 | | | $ | 43,604 | | | 8.5 | % | | 69 | | | $ | 49,959 | | | 8.3 | % |
Interest-only - first liens | | 329 | | | 463,666 | | | 90.7 | % | | 376 | | | 545,371 | | | 90.8 | % |
Negative amortization | | 8 | | | 2,335 | | | 0.5 | % | | 9 | | | 3,027 | | | 0.5 | % |
Total NTM - first liens | | 398 | | | 509,605 | | | 99.7 | % | | 454 | | | 598,357 | | | 99.6 | % |
Other consumer: | | | | | | | | | | | | |
Green Loans (HELOC) - second liens | | 5 | | | 1,598 | | | 0.3 | % | | 7 | | | 2,299 | | | 0.4 | % |
| | | | | | | | | | | | |
Total NTM - second liens | | 5 | | | 1,598 | | | 0.3 | % | | 7 | | | 2,299 | | | 0.4 | % |
Total NTM loans | | 403 | | | $ | 511,203 | | | 100.0 | % | | 461 | | | $ | 600,656 | | | 100.0 | % |
Total loans receivable | | | | $ | 5,627,696 | | | | | | | $ | 5,951,885 | | | |
% of total NTM loans to total loans receivable | | | | 9.1 | % | | | | | | 10.1 | % | | |
|
| | | |
| | June 30, 2019 |
Weighted-average remaining lease term (in years): | | |
Operating leases | | 6.64 years |
|
Weighted-average discount rate: | | |
Operating leases | | 2.88 | % |
Maturities of lease liabilities at June 30, 2019 were as follows:
|
| | | | |
($ in thousands) | | Operating Leases |
Remainder of 2019 | | $ | 3,325 |
|
2020 | | 6,590 |
|
2021 | | 4,827 |
|
2022 | | 3,250 |
|
2023 | | 2,440 |
|
2024 | | 1,568 |
|
Thereafter | | 6,338 |
|
Total lease payments | | 28,338 |
|
Less: present value discount | | (2,881 | ) |
Total Lease Liability | | $ | 25,457 |
|
NOTE 75 – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
At June 30, 20192020 and December 31, 2018, the Company2019, we had goodwill of $37.1 million. The Company evaluatesWe evaluate goodwill impairment as of August 31st each year, and more frequently if events or circumstances indicate that there may be impairment. The CompanyWe completed itsour most recent annual goodwill impairment test (Step 0) as of August 31, 20182019 and determined that no0 goodwill impairment existed. As a
result of the economic volatility caused by COVID-19 pandemic in both the second and first quarters of 2020, we analyzed the risk indicators related to potential goodwill impairment. Based on these analyses, we did 0t identify any impairment to goodwill during the first six months of 2020, however, there can be no assurance that prolonged market volatility resulting from the COVID-19 pandemic or other factors will not result in impairments to goodwill or other intangibles in future periods.
Core deposit intangibles are amortized over their useful lives ranging from four to ten years. As of June 30, 2019,2020, the weighted average remaining amortization period for core deposit intangibles was approximately 5.14.3 years.
| ($ in thousands) | | ($ in thousands) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
June 30, 2020 | | June 30, 2020 | | | | | | |
Core deposit intangibles | | Core deposit intangibles | | $ | 30,904 | | | $ | 27,612 | | | $ | 3,292 | |
| | ($ in thousands) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | |
June 30, 2019 | | | | | | | |
December 31, 2019 | | December 31, 2019 | |
Core deposit intangibles | | $ | 30,904 |
| | $ | 25,799 |
| | $ | 5,105 |
| Core deposit intangibles | | $ | 30,904 | | | $ | 26,753 | | | $ | 4,151 | |
December 31, 2018 | | | | | | | |
Core deposit intangibles | | $ | 30,904 |
| | $ | 24,558 |
| | $ | 6,346 |
| |
|
Aggregate amortization of intangible assets was $621$430 thousand and $827$621 thousand for the three months ended June 30, 2020 and 2019 and 2018, respectively$859 thousand and $1.2 million and $1.7 million for the six months ended June 30, 20192020 and 2018, respectively.2019. The following table presents estimated future amortization expenses as of June 30, 2019:2020:
| | ($ in thousands) | | Remainder of 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and After | | Total | ($ in thousands) | | Remainder of 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | | Total |
Estimated future amortization expense | | $ | 954 |
| | $ | 1,518 |
| | $ | 1,082 |
| | $ | 799 |
| | $ | 517 |
| | $ | 235 |
| | $ | 5,105 |
| Estimated future amortization expense | | $ | 659 | | | $ | 1,082 | | | $ | 799 | | | $ | 517 | | | $ | 235 | | | | $ | 3,292 | |
NOTE 86 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The following table presents the Company's advances from the FHLB as of the dates indicated:
| | | | | | | | | | | | | | | | | |
($ in thousands) | | June 30, 2020 | | | December 31, 2019 |
Fixed rate: | | | | | |
Outstanding balance | | $ | 624,000 | | (1) | | $ | 730,000 | |
Interest rates ranging from | | — | % | (2) | | 1.82 | % |
Interest rates ranging to | | 3.32 | % | | | 3.32 | % |
Weighted average interest rate | | 2.24 | % | | | 2.66 | % |
Variable rate: | | | | | |
Outstanding balance | | — | | | | 465,000 | |
Weighted average interest rate | | — | % | | | 1.66 | % |
(1)Excludes $6.8 million of unamortized debt issuance costs at June 30, 2020.
|
| | | | | | | | |
($ in thousands) | | June 30, 2019 | | December 31, 2018 |
Fixed rate: | | | | |
Outstanding balance | | $ | 1,180,000 |
| | $ | 805,000 |
|
Interest rates ranging from | | 1.61 | % | | 1.61 | % |
Interest rates ranging to | | 3.32 | % | | 3.32 | % |
Weighted average interest rate | | 2.51 | % | | 2.58 | % |
Variable rate: | | | | |
Outstanding balance | | 645,000 |
| | 715,000 |
|
Weighted average interest rate | | 2.52 | % | | 2.56 | % |
(2)Includes $10.0 million in FHLB recovery advances with an interest rate of 0.00%, consisting of $5.0 million with a maturity date of November 27, 2020 and $5.0 million with a maturity date of May 27, 2021.
Each advance is payable at its maturity date. Advances paid early are subject to a prepayment penalty. In June 2020, we repaid a $100.0 million FHLB term advance with a weighted average interest rate of 2.07% and incurred a $2.5 million extinguishment fee that is included in other noninterest expense. Additionally, in June 2020 we refinanced $111.0 million of FHLB term advances to take advantage of the rapid decline in market interest rates. As a result of this refinancing, our weighted average effective interest rate on such FHLB term advances changed from 2.81% to 2.02% and the weighted average life extended from 2.52 years to 5.18 years. At the end of the second quarter, FHLB advances included 0 overnight borrowings, $58.0 million maturing within three months, and $566.0 million maturing beyond three months with a weighted average life of 4.1 years and weighted average interest rate of 2.39%.
At June 30, 20192020 and December 31, 2018,2019, the Bank’s advances from the FHLB were collateralized by certain real estate loans with an aggregate unpaid principal balance of $3.71$2.66 billion and $4.05$3.05 billion. Based on this collateral, the Bank was eligible to borrow an additional $1.06 billion respectively. at June 30, 2020.
The Bank’s investment in capital stock of the FHLB of San Francisco totaled $49.3$19.4 million and $41.0$32.3 million at June 30, 20192020 and December 31, 2018, respectively. Based on this collateral and2019.
During the Bank’s holdingssecond quarter of FHLB stock,2020, we expanded our existing secured borrowing capacity with the Federal Reserve Bank was eligibleof San Francisco (“Federal Reserve”) by participating in its Borrower-in-Custody (“BIC”) program. As a result, our borrowing capacity with the Federal Reserve increased to borrow an additional $942.6$370.4 million at June 30, 2019.
The Bank maintained a line of credit of $21.0 million from2020. Prior to participating in the Federal Reserve Discount Window, to whichBIC program, the Bank only pledged securities as collateral for access to the discount window. At June 30, 2020, the Bank has pledged certain qualifying loans with an unpaid principal balance of $870.1 million and securities with a carrying value of $28.3$23.0 million as collateral for this line of credit. Borrowings under this BIC program are overnight advances with no outstandinginterest chargeable at the discount window (“primary credit”) borrowing rate. There were 0 borrowings atunder this arrangement for the three and six months ended June 30, 2020 and 2019.
The Bank maintained available unsecured federal funds lines with 5 correspondent banks totaling $185.0 million, with no0 outstanding borrowings at June 30, 2019.2020.
The Bank also maintained repurchase agreements and had no0 outstanding securities sold under agreements to repurchase at June 30, 20192020 and December 31, 2018.2019. Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and the pledging of additional investment securities.
On February 14, 2019, the Company entered into a new line of credit for $15.0 million, which bears interest at LIBOR plus 2.00% and has a maturity date of February 13, 2020. At June 30, 2019, total borrowings under the line of credit were $0.
NOTE 97 – LONG-TERM DEBT
The following table presents the Company'sour long-term debt as of the dates indicated:
| | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | | December 31, 2019 | |
($ in thousands) | | Par Value | | Unamortized Debt Issuance Cost and Discount | | Par Value | | Unamortized Debt Issuance Cost and Discount | ($ in thousands) | | Par Value | | Unamortized Debt Issuance Cost and Discount | | Par Value | | Unamortized Debt Issuance Cost and Discount |
5.25% senior notes due April 15, 2025 | | $ | 175,000 |
| | $ | (1,743 | ) | | $ | 175,000 |
| | $ | (1,826 | ) | 5.25% senior notes due April 15, 2025 | | $ | 175,000 | | | $ | (1,463) | | | $ | 175,000 | | | $ | (1,579) | |
Total | | $ | 175,000 |
| | $ | (1,743 | ) | | $ | 175,000 |
| | $ | (1,826 | ) | Total | | $ | 175,000 | | | $ | (1,463) | | | $ | 175,000 | | | $ | (1,579) | |
Senior Notes
On April 6, 2015, the Company completed the issuance and sale of $175.0 million aggregate principal amount of its 5.25 percentWe were in compliance with all covenants under 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 the Company’s senior unsecured debt obligations and rank equally with all of the Company’s other present and future unsecured unsubordinated obligations. The Company makes interest payments on the Senior Notes semi-annually in arrears.
The Company may, at its 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 percent 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 the Company’s ability and the ability of the Company’s subsidiaries to dispose of or incur liens on the voting stock of certain subsidiaries and also contains customary events of default. The Company was in compliance with all covenants under the Indenture at June 30, 2019.2020.
NOTE 108 – INCOME TAXES
For the three and six months ended June 30, 2020, income tax benefit was $5.3 million and $7.5 million and the effective tax rate was 22.3% and 23.0%. For the three and six months ended June 30, 2019, income tax expense on a consolidated operations basis, was $4.3 million and $7.0 million respectively, and the effective tax rate was 20.6% and 22.9%, respectively. For the three and six months ended June 30, 2018 income tax expense (benefit), on a consolidated operations basis, was $2.1 million and $(3.7) million, respectively, and the. Our effective tax rate was 12.6%of 22.3% and (18.6)%, respectively. The Company recognized higher income tax expense for the 2019 periods mainly due to the reduction in the recognition of year-to-date tax credits from the investments in alternative energy partnerships of $1.9 million and $9.2 million23.0% for the three and six months ended June 30, 2018, respectively, compared2020 differs from the 21% federal statutory rate due to $1.7 million and $1.7 million, respectively,the impact of state taxes as well as various tax credits recognized for the three and six months ended June 30, 2019, respectively. The Company uses the flow-through income statement method tocredits.
We account for the investment tax credits earned on the solar investments. Under this method, investment 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.
The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including considering the four possible sources of future taxable income, such as future reversal of itsexisting taxable temporary differences, the existencefuture taxable income exclusive of its historical earnings, the amounts ofreversing temporary differences and carryforwards, taxable income in prior carryback year(s), and future projected earnings as well as the tax expiration periods of its income tax credits.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, no0 valuation allowance was provided against the net deferred tax assets of $42.8$48.3 million and $49.4$44.9 million at June 30, 20192020 and December 31, 2018,2019, respectively. The overall decreaseincrease in net deferred tax assets was primarily due to increases of $1.8 millionan increase in deferred tax liabilities resulting from year-to-date temporary book-tax differences and an increaseassets of $4.8$1.5 million in deferred tax liabilities from the decrease ofincrease in net unrealized loss on securities available-for-sale.available-for-sale and $1.9 million from the adoption of ASU 2016-13.
ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10-25 prescribes a threshold and a measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The CompanyWe had unrecognized tax benefits of $1.3$1.0 million and $1.2 million$977 thousand at June 30, 20192020 and December 31, 2018,2019, respectively. The Company doesWe do not expectbelieve that the total amount of unrecognized
tax benefits to significantlywill change materially in the next twelve months. As of June 30, 2019,2020, the total unrecognized tax benefit that, if recognized, would impact the effective tax rate was $1.1 million. $820 thousand.
At June 30, 20192020 and December 31, 2018, the Company2019, we had no0 accrued interest or penalties. In the event the Company iswe are assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income tax expense.
The Company and its subsidiariesWe are subject to U.S. Federalfederal income tax as well as income tax in multiple state jurisdictions. The Company isWe are no longer subject to the assessment ofexamination by U.S. federal income taxtaxing authorities for years before 2015.2016. The statute of limitations for the assessment of California Franchisefranchise taxes has expired for tax years before 2014 (other state income and franchise tax statutes of limitations vary by state).
NOTE 119 – DERIVATIVE INSTRUMENTS
The Company usesWe use derivative instruments and other risk management techniques to reduce itsour exposure to adverse fluctuations in interest rates and foreign currency exchange rates in accordance with itsour risk management policies.
Interest Rate Swaps and Caps on Loans:The Company offers interest rate swap and cap products to certain loan customers to allow them to hedge the risk of rising interest rates on their variable rate loans. When such products are issued, the Company also enters into an offsetting swap with institutional counterparties to eliminate the interest rate risk. These back-to-back derivative agreements, which generate fee income for the Company, are intended to offset each other. The Company retains the credit risk of the original loan. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer plus the fee. These swaps and caps are not designated as hedging instruments and are recorded at fair value in Other Assets and Accrued Expenses and Other Liabilities in the Consolidated Statements of Financial Condition. The changes in fair value are recorded in Other Income in the Consolidated Statements of Income. ForDuring the three and six months ended June 30, 2018,2020, changes in fair value recorded through Other Income in the Consolidated Statements of Incomeon interest rate swaps and caps on loans and foreign exchange contracts were immaterial.
For$(107) thousand and $(288) thousand, respectively, compared to $(9.7) million and $(9.8) million for the three and six months endedJune 30, 2019, respectively, and were included in other income also includes a $9.6 million unrealized loss on interest rate swaps related to the pending Freddie Mac multifamily securitization in which we planned to sell the associated mortgage servicing rights. The $9.6 million unrealized loss on these interest rate swaps was due to a decline in interest rates since their execution and is expected to be primarily offset by the anticipated gain in fair value of the loans sold into the securitization in the third quarter. Subsequent to June 30, 2019, this securitization was completed (refer to Note 20 — Subsequent Events for more information).
Foreign Exchange Contracts: The Company offers short-term foreign exchange contracts to its customers to purchase and/or sell foreign currencies at set rates in the future. These products allow customers to hedge the foreign exchange rate risk of their deposits and loans denominated in foreign currencies. In conjunction with these products the Company also enters into offsetting contracts with institutional counterparties to hedge the Company’s foreign exchange rate risk. These back-to-back contracts allow the Company to offer its customers foreign exchange products while minimizing its exposure to foreign exchange rate fluctuations. These foreign exchange contracts are not designated as hedging instruments and are recorded at fair value in Other Assets and Accrued Expenses and Other Liabilities on the Consolidated Statementsconsolidated statements of Financial Condition. For the three and six months ended June 30, 2019 and 2018, changes in fair value recorded through Other Income in the Consolidated Statements of Income were immaterial.operations.
The following table presents the notional amount and fair value of derivative instruments included in the Consolidated Statementsconsolidated statements of Financial Conditionfinancial condition as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | December 31, 2019 | | |
($ in thousands) | | Notional Amount | | Fair Value(1) | | Notional Amount | | Fair Value(1) |
Derivative assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and caps on loans | | $ | 69,266 | | | $ | 8,598 | | | $ | 70,674 | | | $ | 3,445 | |
Foreign exchange contracts | | 3,657 | | | 137 | | | 4,643 | | | 138 | |
Total | | $ | 72,923 | | | $ | 8,735 | | | $ | 75,317 | | | $ | 3,583 | |
Derivative liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate swaps and caps on loans | | $ | 69,266 | | | $ | 9,239 | | | $ | 70,674 | | | 3,717 | |
| | | | | | | | |
Foreign exchange contracts | | 3,657 | | | 54 | | | 4,643 | | | 136 | |
Total | | $ | 72,923 | | | $ | 9,293 | | | $ | 75,317 | | | $ | 3,853 | |
(1) |
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
($ in thousands) | | Notional Amount | | Fair Value(1) | | Notional Amount | | Fair Value(1) |
Derivative assets: | | | | | | | | |
Interest rate swaps and caps on loans | | $ | 130,121 |
| | $ | 4,119 |
| | $ | 103,812 |
| | $ | 1,534 |
|
Foreign exchange contracts | | 1,209 |
| | 30 |
| | — |
| | — |
|
Total | | $ | 131,330 |
| | $ | 4,149 |
| | $ | 103,812 |
| | $ | 1,534 |
|
Derivative liabilities: | | | | | | | | |
Interest rate swaps and caps on loans | | $ | 673,514 |
| | $ | 14,041 |
| | $ | 103,812 |
| | 1,600 |
|
Foreign exchange contracts | | 1,209 |
| | 14 |
| | — |
| | — |
|
Total | | $ | 674,723 |
| | $ | 14,055 |
| | $ | 103,812 |
| | $ | 1,600 |
|
The fair value of interest rate swaps and caps on loans are included in other assets and accrued expenses and other liabilities, respectively, in the accompanying consolidated statements of financial condition. | |
(1) | The fair value of derivative assets and derivative liabilities are included in other assets and accrued expenses and other liabilities, respectively, in the accompanying consolidated balance sheets. |
The Company hasWe 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, the Company electedWe elect, however, to account for all derivatives with counterparty institutions on a gross basis. Due to clearinghouse rule changes, variation margin payments are treated as settlements of derivative exposure rather than as collateral.
NOTE 1210 – EMPLOYEE STOCK COMPENSATION
On May 31, 2018, (the Effective Date), the Company'sour stockholders approved the Company's 2018 Omnibus Stock Incentive Plan (2018 Omnibus Plan). As of the Effective Date, the Company discontinued granting awards under the Company’s 2013 Omnibus Incentive Plan (2013 Omnibus Plan) or any prior equity incentive plans and future stock-based compensation awards to its directors and employees will be made pursuant to the (“2018 Omnibus Plan.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.4,417,882. As of June 30, 2019, 3,644,2932020, 3,359,922 shares were available for future awards.
Stock-based Compensation Expense
The following table presents stock-based compensation expense and the related tax benefits for the periods indicated:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Stock options | | $ | (24 | ) | | $ | 80 |
| | $ | (16 | ) | | $ | 113 |
| Stock options | | $ | 2 | | | $ | (24) | | | $ | 4 | | | $ | (16) | |
Restricted stock awards and units | | 1,521 |
| | 1,708 |
| | 2,366 |
| | 3,762 |
| Restricted stock awards and units | | 1,468 | | | 1,521 | | | 3,042 | | | 2,366 | |
| Total share-based compensation expense | | $ | 1,497 |
| | $ | 1,788 |
| | $ | 2,350 |
| | $ | 3,875 |
| Total share-based compensation expense | | $ | 1,470 | | | $ | 1,497 | | | $ | 3,046 | | | $ | 2,350 | |
Related tax benefits | | $ | 440 |
| | $ | 524 |
| | $ | 691 |
| | $ | 1,136 |
| Related tax benefits | | $ | 433 | | | $ | 440 | | | $ | 897 | | | $ | 691 | |
The following table presents unrecognized stock-based compensation expense as of June 30, 2019:2020:
|
| | | | | | |
($ in thousands) | | Unrecognized Expense | | Weighted-Average Remaining Expected Recognition Period |
Stock option awards | | $ | 11 |
| | 1.0 year |
Restricted stock awards and restricted stock units | | 12,826 |
| | 2.5 years |
Total | | $ | 12,837 |
| | 2.5 years |
| | | | | | | | | | | | | | |
($ in thousands) | | Unrecognized Expense | | Weighted-Average Remaining Expected Recognition Period |
| | | | |
Restricted stock awards and restricted stock units | | 9,530 | | | 2.3 years |
| | | | |
Total | | $ | 9,530 | | | 2.3 years |
Stock Options
The Company hasWe issued stock options to certain employees, officers, and directors. Stock options are issued at the closing market price immediately before the grant date and generally have a three to five year vesting period and contractual terms of seven to ten years. The Company recognizesWe 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 following table represents stock option activity for the three months ended June 30, 2019:2020:
| | | | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2020 | |
($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value | ($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value |
Outstanding at beginning of period | | 170,973 |
| | $ | 13.56 |
| | 5.5 years | | | Outstanding at beginning of period | | 55,069 | | | $ | 13.96 | | | 4.0 years | | |
Exercised | | (1,836 | ) | | $ | 10.90 |
| | 5.1 years | | | |
Forfeited | | (33,616 | ) | | $ | 13.37 |
| | 6.0 years | | | |
| Outstanding at end of period | | 135,521 |
| | $ | 13.65 |
| | 5.1 years | | $ | 43 |
| Outstanding at end of period | | 55,069 | | | $ | 13.96 | | | 3.7 years | | $ | (194) | |
Exercisable at end of period | | 127,673 |
| | $ | 13.67 |
| | 5.0 years | | $ | 38 |
| Exercisable at end of period | | 52,821 | | | $ | 13.97 | | | 3.6 years | | $ | (187) | |
The following table represents stock option activity for the six months ended June 30, 2019:2020:
| | | | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2020 | |
($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value | ($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value |
Outstanding at beginning of period | | 186,973 |
| | $ | 13.54 |
| | 5.8 years | |
|
| Outstanding at beginning of period | | 62,521 | | | $ | 13.85 | | | 4.3 years | | |
| Exercised | | (1,836 | ) | | $ | 10.90 |
| | 5.1 years | | | Exercised | | (7,452) | | | $ | 13.05 | | | 5.2 years | |
Forfeited | | (49,616 | ) | | $ | 13.34 |
| | 6.1 years | |
|
| |
| Outstanding at end of period | | 135,521 |
| | $ | 13.65 |
| | 5.1 years | | $ | 43 |
| Outstanding at end of period | | 55,069 | | | $ | 13.96 | | | 3.7 years | | $ | (194) | |
Exercisable at end of period | | 127,673 |
| | $ | 13.67 |
| | 5.0 years | | $ | 38 |
| Exercisable at end of period | | 52,821 | | | $ | 13.97 | | | 3.6 years | | $ | (187) | |
The following table sets forth information regarding unvested stock options for the three and six months ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | | | | Six Months Ended June 30, 2020 | | |
| | Number of Shares | | Weighted-Average Exercise Price Per Share | | Number of Shares | | Weighted-Average Exercise Price Per Share |
Outstanding at beginning of period | | 2,248 | | | $ | 13.75 | | | 2,248 | | | $ | 13.75 | |
| | | | | | | | |
Vested | | — | | | $ | — | | | — | | | $ | — | |
Forfeited | | — | | | $ | — | | | — | | | $ | — | |
Outstanding at end of period | | 2,248 | | | $ | 13.75 | | | 2,248 | | | $ | 13.75 | |
|
| | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| | Number of Shares | | Weighted-Average Exercise Price Per Share | | Number of Shares | | Weighted-Average Exercise Price Per Share |
Outstanding at beginning of period | | 47,848 |
| | $ | 13.30 |
| | 63,848 |
| | $ | 13.30 |
|
Vested | | (12,000 | ) | | $ | 13.29 |
| | (12,000 | ) | | $ | 13.29 |
|
Forfeited | | (28,000 | ) | | $ | 13.29 |
| | (44,000 | ) | | $ | 13.29 |
|
Outstanding at end of period | | 7,848 |
| | $ | 13.35 |
| | 7,848 |
| | $ | 13.35 |
|
37
Restricted Stock Awards and Restricted Stock Units
The CompanyWe also hashave granted restricted stock awards and restricted stock units to certain employees, officers, and directors. The restricted stock awards and units are valued at the closing price of the Company’sour 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 the Company’sour profitability and regulatory standing. The actual amounts of stock released upon vesting will be determined by the Compensation Committee of the Company'sour Board of Directors upon the Committee's certification of the satisfaction of the target level of performance. The Company recognizesWe 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 three and six months ended June 30, 2019:2020:
| | | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | Three Months Ended June 30, 2020 | | | Six Months Ended June 30, 2020 | |
| | Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Number of Shares | | Weighted Average Grant Date Fair Value Per Share |
Outstanding at beginning of period | | 848,644 |
| | $ | 18.20 |
| | 833,601 |
| | $ | 19.02 |
| Outstanding at beginning of period | | 1,083,107 | | | $ | 15.65 | | | 923,482 | | | $ | 15.74 | |
Granted (1) | | 587,804 |
| | $ | 14.23 |
| | 723,398 |
| | $ | 14.33 |
| Granted (1) | | 84,998 | | | $ | 8.76 | | | 354,136 | | | $ | 13.79 | |
Vested (2) | | (201,816 | ) | | $ | 19.07 |
| | (215,257 | ) | | $ | 18.94 |
| Vested (2) | | (231,362) | | | $ | 16.09 | | | (293,695) | | | $ | 15.95 | |
Forfeited (3) | | (127,778 | ) | | $ | 18.19 |
| | (234,888 | ) | | $ | 19.19 |
| Forfeited (3) | | (24,073) | | | $ | 18.20 | | | (71,253) | | | $ | 16.85 | |
Outstanding at end of period | | 1,106,854 |
| | $ | 15.93 |
| | 1,106,854 |
| | $ | 15.93 |
| Outstanding at end of period | | 912,670 | | | $ | 14.91 | | | 912,670 | | | $ | 14.91 | |
(1)There were 0 and 78,771 performance-based shares/units included in shares granted for the three and six months ended June 30, 2020.
(2)There were 13,074 and 18,473 performance-based shares/units included in vested shares for the three and six months ended June 30, 2020.
(3)The number of forfeited shares includes aggregate performance-based shares/units of 1,782 and 17,404 for the three and six months ended June 30, 2020.
| |
(1) | There were 151,395 performance-based shares/units included in shares granted for the three and six months ended June 30, 2019. |
| |
(2) | There were 37,572 performance-based shares/units included in vested shares for the three and six months ended June 30, 2019. |
| |
(3) | The number of forfeited shares includes aggregate performance-based shares/units of 69,966 and 142,533 for the three and six months ended June 30, 2019, respectively. |
Stock Appreciation Rights
On August 21, 2012, the Companywe granted to it then-actingthe then, and now former, chief executive officer, Steven A. Sugarman, a ten-yearten-year stock appreciation right (SAR)(“SAR”).
The following table represents SARs activity and the weighted average exercise price per share as of and for the three months ended June 30, 2019:2020:
| | | | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2020 | |
($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value | ($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value |
Outstanding at beginning of period | | 1,559,012 |
| | $ | 11.60 |
| | 3.4 years | | $ | 3,488 |
| Outstanding at beginning of period | | 1,559,012 | | | $ | 11.60 | | | 2.4 years | | $ | (5,616) | |
| Outstanding at end of period | | 1,559,012 |
| | $ | 11.60 |
| | 3.2 years | | $ | 3,691 |
| Outstanding at end of period | | 1,559,012 | | | $ | 11.60 | | | 2.1 years | | $ | (1,812) | |
Exercisable at end of period | | 1,559,012 |
| | $ | 11.60 |
| | 3.2 years | | $ | 3,691 |
| Exercisable at end of period | | 1,559,012 | | | $ | 11.60 | | | 2.1 years | | $ | (1,812) | |
The following table represents SARs activity and the weighted average exercise price per share as of and for the six months ended June 30, 2019:2020:
| | | | Six Months Ended June 30, | | Six Months Ended June 30, | |
($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value | ($ in thousands except per share data) | | Number of Shares | | Weighted-Average Exercise Price Per Share | | Weighted-Average Remaining Contract Term | | Aggregated Intrinsic Value |
Outstanding at beginning of period | | 1,559,012 |
| | $ | 11.60 |
| | 3.6 years | | $ | 2,662 |
| Outstanding at beginning of period | | 1,559,012 | | | $ | 11.60 | | | 2.6 years | | $ | 8,508 | |
| Outstanding at end of period | | 1,559,012 |
| | $ | 11.60 |
| | 3.2 years | | $ | 3,691 |
| Outstanding at end of period | | 1,559,012 | | | $ | 11.60 | | | 2.1 years | | $ | (1,812) | |
Exercisable at end of period | | 1,559,012 |
| | $ | 11.60 |
| | 3.2 years | | $ | 3,691 |
| Exercisable at end of period | | 1,559,012 | | | $ | 11.60 | | | 2.1 years | | $ | (1,812) | |
NOTE 1311 – STOCKHOLDERS’ EQUITY
Warrants
On November 1, 2010, the Company issued warrants to COR Advisors LLC (COR Advisors), an entity controlled by Steven A. Sugarman, who became a director of the Company on that date and later became President and Chief Executive Officer of the Company (and resigned from those and all other positions with the Company 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, the Company's 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, respectively. 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, respectively, had been exercised, resulting in issuances of 25,051 and 64,962 shares of the Company's voting common stock and 75,875, 77,376 and 23,237 shares of the Company's non-voting common stock, respectively. 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, respectively. As a result of these exercises, Jason Sugarman no longer holds any warrants to purchase shares of the Company’s 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 the Company's non-voting common stock owned by Jason Sugarman were canceled and he was issued 176,488 shares of the Company's 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, respectively) 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 the Company's 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, the Company was 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, respectively, 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, the Company 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, respectively, resulting in the issuance of 77,413, 72,159, and 73,543 shares of the Company's non-voting common stock, respectively, on December 31, 2017, April 2, 2018 and July 2, 2018, respectively. 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, respectively. 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, respectively, 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, respectively. 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, respectively. As a result of these exercises, Mr. Seabold no longer holds any warrants to purchase shares of the Company's 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 the Company's stockholders at a special meeting held on October 25, 2010.
Preferred Stock
The Company isWe 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 the Company'sour outstanding shares of preferred stock have a $1,000 per share liquidation preference. The following table presents the Company'sour total outstanding preferred stock as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
($ in thousands) | | Shares Authorized and Outstanding | | Liquidation Preference | | Carrying Value | | Shares Authorized and Outstanding | | Liquidation Preference | | Carrying Value |
Series C 8.00% non-cumulative perpetual | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Series D 7.375% non-cumulative perpetual | | 115,000 |
| | 115,000 |
| | 110,873 |
| | 115,000 |
| | 115,000 |
| | 110,873 |
|
Series E 7.00% non-cumulative perpetual | | 125,000 |
| | 125,000 |
| | 120,255 |
| | 125,000 |
| | 125,000 |
| | 120,255 |
|
Total | | $ | 240,000 |
| | $ | 240,000 |
| | $ | 231,128 |
| | $ | 240,000 |
| | $ | 240,000 |
| | $ | 231,128 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | December 31, 2019 | | | | |
($ in thousands) | | Shares Outstanding | | Liquidation Preference | | Carrying Value | | Shares Outstanding | | Liquidation Preference | | Carrying Value |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Series D
7.375% non-cumulative perpetual | | 93,272 | | | $ | 93,272 | | | $ | 89,924 | | | 96,629 | | | $ | 96,629 | | | $ | 93,162 | |
Series E
7.00% non-cumulative perpetual | | 98,865 | | | 98,865 | | | 95,113 | | | 100,477 | | | 100,477 | | | 96,663 | |
Total | | 192,137 | | | $ | 192,137 | | | $ | 185,037 | | | 197,106 | | | $ | 197,106 | | | $ | 189,825 | |
On September 17, 2018,During the Company completed the redemption of all 40,250 outstanding shares of the Company's 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 relatedthree and six months ended June 30, 2020, we repurchased depositary shares (Series C DepositoryD Depositary Shares), each representing a 1/40th interest in a share of Series CD Preferred Stock, at a redemption price of the liquidation amount of $1,000 per share of Series CD Preferred Stock, (equivalentresulting in the repurchase of 53,006 and 134,310 outstanding Series D Depositary Shares and the related retirement of 1,325 and 3,357 outstanding shares of Series D Preferred Stock. The repurchase price aggregated to $25 per Series C Depository Share). The redemption price represented an aggregate
amount of $40.3$1.2 million and did not accrue interest from$2.7 million. The $40 thousand and following$541 thousand difference between 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 issuanceconsideration paid and the carrying value of the Series CD Preferred Stock werewas reclassified to retained earnings and resulted in a one-time, non-cash reductionan increase to net (loss) income allocated to common stockholders.
During the three and six months ended June 30, 2020, we repurchased 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 57,065 and 64,465 outstanding Series E Depositary Shares and the related retirement of 1,427 and 1,612 outstanding shares of Series E Preferred Stock. The repurchase price aggregated to $1.4 million and $1.5 million. The $9 thousand and $34 thousand difference between the consideration paid and the carrying value of the Series E Preferred Stock was reclassified to retained earnings and resulted in an increase to net (loss) income allocated to common stockholders.
Share Repurchase Program
On July 25, 2019,February 10, 2020, we announced that our Board of Directors (the “Board”) authorized the Company commenced a tender offerrepurchase of up to $45 million of our common stock. The repurchase authorization expires in February 2021, however given current macroeconomic conditions and the COVID-19 pandemic, we have suspended common stock repurchases for the depositary shares representingimmediate future. There were 0 repurchases of common stock for the three months ended June 30, 2020. During the six months ended June 30, 2020, we repurchased 827,584 shares of its Series Dcommon stock at a weighted average price of $14.50 per share and Series E preferred stock for up to $75 millionan aggregate amount of $12.0 million. Purchases may be made in aggregate purchase price. Subject toopen-market transactions, in block transactions on or off an exchange, in privately negotiated transactions, or by other means as determined by our management and in accordance with the termsregulations of the Securities and conditions described inExchange Commission. The timing of purchases and the tender offer materials,number of shares repurchased under the tender offer is expected to close by the endprogram will depend on a variety of August 2019.factors including price, trading volume, corporate and regulatory requirements, and market conditions.
Change in Accumulated Other Comprehensive (Loss) Income (Loss)("AOCI")
The Company’sOur AOCI includes unrealized gain (loss) on securities available-for-sale. Changes to AOCI are presented net of tax effect as a component of stockholders' equity. Reclassifications from AOCI are recorded on the Consolidated Statementsconsolidated statements of Incomeoperations either as a gain or loss. The following table presents changes to AOCI for the periods indicated:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Unrealized gain (loss) on securities available-for-sale | | | | | | | | | |
Unrealized(loss) gain on securities available-for-sale | | Unrealized(loss) gain on securities available-for-sale | | | | | | | | |
Balance at beginning of period | | $ | (18,091 | ) | | $ | (11,542 | ) | | $ | (24,117 | ) | | $ | 5,227 |
| Balance at beginning of period | | $ | (54,148) | | | $ | (18,091) | | | $ | (11,900) | | | $ | (24,117) | |
Unrealized gain (loss) arising during the period | | 7,678 |
| | (10,796 | ) | | 16,422 |
| | (30,478 | ) | Unrealized gain (loss) arising during the period | | 56,701 | | | 7,678 | | | (3,182) | | | 16,422 | |
| Reclassification adjustment from other comprehensive income | | — |
| | (278 | ) | | (208 | ) | | (5,519 | ) | Reclassification adjustment from other comprehensive income | | (2,011) | | | — | | | (2,011) | | | (208) | |
Tax effect of current period changes | | (2,255 | ) | | 3,246 |
| | (4,765 | ) | | 10,904 |
| Tax effect of current period changes | | (16,107) | | | (2,255) | | | 1,528 | | | (4,765) | |
Total changes, net of taxes | | 5,423 |
| | (7,828 | ) | | 11,449 |
| | (25,093 | ) | Total changes, net of taxes | | 38,583 | | | 5,423 | | | (3,665) | | | 11,449 | |
Reclassification of stranded tax effects to retained earnings | | — |
| | — |
| | — |
| | 496 |
| |
| Balance at end of period | | $ | (12,668 | ) | | $ | (19,370 | ) | | $ | (12,668 | ) | | $ | (19,370 | ) | Balance at end of period | | $ | (15,565) | | | $ | (12,668) | | | $ | (15,565) | | | $ | (12,668) | |
NOTE 1412 – VARIABLE INTEREST ENTITIES
The Company holdsWe hold ownership interests in alternative energy partnerships and qualified affordable housing partnerships. The Company evaluates itspartnerships and have a variable interest in a multifamily securitization trust. We evaluate our interests in these entities to determine whether they meet the definition of a variable interest entity (VIE) and whether the Company iswe are required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holdswe hold could potentially be significant to the VIE, the Company considerswe consider both qualitative and quantitative factors regarding the nature, size, and form of the Company'sour involvement with the VIE. The Company hasWe have determined that itsour interests in these entities meet the definition of a variable interest.interests.
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% 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 the 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%. We believe that the loss exposure on the 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 June 30, 2020, we have a $3.5 million repurchase reserve related to this VIE.
Alternative Energy Partnerships
The Company investsWe 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 either newly installedestablished residential rooftopand commercial solar leases and power purchase agreements or newly installed ground mount solar power purchase agreements. As a result of itsour investments, the Company haswe 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 customersindividual consumers for a fixed period of time.
While the Company'sour interest in the alternative energy partnerships meets the definition of a VIE in accordance with ASC 810, the Company haswe have determined that the Company iswe are not the primary beneficiary because the Company doeswe 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 the Company iswe are not the primary beneficiary, the Companywe did not consolidate the entities. The Company uses
We use the Hypothetical Liquidation at Book Value (HLBV) method to account for theseour 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 the Company’sour 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, the Company useswe 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 three and six months ended June 30, 2019 and 2018, the Company funded $235 thousand for its Investments in alternative energy partnerships and did not receive any return of capital from its alternative energy partnerships. During the three months ended June 30, 2018, the Company received a return of capital of $1.0totaled $27.0 million and funded $13 thousand, respectively, from and into these partnerships. During the six months ended June 30, 2018, the Company received a return of capital of $1.0 million and funded $30.9 million, respectively, from and into these partnerships.
During the three months ended June 30, 2019 and 2018, the Company recognized a (gain) loss on investment of $(0.4) million and $1.8 million, respectively, through its HLBV application. During the six months ended June 30, 2019 and 2018, the Company recognized a loss on investment of $1.6 million and $1.8 million, respectively, through its HLBV application. As a result, the balance of these investments was $26.6 million and $44.8$29.3 million at June 30, 20192020 and 2018, respectively. From an income tax benefit perspective, the Company recognized investment tax credits of $1.7 million and $1.9 millionDecember 31, 2019.
The following table presents information regarding activity in our alternative energy partnerships for the three months ended June 30, 2019 and 2018, respectively, and $1.7 million and $9.2 million during the six months ended June 30, 2019 and 2018, respectively, as well as income tax benefits (expense) relating to the recognition of its loss (gain) through its HLBV application during these periods.periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Fundings | | $ | — | | | $ | 235 | | | $ | 3,631 | | | $ | 235 | |
Cash distribution from investment | | 547 | | | 535 | | | 1,001 | | | 995 | |
| | | | | | | | |
Gain (loss) on investments in alternative energy partnerships | | 167 | | | 355 | | | (1,738) | | | (1,595) | |
Income tax credits recognized | | — | | | 1,723 | | | — | | | 1,723 | |
Tax (expense) benefit recognized from HLBV application | | (38) | | | 380 | | | 398 | | | 380 | |
The following table represents the carrying value of the associated unconsolidated assets and liabilities and the associated maximum loss exposure for alternative energy partnerships as of the dates indicated:
| | ($ in thousands) | | June 30, 2019 | | December 31, 2018 | ($ in thousands) | | June 30, 2020 | | December 31, 2019 |
Cash | | $ | 3,610 |
| | $ | 3,012 |
| Cash | | $ | 2,958 | | | $ | 4,224 | |
Equipment, net of depreciation | | 252,888 |
| | 259,464 |
| Equipment, net of depreciation | | 244,961 | | | 248,920 | |
Other assets | | 4,842 |
| | 4,470 |
| Other assets | | 6,751 | | | 6,301 | |
Total unconsolidated assets | | $ | 261,340 |
| | $ | 266,946 |
| Total unconsolidated assets | | $ | 254,670 | | | $ | 259,445 | |
Total unconsolidated liabilities | | $ | 6,166 |
| | $ | 6,269 |
| Total unconsolidated liabilities | | $ | 6,326 | | | $ | 7,143 | |
| Maximum loss exposure | | $ | 30,429 |
| | $ | 28,988 |
| Maximum loss exposure | | $ | 26,967 | | | $ | 32,525 | |
The maximum loss exposure that would be absorbed by the Companyus in the event that all of the assets in alternative energy partnerships are deemed worthless is $30.4$27.0 million, which is the Company'sour recorded investment amount and remaining unfunded commitment at June 30, 2019.2020.
The Company believesWe believe that the loss exposure on its investmentour investments is reduced considering that theour return on itsour investment is provided not only by the cash flows of the underlying customerclient leases and power purchase agreements, but also through the significant tax benefits, including federal tax credits generated from the investments. In addition, the management 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 the Company’sour exposure.
Qualified Affordable Housing Partnerships
The Company also investsWe 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 the Company'sour 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, the Company iswe 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, the Company doesAs a result, we do not consolidate these partnerships.
At June 30, 2019 and December 31, 2018, the Company had a total investment
The following table presents information regarding balances in qualified affordable housing projects of $18.8 million and $20.0 million, respectively. During the three and six months ended June 30, 2019, the Company funded zero and $454 thousand, respectively, and recognized proportional amortization expense of $553 thousand and $1.2 million, respectively. The Company has funded $18.2 million of its $29.3 million aggregated funding commitments and had an unfunded commitment of $11.1 million at June 30, 2019. During the three and six months ended June 30, 2018, the Company funded $1.6 million and $1.6 million, respectively, into qualified affordable housing projects and recognized proportional amortization expense of $477 thousand and $974 thousand, respectively. From an income tax benefit perspective, the Company recognized investment tax credits of $554 thousand and $466 thousand, respectively, during the three months ended June 30, 2019 and 2018 and $1.1 million and $941 thousand for the six months ended June 30, 2019 and 2018, respectively. At June 30,
2019 and December 31, 2018, the maximum loss exposure that would be absorbed by the Company in the event that all of the assets in this investment are deemed worthless is $18.8 million and $20.0 million, respectively, which is the Company's recorded investment amount. The recorded investment amount is included in Other Assets in the Consolidated Statements of Financial Condition and the proportional amortization expense is recorded in Income Tax Expense (Benefit) in the Consolidated Statements of Income.
As the investments in alternative energy partnerships andour qualified affordable housing partnerships represent unconsolidated VIEs tofor the Company,periods indicated:
| | | | | | | | | | | | | | |
($ in thousands) | | June 30, 2020 | | December 31, 2019 |
Ending balance(1) | | $ | 46,167 | | | $ | 36,462 | |
Aggregate funding commitment | | 61,278 | | | 49,278 | |
Total amount funded | | 40,776 | | | 26,905 | |
Unfunded commitment | | 20,502 | | | 22,373 | |
Maximum loss exposure | | 46,167 | | | 36,462 | |
(1)Included in other assets in the assets and liabilitiesaccompanying consolidated statements of financial condition.
The following table presents information regarding activity in our qualified affordable housing partnerships for the investments themselves are not recorded on the Company's Statements of Financial Condition.periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Fundings | | $ | 9,312 | | | $ | — | | | $ | 13,871 | | | $ | 454 | |
Proportional amortization recognized | | 1,148 | | | 553 | | | 2,295 | | | 1,190 | |
Income tax credits recognized | | 1,152 | | | 554 | | | 2,208 | | | 1,109 | |
NOTE 1513 – (LOSS) EARNINGS PER COMMON SHARE
The following table presents computations of basic and diluted (loss) earnings per common share ("EPS") for the three and six months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2020 | | | | | | Six Months Ended June 30, 2020 | | | | |
($ in thousands except per share data) | | Common Stock | | Class B Common Stock | | | | Common Stock | | Class B Common Stock | | |
Loss from operations | | $ | (18,273) | | | $ | (176) | | | | | $ | (24,804) | | | $ | (238) | | | |
| | | | | | | | | | | | |
Less: participating securities dividends | | (93) | | | (1) | | | | | (186) | | | (2) | | | |
Less: preferred stock dividends | | (3,409) | | | (33) | | | | | (6,909) | | | (66) | | | |
Less: preferred stock redemption | | 49 | | | — | | | | | 570 | | | 5 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net loss allocated to common stockholders | | $ | (21,726) | | | $ | (210) | | | | | $ | (31,329) | | | $ | (301) | | | |
| | | | | | | | | | | | |
Weighted average common shares outstanding | | 49,553,598 | | | 477,321 | | | | | 49,770,527 | | | 477,321 | | | |
Dilutive effects of restricted shares/units | | — | | | — | | | | | — | | | — | | | |
| | | | | | | | | | | | |
Dilutive effects of stock options | | — | | | — | | | | | — | | | — | | | |
| | | | | | | | | | | | |
Average shares and dilutive common shares | | 49,553,598 | | | 477,321 | | | | | 49,770,527 | | | 477,321 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic loss per common share | | $ | (0.44) | | | $ | (0.44) | | | | | $ | (0.63) | | | $ | (0.63) | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Diluted loss per common share | | $ | (0.44) | | | $ | (0.44) | | | | | $ | (0.63) | | | $ | (0.63) | | | |
For the three and six months ended June 30, 2020, there were 960,090 and 960,883 of restricted shares/units and 55,069 and 55,438 of stock options that were not considered in computing diluted earnings per common share, because they were anti-dilutive.
The following table presents computations of basic and diluted EPS for the three and six months ended June 30, 2019:
| | | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 | | Three Months Ended June 30, 2019 | | | Six Months Ended June 30, 2019 | |
($ in thousands except per share data) | | Common Stock | | Class B Common Stock | | Total | | Common Stock | | Class B Common Stock | | Total | ($ in thousands except per share data) | | Common Stock | | Class B Common Stock | | | Common Stock | | Class B Common Stock | |
Income from continuing operations | | $ | 16,426 |
| | $ | 156 |
| | $ | 16,582 |
| | $ | 23,397 |
| | $ | 222 |
| | $ | 23,619 |
| |
Income from operations | | Income from operations | | $ | 16,426 | | | $ | 156 | | | | $ | 23,397 | | | $ | 222 | | |
Less: income allocated to participating securities | | (268 | ) | | (3 | ) | | (271 | ) | | (152 | ) | | (1 | ) | | (153 | ) | Less: income allocated to participating securities | | (268) | | | (3) | | | | (152) | | | (1) | | |
Less: participating securities dividends | | (93 | ) | | (1 | ) | | (94 | ) | | (292 | ) | | (3 | ) | | (295 | ) | Less: participating securities dividends | | (93) | | | (1) | | | | (292) | | | (3) | | |
Less: preferred stock dividends | | (4,268 | ) | | (40 | ) | | (4,308 | ) | | (8,535 | ) | | (81 | ) | | (8,616 | ) | Less: preferred stock dividends | | (4,268) | | | (40) | | | | (8,535) | | | (81) | | |
Income from continuing operations allocated to common stockholders | | 11,797 |
| | 112 |
| | 11,909 |
| | 14,418 |
| | 137 |
| | 14,555 |
| |
Income from discontinued operations | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Net income allocated to common stockholders | | $ | 11,797 |
| | $ | 112 |
| | $ | 11,909 |
| | $ | 14,418 |
| | $ | 137 |
| | $ | 14,555 |
| Net income allocated to common stockholders | | $ | 11,797 | | | $ | 112 | | | | $ | 14,418 | | | $ | 137 | | |
| Weighted average common shares outstanding | | 50,379,816 |
| | 477,321 |
| | 50,857,137 |
| | 50,290,107 |
| | 477,321 |
| | 50,767,428 |
| Weighted average common shares outstanding | | 50,379,816 | | | 477,321 | | | | 50,290,107 | | | 477,321 | | |
Dilutive effects of stock units | | 103,677 |
| | — |
| | 103,677 |
| | 119,967 |
| | — |
| | 119,967 |
| Dilutive effects of stock units | | 103,677 | | | — | | | | 119,967 | | | — | | |
| Dilutive effects of stock options | | 4,142 |
| | — |
| | 4,142 |
| | 7,795 |
| | — |
| | 7,795 |
| Dilutive effects of stock options | | 4,142 | | | — | | | | 7,795 | | | — | | |
Dilutive effects of warrants | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Average shares and dilutive common shares | | 50,487,635 |
| | 477,321 |
| | 50,964,956 |
| | 50,417,869 |
| | 477,321 |
| | 50,895,190 |
| Average shares and dilutive common shares | | 50,487,635 | | | 477,321 | | | | 50,417,869 | | | 477,321 | | |
| | Basic earnings per common share | | | | | | | | | | | | | Basic earnings per common share | | $ | 0.23 | | | $ | 0.23 | | | | $ | 0.29 | | | $ | 0.29 | | |
Income from continuing operations | | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.29 |
| | $ | 0.29 |
| | $ | 0.29 |
| |
Income from discontinued operations | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income | | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.29 |
| | $ | 0.29 |
| | $ | 0.29 |
| |
| Diluted earnings per common share | | | | | | | | | | | | | Diluted earnings per common share | | $ | 0.23 | | | $ | 0.23 | | | | $ | 0.29 | | | $ | 0.29 | | |
Income from continuing operations | | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.29 |
| | $ | 0.29 |
| | $ | 0.29 |
| |
Income from discontinued operations | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Net income | | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.23 |
| | $ | 0.29 |
| | $ | 0.29 |
| | $ | 0.29 |
| |
For the three and six months ended June 30, 2019, there were 517,833 and 484,163, respectively, of stock units and 58,859 and 33,013, respectively, of stock options that were not considered in computing diluted earnings per common share, because they were anti-dilutive.
The following table presents computations of basic and diluted EPS for the three and six months ended June 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
($ in thousands except per share data) | | Common Stock | | Class B Common Stock | | Total | | Common Stock | | Class B Common Stock | | Total |
Income from continuing operations | | $ | 13,709 |
| | $ | 145 |
| | $ | 13,854 |
| | $ | 20,713 |
| | $ | 215 |
| | $ | 20,928 |
|
Less: income allocated to participating securities | | (85 | ) | | (1 | ) | | (86 | ) | | — |
| | — |
| | — |
|
Less: participating securities dividends | | (201 | ) | | (2 | ) | | (203 | ) | | (402 | ) | | (4 | ) | | (406 | ) |
Less: preferred stock dividends | | (5,059 | ) | | (54 | ) | | (5,113 | ) | | (10,121 | ) | | (105 | ) | | (10,226 | ) |
Income from continuing operations allocated to common stockholders | | 8,364 |
| | 88 |
| | 8,452 |
| | 10,190 |
| | 106 |
| | 10,296 |
|
Income from discontinued operations | | 916 |
| | 10 |
| | 926 |
| | 2,385 |
| | 25 |
| | 2,410 |
|
Net income allocated to common stockholders | | $ | 9,280 |
| | $ | 98 |
| | $ | 9,378 |
| | $ | 12,575 |
| | $ | 131 |
| | $ | 12,706 |
|
Weighted average common shares outstanding | | 50,062,442 |
| | 530,987 |
| | 50,593,429 |
| | 50,072,385 |
| | 519,610 |
| | 50,591,995 |
|
Dilutive effects of stock units | | 211,380 |
| | — |
| | 211,380 |
| | 153,029 |
| | — |
| | 153,029 |
|
Dilutive effects of stock options | | 40,561 |
| | — |
| | 40,561 |
| | 44,082 |
| | — |
| | 44,082 |
|
Dilutive effects of warrants | | 73,721 |
| | — |
| | 73,721 |
| | 111,781 |
| | — |
| | 111,781 |
|
Average shares and dilutive common shares | | 50,388,104 |
| | 530,987 |
| | 50,919,091 |
| | 50,381,277 |
| | 519,610 |
| | 50,900,887 |
|
Basic earnings per common share | | | | | | | | | | | | |
Income from continuing operations | | $ | 0.17 |
| | $ | 0.17 |
| | $ | 0.17 |
| | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.20 |
|
Income from discontinued operations | | 0.02 |
| | 0.02 |
| | 0.02 |
| | 0.05 |
| | 0.05 |
| | 0.05 |
|
Net income | | $ | 0.19 |
| | $ | 0.19 |
| | $ | 0.19 |
| | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.25 |
|
Diluted earnings per common share | | | | | | | | | | | | |
Income from continuing operations | | $ | 0.16 |
| | $ | 0.17 |
| | $ | 0.16 |
| | $ | 0.20 |
| | $ | 0.20 |
| | $ | 0.20 |
|
Income from discontinued operations | | 0.02 |
| | 0.02 |
| | 0.02 |
| | 0.05 |
| | 0.05 |
| | 0.05 |
|
Net income | | $ | 0.18 |
| | $ | 0.19 |
| | $ | 0.18 |
| | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.25 |
|
For the three and six months ended June 30, 2018, there were 38,836 and 222,431, respectively, of stock units and 0 and 0, respectively of stock options that were not considered in computing diluted earnings per common share, because they were anti-dilutive.
NOTE 1614 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as unfunded loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Risk of credit loss exists up to the face amount of these instruments. The same credit policies are used to make such commitments as are used for originating loans, including obtaining collateral at exercise of the commitment.
The following table presents the contractual amount of financial instruments with off-balance-sheet risk was as follows forof the datesperiods indicated:
| | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | | December 31, 2019 | |
($ in thousands) | | Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate | ($ in thousands) | | Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate |
Commitments to extend credit (1) | | $ | 60 |
| | $ | 247,435 |
| | $ | 2,167 |
| | $ | 288,770 |
| |
Commitments to extend credit | | Commitments to extend credit | | $ | 6,249 | | | $ | 73,844 | | | $ | 473 | | | $ | 129,495 | |
Unused lines of credit | | 817 |
| | 904,298 |
| | 1,514 |
| | 1,119,158 |
| Unused lines of credit | | 590 | | | 1,391,625 | | | 703 | | | 1,049,632 | |
Letters of credit | | 1,847 |
| | 8,402 |
| | 1,266 |
| | 8,561 |
| Letters of credit | | 336 | | | 3,243 | | | 134 | | | 5,316 | |
| |
(1) | Included no commitments to extend credit related to discontinued operations at December 31, 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 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. During the
three months ended June 30, 2019 and 2018, advertising and promotion expense related to the LAFC commitment was $1.7 million. During the six months ended June 30, 2019 and 2018, advertising and promotion expense related to the LAFC commitment was $3.3 million. As of June 30, 2019, the Bank has paid $18.0 million of the $100.0 million commitment. The prepaid commitment balance, net of amortization, was $8.0 million as of June 30, 2019, which was recognized as a prepaid asset and included in Other Assets in the Consolidated Statements of Financial Condition. See Note 18 for additional information.
At June 30, 2019, the Company2020, we had unfunded commitments of $11.1$20.5 million, $7.6$7.1 million, and $501 thousand for affordable housing fund investments, Small Business Investment Company (SBIC) investments, and other investments, respectively.
NOTE 1715 – REVENUE RECOGNITION
The following presents noninterest (loss) income, segregated by revenue streams, in-scope and out-of-scope of Topic 606 - Revenue From Contracts With Customers, for the periods indicated.indicated:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Noninterest income | | | | | | | | |
In scope of Topic 606 | | | | | | | | |
Deposit service fees | | $ | 575 |
| | $ | 708 |
| | $ | 1,242 |
| | $ | 1,486 |
|
Debit card fees | | 178 |
| | 177 |
| | 291 |
| | 402 |
|
Investment commissions | | 260 |
| | 619 |
| | 539 |
| | 942 |
|
Other | | 109 |
| | — |
| | 216 |
| | 155 |
|
Noninterest income (in-scope of Topic 606) | | 1,122 |
| | 1,504 |
| | 2,288 |
| | 2,985 |
|
Noninterest (loss) income (out-of-scope of Topic 606) | | (3,412 | ) | | 6,557 |
| | 1,717 |
| | 13,658 |
|
Total noninterest (loss) income | | $ | (2,290 | ) | | $ | 8,061 |
| | $ | 4,005 |
| | $ | 16,643 |
|
43
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Noninterest income (loss) | | | | | | | | |
In scope of Topic 606 | | | | | | | | |
Deposit service fees | | $ | 420 | | | $ | 575 | | | $ | 959 | | | $ | 1,242 | |
Debit card fees | | 380 | | | 178 | | | 557 | | | 291 | |
Investment commissions | | — | | | 260 | | | — | | | 539 | |
Other | | 59 | | | 109 | | | 108 | | | 216 | |
Noninterest income (in-scope of Topic 606) | | 859 | | | 1,122 | | | 1,624 | | | 2,288 | |
Noninterest income (out-of-scope of Topic 606) | | 4,669 | | | (3,412) | | | 5,965 | | | 1,717 | |
Total noninterest income (loss) | | $ | 5,528 | | | $ | (2,290) | | | $ | 7,589 | | | $ | 4,005 | |
The Company doesWe do not typically enter into long-term revenue contracts with customers. As of June 30, 20192020 and December 31, 2018, the Company2019, we did not have any significant contract balances. As of June 30, 2019, the Company2020, we did not capitalize any contract acquisition costs.
NOTE 1816 – RELATED-PARTY TRANSACTIONS
General. Certain of our executive officers and directors, and their related interests, are customers 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, andguidelines. These loans do not involve more than the normal risk of collectability or present other unfavorable features. As of the date of this filing,June 30, 2020, no related party loans were categorized as nonaccrual,non-accrual, 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.
Transactions with Current Related Parties
The Company and the Bank have engaged in transactions described below with the Company’s current or former directors, executive officers, and beneficial owners of more than 5 percent of the outstanding shares of the Company’s voting common stock and certain persons related to them.
Indemnification for Costs of Counsel in Connection with Special Committee Investigation, SEC Investigation and Related Matters. On November 3, 2016, in connection with an investigation by the Special Committee ofAs previously disclosed, the Company’s Board of Directors the Company Boardhas authorized and directed the Company 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 (i) an investigation by the investigation, and to advise them on their rights and obligations with respect to the investigation. At the directionSpecial Committee of the CompanyCompany’s 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 the Company, 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, the Company is providing indemnification, advancement and/or reimbursement for costs related to (i)of Directors, (ii) 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(since resolved), and (ii)(iii) any related civil or administrative proceedings against the Company as well as officers and directors currently or previously associated with the Company (collectively, the “Indemnity Matters”).
Indemnification costs were paid on behalf of certain current and former executive officers and directors in amounts less than $120 thousand for the three and six months ended June 30, 2020. During the three and six months ended June 30, 2019, indemnification costs paid by the Company included $2 thousand and $149 thousand, respectively, incurred by the Company's General Counsel Emeritus John Grosvenor, who retired from that position effective April 15, 2019. Indemnification costs were paid on behalf of other executive officers and directors in lesser amounts for the three and six months ended June 30, 2019.
During the three and six months ended June 30, 2018, indemnification costs paid by the Company included $233 thousand and $272 thousand, respectively, incurred by director Halle J. Benett; $233 thousand and $272 thousand, respectively, incurred by director Jonah F. Schnel; and $233 thousand and $272 thousand, respectively, incurred by director Robert Sznewajs. Indemnification costs were paid on behalf of other executive officers and directors in lesser amounts for the three and six months ended June 30, 2018.
Sabal Loan. On September 5, 2017, John A. Bogler became the Chief Financial Officer of the Company and the Bank. Mr. Bogler is a founding member, and since 2015 and up until his employment with the Company, was a board member and Chief Financial Officer, of Sabal Capital Partners, LLC and Sabal Investment Advisors, LLC. Sabal Capital Partners, LLC is the sole owner of Sabal Opportunities Fund I, LLC, which in turn is the sole owner of Sabal TL1, LLC; Sabal Investment Advisors, LLC is the investment manager of SIA Debt Opportunities Fund, LP. SDOF GP, LLC is the general partner of Sabal Investment Advisors, LLC (together, Sabal). As of September 1, 2018, Mr. Bogler had completely divested his ownership in Sabal, except for an investment in SDOF GP, LLC that represents only a right of Mr. Bogler to receive his pro-rata share of pass through distributions (net of expenses) by SIA Debt Opportunities Fund, LP with respect to underlying investments that were made by the fund. Effective June 26, 2015, the Bank provided a $35.0 million committed revolving repurchase facility, which was increased to $40.0 million effective June 11, 2017, to Sabal TL1, LLC, with a maximum funding amount of $100.0 million in certain situations. On June 6, 2018, the revolving repurchase facility was extended for 90 days beyond its original maturity date of June 10, 2018. The repurchase facility's outstanding balance was $3.5 million before it was completely paid off in August 2018. The extension was not renewed and expired on September 10, 2018.
Under the Sabal repurchase facility, commercial mortgage loans originated by Sabal were purchased from Sabal by the Bank, together with a simultaneous agreement by Sabal to repurchase the commercial mortgage loans from the Bank at a future date. The advances under the Sabal repurchase facility were secured by commercial mortgage loans that had a market value in excess of the balance of the advances under the facility. During the year ended December 31, 2018, the largest aggregate amount of principal outstanding under the Sabal repurchase facility was $32.5 million. The Sabal repurchase facility was paid off during the year ended December 31, 2018.
Interest on the outstanding balance under the Sabal repurchase facility accrued at the six month LIBOR rate plus a margin. $210.4 million in principal and $370 thousand in interest were paid by Sabal on the facility to the Bank during the year ended December 31, 2018.
Transactions with Former Related Parties
In addition to the transactions described above with the Company’s current directors, executive officers, and 5% or greater stockholders, and related persons, the Company and the Bank have engaged in transactions described below with the Company’s then (now former) directors and executive officers, and certain persons related to them.
Indemnification for Costs of Counsel for Former Executive Officers and Former Directors in Connection with the Indemnity Matters.
During the three and six months ended June 30, 2019, indemnification costs paid by the Company in connection with the Indemnity Matters included $4.7 million and $6.9 million respectively, incurred by the Company’s former Chair, President, and Chief Executive Officer, Steven A. Sugarman; and $186 thousand and $741 thousand respectively, jointly incurred by the Company’s former Interim Chief Financial Officer and Chief Strategy Officer, J. Francisco A. TurnerTurner; and the Company’s former Chief Financial Officer, James J. McKinney; and $139 thousand and $142 thousand incurred by the Bank’s former director, Cynthia Abercrombie. Indemnification costs were paid on behalf of other former executive officers and other former directors in lesser amounts e for the three andCompany's former General Counsel Emeritus John Grosvenor were $149 thousand for the six months ended June 30, 2019.
During the three and six months ended June 30, 2018, indemnification costs paid by the Company included $1.8 million and $2.0 million, respectively, incurred by the Company’s former Chair, President and Chief Executive Officer Steven A. Sugarman; $64 thousand and $135 thousand, respectively, incurred by the Bank’s former Management Vice Chair Jeffrey T. Seabold; and $173 thousand and $287 thousand, respectively, incurred by the Bank’s former director Cynthia Abercrombie; and $233 thousand and $272 thousand, respectively, incurred by the Company’s former director Jeffrey Karish. Indemnification
costs were paid on behalf of other former executive officers and other former directors in lesser amounts for the three and six months ended June 30, 2018.2019.
Settlement Agreement. On September 5, 2017, Jeffrey T. Seabold, the Bank’s former Management Vice Chair, submitted a notice of termination of employment pursuant to his employment agreement with the Bank and, that same day, filed a complaint in the Superior Court of the State of California, County of Los Angeles, against the Company and the Bank and multiple unnamed defendants asserting claims for breach of contract, wrongful termination, retaliation and unfair business practices. On January 19, 2018, the parties reached a settlement in principle through mediation and a final settlement agreement was entered into by the Company, the Bank and Mr. Seabold on February 14, 2018 (the "Settlement Agreement"). Under the Settlement Agreement, which provided for a mutual release of claims and the dismissal of Mr. Seabold’s complaint with prejudice, Mr. Seabold received lump sum cash payments from the Company and the Bank aggregating $4.3 million, less applicable withholdings for the portions of such payments representing employee compensation. Included within this amount were cash payments totaling $576 thousand representing a benefit with respect to Mr. Seabold's unvested stock options and restricted stock awards. Mr. Seabold also received a cash payment of $38 thousand as reimbursement for his premiums for health care coverage for the period October 1, 2017 through March 2019. In addition, in accordance with the Settlement Agreement the Bank paid $650 thousand of attorneys’ fees incurred by Mr. Seabold in connection with his lawsuit and the Settlement Agreement. All the cash payments to Mr. Seabold under the Settlement Agreement were made during the three months ended March 31, 2018. The Settlement Agreement contains certain standstill provisions that, prior to December 31, 2018, generally restricted Mr. Seabold and his affiliates from, among other things, acquiring beneficial ownership of any shares of the Company’s common stock or common stock equivalents to the extent this would result in Mr. Seabold beneficially owning in excess of 4.99 percent of the total number of shares of common stock outstanding, soliciting proxies in opposition to any matter not recommended by the Company’s Board of Directors or in favor of any matter not approved by the Company’s Board of Directors or initiating any stockholder proposal.
NOTE 1917 – 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, the Company establisheswe establish an accrued liability when those matters present loss contingencies that are both probable and estimable. The Company continuesWe continue to monitor the mattermatters for further developments that could affect the amount of the accrued liability that has been previously established. As
While the Company accrued $475 thousand for various litigation filed against the Companyultimate liability with respect to legal actions cannot be determined at this time, we believe that damages, if any, and the Bank.
The Company was named as a defendant in several complaints filed in the United States District Court for the Central District of California in January 2017 alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints were brought as purported class actions on behalf of stockholders who purchased shares of the Company’s common stock between varying dates, inclusive of August 7, 2015 through January 23, 2017. Those actions were consolidated, a lead plaintiff was appointed, and the lead plaintiff filed a Consolidated Amended Complaint on May 31, 2017. The defendants movedother amounts relating to dismiss the Consolidated Amended Complaint. On September 18, 2017, the district court granted in part and denied in part Defendants’ motionspending matters are not likely to dismiss. Specifically, the court denied the defendants’ motions asbe material to the Company’s April 15, 2016 Proxy Statement which listed the positions held by Steven A. Sugarman (the Company’s then (now former) Chairman, President and Chief Executive Officer) with COR Securities Holdings Inc., COR Clearing LLC, and COR Capital LLC while omitting their alleged connections with Jason Galanis. On May 31, 2018, the court certified a class of shareholders who purchased Company stock between April 15, 2016 and January 20, 2017. Trial is currently set for February 18, 2020. The Company believes that the action is without merit and intends to vigorously contest it.consolidated financial statements.
NOTE 2018 – SUBSEQUENT EVENTS
The CompanyWe have evaluated events from the date of the consolidated financial statements on June 30, 20192020 through the issuance of these consolidated financial statements included in this Quarterly Report on Form 10-Q.
On July 25, 2019, the Company commenced a tender offer for the depositary shares representing shares
On August 1, 2019, the Company completed the Freddie Mac multifamily securitization and sold the associated mortgage servicing rights.
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 2019.2020. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20182019 and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019.2020.
CRITICAL ACCOUNTING POLICIES
The Company'sOur consolidated financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within these financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated statements of financial condition dates and our results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, the Company haswe have established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. The Company'sOur critical accounting policies are described in Note 1 to Consolidated Financial Statements and in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 20182019 and in Note 1 Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.
Adoption of the Current Expected Credit Loss (CECL) Model
On January 1, 2020, we adopted the new accounting standard, commonly known as CECL, which uses a current expected credit loss model for determining allowance for credit losses (ACL). Upon adoption, we recognized a Day 1 increase in the ACL of $6.4 million and a related after-tax decrease to retained earnings of $4.5 million. Our Day 1 ACL under the new CECL model totaled $68.1 million compared to $61.7 million under the incurred loss model at December 31, 2019, and represented 1.14% of total loans. At June 30, 2020, the ACL totaled $94.6 million resulting in an ACL to total loans coverage ratio of 1.68%, up from 1.04% at December 31, 2019. Excluding PPP loans, the ACL to total loans coverage ratio was 1.76% at June 30, 2020. The ACL and provision for credit losses include amounts for the reserve for unfunded loan commitments.
Recent Accounting Pronouncements Not Yet Adopted:Adopted The following are recently issued
Our recent accounting pronouncements applicable to the Company that have not yet been adopted:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) ("ASU 2016-13"). This guidance is intendedadopted are described in Note 1 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. Early adoption is available for fiscal years beginning after December 15, 2018. Currently, the Company cannot reasonably estimate the impact that adoption of ASU 2016-13 will have on its Consolidated Financial Statements; however,Statements in the impact may be significant. That assessment is based upon the fact that, unlike the incurred loss models in existing GAAP, the current expected credit loss (“CECL”) model in ASU 2016-13 does not specify a thresholdCompany's Annual Report on Form 10-K for the recognitionyear ended December 31, 2019 and in Note 1 Consolidated Financial Statements (unaudited) included in Part I of an impairment allowance. Rather, the Company will recognize an impairment allowance equal to its estimate of lifetime expected credit losses, adjusted for prepayments, for in-scope financial instruments as of the end of the reporting period. Accordingly, the impairment allowance measured under the CECL model could increase significantly from the impairment allowance measured under the Company’s existing incurred loss model. We have established a working group under the direction of the ALLL Committee composed of our Chief Financial Officer, Chief Credit Officer, Chief Risk Officer and Chief Accounting Officer. The Company has engaged a third-party vendor to assist in the CECL calculation and has developed an internal governance framework to oversee the CECL implementation. Other significant CECL implementation matters in process and being addressed by the Company include selecting loss estimation methodologies, identifying, sourcing and storing data, addressing data gaps, defining a reasonable and supportable forecast period, selecting historical loss information which will be reverted to, documenting the CECL estimation process, assessing the impact to internal control over financial reporting, capital planning and seeking process approval from audit and regulatory stakeholders. The Company expects to begin parallel calculations, testing, and sensitivity analysisthis Quarterly Report on its initial modeling assumptions and results in the third quarter of 2019.Form 10-Q.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). 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 is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company plans to adopt the ASU on January 1, 2020. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
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. The Company plans to adopt the
ASU on January 1, 2020. The adoption of ASU 2018-13 is not expected to significantly impact the Company's consolidated financial statements.
Executive Overview
The Company isWe are focused on providing core banking products and services, including customized and innovative banking and lending solutions, designed to cater to the unique needs of California's diverse businesses, entrepreneurs and communities through its 32our 31 full service branches in Orange, Los Angeles, San Diego, Orange,and Santa Barbara and Los Angeles Counties. Through our 700+over 600 dedicated professionals, the Company iswe are committed to serviceservicing and building enduring relationships by providing a higher standard of banking. The Company offersWe offer a variety of financial products and services designed around itsour target clients in order to serve all of their banking and financial needs. The Company continuesWe continue to focus on three main initiatives designed to improve our franchise and profitability on an ongoing basis: reducing our cost of deposits while adding value, optimizing the balance sheet to focus on higher-margin products while managing credit risk, and appropriately managing down expenses to the size and complexity of the business. Through these efforts, we continue to transform our franchise into a relationship-focused community bank, maintaining our high credit quality and serving businesses, entrepreneurs and individuals within our footprint.
Financial Highlights
For the three months ended June 30, 2020 and 2019, and 2018, net (loss) income from continuing operations was $16.6$(18.4) million and $13.9 million, respectively.$16.6 million. Diluted (loss) earnings from continuing operations per common share were $0.23$(0.44) and $0.16, respectively,$0.23 for the three months ended June 30, 20192020 and 2018. The increase in net income from continuing operations2019. Financial results for the three months ended June 30, 2019 compared to same period last year was due mainly to reductions in noninterest expense and provision for loan losses, partially offset by decreases in net interest income and noninterest income coupled with an increase in income taxes.
Total assets were $9.36 billion at June 30, 2019,second quarter of 2020 included a decreaseone-time pre-tax charge of $1.27 billion from $10.63 billion at December 31, 2018. The decrease was mainly due$26.8 million related to the restructuring of the Company’s continued progress towards transitioning to a core commercial banking platform. As partrelationship with the Los Angeles Football Club (“LAFC”). The restructuring of this transition, the Company is de-emphasizingrelationship will result in estimated pre-tax cost savings of approximately $89 million over the production of lower margin loan products and is opportunistically reducing its holdings of certain investment securities.next 12.5 years, or approximately $7.1 million per year.
Significant financial highlights during the three months ended June 30, 20192020 included:
•Noninterest-bearing deposit balances increased $135.4 million during the quarter and represented 23% of total deposits at June 30, 2020, up from 16% a year earlier
•Total checking balances increased $409.7 million during the quarter and represented 54% of total deposits at June 30, 2020, up from 40% a year earlier
•Net interest margin increased by 512 basis points from the prior quarter to 2.86% for the second quarter, resulting from a 5 basis point decline in our3.09%
•Average cost of deposits
Loan production was $599 million for the quarter, including $186 million of commercial and industrial loan commitments
Loan delinquencies decreased by 12.2% declined 40 basis points from the prior quarter to $52.2 million0.71%
Held-for-investment loan balances•Allowance for the second quarter decreasedcredit losses strengthened to $6.7 billion as we sold lower coupon single family and multifamily1.68% of total loans and transferred $574 million of multifamily loans to held-for-sale, pending a planned Freddie Mac securitization
Collateralized loan obligations declined to $737.2 million following $298.2 million of sales and calls
Noninterest expense was $43.6 million for the quarter, including $6.2 million of litigation, indemnification, investigation and other legal fees, $12.6 million of insurance recoveries, and net project charge-offs of $869 thousand
The Company's •Common Equity Tier 1 ratio was 10.50%capital at 11.68%
COVID-19 Operational Update
The markets in which we operate are marked by continuing uncertainty about the pace and strength of reopening and recovering from the impacts of the global pandemic. Despite the challenges created by the coronavirus, we continue to execute on our strategic initiatives and the transformation of our balance sheet. We continue to operate 25 of our 31 branches as we temporarily consolidated some overlapping areas at the beginning of the pandemic to ensure an adequate balance between employee and client safety and business continuity to meet our clients' banking needs. The majority of our employees outside of our branches are working offsite with only essential employees onsite. We are classified as an 'essential' business and we have implemented social and physical safeguards for our customers and employees within all of our locations.
CARES Act Response Efforts
On March 27, 2020, the U.S. federal government signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act provides emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic and includes numerous measures which we are utilizing to support our customers, including the Paycheck Protection Program (“PPP”).
The CARES Act initially allocated nearly $350 billion for the PPP, with an additional $310 billion added through an amendment bill several weeks later. This program is intended to assist small businesses affected by the pandemic and economic downturn with funds to pay payroll and other expenses through June 30, 2019, compared2020. The program has been extended through August 8, 2020. The loans are 100% guaranteed by the Small Business Administration (“SBA”) and the full principal amount of the loans may qualify for loan forgiveness if certain conditions are met.
Within seven business days of the announcement of PPP, we redeployed resources to 9.53% at Decemberthis program in support of our clients and others seeking financial relief under the program. As of June 30, 2020, we estimate we helped businesses that represent an aggregate workforce of more than 25,000 jobs through approvals of $262 million in PPP funds. We served existing clients with our high touch business framework in addition to successfully attracting many new clients by using the PPP opportunity to differentiate ourselves by demonstrating how true service can make a meaningful difference. As a result, we added many new clients who are consistent with the type of commercial customers that we target in our traditional business development efforts. During the three months ended June 30, 2020, we collected $7.5 million in fees on the 1,069 PPP loans funded, which will be recognized over their estimated life of nine months. We have started the loan forgiveness process with a number of clients and we expect this will be complete early next year.
Borrower Payment Relief Efforts
We are committed to supporting our existing borrowers and customers during this period of economic uncertainty. We actively engaged with our borrowers seeking payment relief and waived certain fees for impacted clients. One method we deployed was to offer forbearance and deferments to qualified clients. For single family residential (“SFR”) loans, the forbearance period is 90 days in length and is patterned after the U.S. Department of Housing and Urban Development (“HUD”) guidelines where applicable. With respect to our non-SFR loan portfolio, deferments are 90 days in length.
Many of our deferred loans have recently reached the expiration of their initial 90-day deferral period and we are reviewing their current financial condition as we evaluate extension requests of deferral periods. For those commercial borrowers that demonstrate a continuing need for a deferral, we generally expect to obtain credit enhancements such as additional collateral, personal guarantees, and/or reserve requirements in order to grant an additional deferral period. We expect the legacy SFR loans to continue with a higher percentage of forbearances due to the applicable consumer regulations, however, the SFR portfolio is well secured with an average portfolio LTV below 70%.
For a discussion of the related risk factors, please refer to Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018.2020.
The following table presents condensed statementsthe composition of continuing operations, discontinued operations and consolidated operationsour loan portfolio for the three and six months endedborrowers that received payment relief as of June 30, 2018. Operating income2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Deferment & Forbearances(1)(2) | | | | | |
| | | | | | | | June 30, 2020 | | | | |
($ in thousands) | | | | | | | | Number of Loans | | Amount(1)(2) | | % of Loan Category |
| | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | 55 | | | $ | 53,255 | | | 3.7 | % |
Commercial real estate | | | | | | | | 53 | | | 218,537 | | | 26.6 | % |
Multifamily | | | | | | | | 30 | | | 114,296 | | | 8.0 | % |
SBA | | | | | | | | 6 | | | 21,819 | | | 7.0 | % |
Construction | | | | | | | | 8 | | | 31,544 | | | 14.8 | % |
| | | | | | | | | | | | |
Total commercial | | | | | | | | 152 | | | 439,451 | | | 10.4 | % |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | | | | | | | 142 | | | 163,815 | | | 12.0 | % |
Other consumer | | | | | | | | 4 | | | 969 | | | 2.5 | % |
Total consumer | | | | | | | | 146 | | | 164,784 | | | 11.7 | % |
Total | | | | | | | | 298 | | | $ | 604,235 | | | 10.7 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1)Excludes loans in forbearance that are current
(2)Excludes loans delinquent prior to COVID-19
With respect to our commercial portfolio, as of July 31, 2020, 67 loans totaling $192.8 million have reached expiration of their initial deferral period and have not requested an additional 90-day deferral period as of that date. As of July 31, 2020, 18 loans totaling $121.3 million have requested an additional 90-day deferral period, of which 5 loans totaling $35.2 million have been approved. We continue to review the remaining requests and will evaluate additional requests from commercial borrowers that have or will soon reach expiration of their initial deferral period as described above.
With respect to our consumer portfolio, consisting primarily of single family residential mortgage loans, as of July 31, 2020, the number of loans on forbearance remained relatively unchanged compared to June 30, 2020.
Other Efforts
To support our community, we partnered with Food Finders to provide over 300,000 meals to our most vulnerable neighbors in Southern California. We also made a donation to the Los Angeles Fire Department to help supply critical personal protective equipment to these first-responders. We developed online financial literacy classes for discontinued operationsyoung adults and we sponsored five LAFC blood drives in 2019 was
partnership with the American Red Cross and Banc of California Stadium.
immaterial.
Termination of LAFC Agreement
On May 22, 2020, we entered into an agreement (the “Termination Agreement”) with the Los Angeles Football Club (LAFC) to amend and terminate certain agreements that we previously entered into with LAFC in 2017 (the “LAFC Agreements”). Among other things, the LAFC Agreements granted us the exclusive naming rights to the Banc of California Stadium, a soccer stadium of LAFC, as well as the right to be the official bank of LAFC. Pursuant to the LAFC Agreements, we agreed to pay LAFC $100 million over a period of 15 years, of which $15.9 million had been recognized as expense from January 1, 2018 through May 22, 2020. In addition to the stated contract amount of $100 million, the LAFC Agreements obligated us to pay for other annual expenses, which have averaged approximately $500 thousand per year.
Under the Termination Agreement, we agreed to restructure our partnership to allow LAFC to expand its roster of sponsors and partners into categories that were previously exclusive to us under the LAFC Agreements and we stepped away from our naming-rights position on LAFC’s soccer stadium. We will continue to serve as LAFC’s primary banking partner, subject to any new sponsor in the financial services space that offers banking services, and remain as a partner on a number of other collaborations. As part of the Termination Agreement, we agreed to pay LAFC a $20.1 million termination fee. The LAFC Agreements will be terminated on December 31, 2020, unless otherwise terminated earlier by LAFC pursuant to the Termination Agreement (the “Termination Date”). We will not have any continuing payment obligations to LAFC following the Termination Date. With respect to the remainder of 2020, we do not expect to have any additional payment obligations except in certain specified circumstances set forth in the Termination Agreement, which amount would not exceed $2.8 million.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
($ in thousands) | | Continuing Operations | | Discontinued Operations | | Consolidated Operations | | Continuing Operations | | Discontinued Operations | | Consolidated Operations |
Interest and dividend income | | $ | 105,185 |
| | $ | 189 |
| | $ | 105,374 |
| | $ | 203,892 |
| | $ | 375 |
| | $ | 204,267 |
|
Interest expense | | 32,421 |
| | — |
| | 32,421 |
| | 59,690 |
| | — |
| | 59,690 |
|
Net interest income | | 72,764 |
| | 189 |
| | 72,953 |
| | 144,202 |
| | 375 |
| | 144,577 |
|
Provision for loan losses | | 2,653 |
| | — |
| | 2,653 |
| | 22,152 |
| | — |
| | 22,152 |
|
Noninterest income | | 8,061 |
| | 1,107 |
| | 9,168 |
| | 16,643 |
| | 2,977 |
| | 19,620 |
|
Noninterest expense | | 62,539 |
| | 15 |
| | 62,554 |
| | 122,339 |
| | 27 |
| | 122,366 |
|
Income from continuing operations before income taxes | | 15,633 |
| | 1,281 |
| | 16,914 |
| | 16,354 |
| | 3,325 |
| | 19,679 |
|
Income tax (benefit) expense | | 1,779 |
| | 355 |
| | 2,134 |
| | (4,574 | ) | | 915 |
| | (3,659 | ) |
Net income | | $ | 13,854 |
| | $ | 926 |
| | $ | 14,780 |
| | $ | 20,928 |
| | $ | 2,410 |
| | $ | 23,338 |
|
The pre-tax impact from our entry into the Termination Agreement was a one-time charge to operations of $26.8 million during the second quarter of 2020. The charge to operations includes the write-off of all of a prepaid advertising asset. As a result of the Termination Agreement, the Bank estimates an aggregate pre-tax cost savings of approximately $89.1 million, or approximately $7.1 million per year, over the remaining 12 ½ year life of the original LAFC Agreements.
RESULTS OF OPERATIONS
Net Interest Income
The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates on a consolidated operations basis, for the three months ended June 30, 2019,2020, March 31, 20192020 and June 30, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | March 31, 2020 | | | | | | June 30, 2019 | | | | |
($ in thousands) | | Average Balance | | Interest and Dividends | | Yield/Cost | | Average Balance | | Interest and Dividends | | Yield/ Cost | | Average Balance | | Interest and Dividends | | Yield/Cost |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Total loans(1) | | $ | 5,707,619 | | | $ | 63,642 | | | 4.48 | % | | $ | 5,780,810 | | | $ | 65,534 | | | 4.56 | % | | $ | 7,445,704 | | | $ | 89,159 | | | 4.80 | % |
Securities | | 1,063,941 | | | 7,816 | | | 2.95 | % | | 952,966 | | | 7,820 | | | 3.30 | % | | 1,304,876 | | | 12,457 | | | 3.83 | % |
Other interest-earning assets (2) | | 424,776 | | | 1,239 | | | 1.17 | % | | 297,444 | | | 1,360 | | | 1.84 | % | | 342,908 | | | 2,424 | | | 2.84 | % |
Total interest-earning assets | | 7,196,336 | | | 72,697 | | | 4.06 | % | | 7,031,220 | | | 74,714 | | | 4.27 | % | | 9,093,488 | | | 104,040 | | | 4.59 | % |
ACL | | (78,528) | | | | | | | (60,470) | | | | | | | (63,046) | | | | | |
BOLI and noninterest-earning assets (3) | | 622,398 | | | | | | | 592,192 | | | | | | | 580,133 | | | | | |
Total assets | | $ | 7,740,206 | | | | | | | $ | 7,562,942 | | | | | | | $ | 9,610,575 | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
Savings | | $ | 905,997 | | | 2,718 | | | 1.21 | % | | $ | 890,830 | | | 3,296 | | | 1.49 | % | | $ | 1,083,571 | | | 4,950 | | | 1.83 | % |
Interest-bearing checking | | 1,710,038 | | | 2,186 | | | 0.51 | % | | 1,520,922 | | | 3,728 | | | 0.99 | % | | 1,580,165 | | | 4,554 | | | 1.16 | % |
Money market | | 592,872 | | | 850 | | | 0.58 | % | | 608,926 | | | 1,760 | | | 1.16 | % | | 853,007 | | | 3,902 | | | 1.83 | % |
Certificates of deposit | | 1,214,939 | | | 4,451 | | | 1.47 | % | | 1,151,518 | | | 5,827 | | | 2.04 | % | | 2,537,060 | | | 15,192 | | | 2.40 | % |
Total interest-bearing deposits | | 4,423,846 | | | 10,205 | | | 0.93 | % | | 4,172,196 | | | 14,611 | | | 1.41 | % | | 6,053,803 | | | 28,598 | | | 1.89 | % |
FHLB advances | | 819,166 | | | 4,818 | | | 2.37 | % | | 1,039,055 | | | 5,883 | | | 2.28 | % | | 1,287,121 | | | 8,289 | | | 2.58 | % |
Securities sold under repurchase agreements | | 1,024 | | | 2 | | | 0.79 | % | | — | | | — | | | — | % | | 2,173 | | | 16 | | | 2.95 | % |
Long-term debt and other interest-bearing liabilities | | 173,977 | | | 2,357 | | | 5.45 | % | | 174,056 | | | 2,359 | | | 5.45 | % | | 174,161 | | | 2,357 | | | 5.43 | % |
Total interest-bearing liabilities | | 5,418,013 | | | 17,382 | | | 1.29 | % | | 5,385,307 | | | 22,853 | | | 1.71 | % | | 7,517,258 | | | 39,260 | | | 2.09 | % |
Noninterest-bearing deposits | | 1,349,735 | | | | | | | 1,133,306 | | | | | | | 1,034,205 | | | | | |
Noninterest-bearing liabilities | | 118,208 | | | | | | | 128,282 | | | | | | | 96,179 | | | | | |
Total liabilities | | 6,885,956 | | | | | | | 6,646,895 | | | | | | | 8,647,642 | | | | | |
Total stockholders’ equity | | 854,250 | | | | | | | 916,047 | | | | | | | 962,933 | | | | | |
Total liabilities and stockholders’ equity | | $ | 7,740,206 | | | | | | | $ | 7,562,942 | | | | | | | $ | 9,610,575 | | | | | |
Net interest income/spread | | | | $ | 55,315 | | | 2.77 | % | | | | $ | 51,861 | | | 2.56 | % | | | | $ | 64,780 | | | 2.50 | % |
Net interest margin (4) | | | | | | 3.09 | % | | | | | | 2.97 | % | | | | | | 2.86 | % |
| | | | | | | | | | | | | | | | | | |
Ratio of interest-earning assets to interest-bearing liabilities | | 132.82 | % | | | | | | 130.56 | % | | | | | | 120.97 | % | | | | |
Total deposits(5) | | 5,773,581 | | | 10,205 | | | 0.71 | % | | 5,305,502 | | | 14,611 | | | 1.11 | % | | 7,088,008 | | | 28,598 | | | 1.62 | % |
Total funding (6) | | 6,767,748 | | | 17,382 | | | 1.03 | % | | 6,518,613 | | | 22,853 | | | 1.41 | % | | 8,551,463 | | | 39,260 | | | 1.84 | % |
(1)Total loans are net of deferred fees, related direct costs and discounts. Non-accrual loans are included in the average balance. Net accretion (amortization) of deferred loan fees (costs) of $1.1 million, $(587) thousand and $106 thousand and accretion of discount on purchased loans of $347 thousand, $8 thousand and $28 thousand for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively, are included in interest income.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2019 | | March 31, 2019 | | June 30, 2018 |
($ in thousands) | | Average Balance | | Interest and Dividends | | Yield/Cost | | Average Balance | | Interest and Dividends | | Yield/Cost | | Average Balance | | Interest and Dividends | | Yield/Cost |
Interest-earning assets: | | | | | | | | | | | | | | | | | | |
Total loans(1) | | $ | 7,445,704 |
| | $ | 89,159 |
| | 4.80 | % | | $ | 7,714,751 |
| | $ | 90,558 |
| | 4.76 | % | | $ | 7,055,079 |
| | $ | 81,496 |
| | 4.63 | % |
Securities | | 1,304,876 |
| | 12,457 |
| | 3.83 | % | | 1,751,509 |
| | 17,841 |
| | 4.13 | % | | 2,279,416 |
| | 21,455 |
| | 3.78 | % |
Other interest-earning assets (2) | | 342,908 |
| | 2,424 |
| | 2.84 | % | | 321,823 |
| | 2,313 |
| | 2.91 | % | | 392,342 |
| | 2,423 |
| | 2.48 | % |
Total interest-earning assets | | 9,093,488 |
| | 104,040 |
| | 4.59 | % | | 9,788,083 |
| | 110,712 |
| | 4.59 | % | | 9,726,837 |
| | 105,374 |
| | 4.35 | % |
ALLL | | (63,046 | ) | | | | | | (61,924 | ) | | | | | | (54,903 | ) | | | | |
BOLI and non-interest earning assets (3) | | 580,133 |
| | | | | | 575,558 |
| | | | | | 565,224 |
| | | | |
Total assets | | $ | 9,610,575 |
| | | | | | $ | 10,301,717 |
| | | | | | $ | 10,237,158 |
| | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | |
Savings | | $ | 1,083,571 |
| | 4,950 |
| | 1.83 | % | | $ | 1,201,802 |
| | 5,480 |
| | 1.85 | % | | $ | 1,055,693 |
| | 3,886 |
| | 1.48 | % |
Interest-bearing checking | | 1,580,165 |
| | 4,554 |
| | 1.16 | % | | 1,554,846 |
| | 4,525 |
| | 1.18 | % | | 1,822,856 |
| | 4,182 |
| | 0.92 | % |
Money market | | 853,007 |
| | 3,902 |
| | 1.83 | % | | 887,538 |
| | 4,128 |
| | 1.89 | % | | 1,134,280 |
| | 3,689 |
| | 1.30 | % |
Certificates of deposit | | 2,537,060 |
| | 15,192 |
| | 2.40 | % | | 2,982,980 |
| | 17,310 |
| | 2.35 | % | | 2,079,932 |
| | 8,558 |
| | 1.65 | % |
Total interest-bearing deposits | | 6,053,803 |
| | 28,598 |
| | 1.89 | % | | 6,627,166 |
| | 31,443 |
| | 1.92 | % | | 6,092,761 |
| | 20,315 |
| | 1.34 | % |
FHLB advances | | 1,287,121 |
| | 8,289 |
| | 2.58 | % | | 1,422,100 |
| | 9,081 |
| | 2.59 | % | | 1,827,307 |
| | 9,539 |
| | 2.09 | % |
Securities sold under repurchase agreements | | 2,173 |
| | 16 |
| | 2.95 | % | | 2,350 |
| | 18 |
| | 3.11 | % | | 29,907 |
| | 211 |
| | 2.83 | % |
Long term debt and other interest-bearing liabilities | | 174,161 |
| | 2,357 |
| | 5.43 | % | | 174,230 |
| | 2,362 |
| | 5.50 | % | | 174,296 |
| | 2,356 |
| | 5.42 | % |
Total interest-bearing liabilities | | 7,517,258 |
| | 39,260 |
| | 2.09 | % | | 8,225,846 |
| | 42,904 |
| | 2.12 | % | | 8,124,271 |
| | 32,421 |
| | 1.60 | % |
Noninterest-bearing deposits | | 1,034,205 |
| | | | | | 1,021,741 |
| | | | | | 1,004,502 |
| | | | |
Non-interest-bearing liabilities | | 96,179 |
| | | | | | 97,426 |
| | | | | | 107,529 |
| | | | |
Total liabilities | | 8,647,642 |
| | | | | | 9,345,013 |
| | | | | | 9,236,302 |
| | | | |
Total stockholders’ equity | | 962,933 |
| | | | | | 956,704 |
| | | | | | 1,000,856 |
| | | | |
Total liabilities and stockholders’ equity | | $ | 9,610,575 |
| | | | | | $ | 10,301,717 |
| | | | | | $ | 10,237,158 |
| | | | |
Net interest income/spread | | | | $ | 64,780 |
| | 2.50 | % | | | | $ | 67,808 |
| | 2.47 | % | | | | $ | 72,953 |
| | 2.75 | % |
Net interest margin (4) | | | | | | 2.86 | % | | | | | | 2.81 | % | | | | | | 3.01 | % |
(2)Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions. | |
(1) | For the three months ended June 30, 2018, total loans includes average loans and related interest income from discontinued operations. Total loans are net of deferred fees, related direct costs and discounts, but exclude the allowance for loan losses. Non-accrual loans are included in the average balance. Net (amortization) accretion of deferred loan fees and costs of $106 thousand, $(289) thousand and $106 thousand and accretion of discount on purchased loans of $28 thousand, $97 thousand and $552 thousand for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively, are included in interest income. |
| |
(2) | Includes average balance of FHLB and other bank stock at cost and average time deposits with other financial institutions. |
(3)Includes average balance of bank-owned life insurance of $110.4 million, $110.0 million and $107.8 million for the three months ended June 30, 2020, March 31, 2020 and June 30, 2019.
| |
(3) | Includes average balance of bank-owned life insurance of $107.8 million, $107.2 million and $105.6 million for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively. |
| |
(4) | Annualized net interest income divided by average interest-earning assets. |
(4)Annualized net interest income divided by average interest-earning assets.
(5)Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of total deposits is calculated as annualized total interest expense on deposits divided by average total deposits.
(6)Total funding is the sum of interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.
Three Months Ended June 30, 2020 Compared to Three Months Ended March 31, 2020
Net interest income increased $3.5 million to $55.3 million for the second quarter of 2020 due mostly to lower funding costs and higher average interest-earning assets, offset by a lower yield on such assets. Compared to the prior quarter, average interest-earning assets increased by $165.1 million to $7.20 billion, due to higher average securities of $111.0 million and other interest-earning assets of $127.3 million, offset by lower average loans of $73.2 million. The average interest-earning assets growth was funded by higher average noninterest-bearing deposits of $216.4 million and interest-bearing deposits of $251.7 million, partially offset by lower average FHLB advances of $219.9 million.
The net interest margin increased 12 basis points to 3.09% for the second quarter from 2.97% for the prior quarter. The increase was due to the 42 basis point decline on the average cost of interest-bearing liabilities outpacing the 21 basis point decline in the average yield on interest-earning assets. The decrease in the average interest-earning asset yield to 4.06% for the second quarter from 4.27% for the first quarter was due to lower yields on most interest-earning asset classes and the change in the mix of interest-earning assets. The lower yields on total loans, securities and other interest-earning assets was due to originating new business and repricing variable rate loans and investments in the lower interest rate environment given the rate cuts by the Federal Reserve in March 2020. Our average yield on loans declined 8 basis points to 4.48% and our average yield on securities decreased 35 basis points to 2.95%. The second quarter includes $1.7 million of PPP fee income, which increased the net interest margin by 3 basis points. The lower securities yield is due mostly to a 38 basis point decrease in the collateralized loan obligations (“CLOs”) yield to 3.22% for the second quarter from 3.60% for the first quarter as these CLOs reprice quarterly.
The average cost of funds decreased 39 basis points to 1.03% for the second quarter from 1.41% for the first quarter. This decrease was driven by the lower average cost of interest-bearing liabilities and improved funding mix, including higher average noninterest-bearing deposits. We have reduced our reliance on high cost transaction accounts, non-brokered certificates of deposits, and wholesale funds as we continue to execute on our relationship-focused business banking strategy. The 42 basis point decline in the average cost of interest-bearing liabilities to 1.29% for the second quarter, from 1.71% for the first quarter, was driven by the lower average cost of interest-bearing deposits. The average cost of interest-bearing deposits declined 48 basis points to 0.93% from the prior quarter due to actively managing down deposit rates in response to the interest rate cuts by the Federal Reserve in March 2020. Additionally, average noninterest-bearing deposits increased by $216.4 million and represented 23.4% of total average deposits in the second quarter compared to 21.4% of total average deposits for the first quarter. Our total cost of average deposits decreased 40 basis points to 0.71% for the second quarter. The spot rate of total deposits at the end of the second quarter of 2020 was 0.59%.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Net interest income was $55.3 million for the three months ended June 30, 2020, a decrease of $9.5 million, or 14.6%, from $64.8 million for the three months ended June 30, 2019. The decrease in net interest income from the prior period was due to lower average interest-earning assets, as a result of targeted sales of securities and loans during 2019, in line with our strategy of remixing the loan portfolio towards relationship based-lending, offset by a higher net interest margin. For the three months ended June 30, 2020, average interest-earning assets declined $1.90 billion to $7.20 billion and the net interest margin increased 23 basis points to 3.09% for the three months ended June 30, 2020 compared to 2.86% for the same 2019 period.
Our average yield on interest-earning assets decreased 53 basis points to 4.06% for the three months ended June 30, 2020, as compared to 4.59% during the same 2019 period. The decrease in yield was primarily attributable to lower average yields on the loan and securities portfolios, partially offset by an increased mix of loans versus
securities. Our average yield on loans was 4.48% for the three months ended June 30, 2020, compared to 4.80% for the same 2019 period, primarily due to lower market interest rates and a lower percentage of higher-yielding commercial and industrial balances in the portfolio due to the market interest rate cuts totaling 225 basis points by the Federal Reserve in the third quarter of 2019 through March of 2020. Our average yield on securities decreased 88 basis points due mostly to CLOs repricing into the lower rate environment and a decrease in average CLO balances.
The average cost of funds decreased to 1.03% for the three months ended June 30, 2020 from 1.84% for the same 2019 period. This decrease was driven by the lower average cost of interest-bearing liabilities and the improved funding mix, including higher average noninterest-bearing deposits. The 80 basis point decline in the average cost of interest-bearing liabilities to 1.29% for the three months ended June 30, 2020 from 2.09% for the same 2019 period was driven by the lower average cost of interest-bearing deposits and rates paid on our FHLB term advances. The average cost of interest-bearing deposits declined 96 basis points to 0.93% from the prior period due to actively managing down deposit rates in response to the previously described interest rate cuts by the Federal Reserve and a lower reliance on brokered deposits. Additionally, average noninterest-bearing deposits increased by $315.5 million when compared to the same 2019 period. Our cost of average total deposits decreased 91 basis points to 0.71% for the three months ended June 30, 2020 when compared to the same 2019 period due to the lower cost of interest-bearing deposits and a higher mix of noninterest-bearing deposits. Average noninterest-bearing deposits represented 23.4% of total average deposits for the three months ended June 30, 2020 compared to 14.6% of total average deposits for the first quarter of 2019.
The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the six months ended June 30, 20192020 and 2018:2019:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
($ in thousands) | | Average Balance | | Interest and Dividends | | Yield/Cost | | Average Balance | | Interest and Dividends | | Yield/Cost |
Interest-earning assets: | | | | | | | | | | | | |
Total loans (1) | | $ | 7,579,485 |
| | $ | 179,717 |
| | 4.78 | % | | $ | 6,930,867 |
| | $ | 156,594 |
| | 4.56 | % |
Securities | | 1,526,959 |
| | 30,298 |
| | 4.00 | % | | 2,401,639 |
| | 43,086 |
| | 3.62 | % |
Other interest-earning assets (2) | | 332,424 |
| | 4,737 |
| | 2.87 | % | | 399,662 |
| | 4,587 |
| | 2.31 | % |
Total interest-earning assets | | 9,438,868 |
| | 214,752 |
| | 4.59 | % | | 9,732,168 |
| | 204,267 |
| | 4.23 | % |
ALLL | | (62,488 | ) | | | | | | (52,095 | ) | | | | |
BOLI and non-interest earning assets (3) | | 577,858 |
| | | | | | 570,050 |
| | | | |
Total assets | | $ | 9,954,238 |
| | | | | | $ | 10,250,123 |
| | | | |
Interest-bearing liabilities: | | | | | | | | | | | �� | |
Savings | | $ | 1,142,360 |
| | 10,429 |
| | 1.84 | % | | $ | 1,055,516 |
| | 7,186 |
| | 1.37 | % |
Interest-bearing checking | | 1,567,575 |
| | 9,079 |
| | 1.17 | % | | 1,899,085 |
| | 8,291 |
| | 0.88 | % |
Money market | | 870,177 |
| | 8,031 |
| | 1.86 | % | | 1,105,359 |
| | 6,523 |
| | 1.19 | % |
Certificates of deposit | | 2,758,789 |
| | 32,502 |
| | 2.38 | % | | 1,993,723 |
| | 15,110 |
| | 1.53 | % |
Total interest-bearing deposits | | 6,338,901 |
| | 60,041 |
| | 1.91 | % | | 6,053,683 |
| | 37,110 |
| | 1.24 | % |
FHLB advances | | 1,354,238 |
| | 17,370 |
| | 2.59 | % | | 1,769,520 |
| | 16,931 |
| | 1.93 | % |
Securities sold under repurchase agreements | | 2,261 |
| | 34 |
| | 3.03 | % | | 74,477 |
| | 961 |
| | 2.60 | % |
Long term debt and other interest-bearing liabilities | | 174,195 |
| | 4,719 |
| | 5.46 | % | | 174,360 |
| | 4,688 |
| | 5.42 | % |
Total interest-bearing liabilities | | 7,869,595 |
| | 82,164 |
| | 2.11 | % | | 8,072,040 |
| | 59,690 |
| | 1.49 | % |
Noninterest-bearing deposits | | 1,028,008 |
| | | | | | 1,030,457 |
| | | | |
Non-interest-bearing liabilities | | 96,801 |
| | | | | | 137,271 |
| | | | |
Total liabilities | | 8,994,404 |
| | | | | | 9,239,768 |
| | | | |
Total stockholders’ equity | | 959,834 |
| | | | | | 1,010,355 |
| | | | |
Total liabilities and stockholders’ equity | | $ | 9,954,238 |
| | | | | | $ | 10,250,123 |
| | | | |
Net interest income/spread | | | | $ | 132,588 |
| | 2.48 | % | | | | $ | 144,577 |
| | 2.74 | % |
Net interest margin (4) | | | | | | 2.83 | % | | | | | | 3.00 | % |
| |
(1) | For the six months ended June 30, 2018, total loans includes average loans and related interest income from discontinued operations. Total loans are net of deferred fees, related direct costs and discounts, but exclude the allowance for loan losses. Non-accrual loans are included in the average balance. Net (amortization) accretion of deferred loan fees and |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | | | | |
| | 2020 | | | | | | 2019 | | | | |
($ in thousands) | | Average Balance | | Interest and Dividends | | Yield/Cost | | Average Balance | | Interest and Dividends | | Yield/Cost |
Interest-earning assets: | | | | | | | | | | | | |
Total loans (1) | | $ | 5,744,214 | | | $ | 129,176 | | | 4.52 | % | | $ | 7,579,485 | | | $ | 179,717 | | | 4.78 | % |
Securities | | 1,008,454 | | | 15,636 | | | 3.12 | % | | 1,526,959 | | | 30,298 | | | 4.00 | % |
Other interest-earning assets (2) | | 361,110 | | | 2,599 | | | 1.45 | % | | 332,424 | | | 4,737 | | | 2.87 | % |
Total interest-earning assets | | 7,113,778 | | | 147,411 | | | 4.17 | % | | 9,438,868 | | | 214,752 | | | 4.59 | % |
ACL | | (69,499) | | | | | | | (62,488) | | | | | |
BOLI and non-interest earning assets (3) | | 607,296 | | | | | | | 577,858 | | | | | |
Total assets | | $ | 7,651,575 | | | | | | | $ | 9,954,238 | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Savings | | $ | 898,414 | | | 6,013 | | | 1.35 | % | | $ | 1,142,360 | | | 10,429 | | | 1.84 | % |
Interest-bearing checking | | 1,615,480 | | | 5,915 | | | 0.74 | % | | 1,567,575 | | | 9,079 | | | 1.17 | % |
Money market | | 600,899 | | | 2,610 | | | 0.87 | % | | 870,177 | | | 8,031 | | | 1.86 | % |
Certificates of deposit | | 1,183,229 | | | 10,278 | | | 1.75 | % | | 2,758,789 | | | 32,502 | | | 2.38 | % |
Total interest-bearing deposits | | 4,298,022 | | | 24,816 | | | 1.16 | % | | 6,338,901 | | | 60,041 | | | 1.91 | % |
FHLB advances | | 929,110 | | | 10,701 | | | 2.32 | % | | 1,354,238 | | | 17,370 | | | 2.59 | % |
Securities sold under repurchase agreements | | 512 | | | 2 | | | 0.79 | | | 2,261 | | | 34 | | | 3.03 | % |
Long-term debt and other interest-bearing liabilities | | 174,017 | | | 4,716 | | | 5.45 | % | | 174,195 | | | 4,719 | | | 5.46 | % |
Total interest-bearing liabilities | | 5,401,661 | | | 40,235 | | | 1.50 | % | | 7,869,595 | | | 82,164 | | | 2.11 | % |
Noninterest-bearing deposits | | 1,241,521 | | | | | | | 1,028,008 | | | | | |
Noninterest-bearing liabilities | | 123,244 | | | | | | | 96,801 | | | | | |
Total liabilities | | 6,766,426 | | | | | | | 8,994,404 | | | | | |
Total stockholders’ equity | | 885,149 | | | | | | | 959,834 | | | | | |
Total liabilities and stockholders’ equity | | $ | 7,651,575 | | | | | | | $ | 9,954,238 | | | | | |
Net interest income/spread | | | | $ | 107,176 | | | 2.67 | % | | | | $ | 132,588 | | | 2.48 | % |
Net interest margin (4) | | | | | | 3.03 | % | | | | | | 2.83 | % |
| | | | | | | | | | | | |
Ratio of interest-earning assets to interest-bearing liabilities | | 131.70 | % | | | | | | 119.94 | % | | | | |
Total deposits(5) | | 5,539,543 | | | 24,816 | | | 0.90 | % | | 7,366,909 | | | 60,041 | | | 1.64 | % |
Total funding (6) | | 6,643,182 | | | 40,235 | | | 1.22 | % | | 8,897,603 | | | 82,164 | | | 1.86 | % |
(1)Total loans are net of deferred fees, related direct costs and discounts, but exclude the allowance for credit losses. Non-accrual loans are included in the average balance. Net accretion (amortization) of $(83)deferred loan fees (costs) of $553 thousand and $228$(83) thousand and accretion of discount on purchased loans of $125$355 thousand and $562$125 thousand for the six months ended June 30, 20192020 and 2018,2019, respectively, are included in interest income.
| |
(2) | Includes average balance of FHLB and other bank stock at cost and average time deposits with other financial institutions. |
| |
(3) | Includes average balance of bank-owned life insurance of $107.5 million and $105.3 million for the six months ended June 30, 2019 and 2018, respectively. |
| |
(4) | Annualized net interest income divided by average interest-earning assets. |
(2)Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions.
(3)Includes average balance of bank-owned life insurance of $110.2 million and $107.5 million for the six months ended June 30, 2020 and 2019.
(4)Annualized net interest income divided by average interest-earning assets.
(5)Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of total deposits is calculated as annualized total interest expense on deposits divided by average total deposits.
(6)Total funding is the sum of interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Net interest income for the six months ended June 30, 2020 decreased $25.4 million to $107.2 million from $132.6 million for the same 2019 period. This decrease was due to lower average interest-earning assets, as a result of targeted sales of securities and loans during 2019, in line with our strategy of remixing the loan portfolio towards relationship based-lending, partially offset by a higher net interest margin. For the six months ended June 30, 2020, average interest-earning assets declined $2.33 billion to $7.11 billion, and the net interest margin increased 20 basis points to 3.03% for the six months ended June 30, 2020 compared to 2.83% for the same 2019 period.
Our average yield on interest-earning assets decreased 42 basis points to 4.17% for the six months ended June 30, 2020 as compared to 4.59% during the same 2019 period. The decrease in yield was primarily attributable to lower average yields on the loan and securities portfolios, partially offset by an increased mix of loans versus securities. Our average yield on loans was 4.52% for the six months ended June 30, 2020, compared to 4.78% for the same 2019 period, primarily due to lower market interest rates and a lower percentage of higher-yielding commercial and industrial balances in the portfolio. Our average yield on securities decreased 88 basis points due mostly to CLOs repricing into the lower rate environment and a decrease in average CLO balances.
The average cost of funds decreased to 1.22% for the six months ended June 30, 2020 from 1.86% for the same 2019 period. This decrease was driven by the lower average cost of interest-bearing liabilities and the improved funding mix, including higher average noninterest-bearing deposits. The 61 basis point decline in the average cost of interest-bearing liabilities to 1.50% for the six months ended June 30, 2020 from 2.11% for the same 2019 period was driven by the lower average cost of interest-bearing deposits and rates paid on our FHLB term advances. The average cost of interest-bearing deposits declined 75 basis points to 1.16% from the prior period due to actively managing down deposit rates in response to the previously described market interest rate cuts by the Federal Reserve and a lower reliance on brokered deposits. Additionally, average noninterest-bearing deposits increased by $213.5 million when compared to the same 2019 period. Our cost of average total deposits decreased 74 basis points to 0.90% for the six months ended June 30, 2020 when compared to the same 2019 period due to the lower cost of interest-bearing deposits and higher noninterest-bearing deposits. Average noninterest-bearing deposits represented 22.4% of total average deposits for the six months ended June 30, 2020 compared to 14.0% of total average deposits for the same 2019 period.
Rate/Volume Analysis
The following table presents the changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities. Information isThe information provided onpresents the changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. | | | | Three Months Ended June 30, 2019 vs. 2018 | | Six Months Ended June 30, 2019 vs. 2018 | | | | Three Months Ended June 30, 2020 vs. 2019 | | | Six Months Ended June 30, 2020 vs. 2019 | |
| | Increase (Decrease) Due to | | Net Increase (Decrease) | | Increase (Decrease) Due to | | Net Increase (Decrease) | | | | Increase (Decrease) Due to | | | Net Increase (Decrease) | | Increase (Decrease) Due to | | | Net Increase (Decrease) |
($ In thousands) | | Volume | | Rate | | Volume | | Rate | | ($ In thousands) | | | Volume | | Rate | | | | Volume | | Rate | | | Net Increase (Decrease) |
Interest and dividend income: | | | | | | | | | | | | | Interest and dividend income: | | | | | | | | | | | | | |
Total loans (1) | | $ | 4,608 |
| | $ | 3,055 |
| | $ | 7,663 |
| | $ | 15,258 |
| | $ | 7,865 |
| | $ | 23,123 |
| |
Total loans | | Total loans | | | $ | (19,848) | | | $ | (5,669) | | | $ | (25,517) | | | $ | (41,270) | | | $ | (9,271) | | | $ | (50,541) | |
Securities | | (9,279 | ) | | 281 |
| | (8,998 | ) | | (16,953 | ) | | 4,165 |
| | (12,788 | ) | Securities | | | (2,068) | | | (2,573) | | | (4,641) | | | (8,897) | | | (5,765) | | | (14,662) | |
Other interest-earning assets | | (327 | ) | | 328 |
| | 1 |
| | (848 | ) | | 998 |
| | 150 |
| Other interest-earning assets | | | 480 | | | (1,665) | | | (1,185) | | | 379 | | | (2,517) | | | (2,138) | |
Total interest and dividend income | | $ | (4,998 | ) | | $ | 3,664 |
| | $ | (1,334 | ) | | $ | (2,543 | ) | | $ | 13,028 |
| | $ | 10,485 |
| Total interest and dividend income | | | $ | (21,436) | | | $ | (9,907) | | | $ | (31,343) | | | $ | (49,788) | | | $ | (17,553) | | | $ | (67,341) | |
Interest expense: | | | | | | | | | | | | | Interest expense: | | | | | | | | | | | | | |
Savings | | $ | 107 |
| | $ | 957 |
| | $ | 1,064 |
| | $ | 627 |
| | $ | 2,616 |
| | $ | 3,243 |
| Savings | | | $ | (728) | | | $ | (1,504) | | | $ | (2,232) | | | $ | (1,965) | | | $ | (2,451) | | | $ | (4,416) | |
Interest-bearing checking | | (612 | ) | | 984 |
| | 372 |
| | (1,619 | ) | | 2,407 |
| | 788 |
| Interest-bearing checking | | | 351 | | | (2,719) | | | (2,368) | | | 272 | | | (3,436) | | | (3,164) | |
Money market | | (1,053 | ) | | 1,266 |
| | 213 |
| | (1,601 | ) | | 3,109 |
| | 1,508 |
| Money market | | | (942) | | | (2,110) | | | (3,052) | | | (1,993) | | | (3,428) | | | (5,421) | |
Certificates of deposit | | 2,162 |
| | 4,472 |
| | 6,634 |
| | 7,105 |
| | 10,287 |
| | 17,392 |
| Certificates of deposit | | | (6,161) | | | (4,580) | | | (10,741) | | | (15,186) | | | (7,038) | | | (22,224) | |
FHLB advances | | (3,186 | ) | | 1,936 |
| | (1,250 | ) | | (4,535 | ) | | 4,974 |
| | 439 |
| FHLB advances | | | (2,837) | | | (634) | | | (3,471) | | | (5,007) | | | (1,662) | | | (6,669) | |
Securities sold under repurchase agreements | | (191 | ) | | (4 | ) | | (195 | ) | | (1,063 | ) | | 136 |
| | (927 | ) | Securities sold under repurchase agreements | | | (6) | | | (8) | | | (14) | | | (16) | | | (16) | | | (32) | |
Long term debt and other interest-bearing liabilities | | (2 | ) | | 3 |
| | 1 |
| | (4 | ) | | 35 |
| | 31 |
| |
Long-term debt and other interest-bearing liabilities | | Long-term debt and other interest-bearing liabilities | | | (2) | | | 2 | | | — | | | (1) | | | (2) | | | (3) | |
Total interest expense | | (2,775 | ) | | 9,614 |
| | 6,839 |
| | (1,090 | ) | | 23,564 |
| | 22,474 |
| Total interest expense | | | (10,325) | | | (11,553) | | | (21,878) | | | (23,896) | | | (18,033) | | | (41,929) | |
Net interest income | | $ | (2,223 | ) | | $ | (5,950 | ) | | $ | (8,173 | ) | | $ | (1,453 | ) | | $ | (10,536 | ) | | $ | (11,989 | ) | Net interest income | | | $ | (11,111) | | | $ | 1,646 | | | $ | (9,465) | | | $ | (25,892) | | | $ | 480 | | | $ | (25,412) | |
| |
(1) | For the three and six months ended June 30, 2018, total loans includes interest income from discontinued operations. |
Three Months Ended June 30, 2019 Compared to Three Months Ended March 31, 2019
Net interest income was $64.8 million for the three months ended June 30, 2019, a decrease of $3.0 million, or 4.5 percent, from $67.8 million for the three months ended March 31, 2019. The decrease in net interest income from the prior period was largely due to an overall decrease in average interest earning assets, partially offset by a decrease in average cost of interest-bearing liabilities.
Interest income on total loans was $89.2 million for the three months ended June 30, 2019, a decrease of $1.4 million, or 1.5 percent, from $90.6 million for the three months ended March 31, 2019. The decrease in interest income on loans was primarily due to a $269.0 million decrease in the average balance of total loans and partially offset by a 4 basis points (bps) increase in average yield. The decrease in average balance was due mainly to the sale of $131.5 million in single family residential loans and $178.2 million in multifamily residential loans, partially offset by loan originations. The increase in average yield was primarily attributable to a reduction in lower-yielding single family residential mortgage and multifamily loans.
Interest income on securities was $12.5 million for the three months ended June 30, 2019, a decrease of $5.4 million, or 30.2 percent, from $17.8 million for the three months ended March 31, 2019. The decrease in interest income on securities was due to a $446.6 million decrease in average balance and a 30 bps decrease in average yield. The decrease in average yield is primarily the result of an interest rate reset on our collateralized loan obligations and a decrease in our average balance attributable to the sale and calls of $298.2 million of our higher yielding collateralized loan obligations during the second quarter of 2019. The decline in the average balance of collateralized loan obligations was also due to sales that occurred late in the first quarter of 2019. We sold a significant amount of these securities at the end of the first quarter, with the full impact of the first quarter sales reflected in the second quarter 2019.
Dividends and interest income on other interest-earning assets was $2.4 million for the three months ended June 30, 2019, an increase of $111 thousand, or 4.8%, from $2.3 million for the three months ended March 31, 2019. The increase in dividends and interest income on other interest-earning assets was due to a $21.1 million increase in average balance, partially offset by a 7 bps decrease in average yield. The decrease in average yield was mainly due to lower interest rates on deposits with financial institutions. The increase in average balance was mainly due to increases in interest-bearing deposits in financial institutions as a result of sales of investment securities and loans.
Interest expense on interest-bearing deposits was $28.6 million for the three months ended June 30, 2019, a decrease of $2.8 million, or 9.0%, from $31.4 million for the three months ended March 31, 2019. The decrease in interest expense on interest-bearing deposits was due to a 3 bps decrease in average cost, coupled with a $573.4 million decrease in average balance. The decrease in average cost and average balance primarily resulted from the shift in our deposit strategy to focus on relationship-based customers and de-emphasize high-rate transactional customers.
Interest expense on FHLB advances was $8.3 million for the three months ended June 30, 2019, a decrease of $0.8 million, or 8.7%, from $9.1 million for the three months ended March 31, 2019. The decrease was due mainly to a 1 bps decrease in average cost, couple with a $135.0 million decrease in average balance for the quarter ended June 30, 2019. The decrease in average cost was mainly due to a reduction in average overnight borrowing rates during the quarter ended June 30, 2019. The decrease in average balance was mainly due to reduced use of overnight borrowings, based on available cash resulting from the Company's sales of investment securities and loans during the quarter ended June 30, 2019.
Interest expense on securities sold under repurchase agreements was $16 thousand for the three months ended June 30, 2019, a decrease of $2 thousand, or 11.1 percent from $18 thousand for the three months ended March 31, 2019. The Company utilized a reduced amount of repurchase agreements during the three months ended June 30, 2019 as a result of cash received from sales of loans and securities over the past year used to redeem its higher yield borrowings, including securities sold under repurchase agreements.
Interest expense on long term debt and other interest-bearing liabilities was $2.4 million for the three months ended June 30, 2019, a decrease of $5 thousand, or 0.2 percent, from $2.4 million for the three months ended March 31, 2019. The average balance and average cost remained relatively flat during the three months ended June 30, 2019 as compared to the previous quarter.
Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018
Net interest income was $64.8 million for the three months ended June 30, 2019, a decrease of $8.2 million, or 11.2 percent, from $73.0 million for the three months ended June 30, 2018. The decrease in net interest income from the prior period was largely due to higher average cost of interest-bearing liabilities outpacing the increase in average yield on interest-earning assets, coupled by a decrease in interest earning assets.
Interest income on total loans was $89.2 million for the three months ended June 30, 2019, an increase of $7.7 million, or 9.4 percent, from $81.5 million for the three months ended June 30, 2018. The increase in interest income on loans was primarily due to a $390.6 million increase in the average balance of total loans and a 17 basis points (bps) increase in average yield. The increase in average balance was due mainly to increased loan originations. The increase in average yield was mainly due to higher interest rates on new loans and loans with variable interest rates increasing due to a rising interest rate environment over the past year.
Interest income on securities was $12.5 million for the three months ended June 30, 2019, a decrease of $9.0 million, or 41.9 percent, from $21.5 million for the three months ended June 30, 2018. The decrease in interest income on securities was due to a $974.5 million decrease in average balance, partially offset by a 5 bps increase in average yield. The decrease in average balance was mainly due to sales of certain longer-duration and fixed-rate mortgage-backed securities, corporate debt securities, collateralized loan obligations and commercial mortgage-backed securities between periods to navigate a volatile rate environment during 2018 and remix of 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 rising interest rate environment between periods.
Dividends and interest income on other interest-earning assets was $2.4 million for the three months ended June 30, 2019, remaining consistent with the prior period amount. Between periods, there was a 36 bps increase in average yield, offset by a $49.4 million decrease in average balance. The increase in average yield was mainly due to higher interest rates on interest-earning deposits with financial institutions from a rising interest rate environment. The decrease in average balance was mainly due to decreases in interest-bearing deposits in financial institutions and FHLB and other bank stock balances.
Interest expense on interest-bearing deposits was $28.6 million for the three months ended June 30, 2019, an increase of $8.3 million, or 40.8 percent, from $20.3 million for the three months ended June 30, 2018. The increase in interest expense on interest-bearing deposits was due to a 55 bps increase in average cost, partially offset by a $39.0 million decrease in average balance. The increase in average cost was mainly due to a rising interest rate environment. The decrease in average balance primarily resulted from the shift in our deposit strategy to focus on relationship-based customers and de-emphasize high-rate transactional customers.
Interest expense on FHLB advances was $8.3 million for the three months ended June 30, 2019, a decrease of $1.3 million, or 13.1 percent, from $9.5 million for the three months ended June 30, 2018. The decrease was due mainly to a $540.2 million decrease in average balance for the quarter ended June 30, 2019, partially offset by a 49 bps increase in average cost. The increase in average cost was mainly due to a rising interest rate environment. The decrease in average balance was mainly due to reduced term advances, primarily three- to ten-year duration, based on available cash resulting from the Company's sales and calls of investment securities and loans during the quarter ended June 30, 2019.
Interest expense on securities sold under repurchase agreements was $16 thousand for the three months ended June 30, 2019, a decrease of $195 thousand, or 92.4% from $211 thousand for the three months ended June 30, 2018. The Company utilized a reduced amount of repurchase agreements during the three months ended June 30, 2019 as a result of cash received from sales of loans and securities over the past year used to redeem its higher yield borrowings, including securities sold under repurchase agreements.
Interest expense on long term debt and other interest-bearing liabilities was $2.4 million for the three months ended June 30, 2019, an increase of $1 thousand from $2.4 million for the three months ended June 30, 2018. The average balance and average cost remained relatively flat during the three months ended June 30, 2019 as compared to the same period last year.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Net interest income was $132.6 million for the six months ended June 30, 2019, a decrease of $12.0 million, or 8.3 percent, from $144.6 million for the six months ended June 30, 2018. The decrease in net interest income from the prior period was largely due to higher average cost of interest-bearing liabilities outpacing the increase in average yield on interest-earning assets, coupled with an decrease in interest earning assets.
Interest income on total loans was $179.7 million for the six months ended June 30, 2019, an increase of $23.1 million, or 14.8 percent, from $156.6 million for the six months ended June 30, 2018. The increase in interest income on loans was primarily due to a $648.6 million increase in the average balance of total loans and a 22 bps
increase in average yield. The increase in average balance was due mainly to increased loan originations. The increase in average yield was mainly due to higher interest rates on new loans and loans with variable interest rates increasing due to a rising interest rate environment over the past year.
Interest income on securities was $30.3 million for the six months ended June 30, 2019, a decrease of $12.8 million, or 29.7 percent, from $43.1 million for the six months ended June 30, 2018. The decrease in interest income on securities was due to a $874.7 million decrease in average balance, partially offset by a 38 bps increase in average yield. The decrease in average balance was mainly due to sales of certain longer-duration and fixed-rate mortgage-backed securities, corporate debt securities, collateralized loan obligations and commercial mortgage-backed securities between periods to navigate a volatile rate environment during 2018 and remix of 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 rising interest rate environment between periods.
Dividends and interest income on other interest-earning assets was $4.7 million for the six months ended June 30, 2019, an increase of $150 thousand, or 3.3%, from $4.6 million for the six months ended June 30, 2018. The increase in dividends and interest income on other interest-earning assets was due to a 56 bps increase in average yield, partially offset by a $67.2 million decrease in average balance. The increase in average yield was mainly due to higher interest rates on interest-earning deposits with financial institutions from a rising interest rate environment. The decrease in average balance was mainly due to decreases in interest-bearing deposits in financial institutions and FHLB and other bank stock balances.
Interest expense on interest-bearing deposits was $60.0 million for the six months ended June 30, 2019, an increase of $22.9 million, or 61.8%, from $37.1 million for the six months ended June 30, 2018. The increase in interest expense on interest-bearing deposits was due to a 67 bps increase in average cost, coupled with a $285.2 million increase in average balance. The increase in average cost was mainly due to a rising interest rate environment. The increase in average balance was mainly due to shifts in deposit balances to higher yielding saving and certificates of deposit accounts as a result of increasing market interest rates between periods, partially offset by the shift in our deposit strategy to focus on relationship-based customers and de-emphasize high-rate transactional customers.
Interest expense on FHLB advances was $17.4 million for the six months ended June 30, 2019, an increase of $0.4 million, or 2.6%, from $16.9 million for the six months ended June 30, 2018. The increase was due mainly to a 66 bps increase in average cost, partially offset by a $415.3 million decrease in average balance for the six months ended June 30, 2019. The increase in average cost was mainly due to a rising interest rate environment. The decrease in average balance was mainly due to reduced term advances, primarily three- to ten-year duration, based on available cash resulting from the Company's sales of investment securities and loans during the six months ended June 30, 2019.
Interest expense on securities sold under repurchase agreements was $34 thousand for the six months ended June 30, 2019, a decrease of $927 thousand, or 96.5% from $1.0 million for the six months ended June 30, 2018. The Company utilized a reduced amount of repurchase agreements during the six months ended June 30, 2019 as a result of cash received from sales of loans and securities over the past year used to redeem its higher yield borrowings, including securities sold under repurchase agreements.
Interest expense on long term debt and other interest-bearing liabilities was $4.7 million for the six months ended June 30, 2019, an increase of $31 thousand, or 0.7%, from $4.7 million for the six months ended June 30, 2018. The average balance and average cost remained relatively flat during the six months ended June 30, 2019 as compared to the same period last year.
Provision for Loan(Reversal of) Credit Losses
The provision for loan(reversal of) credit losses is charged to operations to adjust the allowance for loancredit losses to the level required to cover current estimated credit losses inherent in our loan portfolio and unfunded commitments. The following table presents the components of our provision for credit losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | Six Months Ended June 30, | | |
($ in thousands) | | June 30, 2020 | | March 31, 2020 | | June 30, 2019 | | 2020 | | 2019 |
Provision for (reversal of) loan losses | | $ | 11,519 | | | $ | 14,711 | | | $ | (1,987) | | | $ | 26,230 | | | $ | 525 | |
Provision for (reversal of) credit losses - unfunded loan commitments | | 307 | | | 1,050 | | | 87 | | | 1,357 | | | (327) | |
| | | | | | | | | | |
Total provision for (reversal of) credit losses | | $ | 11,826 | | | $ | 15,761 | | | $ | (1,900) | | | $ | 27,587 | | | $ | 198 | |
We recognized a provision for credit losses of $11.8 million during the second quarter of 2020, compared to $15.8 million during the first quarter of 2020 and a reversal of credit losses of $1.9 million for the second quarter of 2019. Our provision for credit losses during the second quarter of 2020 included $307 thousand related to unfunded commitments, compared to $1.1 million during the first quarter. The remaining second quarter of 2020 provision for credit losses was comprised of $5.0 million of general reserves and $6.8 million related to specific reserves, primarily related to a previously reported non-accrual, shared national credit. The general provision is due to a continued deterioration in key macro-economic forecast variables, such as unemployment and gross domestic product, and loan risk rating downgrades, offset by lower period end loan balances.
During the six months ended June 30, 2020, we recognized a provision for credit losses of $27.6 million under the CECL model, compared to $198 thousand under the incurred loss model during 2019. Our provision for credit losses included $1.4 million related to unfunded commitments during the six months ended June 30, 2020, compared to provision reversal of $327 thousand during the six months ended June 30, 2019. The higher provision for credit losses was driven by using the new CECL model, the estimated future impact of the health crisis on our loans, net charge-offs, and lease portfolio.an increase in specific reserves, partially offset by lower period end loan balances of $1.09 billion as compared to June 30, 2019.
See further discussion in "Allowance for Credit Losses."
Noninterest Income (Loss)
The Company recorded a (reversal of) provisionfollowing table presents the components of noninterest income for loan losses of $(2.0) million and $2.5the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | Six Months Ended June 30, | | |
($ in thousands) | | June 30, 2020 | | March 31, 2020 | | June 30, 2019 | | 2020 | | 2019 |
Customer service fees | | $ | 1,224 | | | $ | 1,096 | | | $ | 1,434 | | | $ | 2,320 | | | $ | 2,949 | |
Loan servicing income | | 95 | | | 75 | | | 121 | | | 170 | | | 239 | |
Income from bank owned life insurance | | 591 | | | 578 | | | 580 | | | 1,169 | | | 1,105 | |
| | | | | | | | | | |
Net gain on sale of securities available-for-sale | | 2,011 | | | — | | | — | | | 2,011 | | | 208 | |
Fair value adjustment on loans held-for-sale | | 25 | | | (1,586) | | | 59 | | | (1,561) | | | 60 | |
Net (loss) gain on sale of loans | | — | | | (27) | | | 2,767 | | | (27) | | | 4,319 | |
| | | | | | | | | | |
Other income | | 1,582 | | | 1,925 | | | (7,251) | | | 3,507 | | | (4,875) | |
Total noninterest income (loss) | | $ | 5,528 | | | $ | 2,061 | | | $ | (2,290) | | | $ | 7,589 | | | $ | 4,005 | |
Three Months Ended June 30, 2020 Compared to Three Months Ended March 31, 2020
Noninterest income was $5.5 million for the three months ended June 30, 2019 and2020; an increase of $3.5 million, or 168.2%, from $2.1 million for the three months ended March 31, 2019, respectively. During the second quarter, the $2.0 million release of our allowance for loan losses2020. The increase was primarily attributabledue to a decrease in the held-for-investment loan portfolio, partially offset by an increase in net charge-offs and other qualitative provisions during the quarter. The decrease in the loan portfolio primarily resulted fromgain on the sale of $178.2securities of $2.0 million of multifamily loans,compared to $0 in the sale of $131.5 million SFR saleprior quarter and the transfer of $573.9 million of multifamily loans to held-for-sale.
The Company recorded a (reversal of) provision for loanlower net unrealized losses of $(2.0)$1.6 million and $2.7for the change in fair value adjustment on loans held-for sale. During the three months ended June 30, 2020, we sold $20.7 million respectively,in securities, primarily consisting of corporate securities, resulting in a gain of $2.0 million. There were no sales of securities during the prior quarter.
In addition, during the three months ended June 30, 2020, customer service fees increased $128 thousand due mostly to higher depositor-related fees. Other income increased $343 thousand due mostly to lower sublease income of $423 thousand.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Noninterest income was $5.5 million for the three months ended June 30, 2019 and 2018. The decrease in the provision during the three months ended June 30, 2019 compared to same period in 2018 was mainly due to the aforementioned decrease in the held-for-investment loan portfolio, partially offset by2020, an increase in net charge-offs and other qualitative provisions during the quarter.
The Company recorded provisions for loan losses of $0.5$7.8 million, and $22.2 million for the six months ended June 30, 2019 and 2018, respectively. During the six months ended June 30, 2019, the provision for loan losses reflects a $59.5 million increase in special mention, substandard and doubtful loans, coupled with increases in delinquencies and nonperforming loans. The reserve needs for these negative credit trends during the six months ended June 30, 2019 were partially offset by the $1.04 billion reduction in the pass-rated portfolio balances and overall decreases in average loan balances as a result of sales and transfers to held for sale since year-end. The provision for loan losses during the comparable 2018 period included an additional provision related to the charge-off of $13.9 million on a line of credit determined to have been fraudulently obtained and an increase due to a downgrade of a commercial and industrial loan with a carrying value of $28.5 millionor 341.4%, from Special Mention to Substandard due to credit deterioration.
See further discussion in "Allowance for Loan Losses."
Noninterest (Loss) Income
The following table presents the breakdown of non-interest (loss) income for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended June 30, |
($ in thousands) | | June 30, 2019 | | March 31, 2019 | | June 30, 2018 | | 2019 | | 2018 |
Customer service fees | | $ | 1,434 |
| | $ | 1,515 |
| | $ | 1,491 |
| | $ | 2,949 |
| | $ | 3,083 |
|
Loan servicing income | | 121 |
| | 118 |
| | 948 |
| | 239 |
| | 3,259 |
|
Income from bank owned life insurance | | 580 |
| | 525 |
| | 533 |
| | 1,105 |
| | 1,066 |
|
Net gain on sale of securities available-for-sale | | — |
| | 208 |
| | 278 |
| | 208 |
| | 5,519 |
|
Net gain on sale of loans | | 2,826 |
| | 1,553 |
| | 821 |
| | 4,379 |
| | 780 |
|
Net loss on sale of mortgage servicing rights | | — |
| | — |
| | (155 | ) | | — |
| | (2,450 | ) |
Other (loss) income | | (7,251 | ) | | 2,376 |
| | 4,145 |
| | (4,875 | ) | | 5,386 |
|
Total noninterest (loss) income | | $ | (2,290 | ) | | $ | 6,295 |
| | $ | 8,061 |
| | $ | 4,005 |
| | $ | 16,643 |
|
Three Months Ended June 30, 2019 Compared to Three Months Ended March 31, 2019
Noninterest (loss) income was $(2.3) million for the three months ended June 30, 2019, a decrease of $8.6 million, or 136.4 percent, from $6.3 million for the three months ended March 31, 2019. The decreaseincrease in noninterest income was primarily due to a $9.6 million unrealized loss. The $9.6 million unrealized loss on interest rate swaps related to the pending Freddie Mac multifamily securitization in which we planned to sell the associated mortgage servicing rights. The $9.6 million unrealized loss on these interest rate swaps was due to a decline in interest rates since their execution and is expected to be primarily offset by the anticipated gain in fair value of the loans sold into the securitization in the third quarter. Subsequent to June 30, 2019, this securitization was completed (refer to Note 20 — Subsequent Events for more information).
Net gain on sale of securities available-for-sale was zero for the three months ended June 30, 2019, compared to $208 thousand for the three months ended March 31, 2019. The Company sold securities available-for-sale of $279.5 million and $502.4 million, respectively, during the three months ended June 30, 2020 was mainly due to the aforementioned 2020 sale of securities and the 2019 and March 31, 2019. Duringsecond quarter $9.6 million unrealized loss from interest rate swap agreements entered into in order to offset the variability in the fair value of the Freddie Mac securitization completed during the third quarter of 2019, offset by lower net gain on sale of loans of $2.8 million.
Customer service fees decreased $210 thousand, or 14.6%, during the three months ended June 30, 2019, the Company continued2020 due mostly to reduce its collateralizedlower borrower loan obligations exposurefees, such as extension and exit fees, offset by selling $279.2 million of these investments resulting in no gain or loss.
higher deposit-related transactional fees.
Net gaingains on sale of loans was $2.8securities available-for-sale increased to $2.0 million forduring the three months ended June 30, 2019, compared to $1.6 million for the three months ended March 31, 2019. During2020 from zero during the three months ended June 30, 2019. The increase between periods was due to the aforementioned $20.7 million
sale of securities during the three months ended June 30, 2020, primarily consisting of corporate securities. There were no securities sales in the first quarter of 2019.
Net loss on sale of loans, which includes premium recapture of previously sold loans, was zero during the three months ended June 30, 2020 compared to $2.8 million during the comparable 2019 period. There were no sales of loans during the Companysecond quarter of 2020. During the second quarter of 2019, we sold jumbo SFR mortgage loans of $131.5 million resulting in a gain of $125 thousand and $178.2 million of multifamily residential loans resulting in a gain of $2.9 million. During the three months ended March 31, 2019, the Company sold SFR mortgage loans of $243.2 million resulting in a gain of $1.6 million.
Other (loss) income was $(7.3)$1.6 million for the three months ended June 30, 2019,2020, compared to $2.4a loss of $7.3 million forin the three months ended March 31, 2019.comparable 2019 period. The $8.8 million decrease iswas primarily attributable to a $9.6 million unrealized loss. Thethe 2019 period including the aforementioned $9.6 million unrealized loss onfrom interest rate swaps relatedswap agreements entered into in order to the pending Freddie Mac multifamily securitizationoffset variability in which we planned to sell the associated mortgage servicing rights. The $9.6 million unrealized loss on these interest rate swaps was due to a decline in interest rates since their execution and is expected to be primarily offset by the anticipated gain in fair value of the loans sold into theFreddie Mac securitization incompleted during the third quarter. Subsequent to June 30, 2019, this securitization was completed (refer to quarter of 2019.
Note 20 — Subsequent Events for more information).
ThreeSix Months Ended June 30, 20192020 Compared to ThreeSix Months Ended June 30, 20182019
Noninterest (loss) income was $(2.3)$7.6 million for the threesix months ended June 30, 2019, a decrease2020, an increase of $10.4$3.6 million, or 128.4 percent,89.5%, from $8.1$4.0 million for the threesix months ended June 30, 2018.2019. The decreaseincrease in noninterest income was mainly due to a $9.6the $1.8 million unrealized loss on our interest rate swaps related to the pending Freddie Mac multifamily securitization as previously mentioned, coupled with decreases in loan servicing income, net gain on sale of securities available-for-sale and other income, partially offset by an increase in net gain on the securities available-for-sale, coupled with a $8.4 million decrease in other income (loss), partially offset by higher unrealized net losses on loans held-for-sale of $1.6 million and lower net gains on sale of loans and a decrease in net loss on sale of mortgage servicing rights.between periods of $4.3 million.
Loan servicing income was $121Customer service fees decreased $629 thousand, foror 21.3%, during the three months ended June 30, 2019, a decrease of $827 thousand, or 87.2 percent, from $948 thousand for the three months ended June 30, 2018. The decrease between periods is attributable2020 due mostly to the sale during the first quarter of 2018 of $26.0 million of mortgage servicing rights on $3.21 billion in unpaid principal balances of conventional mortgage loans. In addition, gains (losses) on fair valuelower borrower loan fees, such as extension and runoff of servicing assets were $(200) thousand and $39 thousand for the three months ended June 30, 2019 and 2018, respectively. Servicing fees were $321 thousand and $909 thousand for the three months ended June 30, 2019 and 2018, respectively.exit fees.
Net gain on sale of securities available-for-sale was zero for the three months ended June 30, 2019, compared to $278 thousand for the three months ended June 30, 2018. The Company sold securities available-for-sale of $279.5 million and $201.4 million, respectively, during the three months ended June 30, 2019 and 2018. During the three months ended June 30, 2019, the Company continued to reduce its collateralized loan obligations exposure by selling $279.2 million of these investments resulting in no gain or loss. The Company sold securities available-for-sale of $201.4 million during the three months ended June 30, 2018 as it further repositioned its securities available-for-sale portfolio to reduce duration by selling longer-duration and fixed rate mortgage-backed securities.
Net gain on sale of loans was $2.8 million for the three months ended June 30, 2019, compared to $821 thousand for the three months ended June 30, 2018. During the three months ended June 30, 2019, the Company sold jumbo SFR mortgage loans of $131.5 million resulting in a gain of $125 thousand and $178.2 million of multifamily residential loans resulting in a gain of $2.9 million. During the three months ended June 30, 2018, the Company sold jumbo SFR mortgage loans of $133.2 million with a gain of $204 thousand, SBA loans of $5.3 million with a gain of $430 thousand and multifamily loans of $71.3 million with a gain of $187 thousand.
Net loss on sale of mortgage servicing rights (MSRs) was zero for the three months ended June 30, 2019, compared to $155 thousand for the three months ended June 30, 2018. During the three months ended June 30, 2018, the Company sold $2.6 million of MSRs on $334.1 million in unpaid principal balances of conventional mortgage loans. This transaction resulted in a loss on sale of MSRs of $155 thousand, primarily related to transaction costs, provision for early repayments of loans and expected repurchase obligations under standard representations and warranties.
Other (loss) income was $(7.3) million for the three months ended June 30, 2019, compared to $4.1 million for the three months ended June 30, 2018. The decrease is primarily attributable to a $9.6 million unrealized loss. The $9.6 million unrealized loss on interest rate swaps related to the pending Freddie Mac multifamily securitization in which we planned to sell the associated mortgage servicing rights. The $9.6 million unrealized loss on these interest rate swaps was due to a decline in interest rates since their execution and is expected to be primarily offset by the anticipated gain in fair value of the loans sold into the securitization in the third quarter. Subsequent to June 30, 2019, this securitization was completed (refer to Note 20 — Subsequent Events for more information).
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Noninterest income was $4.0$2.0 million for the six months ended June 30, 2019, a decrease of $12.6 million, or 75.9 percent, from $16.6 million for the six months ended June 30, 2018. The decrease in noninterest income was mainly due2020, compared to a $9.6 million
unrealized loss on our hedge of the pending Freddie Mac multifamily securitization as previously mentioned, coupled with decreases in loan servicing income, net gain on sale of securities available-for-sale and other (loss) income, partially offset by an increase in net gain on sale of loans and a decrease in net loss on sale of mortgage servicing rights.
Loan servicing income was $239 thousand for the six months ended June 30, 2019, a decrease of $3.0 million, or 92.7 percent, from $3.3 million for the six months ended June 30, 2018. The decrease between periods is attributable to the sale during the six months ended June 30, 2018 of $28.5 million of mortgage servicing rights on $3.55 billion in unpaid principal balances of conventional mortgage loans. In addition, losses on fair value and runoff of servicing assets were $391 thousand and $881 thousand for the six months ended June 30, 2019 and 2018, respectively. Servicing fees were $630 thousand and $4.1 million for the six months ended June 30, 2019 and 2018, respectively.
Net gain on sale of securities available-for-sale was $208 thousand for the six months ended June 30, 2019. During the six months ended June 30, 2020 we sold $20.7 million in securities, primarily consisting of corporate securities, resulting in a gain of $2.0 million. During the six months ended June 30, 2019, we sold $132.2 million of non-agency commercial mortgage-backed securities resulting in a gain of $9 thousand and $644.5 million in collateralized loan obligations resulting in a gain of $143 thousand.
Net (loss) gain on sale of loans, which includes premium recapture of previously sold loans, was $27 thousand for the six months ended June 30, 2020, compared to $5.5a gain of $4.3 million for the six months ended June 30, 2018. The Company sold securities available-for-sale2019. There were no sales of $782.0 million and $381.5 million, respectively,loans during the six months ended June 30, 2019 and 2018. Included in the $782.0 million in securities available for sale sold during the six months ended June 30, 2019 was $132.2 million of non-agency commercial mortgage-backed securities that were sold for a gain of $9 thousand. At December 31, 2018, the Company changed its intent and decided to sell its non-agency commercial mortgage-backed securities in an unrealized loss position due to its strategy to reposition its securities profile and recognized $3.3 million of OTTI losses during the fourth quarter of 2018. Additionally, during the six months ended June 30, 2019, the Company continued to reduce its collateralized loan obligations exposure by selling $644.5 million of these investments resulting in a gain of $143 thousand.
Net gain on sale of loans was $4.4 million for the six months ended June 30, 2019, compared to $780 thousand for the six months ended June 30, 2018.2020. During the six months ended June 30, 2019, the Companywe sold jumbo SFR mortgage loans of $374.7 million resulting in a gain of $1.8 million and $178.2 million of multifamily residential loans resulting in a gain of $2.9 million. During the six months ended June 30, 2018, the Company sold jumbo SFR mortgage loans of $135.4 million with a loss of $179 thousand and multifamily and other consumer loans of $75.7 million with a gain of $171 thousand
Net loss on sale of mortgage servicing rightsOther income (loss) was zero for the six months ended June 30, 2019, compared to $2.5$3.5 million for the six months ended June 30, 2018. During the six months ended June 30, 2018, the Company sold $28.5 million of MSRs on $3.55 billion in unpaid principal balances of conventional mortgage loans. These transactions resulted in a loss on sale of MSRs of $2.5 million, primarily related2020, compared 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 six months ended June 30, 2019.
Other (loss) income was $(4.9) million for the six months ended June 30, 2019, compared to $5.42019. The $8.4 million for the six months ended June 30, 2018. The decrease isincrease was primarily attributable to a $9.6 million unrealized loss. Thethe aforementioned $9.6 million unrealized loss onfrom interest rate swaps relatedswap agreements entered into in order to the pending Freddie Mac multifamily securitizationoffset variability in which we planned to sell the associated mortgage servicing rights. The $9.6 million unrealized loss on these interest rate swaps was due to a decline in interest rates since their execution and is expected to be primarily offset by the anticipated gain in fair value of the loans sold into theFreddie Mac securitization incompleted during the third quarter. Subsequent to June 30,quarter of 2019, this securitization was completed (refer to offset by lower sublease income of $312 thousand.Note 20 — Subsequent Events for more information).
Noninterest Expense
The following table presents the breakdown of noninterest expense for the periods indicated: | | | | Three Months Ended | | Six Months Ended June 30, | | Three Months Ended | | | Six Months Ended June 30, | |
($ in thousands) | | June 30, 2019 | | March 31, 2019 | | June 30, 2018 | | 2019 | | 2018 | ($ in thousands) | | June 30, 2020 | | March 31, 2020 | | June 30, 2019 | | 2020 | | 2019 |
Salaries and employee benefits | | $ | 27,506 |
| | $ | 28,439 |
| | $ | 29,440 |
| | $ | 55,945 |
| | $ | 60,555 |
| Salaries and employee benefits | | $ | 24,260 | | | $ | 23,436 | | | $ | 27,506 | | | $ | 47,696 | | | $ | 55,945 | |
Naming rights termination | | Naming rights termination | | 26,769 | | | — | | | — | | | 26,769 | | | — | |
Occupancy and equipment | | 7,955 |
| | 7,686 |
| | 7,883 |
| | 15,641 |
| | 15,570 |
| Occupancy and equipment | | 7,090 | | | 7,243 | | | 7,955 | | | 14,333 | | | 15,641 | |
Professional fees (reimbursement) | | (2,903 | ) | | 11,041 |
| | 6,303 |
| | 8,138 |
| | 15,480 |
| |
Outside service fees | | 489 |
| | 403 |
| | 413 |
| | 892 |
| | 2,959 |
| |
Professional fees | | Professional fees | | 4,596 | | | 5,964 | | | (2,903) | | | 10,560 | | | 8,138 | |
| Data processing | | 1,672 |
| | 1,496 |
| | 1,678 |
| | 3,168 |
| | 3,334 |
| Data processing | | 1,536 | | | 1,773 | | | 1,672 | | | 3,309 | | | 3,168 | |
Advertising | | 2,048 |
| | 2,057 |
| | 2,864 |
| | 4,105 |
| | 6,141 |
| Advertising | | 1,157 | | | 1,756 | | | 2,048 | | | 2,913 | | | 4,105 | |
Regulatory assessments | | 2,136 |
| | 2,482 |
| | 2,196 |
| | 4,618 |
| | 4,288 |
| Regulatory assessments | | 725 | | | 484 | | | 2,136 | | | 1,209 | | | 4,618 | |
Reversal of provision for loan repurchases | | (61 | ) | | (116 | ) | | (218 | ) | | (177 | ) | | (2,006 | ) | Reversal of provision for loan repurchases | | (34) | | | (600) | | | (61) | | | (634) | | | (177) | |
Amortization of intangible assets | | 621 |
| | 620 |
| | 827 |
| | 1,241 |
| | 1,670 |
| Amortization of intangible assets | | 430 | | | 429 | | | 621 | | | 859 | | | 1,241 | |
Restructuring (reversal) expense | | (158 | ) | | 2,795 |
| | 3,983 |
| | 2,637 |
| | 3,983 |
| |
| Restructuring expense | | Restructuring expense | | — | | | — | | | (158) | | | — | | | 2,637 | |
All other expense | | 4,637 |
| | 2,982 |
| | 5,362 |
| | 7,619 |
| | 8,591 |
| All other expense | | 6,408 | | | 4,529 | | | 5,039 | | | 10,937 | | | 8,838 | |
Noninterest expense before (gain) loss on investments in alternative energy partnerships | | 43,942 |
| | 59,885 |
| | 60,731 |
| | 103,827 |
| | 120,565 |
| |
Noninterest expense before loss on investments in alternative energy partnerships | | Noninterest expense before loss on investments in alternative energy partnerships | | 72,937 | | | 45,014 | | | 43,855 | | | 117,951 | | | 104,154 | |
(Gain) loss on investments in alternative energy partnerships | | (355 | ) | | 1,950 |
| | 1,808 |
| | 1,595 |
| | 1,774 |
| (Gain) loss on investments in alternative energy partnerships | | (167) | | | 1,905 | | | (355) | | | 1,738 | | | 1,595 | |
Total noninterest expense | | $ | 43,587 |
| | $ | 61,835 |
| | $ | 62,539 |
| | $ | 105,422 |
| | $ | 122,339 |
| Total noninterest expense | | $ | 72,770 | | | $ | 46,919 | | | $ | 43,500 | | | $ | 119,689 | | | $ | 105,749 | |
Three Months Ended June 30, 20192020 Compared to Three Months Ended March 31, 20192020
Noninterest expense was $43.6$72.8 million for the three months ended June 30, 2019, a decrease2020, an increase of $18.2$25.9 million, or 29.5 percent,55.1%, from $61.8$46.9 million for the three months ended March 31, 2019.2020. The increase was mainly due to the aforementioned $26.8 million one-time charge related to the termination of our LAFC naming rights agreements and a $2.5 million debt extinguishment fee associated with the early repayment of certain FHLB term advances. There were no similar charges in any of the other periods presented. When these charges are excluded, noninterest expense decreased $3.4 million, due to (i) lower professional fees of $1.4 million as a result of the timing of certain indemnified legal costs and recoveries compared to the prior quarter, (ii) higher net gains on investments in alternative energy partnerships of $2.1 million, and (iii) lower advertising costs of $599 thousand, offset by (iv) higher salaries and benefits expense of $824 thousand due mostly to higher incentive accruals, (v) lower reversals of loan repurchases, and (vi) higher regulatory assessments of $241 thousand.
Professional fees were $4.6 million for the three months ended June 30, 2020, a decrease of $1.4 million, or 22.9%, from $6.0 million for the three months ended March 31, 2020. The decrease included lower indemnified legal costs and recoveries as the current quarter included $875 thousand of such legal costs compared to $1.7 million for the prior quarter. When these indemnified legal costs and recoveries are excluded, professional fees would have decreased $565 thousand from the prior quarter. The remaining decrease relates to lower audit fees and other legal costs.
Advertising costs were $1.2 million for the three months ended June 30, 2020, a decrease of $599 thousand, or 34.1%, from $1.8 million for the three months ended March 31, 2020. The decrease was mainly due to decreasesreductions in salariesoverall events and employee benefits, professional fees (reimbursement)media spending due, in part, to the termination of the LAFC Agreement on May 22, 2020. Refer to the earlier discussion in the "Termination of LAFC Agreement" section.
Regulatory assessments were $725 thousand for the three months ended June 30, 2020, an increase of $241 thousand, or 49.8%, regulatory assessments, restructuring (reversal) expense,from $484 thousand for the three months ended March 31, 2020. The increase was mainly due to the first quarter of 2020 having a FDIC small bank assessment credit.
Reversal of provision for loan repurchases decreased $566 thousand and resulted in higher expenses. The reversal of provision for loan repurchases andtotaled $34 thousand for the three months ended June 30, 2020 compared to $600 thousand for the prior quarter. The decrease was due to changes in the credit quality of the previously sold loans resulting in a lower release of reserve amount.
The (gain) loss on investments in alternative energy partnerships partially offset by increases in outside services, data processing and other expenses.
Salaries and employee benefits expense was $27.5 milliona gain of $167 thousand for the three months ended June 30, 2019,2020, an increase of $2.1 million, from a decreaseloss of $0.9 million, or 3.3 percent, from $28.4$1.9 million for the three months ended March 31, 2019.2020. The decrease was mainly due to decreases in number of employees, incentives and commissions, and temporary staff expenses.
Professional fees (reimbursement) were $(2.9) million for the three months ended June 30, 2019, a decrease of $13.9 million, or 126.3 percent, from $11.0 million for the three months ended March 31, 2019. The decrease was primarily attributable to $6.2 million of insurance recoveries net of expenses related to securities litigation, indemnification, investigation and other legal expenses in the second quarter as compared to $3.0 million of net expense in the prior quarter.
Data processing expense was $1.7 million for the three months ended June 30, 2019, an increase of $176 thousand, or 11.8 percent, from $1.5 million for the three months ended March 31, 2019. The increase was mainly due to a increased volume of transactions resulting from fluctuations in transactional account average balances during the three months ended June 30, 2019.
Regulatory assessments were $2.1 million for the three months ended June 30, 2019, a decrease of $346 thousand, or 13.9 percent, from $2.5 million for the three months ended March 31, 2019. The decrease was mainly due to a lower FDIC assessment rategain between periods as a result of lower average balance of core deposits over total liabilities and a higher balance sheet liquidity ratio during the three months ended June 30, 2019.
Reversal of provision for loan repurchases was $61 thousand and $116 thousand for the three months ended June 30, 2019 and March 31, 2019, respectively. The decrease was mainly due to reduced repurchase settlement activities between periods.
For the three months ended June 30, 2019 and March 31, 2019, restructuring (reversal) expense was $(158) thousand and $2.8 million, respectively. The change between periods was due to a true-up of expected costs, consisting of severance and retention costs associated with the Company's exit from its third-party mortgage origination and brokered single family lending business and CEO transition during the first quarter of 2019.
(Gain) loss on investments in alternative energy partnerships was $(355) thousand for the three months ended June 30, 2019, a decrease of $2.3 million, from a loss of $2.0 million for the three months ended March 31, 2019. The decrease in loss was mainly due to decreased loss sharing allocations and resulting lower HLBV losses.
All other expense for the three months ended June 30, 2020 increased $1.9 million or 41.5%, to $6.4 million from $4.5 million for the three months ended March 31, 2020.The increase was primarily attributable to a $2.5 million debt extinguishment fee, partially offset by decreases in other expenses such as legal settlements, business travel, and the write-off of certain capitalized software cost. During the three months ended June 30, 2020, we repaid a $100.0 million FHLB term advance with a weighted average interest rate of 2.07% and incurred a $2.5 million debt extinguishment fee. All other expense for the three months ended March 31, 2020 included an $850 thousand charge to settle and conclude a legacy loan sale claim from an acquired bank.
Three Months Ended June 30, 20192020 Compared to Three Months Ended June 30, 20182019
Noninterest expense was $43.6$72.8 million for the three months ended June 30, 2019, a decrease2020, an increase of $19.0$29.3 million, or 30.3 percent,67.3%, from $62.5$43.5 million for the three months ended June 30, 2018.2019. The decreaseincrease was mainly due to decreases inthe $26.8 million LAFC naming rights termination fee, coupled with higher professional fees of $7.5 million and other expenses of $1.4 million, offset by lower salaries and employee benefits professional fees (reimbursement), advertising, amortization of intangible assets, restructuring (reversal) expenses, all other expense$3.2 million and loss on investments in alternative energy partnerships, partially offset by increases in outside service fees.lower regulatory assessments of $1.4 million.
Salaries and employee benefits expense was $24.3 million for the three months ended June 30, 2020, a decrease of $3.2 million, or 11.8%, from $27.5 million for the three months ended June 30, 2019,2019. The decrease was primarily due to overall reductions in headcount between periods.
As discussed above, we terminated our naming rights agreements with LAFC and incurred a pre-tax, one-time charge to operations of $26.8 million. Refer to earlier discussion in "Termination of LAFC Agreement."
Occupancy and equipment was $7.1 million for the three months ended June 30, 2020, a decrease of $1.9 million,$865 thousand or 6.6 percent,10.9% from $29.4$8.0 million for the three months ended June 30, 2018.2019. The decrease was primarily due to overall reductions in costs between periods as a result of exiting the TPMO and brokered single family lending businesses during the first quarter of 2019.
Professional fees were $4.6 million for the three months ended June 30, 2020, an increase of $7.5 million, or 258.3%, from recoveries of $2.9 million for the three months ended June 30, 2019. The increase was mainly due the 2019 period including net recoveries of legal fees of $6.4 million due to the timing of insurance recoveries related to securities litigation, indemnification, investigation and other legal expenses compared to legal fees of $1.7 million during the 2020 period. Offsetting this increase was a $677 thousand decrease in other professional fees.
Advertising costs were $1.2 million for the three months ended June 30, 2020, a decrease of $891 thousand, or 43.5%, from $2.0 million for the three months ended June 30, 2019. The decrease was mainly due to reductions in overall events and media spending due in part to the termination of the LAFC Agreement on May 22, 2020.
Regulatory assessments were $725 thousand for the three months ended June 30, 2020, a decrease of $1.4 million, or 66.1%, from $2.1 million for the three months ended June 30, 2019. The decrease was mainly due to a reduction in our FDIC assessment rate given the decrease in our asset size.
All other expense was $6.4 million for the three months ended June 30, 2020, an increase of $1.4 million, or 27.2%, from $5.0 million for the three months ended June 30, 2019. The increase was primarily attributable to the aforementioned $2.5 million debt extinguishment fee associated with the early repayment of certain FHLB term advances in the second quarter of 2020. All other expense during the same 2019 period included a $797 impairment of capitalized software projects. There were no similar impairment charges during the three months ended June 30, 2020.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Noninterest expense was $119.7 million for the six months ended June 30, 2020, an increase of $13.9 million, or 13.2%, from $105.7 million for the six months ended June 30, 2019. The increase was mainly due to the $26.8 million LAFC naming rights termination, coupled with a $2.4 million increase in professional fees and $2.1 million increase in all other expense, offset by a $8.2 million decrease in salaries and employee benefits, a $3.4 million decrease in regulatory assessments and a $2.6 million decrease in restructuring expense, as well as decreases in occupancy and equipment, and advertising expenses.
Salaries and employee benefits expense was $47.7 million for the six months ended June 30, 2020, a decrease of $8.2 million, or 14.7%, from $55.9 million for the six months ended June 30, 2019. The decrease was mainly due to decreases in number of employees, commissions, and temporary staff expenses.expenses, including overall reductions in headcount between periods as a result of exiting the TPMO and brokered single family lending businesses during the first quarter of 2019.
Professional fees (reimbursement) were $(2.9)
Occupancy and equipment was $14.3 million for the three months ended June 30, 2019,2020, a decrease of $9.2$1.3 million or 146.1 percent,8.4% from $6.3 million for the three months ended June 30, 2018. The decrease was mainly due to insurance recoveries for legal expenses related to the SEC investigation and various other litigation.
Advertising costs were $2.0 million for the three months ended June 30, 2019, a decrease of $0.8 million, or 28.5 percent, from $2.9 million for the three months ended June 30, 2018. The decrease was mainly due to overall reductions in advertising expenses between periods due to a focus on digital rather than traditional marketing. Advertising costs include $1.7 million of the LAFC naming rights commitment being expensed to marketing and advertising expenses during both the three months ended June 30, 2019 and 2018.
Amortization of intangible assets was $621 thousand for the three months ended June 30, 2019, a decrease of $206 thousand, or 24.9 percent, from $827 thousand for the three months ended June 30, 2018. The decrease was mainly due to decreases in amortization of core deposit intangibles.
For the three months ended June 30, 2019, restructuring (reversal) expense was $158 thousand and consisted of a true-up of expected costs, consisting of severance and retention costs associated with the Company's exit from its third-party mortgage origination and brokered single family lending business and CEO transition during the first quarter of 2019. The comparable 2018 period included severance-related costs of $4.0 million, pre-tax, as a result of the reduction in force by approximately 9% of total staffing.
(Gain) loss on investments in alternative energy partnerships was $(355) thousand for the three months ended June 30, 2019, a decrease in loss of $2.2 million, from a loss of $1.8 million for the three months ended June 30, 2018. The decrease in loss was mainly due to decreased loss sharing allocations and resulting lower HLBV losses.
All other expense was $4.6 million for the for the three months ended June 30, 2019, a decrease of $725 thousand or 13.5 percent from $5.4 million for the three months ended June 30, 2018. The decrease was mainly due to overall expense reductions from the Company's effort to manage its expenses on supplies, business travel, and other administrative expenditures, and insurance recoveries from previous accrued legal settlement expense, offset by impairment of capitalized software and an increase in provision for unfunded commitments.
Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
Noninterest expense was $105.4$15.6 million for the six months ended June 30, 2019,2019. The decrease was primarily due to overall reductions in costs between periods as a decreaseresult of $16.9 million, or 13.8 percent, from $122.3exiting the TPMO and brokered single family lending businesses during the first quarter of 2019.
Professional fees were $10.6 million for the six months ended June 30, 2018. The2020, an increase was mainly due to decreases in salaries and employee benefits, professional fees, outside services, advertising, amortization of intangible assets, all other expense and loss on investments in alternative energy partnerships, partially offset by increases in regulatory assessments, a reduction in reversal of provision for loan repurchases.
Salaries and employee benefits expense was $55.9 million for the six months ended June 30, 2019, a decrease of $4.6$2.4 million, or 7.6 percent,29.8%, from $60.6 million for the six months ended June 30, 2018. The decrease was mainly due to decreases in number of employees, commissions, and temporary staff expenses.
Professional fees were $8.1 million for the six months ended June 30, 2019, a decrease2019. The increase in fees was primarily the result of $7.3 million, or 47.4 percent, from $15.5 million for the six months ended June 30, 2018. The decrease was mainlyhigher legal fees (net of recoveries of $2.5 million) due to $12.6 millionthe timing of insurance recoveries related to securities litigation, indemnification, investigation and other legal expenses during the 2019 period.of $6.6 million, offset by lower other professional fees of $2.4 million.
Outside service feesAdvertising costs were $892 thousand for the six months ended June 30, 2019, a decrease of $2.1 million, or 69.9 percent, from $3.0$2.9 million for the six months ended June 30, 2018. The decrease was primarily due to lower loan subservicing costs incurred during the six months ended June 30, 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.
Data processing expense was $3.2 million for the six months ended June 30, 2019,2020, a decrease of $166 thousand,$1.2 million, or 5.0 percent,29.0%, from $3.3 million for the six months ended June 30, 2018. The decrease was mainly due to a decreased volume of transactions resulting from the lower deposit average balances during the six months ended June 30, 2019.
Advertising costs were $4.1 million for the six months ended June 30, 2019, a decrease of $2.0 million, or 33.2 percent, from $6.1 million for the six months ended June 30, 2018.2019. The decrease was mainly due to overall reductions in reductions in overall events and media spending, as well as a decrease in advertising expenses between periods duecosts related to a focus on digital rather than traditional marketing. Advertising costs include $3.3 million of the now-terminated LAFC naming rights commitment being expensed to marketing and advertising expenses during bothcommitment. Advertising costs for the six months ended June 30, 2019 and 2018.2020 included $2.6 million related to the now-terminated LAFC naming rights agreement compared to $3.3 million during six months ended June 30, 2019.
Regulatory assessments were $1.2 million for the six months ended June 30, 2020, a decrease of $3.4 million, or 73.8%, from $4.6 million for the six months ended June 30, 2019,2019. The decrease was mainly due to a reduction in our FDIC assessment rate given the decrease in our asset size and an increase of $330 thousand, or 7.7 percent, from $4.3 millionFDIC small bank assessment credit.
Restructuring expense was zero for the six months ended June 30, 2018. The increase was mainly due to a higher FDIC assessment rate between periods as a result of lower average balance of core deposits over total liabilities and lower balance sheet liquidity ratio during the six months ended June 30, 2019.
Reversal of provision for loan repurchases was $177 thousand and $2.0 million for the six months ended June 30, 2019 and 2018, respectively. 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 repurchase settlement activities as well as methodology and data enhancements that occurred during 2018.
2020. For the six months ended June 30, 2019, restructuring expense was $2.6 million and consisted of severance and retention costs associated with the Company'sour exit from its third-party mortgage originationthe TPMO and brokered single family lending businessbusinesses and CEO transition during the first quarter of 2019. For the six months ended June 30, 2018, restructuring expense was $4.0 million and consisted of severance-related costs in the second quarter of 2018 of $4.0 million, pre-tax, as a result of the reduction in force.
All other expenses were $7.6$10.9 million for the six months ended June 30, 2019, a decrease2020, an increase of $972 thousand,$2.1 million, or 11.3 percent,23.7%, from $8.6$8.8 million for the six months ended June 30, 2018.2019. The decreaseincrease was mainly due to the aforementioned $2.5 million debt extinguishment fee associated with the early repayment of $100 million in FHLB term advances, combined with the aforementioned $850 thousand charge to settle and conclude a legacy loan sale claim from an acquired bank; All other expense during the comparable 2019 period included a $835 thousand impairment of capitalized software projects, compared to $157 thousand during the six months ended June 30, 2020. Offsetting these increases were overall expense reductions from the Company's effortour efforts to manage its expenses on supplies, business travel, directors' fees, and other administrative expenditures, a decrease in provision for unfunded loan commitments, and insurance recoveries from previous accrued legal settlement expense.expenditures.
Loss on investments in alternative energy partnerships was $1.6 million for the six months ended June 30, 2019, a decrease of $179 thousand, from $1.8 million for the six months ended June 30, 2018. The decrease in loss was mainly due to decreased loss sharing allocations and resulting lower HLBV losses.
Income Tax (Benefit) Expense
For the three months ended June 30, 2019,2020, March 31, 20192020 and June 30, 2018,2019, income tax (benefit) expense (benefit), on a consolidated operations basis was $(5.3) million, $(2.2) million, and $4.3 million, $2.7 million and $2.1 million, respectively, and theresulting in an effective tax rate of 22.3%, 24.7% and 20.6%. Our 22.3% effective tax rate for the three months ended June 30, 2020 differs from the 21% federal statutory rate was 20.6 percent, 27.9 percent and 12.6 percent, respectively. due to the impact of state taxes offset by various tax credits. The full year estimated effective tax rate for 2020 is expected to be approximately 23%.
For the six months ended June 30, 2020 and 2019, the income tax benefit was $7.5 million and 2018,the income tax expense (benefit), on a consolidated operation basis, was $7.0 million, and $(3.7) million, respectively, and theresulting in an effective tax rate was 22.9 percentof 23.0% and (18.6) percent,22.9%, respectively.
The Company recognized higher income tax expense for the 2019 periods mainly due to the reduction in the recognition of year-to-date tax credits from the investments in alternative energy partnerships of $1.9 million and $9.2 million for the three and six months ended June 30, 2018, compared to $1.7 million and $1.7 million, respectively, of tax credits recognized for the three and six months ended June 30, 2019. The Company usesWe use the flow-through income statement method to account for the annual investment tax credits forecasted to be earned on the solar investments in the Company’sour annual Effective Tax Rate.effective tax rate. Under this method, 50% of the annual forecasted investment tax credits are recognized as a reduction to income tax expense and the initial book-tax difference in the basis of the investments are recognized as additional tax expense as of June 30, 2019.in the year they are earned.
For additional information, see Note 108 to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
FINANCIAL CONDITION
Investment Securities
At June 30, 2019,2020, all of the Company’sour investment securities were classified as available-for-sale.
The primary goal of our investment securities portfolio is to provide a relatively stable source of interest income while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk, and interest rate risk. Certain investment securities provide a source of liquidity as collateral for FHLB advances, repurchase agreements, certain public funds deposits, and for Federal Reserve Discount Window availability.capacity, repurchase agreements, and certain public deposits.
The following table presents the amortized cost and fair value of the investment securities portfolio and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated: | | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | | December 31, 2019 | |
($ in thousands) | | Amortized Cost | | Fair Value | | Unrealized Gain (Loss) | | Amortized Cost | | Fair Value | | Unrealized Gain (Loss) | ($ in thousands) | | Amortized Cost | | Fair Value | | Unrealized Gain (Loss) | | Amortized Cost | | Fair Value | | Unrealized Gain (Loss) |
Securities available-for-sale: | | | | | | | | | | | | | Securities available-for-sale: | | | | | | | | | | |
SBA loan pool securities | | $ | 831 |
| | $ | 853 |
| | $ | 22 |
| | $ | 911 |
| | $ | 910 |
| | $ | (1 | ) | |
| U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 436,049 |
| | 429,347 |
| | (6,702 | ) | | 461,987 |
| | 437,442 |
| | (24,545 | ) | U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | 100,128 | | | $ | 105,555 | | | $ | 5,427 | | | $ | 37,613 | | | $ | 36,456 | | | $ | (1,157) | |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 199,262 | | | 201,136 | | | 1,874 | | | 91,543 | | | 91,299 | | | (244) | |
Municipal securities | | Municipal securities | | 52,973 | | | 57,174 | | | 4,201 | | | 52,997 | | | 52,689 | | | (308) | |
Non-agency residential mortgage-backed securities | | 275 |
| | 285 |
| | 10 |
| | 418 |
| | 427 |
| | 9 |
| Non-agency residential mortgage-backed securities | | 161 | | | 164 | | | 3 | | | 191 | | | 196 | | | 5 | |
Non-agency commercial mortgage-backed securities | | — |
| | — |
| | — |
| | 132,199 |
| | 132,199 |
| | — |
| |
| Collateralized loan obligations | | 748,502 |
| | 737,202 |
| | (11,300 | ) | | 1,431,171 |
| | 1,421,522 |
| | (9,649 | ) | Collateralized loan obligations | | 703,605 | | | 668,353 | | | (35,252) | | | 733,605 | | | 718,361 | | | (15,244) | |
Corporate debt securities | | Corporate debt securities | | 141,962 | | | 143,647 | | | 1,685 | | | 13,500 | | | 13,579 | | | 79 | |
Total securities available-for-sale | | $ | 1,185,657 |
| | $ | 1,167,687 |
| | $ | (17,970 | ) | | $ | 2,026,686 |
| | $ | 1,992,500 |
| | $ | (34,186 | ) | Total securities available-for-sale | | $ | 1,198,091 | | | $ | 1,176,029 | | | $ | (22,062) | | | $ | 929,449 | | | $ | 912,580 | | | $ | (16,869) | |
Securities available-for-sale were $1.17$1.18 billion at June 30, 2019, a decrease2020, an increase of $824.8$263.4 million, or 41.4 percent,28.9%, from $1.99 billion$912.6 million at December 31, 2018.2019. The decreaseincrease was mainly due to salespurchases of $782.0$322.6 million, callsincluding $174.0 million in U.S. government agency securities and payoffs$148.6 million in corporate debt securities, offset by a $30.0 million pay-off of $38.1 million, principal payments ofone CLO holding, $20.7 million in sales, and decrease inhigher net unrealized losses of $16.6$5.2 million.
As of December 31, 2018, the Company changed its intent and decided to sell its non-agency commercial mortgage-backed securities in an unrealized loss position due to its strategy to reposition its securities profile and recognized $3.3 million of OTTI losses during the fourth quarter of 2018. During the first quarter of 2019, the Company completed the sale of its non-agency commercial mortgage-backed securities totaling $132.2 million. Additionally, during the three and six months ended June 30, 2019, the Company continued to reduce its collateralized loan obligations exposure by selling $279.2 million of these investments resulting in no gain or loss. The net proceeds from the sale of securities and the run-off in collateralized loan obligations were used to redeem $1.16 billion of high cost brokered deposits and pay down $305.0 million of higher yielding FHLB advances.
CLOs totaled $748.5$668.4 million and $1.43 billion in amortized cost basis$718.4 million at June 30, 20192020 and December 31, 2018 respectively.2019. 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 ratedAAA-rated to equityequity-grade tranches. The Company believes that its CLO portfolio, consisting entirely of variable rate securities, supports the Company’s interest rate risk management strategy by lowering the extension risk and duration risk inherent to certain fixed rate investment securities. At June 30, 2019, the Company owned2020, all of our CLO holdings were AAA and AA rated CLOs and did not own CLOs rated below AA. As all CLOs arerated. We also rated above investment grade credit ratings and were diversified across issuers, the Company believes that these CLOs enhance the Company's liquidity position. The Company also maintainsperform pre-purchase due diligence and ongoing credit quality review processes by a dedicated credit administration team. The ongoing review processof our CLO holdings, which includes monitoring of performance factors includingsuch as external credit ratings, collateralization levels, collateral concentration levels, and other performance factors. The CompanyWe only acquiresacquire CLOs that it believeswe believe are Volcker Rule compliant.
The CompanyWe did not record OTTIcredit impairment for any investment securities for the three and six months ended June 30, 20192020 or 2018. The Company monitors its2019. We monitor our securities portfolio to ensure it has adequate credit support. As of June 30, 2019, the Company believed2020, we believe there was no OTTIcredit impairment and we did not have the current intent to sell securities with a fair value below amortized cost at June 30, 2019. The Company considers2020, and it is more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost basis. We consider the lowest credit rating for identification of potential OTTI.credit impairment. As of June 30, 2019,2020, all of the Company'sour investment securities in an unrealized loss position received an investment grade credit rating. As partCredit spreads for CLOs widened during the first quarter of 2020 and have narrowed during the OTTI analysis performed, the Company believes the CLO securities are not OTTI, and thesecond quarter. The overall net decline in fair value is predominantly driven byduring 2020 was attributable to a combination of changes in interest rates.rates and general volatility in the credit market conditions.
The following table presents maturities, based on the compositionearlier of thematurity dates or next repricing dates, and yield information of the investment securities portfolio as of June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One Year or Less | | | | More than One Year through Five Years | | | | More than Five Years through Ten Years | | | | More than Ten Years | | | | Total | | |
($ in thousands) | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 30,413 | | | 2.20 | % | | $ | 75,142 | | | 2.35 | % | | $ | 105,555 | | | 2.31 | % |
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations | | 118,163 | | | 0.74 | % | | 11,608 | | | 2.02 | % | | 25,579 | | | 1.63 | % | | 45,786 | | | 0.93 | % | | 201,136 | | | 0.96 | % |
Municipal securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 57,174 | | | 2.79 | % | | 57,174 | | | 2.79 | % |
Non-agency residential mortgage-backed securities | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 164 | | | 6.14 | % | | 164 | | | 6.14 | % |
| | | | | | | | | | | | | | | | | | | | |
Collateralized loan obligations | | 668,353 | | | 2.73 | % | | — | | | — | % | | — | | | — | % | | — | | | — | % | | 668,353 | | | 2.73 | % |
Corporate debt securities | | — | | | — | % | | 122,301 | | | 4.99 | % | | 21,346 | | | 5.64 | % | | — | | | — | % | | 143,647 | | | 5.08 | % |
Total securities available-for-sale | | $ | 786,516 | | | 2.45 | % | | $ | 133,909 | | | 4.74 | % | | $ | 77,338 | | | 2.96 | % | | $ | 178,266 | | | 2.11 | % | | $ | 1,176,029 | | | 2.68 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | One Year or Less | | More than One Year through Five Years | | More than Five Years through Ten Years | | More than Ten Years | | Total |
($ in thousands) | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | | | |
SBA loan pools securities | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 853 |
| �� | 2.08 | % | | $ | 853 |
| | 2.08 | % |
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities | | 243 |
| | 2.36 | % | | 3,069 |
| | 2.67 | % | | — |
| | — | % | | 426,035 |
| | 2.74 | % | | 429,347 |
| | 2.74 | % |
Non-agency residential mortgage-backed securities | | 66 |
| | 3.23 | % | | — |
| | — | % | | — |
| | — | % | | 219 |
| | 5.74 | % | | 285 |
| | 5.16 | % |
Collateralized loan obligations | | 737,202 |
| | 3.71 | % | | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | 737,202 |
| | 3.71 | % |
Total securities available-for-sale | | $ | 737,511 |
| | 3.71 | % | | $ | 3,069 |
| | 2.67 | % | | $ | — |
| | — | % | | $ | 427,107 |
| | 2.74 | % | | $ | 1,167,687 |
| | 3.35 | % |
Loans Held-for-Sale
Total loans held-for-sale on a consolidated operations basis were $597.7 million and $27.6 million, respectively, at June 30, 2019 and December 31, 2018.
During the second quarter of 2019, the Company transferred $573.9 million in multifamily loans from loans held-for-investment to loans held-for-sale, carried at lower of cost or fair value, related to our pending Freddie Mac multifamily securitization which is expected to close during the third quarter of 2019. The loans included in the securitization have a weighted average coupon of 3.79% and a weighted average term to initial reset of 3.5 years. The related mortgage servicing rights will also be sold.
In connection with the anticipated securitization, during the second quarter of 2019, the Company entered into an interest rate swap agreement with a notional value of $543.4 million to offset variability in fair value of the related loans as a result of changes in market interest rates. During the three months ended June 30, 2019, the Company recognized a $9.6 million unrealized loss. The $9.6 million unrealized loss on interest rate swaps related to the pending Freddie Mac multifamily securitization in which we planned to sell the associated mortgage servicing rights. The $9.6 million unrealized loss on these interest rate swaps was due to a decline in interest rates since their execution and is expected to be primarily offset by the anticipated gain in fair value of the loans sold into the securitization in the third quarter. Subsequent to June 30, 2019, this securitization was completed (refer to Note 20 — Subsequent Events for more information).
As of June 30, 2019, loans held-for-sale carried at fair value, with a balance of $23.8 million, consisted of mainly repurchased conforming SFR mortgage loans that were previously sold. As of December 31, 2018, loans held-for-sale carried at fair value were $19.8 million and $22.6 million, respectively, at June 30, 2020 and December 31, 2019 and consisted mainly of repurchased conforming SFR mortgage loans that were previously sold and loans previously sold to GNMA that arewere delinquent more than 90 days and subject to a repurchase option by the Company. Loans held-for-sale carried at fair value on a consolidated operations basis were $23.8 million and $27.2 million at June 30, 2019 and December 31, 2018, respectively.us. The $3.4$2.9 million, or 12.5 percent,12.7%, decrease was mainly due to sales and payoffs of $3.8 million, repurchases of $699$613 thousand and a transfer of one loan, totaling $276 thousand, to other real estate owned, which is includeddecrease in Other Assets in the Company's Consolidated Statements of Financial Condition.
Loans held-for-sale carried at fair value as a result of the sale of the Company's Banc Home Loans division (Refer to Note 2 - $1.6 million.
Sale of Business Unit (Discontinued Operations)), that are included Assets of Discontinued Operations on the Consolidated Statements of Financial Condition totaled zero and $19.5 million at June 30, 2019 and December 31, 2018, respectively.
Loans Receivable, Net
The following table presents the composition of the Company’sour loan and lease portfolio as of the dates indicated: | | ($ in thousands) | | June 30, 2019 | | December 31, 2018 | | Amount Change | | Percentage Change | ($ in thousands) | | June 30, 2020 | | December 31, 2019 | | Amount Change | | Percentage Change |
Commercial: | | | | | | | | | Commercial: | | | | | | | | |
Commercial and industrial | | $ | 1,951,707 |
| | $ | 1,944,142 |
| | $ | 7,565 |
| | 0.4 | % | Commercial and industrial | | $ | 1,436,990 | | | $ | 1,691,270 | | | $ | (254,280) | | | (15.0) | % |
Commercial real estate | | 856,497 |
| | 867,013 |
| | (10,516 | ) | | (1.2 | )% | Commercial real estate | | 822,694 | | | 818,817 | | | 3,877 | | | 0.5 | % |
Multifamily | | 1,598,978 |
| | 2,241,246 |
| | (642,268 | ) | | (28.7 | )% | Multifamily | | 1,434,071 | | | 1,494,528 | | | (60,457) | | | (4.0) | % |
SBA | | 80,929 |
| | 68,741 |
| | 12,188 |
| | 17.7 | % | |
SBA(1) | | SBA(1) | | 310,784 | | | 70,981 | | | 239,803 | | | 337.8 | % |
Construction | | 209,029 |
| | 203,976 |
| | 5,053 |
| | 2.5 | % | Construction | | 212,979 | | | 231,350 | | | (18,371) | | | (7.9) | % |
| Consumer: | | | | | | | | | Consumer: | |
Single family residential mortgage | | 1,961,065 |
| | 2,305,490 |
| | (344,425 | ) | | (14.9 | )% | Single family residential mortgage | | 1,370,785 | | | 1,590,774 | | | (219,989) | | | (13.8) | % |
| Other consumer | | 61,365 |
| | 70,265 |
| | (8,900 | ) | | (12.7 | )% | Other consumer | | 39,393 | | | 54,165 | | | (14,772) | | | (27.3) | % |
Total loans(1) | | 6,719,570 |
| | 7,700,873 |
| | (981,303 | ) | | (12.7 | )% | |
Total loans(2) | | Total loans(2) | | 5,627,696 | | | 5,951,885 | | | (324,189) | | | (5.4) | % |
Allowance for loan losses | | (59,523 | ) | | (62,192 | ) | | 2,669 |
| | (4.3 | )% | Allowance for loan losses | | (90,370) | | | (57,649) | | | (32,721) | | | 56.8 | % |
Total loans receivable, net | | $ | 6,660,047 |
| | $ | 7,638,681 |
| | $ | (978,634 | ) | | (12.8 | )% | Total loans receivable, net | | $ | 5,537,326 | | | $ | 5,894,236 | | | $ | (356,910) | | | (6.1) | % |
| |
(1) | Total loans include deferred loan origination costs/(fees) and premiums/(discounts), net of $16.1 million and $17.7 million, respectively,(1)Includes PPP loans totaling $240.7 million, which included $5.6 million of net unamortized loan fees at June 30, 2019 and December 31, 2018. |
During the three and six months ended June 30, 20192020. There were no PPP loans outstanding at December 31, 2019.
(2)Total loans include deferred loan origination costs/(fees) and premiums/(discounts), the Company sold $131.5net of $6.0 million and $374.7$14.3 million, respectively, at June 30, 2020 and December 31, 2019.
Gross loans decreased $324.2 million to $5.63 billion during the year, due mostly to lower single family residential mortgage loans of $220.0 million, lower commercial and industrial (“C&I“) loans of $254.3 million, and lower multifamily loans of $60.5 million. The decline in single family residential mortgage loans resultingwas attributed to payoffs as the loans refinance away in the lower rate environment and these proceeds are invested in other core business loans. The decline in C&I loans was primarily in response to strategically reducing certain credit facilities in response to the changed economic landscape and corresponding lower outstanding balances. These decreases were partially offset by a gain$239.8 million increase in SBA loans attributable to the funding of $125 thousand and $1.8 million, respectively.loans under the SBA's PPP. Our focus on processing PPP loans, in addition to the impact of the COVID-19, pandemic tempered other loan production; additionally, we did not experience any significant increase in credit line usage.
DuringWe continue to remix our real estate loan portfolio toward relationship-based multifamily, bridge, light infill construction, and commercial real estate loans. Single family residential mortgage and multifamily loans comprised 49.9% of the threetotal held-for-investment loan portfolio as compared to 53.0% one year ago. Commercial real estate loans comprised 14.6% of the loan portfolio and six months ended commercial and industrial loans constituted 25.5%. As of June 30, 20192020, loans secured by residential real estate (single family, multifamily, single family construction, and warehouse credit facilities) represent approximately 66% of our total loans outstanding.
The C&I portfolio has limited exposure to certain business sectors undergoing severe stress, as demonstrated by the Company sold $178.2 millionfollowing (as a percentage of multifamily residential loans resulting in a gain of $2.9 million.total outstanding C&I loan balances):
| | | | | | | | | | | | | | |
| | June 30, 2020 | | |
($ in thousands) | | Amount | | % of Portfolio |
C&I Portfolio by Industry | | | | |
Finance and insurance (includes Warehouse lending) | | $ | 777,015 | | | 54 | % |
Real estate and rental leasing | | 201,630 | | | 14 | % |
Gas stations | | 76,510 | | | 5 | % |
Manufacturing | | 60,128 | | | 4 | % |
Healthcare | | 43,256 | | | 3 | % |
Wholesale trade | | 39,740 | | | 3 | % |
Other retail trade | | 37,699 | | | 3 | % |
Television/motion pictures | | 33,590 | | | 2 | % |
Food services | | 30,216 | | | 2 | % |
Professional services | | 14,975 | | | 1 | % |
Transportation | | 5,363 | | | — | % |
Accommodations | | 1,496 | | | — | % |
All other | | 115,372 | | | 8 | % |
Total | | $ | 1,436,990 | | | 100 | % |
Non-Traditional Mortgage Portfolio ("NTM")
The Company’sOur 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 June 30, 20192020 and December 31, 2018,2019, the NTM portfolio totaled $747.3$511.2 million, or 11.1 percent9.1% of the total gross loan portfolio, and $826.7$600.7 million, or 10.7 percent10.1% of the total gross loan portfolio, respectively.portfolio. The total NTM portfolio decreased by $79.5$89.5 million, or 9.6 percent14.9% during the threesix months ended June 30, 2019.2020. The decrease was primarily due to principal paydowns and amortization of $131.2 million, partially offset by originations of $61.5 million.payoffs.
The initial credit guidelines for the NTM portfolio were established based on the borrower's Fair Isaac Corporation (FICO)(“FICO”) score, LTV ratio, property type, occupancy type, loan amount, and geography. Additionally, from an ongoing credit risk management perspective, the Company haswe have determined that the most significant performance indicators for NTMs are LTV ratios and FICO scores. The Company reviewsWe review the NTM loan portfolio periodically, which includes refreshing FICO scores on the Green Loans and HELOCs and ordering third party automated valuation models (AVMs)(“AVMs”) to confirm collateral values.
Green Loans
The Company 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. The Company initiated the Green Loan products in 2005 and proactively refined underwriting and credit management practices and credit guidelines in response to changing economic environments, competitive conditions and portfolio performance. The Company continues to manage credit risk, to the extent possible, throughout the borrower’s credit cycle. We no longer originate NTM loans.
Green Loans totaled $63.7$45.2 million at June 30, 2019,2020, a decrease of $6.5$7.1 million, or 9.2 percent13.5% from $70.1$52.3 million at December 31, 2018,2019, primarily due to reductions in principal balancespaydowns and payoffs. AtThe NTM loans on non-accrual status included $4.6 million of Green Loans and $14.6 million of interest-only loans at June 30, 20192020 compared to $1.5 million of Green Loans and $11.5 million of interest-only loans at December 31, 2018, $286 thousand and zero, respectively, of the Company’s Green Loans were non-performing. As a result of their unique payment feature, Green Loans possess higher credit risk due to the potential of negative amortization; however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on loan-to-value ratios and the Company’s contractual ability to curtail loans when the value of underlying collateral declines.
The 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 the Company held the first liens, owner occupied as well as non-owner occupied properties. The Company utilized its underwriting guidelines for first liens to underwrite the Green Loan secured by second trust deeds as if the combined loans were a single Green Loan. For all Green Loans, the loan income was underwritten using either full income documentation or alternative income documentation.2019.
The following table presents the Company’sour Green Loans first lien portfolio at June 30, 20192020 by FICO scores that were obtained during the quarter ended June 30, 2019,2020, compared to the FICO scores for those same loans that were obtained during
the quarter ended DecemberMarch 31, 2018:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | By FICO Scores Obtained During the Quarter Ended June 30, 2020 | | | | | | By FICO Scores Obtained During the Quarter Ended December 31, 2019 | | | | | | Change | | | | |
($ in thousands) | | Count | | Amount | | Percent | | Count | | Amount | | Percent | | Count | | Amount | | Percent |
FICO Score | | | | | | | | | | | | | | | | | | |
800+ | | 12 | | | $ | 2,870 | | | 6.6 | % | | 13 | | | $ | 3,509 | | | 7.0 | % | | (1) | | | $ | (639) | | | (18.2) | % |
700-799 | | 31 | | | 21,756 | | | 49.9 | % | | 38 | | | 27,011 | | | 54.1 | % | | (7) | | | (5,255) | | | (19.5) | % |
600-699 | | 10 | | | 11,974 | | | 27.4 | % | | 10 | | | 12,400 | | | 24.8 | % | | — | | | (426) | | | (3.4) | % |
<600 | | 5 | | | 3,253 | | | 7.5 | % | | 5 | | | 3,286 | | | 6.6 | % | | — | | | (33) | | | (1.0) | % |
No FICO | | 3 | | | 3,751 | | | 8.6 | % | | 3 | | | 3,753 | | | 7.5 | % | | — | | | (2) | | | (0.1) | % |
Totals | | 61 | | | $ | 43,604 | | | 100.0 | % | | 69 | | | $ | 49,959 | | | 100.0 | % | | (8) | | | $ | (6,355) | | | (12.7) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | By FICO Scores Obtained During the Quarter Ended June 30, 2019 | | By FICO Scores Obtained During the Quarter Ended March 31, 2019 | | Change |
($ in thousands) | | Count | | Amount | | Percent | | Count | | Amount | | Percent | | Count | | Amount | | Percent |
FICO Score | | | | | | | | | | | | | | | | | | |
800+ | | 15 |
| | $ | 10,221 |
| | 16.6 | % | | 16 |
| | $ | 5,277 |
| | 8.2 | % | | (1 | ) | | $ | 4,944 |
| | 93.7 | % |
700-799 | | 42 |
| | 28,744 |
| | 46.8 | % | | 45 |
| | 34,651 |
| | 53.8 | % | | (3 | ) | | (5,907 | ) | | (17.0 | )% |
600-699 | | 16 |
| | 17,948 |
| | 29.2 | % | | 16 |
| | 16,820 |
| | 26.1 | % | | — |
| | 1,128 |
| | 6.7 | % |
<600 | | 2 |
| | 771 |
| | 1.3 | % | | 3 |
| | 3,918 |
| | 6.1 | % | | (1 | ) | | (3,147 | ) | | (80.3 | )% |
No FICO | | 3 |
| | 3,755 |
| | 6.1 | % | | 3 |
| | 3,778 |
| | 5.9 | % | | — |
| | (23 | ) | | (0.6 | )% |
Totals | | 78 |
| | $ | 61,439 |
| | 100.0 | % | | 83 |
| | $ | 64,444 |
| | 100.1 | % | | (5 | ) | | $ | (3,005 | ) | | (4.7 | )% |
Interest Only Loans
Loans with the Potential for Negative Amortization
Negative amortization loans other than Green Loans totaled $3.2 million at June 30, 2019, a decrease of $309 thousand, or 8.8 percent, from $3.5 million as of December 31, 2018. The Company discontinued origination of negative amortization loans in 2007. At June 30, 2019 and December 31, 2018, none of the loans that had the potential for negative amortization were non-performing. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization; however, management believes the risk is mitigated through the loan terms and underwriting standards, including the Company’s policies on loan-to-value ratios.
NTM Loan Credit Risk Management
The Company performs detailed reviews of collateral values on loans collateralized by residential real property including its NTM portfolio based on appraisals or estimates from third party AVMs to analyze property value trends periodically. AVMs are used to identify loans that have experienced potential collateral deterioration. Once a loan has been identified that may have experienced collateral deterioration, the Company will obtain updated drive by or full appraisals in order to confirm the valuation. This information is used to update key monitoring metrics such as LTV ratios. Additionally, FICO scores are obtained in conjunction with the collateral analysis. In addition to LTV ratios and FICO scores, the Company evaluates the portfolio on a specific loan basis through delinquency and portfolio charge-offs to determine whether any risk mitigation or portfolio management actions are warranted. The borrowers may be contacted as necessary to discuss material changes in loan performance or credit metrics.
The Company’s risk management policy and credit monitoring includes reviewing delinquency, FICO scores, and collateral values on the NTM loan portfolio. The Company also continuously monitors market conditions for our geographic lending areas. The Company has 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 percent or more and a resulting FICO score of 620 or less. The loans are then further analyzed to determine if the risk rating should be downgraded, which may require an increase in the ALLL the Company needs to establish for potential losses. A report is prepared and regularly monitored.
As these loans are revolving lines of credit, the Company, based on the loan agreement and loan covenants of the particular loan, as well as applicable rules and regulations, could suspend the borrowing privileges or reduce the credit limit at any time the Company reasonably believes that the borrower will be unable to fulfill their repayment obligations under the agreement or certain other conditions are met. In many cases, the decrease in FICO score is the first red flag that the borrower may have difficulty in making their future payment obligations.
As a result, the Company proactively manages the portfolio by performing a detailed analysis with emphasis on the non-traditional mortgage portfolio. The Company’s Management Credit Committee (MCC), formally known as Internal Asset Review Committee, conducts regular meetings to review the loans classified as special mention, substandard, or doubtful and
determines whether suspension of the line or reduction in the credit limit is warranted. If the line has been suspended and the borrower would like to have their credit privileges reinstated, they would need to provide updated financials showing their ability to meet their payment obligations. From the most recent review completed during the three months ended June 30, 2019, the Company made no curtailment in available commitments on Green Loans.
On the interest only loans, the Company projects future payment changes to determine if there will be an increase in payment of 3.50 percent or greater and then monitors the loans for possible delinquencies. The individual loans are monitored for possible downgrading of risk rating, and trends within the portfolio are identified that could affect other interest only loans scheduled for payment changes in the near future.
Consumer and NTM loans may entail greater risk than do traditional SFR mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as automobiles and recreational vehicles. In these cases, any repossessed collateral for a consumer and NTM loan are more dependent on the borrower‘s continued financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy.
Loan-to-Value Ratio
LTV ratio represents estimated current loan to value ratio, determined by dividing the current unpaid principal balance by the latest estimated property value received per the Companyour policy. The table below represents the Company’sour single family residential NTM first lien portfolio by LTV ratiosratio ranges as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Green | | | | | | Interest Only | | | | | | Negative Amortization | | | | | | Total | | | | |
($ in thousands) | | Count | | Amount | | Percent | | Count | | Amount | | Percent | | Count | | Amount | | Percent | | Count | | Amount | | Percent |
June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | |
< 61% | | 49 | | | $ | 32,547 | | | 74.7 | % | | 208 | | | $ | 294,171 | | | 63.4 | % | | 8 | | | $ | 2,335 | | | 100.0 | % | | 265 | | | $ | 329,053 | | | 64.6 | % |
61-80% | | 10 | | | 9,257 | | | 21.2 | % | | 116 | | | 158,111 | | | 34.1 | % | | — | | | — | | | — | % | | 126 | | | 167,368 | | | 32.8 | % |
81-100% | | 2 | | | 1,800 | | | 4.1 | % | | 3 | | | 4,875 | | | 1.1 | % | | — | | | — | | | — | % | | 5 | | | 6,675 | | | 1.3 | % |
> 100% | | — | | | — | | | — | % | | 2 | | | 6,509 | | | 1.4 | % | | — | | | — | | | — | % | | 2 | | | 6,509 | | | 1.3 | % |
Total | | 61 | | | $ | 43,604 | | | 100.0 | % | | 329 | | | $ | 463,666 | | | 100.0 | % | | 8 | | | $ | 2,335 | | | 100.0 | % | | 398 | | | $ | 509,605 | | | 100.0 | % |
December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
< 61% | | 54 | | | $ | 37,804 | | | 75.6 | % | | 231 | | | $ | 346,899 | | | 63.6 | % | | 9 | | | $ | 3,027 | | | 100.0 | % | | 294 | | | $ | 387,730 | | | 64.8 | % |
61-80% | | 12 | | | 8,531 | | | 17.1 | % | | 136 | | | 183,664 | | | 33.7 | % | | — | | | — | | | — | % | | 148 | | | 192,195 | | | 32.1 | % |
81-100% | | 3 | | | 3,624 | | | 7.3 | % | | 6 | | | 7,081 | | | 1.3 | % | | — | | | — | | | — | % | | 9 | | | 10,705 | | | 1.8 | % |
> 100% | | — | | | — | | | — | % | | 3 | | | 7,727 | | | 1.4 | % | | — | | | — | | | — | % | | 3 | | | 7,727 | | | 1.3 | % |
Total | | 69 | | | $ | 49,959 | | | 100.0 | % | | 376 | | | $ | 545,371 | | | 100.0 | % | | 9 | | | $ | 3,027 | | | 100.0 | % | | 454 | | | $ | 598,357 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Green | | Interest Only | | Negative Amortization | | Total |
($ in thousands) | | Count | | Amount | | Percent | | Count | | Amount | | Percent | | Count | | Amount | | Percent | | Count | | Amount | | Percent |
June 30, 2019 | | | | | | | | | | | | | | | | | | | | | | | | |
< 61% | | 60 |
| | $ | 45,675 |
| | 74.4 | % | | 267 |
| | $ | 442,601 |
| | 65.1 | % | | 10 |
| | $ | 3,219 |
| | 100.0 | % | | 337 |
| | $ | 491,495 |
| | 66.0 | % |
61-80% | | 14 |
| | 12,930 |
| | 21.0 | % | | 163 |
| | 216,625 |
| | 31.8 | % | | — |
| | — |
| | — | % | | 177 |
| | 229,555 |
| | 30.8 | % |
81-100% | | 4 |
| | 2,834 |
| | 4.6 | % | | 9 |
| | 11,338 |
| | 1.7 | % | | — |
| | — |
| | — | % | | 13 |
| | 14,172 |
| | 1.9 | % |
> 100% | | — |
| | — |
| | — | % | | 5 |
| | 9,797 |
| | 1.4 | % | | — |
| | — |
| | — | % | | 5 |
| | 9,797 |
| | 1.3 | % |
Total | | 78 |
| | $ | 61,439 |
| | 100.0 | % | | 444 |
| | $ | 680,361 |
| | 100.0 | % | | 10 |
| | $ | 3,219 |
| | 100.0 | % | | 532 |
| | $ | 745,019 |
| | 100.0 | % |
December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | |
< 61% | | 69 |
| | $ | 51,827 |
| | 76.5 | % | | 312 |
| | $ | 495,930 |
| | 65.9 | % | | 11 |
| | $ | 3,528 |
| | 100.0 | % | | 392 |
| | $ | 551,285 |
| | 66.9 | % |
61-80% | | 17 |
| | 13,476 |
| | 19.9 | % | | 201 |
| | 245,568 |
| | 32.6 | % | | — |
| | — |
| | — | % | | 218 |
| | 259,044 |
| | 31.4 | % |
81-100% | | 2 |
| | 2,426 |
| | 3.6 | % | | 5 |
| | 7,441 |
| | 1.0 | % | | — |
| | — |
| | — | % | | 7 |
| | 9,867 |
| | 1.2 | % |
> 100% | | — |
| | — |
| | — | % | | 1 |
| | 4,122 |
| | 0.5 | % | | — |
| | — |
| | — | % | | 1 |
| | 4,122 |
| | 0.5 | % |
Total | | 88 |
| | $ | 67,729 |
| | 100.0 | % | | 519 |
| | $ | 753,061 |
| | 100.0 | % | | 11 |
| | $ | 3,528 |
| | 100.0 | % | | 618 |
| | $ | 824,318 |
| | 100.0 | % |
Non-Performing Assets
The following table presents a summary of total non-performing assets, excluding loans held-for-sale, as of the dates indicated: | | ($ in thousands) | | June 30, 2019 | | December 31, 2018 | | Amount Change | | Percentage Change | ($ in thousands) | | June 30, 2020 | | December 31, 2019 | | Amount Change | | Percentage Change |
Loans past due 90 days or more still on accrual | | $ | 275 |
| | $ | 470 |
| | $ | (195 | ) | | (41.5 | )% | Loans past due 90 days or more still on accrual | | $ | — | | | $ | — | | | $ | — | | | — | % |
Non-accrual loans | | 28,499 |
| | 21,585 |
| | 6,914 |
| | 32.0 | % | Non-accrual loans | | 72,703 | | | 43,354 | | | 29,349 | | | 67.7 | % |
Total non-performing loans | | 28,774 |
| | 22,055 |
| | 6,719 |
| | 30.5 | % | Total non-performing loans | | 72,703 | | | 43,354 | | | 29,349 | | | 67.7 | % |
Other real estate owned | | 276 |
| | 672 |
| | (396 | ) | | (58.9 | )% | Other real estate owned | | — | | | — | | | — | | | — | % |
Total non-performing assets | | $ | 29,050 |
| | $ | 22,727 |
| | $ | 6,323 |
| | 27.8 | % | Total non-performing assets | | $ | 72,703 | | | $ | 43,354 | | | $ | 29,349 | | | 67.7 | % |
Performing restructured loans (1) | | $ | 20,245 |
| | $ | 5,745 |
| | $ | 14,500 |
| | 252.4 | % | Performing restructured loans (1) | | $ | 5,597 | | | $ | 6,621 | | | $ | (1,024) | | | (15.5) | % |
Total non-performing loans to total loans | | 0.43 | % | | 0.29 | % | | | | | Total non-performing loans to total loans | | 1.29 | % | | 0.73 | % | |
Total non-performing assets to total assets | | 0.31 | % | | 0.21 | % | | | | | Total non-performing assets to total assets | | 0.94 | % | | 0.55 | % | |
ALLL to non-performing loans | | 206.86 | % | | 281.99 | % | | | | | |
ALL to non-performing loans | | ALL to non-performing loans | | 124.30 | % | | 132.97 | % | |
ACL to non-performing loans | | ACL to non-performing loans | | 130.07 | % | | 142.35 | % | |
(1) Excluded from non-performing loans
Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where we believe the borrower will eventually overcome those circumstances and repay the loan in full.
Additional interest income of approximately $535$952 thousand and $653 thousand$1.7 million would have been recorded during the three and six months ended June 30, 2019, respectively,2020, had these loans been paid in accordance with their original terms throughout the periods indicated.
During the three months endedNon-performing loans totaled $72.7 million as of June 30, 2019, non-accrual2020, of which $21.9 million, or 30% of the balance relates to loans increased $6.9in a current payment status. The $16.2 million increase during the second quarter was primarily due to certain single family residential, SBA and construction$18.6 million of loans being placed on non-accrual status. During the six months ended June 30, 2019, the provision for loan losses reflects a $59.5 million increase in special mention, substandard and doubtful loans, coupled with increases in delinquencies and nonperforming loansstatus, offset by cured loans and payoffs. The quarter-end balance included three large loan relationships totaling $36.9 million, or 51% of our total non-performing loans, which consist of one $16.4 million legacy shared national credit, a $9.1 million single family mortgage residential loan with a loan-to-value ratio of 58%, and an $11.5 million legacy relationship well-secured by commercial real estate and single family residential properties with an average loan-to-value ratio of 51%. Aside from those three loan relationships, non-performing single family residential loans totaled $19.4 million and the $1.04 billion reduction in the pass-rated portfolio balances and overall decreases in average loan balances as a result of sales and transfers to held for sale since year-end.remaining non-performing loans totaled $16.4 million.
Troubled Debt Restructurings
Loans that the Company modifieswe modify or restructuresrestructure where the debtor is experiencing financial difficulties and makes a concession to the borrower in the form of changesa below-market change in the amortization terms, reductionsstated interest rate, a reduction in the loan balance or accrued interest, rates,an extension of the acceptance of interest only payments and, in limited cases, reductions in the outstanding loan balancesmaturity date, or a note split with principal forgiveness are classified as troubled debt restructurings (“TDRs”). TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. A workout plan between a borrower and the Companyus 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 June 30, 20192020 and December 31, 2018, the Company2019, we had 2426 and 1325 loans, respectively, with an aggregate balance of $22.7$25.9 million and $8.0$21.8 million, respectively, classified as TDRs. When a loan becomes a TDR, the Company ceaseswe cease accruing interest, and classifiesclassify it as non-accrual until the borrower demonstrates that the loan is again performing. The increase in TDRs during the three and six months ended June 30, 2020 was primarily due to one commercial and industrial relationship totaling $3.7 million.
At June 30, 2019,2020, of the 2426 loans classified as TDRs, 2112 loans totaling $20.2$5.6 million were making payments according to their modified terms and were less than 90 days delinquent under the modified terms and, as such, were on accruing status. At December 31, 2018,2019, of the 1325 loans classified as TDRs, 1214 loans totaling $5.7$6.6 million were making payments according to their modified terms and were less than 90 days delinquent under the modified terms and, as such, were on accruing status.
Troubled Debt Restructuring (TDR) Relief: Under U.S. GAAP, banks are required to assess modifications to a loan’s terms for potential classification as a TDR. A loan to a borrower experiencing financial difficulty is classified as a TDR when a lender grants a concession that it would otherwise not consider, such as a payment deferral or interest concession. In order to encourage banks to work with impacted borrowers, the CARES Act and U.S. banking regulatory agencies have provided relief
from TDR accounting. The main benefits of TDR relief include 1) a capital benefit in the form of reduced risk-weighted assets, as TDRs are more heavily risk-weighted for capital purposes; 2) a delinquency status benefit, as the aging of loans are frozen, i.e., they will continue to be reported in the same delinquency bucket they were in at the time of modification; and 3) a non-accrual status benefit as the loans are generally not reported as non-accrual during the modification period. Refer to "Borrower Payment Relief Efforts" above for additional information regarding CARES Act deferrals.
Allowance for LoanCredit Losses (ACL)
The Company maintains an ALLLOur ACL is comprised of our allowance for loan losses ("ALL") and reserve for unfunded loan commitments. Our ACL methodology and resulting provision continues to absorb probable incurred losses inherent inbe impacted by the current economic uncertainty and volatility caused by the COVID-19 pandemic. Our ACL methodology uses a nationally recognized third-party model that includes many assumptions based on our historical and peer loss data, our current loan portfolio atrisk profile including risk ratings, and economic forecasts including macroeconomic variables ("MEVs"). As of June 30, 2020, we used economic forecasts released by our model provider during June 2020. Similar to the balance sheet date. The ALLL is based on an ongoing assessmentlate March 2020 forecasts, these June 2020 forecasts reflect the onset of the estimated probable losses inherentpandemic, its impact on the MEVs, and the future economic recovery. These forecasts published by our model provider have deteriorated since the end of the first quarter, with June baseline unemployment rate forecasts for 2020 and 2021 increasing and real gross domestic product growth rates decreasing. Similar to the first quarter of 2020, we incorporated qualitative factors to account for certain loan portfolio characteristics that are not taken into consideration by our third-party model including underlying strengths and weaknesses in the loan portfolio. In evaluatingAs is the levelcase with all estimates, we expect the ACL to be impacted in future periods by economic volatility, changing economic forecasts, actual and projected credit experience, and underlying model assumptions, all of the ALLL, management considers the types of loans and the amount of loans in the portfolio, peer group information, historical loss experience, adverse situations thatwhich may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This methodology takes into account many factors, including the Company’s own historical and peer loss trends, loan-level credit quality ratings, loan specific attributes along with a review of various credit metrics and trends. be better than or worse than our current estimate.
The ACL process involves subjective as well asand complex judgments. In addition, the Company useswe use adjustments for numerous factors including those founddescribed in the federal banking agencies' joint Interagency Policy Statementinteragency policy statement on
ALLL, ALL, which include current economic conditions, loan seasoning, underwriting experience and collateral value changes, among others. The Company evaluatesWe evaluate all impaired loans individually using guidance from ASC 310 primarily through the evaluation of cash flows or collateral values.
The ACL, which includes the reserve for unfunded loan commitments, totaled $94.6 million, or 1.68% of total loans at June 30, 2020 compared to $82.1 million or 1.45% at March 31, 2020. The $12.4 million increase in the allowance for expected credit losses was due to: (i) $6.8 million provided for specific reserves, primarily related to one previously reported non-accrual shared national credit, (ii) $5.0 million provided for general reserves related to the continued deterioration in key macro-economic forecast variables, offset by the impact of lower loan balances, and (iii) net recoveries of $608 thousand. The ACL coverage of non-performing loans was 130% at June 30, 2020 compared to 145% at March 31, 2020 and 142% at December 31, 2019.
The reserve for unfunded loan commitments is established to cover the expected credit losses for the estimated level of funding of these loan commitments, except for unconditionally cancellable commitments for which no reserve is required under ASC 326. The reserve for unfunded loan commitments is included in accrued expenses and other liabilities on the consolidated statements of financial condition.
The following table provides a summary of components of the allowance for credit losses and related ratios as of the dates indicated:
| | | | | | | | | | | | | | |
($ in thousands) | | June 30, 2020 | | December 31, 2019 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Allowance for credit losses: | | | | |
Allowance for loan losses (ALL) | | $ | 90,370 | | | $ | 57,649 | |
Reserve for unfunded loan commitments | | 4,195 | | | 4,064 | |
Total allowance for credit losses (ACL) | | $ | 94,565 | | | $ | 61,713 | |
| | | | |
ALL to total loans | | 1.61 | % | | 0.97 | % |
ACL to total loans | | 1.68 | % | | 1.04 | % |
The following tables provide summaries of activity in the allowance for credit losses for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | | | | | | | |
($ in thousands) | | 2020 | | | | | | 2019 | | | | | | | | |
| | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | | | |
Balance at beginning of period | | $ | 78,243 | | | $ | 3,888 | | | $ | 82,131 | | | $ | 63,885 | | | $ | 4,208 | | | $ | 68,093 | | | | | |
| | | | | | | | | | | | | | | | |
Loans charged off | | — | | | — | | | — | | | (2,451) | | | — | | | (2,451) | | | | | |
Recoveries of loans previously charged off | | 608 | | | — | | | 608 | | | 76 | | | — | | | 76 | | | | | |
Net charge-offs | | 608 | | | — | | | 608 | | | (2,375) | | | — | | | (2,375) | | | | | |
| | | | | | | | | | | | | | | | |
Provision for credit losses | | 11,519 | | | 307 | | | 11,826 | | | (1,987) | | | 87 | | | (1,900) | | | | | |
Balance at end of period | | $ | 90,370 | | | $ | 4,195 | | | $ | 94,565 | | | $ | 59,523 | | | $ | 4,295 | | | $ | 63,818 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | | | | | | | | |
($ in thousands) | | 2020 | | | | | | 2019 | | | | | | | | |
| | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | Allowance for Loan Losses | | Reserve for Unfunded Loan Commitments | | Allowance for Credit Losses | | | | |
Balance at beginning of period | | $ | 57,649 | | | $ | 4,064 | | | $ | 61,713 | | | $ | 62,192 | | | $ | 4,622 | | | $ | 66,814 | | | | | |
Impact of adopting ASU 2016-13(1) | | 7,609 | | | (1,226) | | | 6,383 | | | — | | | — | | | — | | | | | |
Loans charged off | | (2,076) | | | — | | | (2,076) | | | (3,514) | | | — | | | (3,514) | | | | | |
Recoveries of loans previously charged off | | 958 | | | — | | | 958 | | | 320 | | | — | | | 320 | | | | | |
Net charge-offs | | (1,118) | | | — | | | (1,118) | | | (3,194) | | | — | | | (3,194) | | | | | |
| | | | | | | | | | | | | | | | |
Provision for (reversal of) credit losses | | 26,230 | | | 1,357 | | | 27,587 | | | 525 | | | (327) | | | 198 | | | | | |
Balance at end of period | | $ | 90,370 | | | $ | 4,195 | | | $ | 94,565 | | | $ | 59,523 | | | $ | 4,295 | | | $ | 63,818 | | | | | |
| | | | | | | | | | | | | | | | |
(1)Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2020. As a result of adopting ASU 2016-13, our methodology to compute our allowance for credit losses is based on a current expected credit loss methodology, rather that the previously applied incurred loss methodology.
The following table provides a summary of the allocation of the ALLLallowance for loan losses by loan category as well as loans receivable for each category as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | December 31, 2019 | | | | |
($ in thousands) | | Allowance for Loan Losses | | Loans Receivable | | % of Loans in Category to Total Loans | | Allowance for Loan Losses | | Loans Receivable | | % of Loans in Category to Total Loans |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 26,618 | | | $ | 1,436,990 | | | 25.5 | % | | $ | 22,353 | | | $ | 1,691,270 | | | 28.4 | % |
Commercial real estate | | 17,372 | | | 822,694 | | | 14.6 | % | | 5,941 | | | 818,817 | | | 13.8 | % |
Multifamily | | 25,105 | | | 1,434,071 | | | 25.5 | % | | 11,405 | | | 1,494,528 | | | 25.1 | % |
SBA | | 4,184 | | | 310,784 | | | 5.5 | % | | 3,120 | | | 70,981 | | | 1.2 | % |
Construction | | 6,675 | | | 212,979 | | | 3.8 | % | | 3,906 | | | 231,350 | | | 3.9 | % |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 9,665 | | | 1,370,785 | | | 24.4 | % | | 10,486 | | | 1,590,774 | | | 26.7 | % |
Other consumer | | 751 | | | 39,393 | | | 0.7 | % | | 438 | | | 54,165 | | | 0.9 | % |
| | | | | | | | | | | | |
Total | | $ | 90,370 | | | $ | 5,627,696 | | | 100.0 | % | | $ | 57,649 | | | $ | 5,951,885 | | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
($ in thousands) | | ALLL | | Loans Receivable | | % of Loans in Category to Total Loans | | ALLL | | Loans Receivable | | % of Loans in Category to Total Loans |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 21,529 |
| | $ | 1,951,707 |
| | 29.1 | % | | $ | 18,191 |
| | $ | 1,944,142 |
| | 25.2 | % |
Commercial real estate | | 6,877 |
| | 856,497 |
| | 12.7 | % | | 6,674 |
| | 867,013 |
| | 11.3 | % |
Multifamily | | 12,625 |
| | 1,598,978 |
| | 23.8 | % | | 17,970 |
| | 2,241,246 |
| | 29.1 | % |
SBA | | 3,120 |
| | 80,929 |
| | 1.2 | % | | 1,827 |
| | 68,741 |
| | 0.9 | % |
Construction | | 3,715 |
| | 209,029 |
| | 3.1 | % | | 3,461 |
| | 203,976 |
| | 2.7 | % |
Consumer: | | | | | | | | | | | | |
Single family residential mortgage | | 11,072 |
| | 1,961,065 |
| | 29.2 | % | | 13,128 |
| | 2,305,490 |
| | 29.9 | % |
Other consumer | | 585 |
| | 61,365 |
| | 0.9 | % | | 941 |
| | 70,265 |
| | 0.9 | % |
Total | | $ | 59,523 |
| | $ | 6,719,570 |
| | 100.0 | % | | $ | 62,192 |
| | $ | 7,700,873 |
| | 100.0 | % |
The following table presents the ALLL allocation among loan origination types as of the dates indicated: |
| | | | | | | | | | | | | | | |
($ in thousands) | | June 30, 2019 | | December 31, 2018 | | Amount Change | | Percentage Change |
Loan breakdown by origination type: | | | | | | | | |
Originated loans | | $ | 6,181,583 |
| | $ | 7,105,171 |
| | $ | (923,588 | ) | | (13.0 | )% |
Acquired loans not impaired at acquisition | | 537,987 |
| | 595,702 |
| | (57,715 | ) | | (9.7 | )% |
Total loans | | $ | 6,719,570 |
| | $ | 7,700,873 |
| | $ | (981,303 | ) | | (12.7 | )% |
ALLL breakdown by origination type: | | | | | | | | |
Originated loans | | $ | 58,135 |
| | $ | 61,255 |
| | $ | (3,120 | ) | | (5.1 | )% |
Acquired loans not impaired at acquisition | | 1,388 |
| | 937 |
| | 451 |
| | 48.1 | % |
Total ALLL | | $ | 59,523 |
| | $ | 62,192 |
| | $ | (2,669 | ) | | (4.3 | )% |
Discount on purchased/acquired Loans: | | | | | | | | |
Acquired loans not impaired at acquisition | | $ | 10,680 |
| | $ | 11,645 |
| | $ | (965 | ) | | (8.3 | )% |
Total discount | | $ | 10,680 |
| | $ | 11,645 |
| | $ | (965 | ) | | (8.3 | )% |
Percentage of ALLL to: | | | | | | | | |
Originated loans | | 0.94 | % | | 0.86 | % | | 0.08 | % | | |
Originated loans and acquired loans not impaired at acquisition | | 0.89 | % | | 0.81 | % | | 0.08 | % | | |
Total loans | | 0.89 | % | | 0.81 | % | | 0.08 | % | | |
The following table provides information regarding activity by loan class in the ALLLallowance for loan losses during the periodsperiods: indicated: | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
ALLL at beginning of period | | $ | 63,885 |
| | $ | 54,763 |
| | $ | 62,192 |
| | $ | 49,333 |
| |
ALL at beginning of period | | ALL at beginning of period | | $ | 78,243 | | | $ | 63,885 | | | $ | 57,649 | | | $ | 62,192 | |
Impact of adopting ASU 2016-13(1) | | Impact of adopting ASU 2016-13(1) | | — | | | — | | | 7,609 | | | — | |
Charge-offs: | | | | | | | | | Charge-offs: | |
Commercial and industrial | | (2,022 | ) | | (276 | ) | | (2,115 | ) | | (347 | ) | Commercial and industrial | | — | | | (2,022) | | | (1,164) | | | (2,115) | |
Multifamily | | (6 | ) | | (8 | ) | | — |
| | — |
| |
| SBA | | 8 |
| | (302 | ) | | (348 | ) | | (683 | ) | SBA | | — | | | 8 | | | (356) | | | (348) | |
| Single family residential mortgage | | (425 | ) | | (364 | ) | | (951 | ) | | (479 | ) | Single family residential mortgage | | — | | | (425) | | | (552) | | | (951) | |
Other consumer | | (6 | ) | | — |
| | (94 | ) | | (14,072 | ) | Other consumer | | — | | | (6) | | | (4) | | | (94) | |
Total charge-offs | | (2,451 | ) | | (950 | ) | | (3,514 | ) | | (15,589 | ) | Total charge-offs | | — | | | (2,451) | | | (2,076) | | | (3,514) | |
Recoveries: | | | | | | | | | Recoveries: | | | | | | | | |
Commercial and industrial | | 11 |
| | 36 |
| | 44 |
| | 97 |
| Commercial and industrial | | 119 | | | 11 | | | 149 | | | 44 | |
| SBA | | 60 |
| | 167 |
| | 101 |
| | 232 |
| SBA | | — | | | 60 | | | 121 | | | 101 | |
| Lease financing | | 3 |
| | 5 |
| | 6 |
| | 9 |
| Lease financing | | — | | | 3 | | | — | | | 6 | |
Single family residential mortgage | | — |
| | — |
| | 150 |
| | 436 |
| Single family residential mortgage | | 488 | | | — | | | 639 | | | 150 | |
Other consumer | | 2 |
| | 4 |
| | 19 |
| | 8 |
| Other consumer | | 1 | | | 2 | | | 49 | | | 19 | |
Total recoveries | | 76 |
| | 212 |
| | 320 |
| | 782 |
| Total recoveries | | 608 | | | 76 | | | 958 | | | 320 | |
Net charge-offs | | (2,375 | ) | | (738 | ) | | (3,194 | ) | | (14,807 | ) | Net charge-offs | | 608 | | | (2,375) | | | (1,118) | | | (3,194) | |
(Reversal of) Provision for loan losses | | (1,987 | ) | | 2,653 |
| | 525 |
| | 22,152 |
| |
ALLL at end of period | | $ | 59,523 |
| | $ | 56,678 |
| | $ | 59,523 |
| | $ | 56,678 |
| |
| Provision for credit losses | | Provision for credit losses | | 11,519 | | | (1,987) | | | 26,230 | | | 525 | |
ALL at end of period | | ALL at end of period | | $ | 90,370 | | | $ | 59,523 | | | $ | 90,370 | | | $ | 59,523 | |
Average total loans held-for-investment | | $ | 7,398,471 |
| | $ | 7,000,288 |
| | $ | 7,540,137 |
| | $ | 6,855,041 |
| Average total loans held-for-investment | | $ | 5,687,652 | | | $ | 7,398,471 | | | $ | 5,723,094 | | | $ | 7,540,145 | |
Total loans held-for-investment at end of period | | $ | 6,719,570 |
| | $ | 7,036,004 |
| | $ | 6,719,570 |
| | $ | 7,036,004 |
| Total loans held-for-investment at end of period | | $ | 5,627,696 | | | $ | 6,719,570 | | | $ | 5,627,696 | | | $ | 6,719,570 | |
Ratios: | | | | | | | | | Ratios: | | | | | | | | |
Annualized net charge-offs to average total loans held-for-investment | | 0.13 | % | | 0.04 | % | | 0.08 | % | | 0.43 | % | |
ALLL to total loans held-for-investment | | 0.89 | % | | 0.81 | % | | 0.89 | % | | 0.81 | % | |
Annualized net charge-offs (recoveries) to average total loans held-for-investment | | Annualized net charge-offs (recoveries) to average total loans held-for-investment | | (0.04) | % | | 0.13 | % | | 0.04 | % | | 0.08 | % |
ALL to total loans held-for-investment | | ALL to total loans held-for-investment | | 1.61 | % | | 0.89 | % | | 1.61 | % | | 0.89 | % |
During(1)Represents the three and six months ended June 30, 2019, net charge-offs were $2.4 million and $3.2 million, respectively comparedimpact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2020. As a result of adopting ASU 2016-13, our methodology to $738 thousand and $14.8 million, respectively, during the comparable 2018 periods. Included in net charge-offs during the three and six months ended June 30, 2019, wascompute our allowance for credit losses is based on a charge off a $2.0 million commercial and industrial loan. During the six months ended June 30, 2018, the Company recorded a charge-off of $13.9 million, which reflected the outstanding balance under a $15.0 million line ofcurrent expected 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 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-conditionloss methodology, rather 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. That action was voluntarily dismissed by the Bank without prejudice, and a substantially similar action was filed in Los Angeles County Superior Court. The Bank is also considering 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. Upon extensive review of the underwriting process for this loan, the Bank determined that this loan was the result of an isolated event of external fraud.applied incurred loss methodology.
Alternative Energy Partnerships
The Company investsWe 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 benefits. The investment helps promote the development of renewable energy sources and help lower the cost of housing for residents by lowering homeowners’ monthly utility costs.
As the Company’sour respective investments in these entities are more than minor, the Company haswe have significant influence, but not control, over the investee’s activities that most significantly impact its economic performance. As a result, the Company iswe 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 the Company’sour investment. As a result, the Company applieswe apply the Hypothetical Liquidation at Book Value (“HLBV”) method of the equity method of accounting.
The HLBV method is a balance sheet approach whereby a calculation is prepared at each balance sheet date to estimate the amount that the Companywe 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 the Company’sour share of the earnings or losses from the equity investment for the period.
The following table presents the activity related to
the Company’sour investment in alternative energy partnerships for the three and six months ended June 30,
20192020 and
2018:2019: | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | ($ in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Balance at beginning of period | | $ | 26,578 |
| | $ | 48,344 |
| | $ | 28,988 |
| | $ | 48,826 |
| Balance at beginning of period | | $ | 27,347 | | | $ | 26,578 | | | $ | 29,300 | | | $ | 28,988 | |
New funding | | 235 |
| | — |
| | 235 |
| | — |
| New funding | | — | | | 235 | | | 3,631 | | | 235 | |
Return of unused capital | | — |
| | (1,027 | ) | | — |
| | (1,027 | ) | |
| Change in unfunded commitments | | Change in unfunded commitments | | — | | | — | | | (3,225) | | | — | |
Cash distribution from investments | | (535 | ) | | (703 | ) | | (995 | ) | | (1,219 | ) | Cash distribution from investments | | (547) | | | (535) | | | (1,001) | | | (995) | |
Gain (loss) on investments using HLBV method | | 355 |
| | (1,808 | ) | | (1,595 | ) | | (1,774 | ) | Gain (loss) on investments using HLBV method | | 167 | | | 355 | | | (1,738) | | | (1,595) | |
Balance at end of period | | $ | 26,633 |
| | $ | 44,806 |
| | $ | 26,633 |
| | $ | 44,806 |
| Balance at end of period | | $ | 26,967 | | | $ | 26,633 | | | $ | 26,967 | | | $ | 26,633 | |
Unfunded equity commitments | | $ | 3,796 |
| | $ | — |
| | $ | 3,796 |
| | $ | — |
| |
Unfunded equity commitments at end of period | | Unfunded equity commitments at end of period | | $ | — | | | $ | 3,796 | | | $ | — | | | $ | 3,796 | |
The Company’s
Our returns on investments in alternative energy partnerships are primarily obtained through the realization of energy tax credits and other tax benefits rather than through distributions or through the sale of the investment. The balance of these investments was $27.0 million and $29.3 million at June 30, 2020 and December 31, 2019.
During the three and six months ended June 30, 2019, the Company2020, we funded $235 thousandzero and $3.6 million for itsour alternative energy partnerships and did not receive any return of capital from itsour alternative energy partnerships. During each of the three months ended June 30, 2018, the Company received a return of capital of $1.0 million and funded $13 thousand, respectively, from and into these partnerships. During the six months ended June 30, 2018, the Company received a2019, we did not receive any return of capital of $1.0 million and funded $30.9 million, respectively, from and$235 thousand into these partnerships.
During the three months ended June 30, 2020 and 2019, and 2018, the Companywe recognized a gain on investment of $355$167 thousand and a loss on investment of $1.8 million, respectively,$355 thousand through its HLBV application. During the six months ended June 30, 2020 and 2019, and 2018, the Companywe recognized a loss on investment of $1.6 million and a loss of $1.8 million, respectively, through its HLBV application. As a result, the balance of these investments was $26.6 million and $44.8 million at June 30, 2019 and 2018, respectively. From an income tax benefit perspective, the Company recognized investment tax credits of $1.7 million and $1.9$1.6 million forthrough our application of the three months ended June 30, 2019 and 2018, respectively, and $1.7 million and $9.2 million duringHLBV method of accounting. The HLBV losses for the six months ended June 30, 2019 and 2018, respectively, as well as income tax expense (benefits) relating to the recognition of its gain (loss) through its HLBV application during these periods.
The HLBV losses for the periods2020 were 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. From an income tax benefit perspective, we recognized no investment tax credits during these periods; however, we recorded income tax (expense) benefit related to these investments of $(38) thousand and $398 thousand for the three and six months ended June 30, 2020 and $380 thousand for each of the three and six months ended June 30, 2019.
For additional information, see Note 1412 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.
Deposits
The following table shows the composition of deposits by type as of the dates indicated: | | | | | | | | | | | | June 30, 2020 | | December 31, 2019 | | | |
($ in thousands) | | June 30, 2019 | | December 31, 2018 | | Amount Change | | Percentage Change | ($ in thousands) | | Amount | | % of Total Deposits | Amount | | % of Total Deposits | | Amount Change | |
Noninterest-bearing deposits | | $ | 993,745 |
| | $ | 1,023,360 |
| | $ | (29,615 | ) | | (2.9 | )% | Noninterest-bearing deposits | | $ | 1,391,504 | | | 23.0 | % | $ | 1,088,516 | | | 20.1 | % | | $ | 302,988 | | |
Interest-bearing demand deposits | | 1,577,901 |
| | 1,556,410 |
| | 21,491 |
| | 1.4 | % | Interest-bearing demand deposits | | 1,846,698 | | | 30.6 | % | 1,533,882 | | | 28.3 | % | | 312,816 | | |
Money market accounts | | 800,898 |
| | 873,153 |
| | (72,255 | ) | | (8.3 | )% | Money market accounts | | 765,854 | | | 12.7 | % | 715,479 | | | 13.2 | % | | 50,375 | | |
Savings accounts | | 1,061,115 |
| | 1,265,847 |
| | (204,732 | ) | | (16.2 | )% | Savings accounts | | 939,018 | | | 15.6 | % | 885,246 | | | 16.3 | % | | 53,772 | | |
Certificates of deposit of $250,000 or less | | 1,126,052 |
| | 2,388,592 |
| | (1,262,540 | ) | | (52.9 | )% | Certificates of deposit of $250,000 or less | | 585,314 | | | 9.7 | % | 582,772 | | | 10.7 | % | | 2,542 | | |
| Certificates of deposit of more than $250,000 | | 732,579 |
| | 809,282 |
| | (76,703 | ) | | (9.5 | )% | Certificates of deposit of more than $250,000 | | 509,077 | | | 8.4 | % | 621,272 | | | 11.4 | % | | (112,195) | | |
Total deposits | | $ | 6,292,290 |
| | $ | 7,916,644 |
| | $ | (1,624,354 | ) | | (20.5 | )% | Total deposits | | $ | 6,037,465 | | | 100.0 | % | $ | 5,427,167 | | | 100.0 | % | | $ | 610,298 | | |
Total deposits were $6.29$6.04 billion at June 30, 2019, a decrease2020, an increase of $1.62 billion,$610.3 million, or 20.5 percent,11.2%, from $7.92$5.43 billion at December 31, 2018. The decrease was mainly due2019. We continue to the Company's continuous effortsfocus on growing relationship-based deposits, strategically supplemented by wholesale funding, as we proactively drive our funding costs down. Noninterest-bearing deposits totaled $1.39 billion and represented 23.0% of total deposits at June 30, 2020 compared to build core deposits across the Company's business units, including strong growth from the community banking$1.09 billion and private banking channel, offset by the Company's strategic reduction of high-rate and high-volatility deposits during the three and six months ended June 30,20.1% at December 31, 2019.
During the six months ended June 30, 2019,2020, demand deposits decreasedincreased by $8.1$615.8 million, including $29.6consisting of increases of $303.0 million of non-interest bearingin noninterest-bearing deposits and $312.8 million in interest-bearing demand deposits. In addition, during the six months ended June 30, 2019, the Company used proceeds from the salemoney market accounts increased $50.4 million and savings accounts increased $53.8 million, offset by a decrease of loans and investments to redeem $1.16 billion of higher cost brokered certificates of$109.7 million in time deposits.
Brokered deposits were $481.0$179.8 million at June 30, 2019, a decrease2020, an increase of $1.23 billion, or 71.8 percent,$169.8 million from $1.71 billion$10.0 million at December 31, 2018.2019. The decreaseincrease between periods is primarily related to the aforementioned $1.16 billion reductionbrokered time deposits as we took advantage of attractive pricing in higher cost brokered certificatesthat market to reduce some of our remaining higher-cost interest bearing deposits.
The following table presents the scheduled maturities of certificates of deposit as of June 30, 2019:2020: | | ($ in thousands) | | Three Months or Less | | Over Three Months Through Six Months | | Over Six Months Through Twelve Months | | Over One Year | | Total | ($ in thousands) | | Three Months or Less | | Over Three Months Through Six Months | | Over Six Months Through Twelve Months | | Over One Year | | Total |
Certificates of deposit of $250,000 or less | | $ | 410,842 |
| | $ | 215,937 |
| | $ | 318,964 |
| | $ | 180,309 |
| | $ | 1,126,052 |
| Certificates of deposit of $250,000 or less | | $ | 222,856 | | | $ | 169,487 | | | $ | 150,881 | | | $ | 42,090 | | | $ | 585,314 | |
Certificates of deposit of more than $250,000 | | 324,211 |
| | 147,467 |
| | 189,731 |
| | 71,170 |
| | 732,579 |
| Certificates of deposit of more than $250,000 | | 211,569 | | | 193,671 | | | 60,687 | | | 43,150 | | | 509,077 | |
Total certificates of deposit | | $ | 735,053 |
| | $ | 363,404 |
| | $ | 508,695 |
| | $ | 251,479 |
| | $ | 1,858,631 |
| Total certificates of deposit | | $ | 434,425 | | | $ | 363,158 | | | $ | 211,568 | | | $ | 85,240 | | | $ | 1,094,391 | |
Borrowings
The Company utilizes FHLBWe utilized Federal Home Loan Bank (“FHLB”) advances and securities sold under repurchase agreements to leverage itsour capital base, to provide funds for its lending and investing activities, as a source of liquidity, and to enhance its interest rate risk management. The CompanyWe also maintainsmaintained additional borrowing availabilities from Federal Reserve Discount Window and unsecured federal funds lines of credit.
Advances from the Federal Home Loan Bank (“FHLB”) increased $305.0FHLB decreased $577.8 million, or 20.1%48.4%, to $1.8 billion$617.2 million as of June 30, 2019, as a result2020, due to repayment of $447.0 million in short-term and overnight advances with the FHLB that we plan to pay down withand $124.0 million in maturities and early repayments of long-term advances. During the proceeds from the sale of loans sold into the Freddie Mac multifamily securitization which is expected to close in the third quarter. As ofthree months ended June 30, 2019, the maturity dates2020, we repaid a $100.0 million FHLB long-term advance with a weighted average interest rate of 2.07% and incurred a $2.5 million extinguishment fee. Additionally, in June 2020 we refinanced $111.0 million of FHLB term advances consistedto take advantage of $645.0 millionthe rapid decline in market interest rates. As a result of this refinancing, our weighted average effective interest rate on such FHLB term advances changed from 2.81% to 2.02% and the weighted average life extended from 2.52 years to 5.18 years.
At June 30, 2020, FHLB advances included 0 overnight $400.0borrowings, $58.0 million maturing in 3within three months, or less, and $780.0$566.0 million maturing beyond 3 months. Asthree months with a weighted average life of the end of the quarter, the overnight advance4.1 years and weighted average interest rate was 2.52%of 2.39%. The Company
We did not utilize repurchase agreements at June 30, 20192020 or December 31, 2018.2019.
For additional information, see Note 86 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.
Long TermLong-term Debt
The following table presents the Company's long termour long-term debt as of the dates indicated: | | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | | December 31, 2019 | |
($ in thousands) | | Par Value | | Unamortized Debt Issuance Cost and Discount | | Par Value | | Unamortized Debt Issuance Cost and Discount | ($ in thousands) | | Par Value | | Unamortized Debt Issuance Cost and Discount | | Par Value | | Unamortized Debt Issuance Cost and Discount |
| 5.25% senior notes due April 15, 2025 | | $ | 175,000 |
| | $ | (1,743 | ) | | $ | 175,000 |
| | $ | (1,826 | ) | 5.25% senior notes due April 15, 2025 | | $ | 175,000 | | | $ | (1,463) | | | $ | 175,000 | | | $ | (1,579) | |
| Total | | $ | 175,000 |
| | $ | (1,743 | ) | | $ | 175,000 |
| | $ | (1,826 | ) | Total | | $ | 175,000 | | | $ | (1,463) | | | $ | 175,000 | | | $ | (1,579) | |
For additional information, see Note 9 to Consolidated Financial Statements (unaudited) included Part I of this Quarterly Report on Form 10-Q.
Reserve for Unfunded Loan Commitments
The Company maintains a reserve for unfunded loan commitmentsWe were in compliance with all covenants under our 5.25% senior notes due April 15, 2025 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 June 30, 2019 and December 31, 2018, the reserve for unfunded loan commitments was $4.3 million and $4.6 million, respectively. The decrease was mainly due to a reduction in expected utilization of unfunded loan commitments.2020.
The following table presents a summary of activity in the reserve for unfunded loan commitments for the periods indicated:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Balance at beginning of period | | $ | 4,208 |
| | $ | 4,293 |
| | $ | 4,622 |
| | $ | 3,716 |
|
(Reversal of) provision for unfunded loan commitments | | 87 |
| | (262 | ) | | (327 | ) | | 315 |
|
Balance at end of period | | $ | 4,295 |
| | $ | 4,031 |
| | $ | 4,295 |
| | $ | 4,031 |
|
Liquidity Management
The Company isWe 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, the Company haswe have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including both expected and unexpected cash flow needs such as funding loan commitments, potential deposit outflows and dividend payments. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained.
As a result of current economic conditions, including government stimulus in response to the pandemic, the Company has participated in the elevated levels of liquidity in the marketplace. A portion of the additional liquidity is viewed as short-term as it is expected to be used by clients in the near term and, accordingly, the Company has maintained higher levels of liquid assets. We have not observed a change in the level of clients' credit line usage and as the Bank's PPP loans are expected to be forgiven over the next 9 to 12 months, we expect additional liquidity that will likely be used to lower wholesale funding as it matures.
Banc of California, N.A.
During the second quarter of 2020, we expanded our existing secured borrowing capacity with the Federal Reserve by participating in its Borrower-in-Custody (“BIC”) program. As a result, our borrowing capacity with the Federal Reserve increased to $370.4 million at June 30, 2020. Prior to participating in the BIC program, the Bank had only pledged certain securities as collateral for access to the discount window. At June 30, 2020, the Bank has pledged certain qualifying loans with an unpaid principal balance of $870.1 million and securities with a carrying value of $23.0 million as collateral for this line of credit. Borrowings under the BIC program are overnight advances with interest chargeable at the discount window (“primary credit”) borrowing rate. There were no borrowings under this arrangement for the three and six months ended June 30, 2020 and 2019.
The Bank's liquidity, represented by cash and cash equivalents and securities available-for-sale, is a product of its operating, investing, and financing activities. The Bank's primary sources of funds are deposits, payments and maturities of outstanding loans and investment securities; sales of loans and 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 from pre-established secured lines of credit 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.operations as well as secured borrowings advances through the Federal Reserve BIC program. 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 the 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 percent of year-to-date net income plus retained net income for the two preceding years without prior OCC approval. At June 30, 2019, the Bank had $37.9 million available to pay dividends to Banc of California, Inc. without prior OCC approval. However, any dividend paid by the Bank would be limited by the need to maintain its well capitalizedwell-capitalized status plus the capital buffer in order to avoid additional dividend restrictions.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 six months ended June 30, 2019,2020, the Bank paid dividends$25.0 million of $54.0 milliondividends to Banc of California, Inc. At June 30, 2019,2020, Banc of California, Inc. had $59.4$61.1 million in cash, all of which was on deposit at the Bank. In connection
On February 10, 2020, we announced that our Board of Directors authorized the repurchase of up to $45 million of our common stock. The repurchase authorization expires in February 2021, however given current macroeconomic conditions and the COVID-19 pandemic, we have suspended common stock repurchases for the immediate future. There were no repurchases of common stock for the three months ended June 30, 2020. During the six months ended June 30, 2020, we repurchased 827,584 shares of common stock at a weighted average price of $14.50 per share and an aggregate amount of $12.0 million. Purchases may be made in open-market transactions, in block transactions on or off an exchange, in privately negotiated transactions, or by other means as determined by our management and in accordance with the Company’s recently announced tender offer forregulations of the Securities and Exchange Commission. The timing of purchases and the number of shares repurchased under the program will depend on a variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions.
During the three months ended June 30, 2020, we repurchased depositary shares representing shares of itsour Series D and Series E preferred stockstock. The aggregate total consideration for up to $75each Series D Depositary Share purchased was $1.2 million. The aggregate total consideration for each Series E Depositary Share purchased was $1.4 million. The $49 thousand difference between the consideration paid and the $2.7 million in aggregate purchase price, the OCC has approved a dividend of $88.5 million from the Bank to Banc of California, Inc. to be declared and paid in the third quarter of 2019 to fund repurchasescarrying value of the Company’s capital stockSeries D Preferred Stock and support anticipated interest expenseSeries E Preferred Stock was reclassified to retained earnings and operating costs through year-end 2019. The proposed dividend will exceedresulted in an increase to net income allocated to common stockholders.
During the bank’s eligible amount pursuant to 12 USC 60, as ofsix months ended June 30, 2019. In exceeding2020, we repurchased depositary shares representing shares of our Series D and Series E preferred stock. The aggregate total consideration for the eligible amount, any future dividend declarations will require prior OCC approval.Series D depositary shares purchased was $2.7 million. The aggregate total consideration for the Series E depositary shares purchased was $1.5 million. The $575 thousand difference between the consideration paid and the $4.8 million aggregate carrying value of the Series D Preferred Stock and Series E Preferred Stock was reclassified to retained earnings and resulted in an increase to net income allocated to common stockholders.
On a consolidated basis, the Companywe maintained $313.9$420.6 million of cash and cash equivalents, which was 3.4 percent5.4% of total assets at June 30, 2019. The Company's2020. Our cash and cash equivalents decreasedincreased by $77.7$47.2 million, or 19.9 percent,12.6%, from $391.6$373.5 million, or 3.7 percent4.8% of total assets, at December 31, 2018.2019. The decreaseincrease was mainly due to the decreaseincrease in deposits and runoff of our legacy single family residential mortgage portfolio, offset by reductions in FHLB advances, offset by sales of investment securities and loans. The Company has benefited from completion during late 2018 of its 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 three months ended June 30, 2019, the Company also strategically decreased its securities portfolio to navigate a volatile rate environment by completing the sale of its entire commercial mortgage-backed securities portfolio and reducing its collateralized loan obligations exposure by selling $279.2 million of these investments resulting in no gain or loss. All of these strategic actions were taken in order to expand core lending activities across the organization and reduce its reliance on higher costing brokered certificates of deposit and FHLB advances, while attempting to reduce risk on the Company's balance sheet.advances.
At June 30, 2019, the Company2020, we had available unused secured borrowing capacities of $942.6$1.06 billion from the FHLB and $370.4 million from FHLB and $21.0 million fromthe Federal Reserve, Discount Window, as well as $185.0 million from unused unsecured federal funds lines of credit. The CompanyWe also maintained repurchase agreements and had noof which none were outstanding securities sold under repurchase agreements at June 30, 2019.2020. Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and pledging additional investment securities. The CompanyWe also had unpledged securities available-for-sale of $1.27$1.13 billion at June 30, 2019. On February 14, 2019, the Company entered into a new line of credit for $15.0 million, which bears interest at LIBOR plus 2.00% and has a maturity date of February 13, 2020.
The Company believesWe believe that itsour liquidity sources are stable and are adequate to meet itsour day-to-day cash flow requirements. Asrequirements as of June 30, 2019,2020. However, in light of the Company believes that there are no events, uncertainties, material commitments, orongoing COVID-19 pandemic, we cannot predict at this time the extent to which the pandemic will negatively affect our business, financial condition, liquidity, capital expenditures that were reasonably likelyand results of operations. For a discussion of the related risk factors, please refer to have a material effectPart II, Item 1A. "Risk Factors" in our Quarterly Report on its liquidity position.Form 10-Q for the quarter ended March 31, 2020.
Commitments and Contractual Obligations
The following table presents the Company’sour commitments and contractual obligations as of June 30, 2019:2020: | | | | Commitments and Contractual Obligations | | Commitments and Contractual Obligations | |
($ in thousands) | | Total Amount Committed | | Within Than One Year | | More Than One Year Through Three Years | | More Than Three Year Through Five Years | | Over Five Years | ($ in thousands) | | Total Amount Committed | | Within One Year | | More Than One Year Through Three Years | | More Than Three Year Through Five Years | | Over Five Years |
Commitments to extend credit | | $ | 247,495 |
| | $ | 70,337 |
| | $ | 141,269 |
| | $ | 4,051 |
| | $ | 31,838 |
| Commitments to extend credit | | $ | 80,093 | | | $ | 36,078 | | | $ | 36,785 | | | $ | 1,842 | | | $ | 5,388 | |
Unused lines of credit | | 905,115 |
| | 662,026 |
| | 93,301 |
| | 40,223 |
| | 109,565 |
| Unused lines of credit | | 1,392,215 | | | 1,225,270 | | | 70,385 | | | 52,710 | | | 43,850 | |
Standby letters of credit | | 10,249 |
| | 7,545 |
| | 2,152 |
| | 157 |
| | 395 |
| Standby letters of credit | | 3,579 | | | 3,258 | | | 210 | | | 111 | | | — | |
Total commitments | | $ | 1,162,859 |
| | $ | 739,908 |
| | $ | 236,722 |
| | $ | 44,431 |
| | $ | 141,798 |
| Total commitments | | $ | 1,475,887 | | | $ | 1,264,606 | | | $ | 107,380 | | | $ | 54,663 | | | $ | 49,238 | |
FHLB advances | | $ | 1,825,000 |
| | $ | 1,169,000 |
| | $ | 291,000 |
| | $ | 65,000 |
| | $ | 300,000 |
| FHLB advances | | $ | 624,000 | | | $ | 213,000 | | | $ | — | | | $ | 291,000 | | | $ | 120,000 | |
| Long-term debt | | 173,257 |
| | — |
| | — |
| | — |
| | 173,257 |
| Long-term debt | | 175,000 | | | — | | | — | | | 175,000 | | | — | |
Operating and capital lease obligations | | 28,469 |
| | 6,698 |
| | 14,381 |
| | 3,262 |
| | 4,128 |
| Operating and capital lease obligations | | 23,274 | | | 6,461 | | | 6,787 | | | 3,805 | | | 6,221 | |
Certificate of deposits | | 1,858,631 |
| | 1,607,151 |
| | 244,719 |
| | 6,761 |
| | — |
| Certificate of deposits | | 1,094,391 | | | 1,009,151 | | | 80,783 | | | 4,457 | | | — | |
Total contractual obligations | | $ | 3,885,357 |
| | $ | 2,782,849 |
| | $ | 550,100 |
| | $ | 75,023 |
| | $ | 477,385 |
| Total contractual obligations | | $ | 1,916,665 | | | $ | 1,228,612 | | | $ | 87,570 | | | $ | 474,262 | | | $ | 126,221 | |
During the three months ended March 31, 2017, the Bank entered into certain definitive agreements which grant the Bank the exclusive naming rights to Banc of California Stadium, a soccer stadium of 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 June 30, 2019, the Bank has paid $18.0 million of the $100.0 million commitment. The prepaid commitment balance, net of amortization, was $8.0 million as of June 30, 2019, which was recognized as a prepaid asset and included in Other Assets in the Consolidated Statements of Financial Condition. See Note 18 of Notes to Consolidated Financial Statements (unaudited) for additional information.
At June 30, 2019, the Company2020, we had unfunded commitments of $11.1$20.5 million, $7.6$7.1 million, and $4.3 million$501 thousand for affordable housing fund investments, SBIC investments, and other investments, including investments in alternative energy partnerships, respectively.
Capital
In order to maintain adequate levels of capital, the Companywe continuously assessesassess projected sources and uses of capital to support projected asset growth, operating needs and credit risk. The Company considers,We consider, among other things, earnings generated from operations and access to capital from financial markets. In addition, the Company performswe perform capital stress tests on an annual basis to assess the impact of adverse changes in the economy on the Company'sour capital base.
Regulatory Capital
The Company and the Bank are subject to the regulatory capital adequacy guidelines that are established by the Federal banking regulators. In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel III and to address relevant provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. The Company and the Bank became subject to the new rule on January 1, 2015 and certain provisions of the new rule were phased in through January 1, 2019. Inclusive of the fully phased-in capital conservation buffer, the common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%, respectively.
The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Minimum Capital Requirements | | | | Minimum Required to Be Well-Capitalized Under Prompt Corrective Action Provisions | | |
($ in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
June 30, 2020 | | | | | | | | | | | | |
Banc of California, Inc. | | | | | | | | | | | | |
Total risk-based capital | | $ | 884,558 | | | 16.35 | % | | $ | 432,780 | | | 8.00 | % | | N/A | | N/A |
Tier 1 risk-based capital | | 816,655 | | | 15.10 | % | | 324,585 | | | 6.00 | % | | N/A | | N/A |
Common equity tier 1 capital | | 631,618 | | | 11.68 | % | | 243,439 | | | 4.50 | % | | N/A | | N/A |
Tier 1 leverage | | 816,655 | | | 10.56 | % | | 309,388 | | | 4.00 | % | | N/A | | N/A |
Banc of California, NA | | | | | | | | | | | | |
Total risk-based capital | | $ | 981,477 | | | 18.17 | % | | $ | 432,124 | | | 8.00 | % | | $ | 540,155 | | | 10.00 | % |
Tier 1 risk-based capital | | 913,785 | | | 16.92 | % | | 324,093 | | | 6.00 | % | | 432,124 | | | 8.00 | % |
Common equity tier 1 capital | | 913,785 | | | 16.92 | % | | 243,070 | | | 4.50 | % | | 351,100 | | | 6.50 | % |
Tier 1 leverage | | 913,785 | | | 11.84 | % | | 308,586 | | | 4.00 | % | | 385,732 | | | 5.00 | % |
December 31, 2019 | | | | | | | | | | | | |
Banc of California, Inc. | | | | | | | | | | | | |
Total risk-based capital | | $ | 921,892 | | | 15.90 | % | | $ | 463,950 | | | 8.00 | % | | N/A | | N/A |
Tier 1 risk-based capital | | 860,179 | | | 14.83 | % | | 347,963 | | | 6.00 | % | | N/A | | N/A |
Common equity tier 1 capital | | 670,355 | | | 11.56 | % | | 260,972 | | | 4.50 | % | | N/A | | N/A |
Tier 1 leverage | | 860,179 | | | 10.89 | % | | 315,825 | | | 4.00 | % | | N/A | | N/A |
Banc of California, NA | | | | | | | | | | | | |
Total risk-based capital | | $ | 1,007,762 | | | 17.46 | % | | $ | 461,843 | | | 8.00 | % | | $ | 577,304 | | | 10.00 | % |
Tier 1 risk-based capital | | 946,049 | | | 16.39 | % | | 346,382 | | | 6.00 | % | | 461,843 | | | 8.00 | % |
Common equity tier 1 capital | | 946,049 | | | 16.39 | % | | 259,787 | | | 4.50 | % | | 375,247 | | | 6.50 | % |
Tier 1 leverage | | 946,049 | | | 12.02 | % | | 314,707 | | | 4.00 | % | | 393,383 | | | 5.00 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Minimum Capital Requirements | | Minimum Required to Be Well-Capitalized Under Prompt Corrective Action Provisions |
($ in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
June 30, 2019 | | | | | | | | | | | | |
Banc of California, Inc. | | | | | | | | | | | | |
Total risk-based capital | | $ | 983,254 |
| | 15.00 | % | | $ | 524,366 |
| | 8.00 | % | | N/A |
| | N/A |
|
Tier 1 risk-based capital | | 919,436 |
| | 14.03 | % | | 393,274 |
| | 6.00 | % | | N/A |
| | N/A |
|
Common equity tier 1 capital | | 688,308 |
| | 10.50 | % | | 294,956 |
| | 4.50 | % | | N/A |
| | N/A |
|
Tier 1 leverage | | 919,436 |
| | 9.62 | % | | 382,152 |
| | 4.00 | % | | N/A |
| | N/A |
|
Banc of California, NA | | | | | | | | | | | | |
Total risk-based capital | | $ | 1,094,864 |
| | 16.70 | % | | $ | 524,349 |
| | 8.00 | % | | $ | 655,436 |
| | 10.00 | % |
Tier 1 risk-based capital | | 1,031,046 |
| | 15.73 | % | | 393,262 |
| | 6.00 | % | | 524,349 |
| | 8.00 | % |
Common equity tier 1 capital | | 1,031,046 |
| | 15.73 | % | | 294,946 |
| | 4.50 | % | | 426,033 |
| | 6.50 | % |
Tier 1 leverage | | 1,031,046 |
| | 10.80 | % | | 381,907 |
| | 4.00 | % | | 477,384 |
| | 5.00 | % |
December 31, 2018 | | | | | | | | | | | | |
Banc of California, Inc. | | | | | | | | | | | | |
Total risk-based capital | | $ | 977,342 |
| | 13.71 | % | | $ | 570,368 |
| | 8.00 | % | | N/A |
| | N/A |
|
Tier 1 risk-based capital | | 910,528 |
| | 12.77 | % | | 427,776 |
| | 6.00 | % | | N/A |
| | N/A |
|
Common equity tier 1 capital | | 679,400 |
| | 9.53 | % | | 320,832 |
| | 4.50 | % | | N/A |
| | N/A |
|
Tier 1 leverage | | 910,528 |
| | 8.95 | % | | 407,145 |
| | 4.00 | % | | N/A |
| | N/A |
|
Banc of California, NA | | | | | | | | | | | | |
Total risk-based capital | | $ | 1,120,122 |
| | 15.71 | % | | $ | 570,832 |
| | 8.00 | % | | $ | 712,977 |
| | 10.00 | % |
Tier 1 risk-based capital | | 1,053,308 |
| | 14.77 | % | | 427,786 |
| | 6.00 | % | | 570,382 |
| | 8.00 | % |
Common equity tier 1 capital | | 1,053,308 |
| | 14.77 | % | | 320,840 |
| | 4.50 | % | | 463,435 |
| | 6.50 | % |
Tier 1 leverage | | 1,053,308 |
| | 10.36 | % | | 406,694 |
| | 4.00 | % | | 508,368 |
| | 5.00 | % |
Dividend Restrictions
Pursuant to the Dodd-Frank Act and regulations adoptedPayment of dividends by the federal banking regulators,Company are subject to guidance provided by the Federal Reserve. That guidance provides that bank holding companies that plan to pay dividends that exceed net earnings for a given period should first consult with the Federal Reserve. Because the Company’s current and, banks with average total consolidated assets greater than $10 billion were requiredfor the near term, future quarterly dividends are expected to conduct an annual “stress test”exceed the applicable quarterly net earnings, payment of capital and consolidated earnings and losses under the baseline, adverse and severely adverse scenarios provided by the federal banking regulators. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”) was signed into law, which amended portionsdividends in respect of the Dodd-Frank ActCompany’s common and immediately raised the asset threshold for company-run stress testing from $10 billion to $100 billion for bank holding companies. As a result, the Company is no longerpreferred stock will be subject to prior consultation and non-objection from the Dodd-Frank Act company-run stress testing requirements. On July 6, 2018, the federal banking regulators issued an interagency statement that banks with less than $100 billion in total consolidated assets, including the Bank, would not be required to comply with company-run stress testing requirements until November 25, 2019, at which time such banks will become exempt from company-run stress testing requirements under the Economic Growth Act. In addition, the federal banking regulators have each proposed to amend their stress testing regulations consistent with the Economic Growth Act. The federal banking regulators noted in their July 6, 2018 interagency statement that the capital planning and risk management practices of banks with assets less than $100 billion will continue to be reviewed through the regular supervisory process.Federal Reserve.
Dividend Restrictions
The Company’sOur 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. At June 30, 2019, the Bank had $37.9 million available to pay dividends to the Company without prior OCC approval. However,Accordingly, any dividend granted 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. In additionAs described below, any near term dividend by the Bank will require OCC approval. During the three and six months ended June 30, 2020, the Bank received approval from the OCC and paid $25.0 million in dividends to dividends on its preferred stock,Banc of California, Inc.
During the Companythree and six months ended June 30, 2020, we declared and paid dividends on itsour common stock of $0.06 and $0.12 per share for the three months ended June 30, 2019. Duringin addition to dividends on our preferred stock. Last year, in April 2019, the Company’sour Board of Directors approved a plan to reduce the quarterly dividend from $0.13 to $0.06 per common share. The Bank paid dividends
ITEM 3 — 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 asset/liability committees 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 asset/liability committee (Management ALCO)(“Management ALCO”), comprised of select members of senior management, and a joint asset/liability committee of the Boards of Directors of the Company and the Bank (Board ALCO,(“Board ALCO”, together with Management ALCO, ALCOs)“ALCOs”). In order to manage the risk of potential adverse effects of material and prolonged or volatile 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 periodicallyno less than quarterly 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,
•Selling longer duration fixed or hybrid 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 the Company’sour interest rate risk position within the asset/liability tolerance set forth by the Company'sour Board of Directors.
As part of its 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.
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 the Asset Liability Management 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 June 30, 2020, our interest rate risk profile reflects an “asset sensitive” position. 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.
The following table presents the projected change in the Bank’s net portfolioeconomic value of equity at June 30, 20192020 and net interest income over the next twelve months, 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:
| | | | Change in Interest Rates in Basis Points (bps) (1) | | Change in Interest Rates in Basis Points (bps) (1) | |
($ in thousands) | | Economic Value of Equity | | Net Interest Income | ($ in thousands) | | Economic Value of Equity | | | Net Interest Income | |
| Amount | | Amount Change | | Percentage Change | | Amount | | Amount Change | | Percentage Change | | | Amount | | Amount Change | | Percentage Change | | Amount | | Amount Change | | Percentage Change |
June 30, 2019 | | | | | | | | | | | | | |
June 30, 2020 | | June 30, 2020 | | | | | | | | | | | | |
+200 bps | | $ | 950,343 |
| | $ | (81,382 | ) | | (7.9 | )% | | $ | 248,094 |
| | $ | (5,222 | ) | | (2.1 | )% | +200 bps | | $ | 1,332,616 | | | $ | 196,900 | | | 17.3 | % | | $ | 222,391 | | | $ | 14,467 | | | 7.0 | % |
+100 bps | | 993,723 |
| | (38,002 | ) | | (3.7 | )% | | 250,850 |
| | (2,466 | ) | | (1.0 | )% | +100 bps | | 1,249,336 | | | 113,620 | | | 10.0 | % | | 215,258 | | | 7,334 | | | 3.5 | % |
0 bp | | 1,031,725 |
| | | | | | 253,316 |
| | | | | |
0 bps | | 0 bps | | 1,135,716 | | | 207,924 | | |
-100 bps | | 1,063,721 |
| | 31,996 |
| | 3.1 | % | | 255,645 |
| | 2,329 |
| | 0.9 | % | -100 bps | | 1,024,455 | | | (111,261) | | | (9.8) | % | | 205,107 | | | (2,817) | | | (1.4) | % |
| |
(1) | Assumes an instantaneous uniform change in interest rates at all maturities. |
(1)Assumes an instantaneous uniform change in interest rates at all maturities and no rate shock has a rate lower than zero percent.
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 the Company.us. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of the Company’sour business activities and operations.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Act) as of June 30, 20192020 was carried out under the supervision and with the participation of the Company’s Principal Executive Officer, Principal Financial Officer and other members of the Company’s senior management. The Company’s Principal Executive Officer and Principal Financial Officer concluded that, as of June 30, 2019,2020, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the 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.
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the three months ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
PART II — OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time to time we are involved as plaintiff or defendant in various legal actions arising in the normal course of business.
On January 23, 2017, the first of three putative class action lawsuits, Garcia v. Banc of California, Inc. et al., Case No. 8:17-cv-00118, was filed against Banc of California, James J. McKinney, Ronald J. Nicolas, Jr., and Steven A. Sugarman in the United States District Court for the Central District of California. Thereafter, two related putative class action lawsuits were filed in the United States District Court for the Central District of California: (1) Malak v. Banc of California, Inc. et al., Case No. 8:17-cv-00138 (January 26, 2017), asserting claims against Banc of California, Inc., James J. McKinney, and Steven A. Sugarman, and (2) Cardona v. Banc of California, Inc. et al., Case No. 2:17-cv-00621 (January 26, 2017), asserting claims against Banc of California, Inc., James J. McKinney, Ronald J. Nicolas, Jr., and Steven A. Sugarman. Those actions were consolidated, a lead plaintiff was appointed, and the lead plaintiff filed a Consolidated Amended Complaint against Banc of California, Inc., Steve A. Sugarman and James J. McKinney on May 31, 2017 alleging that the defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
In general, the Consolidated Amended Complaint alleges that the purported concealment of the defendants’ alleged relationship with Jason Galanis caused various statements made by the defendants to be false and misleading. The defendants moved to dismiss the Consolidated Amended Complaint. The plaintiff thereafter dismissed Mr. McKinney, leaving the Company and Mr. Sugarman as the remaining defendants. On September 18, 2017, the district court granted in part and denied in part the defendants’ motions to dismiss. Specifically, the court denied the defendants’ motions as to the Company’s April 15, 2016 Proxy Statement which listed Mr. Sugarman’s positions with COR Securities Holdings Inc., COR Clearing LLC, and COR Capital LLC while omitting their alleged connections with Jason Galanis. The action purports to be brought on behalf of stockholders who purchased stock in the Company between varying dates, inclusive of August 7, 2015 through January 23, 2017. Plaintiff seeks an award of unspecified compensatory and punitive damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On May 31, 2018, the court certified a class of shareholders who purchased Company stock between April 15, 2016 and January 20, 2017. Trial is currently set for February 18, 2020. The Company believes that the consolidated action is without merit and intends to vigorously contest it.
On August 15, 2017, COR Securities Holdings, Inc., and COR Clearing LLC filed an action in the United States District Court for the Central District of California, captioned COR Securities Holdings, Inc., et al. v. Banc of California, N.A., et al., Case No. 8:17-cv-01403 (DOC JCGx), against the Bank and Hugh F. Boyle, the Company’s and the Bank’s Chief Risk Officer. The lawsuit asserts claims under various state and federal statutes related to computer fraud and abuse, as well as a claim of common law fraud. The plaintiffs allege that the Bank inappropriately gained access to their confidential and privileged documents on a cloud storage site. The parties settled this action for an immaterial amount and it has been dismissed with prejudice.
On December 7, 2017, Heather Endresen filed an action in the Los Angeles Superior Court, captioned Heather Endresen v. Banc of California, Inc.; Banc of California, N.A., Case No. BC685641. Ms. Endresen’s complaint purports to state claims for retaliation, wrongful termination, breach of contract, breach of the implied covenant of good faith and fair dealing, and various statutory claims. Ms. Endresen dismissed the action without prejudice. On May 23, 2018, Ms. Endresen filed an action in the United States District Court for the Central District of California, captioned Heather Endresen v. Banc of California, Inc. and Banc of California, N.A., Case No. 8:18-cv-00899, asserting the claims she had made in the state court action and adding a claim for violation of the Sarbanes-Oxley Act. The complaint does not specify any amount of alleged damages. On August 22, 2018, Banc of California, Inc. and Banc of California, N.A. moved to compel arbitration of all of Ms. Endresen’s claims except for the Sarbanes-Oxley Act claim, pursuant to Ms. Endresen’s binding arbitration agreement. On September 20, 2018, the court granted the motion to compel arbitration and stayed the litigation on the Sarbanes-Oxley Act claim pending arbitration. Ms. Endresen has commenced arbitration. The Company believes that the claims are without merit and intends to vigorously contest them.
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 Schel,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. AlthoughOn September 23, 2019, the parties have discussedCourt, ordered that the possible consolidation of theseGordon, Johnston, and Witmer actions the actions have not yet beenare consolidated at the present time.for all purposes, including pre-trial proceedings and trial. On November 22, 2019, plaintiffs filed a consolidated complaint. The Company’s motion to dismiss is currently due on August 14, 2020.
In general, all three shareholder derivative plaintiffs allegethe consolidated complaint alleges that the Company’sour board wrongfully refused demands that the plaintiffs made to the Company’sour board of directors that the Companywe should initiate litigation against the various current and former officers and directors based on their alleged role in the purported concealment of the Company’sCompany'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. The Company doesWe do not believe that the demands made by these shareholder derivative plaintiffs were wrongfully refused, and it intendswe intend to vigorously contest these actions on that basis.
ITEM 1A - RISK FACTORS
There have been no material changes to the risk factors that appeared under “PartPart I, Item 1A. Risk“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019 and Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
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| | | | | | | | | | | | | |
| | Purchase of Equity Securities by the Issuer | | |
| | Total Number of Shares | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Total Number of Shares That May Yet be Purchased Under the Plan |
From April 1, 2019 to April 30, 2019 | | 49,009 |
| | $ | 14.07 |
| | — |
| | — |
|
From May 1, 2019 to May 31, 2019 | | 2,843 |
| | $ | 13.45 |
| | — |
| | — |
|
From June 1, 2019 to June 30, 2019 | | 5,114 |
| | $ | 13.63 |
| | — |
| | — |
|
Total | | 56,966 |
| | $ | 14.00 |
| | — |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Purchase of Equity Securities by the Issuer | | | | | | |
| | Total Number of Shares | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Total Number of Shares That May Yet be Purchased Under the Plan |
Common Stock: | | | | | | | | |
From April 1, 2020 to April 30, 2020 | | 47,939 | | | $ | 8.19 | | | — | | | — | |
From May 1, 2020 to May 31, 2020 | | 2,188 | | | $ | 11.40 | | | — | | | — | |
From June 1, 2020 to June 30, 2020 | | 7,610 | | | $ | 10.62 | | | — | | | — | |
Total | | 57,737 | | | $ | 8.63 | | | — | | | — | |
| | | | | | | | |
Preferred Stock (Depositary Shares): | | | | | | | | |
From April 1, 2020 to April 30, 2020 | | 94,813 | | | $ | 23.39 | | | — | | | — | |
From May 1, 2020 to May 31, 2020 | | 12,269 | | | $ | 24.80 | | | — | | | — | |
From June 1, 2020 to June 30, 2020 | | 2,989 | | | $ | 24.97 | | | — | | | — | |
Total | | 110,071 | | | $ | 23.59 | | | — | | | — | |
During the three months ended June 30, 2019,2020, purchases of shares of common stock related to shares surrendered by employees in order to pay employee tax liabilities associated with vested awards under the Company'sour employee stock benefit plans. There were no purchases of shares of common stock during the three months ended June 30, 2020 related to the Company's previously announced stock repurchase program discussed below.
On February 10, 2020, we announced a repurchase program of up to $45 million of our common stock. The repurchase authorization expires in February 2021. Purchases may be made in open-market transactions, in block transactions on or off an exchange, in privately negotiated transactions or by other means as determined by our management and in accordance with the regulations of the Securities and Exchange Commission. The timing of purchases and the number of shares repurchased under the program will depend on a variety of factors including price, trading volume, corporate and regulatory requirements and market conditions.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable
ITEM 5 - OTHER INFORMATION
Rita H. Dailey’s, EVP, HeadNone
ITEM 6 - EXHIBITS
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101.0 | The following financial statements and footnotes from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 20192020 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Income;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. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | | BANC OF CALIFORNIA, INC. |
| | | |
Date: | August 7, 2020 | | BANC OF CALIFORNIA, INC. |
| | | |
Date: | August 9, 2019 | | /s/ Jared Wolff |
| | | Jared Wolff |
| | | President/Chief Executive Officer (Principal Executive Officer) |
| | | |
Date: | August 9, 20197, 2020 | | /s/ John A. BoglerLynn M. Hopkins |
| | | John A. BoglerLynn M. Hopkins |
| | | Executive Vice President/Chief Financial Officer
(Principal Financial Officer) |
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Date: | | | |
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Date: | August 9, 20197, 2020 | | /s/ Mike Smith |
| | | Mike Smith |
| | | Senior Vice President/Chief Accounting Officer and Director of Treasury (Principal Accounting Officer) |