BANC OF CALIFORNIA, INC. 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 endedJune 30, 2020 . This analysis should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2019 and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period endedJune 30, 2020 . CRITICAL ACCOUNTING POLICIES Our consolidated financial statements are prepared in accordance with GAAP and general practices within the banking industry. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, we have established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. Our 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 endedDecember 31, 2019 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 OnJanuary 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 atDecember 31, 2019 , and represented 1.14% of total loans. AtJune 30, 2020 , the ACL totaled$94.6 million resulting in an ACL to total loans coverage ratio of 1.68%, up from 1.04% atDecember 31, 2019 . Excluding PPP loans, the ACL to total loans coverage ratio was 1.76% atJune 30, 2020 . The ACL and provision for credit losses include amounts for the reserve for unfunded loan commitments. Recent Accounting Pronouncements Not Yet Adopted Our recent accounting pronouncements not yet adopted are described in Note 1 to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 and in Note 1 Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q. Executive Overview We are focused on providing core banking products and services, including customized and innovative banking and lending solutions, designed to cater to the unique needs ofCalifornia's diverse businesses, entrepreneurs and communities through our 31 full service branches inOrange ,Los Angeles ,San Diego , andSanta Barbara Counties. Through our over 600 dedicated professionals, we are committed to servicing and building enduring relationships by providing a higher standard of banking. We offer a variety of financial products and services designed around our target clients in order to serve all of their banking and financial needs. We continue to focus on three main initiatives designed to improve our franchise and profitability on an ongoing basis: reducing our cost of deposits while adding value, optimizing the balance sheet to focus on higher-margin products while managing credit risk, and appropriately managing down expenses to the size and complexity of the business. Through these efforts, we continue to transform our franchise into a relationship-focused community bank, maintaining our credit quality and serving businesses, entrepreneurs and individuals within our footprint. Financial Highlights For the three months endedJune 30, 2020 and 2019, net (loss) income was$(18.4) million and$16.6 million . Diluted (loss) earnings from operations per common share were$(0.44) and$0.23 for the three months endedJune 30, 2020 and 2019. Financial results for the second quarter of 2020 included a one-time pre-tax charge of$26.8 million related to the restructuring of the Company's relationship with theLos Angeles Football Club ("LAFC"). The restructuring of the relationship will result in estimated pre-tax cost savings of approximately$89 million over the next 12.5 years, or approximately$7.1 million per year. Significant financial highlights during the three months endedJune 30, 2020 included: 46 -------------------------------------------------------------------------------- Table of Contents •Noninterest-bearing deposit balances increased$135.4 million during the quarter and represented 23% of total deposits atJune 30, 2020 , up from 16% a year earlier •Total checking balances increased$409.7 million during the quarter and represented 54% of total deposits atJune 30, 2020 , up from 40% a year earlier •Net interest margin increased 12 basis points from the prior quarter to 3.09% •Average cost of deposits declined 40 basis points from the prior quarter to 0.71% •Allowance for credit losses strengthened to 1.68% of total loans •Common Equity Tier 1 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 OnMarch 27, 2020 , theU.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 throughJune 30, 2020 . The program has been extended throughAugust 8, 2020 . The loans are 100% guaranteed by theSmall 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 this program in support of our clients and others seeking financial relief under the program. As ofJune 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 endedJune 30, 2020 , we collected$7.5 million in fees on the 1,069 PPP loans funded, which will be recognized over their estimated life of nine months. We have started the loan forgiveness process with a number of clients and we expect this will be complete early next year. Borrower Payment Relief Efforts We are committed to supporting our existing borrowers and customers during this period of economic uncertainty. We actively engaged with our borrowers seeking payment relief and waived certain fees for impacted clients. One method we deployed was to offer forbearance and deferments to qualified clients. For single family residential ("SFR") loans, the forbearance period is 90 days in length and is patterned after theU.S. Department of Housing and Urban Development ("HUD") guidelines where applicable. With respect to our non-SFR loan portfolio, deferments are 90 days in length. Many of our deferred loans have recently reached the expiration of their initial 90-day deferral period and we are reviewing their current financial condition as we evaluate extension requests of deferral periods. For those commercial borrowers that demonstrate a continuing need for a deferral, we generally expect to obtain credit enhancements such as additional collateral, personal guarantees, and/or reserve requirements in order to grant an additional deferral period. We expect the legacy SFR loans to continue with a higher percentage of forbearances due to the applicable consumer regulations, however, the SFR portfolio is well secured with an average portfolio LTV below 70%. For a discussion of the related risk factors, please refer to Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . 47 -------------------------------------------------------------------------------- Table of Contents The following table presents the composition of our loan portfolio for borrowers that received payment relief as ofJune 30, 2020 : Deferment & Forbearances(1)(2) June 30, 2020 % of ($ in thousands) Number of Loans Amount(1)(2) 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 ofJuly 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 ofJuly 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
Other Efforts To support our community, we partnered with Food Finders to provide over 300,000 meals to our most vulnerable neighbors inSouthern California . We also made a donation to theLos Angeles Fire Department to help supply critical personal protective equipment to these first-responders. We developed online financial literacy classes for young adults and we sponsored five LAFC blood drives in partnership with theAmerican Red Cross and Banc ofCalifornia Stadium . Termination of LAFC Agreement OnMay 22, 2020 , we entered into an agreement (the "Termination Agreement") with theLos 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 ofCalifornia 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 fromJanuary 1, 2018 throughMay 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 onDecember 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 . 48 -------------------------------------------------------------------------------- Table of Contents 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$7.1 million per year, over the remaining 12 ½ year life of the original LAFC Agreements. 49 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Net Interest Income The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates for the three months endedJune 30, 2020 ,March 31, 2020 andJune 30, 2019 : Three Months EndedJune 30, 2020 March 31, 2020 June 30, 2019 Interest and Interest and Yield/ Interest and ($ in thousands) Average Balance Dividends Yield/Cost Average Balance Dividends Cost Average Balance 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
$ 7,562,942 $ 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 endedJune 30, 2020 ,March 31, 2020 andJune 30, 2019 , respectively, are included in interest income. 50 -------------------------------------------------------------------------------- Table of Contents (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$110.4 million ,$110.0 million and$107.8 million for the three months endedJune 30, 2020 ,March 31, 2020 andJune 30, 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. Three Months EndedJune 30, 2020 Compared to Three Months EndedMarch 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 theFederal Reserve inMarch 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 theFederal Reserve inMarch 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 EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Net interest income was$55.3 million for the three months endedJune 30, 2020 , a decrease of$9.5 million , or 14.6%, from$64.8 million for the three months endedJune 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 endedJune 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 endedJune 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 endedJune 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 51 -------------------------------------------------------------------------------- Table of Contents securities. Our average yield on loans was 4.48% for the three months endedJune 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 theFederal 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 endedJune 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 endedJune 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 theFederal Reserve and a lower reliance on brokered deposits. Additionally, average noninterest-bearing deposits increased by$315.5 million when compared to the same 2019 period. Our cost of average total deposits decreased 91 basis points to 0.71% for the three months endedJune 30, 2020 when compared to the same 2019 period due to the lower cost of interest-bearing deposits and a higher mix of noninterest-bearing deposits. Average noninterest-bearing deposits represented 23.4% of total average deposits for the three months endedJune 30, 2020 compared to 14.6% of total average deposits for the first quarter of 2019. The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the six months endedJune 30, 2020 and 2019: 52
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Table of Contents
Six Months Ended June 30,
2020 2019
Interest and Interest and
($ in thousands) Average Balance Dividends Yield/Cost Average Balance 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 deferred loan fees (costs) of$553 thousand and$(83) thousand and accretion of discount on purchased loans of$355 thousand and$125 thousand for the six months endedJune 30, 2020 and 2019, respectively, are included in interest income. (2)Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions. 53 -------------------------------------------------------------------------------- Table of Contents (3)Includes average balance of bank-owned life insurance of$110.2 million and$107.5 million for the six months endedJune 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 EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 Net interest income for the six months endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 endedJune 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 theFederal Reserve and a lower reliance on brokered deposits. Additionally, average noninterest-bearing deposits increased by$213.5 million when compared to the same 2019 period. Our cost of average total deposits decreased 74 basis points to 0.90% for the six months endedJune 30, 2020 when compared to the same 2019 period due to the lower cost of interest-bearing deposits and higher noninterest-bearing deposits. Average noninterest-bearing deposits represented 22.4% of total average deposits for the six months endedJune 30, 2020 compared to 14.0% of total average deposits for the same 2019 period. 54 -------------------------------------------------------------------------------- Table of Contents Rate/Volume Analysis The following table presents the changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities. The information provided presents the changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. Three Months Ended Six Months EndedJune 30, 2020 vs. 2019June 30, 2020 vs. 2019 Increase (Decrease) Due to Net Increase Increase (Decrease) Due to Net ($ In thousands) Volume Rate (Decrease) Volume Rate Increase (Decrease) Interest and dividend income: Total loans$ (19,848) $ (5,669) $ (25,517) $ (41,270) $ (9,271) $ (50,541) Securities (2,068) (2,573) (4,641) (8,897) (5,765) (14,662) Other interest-earning assets 480 (1,665) (1,185) 379 (2,517) (2,138) Total interest and dividend income$ (21,436) $ (9,907) $ (31,343) $ (49,788) $ (17,553) $ (67,341) Interest expense: Savings$ (728) $ (1,504) $ (2,232) $ (1,965) $ (2,451) $ (4,416) Interest-bearing checking 351 (2,719) (2,368) 272 (3,436) (3,164) Money market (942) (2,110) (3,052) (1,993) (3,428) (5,421) Certificates of deposit (6,161) (4,580) (10,741) (15,186) (7,038) (22,224) FHLB advances (2,837) (634) (3,471) (5,007) (1,662) (6,669) Securities sold under repurchase agreements (6) (8) (14) (16) (16) (32) Long-term debt and other interest-bearing liabilities (2) 2 - (1) (2) (3) Total interest expense (10,325)
(11,553) (21,878) (23,896) (18,033) (41,929)
Net interest income $ (11,111) $ 1,646 $ (9,465) $ (25,892) $ 480 $ (25,412)
Provision for (Reversal of) Credit Losses
The provision for (reversal of) credit losses is charged to operations to adjust
the allowance for credit losses to the level required to cover current estimated
credit losses 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,
June 30, March 31, June 30,
($ in thousands) 2020 2020 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
55-------------------------------------------------------------------------------- Table of Contents 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 endedJune 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 endedJune 30, 2020 , compared to provision reversal of$327 thousand during the six months endedJune 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 an increase in specific reserves, partially offset by lower period end loan balances of$1.09 billion as compared toJune 30, 2019 . See further discussion in "Allowance for Credit Losses." Noninterest Income (Loss) The following table presents the components of noninterest income for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, March 31, June 30, ($ in thousands) 2020 2020 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)
Three Months EndedJune 30, 2020 Compared to Three Months EndedMarch 31, 2020 Noninterest income was$5.5 million for the three months endedJune 30, 2020 ; an increase of$3.5 million , or 168.2%, from$2.1 million for the three months endedMarch 31, 2020 . The increase was primarily due to a gain on the sale of securities of$2.0 million compared to$0 in the prior quarter and lower net unrealized losses of$1.6 million for the change in fair value adjustment on loans held-for sale. During the three months endedJune 30, 2020 , we sold$20.7 million 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 endedJune 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 EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Noninterest income was$5.5 million for the three months endedJune 30, 2020 , an increase of$7.8 million , or 341.4%, from$(2.3) million for the three months endedJune 30, 2019 . The increase in noninterest income during the three months endedJune 30, 2020 was mainly due to the aforementioned 2020 sale of securities and the 2019 second 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 endedJune 30, 2020 due mostly to lower borrower loan fees, such as extension and exit fees, offset by higher deposit-related transactional fees. Net gains on sale of securities available-for-sale increased to$2.0 million during the three months endedJune 30, 2020 from zero during the three months endedJune 30, 2019 . The increase between periods was due to the aforementioned$20.7 million 56 -------------------------------------------------------------------------------- Table of Contents sale of securities during the three months endedJune 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 endedJune 30, 2020 compared to$2.8 million during the comparable 2019 period. There were no sales of loans during the second 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 . Other income was$1.6 million for the three months endedJune 30, 2020 , compared to a loss of$7.3 million in the comparable 2019 period. The$8.8 million decrease was primarily attributable to the 2019 period including the aforementioned$9.6 million unrealized loss from interest rate swap agreements entered into in order to offset variability in the fair value of the Freddie Mac securitization completed during the third quarter of 2019. Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 Noninterest income was$7.6 million for the six months endedJune 30, 2020 , an increase of$3.6 million , or 89.5%, from$4.0 million for the six months endedJune 30, 2019 . The increase in noninterest income was mainly due to the$1.8 million 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 of between periods of$4.3 million . Customer service fees decreased$629 thousand , or 21.3%, during the three months endedJune 30, 2020 due mostly to lower borrower loan fees, such as extension and exit fees. Net gain on sale of securities available-for-sale was$2.0 million for the six months endedJune 30, 2020 , compared to$208 thousand for the six months endedJune 30, 2019 . During the six months endedJune 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 endedJune 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 endedJune 30, 2020 , compared to a gain of$4.3 million for the six months endedJune 30, 2019 . There were no sales of loans during the six months endedJune 30, 2020 . During the six months endedJune 30, 2019 , we 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 . Other income (loss) was$3.5 million for the six months endedJune 30, 2020 , compared to$(4.9) million for the six months endedJune 30, 2019 . The$8.4 million increase was primarily attributable to the aforementioned$9.6 million unrealized loss from interest rate swap agreements entered into in order to offset variability in the fair value of the Freddie Mac securitization completed during the third quarter of 2019, offset by lower sublease income of$312 thousand . 57 -------------------------------------------------------------------------------- Table of Contents Noninterest Expense The following table presents the breakdown of noninterest expense for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, March 31, June 30, ($ in thousands) 2020 2020 2019 2020 2019 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 1,157 1,756 2,048 2,913 4,105 Regulatory assessments 725 484 2,136 1,209 4,618 Reversal of provision for loan repurchases (34) (600) (61) (634) (177) Amortization of intangible assets 430 429 621 859 1,241 Restructuring expense - - (158) - 2,637 All other expense 6,408 4,529 5,039 10,937 8,838 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 (167) 1,905 (355) 1,738 1,595 Total noninterest expense$ 72,770 $ 46,919 $ 43,500 $ 119,689 $ 105,749 Three Months EndedJune 30, 2020 Compared to Three Months EndedMarch 31, 2020 Noninterest expense was$72.8 million for the three months endedJune 30, 2020 , an increase of$25.9 million , or 55.1%, from$46.9 million for the three months endedMarch 31, 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 endedJune 30, 2020 , a decrease of$1.4 million , or 22.9%, from$6.0 million for the three months endedMarch 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 endedJune 30, 2020 , a decrease of$599 thousand , or 34.1%, from$1.8 million for the three months endedMarch 31, 2020 . The decrease was mainly due to reductions in overall events and media spending due, in part, to the termination of the LAFC Agreement onMay 22, 2020 . Refer to the earlier discussion in the "Termination of LAFC Agreement" section. Regulatory assessments were$725 thousand for the three months endedJune 30, 2020 , an increase of$241 thousand , or 49.8%, from$484 thousand for the three months endedMarch 31, 2020 . The increase was mainly due to the first quarter of 2020 having aFDIC 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 totaled$34 thousand for the three months endedJune 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. 58 -------------------------------------------------------------------------------- Table of Contents The (gain) loss on investments in alternative energy partnerships was a gain of$167 thousand for the three months endedJune 30, 2020 , an increase of$2.1 million , from a loss of$1.9 million for the three months endedMarch 31, 2020 . The gain between periods was mainly due to decreased loss sharing allocations and resulting lower HLBV losses. All other expense for the three months endedJune 30, 2020 increased$1.9 million or 41.5%, to$6.4 million from$4.5 million for the three months endedMarch 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 endedJune 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 endedMarch 31, 2020 included an$850 thousand charge to settle and conclude a legacy loan sale claim from an acquired bank. Three Months EndedJune 30, 2020 Compared to Three Months EndedJune 30, 2019 Noninterest expense was$72.8 million for the three months endedJune 30, 2020 , an increase of$29.3 million , or 67.3%, from$43.5 million for the three months endedJune 30, 2019 . The increase was mainly due to the$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 of$3.2 million and lower regulatory assessments of$1.4 million . Salaries and employee benefits expense was$24.3 million for the three months endedJune 30, 2020 , a decrease of$3.2 million , or 11.8%, from$27.5 million for the three months endedJune 30, 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 endedJune 30, 2020 , a decrease of$865 thousand or 10.9% from$8.0 million for the three months endedJune 30, 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 endedJune 30, 2020 , an increase of$7.5 million , or 258.3%, from recoveries of$2.9 million for the three months endedJune 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 endedJune 30, 2020 , a decrease of$891 thousand , or 43.5%, from$2.0 million for the three months endedJune 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 onMay 22, 2020 . Regulatory assessments were$725 thousand for the three months endedJune 30, 2020 , a decrease of$1.4 million , or 66.1%, from$2.1 million for the three months endedJune 30, 2019 . The decrease was mainly due to a reduction in ourFDIC assessment rate given the decrease in our asset size. All other expense was$6.4 million for the three months endedJune 30, 2020 , an increase of$1.4 million , or 27.2%, from$5.0 million for the three months endedJune 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 endedJune 30, 2020 . Six Months EndedJune 30, 2020 Compared to Six Months EndedJune 30, 2019 Noninterest expense was$119.7 million for the six months endedJune 30, 2020 , an increase of$13.9 million , or 13.2%, from$105.7 million for the six months endedJune 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 endedJune 30, 2020 , a decrease of$8.2 million , or 14.7%, from$55.9 million for the six months endedJune 30, 2019 . The decrease was mainly due to decreases in number of employees, commissions, and temporary staff 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. 59 -------------------------------------------------------------------------------- Table of Contents Occupancy and equipment was$14.3 million for the three months endedJune 30, 2020 , a decrease of$1.3 million or 8.4% from$15.6 million for the six months endedJune 30, 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$10.6 million for the six months endedJune 30, 2020 , an increase of$2.4 million , or 29.8%, from$8.1 million for the six months endedJune 30, 2019 . The increase in fees was primarily the result of higher legal fees (net of recoveries of$2.5 million ) due to the timing of insurance recoveries related to securities litigation, indemnification, investigation and other legal expenses of$6.6 million , offset by lower other professional fees of$2.4 million . Advertising costs were$2.9 million for the six months endedJune 30, 2020 , a decrease of$1.2 million , or 29.0%, from$4.1 million for the six months endedJune 30, 2019 . The decrease was mainly due to overall reductions in reductions in overall events and media spending, as well as a decrease in advertising costs related to the now-terminated LAFC naming rights commitment. Advertising costs for the six months endedJune 30, 2020 included$2.6 million related to the now-terminated LAFC naming rights agreement compared to$3.3 million during six months endedJune 30, 2019 . Regulatory assessments were$1.2 million for the six months endedJune 30, 2020 , a decrease of$3.4 million , or 73.8%, from$4.6 million for the six months endedJune 30, 2019 . The decrease was mainly due to a reduction in ourFDIC assessment rate given the decrease in our asset size and anFDIC small bank assessment credit. Restructuring expense was zero for the six months endedJune 30, 2020 . For the six months endedJune 30, 2019 , restructuring expense was$2.6 million and consisted of severance and retention costs associated with our exit from the TPMO and brokered single family lending businesses and CEO transition during the first quarter of 2019. All other expenses were$10.9 million for the six months endedJune 30, 2020 , an increase of$2.1 million , or 23.7%, from$8.8 million for the six months endedJune 30, 2019 . The increase 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$157 thousand during the six months endedJune 30, 2020 . Offsetting these increases were overall expense reductions from our efforts to manage expenses on supplies, business travel, directors' fees, and other administrative expenditures. Income Tax (Benefit) Expense For the three months endedJune 30, 2020 ,March 31, 2020 andJune 30, 2019 , income tax (benefit) expense was$(5.3) million ,$(2.2) million , and$4.3 million , resulting in an effective tax rate of 22.3%, 24.7% and 20.6%. Our 22.3% effective tax rate for the three months endedJune 30, 2020 differs from the 21% federal statutory rate was 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 endedJune 30, 2020 and 2019, the income tax benefit was$7.5 million and the income tax expense was$7.0 million , resulting in an effective tax rate of 23.0% and 22.9%, respectively. We use the flow-through income statement method to account for the annual investment tax credits forecasted to be earned on the solar investments in our annual effective tax rate. Under this method, the investment tax credits are recognized as a reduction to income tax expense and the initial book-tax difference in the basis of the investments are recognized as additional tax expense in the year they are earned. For additional information, see Note 8 to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q. 60 -------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITIONInvestment Securities AtJune 30, 2020 , all of our investment securities were classified as available-for-sale. The primary goal of our investment securities portfolio is to provide a relatively stable source of interest income while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk, and interest rate risk. Certain investment securities provide a source of liquidity as collateral for FHLB advances, Federal Reserve Discount Window capacity, repurchase agreements, and certain public deposits. The following table presents the amortized cost and fair value of the investment securities portfolio and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated: June 30, 2020 December 31, 2019 Unrealized Unrealized ($ in thousands) Amortized Cost
Fair Value Gain (Loss) Amortized Cost Fair Value
Gain (Loss)
Securities available-for-sale:
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 199,262 201,136 1,874 91,543 91,299 (244)
Municipal securities 52,973 57,174 4,201 52,997 52,689 (308)
Non-agency residential mortgage-backed
securities 161 164 3 191 196 5
Collateralized loan obligations 703,605 668,353 (35,252) 733,605 718,361 (15,244)
Corporate debt securities 141,962 143,647 1,685 13,500 13,579 79
Total securities available-for-sale $ 1,198,091 $ 1,176,029 $ (22,062) $ 929,449 $ 912,580 $ (16,869)
Securities available-for-sale were $1.18 billion at June 30, 2020 , an increase
of $263.4 million , or 28.9%, from $912.6 million at December 31, 2019 . The
increase was mainly due to purchases of $322.6 million , including $174.0 million
in U.S. government agency securities and $148.6 million in corporate debt
securities, offset by a $30.0 million pay-off of one CLO holding, $20.7 million
in sales, and higher net unrealized losses of $5.2 million .
CLOs totaled $668.4 million and $718.4 million at June 30, 2020 and December 31,
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-rated to equity-grade tranches. At June 30, 2020 , all of our CLO
holdings were AAA and AA rated. We also perform pre-purchase due diligence and
ongoing credit quality review of our CLO holdings, which includes monitoring
performance factors such as external credit ratings, collateralization levels,
collateral concentration levels, and other performance factors. We only acquire
CLOs that we believe are Volcker Rule compliant.
We did not record credit impairment for any investment securities for the three
and six months ended June 30, 2020 or 2019. We monitor our securities portfolio
to ensure it has adequate credit support. As of June 30, 2020 , we believe there
was no credit impairment and we did not have the current intent to sell
securities with a fair value below amortized cost at June 30, 2020 , 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 credit impairment. As of June 30, 2020 ,
all of our investment securities in an unrealized loss position received an
investment grade credit rating. Credit spreads for CLOs widened during the first
quarter of 2020 and have narrowed during the second quarter. The overall net
decline in fair value during 2020 was attributable to a combination of changes
in interest rates and general volatility in the credit market conditions.
61
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The following table presents maturities, based on the earlier of maturity dates
or next repricing dates, and yield information of the investment securities
portfolio as of June 30, 2020 :
More than One Year through Five
One Year or Less Years More than Five Years through Ten Years More than Ten Years Total
Fair Weighted Fair Weighted Fair Weighted Fair Weighted Fair Weighted
($ in thousands) Value Average Yield Value Average Yield Value Average Yield Value Average Yield Value Average Yield
Securities available-for-sale:
U.S. government agency andU.S. government sponsored enterprise residential mortgage-backed securities $ - - % $ - - %$ 30,413 2.20 %$ 75,142 2.35 %$ 105,555 2.31 %U.S. government agency andU.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 % 62
-------------------------------------------------------------------------------- Table of Contents Loans Held-for-Sale Total loans held-for-sale carried at fair value were$19.8 million and$22.6 million , respectively, atJune 30, 2020 andDecember 31, 2019 and consisted mainly of repurchased conforming SFR mortgage loans that were previously sold and loans previously sold to GNMA that were delinquent more than 90 days and subject to a repurchase option by us. The$2.9 million , or 12.7%, decrease was mainly due to payoffs of$613 thousand and a decrease in fair value of$1.6 million . Loans Receivable, Net The following table presents the composition of our loan and lease portfolio as of the dates indicated: June 30, ($ in thousands) 2020 December 31, 2019 Amount Change Percentage Change Commercial: Commercial and industrial$ 1,436,990 $
1,691,270$ (254,280) (15.0) % Commercial real estate 822,694 818,817 3,877 0.5 % Multifamily 1,434,071 1,494,528 (60,457) (4.0) % SBA(1) 310,784 70,981 239,803 337.8 % Construction 212,979 231,350 (18,371) (7.9) % Consumer: Single family residential mortgage 1,370,785 1,590,774 (219,989) (13.8) % Other consumer 39,393 54,165 (14,772) (27.3) % Total loans(2) 5,627,696 5,951,885 (324,189) (5.4) % Allowance for loan losses (90,370) (57,649) (32,721) 56.8 % Total loans receivable, net$ 5,537,326 $ 5,894,236 $ (356,910) (6.1) % (1)Includes PPP loans totaling$240.7 million , which included$5.6 million of net unamortized loan fees atJune 30, 2020 . There were no PPP loans outstanding atDecember 31, 2019 . (2)Total loans include deferred loan origination costs/(fees) and premiums/(discounts), net of$6.0 million and$14.3 million , respectively, atJune 30, 2020 andDecember 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 was 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$239.8 million increase in SBA loans attributable to the funding of loans under the SBA's PPP. Our focus on processing PPP loans, in addition to the impact of the COVID-19, pandemic tempered other loan production; additionally, we did not experience any significant increase in credit line usage. We continue to remix our real estate loan portfolio toward relationship-based multifamily, bridge, light infill construction, and commercial real estate loans. Single family residential mortgage and multifamily loans comprised 49.9% of the total held-for-investment loan portfolio as compared to 53.0% one year ago. Commercial real estate loans comprised 14.6% of the loan portfolio and commercial and industrial loans constituted 25.5%. As ofJune 30, 2020 , loans secured by residential real estate (single family, multifamily, single family construction, and warehouse credit facilities) represent approximately 66% of our total loans outstanding. 63 -------------------------------------------------------------------------------- Table of Contents The C&I portfolio has limited exposure to certain business sectors undergoing severe stress, as demonstrated by the following (as a percentage of total outstanding C&I loan balances): June 30, 2020 ($ in thousands) Amount % of Portfolio C&I Portfolio by Industry
Finance and insurance (includes Warehouse lending)
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") Our NTM portfolio is comprised of three interest only products: Green Loans, Interest Only loans and a small number of additional loans with the potential for negative amortization. As ofJune 30, 2020 andDecember 31, 2019 , the NTM portfolio totaled$511.2 million , or 9.1% of the total gross loan portfolio, and$600.7 million , or 10.1% of the total gross loan portfolio. The total NTM portfolio decreased by$89.5 million , or 14.9% during the six months endedJune 30, 2020 . The decrease was primarily due to principal paydowns and payoffs. 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, which includes refreshing FICO scores on the Green Loans and HELOCs and ordering third party automated valuation models ("AVMs") to confirm collateral values. We no longer originate NTM loans. Green Loans totaled$45.2 million atJune 30, 2020 , a decrease of$7.1 million , or 13.5% from$52.3 million atDecember 31, 2019 , primarily due to principal paydowns and payoffs. The NTM loans on non-accrual status included$4.6 million of Green Loans and$14.6 million of interest-only loans atJune 30, 2020 compared to$1.5 million of Green Loans and$11.5 million of interest-only loans atDecember 31, 2019 . The following table presents our Green Loans first lien portfolio atJune 30, 2020 by FICO scores that were obtained during the quarter endedJune 30, 2020 , compared to the FICO scores for those same loans that were obtained during the quarter endedMarch 31, 2020 : By FICO Scores Obtained During the Quarter By FICO Scores Obtained During the Quarter EndedJune 30, 2020 EndedDecember 31, 2019 Change ($ 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) % 64
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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 our policy. The table below represents our single family
residential NTM first lien portfolio by LTV ratio 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 %
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Non-Performing Assets
The following table presents a summary of total non-performing assets, excluding
loans held-for-sale, as of the dates indicated:
June 30 , December 31,
($ in thousands) 2020 2019 Amount Change Percentage Change Loans past due 90 days or more still on accrual $ - $ - $ - - % Non-accrual loans 72,703 43,354 29,349 67.7 % Total non-performing loans 72,703 43,354 29,349 67.7 % Other real estate owned - - - - % Total non-performing assets$ 72,703 $ 43,354 $ 29,349 67.7 % Performing restructured loans (1)$ 5,597 $ 6,621 $ (1,024) (15.5) % Total non-performing loans to total loans 1.29 % 0.73 % Total non-performing assets to total assets 0.94 % 0.55 % ALL to non-performing loans 124.30 % 132.97 % 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$952 thousand and$1.7 million would have been recorded during the three and six months endedJune 30, 2020 , had these loans been paid in accordance with their original terms throughout the periods indicated. Non-performing loans totaled$72.7 million as ofJune 30, 2020 , of which$21.9 million , or 30% of the balance relates to loans in a current payment status. The$16.2 million increase during the second quarter was primarily due to$18.6 million of loans being placed on non-accrual status, 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 remaining non-performing loans totaled$16.4 million . Troubled Debt Restructurings Loans that we modify or restructure where the debtor is experiencing financial difficulties and makes a concession to the borrower in 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 are classified as troubled debt restructurings ("TDRs"). TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower's financial condition. A workout plan between a borrower and us is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated. AtJune 30, 2020 andDecember 31, 2019 , we had 26 and 25 loans, respectively, with an aggregate balance of$25.9 million and$21.8 million , respectively, classified as TDRs. When a loan becomes a TDR, we cease accruing interest, and classify it as non-accrual until the borrower demonstrates that the loan is again performing. The increase in TDRs during the three and six months endedJune 30, 2020 was primarily due to one commercial and industrial relationship totaling$3.7 million . AtJune 30, 2020 , of the 26 loans classified as TDRs, 12 loans totaling$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. AtDecember 31, 2019 , of the 25 loans classified as TDRs, 14 loans totaling$6.6 million were making payments according to their modified terms and were less than 90 days delinquent under the modified terms and, as such, were on accruing status. Troubled Debt Restructuring (TDR) Relief: UnderU.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 andU.S. banking regulatory agencies have provided relief 66 -------------------------------------------------------------------------------- Table of Contents 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 Credit Losses (ACL) 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 ofJune 30, 2020 , we used economic forecasts released by our model provider duringJune 2020 . Similar to the lateMarch 2020 forecasts, theseJune 2020 forecasts reflect the onset of the pandemic, 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. 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. In addition, we use 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. The ACL, which includes the reserve for unfunded loan commitments, totaled$94.6 million , or 1.68% of total loans atJune 30, 2020 compared to$82.1 million or 1.45% atMarch 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$608 thousand . The ACL coverage of non-performing loans was 130% atJune 30, 2020 compared to 145% atMarch 31, 2020 and 142% atDecember 31, 2019 . The reserve for unfunded loan commitments is established to cover the expected credit losses for the estimated level of funding of these loan commitments, except for unconditionally cancellable commitments for which no reserve is required under ASC 326. The reserve for unfunded loan commitments is included in accrued expenses and other liabilities on the consolidated statements of financial condition. The following table provides a summary of components of the allowance for credit losses and related ratios as of the dates indicated: ($ in thousands)June 30, 2020
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 %
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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 Allowance Allowance Allowance
for Reserve for Unfunded for for Reserve for Unfunded for
Loan Losses Loan Commitments Credit Losses Loan Losses Loan Commitments 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 Allowance Allowance Allowance
for Reserve for Unfunded for for Reserve for Unfunded for
Loan Losses Loan Commitments Credit Losses Loan Losses Loan Commitments 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 allowance 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
% of % of
Loans in Loans in
Allowance for Category to Allowance for Category to
($ in thousands) Loan Losses Loans Receivable Total Loans Loan Losses Loans Receivable 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 % 68
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The following table provides information regarding activity by loan class in the
allowance for loan losses during the periods: indicated:
Three Months Ended Six Months Ended
June 30, June 30,
($ in thousands) 2020 2019 2020 2019
ALL at beginning of period $ 78,243 $
63,885
- - 7,609 -
Charge-offs:
Commercial and industrial - (2,022) (1,164) (2,115) SBA - 8 (356) (348) Single family residential mortgage - (425) (552) (951) Other consumer - (6) (4) (94) Total charge-offs - (2,451) (2,076) (3,514) Recoveries: Commercial and industrial 119 11 149 44 SBA - 60 121 101 Lease financing - 3 - 6 Single family residential mortgage 488 - 639 150 Other consumer 1 2 49 19 Total recoveries 608 76 958 320 Net charge-offs 608 (2,375) (1,118) (3,194) Provision for credit losses 11,519 (1,987) 26,230 525 ALL at end of period$ 90,370 $
59,523
$ 5,687,652 $
7,398,471
$ 5,627,696 $ 6,719,570 $ 5,627,696 $ 6,719,570 Ratios: 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 1.61 % 0.89 % 1.61 % 0.89 % (1)Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses onJanuary 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. Alternative Energy Partnerships We invest in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects that are designed to generate a return primarily through the realization of federal tax credits (energy tax credits) and other tax 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 our respective investments in these entities are more than minor, we have significant influence, but not control, over the investee's activities that most significantly impact its economic performance. As a result, we are required to apply the equity method of accounting, which generally prescribes applying the percentage ownership interest to the investee's GAAP net income in order to determine the investor's earnings or losses in a given period. However, because the liquidation rights, tax credit allocations and other benefits to investors can change upon the occurrence of specified events, application of the equity method based on the underlying ownership percentages would not accurately represent our investment. As a result, we apply the Hypothetical Liquidation at Book Value ("HLBV") method of the equity method of accounting. The HLBV method is a balance sheet approach whereby a calculation is prepared at each balance sheet date to estimate the amount that we would receive if the equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses from the equity investment for the period. 69 -------------------------------------------------------------------------------- Table of Contents The following table presents the activity related to our investment in alternative energy partnerships for the three and six months endedJune 30, 2020 and 2019: Three Months Ended Six Months Ended June 30, June 30, ($ in thousands) 2020 2019 2020 2019 Balance at beginning of period$ 27,347 $ 26,578 $ 29,300 $ 28,988 New funding - 235 3,631 235 Change in unfunded commitments - - (3,225) - Cash distribution from investments (547) (535) (1,001) (995) Gain (loss) on investments using HLBV method 167 355 (1,738) (1,595) Balance at end of period$ 26,967 $ 26,633 $ 26,967 $ 26,633 Unfunded equity commitments at end of period $ -$ 3,796 $ -$ 3,796 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 atJune 30, 2020 andDecember 31, 2019 . During the three and six months endedJune 30, 2020 , we funded zero and$3.6 million for our alternative energy partnerships and did not receive any return of capital from our alternative energy partnerships. During each of the three and six months endedJune 30, 2019 , we did not receive any return of capital and funded$235 thousand into these partnerships. During the three months endedJune 30, 2020 and 2019, we recognized a gain on investment of$167 thousand and a loss on investment of$355 thousand through its HLBV application. During the six months endedJune 30, 2020 and 2019, we recognized a loss on investment of$1.7 million and$1.6 million through our application of the HLBV method of accounting. The HLBV losses for the six months endedJune 30, 2020 were largely driven by accelerated tax depreciation on equipment and the recognition of energy tax credits which reduces the amount distributable by the investee in a hypothetical liquidation under the contractual liquidation provisions. From an income tax benefit perspective, we recognized no investment tax credits during these periods; however, we recorded income tax (expense) benefit related to these investments of$(38) thousand and$398 thousand for the three and six months endedJune 30, 2020 and$380 thousand for each of the three and six months endedJune 30, 2019 . For additional information, see Note 12 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q. 70 -------------------------------------------------------------------------------- Table of Contents Deposits The following table shows the composition of deposits by type as of the dates indicated: June 30, 2020 December 31, 2019 % of Total ($ in thousands) Amount Deposits Amount % of Total Deposits Amount Change Noninterest-bearing deposits$ 1,391,504 23.0 %$ 1,088,516 20.1 %$ 302,988 Interest-bearing demand deposits 1,846,698 30.6 % 1,533,882 28.3 % 312,816 Money market accounts 765,854 12.7 % 715,479 13.2 % 50,375 Savings accounts 939,018 15.6 % 885,246 16.3 % 53,772 Certificates of deposit of$250,000 or less 585,314 9.7 % 582,772 10.7 % 2,542 Certificates of deposit of more than$250,000 509,077 8.4 % 621,272 11.4 % (112,195) Total deposits$ 6,037,465 100.0 %$ 5,427,167 100.0 %$ 610,298 Total deposits were$6.04 billion atJune 30, 2020 , an increase of$610.3 million , or 11.2%, from$5.43 billion atDecember 31, 2019 . We continue to focus 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 atJune 30, 2020 compared to$1.09 billion and 20.1% atDecember 31, 2019 . During the six months endedJune 30, 2020 , demand deposits increased by$615.8 million , consisting of increases of$303.0 million in noninterest-bearing deposits and$312.8 million in interest-bearing demand deposits. In addition, money market accounts increased$50.4 million and savings accounts increased$53.8 million , offset by a decrease of$109.7 million in time deposits. Brokered deposits were$179.8 million atJune 30, 2020 , an increase of$169.8 million from$10.0 million atDecember 31, 2019 . The increase between periods related to brokered time deposits as we took advantage of attractive pricing in that market to reduce some of our remaining higher-cost interest bearing deposits. The following table presents the scheduled maturities of certificates of deposit as ofJune 30, 2020 : Over Six Months Three Months Over Three Months Through Twelve ($ in thousands) or Less Through Six Months Months Over One Year Total Certificates of deposit of$250,000 or less$ 222,856 $ 169,487 $ 150,881 $ 42,090 $ 585,314 Certificates of deposit of more than$250,000 211,569 193,671 60,687 43,150 509,077 Total certificates of deposit$ 434,425 $ 363,158 $ 211,568 $ 85,240 $ 1,094,391 Borrowings We utilizedFederal Home Loan Bank ("FHLB") advances to leverage our capital base, to provide funds for lending and investing activities, as a source of liquidity, and to enhance interest rate risk management. We also maintained additional borrowing availabilities from Federal Reserve Discount Window and unsecured federal funds lines of credit. Advances from the FHLB decreased$577.8 million , or 48.4%, to$617.2 million as ofJune 30, 2020 , due to repayment of$447.0 million in short-term and overnight advances with the FHLB and$124.0 million in maturities and early repayments of long-term advances. During the three months endedJune 30, 2020 , 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, inJune 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. AtJune 30, 2020 , FHLB advances included no overnight borrowings,$58.0 million maturing within three months, and$566.0 million maturing beyond three months with a weighted average life of 4.1 years and weighted average interest rate of 2.39%. We did not utilize repurchase agreements atJune 30, 2020 orDecember 31, 2019 . 71
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Table of Contents For additional information, see Note 6 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.
Long-term Debt
The following table presents our long-term debt as of the dates indicated:
June 30, 2020 December 31, 2019
Unamortized Debt Unamortized Debt
Issuance Cost and Issuance Cost and
($ in thousands) Par Value Discount Par Value Discount
5.25% senior notes due April 15, 2025 $ 175,000 $ (1,463) $ 175,000 $ (1,579)
Total $ 175,000 $ (1,463) $ 175,000 $ (1,579) We were in compliance with all covenants under our 5.25% senior notes due
Liquidity Management We are required to maintain sufficient liquidity to ensure a safe and sound operation. Liquidity may increase or decrease depending upon availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including 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 theFederal Reserve by participating in its Borrower-in-Custody ("BIC") program. As a result, our borrowing capacity with theFederal Reserve increased to$370.4 million atJune 30, 2020 . Prior to participating in the BIC program, the Bank had only pledged certain securities as collateral for access to the discount window. AtJune 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 endedJune 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 as well as secured borrowings advances through theFederal 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. 72 -------------------------------------------------------------------------------- Table of ContentsBanc of California, Inc. The primary sources of funds forBanc of California, Inc. , on a stand-alone holding company basis, are dividends and intercompany tax payments from the Bank, outside borrowing, and its ability to raise capital and issue debt securities. Dividends from the Bank are largely dependent upon the Bank's earnings and are subject to restrictions under certain regulations that limit its ability to transfer funds to the holding company. OCC regulations impose various restrictions on the ability of a bank to make capital distributions, which include dividends, stock redemptions or repurchases, and certain other items. Generally, a well-capitalized bank may make capital distributions during any calendar year equal to up to 100 percent of year-to-date net income plus retained net income for the two preceding years without prior OCC approval. However, any dividend paid by the Bank would be limited by the need to maintain its well-capitalized status plus the capital buffer in order to avoid additional dividend restrictions (Refer to Capital - Dividend Restrictions below for additional information). Currently, the Bank does not have sufficient dividend-paying capacity to declare and pay such dividends to the holding company without obtaining prior approval from the OCC under the applicable regulations. During the six months endedJune 30, 2020 , the Bank paid$25.0 million of dividends toBanc of California, Inc. AtJune 30, 2020 ,Banc of California, Inc. had$61.1 million in cash, all of which was on deposit at the Bank. OnFebruary 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 inFebruary 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 endedJune 30, 2020 . During the six months endedJune 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 regulations of theSecurities 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 endedJune 30, 2020 , we repurchased depositary shares representing shares of our Series D and Series E preferred stock. The aggregate total consideration for each 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 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. During the six months endedJune 30, 2020 , we repurchased depositary shares representing shares of our Series D and Series E preferred stock. The aggregate total consideration for the 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, we maintained$420.6 million of cash and cash equivalents, which was 5.4% of total assets atJune 30, 2020 . Our cash and cash equivalents increased by$47.2 million , or 12.6%, from$373.5 million , or 4.8% of total assets, atDecember 31, 2019 . The increase was mainly due to the increase in deposits and runoff of our legacy single family residential mortgage portfolio, offset by reductions in FHLB advances. AtJune 30, 2020 , we had available unused secured borrowing capacities of$1.06 billion from the FHLB and$370.4 million from theFederal Reserve , as well as$185.0 million from unsecured federal funds lines of credit. We also maintained repurchase agreements of which none were outstanding atJune 30, 2020 . Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and pledging additional investment securities. We also had unpledged securities available-for-sale of$1.13 billion atJune 30, 2020 . We believe that our liquidity sources are stable and are adequate to meet our day-to-day cash flow requirements as ofJune 30, 2020 . However, in light of the ongoing COVID-19 pandemic, we cannot predict at this time the extent to which the pandemic will negatively affect our business, financial condition, liquidity, capital and results of operations. For a discussion of the related risk factors, please refer to Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . 73 -------------------------------------------------------------------------------- Table of Contents Commitments and Contractual Obligations The following table presents our commitments and contractual obligations as ofJune 30, 2020 :
Commitments and Contractual Obligations
More Than One Year More Than Three
Total Amount Within Through Three Year Through Five
($ in thousands) Committed One Year Years Years Over Five Years
Commitments to extend credit $ 80,093 $ 36,078 $ 36,785 $ 1,842 $ 5,388
Unused lines of credit 1,392,215 1,225,270 70,385 52,710 43,850
Standby letters of credit 3,579 3,258 210 111 -
Total commitments $ 1,475,887 $ 1,264,606 $ 107,380 $ 54,663 $ 49,238
FHLB advances $ 624,000 $ 213,000 $ - $ 291,000 $ 120,000
Long-term debt 175,000 - - 175,000 -
Operating and capital lease
obligations 23,274 6,461 6,787 3,805 6,221
Certificate of deposits 1,094,391 1,009,151 80,783 4,457 -
Total contractual obligations $ 1,916,665 $ 1,228,612 $ 87,570 $ 474,262 $ 126,221
At June 30, 2020 , we had unfunded commitments of $20.5 million , $7.1 million ,
and $501 thousand for affordable housing fund investments, SBIC investments, and
other investments, including investments in alternative energy partnerships,
respectively.
Capital
In order to maintain adequate levels of capital, we continuously assess projected sources and uses of capital to support projected asset growth, operating needs and credit risk. We consider, among other things, earnings generated from operations and access to capital from financial markets. In addition, we perform capital stress tests on an annual basis to assess the impact of adverse changes in the economy on our capital base.Regulatory Capital The Company and the Bank are subject to the regulatory capital adequacy guidelines that are established by the Federal banking regulators. InJuly 2013 , the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel III and to address relevant provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. The Company and the Bank became subject to the new rule onJanuary 1, 2015 and certain provisions of the new rule were phased in throughJanuary 1, 2019 . Inclusive of the fully phased-in capital conservation buffer, the common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%, respectively. 74 -------------------------------------------------------------------------------- Table of Contents The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated: Minimum Required to Be Well-Capitalized Under Prompt Minimum Capital Requirements Corrective Action Provisions ($ in thousands) Amount Ratio Amount Ratio Amount Ratio June 30, 2020Banc 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/ABanc 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, 2019Banc 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/ABanc 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 % Dividend Restrictions Payment of dividends by the Company are subject to guidance provided by theFederal 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 theFederal Reserve . Because the Company's current and, for the near term, future quarterly dividends are expected to exceed the applicable quarterly net earnings, payment of dividends in respect of the Company's common and preferred stock will be subject to prior consultation and non-objection from theFederal Reserve . Our 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. 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. As described below, any near term dividend by the Bank will require OCC approval. During the three and six months endedJune 30, 2020 , the Bank received approval from the OCC and paid$25.0 million in dividends toBanc of California, Inc. During the three and six months endedJune 30, 2020 , we declared and paid dividends on our common stock of$0.06 and$0.12 per share in addition to dividends on our preferred stock. Last year, inApril 2019 , our Board of Directors approved a plan to reduce the quarterly dividend from$0.13 to$0.06 per common share. 75
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