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BANC Banc of California

Filed: 10 May 21, 3:20pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-35522
BANC OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
04-3639825
(IRS Employer Identification No.)
3 MacArthur Place, Santa Ana, California
(Address of principal executive offices)
92707
(Zip Code)
(855) 361-2262
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes  No 


Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareBANCNew York Stock Exchange
Depositary Shares each representing a 1/40th interest in a share of 7.00% Non-Cumulative Perpetual Preferred Stock, Series EBANC PRENew York Stock Exchange
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
As of May 5, 2021, the registrant had outstanding 50,187,520 shares of voting common stock and 477,321 shares of Class B non-voting common stock.


BANC OF CALIFORNIA, INC.
FORM 10-Q QUARTERLY REPORT
March 31, 2021
Table of Contents

2

Forward-Looking Statements -
When used in this report and in documents filed with or furnished to the Securities and Exchange Commission (the “SEC”), in press releases or other public stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the “Safe-Harbor” provisions of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements. These statements may relate to future financial performance, strategic plans or objectives, revenue, expense or earnings projections, or other financial items of Banc of California, Inc. and its affiliates (“BANC,” the “Company”, “we”, “us” or “our”), as well as the continuing effects of the COVID-19 pandemic on the Company’s business, operations, financial performance and prospects. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.
Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following:
i.the effect of the COVID-19 pandemic and steps taken by governmental and other authorities to contain, mitigate, and combat the pandemic on our business, operations, financial performance and prospects;
ii.the costs and effects of litigation generally, including legal fees and other expenses, settlements and judgments;
iii.the risk that we will not be successful in the implementation of our capital utilization strategy, new lines of business, new products and services, or other strategic project initiatives;
iv.risks that the Company’s merger and acquisition transactions may disrupt current plans and operations and lead to difficulties in customer and employee retention, risks that the costs, fees, expenses and charges related to these transactions could be significantly higher than anticipated and risks that the expected revenues, cost savings, synergies, and other benefits of these transactions might not be realized to the extent anticipated, within the anticipated timetables, or at all;
v.the credit risks of lending activities, which may be affected by deterioration in real estate markets and the financial condition of borrowers, and the operational risk of lending activities, including but not limited to, the effectiveness of our underwriting practices and the risk of fraud, any of which may lead to increased loan delinquencies, losses, and nonperforming assets in our loan portfolio, and may result in our allowance for credit losses not being adequate and require us to materially increase our credit loss reserves;
vi.the quality and composition of our securities portfolio;
vii.changes in general economic conditions, either nationally or in our market areas, or changes in financial markets;
viii.continuation of, or changes in, the short-term interest rate environment, changes in the levels of general interest rates, volatility in the interest rate environment, the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin, and funding sources;
ix.fluctuations in the demand for loans, and fluctuations in commercial and residential real estate values in our market area;
x.our ability to develop and maintain a strong core deposit base or other low cost funding sources necessary to fund our activities;
xi.results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, limit our business activities, require us to change our business mix, restrict our ability to invest in certain assets, increase our allowance for credit losses, write-down asset values, increase our capital levels, affect our ability to borrow funds or maintain or increase deposits, or impose fines, penalties or sanctions, any of which could adversely affect our liquidity and earnings;
xii.legislative or regulatory changes that adversely affect our business, including, without limitation, changes in tax laws and policies, changes in privacy laws, and changes in regulatory capital or other rules, and the availability of resources to address or respond to such changes;
xiii.our ability to control operating costs and expenses;
xiv.staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges;
xv.the risk that our enterprise risk management framework may not be effective in mitigating risk and reducing the potential for losses;
xvi.errors in estimates of the fair values of certain of our assets and liabilities, which may result in significant changes in valuation;
xvii.failures or security breaches with respect to the network and computer systems on which we depend, including but not limited to, due to cybersecurity threats;
xviii.our ability to attract and retain key members of our senior management team;
xix.increased competitive pressures among financial services companies;
xx.changes in consumer spending, borrowing and saving habits;
xxi.the effects of severe weather, natural disasters, pandemics, acts of war or terrorism, and other external events on our business;
xxii.the ability of key third-party providers to perform their obligations to us;
xxiii.changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board or their application to our business, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting standards;
xxiv.continuing impact of the Financial Accounting Standards Board’s credit loss accounting standard, referred to as Current Expected Credit Loss, which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and provide for the expected credit losses as allowances for loan losses;
xxv.share price volatility and reputational risks, related to, among other things, speculative trading and certain traders shorting our common shares and attempting to generate negative publicity about us;
xxvi.our ability to obtain regulatory approvals or non-objection to take various capital actions, including the payment of dividends by us or our bank subsidiary, or repurchases of our common or preferred stock; and
xxvii.other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this report and from time to time in other documents that we file with or furnish to the SEC, including, without limitation, the risks described under “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Further, statements about the potential effects of the proposed acquisition of Pacific Mercantile Bancorp (“PMBC”) on our business, financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially,from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including (i) the possibility that the merger does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; (ii) changes in BANC’s or PMBC’s stock price before closing, including as a result of its financial performance prior to closing, or more generally due to broader stock market movements, and the performance of financial companies and peer group companies; (iii) the risk that the benefits from the transaction may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which BANC and PMBC operate; (iv) the ability to promptly and effectively integrate the businesses of BANC and PMBC; (v) the reaction to the transaction of the companies’ customers, employees and counterparties; (vi) diversion of management time on merger-related issues; (vii) lower than expected revenues, credit quality deterioration or a reduction in real estate values or a reduction in net earnings; and (viii) other risks that are described in BANC’s and PMBC’s public filings with the SEC.
3

PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Amounts in thousands, except share and per share data)
(Unaudited)
March 31,
2021
December 31,
2020
ASSETS
Cash and due from banks$21,754 $38,330 
Interest-earning deposits in financial institutions357,755 182,489 
Total cash and cash equivalents379,509 220,819 
Securities available-for-sale, at fair value1,270,830 1,231,431 
Loans held-for-sale, carried at fair value1,408 1,413 
Loans receivable5,764,401 5,898,405 
Allowance for loan losses(79,353)(81,030)
Loans receivable, net5,685,048 5,817,375 
Federal Home Loan Bank and other bank stock, at cost44,964 44,506 
Premises and equipment, net120,071 121,520 
Bank owned life insurance112,479 111,807 
Operating lease right-of-use assets22,069 19,633 
Investments in alternative energy partnerships, net23,809 27,977 
Deferred income taxes, net47,877 45,957 
Goodwill37,144 37,144 
Other intangible assets, net2,351 2,633 
Other assets185,900 195,119 
Total assets$7,933,459 $7,877,334 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing deposits$1,700,343 $1,559,248 
Interest-bearing deposits4,441,699 4,526,552 
Total deposits6,142,042 6,085,800 
Federal Home Loan Bank advances, net635,105 539,795 
Long-term debt, net256,441 256,315 
Reserve for loss on repurchased loans5,383 5,515 
Operating lease liabilities23,173 20,647 
Accrued expenses and other liabilities66,622 72,055 
Total liabilities7,128,766 6,980,127 
Commitments and contingent liabilities00
Preferred stock94,956 184,878 
Common stock, $0.01 par value per share, 446,863,844 shares authorized; 52,561,411 shares issued and 50,150,447 shares outstanding at March 31, 2021; 52,178,453 shares issued and 49,767,489 shares outstanding at December 31, 2020526 522 
Class B non-voting non-convertible common stock, $0.01 par value per share, 3,136,156 shares authorized; 477,321 shares issued and outstanding at March 31, 2021 and at December 31, 2020
Additional paid-in capital629,844 634,704 
Retained earnings115,004 110,179 
Treasury stock, at cost (2,410,964 and 2,410,964 shares at March 31, 2021 and December 31, 2020)(40,827)(40,827)
Accumulated other comprehensive income, net5,185 7,746 
Total stockholders’ equity804,693 897,207 
Total liabilities and stockholders’ equity$7,933,459 $7,877,334 
See accompanying notes to consolidated financial statements (unaudited)
4

BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2021
December 31,
2020
March 31,
2020
Interest and dividend income
Loans, including fees$61,345 $66,105 $65,534 
Securities6,501 6,636 7,820 
Other interest-earning assets772 789 1,360 
Total interest and dividend income68,618 73,530 74,714 
Interest expense
Deposits4,286 5,436 14,611 
Federal Home Loan Bank advances3,112 3,479 5,883 
Long-term debt and other interest-bearing liabilities3,304 3,052 2,359 
Total interest expense10,702 11,967 22,853 
Net interest income57,916 61,563 51,861 
(Reversal of) provision for credit losses(1,107)991 15,761 
Net interest income after (reversal of) provision for credit losses59,023 60,572 36,100 
Noninterest income
Customer service fees1,758 1,953 1,096 
Loan servicing income268 149 75 
Income from bank owned life insurance672 691 578 
Fair value adjustment for loans held-for-sale36 (1,586)
Net loss on sale of loans(27)
Other income1,683 4,146 1,925 
Total noninterest income4,381 6,975 2,061 
Noninterest expense
Salaries and employee benefits25,719 25,836 23,436 
Occupancy and equipment7,196 7,560 7,243 
Professional fees4,022 29 5,964 
Data processing1,655 1,608 1,773 
Advertising and promotion118 171 1,756 
Regulatory assessments774 748 484 
Loss (gain) on investments in alternative energy partnerships3,630 (673)1,905 
(Reversal of) provision for loan repurchases(132)28 (600)
Amortization of intangible assets282 306 429 
Merger-related costs700 
All other expense2,771 3,337 4,529 
Total noninterest expense46,735 38,950 46,919 
Income (loss) from operations before income taxes16,669 28,597 (8,758)
Income tax expense (benefit)2,294 6,894 (2,165)
Net income (loss)14,375 21,703 (6,593)
Preferred stock dividends3,141 3,447 3,533 
Income allocated to participating securities62 456 
Participating securities dividends94 94 
Impact of preferred stock redemption3,347 (526)
Net income (loss) available to common stockholders$7,825 $17,706 $(9,694)
Earnings (loss) per common share:
Basic$0.16 $0.35 $(0.19)
Diluted$0.15 $0.35 $(0.19)
Earnings (loss) per class B common share:
Basic$0.16 $0.35 $(0.19)
Diluted$0.15 $0.35 $(0.19)
See accompanying notes to consolidated financial statements (unaudited)

5

BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands)
(Unaudited)
Three Months Ended
March 31,
2021
December 31,
2020
March 31,
2020
Net income (loss)$14,375 $21,703 $(6,593)
Other comprehensive (loss) income, net of tax:
Unrealized (loss) gain on available-for-sale securities:
Unrealized (loss) gain arising during the period(2,561)6,480 (42,248)
Total change in unrealized (loss) gain on available-for-sale securities(2,561)6,480 (42,248)
Total other comprehensive (loss) income(2,561)6,480 (42,248)
Comprehensive income (loss)$11,814 $28,183 $(48,841)

See accompanying notes to consolidated financial statements (unaudited)

6

BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
Preferred StockCommon StockAdditional Paid-in CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
VotingClass B
Non-Voting
Three Months Ended March 31, 2021
Balance at December 31, 2020$184,878 $522 $5 $634,704 $110,179 $(40,827)$7,746 $897,207 
Comprehensive income:
Net income— — — — 14,375 — — 14,375 
Other comprehensive income, net— — — — — — (2,561)(2,561)
Issuance of common stock— — (1)— — — 
Redemption of preferred stock(89,922)— — — (3,347)— — (93,269)
Exercise of stock options— — — 300 — — — 300 
Exercise of stock appreciation rights— — (5,375)— — — (5,372)
Share-based compensation expense— — — 1,544 — — — 1,544 
Restricted stock surrendered due to employee tax liability— — — (1,328)— — — (1,328)
Shares purchased under the Dividend Reinvestment Plan— — — — (29)— — (29)
Dividends declared ($0.06 per common share)— — — — (3,033)— — (3,033)
Preferred stock dividends— — — — (3,141)— — (3,141)
Balance at March 31, 2021$94,956 $526 $5 $629,844 $115,004 $(40,827)$5,185 $804,693 
Three Months Ended March 31, 2020
Balance at December 31, 2019$189,825 $520 $5 $629,848 $127,733 $(28,786)$(11,900)$907,245 
Adoption of ASU No. 2016-13— — — — (4,503)— — (4,503)
Comprehensive loss:
Net loss— — — — (6,593)— — (6,593)
Other comprehensive income, net— — — — — — (42,248)(42,248)
Redemption of preferred stock(2,138)— — — 526 — — (1,612)
Repurchase of 0 shares of common stock— — — — (12,041)— (12,041)
Share-based compensation expense— — — 1,576 — — — 1,576 
Restricted stock surrendered due to employee tax liability— — — (299)— — — (299)
Shares purchased under the Dividend Reinvestment Plan— — — — (19)— — (19)
Stock appreciation right dividend equivalents— — — — (94)— — (94)
Dividends declared ($0.06 per common share)— — — — (2,877)— — (2,877)
Preferred stock dividends— — — — (3,533)— — (3,533)
Balance at March 31, 2020$187,687 $520 $5 $631,125 $110,640 $(40,827)$(54,148)$835,002 

See accompanying notes to consolidated financial statements (unaudited)
7

BANC OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended
March 31,
20212020
Cash flows from operating activities:
Net income (loss)$14,375 $(6,593)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
(Reversal of) provision for credit losses(1,107)15,761 
Reversal of provision for loan repurchases(132)(600)
Depreciation on premises and equipment3,885 4,524 
Amortization of intangible assets282 429 
Amortization of debt issuance costs385 58 
Net amortization of premium on securities432 77 
Net (accretion) amortization of deferred loan costs and fees(1,315)587 
Accretion of discounts on purchased loans426 (8)
Deferred income tax (benefit) expense(845)573 
Bank owned life insurance income(672)(578)
Share-based compensation expense1,544 1,576 
(Income) loss on interest rate swaps(271)182 
Loss on investments in alternative energy partnerships and affordable housing investments4,812 3,052 
Impairment on capitalized software projects157 
Fair value adjustment for loans held-for-sale1,586 
Net gain on sale of loans27 
Loss on sale or disposal of property and equipment106 
Proceeds from sales of and principal collected on loans held-for-sale822 
Change in accrued interest receivable and other assets4,985 (5,865)
Change in accrued interest payable and other liabilities(2,853)(8,824)
Net cash provided by operating activities23,936 7,049 
Cash flows from investing activities:
Proceeds from maturities and calls of securities available-for-sale30,000 
Proceeds from principal repayments of securities available-for-sale9,378 602 
Purchases of securities available-for-sale(52,845)(147,410)
Loan originations and principal collections, net267,366 282,116 
Purchase of loans(132,866)
Redemption of Federal Home Loan Bank stock11,490 
Purchase of Federal Home Loan Bank and other bank stock(458)(9,307)
Purchases of premises and equipment(849)(2,487)
Payments of capital lease obligations(33)(134)
Funding of equity investment(876)(4,437)
(Increase) decrease in investments in alternative energy partnerships538 (3,177)
Net cash provided by investing activities89,355 157,256 
Cash flows from financing activities:
Net increase in deposits56,242 135,671 
Net increase (decrease) in short-term Federal Home Loan Bank advances95,000 (193,000)
Repayment of long-term Federal Home Loan Bank advances(24,000)
Redemption of preferred stock(93,269)(1,612)
Purchase of treasury stock(12,041)
Proceeds from exercise of stock options300 
Purchase of stock surrendered due to employee tax liability(6,700)(299)
Dividend equivalents paid on participating securities(94)
Dividends paid on preferred stock(3,141)(3,533)
Dividends paid on common stock(3,033)(2,877)
Net cash provided by (used in) financing activities45,399 (101,785)
Net change in cash and cash equivalents158,690 62,520 
Cash and cash equivalents at beginning of period220,819 373,472 
Cash and cash equivalents at end of period$379,509 $435,992 
Supplemental cash flow information
Interest paid on deposits and borrowed funds7,313 20,331 
Income taxes paid
Supplemental disclosure of non-cash activities
Equipment acquired under capital leases256 30 
Operating lease right-of-use assets recognized4,023 
Operating lease liabilities recognized4,023 
Impact of adoption of ASU 2016-13 on retained earnings— (4,503)

See accompanying notes to consolidated financial statements (unaudited)
8

BANC OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2021

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Banc of California, Inc. (collectively, with its consolidated subsidiaries, the Company, we, us, and our) is a financial holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Santa Ana, California and incorporated under the laws of Maryland. Banc of California, Inc. is subject to regulation by the Board of Governors of the Federal Reserve System (“FRB”) and its wholly-owned subsidiary, Banc of California, National Association (the “Bank”), operates under a national bank charter issued by the Office of the Comptroller of the Currency (“OCC”), the Bank's primary regulator. The Bank is a member of the Federal Home Loan Bank (“FHLB”) system, and maintains insurance on deposit accounts with the Federal Deposit Insurance Corporation (“FDIC”).
The Bank offers a variety of financial services to meet the banking and financial needs of the communities it serves, with operations conducted through 29 full-service branches located throughout Southern California as of March 31, 2021.
Proposed Merger with Pacific Mercantile Bancorp: In March 2021, we entered into an agreement to merge (the “Merger Agreement”) with Pacific Mercantile Bancorp (“PMB”), pursuant to which PMB will merge (the “Merger”) with and into the Company, with the Company as the surviving corporation. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of PMB common stock, excluding certain specified shares, will be converted into the right to receive 0.50 (the “Exchange Ratio”) of a share of the Company's common stock. In addition, at the effective time of the Merger, the Company will cash out all outstanding share-based awards based on formulas using the average price of the Company's common stock for a 20-day trading period prior to the closing of the Merger. Subject to regulatory and shareholder approval, the transaction is expected to close during the third quarter of 2021.
Basis of Presentation: The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (“GAAP”) are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2020 filed by us with the SEC. The December 31, 2020 consolidated statements of financial condition presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC. Certain prior period amounts have been reclassified to conform to current period presentation, including i) reclassification of income taxes receivable to other assets in the consolidated statement of financial condition, and ii) reclassification of outside services expense from "outside services fees" to "all other expense" in the consolidated statements of operations.
In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Principles of Consolidation: The accompanying unaudited consolidated financial statements include the accounts of the Company and its consolidated subsidiaries as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020. Significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its then wholly-owned subsidiaries.
Adopted Accounting Pronouncements: On January 1, 2021, we adopted Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) which simplifies the accounting for income taxes by removing certain exceptions for investments, intra-period allocations, and interim calculations, and adding guidance to reduce the complexity of applying Topic 740. The adoption of these amendments did not have a material effect on our consolidated financial statements.
Significant Accounting Policies: The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. We have not made any significant changes in our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC.
Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the consolidated financial statements and disclosures provided, and actual results could differ. The allowance for credit losses (“ACL”) (which includes the allowance for loan losses (“ALL”) and the reserve for
9

unfunded loan commitments), provision for credit losses, loan repurchase reserve, realization of deferred tax assets, the valuation of goodwill and other intangible assets, other derivatives, Hypothetical Liquidation at Book Value (“HLBV”) of investments in alternative energy partnerships, and the fair value measurement of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements.
Recent Accounting Guidance: Beginning in June 2023, the London Interbank Offered Rate (“LIBOR”) will be discontinued. To assist entities with the transition away from LIBOR, the Financial Accounting Standards Board (“FASB”) has issued accounting guidance to clarify GAAP and provide practical expedients for entities to utilize during the time of transition. We are in the process of evaluating the potential impact the discontinuation of LIBOR will have on our consolidated financial statements. The optional expedients and exceptions provided through this relief are set forth below and were effective immediately; however, certain provisions from this relief are not yet determined due to the fact that LIBOR has not yet been discontinued.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), ("ASU 2020-04") which provided optional guidance, for a limited period of time, to ease the potential burden in accounting for (or recognizing the benefits of) reference rate reform on financial reporting. The amendments in ASU 2020-04 were elective and applied to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provided optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria. When elected, the optional expedients for contract modifications must be applied consistently for all eligible contracts or eligible transactions within the relevant topic or industry subtopic within the codification that contains the guidance that otherwise would be required to be applied. The amendments in ASU 2020-04 were effective for all entities as of March 12, 2020 through December 31, 2022.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848)("ASU 2021-01"). The amendments in ASU 2021-01 clarified that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this Update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments also optionally apply to all entities that designate receive-variable-rate, pay-variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are modified as a result of reference rate reform. The amendments in ASU 2021-01 were effective immediately for all entities. ASU 2021-01 is not expected to have a material effect on our consolidated financial statements.

NOTE 2 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Value Hierarchy
ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities Measured on a Recurring Basis
Securities Available-for-Sale: The fair values of securities available-for-sale are generally determined by quoted market prices in active markets, if available (Level 1). If quoted market prices are not available, we primarily employ independent pricing services that utilize pricing models to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds,
10

credit information, and respective terms and conditions for debt instruments. We employ procedures to monitor the pricing service's assumptions and establish processes to challenge the pricing service's valuations that appear unusual or unexpected. Multiple quotes or prices may be obtained in this process and we determine which fair value is most appropriate based on market information and analysis. Quotes obtained through this process are generally non-binding. We follow established procedures to ensure that assets and liabilities are properly classified in the fair value hierarchy. Level 2 securities include SBA loan pool securities, U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities, non-agency residential mortgage-backed securities, non-agency commercial mortgage-backed securities, collateralized loan obligations, and corporate debt securities. When a market is illiquid or there is a lack of transparency around the inputs to valuation, including at least one unobservable input, the securities are classified as Level 3 and reliance is placed upon internally developed models and management's judgment and evaluation for valuation. We had 0 securities available-for-sale classified as Level 3 at March 31, 2021 or December 31, 2020.
Loans Held-for-Sale, Carried at Fair Value: The fair value of loans held-for-sale is based on commitments outstanding from investors and current offerings in the secondary market for portfolios with similar characteristics, except for loans that are repurchased out of GNMA loan pools that become severely delinquent which are valued based on an internal model. Loans held-for-sale subject to recurring fair value adjustments are classified as Level 2, or in the case of loans repurchased, Level 3. The fair value includes the servicing value of the loans and any accrued interest.
Derivative Assets and Liabilities:
Interest Rate Swaps and Caps. We offer interest rate swap and cap products to certain loan clients to allow them to hedge the risk of rising interest rates on their variable rate loans. We originate a variable rate loan and enter into a variable-to-fixed interest rate swap with the client. We also enter into an offsetting swap with a correspondent bank. These back-to-back agreements are intended to offset each other and allow us to originate a variable rate loan while providing a contract for fixed interest payments for the client. The net cash flow for us is equal to the interest income received from a variable rate loan originated with the client plus a fee. The fair value of these derivatives is based on a discounted cash flow approach. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of interest rate swaps is classified as Level 2.
Foreign Exchange Contracts. 
We offer short-term foreign exchange contracts to customers to purchase and/or sell foreign currencies at set rates in the future. These products allow customers to hedge the foreign exchange rate risk of their deposits and loans denominated in foreign currencies. In conjunction with these products, we also enter into offsetting contracts with institutional counterparties to hedge the Company’s foreign exchange rate risk. These back-to-back contracts allow us to offer our customers foreign exchange products while minimizing exposure to foreign exchange rate fluctuations. The fair value of these instruments is determined at each reporting period based on the change in the foreign exchange rate. Given the short-term nature of the contracts, the counterparties’ credit risks are considered nominal and result in no adjustments to the valuation of the short-term foreign exchange contracts. Due to the observable nature of the inputs used in deriving the fair value of these derivative contracts, the valuation of these contracts is classified as Level 2.
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The following table presents our financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated:
Fair Value Measurement Level
($ in thousands)Carrying ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
March 31, 2021
Assets
Securities available-for-sale:
SBA loan pools securities$16,733 $$16,733 $
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities123,300 123,300 
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations210,956 210,956 
Municipal securities85,538 85,538 
Non-agency residential mortgage-backed securities158 158 
Collateralized loan obligations683,873 683,873 
Corporate debt securities150,272 150,272 
Loans held-for-sale, carried at fair value1,408 465 943 
Derivative assets:
Interest rate swaps and caps (1)
4,452 4,452 
Foreign exchange contracts (1)
255 255 
Liabilities
Derivative liabilities:
Interest rate swaps and caps (2)
4,663 4,663 
Foreign exchange contracts (2)
243 243 
December 31, 2020
Assets
Securities available-for-sale:
SBA loan pools securities$17,354 $$17,354 $
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities106,384 106,384 
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations211,831 211,831 
Municipal securities68,623 68,623 
Non-agency residential mortgage-backed securities160 160 
Collateralized loan obligations677,785 677,785 
Corporate debt securities149,294 149,294 
Loans held-for-sale, carried at fair value1,413 468 945 
Derivative assets:
Interest rate swaps and caps (1)
7,304 7,304 
Foreign exchange contracts (1)
328 328 
Liabilities
Derivative liabilities:
Interest rate swaps and caps (2)
7,789 7,789 
Foreign exchange contracts (2)
313 313 

(1)Included in other assets in the Consolidated Statements of Financial Condition.
(2)Included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.
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The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Loans repurchased from GNMA Loan Pools
Balance at beginning of period$945 $19,233 
Total gains (losses) (realized/unrealized):
Included in earnings—fair value adjustment(1,391)
Sales, settlements, and other(2)(715)
Balance at end of period$943 $17,127 

Loans repurchased from GNMA loan pools had aggregate unpaid principal balances of $1.1 million and $1.1 million as of March 31, 2021 and December 31, 2020. The significant unobservable inputs used in the fair value measurement of our loans repurchased from GNMA loan pools at March 31, 2021 and December 31, 2020 included an expected loss rate of 1.55% for insured loans and 20.00% for uninsured loans. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results.
Fair Value Option
Loans Held-for-Sale, Carried at Fair Value: We elected the fair value option for certain SFR mortgage loans held-for-sale. Electing to measure SFR mortgage loans held-for-sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. We also elected to record loans repurchased from GNMA at fair value, as we intend to sell them after curing any defects and, accordingly, they are classified as held-for-sale.
The following table presents the fair value and aggregate principal balance of certain assets under the fair value option:
March 31, 2021December 31, 2020
($ in thousands)Fair ValueUnpaid Principal BalanceDifferenceFair ValueUnpaid Principal BalanceDifference
Loans held-for-sale, carried at fair value:
Total loans$1,408 $1,674 $(266)$1,413 $1,680 $(267)
Nonaccrual loans (1)
654 750 (96)654 750 (96)
(1)Includes loans guaranteed by the U.S. government of $181 thousand and $190 thousand at March 31, 2021 and December 31, 2020.

There were 0 loans held-for-sale that were 90 days or more past due and still accruing interest as of March 31, 2021 and December 31, 2020.
The assets accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The following table presents changes in fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets measured at fair value for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Net gains (losses) from fair value changes:
Fair value adjustment for loans held-for-sale$$(1,586)

Interest income on loans held-for-sale under the fair value option is measured based on the contractual interest rate and reported in interest income on loans, including fees in the consolidated statements of operations.
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Assets and Liabilities Measured on a Non-Recurring Basis
Impaired Loans: The fair value of impaired loans with specific allocations of the ACL based on collateral is generally based on recent real estate appraisals and automated valuation models (“AVMs”). These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers for differences between the comparable sales and income data available. Such adjustments are typically deemed significant unobservable inputs used for determining fair value and result in a Level 3 classification.
The following table presents our financial assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated:
Fair Value Measurement Level
($ in thousands)Carrying ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
March 31, 2021
Assets
Collateral dependent loans:
SBA$794 $$$794 
December 31, 2020
Assets
Collateral dependent loans:
SBA$629 $$$629 

The following table presents the gains (losses) recognized on assets measured at fair value on a non-recurring basis for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Collateral dependent loans:
Single family residential mortgage$$22 
Commercial and industrial18 (1,331)
SBA(133)(519)
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Estimated Fair Values of Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities as of the dates indicated:
Carrying AmountFair Value Measurement Level
($ in thousands)Level 1Level 2Level 3Total
March 31, 2021
Financial assets
Cash and cash equivalents$379,509 $379,509 $$$379,509 
Securities available-for-sale1,270,830 1,270,830 1,270,830 
Federal Home Loan Bank and other bank stock44,964 44,964 44,964 
Loans held-for-sale, carried at fair value1,408 465 943 1,408 
Loans receivable, net of allowance for credit losses5,685,048 5,754,031 5,754,031 
Accrued interest receivable30,270 30,270 30,270 
Derivative assets4,707 4,707 4,707 
Financial liabilities
Deposits6,142,042 6,143,213 6,143,213 
Advances from Federal Home Loan Bank635,105 669,799 669,799 
Long-term debt256,441 272,260 272,260 
Derivative liabilities4,906 4,906 4,906 
Accrued interest payable6,718 6,718 6,718 
December 31, 2020
Financial assets
Cash and cash equivalents$220,819 $220,819 $$$220,819 
Securities available-for-sale1,231,431 1,231,431 1,231,431 
Federal Home Loan Bank and other bank stock44,506 44,506 44,506 
Loans held-for-sale1,413 468 945 1,413 
Loans receivable, net of allowance for credit losses5,817,375 5,936,708 5,936,708 
Accrued interest receivable29,445 29,445 29,445 
Derivative assets7,632 7,632 7,632 
Financial liabilities
Deposits6,085,800 6,087,714 6,087,714 
Advances from Federal Home Loan Bank539,795 585,416 585,416 
Long-term debt256,315 273,230 273,230 
Derivative liabilities8,102 8,102 8,102 
Accrued interest payable3,714 3,714 3,714 

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NOTE 3 – INVESTMENT SECURITIES
The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:
($ in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
March 31, 2021
Securities available-for-sale:
SBA loan pool securities$16,812 $$(79)$16,733 
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities122,300 1,419 (419)123,300 
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations210,343 2,079 (1,466)210,956 
Municipal securities84,385 2,242 (1,089)85,538 
Non-agency residential mortgage-backed securities154 158 
Collateralized loan obligations687,505 (3,632)683,873 
Corporate debt securities141,982 8,302 (12)150,272 
Total securities available-for-sale$1,263,481 $14,046 $(6,697)$1,270,830 
December 31, 2020
Securities available-for-sale:
SBA loan pool securities$17,436 $$(82)$17,354 
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities99,591 6,793 106,384 
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations209,426 2,571 (166)211,831 
Municipal securities64,355 4,272 (4)68,623 
Non-agency residential mortgage-backed securities156 160 
Collateralized loan obligations687,505 (9,720)677,785 
Corporate debt securities141,975 7,319 149,294 
Total securities available-for-sale$1,220,444 $20,959 $(9,972)$1,231,431 

At March 31, 2021, our investment securities portfolio consisted of agency securities, municipal securities, mortgage-backed securities, collateralized loan obligations (“CLOs”), and corporate debt securities. The expected maturities of these types of securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
There was 0 allowance for credit losses for debt securities as of March 31, 2021 and December 31, 2020. Accrued interest receivable on debt securities available-for-sale totaled $5.8 million and $4.5 million at March 31, 2021 and December 31, 2020, and is included within other assets in the accompanying consolidated statements of financial condition.
At March 31, 2021 and December 31, 2020, there were no holdings of any one issuer, other than the U.S. government sponsored enterprises, in an amount greater than 10 percent of our stockholders’ equity.
The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Gross realized gains on sales and calls of securities available-for-sale$$
Gross realized losses on sales and calls of securities available-for-sale
Net realized (losses) gains on sales and calls of securities available-for-sale$0 $0 
Proceeds from sales and calls of securities available-for-sale$0 $30,000 

Investment securities with carrying values of $43.9 million and $43.7 million as of March 31, 2021 and December 31, 2020, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.
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The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous, unrealized loss position as of the dates indicated:
Less Than 12 Months12 Months or LongerTotal
($ in thousands)Fair
Value
Gross Unrealized LossesFair
Value
Gross Unrealized LossesFair
Value
Gross Unrealized Losses
March 31, 2021
Securities available-for-sale:
SBA loan pool securities$16,733 $(79)$$$16,733 $(79)
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage-backed securities47,975 (419)47,975 (419)
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations42,339 (1,466)42,339 (1,466)
Municipal securities30,357 (1,089)30,357 (1,089)
Collateralized loan obligations37,446 (54)427,177 (3,578)464,623 (3,632)
Corporate debt securities4,988 (12)4,988 (12)
Total securities available-for-sale$179,838 $(3,119)$427,177 $(3,578)$607,015 $(6,697)
December 31, 2020
SBA loan pool securities$17,354 $(82)$$$17,354 $(82)
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations19,033 (166)19,033 (166)
Municipal securities11,401 (4)11,401 (4)
Collateralized loan obligations64,775 (225)613,010 (9,495)677,785 (9,720)
Total securities available-for-sale$112,563 $(477)$613,010 $(9,495)$725,573 $(9,972)

At March 31, 2021, our securities available-for-sale portfolio consisted of 111 securities, of which 47 securities were in an unrealized loss position. At December 31, 2020, our securities available-for-sale portfolio consisted of 103 securities, of which 50 securities were in an unrealized loss position.
We monitor our securities portfolio to ensure it has adequate credit support. The majority of unrealized losses are related to our collateralized loan obligations. We consider the lowest credit rating for identification of credit impairment for collateralized loan obligations and other securities. As of March 31, 2021, all of our collateralized loan obligations investment securities in an unrealized loss position received an investment grade credit rating. The decline in fair value was attributable to a combination of changes in interest rates and general volatility in the credit market conditions in response to the economic uncertainty caused by the global pandemic. We do not currently intend to sell any of the securities in an unrealized loss position and further believe, it is more likely than not, that we will not be required to sell these securities before their anticipated recovery. Securities that are in an unrealized gain position or are trading at par are evaluated for continued inclusion in our portfolio based on interest rate, liquidity and yield objectives of the Company.
During the three months ended March 31, 2021 and 2020, 0 allowance for credit losses related to securities available-for-sale was recorded.
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The following table presents the fair value and yield information of the investment securities portfolio, based on the earlier of maturity dates or next repricing date, as of March 31, 2021:
One year or lessMore than One Year through Five YearsMore than Five Years through Ten YearsMore than Ten YearsTotal
($ in thousands)Fair
Value
Weighted-Average YieldFair
Value
Weighted-Average YieldFair
Value
Weighted-Average YieldFair
Value
Weighted-Average YieldFair
Value
Weighted-Average Yield
Securities available-for-sale:
SBA loan pool securities$16,733 1.34 %$%$%$%$16,733 1.34 %
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities%%29,238 2.20 %94,062 2.35 %123,300 2.31 %
U.S. government agency and U.S. government sponsored enterprise collateralized mortgage obligations110,147 0.67 %11,193 1.99 %42,747 1.35 %46,869 1.76 %210,956 1.12 %
Municipal securities%%9,193 2.60 %76,345 2.49 %85,538 2.51 %
Non-agency residential mortgage-backed securities%%%158 6.36 %158 6.36 %
Collateralized loan obligations683,873 1.86 %%%%683,873 1.86 %
Corporate debt securities%132,244 5.01 %18,028 5.73 %%150,272 5.08 %
Total securities available-for-sale$810,753 1.69 %$143,437 4.77 %$99,206 2.40 %$217,434 2.28 %$1,270,830 2.18 %
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NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
The following table presents the balances in our loan portfolio as of the dates indicated:
($ in thousands)March 31,
2021
December 31,
2020
Commercial:
Commercial and industrial$1,878,325 $2,088,308 
Commercial real estate839,965 807,195 
Multifamily1,258,278 1,289,820 
SBA(1)
338,903 273,444 
Construction169,122 176,016 
Consumer:
Single family residential mortgage1,253,251 1,230,236 
Other consumer26,557 33,386 
Total loans(2)
$5,764,401 $5,898,405 
Allowance for loan losses(79,353)(81,030)
Loans receivable, net$5,685,048 $5,817,375 
(1)Includes 1,228 PPP loans totaling $276.0 million, net of unamortized loan fees totaling $5.1 million at March 31, 2021 and 949 PPP loans totaling $210.0 million, net of unamortized loan fees totaling $1.6 million at December 31, 2020.
(2)Includes net deferred loan origination costs/(fees) and premiums/(discounts) of $4.6 million and $6.2 million at March 31, 2021 and December 31, 2020.

Credit Quality Indicators
We categorize loans into risk categories based on relevant information about the ability of borrowers to repay their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We perform a historical loss analysis that is combined with a comprehensive loan to value analysis to analyze the associated risks in the current loan portfolio. We analyze loans individually and grade each loan for credit risk. This analysis includes all loans delinquent over 60 days and non-homogeneous loans such as commercial and commercial real estate loans. We use the following definitions for credit risk ratings:
Pass: Loans risk rated as pass are in compliance in all respects with the Bank’s credit policy and regulatory requirements, and do not exhibit any potential or defined weakness as defined under “Special Mention”, “Substandard” or “Doubtful”.
Special Mention: Loans risk rated as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit position at some future date.
Substandard: Loans risk rated as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so risk rated have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.



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The following table presents the risk categories for total loans by class of loans and origination year as of March 31, 2021:
Term Loans Amortized Cost Basis by Origination Year
($ in thousands)20212020201920182017PriorRevolving Loans Amortized Cost BasisRevolving Loans Amortized Cost Basis
Converted to Term
Total
March 31, 2021
Commercial:
Commercial and industrial
Pass$42,010 $81,257 $74,627 $67,474 $51,189 $118,729 $1,342,027 $13,507 $1,790,820 
Special mention3,501 3,984 2,702 12,399 6,007 1,500 7,506 37,599 
Substandard17,057 6,076 9,010 13,792 3,971 49,906 
Doubtful
Commercial and industrial42,010 84,758 95,668 76,252 63,588 133,746 1,357,319 24,984 1,878,325 
Commercial real estate
Pass111,377 66,607 147,993 171,212 62,798 229,419 2,682 1,580 793,668 
Special mention9,390 16,964 3,761 30,115 
Substandard512 14,451 14,963 
Doubtful1,219 1,219 
Commercial real estate111,377 66,607 148,505 180,602 62,798 262,053 6,443 1,580 839,965 
Multifamily
Pass16,566 235,977 383,314 268,034 109,761 221,183 40 1,234,875 
Special mention3,050 801 3,851 
Substandard19,552 19,552 
Doubtful
Multifamily16,566 235,977 386,364 268,034 109,761 241,536 40 0 1,258,278 
SBA
Pass130,594 151,088 13,995 1,224 3,648 27,863 953 384 329,749 
Special mention1,755 206 1,265 3,231 
Substandard1,272 2,595 269 1,306 5,442 
Doubtful391 90 481 
SBA130,594 151,088 15,750 1,615 5,126 31,723 1,222 1,785 338,903 
Construction
Pass1,177 45,148 29,576 32,931 48,817 157,649 
Special mention4,037 7,436 11,473 
Substandard
20

Doubtful
Construction1,177 45,148 29,576 36,968 48,817 7,436 0 0 169,122 
Consumer:
Single family residential mortgage
Pass116,087 165,321 120,880 225,492 147,342 415,134 14,442 1,204,698 
Special mention901 3,144 685 9,456 14,186 
Substandard9,181 3,083 21,846 257 34,367 
Doubtful
Single family residential mortgage116,087 165,321 121,781 237,817 151,110 446,436 14,699 0 1,253,251 
Other consumer
Pass34 1,865 22,256 2,137 26,292 
Special mention30 64 94 
Substandard99 72 171 
Doubtful
Other consumer0 0 0 34 0 1,895 22,419 2,209 26,557 
Total loans$417,811 $748,899 $797,644 $801,322 $441,200 $1,124,825 $1,402,142 $30,558 $5,764,401 



21

The following table presents the risk categories for total loans by class of loans and origination year as of December 31, 2020:
Term Loans Amortized Cost Basis by Origination Year
($ in thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Amortized Cost Basis
Converted to Term
Total
December 31, 2020
Commercial:
Commercial and industrial
Pass$99,015 $78,783 $70,248 $52,786 $44,536 $92,129 $1,572,259 $9,945 $2,019,701 
Special mention928 2,748 7,986 1,574 2,271 1,500 225 17,232 
Substandard13,937 6,262 4,618 9,264 12,598 4,696 51,375 
Doubtful
Commercial and industrial99,015 93,648 79,258 65,390 46,110 103,664 1,586,357 14,866 2,088,308 
Commercial real estate
Pass75,432 150,731 192,831 63,144 91,454 182,756 2,682 1,582 760,612 
Special mention9,452 2,518 14,754 3,761 30,485 
Substandard16,098 16,098 
Doubtful
Commercial real estate75,432 150,731 202,283 63,144 93,972 213,608 6,443 1,582 807,195 
Multifamily
Pass239,449 407,532 275,881 110,105 97,160 154,841 27 1,284,995 
Special mention2,050 803 2,853 
Substandard1,972 1,972 
Doubtful
Multifamily239,449 409,582 275,881 110,105 97,160 157,616 27 0 1,289,820 
SBA
Pass211,962 14,082 1,260 3,746 11,087 18,589 3,111 1,014 264,851 
Special mention1,768 212 415 874 3,275 
Substandard1,319 682 1,855 226 755 4,837 
Doubtful390 91 481 
SBA211,962 15,850 1,650 5,277 12,184 21,318 3,337 1,866 273,444 
Construction
Pass41,677 30,387 45,397 50,024 167,485 
Special mention1,537 6,994 8,531 
Substandard
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Doubtful— 
Construction41,677 30,387 46,934 50,024 6,994 0 0 0 176,016 
Consumer:
Single family residential mortgage
Pass149,382 140,129 271,667 161,332 237,285 227,711 15,252 1,202,758 
Special mention1,837 688 4,868 4,460 11,853 
Substandard157 491 1,079 4,978 8,920 15,625 
Doubtful
Single family residential mortgage149,382 140,286 273,995 163,099 247,131 241,091 15,252 0 1,230,236 
Other consumer
Pass38 47 1,876 27,644 2,218 31,823 
Special mention30 1,185 1,215 
Substandard274 74 348 
Doubtful
Other consumer38 0 47 0 0 1,906 29,103 2,292 33,386 
Total loans$816,955 $840,484 $880,048 $457,039 $503,551 $739,203 $1,640,519 $20,606 $5,898,405 

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Past Due Loans
The following table presents the aging of the recorded investment in past due loans, excluding accrued interest receivable (which is not considered to be material), by class of loans as of the dates indicated:
($ in thousands)30 - 59 Days Past Due60 - 89 Days Past DueGreater than 89 Days Past dueTotal Past DueCurrentTotal
March 31, 2021
Non-Traditional Mortgage (NTM) loans:
Single family residential mortgage$6,799 $2,441 $6,997 $16,237 $394,293 $410,530 
Other consumer1,606 1,606 
Total NTM loans6,799 2,441 6,997 16,237 395,899 412,136 
Traditional loans:
Commercial:
Commercial and industrial14 517 3,517 4,048 1,874,277 1,878,325 
Commercial real estate2,644 923 3,567 836,398 839,965 
Multifamily801 801 1,257,477 1,258,278 
SBA1,520 997 2,457 4,974 333,929 338,903 
Construction169,122 169,122 
Consumer:
Single family residential mortgage11,729 2,536 17,321 31,586 811,135 842,721 
Other consumer84 84 24,867 24,951 
Total traditional loans16,792 4,973 23,295 45,060 5,307,205 5,352,265 
Total$23,591 $7,414 $30,292 $61,297 $5,703,104 $5,764,401 
December 31, 2020
NTM loans:
Single family residential mortgage$4,200 $641 $6,548 $11,389 $424,126 $435,515 
Other consumer1,598 1,598 
Total NTM loans4,200 641 6,548 11,389 425,724 437,113 
Traditional loans:
Commercial:
Commercial and industrial67 4,284 4,351 2,083,957 2,088,308 
Commercial real estate807,195 807,195 
Multifamily1,289,820 1,289,820 
SBA354 626 3,062 4,042 269,402 273,444 
Construction176,016 176,016 
Consumer:
Single family residential mortgage6,836 980 3,742 11,558 783,163 794,721 
Other consumer216 61 277 31,511 31,788 
Total traditional loans7,473 1,667 11,088 20,228 5,441,064 5,461,292 
Total$11,673 $2,308 $17,636 $31,617 $5,866,788 $5,898,405 
In accordance with regulatory guidance, borrowers that are on forbearance or deferment, which were current prior to becoming affected by the global pandemic are not be reported as past due.
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Nonaccrual Loans
The following table presents nonaccrual loans as of the dates indicated:
March 31, 2021December 31, 2020
($ in thousands)NTM LoansTraditional LoansTotal
Nonaccrual Loans
Nonaccrual Loans with no ACLNTM LoansTraditional LoansTotal
Nonaccrual Loans
Nonaccrual Loans with no ACL
Nonaccrual loans
Commercial:
Commercial and industrial$$13,475 $13,475 $13,324 $$13,821 $13,821 $13,088 
Commercial real estate5,834 5,834 5,834 4,654 4,654 4,654 
SBA4,179 4,179 796 3,749 3,749 648 
Construction
Consumer:
Single family residential mortgage11,652 20,780 32,432 32,431 8,697 4,822 13,519 13,519 
Other consumer157 157 157 
Total nonaccrual loans$11,652 $44,268 $55,920 $52,385 $8,697 $27,203 $35,900 $32,066 

At March 31, 2021 and December 31, 2020, there were 0 and $728 thousand of loans that were past due 90 days or more and still accruing.
The non-traditional mortgage (“NTM”) loans on nonaccrual status included $4.5 million of Green Loans and $7.1 million of Interest Only loans at March 31, 2021 compared to $4.0 million of Green Loans and $4.7 million of Interest Only loans at December 31, 2020.

Loans in Process of Foreclosure
At March 31, 2021, there was 1 consumer mortgage loan secured by residential real estate properties totaling $3.3 million for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction. At December 31, 2020, there were NaN.

Allowance for Credit Losses
Our ACL methodology and resulting provision continues to be impacted by the current economic uncertainty and volatility caused by the COVID-19 pandemic. The ACL methodology uses a nationally recognized, third-party model that includes many assumptions based on historical and peer loss data, current loan portfolio risk profile including risk ratings, and economic forecasts including macroeconomic variables (MEVs) released by our model provider during March 2021. In contrast to the December 2020 forecasts, the March forecasts reflect a more favorable view of the economy (i.e. higher GDP growth rates and lower unemployment rates). While the forecasts are improving and the economy is showing signs of recovery with the rollout of the vaccine and additional government stimulus, there remains uncertainty regarding the ultimate impact of the pandemic and the pace of the recovery. Accordingly, our economic assumptions and the resulting ACL level and provision reflect these uncertainties. The ACL also incorporated qualitative factors to account for certain loan portfolio characteristics that are not taken into consideration by the third-party model including underlying strengths and weaknesses in the loan portfolio. As is the case with all estimates, the ACL is expected to be impacted in future periods by economic volatility, changing economic forecasts, underlying model assumptions, and asset quality metrics, all of which may be better than or worse than current estimates.
The ACL process involves subjective and complex judgments as well as adjustments for numerous factors including those described in the federal banking agencies' joint interagency policy statement on ALL, which include underwriting experience and collateral value changes, among others. .
We have established credit risk management processes that include regular management review of the loan portfolio to identify problem loans. During the ordinary course of business, management may become aware of borrowers who may not be able to fulfill their contractual payment requirements within the loan agreements. Such loans are subject to increased monitoring. Consideration is given to placing these loans on nonaccrual status, assessing the need for additional allowance for loan loss, and
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partially or fully charging off the principal balance. We maintain the allowance for loan losses at a level that is considered adequate to cover the current expected credit losses in the loan portfolio.
The reserve for unfunded loan commitments is established to cover the current expected credit losses for the estimated level of funding of these loan commitments, except for unconditionally cancellable commitments for which no reserve is required under ASC 326. At March 31, 2021 and December 31, 2020, the reserve for unfunded loan commitments was $3.4 million and $3.2 million, respectively, and was included in accrued expenses and other liabilities on the consolidated statements of financial condition.
The credit risk monitoring system is designed to identify impaired and potential problem loans, perform periodic evaluation of impairment, and determine the adequacy of the allowance for credit losses in a timely manner. In addition, management has adopted a credit policy that includes a credit review and control system that it believes should be effective in ensuring that we maintain an adequate allowance for credit losses. Further, the Board of Directors provides oversight and guidance for management’s allowance evaluation process.
The following table presents a summary of activity in the ACL for the periods indicated:
Three Months Ended March 31,
($ in thousands)20212020
Allowance
for
Loan Losses
Reserve for Unfunded Loan CommitmentsAllowance
for
Credit Losses
Allowance
for
Loan Losses
Reserve for Unfunded Loan CommitmentsAllowance
for
Credit Losses
Balance at beginning of period$81,030 $3,183 $84,213 $57,649 $4,064 $61,713 
Impact of adopting ASU 2016-137,609 (1,226)6,383 
Loans charged off(565)(565)(2,076)(2,076)
Recoveries of loans previously charged off172 172 350 350 
Net charge-offs(393)(393)(1,726)(1,726)
Provision for (reversal of) credit losses(1,284)177 (1,107)14,711 1,050 15,761 
Balance at end of period$79,353 $3,360 $82,713 $78,243 $3,888 $82,131 



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Accrued interest receivable on loans receivable, net totaled $23.7 million and $24.7 million at March 31, 2021 and December 31, 2020, and is included within other assets in the accompanying consolidated statements of financial condition. Accrued interest receivable is excluded from the estimate of expected credit losses.
The following table presents the activity and balance in the ALL and the recorded investment, excluding accrued interest, in loans based on the impairment methodology as of or for the three months ended March 31, 2021:
($ in thousands)Commercial and IndustrialCommercial Real EstateMultifamilySBAConstructionSingle Family Residential MortgageOther ConsumerTotal
ALL:
Balance at December 31, 2020$20,608 $19,074 $22,512 $3,145 $5,849 $9,191 $651 $81,030 
Charge-offs(565)(565)
Recoveries45 126 172 
Net (charge-offs) recoveries(520)126 (393)
(Reversal of) provision for credit losses(385)(1,974)1,372 180 (297)(30)(150)(1,284)
Balance at March 31, 2021$19,703 $17,100 $23,884 $3,451 $5,552 $9,161 $502 $79,353 

The following table presents the activity and balance in the ALL and the recorded investment, excluding accrued interest, in loans based on the impairment methodology as of or for the three months ended March 31, 2020:
($ in thousands)Commercial and IndustrialCommercial Real EstateMultifamilySBAConstructionSingle Family Residential MortgageOther ConsumerTotal
ALL:
Balance at December 31, 2019$22,353 $5,941 $11,405 $3,120 $3,906 $10,486 $438 $57,649 
Adoption of ASU N. 2016-13662 4,847 1,809 388 103 (420)220 7,609 
Charge-offs(1,164)(356)(552)(4)(2,076)
Recoveries30 121 151 48 350 
Net (charge-offs) recoveries(1,134)(235)(401)44 (1,726)
Provision for (reversal of ) credit losses1,692 2,832 6,858 379 3,043 (72)(21)14,711 
Balance at March 31, 2020$23,573 $13,620 $20,072 $3,652 $7,052 $9,593 $681 $78,243 
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Collateral Dependent Loans
A loan is considered collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are evaluated individually and the ACL is determined based on the amount by which amortized costs exceed the estimated fair value of the collateral, adjusted for estimated selling costs.
Collateral dependent loans consisted of the following as of March 31, 2021 and December 31, 2020:
March 31, 2021
Real Estate
($ in thousands)CommercialResidentialBusiness AssetsTotal
Commercial:
Commercial and industrial5,368 4,924 10,292 
Commercial real estate3,864 1,971 5,835 
SBA74 1,208 2,682 3,964 
Consumer:
Single family residential mortgage38,544 38,544 
Total loans$9,306 $41,723 $7,606 $58,635 
December 31, 2020
Real Estate
($ in thousands)CommercialResidentialBusiness AssetsTotal
Commercial:
Commercial and industrial5,492 4,965 10,457 
Commercial real estate2,644 2,010 4,654 
SBA349 497 2,750 3,596 
Consumer:
Single family residential mortgage17,820 17,820 
Other consumer157 157 
Total loans$8,485 $20,484 $7,715 $36,684 

Troubled Debt Restructurings
TDR loans consisted of the following as of the dates indicated:
March 31, 2021December 31, 2020
($ in thousands)NTM
Loans
Traditional LoansTotalNTM
Loans
Traditional LoansTotal
Commercial:
Commercial and industrial$$3,565 $3,565 $$3,884 $3,884 
SBA265 265 265 265 
Consumer:
Single family residential mortgage4,409 2,238 6,647 2,631 2,217 4,848 
Other consumer
Total$4,409 $6,068 $10,477 $2,631 $6,366 $8,997 

We had commitments to lend to customers with outstanding loans that were classified as TDRs of $63 thousand at both March 31, 2021 and December 31, 2020. Accruing TDRs were $6.3 million and nonaccrual TDRs were $4.1 million at March 31, 2021, compared to accruing TDRs of $4.7 million and nonaccrual TDRs of $4.3 million at December 31, 2020. The
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increase in TDRs during the three months ended March 31, 2021 was primarily due to one commercial and industrial relationship.
The following table summarizes the pre-modification and post-modification balances of the new TDRs for the periods indicated:
Three Months Ended
($ in thousands)Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
March 31, 2021
Consumer:
Single family residential mortgage$1,800 $1,800 
Total1,800 1,800 
March 31, 2020
Commercial:
Commercial and industrial$5,000 $5,000 
Total$5,000 $5,000 

We consider a TDR to be in payment default once it becomes 30 days or more past due following a modification. During the three months ended March 31, 2021 and 2020, there were 0 loans that were modified as a TDR during the past 12 months that had subsequent payment defaults.
The following table summarizes TDRs by modification type for the periods indicated:
Three Months Ended
Modification Type
Extension of MaturityTotal
($ in thousands)CountAmountCountAmount
March 31, 2021
Consumer:
Single family residential mortgage1,800 1,800 
Total1 1,800 1 $1,800 
March 31, 2020
Commercial:
Commercial and industrial5,000 $5,000 
Total1 5,000 1 $5,000 

Purchases, Sales, and Transfers
From time to time, we purchase and sell loans in the secondary market. Certain loans are transferred from held-for-investment to held-for-sale at the lower of cost or fair value and any reductions in value on transfer are reflected as write-downs to allowance for credit losses. During the three months ended March 31, 2021 we purchased loans aggregating $132.9 million. There were 0 purchases of loans during the three months ended March 31, 2020.
There were 0 loans transferred from (to) loans held-for-sale and there were 0 sales of loans for the three months ended March 31, 2021 and 2020.

Non-Traditional Mortgage Loans (“NTM”)
Our NTM portfolio is comprised of 3 interest-only products: Green Loans, Interest Only loans and a small number of loans with the potential for negative amortization. The initial credit guidelines for the NTM portfolio were established based on the borrower's Fair Isaac Corporation (“FICO”) score, LTV ratio, property type, occupancy type, loan amount, and geography. Additionally, from an ongoing credit risk management perspective, we have determined that the most significant performance
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indicators for NTMs are LTV ratios and FICO scores. We review the NTM loan portfolio periodically by refreshing FICO scores on the Green Loans and HELOCs and ordering third party automated valuation models ("AVMs") to confirm collateral values. We no longer originate NTM loans.
The following table presents the composition of the NTM portfolio, which are included in the single family residential mortgage portfolio, as of the dates indicated:
March 31, 2021December 31, 2020
($ in thousands)CountAmountPercentCountAmountPercent
Consumer:
Single family residential mortgage:
Green Loans (HELOC) - first liens46 $30,293 7.4 %48 $31,587 7.2 %
Interest Only - first liens263 378,088 91.7 %283 401,640 91.9 %
Negative amortization2,149 0.5 %2,288 0.5 %
Total NTM - first liens315 410,530 99.6 %339 435,515 99.6 %
Other consumer:
Green Loans (HELOC) - second liens1,606 0.4 %1,598 0.4 %
Total NTM - second liens1,606 0.4 %1,598 0.4 %
Total NTM loans320 $412,136 100.0 %344 $437,113 100.0 %
Total loans receivable$5,764,401 $5,898,405 
% of total NTM loans to total loans receivable7.1 %7.4 %

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
At March 31, 2021 and December 31, 2020, we had goodwill of $37.1 million. We evaluate goodwill impairment as of October 1st each year, and more frequently if events or circumstances indicate that there may be impairment. We completed our most recent annual goodwill impairment test as of October 1, 2020 and determined that 0 goodwill impairment existed.
Core deposit intangibles are amortized over their useful lives ranging from four to ten years. As of March 31, 2021, the weighted average remaining amortization period for core deposit intangibles was approximately 3.6 years.
($ in thousands)Gross Carrying ValueAccumulated AmortizationNet Carrying Value
March 31, 2021
Core deposit intangibles$30,904 $28,553 $2,351 
December 31, 2020
Core deposit intangibles$30,904 $28,271 $2,633 

Aggregate amortization of intangible assets was $282 thousand and $429 thousand for the three months ended March 31, 2021 and 2020. The following table presents estimated future amortization expenses as of March 31, 2021:
($ in thousands)Remainder of 20212022202320242025Total
Estimated future amortization expense$800 $799 $517 $235 $$2,351 


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NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
The following table presents advances from the FHLB as of the dates indicated:
($ in thousands)March 31,
2021
December 31,
2020
Fixed rate:
Outstanding balance (1)(2)
$416,000 $461,000 
Interest rates ranging from (2)
%%
Interest rates ranging to3.32 %3.32 %
Weighted average interest rate2.50 %2.51 %
Variable rate:
Outstanding balance$225,000 $85,000 
Weighted average interest rate0.09 %0.17 %
(1)Excludes $5.9 million and $6.2 million of unamortized debt issuance costs at March 31, 2021 and December 31, 2020.    
(2)Includes $5.0 million in FHLB recovery advances with an interest rate of 0.00% and a maturity date of May 27, 2021.

Each advance is payable at its maturity date. Advances paid early are subject to a prepayment penalty. At the end of the first quarter of 2021, FHLB advances included $225.0 million overnight borrowings, $5.0 million maturing within three months, and $411.0 million maturing beyond three months with a weighted average life of 4.7 years and weighted average interest rate of 2.53%.
At March 31, 2021 and December 31, 2020, the Bank’s advances from the FHLB were collateralized by certain real estate loans with an aggregate unpaid principal balance of $2.23 billion and $2.37 billion. Based on this collateral, the Bank was eligible to borrow an additional $584.2 million at March 31, 2021.
The Bank’s investment in capital stock of the FHLB of San Francisco totaled $17.7 million and $17.3 million at March 31, 2021 and December 31, 2020.
We participate in the Federal Reserve Bank of San Francisco (“Federal Reserve”) Borrower-in-Custody (“BIC”) program. Our borrowing capacity with the Federal Reserve was $384.9 million at March 31, 2021. At March 31, 2021, the Bank has pledged certain qualifying loans with an unpaid principal balance of $745.3 million and securities with a carrying value of $23.9 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 0 borrowings under this arrangement for the three months ended March 31, 2021 and 2020.
The Bank maintained available unsecured federal funds lines with 4 correspondent banks totaling $175.0 million, with 0 outstanding borrowings at March 31, 2021. The Bank also has the ability to perform unsecured overnight borrowing from various financial institutions through the American Financial Exchange platform. The availability of such unsecured borrowings fluctuates regularly and are subject to the counterparties discretion and totaled $231.0 million and $196.0 million at March 31, 2021 and December 31, 2020.
The Bank also maintained repurchase agreements and had 0 outstanding securities sold under agreements to repurchase at March 31, 2021 and December 31, 2020. Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and the pledging of additional investment securities.

NOTE 7 – LONG-TERM DEBT
The following table presents our long-term debt as of the dates indicated:
March 31, 2021December 31, 2020
($ in thousands)Par ValueUnamortized Debt Issuance Cost and DiscountPar ValueUnamortized Debt Issuance Cost and Discount
5.25% senior notes due April 15, 2025$175,000 $(1,255)$175,000 $(1,291)
4.375% subordinated notes due October 30, 203085,000 (2,304)85,000 (2,394)
Total$260,000 $(3,559)$260,000 $(3,685)
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At March 31, 2021, we were in compliance with all covenants under our long-term debt agreements.

NOTE 8 – INCOME TAXES
For the three months ended March 31, 2021, income tax expense was $2.3 million, resulting in an effective tax rate of 13.8%. For the three months ended March 31, 2020, income tax benefit was $2.2 million and the effective tax rate was 24.7%. For the three months ended March 31, 2021, income tax expense included a benefit resulting from the exercise of all previously issued outstanding stock appreciation rights, including a net benefit of $2.1 million in the first quarter. The effective tax rate is expected to be in the 25% to 27% range for the remaining quarters in 2021.
We account for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including considering the four possible sources of future taxable income, such as future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback year(s), and future tax planning strategies. Based on this analysis, management determined, it was more likely than not, that all of the deferred tax assets would be realized; therefore, 0 valuation allowance was provided against the net deferred tax assets of $47.9 million and $46.0 million at March 31, 2021 and December 31, 2020, respectively.
ASC 740-10-25 relates to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740-10-25 prescribes a threshold and a measurement process for recognizing in the financial statements a tax position taken or expected to be taken in a tax return and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We had unrecognized tax benefits of $954 thousand and $924 thousand at March 31, 2021 and December 31, 2020, respectively. We do not believe that the unrecognized tax benefits will change materially in the next twelve months. As of March 31, 2021, the total unrecognized tax benefit that, if recognized, would impact the effective tax rate was $727 thousand.
At March 31, 2021 and December 31, 2020, we had 0 accrued interest or penalties. In the event we are assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income tax expense.
We are subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. We are no longer subject to examination by U.S. federal taxing authorities for years before 2017. The statute of limitations for the assessment of California franchise taxes has expired for tax years before 2014 (other state income and franchise tax statutes of limitations vary by state).

NOTE 9 – DERIVATIVE INSTRUMENTS
We use derivative instruments and other risk management techniques to reduce our exposure to adverse fluctuations in interest rates and foreign currency exchange rates in accordance with our risk management policies.
During the three months ended March 31, 2021, changes in fair value of interest rate swaps and caps on loans and foreign exchange contracts were a gain of $271 thousand, compared to a loss of $182 thousand for the three months ended March 31, 2020, and were included in other income on the consolidated statements of operations.
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The following table presents the notional amount and fair value of derivative instruments included in the consolidated statements of financial condition as of the dates indicated.
March 31, 2021December 31, 2020
($ in thousands)Notional AmountFair
Value(1)
Notional AmountFair
Value(1)
Derivative assets:
Interest rate swaps and caps on loans$64,911 $4,452 $67,840 $7,304 
Foreign exchange contracts6,647 255 7,010 328 
Total$71,558 $4,707 $74,850 $7,632 
Derivative liabilities:
Interest rate swaps and caps on loans$64,911 $4,663 $67,840 7,789 
Foreign exchange contracts6,647 243 7,010 313 
Total$71,558 $4,906 $74,850 $8,102 
(1)The fair value of interest rate swaps and caps on loans are included in other assets and accrued expenses and other liabilities, respectively, in the accompanying consolidated statements of financial condition.
We have entered into agreements with counterparty financial institutions, which include master netting agreements that provide for the net settlement of all contracts with a single counterparty in the event of default. We elect, however, to account for all derivatives with counterparty institutions on a gross basis.
NOTE 10 – EMPLOYEE STOCK COMPENSATION
On May 31, 2018, our stockholders approved the Company's 2018 Omnibus Stock Incentive Plan (“2018 Omnibus Plan”). The 2018 Omnibus Plan provides that the maximum number of shares available for awards is 4,417,882. As of March 31, 2021, 3,183,000 shares were available for future awards.
Stock-based Compensation Expense
The following table presents stock-based compensation expense and the related tax benefits for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Stock options$$
Restricted stock awards and units1,544 1,574 
Total share-based compensation expense$1,544 $1,576 
Related tax benefits$455 $464 

The following table presents unrecognized stock-based compensation expense as of March 31, 2021:
($ in thousands)Unrecognized ExpenseWeighted-Average Remaining Expected Recognition Period
Restricted stock awards and restricted stock units$8,861 2.5 years
Total$8,861 2.5 years
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Stock Options
We issued stock options to certain employees, officers, and directors. Stock options are issued at the closing market price immediately before the grant date and generally have a three to five year vesting period and contractual terms of seven to ten years. We recognize an income tax deduction upon exercise of a stock option to the extent taxable income is recognized by the option holder. In the case of a non-qualified stock option, the option holder recognizes taxable income based on the fair market value of the shares acquired at the time of exercise less the exercise price.
The following table represents stock option activity for the three months ended March 31, 2021:
Three Months Ended March 31, 2021
($ in thousands except per share data)Number of SharesWeighted-Average Exercise Price Per ShareWeighted-Average Remaining Contract TermAggregated Intrinsic Value
Outstanding at beginning of period55,069 $13.96 
Exercised(40,165)$14.30 
Outstanding at end of period14,904 $13.05 4.0 years$75 
Exercisable at end of period14,904 $13.05 4.0 years$75 

There were 0 unvested stock options as of March 31, 2021 and December 31, 2020.

Restricted Stock Awards and Restricted Stock Units
We also have granted restricted stock awards and restricted stock units to certain employees, officers, and directors. The restricted stock awards and units are valued at the closing price of our stock on the measurement date. The restricted stock awards and units fully vest after a specified period (generally ranging from one to five years) of continued service from the date of grant plus, in some cases, the satisfaction of performance conditions. These performance targets include conditions relating to our profitability and regulatory standing. The actual amounts of stock released upon vesting will be determined by the Compensation Committee of our Board of Directors upon the Committee's certification of the satisfaction of the target level of performance. We recognize an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock, generally upon vesting or, in the case of restricted stock units, when settled. The following table presents unvested restricted stock awards and restricted stock units activity for the three months ended March 31, 2021:
Three Months Ended
March 31, 2021
Number of SharesWeighted Average Grant Date Fair Value Per Share
Outstanding at beginning of period848,302 $14.42 
Granted (1)
220,457 $20.63 
Vested (2)
(152,248)$14.82 
Forfeited (3)
(50,532)$11.17 
Outstanding at end of period865,979 $16.12 
(1)There were 58,839 performance-based shares/units included in shares granted for the three months ended March 31, 2021.
(2)There were 69,109 performance-based shares/units included in vested shares for the three months ended March 31, 2021.
(3)The number of forfeited shares includes aggregate performance-based shares/units of 40,160 for the three months ended March 31, 2021.

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Stock Appreciation Rights
On August 21, 2012, we granted to the then, and now former, chief executive officer, a ten-year stock appreciation right (“SAR”), which were fully exercised during the three months ended March 31, 2021, resulting in the issuance of 305,772 shares of voting common stock. In connection with the exercise of the SARs, we recognized a tax benefit of $2.1 million (refer to Note 8 - Income Taxes). The following table represents SARs activity and the weighted average exercise price per share as of and for the three months ended March 31, 2021:
Three Months Ended March 31, 2021
($ in thousands except per share data)Number of SharesWeighted-Average Exercise Price Per Share
Outstanding at beginning of period1,559,012 $11.60 
Exercised(1,559,012)$11.60 
Outstanding at end of period0 $0 
Exercisable at end of period0 $0 

NOTE 11 – STOCKHOLDERS’ EQUITY
Preferred Stock
We are authorized to issue 50,000,000 shares of preferred stock with par value of $0.01 per share. Preferred shares outstanding rank senior to common shares both as to dividends and liquidation preference but generally have no voting rights. All of our outstanding shares of preferred stock have a $1,000 per share liquidation preference. The following table presents our total outstanding preferred stock as of the dates indicated:
March 31, 2021December 31, 2020
($ in thousands)Shares OutstandingLiquidation PreferenceCarrying ValueShares OutstandingLiquidation PreferenceCarrying Value
Series D
7.375% non-cumulative perpetual
$$93,270 $93,270 $89,922 
Series E
7.00%
non-cumulative perpetual
98,702 98,702 94,956 98,702 98,702 94,956 
Total98,702 $98,702 $94,956 191,972 $191,972 $184,878 


During certain periods, we have repurchased Series D Depositary Shares and Series E Depositary Shares, each representing a 1/40th interest in a share of Series D Preferred Stock and Series E Preferred Stock. When the consideration paid to repurchase shares exceeds the repurchased shares' carrying value, the difference reduces net income allocated to common shareholders. When the consideration paid to repurchase shares is less than the repurchased shares' carrying value, the difference increases net income allocated to common shareholders. The following table summarizes repurchases of these depositary shares for the periods indicated:
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Three Months Ended
March 31,
($ in thousands)20212020
Series D Preferred Stock:
Depositary shares repurchased3,730,767 81,304 
Preferred Stock retired (shares)93,269 2,033 
Consideration paid$93,269 $1,458 
Carrying value89,922 1,959 
Impact of preferred stock redemption$3,347 $(501)
Series E Preferred Stock:
Depositary shares repurchased7,400 
Preferred Stock retired (shares)185 
Consideration paid$— $153 
Carrying value— 178 
Impact of preferred stock redemption$$(25)

During the three months ended March 31, 2021, we repurchased all of our outstanding Series D Depositary Shares, resulting in an impact of preferred stock redemption of $3.3 million in the accompanying consolidated statements of operations.

Change in Accumulated Other Comprehensive (Loss) Income ("AOCI")
Our AOCI includes unrealized gain (loss) on securities available-for-sale. Changes to AOCI are presented net of the tax effect as a component of stockholders' equity. Reclassifications from AOCI occur when a security is sold, called or matures and are recorded on the consolidated statements of operations either as a gain or loss. The following table presents changes to AOCI for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Unrealized gain (loss) on securities available-for-sale
Balance at beginning of period$7,746 $(11,900)
Unrealized loss arising during the period(3,638)(59,885)
Tax effect of current period changes1,077 17,637 
Total changes, net of taxes(2,561)(42,248)
Balance at end of period$5,185 $(54,148)

NOTE 12 – VARIABLE INTEREST ENTITIES
We hold ownership interests in alternative energy partnerships and qualified affordable housing partnerships and have a variable interest in a multifamily securitization trust. We evaluate our interests in these entities to determine whether they meet the definition of a variable interest entity ("VIE") and whether we are required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest we hold could potentially be significant to the VIE, we consider both qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE. We have determined that our interests in these entities meet the definition of variable interests.
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Unconsolidated VIEs
Multifamily Securitization
During the third quarter of 2019, we transferred $573.5 million of multifamily loans, through a two-step process, to a third-party depositor which placed the multifamily loans into a third-party trust (a VIE) that issued structured pass-through certificates to investors. The transfer of these loans was accounted for as a sale for financial reporting purposes, in accordance with ASC 860. We determined that we are not the primary beneficiary of this VIE as we do not have the power to direct the activities that will have the most significant economic impact on the entity. Our continuing involvement in this securitization is limited to customary obligations associated with the securitization of loans, including the obligation to cure, repurchase, or substitute loans in the event of a material breach in representations. Additionally, we have the obligation to guarantee credit losses up to 12% of the aggregate unpaid principal balances at cut-off date of the securitization. This obligation is supported by a $68.8 million letter of credit between the Freddie Mac and the FHLB.
The maximum loss exposure that would be absorbed by us in the event that all of the assets in the securitization trust are deemed worthless is $68.8 million, which represents the aforementioned obligation to guarantee credit losses up to 12%. We believe that the loss exposure on the multifamily securitization is reduced by both loan-to-value ratios of the underlying collateral balances and the overcollateralization that exists within the securitization trust. At March 31, 2021, we have a $3.6 million repurchase reserve related to this VIE.
Alternative Energy Partnerships
We invest in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects that are designed to generate a return primarily through the realization of federal tax credits (energy tax credits). These entities were formed to invest in newly established residential and commercial solar leases and power purchase agreements. As a result of our investments, we have the right to certain investment tax credits and tax depreciation benefits (recognized on the flow through and income statement method in accordance with ASC 740), and to a lesser extent, cash flows generated from the installed solar systems leased to individual consumers for a fixed period of time. While our interest in the alternative energy partnerships meets the definition of a VIE in accordance with ASC 810, we have determined that we are not the primary beneficiary because we do not have the power to direct the activities that most significantly impact the economic performance of the entities including operational and credit risk management activities. As we are not the primary beneficiary, we did not consolidate the entities.
We use the Hypothetical Liquidation at Book Value ("HLBV") method to account for our investments in energy tax credits as an equity investment under ASC 970-323-25-17. Under the HLBV method, an equity method investor determines its share of an investee's earnings by comparing its claim on the investee's book value at the beginning and end of the period, assuming the investee were to liquidate all assets at their U.S. GAAP amounts and distribute the resulting cash to creditors and investors under their respective priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses from the equity investment for the period. To account for the tax credits earned on investments in alternative energy partnerships, we use the flow-through income statement method. Under this method, the tax credits are recognized as a reduction to income tax expense and the initial book-tax differences in the basis of the investments are recognized as additional tax expense in the year they are earned. Investments in alternative energy partnerships totaled $23.8 million and $28.0 million at March 31, 2021 and December 31, 2020.
The following table presents information regarding activity in our alternative energy partnerships for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Fundings$$3,631 
Cash distribution from investment538 454 
Loss on investments in alternative energy partnerships(3,630)(1,905)
Income tax credits recognized
Tax expense (benefit) recognized from HLBV application(992)(458)

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The following table represents the carrying value of the associated unconsolidated assets and liabilities and the associated maximum loss exposure for alternative energy partnerships as of the dates indicated:
($ in thousands)March 31,
2021
December 31,
2020
Cash$4,469 $3,228 
Equipment, net of depreciation239,043 241,015 
Other assets7,708 7,470 
Total unconsolidated assets$251,220 $251,713 
Total unconsolidated liabilities$6,347 $6,357 
Maximum loss exposure$23,809 $27,977 

The maximum loss exposure that would be absorbed by us in the event that all of the assets in alternative energy partnerships are deemed worthless is $23.8 million, which is our recorded investment amount at March 31, 2021.
We believe that the loss exposure on our investments is reduced considering our return on our investment is provided not only by the cash flows of the underlying client leases and power purchase agreements, but also through the significant tax benefits, including the federal tax credit carryover that resulted from the investments. In addition, our exposure is further limited as the arrangements include a transition manager to support any transition of the solar company sponsor, whose role includes that of the servicer and operation and maintenance provider, in the event the sponsor would be required to be removed from its responsibilities (e.g., bankruptcy, breach of contract, etc.).
Qualified Affordable Housing Partnerships
We invest in limited partnerships that operate qualified affordable housing projects. The returns on these investments are generated primarily through allocated Federal tax credits and other tax benefits. In addition, these investments contribute to our compliance with the Community Reinvestment Act. These limited partnerships are considered to be VIEs, because either (i) they do not have sufficient equity investment at risk or (ii) the limited partners with equity at risk do not have substantive kick-out rights through voting rights or substantive participating rights over the general partner. As a limited partner, we are not the primary beneficiary because the general partner has the ability to direct the activities of the VIEs that most significantly impact their economic performance. As a result, we do not consolidate these partnerships.
The following table presents information regarding balances in our qualified affordable housing partnerships for the periods indicated:
($ in thousands)March 31,
2021
December 31,
2020
Ending balance(1)
$42,027 $43,209 
Aggregate funding commitment61,278 61,278 
Total amount funded43,994 42,991 
Unfunded commitment17,284 18,287 
Maximum loss exposure42,027 43,209 
(1)Included in other assets in the accompanying Consolidated Statements of Financial Condition.
The following table presents information regarding activity in our qualified affordable housing partnerships for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20202019
Fundings$1,003 $4,559 
Proportional amortization recognized1,182 1,147 
Income tax credits recognized1,116 1,056 

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NOTE 13 – EARNINGS (LOSS) PER COMMON SHARE
The following table presents computations of basic and diluted earnings (loss) per common share ("EPS") for the three months ended March 31, 2021:
Three Months Ended
March 31, 2021
($ in thousands except per share data)Common StockClass B
Common Stock
Net income$14,239 $136 
Less: Income allocated to participating securities(61)(1)
Less: preferred stock dividends(3,111)(30)
Less: preferred stock redemption(3,316)(31)
Net income allocated to common stockholders$7,751 $74 
Weighted average common shares outstanding49,873,576 477,321 
Dilutive effects of restricted shares/units391,206 
Dilutive effects of stock options8,419 
Average shares and dilutive common shares50,273,201 477,321 
Basic earnings per common share$0.16 $0.16 
Diluted earnings per common share$0.15 $0.15 

For the three months ended March 31, 2021, there were 56,839 of restricted shares/units and 0 stock options that were not considered in computing diluted earnings per common share, because they were anti-dilutive.
During the three months ended March 31, 2021 all outstanding stock appreciation rights were exercised resulting in the net issuance of 305,772 shares of voting common stock. Prior to this exercise, stock appreciation rights were considered participating securities and income was allocated to the respective holder and not part of income (loss) available to common stockholders. Subsequent to this exercise, there are no longer any participating securities and the net shares issued are included in the computation of average common shares for both basic and diluted earnings per share.
The following table presents computations of basic and diluted EPS for the three months ended March 31, 2020:
Three Months Ended
March 31, 2020
($ in thousands except per share data)Common StockClass B Common Stock
Net loss$(6,531)$(62)
Less: participating securities dividends(93)(1)
Less: preferred stock dividends(3,500)(33)
Less: preferred stock redemption521 
Net loss allocated to common stockholders$(9,603)$(91)
Weighted average common shares outstanding49,987,456 477,321 
Dilutive effects of stock units
Dilutive effects of stock options
Average shares and dilutive common shares49,987,456 477,321 
Basic loss per common share$(0.19)$(0.19)
Diluted loss per common share$(0.19)$(0.19)

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For the three months ended March 31, 2020, there were 962,566 of restricted shares/units and 55,806 of stock options that were not considered in computing diluted earnings per common share, because they were anti-dilutive.

NOTE 14 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as unfunded loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Risk of credit loss exists up to the face amount of these instruments. The same credit policies are used to make such commitments as are used for originating loans, including obtaining collateral at exercise of the commitment.
The following table presents the contractual amount of financial instruments with off-balance-sheet risk as of the periods indicated:
March 31, 2021December 31, 2020
($ in thousands)Fixed RateVariable RateFixed RateVariable Rate
Commitments to extend credit
$18,703 $31,658 $17,555 $38,141 
Unused lines of credit1,793 1,625,253 1,783 1,348,138 
Letters of credit535 7,472 234 8,274 

Other Commitments
At March 31, 2021, we had unfunded commitments of $17.3 million, $5.6 million, and $2.5 million for qualified affordable housing fund partnerships, Small Business Investment Company ("SBIC") investments, and other investments, respectively.

NOTE 15 – REVENUE RECOGNITION
The following presents noninterest income, segregated by revenue streams, in-scope and out-of-scope of Topic 606 - Revenue From Contracts With Customers, for the periods indicated:
Three Months Ended
March 31,
($ in thousands)20212020
Noninterest income
In scope of Topic 606
Deposit service fees$810 $539 
Debit card fees387 177 
Other79 49 
Noninterest income (in-scope of Topic 606)1,276 765 
Noninterest income (out-of-scope of Topic 606)3,105 1,296 
Total noninterest income$4,381 $2,061 

We do not typically enter into long-term revenue contracts with customers. As of March 31, 2021 and December 31, 2020, we did not have any significant contract balances. As of March 31, 2021, we did not capitalize any contract acquisition costs.

NOTE 16 – RELATED-PARTY TRANSACTIONS
Certain of our executive officers and directors, and their related interests, are customers of, or have had transactions with the Bank in the ordinary course of business, including deposits, loans and other financial services related transactions. From time to time, the Bank may make loans to executive officers and directors, and their related interests, in the ordinary course of business and on substantially the same terms and conditions, including interest rates and collateral, as those of comparable transactions with non-insiders prevailing at the time, in accordance with the Bank’s underwriting guidelines, and do not involve more than the normal risk of collectability or present other unfavorable features. As of March 31, 2021, no related party loans were categorized as nonaccrual, past due, restructured or potential problem loans.
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Transactions with Related Parties
The Company and the Bank have engaged in transactions described below with the Company’s current or former directors, executive officers, and beneficial owners of more than 5 percent of the outstanding shares of the Company’s voting common stock and certain persons related to them.
As previously disclosed, the Company’s Board of Directors has authorized and directed the Company to provide indemnification, advancement and/or reimbursement for the costs of separate independent counsel retained by any then-current officer or director, in their individual capacity, with respect to matters related to (i) an investigation by the Special Committee of the Company’s Board of Directors, (ii) a formal order of investigation issued by the SEC on January 4, 2017 (since resolved) and (iii) any related civil or administrative proceedings against the Company as well as officers and directors currently or previously associated with the Company.
Indemnification costs were paid on behalf of certain former directors and former executive officers in amounts each less than $120 thousand for the three months ended March 31, 2021.
Indemnification costs were paid on behalf of certain current and former directors and former executive officers in amounts each less than $120 thousand for the three months ended March 31, 2020.

NOTE 17 – LITIGATION
From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. In accordance with applicable accounting guidance, we establish an accrued liability when those matters present loss contingencies that are both probable and estimable. We continue to monitor the matters for further developments that could affect the amount of the accrued liability that has been previously established.

While the ultimate liability with respect to legal actions cannot be determined at this time, we believe that damages, if any, and other amounts relating to pending matters are not likely to be material to the consolidated financial statements.

NOTE 18 – SUBSEQUENT EVENTS
We have evaluated events from the date of the consolidated financial statements on March 31, 2021 through the issuance of these consolidated financial statements included in this Quarterly Report on Form 10-Q.
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three months ended March 31, 2021. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.

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 of California's diverse businesses, entrepreneurs and communities through our 29 full service branches in Orange, Los Angeles, San Diego, and Santa 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 their banking and financial needs. We continue to grow average loans and earning assets, improve our deposit mix, reduce our cost of deposits, and maintain disciplined expense control. Strong loan production helped to offset runoff in certain legacy areas of our portfolio. Our loan pipeline is steadily building which is expected to support continued loan and earning asset growth through the year, assuming economic trends continue. During the first quarter, we also announced that we entered into a definitive agreement to acquire Pacific Mercantile Bancorp. 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 ended March 31, 2021, December 31, 2020 and March 31, 2020, net income (loss) was $14.4 million, $21.7 million and $(6.6) million. Diluted earnings (loss) from operations per common share were $0.15, $0.35 and $(0.19) for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020.
Financial results for the first quarter of 2021 included:
Return on average assets of 0.74%
Average cost of total deposits of 0.28%, an 8 basis point decrease from the prior quarter and an 83 basis point decrease from the year ago period
Period-end total cost of deposits of 0.24%, a 5 basis point decrease since year-end and a 65 basis point decrease since the end of the first quarter of 2020.
Noninterest-bearing deposit balances represented 28% of total deposits at March 31, 2021, up from 23% a year earlier
Allowance for credit losses at 1.43% of total loans and 148% of non-performing loans
Total deferrals/forbearances declined to $108.7 million at March 31, 2021 from $251.9 million at December 31, 2020
Common Equity Tier 1 capital at 11.50%
Entered into an agreement and plan of merger with Pacific Mercantile Bancorp, a commercial bank headquartered in Costa Mesa, California with total assets of $1.6 billion at December 31, 2020
Redemption of all Series D Preferred Stock for total consideration of $93.3 million
Proposed Merger with Pacific Mercantile Bancorp: In March 2021, we entered into an agreement to merge (the “Merger Agreement”) with Pacific Mercantile Bancorp (“PMB”), pursuant to which PMB will merge (the “Merger”) with and into the Company, with the Company as the surviving corporation. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each outstanding share of PMB common stock, excluding certain specified shares, will be converted into the right to receive 0.50 (the “Exchange Ratio”) of a share of the Company's common stock. In addition, at the effective time of the Merger, the Company will cash out all outstanding share-based awards based on formulas using the average price of the Company's common stock for a 20-day trading period prior to the closing of the Merger. Subject to regulatory and shareholder approval, the transaction is expected to close during the third quarter of 2021.
COVID-19 Operational Update
The markets in which we operate are impacted by continuing uncertainty about the pace and strength of reopening and recovering from the COVID-19 pandemic. Despite the challenges created by the pandemic, we continue to execute on our strategic initiatives and the transformation of our balance sheet. We continue to operate 24 of our 29 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.

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CARES Act Response Efforts
On March 27, 2020, the U.S. federal government signed the CARES Act into law, which provided emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic. The CARES Act allocated nearly $660 billion for the PPP and was intended to assist small businesses negatively affected by the pandemic and economic downturn by providing funds for payroll and other qualifying expenses made through August 8, 2020. The loans are 100% guaranteed by the SBA and the full principal amount of the loans may qualify for loan forgiveness if certain conditions are met.

Paycheck Protection Program Flexibility Act of 2020
On October 7, 2020, the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”) extended the deferral period for borrower payments of principal, interest, and fees on all PPP loans to the date that the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period). The extension of the deferral period under the Flexibility Act automatically applied to all PPP loans.

Economic Aid Act
The Economic Aid Act became law December 27, 2020 extending the SBA authority to make PPP loans through March 31, 2021. The SBA issued an Interim Final Rule (IFR) January 6, 2021. The IFR allows for PPP First and Second Draw Loans for eligible applicants. We elected to continue our participation in the PPP and resumed the origination of PPP loans effective January 11, 2021.

The PPP has provided an opportunity to differentiate ourselves by demonstrating how true service can make a meaningful difference. We assisted numerous existing clients with our high touch business framework in addition to successfully attracting many new clients who are consistent with the type of commercial customers that we target in our traditional business development efforts.

As of March 31, 2021, we have helped businesses through the approvals of $262 million in PPP funds during the first round and the related processing of forgiveness by the SBA totaling $109 million. We have also supported our clients in obtaining $132 million in PPP fund under the second round of the PPP program, of which no amounts have yet to be forgiven. We continue to work through the loan forgiveness process with our clients for PPP loans. We expect will be substantially complete with loan forgiveness for the first round of PPP by the end of 2021. At March 31, 2021, PPP loans totaled $276.0 million, net of fees.

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 mortgage loans, the forbearance period was initially 90 days in length and was patterned after the HUD guidelines where applicable. With respect to our non-SFR loan portfolio, the forbearance and deferment periods were also initially 90 days in length and were permitted to be extended.

Although many of our loans on assistance have reached the expiration of their deferral and forbearance periods, the Bank continues to work with our borrowers to provide reasonable solutions to assist each unique situation during this period of economic uncertainty. We are reviewing their current financial condition as we evaluate additional 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 risk factors related to COVID-19, please refer to Part II, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020.

The following table presents the composition of our loan portfolio for borrowers that received payment relief as of March 31, 2021 and December 31, 2020:
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Deferment & Forbearances(1)(2)
March 31, 2021December 31, 2020
($ in thousands)Number of Loans
Amount(1)(2)
% of
Loan Category
Number of Loans
Amount(1)(2)
% of
Loan Category
Commercial:
Commercial and industrial$25,427 1.4 %$39,240 1.9 %
Commercial real estate3,765 0.4 %12 57,159 7.1 %
Multifamily17,000 1.4 %803 0.1 %
SBA13,238 3.9 %10 15,302 5.6 %
Construction— — — %— — — %
Total commercial13 59,430 1.3 %31 112,504 2.4 %
Consumer:
Single family residential mortgage47 48,831 3.9 %123 138,771 11.3 %
Other consumer428 1.6 %659 2.0 %
Total consumer49 49,259 3.8 %125 139,430 11.0 %
Total62 $108,689 1.9 %156 $251,934 4.3 %
(1)Excludes loans in forbearance that are current
(2)Excludes loans delinquent prior to COVID-19

Loans on deferment or forbearance status decreased $143.2 million, or 57%, during the first quarter of 2021. Of the balances as of March 31, 2021, all other loans include 8 commercial loans totaling $34.0 million under review and pending approval for deferral, of which 3 loans totaling $17.3 million were initial deferral requests. The bank experienced an overall increase in SFR delinquencies as loans exited deferment and forbearance programs without plans for extension of the current program or intention to resume payments during the period. The bank is in contact with borrowers to provide additional assistance as needed. In the event borrowers return to deferral status there is an expectation of a corresponding reduction to delinquencies within the impacted loan segments. We continue to actively monitor and manage all lending relationships in a manner that supports our clients and protects the Bank.

Other Efforts
To support our community, we continue to meet the immediate needs of our most vulnerable neighbors. We meet these needs by providing donations, grants and sponsorships that support affordable housing, workforce and economic development and community services. Our volunteers have continued to provide financial literacy classes in a virtual environment as well as developing a virtual tour of the Bank’s headquarters that introduces students to a variety of different career paths and business unit leaders.

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 ended December 31, 2020 and in Note 1 Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.

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 ended December 31, 2020 and in Note 1 Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.


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Non-GAAP Financial Measures
Under Item 10(e) of SEC Regulation S-K, public companies disclosing financial measures in filings with the SEC that are not calculated in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a presentation of the most directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure, as well as a statement of the reasons why the company's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the company's financial condition and results of operations and, to the extent material, a statement of the additional purposes, if any, for which the company's management uses the non-GAAP financial measure.
Tangible assets, tangible equity, tangible common equity, tangible equity to tangible assets, tangible common equity to tangible assets, tangible common equity per common share, return on average tangible common equity, adjusted noninterest income, adjusted noninterest expense, adjusted noninterest expense to average assets, pre-tax pre-provision (PTPP) income (loss), adjusted PTPP income (loss), PTPP income (loss) ROAA, adjusted PTPP income (loss) ROAA, efficiency ratio, adjusted efficiency ratio, adjusted net income, adjusted net income available to common stockholders, adjusted diluted earnings per share (EPS) and adjusted return on average assets (ROAA) constitute supplemental financial information determined by methods other than in accordance with GAAP. These non-GAAP measures are used by management in its analysis of the Company's performance.
Tangible assets and tangible equity are calculated by subtracting goodwill and other intangible assets from total assets and total equity. Tangible common equity is calculated by subtracting preferred stock from tangible equity. Return on average tangible common equity is computed by dividing net income (loss) available to common stockholders by average tangible common equity. Banking regulators also exclude goodwill and other intangible assets from stockholders' equity when assessing the capital adequacy of a financial institution.
PTPP income is calculated by adding net interest income and noninterest income (total revenue) and subtracting noninterest expense. Adjusted PTPP income is calculated by adding net interest income and adjusted noninterest income (adjusted total revenue) and subtracting adjusted noninterest expense. PTPP income ROAA is computed by dividing annualized PTPP income by average assets. Adjusted PTPP income ROAA is computed by dividing annualized adjusted PTPP income by average assets. Efficiency ratio is computed by dividing noninterest expense by total revenue. Adjusted efficiency ratio is computed by dividing adjusted noninterest expense by adjusted total revenue.
Adjusted net income (loss) is calculated by adjusting net income (loss) for tax-effected noninterest income and expense adjustments and the tax impact from the exercise of stock appreciation rights. Adjusted ROAA is computed by dividing annualized adjusted net income by average assets. Adjusted net income (loss) available to common shareholders is computed by removing the impact of preferred stock redemptions from adjusted net income (loss).
Management believes the presentation of these financial measures adjusting the impact of these items provides useful supplemental information that is essential to a proper understanding of the financial results and operating performance of the Company. This disclosure should not be viewed as a substitute for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.
The following tables provide reconciliations of the non-GAAP measures with financial measures defined by GAAP.
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(Dollars in thousands, except per share data)
(Unaudited)
March 31,
2021
December 31,
2020
Tangible common equity, and tangible common equity to tangible assets ratio
Total assets$7,933,459 $7,877,334 
Less goodwill(37,144)(37,144)
Less other intangible assets(2,351)(2,633)
Tangible assets(1)
$7,893,964 $7,837,557 
Total stockholders' equity$804,693 $897,207 
Less goodwill(37,144)(37,144)
Less other intangible assets(2,351)(2,633)
Tangible equity(1)
765,198 857,430 
Less preferred stock(94,956)(184,878)
Tangible common equity(1)
$670,242 $672,552 
Total stockholders' equity to total assets10.14 %11.39 %
Tangible equity to tangible assets(1)
9.69 %10.94 %
Tangible common equity to tangible assets(1)
8.49 %8.58 %
Common shares outstanding50,150,447 49,767,489 
Class B non-voting non-convertible common shares outstanding477,321 477,321 
Total common shares outstanding50,627,768 50,244,810 
Tangible common equity per common share(1)
$13.24 $13.39 
Book value per common share$14.02 $14.18 
(1)Non-GAAP measure.
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Three Months Ended
(Dollars in thousands)
(Unaudited)
March 31,
2021
December 31,
2020
March 31,
2020
Return on tangible common equity
Average total stockholders' equity$888,174 $892,565 $916,047 
Less average preferred stock(164,895)(184,878)(189,607)
Less average goodwill(37,144)(37,144)(37,144)
Less average other intangible assets(2,517)(2,826)(4,003)
Average tangible common equity(1)
$683,618 $667,717 $685,293 
Net income (loss)$14,375 $21,703 $(6,593)
Less preferred stock dividends and impact of preferred stock redemption(6,488)(3,447)(3,007)
Add amortization of intangible assets282 306 429 
Less tax effect on amortization of intangible assets(59)(64)(90)
Net income (loss) available to common stockholders(1)
$8,110 $18,498 $(9,261)
Return on average equity6.56 %9.67 %(2.89)%
Return on average tangible common equity(1)
4.81 %11.02 %(5.44)%
Statutory Federal tax rate utilized for calculating tax effect on amortization of intangible assets21.00 %21.00 %21.00 %
(1)Non-GAAP measure.
Three Months Ended
(Dollars in thousands)
(Unaudited)
March 31,
2021
December 31,
2020
March 31,
2020
Adjusted noninterest income and expense
Total noninterest income$4,381 $6,975 $2,061 
Noninterest income adjustments:
Fair value adjustment on legacy SFR loans held for sale— (36)1,586 
Total noninterest income adjustments— (36)1,586 
Adjusted noninterest income(1)
$4,381 $6,939 $3,647 
Total noninterest expense$46,735 $38,950 $46,919 
Noninterest expense adjustments:
Professional (fees) recoveries(721)4,398 (1,678)
Merger-related costs(700)— — 
Adjusted noninterest expense before gain (loss) in alternative energy partnership investments(1,421)4,398 (1,678)
Gain (loss) in alternative energy partnership investments(3,630)673 (1,905)
Total noninterest expense adjustments(5,051)5,071 (3,583)
Adjusted noninterest expense(1)
$41,684 $44,021 $43,336 
Average assets$7,860,952 $7,764,997 $7,562,942 
Noninterest expense to average total assets2.41 %2.00 %2.50 %
Adjusted noninterest expense to average total assets(1)
2.15 %2.26 %2.30 %
(1)Non-GAAP measure.

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Three Months Ended
(Dollars in thousands)
(Unaudited)
March 31,
2021
December 31,
2020
March 31,
2020
Adjusted pre-tax pre-provision income
Net interest income$57,916 $61,563 $51,861 
Noninterest income4,381 6,975 2,061 
Total revenue62,297 68,538 53,922 
Noninterest expense46,735 38,950 46,919 
Pre-tax pre-provision income (loss)(1)
$15,562 $29,588 $7,003 
Total revenue$62,297 $68,538 $53,922 
Total noninterest income adjustments— (36)1,586 
Adjusted total revenue(1)
62,297 68,502 55,508 
Noninterest expense46,735 38,950 46,919 
Total noninterest expense adjustments(5,051)5,071 (3,583)
Adjusted noninterest expense(1)
41,684 44,021 43,336 
Adjusted pre-tax pre-provision income(1)
$20,613 $24,481 $12,172 
Average assets$7,860,952 $7,764,997 $7,562,942 
Pre-tax pre-provision income (loss) ROAA(1)
0.80 %1.52 %0.37 %
Adjusted pre-tax pre-provision income ROAA(1)
1.06 %1.25 %0.65 %
Efficiency ratio(1)
75.02 %56.83 %87.01 %
Adjusted efficiency ratio(1)
66.91 %64.26 %78.07 %
(1)Non-GAAP measure.


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