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BANC OF CALIFORNIA, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 9, 2014

CRITICAL ACCOUNTING POLICIES

Our financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within these financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the Consolidated Statements of Financial Condition dates and our results of operations for the reporting period. 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 the "Notes 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 our Annual Report on Form 10-K and in Note 1 to the Consolidated Financial Statements, "Significant Accounting Policies" in this Form 10-Q. 52



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SELECTED FINANCIAL DATA

The following table presents certain selected financial data as of or for the periods indicated: As of or for the three months ended March 31, December 31, March 31, 2014 2013 2013 ($ in thousands, except per share data) Selected Financial Condition Data: Total assets $ 4,030,634$ 3,628,023$ 2,051,055 Loans and leases receivable, net of allowance for loan and lease losses 2,376,992 2,427,306 1,611,257 Loans held for sale 1,000,394 716,733 114,582 Securities available-for-sale 107,525 170,022 99,658 Cash and cash equivalents 333,639 110,118 123,196 Deposits 3,109,146 2,918,644 1,698,798 Total borrowings 547,416 332,320 132,031 Total equity 325,326 324,869 188,298 Average Balances: Average earning assets $ 3,568,092$ 3,387,120$ 1,682,573 Average interest-bearing liabilities 2,943,515 2,752,010 1,405,606 Total average assets 3,728,170 3,555,265 1,770,089 Total average equity 329,617 324,290 191,903 Selected Operations Data: Total interest income $ 42,776$ 40,756$ 19,168 Total interest expense 7,591 7,454 3,809 Provision for loan losses 1,929 1,768 2,168 Total non-interest income 25,278 34,517 17,928 Total non-interest expense 57,768 57,214 29,558 Income/(loss) before income taxes 766 8,837 1,561 Income tax expense/(benefit) 9 5,516 632 Net income/(loss) 757 3,321 929 Dividends paid on preferred stock and discount accretion 910 951 288 Net income/(loss) available to common shareholders (153 ) 2,370 641 Basic earnings/(loss) per common share $ (0.01 ) $ 0.13 $ 0.05 Diluted earnings/(loss) per common share $ (0.01 ) $ 0.12 $ 0.05 Selected Financial Ratios and Other Data: Performance ratios: Return on average assets 0.08 % 0.37 % 0.21 % Return on average equity 0.93 % 4.06 % 1.96 % Dividend payout ratio (ratio of dividends declared per common share to basic earnings per common share) (1) N/A 92.31 % 240.00 % Interest Rate Spread Information: Net interest spread 3.81 % 3.70 % 3.52 % Net interest margin (2) 4.00 % 3.90 % 3.70 % Ratio of operating expense to average total assets 6.20 % 6.44 % 6.68 % Efficiency ratio (3) 95.54 % 84.36 % 88.80 % Ratio of average interest-earning assets to average interest-bearing liabilities 121.22 % 123.08 % 119.70 % Credit Quality Ratios and Other Data: Nonperforming assets to total assets 0.81 % 0.87 % 0.89 % Allowance for loan losses to nonperforming loans (4) 61.66 % 59.42 % 96.94 % Allowance for loan losses to gross loans (4) 0.83 % 0.77 % 0.98 % Nonperforming loans $ 32,440$ 31,648$ 16,521 Nonperforming assets $ 32,590$ 31,648$ 18,285 Capital Ratios: Equity to total assets at end of period 8.07 % 8.95 % 9.18 % Average equity to average assets 8.84 % 9.12 % 10.84 %



(1) Not applicable due to the net loss attributable to shareholders reported for

the three months ended March 31, 2014

(2) Net interest income divided by average interest-earning assets

(3) Efficiency ratio represents noninterest expense as a percentage of net

interest income plus noninterest income

(4) The allowance for loan and lease losses were $20.0 million, $18.8 million and

$16.0 million at March 31, 2014, December 31, 2013 and March 31, 2013, respectively. 53



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EXECUTIVE OVERVIEW

This overview of management's discussion and analysis highlights selected information in the financial results of the Company and may not contain all of the information that is important to you. For a more complete understanding of trends, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Company's financial condition and results of operations. Banc of California, Inc. is a financial holding company and the parent of Banc of California, National Association, a national bank (the Bank), the Palisades Group, LLC, an SEC-registered investment advisor (TPG), and PTB Property Holdings, LLC, an entity formed to hold real estate, cash and fixed income investments (PTB). Prior to October 11, 2013, Banc of California, Inc. was a multi-bank holding company with two banking subsidiaries, Pacific Trust Bank, a federal savings bank (PacTrust Bank or Pacific Trust Bank) and The Private Bank of California (Beach Business Bank prior to July 1, 2013). On October 11, 2013, Banc of California, Inc. became a one-bank holding company when Pacific Trust Bank converted from a federal savings bank to a national bank and changed its name to Banc of California, National Association, and immediately thereafter The Private Bank of California was merged into Banc of California, National Association. On January 17, 2014, Banc of California, Inc. became a financial holding company. The Company was incorporated under Maryland law in March 2002, and in July 2013, the Company changed its name from "First PacTrust Bancorp, Inc." to "Banc of California, Inc." and, as noted above, in October 2013, the Company's subsidiary banks merged to form a single, national bank subsidiary under the name Banc of California, National Association. The Bank has one wholly owned subsidiary, CS Financial, Inc., which was acquired on October 31, 2013. Banc of California, Inc. is subject to regulation by the Board of Governors of the Federal Reserve System (the Federal Reserve Board or FRB), and the Bank is subject to regulation primarily by the Office of the Comptroller of the Currency (OCC). As a financial holding company, Banc of California, Inc. may engage in activities permissible for bank holding companies and may engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature, primarily securities, insurance and merchant banking activities. The Bank offers a variety of financial services to meet the banking and financial needs of the communities we serve. The Bank is headquartered in Orange County, California and as of March 31, 2014, the Bank operated 16 branches in San Diego, Orange, and Los Angeles Counties in California and 53 producing mortgage loan production offices in California, Arizona, Oregon, Montana, Virginia, North Carolina, Maryland, and Washington. The principal business of the Bank consists of attracting retail deposits from the general public and investing these funds primarily in commercial, consumer and real estate secured loans. The Bank solicits deposits in its market area and, to a lesser extent, from institutional depositors nationwide and may accept brokered deposits. The Bank's deposit product and service offerings include checking, savings, money market, certificates of deposit, retirement accounts as well as mobile, online, cash and treasury management, card payment services, remote deposit, ACH origination, employer/employee retirement planning, telephone banking, automated bill payment, electronic statements, safe deposit boxes, direct deposit and wire transfers. Bank customers also have the ability to access their accounts through a nationwide network of over 30,000 surcharge-free ATMs.



2014 First Quarter Highlights

• Completed the acquisition of RenovationReady®. • Total interest and dividend income for the three months ended March 31,



2014 increased by $23.6 million, or 123.2 percent, to $42.8 million from

$19.2 million for the three months ended March 31, 2013.



• Net interest margin was 4.00 percent and 3.70 percent for the three months

ended March 31, 2014 and 2013, respectively.



• Net interest income increased by $19.8 million, or 129.1 percent, to $35.2

million for the three months ended March 31, 2014 from $15.4 million for

the three ended March 31, 2013. • Non-interest income increased by $7.4 million, or 41.0 percent, to $25.3



million for the three months ended March 31, 2014 from $17.9 million for

the three months ended March 31, 2013. The Company recognized $17.3

million and $16.4 million on net gain on mortgage banking activities for

the three months ended March 31, 2014 and 2013, respectively. 54



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• Non-interest expense increased by $28.2 million, or 95.4 percent, to $57.8

million for the three months ended March 31, 2014 from $29.6 million for

the three months ended March 31, 2013. The increase relates predominantly

to a higher salaries and employee benefits expense related to increased

headcount as a result of growth and the acquisitions the Company completed

during 2013. • Total assets increased by $402.6 million, or 11.1 percent, to $4.03 billion at March 31, 2014 from $3.63 billion at December 31, 2013, due primarily to an increase in loans held for sale and an increase in



interest bearing deposit balances. Average total assets increased to $3.73

billion for the three months ended March 31, 2014 from $1.77 billion for

the three months ended March 31, 2013. • Loans and leases receivable, net of allowance for loan and lease losses,



slightly decreased by $50.3 million, or 2.1 percent, to $2.38 billion at

March 31, 2014 from $2.43 billion at December 31, 2013 as a result of

transferring $59.1 million of loans to loans held for sale. Loans held for

sale increased $283.7 million, 39.6 percent, to $1.00 billion at March 31,

2014 from $716.7 million at December 31, 2013 due to more originations

than sales during the quarter. Average gross loans and leases receivable

increased to $3.29 billion for the three months ended March 31, 2014 from

$1.42 billion for the three months ended March 31, 2013. • Total deposits increased by $190.5 million, or 6.5 percent, to $3.11



billion at March 31, 2014 from $2.92 billion at December 31, 2013. Average

total deposits increased to $3.01 billion for the three months ended March 31, 2014 from $1.41 billion for the three months ended March 31, 2013. RESULTS OF OPERATIONS The following table presents condensed statements of operations for the periods indicated: Three months ended March 31, Amount Percentage 2014 2013 Change Change ($ in thousands, except per share data) Interest and dividend income $ 42,776$ 19,168$ 23,608 123.2 % Interest expense 7,591 3,809 3,782 99.3 % Net interest income 35,185 15,359 19,826 129.1 % Provision for loan and lease losses 1,929 2,168 (239 ) -11.0 % Net interest income after provision for loan and lease losses 33,256 13,191 20,065 152.1 % Noninterest income 25,278 17,928 7,350 41.0 % Noninterest expense 57,768 29,558 28,210 95.4 % Income before income taxes 766 1,561 (795 ) -50.9 % Income tax expense 9 632 (623 ) -98.6 % Net income 757 929 (172 ) -18.5 % Preferred stock dividends 910 288 622 216.0 % Net income (loss) available to common shareholders $ (153 )$ 641



$ (794 ) -123.9 %

Basic earnings (loss) per common share $ (0.01 )$ 0.05$ (0.06 ) Diluted earnings (loss) per common share $ (0.01 )$ 0.05$ (0.06 ) Basic earnings (loss) per class B common share $ (0.01 )$ 0.05$ (0.06 ) Diluted earnings (loss) per class B common share $ (0.01 )$ 0.05



$ (0.06 )

For the three months ended March 31, 2014, the Company recorded net income of $757 thousand, a decrease of $172 thousand from net income of $929 thousand for the three months ended March 31, 2013. Preferred stock dividends were $910 thousand and $288 thousand for the three months ended March 31, 2014 and 2013, respectively, and net (loss) income available to common shareholders was $(153) thousand and $641 thousand for the three months ended March 31, 2014 and 2013, respectively. 55



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Net Interest Income

The following table presents interest income from average interest-earning assets and their correspondent yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates for the periods indicated.

Three months ended March 31, 2014 2013 Average Average Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost ($ in thousands) INTEREST EARNING ASSETS Gross loans and leases (1) $ 3,289,689$ 41,530



5.12 % $ 1,416,071$ 18,537 5.31 % Securities

163,007 924 2.30 % 117,108 498 1.72 % Other interest-earning assets (2) 115,396 322 1.13 % 149,394 133 0.36 % Total interest-earning assets 3,568,092 42,776



4.86 % 1,682,573 19,168 4.62 %

Allowance for loan and lease losses (19,392 ) (15,242 ) BOLI and non-interest earning assets (3) 179,470 102,758 Total assets $ 3,728,170$ 1,770,089 INTEREST-BEARING LIABILITIES Savings $ 966,361$ 2,516 1.06 % $ 360,433$ 326 0.37 % NOW 593,126 1,715 1.17 % 123,583 293 0.96 % Money market 515,131 572 0.45 % 168,634 229 0.55 % Certificates of deposit 518,266 932 0.73 % 612,245 1,151 0.76 % FHLB advances 259,611 100 0.16 % 54,978 63 0.46 % Long-term debt and other interest-bearing liabilities 91,020 1,756



7.82 % 85,733 1,747 8.26 %

Total interest-bearing liabilities 2,943,515 7,591 1.05 % 1,405,606 3,809 1.10 %

Noninterest-bearing deposits 416,074 144,212 Non-interest-bearing liabilities 38,964 28,368 Total liabilities 3,398,553 1,578,186 Total shareholders' equity 329,617 191,903 Total liabilities and shareholders' equity $ 3,728,170$ 1,770,089 Net interest income/spread $ 35,185 3.81 % $ 15,359 3.52 % Net interest margin (4) 4.00 % 3.70 % Ratio of interest-earning assets to interest-bearing liabilities 121.22 % 119.70 %



(1) Gross loans and leases are net of deferred fees, related direct cost and

discounts, but exclude the allowance for loan and lease losses. Non-accrual

loans and leases are included in the average balance. Loan fees of $169

thousand and $244 thousand and accretion of discount on purchased loans of

$10.4 million and $2.6 million for the three months ended March 31, 2014 and

2013, respectively, are included in the interest income.

(2) Includes average balance of FHLB stock at cost and average time deposits with

other financial institutions

(3) Includes average balance of bank-owned life insurance of $18.9 million and

$18.7 million for the three months ended March 31, 2014 and 2013,

respectively

(4) Annualized net interest income divided by average interest-earning assets

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Rate/Volume Analysis

The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to (1) changes in volume multiplied by the prior rate, and (2) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. Three months ended March 31, 2014 compared to March 31, 2013 Increase (decrease) Net due to increase Volume Rate (decrease) (In thousands) INTEREST EARNING ASSETS Gross loans and leases $ 23,676$ (683 )$ 22,993 Securities 230 196 426 Other interest-earning assets (36 ) 225 189 Total interest-earning assets 23,870 (262 ) 23,608 INTEREST-BEARING LIABILITIES Savings $ 1,035$ 1,155$ 2,190 NOW 1,345 77 1,422 Money market 392 (49 ) 343 Certificates of deposit (171 ) (48 ) (219 ) FHLB advances 103 (66 ) 37 Long-term debt and other interest-bearing liabilities 105 (96 ) 9 Total interest-bearing liabilities 2,809 973 3,782 Net Interest Income $ 21,061$ (1,235 )$ 19,826 Net interest income was $35.2 million for the three months ended March 31, 2014, an increase of 129.1 percent from $15.4 million for the three months ended March 31, 2013. The growth in net interest income from the three months ended March 31, 2013 was largely due to higher interest income from loans partially offset by higher interest expense on deposits. Interest income on total loans and leases was $41.5 million for the three months ended March 31, 2014, up 124.0 percent from $18.5 million for the three months ended March 31, 2013. The increase in loan interest income was driven by a $1.66 billion increase in total loans as a result of acquired loans of $385.3 million from the PBOC acquisition, purchases of the seasoned SFR mortgage loan pools of $519.8 million, and increases in residential mortgage loans held for sale. Interest income on securities increased by $426 thousand, or 85.5 percent, to $924 thousand for the three months ended March 31, 2014, due mainly to an increase in average yield of 58 bps to 2.30 percent and an increase in average balance of $45.9 million to $163.0 million. The increases were mainly due to acquired securities of $219.3 million from the PBOC acquisition and purchases of $62.4 million, partially offset by sales, calls, paid offs, and pay-downs of $272.3 million. Interest expense on interest-bearing deposits increased by $3.7 million, or 186.9 percent, to $5.7 million for the three months ended March 31, 2014, due mainly to an increase in average balance of $1.33 billion, or 105.0 percent, to $2.59 billion and an increase in average cost of 26 bps to 0.90 percent. The increase in average balance was mainly due to acquired interest-bearing deposits of $325.8 million from the PBOC acquisition and $1.50 billion of deposits generated through strategic plans aiming to increase core deposits by launching interest-bearing core deposit products with enhanced features to attract high net worth depositors, partially offset by $464.3 million of deposits sold to AWB. The increase in average cost was due to the higher interest rates on those deposits generated through strategic plans. Interest expense on FHLB advances increased by $37 thousand, or 58.7 percent, to $100 thousand for the three months ended March 31, 2014, due mainly to an increase of $204.6 million in average balance, partially offset by a decrease in average rate resulting from the replacement of matured long-term advances with short-term advances. 57



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Interest expense on long-term debt and other interest-bearing liabilities increased by $9 thousand, or 0.5 percent, to $1.8 million for the three months ended March 31, 2014, due mainly to the utilization of federal funds sold and repurchase agreements.



Provision for Loan and Lease Losses

Provisions for loan and lease losses are charged to operations at a level required to reflect probable incurred credit losses in the loan and lease portfolio. During the three months ended March 31, 2014 and 2013, the Company provided $1.9 million and $2.1 million, respectively, to its provision for loan and lease losses. On a quarterly basis, the Company evaluates the PCI loans and the loan pools for potential impairment. We had none and $439 thousand provision for loan losses for the PCI loans the three months ended March 31, 2014 and 2013, respectively. The provision for losses on PCI loans is the result of changes in expected cash flows, both amount and timing, due to loan payments and the Company's revised loss forecasts. The revisions of the loss forecasts were based on the results of management's review of the credit quality of the outstanding loans/loan pools and the analysis of the loan performance data since the acquisition of these loans. The Company will continue updating cash flow projections on PCI loans on a quarterly basis. Due to the uncertainty in the future performance of the PCI loans, additional impairments may be recognized in the future. See further discussion in Item 2. Management's Discussion and Analysis - Allowance for Loan and Lease Losses.



Noninterest Income

The following table sets forth the breakdown of non-interest income for the three months ended March 31, 2014 and 2013:

Three months ended March 31, Amount Percentage 2014 2013 Change Change ($ in thousands) Customer service fees $ 253 $ 546 $ (293 ) -53.7 % Loan servicing income 1,253 188 1,065 566.5 % Income from bank owned life insurance 47 38 9 23.7 % Net gain (loss) on sales of securities available for sale 507 308 199 64.6 % Net gain on sale of loans 2,603 312 2,291 734.3 % Net gain on mortgage banking activities 17,324 16,370 954 5.8 % Other income 3,291 166 3,125 1882.5 %

Total noninterest income $ 25,278$ 17,928$ 7,350 41.0 % Noninterest income increased by $7.4 million, or 41.0 percent, to $25.3 million for the three months ended March 31, 2014, from $17.9 million for the three months ended March 31, 2013. The increase in noninterest income relates predominantly to increases in net gain on mortgage banking activities, net gain on sale of loans, and loan servicing income, partially offset by less customer service fees. Customer service fees decreased by $293 thousand, or 53.7 percent, to $253 thousand, for the three months ended March 31, 2014, due mainly to the reduction in the number of customer deposit accounts as a result of the AWB branch sale in the fourth quarter of 2013.



Loan servicing income was $1.3 million for the three months ended March 31, 2013, due mainly to an increase of the principal balance of the underlying loans.

Net gain (loss) on sales of securities available for sale was $507 thousand for the three months ended March 31, 2014, up 64.6 percent from $308 thousand for the three months ended March 31, 2013. During the first quarter of 2014 the Company sold a portion of its securities which led to higher realized gains during the quarter. Net gain on the sale of loans was $2.6 million for the three months ended March 31, 2014, up from $312 thousand for the three months ended March 31, 2013. The increase was driven by sales of jumbo mortgages that were previously classified as held for investment. During the three months ended March 31, 2014, the Company sold $96.7 million of jumbo mortgages compared to $19.7 million sold during the three months ended March 31, 2013. Net gain on mortgage banking activities was $17.3 million for the three months ended March 31, 2014, up 5.8 percent from $16.4 million for the three months ended March 31, 2013. The amount of net gain on mortgage banking activities is a function of mortgage loans originated for sale and the fair value of these loans. Net gain on mortgage banking activities includes mark to market 58



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pricing adjustments on loan commitments and forward sales contracts, initial capitalized value of mortgage servicing rights (MSRs) and loan origination fees. During the three months ended March 31, 2014, the Bank originated $511.5 million of conforming single family residential mortgage loans and sold $531.8 million of conforming single family residential mortgage loans in the secondary market. The net gain on sale and margin were $15.2 million and 2.96 percent, respectively, and loan origination fees were $2.2 million for the three months ended March 31, 2014. Included in the net gain is the initial capitalized value of our MSRs, which totaled $4.8 million, on loans sold to Fannie Mae, Freddie Mac and Ginnie Mae for the three months ended March 31, 2014. Other income was $3.3 million for the three months ended March 31, 2014, up from $166 thousand for the three months ended March 31, 2013. The increase is mainly due to additional broker fee income generated from non-bank subsidiaries that were acquired in the second half of 2013.



Noninterest Expense

The following table sets forth the breakdown of non-interest expense for the three months ended March 31, 2014 and 2013:

Three months ended March 31, Amount Percentage 2014 2013 Change Change ($ in thousands) Salaries and employee benefits, excluding commissions $ 27,851$ 15,307$ 12,544 81.9 % Commissions for mortgage banking activities 6,830 3,773 3,057 81.0 % Total salaries and employee benefits $ 34,681$ 19,080$ 15,601 81.8 % Occupancy and equipment 8,537 3,193 5,344 167.4 % Professional fees 3,865 2,297 1,568 68.3 % Data processing 791 910 (119 ) -13.1 % Advertising 1,075 522 553 105.9 % Regulatory assessments 941 381 560 147.0 % Loan servicing and foreclosure expense 175 204 (29 ) -14.2 % Operating loss on equity investment 174 159 15 9.4 % Valuation allowance for other real estate owned - 79 (79 ) -100.0 % Net gain (loss) on sales of other real estate owned - (114 ) 114 -100.0 % Provision for loan repurchases 571 256 315 123.0 % Amortization of intangible assets 939 367 572 155.9 % All other expense 6,019 2,224 3,795 170.6 % Total noninterest expense $ 57,768$ 29,558$ 28,210 95.4 %



Noninterest expense increased by $28.2 million, or 95.4 percent, to $57.8 million for the three months ended March 31, 2014. The increase in noninterest expense relates predominantly to the bank and non-bank acquisitions by the Company along with growth related to the mortgage banking strategy.

Total salaries and employee benefits including commissions increased $15.6 million, or 81.8 percent, to $34.7 million for the three months ended March 31, 2014, due mainly to additional compensation expense related to an increase in the number of full-time employees resulting from the recent acquisitions, as well as expansion in mortgage banking activities, primarily at Banc Home Loans. Commission expense, which is a loan origination variable expense, related to mortgage banking activities, totaled $6.8 million and $3.8 million for the three months ended March 31, 2014 and 2013, respectively. Total originations of single family residential mortgage loans for the three months ended March 31, 2014 and 2013 totaled $511.5 million and $332.8 million, respectively. Occupancy and equipment expenses increased $5.3 million, or 167.4 percent, to $8.5 million for the three months ended March 31, 2014, from $3.2 million for the three months ended March 31, 2013. For the three months ended March 31, 2014, the increase was due mainly to increased building and maintenance costs associated with new branch locations from the PBOC acquisition, additional facilities costs associated with the TPG and CS acquisitions, and new mortgage banking loan production offices. Professional fees increased by $1.6 million, or 68.3 percent, to $3.9 million for the three months ended March 31, 2014, from $2.3 million for the three months ended March 31, 2013. The increases were mainly due to higher accounting, legal and consulting costs associated with the Company's recent acquisitions and growth. 59



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Advertising costs increased by $553 thousand, or 105.9 percent, to $1.1 million for the three months ended March 31, 2014, from $522 thousand for the three months ended March 31, 2014. The increases were mainly due to the overall expansion of the Company's business footprint.

Regulatory assessments increased by $560 thousand, or 147.0 percent, to $941 thousand for the three months ended March 31, 2014, from $381 thousand for the three months ended March 31, 2013, due to year-over-year balance sheet growth. Valuation allowances for other real estate owned decreased by $79 thousand to none for the three months ended March 31, 2014. The Company had $150 thousand other real estate owned at March 31, 2014, compared to $1.8 million at March 31, 2013. Provision for loan repurchases increased by $315 thousand, or 123.0 percent, to $571 thousand for the three months ended March 31, 2014, from $256 thousand for the three months ended March 31, 2013, mainly due to increased volume of mortgage loan originations at the Bank. Amortization of intangible assets increased by $572 thousand, or 155.9 percent, to $939 thousand for the three months ended March 31, 2014, from $367 thousand for the three months ended March 31, 2013. This increase is due to the amortization of PBOC core deposit intangibles that were acquired in the third quarter of last year. Other expenses increased by $3.8 million, or 170.6 percent, to $6.0 million for the three months ended March 31, 2014, from $2.2 million. The increase was mainly due to costs associated with the growth in mortgage banking activity and a $176 thousand increase in off balance sheet provision expense.



Income Tax Expense

For the three months ended March 31, 2014 and 2013, income tax expense was $9 thousand and $632 thousand, respectively, and the effective tax rate was 1.1 percent and 40.5 percent, respectively. The Company's effective tax rate decreased due to the establishment of a full valuation allowance in 2013. Due to the inability to reliably estimate the income for the year, the Company has used the year to date effective tax rate as the best estimate of the annual effective tax rate, under ASC 740-270-30. The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. A valuation allowance is established when necessary to reduce deferred tax assets when it is more-likely-than-not that a portion or all of the net deferred tax assets will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. As of March 31, 2014, the Company had a net deferred tax asset of none, net of a $17.0 million valuation allowance and as of December 31, 2013, the Company had a net deferred tax asset of none, net of a $17.3 million valuation allowance. The Company adopted the provisions of ASC 740-10-25 (formally FIN 48), which relates to the accounting for uncertainty in income taxes recognized in an enterprise's financial statements on January 1, 2007. 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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company had unrecognized tax benefits of $2.6 million and $2.2 million at March 31, 2014 and December 31, 2013, respectively. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months. The total amount of tax benefit that, if recognized, would impact the effective tax rate was none as of March 31, 2014. 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. At March 31, 2014 and December 31, 2013, the Company had no accrued interest or penalties. Banc of California, Inc. and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to examination by U.S. federal taxing authorities for tax years before 2010 and for all state tax years before 2009, except for Gateway Bancorp, Inc. and its subsidiaries (which the Company acquired in 2012) that are currently under examination by the Internal Revenue Service (IRS) for 2008 and 2009 tax years. Banc of California, Inc. and its subsidiaries are currently under examination by IRS for the 2010 and 2011 tax years. The consolidated returns for these years include Banc of California, Inc. and the Bank. 60



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FINANCIAL CONDITION

Total assets increased by $402.6 million, or 11.1 percent, to $4.03 billion at March 31, 2014, compared to $3.63 billion at December 31, 2013. The increase in total assets was due primarily to a $283.7 million increase in loans held for sale, a $223.5 million increase in cash and cash equivalents, partially offset by a $62.5 million decrease in securities available for sale and a $50.3 million decrease in loans and lease receivable, net of allowance.



Investment Securities

The primary goal of our investment securities portfolio is to provide a relatively stable source of income while maintaining an appropriate level of liquidity. Investment securities provide a source of liquidity as collateral for repurchase agreements and for certain public funds deposits. Investment securities classified as available-for-sale are carried at their estimated fair values with the changes in fair values recorded in accumulated other comprehensive income, as a component of shareholders' equity. All investment securities have been classified as available-for-sale securities as of March 31, 2014 and December 31, 2013. Total investment securities available-for-sale decreased by $62.5 million, or 36.8 percent, to $107.5 million at March 31, 2014, compared to $170.0 million at December 31, 2013, due to sales of $50.5 million, principal payments of $10.7 million, and calls and pay-offs of $2.8 million, partially offset by purchases of $1.2 million. Investment securities had a net unrealized loss of $971 thousand at March 31, 2014, compared to a net unrealized loss of $1.5 million at December 31, 2013. Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value (In thousands) March 31, 2014: Available-for-sale SBA loan pools securities $ 1,749 $ - $ (47 )$ 1,702 U.S. government-sponsored entities and agency securities 1,930 28 - 1,958 Private label residential mortgage-backed securities 5,086 10 (29 ) 5,067 Agency mortgage-backed securities 99,731 31 (964 ) 98,798



Total securities available for sale $ 108,496 $ 69 $ (1,040 )$ 107,525

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



(1,819 ) 151,614

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

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The following table summarizes the investment securities with unrealized losses at the dates indicated by security type and length of time in a continuous unrealized loss position: Less Than 12 Months 12 Months or Longer Total Gross Gross Gross Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses (In thousands) March 31, 2014: Available-for-sale SBA loan pools securities $ 1,702$ (47 ) $ - $ - $ 1,702$ (47 ) U.S. government-sponsored entities and agency securities - - - - - - Private label residential mortgage-backed securities 1,219 (15 ) 2,931 (14 ) 4,150 (29 ) Agency mortgage-backed securities 86,795 (950 ) 1,798 (14 ) 88,593 (964 ) Total available-for-sale $ 89,716$ (1,012 )$ 4,729 $ (28 ) $ 94,445$ (1,040 ) December 31, 2013: Available-for-sale SBA loan pools securities $ 1,736$ (58 ) $ - $ - $ 1,736$ (58 ) U.S. government-sponsored entities and agency securities 1,920 (8 ) - - 1,920 (8 ) Private label residential mortgage-backed securities 2,064 (11 ) 3,913 (25 ) 5,977 (36 ) Agency mortgage-backed securities 114,104 (1,790 ) 1,821 (29 ) 115,925 (1,819 ) Total available-for-sale $ 119,824$ (1,867 )$ 5,734 $ (54 ) $ 125,558$ (1,921 )



The Company recorded no other-than-temporary impairment (OTTI) for securities available for sale for the three months ended March 31, 2014 and 2013.

At March 31, 2014, the Company's securities available for sale portfolio consisted of 80 securities, 67 of which were in an unrealized loss position. The unrealized losses are related to an overall increase in interest rates and a decrease in prepayment speeds of the agency mortgage-backed securities. The Company's private label residential mortgage-backed securities in unrealized loss positions had fair values of $4.2 million with unrealized losses of $29 thousand at March 31, 2014. The Company's agency residential mortgage-backed securities in unrealized loss positions had fair values of $88.6 million with unrealized losses of $964 thousand at March 31, 2014. The Company's private label residential mortgage-backed securities in unrealized loss positions had fair values of $6.0 million with unrealized losses of $36 thousand at December 31, 2013. The Company's agency residential mortgage-backed securities in unrealized loss positions had fair values of $115.9 million with unrealized losses of $1.8 million at December 31, 2013. The Company monitors to ensure it has adequate credit support and as of March 31, 2014, the Company does not have the intent to sell these securities and it is not likely that it will be required to sell the securities before their anticipated recoveries. Of the Company's $107.5 million securities portfolio, $107.3 million were rated AAA, AA or A, and $231 thousand were rated BBB based on the most recent credit rating from the rating agencies as of March 31, 2014. The Company considers the lowest credit rating for identification of potential OTTI.



Loans Held for Sale

Loans held for sale totaled $1.00 billion at March 31, 2014 compared to $716.7 million at December 31, 2013. The loans held for sale consisted of $169.2 million and $192.6 million carried at fair value, respectively, and $831.2 million and $524.1 million carried at lower of cost or fair value, respectively, at March 31, 2014 and December 31, 2013. The loans carried at fair value represent conforming single family residential mortgage loans originated by the Bank that are sold into the secondary market on a whole loan basis. Some of these loans are expected to be sold to Fannie Mae, Freddie Mac and Ginnie Mae on a servicing retained basis. The servicing of these loans is performed by a third party sub-servicer. These loans decreased by $23.4 million to $169.2 million at March 31, 2014 due to sales of $531.8 million and net amortization, including fair value change, of $2.2 million, offset by originations of $511.5 million. Loans held for sale carried at the lower of cost or fair value are non-conforming jumbo mortgage loans that are originated to sell in pools, unlike the loans individually originated to sell into the secondary market on a whole loan basis. These loans increased by $307.1 million to $831.2 million at March 31, 2014, due mainly to originations of $373.0 million, loans transferred from loans and leases held for investment of $59.1 million, net of $963 thousand of allowance for loan and leases transferred, and partially offset by sales of $108.3 million and other net amortizations. 62



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Loans and Leases Receivable

The following table presents the composition of the Company's loan and lease portfolio as of the dates indicated:

March 31, December 31, Amount Percentage 2014 2013 Change Change ($ in thousands) Commercial: Commercial and industrial $ 299,184$ 287,771$ 11,413 4.0 % Real estate mortgage 560,581 529,883 30,698 5.8 % Multi-family 155,382 141,580 13,802 9.7 % SBA 26,541 27,428 (887 ) -3.2 % Construction 25,144 24,933 211 0.8 % Lease financing 48,537 31,949 16,588 51.9 % Consumer: Real estate 1-4 family first mortgage 1,015,155 1,138,836 (123,681 ) -10.9 % Green Loans (HELOC)-First Liens 143,708 147,705 (3,997 ) -2.7 % Green Loans (HELOC)-Second Liens 4,921 5,289 (368 ) -7.0 % Other HELOC's, home equity loans, and other consumer installment credit 117,842 110,737 7,105 6.4 % Total Gross Loans $ 2,396,995$ 2,446,111$ (49,116 ) -2.0 % Allowance for loan losses (20,003 ) (18,805 ) (1,198 ) 6.4 %



Loans and leases receivable, net $ 2,376,992$ 2,427,306

(50,314 ) -2.1 %



Seasoned SFR Mortgage Loan Acquisitions

During the three months ended March 31, 2014, the Company did not acquire any additional seasoned SFR mortgage loan pools.

During the year ended December 31, 2013, the Company completed five seasoned SFR mortgage loan pool acquisitions with unpaid principal balances and fair values of $1.02 billion and $849.9 million, respectively,at their respective acquisition dates and $757.5 million and $666.3 million, respectively, million at March 31, 2014. These loan pools generally consist of re-performing residential mortgage loans whose characteristics and payment history were consistent with borrowers that demonstrated a willingness and ability to remain in the residence pursuant to the current terms of the mortgage loan agreement. The Company was able to acquire these loans at a significant discount to both current property value at acquisition and note balance. The Company determined that certain loans in these seasoned SFR mortgage loan acquisitions reflect credit quality deterioration since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The unpaid principal balances and fair values of these loans at the respective dates of acquisition were $473.9 million and $342.1 million, respectively. At March 31, 2014, the unpaid principal balance and carrying value of these loans were $304.4 million and $247.8 million, respectively. For each acquisition the Company was able to utilize its background in mortgage credit analysis to re-underwrite the borrower's credit to arrive at what it believes to be an attractive risk adjusted return for a highly collateralized investment in performing mortgage loans. The acquisition program implemented and executed by the Company involved a multifaceted due diligence process that included compliance reviews, title analyses, review of modification agreements, updated property valuation assessments, collateral inventory and other undertakings related to the scope of due diligence. In aggregate, the purchase price of the loans was less than 61.1 percent of current property value at the time of acquisition based on a third party broker price opinion, and less than 83.1 percent of note balance at the time of acquisition. At the time of acquisition, approximately 86.3 percent of the mortgage loans by current principal balance (excluding any forbearance amounts) had the original terms modified at some point since origination by a prior owner or servicer. The mortgage loans had a current weighted average interest rate of 4.39 percent, determined by current principal balance. The weighted average credit score of the borrowers comprising the mortgage loans at or near the time of acquisition determined by current principal balance and excluding those with no credit score on file was 655. The average property value determined by a broker price opinion obtained by third party licensed real estate professionals at or around the time of acquisition was $292 thousand. Approximately 89.6 percent of the borrowers by current principal balance had made at least 12 monthly payments in the 12 months preceding the trade date (or, in some cases calculated as making 11 monthly payments in the 11 months preceding the trade date), and 94.0 percent had made nine monthly payments in the nine months preceding the trade date. The 63



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mortgage loans are secured by residences located in all 50 states and Washington DC, with California being the largest state concentration representing 36.3 percent of the note balance, and with no other state concentration exceeding 10.0 percent based upon the current note balance. At March 31, 2014 and December 31, 2013, approximately 4.96 percent and 5.63 percent of unpaid principal balance of these loans were delinquent 60 or more days, respectively, and 1.41 percent and 1.37 percent were in bankruptcy or foreclosure, respectively. During the three months ended March 31, 2014, delinquencies on seasoned SFR loan pools decreased due to a sale of a small portion of these loans. As part of the acquisition program, the Company may sell from time to time seasoned SFR mortgage loans that do not meet the Company's investment standards. During the three months ended March 31, 2014, the Company sold seasoned SFR mortgage loans with an unpaid principal balance of $43.5 million and a carrying value of $30.7 million.



The following table presents the outstanding balance and carrying amount of PCI loans and leases as of dates indicated:

March 31, 2014 December 31, 2013 Outstanding Carrying Outstanding Carrying Balance Amount Balance Amount (In thousands) Commercial: Commercial and industrial $ 2,322$ 1,538$ 5,838$ 4,028 Real estate mortgage 17,234 14,613 17,682 15,014 Multi-family - - - - SBA 4,657 3,477 4,940 3,688 Consumer: Real estate 1-4 family first mortgage 376,380 292,039 414,341 314,820 HELOC's, home equity loans, and other consumer installment credit 2,133 1,756 2,134 1,736 Total $ 402,726$ 313,423$ 444,935$ 339,286



Seasoned SFR Mortgage Loan Acquisition Due Diligence

The acquisition program implemented and executed by the Company involved a multifaceted due diligence process that included compliance reviews, title analyses, review of modification agreements, updated property valuation assessments, collateral inventory and other undertakings related to the scope of due diligence. Prior to acquiring mortgage loans, the Company, its affiliates, sub-advisors or due diligence partners typically will review the loan portfolio and conduct certain due diligence on a loan by loan basis according to its proprietary diligence plan. This due diligence encompasses analyzing the title, subordinate liens and judgments as well as a comprehensive reconciliation of current property value. The Company, its affiliates, and its sub-advisors prepare a customized version of its diligence plan for each mortgage loan pool being reviewed that is designed to address certain identified pool specific risks. The diligence plan generally reviews several factors, including but not limited to, obtaining and reconciling property value, confirming chain of titles, reviewing assignments, confirming lien position, confirming regulatory compliance, updating borrower credit, certifying collateral, and reviewing servicing notes. In certain transactions, a portion of the diligence may be provided by the seller. In those instances, the Company reviews the mortgage loan portfolio to confirm the accuracy of the provided diligence information and supplements as appropriate. As part of the confirmation of property values in the diligence process, the Company conducts independent due diligence on the individual properties and borrowers prior to the acquisition of the mortgage loans. In addition, market conditions, regional mortgage loan information and local trends in home values, coupled with market knowledge, are used by the Company in calculating the appropriate additional risk discount to compensate for potential property declines, foreclosures, defaults or other risks associated with the mortgage loan portfolio to be acquired. Typically, the Company may enter into one or more agreements with affiliates or third parties to perform certain of these due diligence tasks with respect to acquiring potential mortgage loans.



Non-Traditional Mortgage Portfolio

The Company's non-traditional mortgage (NTM) portfolio is comprised of three interest only products: Green Account Loans (Green Loans), hybrid interest only fixed or adjustable rate mortgage (Interest Only) loans and a small number of additional 64



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loans with the potential for negative amortization. As of March 31, 2014 and December 31, 2013, the non-traditional mortgage loans totaled $269.4 million, or 11.2 percent of the total gross loan portfolio, and $309.6 million, or 12.7 percent of the total gross loan portfolio, respectively. Total NTM portfolio decreased by $40.2 million, or 13.0 percent, during the three months ended March 31, 2014. The following table presents the composition of the NTM portfolio as of the dates indicated: March 31, 2014 December 31, 2013 Count Amount Percent Count Amount Percent ($ in thousands) Green Loans (HELOC)-first liens 167 $ 143,708 53.3 % 173 $ 147,705 47.6 % Interest-only-first liens 221 105,446 39.1 % 244 139,867 45.2 % Negative amortization 35 15,222 5.7 % 37 16,623 5.4 % Total NTM-first liens 423 264,376 98.1 % 454 304,195 98.2 % Green Loans (HELOC)-second liens 20 $ 4,921 1.8 % 23 $ 5,289 1.7 % Interest-only-second liens 1 113 0.1 % 1 113 0.1 % Total NTM-second liens 21 5,034 1.9 % 24 5,402 1.8 % Total NTM loans 444 $ 269,410 100.0 % 478 $ 309,597 100.0 % Total gross loan portfolio $ 2,396,995$ 2,446,111 % of NTM to total gross loan portfolio 11.2 % 12.7 % The initial credit guidelines for the non-traditional mortgage portfolio were established based on borrower Fair Isaac Company (FICO) score, loan-to-value (LTV), property type, occupancy type, loan amount, and geography. Additionally from an ongoing credit risk management perspective, the Company has determined that the most significant performance indicators for NTMs to be loan-to-value and FICO scores. On a semi-annual basis, the Company performs loan reviews of the NTM loan portfolio, which includes refreshing FICO scores on the Green Loans and HELOCs and ordering third party automated valuation models (AVM) to confirm collateral values. LTV represents current unpaid principal balance divided by estimated property value. The following table presents the one-to-four family residential NTM first lien portfolio by LTV at the dates indicated: Green Interest-Only Negative Amortization Total Count Amount Percent Count Amount Percent Count Amount Percent Count Amount Percent ($ in thousands) March 31, 2014: LTV's (1) < 61 81 $ 82,430 57.4



% 75 $ 43,389 41.2 % 14 $ 5,670 37.2 % 170 $ 131,489 49.8 % 61-80

49 37,055 25.8



% 39 18,777 17.8 % 14 7,181 47.2 % 102 63,013 23.8 % 81-100

25 14,108 9.8 % 41 20,911 19.8 % 6 1,967 12.9 % 72 36,986 14.0 % > 100 12 10,115 7.0 % 66 22,369 21.2 % 1 404



2.7 % 79 32,888 12.4 %

Totals 167 $ 143,708 100.0 % 221 $ 105,446 100.0 % 35 $ 15,222 100.0 % 423 $ 264,376 100.0 % December 31, 2013: LTV's (1) < 61 90 $ 78,807 53.3



% 80 $ 65,181 46.6 % 13 $ 4,930 29.7 % 183 $ 148,918 49.0 % 61-80

38 33,604 22.8



% 51 28,999 20.7 % 13 7,643 45.9 % 102 70,246 23.1 % 81-100

26 14,917 10.1 % 43 21,474 15.4 % 8 3,277 19.7 % 77 39,668 13.0 % > 100 19 20,377 13.8 % 70 24,213 17.3 % 3 773



4.7 % 92 45,363 14.9 %

173 $ 147,705 100.0



% 244 $ 139,867 100.0 % 37 $ 16,623 100.0 % 454 $ 304,195 100.0 %

(1) LTV represents estimated current loan to value ratio, determined by dividing

current unpaid principal balance by latest estimated property value received

per the Company's policy

Green Loans

Green Loans are single family residential first and second mortgage lines of credit with a linked checking account that allows all types of deposits and withdrawals to be performed. The loans are generally interest only with a 15 year balloon payment due at maturity. The Company initiated the Green Loan products in 2005 and proactively refined underwriting and credit management practices and credit guidelines in response to changing economic environments, competitive conditions and portfolio performance. The Company continues to manage credit risk, to the extent possible, throughout the borrower's credit cycle. The Company discontinued the origination of Green Loan products in 2011. 65



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At March 31, 2014, Green Loans totaled $148.6 million, a decrease of $4.4 million, or 2.9 percent from $153.0 million at December 31, 2013, primarily due to reductions in principal balance and payoffs. As of March 31, 2014 and December 31, 2013, $5.6 million and $5.7 million, respectively, of the Company's Green Loans were non-performing. As a result of their unique payment feature, Green Loans possess higher credit risk due to the potential of negative amortization; however, management believes the risk is mitigated through the Company's loan terms and underwriting standards, including its policies on loan-to-value ratios. The Green Loans are similar to HELOCs in that they are collateralized primarily by the equity in one-to-four family mortgage loans. However, some Green Loans are subject to differences from HELOCs relating to certain characteristics including one-action laws. Similar to Green Loans, HELOC's allow the borrower to draw down on the credit line based on an established loan amount for a period of time, typically 10 years, requiring an interest only payment with an option to pay principal at any time. A typical HELOC provides that at the end of the term the borrower can continue to make monthly principal and interest payments based on loan balance until the maturity date. The Green Loan is an interest only loan with a maturity of 15 years at which time the loan comes due and payable with a balloon payment due at maturity. The unique payment structure also differs from a traditional HELOC in that payments are made through the direct linkage of a personal checking account to the loan through a nightly sweep of funds into the Green Loan Account. This reduces any outstanding balance on the loan by the total amount deposited into the checking account. As a result, every time a deposit is made, effectively a payment to the Green Loan is made. HELOCs typically do not cause the loan to be paid down by a borrower's depositing of funds into their checking account at the same bank. Credit guidelines for Green Loans were established based on borrower Fair Isaac Company (FICO) scores, property type, occupancy type, loan amount, and geography. Property types include single family residences and second trust deeds where the Company owned the first liens, owner occupied as well as non-owner occupied properties. The Company utilized its underwriting guidelines for first liens to underwrite the Green Loan secured by second trust deeds as if the combined loans were a single Green Loan. For all Green Loans, the loan income was underwritten using either full income documentation or alternative income documentation. For single family properties the loan sizes ranged up to $7.0 million. For two-to-four family properties, the loan sizes ranged up to $7.5 million. As loan size increased, the maximum LTV decreased from 80 percent to 60 percent. Maximum LTVs were adjusted by 5-10 percent for specified property types such as condos. FICOs were based on the primary wage earners' mid FICO score and the lower of two mid FICO scores for full and alternative documentation, respectively. 76 percent of the FICO scores exceeded 700 at the time of origination. Loans greater than $1 million were subject to a second appraisal or third party appraisal review at origination.



The following table presents the Company's non-traditional one-to-four family residential mortgage Green Loans first lien portfolio at March 31, 2014 and December 31, 2013 by FICO scores:

March 31, 2014 December 31, 2013 Changes Count Amount Percent Count Amount Percent Count Amount Percent ($ in thousands) FICO Score 800+ 7 $ 1,178 0.8 % 7 $ 1,382 0.9 % - $ (204 ) -0.1 % 700-799 91 71,894 50.0 % 94 74,876 50.8 % (3 ) (2,982 ) -0.8 % 600-699 43 41,985 29.2 % 44 42,739 28.9 % (1 ) (754 ) 0.3 % <600 13 11,907 8.3 % 14 11,965 8.1 % (1 ) (58 ) 0.2 % No FICO 13 16,744 11.7 % 14 16,743 11.3 % (1 ) 1 0.4 % Totals 167 $ 143,708 100.0 % 173 $ 147,705 100.0 % (6 ) $ (3,997 ) 0.0 % The Company updates FICO scores on a semi-annual basis, typically in the second and fourth quarters or as needed in conjunction with proactive portfolio management. As such, the FICO scores did not materially change from December 31, 2013 to March 31, 2014, but the change during the quarter reflects loans that were paid off during the quarter.



Interest Only Loans

Interest only loans are primarily single family residential first mortgage loans with payment features that allow interest only payment in initial periods before converting to a fully amortizing loan. As of March 31, 2014, our interest only loans decreased by $34.4 million, or 24.6 percent, to $105.6 million from $140.0 million at December 31, 2013, primarily due to transfers to loans held 66



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for sale of $23.9 million and net amortization of $10.5 million. As of March 31, 2014 and December 31, 2013, $843 thousand and $752 thousand of the interest only loans were non-performing, respectively.



Loans with the Potential for Negative Amortization

Negative amortization loans decreased by $1.4 million, or 8.4 percent, to $15.2 million as of March 31, 2014 from $16.6 million as of December 31, 2013. The Company discontinued origination of negative amortization loans in 2007. As of March 31, 2014 and December 31, 2013, $983 thousand and $1.2 million of the loans that had the potential for negative amortization were non-performing, respectively. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization; however, management believes the risk is mitigated through the loan terms and underwriting standards, including its policies on loan-to-value ratios.



Non-Traditional Mortgage Loan Credit Risk Management

The Company performs detailed reviews of collateral values on loans collateralized by residential real property including its non-traditional mortgage portfolio based on appraisals or estimates from third party automated valuation models (AVMs) to analyze property value trends on a semi-annual basis or as needed. AVMs are used to identify loans that have experienced potential collateral deterioration. Once a loan has been identified that may have experienced collateral deterioration, the Company will obtain updated drive by or full appraisals in order to confirm the valuation. This information is used to update key monitoring metrics such as LTV. Additionally, FICO scores are obtained bi-annually in conjunction with the collateral analysis. In addition to LTV and FICO, the Company evaluates the portfolio on a specific loan basis through delinquency and portfolio charge-offs to determine whether any risk mitigation or portfolio management actions are warranted. The borrowers may be contacted as necessary to discuss material changes in loan performance or credit metrics. The Company's risk management policy and credit monitoring includes reviewing delinquency, FICO scores, and collateral values on the non-traditional mortgage loan portfolio. We also continuously monitor market conditions for our geographic lending areas. The Company has determined that the most significant performance indicators for non-traditional mortgages to be LTV and FICO scores. The loan review provides an effective method of identifying borrowers who may be experiencing financial difficulty before they fail to make a loan payment. Upon receipt of the updated FICO scores, an exception report is run to identify loans with a decrease in FICO of 10 percent or more and a resulting FICO of 620 or less. The loans are then further analyzed to determine if the risk rating should be downgraded that will increase the ALLL the Company will establish for potential losses. A report of the semi-annual loan reviews is published and regularly monitored. On the interest only loans, the Company projects future payment changes to determine if there will be an increase in payment of 3.50 percent or greater and then monitor the loans for possible delinquencies. The individual loans are monitored for possible downgrading of risk rating, and trends within the portfolio are identified that could affect other interest only loans scheduled for payment changes in the near future. As these loans are revolving lines of credit, the Company, based on the loan agreement and loan covenants of the particular loan, as well as applicable rules and regulations, could suspend the borrowing privileges or reduce the credit limit at any time the Company reasonably believes that the borrower will be unable to fulfill their repayment obligations under the agreement or certain other conditions are met. In many cases, the decrease in FICO is the first red flag that the borrower may have difficulty in making their future payment obligations. As a result, the Company proactively manages the portfolio by performing detailed analysis on its portfolio with emphasis on the non-traditional mortgage portfolio. The Company's Internal Asset Review Committee (IARC) conducts monthly meetings to review the loans classified as special mention, substandard, or doubtful and determines whether suspension or reduction in credit limit is warranted. If the line has been suspended and the borrower would like to have their credit privileges reinstated, they would need to provide updated financials showing their ability to meet their payment obligations. From the most recent bi-annual review completed in the first quarter of 2014, the Company did not freeze or reduce any additional commitments. Consumer and non-traditional mortgage loans may entail greater risk than do traditional one-to-four family residential mortgage loans, particularly in the case of consumer loans that are secured by rapidly depreciable assets, such as automobiles and recreational vehicles. In these cases, any repossessed collateral for a consumer and non-traditional mortgage loan are more dependent on the borrower's continued financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. 67



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Allowance for Loan and Lease Losses

The Company maintains an allowance for loan and lease losses (ALLL) to absorb probable incurred losses inherent in the loan and lease portfolio at the balance sheet date. The ALLL is based on ongoing assessment of the estimated probable losses presently inherent in the loan portfolio. In evaluating the level of the ALLL, management considers the types of loans and leases and the amount of loans and leases in the portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This methodology takes into account many factors, including the Company's own historical and peer loss trends, loan and lease-level credit quality ratings, loan and lease specific attributes along with a review of various credit metrics and trends. The process involves subjective as well as complex judgments. The Company uses a three year loss experience of the Company and its peers in analyzing an appropriate reserve factor for all loans. In addition, the Company uses adjustments for numerous factors including those found in the Interagency Guidance on ALLL, which include current economic conditions, loan and lease seasoning, underwriting experience, and collateral value changes among others. The Company evaluates all impaired loans and leases individually using guidance from ASC 310 primarily through the evaluation of cash flows or collateral values. The Company acquired PBOC during 2013 and Beach and Gateway during 2012, and their loans and leases were treated under ASC 805, accounting for acquisitions. The acquired loans and leases include loans and leases that are accounted for under ASC 310-30, accounting for purchase credit impaired loans and leases. In addition, the Company acquired three pools of credit impaired re-performing seasoned SFR mortgage loan pools during 2012. For the year ended December 31, 2013, the Bank acquired five pools of seasoned SFR mortgage loan pools, which were partially ASC 310-30 loans. During the three months ended March 31, 2014, there was no provision for loan and lease losses or allowance for loan and lease losses related to these pools as these loans were acquired at an aggregate 16.9 percent discount to the aggregated unpaid principal balances and there were no impairments on these pools. The Company may recognize provisions for loan and lease losses in the future should there be further deterioration in these loans after the purchase date should the impairment exceed the non-accretable yield and purchased discount. On a quarterly basis, the Company determines whether it needs to re-forecast its expected cash flows for the PCI loans relating to the PBOC, Beach and Gateway acquisitions, and the eight loan pools acquired in 2012 and 2013 to be evaluated for potential impairment. The provision for loans and leases losses on PCI loans reflected a decrease in expected cash flows on PCI loans compared to those previously estimated. The impairment reserve for PCI loans at March 31, 2014 was $196 thousand. The ALLL that was collectively evaluated for impairment on originated loans and leases at March 31, 2014 was $17.4 million, which represented 1.44 percent of total originated loans and leases, as compared to $17.1 million, or 1.46 percent, of total originated loans and leases at December 31, 2013. Including the non-credit impaired loans acquired through the Beach, Gateway, and PBOC acquisitions, ALLL that was collectively evaluated for impairment was $19.7 million as of March 31, 2014, which represents 1.20 percent of the total amount of such loans and leases, as compared to $18.5 million, or 1.13 percent, of the total amount of such loans and leases at December 31, 2013. The ALLL that was individually evaluated for impairment was $62 thousand at March 31, 2014 compared to $96 thousand at December 31, 2013. An unallocated ALLL of $353 thousand and $450 thousand was held at March 31, 2014 and December 31, 2013, respectively. The ALLL plus market discount for originated and acquired non-credit impaired loans and leases to the total amount of such loans and leases was 1.64 percent at March 31, 2014 versus 1.63 percent at December 31, 2013. The Company provided $1.9 million to its provision for loan and lease losses during the three months ended March 31, 2014, related primarily to new commercial real estate mortgage, multifamily, and commercial and industrial loan production. 68



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The following table provides information regarding activity in the allowance for loan and lease losses during the periods indicated:

HELOC's, Home Equity Real Estate Loans, and Commercial Commercial 1-4 family Other and Real Estate Multi- Lease First Consumer Industrial Mortgage Family SBA Construction Financing Mortgage Credit Unallocated TOTAL (In thousands) March 31, 2014: Allowance for loan and lease losses: Balance as of December 31, 2013$ 1,822$ 5,484$ 2,566$ 235 $ 244 $ 428$ 7,044 $ 532 $ 450 $ 18,805 Charge-offs - - - (17 ) - - (151 ) (35 ) - (203 ) Recoveries 26 316 - 92 - - - 1 - 435 Transfer of loans to held-for-sale - - - - - - (963 ) - - (963 ) Provision 519 649 154 (99 ) 108 194 217 284 (97 ) 1,929



Balance as of March 31, 2014$ 2,367$ 6,449$ 2,720$ 211 $ 352 $ 622$ 6,147 $ 782 $ 353 $ 20,003

Individually evaluated for impairment $ - $ - $ 37 $ - $ - $ - $ 25 $ - $ - $ 62 Collectively evaluated for impairment 2,367 6,449 2,683 211 352 622 5,926 782 353 19,745 Acquired with deteriorated credit quality - - - - - - 196 - - 196 Total ending allowance balance $ 2,367$ 6,449$ 2,720$ 211 $ 352 $ 622$ 6,147 $ 782 $ 353 $ 20,003



Loans:

Individually evaluated for impairment $ - $ 3,218$ 1,674 $ - $ - $ - $



10,160 $ 212 $ - $ 15,264 Collectively evaluated for impairment

297,646 542,750 153,708 23,064 25,144 48,537 856,664 120,795 - 2,068,308 Acquired with deteriorated credit quality 1,538 14,613 - 3,477 - - 292,039 1,756 - 313,423



Total ending loan balances $ 299,184$ 560,581$ 155,382$ 26,541$ 25,144$ 48,537$ 1,158,863$ 122,763 $ - $ 2,396,995

March 31, 2013: Allowance for loan and lease losses: Balance as of December 31, 2012 $ 263$ 3,178$ 1,478$ 118 $ 21 $ 261 $



8,855 $ 274 $ - $ 14,448 Charge-offs

- (105 ) (384 ) (125 ) - (23 ) (262 ) (7 ) - (906 ) Recoveries - - 88 125 - 2 90 - - 305 Provision 218 625 362 15 273 23 529 (70 ) 193 2,168



Balance as of March 31, 2013$ 481$ 3,698$ 1,544$ 133 $ 294 $ 263$ 9,212 $ 197 $ 193 $ 16,015

Individually evaluated for impairment $ - $ 38 $ 329 $ - $ - $ - $ 1,095 $ - $ 1,462 Collectively evaluated for impairment 481 3,636 1,215 133 294 263 7,902 197 193 14,314 Acquired with deteriorated credit quality 24 215 239 Total ending allowance balance $ 481$ 3,698$ 1,544$ 133 $ 294 $ 263$ 9,212 $ 197 $ 193 $ 16,015



Loans:

Individually evaluated for impairment $ - $ 2,511$ 2,336 $ - $ - $ - $ 17,062 $ - $ 21,909 Collectively evaluated for impairment 74,564 307,338 123,329 30,329 6,831 16,418 806,197 21,901 1,386,907 Acquired with deteriorated credit quality 4,781 21,616 838 5,333 - - 185,833 55 218,456



Total ending loan balances $ 79,345$ 331,465$ 126,503$ 35,662$ 6,831$ 16,418$ 1,009,092$ 21,956 $ - $ 1,627,272

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The following table presents the ALLL allocation among loan and lease origination types as of the dates indicated:

March 31, December 31, Amount Percentage 2014 2013 Change Change (In thousands) Loan breakdown by evaluation type: Originated loans Individually evaluated for impairment $ 13,504$ 16,704$ (3,200 ) -19.2 % Collectively evaluated for impairment 1,210,993 1,168,195 42,798 3.7 % Acquired loans through business acquisitions - non-impaired Individually evaluated for impairment 1,759 2,243 (484 ) -21.6 % Collectively evaluated for impairment 438,815 469,916 (31,101 ) -6.6 % Seasoned SFR mortgage loan pools - non-impaired 418,501 449,767 (31,266 ) -7.0 % Acquired with deteriorated credit quality 313,422 339,286 (25,864 ) -7.6 % Total loans $ 2,396,995$ 2,446,111$ (49,116 ) -2.0 % Allowance for loan and leases losses (ALLL) breakdown: Originated loans Individually evaluated for impairment $ 62 $ 96 $ (34 ) -34.9 % Collectively evaluated for impairment 17,397 17,103 294 1.7 % Acquired loans through business acquisitions - non-impaired Individually evaluated for impairment - - - NM Collectively evaluated for impairment 2,347 1,410 937 66.5 % Seasoned SFR mortgage loan pools - non-impaired - - - NM Acquired with deteriorated credit quality 196 196 0 0.2 % Total ALLL $ 20,003$ 18,805$ 1,198 6.4 % Discount on Purchased/Acquired Loans: Acquired loans through business acquisitions - non-impaired $ 7,479$ 8,354$ (875 ) -10.5 % Seasoned SFR mortgage loan pools - non-impaired 34,619 38,240 (3,621 ) -9.5 % Acquired with deteriorated credit quality 89,303 105,650 (16,347 ) -15.5 % Total Discount $ 131,400$ 152,244$ (20,844 ) -13.7 % Ratios: To originated loans: Individually evaluated for impairment 0.46 % 0.57 % Collectively evaluated for impairment 1.44 % 1.46 % Total ALLL 1.43 % 1.45 % To originated and acquired non-impaired loans: Individually evaluated for impairment 0.41 % 0.51 % Collectively evaluated for impairment 1.20 % 1.13 % Total ALLL 1.19 % 1.12 % Total ALLL and discount (1) 1.64 % 1.63 % To total loans: Individually evaluated for impairment 0.41 % 0.51 % Collectively evaluated for impairment 0.95 % 0.89 % Total ALLL 0.83 % 0.77 % Total ALLL and discount (1) 6.32 % 6.99 %



(1) Total ALLL plus discount divided by carrying value

Servicing Rights

Total mortgage and SBA servicing rights were $18.9 million and $13.9 million at March 31, 2014 and December 31, 2013, respectively. The fair value of the mortgage servicing rights (MSRs) amounted to $18.6 million and $13.5 million and the amortized cost of the SBA servicing rights was $327 thousand and $348 thousand at March 31, 2014 and December 31, 2013, respectively. The Company retains servicing rights from certain of its sales of SFR mortgage loans and SBA loans. The principal balance of the loans underlying our total MSRs and SBA servicing rights was $1.90 billion and $15.5 million, respectively, at March 31, 2014 and $1.37 billion and $20.0 million, respectively, at December 31, 2013. The recorded amount of the MSR and SBA servicing rights as a percentage of the unpaid principal balance of the loans we are servicing was 0.98 percent and 2.10 percent, respectively, at March 31, 2014 as compared to 1.00 percent and 1.74 percent, respectively, at December 31, 2013. 70



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During the three months ended March 31, 2014, the Company entered into an agreement with a third party to sell servicing rights on mortgage loans with $941.1 million of outstanding unpaid principal balance at March 31, 2014 for a fair value of $10.1 million. The sale closed on April 1, 2014. The fair values on the sold MSRs are carried at the closing price of the transaction at March 31, 2014.



Deposits

The following table shows the composition of deposits by type as of the dates indicated. March 31, December 31, Amount Percentage 2014 2013 Change Change (In thousands) Noninterest-bearing deposits $ 430,925$ 429,158$ 1,767 0.4 % Interest-bearing demand deposits 644,649 539,098 105,551 19.6 % Money market accounts 502,368 518,696 (16,328 ) -3.1 % Savings accounts 986,201 963,536 22,665 2.4 % Certificates of deposits 545,003 468,156 76,847 16.4 %



Total interest-bearing deposits $ 3,109,146$ 2,918,644

$ 190,502 6.5 % Total deposits increased by $190.5 million, or 6.5 percent, to $3.11 billion at March 31, 2014, compared to $2.92 billion at December 31, 2013. The increase in total deposits primarily resulted from strategic plans aiming to increase core deposits. In December 2012, the Company launched interest-bearing core deposits products with enhanced features to attract high net worth depositors in our target markets while reducing the reliance on certificates of deposit. As of March 31, 2014, deposits generated through this program totaled approximately $1.50 billion.



Federal Home Loan Bank Advances and Other Borrowings

At March 31, 2014, the Bank had a fixed-rate advance of $15.0 million at an interest rate of 0.82 percent and a variable-rate advance of $380.0 million at an interest rate of 0.11 percent from the FHLB. At December 31, 2013, $25.0 million of the Bank's advances from the FHLB were fixed-rate and had interest rates ranging from 0.59 percent to 0.82 percent with a weighted average rate of 0.73 percent. At December 31, 2013, $225.0 million of the Bank's advances from the FHLB were variable-rate and had a weighted average interest rate of 0.06 percent as of that date. In additional, the Company had outstanding federal funds purchased of $70.0 million at March 31, 2014. Each advance is payable at its maturity date. Advances paid early are subject to a prepayment penalty. At March 31, 2014 and December 31, 2013, the Bank's advances from the FHLB were collateralized by certain real estate loans with an aggregate unpaid principal balance of $1.67 billion and $740.1 million, respectively. The Bank's investment in capital stock of the FHLB of San Francisco totaled $18.6 million and $14.4 million, respectively, at March 31, 2014 and December 31, 2013. Based on this collateral and the Bank's holdings of FHLB stock, the Bank was eligible to borrow an additional $509.0 million at March 31, 2014. In addition, the Bank had available lines of credit with the Federal Reserve Bank totaling $89.3 million at March 31, 2014.



Long Term Debt

On April 23, 2012, the Company completed the public offering of $33.0 million aggregate principal amount of its 7.50 percent Senior Notes due April 15, 2020 at a price to the public of $25.00 per Senior Note. Net proceeds after discounts were approximately $31.7 million. The Senior Notes were issued under the Senior Debt Securities Indenture, dated as of April 23, 2012 (the Base Indenture), as supplemented by the First Supplemental Indenture, dated as of April 23, 2012 (the Supplemental Indenture, and together with the Base Indenture, the Indenture), between the Company and U.S. Bank National Association, as trustee. On December 6, 2012, the Company completed the issuance and sale of an additional $45.0 million aggregate principal amount of the Senior Notes at a price to the public of $25.00 per Senior Note, plus accrued interest from October 15, 2012. Net proceeds after discounts, including a full exercise of the $6.8 million underwriters' overallotment option on December 7, 2012, were approximately $50.1 million. 71



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The Senior Notes are the Company's senior unsecured debt obligations and rank equally with all of the Company's other present and future unsecured unsubordinated obligations. The Senior Notes bear interest at a per-annum rate of 7.50 percent. The Company makes interest payments on the Senior Notes quarterly in arrears. The Senior Notes will mature on April 15, 2020. However, the Company may, at the Company's option, on April 15, 2015, or on any scheduled interest payment date thereafter, redeem the Senior Notes in whole or in part on not less than 30 nor more than 60 days prior notice. The Senior Notes will be redeemable at a redemption price equal to 100 percent of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to the date of redemption. The Indenture contains several covenants which, among other things, restrict the Company's ability and the ability of the Company's subsidiaries to dispose of or incur liens on the voting stock of certain subsidiaries and also contains customary events of default.



Reserve for Loss on Repurchased Loans

Reserve for loss reimbursements on sold loans was $5.9 million and $5.4 million at March 31, 2014 and December 31, 2013, respectively. This reserve relates to our single family residential mortgage business. We sell most of the residential mortgage loans that we originate into the secondary mortgage market. When we sell mortgage loans, we make customary representations and warranties to the purchasers about various characteristics of each loan, such as the manner of origination, the nature and extent of underwriting standards applied and the types of documentation being provided. Typically, these representations and warranties are in place for the life of the loan. If a defect in the origination process is identified, we may be required to either repurchase the loan or indemnify the purchaser for losses it sustains on the loan. If there are no such defects, generally we have no liability to the purchaser for losses it may incur on such loan. We maintain a reserve for loss reimbursements on sold loans to account for the expected losses related to loans we might be required to repurchase (or the indemnity payments we may have to make to purchasers). The reserve takes into account both our estimate of expected losses on loans sold during the current accounting period, as well as adjustments to our previous estimates of expected losses on loans sold. In each case, these estimates are based on the most recent data available to us, including data from third parties, regarding demands for loan repurchases, actual loan repurchases, and actual credit losses on repurchased loans, among other factors. Provisions added to the reserve for loss reimbursements on sold loans are recorded under non-interest expense in the consolidated statements of operations as an increase or decrease to provision for loss reimbursements on loans sold.



The following table presents a summary of activity in the reserve for loss reimbursements on sold loans for the periods indicated:

Three months ended March 31, 2014 2013 (In thousands) Balance at beginning of period $ 5,427 $



3,485

Provision for loan repurchases 571



256

Payments made for loss reimbursement on sold loans (132 ) (243 ) Balance at end of period $ 5,866$ 3,498 Liquidity The Bank is required to have enough liquid assets in order to maintain sufficient liquidity to ensure a safe and sound operation. Liquidity may increase or decrease depending upon availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained. The Bank's liquidity, represented by cash and cash equivalents and securities available for sale, is a product of its operating, investing, and financing activities. The Bank's primary sources of funds are deposits, payments and maturities of outstanding loans and investment securities; and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Bank invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. The Bank also generates cash through borrowings. The Bank utilizes FHLB advances to leverage its capital base, to provide funds for its lending activities, as a source of liquidity, and to enhance its interest rate risk management. The Bank also has the 72



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ability to obtain brokered certificates of deposit. Liquidity management is both a daily and long-term function of business management. Any excess liquidity would be invested in federal funds or authorized investments such as mortgage-backed or U.S. agency securities. On a longer-term basis, the Bank maintains a strategy of investing in various lending products. The Bank uses its sources of funds primarily to meet its ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, to fund loan commitments, and to maintain its portfolio of mortgage-backed securities and investment securities. At March 31, 2014, there were $104.8 million of approved loan origination commitments, $328.6 million of unused lines of credit and $6.3 million of outstanding letters of credit. Certificates of deposit maturing in the next 12 months totaled $335.0 million and $395.0 million of FHLB advances and $70.0 million of federal funds sold had maturities of less than 12 months at March 31, 2014. Based on the competitive deposit rates offered and on historical experience, management believes that a significant portion of maturing deposits will remain with the Bank, although no assurance can be given in this regard. At March 31, 2014, the Company maintained $333.6 million of cash and cash equivalents that was 8.3 percent to total assets. In addition, the Bank had the ability at March 31, 2014 to borrow an additional $509.0 million from the FHLB and $89.3 million from the Federal Reserve Bank.



Commitments

The following table presents information as of March 31, 2014 regarding the Company's commitments and contractual obligations:

Commitments and Contractual Obligations Total More Than One More Than Three Amount Less Than Year Through Year Through Over Committed One Year Three Years Five Years Five Years (In thousands) Commitments to extend credit $ 104,767$ 50,904$ 33,733 $ 11,013 $ 9,117 Unused lines of credit 328,557 183,752 28,862 67,924 48,019 Standby letters of credit 6,349 4,899 672 - 778 Total commitments $ 439,673$ 239,555$ 63,267 $ 78,937 $ 57,914 FHLB advances $ 395,000$ 395,000 $ - $ - $ - Federal funds purchased 70,000 70,000 - - - Long-term debt 123,152 6,356 12,713 12,713 91,370 Operating and capital lease obligations 37,872 10,151 16,622 7,863 3,236 Maturing certificates of deposit 545,003 335,023 153,710 56,077 193 Total contractual obligations $ 1,171,027$ 816,530$ 183,045 $ 76,653 $ 94,799 73



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Regulatory Capital

Federal bank regulatory agencies currently require bank holding companies such as the Company to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0 percent. In addition to the risk-based guidelines, federal bank regulatory agencies currently require bank holding companies to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 4.0 percent. In order to be considered "well capitalized," federal bank regulatory agencies currently require depository institutions such as the Bank to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 10.0 percent and a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0 percent. In addition to the risk-based guidelines, the federal bank regulatory agencies require depository institutions to maintain a minimum ratio of Tier 1 capital to average total assets, referred to as the leverage ratio, of 5.0 percent.



The following table presents the capital amounts and ratios for the Company and the Bank as of dates indicated:

Minimum Required to Be Well Capitalized Under Minimum Capital Prompt Corrective Amount Requirements Action Provisions Amount Ratio Amount Ratio Amount Ratio ($ in thousands) March 31, 2014: Banc of California, Inc. Total risk-based capital ratio $ 307,141 11.93 % $ 205,953 8.00 % N/A N/A Tier 1 risk-based capital ratio 279,658 10.86 % 102,976 4.00 % N/A N/A Tier 1 leverage ratio 279,658 7.59 % 147,288 4.00 % N/A N/A Banc of California, NA Total risk-based capital ratio $ 373,039 14.54 % $ 205,241 8.00 % $ 256,551 10.00 % Tier 1 risk-based capital ratio 345,556 13.47 % 102,620 4.00 % 153,930 6.00 % Tier 1 leverage ratio 345,556 9.41 % 146,925 4.00 % 183,656 5.00 % December 31, 2013: Banc of California, Inc. Total risk-based capital ratio $ 307,457 12.45 % $ 197,503 8.00 % N/A N/A Tier 1 risk-based capital ratio 281,786 11.41 % 98,752 4.00 % N/A N/A Tier 1 leverage ratio 281,786 8.02 % 140,463 4.00 % N/A N/A Banc of California, NA Total risk-based capital ratio $ 360,634 14.65 % $ 196,998 8.00 % $ 246,247 10.00 % Tier 1 risk-based capital ratio 334,963 13.60 % 98,499 4.00 % 147,748 6.00 % Tier 1 leverage ratio 334,963 9.58 % 139,874 4.00 % 174,842 5.00 % In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. The Company and the Bank will become subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of 2015 through 2019. The final rule:



• Permits banking organizations that had less than $15 billion in total

consolidated assets as of December 31, 2009, to include in Tier 1 capital

trust preferred securities and cumulative perpetual preferred stock that

were issued and included in Tier 1 capital prior to May 19, 2010, subject

to a limit of 25 percent of Tier 1 capital elements, excluding any

non-qualifying capital instruments and after all regulatory capital

deductions and adjustments have been applied to Tier 1 capital.



• Establishes new qualifying criteria for regulatory capital, including new

limitations on the inclusion of deferred tax assets and mortgage servicing

rights.



• Requires a minimum ratio of common equity Tier 1 capital to risk-weighted

assets of 4.5percent. 74



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• Increases the minimum Tier 1 capital to risk-weighted assets ratio

requirement from 4 percent to 6 percent. • Retains the minimum total capital to risk-weighted assets ratio requirement of 8 percent. • Establishes a minimum leverage ratio requirement of 4 percent.



• Retains the existing regulatory capital framework for one-to-four family

residential mortgage exposures. • Permits banking organizations that are not subject to the advanced



approaches rule, such as the Company and the Bank, to retain, through a

one-time election, the existing treatment for most accumulated other

comprehensive income, such that unrealized gains and losses on securities

available for sale will not affect regulatory capital amounts and ratios. • Implements a new capital conservation buffer requirement for a banking



organization to maintain a common equity capital ratio more than 2.5

percent above the minimum common equity Tier 1 capital, Tier 1 capital and

total risk-based capital ratios in order to avoid limitations on capital

distributions, including dividend payments, and certain discretionary

bonus payments. The capital conservation buffer requirement will be phased

in beginning on January 1, 2016 at 0.625 percent and will be fully phased in at 2.50 percent by January 1, 2019. A banking organization with a



buffer of less than the required amount would be subject to increasingly

stringent limitations on such distributions and payments as the buffer approaches zero. The new rule also generally prohibits a banking organization from making such distributions or payments during any quarter



if its eligible retained income is negative and its capital conservation

buffer ratio was 2.5 percent or less at the end of the previous quarter.

The eligible retained income of a banking organization is defined as its

net income for the four calendar quarters preceding the current calendar

quarter, based on the organization's quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income.



• Increases capital requirements for past-due loans, high volatility

commercial real estate exposures, and certain short-term commitments and

securitization exposures.



• Expands the recognition of collateral and guarantors in determining

risk-weighted assets. • Removes references to credit ratings consistent with the Dodd Frank Act



and establishes due diligence requirements for securitization exposures.

The Company's management is currently evaluating the provisions of the final rule and their expected impact on the Company.


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