PACIFIC PREMIER BANCORP INC - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 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 0-22193
![ppbi-20210930_g1.jpg](https://www.sec.gov/Archives/edgar/data/0001028918/000102891821000188/ppbi-20210930_g1.jpg)
(Exact name of registrant as specified in its charter)
Delaware | 33-0743196 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S Employer Identification No.) |
17901 Von Karman Avenue, Suite 1200, Irvine, California 92614
(Address of principal executive offices and zip code)
(949) 864-8000
(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 (§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 (Do not check if a smaller reporting company) | ☐ | 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 Exchange Act Rule 12b-2). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||||||||
Common Stock, par value $0.01 per share | PPBI | NASDAQ Global Select Market |
The number of shares outstanding of the registrant’s common stock as of October 29, 2021 was 94,355,063.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except par value and share data) | September 30, 2021 | December 31, 2020 | ||||||||||||
ASSETS | ||||||||||||||
Cash and due from banks | $ | 160,276 | $ | 135,429 | ||||||||||
Interest-bearing deposits with financial institutions | 162,044 | 745,337 | ||||||||||||
Cash and cash equivalents | 322,320 | 880,766 | ||||||||||||
Interest-bearing time deposits with financial institutions | 2,708 | 2,845 | ||||||||||||
Investments held-to-maturity, at amortized cost, net of allowance for credit losses of $11 and $0 (fair value of $169,154 and $25,013) at September 30, 2021 and December 31, 2020, respectively | 170,576 | 23,732 | ||||||||||||
Investment securities available-for-sale, at fair value | 4,709,815 | 3,931,115 | ||||||||||||
FHLB, FRB, and other stock, at cost | 118,399 | 117,055 | ||||||||||||
Loans held for sale, at lower of cost or fair value | 8,100 | 601 | ||||||||||||
Loans held for investment | 13,982,861 | 13,236,433 | ||||||||||||
Allowance for credit losses | (211,481) | (268,018) | ||||||||||||
Loans held for investment, net | 13,771,380 | 12,968,415 | ||||||||||||
Accrued interest receivable | 63,228 | 74,574 | ||||||||||||
Premises and equipment | 72,850 | 78,884 | ||||||||||||
Deferred income taxes, net | 83,432 | 89,056 | ||||||||||||
Bank-owned life insurance | 447,135 | 292,564 | ||||||||||||
Intangible assets | 73,451 | 85,507 | ||||||||||||
Goodwill | 901,312 | 898,569 | ||||||||||||
Other assets | 260,505 | 292,861 | ||||||||||||
Total assets | $ | 21,005,211 | $ | 19,736,544 | ||||||||||
LIABILITIES | ||||||||||||||
Deposit accounts: | ||||||||||||||
Noninterest-bearing checking | $ | 6,841,495 | $ | 6,011,106 | ||||||||||
Interest-bearing: | ||||||||||||||
Checking | 3,477,902 | 2,913,260 | ||||||||||||
Money market/savings | 6,037,532 | 5,662,969 | ||||||||||||
Retail certificates of deposit | 1,113,070 | 1,471,512 | ||||||||||||
Wholesale/brokered certificates of deposit | — | 155,330 | ||||||||||||
Total interest-bearing | 10,628,504 | 10,203,071 | ||||||||||||
Total deposits | 17,469,999 | 16,214,177 | ||||||||||||
FHLB advances and other borrowings | 150,000 | 31,000 | ||||||||||||
Subordinated debentures | 330,408 | 501,511 | ||||||||||||
Accrued expenses and other liabilities | 216,688 | 243,207 | ||||||||||||
Total liabilities | 18,167,095 | 16,989,895 | ||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||
Preferred stock, $0.01 par value; 1,000,000 authorized; none issued and outstanding | — | — | ||||||||||||
Common stock, $0.01 par value; 150,000,000 shares authorized at September 30, 2021 and December 31, 2020; 94,354,211 shares and 94,483,136 shares issued and outstanding, respectively. | 929 | 931 | ||||||||||||
Additional paid-in capital | 2,347,626 | 2,354,871 | ||||||||||||
Retained earnings | 488,385 | 330,555 | ||||||||||||
Accumulated other comprehensive income | 1,176 | 60,292 | ||||||||||||
Total stockholders’ equity | 2,838,116 | 2,746,649 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 21,005,211 | $ | 19,736,544 | ||||||||||
Accompanying notes are an integral part of these consolidated financial statements.
3
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands, except share data) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
INTEREST INCOME | ||||||||||||||||||||||||||||||||
Loans | $ | 157,025 | $ | 152,365 | $ | 167,455 | $ | 464,615 | $ | 414,059 | ||||||||||||||||||||||
Investment securities and other interest-earning assets | 19,022 | 18,327 | 14,536 | 55,118 | 35,843 | |||||||||||||||||||||||||||
Total interest income | 176,047 | 170,692 | 181,991 | 519,733 | 449,902 | |||||||||||||||||||||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||||||||||
Deposits | 2,432 | 3,265 | 8,509 | 10,123 | 28,651 | |||||||||||||||||||||||||||
FHLB advances and other borrowings | 1 | — | 113 | 66 | 1,411 | |||||||||||||||||||||||||||
Subordinated debentures | 4,545 | 6,493 | 6,823 | 17,889 | 13,827 | |||||||||||||||||||||||||||
Total interest expense | 6,978 | 9,758 | 15,445 | 28,078 | 43,889 | |||||||||||||||||||||||||||
Net interest income before provision for credit losses | 169,069 | 160,934 | 166,546 | 491,655 | 406,013 | |||||||||||||||||||||||||||
Provision for credit losses | (19,726) | (38,476) | 4,210 | (56,228) | 190,299 | |||||||||||||||||||||||||||
Net interest income after provision for credit losses | 188,795 | 199,410 | 162,336 | 547,883 | 215,714 | |||||||||||||||||||||||||||
NONINTEREST INCOME | ||||||||||||||||||||||||||||||||
Loan servicing income | 536 | 622 | 481 | 1,616 | 1,395 | |||||||||||||||||||||||||||
Service charges on deposit accounts | 2,375 | 2,222 | 1,593 | 6,629 | 4,707 | |||||||||||||||||||||||||||
Other service fee income | 350 | 352 | 487 | 1,175 | 1,095 | |||||||||||||||||||||||||||
Debit card interchange fee income | 834 | 1,099 | 944 | 2,720 | 1,749 | |||||||||||||||||||||||||||
Earnings on bank-owned life insurance | 3,266 | 2,279 | 2,270 | 7,778 | 4,920 | |||||||||||||||||||||||||||
Net gain from sales of loans | 1,187 | 1,546 | 9,542 | 3,094 | 8,281 | |||||||||||||||||||||||||||
Net gain from sales of investment securities | 4,190 | 5,085 | 1,141 | 13,321 | 8,880 | |||||||||||||||||||||||||||
Trust custodial account fees | 11,446 | 7,897 | 6,960 | 26,565 | 9,357 | |||||||||||||||||||||||||||
Escrow and exchange fees | 1,867 | 1,672 | 1,142 | 5,065 | 1,407 | |||||||||||||||||||||||||||
Other income | 4,049 | 3,955 | 2,198 | 12,606 | 6,340 | |||||||||||||||||||||||||||
Total noninterest income | 30,100 | 26,729 | 26,758 | 80,569 | 48,131 | |||||||||||||||||||||||||||
NONINTEREST EXPENSE | ||||||||||||||||||||||||||||||||
Compensation and benefits | 53,592 | 53,474 | 51,021 | 159,614 | 128,408 | |||||||||||||||||||||||||||
Premises and occupancy | 12,611 | 12,240 | 12,373 | 36,831 | 30,028 | |||||||||||||||||||||||||||
Data processing | 6,296 | 5,765 | 6,783 | 17,889 | 14,501 | |||||||||||||||||||||||||||
Other real estate owned operations, net | — | — | (17) | — | 6 | |||||||||||||||||||||||||||
FDIC insurance premiums | 1,392 | 1,312 | 1,145 | 3,885 | 2,358 | |||||||||||||||||||||||||||
Legal and professional services | 4,563 | 4,186 | 5,108 | 12,684 | 11,328 | |||||||||||||||||||||||||||
Marketing expense | 2,008 | 1,490 | 1,718 | 5,096 | 4,449 | |||||||||||||||||||||||||||
Office expense | 1,076 | 1,589 | 2,389 | 4,494 | 5,025 | |||||||||||||||||||||||||||
Loan expense | 1,332 | 1,165 | 802 | 3,612 | 2,447 | |||||||||||||||||||||||||||
Deposit expense | 3,974 | 3,985 | 4,728 | 11,818 | 14,674 | |||||||||||||||||||||||||||
Merger-related expense | — | — | 2,988 | 5 | 44,058 | |||||||||||||||||||||||||||
Amortization of intangible assets | 3,912 | 4,001 | 4,538 | 12,056 | 12,567 | |||||||||||||||||||||||||||
Other expense | 5,284 | 5,289 | 5,003 | 15,041 | 11,331 | |||||||||||||||||||||||||||
Total noninterest expense | 96,040 | 94,496 | 98,579 | 283,025 | 281,180 | |||||||||||||||||||||||||||
Net income (loss) before income taxes | 122,855 | 131,643 | 90,515 | 345,427 | (17,335) | |||||||||||||||||||||||||||
Income tax expense (benefit) | 32,767 | 35,341 | 23,949 | 90,369 | (10,550) | |||||||||||||||||||||||||||
Net income (loss) | $ | 90,088 | $ | 96,302 | $ | 66,566 | $ | 255,058 | $ | (6,785) | ||||||||||||||||||||||
EARNINGS (LOSS) PER SHARE | ||||||||||||||||||||||||||||||||
Basic | $ | 0.95 | $ | 1.02 | $ | 0.71 | $ | 2.70 | $ | (0.10) | ||||||||||||||||||||||
Diluted | 0.95 | 1.01 | 0.70 | 2.68 | (0.10) | |||||||||||||||||||||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||||||||||||||||||||
Basic | 93,549,639 | 93,635,392 | 93,529,967 | 93,571,468 | 74,391,688 | |||||||||||||||||||||||||||
Diluted | 94,060,724 | 94,218,028 | 93,719,167 | 94,090,407 | 74,391,688 | |||||||||||||||||||||||||||
Accompanying notes are an integral part of these consolidated financial statements.
4
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Net income (loss) | $ | 90,088 | $ | 96,302 | $ | 66,566 | $ | 255,058 | $ | (6,785) | ||||||||||||||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||||||||||
Unrealized (loss) gain on securities available-for-sale arising during the period, net of income taxes (1) | (20,138) | 45,343 | (11,747) | (47,387) | 30,473 | |||||||||||||||||||||||||||
Reclassification adjustment for net (gain) on sales of securities included in net income, net of income taxes (2) | (2,991) | (3,630) | (814) | (9,510) | (6,333) | |||||||||||||||||||||||||||
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (3) | (2,277) | — | — | (2,277) | — | |||||||||||||||||||||||||||
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (4) | 58 | — | — | 58 | — | |||||||||||||||||||||||||||
Other comprehensive (loss) income, net of tax | (25,348) | 41,713 | (12,561) | (59,116) | 24,140 | |||||||||||||||||||||||||||
Comprehensive income, net of tax | $ | 64,740 | $ | 138,015 | $ | 54,005 | $ | 195,942 | $ | 17,355 |
______________________________
(1) Income tax (benefit) expense of the unrealized (loss) gain on securities was $(8.1) million, $18.2 million, and $(4.7) million for the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, respectively, and $(19.0) million and $12.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.
(2) Income tax expense on the reclassification adjustment for net (gain) on sales of securities included in net income was $1.2 million, $1.5 million, and $327,000 for the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, respectively, and $3.8 million and $2.5 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.
(3) Income tax (benefit) on the unrealized loss on securities transferred from available-for-sale to held-to maturity was $(913,000) for the three and nine months ended September 30, 2021.
(4) Income tax expense on the amortization of unrealized (loss) on securities transferred from available-for-sale to held-to maturity included in net income was $24,000 for the three and nine months ended September 30, 2021.
Accompanying notes are an integral part of these consolidated financial statements.
5
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2021
(Unaudited)
(Dollars in thousands, except share data) | Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
Balance at December 31, 2020 | 94,483,136 | $ | 931 | $ | 2,354,871 | $ | 330,555 | $ | 60,292 | $ | 2,746,649 | ||||||||||||||||||||||||
Net income | — | — | — | 255,058 | — | 255,058 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (59,116) | (59,116) | |||||||||||||||||||||||||||||
Repurchase and retirement of common stock | (479,944) | (5) | (11,942) | (6,120) | — | (18,067) | |||||||||||||||||||||||||||||
Cash dividends declared ($0.96 per common share) | — | — | — | (90,747) | — | (90,747) | |||||||||||||||||||||||||||||
Dividend equivalents declared ($0.96 per restricted stock unit) | — | — | 361 | (361) | — | — | |||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 9,911 | — | — | 9,911 | |||||||||||||||||||||||||||||
Issuance of restricted stock, net | 450,549 | 3 | (3) | — | — | — | |||||||||||||||||||||||||||||
Restricted stock surrendered and canceled | (149,782) | — | (6,354) | — | — | (6,354) | |||||||||||||||||||||||||||||
Exercise of stock options | 50,252 | — | 782 | — | — | 782 | |||||||||||||||||||||||||||||
Balance at September 30, 2021 | 94,354,211 | $ | 929 | $ | 2,347,626 | $ | 488,385 | $ | 1,176 | $ | 2,838,116 |
Balance at June 30, 2021 | 94,656,575 | $ | 931 | $ | 2,352,112 | $ | 433,852 | $ | 26,524 | $ | 2,813,419 | ||||||||||||||||||||||||
Net income | — | — | — | 90,088 | — | 90,088 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (25,348) | (25,348) | |||||||||||||||||||||||||||||
Repurchase and retirement of common stock | (280,270) | (3) | (6,965) | (4,202) | — | (11,170) | |||||||||||||||||||||||||||||
Cash dividends declared ($0.33 per common share) | — | — | — | (31,226) | — | (31,226) | |||||||||||||||||||||||||||||
Dividend equivalents declared ($0.33 per restricted stock unit) | — | — | 127 | (127) | — | — | |||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 3,349 | — | — | 3,349 | |||||||||||||||||||||||||||||
Issuance of restricted stock, net | 14,592 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
Restricted stock surrendered and canceled | (39,755) | — | (1,046) | — | — | (1,046) | |||||||||||||||||||||||||||||
Exercise of stock options | 3,069 | — | 50 | — | — | 50 | |||||||||||||||||||||||||||||
Balance at September 30, 2021 | 94,354,211 | $ | 929 | $ | 2,347,626 | $ | 488,385 | $ | 1,176 | $ | 2,838,116 |
Accompanying notes are an integral part of these consolidated financial statements.
6
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2020
(Unaudited)
(Dollars in thousands, except share data) | Common Stock Shares | Common Stock | Additional Paid-in Capital | Accumulated Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
Balance at December 31, 2019 | 59,506,057 | $ | 586 | $ | 1,594,434 | $ | 396,051 | $ | 21,523 | $ | 2,012,594 | ||||||||||||||||||||||||
Net loss | — | — | — | (6,785) | — | (6,785) | |||||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 24,140 | 24,140 | |||||||||||||||||||||||||||||
Cash dividends declared ($0.75 per common share) | — | — | — | (53,464) | — | (53,464) | |||||||||||||||||||||||||||||
Dividend equivalents declared ($0.75 per restricted stock unit) | — | — | 217 | (217) | — | — | |||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 7,747 | — | — | 7,747 | |||||||||||||||||||||||||||||
Issuance of restricted stock, net | 493,411 | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock - acquisition | 34,407,403 | 344 | 749,259 | — | — | 749,603 | |||||||||||||||||||||||||||||
Restricted stock surrendered and canceled | (102,486) | — | (1,372) | — | — | (1,372) | |||||||||||||||||||||||||||||
Exercise of stock options | 71,136 | — | 1,247 | — | — | 1,247 | |||||||||||||||||||||||||||||
— | — | — | (45,625) | — | (45,625) | ||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 94,375,521 | $ | 930 | $ | 2,351,532 | $ | 289,960 | $ | 45,663 | $ | 2,688,085 |
Balance at June 30, 2020 | 94,350,902 | $ | 930 | $ | 2,348,415 | $ | 247,078 | $ | 58,224 | $ | 2,654,647 | ||||||||||||||||||||||||
Net income | — | — | — | 66,566 | — | 66,566 | |||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (12,561) | (12,561) | |||||||||||||||||||||||||||||
Cash dividends declared ($0.25 per common share) | — | — | — | (23,590) | — | (23,590) | |||||||||||||||||||||||||||||
Dividend equivalents declared ($0.25 per restricted stock unit) | — | — | 94 | (94) | — | — | |||||||||||||||||||||||||||||
Share-based compensation expense | — | — | 2,899 | — | — | 2,899 | |||||||||||||||||||||||||||||
Issuance of restricted stock, net | 19,902 | — | — | — | — | — | |||||||||||||||||||||||||||||
Restricted stock surrendered and canceled | (8,180) | — | (99) | — | (99) | ||||||||||||||||||||||||||||||
Exercise of stock options | 12,897 | — | 223 | — | 223 | ||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 94,375,521 | $ | 930 | $ | 2,351,532 | $ | 289,960 | $ | 45,663 | $ | 2,688,085 |
______________________________
(1) Related to the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
Accompanying notes are an integral part of these consolidated financial statements.
7
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||||||||||
September 30, | September 30, | |||||||||||||
(Dollars in thousands) | 2021 | 2020 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income (loss) | $ | 255,058 | $ | (6,785) | ||||||||||
Adjustments to net income: | ||||||||||||||
Depreciation and amortization expense | 12,147 | 9,186 | ||||||||||||
Provision for credit losses | (56,228) | 190,299 | ||||||||||||
Share-based compensation expense | 9,911 | 7,747 | ||||||||||||
Loss on sales and disposals of premises and equipment | 179 | 255 | ||||||||||||
Loss on sales of or write downs of other real estate owned | — | 42 | ||||||||||||
Net amortization on securities | 17,078 | 9,417 | ||||||||||||
Net (accretion) of discounts/premiums for acquired loans and deferred loan fees/costs | (31,955) | (28,317) | ||||||||||||
Gain on sales of investment securities available-for-sale | (13,321) | (8,880) | ||||||||||||
Loss on debt extinguishment | 180 | — | ||||||||||||
Originations of loans held for sale | (34,902) | (12,217) | ||||||||||||
Proceeds from the sales of and principal payments from loans held for sale | 29,973 | 14,201 | ||||||||||||
Gain on sales of loans | (3,094) | (8,281) | ||||||||||||
Deferred income tax expense (benefit) | 29,111 | (52,471) | ||||||||||||
Change in accrued expenses and other liabilities, net | (17,404) | 19,770 | ||||||||||||
Income from bank-owned life insurance, net | (6,071) | (3,849) | ||||||||||||
Amortization of intangible assets | 12,056 | 12,567 | ||||||||||||
Change in accrued interest receivable and other assets, net | 53,953 | 28,426 | ||||||||||||
Net cash provided by operating activities | 256,671 | 171,110 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Net decrease in interest-bearing time deposits with financial institutions | 137 | — | ||||||||||||
Proceeds from sales of other real estate owned | — | 273 | ||||||||||||
Loan originations and payments, net | (719,657) | (111,334) | ||||||||||||
Proceeds from loans held for sale previously classified as portfolio loans | 1,530 | 1,283,214 | ||||||||||||
Purchase of loans held for investment | — | (66,470) | ||||||||||||
Proceeds from prepayments and maturities of securities held-to-maturity | 7,509 | 9,782 | ||||||||||||
Purchase of securities available-for-sale | (2,079,198) | (2,057,690) | ||||||||||||
Proceeds from prepayments and maturities of securities available-for-sale | 429,235 | 149,720 | ||||||||||||
Proceeds from sales of securities available-for-sale | 630,437 | 558,899 | ||||||||||||
Proceeds from the sales of premises and equipment | 26 | 42 | ||||||||||||
Proceeds from surrender of bank-owned life insurance | 1,400 | 17,799 | ||||||||||||
Purchase of bank-owned life insurance | (150,000) | — | ||||||||||||
Purchase of premises and equipment | (6,318) | (8,687) | ||||||||||||
Change in FHLB, FRB, and other stock, at cost | 3 | (22,584) | ||||||||||||
Funding of CRA investments, net | (19,001) | (9,025) | ||||||||||||
Change in cash acquired in acquisitions, net | — | 937,100 | ||||||||||||
Net cash (used in) provided by investing activities | (1,903,897) | 681,039 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||
Net increase in deposit accounts | 1,255,822 | 516,308 | ||||||||||||
Net change in short-term borrowings | 140,000 | (681,000) | ||||||||||||
Repayment of long-term FHLB borrowings | (21,503) | (5,000) | ||||||||||||
Proceeds from issuance of subordinated debt, net | — | 147,359 | ||||||||||||
Redemption of subordinated debentures | (171,153) | — | ||||||||||||
Cash dividends paid | (90,747) | (53,464) | ||||||||||||
Repurchase and retirement of common stock | (18,067) | — | ||||||||||||
Proceeds from exercise of stock options | 782 | 1,247 | ||||||||||||
Restricted stock surrendered and canceled | (6,354) | (1,372) | ||||||||||||
Net cash provided by (used in) financing activities | 1,088,780 | (75,922) | ||||||||||||
Net (decrease) increase in cash and cash equivalents | (558,446) | 776,227 | ||||||||||||
Cash and cash equivalents, beginning of period | 880,766 | 326,850 | ||||||||||||
Cash and cash equivalents, end of period | $ | 322,320 | $ | 1,103,077 | ||||||||||
Supplemental cash flow disclosures: | ||||||||||||||
Interest paid | $ | 29,745 | $ | 43,188 | ||||||||||
Income taxes paid | 56,472 | 26,151 | ||||||||||||
Noncash investing activities during the period: | ||||||||||||||
Transfers from portfolio loans to loans held for sale | 1,006 | 1,276,277 | ||||||||||||
Transfers from loans to other real estate owned | — | 208 | ||||||||||||
Transfers of investment securities from available-for-sale to held-to-maturity | 154,456 | — | ||||||||||||
Recognition of operating lease right-of-use assets | (3,812) | (11,118) | ||||||||||||
Recognition of operating lease liabilities | 3,812 | 11,118 | ||||||||||||
Due on unsettled security purchases | — | (20,000) | ||||||||||||
Acquisitions (See Note 4): | ||||||||||||||
Fair value of stock and equity award consideration | — | 749,603 | ||||||||||||
Cash consideration | — | 2 | ||||||||||||
Fair value of assets acquired | — | 8,102,281 | ||||||||||||
Liabilities assumed | — | 7,352,676 |
Accompanying notes are an integral part of these consolidated financial statements.
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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiaries, including Pacific Premier Bank (the “Bank”) (collectively, the “Company,” “we,” “our,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the unaudited consolidated financial statements reflect all normal recurring adjustments and accruals that are necessary for a fair presentation of the statement of financial position and the results of operations for the interim periods presented. The results of operations for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2021. Certain items in the prior year financial statements were reclassified to conform to the current year presentation. Reclassification had no effect on prior year net income or stockholders’ equity.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
The Company consolidates voting entities in which the Company has control through voting interests or entities through which the Company has a controlling financial interest in a variable interest entity (“VIE”). The Company evaluates its interests in these entities to determine whether they meet the definition of a VIE and whether the Company is required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size, and form of the Company's involvement with the VIE. See Note 16 – Variable Interest Entities for additional information.
Effective June 1, 2020, the Corporation completed the acquisition of Opus Bank (“Opus”), a California-chartered state bank headquartered in Irvine, California, for a total consideration of approximately $749.6 million. See further discussion in Note 4 – Acquisitions.
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Note 2 – Recently Issued Accounting Pronouncements
Accounting Standards Adopted in 2021
In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. The amendments included in this Update are intended to clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The guidance in paragraph 310-20-35-33 relates to amortization of premiums on individual callable debt securities and the period over which the premium shall be amortized in relation to the date the security is callable. For public business entities, the amendments in this Update became effective for fiscal years beginning after December 15, 2020, and interim periods within those years. The Company’s adoption of this Update did not have a material impact on its financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323, as well as the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments within this Update also clarify that when applying the guidance in paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. The amendments within this Update became effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company’s adoption of this Update did not have a material impact on its financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which includes updates to Topic 740 - Income Taxes. The amendments to this Update include the removal of the following exceptions included in Topic 740:
(1) Exception to the general intra-period tax allocation principle when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);
(2) Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;
(3) Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and
(4) Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
The amendments included in this update also require the following:
(1) Requiring that an entity recognize a franchise tax by (i) accounting for the amount based on income under Accounting Standards Codification (“ASC”) 740 and (ii) accounting for any residual amount as a non-income-based tax.
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(2) Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
(3) Specifying that an entity is not required to allocate any portion of the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.
(4) Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
(5) Making minor Codification improvements for tax benefits related to tax-deductible dividends on employee stock ownership plan shares and investments in qualified affordable housing projects accounted for using the equity method.
The amendments within this Update became effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company’s adoption of this Update did not have a material impact on its financial statements.
Recent Accounting Guidance Not Yet Effective
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The amendments included in this Update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the worldwide transition to new reference rates (commonly referred to as 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 are to the expedients and exceptions in Topic 848 and capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this Update are effective immediately for all entities that elect to apply the optional guidance in Topic 848.
An entity may elect to apply the amendments in this Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company is currently evaluating the impact of this Update on its consolidated financial statements, upon which this accounting guidance is not expected to have a material impact.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In response to concerns about structural risks of interbank offered rates (“IBORs”), and, particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as well as optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this Update are elective and became effective upon issuance for all entities.
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An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment.
An entity may elect to apply the amendments in this Update to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has not entered into any hedging related transactions that reference LIBOR or another reference rate that is expected to be discontinued, and as such, the amendments included in this Update have not had an impact on the Company’s consolidated financial statements.
The Company has created a cross-functional working group to manage the transition away from LIBOR. This working group is comprised of senior leadership and staff from functional areas that include: finance, treasury, lending, loan servicing, enterprise risk management, information technology, legal, and other internal stakeholders integral to the Bank’s transition away from LIBOR. The working group monitors developments related to transition and uncertainty surrounding reference rate reform and guides the Bank’s response. The working group is currently assessing the population of financial instruments that reference LIBOR, confirming our loan documents that reference LIBOR have been appropriately amended, ensuring that our internal systems are prepared for the transition, and managing the transition process with our customers. While the Company has not yet selected a preferred reference rate as an alternative to LIBOR, currently, new loan originations are primarily being made with the use of the Constant Maturity Treasury (“CMT”) Index. The Company may also consider the use of other alternative reference rates based on the individual needs of its customers as well as the types of credit being extended.
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The FASB issued this Update to address complexities associated with the accounting for certain financial instruments that possess characteristics of liabilities and equity, and to amend guidance for the derivatives scope exception for contracts in an entity’s own equity in an effort to reduce disparate accounting results for certain economically similar contracts. With respect to convertible instruments, this Update eliminates certain accounting models with the intent to simplify the accounting for convertible instruments and reduce the complexity for preparers and users of an entity’s financial statements. Convertible instruments primarily affected by this Update are those issued with beneficial conversion features or cash conversion features, because the accounting models for those specific features are removed. For contracts in an entity’s own equity, the type of contracts primarily affected by this Update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This Update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. This Update also makes targeted improvements to the disclosures for convertible instruments and earnings per share guidance. Entities may adopt the provisions of this Update using either the modified retrospective method or a fully retrospective method. Under the modified retrospective method, entities are required to apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments in this Update are adopted. Any cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings in the year of adoption for entities applying the modified retrospective method. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is evaluating the impact of this Update on its financial statements.
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Note 3 – Significant Accounting Policies
Our accounting policies are described in Note 1. Description of Business and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2020 Form 10-K. Select policies have been reiterated below that have a particular affiliation to our interim financial statements.
Revenue Recognition. The Company accounts for certain of its revenue streams deemed to arise from contracts with customers in accordance with ASC 606 - Revenue from Contracts with Customers. Revenue streams within the scope of and accounted for under ASC 606 include: service charges and fees on deposit accounts, debit card interchange fees, custodial account fees, fees from other services the Bank provides its customers, and gains and losses from the sale of other real estate owned and property, premises and equipment. These revenue streams are included in noninterest income in the Company’s consolidated statements of income. ASC 606 requires revenue to be recognized when the Company satisfies related performance obligations by transferring to the customer a good or service. The recognition of revenue under ASC 606 requires the Company to first identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations, and finally recognize revenue when the performance obligations have been satisfied and the good or service has been transferred. Revenue is measured as the amount of consideration the Company expects to receive in exchange for the transfer of goods or services to the associated customer. The majority of the Company’s contracts with customers associated with revenue streams that are within the scope of ASC 606 are considered short-term in nature and can be canceled at any time by the customer or the Bank, such as a deposit account agreement. Other more significant revenue streams for the Company such as interest income on loans and investment securities are specifically excluded from the scope of ASC 606 and are accounted for under other applicable GAAP.
Goodwill and Other Intangible Assets. Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have indefinite useful lives are not amortized, but are tested for impairment at least annually or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired. Impairment testing is performed at the reporting unit level, which is considered the Company level as management has identified the Company is its sole reporting unit as of September 30, 2021. Management’s assessment of goodwill is performed in accordance with ASC 350-20 - Intangibles - Goodwill and Other - Goodwill, which allows the Company to first perform a qualitative assessment of goodwill to determine if it is more likely than not the fair value of the Company’s equity is below its carrying value. However, GAAP also allows the Company, at its option, to unconditionally forego the qualitative assessment and proceed directly to a quantitative assessment. When performing a qualitative assessment of goodwill, should the results of such analysis indicate it is more likely than not the fair value of the Company’s equity is below its carrying value, the Company then performs the quantitative assessment of goodwill to determine the fair value of the reporting unit and compares it to its carrying value. If the fair value of the reporting unit is below its carrying value, the Company would then recognize the amount of impairment as the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill allocated to the reporting unit. Impairment losses are recorded as a charge to noninterest expense.
Other intangible assets consist of core deposit intangible (“CDI”) and customer relationship intangible assets arising from whole bank acquisitions, and are amortized on either an accelerated basis, reflecting the pattern in which the economic benefits of the intangible assets are consumed or otherwise used, or on a straight-line amortization method over their estimated useful lives, which range from 6 to 11 years. GAAP also requires that intangible assets other than goodwill be tested for impairment when events and circumstances change, indicating that their carrying value may not be recoverable. For intangible assets other than goodwill, the Company first performs a qualitative assessment to determine if the carrying value of such assets may not be recoverable. A quantitative assessment is followed to determine the amount of impairment in the event the carrying value of such assets are deemed not recoverable. Impairment is measured as the amount by which their carrying value exceeds their estimated fair value.
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Leases. The Company accounts for its leases in accordance with ASC 842, which requires the Company to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased asset. Leases with a term of 12 months or less are accounted for using straight-line expense recognition with no right-of-use asset being recorded for such leases. Other than short-term leases, the Company classifies its leases as either finance leases or operating leases. Leases are classified as finance leases when any of the following are met: (a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (b) the lease contains an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (c) the term of the lease represents a major part of the remaining life of the underlying asset, (d) the present value of the future lease payments equals or exceeds substantially all of the fair value of the underlying asset, or (e) the underling leased asset is expected to have no alternative use to the lessor at the end of the lease term due to its specialized nature. When the Company’s assessment of a lease does not meet the foregoing criteria, and the term of the lease is in excess of 12 months, the lease is classified as an operating lease.
Liabilities to make lease payments and right-of-use assets are determined based on the total contractual base rents for each lease, discounted at the rate implicit in the lease or at the Company’s estimated incremental borrowing rate if the rate is not implicit in the lease. The Company measures future base rents based on the minimum payments specified in the lease agreement, giving consideration for periodic contractual rent increases which are based on an escalation rate or a specified index. When future rent payments are based on an index, the Company uses the index rate observed at the time of lease commencement to measure future lease payments. Liabilities to make lease payments are accounted for using the interest method, which are reduced by periodic rent payments, net of interest accretion. Right-of-use assets for finance leases are amortized on a straight-line basis over the term of the lease, while right-of-use assets for operating leases are amortized over the term of the lease by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion on the related liability to make lease payments. Expense recognition for finance leases is representative of the sum of periodic amortization of the associated right-of-use asset as well as the periodic interest accretion on the liability to make lease payments. Expense recognition for operating leases is recorded on a straight-line basis. As of September 30, 2021, all of the Company’s leases were classified as either operating leases or short-term leases.
From time to time the Company leases portions of the space it leases to other parties through sublease transactions. Income received from these transactions is recorded on a straight-line basis over the term of the sublease.
Securities. The Company has established written guidelines and objectives for its investing activities. At the time of purchase, management designates the security as either held-to-maturity, available-for-sale, or held for trading based on the Company’s investment objectives, operational needs, and intent. The investments are monitored to ensure that those activities are consistent with the established guidelines and objectives.
Securities Held-to-Maturity. Investments in debt securities that management has the positive intent and ability to hold to maturity are reported at cost and adjusted for periodic principal payments and the amortization of premiums and accretion of discounts, which are recognized in interest income using the interest method over the period of time remaining to investment’s maturity.
Transfers of debt securities from available-for-sale classification to held-to-maturity classification are made at fair value. Any associated unrealized gains or losses on such securities become part of the security’s amortized cost at the time of transfer and are subsequently amortized or accreted into interest income over the remaining life of the security using the interest method. In addition, the related unrealized gains and losses included in accumulated other comprehensive income at the time a security is transferred are also subsequently amortized or accreted into interest income over the remaining life of the security using the interest method.
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Securities Available-for-Sale. Investments in debt securities that management has no immediate plan to sell, but which may be sold in the future, are carried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to the call date for premiums or contractual maturity for discounts and, in the case of mortgage-backed securities, the estimated average life, which can fluctuate based on the anticipated prepayments on the underlying collateral of the securities. Unrealized holding gains and losses, net of tax, are recorded in a separate component of stockholders’ equity as accumulated other comprehensive income. Realized gains and losses on the sales of securities are determined on the specific identification method, recorded on a trade date basis based on the amortized cost basis of the specific security and are included in noninterest income as net gain (loss) on investment securities.
Equity Securities. Investments classified as equity securities that have readily determinable fair values are carried at fair value with changes in fair value recognized in current period earnings as a component of noninterest income. Equity securities that do not have readily determinable fair values are carried at cost, adjusted for any observable price changes in orderly transactions for identical or similar investments of the same issuer. Such investments are also recorded net of any previously recognized impairment. Certain equity securities the Company holds, such as investments in the stock of the Federal Home Loan Bank and the Federal Reserve Bank of San Francisco are carried at cost, less any previously recognized impairment. Investment in these securities is restricted to member banks and the securities are not actively traded on an exchange.
Allowance for Credit Losses (“ACL”) on Investment Securities. The ACL on investment securities is determined for both the held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326. The ACL for held-to-maturity investment securities is recorded at the time of purchase or acquisition, representing the Company’s best estimate of current expected credit losses (“CECL”) as of the date for the consolidated statements of financial condition. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. For investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or other government enterprises, a zero credit loss assumption is applied. For available-for-sale investment securities, the Company performs a quarterly qualitative evaluation of securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer, (iii) downgrades in credit ratings, (iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments, and (vi) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that the unrealized loss can be attributed to credit loss, the Company records the amount of credit loss through a charge to provision for credit losses in current period earnings. However, the amount of credit loss recorded in current period earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost. If it is likely the Company will be required to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings. Unrealized losses deemed non-credit related are recorded, net of tax, through accumulated other comprehensive income.
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The Company determines expected credit losses on available-for-sale and held-to-maturity securities through a discounted cash flow approach, using the security’s effective interest rate. However, as previously mentioned, the measurement of credit losses on available-for-sale securities only occurs when, through the Company’s qualitative assessment, it is determined all or a portion of the unrealized loss is deemed to be credit related. The Company’s discounted cash flow approach incorporates assumptions about the collectability of future cash flows. The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows. Credit losses on available-for-sale securities are measured on an individual basis. The Company does not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverses from current period earnings the amount of accrued interest that is no longer deemed collectible. Accrued interest receivable for investment securities is included in accrued interest receivable balances in the consolidated statements of financial condition.
Loans Held for Investment. Loans held for investment are loans the Company has the ability and intent to hold until their maturity. These loans are carried at amortized cost, including discounts and premiums on purchased and acquired loans, and net deferred loan origination fees and costs. Purchase discounts and premiums and net deferred loan origination fees and costs on loans are accreted or amortized as an adjustment of yield, using the interest method, over the expected lives of the loans. Income recognition of deferred loan fees, deferred loan costs, discounts and premiums is discontinued for loans that are placed on nonaccrual. Any remaining discounts, premiums, deferred loan fees or costs, and prepayment fees associated with loan payoffs prior to contractual maturity are included in loan interest income in the period of payoff. Loan commitment fees received to originate or purchase a loan are deferred and, if the commitment is exercised, recognized over the life of the loan using the interest method as an adjustment of yield or, if the commitment expires unexercised, recognized as income upon expiration of the commitment.
The Company accrues interest on loans using the interest method and only if deemed collectible. Loans for which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days or more based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collection of principal and or interest. When loans are placed on nonaccrual status, previously accrued and uncollected interest is promptly reversed against current period interest income, and as such an ACL for accrued interest receivable is not established. Interest income generally is not recognized on nonaccrual loans unless the likelihood of further loss is remote. Interest payments received on nonaccrual loans are applied as a reduction to the loan principal balance. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.
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Allowance for Credit Losses on Loans. The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for current expected future credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. The Company measures the ACL on commercial real estate loans and commercial loans using a discounted cash flow approach, and a historical loss rate methodology is used to determine the ACL on retail loans. The Company’s discounted cash flow methodology incorporates a probability of default and loss given default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. Together, the probability of default and loss given default model with the use of reasonable and supportable forecasts generate estimates for cash flows expected and not expected to be collected over the estimated life of a loan. Estimates of future expected cash flows ultimately reflect assumptions made concerning net credit losses over the life of a loan. The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management leverages economic projections from a reputable and independent third party to inform and provide its reasonable and supportable economic forecasts. Other internal and external indicators of economic forecasts may also be considered by management when developing the forecast metrics. The Company’s ACL model reverts to long-term average loss rates for purposes of estimating cash flows beyond a period deemed reasonable and supportable. The Company forecasts probability of default and loss given default based on economic forecast scenarios over a two-year time horizon before reverting to long-term average loss rates over a period of three years. The duration of the forecast horizon, the period over which forecasts revert to long-term averages, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio. Changes in economic forecasts, in conjunction with changes in loan specific attributes, impact a loan’s probability of default and loss given default, which can drive changes in the determination of the ACL.
Expectations of future cash flows are discounted at the loan’s effective interest rate. The resulting ACL term loans represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows expected to be collected. The ACL for credit facilities is determined by discounting estimates for cash flows not expected to be collected. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is the Company’s policy to charge-off loan balances at the time they have been deemed uncollectible. Please also see Note 7 - Allowance for Credit Losses, of these consolidated financial statements for additional discussion concerning the Company’s ACL methodology, including discussion concerning economic forecasts used in the determination of the ACL.
The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Since historical information (such as historical net losses and economic cycles) may not always, by itself, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not limited to factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.
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The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a substandard or worse internal risk grade, and may consist of loans on nonaccrual status, troubled debt restructurings (“TDRs”), loans where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, be deemed to no longer possess risk characteristics similar to other loans in the loan portfolio, and as such may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent. Collateral dependent loans are loans where the repayment of the loan is expected to come from the operation of and/or eventual liquidation of the underlying collateral. The ACL for collateral dependent loans is determined using estimates for the expected fair value of the underlying collateral, less costs to sell.
Although management uses the best information available to derive estimates necessary to measure an appropriate level of ACL, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit review process. Such agencies may require the Company to recognize additions to the ACL based on judgments different from those of management.
The Company has segmented the loan portfolio according to loans that share similar attributes and risk characteristics. Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. These segment groupings are: investor loans secured by real estate, business loans secured by real estate, commercial loans, and retail loans. Within each segment grouping there are various classes of loans as disclosed below. The Company determines the ACL for loans based on this more detailed loan segmentation and classification.
At September 30, 2021, the Company had the following segments and classes of loans:
Investor Loans Secured by Real Estate:
•Commercial real estate non-owner-occupied - Commercial real estate (“CRE”) non-owner-occupied includes loans for which the Company holds real property as collateral, but where the borrower does not occupy the underlying property. The primary risks associated with these loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, significant increases in interest rates, changes in market rents, and vacancy of the underlying property, any of which may make the real estate loan unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
•Multifamily - Multifamily loans are secured by multi-tenant (5 or more units) residential real properties. Payments on multifamily loans are dependent on the successful operation or management of the properties, and repayment of these loans may be subject to adverse conditions in the real estate market or the economy.
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•Construction and land - We originate loans for the construction of one-to-four family and multifamily residences and CRE properties in our primary market area. We concentrate our origination efforts on single homes and infill multifamily and commercial projects in established neighborhoods where there is not abundant land available for development. Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, government regulation of real property, and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. We occasionally originate land loans located predominantly in California for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.
Business Loans Secured by Real Estate:
•Commercial real estate owner-occupied - CRE owner-occupied includes loans for which the Company holds real property as collateral and where the underlying property is occupied by the borrower, such as with a place of business. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. The primary risks associated with CRE owner-occupied loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may make the real estate loan unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
•Franchise secured by real estate - Franchise real estate secured loans are business loans secured by real property occupied by franchised restaurants, generally quick-service restaurants. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. Risks associated with these loans include material decreases in the value of real estate being held as collateral, and the borrower’s inability to pay as a result of increases in interest rates or decreases in cash flow from the underlying business.
•Small Business Administration (“SBA”) - We are approved to originate loans under the SBA’s Preferred Lenders Program (“PLP”). The PLP lending status affords us a higher level of delegated credit autonomy, translating to a significantly shorter turnaround time from application to funding, which is critical to our marketing efforts. We originate loans nationwide under the SBA’s 7(a), SBAExpress, International Trade, and 504(a) loan programs, in conformity with SBA underwriting and documentation standards. SBA loans are similar to commercial business loans, but have additional credit enhancement provided by the U.S. Small Business Administration, for up to 85% of the loan amount for loans up to $150,000 and 75% of the loan amount for loans of more than $150,000. However, as part of the Consolidated Appropriations Act of 2021, the credit enhancement provided by the SBA under the 7(a) program was temporarily increased to 90% through September 30, 2021. The Company originates SBA loans with the intent to sell the guaranteed portion into the secondary market on a quarterly basis. Certain loans classified as SBA are secured by commercial real estate property. SBA loans secured by hotels are included in the segment investor loans secured by real estate, and SBA loans secured by all other forms of real estate are included in the business loans secured by real estate segment. All other SBA loans are included in the commercial loans segment below, and are secured by business assets.
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Commercial Loans:
•Commercial and industrial (including franchise commercial loans) (“C&I”) - Loans to businesses, secured by business assets including inventory, receivables, and machinery and equipment. Loan types include revolving lines of credit, term loans, seasonal loans, and loans secured by liquid collateral such as cash deposits or marketable securities. Franchise credit facilities not secured by real estate and Home Owners’ Association (“HOA”) credit facilities are included in C&I loans. We also issue letters of credit on behalf of our customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans, and occasionally upon other borrower assets and guarantor assets. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.
Retail Loans:
•One-to-four family - Although we do not originate first lien single family loans, we have acquired them through bank acquisitions. The primary risks of one-to-four family loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may make loans unprofitable to the borrower.
•Consumer loans - In addition to consumer loans acquired through our various bank acquisitions, we originate a limited number of consumer loans, generally to banking clients, which consist primarily of home equity lines of credit, savings account secured loans, and auto loans. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral.
Troubled Debt Restructurings (“TDRs”). From time to time, the Company makes modifications to certain loans when a borrower is experiencing financial difficulty. These modifications are made to alleviate temporary impairments in the borrower’s financial condition and/or constraints on the borrower’s ability to repay the loan, and to minimize potential losses to the Company. Modifications typically include: changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and, in limited cases, reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status and are returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the ACL for TDRs on an individual basis when the loans are deemed to no longer share similar risk characteristics with other loans in the portfolio. The determination of the ACL for TDRs is based on a discounted cash flow approach for both those measured collectively and individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell.
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The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The Consolidated Appropriations Act (“CAA”), signed into law on December 27, 2020, extends the applicable period to include modification to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022, or (ii) 60 days after the date of termination of the COVID-19 national emergency. The Company has elected to apply this guidance to certain qualifying loan modifications. For such modifications, which are in the form of payment deferrals, the delinquency status will not advance, and loans that were accruing at the time that the relief was provided will generally not be placed on nonaccrual status during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. However, the Company, through its credit portfolio management activities, continues to monitor facts and circumstances associated with the underlying credit quality of the loans modified under the provisions of the CARES Act in an effort to identify any loans where the accrual of interest during the modification period is no longer appropriate. In such cases, the Company ceases the accrual of interest and all previously accrued and uncollected interest is promptly reversed against the current period interest income. For additional information, see Note 6 - Loans Held for Investment.
Acquired Loans. When the Company acquires loans through purchase or a business combination, an assessment is first performed to determine if such loans have experienced more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as purchased credit deteriorated (“PCD”) loans or otherwise classified as non-PCD loans. All acquired loans are recorded at their fair value as of the date of acquisition, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records an ACL based on the Company’s methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans were purchased or acquired.
Unlike non-PCD loans, the initial ACL for PCD loans is established through an adjustment to the acquired loan balance and not through a charge to the provision for credit losses in the period in which the loans were acquired. The ACL for PCD loans is determined with the use of the Company’s ACL methodology. Characteristics of PCD loans include: delinquency, downgrade in credit quality since origination, loans on nonaccrual status, and/or other factors the Company may become aware of through its initial analysis of acquired loans that may indicate there has been more than insignificant deterioration in credit quality since a loan’s origination. Subsequent to acquisition, the ACL for both non-PCD and PCD loans are measured with the use of the Company’s ACL methodology in the same manner as all other loans.
In connection with the Opus acquisition on June 1, 2020, the Company acquired PCD loans with an aggregate fair value of approximately $841.2 million, and recorded an ACL of approximately $21.2 million, which was added to the amortized cost of the loans on the date of acquisition.
Other Real Estate Owned (“OREO”). Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at fair value, less cost to sell, with any excess of the loan’s amortized cost balance over the fair value of the property recorded as a charge against the ACL. The Company obtains an appraisal and/or market valuation on all other real estate owned at the time of possession. After foreclosure, valuations are periodically performed by management. Any subsequent declines in fair value are recorded as a charge to non-interest expense in current period earnings with a corresponding write-down to the asset. All legal fees and direct costs, including foreclosure and other related costs, are expensed as incurred.
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Derivatives as Part of Designated Accounting Hedges. The Company applies hedge accounting to certain derivative instruments used for risk management purposes, primarily interest rate risk. To qualify for hedge accounting, a derivative instrument must be highly effective at reducing the risk associated with the hedged exposure, and the hedging relationship must be formally documented at its inception. The Company uses regression analysis to assess the effectiveness of each hedging relationship, unless the hedge qualifies for other methods of assessing effectiveness (e.g., shortcut or critical terms match), both at inception and throughout the life of the hedge transaction.
The Company currently has derivative instruments designated as part of fair value hedges for accounting purposes. These derivatives consist of pay-fixed, receive-floating interest rate swaps, and were entered into to hedge changes in the fair value of fixed-rate assets for specific risks, such as interest rate risk resulting from changes in a benchmark interest rate. In a qualifying fair value hedge, the Company records periodic changes in the fair value of the derivative instrument in current period earnings. Simultaneously, periodic changes in the fair value of the hedged risk are also recorded in current period earnings. Together, these periodic changes in the fair value of the derivative instrument and the fair value of the hedged risk are included in the same line item of the statements of income associated with the hedged item (i.e. interest income), and largely offset each other. Interest accruals on both the derivative instrument and the hedged item are also recorded in the same line item, which effectively converts the designated fixed-rate assets to floating-rate assets. The Company structures these swaps to match the critical terms of the hedged items (i.e. fixed-rate loans), thereby maximizing the economic and accounting effectiveness of the hedging relationships and resulting in the expectation that the hedging relationship will be highly effective. If a fair value hedging relationship ceases to qualify for hedge accounting, hedge accounting is discontinued and future changes in the fair value of the derivative instrument are recognized in current period earnings, until the derivative is settled with the counterparty. In addition, all remaining basis adjustments resulting from periodic changes in the fair value of the hedged risk, previously recorded to the carrying amount of the hedged item, are now amortized or accreted into interest income using the interest method over the remaining life of the hedged item.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
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Note 4 – Acquisitions
Acquisition of Opus
Effective as of June 1, 2020, the Corporation completed the acquisition of Opus, a California-chartered state bank headquartered in Irvine, California, pursuant to a definitive agreement dated as of January 31, 2020. At closing, Opus had $8.32 billion in total assets, $5.94 billion in gross loans, and $6.91 billion in total deposits and operated 46 banking offices located throughout California, Washington, Oregon, and Arizona. As a result of the Opus acquisition, the Corporation acquired specialty lines of business, including trust and escrow services.
Prior to the Opus acquisition, PENSCO Trust Company LLC, a Colorado-chartered non-depository trust company (“PENSCO”), operated as an indirect, wholly-owned subsidiary of Opus and served as a custodian for self-directed individual retirement accounts (“IRA”), the funds of which account owners used for self-directed investments in various alternative asset classes. Immediately following the Opus acquisition, PENSCO merged with and into the Bank and operates its custodial business under the name of Pacific Premier Trust, as a division of the Bank. As of May 31, 2020, PENSCO had approximately $14.48 billion of custodial assets and approximately 44,000 client accounts.
Prior to the Opus acquisition, Commerce Escrow operated as a division of Opus, offering commercial escrow services and facilitating tax-deferred commercial exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Following the acquisition of Opus, Commerce Escrow operates as a division of the Bank, which created synergies with the Company’s existing escrow deposit business.
The acquisition of Opus expanded the Company’s presence in major metropolitan markets with greater operational scale, diversifies business lines, banking products and services, as well as deposit base and clients by adding a new channel of stable, low-cost deposits and fee income from Opus’s trust and escrow businesses, improves revenue, and accelerates the Company’s ability to invest in technology solutions and increase efficiencies.
Pursuant to the terms of the merger agreement, the consideration paid to Opus shareholders consisted of whole shares of the Corporation’s common stock and cash in lieu of fractional shares of the Corporation’s common stock. Upon consummation of the transaction, (i) each share of Opus common stock issued and outstanding immediately prior to the effective time of the acquisition was canceled and exchanged for the right to receive 0.900 shares of the Corporation’s common stock, with cash to be paid in lieu of fractional shares at a rate of $19.31 per share, and (ii) each share of Opus Series A non-cumulative, non-voting preferred stock issued and outstanding immediately prior to the effective time of the acquisition was converted into and canceled in exchange for the right to receive that number of shares of the Corporation’s common stock equal to the product of (X) the number of shares of Opus common stock into which such share of Opus preferred stock was convertible in connection with, and as a result of, the acquisition, and (Y) 0.900, in each case, plus cash in lieu of fractional shares of the Corporation’s common stock.
The Corporation issued 34,407,403 shares, net of 165,136 shares for tax withholding from Opus equity award holders, of the Corporation’s common stock valued at $21.62 per share, which was the closing price of the Corporation’s common stock on May 29, 2020, the last trading day prior to the consummation of the acquisition, and paid cash in lieu of fractional shares. The Corporation assumed Opus’s warrants and options, which represented the issuance of up to approximately 406,778 and 9,538 additional shares of the Corporation’s common stock, valued at approximately $1.8 million and $46,000, respectively, and issued substitute restricted stock units in an aggregate amount of $328,000. The value of the total transaction consideration paid amounted to approximately $749.6 million. The Opus warrants assumed by the Corporation expired unexercised as of September 30, 2020 and no longer remain outstanding. The Opus options assumed by the Corporation were fully exercised during the third quarter of 2020.
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(Dollars in thousands) | May 29, 2020 | |||||||
Merger consideration | ||||||||
Value of stock consideration paid to shareholders | $ | 747,458 | ||||||
Cash paid in lieu of fractional shares | 2 | |||||||
Value of restricted stock awards | 328 | |||||||
Value of options and warrants (1) | 1,817 | |||||||
Total merger consideration | $ | 749,605 |
______________________________
(1) The Opus warrants assumed by the Corporation expired unexercised on September 30, 2020 and no longer remain outstanding. The Opus options assumed by the Corporation were fully exercised during the third quarter of 2020.
Core deposit intangible of $16.1 million, customer relationship intangible of $3.2 million, and goodwill of $93.0 million were recognized as a result of the acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.
The following table summarizes the estimated fair value of assets acquired and liabilities assumed of Opus as of June 1, 2020 under the acquisition method of accounting, net of purchase accounting adjustments:
(Dollars in thousands) | June 1, 2020 | |||||||
Net identifiable assets acquired, at fair value | ||||||||
Assets acquired | ||||||||
Cash and cash equivalents | $ | 937,102 | ||||||
Interest bearing time deposits with financial institutions | 137 | |||||||
Investment securities | 829,891 | |||||||
Loans | 5,809,451 | |||||||
Allowance for credit losses | (21,242) | |||||||
Premises and equipment | 22,121 | |||||||
Intangible assets | 19,267 | |||||||
Deferred tax assets | 43,395 | |||||||
Other assets | 369,169 | |||||||
Total assets acquired | $ | 8,009,291 | ||||||
Liabilities assumed | ||||||||
Deposits | $ | 6,915,990 | ||||||
FHLB advances and other borrowings | 213,491 | |||||||
Subordinated debt | 138,653 | |||||||
Other liabilities | 84,542 | |||||||
Total liabilities assumed | 7,352,676 | |||||||
Total fair value of net identifiable assets | 656,615 | |||||||
Total merger consideration | 749,605 | |||||||
Goodwill recognized | $ | 92,990 |
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The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed and consideration exchanged to be recorded at their respective estimated fair values at the date of acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the acquisition, and other future events that are highly subjective in nature and subject to refinement for up to one year after the closing date of acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Since the acquisition, the Company has made a net adjustment of $146,000 related to loans, deferred tax assets, other assets, and other liabilities. In May 2021, the Company finalized its fair values analysis of the acquired assets and assumed liabilities associated with this acquisition.
The Company determined the fair value of loans, intangible assets, investment securities, real property, leases, deposits, and borrowings with the assistance of third-party valuations.
Loans
Opus’s loan portfolio was recorded at fair value at the date of acquisition. A valuation of Opus’s loan portfolio was performed by a third party as of the acquisition date in accordance with ASC 820 to assess the fair value of the loan portfolio, considering adjustments for interest rate risk, required equity return, servicing, credit, and liquidity risk. The loan portfolio was segmented into two groups: non-PCD loans and PCD loans. The non-PCD loans were pooled based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The PCD loans were valued at the loan level with similar characteristics noted above. The fair value was calculated using a discounted cash flow analysis. The discount rate utilized to analyze fair value considered the cost of funds rate, capital charge, servicing costs, and liquidity premium, mostly based on industry standards.
At the acquisition date, non-PCD loans and PCD loans had a fair value of $4.94 billion and $841.2 million, respectively, and a contractual balance of $5.05 billion and $896.5 million, respectively. In accordance with GAAP, there was no carryover of the allowance for credit losses that had been previously recorded by Opus. The Company recorded an ACL of $75.9 million through an increase to the provision for credit losses. The initial ACL for PCD loans of $21.2 million was established through an adjustment to the acquired loan balance and goodwill.
Core deposit intangible
The CDI on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates and maintenance costs, and costs of alternative funding using the discounted cash flow approach. The core deposit intangibles represent the costs saved by the Company between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base.
Customer relationship intangible
PENSCO operated as the legal trustee for its clients to provide recurring trust services over the life of client’s trust, and as a custodian for certain accounts that do not qualify as individual retirement accounts pursuant to the Internal Revenue Code. PENSCO could separately identify each of its customer relationships through the trustee agreement between each customer and PENSCO, as well as account-level specific information, and has a history and pattern of conducting business with them as their legal trustee. In the event that PENSCO (or its successor trust division within the Bank) were to merge, reorganize, get acquired, or change its name, the surviving entity will become the trustee or custodian of the IRAs provided that the surviving entity is authorized to serve in that capacity pursuant to the Internal Revenue Code. Accordingly, such PENSCO client relationships met the contractual or other legal rights criterion for identification as a recognizable intangible asset separate from goodwill. The fair value of the customer relationship intangible asset was determined through the use of an excess earnings model associated with the expected fee income associated with underlying client relationships.
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Fixed maturity deposits
In determining the fair value of certificates of deposit, the cash flows of the contractual interest payments during the specific period of the certificates of deposit and scheduled principal payout were discounted to present value at market-based interest rates.
FHLB advances
The fair value of fixed rate Federal Home Loan Bank of San Francisco (“FHLB”) advances was determined using a discounted cash flow approach. The cash flows of the advances were projected based on scheduled payments of the fixed rate advances, factoring in prepayment fees. The cash flows were then discounted to present value using the FHLB rates as of May 29, 2020.
Subordinated debt
The fair value of subordinated debt was determined by using a discounted cash flow method using a market participant discount rate for similar instruments.
The Company incurred $5,000 of expenses in connection with the Opus acquisition during the nine months ended September 30, 2021 compared with $44.1 million during the nine months ended September 30, 2020. Merger-related expenses are included in noninterest expense in the Company's consolidated statements of income.
The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three and nine months ended September 30, 2020 as if Opus had been acquired on January 1, 2020. This unaudited pro forma information combines the historical results of Opus with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented, and the differences could be significant.
Three Months Ended | Nine Months Ended | |||||||||||||
(Dollar in thousands, except per share data) | September 30, 2020 | September 30, 2020 | ||||||||||||
Net interest and other income | $ | 193,304 | $ | 577,799 | ||||||||||
Net income (loss) | 66,566 | (78,570) | ||||||||||||
Basic earnings (loss) per share | 0.71 | (0.84) | ||||||||||||
Diluted earnings (loss) per share | 0.70 | (0.84) |
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Note 5 – Investment Securities
The amortized cost and estimated fair value of investment securities available-for-sale were as follows:
(Dollars in thousands) | Amortized Cost | Gross Unrealized Gain | Gross Unrealized Loss | Estimated Fair Value | ||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||
U.S. Treasury | $ | 77,803 | $ | 1,665 | $ | (126) | $ | 79,342 | ||||||||||||||||||
Agency | 531,867 | 5,252 | (7,026) | 530,093 | ||||||||||||||||||||||
Corporate | 383,910 | 5,381 | (2,900) | 386,391 | ||||||||||||||||||||||
Municipal bonds | 1,237,923 | 27,585 | (9,642) | 1,255,866 | ||||||||||||||||||||||
Collateralized mortgage obligations | 665,851 | 1,109 | (4,729) | 662,231 | ||||||||||||||||||||||
Mortgage-backed securities | 1,807,758 | 6,194 | (18,060) | 1,795,892 | ||||||||||||||||||||||
Total investment securities available-for-sale | $ | 4,705,112 | $ | 47,186 | $ | (42,483) | $ | 4,709,815 |
December 31, 2020 | ||||||||||||||||||||||||||
U.S. Treasury | $ | 30,153 | $ | 2,380 | $ | — | $ | 32,533 | ||||||||||||||||||
Agency | 666,702 | 24,292 | (608) | 690,386 | ||||||||||||||||||||||
Corporate | 412,223 | 3,591 | (506) | 415,308 | ||||||||||||||||||||||
Municipal bonds | 1,412,012 | 37,260 | (3,253) | 1,446,019 | ||||||||||||||||||||||
Collateralized mortgage obligations | 513,259 | 819 | (712) | 513,366 | ||||||||||||||||||||||
Mortgage-backed securities | 812,384 | 21,662 | (543) | 833,503 | ||||||||||||||||||||||
Total investment securities available-for-sale | $ | 3,846,733 | $ | 90,004 | $ | (5,622) | $ | 3,931,115 |
The carrying amount and estimated fair value of investment securities held-to-maturity were as follows:
(Dollars in thousands) | Amortized Cost | Allowance for Credit Losses | Net Carrying Amount | Gross Unrecognized Gain | Gross Unrecognized Loss | Estimated Fair Value | ||||||||||||||||||||||||||||||||
Investment securities held-to-maturity: | ||||||||||||||||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
Municipal bonds | $ | 154,399 | $ | (11) | $ | 154,388 | $ | — | $ | (2,225) | $ | 152,163 | ||||||||||||||||||||||||||
Mortgage-backed securities | 14,656 | — | 14,656 | 803 | — | 15,459 | ||||||||||||||||||||||||||||||||
Other | 1,532 | — | 1,532 | — | — | 1,532 | ||||||||||||||||||||||||||||||||
Total investment securities held-to-maturity | $ | 170,587 | $ | (11) | $ | 170,576 | $ | 803 | $ | (2,225) | $ | 169,154 |
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | $ | 22,124 | $ | — | $ | 22,124 | $ | 1,281 | $ | — | $ | 23,405 | ||||||||||||||||||||||||||
Other | 1,608 | — | 1,608 | — | — | 1,608 | ||||||||||||||||||||||||||||||||
Total investment securities held-to-maturity | $ | 23,732 | $ | — | $ | 23,732 | $ | 1,281 | $ | — | $ | 25,013 |
27
The Company reassesses classification of certain investments as part of the ongoing review of the investment securities portfolio. During the third quarter of 2021, the Company transferred approximately $157.6 million of municipal bonds, which the Company intends and has the ability to hold to maturity, from available-for-sale to held-to-maturity securities. The transfer of these securities was accounted for at fair value. These securities had a net carrying amount of $154.5 million with a pre-tax unrealized loss of $3.2 million, which was reflected as a discount on the date of transfer. This discount, as well as the related unrealized loss in accumulated other comprehensive income, will be amortized into interest income as a yield adjustment over the remaining term of the securities. The amortization of the unrealized loss reported in accumulated other comprehensive income will offset the effect on interest income of the amortization of the discount. No gains or losses were recorded at the time of transfer.
Investment securities with carrying values of $131.8 million and $147.3 million as of September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, other borrowings, and for other purposes as required or permitted by law.
At September 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.
Unrealized Gains and Losses
Unrealized gains and losses on investment securities available-for-sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At September 30, 2021, the Company had accumulated other comprehensive income of $4.7 million, or $3.4 million net of tax, compared to accumulated other comprehensive income of $84.4 million, or $60.3 million net of tax, at December 31, 2020.
For investment securities transferred from available-for-sale to held-to-maturity, the unrealized gains and losses at the date of transfer continue to be reported in stockholders’ equity as accumulated other comprehensive income and are amortized over the remaining lives of the securities with an offsetting entry to interest income as an adjustment of yield. At September 30, 2021, the gross unrealized loss on municipal bonds transferred from available-for-sale to held-to-maturity in accumulated other comprehensive income was $3.1 million, or $2.2 million net of tax.
The table below summarizes the number, fair value, and gross unrealized holding losses of the Company’s investment securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded as of the dates indicated, aggregated by investment category and length of time in a continuous loss position.
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Number | Fair Value | Gross Unrealized Losses | Number | Fair Value | Gross Unrealized Losses | Number | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||||||
Investment securities available-for-sale: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury | 2 | $ | 32,626 | $ | (126) | — | $ | — | $ | — | 2 | $ | 32,626 | $ | (126) | ||||||||||||||||||||||||||||||||||||||
Agency | 24 | 339,270 | (5,365) | 12 | 64,991 | (1,661) | 36 | 404,261 | (7,026) | ||||||||||||||||||||||||||||||||||||||||||||
Corporate | 8 | 88,666 | (1,916) | 1 | 20,346 | (984) | 9 | 109,012 | (2,900) | ||||||||||||||||||||||||||||||||||||||||||||
Municipal bonds | 108 | 651,169 | (9,102) | 2 | 11,068 | (540) | 110 | 662,237 | (9,642) | ||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | 30 | 302,104 | (4,297) | 5 | 44,615 | (432) | 35 | 346,719 | (4,729) | ||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities. | 113 | 1,570,327 | (17,961) | 1 | 7,395 | (99) | 114 | 1,577,722 | (18,060) | ||||||||||||||||||||||||||||||||||||||||||||
Total investment securities available-for-sale | 285 | $ | 2,984,162 | $ | (38,767) | 21 | $ | 148,415 | $ | (3,716) | 306 | $ | 3,132,577 | $ | (42,483) | ||||||||||||||||||||||||||||||||||||||
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December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Number | Fair Value | Gross Unrealized Losses | Number | Fair Value | Gross Unrealized Losses | Number | Fair Value | Gross Unrealized Losses | ||||||||||||||||||||||||||||||||||||||||||||
Investment securities available-for-sale: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency | 4 | $ | 74,194 | $ | (307) | 9 | $ | 10,434 | $ | (301) | 13 | $ | 84,628 | $ | (608) | ||||||||||||||||||||||||||||||||||||||
Corporate | 9 | 71,226 | (506) | — | — | — | 9 | 71,226 | (506) | ||||||||||||||||||||||||||||||||||||||||||||
Municipal bonds | 56 | 312,894 | (3,253) | — | — | — | 56 | 312,894 | (3,253) | ||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | 21 | 215,603 | (710) | 1 | 431 | (2) | 22 | 216,034 | (712) | ||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 16 | 139,071 | (543) | — | — | — | 16 | 139,071 | (543) | ||||||||||||||||||||||||||||||||||||||||||||
Total investment securities available-for-sale | 106 | $ | 812,988 | $ | (5,319) | 10 | $ | 10,865 | $ | (303) | 116 | $ | 823,853 | $ | (5,622) | ||||||||||||||||||||||||||||||||||||||
Allowance for Credit Losses on Investment Securities
The Company reviews individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is deemed credit related or due to other factors such as changes in interest rates and general market conditions. An ACL on available-for-sale investment securities is recorded when the fair value of the investment is below its amortized cost and the decline in fair value has been deemed, through the Company’s qualitative assessment, to be credit related. Non-credit related declines in fair value of available-for-sale investment securities, which may be attributed to changes in interest rates and other market related factors, are not recorded through an ACL. Such declines are recorded as an adjustment to accumulated other comprehensive income, net of tax. In the event the Company is required to sell or has the intent to sell an available-for-sale security that has experienced a decline in fair value below its amortized cost, the Company writes the amortized cost of the security down to fair value in the current period.
Credit losses on held-to-maturity investment securities are recorded at the time of purchase or acquisition and when the Company has designated securities as held-to-maturity. Credit losses on held-to-maturity investment securities are representative of current expected credit losses that may be incurred over the life of the investment.
The Company determines credit losses on both available-for-sale and held-to-maturity investment securities through the use of a discounted cash flow approach using the security’s effective interest rate. The ACL is measured as the amount by which an investment security’s amortized cost exceeds the net present value of expected future cash flows. However, the amount of credit losses for available-for-sale investment securities is limited to the amount of a security’s unrealized loss. The ACL is established through a charge to provision for credit losses in current period earnings.
During the second quarter of 2020, the Company acquired $829.9 million of available-for-sale securities in connection with the acquisition of Opus. Such securities were evaluated and it was determined that there were no investment securities classified as purchase credit deteriorated upon acquisition and, as a result, no allowance for credit losses was recorded.
At September 30, 2021, the Company had an ACL of $11,000 for held-to-maturity investment securities classified as municipal bonds. These securities were transferred from available-for-sale to held-to-maturity during the third quarter of 2021. There was no ACL for held-to-maturity investment securities at December 31, 2020. The Company recognized $11,000 of provision for credit losses for held-to-maturity investment securities during the three months and nine months ended September 30, 2021. There was no provision for credit losses recognized for held-to-maturity investment securities during the three months June 30, 2021, and September 30, 2020, and the nine months ended September 30, 2020.
29
The Company had no ACL for available-for-sale or investment securities at September 30, 2021 and December 31, 2020. As of September 30, 2021, the Company had not recorded credit losses on certain available-for-sale securities that were in an unrealized loss position due to the high quality of the investments, with investment grade ratings, and many of them are issued by U.S. government agencies. Additionally, the Company continues to receive contractual principal and interest payments in a timely manner. The Company performed a qualitative assessment of these investments as of September 30, 2021, and does not believe the declines in fair value are credit related. There was no provision for credit losses recognized for available-for-sale investment securities during the three months ended September 30, 2021, June 30, 2021, or September 30, 2020, and the nine months ended September 30, 2021 and September 30, 2020.
At September 30, 2021 and December 31, 2020, there were no available-for-sale or held-to-maturity securities in nonaccrual status. All securities in the portfolio were current with their contractual principal and interest payments. At September 30, 2021 and December 31, 2020, there were no securities purchased with deterioration in credit quality since their origination. At September 30, 2021 and December 31, 2020, there were no collateral dependent available-for-sale or held-to-maturity securities.
The following table summarizes the Company’s investment securities portfolio by Moody’s external rating equivalent and by vintage as of September 30, 2021:
Vintage | |||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total | ||||||||||||||||||||||||||||||||||
Investment securities available-for-sale at fair value: | |||||||||||||||||||||||||||||||||||||||||
U.S. Treasury | |||||||||||||||||||||||||||||||||||||||||
Aaa - Aa3 | $ | 32,973 | $ | 14,634 | $ | — | $ | 21,274 | $ | 10,461 | $ | — | $ | 79,342 | |||||||||||||||||||||||||||
Agency | |||||||||||||||||||||||||||||||||||||||||
Aaa - Aa3 | 24,393 | 324,241 | 44,487 | 76,415 | — | 46,390 | 515,926 | ||||||||||||||||||||||||||||||||||
Baa1 - Baa3 | — | — | — | 5,715 | — | 8,452 | 14,167 | ||||||||||||||||||||||||||||||||||
Corporate debt | |||||||||||||||||||||||||||||||||||||||||
A1 - A3 | 79,252 | 57,799 | — | — | 17,864 | 10,029 | 164,944 | ||||||||||||||||||||||||||||||||||
Baa1 - Baa3 | 36,473 | 100,614 | 70,704 | — | — | 13,656 | 221,447 | ||||||||||||||||||||||||||||||||||
Municipal bonds | |||||||||||||||||||||||||||||||||||||||||
Aaa - Aa3 | 118,941 | 725,524 | 294,323 | 32,429 | 50,536 | 33,264 | 1,255,017 | ||||||||||||||||||||||||||||||||||
A1 - A3 | — | — | — | — | — | 849 | 849 | ||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | |||||||||||||||||||||||||||||||||||||||||
Aaa - Aa3 | 212,687 | 224,252 | 86,604 | 18,523 | 14,199 | 105,966 | 662,231 | ||||||||||||||||||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||||||||||||||
Aaa - Aa3 | 1,250,191 | 391,394 | 101,935 | 6,891 | 25,280 | 20,201 | 1,795,892 | ||||||||||||||||||||||||||||||||||
Total investment securities available-for-sale | 1,754,910 | 1,838,458 | 598,053 | 161,247 | 118,340 | 238,807 | 4,709,815 | ||||||||||||||||||||||||||||||||||
Investment securities held-to-maturity at amortized cost: | |||||||||||||||||||||||||||||||||||||||||
Municipal bonds | |||||||||||||||||||||||||||||||||||||||||
Aaa - Aa3 | — | 154,399 | — | — | — | — | 154,399 | ||||||||||||||||||||||||||||||||||
Mortgage-backed securities | |||||||||||||||||||||||||||||||||||||||||
Aaa - Aa3 | — | — | — | 4,206 | 3,767 | 6,683 | 14,656 | ||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||||||||
Baa1 - Baa3 | — | — | — | 600 | — | 932 | 1,532 | ||||||||||||||||||||||||||||||||||
Total investment securities held-to-maturity | — | 154,399 | — | 4,806 | 3,767 | 7,615 | 170,587 | ||||||||||||||||||||||||||||||||||
Total investment securities | $ | 1,754,910 | $ | 1,992,857 | $ | 598,053 | $ | 166,053 | $ | 122,107 | $ | 246,422 | $ | 4,880,402 |
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Realized Gains and Losses
During the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, the Company recognized gross gains on sales of available-for-sale securities in the amount of $4.2 million, $10.0 million, and $1.2 million, respectively. The Company did not recognize any gross losses during the three months ended September 30, 2021. During the three months ended June 30, 2021 and September 30, 2020, the Company recognized gross losses on sales of available-for-sale securities in the amount of $5.0 million and $12,000, respectively. The Company had net proceeds from the sales of available-for-sale securities of $165.8 million, $285.3 million, and $212.5 million during the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, respectively.
During the nine months ended September 30, 2021 and 2020, the Company recognized gross gains on sales of available-for-sale securities in the amount of $18.5 million and $10.4 million, respectively. During the nine months ended September 30, 2021 and 2020, the Company recognized gross losses on the sales of available-for sale securities in the amount of $5.1 million and $1.5 million, respectively. The Company had net proceeds from the sales of available-for-sale securities of $630.4 million and $558.9 million during the nine months ended September 30, 2021 and 2020, respectively.
Contractual maturities
The amortized cost and estimated fair value of investment securities at September 30, 2021, by contractual maturity, are shown in the table below.
Due in One Year or Less | Due after One Year through Five Years | Due after Five Years through Ten Years | Due after Ten Years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities available-for-sale: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury | $ | — | $ | — | $ | 30,126 | $ | 31,734 | $ | 47,677 | $ | 47,608 | $ | — | $ | — | $ | 77,803 | $ | 79,342 | |||||||||||||||||||||||||||||||||||||||
Agency | — | — | 352,023 | 353,184 | 135,567 | 134,426 | 44,277 | 42,483 | 531,867 | 530,093 | |||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 10,021 | 10,029 | 21,178 | 21,227 | 352,711 | 355,135 | — | — | 383,910 | 386,391 | |||||||||||||||||||||||||||||||||||||||||||||||||
Municipal bonds | — | — | 3,528 | 3,731 | 95,420 | 96,849 | 1,138,975 | 1,155,286 | 1,237,923 | 1,255,866 | |||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | — | — | 41,692 | 41,631 | 226,958 | 223,612 | 397,201 | 396,988 | 665,851 | 662,231 | |||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | 12,098 | 12,704 | 709,280 | 709,155 | 1,086,380 | 1,074,033 | 1,807,758 | 1,795,892 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total investment securities available-for-sale | 10,021 | 10,029 | 460,645 | 464,211 | 1,567,613 | 1,566,785 | 2,666,833 | 2,668,790 | 4,705,112 | 4,709,815 | |||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities held-to-maturity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Municipal bonds | — | — | — | — | — | — | 154,399 | 152,163 | 154,399 | 152,163 | |||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | 14,656 | 15,459 | 14,656 | 15,459 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | 1,532 | 1,532 | 1,532 | 1,532 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total investment securities held-to-maturity | — | — | — | — | — | — | 170,587 | 169,154 | 170,587 | 169,154 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total investment securities | $ | 10,021 | $ | 10,029 | $ | 460,645 | $ | 464,211 | $ | 1,567,613 | $ | 1,566,785 | $ | 2,837,420 | $ | 2,837,944 | $ | 4,875,699 | $ | 4,878,969 |
31
FHLB, FRB, and Other Stock
The Company’s equity securities primarily consist of FHLB and Federal Reserve Bank of San Francisco (“FRB”) stock, which are considered restricted securities and held as a condition of membership of the FHLB and the Board of Governors of the Federal Reserve System. These equity securities without readily determinable fair values are carried at cost less impairment. At September 30, 2021, the Company had $17.3 million in FHLB stock, $74.5 million in FRB stock, and $26.7 million in other stock, all carried at cost. During the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, the FHLB did not repurchase any of the Company’s excess FHLB stock through its stock repurchase program.
The Company periodically evaluates its investments in FHLB, FRB, and other stock for impairment, including their capital adequacy and overall financial condition. No impairment losses have been recorded through September 30, 2021.
Note 6 – Loans Held for Investment
The Company’s loan portfolio is segmented according to loans that share similar attributes and risk characteristics.
Investor loans secured by real estate includes CRE non-owner-occupied, multifamily, construction, and land, as well as SBA loans secured by real estate, which are loans collateralized by hotel/motel real property.
Business loans secured by real estate are loans to businesses that are collateralized by real estate where the operating cash flow of the business is the primary source of repayment. This loan portfolio includes CRE owner-occupied, franchise loans secured by real estate, and SBA loans secured by real estate, which are collateralized by real property other than hotel/motel real property.
Commercial loans are loans to businesses where the operating cash flow of the business is the primary source of repayment. This loan portfolio includes commercial and industrial, franchise loans non-real estate secured, and SBA loans non-real estate secured.
Retail loans include single family residential and consumer loans. Single family residential includes home equity lines of credit, as well as second trust deeds.
32
The following table presents the composition of the loan portfolio for the periods indicated:
September 30, | December 31, | |||||||||||||
(Dollars in thousands) | 2021 | 2020 | ||||||||||||
Investor loans secured by real estate | ||||||||||||||
CRE non-owner-occupied | $ | 2,823,065 | $ | 2,675,085 | ||||||||||
Multifamily | 5,705,666 | 5,171,356 | ||||||||||||
Construction and land | 292,815 | 321,993 | ||||||||||||
SBA secured by real estate | 49,446 | 57,331 | ||||||||||||
Total investor loans secured by real estate | 8,870,992 | 8,225,765 | ||||||||||||
Business loans secured by real estate | ||||||||||||||
CRE owner-occupied | 2,242,164 | 2,114,050 | ||||||||||||
Franchise real estate secured | 354,481 | 347,932 | ||||||||||||
SBA secured by real estate | 69,937 | 79,595 | ||||||||||||
Total business loans secured by real estate | 2,666,582 | 2,541,577 | ||||||||||||
Commercial loans | ||||||||||||||
Commercial and industrial | 1,888,870 | 1,768,834 | ||||||||||||
Franchise non-real estate secured | 392,950 | 444,797 | ||||||||||||
SBA non-real estate secured | 12,732 | 15,957 | ||||||||||||
Total commercial loans | 2,294,552 | 2,229,588 | ||||||||||||
Retail loans | ||||||||||||||
Single family residential | 144,309 | 232,574 | ||||||||||||
Consumer | 6,426 | 6,929 | ||||||||||||
Total retail loans | 150,735 | 239,503 | ||||||||||||
Gross loans held for investment (1) | 13,982,861 | 13,236,433 | ||||||||||||
Allowance for credit losses for loans held for investment | (211,481) | (268,018) | ||||||||||||
Loans held for investment, net | $ | 13,771,380 | $ | 12,968,415 | ||||||||||
Total unfunded loan commitments | $ | 2,504,188 | $ | 1,947,250 | ||||||||||
Loans held for sale, at lower of cost or fair value | $ | 8,100 | $ | 601 |
______________________________
(1) Includes net deferred origination fees of $3.0 million and $2.6 million, and unaccreted fair value net purchase discounts of $85.0 million and $113.8 million as of September 30, 2021 and December 31, 2020, respectively.
33
Loans Serviced for Others and Loan Securitization
The Company generally retains the servicing rights of the guaranteed portion of SBA loans sold, for which the Company records a servicing asset at fair value within its other assets category. Servicing assets are subsequently measured using the amortization method and amortized to noninterest income. Servicing assets are evaluated for impairment based on the fair value of the assets as compared to carrying amount. At September 30, 2021 and December 31, 2020, the servicing asset totaled $4.1 million and $5.3 million, respectively, and was included in other assets in the Company’s consolidated statement of financial condition. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is recognized through a valuation allowance, to the extent the fair value is less than the carrying amount. At September 30, 2021 and December 31, 2020, the Company determined that no valuation allowance was necessary.
Opus entered into securitization sales on December 23, 2016 with the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The transaction involved the sale of $509 million in originated multifamily loans through a Freddie Mac-sponsored transaction. One class of Freddie Mac guaranteed structured pass-through certificates was issued and purchased entirely by Opus. In connection with the Opus acquisition, the Company's continuing involvement includes sub-servicing responsibilities, general representations and warranties, and reimbursement obligations. Servicing responsibilities on loan sales generally include obligations to collect and remit payments of principal and interest, provide foreclosure services, manage payments of taxes and insurance premiums, and otherwise administer the underlying loans. In connection with the securitization transaction, Freddie Mac was designated as the master servicer and appointed the Company to perform sub-servicing responsibilities, which generally include the servicing responsibilities described above with the exception of the servicing of foreclosed or defaulted loans. The overall management, servicing, and resolution of defaulted loans and foreclosed loans are separately designated to the special servicer, a third-party institution that is independent of the master servicer and the Company. The master servicer has the right to terminate the Company in its role as sub-servicer and direct such responsibilities accordingly.
General representations and warranties associated with loan sales and securitization sales require the Company to uphold various assertions that pertain to the underlying loans at the time of the transaction, including, but not limited to, compliance with relevant laws and regulations, absence of fraud, enforcement of liens, no environmental damages, and maintenance of relevant environmental insurance. Such representations and warranties are limited to those that do not meet the quality represented at the transaction date and do not pertain to a decline in value or future payment defaults. In circumstances where the Company breaches its representations and warranties, the Company would generally be required to cure such instances through a repurchase or substitution of the subject loan(s).
To the extent the ultimate resolution of defaulted loans results in contractual principal and interest payments that are deficient, the Company is obligated to reimburse Freddie Mac for such amounts, not to exceed 10% of the original principal amount of the loans comprising the securitization pool at the closing date of December 23, 2016. The liability recorded for Company’s exposure to the reimbursement agreement with Freddie Mac was $448,000 as of September 30, 2021 and December 31, 2020.
Loans sold and serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of loans and participations serviced for others were $590.9 million at September 30, 2021 and $686.0 million at December 31, 2020. Included within the balances were loans transferred through securitization with Freddie Mac of $85.2 million and SBA participations serviced for others of $372.7 million at September 30, 2021, and loans transferred through securitization with Freddie Mac of $99.4 million and SBA participations serviced for others of $421.7 million at December 31, 2020.
34
Concentration of Credit Risk
As of September 30, 2021, the Company’s loan portfolio was primarily collateralized by various forms of real estate and business assets located predominately in California. The Company’s loan portfolio contains concentrations of credit in multifamily, CRE non-owner-occupied, CRE owner-occupied, and C&I business loans. The Bank maintains policies approved by the Bank’s Board of Directors (the “Bank Board”) that address these concentrations and diversifies its loan portfolio through loan originations, purchases, and sales to meet approved concentration levels.
Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of the Bank’s unimpaired capital plus surplus and likewise in excess of 15% of the Bank’s unimpaired capital plus surplus for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $838.4 million for secured loans and $503.0 million for unsecured loans at September 30, 2021. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At September 30, 2021, the Bank’s largest aggregate outstanding balance of loans to one borrower was $176.8 million secured by multifamily properties.
Credit Quality and Credit Risk Management
The Company’s credit quality and credit risk are controlled in two areas. The first is the loan origination process, wherein the Bank underwrites credit and chooses which types and levels of risk it is willing to accept. The Company maintains a credit policy which addresses many related topics, sets forth maximum tolerances for key elements of loan risk, and indicates appropriate protocols for identifying and analyzing these risk elements. The policy sets forth specific guidelines for analyzing each of the loan products the Company offers from both an individual and portfolio-wide basis. The credit policy is reviewed annually by the Bank Board. The Bank’s underwriters ensure all key risk factors are analyzed, with most underwriting including a global cash flow analysis of the prospective borrowers.
The second area is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and appropriate fashion. Credit risk is monitored and managed within the loan portfolio by the Company’s portfolio managers based on both the credit policy and a credit and portfolio review policy. This latter policy requires a program of financial data collection and analysis, thorough loan reviews, property and/or business inspections, monitoring of portfolio concentrations and trends, and incorporation of current business and economic conditions. The portfolio managers also monitor asset-based lines of credit, loan covenants, and other conditions associated with the Company’s business loans as a means to help identify potential credit risk. Most individual loans, excluding the homogeneous loan portfolio, are reviewed at least annually, including the assignment or confirmation of a risk grade.
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful, and Loss classifications, as such classifications are defined by the regulatory agencies. The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are reviewed regularly with the Company’s Credit and Portfolio Review Committee, and the portfolio management and risk grading process is reviewed on an ongoing basis by an independent loan review function, as well as by regulatory agencies during scheduled examinations.
35
The following provides brief definitions for risk grades assigned to loans in the portfolio:
•Pass classifications represent assets with a level of credit quality, in which no well-defined deficiency or weakness exists.
•Special Mention assets do not currently expose the Bank to a sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiencies or potential weaknesses deserving management’s close attention.
•Substandard assets are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. These assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. OREO acquired from foreclosure is also classified as Substandard.
•Doubtful credits have all the weaknesses inherent in Substandard credits, 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.
•Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted. Amounts classified as loss are promptly charged off.
The Bank’s portfolio managers also manage loan performance risks, collections, workouts, bankruptcies, and foreclosures. A special department, whose portfolio managers have professional expertise in these areas, typically handles or advises on these types of matters. Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credits when they are identified. Collection efforts commence immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss. When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.
When a loan is graded as special mention, substandard, or doubtful, the Company obtains an updated valuation of the underlying collateral. If, through the Company’s credit risk management process, it is determined the ultimate repayment of a loan will come from the foreclosure upon and ultimate sale of the underlying collateral, the loan is deemed collateral dependent and evaluated individually to determine an appropriate ACL for the loan. The ACL for such loans is measured as the amount by which the fair value of the underlying collateral, less estimated costs to sell, is less than the amortized cost of the loan. The Company typically continues to obtain or confirm updated valuations of underlying collateral for special mention and classified loans on an annual or biennial basis in order to have the most current indication of fair value of the underlying collateral securing the loan. Additionally, once a loan is identified as collateral dependent, due to the likelihood of foreclosure, and repayment of the loan is expected to come from the eventual sale of the underlying collateral, an analysis of the underlying collateral is performed at least quarterly. Changes in the estimated fair value of the collateral are reflected in the lifetime ACL for the loan. Balances deemed to be uncollectable are promptly charged-off.
36
The following table stratifies the loans held for investment portfolio by the Company’s internal risk grading, and by year of origination, as of September 30, 2021:
Term Loans by Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 565,605 | $ | 268,733 | $ | 424,397 | $ | 462,395 | $ | 219,672 | $ | 823,208 | $ | 9,599 | $ | — | $ | 2,773,609 | |||||||||||||||||||||||||||||||||||
Special mention | — | — | 16,263 | 1,943 | — | — | — | — | 18,206 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 25,775 | — | — | 4,950 | 525 | — | 31,250 | ||||||||||||||||||||||||||||||||||||||||||||
Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 1,694,447 | 1,012,346 | 1,348,563 | 526,744 | 501,849 | 619,628 | 218 | — | 5,703,795 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | 543 | 556 | 772 | — | — | 1,871 | ||||||||||||||||||||||||||||||||||||||||||||
Construction and land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 86,107 | 125,190 | 51,733 | 22,134 | 3,996 | 3,607 | 48 | — | 292,815 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 130 | 499 | 7,373 | 9,113 | 12,665 | 9,722 | — | — | 39,502 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | — | 962 | — | 548 | — | — | 1,510 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 9 | 2,353 | 3,170 | 2,902 | — | — | 8,434 | ||||||||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 2,346,289 | 1,406,768 | 1,874,113 | 1,026,187 | 741,908 | 1,465,337 | 10,390 | — | 8,870,992 | ||||||||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 635,469 | 302,683 | 317,035 | 221,806 | 207,923 | 531,119 | 3,211 | 300 | 2,219,546 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | 6,078 | 1,741 | — | — | — | — | 7,819 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | 6,109 | 2,972 | 5,718 | — | — | 14,799 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 97,884 | 43,332 | 59,772 | 44,306 | 66,901 | 42,286 | — | — | 354,481 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 3,789 | 2,368 | 7,533 | 10,498 | 11,230 | 25,181 | 1,361 | — | 61,960 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | — | — | — | 212 | — | — | 212 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | 1,326 | 3,000 | 3,439 | — | — | 7,765 | ||||||||||||||||||||||||||||||||||||||||||||
Total loans secured by business real estate | 737,142 | 348,383 | 390,418 | 285,786 | 292,026 | 607,955 | 4,572 | 300 | 2,666,582 |
37
Term Loans by Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 260,359 | 89,545 | 204,683 | 139,560 | 156,915 | 78,951 | 906,369 | 2,059 | 1,838,441 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | 189 | — | — | — | 14,629 | — | 14,818 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | 650 | 1,759 | 552 | 2,854 | 867 | 1,570 | 26,619 | 740 | 35,611 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise non-real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 118,333 | 24,954 | 96,784 | 65,300 | 27,683 | 37,157 | — | — | 370,211 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 2,236 | 4,421 | 14,903 | 1,179 | — | — | 22,739 | ||||||||||||||||||||||||||||||||||||||||||||
SBA non-real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 152 | 653 | 1,424 | 938 | 3,239 | 3,567 | — | — | 9,973 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | 698 | 117 | — | — | — | — | 815 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 78 | 338 | 247 | 617 | 664 | — | 1,944 | ||||||||||||||||||||||||||||||||||||||||||||
Total commercial loans | 379,494 | 116,911 | 306,644 | 213,528 | 203,854 | 123,041 | 948,281 | 2,799 | 2,294,552 | ||||||||||||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Single family residential | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 20,201 | 3,518 | 1,967 | 1,633 | 6,954 | 86,711 | 23,274 | — | 144,258 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | — | 51 | — | — | 51 | ||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 28 | 30 | 57 | 22 | 15 | 2,964 | 3,268 | — | 6,384 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 6 | — | — | 36 | — | — | 42 | ||||||||||||||||||||||||||||||||||||||||||||
Total retail loans | 20,229 | 3,548 | 2,030 | 1,655 | 6,969 | 89,762 | 26,542 | — | 150,735 | ||||||||||||||||||||||||||||||||||||||||||||
Totals gross loans | $ | 3,483,154 | $ | 1,875,610 | $ | 2,573,205 | $ | 1,527,156 | $ | 1,244,757 | $ | 2,286,095 | $ | 989,785 | $ | 3,099 | $ | 13,982,861 |
38
The following table stratifies the loans held for investment portfolio by the Company’s internal risk grading, and by year of origination, as of December 31, 2020:
Term Loans by Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 265,901 | $ | 541,994 | $ | 440,351 | $ | 287,580 | $ | 279,238 | $ | 791,477 | $ | 11,114 | $ | — | $ | 2,617,655 | |||||||||||||||||||||||||||||||||||
Special mention | — | — | 6,669 | 437 | 2,516 | 29,738 | — | — | 39,360 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 9,732 | 2,045 | — | 516 | 5,218 | 559 | — | 18,070 | ||||||||||||||||||||||||||||||||||||||||||||
Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 1,027,644 | 1,677,716 | 899,123 | 665,939 | 354,859 | 531,287 | 420 | — | 5,156,988 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | 1,758 | 2,630 | — | 8,649 | — | — | — | 13,037 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | 559 | 772 | — | — | — | 1,331 | ||||||||||||||||||||||||||||||||||||||||||||
Construction and land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 57,309 | 144,759 | 73,313 | 18,625 | 20,531 | 6,672 | 784 | — | 321,993 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | — | 8,306 | 9,029 | 13,418 | 6,305 | 7,696 | — | — | 44,754 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | 496 | 1,032 | 1,159 | 1,000 | 373 | 306 | — | — | 4,366 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 1,220 | 2,959 | 1,091 | 400 | 2,541 | — | — | 8,211 | ||||||||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 1,351,350 | 2,386,517 | 1,437,278 | 988,649 | 674,159 | 1,374,935 | 12,877 | — | 8,225,765 | ||||||||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 293,324 | 409,758 | 332,672 | 327,475 | 225,098 | 469,704 | 14,268 | 246 | 2,072,545 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | 2,190 | 15,917 | 3,802 | — | 4,153 | 201 | — | — | 26,263 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 3,636 | 4,214 | 1,169 | 5,973 | 250 | — | 15,242 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 44,413 | 81,438 | 66,241 | 96,999 | 24,673 | 27,020 | — | — | 340,784 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | 878 | 1,650 | 2,652 | — | — | — | — | — | 5,180 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | 1,968 | — | — | — | 1,968 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 3,253 | 7,637 | 12,608 | 16,058 | 8,488 | 23,624 | — | — | 71,668 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | 1,200 | — | 137 | — | — | — | 1,337 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 184 | 1,987 | 1,376 | 3,043 | — | — | 6,590 | ||||||||||||||||||||||||||||||||||||||||||||
Total loans secured by business real estate | 344,058 | 516,400 | 422,995 | 446,733 | 267,062 | 529,565 | 14,518 | 246 | 2,541,577 |
39
Term Loans by Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 127,082 | 260,368 | 159,001 | 210,163 | 51,800 | 82,291 | 801,752 | 9,315 | 1,701,772 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | 735 | — | 2,331 | 185 | 1,320 | 243 | 17,890 | 37 | 22,741 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 3,310 | 2,737 | 610 | 1,333 | 2,446 | 32,858 | 1,027 | 44,321 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise non-real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 27,607 | 164,025 | 94,494 | 46,174 | 40,829 | 27,745 | 1,361 | 502 | 402,737 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | 7,267 | 2,037 | 230 | 480 | 2,321 | — | — | 12,335 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 6,690 | 3,706 | 18,425 | 700 | 204 | — | — | 29,725 | ||||||||||||||||||||||||||||||||||||||||||||
SBA non-real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 407 | 2,257 | 1,558 | 2,674 | 610 | 4,449 | — | 259 | 12,214 | ||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | — | 1,574 | — | — | — | — | 1,574 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 83 | 357 | 282 | 340 | 400 | 707 | — | 2,169 | ||||||||||||||||||||||||||||||||||||||||||||
Total commercial loans | 155,831 | 444,000 | 266,221 | 280,317 | 97,412 | 120,099 | 854,568 | 11,140 | 2,229,588 | ||||||||||||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Single family residential | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 10,794 | 7,714 | 13,982 | 14,039 | 33,968 | 124,248 | 27,172 | — | 231,917 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | — | 657 | — | — | 657 | ||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 52 | 112 | 37 | 25 | 2 | 3,145 | 3,508 | — | 6,881 | ||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | 7 | — | — | — | 41 | — | — | 48 | ||||||||||||||||||||||||||||||||||||||||||||
Total retail loans | 10,846 | 7,833 | 14,019 | 14,064 | 33,970 | 128,091 | 30,680 | — | 239,503 | ||||||||||||||||||||||||||||||||||||||||||||
Totals gross loans | $ | 1,862,085 | $ | 3,354,750 | $ | 2,140,513 | $ | 1,729,763 | $ | 1,072,603 | $ | 2,152,690 | $ | 912,643 | $ | 11,386 | $ | 13,236,433 |
40
The following tables stratify loans held for investment by delinquencies in the Company’s loan portfolio at the dates indicated:
Days Past Due | |||||||||||||||||||||||||||||
(Dollars in thousands) | Current | 30-59 | 60-89 | 90+ | Total | ||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 2,812,797 | $ | — | $ | — | $ | 10,268 | $ | 2,823,065 | |||||||||||||||||||
Multifamily | 5,705,666 | — | — | — | 5,705,666 | ||||||||||||||||||||||||
Construction and land | 292,815 | — | — | — | 292,815 | ||||||||||||||||||||||||
SBA secured by real estate | 48,470 | — | 629 | 347 | 49,446 | ||||||||||||||||||||||||
Total investor loans secured by real estate | 8,859,748 | — | 629 | 10,615 | 8,870,992 | ||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||
CRE owner-occupied | 2,237,186 | — | — | 4,978 | 2,242,164 | ||||||||||||||||||||||||
Franchise real estate secured | 354,481 | — | — | — | 354,481 | ||||||||||||||||||||||||
SBA secured by real estate | 69,496 | — | — | 441 | 69,937 | ||||||||||||||||||||||||
Total business loans secured by real estate | 2,661,163 | — | — | 5,419 | 2,666,582 | ||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||
Commercial and industrial | 1,886,386 | 654 | 14 | 1,816 | 1,888,870 | ||||||||||||||||||||||||
Franchise non-real estate secured | 392,950 | — | — | — | 392,950 | ||||||||||||||||||||||||
SBA not secured by real estate | 11,701 | 74 | 293 | 664 | 12,732 | ||||||||||||||||||||||||
Total commercial loans | 2,291,037 | 728 | 307 | 2,480 | 2,294,552 | ||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||
Single family residential | 144,309 | — | — | — | 144,309 | ||||||||||||||||||||||||
Consumer loans | 6,426 | — | — | — | 6,426 | ||||||||||||||||||||||||
Total retail loans | 150,735 | — | — | — | 150,735 | ||||||||||||||||||||||||
Totals | $ | 13,962,683 | $ | 728 | $ | 936 | $ | 18,514 | $ | 13,982,861 |
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Days Past Due | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Current | 30-59 | 60-89 | 90+ | Total Gross Loans | |||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||
Investor loans secured by real estate | ||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 2,674,328 | $ | — | $ | — | $ | 757 | $ | 2,675,085 | ||||||||||||||||||||||
Multifamily | 5,171,355 | 1 | — | — | 5,171,356 | |||||||||||||||||||||||||||
Construction and land | 321,993 | — | — | — | 321,993 | |||||||||||||||||||||||||||
SBA secured by real estate | 56,074 | — | — | 1,257 | 57,331 | |||||||||||||||||||||||||||
Total investor loans secured by real estate | 8,223,750 | 1 | — | 2,014 | 8,225,765 | |||||||||||||||||||||||||||
Business loans secured by real estate | ||||||||||||||||||||||||||||||||
CRE owner-occupied | 2,108,746 | — | — | 5,304 | 2,114,050 | |||||||||||||||||||||||||||
Franchise real estate secured | 347,932 | — | — | — | 347,932 | |||||||||||||||||||||||||||
SBA secured by real estate | 78,036 | 486 | — | 1,073 | 79,595 | |||||||||||||||||||||||||||
Total business loans secured by real estate | 2,534,714 | 486 | — | 6,377 | 2,541,577 | |||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Commercial and industrial | 1,765,451 | 428 | 57 | 2,898 | 1,768,834 | |||||||||||||||||||||||||||
Franchise non-real estate secured | 444,797 | — | — | — | 444,797 | |||||||||||||||||||||||||||
SBA not secured by real estate | 14,912 | 338 | — | 707 | 15,957 | |||||||||||||||||||||||||||
Total commercial loans | 2,225,160 | 766 | 57 | 3,605 | 2,229,588 | |||||||||||||||||||||||||||
Retail loans | ||||||||||||||||||||||||||||||||
Single family residential | 232,559 | 15 | — | — | 232,574 | |||||||||||||||||||||||||||
Consumer loans | 6,928 | 1 | — | — | 6,929 | |||||||||||||||||||||||||||
Total retail loans | 239,487 | 16 | — | — | 239,503 | |||||||||||||||||||||||||||
Totals | $ | 13,223,111 | $ | 1,269 | $ | 57 | $ | 11,996 | $ | 13,236,433 |
Individually Evaluated Loans
Beginning on January 1, 2020, the Company evaluates loans collectively for purposes of determining the ACL in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the portfolio. These loans are typically identified from a substandard or worse internal risk grade, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, modified through a TDR, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio are evaluated individually for purposes of determining an appropriate lifetime ACL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated costs to sell. The Company may increase or decrease the ACL for collateral dependent individually evaluated loans based on changes in the estimated expected fair value of the collateral. Changes in the ACL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans.
As of September 30, 2021, $35.1 million of loans were individually evaluated with $571,000 ACL attributed to such loans. At September 30, 2021, $12.8 million of individually evaluated loans were evaluated using a discounted cash flow approach and $22.3 million of individually evaluated loans were evaluated based on the underlying value of the collateral.
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As of December 31, 2020, $29.2 million of loans were individually evaluated, and the ACL attributed to such loans totaled $126,000. At December 31, 2020, $15.2 million of individually evaluated loans were evaluated using a discounted cash flow approach and $14.0 million of individually evaluated loans were evaluated based on the underlying value of the collateral.
The Company had individually evaluated loans on nonaccrual status of $35.1 million and $29.2 million at September 30, 2021 and December 31, 2020, respectively.
Troubled Debt Restructurings
We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest-only payments, and, in limited cases, concessions to the outstanding loan balances. These loans are classified as TDRs. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. In most cases, the Company initially places TDRs on nonaccrual status, and they may return to accrual status when the loans are brought current, have performed in accordance with the contractual restructured terms for a period of at least six months, and the ultimate collectability of the total contractual restructured principal and interest payments are no longer in doubt. At September 30, 2021, there were $17.6 million loans classified as TDRs, compared with no TDR loans as of December 31, 2020. During the three and nine months ended September 30, 2021, there were six loans totaling $17.6 million modified as TDRs, which are comprised of three CRE owner-occupied loans and one C&I loan totaling $5.2 million belonging to one borrower relationship with the terms modified due to bankruptcy, and two franchise non-real estate secured loans totaling $12.3 million belonging to another borrower relationship with the terms modified for payment deferral. During the three and nine months ended September 30, 2021, the three CRE owner-occupied loans and one C&I loan classified as TDRs were in payment default and all TDRs were on nonaccrual status as of September 30, 2021. During the three and nine months ended September 30, 2020, there were no TDRs that experienced payment defaults after modifications within the previous 12 months.
The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. On April 7, 2020, federal bank regulators issued a joint interagency statement that allowed lenders to conclude that a borrower is not experiencing financial difficulty if short-term (e.g., six months or less) modifications are made in response to the COVID-19 pandemic, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The CAA, signed into law on December 27, 2020, extended the applicable period to include modification to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022, or (ii) 60 days after the date of termination of the COVID-19 national emergency.
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For COVID-19 related loan modifications in the form of payment deferrals, the delinquency status will not advance and loans that were accruing at the time that the relief is provided will generally not be placed on nonaccrual status during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. However, the Company, through its credit portfolio management activities, has continued to monitor facts and circumstances associated with the underlying credit quality of loans modified under the provisions of the CARES Act in an effort to identify any loans where the accrual of interest during the modification period is no longer appropriate. In such cases, the Company ceases the accrual of interest and all previously accrued and uncollected interest is promptly reversed against current period interest income. At September 30, 2021, no loans were classified as a COVID-19 modification under Section 4013 of the CARES Act and no loans were in-process for potential modification. At December 31, 2020, 52 loans totaling $79.5 million, or 0.60% of loans held for investment, remained within their COVID-19 modification period.
Purchased Credit Deteriorated Loans
Following the adoption of ASC 326 on January 1, 2020, the Company analyzed acquired loans for more-than-insignificant deterioration in credit quality since their origination. Such loans are classified as purchased credit deteriorated loans. Please see Note 3 - Significant Accounting Policies for more information concerning the accounting for PCD loans.
The Company accounts for interest income on PCD loans using the interest method, whereby any purchase discounts or premiums are accreted or amortized into interest income as an adjustment of the loan’s yield.
Acquired loans classified as PCD are recorded at an initial amortized cost, which is comprised of the purchase price of the loans (or initial fair value) and the initial ACL determined for the loans, which is added to the purchase price, as well as any resulting discount or premium related to factors other than credit. Subsequent to acquisition, the ACL for PCD loans is measured in accordance with the Company’s ACL methodology. Please also see Note 7 - Allowance for Credit Losses for more information concerning the Company’s ACL methodology.
Nonaccrual Loans
When loans are placed on nonaccrual status, previously accrued but unpaid interest is promptly reversed from earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only. Generally, the Company may return a loan to accruing status if all past due principal and interest have been collected and the Company expects repayment of the remaining contractual amounts on the loan. In some cases, the Company may require a sustained period of performance from the borrower, such as three consecutive payments, before returning a loan to accruing status. The Company may also return a loan to accruing status when it becomes well secured and in the process of collection.
The Company typically does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the timely collection of principal or interest. However, when such loans are well secured and in the process of collection, the Company may continue accruing interest. The Company had no loans 90 days or more past due and still accruing at September 30, 2021 and December 31, 2020, respectively. Nonaccrual loans totaled $35.1 million at September 30, 2021 and $29.2 million as of December 31, 2020. No interest income was recognized on nonaccrual loans during the three and nine months ended September 30, 2021 and September 30, 2020.
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The following tables provide a summary of nonaccrual loans as of the dates indicated:
Nonaccrual Loans (1) | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Collateral Dependent Loans | ACL | Non-Collateral Dependent Loans | ACL | Total Nonaccrual Loans | Nonaccrual Loans with No ACL | |||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 12,179 | $ | 571 | $ | — | $ | — | $ | 12,179 | $ | 4,563 | |||||||||||||||||||||||
SBA secured by real estate | 976 | — | — | — | 976 | 976 | |||||||||||||||||||||||||||||
Total investor loans secured by real estate | 13,155 | 571 | — | — | 13,155 | 5,539 | |||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE owner-occupied | 4,978 | — | — | — | 4,978 | 4,978 | |||||||||||||||||||||||||||||
SBA secured by real estate | 604 | — | — | — | 604 | 604 | |||||||||||||||||||||||||||||
Total business loans secured by real estate | 5,582 | — | — | — | 5,582 | 5,582 | |||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 1,816 | — | 443 | — | 2,259 | 2,259 | |||||||||||||||||||||||||||||
Franchise non-real estate secured | 1,086 | — | 12,333 | — | 13,419 | 13,419 | |||||||||||||||||||||||||||||
SBA non-real estate secured | 664 | — | — | — | 664 | 664 | |||||||||||||||||||||||||||||
Total commercial loans | 3,566 | — | 12,776 | — | 16,342 | 16,342 | |||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||
Single family residential | 11 | — | — | — | 11 | 11 | |||||||||||||||||||||||||||||
Total retail loans | 11 | — | — | — | 11 | 11 | |||||||||||||||||||||||||||||
Total nonaccrual loans | $ | 22,314 | $ | 571 | $ | 12,776 | $ | — | $ | 35,090 | $ | 27,474 |
______________________________
(1) The ACL for nonaccrual loans is determined based on a discounted cash flow methodology unless the loan is considered collateral dependent; otherwise, the ACL for collateral dependent nonaccrual loans is determined based on the estimated fair value of the underlying collateral.
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Nonaccrual Loans (1) | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Collateral Dependent Loans | ACL | Non-Collateral Dependent Loans | ACL | Total Nonaccrual Loans | Nonaccrual Loans with No ACL | |||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 2,792 | $ | — | $ | — | $ | — | $ | 2,792 | $ | 2,792 | |||||||||||||||||||||||
SBA secured by real estate | 1,257 | — | — | — | 1,257 | 1,257 | |||||||||||||||||||||||||||||
Total investor loans secured by real estate | 4,049 | — | — | — | 4,049 | 4,049 | |||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE owner-occupied | 6,083 | — | — | — | 6,083 | 6,083 | |||||||||||||||||||||||||||||
SBA secured by real estate | 1,143 | — | — | — | 1,143 | 1,143 | |||||||||||||||||||||||||||||
Total business loans secured by real estate | 7,226 | — | — | — | 7,226 | 7,226 | |||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 2,040 | — | 1,934 | 126 | 3,974 | 2,733 | |||||||||||||||||||||||||||||
Franchise non-real estate secured | — | — | 13,238 | — | 13,238 | 13,238 | |||||||||||||||||||||||||||||
SBA non-real estate secured | 707 | — | — | — | 707 | 707 | |||||||||||||||||||||||||||||
Total commercial loans | 2,747 | — | 15,172 | 126 | 17,919 | 16,678 | |||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||
Single family residential | 15 | — | — | — | 15 | 15 | |||||||||||||||||||||||||||||
Total retail loans | 15 | — | — | — | 15 | 15 | |||||||||||||||||||||||||||||
Total nonaccrual loans | $ | 14,037 | $ | — | $ | 15,172 | $ | 126 | $ | 29,209 | $ | 27,968 |
______________________________
(1) The ACL for nonaccrual loans is determined based on a discounted cash flow methodology unless the loan is considered collateral dependent; otherwise, the ACL for collateral dependent nonaccrual loans is determined based on the estimated fair value of the underlying collateral.
Residential Real Estate Loans In Process of Foreclosure
The Company had no consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of September 30, 2021 or December 31, 2020.
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Collateral Dependent Loans
Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded.
The following tables summarize collateral dependent loans by collateral type as of the dates indicated:
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Office Properties | Industrial Properties | Retail Properties | Land Properties | Hotel Properties | Residential Properties | Business Assets | Total | |||||||||||||||||||||||||||||||||||||||
Investor loan secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | — | $ | — | $ | 2,437 | $ | — | $ | 9,742 | $ | — | $ | — | $ | 12,179 | |||||||||||||||||||||||||||||||
SBA secured by real estate | — | — | — | — | 976 | — | — | 976 | |||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | — | — | 2,437 | — | 10,718 | — | — | 13,155 | |||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | — | — | — | 4,978 | — | — | — | 4,978 | |||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | 163 | 441 | — | — | — | — | — | 604 | |||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | 163 | 441 | — | 4,978 | — | — | — | 5,582 | |||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | — | — | — | 246 | — | 240 | 1,330 | 1,816 | |||||||||||||||||||||||||||||||||||||||
Franchise non-real estate secured | — | — | — | — | — | — | 1,086 | 1,086 | |||||||||||||||||||||||||||||||||||||||
SBA non-real estate secured | — | — | — | — | — | — | 664 | 664 | |||||||||||||||||||||||||||||||||||||||
Total commercial loans | — | — | — | 246 | — | 240 | 3,080 | 3,566 | |||||||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||||||||
Single family residential | — | — | — | — | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||
Total retail loans | — | — | — | — | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||
Total collateral dependent loans | $ | 163 | $ | 441 | $ | 2,437 | $ | 5,224 | $ | 10,718 | $ | 251 | $ | 3,080 | $ | 22,314 |
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December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Office Properties | Industrial Properties | Retail Properties | Land Properties | Hotel Properties | Residential Properties | Business Assets | Total | |||||||||||||||||||||||||||||||||||||||
Investor loan secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | — | $ | — | $ | 2,594 | $ | — | $ | 198 | $ | — | $ | — | $ | 2,792 | |||||||||||||||||||||||||||||||
SBA secured by real estate | — | — | — | — | 1,257 | — | — | 1,257 | |||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | — | — | 2,594 | — | 1,455 | — | — | 4,049 | |||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | — | 779 | — | 5,304 | — | — | — | 6,083 | |||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | 288 | 757 | — | — | — | 98 | — | 1,143 | |||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | 288 | 1,536 | — | 5,304 | — | 98 | — | 7,226 | |||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | — | — | — | — | — | — | 2,040 | 2,040 | |||||||||||||||||||||||||||||||||||||||
SBA non-real estate secured | — | — | — | — | — | — | 707 | 707 | |||||||||||||||||||||||||||||||||||||||
Total commercial loans | — | — | — | — | — | — | 2,747 | 2,747 | |||||||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||||||||
Single family residential | — | — | — | — | — | 15 | — | 15 | |||||||||||||||||||||||||||||||||||||||
Total retail loans | — | — | — | — | — | 15 | — | 15 | |||||||||||||||||||||||||||||||||||||||
Total collateral dependent loans | $ | 288 | $ | 1,536 | $ | 2,594 | $ | 5,304 | $ | 1,455 | $ | 113 | $ | 2,747 | $ | 14,037 |
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Note 7 – Allowance for Credit Losses
The Company determines the ACL for loans and unfunded loan commitments in accordance with ASC 326 - Financial Instruments - Credit Losses. ASC 326 requires the Company to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition. The recognition of losses at origination or acquisition represents the Company’s best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics. Determining the ACL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The Company uses a discounted cash flow model when determining estimates for the ACL for commercial real estate loans and commercial loans, which comprise the majority of the loan portfolio, and uses a historical loss rate model for retail loans. The Company also utilizes proxy loan data in its ACL model where the Company’s own historical data is not sufficiently available.
The discounted cash flow model is applied on an instrument-by-instrument basis, and for loans with similar risk characteristics, to derive estimates for the lifetime ACL for each loan. The discounted cash flow methodology relies on several significant components essential to the development of estimates for future cash flows on loans and unfunded commitments. These components consist of: (i) the estimated probability of default, (ii) the estimated loss given default, which represents the estimated severity of the loss when a loan is in default, (iii) estimates for prepayment activity on loans, and (iv) the estimated exposure to the Company at default (“EAD”). These components are also heavily influenced by changes in economic forecasts employed in the model over a reasonable and supportable period. The Company’s ACL methodology for unfunded loan commitments also includes assumptions concerning the probability an unfunded commitment will be drawn upon by the borrower. These assumptions are based on the Company’s historical experience.
The Company’s discounted cash flow ACL model for commercial real estate and commercial loans uses internally derived estimates for prepayments in determining the amount and timing of future contractual cash flows to be collected. The estimate of future cash flows also incorporates estimates for contractual amounts the Company believes may not be collected, which are based on assumptions for PD, LGD, and EAD. EAD is the estimated outstanding balance of the loan at the time of default. It is determined by the contractual payment schedule and expected payment profile of the loan, incorporating estimates for expected prepayments and future draws on revolving credit facilities. The Company discounts cash flows using the effective interest rate on the loan. The effective interest rate represents the contractual rate on the loan; adjusted for any purchase premiums, purchase discounts, and deferred fees and costs associated with an originated loan. The Company has made an accounting policy election to adjust the effective interest rate to take into consideration the effects of estimated prepayments. The ACL for term loans is determined by measuring the amount by which a loan’s amortized cost exceeds its discounted cash flows expected to be collected. The ACL for credit facilities is determined by discounting estimates for cash flows not expected to be collected.
Probability of Default
The PD for investor loans secured by real estate is based largely on a model provided by a third party, using proxy loan information. The PDs generated by this model are reflective of current and expected economic conditions and conditions in the commercial real estate market, and how they are expected to impact loan level and property level attributes, and ultimately the likelihood of a default event occurring. This model also incorporates assumptions for PD at a loan’s maturity. Significant loan and property level attributes include: loan to value ratios, debt service coverage, loan size, loan vintage, and property types.
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The PD for business loans secured by real estate and commercial loans is based on an internally developed PD rating scale that assigns PDs based on the Company’s internal risk grades for loans. This internally developed PD rating scale is based on a combination of the Company’s own historical data and observed historical data from the Company’s peers, which consist of banks that management believes align with our business profile. As credit risk grades change for these loans, the PD assigned to them also changes. As with investor loans secured by real estate, the PD for business loans secured by real estate and commercial loans is also impacted by current and expected economic conditions.
The Company considers loans to be in default when they are 90 days or more past due and still accruing or placed on nonaccrual status.
Loss Given Default
LGDs for commercial real estate loans are derived from a third party, using proxy loan information, and are based on loan and property level characteristics in the Company’s loan portfolio, such as: loan to values, estimated time to resolution, property size, and current and estimated future market price changes for underlying collateral. The LGD is highly dependent upon loan to value ratios, and incorporates estimates for the expense associated with managing the loan through to resolution. LGDs also incorporate an estimate for the loss severity associated with loans where the borrower fails to meet their debt obligation at maturity, such as through a balloon payment or the refinancing of the loan through another lender. External factors that have an impact on LGDs include: changes in the index for CRE pricing, GDP growth rate, unemployment rates, and the Moody’s Baa rating corporate debt interest rate spread. LGDs are applied to each loan in the commercial real estate portfolio, and in conjunction with the PD, produce estimates for net cash flows not expected to be collected over the estimated term of the loan.
LGDs for commercial loans are also derived from a third party that has a considerable database of credit related information specific to the financial services industry and the type of loans within this segment, and is used to generate annual default information for commercial loans. These proxy LGDs are dependent upon data inputs such as: credit quality, borrower industry, region, borrower size, and debt seniority. LGDs are then applied to each loan in the commercial portfolio, and in conjunction with the PD, produce estimates for net cash flows not expected to be collected over the estimated term of the loan.
Historical Loss Rates for Retail Loans
The historical loss rate model for retail loans are derived from a third party that has a considerable database of credit related information for retail loans. Key loan level attributes and economic drivers in determining the loss rate for retail loans include FICO scores, vintage, as well as geography, unemployment rates, and changes in consumer real estate prices.
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Forecasts
GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Bank and the ultimate collectability of future cash flows over the life of a loan. The Company uses economic scenarios from an independent third party, Moody’s Analytics. These scenarios are based on past events, current conditions, and the likelihood of future events occurring. These scenarios typically are comprised of: (1) a base-case scenario, (2) an upside scenario, representing slightly better economic conditions than currently experienced, and (3) a downside scenario, representing recessionary conditions. Management periodically evaluates economic scenarios and may decide that a particular economic scenario or a combination of probability-weighted economic scenarios should be used in the Company’s ACL model. The economic scenarios chosen for the model, the extent to which more than one scenario is used, and the weights that are assigned to them, are based on the Company’s estimate of the probability of each scenario occurring, which is based in part on analysis performed by an independent third-party. Economic scenarios chosen, as well as the assumptions within those scenarios, and whether to use a probability-weighted multiple scenario approach, can vary from one period to the next based on changes in current and expected economic conditions, and due to the occurrence of specific events such as the ongoing COVID-19 pandemic. The Company recognizes the non-linearity of credit losses relative to economic performance and thus the Company believes consideration of, and if appropriate under the circumstances, use of multiple probability-weighted economic scenarios is appropriate in estimating credit losses over the forecast period. This approach is based on certain assumptions. The first assumption is that no single forecast of the economy, however detailed or complex, is completely accurate over a reasonable forecast time-frame, and is subject to revisions over time. By considering multiple scenario outcomes and assigning reasonable probability weightings to them, some of the uncertainty associated with a single scenario approach, the Company believes, is mitigated.
As of September 30, 2021, the Company’s ACL model used three probability-weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The weightings assigned to each scenario were as follows: the base-case scenario, or most likely scenario, was assigned a weighting of 40%, while the upside and downside scenarios were each assigned a weighting of 30%. These economic scenarios include the current and estimated future impact associated with the ongoing COVID-19 pandemic. The Company evaluated the weightings of each economic scenario in the current period with the assistance of Moody's Analytics, and determined the current weightings of 40% for the base-case scenario, and 30% for each of the upside and downside scenarios appropriately reflect the likelihood of outcomes for each scenario given the current economic environment. The use of three probability-weighted scenarios at September 30, 2021 and the weighting assigned to each scenario is consistent with the approach used in the Company’s ACL model at June 30, 2021 and December 31, 2020.
The Company, with the assistance of Moody’s Analytics, currently forecasts PDs and LGDs based on economic scenarios over a two-year period, which we believe is a reasonable and supportable period. Beyond this point, PDs and LGDs revert to their long-term averages. The Company has reflected this reversion over a period of three years in each of its economic scenarios used to generate the overall probability-weighted forecast. Changes in economic forecasts impact the PD, LGD, and EAD for each loan, and therefore influence the amount of future cash flows for each loan the Company does not expect to collect.
The Company derives the economic forecasts it uses in its ACL model from Moody's Analytics that has a large team of economists, database managers, and operational engineers with a long history of producing monthly economic forecasts. The forecasts produced by this third-party have been widely used by banks, credit unions, government agencies, and real estate developers. These economic forecasts cover all states and metropolitan areas in the Unites States, and reflect changes in economic variables such as: GDP growth, interest rates, employment rates, changes in wages, retail sales, industrial production, metrics associated with the single-family and multifamily housing markets, vacancy rates, changes in equity market prices, and energy markets.
51
It is important to note that the Company’s ACL model relies on multiple economic variables, which are used under several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Company has identified certain economic variables that have significant influence in the Company’s model for determining the ACL.
As of September 30, 2021, the Company’s ACL model incorporated the following assumptions for key economic variables in the base-case, upside, and downside scenarios:
Base-case Scenario:
•U.S. unemployment declines to approximately 4.5% by the end of 2021. Unemployment continues to decline in 2022 to approximately 3.4% by the end of 2022. The rate of unemployment holds relatively constant at approximately 3.5% throughout 2023.
•U.S. real GDP experiences annualized growth of approximately 7% through the remainder of 2021. Growth in real GDP for 2022 under this scenario decelerates from an annualized rate of approximately 5% in early 2022 to approximately 1% by the end of 2022. Annualized real GDP growth of approximately 2-3% in 2023.
•CRE index experiences a slight decline throughout the remainder of 2021, with an annualized rate of decline of approximately -2% for 2021. The CRE index returns to moderate levels of growth beginning in the first quarter of 2022, with the annualized rate of growth increasing from 2% in early 2022 to 11% by the end of 2022. The CRE index is anticipated to increase approximately 7-9% on an annualized basis in 2023.
Upside Scenario:
•U.S. unemployment declines to approximately 4.3% by the end of 2021. The unemployment rates holds at approximately 3% throughout all of 2022 and 2023.
•U.S. real GDP experiences annualized growth of approximately 11% through the remainder of 2021. Growth in real GDP throughout 2022 decelerates from an annualized rate of approximately 7% in early 2022 to approximately 1% by the end of 2022. Annualized real GDP growth of approximately 1-2% in 2023.
•CRE index remains relatively unchanged throughout the remainder of 2021. The CRE index returns growth in 2022, with the annualized rate of growth increasing from 5% in early 2022 to 14% by the end of 2022. The CRE index is anticipated to experience a decelerating annualized rate of growth from approximately 10% in early 2023 to approximately 7% by the end of 2023.
52
Downside Scenario:
•U.S. unemployment increases to approximately 6.7% by the end of 2021. Unemployment remains elevated in 2022 at approximately 8-9%. Unemployment declines throughout 2023 to approximately 6.8% at the end of 2023.
•U.S. real GDP experiences a decline of approximately -3.5% for the remainder of 2021. Real GDP returns to modest annualized growth in the third quarter of 2022, with growth of approximately 1% for the remainder of 2022. Annualized real GDP fluctuates within a range of approximately 2-4% throughout 2023.
•CRE index experiences an annualized rate of decline throughout the remainder 2021 of approximately -5%. The CRE index is estimated to experience decelerating declines throughout 2022, with the annualized rate of decline slowing from approximately -16% in early 2022 to approximately -11% by the end of 2022. Under this scenario, the CRE index is anticipated to experience accelerating annualized growth throughout 2023 to approximately 18% by the end of 2023.
Qualitative Adjustments
The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by themselves, provide a sufficient basis for determining future expected credit losses. The Company, therefore, periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.
As of September 30, 2021, qualitative adjustments included in the ACL totaled $6.5 million. These adjustments primarily relate to continued uncertainty concerning the strength of the economic recovery and how it may impact certain classes of loans in the loan portfolio. Management determined through additional review that the uneven recovery and continued government interventions are potentially underestimating the impact the ongoing COVID-19 pandemic may have on certain segments and classes of the loan portfolio, such as loans within the SBA, construction, franchise, and CRE owner-occupied classifications. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.
53
The following tables provides the allocation of the ACL for loans held for investment as well as the activity in the ACL attributed to various segments in the loan portfolio as of, and for the periods indicated:
Three Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Beginning ACL Balance | Charge-offs | Recoveries | Provision for Credit Losses | Ending ACL Balance | ||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||
CRE non-owner occupied | $ | 47,112 | $ | — | $ | — | $ | (4,645) | $ | 42,467 | |||||||||||||||||||
Multifamily | 59,059 | — | — | (6,895) | 52,164 | ||||||||||||||||||||||||
Construction and land | 9,548 | — | — | (1,531) | 8,017 | ||||||||||||||||||||||||
SBA secured by real estate | 4,681 | (158) | — | (644) | 3,879 | ||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||
CRE owner-occupied | 35,747 | — | 14 | (2,082) | 33,679 | ||||||||||||||||||||||||
Franchise real estate secured | 11,436 | — | — | (1,810) | 9,626 | ||||||||||||||||||||||||
SBA secured by real estate | 6,317 | — | 50 | (1,263) | 5,104 | ||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||
Commercial and industrial | 39,879 | (84) | 729 | (2,929) | 37,595 | ||||||||||||||||||||||||
Franchise non-real estate secured | 17,313 | (2,398) | 80 | 2,523 | 17,518 | ||||||||||||||||||||||||
SBA non-real estate secured | 730 | — | 15 | (113) | 632 | ||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||
Single family residential | 670 | — | 2 | (143) | 529 | ||||||||||||||||||||||||
Consumer loans | 282 | — | — | (11) | 271 | ||||||||||||||||||||||||
Totals | $ | 232,774 | $ | (2,640) | $ | 890 | $ | (19,543) | $ | 211,481 |
Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Beginning ACL Balance | Charge-offs | Recoveries | Provision for Credit Losses | Ending ACL Balance | ||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||
CRE non-owner occupied | $ | 49,176 | $ | (154) | $ | — | $ | (6,555) | $ | 42,467 | |||||||||||||||||||
Multifamily | 62,534 | — | — | (10,370) | 52,164 | ||||||||||||||||||||||||
Construction and land | 12,435 | — | — | (4,418) | 8,017 | ||||||||||||||||||||||||
SBA secured by real estate | 5,159 | (423) | — | (857) | 3,879 | ||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||
CRE owner-occupied | 50,517 | — | 44 | (16,882) | 33,679 | ||||||||||||||||||||||||
Franchise real estate secured | 11,451 | — | — | (1,825) | 9,626 | ||||||||||||||||||||||||
SBA secured by real estate | 6,567 | (98) | 130 | (1,495) | 5,104 | ||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||
Commercial and industrial | 46,964 | (4,653) | 3,428 | (8,144) | 37,595 | ||||||||||||||||||||||||
Franchise non-real estate secured | 20,525 | (2,554) | 80 | (533) | 17,518 | ||||||||||||||||||||||||
SBA non-real estate secured | 995 | — | 19 | (382) | 632 | ||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||
Single family residential | 1,204 | — | 3 | (678) | 529 | ||||||||||||||||||||||||
Consumer loans | 491 | — | — | (220) | 271 | ||||||||||||||||||||||||
Totals | $ | 268,018 | $ | (7,882) | $ | 3,704 | $ | (52,359) | $ | 211,481 |
54
Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Beginning ACL Balance | Charge-offs | Recoveries | Provision for Credit Losses | Ending ACL Balance | ||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||
CRE non-owner occupied | $ | 63,007 | $ | (443) | $ | — | $ | (8,459) | $ | 54,105 | |||||||||||||||||||
Multifamily | 63,511 | — | — | 3,825 | 67,336 | ||||||||||||||||||||||||
Construction and land | 18,804 | (377) | — | (2,870) | 15,557 | ||||||||||||||||||||||||
SBA secured by real estate | 2,010 | (145) | 34 | 3,428 | 5,327 | ||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||
CRE owner-occupied | 48,213 | (1,739) | 21 | 2,171 | 48,666 | ||||||||||||||||||||||||
Franchise real estate secured | 13,060 | — | — | (1,072) | 11,988 | ||||||||||||||||||||||||
SBA secured by real estate | 4,368 | — | 76 | 1,716 | 6,160 | ||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||
Commercial and industrial | 41,967 | (2,437) | 10 | 8,374 | 47,914 | ||||||||||||||||||||||||
Franchise non-real estate secured | 21,676 | (207) | 865 | (2,185) | 20,149 | ||||||||||||||||||||||||
SBA non-real estate secured | 600 | (10) | 8 | 353 | 951 | ||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||
Single family residential | 1,479 | — | 2 | (238) | 1,243 | ||||||||||||||||||||||||
Consumer loans | 3,576 | (129) | 1 | (341) | 3,107 | ||||||||||||||||||||||||
Totals | $ | 282,271 | $ | (5,487) | $ | 1,017 | $ | 4,702 | $ | 282,503 |
Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Beginning ACL Balance (1) | Adoption of ASC 326 | Initial ACL Recorded for PCD Loans | Charge-offs | Recoveries | Provision for Credit Losses | Ending ACL Balance | ||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||
CRE non-owner occupied | $ | 1,899 | $ | 8,423 | $ | 3,025 | $ | (830) | $ | — | $ | 41,588 | $ | 54,105 | |||||||||||||||||||||||||||
Multifamily | 729 | 9,174 | 8,710 | — | — | 48,723 | 67,336 | ||||||||||||||||||||||||||||||||||
Construction and land | 4,484 | (124) | 2,051 | (377) | — | 9,523 | 15,557 | ||||||||||||||||||||||||||||||||||
SBA secured by real estate | 1,915 | (1,401) | — | (699) | 34 | 5,478 | 5,327 | ||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | 2,781 | 20,166 | 3,766 | (1,739) | 44 | 23,648 | 48,666 | ||||||||||||||||||||||||||||||||||
Franchise real estate secured | 592 | 5,199 | — | — | — | 6,197 | 11,988 | ||||||||||||||||||||||||||||||||||
SBA secured by real estate | 2,119 | 2,207 | 235 | (315) | 147 | 1,767 | 6,160 | ||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 13,857 | 87 | 2,325 | (5,213) | 37 | 36,821 | 47,914 | ||||||||||||||||||||||||||||||||||
Franchise non-real estate secured | 5,816 | 9,214 | — | (1,434) | 865 | 5,688 | 20,149 | ||||||||||||||||||||||||||||||||||
SBA non-real estate secured | 445 | 218 | 924 | (803) | 13 | 154 | 951 | ||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||
Single family residential | 655 | 541 | 206 | (62) | 3 | (100) | 1,243 | ||||||||||||||||||||||||||||||||||
Consumer loans | 406 | 1,982 | — | (137) | 2 | 854 | 3,107 | ||||||||||||||||||||||||||||||||||
Totals | $ | 35,698 | $ | 55,686 | $ | 21,242 | $ | (11,609) | $ | 1,145 | $ | 180,341 | $ | 282,503 |
______________________________
(1) Beginning ACL balance represents the ALLL accounted for under ASC 450 and ASC 310, which is reflective of probable incurred losses as of the balance sheet date.
55
The decrease in the ACL for loans held for investment during the three months ended September 30, 2021 of $21.3 million was comprised of a $19.5 million provision recapture and $1.8 million in net charge-offs. The provision recapture for the three months ended September 30, 2021 was reflective of improving economic forecasts employed in the Company’s ACL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the quarter. The decrease in the ACL for the nine months ended September 30, 2021 of $56.5 million was comprised of a $52.4 million provision recapture and $4.2 million in net charge-offs. The provision recapture for the nine months ended September 30, 2021 was also reflective of improving economic forecasts employed in the Company’s ACL model and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the first nine months of 2021.
The increase in the ACL for the three months ended September 30, 2020 of $232,000 was comprised of a $4.7 million provision for credit losses and $4.5 million in net charge-offs. The provision for credit losses for the three months ended September 30, 2020 was reflective of unfavorable, but improving economic forecasts used in the Company’s ACL model. The increase in the ACL for the nine months ended September 30, 2020 of $246.8 million was reflective of a $55.7 million addition associated with the Company’s adoption of ASC 326 on January 1, 2020, which was recorded through a cumulative effect adjustment to retained earnings, as well as a $180.3 million provision for credit losses on loans, net charge-offs of $10.5 million, and the establishment of $21.2 million in net ACL for PCD loans previously mentioned. The provision for credit losses of $180.3 million during the nine months ended September 30, 2020 was inclusive of $75.9 million related to the initial ACL required for the acquisition of non-PCD loans in the Opus acquisition. Under ASC 326, the Company is required to record an ACL for estimates of life-time credit losses on loans at the time of acquisition. For non-PCD loans, the initial ACL is established through a charge to provision for credit losses at the time of acquisition. However, the ACL for PCD loans is established through an adjustment to the loan’s purchase price (or initial fair value). Excluding the impact of the Opus acquisition, the provision for credit losses for the nine months ended September 30, 2020 is also reflective of unfavorable economic forecasts used in the Company’s ACL model driven by the COVID-19 pandemic.
Allowance for Credit Losses for Off-Balance Sheet Commitments
The Company maintains an ACL on off-balance sheet commitments related to unfunded loans and lines of credit, which is included in other liabilities of the consolidated statements of financial condition. The allowance for off-balance sheet commitments was $27.2 million at September 30, 2021, $27.4 million at June 30, 2021, and $31.1 million at December 31, 2020. The provision recapture for off-balance sheet commitments of $194,000 and $3.9 million during the three and nine months ended September 30, 2021, respectively, was related primarily to improving economic conditions and forecasts reflected in the Company’s ACL model.
The Company recorded a provision recapture for off-balance sheet commitments of $492,000 and a provision for credit losses of $10.0 million for the three and nine months ended September 30, 2020, respectively. The provision recapture for off-balance sheet commitments for the three months ended September 30, 2020 can be attributed to lower outstanding unfunded balances in certain loan segments where a higher reserve allocation had been assigned. The provision for credit losses on off-balance sheet commitments for the nine months ended September 30, 2020 can be attributed to an $8.6 million provision for credit losses in the second quarter of 2020 related to the initial ACL for off-balance sheet loan commitments that the Company was required to establish at the time of acquisition of Opus, and a $1.4 million in provision for credit losses for the first nine months of 2020 related primarily to the deterioration in economic forecasts, primarily in the second quarter of 2020, used in the Company’s CECL model.
The Company applies an expected credit loss estimation methodology for off-balance sheet commitments that is largely commensurate with the methodology applied to each respective segment of the loan portfolio in determining the ACL for loans held-for-investment. The loss estimation process includes assumptions for utilization at default. These assumptions are based on the Company’s own historical internal loan data.
56
The following tables present PD bands for commercial real estate and commercial loan segments of the loan portfolio as of the dates indicated.
Commercial Real Estate and Commercial Term Loans by PD and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | $ | 530,275 | $ | 239,267 | $ | 392,557 | $ | 421,922 | $ | 198,651 | $ | 722,951 | $ | 4,270 | $ | — | $ | 2,509,893 | |||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 35,330 | 24,645 | 23,757 | 9,755 | 11,088 | 53,696 | 5,329 | — | 163,600 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | 4,821 | 50,121 | 32,661 | 9,933 | 51,511 | 525 | — | 149,572 | ||||||||||||||||||||||||||||||||||||||||||||
Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 1,660,670 | 962,609 | 1,316,575 | 520,329 | 500,815 | 609,731 | 218 | — | 5,570,947 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 28,718 | 49,737 | 31,988 | 6,958 | 1,590 | 8,314 | — | — | 127,305 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 5,059 | — | — | — | — | 2,355 | — | — | 7,414 | ||||||||||||||||||||||||||||||||||||||||||||
Construction and Land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 56,187 | 82,557 | 2,329 | 991 | 3,996 | 3,607 | 48 | — | 149,715 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 21,654 | 11,027 | 1,700 | — | — | — | — | — | 34,381 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 8,266 | 31,606 | 47,704 | 21,143 | — | — | — | — | 108,719 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 130 | 499 | 7,373 | 12,428 | 15,206 | 12,834 | — | — | 48,470 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | — | 9 | — | 629 | 338 | — | — | 976 | ||||||||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 2,346,289 | 1,406,768 | 1,874,113 | 1,026,187 | 741,908 | 1,465,337 | 10,390 | — | 8,870,992 | ||||||||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 635,469 | 302,683 | 315,267 | 215,974 | 201,190 | 499,308 | 3,211 | 300 | 2,173,402 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | — | — | 7,846 | 7,573 | 6,733 | 31,811 | — | — | 53,963 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | — | — | 6,109 | 2,972 | 5,718 | — | — | 14,799 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 95,937 | 43,332 | 55,621 | 39,053 | 61,591 | 37,696 | — | — | 333,230 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 812 | — | 4,151 | 5,253 | 5,310 | 4,590 | — | — | 20,116 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 1,135 | — | — | — | — | — | — | — | 1,135 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 3,789 | 2,368 | 6,237 | 9,605 | 8,900 | 16,909 | — | — | 47,808 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | — | — | 1,296 | 893 | 2,318 | 8,273 | — | — | 12,780 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | — | — | 1,326 | 3,012 | 3,650 | 1,361 | — | 9,349 | ||||||||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | 737,142 | 348,383 | 390,418 | 285,786 | 292,026 | 607,955 | 4,572 | 300 | 2,666,582 |
57
Commercial Real Estate and Commercial Term Loans by PD and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 253,639 | 87,252 | 196,671 | 118,678 | 128,879 | 69,707 | 764,279 | 2,055 | 1,621,160 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 6,720 | 2,293 | 8,012 | 20,835 | 27,760 | 8,438 | 140,001 | 4 | 214,063 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 650 | 1,759 | 741 | 2,901 | 1,143 | 2,376 | 43,337 | 740 | 53,647 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise non-real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 108,905 | 19,246 | 63,233 | 59,636 | 22,735 | 15,697 | — | — | 289,452 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 9,159 | 5,708 | 33,550 | 5,594 | 3,483 | 18,536 | — | — | 76,030 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 269 | — | 2,237 | 4,491 | 16,368 | 4,103 | — | — | 27,468 | ||||||||||||||||||||||||||||||||||||||||||||
SBA not secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 152 | 653 | 1,215 | 633 | 1,008 | 2,421 | — | — | 6,082 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | — | — | 209 | 305 | 2,231 | 1,137 | — | — | 3,882 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | — | 776 | 455 | 247 | 626 | 664 | — | 2,768 | ||||||||||||||||||||||||||||||||||||||||||||
Total commercial loans | $ | 379,494 | $ | 116,911 | $ | 306,644 | $ | 213,528 | $ | 203,854 | $ | 123,041 | $ | 948,281 | $ | 2,799 | $ | 2,294,552 |
Commercial Real Estate and Commercial Term Loans by PD and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | $ | 261,885 | $ | 491,522 | $ | 431,791 | $ | 266,942 | $ | 254,527 | $ | 763,101 | $ | 11,114 | $ | — | $ | 2,480,882 | |||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 4,016 | 34,360 | 5,794 | 10,558 | 16,961 | 33,734 | — | — | 105,423 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | 25,844 | 11,480 | 10,517 | 10,782 | 29,598 | 559 | — | 88,780 | ||||||||||||||||||||||||||||||||||||||||||||
Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 950,089 | 1,610,011 | 878,233 | 634,268 | 349,549 | 516,452 | — | — | 4,938,602 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 38,892 | 59,500 | 12,181 | 19,751 | 10,917 | 13,606 | — | — | 154,847 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 38,663 | 9,963 | 11,339 | 12,479 | 3,814 | 1,229 | 420 | — | 77,907 | ||||||||||||||||||||||||||||||||||||||||||||
Construction and land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 55,785 | 40,860 | 4,604 | 11,238 | — | 6,412 | 784 | — | 119,683 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 1,123 | 41,046 | 9,197 | 3,601 | — | 260 | — | — | 55,227 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 401 | 62,853 | 59,512 | 3,786 | 20,531 | — | — | — | 147,083 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 496 | 10,400 | 12,558 | 14,497 | 7,078 | 10,032 | — | — | 55,061 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | — | — | — | 1,012 | — | — | — | — | 1,012 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | 158 | 589 | — | — | 511 | — | — | 1,258 | ||||||||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 1,351,350 | 2,386,517 | 1,437,278 | 988,649 | 674,159 | 1,374,935 | 12,877 | — | 8,225,765 |
58
Commercial Real Estate and Commercial Term Loans by PD and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 286,745 | 367,269 | 274,512 | 295,809 | 202,282 | 422,614 | 10,393 | 246 | 1,859,870 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 8,769 | 42,310 | 60,222 | 28,421 | 23,875 | 44,855 | 3,875 | — | 212,327 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | 16,096 | 5,376 | 7,459 | 4,263 | 8,409 | 250 | — | 41,853 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 37,262 | 79,926 | 65,619 | 96,672 | 19,046 | 22,927 | — | — | 321,452 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 7,587 | 1,650 | 3,274 | 327 | 5,627 | 4,093 | — | — | 22,558 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 442 | 1,512 | — | — | 1,968 | — | — | — | 3,922 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 3,253 | 7,637 | 11,840 | 15,069 | 5,707 | 18,742 | — | — | 62,248 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | — | — | 768 | 989 | 2,780 | 4,882 | — | — | 9,419 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | — | 1,384 | 1,987 | 1,514 | 3,043 | — | — | 7,928 | ||||||||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | 344,058 | 516,400 | 422,995 | 446,733 | 267,062 | 529,565 | 14,518 | 246 | 2,541,577 | ||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 70,233 | 205,395 | 99,178 | 193,046 | 36,957 | 62,682 | 394,124 | 5,051 | 1,066,666 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 49,883 | 50,743 | 35,813 | 13,427 | 12,922 | 13,948 | 322,123 | 2,469 | 501,328 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | 7,701 | 7,540 | 29,078 | 4,485 | 4,574 | 8,350 | 136,253 | 2,859 | 200,840 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise non-real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 21,409 | 145,392 | 88,171 | 38,010 | 21,956 | 23,479 | — | 502 | 338,919 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | 6,198 | 15,754 | 5,454 | 8,164 | 18,415 | 3,626 | — | — | 57,611 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | 16,836 | 6,612 | 18,655 | 1,638 | 3,165 | 1,361 | — | 48,267 | ||||||||||||||||||||||||||||||||||||||||||||
SBA not secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
0% - 5.00% | 407 | 2,257 | 910 | 1,078 | 441 | 2,782 | — | — | 7,875 | ||||||||||||||||||||||||||||||||||||||||||||
>5.00% - 10.00% | — | — | 648 | 1,596 | 169 | 1,652 | — | 259 | 4,324 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 10% | — | 83 | 357 | 1,856 | 340 | 415 | 707 | — | 3,758 | ||||||||||||||||||||||||||||||||||||||||||||
Total commercial loans | $ | 155,831 | $ | 444,000 | $ | 266,221 | $ | 280,317 | $ | 97,412 | $ | 120,099 | $ | 854,568 | $ | 11,140 | $ | 2,229,588 |
59
A significant driver in the ACL for loans in the investor real estate secured and business real estate secured segments is estimated loan to value (“LTV”). The following tables summarize the amortized cost of loans in these segments by current estimated LTV and by year of origination as of the dates indicated:
Term Loans by LTV and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | $ | 291,909 | $ | 142,444 | $ | 188,747 | $ | 208,825 | $ | 127,768 | $ | 589,484 | $ | 9,599 | — | $ | 1,558,776 | ||||||||||||||||||||||||||||||||||||
>55-65% | 220,116 | 89,488 | 193,461 | 104,301 | 79,960 | 204,683 | 525 | — | 892,534 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 53,580 | 36,801 | 64,165 | 146,402 | 8,118 | 32,513 | — | — | 341,579 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | — | — | 20,062 | 4,810 | 3,826 | 1,478 | — | — | 30,176 | ||||||||||||||||||||||||||||||||||||||||||||
Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 260,469 | 219,510 | 314,269 | 211,795 | 207,913 | 299,265 | 218 | — | 1,513,439 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 719,640 | 421,994 | 580,084 | 229,609 | 158,927 | 226,977 | — | — | 2,337,231 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 703,894 | 367,815 | 442,661 | 85,883 | 133,716 | 85,918 | — | — | 1,819,887 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 10,444 | 3,027 | 11,549 | — | 1,849 | 8,240 | — | — | 35,109 | ||||||||||||||||||||||||||||||||||||||||||||
Construction and land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 82,458 | 120,912 | 42,774 | 4,183 | 3,996 | 3,607 | 48 | — | 257,978 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | — | 4,278 | 6,630 | 17,951 | — | — | — | — | 28,859 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 3,649 | — | 2,329 | — | — | — | — | — | 5,978 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | — | — | 9 | 637 | 695 | 2,177 | — | — | 3,518 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | — | — | 2,407 | 1,958 | 1,910 | 2,853 | — | — | 9,128 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 130 | — | 3,870 | 4,606 | 4,461 | 5,544 | — | — | 18,611 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | — | 499 | 1,096 | 5,227 | 8,769 | 2,598 | — | — | 18,189 | ||||||||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 2,346,289 | 1,406,768 | 1,874,113 | 1,026,187 | 741,908 | 1,465,337 | 10,390 | — | 8,870,992 | ||||||||||||||||||||||||||||||||||||||||||||
Business loan secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 296,313 | 108,338 | 123,527 | 100,865 | 139,455 | 383,599 | 3,211 | 300 | 1,155,608 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 161,368 | 73,789 | 66,407 | 70,311 | 46,314 | 99,171 | — | — | 517,360 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 126,160 | 87,909 | 123,495 | 52,679 | 16,909 | 37,740 | — | — | 444,892 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 51,628 | 32,647 | 9,684 | 5,801 | 8,217 | 16,327 | — | — | 124,304 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 17,039 | 23,695 | 9,052 | 12,776 | 14,889 | 19,988 | — | — | 97,439 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 39,872 | 2,622 | 11,055 | 10,137 | 4,804 | 10,129 | — | — | 78,619 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 23,262 | 15,150 | 36,521 | 8,632 | 15,563 | 10,951 | — | — | 110,079 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 17,711 | 1,865 | 3,144 | 12,761 | 31,645 | 1,218 | — | — | 68,344 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 2,547 | 591 | 1,897 | 1,127 | 5,146 | 14,667 | 1,361 | — | 27,336 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 186 | 556 | 199 | 1,513 | 1,306 | 7,513 | — | — | 11,273 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 703 | 328 | 3,111 | 5,254 | 4,104 | 3,586 | — | — | 17,086 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 353 | 893 | 2,326 | 3,930 | 3,674 | 3,066 | — | — | 14,242 | ||||||||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | $ | 737,142 | $ | 348,383 | $ | 390,418 | $ | 285,786 | $ | 292,026 | $ | 607,955 | $ | 4,572 | $ | 300 | $ | 2,666,582 |
60
Term Loans by LTV and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | $ | 138,007 | $ | 229,272 | $ | 182,385 | $ | 136,355 | $ | 189,848 | $ | 588,230 | $ | 11,114 | $ | — | $ | 1,475,211 | |||||||||||||||||||||||||||||||||||
>55-65% | 101,434 | 217,210 | 92,015 | 130,024 | 78,470 | 204,161 | 559 | — | 823,873 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 26,460 | 102,494 | 169,878 | 18,876 | 13,952 | 29,506 | — | — | 361,166 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | — | 2,750 | 4,787 | 2,762 | — | 4,536 | — | — | 14,835 | ||||||||||||||||||||||||||||||||||||||||||||
Multifamily | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 218,833 | 345,519 | 294,464 | 233,997 | 84,530 | 269,906 | — | — | 1,447,249 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 381,737 | 731,408 | 381,282 | 215,170 | 152,066 | 189,151 | 420 | — | 2,051,234 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 427,074 | 583,078 | 215,389 | 215,452 | 127,684 | 66,457 | — | — | 1,635,134 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | — | 19,469 | 10,618 | 1,879 | — | 5,773 | — | — | 37,739 | ||||||||||||||||||||||||||||||||||||||||||||
Construction and land | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 57,309 | 105,308 | 36,068 | 18,625 | 20,531 | 6,672 | 784 | — | 245,297 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | — | 36,113 | 23,770 | — | — | — | — | — | 59,883 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | — | 3,338 | 13,475 | — | — | — | — | — | 16,813 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | — | 2,066 | 649 | 673 | 317 | 778 | — | — | 4,483 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | — | 2,427 | 1,639 | 4,008 | 879 | 4,354 | — | — | 13,307 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | — | 3,897 | 3,882 | 3,482 | 4,519 | 1,884 | — | — | 17,664 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 496 | 2,168 | 6,977 | 7,346 | 1,363 | 3,527 | — | — | 21,877 | ||||||||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 1,351,350 | 2,386,517 | 1,437,278 | 988,649 | 674,159 | 1,374,935 | 12,877 | — | 8,225,765 | ||||||||||||||||||||||||||||||||||||||||||||
Business loan secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 96,803 | 160,605 | 157,868 | 179,791 | 131,795 | 328,188 | 14,518 | 246 | 1,069,814 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 72,044 | 91,028 | 98,176 | 94,712 | 65,120 | 90,548 | — | — | 511,628 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 71,692 | 152,920 | 79,106 | 43,832 | 31,303 | 31,493 | — | — | 410,346 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 54,975 | 21,122 | 4,960 | 13,354 | 2,202 | 25,649 | — | — | 122,262 | ||||||||||||||||||||||||||||||||||||||||||||
Franchise real estate secured | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 20,801 | 10,470 | 13,864 | 20,956 | 9,189 | 16,213 | — | — | 91,493 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 2,689 | 9,955 | 16,001 | 19,102 | 6,855 | 2,333 | — | — | 56,935 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 19,349 | 51,719 | 23,258 | 9,153 | 10,597 | 7,236 | — | — | 121,312 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 2,452 | 10,944 | 15,770 | 47,788 | — | 1,238 | — | — | 78,192 | ||||||||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
55% and below | 1,825 | 1,626 | 5,332 | 5,495 | 3,615 | 13,582 | — | — | 31,475 | ||||||||||||||||||||||||||||||||||||||||||||
>55-65% | 246 | 513 | 1,795 | 1,094 | 3,586 | 5,448 | — | — | 12,682 | ||||||||||||||||||||||||||||||||||||||||||||
>65-75% | 264 | 3,142 | 1,515 | 3,968 | 1,586 | 4,043 | — | — | 14,518 | ||||||||||||||||||||||||||||||||||||||||||||
Greater than 75% | 918 | 2,356 | 5,350 | 7,488 | 1,214 | 3,594 | — | — | 20,920 | ||||||||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | $ | 344,058 | $ | 516,400 | $ | 422,995 | $ | 446,733 | $ | 267,062 | $ | 529,565 | $ | 14,518 | $ | 246 | $ | 2,541,577 |
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The following tables present the FICO bands, at origination, for the retail segment of the loan portfolio as of the dates indicated:
Term Loans by FICO and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Single family residential | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Greater than 740 | $ | 20,201 | $ | 3,518 | $ | 1,967 | $ | 1,599 | $ | 3,319 | $ | 53,609 | $ | 17,213 | — | $ | 101,426 | ||||||||||||||||||||||||||||||||||||
>680 - 740 | — | — | — | 34 | 3,172 | 9,756 | 5,271 | — | 18,233 | ||||||||||||||||||||||||||||||||||||||||||||
>580 - 680 | — | — | — | — | 453 | 9,301 | 757 | — | 10,511 | ||||||||||||||||||||||||||||||||||||||||||||
Less than 580 | — | — | — | — | 10 | 14,096 | 33 | — | 14,139 | ||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Greater than 740 | 27 | 30 | 37 | 22 | 12 | 2,500 | 1,325 | — | 3,953 | ||||||||||||||||||||||||||||||||||||||||||||
>680 - 740 | 1 | — | 19 | — | 3 | 441 | 1,876 | — | 2,340 | ||||||||||||||||||||||||||||||||||||||||||||
>580 - 680 | — | — | 7 | — | — | 59 | 49 | — | 115 | ||||||||||||||||||||||||||||||||||||||||||||
Less than 580 | — | — | — | — | — | — | 18 | — | 18 | ||||||||||||||||||||||||||||||||||||||||||||
Total retail loans | $ | 20,229 | $ | 3,548 | $ | 2,030 | $ | 1,655 | $ | 6,969 | $ | 89,762 | $ | 26,542 | $ | — | $ | 150,735 |
Term Loans by FICO and Vintage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving | Revolving Converted to Term During the Period | Total | ||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Single family residential | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Greater than 740 | $ | 10,794 | $ | 6,531 | $ | 12,679 | $ | 8,846 | $ | 28,222 | $ | 81,838 | $ | 19,588 | — | $ | 168,498 | ||||||||||||||||||||||||||||||||||||
>680 - 740 | — | 1,183 | 1,303 | 4,732 | 2,614 | 15,624 | 6,685 | — | 32,141 | ||||||||||||||||||||||||||||||||||||||||||||
>580 - 680 | — | — | — | 461 | 3,132 | 7,473 | 864 | — | 11,930 | ||||||||||||||||||||||||||||||||||||||||||||
Less than 580 | — | — | — | — | — | 19,970 | 35 | — | 20,005 | ||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Greater than 740 | 52 | 69 | 31 | 22 | 1 | 2,609 | 2,198 | — | 4,982 | ||||||||||||||||||||||||||||||||||||||||||||
>680 - 740 | — | 35 | 6 | 3 | — | 469 | 1,227 | — | 1,740 | ||||||||||||||||||||||||||||||||||||||||||||
>580 - 680 | — | 15 | — | — | 1 | 95 | 56 | — | 167 | ||||||||||||||||||||||||||||||||||||||||||||
Less than 580 | — | — | — | — | — | 13 | 27 | — | 40 | ||||||||||||||||||||||||||||||||||||||||||||
Total retail loans | $ | 10,846 | $ | 7,833 | $ | 14,019 | $ | 14,064 | $ | 33,970 | $ | 128,091 | $ | 30,680 | $ | — | $ | 239,503 |
Note 8 – Goodwill and Other Intangible Assets
The Company had goodwill of $901.3 million and $898.6 million at September 30, 2021 and December 31, 2020, respectively. The Company recorded adjustments to goodwill associated with the acquisition of Opus in the amount of $2.7 million during the first six months of 2021, within the one-year measurement period subsequent to the acquisition date of June 1, 2020. These adjustments largely relate to the finalization of the short-year Opus tax returns. During the nine months ended September 30, 2020, the additions to goodwill included $92.8 million associated with the acquisition of Opus and adjustments to goodwill in the amount of $2.7 million during the third quarter of 2020, within the one-year measurement period subsequent to the acquisition date. During the second quarter of 2021, the Company finalized its fair value analysis of the acquired assets and assumed liabilities associated with the Opus acquisition.
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September 30, | September 30, | ||||||||||
(Dollars in thousands) | 2021 | 2020 | |||||||||
Balance, beginning of year | $ | 898,569 | $ | 808,322 | |||||||
Goodwill acquired during the year | — | 92,844 | |||||||||
Purchase accounting adjustments | 2,743 | (2,732) | |||||||||
Balance, end of year | $ | 901,312 | $ | 898,434 | |||||||
Accumulated impairment losses at end of year | $ | — | $ | — |
The Company’s policy is to assess goodwill for impairment on an annual basis during the fourth quarter of each year, and more frequently if events or circumstances lead management to believe the value of goodwill may be impaired.
The Company had other intangible assets of $73.5 million at September 30, 2021, consisting of $70.7 million in core deposit intangibles and $2.8 million in customer relationship intangibles. The Company had other intangibles assets of $85.5 million at December 31, 2020, consisting of $82.5 million in core deposit intangibles and $3.0 million in customer relationship intangibles. The following table summarizes the change in the balance of core deposit intangibles and customer relationship intangibles, and the related accumulated amortization for the periods indicated below:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
Gross amount of intangible assets: | |||||||||||||||||||||||||||||
Beginning balance | $ | 145,212 | $ | 145,212 | $ | 145,212 | $ | 145,212 | $ | 125,945 | |||||||||||||||||||
Additions due to acquisitions | — | — | — | — | 19,267 | ||||||||||||||||||||||||
Ending balance | 145,212 | 145,212 | 145,212 | 145,212 | 145,212 | ||||||||||||||||||||||||
Accumulated amortization: | |||||||||||||||||||||||||||||
Beginning balance | (67,849) | (63,848) | (50,662) | (59,705) | (42,633) | ||||||||||||||||||||||||
Amortization | (3,912) | (4,001) | (4,538) | (12,056) | (12,567) | ||||||||||||||||||||||||
Ending balance | (71,761) | (67,849) | (55,200) | (71,761) | (55,200) | ||||||||||||||||||||||||
Net intangible assets | $ | 73,451 | $ | 77,363 | $ | 90,012 | $ | 73,451 | $ | 90,012 |
The Company amortizes core deposit intangibles and customer relationship intangibles based on the projected useful lives of the related deposits in the case of core deposit intangibles, and over the projected useful lives of the related client relationships in the case of customer relationship intangibles. The amortization periods typically range from to eleven years. The estimated aggregate amortization expense related to our core deposit intangible and customer relationship intangible assets for each of the next five years succeeding December 31, 2020, in order from the present, is $15.9 million, $14.0 million, $12.3 million, $11.1 million, and $10.0 million. The Company analyzes core deposit intangibles and customer relationship intangibles annually for impairment, or sooner if events and circumstances indicate possible impairment. Factors that may contribute to impairment include customer attrition and run-off. Management is unaware of any events and/or circumstances that would indicate a possible impairment to the core deposit intangibles or customer relationship intangibles as of September 30, 2021.
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Note 9 – Subordinated Debentures
On April 15, 2021, the Company redeemed the subordinated notes totaling $25.0 million that the Company assumed as part of the acquisition of Plaza Bancorp, Inc. in 2017. Prior to redemption, such subordinated notes carried a fixed interest rate of 7.125% and were scheduled to mature on June 26, 2025. These subordinated notes were called at 103% of the principal amount of the notes, plus accrued and unpaid interest, for an aggregate amount of $25.8 million. The Company recorded a loss on early debt extinguishment of $647,000 after considering a $103,000 fair value mark related to purchase accounting adjustments.
On July 1, 2021, the Company redeemed $135.0 million subordinated notes acquired from Opus and $5.2 million junior subordinated debt associated with Heritage Oaks Capital Trust II. Prior to redemption, the subordinated notes and junior subordinated debt securities carried an interest rate of 5.50% and 1.92%, respectively. On July 7, 2021, the Company redeemed $5.2 million junior subordinated debt associated with Santa Lucia Bancorp (CA) Capital Trust. Prior to redemption, the junior subordinated debt securities carried an interest rate of 1.66%. The subordinated notes and junior subordinated debt were redeemed at par, plus accrued and unpaid interest, for an aggregate amount of $149.2 million. The Company recorded a net gain on early debt extinguishment of $970,000 related to purchase accounting adjustments. Subsequent to the redemptions of these junior subordinated debt securities, the Company’s unconsolidated Delaware statutory trust subsidiaries, Heritage Oaks Capital Trust II and Santa Lucia Bancorp (CA) Capital Trust, that were used as business trusts for the purpose of issuing trust preferred securities to third party investors were dissolved.
As of September 30, 2021, the Company had three issuances of subordinated notes with an aggregate carrying value of $330.4 million and a weighted interest rate of 5.33%, compared with five issuances of subordinated notes and two issuances of junior subordinated debt securities, with an aggregate carrying value of $501.5 million and a weighted interest rate of 5.38% at December 31, 2020.
The following table summarizes our outstanding subordinated debentures as of the dates indicated:
September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Stated Maturity | Current Interest Rate | Current Principal Balance | Carrying Value | ||||||||||||||||||||||||||||
Subordinated notes | ||||||||||||||||||||||||||||||||
Subordinated notes due 2024, 5.75% per annum | September 3, 2024 | 5.75 | % | $ | 60,000 | $ | 59,641 | $ | 59,552 | |||||||||||||||||||||||
Subordinated notes due 2029, 4.875% per annum until May 15, 2024, 3-month LIBOR +2.5% thereafter | May 15, 2029 | 4.875 | % | 125,000 | 123,068 | 122,877 | ||||||||||||||||||||||||||
Subordinated notes due 2030, 5.375% per annum until June 15, 2025, 3-month SOFR +5.170% thereafter | June 15, 2030 | 5.375 | % | 150,000 | 147,699 | 147,501 | ||||||||||||||||||||||||||
Subordinated notes due 2025, 7.125% per annum | June 26, 2025 | — | % | — | — | 25,109 | ||||||||||||||||||||||||||
Subordinated notes due 2026, 5.50% per annum until June 30 2021, 3-month LIBOR +4.285% thereafter | July 1, 2026 | — | % | — | — | 138,371 | ||||||||||||||||||||||||||
Total subordinated notes | 335,000 | 330,408 | 493,410 | |||||||||||||||||||||||||||||
Subordinated debt | ||||||||||||||||||||||||||||||||
Heritage Oaks Capital Trust II (junior subordinated debt), 3-month LIBOR+1.72% | January 1, 2037 | — | % | — | — | 4,121 | ||||||||||||||||||||||||||
Santa Lucia Bancorp (CA) Capital Trust (junior subordinated debt), 3-month LIBOR+1.48% | July 7, 2036 | — | % | — | — | 3,980 | ||||||||||||||||||||||||||
Total subordinated debt | — | — | 8,101 | |||||||||||||||||||||||||||||
Total subordinated debentures | $ | 335,000 | $ | 330,408 | $ | 501,511 |
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In connection with the various issuances of subordinated notes, the Corporation obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned investment grade ratings of BBB+ and BBB for the Corporation’s senior unsecured debt and subordinated debt, respectively, and a deposit and senior unsecured debt rating of A- and subordinated debt of BBB+ for the Bank. The Corporation’s and Bank’s ratings were reaffirmed in June 2021 by KBRA.
For additional information on the Company’s subordinated debentures, see “Note 14 — Subordinated Debentures” to the consolidated financial statements of the Company’s 2020 Form 10-K.
For regulatory capital purposes, subordinated notes and the trust preferred securities qualify as Tier 2 capital. The redemption of subordinated notes totaling $25.0 million during the second quarter of 2021 reduced the Company’s Tier 2 capital by approximately $20.0 million. The redemption of subordinated notes and trust preferred securities totaling $145.4 million during the third quarter of 2021 reduced the Company’s Tier 2 capital by approximately $146.0 million. Following these redemptions, the regulatory total capital ratios of the Company and the Bank continued to exceed regulatory minimums to be well-capitalized and the fully phased-in capital conservation buffer.
Note 10 – Earnings per Share
The Company’s restricted stock awards contain non-forfeitable rights to dividends and therefore are considered participating securities. The Company calculates basic and diluted earnings per common share using the two-class method.
Under the two-class method, distributed and undistributed earnings allocable to participating securities are deducted from net income to determine net income allocable to common shareholders, which is then used in the numerator of both basic and diluted earnings per share calculations. Basic earnings per common share is computed by dividing net income allocable to common shareholders by the weighted average number of common shares outstanding for the reporting period, excluding outstanding participating securities. Diluted earnings per common share is computed by dividing net income allocable to common shareholders by the weighted average number of common shares outstanding over the reporting period, adjusted to include the effect of potentially dilutive common shares, but excludes awards considered participating securities. The computation of diluted earnings per common share excludes the impact of the assumed exercise or issuance of securities that would have an anti-dilutive effect.
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The following tables set forth the Corporation’s earnings per share calculations for the periods indicated:
Three Months Ended | |||||||||||||||||
(Dollars in thousands, except per share data) | September 30, 2021 | June 30, 2021 | September 30, 2020 | ||||||||||||||
Basic | |||||||||||||||||
Net income | $ | 90,088 | $ | 96,302 | $ | 66,566 | |||||||||||
Less: dividends and undistributed earnings allocated to participating securities | (937) | (1,034) | (612) | ||||||||||||||
Net income allocated to common stockholders | $ | 89,151 | $ | 95,268 | $ | 65,954 | |||||||||||
Weighted average common shares outstanding | 93,549,639 | 93,635,392 | 93,529,967 | ||||||||||||||
Basic earnings per common share | $ | 0.95 | $ | 1.02 | $ | 0.71 | |||||||||||
Diluted | |||||||||||||||||
Net income allocated to common stockholders | $ | 89,151 | $ | 95,268 | $ | 65,954 | |||||||||||
Weighted average common shares outstanding | 93,549,639 | 93,635,392 | 93,529,967 | ||||||||||||||
Diluted effect of share-based compensation | 511,085 | 582,636 | 189,200 | ||||||||||||||
Weighted average diluted common shares | 94,060,724 | 94,218,028 | 93,719,167 | ||||||||||||||
Diluted earnings per common share | $ | 0.95 | $ | 1.01 | $ | 0.70 |
Nine Months Ended | |||||||||||
(Dollars in thousands, except per share data) | September 30, 2021 | September 30, 2020 | |||||||||
Basic | |||||||||||
Net income (loss) | $ | 255,058 | $ | (6,785) | |||||||
Less: dividends and undistributed earnings allocated to participating securities | (2,641) | (564) | |||||||||
Net income (loss) allocated to common stockholders | $ | 252,417 | $ | (7,349) | |||||||
Weighted average common shares outstanding | 93,571,468 | 74,391,688 | |||||||||
Basic earnings (loss) per common share | $ | 2.70 | $ | (0.10) | |||||||
Diluted | |||||||||||
Net income (loss) allocated to common stockholders | $ | 252,417 | $ | (7,349) | |||||||
Weighted average common shares outstanding | 93,571,468 | 74,391,688 | |||||||||
Diluted effect of share-based compensation | 518,939 | — | |||||||||
Weighted average diluted common shares | 94,090,407 | 74,391,688 | |||||||||
Diluted earnings (loss) per common share | $ | 2.68 | $ | (0.10) |
The impact of stock options, which are anti-dilutive, are excluded from the computations of diluted earnings per share. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases. For the three and nine months ended September 30, 2021 and the three months ended June 30, 2021 there were no potential common shares that were anti-dilutive. For the three months ended September 30, 2020, there were 27,815 potential common shares that were anti-dilutive. As a result of incurring a net loss for the nine months ended September 30, 2020, potential common shares of 173,235 were excluded from diluted loss per share because the effect would have been anti-dilutive.
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Note 11 – Fair Value of Financial Instruments
The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value are discussed below.
In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.), or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.
Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.
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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of both the general and specific valuation methodologies used to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.
Investment Securities – Investment securities are generally valued based upon quotes obtained from independent third-party pricing services, which use evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the market place and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and, accordingly, the Company categorized its investment portfolio within Level 2 of the fair value hierarchy.
Interest Rate Swaps – The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certain fixed-rate loans. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a market standard discounted cash flow approach. The Company incorporates credit value adjustments on derivatives to properly reflect the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The Company has determined that the observable nature of the majority of inputs used in deriving the fair value of these derivative contracts fall within Level 2 of the fair value hierarchy, and the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the valuation of interest rate swaps is classified as Level 2 of the fair value hierarchy.
Equity Warrant Assets – The Company acquired equity warrant assets as a result of acquisition of Opus. Opus received equity warrant assets through its lending activities as part of loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The fair value of equity warrant assets is determined using a Black-Scholes option pricing model and are classified as Level 3 with the fair value hierarchy due to the extent of unobservable inputs. The key assumptions used in determining the fair value include the exercise price of the warrants, valuation of the underlying entity's outstanding stock, expected term, risk-free interest rate, marketability discount for private company warrants, and price volatility.
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The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at the dates indicated:
September 30, 2021 | ||||||||||||||||||||||||||
Fair Value Measurement Using | ||||||||||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||
U.S. Treasury | $ | — | $ | 79,342 | $ | — | $ | 79,342 | ||||||||||||||||||
Agency | — | 530,093 | — | 530,093 | ||||||||||||||||||||||
Corporate | — | 386,391 | — | 386,391 | ||||||||||||||||||||||
Municipal bonds | — | 1,255,866 | — | 1,255,866 | ||||||||||||||||||||||
Collateralized mortgage obligations | — | 662,231 | — | 662,231 | ||||||||||||||||||||||
Mortgage-backed securities | — | 1,795,892 | — | 1,795,892 | ||||||||||||||||||||||
Total securities available-for-sale | $ | — | $ | 4,709,815 | $ | — | $ | 4,709,815 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate swaps | $ | — | $ | 6,747 | $ | — | $ | 6,747 | ||||||||||||||||||
Equity warrants | — | — | 1,895 | 1,895 | ||||||||||||||||||||||
Total derivative assets | $ | — | $ | 6,747 | $ | 1,895 | $ | 8,642 | ||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||
Derivative liabilities | $ | — | $ | 5,819 | $ | — | $ | 5,819 |
December 31, 2020 | ||||||||||||||||||||||||||
Fair Value Measurement Using | ||||||||||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||
U.S. Treasury | $ | — | $ | 32,533 | $ | — | $ | 32,533 | ||||||||||||||||||
Agency | — | 690,386 | — | 690,386 | ||||||||||||||||||||||
Corporate | — | 415,308 | — | 415,308 | ||||||||||||||||||||||
Municipal bonds | — | 1,446,019 | — | 1,446,019 | ||||||||||||||||||||||
Collateralized mortgage obligations | — | 513,366 | — | 513,366 | ||||||||||||||||||||||
Mortgage-backed securities | — | 833,503 | — | 833,503 | ||||||||||||||||||||||
Total securities available-for-sale | $ | — | $ | 3,931,115 | $ | — | $ | 3,931,115 | ||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||
Interest rate swaps | $ | — | $ | 12,053 | $ | — | $ | 12,053 | ||||||||||||||||||
Equity warrants | — | — | 1,914 | 1,914 | ||||||||||||||||||||||
Total derivative assets | $ | — | $ | 12,053 | $ | 1,914 | $ | 13,967 | ||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||
Derivative liabilities | $ | — | $ | 12,066 | $ | — | $ | 12,066 |
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The following table is a reconciliation of the fair value of the equity warrants that are classified as Level 3 and measured on a recurring basis as of:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Beginning balance | $ | 1,903 | $ | 1,952 | $ | 1,914 | $ | 5,162 | |||||||||||||||
Change in fair value (1) | (8) | (32) | (19) | (35) | |||||||||||||||||||
Sales | — | — | — | (3,207) | |||||||||||||||||||
Ending balance | $ | 1,895 | $ | 1,920 | $ | 1,895 | $ | 1,920 | |||||||||||||||
______________________________
(1) The changes in fair value are included in other income on the consolidated statement of income.
The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a recurring basis at the dates indicated.
September 30, 2021 | |||||||||||||||||||||||||||||||||||
Range | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Valuation Technique(s) | Unobservable Input(s) | Min | Max | Weighted Average | |||||||||||||||||||||||||||||
Equity warrants | $ | 1,895 | Black-Scholes option pricing model | Volatility Risk free interest rate Marketability discount | 30.00% 0.19% 5.50% | 35.00% 0.76% 16.00% | 31.15% 0.32% 13.59% |
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Range | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Valuation Technique(s) | Unobservable Input(s) | Min | Max | Weighted Average | |||||||||||||||||||||||||||||
Equity warrants | $ | 1,914 | Black-Scholes option pricing model | Volatility Risk free interest rate Marketability discount | 30.00% 0.13% 6.00% | 35.00% 0.36% 16.00% | 31.19% 0.18% 13.51% |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Individually Evaluated Loans – A loan is individually evaluated for expected credit losses when it does not share similar risk characteristics with other loans. Individually evaluated loans are measured based on the fair value of the underlying collateral or the discounted expected future cash flows. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate, and cash. The Company measures impairment on all nonaccrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost.
The fair value of individually evaluated loans were determined using Level 3 assumptions, and represents individually evaluated loan balances for which a specific reserve has been established or on which a write down has been taken. For real estate loans, generally, the Company obtains third party appraisals (or property valuations) and/or collateral audits in conjunction with internal analysis based on historical experience on its individually evaluated loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for individually evaluated loans, the Company will then discount the valuation to cover both market price fluctuations and selling costs, typically ranging from 7% to 10% of the collateral value, that the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions, and management’s expertise and knowledge of the client and client’s business.
70
At September 30, 2021, the Company’s individually evaluated collateral dependent loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisals available to management. The Company completed partial charge-offs on certain individually evaluated loans based on recent real estate or property appraisals and released the related reserves during the nine months ended September 30, 2021.
The following table presents our assets measured at fair value on a nonrecurring basis at the dates indicated.
September 30, 2021 | ||||||||||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||
Collateral dependent loans | $ | — | $ | — | $ | 9,348 | $ | 9,348 | ||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||
Collateral dependent loans | $ | — | $ | — | $ | 4,077 | $ | 4,077 | ||||||||||||||||||
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The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a nonrecurring basis at the dates indicated.
September 30, 2021 | |||||||||||||||||||||||||||||||||||
Range | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Valuation Technique(s) | Unobservable Input(s) | Min | Max | Weighted Average | |||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 7,045 | Fair value of collateral | Collateral discount and cost to sell | 7.00% | 7.00% | 7.00% | ||||||||||||||||||||||||||||
SBA secured by real estate (1) | 976 | Fair value of collateral | Collateral discount and cost to sell | 10.00% | 10.00% | 10.00% | |||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 240 | Fair value of collateral | Collateral discount and cost to sell | 20.00% | 20.00% | 20.00% | |||||||||||||||||||||||||||||
Franchise non-real estate secured | 1,087 | Fair value of collateral | Collateral discount and cost to sell | —% | 100.00% | 10.32% | |||||||||||||||||||||||||||||
Total individually evaluated loans | $ | 9,348 | |||||||||||||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Range | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Valuation Technique(s) | Unobservable Input(s) | Min | Max | Weighted Average | |||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 198 | Fair value of collateral | Collateral discount and cost to sell | 10.00% | 10.00% | 10.00% | ||||||||||||||||||||||||||||
SBA secured by real estate (1) | 746 | Fair value of collateral | Collateral discount and cost to sell | 10.00% | 10.00% | 10.00% | |||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||
SBA secured by real estate (2) | 386 | Fair value of collateral | Collateral discount and cost to sell | 7.00% | 10.00% | 9.09% | |||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 2,040 | Fair value of collateral | Collateral discount and cost to sell | 7.00% | 10.00% | 9.06% | |||||||||||||||||||||||||||||
SBA non-real estate secured | 707 | Fair value of collateral | Collateral discount and cost to sell | 7.00% | 7.00% | 7.00% | |||||||||||||||||||||||||||||
Total individually evaluated loans | $ | 4,077 |
______________________________
(1) SBA loans that are collateralized by hotel/motel real property.
(2) SBA loans that are collateralized by real property other than hotel/motel real property.
72
Fair Values of Financial Instruments
The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated, representing an exit price.
At September 30, 2021 | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 322,320 | $ | 322,320 | $ | — | $ | — | $ | 322,320 | ||||||||||||||||||||||
Interest-bearing time deposits with financial institutions | 2,708 | 2,708 | — | — | 2,708 | |||||||||||||||||||||||||||
Investments held-to-maturity | 170,576 | — | 169,154 | — | 169,154 | |||||||||||||||||||||||||||
Investment securities available-for-sale | 4,709,815 | — | 4,709,815 | — | 4,709,815 | |||||||||||||||||||||||||||
Loans held for sale | 8,100 | — | 8,899 | — | 8,899 | |||||||||||||||||||||||||||
Loans held for investment, net | 13,982,861 | — | — | 14,121,193 | 14,121,193 | |||||||||||||||||||||||||||
Derivative assets | 8,642 | — | 6,747 | 1,895 | 8,642 | |||||||||||||||||||||||||||
Accrued interest receivable | 63,228 | 63,228 | — | — | 63,228 | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Deposit accounts | $ | 17,469,999 | $ | 16,356,929 | $ | 1,167,405 | $ | — | $ | 17,524,334 | ||||||||||||||||||||||
FHLB advances | 150,000 | — | 150,000 | — | 150,000 | |||||||||||||||||||||||||||
Subordinated debentures | 330,408 | — | 367,515 | — | 367,515 | |||||||||||||||||||||||||||
Derivative liabilities | 5,819 | — | 5,819 | — | 5,819 | |||||||||||||||||||||||||||
Accrued interest payable | 5,065 | 5,065 | — | — | 5,065 |
At December 31, 2020 | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Carrying Amount | Level 1 | Level 2 | Level 3 | Estimated Fair Value | |||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 880,766 | $ | 880,766 | $ | — | $ | — | $ | 880,766 | ||||||||||||||||||||||
Interest-bearing time deposits with financial institutions | 2,845 | 2,845 | — | — | 2,845 | |||||||||||||||||||||||||||
Investments held-to-maturity | 23,732 | — | 25,013 | — | 25,013 | |||||||||||||||||||||||||||
Investment securities available-for-sale | 3,931,115 | — | 3,931,115 | — | 3,931,115 | |||||||||||||||||||||||||||
Loans held for sale | 601 | — | 645 | — | 645 | |||||||||||||||||||||||||||
Loans held for investment, net | 13,236,433 | — | — | 13,351,092 | 13,351,092 | |||||||||||||||||||||||||||
Derivative assets | 13,967 | — | 12,053 | 1,914 | 13,967 | |||||||||||||||||||||||||||
Accrued interest receivable | 74,574 | 74,574 | — | — | 74,574 | |||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Deposit accounts | $ | 16,214,177 | $ | 14,587,335 | $ | 1,631,047 | $ | — | $ | 16,218,382 | ||||||||||||||||||||||
FHLB advances | 31,000 | — | 31,564 | — | 31,564 | |||||||||||||||||||||||||||
Subordinated debentures | 501,511 | — | 544,436 | — | 544,436 | |||||||||||||||||||||||||||
Derivative liabilities | 12,066 | — | 12,066 | — | 12,066 | |||||||||||||||||||||||||||
Accrued interest payable | 6,569 | 6,569 | — | — | 6,569 |
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Note 12 – Derivative Instruments
The Company uses derivative instruments to manage its exposure to market risks, including interest rate risk, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, while other derivatives serve as economic hedges that do not qualify for hedge accounting.
Derivatives Designated as Hedging Instruments
Fair Value Hedges – The Company is exposed to changes in the fair value of fixed-rate assets due to changes in benchmark interest rates. During the third quarter of 2021, the Company entered into pay-fixed and receive-floating interest rate swaps of certain fixed rate loans, primarily commercial real estate loans, to manage its exposure to changes in fair value on these instruments attributable to changes in the designated USD-SOFR-COMPOUND benchmark interest rate. These interest rate swaps are designated as fair value hedges using the last-of-layer method. As a result, the Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The fair value of fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated statements of financial condition. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk are recognized in interest income in the Company’s consolidated statements of income. At September 30, 2021, interest rate swaps with a notional amount totaling $300.0 million and a fair value totaling $932,000 were designated as fair value hedges.
The following amounts were recorded on the consolidated statement of financial condition related to cumulative basis adjustment for fair value hedges as of the dates indicated:
Line Item in the Statement of Financial Position in Which the Hedged Item is Included | Carrying Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | ||||||||||||||||||||||||
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
Loans held for investment(1) | $ | 298,973 | $ | — | $ | (1,027) | $ | — | ||||||||||||||||||
Total | $ | 298,973 | $ | — | $ | (1,027) | $ | — |
______________________________
(1) These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $815.2 million; the cumulative basis adjustments associated with these hedging relationships was $1.0 million; and the amounts of the designated hedged items were $300.0 million.
74
Derivatives Not Designated as Hedging Instruments
Interest Rate Swap Contracts – From time to time, the Company enters into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company. At the same time, the Company enters into identical offsetting interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements it enters into with its borrowers. At September 30, 2021, the Company had over-the-counter derivative instruments and centrally-cleared derivative instruments with matched terms with an aggregate notional amount of $135.6 million and a fair value of $5.8 million compared with an aggregate notional amount of $145.2 million and a fair value of $12.1 million at December 31, 2020. The fair value of these agreements are determined through a third party valuation model used by the Company’s counterparty bank, which uses observable market data such as interest rates, prices of Eurodollar futures contracts, and market swap rates. The fair values of these swaps are recorded as components of other assets and other liabilities in the Company’s consolidated statements of financial condition. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s consolidated statements of income as a component of noninterest income.
Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, generally contain a greater degree of credit risk and liquidity risk than centrally-cleared contracts, which have standardized terms. Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of these swap agreements. Offsetting over-the-counter swap agreements the Company has with other financial institutions are collateralized with cash and investment securities, and swap agreements with borrowers are secured by the collateral arrangements for the underlying loans these borrowers have with the Company. During the nine months ended September 30, 2021 and 2020, there were no losses recorded on swap agreements attributable to the change in credit risk associated with a counterparty. All interest rate swap agreements entered into by the Company as of September 30, 2021 and December 31, 2020 are free-standing derivatives and are not designated as hedging instruments.
Other Contracts – The Company’s credit derivatives result from entering into credit risk participation agreements (“RPAs”) with a counterparty bank (Opus) during the first quarter of 2020 to accept a portion of the credit risk on interest rate swaps related to loans. RPAs provide credit protection to the financial institution should the borrower fail to perform on its interest rate swap derivative contract with the financial institution. The credit risk related to these credit derivatives is managed through the Company’s loan underwriting process. RPAs are derivative financial instruments not designated as hedging instruments and are recorded at fair value. Changes in fair value are recognized as a component of noninterest income with a corresponding offset within other assets or other liabilities. As the result of the acquisition of Opus, the RPAs were terminated in the second quarter 2020.
Equity Warrant Assets – The Company acquired two individual equity warrant assets as a result of the acquisition of Opus. Opus received equity warrant assets through its lending activities, which were accounted for as loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The Company no longer has loans associated with these borrowers. Changes in fair value are recognized as a component of noninterest income with a corresponding offset within other assets. The total fair value of the warrants held in private companies was $1.9 million in other assets as of September 30, 2021 and December 31, 2020. The two warrants expire on March 12, 2023 and July 28, 2025, respectively.
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The following tables summarize the Company's derivative instruments included in other assets and other liabilities in the consolidated statements of financial condition:
September 30, 2021 | |||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
(Dollars in thousands) | Notional | Fair Value | Notional | Fair Value | |||||||||||||||||||
Derivative instruments designated as hedging instruments: | |||||||||||||||||||||||
Fair value hedge - interest rate swap contracts | $ | 300,000 | $ | 932 | $ | — | $ | — | |||||||||||||||
Total derivative designated as hedging instruments | 300,000 | 932 | — | — | |||||||||||||||||||
Derivative instruments not designated as hedging instruments: | |||||||||||||||||||||||
Interest rate swaps contracts | 135,580 | 5,815 | 135,580 | 5,819 | |||||||||||||||||||
Equity warrants | — | 1,895 | — | — | |||||||||||||||||||
Total derivative not designated as hedging instruments | $ | 135,580 | $ | 7,710 | $ | 135,580 | $ | 5,819 | |||||||||||||||
Total derivatives | 435,580 | 8,642 | 135,580 | 5,819 |
December 31, 2020 | |||||||||||||||||||||||
Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||
(Dollars in thousands) | Notional | Fair Value | Notional | Fair Value | |||||||||||||||||||
Derivative instruments not designated as hedging instruments: | |||||||||||||||||||||||
Interest rate swaps contracts | $ | 145,181 | $ | 12,053 | $ | 145,181 | $ | 12,066 | |||||||||||||||
Equity warrants | — | 1,914 | — | — | |||||||||||||||||||
Total derivative instruments | $ | 145,181 | $ | 13,967 | $ | 145,181 | $ | 12,066 |
The following table presents the effect of fair value hedge accounting on the consolidated statements of income:
Three Months Ended | ||||||||||||||
(Dollars in thousands) | Location of Gain (Loss) Recognized in Income on Derivative Instruments | September 30, 2021 | ||||||||||||
Gain (loss) on fair value hedging relationships: | ||||||||||||||
Hedged items | Interest Income | $ | (1,027) | |||||||||||
Derivatives designated as hedging instruments | Interest Income | 932 |
The following table summarizes the effect of the derivatives not designated as hedging instruments in the consolidated statements of income.
(Dollars in thousands) | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
Derivatives Not Designated as Hedging Instruments: | Location of Gain (Loss) Recognized in Income on Derivative Instruments | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Interest rate products | Other income | $ | 1 | $ | — | $ | 9 | $ | — | |||||||||||||||||||||||
Other contracts | Other income | — | 218 | — | 415 | |||||||||||||||||||||||||||
Equity warrants | Other income | (8) | (31) | (19) | (35) | |||||||||||||||||||||||||||
Total | $ | (7) | $ | 187 | $ | (10) | $ | 380 |
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Note 13 – Balance Sheet Offsetting
Derivative financial instruments may be eligible for offset in the consolidated statements of financial condition, such as those subject to enforceable master netting arrangements or a similar agreement. Under these agreements, the Company has the right to net settle multiple contracts with the same counterparty. The Company offers an interest rate swap product to qualified customers, which are then paired with derivative contracts the Company enters into with a counterparty bank. While derivative contracts entered into with counterparty banks may be subject to enforceable master netting agreements, derivative contracts with customers may not be subject to enforceable master netting arrangements. The Company elected to account for centrally-cleared derivative contracts on a gross basis. With regard to derivative contracts not centrally cleared through a clearinghouse, regulations require collateral to be posted by the party with a net liability position. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments are commonly referred to as variation margin and are treated as settlements of derivative exposure rather than as collateral.
Financial instruments that are eligible for offset in the consolidated statements of financial condition as of the periods indicated are presented below:
Gross Amounts Not Offset in the Consolidated Statements of Financial Condition | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Gross Amounts Recognized | Gross Amounts Offset in the Consolidated Statements of Financial Condition | Net Amounts Presented in the Consolidated Statements of Financial Condition | Financial Instruments (1) | Cash Collateral (2) | Net Amount | |||||||||||||||||||||||||||||
September 30, 2021 | |||||||||||||||||||||||||||||||||||
Derivative assets: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 6,747 | $ | — | $ | 6,747 | $ | — | $ | — | $ | 6,747 | |||||||||||||||||||||||
Total | $ | 6,747 | $ | — | $ | 6,747 | $ | — | $ | — | $ | 6,747 | |||||||||||||||||||||||
Derivative liabilities: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 5,819 | $ | — | $ | 5,819 | $ | (4,593) | $ | (1,226) | $ | — | |||||||||||||||||||||||
Total | $ | 5,819 | $ | — | $ | 5,819 | $ | (4,593) | $ | (1,226) | $ | — | |||||||||||||||||||||||
December 31, 2020 | |||||||||||||||||||||||||||||||||||
Derivative assets: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 12,053 | $ | — | $ | 12,053 | $ | — | $ | — | $ | 12,053 | |||||||||||||||||||||||
Total | $ | 12,053 | $ | — | $ | 12,053 | $ | — | $ | — | $ | 12,053 | |||||||||||||||||||||||
Derivative liabilities: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 12,066 | $ | — | $ | 12,066 | $ | (6,140) | $ | (5,926) | $ | — | |||||||||||||||||||||||
Total | $ | 12,066 | $ | — | $ | 12,066 | $ | (6,140) | $ | (5,926) | $ | — | |||||||||||||||||||||||
(1) Represents the fair value of securities pledged with counterparty bank. | |||||||||||||||||||||||||||||||||||
(2) Represents cash collateral pledged with counterparty bank. |
77
Note 14 – Leases
The Company accounts for its leases in accordance with ASC 842 which requires the Company to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased asset. The Company’s leases primarily represent future obligations to make payments for the use of buildings or space for its operations. Liabilities to make future lease payments are recorded in accrued expenses and other liabilities, while right-of-use assets are recorded in other assets in the Company’s consolidated statements of financial condition. At September 30, 2021, all of the Company’s leases were classified as operating leases or short-term leases.
Liabilities to make future lease payments and right-of-use assets are recorded for the Company’s operating leases and not short-term leases. These liabilities and right-of-use assets are determined based on the total contractual base rents for each lease, which include options to extend or renew each lease, where applicable, and where the Company believes it has an economic incentive to extend or renew the lease. Future contractual base rents are discounted using the rate implicit in the lease or using the Company’s estimated incremental borrowing rate if the rate implicit in the lease is not readily determinable. For leases that contain variable lease payments, the Company assumes future lease payment escalations based on a lease payment escalation rate specified in the lease or the specified index rate observed at the time of lease commencement. Liabilities to make future lease payments are accounted for using the interest method, being reduced by periodic contractual lease payments net of periodic interest accretion. Right-of-use assets for operating leases are amortized over the term of the associated lease by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion on the related liability to make future lease payments. Short-term leases are leases that have a term of 12 months or less at commencement. The Company recognizes expense for both operating leases and short-term leases on a straight-line basis.
The Company’s lease expense is recorded in premises and occupancy expense in the consolidated statements of income (loss). The following table presents the components of lease expense for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
(Dollars in thousands) | September 30, 2021 | June 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||||||||||||||||
Operating lease | $ | 4,826 | $ | 4,887 | 5,618 | $ | 14,725 | $ | 12,690 | |||||||||||||||||||||||
Short-term lease | 433 | 323 | 495 | 1,263 | 1,425 | |||||||||||||||||||||||||||
Total lease expense | $ | 5,259 | $ | 5,210 | $ | 6,113 | $ | 15,988 | $ | 14,115 |
The Company assumed operating leases in the acquisition of Opus on June 1, 2020. The liabilities and related right-of-use assets recorded for the assumption of these leases was approximately $43.3 million and $42.4 million, respectively. Right-of-use assets related to the Opus acquisition reflect unfavorable lease liability adjustments of approximately $900,000. Lease liabilities for leases assumed from Opus were measured based on the net present value of remaining future lease payments, with consideration given for options to extend or renew each lease. Remaining future lease payments were discounted at the Company’s estimated incremental borrowing rate on the date of acquisition.
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The following table presents supplemental information related to operating leases as of and for nine months ended:
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
Balance Sheet: | ||||||||||||||
$ | 67,586 | $ | 76,090 | |||||||||||
76,592 | 85,556 | |||||||||||||
Nine Months Ended | ||||||||||||||
(Dollars in thousands) | September 30, 2021 | September 30, 2020 | ||||||||||||
Cash Flows: | ||||||||||||||
Operating cash outflow from operating leases | $ | 15,512 | $ | 10,946 |
The following table provides information related to minimum contractual lease payments and other information associated with the Company’s leases as of the dates indicated:
(Dollars in thousands) | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||||||||||||||
As of September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
Operating leases | $ | 5,103 | $ | 20,058 | $ | 19,463 | $ | 17,454 | $ | 12,171 | $ | 15,855 | $ | 90,104 | |||||||||||||||||||||||||||
Short-term leases | 130 | 24 | — | — | — | — | 154 | ||||||||||||||||||||||||||||||||||
Total contractual base rents (1) | $ | 5,233 | $ | 20,082 | $ | 19,463 | $ | 17,454 | $ | 12,171 | $ | 15,855 | $ | 90,258 | |||||||||||||||||||||||||||
Total liability to make lease payments | $ | 76,592 | |||||||||||||||||||||||||||||||||||||||
Difference in undiscounted and discounted future lease payments | $ | 13,666 | |||||||||||||||||||||||||||||||||||||||
Weighted average discount rate | 5.23 | % | |||||||||||||||||||||||||||||||||||||||
Weighted average remaining lease term (years) | 5.1 |
______________________________
(1) Contractual base rents reflect options to extend and renewals, and do not include property taxes and other operating expenses due under respective lease agreements.
The Company from time to time leases portions of space it owns to other parties. Income received from these transactions is recorded on a straight-line basis over the term of the sublease. For the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, rental income totaled $176,000, $177,000, and $265,000, respectively. For the nine months ended September 30, 2021 and September 30, 2020, rental income totaled $528,000 and $356,000, respectively.
Note 15 – Revenue Recognition
The Company accounts for revenue from contracts with customers under ASC 606, which requires revenue that is derived from a contract with a customer to be recognized when the Company satisfies the related performance obligations by transferring to the customer a good or service. The majority of the Company’s contracts with customers associated with revenue streams that are within the scope of ASC 606 are considered short-term in nature and can be canceled at any time by the customer or the Company without penalty, such as a deposit account agreement. These revenue streams are included in noninterest income.
The Company’s principal source of revenue is interest income on loans, investment securities, and other interest earning assets, all of which are not within the scope of ASC 606. The remainder of the Company’s revenue is classified as noninterest income and is earned from a variety of fees, such as custodial and other fees, service charges, gains and losses, and other income.
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The following tables provide a summary of the Company’s noninterest income, segregated by revenue streams within and outside the scope of ASC 606 for the periods indicated:
Three Months Ended | |||||||||||||||||||||||||||||||||||
September 30, 2021 | June 30, 2021 | September 30, 2020 | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | Within Scope(1) | Out of Scope(2) | Within Scope(1) | Out of Scope(2) | Within Scope(1) | Out of Scope(2) | |||||||||||||||||||||||||||||
Noninterest income | |||||||||||||||||||||||||||||||||||
Loan servicing income | $ | — | $ | 536 | $ | — | $ | 622 | $ | — | $ | 481 | |||||||||||||||||||||||
Service charges on deposit accounts | 2,375 | — | 2,222 | — | 1,593 | — | |||||||||||||||||||||||||||||
Other service fee income | 350 | — | 352 | — | 487 | — | |||||||||||||||||||||||||||||
Debit card interchange income | 834 | — | 1,099 | — | 944 | — | |||||||||||||||||||||||||||||
Earnings on bank-owned life insurance | — | 3,266 | — | 2,279 | — | 2,270 | |||||||||||||||||||||||||||||
Net gain (loss) from sales of loans | — | 1,187 | — | 1,546 | — | 9,542 | |||||||||||||||||||||||||||||
Net gain (loss) from sales of investment securities | — | 4,190 | — | 5,085 | — | 1,141 | |||||||||||||||||||||||||||||
Trust custodial account fees | 11,446 | — | 7,897 | — | 6,960 | — | |||||||||||||||||||||||||||||
Escrow and exchange fees | 1,867 | — | 1,672 | — | 1,142 | — | |||||||||||||||||||||||||||||
Other income | (14) | 4,063 | 97 | 3,858 | 91 | 2,107 | |||||||||||||||||||||||||||||
Total noninterest income | $ | 16,858 | $ | 13,242 | $ | 13,339 | $ | 13,390 | $ | 11,217 | $ | 15,541 |
___________________________________
(1) Revenues from contracts with customers accounted for under ASC 606.
(2) Revenues not within the scope of ASC 606 and accounted for under other applicable GAAP requirements.
Nine Months Ended | |||||||||||||||||||||||
September 30, 2021 | September 30, 2020 | ||||||||||||||||||||||
(Dollars in thousands) | Within Scope(1) | Out of Scope(2) | Within Scope(1) | Out of Scope(2) | |||||||||||||||||||
Noninterest income | |||||||||||||||||||||||
Loan servicing income | $ | — | $ | 1,616 | $ | — | $ | 1,395 | |||||||||||||||
Service charges on deposit accounts | 6,629 | — | 4,707 | — | |||||||||||||||||||
Other service fee income | 1,175 | — | 1,095 | — | |||||||||||||||||||
Debit card interchange income | 2,720 | — | 1,749 | — | |||||||||||||||||||
Earnings on bank-owned life insurance | — | 7,778 | — | 4,920 | |||||||||||||||||||
Net gain (loss) from sales of loans | — | 3,094 | — | 8,281 | |||||||||||||||||||
Net gain from sales of investment securities | — | 13,321 | — | 8,880 | |||||||||||||||||||
Trust custodial account fees | 26,565 | — | 9,357 | — | |||||||||||||||||||
Escrow and exchange fees | 5,065 | — | 1,407 | — | |||||||||||||||||||
Other income | 365 | 12,241 | 227 | 6,113 | |||||||||||||||||||
Total noninterest income | $ | 42,519 | $ | 38,050 | $ | 18,542 | $ | 29,589 |
______________________________
(1) Revenues from contracts with customers accounted for under ASC 606.
(2) Revenues not within the scope of ASC 606 and accounted for under other applicable GAAP requirements.
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The major revenue streams by type that are within the scope of ASC 606 presented in the tables above are described in additional detail below:
Service Charges on Deposit Accounts and Other Service Fee Income
Service charges on deposit accounts and other service fee income consists of periodic service charges on deposit accounts and transaction based fees such as those related to overdrafts, ATM charges, and wire transfer fees. The majority of these revenues are accounted for under ASC 606. Performance obligations for periodic service charges on deposit accounts are typically short-term in nature and are generally satisfied on a monthly basis, while performance obligations for other transaction based fees are typically satisfied at a point in time (which may consist of only a few moments to perform the service or transaction) with no further obligations on behalf of the Company to the customer. Periodic service charges are generally collected monthly directly from the customer’s deposit account, and at the end of a statement cycle, while transaction based service charges are typically collected at the time of or soon after the service is performed.
Debit Card Interchange Income
Debit card interchange fee income consists of transaction processing fees associated with customer debit card transactions processed through a payment network and are accounted for under ASC 606. These fees are earned each time a request for payment is originated by a customer debit cardholder at a merchant. In these transactions, the Company transfers funds from the debit cardholder’s account to a merchant through a payment network at the request of the debit cardholder by way of the debit card transaction. The related performance obligations are generally satisfied when the transfer of funds is complete, which is generally a point in time when the debit card transaction is processed. Debit card interchange fees are typically received and recorded as revenue on a daily basis.
Trust Custodial Account Fees
Custodial account fees is a revenue stream acquired in the Opus acquisition and is governed by contracts executed with Pacific Premier Trust clients, largely to perform maintenance and custodial services over their alternative IRA investments as well as certain accounts that do not qualify as individual retirement accounts pursuant to the Internal Revenue Code. Typically, such fees are billed and collected on a quarterly basis and recognized commensurate with the completion of the performance obligations required under the contracts. At September 30, 2021, the Company had accrued fees receivable of approximately $10.4 million, which are included in other assets in the consolidated statements of financial position. The balance of accrued fees receivable is net of approximately $988,000 of allowance for credit losses on doubtful accounts. The allowance represents the Company’s estimate of credit losses on accrued fees receivable in accordance in ASC 326. The Company recorded approximately $281,000 and $411,000 in credit loss expense associated with accrued fees receivable for the three and nine month periods ended September 30, 2021, respectively. The credit loss expense for the three and nine month periods ended September 30, 2020, was $12,000 and $76,000, respectively. Credit loss expense for fees receivable is included in other expense of the Company’s consolidated statements of income (loss).
Escrow and Exchange Fees
Escrow and exchange fees is a revenue stream from the Commerce Escrow division acquired in the Opus acquisition, which are related to agreements with customers participating in escrow transactions. Transactions under Section 1031 of the Internal Revenue Code generate exchange fees as well as escrow fees. These fees relate to services that include preparation of closing statements and custody of escrow funds. The fees are received from the sale proceeds of a relinquished property and are recognized as revenue upon closing of the escrow transaction, which is the final performance obligation.
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Other Income
Other noninterest income includes other miscellaneous fees, which are accounted for under ASC 606; however, much like service charges on deposit accounts, these fees have performance obligations that are very short-term in nature and are typically satisfied at a point in time. Revenue is typically recorded at the time these fees are collected, which is generally upon the completion the related transaction or service provided.
Other revenue streams that may be applicable to the Company include gains and losses from the sale of nonfinancial assets such as other real estate owned and property premises and equipment. The Company accounts for these revenue streams in accordance with ASC 610-20, which requires the Company to look to guidance in ASC 606 in the application of certain measurement and recognition concepts. The Company records gains and losses on the sale of nonfinancial assets when control of the asset has been surrendered to the buyer, which generally occurs at a specific point in time.
Practical Expedient
The Company also employs a practical expedient with respect to contract acquisition costs, which are generally capitalized and amortized into expense. These costs relate to expenses incurred directly attributable to the efforts to obtain a contract. The practical expedient allows the Company to immediately recognize contract acquisition costs in current period earnings when these costs would have been amortized over a period of one year or less.
Note 16 – Variable Interest Entities
The Company is involved with VIEs through its loan securitization activities, affordable housing investments that qualify for the low-income housing tax credit (“LIHTC”), and trust subsidiaries, which have issued trust preferred securities. The Company has determined that its interests in these entities meet the definition of variable interests.
As of September 30, 2021 and December 31, 2020, the Company determined it was not the primary beneficiary of the VIEs and did not consolidate its interests in VIEs. The following table provides a summary of the carrying amount of assets and liabilities in the Company’s consolidated statements of financial condition and maximum loss exposures as of September 30, 2021 and December 31, 2020 that relate to variable interests in non-consolidated VIEs.
September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Maximum Loss | Assets | Liabilities | Maximum Loss | Assets | Liabilities | |||||||||||||||||||||||||||||
Multifamily loan securitization: | |||||||||||||||||||||||||||||||||||
Investment securities (1) | $ | 90,575 | $ | 90,575 | $ | — | $ | 100,927 | $ | 100,927 | $ | — | |||||||||||||||||||||||
Reimbursement obligation (2) | 50,901 | — | 448 | 50,901 | — | 448 | |||||||||||||||||||||||||||||
Affordable housing partnership: | |||||||||||||||||||||||||||||||||||
Other investments (3) | 70,606 | 90,010 | — | 71,681 | 89,759 | — | |||||||||||||||||||||||||||||
Unfunded equity commitments (2) | — | — | 19,404 | — | — | 18,078 | |||||||||||||||||||||||||||||
Total | $ | 212,082 | $ | 180,585 | $ | 19,852 | $ | 223,509 | $ | 190,686 | $ | 18,526 |
______________________________
(1) Included in investment securities available-for-sale on the consolidated statement of financial condition.
(2) Included in accrued expenses and other liabilities on the consolidated statement of financial condition.
(3) Included in other assets on the consolidated statement of financial condition.
.
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Multifamily loan securitization
With respect to the securitization transaction with Freddie Mac discussed in Note 6 - Loans Held for Investment, the Company’s variable interests reside with the purchase of the underlying Freddie Mac-issued guaranteed, structured pass-through certificates that were held as investment securities available-for-sale at fair value as of September 30, 2021. Additionally, the Company has variable interests through a reimbursement agreement executed by Freddie Mac that obligates the Company to reimburse Freddie Mac for any defaulted contractual principal and interest payments identified after the ultimate resolution of the defaulted loans. Such reimbursement obligations are not to exceed 10% of the original principal amount of the loans comprising the securitization pool.
As part of the securitization transaction, the Company released all servicing obligations and rights to Freddie Mac who was designated as the Master Servicer. In its capacity as Master Servicer, Freddie Mac can terminate the Company’s role as sub-servicer and direct such responsibilities accordingly. In evaluating our variable interests and continuing involvement in the VIE, we determined that we do not have the power to make significant decisions or direct the activities that most significantly impact the economic performance of the VIE’s assets and liabilities. As sub-servicer of the loans, the Company does not have the authority to make significant decisions that influence the value of the VIE’s net assets and, therefore, the Company is not the primary beneficiary of the VIE. As a result, we determined that the VIE associated with the multifamily securitization should not be included in the consolidated financial statements of the Company.
We believe that our maximum exposure to loss as a result of our involvement with the VIE associated with the securitization is the carrying value of the investment securities issued by Freddie Mac and purchased by the Company. Additionally, our maximum exposure to loss under the reimbursement agreement executed with Freddie Mac is 10% of the original principal amount of the loans comprising the securitization pool, or $50.9 million. Based upon our analysis of quantitative and qualitative data over the underlying loans included in the securitization pool, as of September 30, 2021 and December 31, 2020, our reserve for estimated losses with respect to the reimbursement obligation was $448,000.
Investments in qualified affordable housing partnerships
The Company has variable interests through its affordable housing partnership investments. These investments are fundamentally designed to provide a return through the generation of income tax credits. The Company has evaluated its involvement with the low-income housing projects and determined it does not have significant influence or decision making capabilities to manage the projects, and therefore, is not the primary beneficiary, and does not consolidate these interests.
The Company’s maximum exposure to loss, exclusive of any potential realization of tax credits, is equal to the commitments invested, adjusted for amortization. The amount of unfunded commitments was included in the investments recognized as assets with a corresponding liability. The table above summarizes the amount of tax credit investments held as assets, the amount of unfunded commitments held as liabilities, and the maximum exposure to loss as of September 30, 2021 and December 31, 2020, respectively.
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Trust preferred securities
The Company accounted for its investments in its wholly owned special purpose entities, Heritage Oaks Capital Trust II and Santa Lucia Bancorp (CA) Capital Trust, acquired through bank acquisitions, under the equity method whereby the subsidiary’s net earnings were recognized in the Company’s consolidated statement of income and the investment in these entities is included in other assets in the Company’s consolidated statements of financial condition. The Corporation was not allowed to consolidate the capital trusts as they have been formed for the sole purpose of issuing trust preferred securities, from which the proceeds were invested in the Company’s junior subordinated debt securities and reflected in our consolidated statements of financial condition as subordinated debentures with the corresponding interest distributions reflected as interest expense in the consolidated statements of income. The capital securities were subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debt, and qualified as Tier 2 capital. In July 2021, the Company redeemed $5.2 million junior subordinated debt securities associated with Heritage Oaks Capital Trust II and $5.2 million junior subordinated debt securities associated with Santa Lucia Bancorp (CA) Capital Trust. Subsequent to the redemptions, Heritage Oaks Capital Trust II and Santa Lucia Bancorp (CA) Capital Trust were dissolved. See Note 9 - Subordinated Debentures for additional information.
Note 17 – Subsequent Events
Quarterly cash dividend
On October 19, 2021, the Corporation’s Board of Directors declared a cash dividend of $0.33 per share, payable on November 12, 2021 to shareholders of record on November 1, 2021.
Branch consolidations
On November 5, 2021, the Bank consolidated two branch offices, one in San Diego County and the other in Los Angeles County, both in California, into nearby branch offices with minimal disruption to clients and daily operations. The consolidated branches were identified largely based on the proximity of neighboring branches, deposit base, historic growth, and market opportunity to improve further the overall efficiency of operations, as well as the Bank's goals related to Fair Lending and the Community Reinvestment Act. After the branch consolidations, the Bank operates 61 branches in major metropolitan markets in California, Washington, Oregon, Arizona, and Nevada.
Transfers of investment securities available-for-sale to held-to-maturity
The Company reassessed classification of certain investments, and effective October 1, 2021, the Company transferred approximately $165.5 million of municipal bonds from available-for-sale to held-to-maturity securities at fair value. These securities had an unrealized loss of $3.4 million at the transfer date, which was reflected as a discount on the date of transfer. This discount, as well as the related unrealized loss in accumulated other comprehensive income, will be amortized into interest income as a yield adjustment over the remaining term of the securities. The amortization of the unrealized loss reported in accumulated other comprehensive income will offset the effect on interest income of the amortization of the discount. No gains or losses were recorded at the time of transfer.
Fair value hedge
On November 1, 2021, as part of its interest rate sensitivity management, the Company entered into pay-fixed and receive-floating interest rate swaps with an aggregate notional amount of $300.0 million of certain fixed rate loans to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. These interest rate swaps are designated as fair value hedges. Under the swap agreement, the Company receives variable-rate interest payments based on USD-SOFR-COMPOUND in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phrases of similar meaning.
We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors, which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
Given the ongoing and dynamic nature of the COVID-19 pandemic, the ultimate extent of the impacts on our business, financial position, results of operations, liquidity and prospects remain uncertain. Although general business and economic conditions have begun to recover, the recovery could be slowed or reversed by a number of factors, including increases in COVID-19 infections, the tight labor market, supply chain disruptions, inflationary pressures, or turbulence in domestic or global financial markets, which could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill or other intangible assets in future periods. Changes to statutes, regulations, or regulatory policies or practices as a result of, or in response, to the COVID-19 pandemic could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance. In addition to the foregoing, the following additional factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
•The strength of the United States economy in general and the strength of the local economies in which we conduct operations;
•The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
•Inflation/deflation, interest rate, market, and monetary fluctuations;
•The effect of changes in accounting policies and practices or accounting standards, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, FASB, or other accounting standards setters, including ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the CECL model, which has changed how we estimate credit losses and has increased the required level of our allowance for credit losses since adoption on January 1, 2020;
•The effect of acquisitions we have made or may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;
•The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
•The impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities, and insurance, and the application thereof by regulatory bodies;
•The transition away from USD LIBOR and uncertainty regarding potential alternative reference rates, including SOFR;
•The effectiveness of our risk management framework and quantitative models;
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•Changes in the level of our nonperforming assets and charge-offs;
•Possible credit-related impairments of securities held by us;
•The impact of current and possible future governmental efforts to restructure the U.S. financial regulatory system;
•Changes in consumer spending, borrowing, and savings habits;
•The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
•Our ability to attract deposits and other sources of liquidity;
•The possibility that we may reduce or discontinue the payments of dividends on our common stock;
•Changes in the financial performance and/or condition of our borrowers;
•Changes in the competitive environment among financial and bank holding companies and other financial service providers;
•Public health crises and pandemics, including the COVID-19 pandemic, and the effects on the economic and business environments in which we operate, including our credit quality and business operations, as well as the impact on general economic and financial market conditions;
•Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
•Cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national, or global level;
•Natural disasters, earthquakes, fires, and severe weather;
•Unanticipated regulatory, legal, or judicial proceedings; and
•Our ability to manage the risks involved in the foregoing.
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking information and statements to reflect actual results or changes in the factors affecting the forward-looking information and statements. For information on the factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our 2020 Form 10-K in addition to Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and other reports as filed with the SEC.
Forward-looking information and statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties disclosed in our filings with the SEC, all of which are accessible on the SEC’s website at http://www.sec.gov.
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GENERAL
This discussion should be read in conjunction with our Management Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021.
The Corporation is a California-based bank holding company incorporated in 1997 in the state of Delaware and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”). Our wholly owned subsidiary, Pacific Premier Bank, is a California state-chartered commercial bank. The Bank was founded in 1983 as a state-chartered thrift and subsequently converted to a federally-chartered thrift in 1991. The Bank converted to a California-chartered commercial bank and became a member of the Federal Reserve System in March 2007. The Bank is also a member of the FHLB, which is a member of the Federal Home Loan Bank System. As a bank holding company, the Corporation is subject to regulation and supervision by the Federal Reserve. We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve may conduct examinations of bank holding companies, such as the Corporation, and its subsidiaries. The Corporation is also a bank holding company within the meaning of the California Financial Code. As such, the Corporation and its subsidiaries are subject to the supervision and examination by, and may be required to file reports with, the California Department of Financial Protection and Innovation (“DFPI”).
A bank holding company, such as the Corporation, is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such a policy. The Federal Reserve, under the BHCA, has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
As a California state-chartered commercial bank, which is a member of the Federal Reserve, the Bank is subject to supervision, periodic examination and regulation by the DFPI, the Federal Reserve, the Consumer Financial Protection Bureau (“CFPB”), and the FDIC. The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund. In general terms, insurance coverage is up to $250,000 per depositor for all deposit accounts. As a result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank. If, as a result of an examination of the Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators. Such remedies include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict growth, to assess civil monetary penalties, to remove officers and directors, and ultimately, to request the FDIC to terminate the Bank’s deposit insurance. As a California-chartered commercial bank, the Bank is also subject to certain provisions of California law.
Our corporate headquarters are located in Irvine, California. At September 30, 2021, we primarily conduct business throughout the Western Region of the United States from 63 full-service depository branches located in Arizona, California, Nevada, Oregon, and Washington. Following the two branch consolidations in San Diego County and Los Angeles County of California in early November 2021, the Bank operates 61 full-service depository branches. The branches consolidated were identified largely based on the proximity of neighboring branches, deposit base, historic growth, and market opportunity to improve further the overall efficiency of operations, as well as the Bank's goals related to Fair Lending and the Community Reinvestment Act.
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As a result of our organic and strategic growth strategy we have developed a variety of banking products and services within our targeted markets in the Western United States tailored to small- and middle-market businesses, corporations, including the owners and employees of those businesses, professionals, entrepreneurs, real estate investors, and non-profit organizations, as well as consumers in the communities we serve. Through our branches and our website, www.ppbi.com, we provide a wide array of banking products and services such as: various types of deposit accounts, digital banking, treasury management services, online bill payment, and a wide array of loan products, including commercial business loans, lines of credit, SBA loans, commercial real estate loans, agribusiness loans, franchise lending, home equity lines of credit, and construction loans throughout the Western United States in major metropolitan markets within Arizona, California, Nevada, Oregon, and Washington. We also have acquired and enhanced nationwide specialty banking products and services for Homeowners’ Associations (“HOA”) and HOA management companies, as well as experienced owner-operator franchisees in the quick service restaurant (“QSR”) industry. Most recently, we have expanded our specialty products and services offerings to include commercial escrow services through our Commerce Escrow division, which facilitates commercial escrow services and tax-deferred commercial real estate exchanges under Section 1031 of the Internal Revenue Code, as well as custodial and maintenance services through our Pacific Premier Trust division, which serves as a custodian for self-directed IRAs as well as certain accounts that do not qualify as IRAs pursuant to the Internal Revenue Code.
The Bank funds its lending and investment activities with retail and commercial deposits obtained through its branches, advances from the FHLB, lines of credit, and wholesale and brokered certificates of deposit.
Our principal source of income is the net spread between interest earned on loans and investments and the interest costs associated with deposits and borrowings used to finance the loan and investment portfolios. Additionally, the Bank generates fee income from loan and investment sales, and various products and services offered to depository, loan, escrow, and IRA custodial clients.
COVID-19 PANDEMIC
The COVID-19 outbreak was declared a Public Health Emergency of International Concern by the World Health Organization on January 30, 2020 and a pandemic by the World Health Organization on March 11, 2020. The ongoing COVID-19 global pandemic and national health emergency has caused significant disruption in the United States and international economies and financial markets. The operations and business results of the Company have been and could continue to be materially adversely affected.
In early March 2020, the Company began preparing for potential disruptions and government limitations of activity in the markets in which we serve. We activated our Business Continuity Program and Pandemic Preparedness Plan, and we were able to quickly execute on multiple initiatives to adjust our operations to protect the health and safety of our employees and clients. We expanded remote-access availability to ensure a greater number of employees have the capability to work from home or other remote locations without impacting our operations while continuing to provide a superior level of customer service. We also reconfigured our corporate headquarters, administrative offices, and branches to promote social distancing for employees by erecting physical barriers. In addition, the Company issued a Company-wide employee appreciation bonus related to the COVID-19 pandemic during the fourth quarter of 2020. Beginning April 2021, non-exempt employees will receive up to 4 hours of paid time off for COVID-19 vaccination appointments and exempt employees will receive flexibility for vaccination appointments.
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Since the beginning of the crisis, we have been in close contact with our clients, assessing the level of impact on their businesses, and implementing a process to evaluate each client’s specific situation, and where appropriate, providing relief programs. We also enhanced client awareness of our digital banking offerings to ensure that we continue to provide a superior level of customer service. We have taken steps to comply with various government directives regarding social distancing and use of personal protective equipment in the work place, and we are following the guidance from the Centers of Disease Control (“CDC”) to protect our clients and employees.
The Company continued its efforts to monitor the loan portfolio to identify potential at-risk segments and line of credit draws for deviations from normal activity, and support our customers affected by the COVID-19 pandemic, including but not limited to the following:
•Participated in the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”)
We were able to quickly establish our process for participating in the SBA PPP program that enabled our clients to utilize this valuable resource beginning in April 2020. Our team executed PPP loans in the two rounds of the program, which allowed us to further strengthen and deepen our client relationships, while positively impacting tens of thousands of individuals. In July 2020, the Bank sold its entire SBA PPP loan portfolio with an aggregate amortized cost of $1.13 billion to a seasoned and experienced non-bank lender and servicer of SBA loans, resulting in improved balance sheet liquidity and a gain on sale of approximately $18.9 million, net of net deferred origination fees and net purchase discounts.
•Implemented a temporary loan modification program for borrowers affected by the COVID-19 pandemic, including payment deferrals, fee waivers, and extensions of repayment terms
In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Bank established a COVID-19 temporary modification program, including interest-only payments, or full payment deferrals for clients that are adversely affected by the COVID-19 pandemic. The CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not classified as TDRs. In accordance with interagency guidance issued in April 2020, these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, including payment deferrals, fee waivers, and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented. The CAA, signed into law on December 27, 2020, extended the applicable period to include modification to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022, or (ii) 60 days after the date of termination of the COVID-19 national emergency. At September 30, 2021, there were no loans classified as a COVID-19 modification under Section 4013 of the CARES Act and no loans in-process for potential modification. At December 31, 2020, 52 loans totaling $79.5 million, or 0.60% of loans held for investment, remained within their COVID-19 modification period. Please also see Note 6 - Loans Held for Investment for additional information.
Additionally, the CARES Act provides for relief on existing and new SBA loans through the Small Business Debt Relief program. As part of the SBA Small Business Debt Relief program, the SBA will automatically pay principal, interest, and fees of certain SBA loans for a period of six months for both existing loans and new loans issued prior to September 27, 2020. On December 27, 2020, the CAA authorized a second round of SBA payments on covered loans approved before March 27, 2020, for a two-month period beginning with the first payment due on the loan on or after February 1, 2021, and for an additional three-month period for certain eligible borrowers. For new loans approved beginning on February 2, 2021 and ending on September 30, 2021, the SBA will make the payments for a three-month period subject to the availability of funds. At September 30, 2021, approximately 13 loans, representing approximately $9.4 million aggregate reported balance, are eligible for this relief. The CARES Act also provides for mortgage payment relief and a foreclosure moratorium.
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The extent to which the COVID-19 pandemic impacts the Company’s business, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the scope and duration of the COVID-19 pandemic, vaccine adoption rates and the effectiveness of vaccines against variants, and the actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, and deferred tax assets.
While economic conditions have improved, the ongoing COVID-19 pandemic has placed strain on certain businesses and service providers, many of which have not been able to conduct operations in their usual manner. Should the COVID-19 pandemic persist, we anticipate it may have an impact on the following:
•Loan growth and interest income - Economic activity expanded moderately during the first nine months of 2021, but macroeconomic conditions have not yet fully recovered to the levels observed prior to the onset of the COVID-19 pandemic in the first quarter of 2020. If a recovery in economic conditions fails to continue, it may have an impact on our borrowers, the businesses they operate, and their financial condition. Our borrowers may have less demand for credit needed to invest in and expand their businesses and/or support their ongoing operations. Additionally, our borrowers may have less demand for real estate and consumer loans. Further, the Federal Reserve’s Federal Open Market Committee continues to maintain the federal funds rate within a range of 0% to 0.25%. Lower levels of interest rates in conjunction with the potential reduction in future loan growth would place pressure on the level of and yield on interest-earning assets, which may negatively impact our interest income.
•Credit quality - Elevated levels of unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things, may result in additional weakness in economic conditions, place strain on our borrowers, and ultimately impact the credit quality of our loan portfolio. We expect this would result in increases in the level of past due, nonaccrual, and classified loans, as well as higher net charge-offs. While there has been a recovery in economic conditions since the onset of the COVID-19 pandemic in the first quarter of 2020, there can be no assurance the recovery will continue. As such, future deterioration in credit quality may require us to record additional provisions for credit losses.
•CECL - On January 1, 2020, the Company adopted ASC 326, which requires the Company to measure credit losses on certain financial assets, such as loans and debt securities, using the CECL model. The CECL model for measuring credit losses is highly dependent upon expectations of future economic conditions and requires management judgment. Should the recovery in economic conditions fail to continue and the expectations concerning future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses under the CECL model.
•Impairment charges - Should the recovery in economic conditions fail to continue, it may adversely impact the Company’s operating results and the value of certain of our assets. As a result, the Company may be required to write-down the value of certain assets such as goodwill, intangible assets, or deferred tax assets when there is evidence to suggest their value has become impaired or will not be realizable at a future date.
The U.S. government as well as other state and local policy makers have responded to the ongoing COVID-19 pandemic with actions geared to support not only the health and well-being of the public, but also consumers, businesses, and the economy as a whole. In addition, during the first quarter of 2021, the President signed into law the American Rescue Plan Act of 2021 (“American Rescue Plan”), which provides approximately $1.9 trillion in various forms of economic stimulus and aid to individuals and state and local governments that have been affected by the ongoing COVID-19 pandemic. However, the impact and overall effectiveness of these actions is difficult to determine at this time.
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ACQUISITION OF OPUS
Effective as of June 1, 2020, the Corporation completed the acquisition of Opus, a California-chartered state bank headquartered in Irvine, California, pursuant to a definitive agreement dated as of January 31, 2020. At closing, Opus had $8.32 billion in total assets, $5.94 billion in gross loans, and $6.91 billion in total deposits and operated 46 banking offices located throughout California, Washington, Oregon, and Arizona. As a result of the Opus acquisition, the Corporation acquired specialty lines of business, including trust and escrow services.
Pursuant to the terms of the merger agreement, the consideration paid to Opus shareholders consisted of whole shares of the Corporation’s common stock and cash in lieu of fractional shares of the Corporation’s common stock. Upon consummation of the transaction, (i) each share of Opus common stock issued and outstanding immediately prior to the effective time of the acquisition was canceled and exchanged for the right to receive 0.900 shares of the Corporation’s common stock, with cash to be paid in lieu of fractional shares at a rate of $19.31 per share, and (ii) each share of Opus Series A non-cumulative, non-voting preferred stock issued and outstanding immediately prior to the effective time of the acquisition was converted into and canceled in exchange for the right to receive that number of shares of the Corporation’s common stock equal to the product of (X) the number of shares of Opus common stock into which such share of Opus preferred stock was convertible in connection with, and as a result of, the acquisition, and (Y) 0.900, in each case, plus cash in lieu of fractional shares of the Corporation’s common stock.
The Corporation issued 34,407,403 shares of the Corporation’s common stock valued at $21.62 per share, which was the closing price of the Corporation’s common stock on May 29, 2020, the last trading day prior to the consummation of the acquisition, and paid cash in lieu of fractional shares. The Corporation assumed Opus’s warrants and options, which represented the issuance of up to approximately 406,778 and 9,538 additional shares of the Corporation’s common stock, valued at approximately $1.8 million and $46,000, respectively, and issued substitute restricted stock units in an aggregate amount of $328,000. The value of the total transaction consideration paid amounted to approximately $749.6 million. The Opus warrants assumed by the Corporation expired unexercised as of September 30, 2020 and no longer remain outstanding. The Opus options assumed by the Corporation were fully exercised during the third quarter of 2020.
As a result of the Opus acquisition, the Company acquired Opus and recorded net assets of $656.6 million. The final fair value of assets acquired and liabilities assumed primarily consist of the following:
•$5.81 billion of loans
•$937.1 million of cash and cash equivalents
•$829.9 million of investment securities
•$93.0 million of goodwill
•$16.1 million of core deposit intangible
•$3.2 million of customer relationship intangible
•$6.92 billion of deposits
The fair values of the assets acquired and liabilities assumed were determined based on the requirements of ASC 820 - Fair Value Measurement. Such fair values are preliminary estimates at the time of acquisition and are subject to adjustment for up to one year after the merger date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Since the acquisition, the Company has made a net adjustment of $146,000 related to loans, deferred tax assets, other assets, and other liabilities. During the second quarter of 2021, the Company finalized its fair values analysis of the acquired assets and assumed liabilities associated with this acquisition. For additional information about the acquisition of Opus, please see Note 4 - Acquisitions.
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The client account integration and system conversion of Opus was completed in October 2020. At the same time, as a result of the Opus acquisition, the Bank consolidated 20 branch offices primarily in California, Washington, and Arizona into nearby branch offices. The consolidated branches were identified largely based on the proximity of neighboring branches, historic growth, and market opportunity to improve further the overall efficiency of operations in line with the Bank's ongoing cost reduction initiatives.
CRITICAL ACCOUNTING POLICIES
Management has established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Certain accounting policies require management to make estimates and assumptions that involve a significant level of estimation uncertainty and are reasonably likely to have a material impact on the carrying value of certain assets and liabilities as well as the Company’s results of operations; management considers these to be critical accounting policies. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of the Company’s assets and liabilities as well as the Company’s results of operations in future reporting periods. Our significant accounting policies are described in the Notes to the consolidated financial statements in our 2020 Form 10-K.
Allowance for Credit Losses
The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for current expected future credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. The Company measures the ACL on commercial real estate loans and commercial loans using a discounted cash flow approach, and a historical loss rate methodology is used to determine the ACL on retail loans. The Company’s discounted cash flow methodology incorporates a probability of default and loss given default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. The use of reasonable and supportable forecasts require significant judgment, such as selecting forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management leverages economic projections from a reputable and independent third party to inform and provide its reasonable and supportable economic forecasts. Other internal and external indicators of economic forecasts may also be considered by management when developing the forecast metrics. The Company’s ACL model reverts to long-term average loss rates for purposes of estimating expected cash flows beyond a period deemed reasonable and supportable. The Company forecasts economic conditions and expected credit losses over a two-year time horizon before reverting to long-term average loss rates over a period of three years. The duration of the forecast horizon, the period over which forecasts revert to long-term averages, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio. Changes in economic forecasts, in conjunction with changes in loan specific attributes, impact a loan’s probability of default and loss given default, which can drive changes in the determination of the ACL.
Expectations of future cash flows are discounted at the loan’s effective interest rate. The resulting ACL represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is the Company’s policy to promptly charge-off loan balances at the time they have been deemed uncollectible. Please also see Note 7 - Allowance for Credit Losses, of the consolidated financial statements for additional discussion concerning the Company’s ACL methodology, including discussion concerning economic forecasts used in the determination of the ACL.
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The Company’s ACL model also includes adjustments for qualitative factors where appropriate. Since historical information (such as historical net losses and economic cycles) may not always, by themselves, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios, changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.
The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a substandard or worse internal risk grade, and may consist of loans on nonaccrual status, troubled debt restructurings, loans where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans, and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, be deemed to no longer possess risk characteristics similar to other loans in the loan portfolio, and as such, may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent. Collateral dependent loans are loans where the repayment of the loan is expected to come from the operation of and/or eventual liquidation of the underlying collateral. The ACL for collateral dependent loans is determined using estimates for the fair value of the underlying collateral, less costs to sell.
Although management uses the best information available to derive estimates necessary to measure an appropriate level of the ACL, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit risk grading process. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. Upon obtaining control of the acquired entity, the Company records all identifiable assets and liabilities at their estimated fair values. Goodwill is recorded when the consideration paid for an acquired entity exceeds the estimated fair value of the net assets acquired. Changes to the acquisition date fair values of assets acquired and liabilities assumed may be made as adjustments to goodwill over a 12-month measurement period following the date of acquisition. Such adjustments are attributable to additional information obtained related to fair value estimates of the assets acquired and liabilities assumed. Certain costs associated with business combinations are expensed as incurred.
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Goodwill
Goodwill assets arise from the acquisition method of accounting for business combinations and represent the excess value of the consideration paid over the fair value of the net assets acquired. Goodwill assets are deemed to have indefinite lives, are not subject to amortization and instead are tested for impairment at least annually. The Company’s policy is to assess goodwill for impairment in the fourth quarter of each year or more frequently if events or circumstances lead management to believe the value of goodwill may be impaired. Impairment testing is performed at the reporting unit level, which is considered the Corporation level as management has identified the Corporation as its sole reporting unit as of the date of the consolidated statements of financial condition. Management’s assessment of goodwill is performed in accordance with ASC 350-20 - Goodwill and Other - Goodwill, which allows the Company to first perform a qualitative assessment of goodwill to determine if it is more likely than not the fair value of the Company’s equity is below its carrying value. However, GAAP also allows the Company, at its option, to unconditionally forego the qualitative assessment and proceed directly to a quantitative assessment. When performing a qualitative assessment of goodwill, should the results of such analysis indicate it is more likely than not the fair value of the Company’s equity is below its carrying value, the Company then performs the quantitative assessment of goodwill to determine the fair value of the reporting unit and compares it to its carrying value. If the fair value of the reporting unit is below its carrying value, the Company would then recognize the amount of impairment as the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill allocated to the reporting unit. Impairment losses are recorded as a charge to noninterest expense.
The Company is required to employ the use of significant judgment in its assessment of goodwill, both in a qualitative assessment and a quantitative assessment, if needed. Assessments of goodwill often require the use of fair value estimates, which are dependent upon various factors including estimates concerning the Company’s long term growth prospects. Imprecision in estimates can affect the estimated fair value of the reporting unit in a goodwill assessment. Additionally, various events or circumstances could have a negative effect on the estimated fair value of a reporting unit, including declines in business performance, increases in credit losses, as well as deterioration in economic or market conditions, which may result in a material impairment charge to earnings in future periods.
Acquired Loans
When the Company acquires loans through purchase or a business combination an assessment is first performed to determine if such loans have experienced more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as PCD loans or otherwise classified as non-PCD loans. All acquired loans are recorded at their fair value as of the date of acquisition, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records an ACL based on the Company’s methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to provision for credit losses in the period in which the loans were purchased or acquired.
Unlike non-PCD loans, the initial ACL for PCD loans is established through an adjustment to the acquired loan balance and not through a charge to provision for credit losses in the period in which the loans were acquired. The ACL for PCD loans is determined with the use of the Company’s ACL methodology. Characteristics of PCD loans include: delinquency, downgrade in credit quality since origination, loans on nonaccrual status, loans that had been modified, and/or other factors the Company may become aware of through its initial analysis of acquired loans that may indicate there has been more than insignificant deterioration in credit quality since a loan’s origination. Subsequent to acquisition, the ACL for both non-PCD and PCD loans are determined with the use of the Company’s ACL methodology in the same manner as all other loans.
In connection with the Opus acquisition on June 1, 2020, the Company acquired PCD loans with an aggregate fair value of approximately $841.2 million, and recorded a net ACL of approximately $21.2 million, which was added to the amortized cost of the loans.
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Fair Value of Financial Instruments
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Investment securities available-for-sale, derivative instruments, and equity warrant assets are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other financial assets at fair value on a non-recurring basis, such as collateral dependent loans that are individually evaluated and OREO. These non-recurring fair value adjustments typically involve the application of lower of cost or fair value accounting or write-downs of individual assets. Please also see Note 11 - Fair Value of Financial Instruments of the consolidated financial statements for more information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used, and its impact to earnings, as well as the estimated fair value disclosures for financial instruments not recorded at fair value.
Income Taxes
Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the asset liability method. In estimating future tax consequences, all expected future events other than enactments of changes in tax laws or tax rates are considered. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are to be recognized for temporary differences that will result in deductible amounts in future years and for tax carryforwards if, in the opinion of management, it is more likely than not that the deferred tax assets will be realized.
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NON-GAAP MEASURES
The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated, and presented in accordance with GAAP. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures and may not be comparable to non-GAAP financial measures that may be presented by other companies.
For periods presented below, return on average tangible common equity is a non-GAAP financial measure derived from GAAP-based amounts. We calculate this figure by excluding amortization of intangible assets expense from net income and excluding the average intangible assets and average goodwill from the average stockholders’ equity during the period. Management believes that the exclusion of such items from this financial measure provides useful information to gain an understanding of the operating results of our core business.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Net income (loss) | $ | 90,088 | $ | 96,302 | $ | 66,566 | $ | 255,058 | $ | (6,785) | ||||||||||||||||||||||
Plus: amortization of intangible assets expense | 3,912 | 4,001 | 4,538 | 12,056 | 12,567 | |||||||||||||||||||||||||||
Less: amortization of intangible assets expense tax adjustment (1) | 1,119 | 1,145 | 1,301 | 3,449 | 3,605 | |||||||||||||||||||||||||||
Net income for average tangible common equity | $ | 92,881 | $ | 99,158 | $ | 69,803 | $ | 263,665 | $ | 2,177 | ||||||||||||||||||||||
Average stockholders’ equity | $ | 2,844,800 | $ | 2,747,308 | $ | 2,689,867 | $ | 2,780,932 | $ | 2,321,138 | ||||||||||||||||||||||
Less: average intangible assets | 75,795 | 79,784 | 92,768 | 79,812 | 86,244 | |||||||||||||||||||||||||||
Less: average goodwill | 901,312 | 900,582 | 898,430 | 900,170 | 848,675 | |||||||||||||||||||||||||||
Average tangible common equity | $ | 1,867,693 | $ | 1,766,942 | $ | 1,698,669 | $ | 1,800,950 | $ | 1,386,219 | ||||||||||||||||||||||
Return on average equity (2) | 12.67 | % | 14.02 | % | 9.90 | % | 12.23 | % | (0.39) | % | ||||||||||||||||||||||
Return on average tangible common equity (2) | 19.89 | % | 22.45 | % | 16.44 | % | 19.52 | % | 0.21 | % | ||||||||||||||||||||||
______________________________
(1) Amortization of intangible assets expense adjusted by statutory tax rate.
(2) Ratio is annualized.
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Tangible book value per share and tangible common equity to tangible assets (the “tangible common equity ratio”) are non-GAAP financial measures derived from GAAP-based amounts. We calculate tangible book value per share by dividing tangible common stockholder’s equity by shares outstanding. We calculate the tangible common equity ratio by excluding the balance of intangible assets from common stockholders’ equity and dividing by period end tangible assets, which also excludes intangible assets. We believe that this information is important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk-based ratios.
September 30, | December 31, | ||||||||||
(Dollars in thousands) | 2021 | 2020 | |||||||||
Total stockholders’ equity | $ | 2,838,116 | $ | 2,746,649 | |||||||
Less: intangible assets | 974,763 | 984,076 | |||||||||
Tangible common equity | $ | 1,863,353 | $ | 1,762,573 | |||||||
Total assets | $ | 21,005,211 | $ | 19,736,544 | |||||||
Less: intangible assets | 974,763 | 984,076 | |||||||||
Tangible assets | $ | 20,030,448 | $ | 18,752,468 | |||||||
Tangible common equity ratio | 9.30 | % | 9.40 | % | |||||||
Common shares issued and outstanding | 94,354,211 | 94,483,136 | |||||||||
Book value per share | $ | 30.08 | $ | 29.07 | |||||||
Less: intangible book value per share | 10.33 | 10.42 | |||||||||
Tangible book value per share | $ | 19.75 | $ | 18.65 |
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For periods presented below, efficiency ratio is a non-GAAP financial measure derived from GAAP-based amounts. This figure represents the ratio of noninterest expense less other real estate owned operations, core deposit intangible amortization, and merger-related expense to the sum of net interest income before provision for loan losses and total noninterest income, less gain/(loss) on sale of securities, other income - security recoveries on investment securities, gain/(loss) on sale of other real estate owned, and gain/(loss) from debt extinguishment. Management believes that the exclusion of such items from this financial measure provides useful information to gain an understanding of the operating results of our core business.
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Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Total noninterest expense | $ | 96,040 | $ | 94,496 | $ | 98,579 | $ | 283,025 | $ | 281,180 | ||||||||||||||||||||||
Less: amortization of intangible assets | 3,912 | 4,001 | 4,538 | 12,056 | 12,567 | |||||||||||||||||||||||||||
Less: merger-related expense | — | — | 2,988 | 5 | 44,058 | |||||||||||||||||||||||||||
Less: other real estate owned operations, net | — | — | (17) | — | 6 | |||||||||||||||||||||||||||
Noninterest expense, adjusted | $ | 92,128 | $ | 90,495 | $ | 91,070 | $ | 270,964 | $ | 224,549 | ||||||||||||||||||||||
Net interest income before provision for loan losses | $ | 169,069 | $ | 160,934 | $ | 166,546 | $ | 491,655 | $ | 406,013 | ||||||||||||||||||||||
Add: total noninterest income | 30,100 | 26,729 | 26,758 | 80,569 | 48,131 | |||||||||||||||||||||||||||
Less: net gain from investment securities | 4,190 | 5,085 | 1,141 | 13,321 | 8,880 | |||||||||||||||||||||||||||
Less: other income - security recoveries | 1 | 6 | 1 | 9 | 1 | |||||||||||||||||||||||||||
Less: net gain (loss) from other real estate owned | — | — | 13 | — | (42) | |||||||||||||||||||||||||||
Less: net gain (loss) from debt extinguishment | 970 | (647) | — | (180) | — | |||||||||||||||||||||||||||
Revenue, adjusted | $ | 194,008 | $ | 183,219 | $ | 192,149 | $ | 559,074 | $ | 445,305 | ||||||||||||||||||||||
Efficiency ratio | 47.5 | % | 49.4 | % | 47.4 | % | 48.5 | % | 50.4 | % |
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Core net interest income and core net interest margin are non-GAAP financial measures derived from GAAP based amounts. We calculate core net interest income by excluding scheduled accretion income, accelerated accretion income, premium amortization on CDs, and nonrecurring nonaccrual interest paid from net interest income. The core net interest margin is calculated as the ratio of core net interest income to average interest-earning assets. Management believes that the exclusion of such items from these financial measures provides useful information to gain an understanding of the operating results of our core business.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Net interest income | $ | 169,069 | $ | 160,934 | $ | 166,546 | $ | 491,655 | $ | 406,013 | ||||||||||||||||||||||
Less: scheduled accretion income | 3,339 | 3,560 | 6,858 | 10,777 | 12,152 | |||||||||||||||||||||||||||
Less: accelerated accretion income | 6,107 | 5,927 | 5,338 | 18,022 | 9,997 | |||||||||||||||||||||||||||
Less: premium amortization on CDs | 390 | 942 | 2,968 | 3,083 | 4,085 | |||||||||||||||||||||||||||
Less: nonrecurring nonaccrual interest paid | (74) | (216) | (275) | (893) | (417) | |||||||||||||||||||||||||||
Core net interest income | $ | 159,307 | $ | 150,721 | $ | 151,657 | $ | 460,666 | $ | 380,196 | ||||||||||||||||||||||
Less: interest income on SBA PPP loans | — | — | 838 | — | 6,220 | |||||||||||||||||||||||||||
Core net interest income excluding SBA PPP loans | $ | 159,307 | $ | 150,721 | $ | 150,819 | $ | 460,666 | $ | 373,976 | ||||||||||||||||||||||
Average interest-earning assets | $ | 19,131,172 | $ | 18,783,803 | $ | 18,707,605 | $ | 18,804,146 | $ | 14,317,164 | ||||||||||||||||||||||
Less: average SBA PPP loans | — | — | 329,396 | — | 386,287 | |||||||||||||||||||||||||||
Average interest-earning assets excluding SBA PPP loans | $ | 19,131,172 | $ | 18,783,803 | $ | 18,378,209 | $ | 18,804,146 | $ | 13,930,877 | ||||||||||||||||||||||
Net interest margin (1) | 3.51 | % | 3.44 | % | 3.54 | % | 3.50 | % | 3.79 | % | ||||||||||||||||||||||
Core net interest margin (1) | 3.30 | % | 3.22 | % | 3.23 | % | 3.28 | % | 3.55 | % | ||||||||||||||||||||||
Core net interest margin excluding SBA PPP loans (1) | 3.30 | % | 3.22 | % | 3.26 | % | 3.28 | % | 3.59 | % |
______________________________
(1) Ratio is annualized.
99
Pre-provision net revenue is a non-GAAP financial measure derived from GAAP-based amounts. We calculate the pre-provision net revenue by excluding income tax, provision for credit losses, and merger-related expenses from net income. Management believes that the exclusion of such items from this financial measure provides useful information to gain an understanding of the operating results of our core business and a better comparison to the financial results of prior periods.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Interest income | $ | 176,047 | $ | 170,692 | $ | 181,991 | $ | 519,733 | $ | 449,902 | ||||||||||||||||||||||
Interest expense | 6,978 | 9,758 | 15,445 | 28,078 | 43,889 | |||||||||||||||||||||||||||
Net interest income | 169,069 | 160,934 | 166,546 | 491,655 | 406,013 | |||||||||||||||||||||||||||
Noninterest income | 30,100 | 26,729 | 26,758 | 80,569 | 48,131 | |||||||||||||||||||||||||||
Revenue | 199,169 | 187,663 | 193,304 | 572,224 | 454,144 | |||||||||||||||||||||||||||
Noninterest expense | 96,040 | 94,496 | 98,579 | 283,025 | 281,180 | |||||||||||||||||||||||||||
Add: merger-related expense | — | — | 2,988 | 5 | 44,058 | |||||||||||||||||||||||||||
Pre-provision net revenue | 103,129 | 93,167 | 97,713 | 289,204 | 217,022 | |||||||||||||||||||||||||||
Pre-provision net revenue (annualized) | $ | 412,516 | $ | 372,668 | $ | 390,852 | $ | 385,605 | $ | 289,363 | ||||||||||||||||||||||
Average assets | $ | 20,804,903 | $ | 20,290,415 | $ | 20,366,761 | $ | 20,366,162 | $ | 15,728,468 | ||||||||||||||||||||||
Pre-provision net revenue on average assets | 0.50 | % | 0.46 | % | 0.48 | % | 1.42 | % | 1.38 | % | ||||||||||||||||||||||
Pre-provision net revenue on average assets (annualized) | 1.98 | % | 1.84 | % | 1.92 | % | 1.89 | % | 1.84 | % |
100
RESULTS OF OPERATIONS
The following table presents the components of results of operations, share data, and performance ratios for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
(Dollar in thousands, except per share data and | September 30, | June 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||
percentages) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Operating data | ||||||||||||||||||||||||||||||||
Interest income | $ | 176,047 | $ | 170,692 | $ | 181,991 | $ | 519,733 | $ | 449,902 | ||||||||||||||||||||||
Interest expense | 6,978 | 9,758 | 15,445 | 28,078 | 43,889 | |||||||||||||||||||||||||||
Net interest income | 169,069 | 160,934 | 166,546 | 491,655 | 406,013 | |||||||||||||||||||||||||||
Provision for credit losses | (19,726) | (38,476) | 4,210 | (56,228) | 190,299 | |||||||||||||||||||||||||||
Net interest income after provision for credit losses | 188,795 | 199,410 | 162,336 | 547,883 | 215,714 | |||||||||||||||||||||||||||
Net gain from sales of loans | 1,187 | 1,546 | 9,542 | 3,094 | 8,281 | |||||||||||||||||||||||||||
Other noninterest income | 28,913 | 25,183 | 17,216 | 77,475 | 39,850 | |||||||||||||||||||||||||||
Noninterest expense | 96,040 | 94,496 | 98,579 | 283,025 | 281,180 | |||||||||||||||||||||||||||
Net income (loss) before income taxes | 122,855 | 131,643 | 90,515 | 345,427 | (17,335) | |||||||||||||||||||||||||||
Income tax expense (benefit) | 32,767 | 35,341 | 23,949 | 90,369 | (10,550) | |||||||||||||||||||||||||||
Net income (loss) | $ | 90,088 | $ | 96,302 | $ | 66,566 | $ | 255,058 | $ | (6,785) | ||||||||||||||||||||||
Pre-provision net revenue (3) | $ | 103,129 | $ | 93,167 | $ | 97,713 | $ | 289,204 | $ | 217,022 | ||||||||||||||||||||||
Share data | ||||||||||||||||||||||||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||||||||||||
Basic | $ | 0.95 | $ | 1.02 | $ | 0.71 | $ | 2.70 | $ | (0.10) | ||||||||||||||||||||||
Diluted | 0.95 | 1.01 | 0.70 | 2.68 | (0.10) | |||||||||||||||||||||||||||
Common equity dividends declared per share | 0.33 | 0.33 | 0.25 | 0.96 | 0.75 | |||||||||||||||||||||||||||
Dividend payout ratio (1) | 34.63 | % | 32.43 | % | 35.45 | % | 35.59 | % | (759.20) | % | ||||||||||||||||||||||
Performance ratios | ||||||||||||||||||||||||||||||||
Return on average assets (2) | 1.73 | % | 1.90 | % | 1.31 | % | 1.67 | % | (0.06) | % | ||||||||||||||||||||||
Return on average equity (2) | 12.67 | 14.02 | 9.90 | 12.23 | (0.39) | |||||||||||||||||||||||||||
Return on average tangible common equity (2)(3) | 19.89 | 22.45 | 16.44 | 19.52 | 0.21 | |||||||||||||||||||||||||||
Pre-provision net revenue on average assets (2)(3) | 1.98 | 1.84 | 1.92 | 1.89 | 1.84 | |||||||||||||||||||||||||||
Average equity to average assets | 13.67 | 13.54 | 13.21 | 13.65 | 14.76 | |||||||||||||||||||||||||||
Efficiency ratio (3) | 47.5 | 49.4 | 47.4 | 48.5 | 50.4 |
______________________________
(1) Dividend payout ratio is defined as common equity dividends declared per share divided by basic earnings per share.
(2) Ratio is annualized.
(3) A reconciliation of the non-GAAP measures are set forth in the Non-GAAP Measures section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q.
101
In the third quarter of 2021, we reported net income of $90.1 million, or $0.95 per diluted share. This compares with net income of $96.3 million, or $1.01 per diluted share, for the second quarter of 2021. The decrease in net income was primarily due to $18.8 million lower recapture of provision for credit losses and an increase of $1.5 million in noninterest expense, partially offset by an increase of $8.1 million in net interest income, a $3.4 million increase in noninterest income, and a decrease of $2.6 million in income tax expense. The provision recaptures during the second and third quarters of 2021 were reflective of improving economic forecasts used in the Company’s CECL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment.
Net income of $90.1 million, or $0.95 per diluted share, for the third quarter of 2021 compares to a net income for the third quarter of 2020 of $66.6 million, or $0.70 per diluted share. The increase in net income was primarily due to a $23.9 million decrease in provision for credit losses, a $3.3 million increase in noninterest income, a $3.0 million decrease in merger-related expense, and a $2.5 million increase in net interest income, partially offset by an increase of $8.8 million in income tax expense and a $449,000 increase in noninterest expense excluding merger-related expenses. The decrease in the provision for credit losses during the third quarter of 2021 was primarily due to improved economic forecasts used in the Company’s CECL model relative to prior periods and the favorable asset quality profile of the loan portfolio.
For the three months ended September 30, 2021, the Company’s return on average assets was 1.73%, return on average equity was 12.67%, and return on average tangible common equity was 19.89%. For the three months ended June 30, 2021, the return on average assets was 1.90%, the return on average equity was 14.02%, and the return on average tangible common equity was 22.45%. For the three months ended September 30, 2020, the return on average assets was 1.31%, the return on average equity was 9.90%, and the return on average tangible common equity was 16.44%.
For the nine months ended September 30, 2021, the Company recorded net income of $255.1 million, or $2.68 per diluted share. This compares with net loss of $6.8 million, or $(0.10) per diluted share, for the nine months ended September 30, 2020. The increase in net income of $261.8 million was primarily due to a $246.5 million decrease in the provision for credit losses, an $85.6 million increase in net interest income, a $44.1 million decrease in merger-related expenses, and a $32.4 million increase in noninterest income, partially offset by a $100.9 million increase in income tax expense and a $45.9 million increase in noninterest expense excluding merger-related expenses. The decrease in the provision for credit losses was attributable to higher provision expense from the Company’s adoption of ASC 326 effective January 1, 2020, the acquisition of Opus, and unfavorable economic forecasts used in the Company’s CECL model driven by the COVID-19 pandemic, as well as the $38.5 million and $19.7 million recapture of provision for credit losses during the second and third quarter of 2021, respectively, primarily due to improved economic forecasts used in the Company’s CECL model relative to prior periods and the favorable asset quality profile of the loan portfolio. The year-over-year increases in net income reflect the impact of the acquisition of Opus in the second quarter of 2020.
For the nine months ended September 30, 2021, the Company’s return on average assets was 1.67%, return on average equity was 12.23%, and return on average tangible common equity was 19.52%, compared with a return on average assets of (0.06)%, return on average equity of (0.39)%, and a return on average tangible common equity of 0.21% for the nine months ended September 30, 2020.
102
Net Interest Income
Our primary source of revenue is net interest income, which is the difference between the interest earned on loans, investment securities, and interest-earning balances with financial institutions (“interest-earning assets”) and the interest paid on deposits and borrowings (“interest-bearing liabilities”). Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income is affected by changes in both interest rates and the volume of interest-earning assets and interest-bearing liabilities.
Net interest income totaled $169.1 million in the third quarter of 2021, an increase of $8.1 million, or 5.1%, from the second quarter of 2021. The increase in net interest income was due to higher average interest-earning assets, higher loan fees, one more day of interest, and a lower cost of funds as compared to the prior quarter, partially offset by lower average investment securities and loan yields.
The net interest margin for the third quarter of 2021 was 3.51%, compared with 3.44% in the prior quarter. Our core net interest margin, which excludes the impact of loan accretion income of $9.4 million, compared to $9.5 million in the prior quarter, certificates of deposit mark-to-market amortization, and other adjustments, increased eight basis points to 3.30%, compared to 3.22% in the prior quarter, reflecting lower cost of funds and higher loan fees, partially offset by lower average investment and loan yields and fees.
Net interest income for the third quarter of 2021 increased $2.5 million, or 1.5%, compared to the third quarter of 2020. The increase was attributable to a lower cost of funds, a $1.52 billion increase in average investment securities, and a $377.5 million decrease in average interest-bearing liabilities, which primarily resulted from the redemptions of subordinated debentures, partially offset by lower average interest-earning asset yields and lower average loan balances.
For the first nine months ended 2021, net interest income increased $85.6 million, or 21.1%, compared to the first nine months ended 2020. The increase was related to an increase in average interest-earning assets of $4.49 billion, which resulted primarily from our acquisition of Opus on June 1, 2020, and a lower cost of funds, partially offset by lower average loan and investment yields and higher average interest-bearing liabilities.
103
The following table presents the interest spread, net interest margin, average balances calculated based on daily average, interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, and the average yield/rate by asset and liability component for the periods indicated:
Average Balance Sheet | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2021 | June 30, 2021 | September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | |||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 663,076 | $ | 195 | 0.12 | % | $ | 1,323,186 | $ | 315 | 0.10 | % | $ | 1,388,897 | $ | 305 | 0.09 | % | ||||||||||||||||||||||||||||||||||||||
Investment securities | 4,807,854 | 18,827 | 1.57 | 4,243,644 | 18,012 | 1.70 | 3,283,840 | 14,231 | 1.73 | |||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable, net (1)(2) | 13,660,242 | 157,025 | 4.56 | 13,216,973 | 152,365 | 4.62 | 14,034,868 | 167,455 | 4.75 | |||||||||||||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 19,131,172 | 176,047 | 3.65 | 18,783,803 | 170,692 | 3.64 | 18,707,605 | 181,991 | 3.87 | |||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-earning assets | 1,673,731 | 1,506,612 | 1,659,156 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 20,804,903 | $ | 20,290,415 | $ | 20,366,761 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest checking | $ | 3,383,219 | $ | 290 | 0.03 | % | $ | 3,155,935 | $ | 336 | 0.04 | % | $ | 3,001,738 | $ | 1,191 | 0.16 | % | ||||||||||||||||||||||||||||||||||||||
Money market | 5,554,881 | 1,309 | 0.09 | 5,558,790 | 2,002 | 0.14 | 5,490,541 | 4,855 | 0.35 | |||||||||||||||||||||||||||||||||||||||||||||||
Savings | 401,804 | 58 | 0.06 | 384,376 | 84 | 0.09 | 357,768 | 109 | 0.12 | |||||||||||||||||||||||||||||||||||||||||||||||
Retail certificates of deposit | 1,196,187 | 775 | 0.26 | 1,294,544 | 839 | 0.26 | 1,587,712 | 1,857 | 0.47 | |||||||||||||||||||||||||||||||||||||||||||||||
Wholesale/brokered certificates of deposit | — | — | — | 1,357 | 4 | 1.18 | 265,672 | 497 | 0.74 | |||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits | 10,536,091 | 2,432 | 0.09 | 10,395,002 | 3,265 | 0.13 | 10,703,431 | 8,509 | 0.32 | |||||||||||||||||||||||||||||||||||||||||||||||
FHLB advances and other borrowings | 1,670 | 1 | 0.24 | 6,303 | — | — | 41,041 | 113 | 1.10 | |||||||||||||||||||||||||||||||||||||||||||||||
Subordinated debentures | 330,575 | 4,545 | 5.50 | 480,415 | 6,493 | 5.41 | 501,396 | 6,823 | 5.44 | |||||||||||||||||||||||||||||||||||||||||||||||
Total borrowings | 332,245 | 4,546 | 5.43 | 486,718 | 6,493 | 5.35 | 542,437 | 6,936 | 5.09 | |||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 10,868,336 | 6,978 | 0.25 | 10,881,720 | 9,758 | 0.36 | 11,245,868 | 15,445 | 0.55 | |||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing deposits | 6,809,211 | 6,341,063 | 5,877,619 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 282,556 | 320,324 | 553,407 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 17,960,103 | 17,543,107 | 17,676,894 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 2,844,800 | 2,747,308 | 2,689,867 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 20,804,903 | $ | 20,290,415 | $ | 20,366,761 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 169,069 | $ | 160,934 | $ | 166,546 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin (3) | 3.51 | % | 3.44 | % | 3.54 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of deposits (4) | 0.06 | 0.08 | 0.20 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of funds (5) | 0.16 | 0.23 | 0.36 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 176.03 | 172.62 | 166.35 |
______________________________
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums.
(2) Interest income includes net discount accretion of $9.4 million, $9.5 million, and $12.2 million, respectively.
(3) Represents annualized net interest income divided by average interest-earning assets.
(4) Represents annualized interest expense on deposits divided by the sum of average interest-bearing deposits and noninterest-bearing deposits.
(5) Represents annualized total interest expense divided by the sum of average total interest-bearing liabilities and noninterest-bearing deposits.
104
Average Balance Sheet | |||||||||||||||||||||||||||||||||||
Nine Months Ended | |||||||||||||||||||||||||||||||||||
September 30, 2021 | September 30, 2020 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | |||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,096,175 | $ | 811 | 0.10 | % | $ | 802,615 | $ | 736 | 0.12 | % | |||||||||||||||||||||||
Investment securities | 4,382,288 | 54,307 | 1.65 | % | 2,196,929 | 35,107 | 2.13 | % | |||||||||||||||||||||||||||
Loans receivable, net (1)(2) | 13,325,683 | 464,615 | 4.66 | % | 11,317,620 | 414,059 | 4.89 | % | |||||||||||||||||||||||||||
Total interest-earning assets | 18,804,146 | 519,733 | 3.70 | % | 14,317,164 | 449,902 | 4.20 | % | |||||||||||||||||||||||||||
Noninterest-earning assets | 1,562,016 | 1,411,304 | |||||||||||||||||||||||||||||||||
Total assets | $ | 20,366,162 | $ | 15,728,468 | |||||||||||||||||||||||||||||||
Liabilities and equity | |||||||||||||||||||||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||
Interest checking | $ | 3,200,920 | $ | 1,045 | 0.04 | % | $ | 1,666,723 | $ | 2,644 | 0.21 | % | |||||||||||||||||||||||
Money market | 5,520,919 | 5,899 | 0.14 | % | 4,302,817 | 16,606 | 0.52 | % | |||||||||||||||||||||||||||
Savings | 384,945 | 224 | 0.08 | % | 293,653 | 307 | 0.14 | % | |||||||||||||||||||||||||||
Retail certificates of deposit | 1,304,436 | 2,815 | 0.29 | % | 1,225,689 | 7,710 | 0.84 | % | |||||||||||||||||||||||||||
Wholesale/brokered certificates of deposit | 39,635 | 140 | 0.47 | % | 178,133 | 1,384 | 1.04 | % | |||||||||||||||||||||||||||
Total interest-bearing deposits | 10,450,855 | 10,123 | 0.13 | % | 7,667,015 | 28,651 | 0.50 | % | |||||||||||||||||||||||||||
FHLB advances and other borrowings | 9,921 | 66 | 0.89 | % | 173,649 | 1,411 | 1.09 | % | |||||||||||||||||||||||||||
Subordinated debentures | 436,888 | 17,889 | 5.46 | % | 335,260 | 13,827 | 5.50 | % | |||||||||||||||||||||||||||
Total borrowings | 446,809 | 17,955 | 5.37 | % | 508,909 | 15,238 | 4.00 | % | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 10,897,664 | 28,078 | 0.34 | % | 8,175,924 | 43,889 | 0.72 | % | |||||||||||||||||||||||||||
Noninterest-bearing deposits | 6,397,703 | 4,922,726 | |||||||||||||||||||||||||||||||||
Other liabilities | 289,863 | 308,680 | |||||||||||||||||||||||||||||||||
Total liabilities | 17,585,230 | 13,407,330 | |||||||||||||||||||||||||||||||||
Stockholders’ equity | 2,780,932 | 2,321,138 | |||||||||||||||||||||||||||||||||
Total liabilities and equity | $ | 20,366,162 | $ | 15,728,468 | |||||||||||||||||||||||||||||||
Net interest income | $ | 491,655 | $ | 406,013 | |||||||||||||||||||||||||||||||
Net interest margin (3) | 3.50 | % | 3.79 | % | |||||||||||||||||||||||||||||||
Cost of deposits (4) | 0.08 | % | 0.30 | % | |||||||||||||||||||||||||||||||
Cost of funds (5) | 0.22 | % | 0.45 | % | |||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities | 172.55 | % | 175.11 | % |
_____________________________
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums.
(2) Interest income includes net discount accretion of $28.8 million and $22.1 million, respectively.
(3) Represents net interest income divided by average interest-earning assets.
(4) Represents annualized interest expense on deposits divided by the sum of average interest-bearing deposits and noninterest-bearing deposits.
(5) Represents annualized total interest expense divided by the sum of average total interest-bearing liabilities and noninterest-bearing deposits.
105
Changes in our net interest income are a function of changes in volume, days in a period, and rates of interest-earning assets and interest-bearing liabilities. The following tables present the impact that the volume, days in a period, and rate changes have had on our net interest income for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes to our net interest income with respect to:
•Changes in volume (changes in volume multiplied by prior rate);
•Changes in days in a period (changes in days in a period multiplied by daily interest; no changes in days for comparisons of the three months ended September 30, 2021 to the three months ended September 30, 2020);
•Changes in interest rates (changes in interest rates multiplied by prior volume and includes the recognition of discounts/premiums and deferred fees/costs); and
•The net change or the combined impact of volume, days in a period, and rate changes allocated proportionately to changes in volume, days in a period, and changes in interest rates.
Three Months Ended September 30, 2021 Compared to Three Months Ended June 30, 2021 Increase (Decrease) Due to | |||||||||||||||||||||||
(Dollars in thousands) | Volume | Days | Rate | Net | |||||||||||||||||||
Interest-earning assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | (204) | $ | 2 | $ | 82 | $ | (120) | |||||||||||||||
Investment securities | 1,919 | — | (1,104) | 815 | |||||||||||||||||||
Loans receivable, net | 4,820 | 1,707 | (1,867) | 4,660 | |||||||||||||||||||
Total interest-earning assets | 6,535 | 1,709 | (2,889) | 5,355 | |||||||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||
Interest checking | 20 | 3 | (69) | (46) | |||||||||||||||||||
Money market | (1) | 14 | (706) | (693) | |||||||||||||||||||
Savings | 4 | 1 | (31) | (26) | |||||||||||||||||||
Retail certificates of deposit | (72) | 8 | — | (64) | |||||||||||||||||||
Wholesale/brokered certificates of deposit | (4) | — | — | (4) | |||||||||||||||||||
FHLB advances and other borrowings | (3) | — | 4 | 1 | |||||||||||||||||||
Subordinated debentures | (2,058) | — | 110 | (1,948) | |||||||||||||||||||
Total interest-bearing liabilities | (2,114) | 26 | (692) | (2,780) | |||||||||||||||||||
Change in net interest income | $ | 8,649 | $ | 1,683 | $ | (2,197) | $ | 8,135 |
106
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Increase (Decrease) Due to | |||||||||||||||||
(Dollars in thousands) | Volume | Rate | Net | ||||||||||||||
Interest-earning assets | |||||||||||||||||
Cash and cash equivalents | $ | (303) | $ | 193 | $ | (110) | |||||||||||
Investment securities | 5,740 | (1,144) | 4,596 | ||||||||||||||
Loans receivable, net | (4,175) | (6,255) | (10,430) | ||||||||||||||
Total interest-earning assets | 1,262 | (7,206) | (5,944) | ||||||||||||||
Interest-bearing liabilities | |||||||||||||||||
Interest checking | 154 | (1,055) | (901) | ||||||||||||||
Money market | 57 | (3,603) | (3,546) | ||||||||||||||
Savings | 16 | (67) | (51) | ||||||||||||||
Retail certificates of deposit | (384) | (698) | (1,082) | ||||||||||||||
Wholesale/brokered certificates of deposit | (249) | (248) | (497) | ||||||||||||||
FHLB advances and other borrowings | (62) | (50) | (112) | ||||||||||||||
Subordinated debentures | (2,354) | 76 | (2,278) | ||||||||||||||
Total interest-bearing liabilities | (2,822) | (5,645) | (8,467) | ||||||||||||||
Change in net interest income | $ | 4,084 | $ | (1,561) | $ | 2,523 |
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Increase (Decrease) due to | |||||||||||||||||||||||
(Dollars in thousands) | Volume | Days | Rate | Net | |||||||||||||||||||
Interest-earning assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 143 | $ | (3) | $ | (65) | $ | 75 | |||||||||||||||
Investment securities | 24,846 | — | (5,646) | 19,200 | |||||||||||||||||||
Loans receivable, net | 71,109 | (1,702) | (18,851) | 50,556 | |||||||||||||||||||
Total interest-earning assets | $ | 96,098 | $ | (1,705) | $ | (24,562) | $ | 69,831 | |||||||||||||||
Interest-bearing liabilities | |||||||||||||||||||||||
Interest checking | $ | 2,410 | $ | (4) | $ | (4,005) | $ | (1,599) | |||||||||||||||
Money market | 6,750 | (22) | (17,435) | (10,707) | |||||||||||||||||||
Savings | 96 | (1) | (178) | (83) | |||||||||||||||||||
Retail certificates of deposit | 532 | (10) | (5,417) | (4,895) | |||||||||||||||||||
Wholesale/brokered certificates of deposit | (727) | (1) | (516) | (1,244) | |||||||||||||||||||
FHLB advances and other borrowings | (1,125) | — | (220) | (1,345) | |||||||||||||||||||
Subordinated debentures | 4,209 | — | (147) | 4,062 | |||||||||||||||||||
Total interest-bearing liabilities | $ | 12,145 | $ | (38) | $ | (27,918) | $ | (15,811) | |||||||||||||||
Change in net interest income | $ | 83,953 | $ | (1,667) | $ | 3,356 | $ | 85,642 |
107
Provision for Credit Losses
For the third quarter of 2021, the Company recorded a $19.7 million provision recapture, compared to a $38.5 million provision recapture recognized during the second quarter of 2021, and a $4.2 million provision expense recognized during the third quarter of 2020. The provision recapture for the third quarter of 2021 was comprised of a $19.5 million provision recapture for loan losses, a $194,000 provision recapture for unfunded commitments, and an $11,000 provision expense for held-to-maturity securities that were transferred from available-for-sale during the third quarter. The provision recaptures for loans and unfunded commitments during the third quarter of 2021 were reflective of improving economic forecasts employed in the Company’s CECL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment. The provision expense in the third quarter of 2020 reflected unfavorable changes in economic forecasts related to the onset of the COVID-19 pandemic.
Three Months Ended | ||||||||||||||||||||
September 30, | June 30, | September 30, | ||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | |||||||||||||||||
Provision for credit losses | ||||||||||||||||||||
Provision for loan losses | $ | (19,543) | $ | (33,131) | $ | 4,702 | ||||||||||||||
Provision for unfunded commitments | (194) | (5,345) | (492) | |||||||||||||||||
Provision for held-to-maturity securities | $ | 11 | $ | — | $ | — | ||||||||||||||
Total provision for credit losses | $ | (19,726) | $ | (38,476) | $ | 4,210 |
For the first nine months of 2021, the Company recorded a $56.2 million provision recapture, compared to a $190.3 million provision expense recorded for the first nine months of 2020. The provision recapture for the first nine months of 2021, which included a $52.4 million provision recapture for loan losses, a $3.9 million provision recapture for unfunded commitments, and an $11,000 provision expense for held-to-maturity securities was reflective of improving economic forecasts employed in the Company’s CECL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the first nine months of 2021. The provision expense for the first nine months of 2020 was driven by unfavorable changes in economic forecasts employed in the Company’s CECL model, the Day 1 provision for loan losses of $75.9 million, and the provision for unfunded commitments of $8.6 million resulting from the acquisition of Opus.
Nine Months Ended | |||||||||||
September 30, | September 30, | ||||||||||
(Dollars in thousands) | 2021 | 2020 | |||||||||
Provision for credit losses | |||||||||||
Provision for loans and lease losses | $ | (52,359) | $ | 180,341 | |||||||
Provision for unfunded commitments | (3,880) | 9,958 | |||||||||
Provision for held-to-maturity securities | $ | 11 | $ | — | |||||||
Total provision for credit losses | $ | (56,228) | $ | 190,299 |
108
Noninterest Income
The following table presents the components of noninterest income for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Noninterest income | ||||||||||||||||||||||||||||||||
Loan servicing income | $ | 536 | $ | 622 | $ | 481 | $ | 1,616 | $ | 1,395 | ||||||||||||||||||||||
Service charges on deposit accounts | 2,375 | 2,222 | 1,593 | 6,629 | 4,707 | |||||||||||||||||||||||||||
Other service fee income | 350 | 352 | 487 | 1,175 | 1,095 | |||||||||||||||||||||||||||
Debit card interchange fee income | 834 | 1,099 | 944 | 2,720 | 1,749 | |||||||||||||||||||||||||||
Earnings on bank-owned life insurance | 3,266 | 2,279 | 2,270 | 7,778 | 4,920 | |||||||||||||||||||||||||||
Net gain from sales of loans | 1,187 | 1,546 | 9,542 | 3,094 | 8,281 | |||||||||||||||||||||||||||
Net gain from sales of investment securities | 4,190 | 5,085 | 1,141 | 13,321 | 8,880 | |||||||||||||||||||||||||||
Trust custodial account fees | 11,446 | 7,897 | 6,960 | 26,565 | 9,357 | |||||||||||||||||||||||||||
Escrow and exchange fees | 1,867 | 1,672 | 1,142 | 5,065 | 1,407 | |||||||||||||||||||||||||||
Other income | 4,049 | 3,955 | 2,198 | 12,606 | 6,340 | |||||||||||||||||||||||||||
Total noninterest income | $ | 30,100 | $ | 26,729 | $ | 26,758 | $ | 80,569 | $ | 48,131 |
Noninterest income for the third quarter of 2021 was $30.1 million, an increase of $3.4 million from the second quarter of 2021. The increase was primarily due to a $3.5 million increase in trust custodial account fees attributable to a new pricing initiative and a $987,000 increase in earnings on bank-owned life insurance ("BOLI") largely driven by a $150 million addition to BOLI in June 2021, partially offset by a $895,000 decrease in net gain from sales of investment securities. Also, other income included a $970,000 net gain on debt extinguishment compared to a $647,000 loss in the prior quarter, partially offset by $1.1 million lower CRA investment income and $483,000 lower SBA PPP loan referral fees.
During the third quarter of 2021, the Bank sold $12.0 million of SBA loans for a net gain of $1.2 million, compared to the sales of $14.7 million of SBA loans for a net gain of $1.5 million during the second quarter of 2021. Additionally, during the third quarter of 2021, the Bank sold $161.6 million of investment securities for a net gain of $4.2 million, compared to the sales of $280.2 million of investment securities for a net gain of $5.1 million in the second quarter of 2021.
Noninterest income for the third quarter of 2021 increased $3.3 million, compared to the third quarter of 2020. The increase was primarily due to a $4.5 million increase in trust custodial account fees, a $3.0 million increase in net gain from sales of investment securities, a $1.9 million increase in other income, and a $996,000 increase in earnings on BOLI, partially offset by a $8.4 million decrease in net gain from the sales of loans.
The net gain from sales of loans for the third quarter of 2021 decreased from the same period last year primarily due to the sales of $12.0 million of SBA loans for a net gain of $1.2 million, compared with the sales of $1.16 billion SBA PPP loans for a net gain of $19.0 million in the third quarter of 2020, offset by sales of $96.2 million of other loans for a net loss of $9.4 million during the third quarter of 2020.
For the first nine months of 2021, noninterest income totaled $80.6 million, an increase of $32.4 million from $48.1 million for the first nine months of 2020. The increase was primarily related to a $17.2 million increase in trust custodial account fees following the Opus acquisition, a $4.4 million increase in net gain from sales of investment securities, a $3.7 million increase in escrow and exchange fee income following the Opus acquisition, a $2.9 million increase in earnings from BOLI largely due to a $150.0 million addition to BOLI, a $1.9 million increase in service charges on deposit accounts, and a $1.0 million increase in debit card interchange fee income, partially offset by a $5.2 million decrease in net gain from the sales of loans. In addition, other income increased $6.3 million primarily due to a $4.3 million increase in equity investment income and $2.9 million of SBA PPP loan referral fees.
109
Noninterest Expense
The following table presents the components of noninterest expense for the periods indicated:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||
Noninterest expense | ||||||||||||||||||||||||||||||||
Compensation and benefits | $ | 53,592 | $ | 53,474 | $ | 51,021 | $ | 159,614 | $ | 128,408 | ||||||||||||||||||||||
Premises and occupancy | 12,611 | 12,240 | 12,373 | 36,831 | 30,028 | |||||||||||||||||||||||||||
Data processing | 6,296 | 5,765 | 6,783 | 17,889 | 14,501 | |||||||||||||||||||||||||||
Other real estate owned operations, net | — | — | (17) | — | 6 | |||||||||||||||||||||||||||
FDIC insurance premiums | 1,392 | 1,312 | 1,145 | 3,885 | 2,358 | |||||||||||||||||||||||||||
Legal and professional services | 4,563 | 4,186 | 5,108 | 12,684 | 11,328 | |||||||||||||||||||||||||||
Marketing expense | 2,008 | 1,490 | 1,718 | 5,096 | 4,449 | |||||||||||||||||||||||||||
Office expense | 1,076 | 1,589 | 2,389 | 4,494 | 5,025 | |||||||||||||||||||||||||||
Loan expense | 1,332 | 1,165 | 802 | 3,612 | 2,447 | |||||||||||||||||||||||||||
Deposit expense | 3,974 | 3,985 | 4,728 | 11,818 | 14,674 | |||||||||||||||||||||||||||
Merger-related expense | — | — | 2,988 | 5 | 44,058 | |||||||||||||||||||||||||||
Amortization of intangible assets | 3,912 | 4,001 | 4,538 | 12,056 | 12,567 | |||||||||||||||||||||||||||
Other expense | 5,284 | 5,289 | 5,003 | 15,041 | 11,331 | |||||||||||||||||||||||||||
Total noninterest expense | $ | 96,040 | $ | 94,496 | $ | 98,579 | $ | 283,025 | $ | 281,180 |
Noninterest expense totaled $96.0 million for the third quarter of 2021, an increase of $1.5 million compared to the second quarter of 2021, driven primarily by a $531,000 increase in data processing expense and a $518,000 increase in marketing expense.
Noninterest expense decreased by $2.5 million compared to the third quarter of 2020. The decrease was primarily due to $3.0 million of merger-related expense for the third quarter of 2020 relating to the Opus acquisition. Excluding merger-related expense, noninterest expense increased $449,000 compared to the third quarter of 2020, primarily due to a $2.6 million increase in compensation and benefits, partially offset by a $1.3 million decrease in office expense.
Noninterest expense totaled $283.0 million for the first nine months of 2021, an increase of $1.8 million, compared with the first nine months of 2020. The increase was driven primarily by increases of $31.2 million in compensation and benefits, $6.8 million in premises and occupancy, $3.7 million in other expense, $3.4 million in data processing, $1.5 million in FDIC insurance premiums, and $1.4 million in legal and professional services, all impacted by the additional operations, personnel, branches, and divisions retained with the acquisition of Opus, partially offset by a $44.1 million decrease in merger-related expense relating to the Opus acquisition.
The Company’s efficiency ratio was 47.5% for the third quarter of 2021, compared to 49.4% for the second quarter of 2021 and 47.4% for the third quarter of 2020. The Company’s efficiency ratio was 48.5% for the first nine months of 2021, compared to 50.4% for the first nine months of 2020.
110
Income Taxes
For the three months ended September 30, 2021, June 30, 2021, and September 30, 2020, income tax expense was $32.8 million, $35.3 million, and $23.9 million, respectively, and the effective income tax rate was 26.7%, 26.8%, and 26.5%, respectively. Our effective tax rate for the three months ended September 30, 2021 differs from the 21% federal statutory rate due to the impact of state taxes as well as various permanent tax differences, including tax-exempt income from municipal securities, BOLI income, tax credits from low-income housing tax credit investments, and the exercise of stock options and vesting of other stock-based compensation.
The total amount of unrecognized tax benefits was $1.7 million and $255,000 as of September 30, 2021 and December 31, 2020, respectively, and was primarily comprised of unrecognized tax benefits related to the Opus acquisition in 2020. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $749,000 and $184,000 at September 30, 2021 and December 31, 2020, respectively. The Company does not believe that the unrecognized tax benefits will change significantly within the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued for $28,000 and $22,000 of such interest at September 30, 2021 and December 31, 2020, respectively. No amounts for penalties were accrued.
The Company and its subsidiaries are subject to U.S. federal income tax, as well as state income and franchise taxes in multiple state jurisdictions. The statute of limitations for the assessment of taxes related to the consolidated federal income tax returns is closed for all tax years up to and including 2016. The expiration of the statute of limitations for the assessment of taxes related to the various state income and franchise tax returns varies by state.
The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management 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 carryback years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Based on the analysis, the Company has determined that a valuation allowance against capital loss carryforward of $170,000 was required as of September 30, 2021 as it is more likely that not that the Company would not generate future capital gains to offset the capital loss carryforward. Except for the valuation allowance against the capital loss carryforward of $170,000, a valuation allowance for deferred tax assets was not required as of September 30, 2021 and December 31, 2020.
111
FINANCIAL CONDITION
At September 30, 2021, assets totaled $21.01 billion, an increase of $1.27 billion, or 6.4%, from $19.74 billion at December 31, 2020. The increase was primarily due to increases in investment securities, total loans, and BOLI of $925.5 million, $753.9 million, and $154.6 million, respectively, partially offset by a $558.4 million decrease in cash and cash equivalents. The increase in BOLI was due to a $150 million purchase of additional BOLI in June 2021.
Loans
Loans held for investment totaled $13.98 billion at September 30, 2021, an increase of $746.4 million, or 5.6%, from $13.24 billion at December 31, 2020. The increase was driven by an increase in loans funded during the first nine months of 2021, partially offset by loan maturities and prepayments. Business line average utilization rates decreased from 35.28% for the fourth quarter of 2020 to 33.12% for the third quarter of 2021. Since December 31, 2020, investor loans secured by real estate increased $645.2 million, business loans secured by real estate increased $125.0 million, commercial loans increased $65.0 million, and retail loans decreased $88.8 million.
Loans held for sale were $8.1 million at September 30, 2021, which primarily represent the guaranteed portion of SBA loans that the Bank originates for sale, and increased by $7.5 million from $601,000 at December 31, 2020.
The total end-of-period weighted average interest rate on loans, net of fees and discounts, at September 30, 2021 was 4.03%, compared to 4.27% at December 31, 2020. The decrease reflects the impact of lower rates on new originations and the continued impact from prepayments of higher rate loans.
112
The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio, and gives the weighted average interest rate by loan category at the dates indicated:
September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent of Total | Weighted Average Interest Rate | Amount | Percent of Total | Weighted Average Interest Rate | |||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 2,823,065 | 20.2 | % | 4.24 | % | $ | 2,675,085 | 20.2 | % | 4.35 | % | |||||||||||||||||||||||
Multifamily | 5,705,666 | 40.8 | 3.81 | 5,171,356 | 39.1 | 4.04 | |||||||||||||||||||||||||||||
Construction and land | 292,815 | 2.1 | 4.94 | 321,993 | 2.4 | 5.60 | |||||||||||||||||||||||||||||
SBA secured by real estate | 49,446 | 0.3 | 4.98 | 57,331 | 0.4 | 5.01 | |||||||||||||||||||||||||||||
Total investor loans secured by real estate | 8,870,992 | 63.4 | 3.99 | 8,225,765 | 62.1 | 4.21 | |||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||
CRE owner-occupied | 2,242,164 | 16.0 | 4.16 | 2,114,050 | 16.0 | 4.45 | |||||||||||||||||||||||||||||
Franchise real estate secured | 354,481 | 2.6 | 4.70 | 347,932 | 2.6 | 5.07 | |||||||||||||||||||||||||||||
SBA secured by real estate | 69,937 | 0.5 | 5.28 | 79,595 | 0.6 | 5.21 | |||||||||||||||||||||||||||||
Total business loans secured by real estate | 2,666,582 | 19.1 | 4.26 | 2,541,577 | 19.2 | 4.56 | |||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 1,888,870 | 13.5 | 3.64 | 1,768,834 | 13.4 | 3.85 | |||||||||||||||||||||||||||||
Franchise non-real estate secured | 392,950 | 2.8 | 4.91 | 444,797 | 3.4 | 5.40 | |||||||||||||||||||||||||||||
SBA non-real estate secured | 12,732 | 0.1 | 5.62 | 15,957 | 0.1 | 5.62 | |||||||||||||||||||||||||||||
Total commercial loans | 2,294,552 | 16.4 | 3.86 | 2,229,588 | 16.9 | 4.16 | |||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||
Single family residential | 144,309 | 1.0 | 4.14 | 232,574 | 1.8 | 4.28 | |||||||||||||||||||||||||||||
Consumer | 6,426 | 0.1 | 4.81 | 6,929 | — | 5.56 | |||||||||||||||||||||||||||||
Total retail loans | 150,735 | 1.1 | 4.17 | 239,503 | 1.8 | 4.31 | |||||||||||||||||||||||||||||
Gross loans held for investment (1) | 13,982,861 | 100.0 | % | 4.03 | 13,236,433 | 100.0 | % | 4.27 | |||||||||||||||||||||||||||
Allowance for credit losses for loans held for investment | (211,481) | (268,018) | |||||||||||||||||||||||||||||||||
Loans held for investment, net | $ | 13,771,380 | $ | 12,968,415 | |||||||||||||||||||||||||||||||
Total unfunded loan commitments | $ | 2,504,188 | $ | 1,947,250 | |||||||||||||||||||||||||||||||
Loans held for sale, at lower of cost or fair value | $ | 8,100 | $ | 601 |
______________________________
(1) Includes net deferred origination fees of $3.0 million and $2.6 million, and unaccreted fair value net purchase discounts of $85.0 million and $113.8 million as of September 30, 2021 and December 31, 2020, respectively.
113
Delinquent Loans. When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally initiate proceedings to pursue our remedies under the loan documents. For loans secured by real estate, we record a notice of default and, after providing the required notices to the borrower, commence foreclosure proceedings. If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale where we generally acquire title to the property. Loans delinquent 30 or more days as a percentage of loans held for investment were 0.14% at September 30, 2021, compared to 0.10% at December 31, 2020.
The following table sets forth delinquencies in the Company’s loan portfolio as of the dates indicated:
30 - 59 Days | 60 - 89 Days | 90 Days or More | Total | ||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | # of Loans | Principal Balance of Loans | # of Loans | Principal Balance of Loans | # of Loans | Principal Balance of Loans | # of Loans | Principal Balance of Loans | |||||||||||||||||||||||||||||||||||||||
At September 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | — | $ | — | — | $ | — | 3 | $ | 10,268 | 3 | $ | 10,268 | |||||||||||||||||||||||||||||||||||
SBA secured by real estate | — | — | 1 | 629 | 2 | 347 | 3 | 976 | |||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | — | — | 1 | 629 | 5 | 10,615 | 6 | 11,244 | |||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | — | — | — | — | 3 | 4,978 | 3 | 4,978 | |||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | — | — | — | — | 1 | 441 | 1 | 441 | |||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | — | — | — | — | 4 | 5,419 | 4 | 5,419 | |||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 4 | 654 | 1 | 14 | 3 | 1,816 | 8 | 2,484 | |||||||||||||||||||||||||||||||||||||||
SBA non-real estate secured | 1 | 74 | 1 | 293 | 1 | 664 | 3 | 1,031 | |||||||||||||||||||||||||||||||||||||||
Total commercial loans | 5 | 728 | 2 | 307 | 4 | 2,480 | 11 | 3,515 | |||||||||||||||||||||||||||||||||||||||
Total | 5 | $ | 728 | 3 | $ | 936 | 13 | $ | 18,514 | 21 | $ | 20,178 | |||||||||||||||||||||||||||||||||||
Delinquent loans to loans held for investment | 0.01 | % | 0.01 | % | 0.12 | % | 0.14 | % |
.
.
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30 - 59 Days | 60 - 89 Days | 90 Days or More | Total | ||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | # of Loans | Principal Balance of Loans | # of Loans | Principal Balance of Loans | # of Loans | Principal Balance of Loans | # of Loans | Principal Balance of Loans | |||||||||||||||||||||||||||||||||||||||
At December 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | — | $ | — | — | $ | — | 2 | $ | 757 | 2 | $ | 757 | |||||||||||||||||||||||||||||||||||
Multifamily | 1 | 1 | — | — | — | — | 1 | 1 | |||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | — | — | — | — | 3 | 1,257 | 3 | 1,257 | |||||||||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 1 | 1 | — | — | 5 | 2,014 | 6 | 2,015 | |||||||||||||||||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | — | — | — | — | 4 | 5,304 | 4 | 5,304 | |||||||||||||||||||||||||||||||||||||||
SBA secured by real estate | 1 | 486 | — | — | 5 | 1,073 | 6 | 1,559 | |||||||||||||||||||||||||||||||||||||||
Total business loans secured by real estate | 1 | 486 | — | — | 9 | 6,377 | 10 | 6,863 | |||||||||||||||||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 10 | 428 | 2 | 57 | 6 | 2,898 | 18 | 3,383 | |||||||||||||||||||||||||||||||||||||||
SBA non-real estate secured | 2 | 338 | — | — | 1 | 707 | 3 | 1,045 | |||||||||||||||||||||||||||||||||||||||
Total commercial loans | 12 | 766 | 2 | 57 | 7 | 3,605 | 21 | 4,428 | |||||||||||||||||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||||||||||||||||||||
Single family residential | 1 | 15 | — | — | — | — | 1 | 15 | |||||||||||||||||||||||||||||||||||||||
Consumer | 1 | 1 | — | — | — | — | 1 | 1 | |||||||||||||||||||||||||||||||||||||||
Total retail loans | 2 | 16 | — | — | — | — | 2 | 16 | |||||||||||||||||||||||||||||||||||||||
Total | 16 | $ | 1,269 | 2 | $ | 57 | 21 | $ | 11,996 | 39 | $ | 13,322 | |||||||||||||||||||||||||||||||||||
Delinquent loans to loans held for investment | 0.01 | % | — | % | 0.09 | % | 0.10 | % |
115
Troubled Debt Restructurings
We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest-only payments, and, in limited cases, concessions to the outstanding loan balances. These loans are classified as TDRs. As of September 30, 2021, there were $17.6 million loans reported as TDRs, compared with no TDR loans as of December 31, 2020. During the three and nine months ended September 30, 2021, there were six loans totaling $17.6 million modified as TDRs, which are comprised of three CRE owner-occupied loans and one C&I loan totaling $5.2 million belonging to one borrower relationship with the terms modified due to bankruptcy and two franchise non-real estate secured loans totaling $12.3 million belonging to another borrower relationship with the terms modified for payment deferral. During the three and nine months ended September 30, 2021, the three CRE owner-occupied loans and one C&I loan classified as TDRs were in payment default and all TDRs were on nonaccrual status as of September 30, 2021. During the three and nine months ended September 30, 2020, there were no TDRs that experienced payment defaults after modifications within the previous 12 months.
In accordance with the CARES Act, the Company implemented various loan modification programs beginning in April 2020 to provide its borrowers relief from the economic impacts of COVID-19 and determined none of the COVID-19 related loan modifications need to be characterized as TDRs. As of September 30, 2021, no loans were classified as a COVID-19 modification under Section 4013 of the CARES Act, and no loans were in-process for potential modification. At December 31, 2020, 52 loans totaling $79.5 million, or 0.60% of loans held for investment, remained within their modification period, of which $20.2 million of loans had migrated to the substandard risk grade. No loans were in-process for potential modification as of December 31, 2020. See Note 6 - Loans Held for Investment for additional information.
Nonperforming Assets
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), OREO, and other repossessed assets owned. It is our general policy to place a loan on nonaccrual status when the loan becomes 90 days or more past due or when collection of principal or interest appears doubtful.
Nonperforming assets totaled $35.1 million, or 0.17% of total assets, at September 30, 2021, an increase from $29.2 million, or 0.15% of total assets, at December 31, 2020. There was no other real estate owned at September 30, 2021 and December 31, 2020. The increase in nonperforming assets during the nine month period ending September 30, 2021 was primarily attributable to $11.7 million of nonperforming loans added since the end of 2020, primarily CRE non-owner occupied and franchise non-real estate secured loans, partially offset by loan charge-offs and repayments during the nine months ended September 30, 2021. The Company had no loans 90 days or more past due and accruing at September 30, 2021 and December 31, 2020.
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The following table sets forth our composition of nonperforming assets at the dates indicated:
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
Nonperforming assets | ||||||||||||||
Investor loans secured by real estate | ||||||||||||||
CRE non-owner-occupied | $ | 12,179 | $ | 2,792 | ||||||||||
SBA secured by real estate | 976 | 1,257 | ||||||||||||
Total investor loans secured by real estate | 13,155 | 4,049 | ||||||||||||
Business loans secured by real estate | ||||||||||||||
CRE owner-occupied | 4,978 | 6,083 | ||||||||||||
SBA secured by real estate | 604 | 1,143 | ||||||||||||
Total business loans secured by real estate | 5,582 | 7,226 | ||||||||||||
Commercial loans | ||||||||||||||
Commercial and industrial | 2,259 | 3,974 | ||||||||||||
Franchise non-real estate secured | 13,419 | 13,238 | ||||||||||||
SBA non-real estate secured | 664 | 707 | ||||||||||||
Total commercial loans | 16,342 | 17,919 | ||||||||||||
Retail loans | ||||||||||||||
Single family residential | 11 | 15 | ||||||||||||
Total retail loans | 11 | 15 | ||||||||||||
Total nonperforming loans | 35,090 | 29,209 | ||||||||||||
Other real estate owned | — | — | ||||||||||||
Other assets owned | — | — | ||||||||||||
Total | $ | 35,090 | $ | 29,209 | ||||||||||
Allowance for credit losses | $ | 211,481 | $ | 268,018 | ||||||||||
Allowance for credit losses as a percent of total nonperforming loans | 603 | % | 918 | % | ||||||||||
Nonperforming loans as a percent of loans held for investment | 0.25 | 0.22 | ||||||||||||
Nonperforming assets as a percent of total assets | 0.17 | 0.15 | ||||||||||||
TDRs included in nonperforming loans | $ | 17,557 | — |
117
Allowance for Credit Losses
The Company determines the ACL for loans and unfunded loan commitments in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans and unfunded loan commitments at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. Loans that have been deemed by management to no longer possess similar risk characteristics are evaluated individually under a discounted cash flow approach, and loans that have been deemed collateral dependent are evaluated individually based on the expected estimated fair value of the underlying collateral.
The Company measures the ACL on commercial real estate and commercial loans using a discounted cash flow approach, using the loan’s effective interest rate, while the ACL for retail loans is based on a historical loss rate model. The discounted cash flow methodology relies on several significant components essential to the development of estimates for future cash flows on loans and unfunded commitments. These components consist of: (i) the estimated probability of default, (ii) the estimated loss given default, which represents the estimated severity of the loss when a loan is in default, (iii) estimates for prepayment activity on loans, and (iv) the estimated exposure to the Company at default. With respect to unfunded loan commitments, the Company’s incorporates estimates for utilization, based on historical loan data. Probability of default and loss given default for investor loans secured by real estate are derived from a third party, using proxy loan information, and loan and property level attributes. Additionally, loss given default for these loans incorporates an estimate for the loss severity associated with loans where the borrower fails to meet their debt obligation at maturity. External factors that impact loss given default for commercial real estate loans include: changes in the index for CRE pricing, GDP growth rate, unemployment rates, and the Moody’s Baa rating corporate debt interest rate spread.
For business loans secured by real estate and commercial loans, probability of default is based on an internally developed rating scale that assigns probability of default based on the Company’s internal risk grades for each loan. Changes in risk grades for these loans result in changes in probability of default. The Company obtains loss given default for these loans from a third party that has a considerable database of credit related information specific to the financial services industry and the type of loans within these segments.
Probability of default for both investor and business real estate loans, as well as commercial loans are heavily impacted by current and expected economic conditions.
The ACL for retail loans is based on a historical loss rate model, which incorporates loss rates derived from a third party that has a considerable database of credit related information for retail loans. Loss rates for retail loans are dependent upon loan level and external factors such as: FICO, vintage, geography, unemployment rates, and changes in consumer real estate prices.
The Company’s ACL includes assumptions concerning current and future economic conditions using reasonable and supportable forecasts and how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Bank and the ultimate collectability of future cash flows over the life of a loan. The Company uses economic scenarios from Moody’s Analytics. These scenarios are based on past events, current conditions, and the likelihood of future events occurring. Management periodically evaluates economic scenarios, determines whether to utilize multiple probability-weighted scenarios, and if multiple scenarios are utilized, evaluates and determines the weighting for each scenario used in the Company’s ACL model, and thus the scenarios and weightings of each scenario may change in future periods. Economic scenarios as well as assumptions within those scenarios can vary based on changes in current and expected economic conditions and due to the occurrence of specific events such as the ongoing COVID-19 pandemic.
118
As of September 30, 2021, the Company’s ACL model used three probability-weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The weightings assigned to each scenario were as follows: the base-case scenario, or most likely scenario, was assigned a weighting of 40%, while the upside and downside scenarios were each assigned a weighting of 30%. These economic scenarios include the current and estimated future impact associated with the ongoing COVID-19 pandemic. The Company evaluated the weightings of each economic scenario in the current period with the assistance of Moody's Analytics, and determined the current weightings of 40% for the base-case scenario, and 30% for each of the upside and downside scenarios appropriately reflect the likelihood of outcomes for each scenario given the current economic environment. The use of three probability-weighted scenarios at September 30, 2021 and the weighting assigned to each scenario is consistent with the approach used in the Company’s ACL model at June 30, 2021 and December 31, 2020.
The Company, with the assistance of Moody’s Analytics, currently forecasts probability of default and loss given default based on economic scenarios over a two-year period, which we believe is a reasonable and supportable period. Beyond this point, probability of default and loss given default revert to their long-term averages. The Company has reflected this reversion over a period of three years in each of its economic scenarios used to generate the overall probability-weighted forecast.
The economic forecasts used in the Company’s ACL model cover all states and metropolitan areas in the Unites States, and reflect changes in economic variables such as: GDP growth, interest rates, employment rates, changes in wages, retail sales, industrial production, metrics associated with the single-family and multifamily housing markets, vacancy rates, changes in equity market prices, and energy markets.
It is important to note that the Company’s ACL model relies on multiple economic variables, which are used under several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Company has identified certain economic variables that have significant influence in the Company’s model for determining the ACL.
As of September 30, 2021, the Company’s ACL model incorporated the following assumptions for key economic variables in the base-case, upside and downside scenarios:
Base-case Scenario:
•U.S. unemployment declines to approximately 4.5% by the end of 2021. Unemployment continues to decline in 2022 to approximately 3.4% by the end of 2022. The rate of unemployment holds relatively constant at approximately 3.5% throughout 2023.
•U.S. real GDP experiences annualized growth of approximately 7% through the remainder of 2021. Growth in real GDP for 2022 under this scenario decelerates from an annualized rate of approximately 5% in early 2022 to approximately 1% by the end of 2022. Annualized real GDP growth of approximately 2-3% in 2023.
•CRE index experiences a slight decline throughout the remainder of 2021, with an annualized rate of decline of approximately -2% for 2021. The CRE index returns to moderate levels of growth beginning in the first quarter of 2022, with the annualized rate of growth increasing from 2% in early 2022 to 11% by the end of 2022. The CRE index is anticipated to increase approximately 7-9% on an annualized basis in 2023.
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Upside Scenario:
•U.S. unemployment declines to approximately 4.3% by the end of 2021. The unemployment rates holds at approximately 3% throughout all of 2022 and 2023.
•U.S. real GDP experiences annualized growth of approximately 11% through the remainder of 2021. Growth in real GDP throughout 2022 decelerates from an annualized rate of approximately 7% in early 2022 to approximately 1% by the end of 2022. Annualized real GDP growth of approximately 1-2% in 2023.
•CRE index remains relatively unchanged throughout the remainder of 2021. The CRE index returns growth in 2022, with the annualized rate of growth increasing from 5% in early 2022 to 14% by the end of 2022. The CRE index is anticipated to experience a decelerating annualized rate of growth from approximately 10% in early 2023 to approximately 7% by the end of 2023.
Downside Scenario:
•U.S. unemployment increases to approximately 6.7% by the end of 2021. Unemployment remains elevated in 2022 at approximately 8-9%. Unemployment declines throughout 2023 to approximately 6.8% at the end of 2023.
•U.S. real GDP experiences a decline of approximately -3.5% for the remainder of 2021. Real GDP returns to modest annualized growth in the third quarter of 2022, with growth of approximately 1% for the remainder of 2022. Annualized real GDP fluctuates within a range of approximately 2-4% throughout 2023.
•CRE index experiences an annualized rate of decline throughout the remainder 2021 of approximately -5%. The CRE index is estimated to experience decelerating declines throughout 2022, with the annualized rate of decline slowing from approximately -16% in early 2022 to approximately -11% by the end of 2022. Under this scenario, the CRE index is anticipated to experience accelerating annualized growth throughout 2023 to approximately 18% by the end of 2023.
The Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL. As of September 30, 2021, qualitative adjustments included in the ACL totaled $6.5 million. These adjustments primarily relate to continued uncertainty concerning the strength of the economic recovery and how it may impact certain classes of loans in the loan portfolio. Management determined through additional review that the uneven recovery and continued government interventions are potentially underestimating the impact the ongoing COVID-19 pandemic may have on certain segments and classes of the loan portfolio, such as loans within the SBA, construction, franchise, and CRE owner-occupied classifications. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.
120
The decrease in the ACL for loans held for investment during the three months ended September 30, 2021 of $21.3 million was comprised of a $19.5 million provision recapture and $1.8 million in net charge-offs. The provision recapture for the three months ended September 30, 2021 was reflective of improving economic forecasts employed in the Company’s ACL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the quarter. The decrease in the ACL for the nine months ended September 30, 2021 of $56.5 million was comprised of a $52.4 million provision recapture and $4.2 million in net charge-offs. The provision recapture for the nine months ended September 30, 2021 was also reflective of improving economic forecasts employed in the Company’s ACL model and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the first nine months of 2021.
The increase in the ACL for the three months ended September 30, 2020 of $232,000 was comprised of a $4.7 million provision for credit losses and $4.5 million in net charge-offs. The provision for credit losses for the three months ended September 30, 2020 is reflective of unfavorable, but improving economic forecasts used in the Company’s ACL model. The increase in the ACL for the nine months ended September 30, 2020 of $246.8 million is reflective of a $55.7 million addition associated with the Company’s adoption of ASC 326 on January 1, 2020, which was recorded through a cumulative effect adjustment to retained earnings, as well as a $180.3 million provision for credit losses on loans, net charge-offs of $10.5 million, and the establishment of $21.2 million in net ACL for PCD loans previously mentioned. The provision for credit losses of $180.3 million during the nine months ended September 30, 2020 is inclusive of $75.9 million related to the initial ACL required for the acquisition of non-PCD loans in the Opus acquisition. Under ASC 326, the Company is required to record an ACL for estimates of life-time credit losses on loans at the time of acquisition. For non-PCD loans, the initial ACL is established through a charge to provision for credit losses at the time of acquisition. However, the ACL for PCD loans is established through an adjustment to the loan’s purchase price (or initial fair value). Excluding the impact of the Opus acquisition, the provision for credit losses for the nine months ended September 30, 2020 is also reflective of unfavorable economic forecasts used in the Company’s ACL model driven by the COVID-19 pandemic.
No assurance can be given that we will not, in any particular period, sustain credit losses that exceed the amount reserved, or that subsequent evaluation of our loan portfolio, in light of prevailing factors, including economic conditions that may adversely affect our market area or other circumstances, will not require significant increases in the ACL. In addition, regulatory agencies, as an integral part of their examination process, periodically review our ACL and may require us to recognize additional provisions to increase the allowance and record charge-offs in anticipation of future losses.
At September 30, 2021, the Company believes the ACL was adequate to cover current expected credit losses in the loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the ACL change, including the size and composition of the loan portfolio, the credit quality of the loan portfolio, as well as forecasts of future economic conditions, the Company’s estimate of current expected credit losses could also significantly change and affect the level of future provisions for credit losses.
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The following table sets forth the Company’s ACL, its corresponding percentage of the loan category balance, and the percentage of loan balance to total gross loans in each of the loan categories listed for the periods indicated:
September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Allowance as a % of Category Total | % of Loans in Category to Total Loans | Amount | Allowance as a % of Category Total | % of Loans in Category to Total Loans | ||||||||||||||||||||||||||||||||
Investor loans secured by real estate | ||||||||||||||||||||||||||||||||||||||
CRE non-owner-occupied | $ | 42,467 | 1.50 | % | 20.2 | % | $ | 49,176 | 1.84 | % | 20.2 | % | ||||||||||||||||||||||||||
Multifamily | 52,164 | 0.91 | 40.8 | 62,534 | 1.21 | 39.1 | ||||||||||||||||||||||||||||||||
Construction and land | 8,017 | 2.74 | 2.1 | 12,435 | 3.86 | 2.4 | ||||||||||||||||||||||||||||||||
SBA secured by real estate | 3,879 | 7.84 | 0.3 | 5,159 | 9.00 | 0.4 | ||||||||||||||||||||||||||||||||
Total investor loans secured by real estate | 106,527 | 1.20 | 63.4 | 129,304 | 1.57 | 62.1 | ||||||||||||||||||||||||||||||||
Business loans secured by real estate | ||||||||||||||||||||||||||||||||||||||
CRE owner-occupied | 33,679 | 1.50 | 16.0 | 50,517 | 2.39 | 16.0 | ||||||||||||||||||||||||||||||||
Franchise real estate secured | 9,626 | 2.72 | 2.6 | 11,451 | 3.29 | 2.6 | ||||||||||||||||||||||||||||||||
SBA secured by real estate | 5,104 | 7.30 | 0.5 | 6,567 | 8.25 | 0.6 | ||||||||||||||||||||||||||||||||
Total business loans secured by real estate | 48,409 | 1.82 | 19.1 | 68,535 | 2.70 | 19.2 | ||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 37,595 | 1.99 | 13.5 | 46,964 | 2.66 | 13.4 | ||||||||||||||||||||||||||||||||
Franchise non-real estate secured | 17,518 | 4.46 | 2.8 | 20,525 | 4.61 | 3.4 | ||||||||||||||||||||||||||||||||
SBA non-real estate secured | 632 | 4.96 | 0.1 | 995 | 6.24 | 0.1 | ||||||||||||||||||||||||||||||||
Total commercial loans | 55,745 | 2.43 | 16.4 | 68,484 | 3.07 | 16.9 | ||||||||||||||||||||||||||||||||
Retail loans | ||||||||||||||||||||||||||||||||||||||
Single family residential | 529 | 0.37 | 1.0 | 1,204 | 0.52 | 1.8 | ||||||||||||||||||||||||||||||||
Consumer loans | 271 | 4.22 | 0.1 | 491 | 7.09 | — | ||||||||||||||||||||||||||||||||
Total retail loans | 800 | 0.53 | 1.1 | 1,695 | 0.71 | 1.8 | ||||||||||||||||||||||||||||||||
Total | $ | 211,481 | 1.51 | % | 100.0 | % | $ | 268,018 | 2.02 | % | 100.0 | % |
At September 30, 2021, the ratio of allowance for credit losses to loans held for investment was 1.51%, a decrease from 2.02% at December 31, 2020. Our unamortized fair value discount on the loans acquired totaled $85.0 million, or 0.60% of total loans held for investment, at September 30, 2021, compared to $113.8 million, or 0.85% of total loans held for investment, at December 31, 2020.
122
The following table sets forth the activity within the Company’s allowance for credit losses in each of the loan categories listed for the periods indicated:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 30, | June 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
Balance, beginning of period | $ | 232,774 | $ | 266,999 | $ | 282,271 | $ | 268,018 | $ | 35,698 | |||||||||||||||||||
Adoption of ASC 326 (1) | — | — | — | — | 55,686 | ||||||||||||||||||||||||
Initial ACL recorded for PCD Loans | — | — | — | — | 21,242 | ||||||||||||||||||||||||
Provision for credit losses | (19,543) | (33,131) | 4,702 | (52,359) | 180,341 | ||||||||||||||||||||||||
Charge-offs | |||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||
CRE non-owner-occupied | — | — | (443) | (154) | (830) | ||||||||||||||||||||||||
Construction and land | — | — | (377) | — | (377) | ||||||||||||||||||||||||
SBA secured by real estate | (158) | — | (145) | (423) | (699) | ||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||
CRE owner-occupied | — | — | (1,739) | — | (1,739) | ||||||||||||||||||||||||
SBA secured by real estate | — | — | — | (98) | (315) | ||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||
Commercial and industrial | (84) | (3,290) | (2,437) | (4,653) | (5,213) | ||||||||||||||||||||||||
Franchise non-real estate secured | (2,398) | — | (207) | (2,554) | (1,434) | ||||||||||||||||||||||||
SBA non-real estate secured | — | — | (10) | — | (803) | ||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||
Single family residential | — | — | — | — | (62) | ||||||||||||||||||||||||
Consumer loans | — | — | (129) | — | (137) | ||||||||||||||||||||||||
Total charge-offs | (2,640) | (3,290) | (5,487) | (7,882) | (11,609) | ||||||||||||||||||||||||
Recoveries | |||||||||||||||||||||||||||||
Investor loans secured by real estate | |||||||||||||||||||||||||||||
SBA secured by real estate | — | — | 34 | — | 34 | ||||||||||||||||||||||||
Business loans secured by real estate | |||||||||||||||||||||||||||||
CRE owner-occupied | 14 | 15 | 21 | 44 | 44 | ||||||||||||||||||||||||
SBA secured by real estate | 50 | 80 | 76 | 130 | 147 | ||||||||||||||||||||||||
Commercial loans | |||||||||||||||||||||||||||||
Commercial and industrial | 729 | 2,098 | 10 | 3,428 | 37 | ||||||||||||||||||||||||
Franchise non-real estate secured | 80 | — | 865 | 80 | 865 | ||||||||||||||||||||||||
SBA non-real estate secured | 15 | 2 | 8 | 19 | 13 | ||||||||||||||||||||||||
Retail loans | |||||||||||||||||||||||||||||
Single family residential | 2 | 1 | 2 | 3 | 3 | ||||||||||||||||||||||||
Consumer loans | — | — | 1 | — | 2 | ||||||||||||||||||||||||
Total recoveries | 890 | 2,196 | 1,017 | 3,704 | 1,145 | ||||||||||||||||||||||||
Net loan charge-offs | (1,750) | (1,094) | (4,470) | (4,178) | (10,464) | ||||||||||||||||||||||||
Balance, end of period | $ | 211,481 | $ | 232,774 | $ | 282,503 | $ | 211,481 | $ | 282,503 | |||||||||||||||||||
Ratios | |||||||||||||||||||||||||||||
Annualized net charge-offs to average total loans, net | 0.05 | % | 0.03 | % | 0.13 | % | 0.04 | % | 0.12 | % | |||||||||||||||||||
Allowance for loan losses to loans held for investment at end of period | 1.51 | 1.71 | 2.10 | 1.51 | 2.10 | ||||||||||||||||||||||||
Allowance for loan losses to loans held for investment at end of period, excluding SBA PPP loans | 1.51 | 1.71 | 2.10 | 1.51 | 2.10 |
________________________________________________
(1) Effective January 1, 2020, the allowance for credit losses is accounted for under ASC 326, which is reflective of estimated expected lifetime credit losses. Prior to January 1, 2020, the allowance was accounted for under ASC 450 and ASC 310, which is reflective of probable incurred losses as of the balance sheet date.
123
Investment Securities
We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled $4.88 billion at September 30, 2021, an increase of $925.5 million, or 23.4%, from $3.95 billion at December 31, 2020. The increase was primarily the result of $2.08 billion in purchases, primarily mortgage-backed securities, partially offset by $617.1 million in sales, $456.8 million in principal payments, amortization, and redemptions, and a $79.7 million decrease in mark-to-market fair value adjustments.
During the third quarter of 2021, the Company reassessed classification of certain investment securities and transferred approximately $157.6 million of municipal bonds from available-for-sale to held-to-maturity securities. The transfer of these securities was accounted for at fair value with a net carrying amount of $154.5 million and pre-tax unrealized loss of $3.2 million reflected as a discount on the date of transfer. This discount, as well as the related unrealized loss in accumulated other comprehensive income, is amortized into interest income as a yield adjustment through earnings over the remaining term of the securities. The amortization of the unrealized holding loss reported in accumulated other comprehensive income largely offsets the effect on interest income of the amortization of the discount. No gains or losses were recorded at the time of transfer. See Note 5 — Investment Securities to the consolidated financial statements in this Form 10-Q.
Effective January 1, 2020, the Company adopted the new CECL accounting standard. The Company’s assessment of held-to-maturity and available-for-sale investment securities as of January 1, 2020 indicated that an ACL was not required. The Company determined the likelihood of default on held-to-maturity investment securities was remote, and the amount of expected non-repayment on those investments was zero. The Company also analyzed available-for-sale investment securities that were in an unrealized loss position as of January 1, 2020 and determined the decline in fair value for those securities was not related to credit, but rather related to changes in interest rates and general market conditions. As of September 30, 2021, the Company had an ACL of $11,000 for held-to-maturity investment securities. These securities were transferred from available-for-sale to held-to-maturity during the third quarter of 2021. The Company did not record an ACL for held-to-maturity investment securities at December 31, 2020, because the likelihood of non-repayment is remote. As of September 30, 2021 and December 31, 2020, there was no ACL for the Company’s available-for-sale investment securities. There were no investment securities classified as PCD upon acquisition of Opus during the second quarter of 2020. We recorded no allowance for credit losses for available-for-sale or held-to-maturity investment securities during the nine months ended September 30, 2020.
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The following table sets forth the fair values and weighted average yields on our investment securities portfolio by contractual maturity at the date indicated:
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
One Year or Less | More than One to Five Years | More than Five Years to Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | Fair Value | Weighted Average Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities available-for-sale: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury | $ | — | — | % | $ | 31,734 | 2.45 | % | $ | 47,608 | 1.18 | % | $ | — | — | % | $ | 79,342 | 1.68 | % | ||||||||||||||||||||||||||||||||||||||||||
Agency | — | — | 353,184 | 0.92 | 134,426 | 1.43 | 42,483 | 1.32 | 530,093 | 1.08 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate | 10,029 | 1.00 | 21,227 | 1.03 | 355,135 | 2.93 | — | — | 386,391 | 2.77 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Municipal bonds | — | — | 3,731 | 2.46 | 96,849 | 1.81 | 1,155,286 | 2.09 | 1,255,866 | 2.07 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | — | — | 41,631 | 0.46 | 223,612 | 0.95 | 396,988 | 1.19 | 662,231 | 1.06 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | 12,704 | 2.50 | 709,155 | 1.16 | 1,074,033 | 1.48 | 1,795,892 | 1.36 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities available-for-sale | 10,029 | 1.00 | 464,211 | 1.04 | 1,566,785 | 1.60 | 2,668,790 | 1.70 | 4,709,815 | 1.59 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment securities held-to-maturity: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Municipal bonds | — | — | — | — | — | — | 152,163 | 2.09 | 152,163 | 2.09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | — | — | — | — | — | — | 15,459 | 2.43 | 15,459 | 2.43 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | 1,532 | 0.97 | 1,532 | 0.97 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities held-to-maturity | — | — | — | — | — | — | 169,154 | 2.11 | 169,154 | 2.11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total securities | $ | 10,029 | 1.00 | % | $ | 464,211 | 1.04 | % | $ | 1,566,785 | 1.60 | % | $ | 2,837,944 | 1.72 | % | $ | 4,878,969 | 1.61 | % |
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Liabilities and Stockholders’ Equity
Total liabilities were $18.17 billion at September 30, 2021, compared to $16.99 billion at December 31, 2020. The increase of $1.18 billion, or 6.9%, from December 31, 2020 was primarily due to a $1.26 billion increase in deposits, and a $119.0 million increase in FHLB advances, partially offset by a decrease of $171.1 million in subordinated debentures.
Deposits. At September 30, 2021, deposits totaled $17.47 billion, an increase of $1.26 billion, or 7.7%, from $16.21 billion at December 31, 2020. Non-maturity deposits totaled $16.36 billion, or 93.6% of total deposits, an increase of $1.77 billion, or 12.1%, from December 31, 2020. The increase in deposits included $830.4 million in noninterest-bearing checking, $564.6 million in interest-bearing checking, and $374.6 million in money market/savings, primarily driven by an increase in business deposit account balances, partially offset by decreases of $358.4 million in retail certificates of deposit and $155.3 million in brokered certificates of deposit.
The total end of period weighted average rate of deposits at September 30, 2021 was 0.04%, a decrease from 0.18% at December 31, 2020, principally driven by lower pricing across all deposit product categories as well as the improvement in deposit mix.
Our ratio of loans held for investment to deposits was 80.0% and 81.6% at September 30, 2021 and December 31, 2020, respectively.
The following table sets forth the distribution of the Company’s deposit accounts at the dates indicated and the weighted average interest rates as of the last day of each period for each category of deposits presented:
September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | % of Total Deposits | Weighted Average Rate | Balance | % of Total Deposits | Weighted Average Rate | |||||||||||||||||||||||||||||
Noninterest-bearing checking | $ | 6,841,495 | 39.2 | % | — | % | $ | 6,011,106 | 37.1 | % | — | % | |||||||||||||||||||||||
Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||
Checking | 3,477,902 | 19.9 | 0.02 | 2,913,260 | 18.0 | 0.06 | |||||||||||||||||||||||||||||
Money market | 5,625,739 | 32.2 | 0.06 | 5,302,073 | 32.7 | 0.23 | |||||||||||||||||||||||||||||
Savings | 411,793 | 2.4 | 0.02 | 360,896 | 2.2 | 0.09 | |||||||||||||||||||||||||||||
Time deposit accounts: | |||||||||||||||||||||||||||||||||||
Less than 1.00% | 1,054,186 | 6.0 | 0.22 | 928,830 | 5.7 | 0.32 | |||||||||||||||||||||||||||||
1.00 - 1.99 | 52,383 | 0.3 | 1.49 | 579,570 | 3.6 | 1.49 | |||||||||||||||||||||||||||||
2.00 - 2.99 | 6,321 | — | 2.23 | 118,358 | 0.7 | 2.34 | |||||||||||||||||||||||||||||
3.00 - 3.99 | 180 | — | 3.45 | 46 | — | 4.00 | |||||||||||||||||||||||||||||
4.00 - 4.99 | — | — | — | 38 | — | 4.30 | |||||||||||||||||||||||||||||
5.00 and greater | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Total time deposit accounts | 1,113,070 | 6.4 | 0.29 | 1,626,842 | 10.0 | 0.88 | |||||||||||||||||||||||||||||
Total interest-bearing deposits | 10,628,504 | 60.8 | 0.07 | 10,203,071 | 62.9 | 0.28 | |||||||||||||||||||||||||||||
Total deposits | $ | 17,469,999 | 100.0 | % | 0.04 | % | $ | 16,214,177 | 100.0 | % | 0.18 | % |
At September 30, 2021, we had $881.3 million in certificates of deposit with balances of $100,000 or more, and $514.8 million in certificates of deposit with balances of $250,000 or more with maturities as follows:
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At September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | $100,000 through $250,000 | Greater than $250,000 | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Maturity Period | Amount | Weighted Average Rate | % of Total Deposits | Amount | Weighted Average Rate | % of Total Deposits | Amount | Weighted Average Rate | % of Total Deposits | |||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three months or less | $ | 75,369 | 0.37 | % | 0.43 | % | $ | 336,590 | 0.15 | % | 1.93 | % | $ | 411,959 | 0.19 | % | 2.36 | % | ||||||||||||||||||||||||||||||||||||||
Over three months through 6 months | 75,502 | 0.24 | 0.43 | 49,171 | 0.24 | 0.28 | 124,673 | 0.24 | 0.71 | |||||||||||||||||||||||||||||||||||||||||||||||
Over 6 months through 12 months | 132,311 | 0.38 | 0.76 | 106,684 | 0.43 | 0.61 | 238,995 | 0.40 | 1.37 | |||||||||||||||||||||||||||||||||||||||||||||||
Over 12 months | 83,317 | 0.34 | 0.48 | 22,331 | 0.41 | 0.13 | 105,648 | 0.36 | 0.60 | |||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 366,499 | 0.34 | % | 2.10 | % | $ | 514,776 | 0.23 | % | 2.95 | % | $ | 881,275 | 0.27 | % | 5.04 | % |
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Borrowings. At September 30, 2021, total borrowings amounted to $480.4 million, a decrease of $52.1 million, or 9.8%, from $532.5 million at December 31, 2020, primarily due to the redemption of $170.4 million in subordinated debentures, partially offset by increases of $119.0 million in FHLB advances. At September 30, 2021, total borrowings represented 2.3% of total assets and had an end of period weighted average rate of 3.71%, compared with 2.7% of total assets at a weighted average rate of 5.16% at December 31, 2020.
At September 30, 2021, total borrowings were comprised of the following:
•Subordinated notes of $60.0 million at a fixed rate of 5.75% due September 3, 2024 (the “Notes I”) and a carrying value of $59.6 million, net of unamortized debt issuance cost of $359,000. Interest is payable semiannually at 5.75% per annum;
•Subordinated notes of $125.0 million at 4.875% fixed-to-floating rate due May 15, 2029 (the “Notes II”) and a carrying value of $123.1 million, net of unamortized debt issuance cost of $1.9 million. Interest is payable semiannually at an initial fixed rate of 4.875% per annum. From and including May 15, 2024, but excluding the maturity date or the date of earlier redemption, the Notes II will bear interest at a floating rate equal to three-month LIBOR plus a spread of 2.50% per annum, payable quarterly in arrears; and
•Subordinated notes of $150.0 million at 5.375% fixed-to-floating rate due June 15, 2030 (the “Notes III”) and a carrying value of $147.7 million, net of unamortized debt issuance cost of $2.3 million. Interest on the Notes III accrue at a rate equal to 5.375% per annum from and including June 15, 2020 to, but excluding, June 15, 2025, payable semiannually in arrears. From and including June 15, 2025 to, but excluding, June 15, 2030 or the earlier redemption date, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be three-month term SOFR, plus a spread of 517 basis points, payable quarterly in arrears.
For additional information about the subordinated notes, subordinated debentures, and trust preferred securities, see Note 9 — Subordinated Debentures to the consolidated financial statements in this Form 10-Q.
The following table sets forth certain information regarding the Company’s borrowed funds at the dates indicated:
September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
(Dollars in thousands) | Balance | Weighted Average Rate | Balance | Weighted Average Rate | |||||||||||||||||||
FHLB advances | $ | 150,000 | 0.15 | % | $ | 31,000 | 1.53 | % | |||||||||||||||
Subordinated debentures | 330,408 | 5.33 | 501,511 | 5.38 | |||||||||||||||||||
Total borrowings | $ | 480,408 | 3.71 | % | $ | 532,511 | 5.16 | % | |||||||||||||||
Weighted average cost of borrowings during the quarter | 5.43 | % | 5.12 | % | |||||||||||||||||||
Borrowings as a percent of total assets | 2.3 | 2.7 |
Stockholders’ Equity. Total stockholders’ equity was $2.84 billion as of September 30, 2021, a $91.5 million increase from $2.75 billion at December 31, 2020. The current year increase in stockholders’ equity was primarily due to $255.1 million net income, partially offset by $90.7 million in cash dividends, $59.1 million in comprehensive loss, and $18.1 million in repurchase of common stock during the nine months ended September 30, 2021.
Our book value per share increased to $30.08 at September 30, 2021 from $29.07 at December 31, 2020. At September 30, 2021, the Company’s tangible common equity to tangible assets ratio was 9.30%, a decrease from 9.40% at December 31, 2020.
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CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments. While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.
In addition to the interest payments on loans and investments as well as fees collected on the services we provide, our primary sources of funds generated during the first nine months of 2021 were from:
•Principal payments on loans held for investment of $2.21 billion;
•Deposit growth of $1.26 billion;
•Proceeds of $630.4 million from the sale or maturity of securities available-for-sale;
•Principal payments on securities of $436.7 million; and
•Increased FHLB borrowing of $119.0 million.
We used these funds to:
•Originate loans held for investment of $2.97 billion;
•Purchase available-for-sale securities of $2.08 billion;
•Redeem subordinated debentures of $170.4 million;
•Purchase bank-owned life insurance of $150.0 million;
•Return capital to shareholders through $90.7 million in dividends;
•Originate loans held for sale of $34.9 million;
•Fund the CRA investments of $19.0 million; and
•Repurchase some of the Company’s common stock at a total cost of $18.1 million.
Our most liquid assets are unrestricted cash and short-term investments. The levels of these assets are dependent on our operating, lending, and investing activities during any given period. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. At September 30, 2021, cash and cash equivalents totaled $322.3 million, and the market value of our investment securities available-for-sale totaled $4.71 billion. If additional funds are needed, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve Board’s lending programs, as well as loan and investment securities sales. As of September 30, 2021, the maximum amount we could borrow through the FHLB was $8.21 billion, of which $5.57 billion was remaining available for borrowing based on collateral pledged of $8.31 billion in real estate loans. At September 30, 2021, we had $150.0 million in FHLB borrowings. At September 30, 2021, we also had a $20.3 million line with the FRB discount window secured by investment securities as well as unsecured lines of credit aggregating to $340.0 million with other financial institutions from which to draw funds. As of September 30, 2021, our liquidity ratio was 27.6%, which is above the Company’s minimum policy requirement of 10.0%. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.
To the extent that 2021 deposit growth is not sufficient to satisfy our ongoing commitments to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, or make investments, we may access funds through our FHLB borrowing arrangement, unsecured lines of credit, or other sources.
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The Bank has a policy in place that permits the purchase of brokered funds, in an amount not to exceed 15% of total deposits or 12% of total assets, as a secondary source for funding. At September 30, 2021, we had $5.6 million in brokered money market deposits which constituted 0.03% of total deposits and 0.03% of total assets at that date.
The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity. The Corporation’s primary sources of liquidity are dividends from the Bank. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation. Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations. During the nine months ended September 30, 2021, the Bank paid $90.5 million in dividends to the Corporation.
The Corporation maintained a line of credit with U.S. Bank with availability of $15.0 million that matured in September 2021. The Corporation renewed the line of credit, extended the maturity date to September 27, 2022, and increased the aggregate principal amount to $25.0 million. This line of credit provides an additional source of liquidity at the Corporation level and had no outstanding balance at September 30, 2021.
During the second and third quarters of 2021, the Company redeemed the subordinated debentures for an aggregate amount of $170.4 million. See Note 9 - Subordinated Debentures for additional information.
During 2021, the Corporation declared a quarterly dividend payment of $0.30 per share for the first quarter and $0.33 per share for each subsequent quarter. On October 19, 2021, the Company's Board of Directors declared a $0.33 per share dividend, payable on November 12, 2021 to stockholders of record as of November 1, 2021. The Corporation’s Board of Directors periodically reviews whether to declare or pay cash dividends, taking into account, among other things, general business conditions, the Company’s financial results, future prospects, capital requirements, legal and regulatory restrictions, and such other factors as the Corporation’s Board of Directors may deem relevant.
On January 11, 2021, the Company’s Board of Directors approved a new stock repurchase program, which authorized the repurchase of up to 4,725,000 shares of its common stock, representing approximately 5% of the Company’s issued and outstanding shares of common stock and approximately $150 million of common stock as of December 31, 2020 based on the closing price of the Company’s common stock on December 31, 2020. During the third quarter of 2021, the Company purchased 280,270 shares for a total of $11.2 million, or $39.82 per share, under this stock repurchase program. The total number of common stock shares repurchased during the nine months ended September 30, 2021 under the program was 479,944 shares for a total of $18.1 million, or $37.61 per share. See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for additional information.
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Contractual Obligations and Off-Balance Sheet Commitments
Contractual Obligations. The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs.
The following schedule summarizes maturities and payments due on our obligations and commitments, excluding accrued interest, as of the date indicated:
September 30, 2021 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | Total | ||||||||||||||||||||||||
Contractual obligations | |||||||||||||||||||||||||||||
FHLB advances | $ | 150,000 | $ | — | $ | — | $ | — | $ | 150,000 | |||||||||||||||||||
Subordinated debentures | — | 59,641 | — | 270,767 | 330,408 | ||||||||||||||||||||||||
Certificates of deposit | 975,205 | 78,183 | 7,152 | 52,530 | 1,113,070 | ||||||||||||||||||||||||
Operating leases | 20,326 | 37,758 | 21,643 | 10,531 | 90,258 | ||||||||||||||||||||||||
Total contractual cash obligations | $ | 1,145,531 | $ | 175,582 | $ | 28,795 | $ | 333,828 | $ | 1,683,736 |
Off-Balance Sheet Commitments. We utilize off-balance sheet commitments in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate real estate, business, and other loans held for investment, undisbursed loan funds, lines and letters of credit, and commitments to purchase loans and investment securities for portfolio. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Commitments to originate loans held for investment are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit on home equity and commercial loans include committed funds not disbursed. Letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. As of September 30, 2021, we had commitments to extend credit on existing lines and letters of credit of $2.50 billion, compared to $1.95 billion at December 31, 2020.
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:
September 30, 2021 | |||||||||||||||||||||||||||||
(Dollars in thousands) | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | Total | ||||||||||||||||||||||||
Other unused commitments | |||||||||||||||||||||||||||||
Commercial and industrial | $ | 731,497 | $ | 882,525 | $ | 99,230 | $ | 96,328 | $ | 1,809,580 | |||||||||||||||||||
Construction | 44,295 | 253,621 | 83,381 | — | 381,297 | ||||||||||||||||||||||||
Agribusiness and farmland | 15,075 | 36,242 | 570 | 14,503 | 66,390 | ||||||||||||||||||||||||
Home equity lines of credit | 3,160 | 5,813 | 1,817 | 54,633 | 65,423 | ||||||||||||||||||||||||
Standby letters of credit | 45,074 | — | — | — | 45,074 | ||||||||||||||||||||||||
All other | 49,798 | 27,005 | 3,447 | 56,174 | 136,424 | ||||||||||||||||||||||||
Total commitments | $ | 888,899 | $ | 1,205,206 | $ | 188,445 | $ | 221,638 | $ | 2,504,188 |
131
Regulatory Capital Compliance
The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Company and the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.
Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III”, became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. The most significant of the provisions of the new capital rules, which apply to the Company and the Bank are as follows: the phase-out of trust preferred securities from Tier 1 capital, the higher risk-weighting of high volatility and past due real estate loans and the capital treatment of deferred tax assets and liabilities above certain thresholds.
Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. The capital conservation buffer fully phased in at 2.50% by January 1, 2019. At September 30, 2021, the Company and Bank are in compliance with the capital conservation buffer requirement and exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of the fully phased-in capital conservation buffer, of 7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as “well-capitalized” for purposes of the federal bank regulatory prompt corrective action regulations.
In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the COVID-19 pandemic. The capital relief in the interim is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period using a 25% scaling factor. The cumulative difference at the end of the second year of the transition period is then phased in to regulatory capital at 25% per year over a three-year transition period. The final rule was adopted and became effective in September 2020. As a result, entities may gradually phase in the full effect of CECL on regulatory capital over a five-year transition period. The Company implemented the CECL model commencing January 1, 2020 and elected to phase in the full effect of CECL on regulatory capital over the five-year transition period.
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For regulatory capital purposes, the Corporation’s subordinated debt is included in Tier 2 capital. Total capital ratio of the Company and the Bank were impacted by the redemptions of subordinated debentures during the second and third quarter of 2021 and remained above the regulatory minimum required for capital adequacy purposes, inclusive of capital conservation buffer. See Note 9 - Subordinated Debentures for additional information.
As defined in applicable regulations and set forth in the table below, the Corporation and the Bank continue to exceed the regulatory capital minimum requirements and the Bank continues to exceed the “well capitalized” standards and the required conservation buffer at the dates indicated:
Actual | Minimum Required for Capital Adequacy Purposes Inclusive of Capital Conservation Buffer | Minimum Required For Well Capitalized Requirement | ||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||
Pacific Premier Bancorp, Inc. Consolidated | ||||||||||||||||||||
Tier 1 leverage ratio | 9.85% | 4.00% | N/A | |||||||||||||||||
Common equity tier 1 capital ratio | 11.96% | 7.00% | N/A | |||||||||||||||||
Tier 1 capital ratio | 11.96% | 8.50% | N/A | |||||||||||||||||
Total capital ratio | 14.56% | 10.50% | N/A | |||||||||||||||||
Pacific Premier Bank | ||||||||||||||||||||
Tier 1 leverage ratio | 11.38% | 4.00% | 5.00% | |||||||||||||||||
Common equity tier 1 capital ratio | 13.81% | 7.00% | 6.50% | |||||||||||||||||
Tier 1 capital ratio | 13.81% | 8.50% | 8.00% | |||||||||||||||||
Total capital ratio | 14.61% | 10.50% | 10.00% | |||||||||||||||||
Actual | Minimum Required for Capital Adequacy Purposes Inclusive of Capital Conservation Buffer | Minimum Required For Well Capitalized Requirement | ||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||
Pacific Premier Bancorp, Inc. Consolidated | ||||||||||||||||||||
Tier 1 leverage ratio | 9.47% | 4.00% | N/A | |||||||||||||||||
Common equity tier 1 capital ratio | 12.04% | 7.00% | N/A | |||||||||||||||||
Tier 1 capital ratio | 12.04% | 8.50% | N/A | |||||||||||||||||
Total capital ratio | 16.31% | 10.50% | N/A | |||||||||||||||||
Pacific Premier Bank | ||||||||||||||||||||
Tier 1 leverage ratio | 10.89% | 4.00% | 5.00% | |||||||||||||||||
Common equity tier 1 capital ratio | 13.84% | 7.00% | 6.50% | |||||||||||||||||
Tier 1 capital ratio | 13.84% | 8.50% | 8.00% | |||||||||||||||||
Total capital ratio | 15.89% | 10.50% | 10.00% |
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
Asset/Liability Management and Market Risk
Market risk is the risk of loss in value or reduced earnings from adverse changes in market prices and interest rates. The Bank’s market risk arises primarily from interest rate risk in our lending and deposit taking activities. Interest rate risk primarily occurs to the degree that the Bank’s interest-bearing liabilities reprice or mature on a different basis and frequency than its interest-earning assets. The Bank actively monitors and manages its portfolios to limit the adverse effects on net interest income and economic value due to changes in interest rates. The Asset/Liability Committee is responsible for implementing the Bank’s interest rate risk management policy established by the board of directors that sets forth limits of acceptable changes in net interest income (“NII”) and economic value of equity (“EVE”) due to specified changes in interest rates. The principal objective of the Company’s interest rate risk management function is to maintain an interest rate risk profile close to the desired risk profile in light of the interest rate outlook. Management monitors asset and liability maturities and repricing characteristics on a regular basis and evaluates its interest rate risk as it relates to operational strategies.
Interest Rate Risk Management
The Bank measures the interest rate risk included in the major balance sheet portfolios and compares the current risk profile to the desired risk profile and to policy limits set by the Board of Directors. Management then implements strategies consistent with the desired risk profile. Asset duration is compared to liability, with the desired mix of fixed and floating rate determined based upon the Company’s risk profile and outlook. Likewise, the Bank seeks to raise non-maturity deposits. Management often implements these strategies through pricing actions. Finally, management structures its security portfolio and borrowings to offset some of the interest rate sensitivity created by the re-pricing characteristics of customer loans and deposits.
Management monitors asset and liability maturities and repricing characteristics on a regular basis and evaluates its interest rate risk as it relates to operational strategies. Management analyzes potential strategies for their impact on the interest rate risk profile. Each quarter the Corporation’s Board of Directors reviews the Bank’s asset/liability position, including simulations showing the impact on the Bank’s economic value of equity in various interest rate scenarios. Interest rate moves, up or down, may subject the Bank to interest rate spread compression, which adversely impacts its net interest income. This is primarily due to the lag in repricing of the indices, to which adjustable rate loans and mortgage-backed securities are tied, as well as their repricing frequencies. Furthermore, large rate moves show the impact of interest rate caps and floors on adjustable rate transactions. This is partly offset by lags in repricing for deposit products. The extent of the interest rate spread compression depends on the direction and severity of interest rate moves and features in the Bank’s product portfolios.
The Company’s interest rate sensitivity is monitored by management through the use of both a simulation model that quantifies the estimated impact to earnings (“Earnings at Risk”) for a twelve and twenty-four month period, and a model that estimates the change in the Company’s EVE under alternative interest rate scenarios, primarily instantaneous parallel interest rate shifts in 100 basis point increments. The simulation model estimates the impact on NII from changing interest rates on interest earning assets and interest expense paid on interest bearing liabilities. The EVE model computes the net present value of equity by discounting all expected cash flows on assets and liabilities under each rate scenario. For each scenario, the EVE is the present value of all assets less the present value of all liabilities. The EVE ratio is defined as the EVE divided by the market value of assets within the same scenario.
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The following table shows the projected NII and net interest margin of the Company at September 30, 2021 and December 31, 2020, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:
September 30, 2021 | ||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Earnings at Risk | Projected Net Interest Margin | |||||||||||||||||||||||||
Change in Rates (Basis Points) | $ Amount | $ Change | % Change | Rate % | ||||||||||||||||||||||
200 | 683,650 | 3,608 | 0.5 | 3.59 | ||||||||||||||||||||||
100 | 680,673 | 631 | 0.1 | 3.58 | ||||||||||||||||||||||
Static | 680,042 | — | — | 3.57 | ||||||||||||||||||||||
-100 | 659,287 | (20,755) | (3.1) | 3.46 | ||||||||||||||||||||||
-200 | 638,027 | (42,015) | (6.2) | 3.35 |
December 31, 2020 | ||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Earnings at Risk | Projected Net Interest Margin | |||||||||||||||||||||||||
Change in Rates (Basis Points) | $ Amount | $ Change | % Change | Rate % | ||||||||||||||||||||||
200 | 678,071 | 4,892 | 0.7 | 3.66 | ||||||||||||||||||||||
100 | 673,368 | 189 | — | 3.64 | ||||||||||||||||||||||
Static | 673,179 | — | — | 3.64 | ||||||||||||||||||||||
-100 | 657,184 | (15,995) | (2.4) | 3.55 | ||||||||||||||||||||||
-200 | 646,912 | (26,267) | (3.9) | 3.49 |
The following table shows the EVE and projected change in the EVE of the Company at September 30, 2021 and December 31, 2020, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:
September 30, 2021 | ||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Economic Value of Equity | EVE as % of market value of portfolio assets | |||||||||||||||||||||||||
Change in Rates (Basis Points) | $ Amount | $ Change | % Change | EVE Ratio | ||||||||||||||||||||||
200 | 2,702,660 | 138,146 | 5.4 | 14.82 | ||||||||||||||||||||||
100 | 2,657,586 | 93,073 | 3.6 | 14.10 | ||||||||||||||||||||||
Static | 2,564,514 | — | — | 13.17 | ||||||||||||||||||||||
-100 | 2,358,047 | (206,467) | (8.1) | 11.71 | ||||||||||||||||||||||
-200 | 1,933,927 | (630,587) | (24.6) | 9.31 |
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December 31, 2020 | ||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
Economic Value of Equity | EVE as % of market value of portfolio assets | |||||||||||||||||||||||||
Change in Rates (Basis Points) | $ Amount | $ Change | % Change | EVE Ratio | ||||||||||||||||||||||
200 | 2,803,543 | 85,252 | 3.1 | 15.57 | ||||||||||||||||||||||
100 | 2,774,537 | 56,246 | 2.1 | 14.91 | ||||||||||||||||||||||
Static | 2,718,291 | — | — | 14.12 | ||||||||||||||||||||||
-100 | 2,535,779 | (182,512) | (6.7) | 12.73 | ||||||||||||||||||||||
-200 | 2,150,082 | (568,209) | (20.9) | 10.46 |
Based on the modeling of the impact on earnings and EVE from changes in interest rates, the Company’s sensitivity to changes in interest rates is low for rising rates. Both the Earnings at Risk and the EVE increase as rates rise. It is important to note the above tables are forecasts based on several assumptions and that actual results may vary. The forecasts are based on estimates of historical behavior and assumptions by management that may change over time and may turn out to be different. Factors affecting these estimates and assumptions include, but are not limited to (1) competitor behavior, (2) economic conditions both locally and nationally, (3) actions taken by the Federal Reserve Board, (4) customer behavior, and (5) management’s responses to the foregoing. Changes that vary significantly from the assumptions and estimates may have significant effects on the Company’s earnings and EVE.
The Company has minimal direct market risk from foreign exchange and no exposure from commodities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in legal proceedings occurring in the ordinary course of business. Management believes that none of the legal proceedings occurring in the ordinary course of business, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.
Item 1A. Risk Factors
The section titled Risk Factors in Part I, Item 1A of our 2020 Form 10-K included a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. There are no material changes to our risk factors as previously described under Item 1A of our 2020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 11, 2021, the Company’s Board of Directors approved a new stock repurchase program, which authorized the repurchase of up to 4,725,000 shares of its common stock. The stock repurchase program may be limited or terminated at any time without notice. During the third quarter of 2021, the Company purchased 280,270 shares for a total of $11.2 million, or $39.82 per share, under this stock repurchase program.
The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the third quarter of 2021.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||||||||||||
July 1, 2021 to July 31, 2021 | — | $ | — | — | 4,525,326 | |||||||||||||||||||||
August 1, 2021 to August 31, 2021 | 280,270 | 39.82 | 280,270 | 4,245,056 | ||||||||||||||||||||||
September 1, 2021 to September 30, 2021 | — | — | — | 4,245,056 | ||||||||||||||||||||||
Total | 280,270 | 280,270 |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
Exhibit 2.1 | |||||||||||
Exhibit 3.1 | |||||||||||
Exhibit 3.2 | |||||||||||
Exhibit 4.1 | |||||||||||
Exhibit 4.2 | Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the SEC upon request. | ||||||||||
Exhibit 10.1 | |||||||||||
Exhibit 10.2 | |||||||||||
Exhibit 10.3 | |||||||||||
Exhibit 10.4 | |||||||||||
Exhibit 10.5 | |||||||||||
Exhibit 31.1 | |||||||||||
Exhibit 31.2 | |||||||||||
Exhibit 32 | |||||||||||
Exhibit 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||||||||
Exhibit 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||||||||
Exhibit 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
Exhibit 101.DEF | Inline XBRL Taxonomy Extension Definitions Linkbase Document | ||||||||||
Exhibit 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||
Exhibit 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
Exhibit 104 | The cover page of Pacific Premier Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (contained in Exhibit 101) | ||||||||||
(1) Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 6, 2020. | |||||||||||
(2) Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on May 15, 2018. | |||||||||||
(3) Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (Registration No. 333-20497) filed with the SEC on January 27, 1997. | |||||||||||
(4) Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on September 3, 2021. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PACIFIC PREMIER BANCORP, INC., | |||||||||||
Date: | November 5, 2021 | By: | /s/ Steven R. Gardner | ||||||||
Steven R. Gardner | |||||||||||
Chairman, President, and Chief Executive Officer | |||||||||||
(Principal Executive Officer) | |||||||||||
Date: | November 5, 2021 | By: | /s/ Ronald J. Nicolas, Jr. | ||||||||
Ronald J. Nicolas, Jr. | |||||||||||
Senior Executive Vice President and Chief Financial Officer | |||||||||||
(Principal Financial Officer) | |||||||||||
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