PACIFIC PREMIER BANCORP INC - Quarter Report: 2022 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, 2022

☐ 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

(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

☐

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 28, 2022 was 95,012,077.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

FOR THE QUARTER ENDED SEPTEMBER 30, 2022


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Consolidated Statements of Financial Condition (Unaudited)			3

Consolidated Statements of Income (Unaudited)			4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)			5

Consolidated Statements of Stockholders’ Equity (Unaudited)			6

Consolidated Statements of Cash Flows (Unaudited)			8

Notes to Consolidated Financial Statements (Unaudited)			9

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			65

Item 3 - Quantitative and Qualitative Disclosures About Market Risk			109

Item 4 - Controls and Procedures			111

PART II - OTHER INFORMATION			112

Item 1 - Legal Proceedings			112

Item 1A - Risk Factors			112

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			112

Item 3 - Defaults Upon Senior Securities			112

Item 4 - Mine Safety Disclosures			112

Item 5 - Other Information			112

Item 6 - Exhibits			113

SIGNATURE			114

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, 2022		December 31, 2021
ASSETS
Cash and due from banks	$	132,351	$	83,150
Interest-bearing deposits with financial institutions	606,860		221,553
Cash and cash equivalents	739,211		304,703
Interest-bearing time deposits with financial institutions	1,733		2,216
Investments held-to-maturity, at amortized cost, net of allowance for credit losses of $91 and $22 (fair value of $1,055,187 and $384,423) at September 30, 2022 and December 31, 2021, respectively	1,385,502		381,674
Investment securities available-for-sale, at fair value	2,661,079		4,273,864
FHLB, FRB, and other stock, at cost	118,778		117,538
Loans held for sale, at lower of cost or fair value	2,163		10,869
Loans held for investment	14,908,811		14,295,897
Allowance for credit losses	(195,549)		(197,752)
Loans held for investment, net	14,713,262		14,098,145
Accrued interest receivable	66,192		65,728

Premises and equipment	65,651		71,908
Deferred income taxes, net	190,948		87,344
Bank owned life insurance	457,301		449,353
Intangible assets	59,028		69,571
Goodwill	901,312		901,312
Other assets	257,041		260,204
Total assets	$	21,619,201	$	21,094,429

LIABILITIES
Deposit accounts:
Noninterest-bearing checking	$	6,775,465	$	6,757,259
Interest-bearing:
Checking	3,605,498		3,493,331
Money market/savings	5,493,988		5,806,726
Retail certificates of deposit	872,421		1,058,273
Wholesale/brokered certificates of deposit	999,002		—
Total interest-bearing	10,970,909		10,358,330
Total deposits	17,746,374		17,115,589
FHLB advances and other borrowings	600,000		558,000
Subordinated debentures	331,045		330,567

Accrued expenses and other liabilities	206,386		203,962
Total liabilities	18,883,805		18,208,118
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, 2022 and December 31, 2021; 95,016,767 shares and 94,389,543 shares issued and outstanding, respectively	933		929
Additional paid-in capital	2,357,731		2,351,294
Retained earnings	657,845		541,950
Accumulated other comprehensive loss	(281,113)		(7,862)
Total stockholders’ equity	2,735,396		2,886,311
Total liabilities and stockholders’ equity	$	21,619,201	$	21,094,429

Accompanying notes are an integral part of these consolidated financial statements.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(Dollars in thousands, except share data)	2022		2022		2021		2022		2021
INTEREST INCOME
Loans	$	174,204	$	164,455	$	157,025	$	489,263	$	464,615
Investment securities and other interest-earning assets	24,821		18,771		19,022		61,534		55,118
Total interest income	199,025		183,226		176,047		550,797		519,733
INTEREST EXPENSE
Deposits	9,873		2,682		2,432		14,228		10,123
FHLB advances and other borrowings	3,480		3,217		1		7,171		66
Subordinated debentures	4,560		4,562		4,545		13,682		17,889
Total interest expense	17,913		10,461		6,978		35,081		28,078
Net interest income before provision for credit losses	181,112		172,765		169,069		515,716		491,655
Provision for credit losses	1,077		469		(19,726)		1,994		(56,228)
Net interest income after provision for credit losses	180,035		172,296		188,795		513,722		547,883
NONINTEREST INCOME
Loan servicing income	397		502		536		1,318		1,616
Service charges on deposit accounts	2,704		2,690		2,375		8,009		6,629
Other service fee income	323		366		350		1,056		1,175
Debit card interchange fee income	808		936		834		2,580		2,720
Earnings on bank owned life insurance	3,339		3,240		3,266		9,800		7,778
Net gain from sales of loans	457		1,136		1,187		3,087		3,094
Net (loss) gain from sales of investment securities	(393)		(31)		4,190		1,710		13,321



Trust custodial account fees	9,951		10,354		11,446		31,884		26,565
Escrow and exchange fees	1,555		1,827		1,867		5,043		5,065
Other income	1,023		1,173		4,049		3,764		12,606
Total noninterest income	20,164		22,193		30,100		68,251		80,569
NONINTEREST EXPENSE
Compensation and benefits	56,355		57,562		53,592		170,898		159,614
Premises and occupancy	12,011		11,829		12,611		35,792		36,831
Data processing	7,058		6,604		6,296		19,658		17,889

FDIC insurance premiums	1,461		1,452		1,392		4,309		3,885
Legal and professional services	4,075		4,629		4,563		12,772		12,684
Marketing expense	1,912		1,926		2,008		5,647		5,096
Office expense	1,338		1,252		1,076		3,793		4,494
Loan expense	789		1,144		1,332		3,067		3,612
Deposit expense	4,846		4,081		3,974		12,678		11,818
Merger-related expense	—		—		—		—		5
Amortization of intangible assets	3,472		3,479		3,912		10,543		12,056
Other expense	7,549		5,016		5,284		18,331		15,041
Total noninterest expense	100,866		98,974		96,040		297,488		283,025
Net income before income taxes	99,333		95,515		122,855		284,485		345,427
Income tax expense	25,970		25,712		32,767		74,415		90,369
Net income	$	73,363	$	69,803	$	90,088	$	210,070	$	255,058
EARNINGS PER SHARE
Basic	$	0.77	$	0.74	$	0.95	$	2.22	$	2.70
Diluted	0.77		0.73		0.95		2.21		2.68
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	93,793,502		93,765,264		93,549,639		93,687,230		93,571,468
Diluted	94,120,637		94,040,691		94,060,724		94,055,116		94,090,407

Accompanying notes are an integral part of these consolidated financial statements.

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)	2022		2022		2021		2022		2021
Net income	$	73,363	$	69,803	$	90,088	$	210,070	$	255,058
Other comprehensive loss, net of tax:
Unrealized loss on securities available-for-sale, net of income taxes (1)	(68,070)		(40,474)		(20,138)		(227,135)		(47,387)
Reclassification adjustment for net loss (gain) on sales of securities included in net income, net of income taxes (2)	281		22		(2,991)		(1,222)		(9,510)
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (3)	—		(31,326)		(2,277)		(47,884)		(2,277)
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (4)	1,694		993		58		2,990		58
Other comprehensive loss , net of tax	(66,095)		(70,785)		(25,348)		(273,251)		(59,116)
Comprehensive income (loss), net of tax	$	7,268	$	(982)	$	64,740	$	(63,181)	$	195,942

______________________________

(1) Income tax (benefit) expense of the unrealized loss on securities was $(27.2) million, $(16.2) million, and $(8.1) million for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively, and $(90.7) million and $(19.0) million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

(2) Income tax (benefit) expense on the reclassification adjustment for net loss (gain) on sales of securities included in net income was $(112,000), $(9,000), and $1.2 million for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively, and $488,000 and $3.8 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

(3) Income tax (benefit) expense on the unrealized loss on securities transferred from available-for-sale to held-to-maturity was $0, $(12.5) million, and $(913,000) for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively, and $(19.1) million and $(913,000) for the nine months ended September 30, 2022 and 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 $677,000, $396,000, and $24,000 for the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively, and $1.2 million and $24,000 for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Accompanying notes are an integral part of these consolidated financial statements.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2022

(Unaudited)


(Dollars in thousands, except share data)	Common Stock Shares	Common Stock		Additional Paid-in Capital		Accumulated Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
Balance at December 31, 2021	94,389,543	$	929	$	2,351,294	$	541,950	$	(7,862)	$	2,886,311
Net income	—	—		—		210,070		—		210,070
Other comprehensive loss	—	—		—		—		(273,251)		(273,251)
Cash dividends declared ($0.99 per common share)	—	—		—		(93,806)		—		(93,806)
Dividend equivalents declared ($0.99 per restricted stock unit)	—	—		369		(369)		—		—
Share-based compensation expense	—	—		14,171		—		—		14,171
Issuance of restricted stock, net	818,229	4		(4)		—		—		—
Restricted stock surrendered and canceled	(234,851)	—		(8,858)		—		—		(8,858)
Exercise of stock options	43,846	—		759		—		—		759
Balance at September 30, 2022	95,016,767	$	933	$	2,357,731	$	657,845	$	(281,113)	$	2,735,396


Balance at June 30, 2022	94,976,605	$	933	$	2,353,361	$	615,943	$	(215,018)	$	2,755,219
Net income	—	—		—		73,363		—		73,363
Other comprehensive loss	—	—		—		—		(66,095)		(66,095)
Cash dividends declared ($0.33 per common share)	—	—		—		(31,337)		—		(31,337)
Dividend equivalents declared ($0.33 per restricted stock unit)	—	—		124		(124)		—		—
Share-based compensation expense	—	—		4,336		—		—		4,336
Issuance of restricted stock, net	56,452	—		—		—		—		—
Restricted stock surrendered and canceled	(22,348)	—		(184)		—		—		(184)
Exercise of stock options	6,058	—		94		—		—		94
Balance at September 30, 2022	95,016,767	$	933	$	2,357,731	$	657,845	$	(281,113)	$	2,735,396

Accompanying notes are an integral part of these consolidated financial statements.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2021


(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.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,		September 30,
(Dollars in thousands)	2022		2021
Cash flows from operating activities:
Net income	$	210,070	$	255,058
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	11,164		12,147
Provision for credit losses	1,994		(56,228)
Share-based compensation expense	14,171		9,911
Loss on sales and disposals of premises and equipment	54		179

Net amortization on securities	14,127		17,078
Net (accretion) of discounts/premiums for acquired loans and deferred loan fees/costs	(22,328)		(31,955)
Gain on sales of investment securities available-for-sale	(1,710)		(13,321)
Loss on debt extinguishment	—		180
Gain on sales of loans	(3,087)		(3,094)
Deferred income tax expense	5,561		29,111
Income from bank owned life insurance, net	(7,949)		(6,071)
Amortization of intangible assets	10,543		12,056
Originations of loans held for sale	(57,685)		(34,902)
Proceeds from the sales of and principal payments from loans held for sale	69,478		29,973
Change in accrued expenses and other liabilities, net	6,075		(17,404)
Change in accrued interest receivable and other assets, net	82,719		53,953
Net cash provided by operating activities	333,197		256,671
Cash flows from investing activities:
Net decrease in interest-bearing time deposits with financial institutions	483		137

Loan originations and payments, net	(664,678)		(719,657)
Proceeds from loans held for sale previously classified as portfolio loans	—		1,530
Purchase of loans held for investment	(797)		—
Proceeds from prepayments and maturities of securities held-to-maturity	15,570		7,509
Purchase of securities available-for-sale	(986,997)		(2,079,198)
Proceeds from prepayments and maturities of securities available-for-sale	248,629		429,235
Proceeds from sales of securities available-for-sale	936,413		630,437
Proceeds from the sales of premises and equipment	—		26
Proceeds from surrender of bank owned life insurance	—		1,400
Purchase of bank owned life insurance	—		(150,000)
Purchase of premises and equipment	(4,961)		(6,318)
Change in FHLB, FRB, and other stock, at cost	(2,321)		3
Funding of CRA investments, net	(10,910)		(19,001)
Net cash used in investing activities	(469,569)		(1,903,897)
Cash flows from financing activities:
Net increase in deposit accounts	$	630,785	$	1,255,822
Net change in short-term borrowings	(358,000)		140,000
Proceeds from long-term borrowings	400,000		—
Repayments of long-term borrowings	—		(21,503)

Redemption of junior subordinated debt securities	—		(171,153)

Cash dividends paid	(93,806)		(90,747)
Repurchase and retirement of common stock	—		(18,067)
Proceeds from exercise of stock options	759		782
Restricted stock surrendered and canceled	(8,858)		(6,354)
Net cash provided by financing activities	570,880		1,088,780
Net increase (decrease) in cash and cash equivalents	434,508		(558,446)
Cash and cash equivalents, beginning of period	304,703		880,766
Cash and cash equivalents, end of period	$	739,211	$	322,320

Supplemental cash flow disclosures:
Interest paid	$	28,638	$	29,745
Income taxes paid, net	47,932		56,472
Noncash investing activities during the period:
Transfers from portfolio loans to loans held for sale	—		1,006

Transfers of investment securities from available-for-sale to held-to-maturity	1,019,472		154,456
Recognition of operating lease right-of-use assets	(1,183)		(3,812)
Recognition of operating lease liabilities	1,183		3,812

Accompanying notes are an integral part of these consolidated financial statements.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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 three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2022.

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, 2021 (the “2021 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 14 – Variable Interest Entities for additional information.

Note 2 – Recently Issued Accounting Pronouncements

Recent Accounting Guidance Not Yet Effective

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. The FASB issued this Update in response to feedback the FASB received from various stakeholders in its post-implementation review process related to the issuance of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was effective for the Company on January 1, 2020. The amendments in this Update include the elimination of accounting guidance for troubled debt restructurings (“TDRs”) in Subtopic 310-40 - Receivables - Troubled Debt Restructurings by Creditors, and introduce new disclosures and enhance existing disclosures concerning certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Rather than applying the recognition and measurement guidance of troubled debt restructurings, an entity must determine whether a modification results in a new loan or the continuation of an existing loan. Further, the amendments in this Update require that a public business entity disclose current period gross charge-offs on financing receivables within the scope of ASC 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, by year of origination and class of financing receivable. The amendments in this Update are effective for the Company in fiscal years beginning after December 15, 2022, as well as interim periods within those years. Early adoption is permitted. The amendments in this Update are to be applied prospectively. However, for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact of this Update on the Company’s consolidated financial statements with internal stakeholders in finance, credit administration, and loan servicing.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815) Fair Value Hedging - Portfolio Layer Method. The amendments in this Update make targeted improvements to fair value hedge accounting and more specifically to the last-of-layer hedge accounting method. This Update expands the last-of-layer hedge accounting method to allow for multiple hedged layers to be designated for a single closed portfolio of prepayable financial assets, and renames this accounting method the “portfolio layer method.” The provisions of this Update also include: (i) expanding the scope of the portfolio layer method to nonprepayable financial assets, (ii) specifying that eligible hedging instruments in a single layer hedge may include spot-starting or forward-starting constant-notional or amortizing-notional swaps and that the number of hedged layers corresponds with the number of hedges designated, (iii) specifies that an entity hedging multiple amounts in a closed portfolio using a single amortizing-notional swap is executing a single-layer hedge, (iv) provides additional guidance on the accounting for and disclosure of hedge basis adjustments resulting from a fair value hedge under the portfolio layer method by requiring such basis adjustments be maintained at the portfolio level and not allocated to individual assets, and to disclose basis adjustments as a reconciling item in certain disclosures, such as those for loans, and (v) specifies that an entity is to exclude hedge basis adjustments in the determination of credit losses on the assets within the closed portfolio. The provisions of this Update are effective for the Company in fiscal years beginning after December 15, 2022, as well as interim periods within those years. Early adoption is permitted. Entities may designate multiple layer hedges only on a prospective basis upon the adoption of this Update. The provisions of this Update that relate to hedge basis adjustments, except for those related to disclosure, are to be applied on a modified retrospective basis through a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The provisions of this Update that relate to disclosure may be applied on a prospective basis or on a retrospective basis to each prior period presented. The Company is currently evaluating the impact of this Update on the Company’s consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in this Update address how to determine whether a contract liability is recognized by an acquirer in a business combination. In addition, the Update addresses inconsistencies in the recognition and measurement of acquired contract assets and contract liabilities from revenue contracts in a business combination. The amendments in this Update are effective for the Company in fiscal years beginning after December 15, 2022, as well as all interim periods within those years. Early adoption is permitted. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application, and (2) prospectively to all business combinations that occur on or after the date of initial application. The Company has not yet adopted the provisions of this Update. The Company does not currently anticipate the adoption of this Update will have a material impact on the Company’s consolidated financial statements.

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 become effective upon issuance for all entities.

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. The Company has chosen to use the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR. However, the Company will also use other alternative reference rates, such as the Constant Maturity Treasury index and Prime rate based on the individual needs of its customers as well as the types of credit being extended.

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 2021 Form 10-K. Select policies have been reiterated below that have a particular affiliation to our interim financial statements.

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 (“HTM”). 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.

The Company accounts for transfers of debt securities from available-for-sale classification to held-to-maturity classification at fair value on the transfer date. 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 on the date of transfer are also subsequently amortized or accreted into interest income over the remaining life of the security using the interest method.

Securities Available-for-Sale (“AFS”). 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 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.

Allowance for Credit Losses on Investment Securities. The allowance for credit losses (“ACL”) on investment securities is determined for both the HTM and AFS classifications of the investment portfolio in accordance with the guidance ASC 326 on a quarterly basis. The ACL for HTM 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 HTM 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, a zero credit loss assumption is applied. Such investment securities typically consist of those guaranteed by the U.S. government or other government enterprises, where there is an explicit or implicit guarantee by the U.S. government, that are highly rated by rating agencies, and historically have had no credit loss experience.

For available-for-sale investment securities, the Company performs a qualitative evaluation for 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, or a portion thereof, is credit related, 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, in accumulated other comprehensive income.

The Company determines expected credit losses on AFS and HTM 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 collectable. Accrued interest receivable for investment securities is included in accrued interest receivable balances in the consolidated statements of financial condition.

Equity Investments. Equity investments 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 investments 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. Dividends received on equity securities are included in interest income on investment securities and other interest earning assets in the consolidated statements of income.

The Company applies the equity method of accounting to investments in the equity of certain entities where it is deemed to have the ability to exercise significant influence over the entity, but does not control the entity, such as when its ownership interest is between 20% and 50%. Further, the Company also applies the equity method of accounting to equity investments it makes in limited partnerships and limited liability companies when its ownership interest in such entities exceeds 3-5% or when the Company believes it has the ability to exercise significant influence over the partnership. Such investments typically reflect equity interests in various partnerships that make investments qualifying for credit under the Community Reinvestment Act (“CRA”). The Company records its share of the operating results associated with equity method investments, based on the most recent information available from the investee, in other noninterest income in the consolidated statements of income.

Loans Held for Investment. Loans held for investment are loans the Company has the ability and intent to hold for the foreseeable future or until their maturity. These loans are carried at amortized cost, net of discounts and premiums on acquired and purchased 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 in interest income as an adjustment of yield, using the interest method, over the contractual life of the loans. Amortization of deferred loan fees or costs, as well as any purchase discounts and premiums, are discontinued for loans that are placed on nonaccrual. Any remaining discounts, premiums, deferred fees or costs, and prepayment fees associated with loan payoffs prior to contractual maturity are included in interest income on loans 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 based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to the collection of principal and/or interest. When loans are placed on nonaccrual status, all previously accrued and uncollected interest is promptly reversed against current period interest income, and therefore 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 deemed to be fully collectible as to all principal and interest.

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 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. 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 (“PD”) and loss given default (“LGD”) model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. Together, the PD and LGD 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 forecasts PD and LGD over a two-year time horizon, which the Company believes is a reasonable and supportable period. PD and LGD forecasts are derived using economic forecast scenarios. Beyond the two-year forecast time horizon, the Company’s ACL model reverts to historical long-term average loss rates over a period of three years. The duration of the forecast horizon, the period over which forecasts revert to historical 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 PD and LGD, 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 for 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.

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, management considers the need for qualitative adjustments to the ACL on a quarterly basis. 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 backtesting, 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.

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, 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, which have exhibited a deterioration in credit quality 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.

Please also see Note 6 – 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 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, 2022, 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.

•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 (“QSR”). 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), SBA Express, 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. government. 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.

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. 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.

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. Any resulting discount or premium on acquired loans is accreted or amortized into interest income over the remaining life of the loans 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. As with non-PCD loans, 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.

Goodwill and Other Intangible Assets. Goodwill assets originate from business combinations where the Company has acquired other financial institutions, and is 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 that are 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 those assets 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.

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.

The Company’s annual impairment test of goodwill is performed in the fourth quarter of each year. The Company performed a qualitative assessment of goodwill in the fourth quarter of 2021, the results of which indicated the value of goodwill assets could be supported and were not impaired. There have been no changes since the most recent assessment.

Other intangible assets include core deposit and customer relationship intangible assets arising from the acquisition of other financial institutions and are amortized on a basis reflecting the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, or on a straight-line basis over their estimated useful lives, which range from 6 to 11 years. GAAP 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. The Company tests intangible assets for impairment in the fourth quarter of each year, the results of which indicated the value of intangible assets could be supported and were not impaired.

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 accounting hedges. 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 loans 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 loans to floating-rate loans. The Company structures these swaps to match the critical terms of the hedged items (i.e. the 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 the cumulative change in the fair value of the hedged risk, previously recorded to the carrying amount of the hedged item, are amortized or accreted into interest income using the interest method over the remaining life of the hedged item.

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 contractual 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 future lease payments on operating leases are reduced by periodic contractual lease payments net of periodic interest accretion on the lease liability. 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 operating leases is recorded on a straight-line basis. As of September 30, 2022, 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.

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 (“OREO”) 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, such as a deposit account agreement, which can be canceled at any time, or a service provided to a customer at a point in time. 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.

Stock-Based Compensation. The Company issues various forms of stock-based compensation awards annually to officers and directors of the Company, including stock options, restricted stock awards, and restricted stock units. The related compensation costs are based on the grant-date fair value and are recognized in the income statement over the period they are expected to vest, net of estimates for forfeitures. Estimates for forfeitures are based on the Company’s historical experience for each award type. A Black-Scholes model is utilized to estimate the fair value of stock options on the grant date. The Black-Scholes model uses certain assumptions to determine grant date fair value such as: expected volatility, expected term of the option, expected risk-free rate of interest, and expected dividend yield on the Corporation’s common stock. The market price of the Corporation’s common stock at the grant date is used for restricted stock awards in determining the grant date fair value for those awards. The Company has not granted any stock option awards during 2022.

Restricted stock awards and restricted stock units are granted to employees of the Company, and represent stock-based compensation awards that when ultimately settled, result in the issuance of shares of the Corporation’s common stock to the grantee. As with other stock-based compensation awards, compensation cost for restricted stock awards and restricted stock units is recognized over the period in which the awards are expected to vest. Certain of the Corporation’s restricted stock units contain vesting conditions which are based on pre-determined performance targets. The level at which the associated performance targets are achieved can impact the ultimate settlement of the award with the grantee and thus the level of compensation expense ultimately recognized. Certain of these awards contain a market-based condition whereby the vesting of the award is based on the Company’s performance, such as total shareholder return, relative to its peers over a specified period of time. The grant date fair value of restricted stock units with a market-based condition is determined through an independent third party which employs the use of a Monte Carlo simulation. The Monte Carlo simulation estimates grant date fair value using input assumptions similar to those used in the Black-Scholes model, however, it also incorporates into the grant date fair value calculation the probability that the performance targets will be achieved. The grant date fair value of restricted stock units that do not contain a market-based condition for vesting is based on the price of the Corporation’s common stock on the grant date.

Holders of restricted stock awards are entitled to receive cash dividends. Holders of restricted stock units are entitled to receive dividend equivalents during the vesting period commensurate with dividends declared and paid on the Corporation’s common stock. As restricted stock awards contain rights to receive non-forfeitable dividends prior to the awards being vested, such awards are considered participating securities.

Comprehensive Income (Loss). Comprehensive income (loss) is reported in addition to net income for all periods presented. Comprehensive income (loss) is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has not been recognized in the calculation of net income. Unrealized gains and losses on the Company’s available-for-sale investment securities are required to be included in other comprehensive income (loss). Total comprehensive income (loss) and the components of accumulated other comprehensive income (loss) are presented in the Consolidated Statements of Stockholders’ Equity and Consolidated Statements of Comprehensive Income.

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.

Note 4 – 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
AFS investment securities:
September 30, 2022
U.S. Treasury	$	48,926	$	—	$	(2,152)	$	46,774
Agency	486,111		—		(55,248)		430,863
Corporate debt	602,058		—		(46,308)		555,750

Collateralized mortgage obligations	856,867		24		(65,776)		791,115
Mortgage-backed securities	991,429		—		(154,852)		836,577
Total AFS investment securities	$	2,985,391	$	24	$	(324,336)	$	2,661,079





December 31, 2021
U.S. Treasury	$	57,708	$	614	$	(456)	$	57,866
Agency	440,183		2,081		(10,129)		432,135
Corporate debt	451,621		6,096		(3,856)		453,861
Municipal bonds	1,061,985		32,209		(4,281)		1,089,913
Collateralized mortgage obligations	680,686		2,012		(6,055)		676,643
Mortgage-backed securities	1,586,406		3,220		(26,180)		1,563,446
Total AFS investment securities	$	4,278,589	$	46,232	$	(50,957)	$	4,273,864

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
HTM investment securities:
September 30, 2022
Municipal bonds	$	1,148,234	$	(91)	$	1,148,143	$	—	$	(294,439)	$	853,704
Mortgage-backed securities	235,937		—		235,937		—		(35,876)		200,061
Other	1,422		—		1,422		—		—		1,422
Total HTM investment securities	$	1,385,593	$	(91)	$	1,385,502	$	—	$	(330,315)	$	1,055,187





December 31, 2021
Municipal bonds	$	368,344	$	(22)	$	368,322	$	3,834	$	(1,649)	$	370,507
Mortgage-backed securities	11,843		—		11,843		564		—		12,407
Other	1,509		—		1,509		—		—		1,509
Total HTM investment securities	$	381,696	$	(22)	$	381,674	$	4,398	$	(1,649)	$	384,423

The Company reassesses classification of certain investments as part of the ongoing review of the investment securities portfolio. During the first half of 2022, the Company transferred all of the AFS municipal bond portfolio of $831.4 million as well as mortgage-backed securities of $255.0 million, both of which the Company intends and has the ability to hold to maturity, to HTM securities. The transfer of these securities was accounted for at fair value on the transfer date. In total, the municipal bonds had a net carrying amount of $780.7 million with a pre-tax unrealized loss of $50.8 million, and the mortgage-backed securities had a net carrying amount of $238.8 million with a pre-tax unrealized loss of $16.2 million, and both realized losses were reflected as discounts on the date of transfer. These discounts are accreted into interest income as yield adjustments over the remaining term of the securities. The amortization of the unrealized losses reported in accumulated other comprehensive income largely offsets the effect on interest income of the accretion of the discounts. No gains or losses were recorded at the time of transfer. During the third quarter of 2022, there was no investment securities transfer from AFS to HTM.

Investment securities with carrying values of $194.0 million and $130.7 million as of September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits, other borrowings, and for other purposes as required or permitted by law.

Unrealized Gains and Losses

Unrealized gains and losses on AFS investment securities are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At September 30, 2022, the Company had a net unrealized loss on AFS investment securities of $324.3 million, or $231.7 million net of tax in accumulated other comprehensive loss, compared to a net unrealized loss of $4.7 million, or $3.3 million net of tax in accumulated other comprehensive loss, at December 31, 2021.

For investment securities transferred from AFS to HTM, the unrealized gains and losses at the date of transfer continue to be reported in stockholders’ equity as accumulated other comprehensive income or loss 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, 2022, the unrealized loss on investment securities transferred from AFS to HTM was $69.2 million, or $49.4 million net of tax in accumulated other comprehensive loss.

The table below summarizes the number, fair value, and gross unrealized holding losses of the Company’s AFS investment securities 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, 2022
	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
AFS investment securities:
U.S. Treasury	5	$	33,865	$	(125)	1	$	12,909	$	(2,027)	6	$	46,774	$	(2,152)
Agency	8	80,049		(1,118)		35	350,814		(54,130)		43	430,863		(55,248)
Corporate debt	49	468,523		(28,413)		8	87,227		(17,895)		57	555,750		(46,308)

Collateralized mortgage obligations	44	543,696		(35,355)		36	239,916		(30,421)		80	783,612		(65,776)
Mortgage-backed securities.	16	103,048		(8,957)		66	733,529		(145,895)		82	836,577		(154,852)
Total AFS investment securities	122	$	1,229,181	$	(73,968)	146	$	1,424,395	$	(250,368)	268	$	2,653,576	$	(324,336)


	December 31, 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
AFS investment securities:
U.S. Treasury	3	$	47,235	$	(456)	—	$	—	$	—	3	$	47,235	$	(456)
Agency	19	278,078		(5,634)		16	119,750		(4,495)		35	397,828		(10,129)
Corporate debt	17	166,563		(849)		3	57,274		(3,007)		20	223,837		(3,856)
Municipal bonds	36	277,564		(4,079)		2	6,596		(202)		38	284,160		(4,281)
Collateralized mortgage obligations	26	226,763		(3,738)		15	121,185		(2,317)		41	347,948		(6,055)
Mortgage-backed securities	103	1,306,455		(20,417)		15	173,121		(5,763)		118	1,479,576		(26,180)
Total AFS investment securities	204	$	2,302,658	$	(35,173)	51	$	477,926	$	(15,784)	255	$	2,780,584	$	(50,957)

Allowance for Credit Losses on Investment Securities

The Company reviews individual securities classified as AFS 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 AFS 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 AFS 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 AFS 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 HTM investment securities are recorded at the time of purchase or acquisition and when the Company has designated securities as HTM. Credit losses on HTM 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 AFS and HTM 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 AFS 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.

At September 30, 2022 and December 31, 2021, the Company had an ACL of $91,000 and $22,000, respectively, for HTM investment securities classified as municipal bonds. The following table presents a rollforward by major security type of the allowance for credit losses on the Company's HTM debt securities as of and for the periods indicated:


	Three Months Ended September 30, 2022
(Dollars in thousands)	Balance, June 30, 2022		Provision for Credit Losses		Balance, September 30, 2022









HTM investment securities:
Municipal bonds	$	109	$	(18)	$	91


	Three Months Ended September 30, 2021
(Dollars in thousands)	Balance, June 30, 2021		Provision for Credit Losses		Balance, September 30, 2021









HTM investment securities:
Municipal bonds	$	—	$	11	$	11


	Nine Months Ended September 30, 2022
(Dollars in thousands)	Balance, December 31, 2021		Provision for Credit Losses		Balance, September 30, 2022









HTM investment securities:
Municipal bonds	$	22	$	69	$	91


	Nine Months Ended September 30, 2021
(Dollars in thousands)	Balance, December 31, 2020		Provision for Credit Losses		Balance, September 30, 2021









HTM investment securities:
Municipal bonds	$	—	$	11	$	11

The Company had no ACL for AFS investment securities at September 30, 2022 and December 31, 2021. The Company performed a qualitative assessment of these investments as of September 30, 2022 and determined that the increase in unrealized losses was the result of changes in interest rates driven by the Federal Reserve’s policy to fight against inflation, and does not believe the declines in fair value were credit related. As of September 30, 2022, the Company had not recorded credit losses on certain AFS securities that were in an unrealized loss position due to the high quality of the investments, with investment grade ratings, and many of them issued by U.S. government agencies. No issuers of these securities have, to the Company’s knowledge, experienced credit downgrades. Additionally, the Company continues to receive contractual principal and interest payments in a timely manner. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recoveries. There was no provision for credit losses recognized for AFS investment securities during the three months ended September 30, 2022, June 30, 2022, or September 30, 2021, or the nine months ended September 30, 2022 and September 30, 2021.

At September 30, 2022 and December 31, 2021, there were no AFS or HTM securities in nonaccrual status. All securities in the portfolio were current with their contractual principal and interest payments. At September 30, 2022 and December 31, 2021, there were no securities purchased with deterioration in credit quality since their origination. At September 30, 2022 and December 31, 2021, there were no collateral dependent AFS or HTM securities.

Realized Gains and Losses

The following table presents the amortized cost of securities sold with related gross realized gains, gross realized losses, and net realized (losses) gains for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,		June 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2022		2022		2021		2022		2021
Amortized cost of AFS investment securities sold	$	231,076	$	45,121	$	161,597	$	934,703	$	617,116

Gross realized gains	$	—	$	7	$	4,190	$	13,645	$	18,462
Gross realized (losses)	(393)		(38)		—		(11,935)		(5,141)
Net realized (losses) gains on sales of AFS investment securities	$	(393)	$	(31)	$	4,190	$	1,710	$	13,321

Contractual Maturities

The amortized cost and estimated fair value of investment securities at September 30, 2022, 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
AFS investment securities:
U.S. Treasury	$	9,648	$	9,639	$	24,342	$	24,226	$	14,936	$	12,909	$	—	$	—	$	48,926	$	46,774
Agency	25,583		25,329		326,627		298,271		96,469		79,143		37,432		28,120		486,111		430,863
Corporate debt	—		—		298,578		289,014		303,480		266,736		—		—		602,058		555,750

Collateralized mortgage obligations	34,661		34,426		70,542		68,834		213,821		192,325		537,843		495,530		856,867		791,115
Mortgage-backed securities	—		—		35,049		34,770		549,549		468,798		406,831		333,009		991,429		836,577
Total AFS investment securities	69,892		69,394		755,138		715,115		1,178,255		1,019,911		982,106		856,659		2,985,391		2,661,079
HTM investment securities:
Municipal bonds	—		—		10,484		9,749		50,556		43,410		1,087,194		800,545		1,148,234		853,704
Mortgage-backed securities	—		—		—		—		—		—		235,937		200,061		235,937		200,061
Other	—		—		—		—		—		—		1,422		1,422		1,422		1,422
Total HTM investment securities	—		—		10,484		9,749		50,556		43,410		1,324,553		1,002,028		1,385,593		1,055,187
Total investment securities	$	69,892	$	69,394	$	765,622	$	724,864	$	1,228,811	$	1,063,321	$	2,306,659	$	1,858,687	$	4,370,984	$	3,716,266

FHLB, FRB, and Other Stock

The Company’s equity securities primarily consist of Federal Home Loan Bank of San Francisco (“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, 2022, the Company had $19.4 million in FHLB stock, $74.7 million in FRB stock, and $24.7 million in other stock. At December 31, 2021, the Company had $17.3 million in FHLB stock, $74.5 million in FRB stock, and $25.7 million in other stock.

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, 2022.

Note 5 – 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.

The following table presents the composition of the loan portfolio for the periods indicated:


	September 30,		December 31,
(Dollars in thousands)	2022		2021
Investor loans secured by real estate
CRE non-owner-occupied	$	2,771,272	$	2,771,137
Multifamily	6,199,581		5,891,934
Construction and land	373,194		277,640
SBA secured by real estate	42,998		46,917
Total investor loans secured by real estate	9,387,045		8,987,628
Business loans secured by real estate
CRE owner-occupied	2,477,530		2,251,014
Franchise real estate secured	383,468		380,381
SBA secured by real estate	64,002		69,184
Total business loans secured by real estate	2,925,000		2,700,579
Commercial loans
Commercial and industrial	2,164,623		2,103,112
Franchise non-real estate secured	409,773		392,576
SBA non-real estate secured	11,557		11,045
Total commercial loans	2,585,953		2,506,733
Retail loans
Single family residential	75,176		95,292
Consumer	3,761		5,665
Total retail loans	78,937		100,957
Loans held for investment before basis adjustment (1)	14,976,935		14,295,897
Basis adjustment associated with fair value hedge (2)	(68,124)		—
Loans held for investment	14,908,811		14,295,897
Allowance for credit losses for loans held for investment	(195,549)		(197,752)
Loans held for investment, net	$	14,713,262	$	14,098,145

Total unfunded loan commitments	$	2,823,555	$	2,507,911
Loans held for sale, at lower of cost or fair value	2,163		10,869

______________________________

(1) Includes net deferred origination fees of $3.0 million and $3.5 million, and unaccreted fair value net purchase discounts of $59.0 million and $77.1 million as of September 30, 2022 and December 31, 2021, respectively.

(2) Represents the basis adjustment associated with the application of hedge accounting on certain loans. Refer to Note 11 – Derivative Instruments for additional information.

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 initially 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, 2022 and December 31, 2021, the servicing asset totaled $3.4 million and $3.8 million, respectively, and were included in other assets in the Company’s consolidated statement of financial condition. Servicing assets 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, 2022 and December 31, 2021, the Company determined that no valuation allowance was necessary.

In connection with the acquisition of Opus Bank (“Opus”), the Company acquired Federal Home Loan Mortgage Corporation (“Freddie Mac”) guaranteed structured pass-through certificates, which were issued as a result of Opus’s securitization sale of $509 million in originated multifamily loans through a Freddie Mac-sponsored transaction in December 2016. 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.

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 $338,000 as of September 30, 2022 and December 31, 2021.

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 $491.0 million at September 30, 2022 and $565.8 million at December 31, 2021. Included in those totals are multifamily loans transferred through securitization with Freddie Mac of $57.4 million and $78.1 million at September 30, 2022 and December 31, 2021, respectively, and SBA participations serviced for others of $328.6 million and $365.6 million at September 30, 2022 and December 31, 2021, respectively.

Concentration of Credit Risk

As of September 30, 2022, 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 $813.1 million for secured loans and $487.9 million for unsecured loans at September 30, 2022. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At September 30, 2022, the Bank’s largest aggregate outstanding balance of loans to one borrower was $257.3 million primarily comprised of an asset-based line of credit.

Credit Quality and Credit Risk Management

The Company’s credit quality and credit risk are controlled in two distinct 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 federal banking 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.

The following provides brief definitions for risk grades assigned to loans in the portfolio:

•Pass classifications represent assets with an acceptable level of credit quality that contains no well-defined deficiencies or weaknesses.

•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 through foreclosure is also classified as substandard assets.

•Doubtful assets have all the weaknesses inherent in substandard assets, 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. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate properties, and cash. 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. However, if a loan is not considered collateral dependent and management determines that the loan no longer possesses risk characteristics similar to other loans in the loan portfolio, the loan is individually evaluated, and the associated ACL is determined through the use of a discounted cash flow analysis.

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, 2022:


	Term Loans by Vintage
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term During the Period		Total
September 30, 2022
Investor loans secured by real estate
CRE non-owner-occupied
Pass	$	500,592	$	619,259	$	223,908	$	362,597	$	318,172	$	711,998	$	—	$	—	$	2,736,526
Special mention	—		—		—		—		7,537		3,965		—		—		11,502
Substandard	—		—		—		16,393		194		6,182		—		475		23,244

Multifamily
Pass	1,193,692		2,225,146		796,705		922,115		292,670		759,311		388		—		6,190,027

Substandard	—		6,074		—		2,732		—		748		—		—		9,554

Construction and land
Pass	154,286		152,548		38,569		18,817		1,853		7,121		—		—		373,194



SBA secured by real estate
Pass	6,596		130		494		5,466		7,575		14,833		—		—		35,094

Substandard	—		—		—		—		2,422		5,482		—		—		7,904

Total investor loans secured by real estate	1,855,166		3,003,157		1,059,676		1,328,120		630,423		1,509,640		388		475		9,387,045
Business loans secured by real estate
CRE owner-occupied
Pass	589,994		737,861		252,950		248,513		121,626		489,097		5,510		—		2,445,551
Special mention	—		—		504		—		—		9,393		—		—		9,897
Substandard	—		—		4,656		2,442		4,718		10,266		—		—		22,082

Franchise real estate secured
Pass	56,586		147,304		33,874		45,173		33,203		60,255		—		—		376,395

Substandard	981		—		—		6,092		—		—		—		—		7,073

SBA secured by real estate
Pass	10,015		7,038		2,332		6,486		4,968		27,076		—		—		57,915

Substandard	—		—		—		—		1,362		4,725		—		—		6,087

Total loans secured by business real estate	657,576		892,203		294,316		308,706		165,877		600,812		5,510		—		2,925,000
Commercial loans
Commercial and industrial
Pass	251,964		306,145		61,872		161,641		90,096		149,371		1,107,645		2,601		2,131,335
Special mention	15,375		—		—		—		—		—		3,764		—		19,139
Substandard	1,437		1,132		—		4,899		615		1,230		4,786		50		14,149

Franchise non-real estate secured
Pass	91,787		146,650		19,005		64,017		32,914		35,933		779		—		391,085

Substandard	1,775		400		2,983		2,276		—		11,254		—		—		18,688

SBA non-real estate secured
Pass	3,212		444		472		1,679		707		3,723		—		—		10,237

Substandard	—		—		—		133		231		349		—		607		1,320






Total commercial loans	365,550		454,771		84,332		234,645		124,563		201,860		1,116,974		3,258		2,585,953


	Term Loans by Vintage
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term During the Period		Total
September 30, 2022
Retail loans
Single family residential
Pass	$	—	$	303	$	178	$	—	$	23	$	50,648	$	23,982	$	—	$	75,134

Substandard	—		—		—		—		—		42		—		—		42

Consumer loans
Pass	—		7		19		13		—		1,113		2,609		—		3,761



Total retail loans	—		310		197		13		23		51,803		26,591		—		78,937
Loans held for investment before basis adjustment (1)	$	2,878,292	$	4,350,441	$	1,438,521	$	1,871,484	$	920,886	$	2,364,115	$	1,149,463	$	3,733	$	14,976,935

______________________________

(1) Excludes the basis adjustment of $68.1 million to the carrying amount of certain loans included in fair value hedging relationships. Refer to Note 11 – Derivative Instruments for additional information.

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, 2021:


	Term Loans by Vintage
(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Revolving Converted to Term During the Period		Total
December 31, 2021
Investor loans secured by real estate
CRE non-owner-occupied
Pass	$	708,560	$	269,944	$	393,097	$	387,923	$	218,388	$	730,736	$	9,353	$	—	$	2,718,001
Special mention	—		—		16,166		7,682		—		—		—		—		23,848
Substandard	—		—		25,777		—		—		2,998		513		—		29,288

Multifamily
Pass	2,260,708		952,127		1,199,505		444,904		479,029		554,067		286		—		5,890,626

Substandard	—		—		—		543		—		765		—		—		1,308

Construction and land
Pass	119,532		97,721		40,556		12,415		3,857		3,559		—		—		277,640



SBA secured by real estate
Pass	130		497		6,259		9,074		12,070		9,198		—		—		37,228
Special mention	—		—		—		957		—		544		—		—		1,501
Substandard	—		—		—		2,343		3,679		2,166		—		—		8,188

Total investor loans secured by real estate	3,088,930		1,320,289		1,681,360		865,841		717,023		1,304,033		10,152		—		8,987,628


	Term Loans by Vintage
(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving		Revolving Converted to Term During the Period		Total
December 31, 2021
Business loans secured by real estate
CRE owner-occupied
Pass	$	853,044	$	273,469	$	287,249	$	161,636	$	187,130	$	464,271	$	6,738	$	292	$	2,233,829

Substandard	—		—		2,553		6,074		2,966		5,592		—		—		17,185

Franchise real estate secured
Pass	156,381		36,335		55,091		40,047		56,288		34,878		1,361		—		380,381



SBA secured by real estate
Pass	6,379		2,364		7,331		9,125		10,734		24,627		—		—		60,560
Special mention	—		—		—		—		—		62		—		—		62
Substandard	—		—		—		2,062		2,690		3,810		—		—		8,562

Total loans secured by business real estate	1,015,804		312,168		352,224		218,944		259,808		533,240		8,099		292		2,700,579
Commercial loans
Commercial and industrial
Pass	425,683		79,635		200,234		117,471		123,345		70,789		1,032,053		3,371		2,052,581
Special mention	—		—		146		—		—		152		14,814		178		15,290
Substandard	1,772		—		14		2,683		863		1,150		27,684		1,075		35,241

Franchise non-real estate secured
Pass	163,865		23,943		85,206		45,061		23,672		31,163		—		—		372,910

Substandard	—		—		1,589		3,627		13,346		1,104		—		—		19,666

SBA non-real estate secured
Pass	474		564		1,292		666		2,806		2,148		—		—		7,950
Special mention	—		—		681		114		—		—		—		—		795
Substandard	—		—		76		339		685		547		653		—		2,300






Total commercial loans	591,794		104,142		289,238		169,961		164,717		107,053		1,075,204		4,624		2,506,733
Retail loans
Single family residential
Pass	313		211		—		32		2,008		68,759		23,920		—		95,243

Substandard	—		—		—		—		—		49		—		—		49

Consumer loans
Pass	11		28		49		19		11		1,394		4,113		—		5,625

Substandard	—		—		5		—		—		35		—		—		40

Total retail loans	324		239		54		51		2,019		70,237		28,033		—		100,957
Loans held for investment	$	4,696,852	$	1,736,838	$	2,322,876	$	1,254,797	$	1,143,567	$	2,014,563	$	1,121,488	$	4,916	$	14,295,897

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, 2022
Investor loans secured by real estate
CRE non-owner-occupied	$	2,754,403	$	—	$	—	$	16,869	$	2,771,272
Multifamily	6,193,507		—		—		6,074		6,199,581
Construction and land	373,194		—		—		—		373,194
SBA secured by real estate	42,998		—		—		—		42,998
Total investor loans secured by real estate	9,364,102		—		—		22,943		9,387,045
Business loans secured by real estate
CRE owner-occupied	2,466,281		—		6,398		4,851		2,477,530
Franchise real estate secured	383,468		—		—		—		383,468
SBA secured by real estate	62,675		1,244		—		83		64,002
Total business loans secured by real estate	2,912,424		1,244		6,398		4,934		2,925,000
Commercial loans
Commercial and industrial	2,159,494		240		135		4,754		2,164,623
Franchise non-real estate secured	409,773		—		—		—		409,773
SBA not secured by real estate	10,950		—		—		607		11,557
Total commercial loans	2,580,217		240		135		5,361		2,585,953
Retail loans
Single family residential	75,176		—		—		—		75,176
Consumer loans	3,759		—		2		—		3,761
Total retail loans	78,935		—		2		—		78,937
Loans held for investment before basis adjustment (1)	$	14,935,678	$	1,484	$	6,535	$	33,238	$	14,976,935




December 31, 2021
Investor loans secured by real estate
CRE non-owner-occupied	$	2,760,882	$	—	$	—	$	10,255	$	2,771,137
Multifamily	5,890,704		1,230		—		—		5,891,934
Construction and land	277,640		—		—		—		277,640
SBA secured by real estate	46,580		—		—		337		46,917
Total investor loans secured by real estate	8,975,806		1,230		—		10,592		8,987,628
Business loans secured by real estate
CRE owner-occupied	2,246,062		—		—		4,952		2,251,014
Franchise real estate secured	380,381		—		—		—		380,381
SBA secured by real estate	68,743		—		—		441		69,184
Total business loans secured by real estate	2,695,186		—		—		5,393		2,700,579
Commercial loans
Commercial and industrial	2,101,558		92		—		1,462		2,103,112
Franchise non-real estate secured	392,576		—		—		—		392,576
SBA not secured by real estate	10,319		73		—		653		11,045
Total commercial loans	2,504,453		165		—		2,115		2,506,733
Retail loans
Single family residential	95,292		—		—		—		95,292
Consumer loans	5,665		—		—		—		5,665
Total retail loans	100,957		—		—		—		100,957
Loans held for investment	$	14,276,402	$	1,395	$	—	$	18,100	$	14,295,897

______________________________

Individually Evaluated Loans

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, 2022, $60.5 million of loans were individually evaluated with $4.4 million ACL attributed to such loans. At September 30, 2022, $11.3 million of individually evaluated loans were evaluated using a discounted cash flow approach, and $49.2 million of individually evaluated loans were evaluated based on the underlying value of the collateral. All individually evaluated loans were on nonaccrual status at September 30, 2022.

As of December 31, 2021, $31.3 million of loans were individually evaluated, and the ACL attributed to such loans totaled $1.5 million. At December 31, 2021, $12.4 million of individually evaluated loans were evaluated using a discounted cash flow approach, and $18.9 million of individually evaluated loans were evaluated based on the underlying value of the collateral. All individually evaluated loans were on nonaccrual status at December 31, 2021.

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 restructured contractual 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, 2022, the Company had five loans totaling $16.3 million modified as TDRs, consisting of three CRE owner-occupied loans and one C&I loan totaling $5.1 million belonging to one borrower relationship with the terms modified due to bankruptcy, and one franchise non-real estate secured loan of $11.2 million belonging to another borrower relationship with the terms modified for payment deferral. Those same loan relationships were classified as TDRs at December 31, 2021. At December 31, 2021, there were six loans totaling $17.3 million modified as TDRs, consisting 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 $12.1 million belonging to another borrower relationship with the terms modified for payment deferral.

During the three and nine months ended September 30, 2022, three CRE owner-occupied loans and one C&I loan classified as TDRs experienced payment defaults after modifications within the previous 12 months and were in payment default. All TDRs were on nonaccrual status as of September 30, 2022 and December 31, 2021. During the three and nine months ended September 30, 2021, three CRE owner-occupied loans and one C&I loan classified as TDRs experienced payment defaults after modifications within the previous 12 months.

Purchased Credit Deteriorated Loans

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 had PCD loans of $451.6 million and $567.6 million at September 30, 2022 and December 31, 2021, respectively.

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. 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. Subsequent to acquisition, the ACL for PCD loans is measured in accordance with the Company’s ACL methodology. Please also see Note 6 – 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 reversed from current period 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 may recognize interest on a cash basis. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.

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 with the accrual of interest. The Company had loans on nonaccrual status of $60.5 million at September 30, 2022 and $31.3 million at December 31, 2021. The Company did not record income from the receipt of cash payments related to nonaccruing loans during the three and nine months ended September 30, 2022 and September 30, 2021. The Company had no loans 90 days or more past due and still accruing at September 30, 2022 and December 31, 2021, respectively.

The following tables provide a summary of nonaccrual loans as of the dates indicated:


	Nonaccrual Loans (1)
	Collateral Dependent Loans				Non-Collateral Dependent Loans				Total Nonaccrual Loans		Nonaccrual Loans with No ACL
(Dollars in thousands)	Balance		ACL		Balance		ACL
September 30, 2022
Investor loans secured by real estate
CRE non-owner-occupied	$	23,050	$	2,640	$	—	$	—	$	23,050	$	6,656
Multifamily	8,806		—		—		—		8,806		8,806

SBA secured by real estate	547		—		—		—		547		547
Total investor loans secured by real estate	32,403		2,640		—		—		32,403		16,009
Business loans secured by real estate
CRE owner-occupied	11,249		1,742		—		—		11,249		9,507

SBA secured by real estate	197		—		—		—		197		197
Total business loans secured by real estate	11,446		1,742		—		—		11,446		9,704
Commercial loans
Commercial and industrial	4,754		—		—		—		4,754		4,754
Franchise non-real estate secured	—		—		11,254		—		11,254		11,254
SBA non-real estate secured	607		—		—		—		607		607
Total commercial loans	5,361		—		11,254		—		16,615		16,615




Total nonaccrual loans	$	49,210	$	4,382	$	11,254	$	—	$	60,464	$	42,328




December 31, 2021
Investor loans secured by real estate
CRE non-owner-occupied	$	10,255	$	1,455	$	—	$	—	$	10,255	$	2,640


SBA secured by real estate	937		—		—		—		937		937
Total investor loans secured by real estate	11,192		1,455		—		—		11,192		3,577
Business loans secured by real estate
CRE owner-occupied	4,952		—		—		—		4,952		4,952

SBA secured by real estate	589		—		—		—		589		589
Total business loans secured by real estate	5,541		—		—		—		5,541		5,541
Commercial loans
Commercial and industrial	1,462		—		336		—		1,798		1,797
Franchise non-real estate secured	—		—		12,079		—		12,079		12,079
SBA non-real estate secured	653		—		—		—		653		653
Total commercial loans	2,115		—		12,415		—		14,530		14,529
Retail loans
Single family residential	10		—		—		—		10		10

Total retail loans	10		—		—		—		10		10
Total nonaccrual loans	$	18,858	$	1,455	$	12,415	$	—	$	31,273	$	23,657

______________________________

(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, 2022 or December 31, 2021.

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:



(Dollars in thousands)	Office Properties		Industrial Properties		Retail Properties		Land Properties		Hotel Properties		Multifamily Properties		Other CRE Properties		Business Assets		Total
September 30, 2022
Investor loan secured by real estate
CRE non-owner-occupied	$	6,181	$	—	$	475	$	—	$	—	$	—	$	16,394	$	—	$	23,050
Multifamily	—		—		—		—		—		8,806		—		—		8,806

SBA secured by real estate	—		—		—		—		547		—		—		—		547
Total investor loans secured by real estate	6,181		—		475		—		547		8,806		16,394		—		32,403
Business loans secured by real estate
CRE owner-occupied	4,656		—		—		4,851		—		—		1,742		—		11,249

SBA secured by real estate	114		83		—		—		—		—		—		—		197
Total business loans secured by real estate	4,770		83		—		4,851		—		—		1,742		—		11,446
Commercial loans
Commercial and industrial	—		—		—		240		—		—		—		4,514		4,754

SBA non-real estate secured	—		—		—		—		—		—		—		607		607
Total commercial loans	—		—		—		240		—		—		—		5,121		5,361




Total collateral dependent loans	$	10,951	$	83	$	475	$	5,091	$	547	$	8,806	$	18,136	$	5,121	$	49,210



(Dollars in thousands)	Office Properties		Industrial Properties		Retail Properties		Land Properties		Hotel Properties		Residential Properties		Business Assets		Total
December 31, 2021
Investor loan secured by real estate
CRE non-owner-occupied	$	—	$	—	$	513	$	—	$	9,742	$	—	$	—	$	10,255


SBA secured by real estate	—		—		—		—		937		—		—		937
Total investor loans secured by real estate	—		—		513		—		10,679		—		—		11,192
Business loans secured by real estate
CRE owner-occupied	—		—		—		4,952		—		—		—		4,952

SBA secured by real estate	148		441		—		—		—		—		—		589
Total business loans secured by real estate	148		441		—		4,952		—		—		—		5,541
Commercial loans
Commercial and industrial	—		—		—		245		—		—		1,217		1,462

SBA non-real estate secured	—		—		—		—		—		—		653		653
Total commercial loans	—		—		—		245		—		—		1,870		2,115
Retail loans
Single family residential	—		—		—		—		—		10		—		10

Total retail loans	—		—		—		—		—		10		—		10
Total collateral dependent loans	$	148	$	441	$	513	$	5,197	$	10,679	$	10	$	1,870	$	18,858

Note 6 – Allowance for Credit Losses

The Company maintains an 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 credit 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 PD, (ii) the estimated LGD, 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 expected 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 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 (“LTV”) ratios, debt service coverage, loan size, loan vintage, and property types.

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 for loans in the Company’s loan portfolio, such as: LTVs, estimated time to resolution, property size, and current and estimated future market price changes for underlying collateral. The LGD is highly dependent upon LTV 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 Consumer Price Index. 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 segment, 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 is 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.

Economic 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 macroeconomic scenarios from an independent third party. These scenarios are based on past events, current conditions, and the likelihood of future events occurring. These scenarios typically are comprised of: a base-case scenario, an upside scenario, representing slightly better economic conditions than currently experienced, and a downside scenario, representing recessionary conditions. Management periodically evaluates appropriateness of 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 likelihood that the economy would perform better than each scenario, 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. The Company’s ACL model at September 30, 2022 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, the potential impact of the ongoing war between Russia and Ukraine, general uncertainty concerning future economic conditions, and the potential for recessionary conditions.

The Company 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 the Company does not expect to collect for each loan.

It is important to note that the Company’s ACL model relies on multiple economic variables, which are used in 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. These key economic variables include the U.S. unemployment rate, U.S. real GDP growth, CRE prices, and the 10-year U.S. Treasury yield.

Qualitative Adjustments

The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. The Company, therefore, considers the need for qualitative adjustments to the ACL on a quarterly basis. 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, 2022, qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile where management believes the quantitative component of the Company’s ACL model may not have fully captured the associated impact to the ACL. In addition, qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on

certain loan segments. 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.

The following tables provide 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, 2022
(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	$	37,221	$	(1,128)	$	—	$	1,011	$	37,104
Multifamily	56,293		—		—		(207)		56,086
Construction and land	5,436		—		—		1,004		6,440
SBA secured by real estate	2,865		—		—		90		2,955
Business loans secured by real estate
CRE owner-occupied	31,461		—		19		346		31,826
Franchise real estate secured	6,530		—		—		180		6,710
SBA secured by real estate	5,149		—		—		(364)		4,785
Commercial loans
Commercial and industrial	37,048		(190)		143		(1,503)		35,498
Franchise non-real estate secured	13,124		—		—		70		13,194
SBA non-real estate secured	452		—		26		(38)		440
Retail loans
Single family residential	278		—		58		(40)		296
Consumer loans	218		—		—		(3)		215
Totals	$	196,075	$	(1,318)	$	246	$	546	$	195,549


	Nine Months Ended September 30, 2022

	Beginning ACL Balance		Charge-offs		Recoveries		Provision for Credit Losses		Ending ACL Balance
(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner occupied	$	37,380	$	(1,128)	$	—	$	852	$	37,104
Multifamily	55,209		—		—		877		56,086
Construction and land	5,211		—		—		1,229		6,440
SBA secured by real estate	3,201		(70)		—		(176)		2,955
Business loans secured by real estate
CRE owner-occupied	29,575		—		33		2,218		31,826
Franchise real estate secured	7,985		—		—		(1,275)		6,710
SBA secured by real estate	4,866		—		—		(81)		4,785
Commercial loans
Commercial and industrial	38,136		(7,750)		2,517		2,595		35,498
Franchise non-real estate secured	15,084		(448)		—		(1,442)		13,194
SBA non-real estate secured	565		(50)		44		(119)		440

Retail loans
Single family residential	255		—		91		(50)		296
Consumer loans	285		(2)		—		(68)		215
Totals	$	197,752	$	(9,448)	$	2,685	$	4,560	$	195,549


	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

The decrease in the ACL for loans held for investment during the three months ended September 30, 2022 of $526,000 was comprised of $1.1 million in net charge-offs, partially offset by a $546,000 provision for credit losses. The provision for credit losses for the three months ended September 30, 2022 was reflective of a combination of factors, including an increase due to specific reserves on two individually evaluated loans, and a decrease due to an overall decrease in loans held for investment, changes in the composition of the loan portfolio, and an overall lower balance of qualitative adjustments included in the ACL. The decrease in the ACL for loans held for investment during the nine months ended September 30, 2022 of $2.2 million can be attributed to net charge-offs of $6.8 million, partially offset by a $4.6 million provision for credit losses. The provision for credit losses during the nine months ended September 30, 2022 is largely attributed to an increase in loans held for investment and specific reserves on two individually evaluated loans, partially offset by the favorable impact of macroeconomic forecasts and an overall lower balance of qualitative adjustments included in the ACL. Charge-offs during the three months ended September 30, 2022 are largely attributed to one CRE non-owner-occupied relationship, while charge-offs during the nine months ended September 30, 2022 can be attributed to one C&I lending relationship, as well as one CRE non-owner-occupied lending relationship.

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 macroeconomic 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 macroeconomic 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.

Allowance for Credit Losses for Off-Balance Sheet Commitments

The Company maintains an ACL for 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 $24.7 million at September 30, 2022, $24.1 million at June 30, 2022, and $27.4 million at December 31, 2021. The Company recorded a provision for credit losses on off-balance sheet commitments during the three months ended September 30, 2022 of $549,000 and a provision recapture of $2.6 million during the nine months ended September 30, 2022. The provision for credit losses in the third quarter of 2022 was largely due to higher unfunded commitments in the commercial and industrial loan segment. The provision recapture during the first nine months of 2022 is largely reflective of slightly favorable macroeconomic forecasts reflected in the Company’s ACL model during the first three quarters of 2022 and changes in the mix of unfunded commitments between various loan segments.

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.

Note 7 – Goodwill and Other Intangible Assets

The Company had goodwill of $901.3 million at September 30, 2022 and December 31, 2021, respectively. The Company recorded adjustments to goodwill associated with the acquisition of Opus in the amount of $2.7 million during the nine months ended September 30, 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 second quarter of 2021, the Company finalized its fair value analysis of the acquired assets and assumed liabilities associated with the Opus acquisition.

The following table summarizes the change in the balance of goodwill for the periods indicated below:



	September 30,		September 30,
(Dollars in thousands)	2022		2021
Beginning balance	$	901,312	$	898,569

Purchase accounting adjustments	—		2,743

Ending balance	$	901,312	$	901,312
Accumulated impairment losses at end of period	$	—	$	—

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.

Other intangible assets with definite lives were $59.0 million at September 30, 2022, consisting of $56.6 million in core deposit intangibles and $2.4 million in customer relationship intangibles. At December 31, 2021, other intangibles assets were $69.6 million, consisting of $66.9 million in core deposit intangibles and $2.7 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)	2022		2022		2021		2022		2021
Gross amount of intangible assets:
Beginning balance	$	145,212	$	145,212	$	145,212	$	145,212	$	145,212
Additions due to acquisitions	—		—		—		—		—
Ending balance	145,212		145,212		145,212		145,212		145,212
Accumulated amortization:
Beginning balance	(82,712)		(79,234)		(67,849)		(75,641)		(59,705)
Amortization	(3,472)		(3,478)		(3,912)		(10,543)		(12,056)
Ending balance	(86,184)		(82,712)		(71,761)		(86,184)		(71,761)
Net intangible assets	$	59,028	$	62,500	$	73,451	$	59,028	$	73,451

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 six 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, 2021, in order from the present, is $14.0 million, $12.3 million, $11.1 million, $10.0 million, and $8.9 million. The Company’s core deposit and customer relationship intangibles are evaluated annually for impairment or more frequently if events and circumstances lead management to believe their value may not be recoverable. Factors that may ultimately attribute to impairment include customer attrition and run-off. The Company is unaware of any events and/or circumstances that would indicate a possible impairment in the values of core deposit intangible assets and customer relationship intangible assets as of September 30, 2022.

Note 8 – Subordinated Debentures

As of September 30, 2022, the Company had three issuances of subordinated notes with an aggregate carrying value of $331.0 million and a weighted interest rate of 5.32%, compared to $330.6 million with a weighted interest rate of 5.33% at December 31, 2021.

The following table summarizes our outstanding subordinated debentures as of the dates indicated:


						Carrying Value
(Dollars in thousands)	Stated Maturity	Current Interest Rate		Current Principal Balance		September 30, 2022		December 31, 2021
Subordinated notes
Subordinated notes due 2024, 5.75% per annum	September 3, 2024	5.75	%	$	60,000	$	59,761	$	59,671
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		123,323		123,132
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		147,961		147,764
Total subordinated debentures				$	335,000	$	331,045	$	330,567

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 2022 by KBRA.

For additional information on the Company’s subordinated debentures, see “Note 13 — Subordinated Debentures” to the Consolidated Financial Statements of the Company’s 2021 Form 10-K.

For regulatory capital purposes, subordinated notes qualify as Tier 2 capital. The regulatory total capital ratios of the Company and the Bank continued to exceed regulatory minimums, inclusive of the fully phased-in capital conservation buffer.

Note 9 – 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.

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, 2022		June 30, 2022		September 30, 2021
Basic
Net income	$	73,363	$	69,803	$	90,088
Less: dividends and undistributed earnings allocated to participating securities	(917)		(867)		(937)
Net income allocated to common stockholders	$	72,446	$	68,936	$	89,151

Weighted average common shares outstanding	93,793,502		93,765,264		93,549,639
Basic earnings per common share	$	0.77	$	0.74	$	0.95

Diluted
Net income allocated to common stockholders	$	72,446	$	68,936	$	89,151

Weighted average common shares outstanding	93,793,502		93,765,264		93,549,639
Dilutive effect of share-based compensation	327,135		275,427		511,085

Weighted average diluted common shares	94,120,637		94,040,691		94,060,724
Diluted earnings per common share	$	0.77	$	0.73	$	0.95


	Nine Months Ended
(Dollars in thousands, except per share data)	September 30, 2022		September 30, 2021
Basic
Net income	$	210,070	$	255,058

Less: dividends and undistributed earnings allocated to participating securities	(2,467)		(2,641)
Net income allocated to common stockholders	$	207,603	$	252,417

Weighted average common shares outstanding	93,687,230		93,571,468
Basic earnings per common share	$	2.22	$	2.70

Diluted
Net income allocated to common stockholders	$	207,603	$	252,417

Weighted average common shares outstanding	93,687,230		93,571,468
Dilutive effect of share-based compensation	367,886		518,939

Weighted average diluted common shares	94,055,116		94,090,407
Diluted earnings per common share	$	2.21	$	2.68

Shares or stock options are excluded from the computations of diluted earnings per share when their inclusion have an anti-dilutive effect. 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, 2022 and September 30, 2021, and the three months ended June 30, 2022 there were no potential common shares that were anti-dilutive.

Note 10 – 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.

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.

AFS 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 marketplace 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 these securities within Level 2 of the fair value hierarchy.

Equity Securities with readily determinable fair values – The Company’s equity securities with readily determinable fair values consist of investments in public companies and qualify for CRA purposes. The fair value is based on the closing price on nationally recognized securities exchanges at the end of each period and classified as Level 1 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 the 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.

Foreign Exchange Contracts – The Company enters into foreign exchange contracts to accommodate the business needs of its customers. Company also enters into offsetting contracts with institutional counterparties to mitigate the Company’s foreign exchange exposure with its customers, or enters into bilateral collateral and master netting agreements with certain customer counterparties to manage its credit exposure. The Company measures the fair value of foreign exchange contracts based on quoted prices for identical instruments in active markets, a Level 1 measurement.

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, 2022
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
AFS investment securities:
U.S. Treasury	$	—	$	46,774	$	—	$	46,774
Agency	—		430,863		—		430,863
Corporate debt	—		555,750		—		555,750

Collateralized mortgage obligations	—		791,115		—		791,115
Mortgage-backed securities	—		836,577		—		836,577
Total AFS investment securities	$	—	$	2,661,079	$	—	$	2,661,079


Equity securities with readily determinable fair values	$	1,035	$	—	$	—	$	1,035

Derivative assets:
Foreign exchange contracts	$	15	$	—	$	—	$	15
Interest rate swaps (1)	—		8,033		—		8,033
Equity warrants	—		—		1,911		1,911
Total derivative assets	$	15	$	8,033	$	1,911	$	9,959

Financial liabilities
Derivative liabilities:
Foreign exchange	$	7	$	—	$	—	$	7
Interest rate swaps	—		12,766		—		12,766
Total derivative liabilities	$	7	$	12,766	$	—	$	12,773

______________________________

(1) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.


	December 31, 2021
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
AFS investment securities:
U.S. Treasury	$	—	$	57,866	$	—	$	57,866
Agency	—		432,135		—		432,135
Corporate debt	—		453,861		—		453,861
Municipal bonds	—		1,089,913		—		1,089,913
Collateralized mortgage obligations	—		676,643		—		676,643
Mortgage-backed securities	—		1,563,446		—		1,563,446
Total AFS investment securities	$	—	$	4,273,864	$	—	$	4,273,864

Derivative assets:
Interest rate swaps	$	—	$	10,100	$	—	$	10,100
Equity warrants	—		—		1,889		1,889
Total derivative assets	$	—	$	10,100	$	1,889	$	11,989

Financial liabilities
Derivative liabilities:
Interest rate swaps	$	—	$	5,263	$	—	$	5,263

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,		June 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2022		2022		2021		2022		2021
Beginning balance	$	1,906	$	1,908	$	1,903	$	1,889	$	1,914
Change in fair value (1)	5		(2)		(8)		22		(19)

Ending balance	$	1,911	$	1,906	$	1,895	$	1,911	$	1,895

______________________________

(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, 2022

Range

(Dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Min

Max

Weighted Average

Equity warrants

1,911

Black-Scholes
option pricing
model

Volatility
Risk free interest rate
Marketability discount

30.00%

3.92%

5.50%

35.00%

4.25%

16.00%

31.17%

4.00%

13.55%

December 31, 2021

Range

(Dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Min

Max

Weighted Average

Equity warrants

1,889

Black-Scholes
option pricing
model

Volatility
Risk free interest rate
Marketability discount

30.00%

0.39%

6.00%

35.00%

0.97%

16.00%

31.14%

0.52%

13.61%

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 is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement and 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 costs.

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 and/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 then discounts the valuation to cover both market price fluctuations and selling costs, typically ranging from 7% to 10% of the collateral value, that the Company expects 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.

At September 30, 2022, 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 recorded the related reserves where applicable during the nine months ended September 30, 2022.

The following table presents our assets measured at fair value on a nonrecurring basis at the dates indicated.


	September 30, 2022
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
Collateral dependent loans	$	—	$	—	$	18,268	$	18,268


	December 31, 2021
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
Collateral dependent loans	$	—	$	—	$	937	$	937

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, 2022

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

13,754

Fair value of collateral

Collateral discount and cost to sell

7.00%

Commercial loans

Commercial and industrial

4,514

Fair value of collateral

Collateral discount and cost to sell

6.00%

Total individually evaluated loans

18,268

December 31, 2021

Range

(Dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Min

Max

Weighted Average

Investor loans secured by real estate

SBA secured by real estate (1)

937

Fair value of collateral

Collateral discount and cost to sell

10.00%

Total individually evaluated loans

937

______________________________

(1) SBA loans that are collateralized by hotel/motel real property.

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, 2022
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
Assets
Cash and cash equivalents	$	739,211	$	739,211	$	—	$	—	$	739,211
Interest-bearing time deposits with financial institutions	1,733		1,733		—		—		1,733
Investment securities held-to-maturity	1,385,502		—		1,055,187		—		1,055,187
Investment securities available-for-sale	2,661,079		—		2,661,079		—		2,661,079
Equity securities with readily determinable fair values	1,035		1,035		—		—		1,035
Loans held for sale	2,163		—		2,261		—		2,261
Loans held for investment, net	14,908,811		—		—		14,207,668		14,207,668
Derivative assets (1)	9,959		15		8,033		1,911		9,959
Accrued interest receivable	66,192		—		66,192		—		66,192

Liabilities
Deposit accounts	$	17,746,374	$	—	$	17,724,242	$	—	$	17,724,242
FHLB advances	600,000		—		582,313		—		582,313

Subordinated debentures	331,045		—		330,742		—		330,742
Derivative liabilities	12,773		7		12,766		—		12,773
Accrued interest payable	8,785		—		8,785		—		8,785

______________________________


	At December 31, 2021
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
Assets
Cash and cash equivalents	$	304,703	$	304,703	$	—	$	—	$	304,703
Interest-bearing time deposits with financial institutions	2,216		2,216		—		—		2,216
Investment securities held-to-maturity	381,674		—		384,423		—		384,423
Investment securities available-for-sale	4,273,864		—		4,273,864		—		4,273,864
Loans held for sale	10,869		—		11,959		—		11,959
Loans held for investment, net	14,295,897		—		—		14,392,684		14,392,684
Derivative assets	11,989		—		10,100		1,889		11,989
Accrued interest receivable	65,728		65,728		—		—		65,728

Liabilities
Deposit accounts	$	17,115,589	$	16,057,316	$	1,058,822	$	—	$	17,116,138
FHLB advances	550,000		—		550,093		—		550,093
Other borrowings	8,000		—		8,000		—		8,000
Subordinated debentures	330,567		—		350,359		—		350,359
Derivative liabilities	5,263		—		5,263		—		5,263
Accrued interest payable	2,366		2,366		—		—		2,366

Note 11 – 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 second half of 2021, the Company entered into pay-fixed and receive-floating interest rate swaps associated with 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. 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 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, 2022 and December 31, 2021, interest rate swaps with an aggregate notional amount of $1.20 billion 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, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Loans held for investment (1)	$	1,131,876	$	1,194,702	$	(68,124)	$	(5,298)
Total	$	1,131,876	$	1,194,702	$	(68,124)	$	(5,298)

______________________________

(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, 2022 and December 31, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $3.24 billion and $3.61 billion, respectively, the cumulative basis adjustments associated with these hedging relationships was $(68.1) million and $(5.3) million, respectively; and the amounts of the designated hedged items were $1.20 billion and $1.20 billion, respectively.

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. The Company had over-the-counter derivative instruments and centrally-cleared derivative instruments with matched terms. The fair values of these agreements are determined through a third-party valuation model used by the Company’s swap advisory firm, 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 balance sheet. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s income statement 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. All interest rate swap agreements entered into by the Company are free-standing derivatives and are not designated as hedging instruments.

Equity Warrant Assets – The Company acquired 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 respective underlying private company 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 the fair value of the warrants are recognized as a component of noninterest income with a corresponding offset within other assets. The total fair value of the warrants was $1.9 million in other assets as of September 30, 2022 and December 31, 2021. The two remaining warrants expire on March 12, 2023 and July 28, 2025, respectively.

Foreign Exchange Contracts – The Company offers foreign exchange spot and forward contracts as accommodations to its customers to purchase and/or sell foreign currencies at a contractual price. In conjunction with these products the Company also enters into offsetting contracts with institutional counterparties to mitigate the Company’s foreign exchange exposure with its customers, or enters into bilateral collateral and master netting agreements with certain customer counterparties to manage its credit exposure. These contracts allow the Company to offer its customers foreign exchange products while minimizing its exposure to foreign exchange rate fluctuations. These foreign exchange contracts are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities in the Company’s consolidated statements of financial condition. Changes in the fair value of these contracts are recorded in the Company’s consolidated statements of income as a component of noninterest income.

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, 2022
	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	$	1,200,000	$	69,169	$	—	$	—
Total derivative designated as hedging instruments	1,200,000		69,169		—		—
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	835		15		528		7
Interest rate swaps contracts	113,632		12,765		113,632		12,766
Equity warrants	—		1,911		—		—
Total derivative not designated as hedging instruments	114,467		14,691		114,160		12,773
Total derivatives	$	1,314,467	83,860		$	114,160	12,773

Netting adjustments - cleared positions (1)			73,901				—
Total derivatives in the Balance Sheet			$	9,959			$	12,773

______________________________

(1) Netting adjustments represents the variation margin payments that are considered legal settlements of derivative exposure and applied to net the fair value of the respective derivative contracts in accordance with the applicable accounting guidance on the settle-to-market rule for cleared derivatives.


	December 31, 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	$	1,100,000	$	4,874	$	100,000	$	33
Total derivative designated as hedging instruments	1,100,000		4,874		100,000		33
Derivative instruments not designated as hedging instruments:
Interest rate swaps contracts	132,056		5,226		132,056		5,230
Equity warrants	—		1,889		—		—
Total derivative not designated as hedging instruments	132,056		7,115		132,056		5,230
Total derivatives	$	1,232,056	$	11,989	$	232,056	$	5,263

The following table presents the effect of fair value hedge accounting on the consolidated statements of income:



		Three Months Ended						Nine Months Ended
(Dollars in thousands)	Location of Gain (Loss) Recognized in Income on Derivative Instruments	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021



Gain (loss) on fair value hedging relationships:
Hedged items	Interest Income	$	(17,037)	$	(11,866)	$	(1,027)	$	(62,826)	$	(1,027)
Derivatives designated as hedging instruments	Interest Income	21,582		12,082		932		65,921		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						Nine Months Ended
Derivatives Not Designated as Hedging Instruments:	Location of Gain (Loss) Recognized in Income on Derivative Instruments	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Foreign exchange contracts	Other income	$	141	$	77	$	22	$	264	$	32
Interest rate products	Other income	1		2		1		4		9
Equity warrants	Other income	5		(2)		(8)		22		(19)
Total		$	147	$	77	$	15	$	290	$	22

Note 12 – 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. 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 the 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. The Company elected to account for centrally-cleared derivative contracts on a gross basis, even when the right for setoff are in place. However, for derivative contracts cleared through certain central clearing parties, the fair value of the respective derivative contracts is reported net of the variation margin payments.

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 (1)		Gross Amounts Offset in the Consolidated Statements of Financial Condition		Net Amounts Presented in the Consolidated Statements of Financial Condition		Financial Instruments		Cash Collateral (2)		Net Amount
September 30, 2022
Derivative assets:
Interest rate swaps	$	8,033	$	—	$	8,033	$	—	$	(3,990)	$	4,043
Total	$	8,033	$	—	$	8,033	$	—	$	(3,990)	$	4,043

Derivative liabilities:
Interest rate swaps	$	12,766	$	—	$	12,766	$	—	$	—	$	12,766
Total	$	12,766	$	—	$	12,766	$	—	$	—	$	12,766





December 31, 2021
Derivative assets:
Interest rate swaps	$	10,100	$	—	$	10,100	$	—	$	—	$	10,100
Total	$	10,100	$	—	$	10,100	$	—	$	—	$	10,100

Derivative liabilities:
Interest rate swaps	$	5,263	$	—	$	5,263	$	(4,377)	$	(886)	$	—
Total	$	5,263	$	—	$	5,263	$	(4,377)	$	(886)	$	—

______________________________

(1) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable.

(2) Represents cash collateral received from or pledged with counterparty bank. Amounts are limited to the derivative asset or liability balance and, accordingly, do not include excess collateral, if any, received or pledged.

Note 13 – 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, 2022, all of the Company’s leases were classified as operating leases or short-term leases. Short-term leases are leases that have a term of 12 months or less at commencement.

Liabilities to make future lease payments 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 the Company’s estimated incremental borrowing rate if the rate implicit in the lease is not readily determinable. Liabilities to make future lease payments on operating leases are 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. 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. The following table presents the components of lease expense for the periods indicated:


	Three Months Ended						Nine Months Ended
(Dollars in thousands)	September 30, 2022		June 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Operating lease	$	4,603	$	4,614	$	4,826	$	13,955	$	14,725
Short-term lease	495		388		433		1,373		1,263
Total lease expense	$	5,098	$	5,002	$	5,259	$	15,328	$	15,988

The following table presents supplemental information related to operating leases as of and for nine months ended:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Balance Sheet:
Operating lease right-of-use assets	$	54,062	$	64,009
Operating lease liabilities	61,852		72,541

	Nine Months Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021
Cash Flows:
Operating cash outflow from operating leases	$	15,024	$	15,512

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)	2022		2023		2024		2025		2026		Thereafter		Total
September 30, 2022

Operating leases	$	4,954	$	19,383	$	17,368	$	11,657	$	5,996	$	9,619	$	68,977
Short-term leases	53		40		—		—		—		—		93
Total contractual base rents (1)	$	5,007	$	19,423	$	17,368	$	11,657	$	5,996	$	9,619	$	69,070

Total liability to make lease payments													$	61,852
Difference in undiscounted and discounted future lease payments													7,125
Weighted average discount rate													5.07		%
Weighted average remaining lease term (years)													4.3

______________________________

(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, 2022, June 30, 2022, and September 30, 2021, rental income totaled $77,000, $86,000, and $176,000, respectively. For the nine months ended September 30, 2022 and September 30, 2021, rental income totaled $288,000 and $528,000, respectively.

Note 14 – Variable Interest Entities

The Company is involved with VIEs through its loan securitization activities and affordable housing investments that qualify for the low-income housing tax credit (“LIHTC”). The Company has determined that its interests in these entities meet the definition of variable interests.

As of September 30, 2022 and December 31, 2021, 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 exposure to loss as of September 30, 2022 and December 31, 2021 that relate to variable interests in non-consolidated VIEs.


	September 30, 2022						December 31, 2021
(Dollars in thousands)	Maximum Loss		Assets		Liabilities		Maximum Loss		Assets		Liabilities
Multifamily loan securitization:
Investment securities (1)	$	57,525	$	57,525	$	—	$	81,103	$	81,103	$	—
Reimbursement obligation (2)	50,901		—		338		50,901		—		338
Affordable housing partnership:
Other investments (3)	60,692		76,201		—		68,765		85,994		—
Unfunded equity commitments (2)	—		—		15,509		—		—		17,229

Total	$	169,118	$	133,726	$	15,847	$	200,769	$	167,097	$	17,567

______________________________

(1) Included in investment securities AFS 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.

Multifamily loan securitization

With respect to the securitization transaction with Freddie Mac discussed in Note 5 – Loans Held for Investment, the Company’s variable interests reside with the underlying Freddie Mac-issued guaranteed, structured pass-through certificates that were held as investment securities AFS at fair value as of September 30, 2022. 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, 2022 and December 31, 2021, our reserve for estimated losses with respect to the reimbursement obligation was $338,000.

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 the ability to exercise significant influence over or participate in the decision-making activities related to the management of 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, 2022 and December 31, 2021, respectively.

Note 15 – Subsequent Events

Quarterly cash dividend

On October 19, 2022, the Corporation’s Board of Directors declared a cash dividend of $0.33 per share, payable on November 10, 2022 to stockholders of record as of October 31, 2022.

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.

The following 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;

•Our ability to attract and retain deposits and to access other sources of liquidity;

•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;

•Possible impairment charges to goodwill, including any impairment that may result from increased volatility in our stock price;

•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 effectiveness of our risk management framework and quantitative models;

•The transition away from USD LIBOR and related uncertainty as well as, the risks and costs related to our adoption of SOFR;

•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, the 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 may further increase the required level of our allowance for credit losses in future periods;

•Possible credit-related impairments of securities held by us;

•Changes in the level of our nonperforming assets and charge-offs;

•The impact of governmental efforts to restructure the U.S. financial regulatory system;

•The impact of recent or future changes in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount;

•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;

•The possibility that we may reduce or discontinue the payments of dividends on our common stock;

•The possibility that we may discontinue, reduce, or otherwise limit the level of repurchases of our common stock we may make from time to time pursuant to our stock repurchase program;

•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;

•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, including the war between Russia and Ukraine, which could impact business and economic conditions in the United States and abroad;

•Public health crises and pandemics, including the COVID-19 pandemic, and their effects on the economic and business environments in which we operate, including on our credit quality and business operations, as well as the impact on general economic and financial market conditions;

•Cybersecurity threats and the cost of defending against them;

•Climate change, including the enhanced regulatory, compliance, credit, and reputational risks and costs;

•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 2021 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.

GENERAL

Management’s discussion and analysis of financial condition and results of operations is intended to provide a better understanding of the significant changes in trends relating to the Company’s financial condition, results of operations, liquidity, and capital resources. This discussion should be read in conjunction with our 2021 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, 2022 are not necessarily indicative of the results expected for the year ending December 31, 2022.

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, and the Federal Deposit Insurance Corporation (“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 is located in Irvine, California. At September 30, 2022, we primarily conduct business throughout the Western Region of the United States from our 59 full-service depository branches located in Arizona, California, Nevada, and Washington.

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 enhanced nationwide specialty banking products and services for HOA and HOA management companies, as well as experienced owner-operator franchisees in the QSR industry. We have expanded our specialty products and services offerings to include commercial escrow and exchange 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.

RECENT DEVELOPMENTS

While economic conditions have generally improved since the onset of the COVID-19 pandemic in early 2020, such as with favorable trends in employment metrics and increased economic activity, the strong demand for goods and services in recent years in conjunction with supply chain constraints have contributed to higher levels of inflation throughout the U.S. economy, including within the Company’s market area. Inflation has resulted in higher prices for food, energy, housing, and various supply chain inputs, among others. These inflationary pressures have persisted throughout 2022, resulting in higher costs for consumers and businesses. To address the persistent levels of inflation, the Federal Open Market Committee (“FOMC”) has taken steps to tighten monetary policy through a cumulative 375 basis point increase to the federal funds rate since March 2022, as well as by beginning to reduce the size of the Federal Reserve’s balance sheet. The FOMC has stated that it remains committed to monetary policy measures that are designed to bring inflation down. The impact of these measures, including future actions taken by the FOMC, on the Company’s business are uncertain. While the recent increases in interest rates have generally resulted in higher levels of interest income for the Company, they may also reduce economic activity overall or result in recessionary conditions in future periods. Should these ongoing economic pressures persist, we anticipate it could have an impact on the following:

•Loan growth and interest income - If economic activity begins to wane, 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, as well as less demand for real estate and consumer loans. Such factors would place pressure on the level of interest-earning assets, which may negatively impact our interest income.

•Credit quality - Should there be a decline in economic activity, the markets we serve could experience increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things. Such factors may result in weakened economic conditions, place strain on our borrowers, and ultimately impact the credit quality of our loan portfolio. We expect this could result in increases in the level of past due, nonaccrual, and classified loans, as well as higher net charge-offs. While economic conditions have generally been favorable thus far, notwithstanding higher levels of inflation, there can be no assurance favorable economic conditions will continue. As such, should we experience future deterioration in the credit quality of our loan portfolio, it may contribute to the need for additional provisions for credit losses.

•ACL - The Company is required to record credit losses on certain financial assets in accordance with the CECL model stipulated under ASC 326, which is highly dependent upon expectations of future economic conditions and requires management judgment. Should expectations of future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses.

•Impairment charges - If economic conditions deteriorate, it could 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.

•Accumulated other comprehensive income (loss) - Unrealized gains and losses on AFS investment securities are recognized in stockholders’ equity as accumulated other comprehensive income (loss). If economic conditions deteriorate, and/or if the interest rates continue to increase, the valuation of the Company’s AFS investment securities could be negatively impacted, which may lead to increases in other comprehensive loss, the potential for credit losses, decreases to the Company’s stockholders’ equity, and declines in the Company’s tangible book value per share. See “Non-GAAP measures” for additional details.

•Deposits and deposit costs - Given the expectation for further rate increases by the FOMC in the near future, it is likely that deposit costs will continue to increase and it may become more challenging for the Company to retain and attract deposit relationships.

•Liquidity - Consistent with our prudent, proactive approach to liquidity management, we may take certain actions to further enhance our liquidity, including but not limited to, increasing our FHLB borrowings, increasing our brokered deposits, and liquidating loans and AFS investment securities. In the event that we liquidate AFS securities having an unrealized loss position, those losses would become realized.

The Company continues to focus on serving its customers and communities, maintaining the well-being of its employees, and executing its strategic initiatives. The Company continues to monitor the economic environment and will make changes as appropriate.

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 Note 1. Description of Business and Summary of Significant Accounting Policies to the consolidated financial statements in our 2021 Form 10-K.

Allowance for Credit Losses on Loans and Off-Balance Sheet Commitments

The Company accounts for credit losses on loans and off-balance sheet commitments, such as unfunded loan commitments, in accordance with ASC 326 - Financial Instruments - Credit Losses, 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 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 estimation process in determining the ACL involves a significant degree of judgement, requiring management to make numerous estimates and assumptions. These estimates and assumptions are subject to change in future periods, which may have a material impact on the level of the ACL and the Company’s results of operations.

The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics, as well as the individual evaluation of loans that are deemed to no longer possess characteristics similar to others in the loan portfolio. The Company measures the ACL on commercial real estate loans and commercial loans through a discounted cash flow approach using a loan’s effective interest rate, while a historical loss rate methodology is used to determine the ACL on retail loans. The Company’s discounted cash flow methodology incorporates a PD and LGD model, which is impacted by expectations of future economic conditions. The Company’s ACL methodology also incorporates estimates and assumptions concerning loan prepayments, future draws on revolving credit facilities, and the probability an unfunded commitment will be drawn upon.

The use of reasonable and supportable forecasts in the ACL methodology 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 forecast metrics. Forecasts of economic conditions and expected credit losses are made over a two-year time horizon, before reverting to long-term average loss rates over a period of three years. Changes in economic forecasts, in conjunction with changes in loan specific attributes, have an impact on a loan’s PD and LGD, which can drive changes in the determination of the ACL and can have a significant impact on the provision for credit losses.

Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the ACL model, the Company, as of September 30, 2022, has identified certain economic variables that have significant influence in the Company’s model for determining the ACL. These key economic variables include the U.S. unemployment rate, U.S. real GDP growth, CRE prices, and the 10-year U.S. Treasury yield. Please also see “Allowance for Credit Losses” under Item 2 - Management’s Discussion and Analysis for additional discussion on assumptions concerning economic forecasts and economic variables used in the Company’s ACL model as well as the impact of those items on the Company’s ACL.

The Company’s ACL methodology also includes adjustments for qualitative factors where appropriate. 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 extend beyond the Company’s control. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL. Such agencies may require the Company to recognize changes to the ACL based on judgments different from those of management. Further, as the size, complexity, and composition of the loan portfolio changes over time, such as through the acquisition of other financial institutions, new product offerings, client demand for various types of credit, and changes in our geographic footprint, the Company may seek to make additional enhancements to its ACL methodology. Such enhancements may have an impact on the level of the ACL in future periods.

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 6 – Allowance for Credit Losses, of the Notes to the Consolidated Financial Statements for additional discussion concerning the Company’s ACL methodology.

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)	2022			2022			2021			2022			2021
Net income	$	73,363		$	69,803		$	90,088		$	210,070		$	255,058
Plus: amortization of intangible assets expense	3,472			3,479			3,912			10,543			12,056
Less: amortization of intangible assets expense tax adjustment (1)	991			993			1,119			3,009			3,449
Net income for average tangible common equity	$	75,844		$	72,289		$	92,881		$	217,604		$	263,665

Average stockholders’ equity	$	2,775,124		$	2,764,893		$	2,844,800		$	2,801,141		$	2,780,932
Less: average intangible assets	61,101			64,583			75,795			64,588			79,812
Less: average goodwill	901,312			901,312			901,312			901,312			900,170
Average tangible common equity	$	1,812,711		$	1,798,998		$	1,867,693		$	1,835,241		$	1,800,950

Return on average equity (2)	10.57		%	10.10		%	12.67		%	10.00		%	12.23		%
Return on average tangible common equity (2)	16.74		%	16.07		%	19.89		%	15.81		%	19.52		%

______________________________

(1) Amortization of intangible assets expense adjusted by statutory tax rate.

(2) Ratio is annualized.

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)	2022			2021
Total stockholders’ equity	$	2,735,396		$	2,886,311
Less: intangible assets	960,340			970,883
Tangible common equity	$	1,775,056		$	1,915,428

Total assets	$	21,619,201		$	21,094,429
Less: intangible assets	960,340			970,883
Tangible assets	$	20,658,861		$	20,123,546

Tangible common equity ratio	8.59		%	9.52		%

Common shares issued and outstanding	95,016,767			94,389,543

Book value per share	$	28.79		$	30.58
Less: intangible book value per share	10.11			10.29
Tangible book value per share	$	18.68		$	20.29

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.


	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in thousands)	2022			2022			2021			2022			2021
Total noninterest expense	$	100,866		$	98,974		$	96,040		$	297,488		$	283,025
Less: amortization of intangible assets	3,472			3,479			3,912			10,543			12,056
Less: merger-related expense	—			—			—			—			5

Noninterest expense, adjusted	$	97,394		$	95,495		$	92,128		$	286,945		$	270,964

Net interest income before provision for loan losses	$	181,112		$	172,765		$	169,069		$	515,716		$	491,655
Add: total noninterest income	20,164			22,193			30,100			68,251			80,569
Less: net (loss) gain from investment securities	(393)			(31)			4,190			1,710			13,321
Less: other income - security recoveries	—			—			1			—			9

Less: net gain (loss) from debt extinguishment	—			—			970			—			(180)

Revenue, adjusted	$	201,669		$	194,989		$	194,008		$	582,257		$	559,074

Efficiency ratio	48.3		%	49.0		%	47.5		%	49.3		%	48.5		%

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, nonrecurring nonaccrual interest paid, and gain (loss) on interest rate in fair value hedging relationships 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)	2022			2022			2021			2022			2021
Net interest income	$	181,112		$	172,765		$	169,069		$	515,716		$	491,655
Less: scheduled accretion income	2,377			2,626			3,339			7,860			10,777
Less: accelerated accretion income	2,269			4,918			6,107			10,270			18,022
Less: premium amortization on CDs	39			60			390			195			3,083
Less: nonrecurring nonaccrual interest paid	(848)			48			(74)			(1,156)			(893)
Less: gain (loss) on fair value hedging relationships	4,240			128			(95)			2,701			(95)
Core net interest income	$	173,035		$	164,985		$	159,402		$	495,846		$	460,761



Average interest-earning assets	$	19,929,636		$	19,876,806		$	19,131,172		$	19,680,163		$	18,804,146



Net interest margin (1)	3.61		%	3.49		%	3.51		%	3.50		%	3.50		%
Core net interest margin (1)	3.44		%	3.33		%	3.31		%	3.37		%	3.28		%

______________________________

(1) Ratio is annualized.

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 consistent 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)	2022			2022			2021			2022			2021
Interest income	$	199,025		$	183,226		$	176,047		$	550,797		$	519,733
Interest expense	17,913			10,461			6,978			35,081			28,078
Net interest income	181,112			172,765			169,069			515,716			491,655
Noninterest income	20,164			22,193			30,100			68,251			80,569
Revenue	201,276			194,958			199,169			583,967			572,224
Noninterest expense	100,866			98,974			96,040			297,488			283,025
Add: merger-related expense	—			—			—			—			5
Pre-provision net revenue	$	100,410		$	95,984		$	103,129		$	286,479		$	289,204
Pre-provision net revenue (annualized)	$	401,640		$	383,936		$	412,516		$	381,972		$	385,605

Average assets	$	21,687,436		$	21,670,153		$	20,804,903		$	21,440,803		$	20,366,162

Pre-provision net revenue to average assets	0.46		%	0.44		%	0.50		%	1.34		%	1.42		%
Pre-provision net revenue to average assets (annualized)	1.85		%	1.77		%	1.98		%	1.78		%	1.89		%


Cost of core deposits is a non-GAAP financial measure derived from GAAP-based amounts. Cost of core deposits is calculated as the ratio of core deposit interest expense to average core deposits. We calculate core deposit interest expense by excluding interest expense for certificates of deposit and brokered deposits from total deposit expense, and we calculate average core deposits by excluding certificates of deposit and brokered deposits from total deposits. Management believes cost of core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.

	Three Months Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in thousands)	2022			2022			2021			2022			2021
Total deposits interest expense	$	9,873		$	2,682		$	2,432		$	14,228		$	10,123
Less: certificates of deposit interest expense	1,420			607			775			2,557			2,815
Less: brokered deposits interest expense	3,827			327			2			4,155			148
Core deposits expense	$	4,626		$	1,748		$	1,655		$	7,516		$	7,160

Total average deposits	$	17,732,822		$	17,752,727		$	17,345,302		$	17,590,276		$	16,848,558
Less: average certificates of deposit	835,645			922,784			1,196,187			934,518			1,304,436
Less: average brokered deposits	703,848			85,131			5,551			268,812			45,181
Average core deposits	$	16,193,329		$	16,744,812		$	16,143,564		$	16,386,946		$	15,498,941

Cost of core deposits	0.11		%	0.04		%	0.04		%	0.06		%	0.06		%

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)	2022			2022			2021			2022			2021
Operating data
Interest income	$	199,025		$	183,226		$	176,047		$	550,797		$	519,733
Interest expense	17,913			10,461			6,978			35,081			28,078
Net interest income	181,112			172,765			169,069			515,716			491,655
Provision for credit losses	1,077			469			(19,726)			1,994			(56,228)
Net interest income after provision for credit losses	180,035			172,296			188,795			513,722			547,883
Net gain from sales of loans	457			1,136			1,187			3,087			3,094
Other noninterest income	19,707			21,057			28,913			65,164			77,475
Noninterest expense	100,866			98,974			96,040			297,488			283,025
Net income before income taxes	99,333			95,515			122,855			284,485			345,427
Income tax expense	25,970			25,712			32,767			74,415			90,369
Net income	$	73,363		$	69,803		$	90,088		$	210,070		$	255,058
Pre-provision net revenue (3)	$	100,410		$	95,984		$	103,129		$	286,479		$	289,204
Share data
Earnings per share:
Basic	$	0.77		$	0.74		$	0.95		$	2.22		$	2.70
Diluted	0.77			0.73			0.95			2.21			2.68
Common equity dividends declared per share	0.33			0.33			0.33			0.99			0.96
Dividend payout ratio (1)	42.72		%	44.89		%	34.63		%	44.68		%	35.59		%
Book value per share	$	28.79		$	29.01		$	30.08		$	28.79		$	30.08
Tangible book value per share (2)	18.68			18.86			19.75			18.68			19.75
Performance ratios
Return on average assets (3)	1.35		%	1.29		%	1.73		%	1.31		%	1.67		%
Return on average equity (3)	10.57			10.10			12.67			10.00			12.23
Return on average tangible common equity (2)(3)	16.74			16.07			19.89			15.81			19.52

Pre-provision net revenue on average assets (2)(3)	1.85			1.77			1.98			1.78			1.89
Net interest margin	3.61			3.49			3.51			3.50			3.50
Cost of deposits	0.22			0.06			0.06			0.11			0.08
Average equity to average assets	12.80			12.76			13.67			13.06			13.65
Efficiency ratio (2)	48.3			49.0			47.5			49.3			48.5

______________________________

(1) Dividend payout ratio is defined as common equity dividends declared per share divided by basic earnings per share.

(2) Reconciliations of the non-GAAP measures are set forth in the Non-GAAP Measures section of Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q.

(3) Ratio is annualized.

In the third quarter of 2022, we reported net income of $73.4 million, or $0.77 per diluted share. This compares with net income of $69.8 million, or $0.73 per diluted share, for the second quarter of 2022. The increase in net income was primarily due to an $8.3 million increase in net interest income, partially offset by a $2.0 million decrease in noninterest income, a $1.9 million increase in noninterest expense, and a $608,000 increase in provision for credit losses.

Net income of $73.4 million, or $0.77 per diluted share, for the third quarter of 2022 compares to net income for the third quarter of 2021 of $90.1 million, or $0.95 per diluted share. The decrease in net income was primarily due to a $1.1 million provision expense for credit losses for the third quarter of 2022, compared to a $19.7 million provision recapture for the third quarter of 2021, a $9.9 million decrease in noninterest income, and a $4.8 million increase in noninterest expense, partially offset by a $12.0 million increase in net interest income and a $6.8 million decrease in income tax expense. The provision recapture during the third quarter of 2021 was reflective of improved macroeconomic forecasts used in the Company’s ACL model relative to prior periods.

For the third quarter of 2022, the Company’s return on average assets was 1.35%, return on average equity was 10.57%, and return on average tangible common equity was 16.74%, compared to 1.29%, 10.10%, and 16.07%, respectively, for the second quarter of 2022, and 1.73%, 12.67%, and 19.89%, respectively, for the third quarter of 2021. For additional details, see “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.

For the nine months ended September 30, 2022, the Company recorded net income of $210.1 million, or $2.21 per diluted share. This compares with net income of $255.1 million or $2.68 per diluted share for the nine months ended September 30, 2021. The decrease in net income of $45.0 million was mostly due to a $2.0 million provision expense for credit losses for the nine months ended September 30, 2022, compared to a $56.2 million provision recapture for the nine months ended September 30, 2021, a $14.5 million increase in noninterest expense excluding merger-related expenses, and a $12.3 million decrease in noninterest income, partially offset by a $24.1 million increase in net interest income and a $16.0 million decrease in income tax expense. The provision recapture during the nine months ended September 30, 2021 was reflective of improved macroeconomic forecasts used in the Company’s ACL model relative to prior periods, partially offset by loan growth and net charge-offs.

For the nine months ended September 30, 2022, the Company’s return on average assets was 1.31%, return on average equity was 10.00%, and return on average tangible common equity was 15.81%, compared with 1.67%, 12.23%, and 19.52%, respectively, for the nine months ended September 30, 2021. For additional details, see “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.

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 $181.1 million in the third quarter of 2022, an increase of $8.3 million, or 4.8%, from the second quarter of 2022. The increase in net interest income was primarily attributable to higher yields on average interest-earning assets and slightly higher average loan balances, a favorable interest impact from fair value hedges on fixed-rate loans of $4.2 million, as well as one more day of interest, partially offset by higher cost of funds and lower loan-related fees and accretion income as a result of decreased prepayment activity.

The net interest margin for the third quarter of 2022 increased 12 basis points to 3.61%, from 3.49% in the prior quarter. The core net interest margin, which excludes the impact of loan accretion income, certificates of deposit mark-to-market amortization, interest impact from fair value hedge, and other adjustments, increased 11 basis points to 3.44%, compared to 3.33% in the prior quarter, reflecting higher yields on interest-earning assets and a favorable remix of earning-assets towards higher yielding loans, partially offset by higher cost of funds and lower loan prepayment fees. For additional details of the core net interest margin, see “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.

Net interest income for the third quarter of 2022 increased $12.0 million, or 7.1%, compared to the third quarter of 2021. The increase was attributable to higher yields on average interest-earning assets and higher average loan balances, as well as a favorable impact from fair value hedges on fixed-rate loans, partially offset by higher cost of funds and lower loan-related fees and accretion income as a result of decreased prepayment activity.

For the nine months ended 2022, net interest income increased $24.1 million, or 4.9%, compared to the nine months ended 2021. The increase was related to an increase in average interest-earning assets, partially offset by lower average loan yields, higher average interest-bearing liabilities, and higher cost of funds. For the nine months ended 2022, the net interest margin was 3.50%, unchanged from the same period last year. The core net interest margin, which excludes the impact of loan accretion income, certificates of deposit mark-to-market amortization, interest impact from fair value hedge, and other adjustments, was 3.37%, compared with 3.28% for the same period last year, reflecting higher average interest-earning assets balance. For additional details of the core net interest margin, see “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.

The following table presents the 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, 2022						June 30, 2022						September 30, 2021
(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	$	665,510	$	2,754	1.64	%	$	702,663	$	1,211	0.69	%	$	663,076	$	195	0.12	%
Investment securities	4,277,444		22,067		2.06	%	4,254,961		17,560		1.65	%	4,807,854		18,827		1.57	%
Loans receivable, net (1)(2)	14,986,682		174,204		4.61	%	14,919,182		164,455		4.42	%	13,660,242		157,025		4.56	%
Total interest-earning assets	19,929,636		199,025		3.96	%	19,876,806		183,226		3.70	%	19,131,172		176,047		3.65	%
Noninterest-earning assets	1,757,800						1,793,347						1,673,731
Total assets	$	21,687,436					$	21,670,153					$	20,804,903
Liabilities and equity
Interest-bearing deposits:
Interest checking	$	3,812,448	$	1,658	0.17	%	$	4,055,506	$	712	0.07	%	$	3,383,219	$	290	0.03	%
Money market	5,053,890		2,940		0.23	%	5,231,464		1,010		0.08	%	5,554,881		1,309		0.09	%
Savings	434,591		28		0.03	%	432,586		27		0.03	%	401,804		58		0.06	%
Retail certificates of deposit	835,645		1,420		0.67	%	922,784		607		0.26	%	1,196,187		775		0.26	%
Wholesale/brokered certificates of deposit	702,785		3,827		2.16	%	80,182		326		1.63	%	—		—		—	%
Total interest-bearing deposits	10,839,359		9,873		0.36	%	10,722,522		2,682		0.10	%	10,536,091		2,432		0.09	%
FHLB advances and other borrowings	636,006		3,480		2.17	%	602,621		3,217		2.14	%	1,670		1		0.24	%
Subordinated debentures	330,975		4,560		5.51	%	330,796		4,562		5.52	%	330,575		4,545		5.50	%
Total borrowings	966,981		8,040		3.31	%	933,417		7,779		3.34	%	332,245		4,546		5.43	%
Total interest-bearing liabilities	11,806,340		17,913		0.60	%	11,655,939		10,461		0.36	%	10,868,336		6,978		0.25	%
Noninterest-bearing deposits	6,893,463						7,030,205						6,809,211
Other liabilities	212,509						219,116						282,556
Total liabilities	18,912,312						18,905,260						17,960,103
Stockholders’ equity	2,775,124						2,764,893						2,844,800
Total liabilities and equity	$	21,687,436					$	21,670,153					$	20,804,903
Net interest income			$	181,112					$	172,765					$	169,069

Net interest margin (3)					3.61	%					3.49	%					3.51	%
Cost of deposits (4)					0.22	%					0.06	%					0.06	%
Cost of funds (5)					0.38	%					0.22	%					0.16	%
Cost of core deposits (6)					0.11	%					0.04	%					0.04	%
Ratio of interest-earning assets to interest-bearing liabilities					168.80	%					170.53	%					176.03	%

______________________________

(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums, and the basis adjustment of certain loans included in fair value hedging relationships, where applicable.

(2) Interest income includes net discount accretion of $4.6 million, $7.5 million, and $9.4 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.

(6) Reconciliation of the “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.



	Average Balance Sheet
	Nine Months Ended
	September 30, 2022						September 30, 2021
(Dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets
Interest-earning assets:
Cash and cash equivalents	$	564,727	$	4,055	0.96	%	$	1,096,175	$	811	0.10	%
Investment securities	4,358,619		57,479		1.76	%	4,382,288		54,307		1.65	%
Loans receivable, net (1)(2)	14,756,817		489,263		4.43	%	13,325,683		464,615		4.66	%
Total interest-earning assets	19,680,163		550,797		3.74	%	18,804,146		519,733		3.70	%
Noninterest-earning assets	1,760,640						1,562,016
Total assets	$	21,440,803					$	20,366,162
Liabilities and equity
Interest-bearing deposits:
Interest checking	$	3,802,932	$	2,599	0.09	%	$	3,200,920	$	1,045	0.04	%
Money market	5,208,713		4,838		0.12	%	5,520,919		5,899		0.14	%
Savings	429,833		81		0.03	%	384,945		224		0.08	%
Retail certificates of deposit	934,518		2,557		0.37	%	1,304,436		2,815		0.29	%
Wholesale/brokered certificates of deposit	263,563		4,153		2.11	%	39,635		140		0.47	%
Total interest-bearing deposits	10,639,559		14,228		0.18	%	10,450,855		10,123		0.13	%
FHLB advances and other borrowings	489,464		7,171		1.96	%	9,921		66		0.89	%
Subordinated debentures	330,801		13,682		5.51	%	436,888		17,889		5.46	%
Total borrowings	820,265		20,853		3.39	%	446,809		17,955		5.37	%
Total interest-bearing liabilities	11,459,824		35,081		0.41	%	10,897,664		28,078		0.34	%
Noninterest-bearing deposits	6,950,717						6,397,703
Other liabilities	229,121						289,863
Total liabilities	18,639,662						17,585,230
Stockholders’ equity	2,801,141						2,780,932
Total liabilities and equity	$	21,440,803					$	20,366,162
Net interest income			$	515,716					$	491,655

Net interest margin (3)					3.50	%					3.50	%
Cost of deposits (4)					0.11	%					0.08	%
Cost of funds (5)					0.25	%					0.22	%
Cost of core deposits (6)					0.06	%					0.06	%
Ratio of interest-earning assets to interest-bearing liabilities					171.73	%					172.55	%

_____________________________

(2) Interest income includes net discount accretion of $18.1 million and $28.8 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.

(6) Reconciliation of the “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.

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 and nine months ended September 30, 2022 to the three and nine months ended September 30, 2021);

•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, 2022
	Compared to
	Three Months Ended June 30, 2022
	Increase (Decrease) Due to
(Dollars in thousands)	Volume		Days		Rate		Net
Interest-earning assets
Cash and cash equivalents	$	(61)	$	30	$	1,574	$	1,543
Investment securities	93		—		4,414		4,507
Loans receivable, net	746		1,894		7,109		9,749
Total interest-earning assets	778		1,924		13,097		15,799
Interest-bearing liabilities
Interest checking	(40)		18		968		946
Money market	(33)		32		1,931		1,930
Savings	—		—		1		1
Retail certificates of deposit	(52)		15		850		813
Wholesale/brokered certificates of deposit	3,320		42		139		3,501
FHLB advances and other borrowings	180		38		45		263
Subordinated debentures	2		—		(4)		(2)
Total interest-bearing liabilities	3,377		145		3,930		7,452
Increase (decrease) in net interest income	$	(2,599)	$	1,779	$	9,167	$	8,347


	Three Months Ended September 30, 2022
	Compared to
	Three Months Ended September 30, 2021
	Increase (Decrease) Due to
(Dollars in thousands)	Volume		Rate		Net
Interest-earning assets
Cash and cash equivalents	$	1	$	2,558	$	2,559
Investment securities	(1,728)		4,968		3,240
Loans receivable, net	15,399		1,780		17,179
Total interest-earning assets	13,672		9,306		22,978
Interest-bearing liabilities
Interest checking	41		1,327		1,368
Money market	(106)		1,737		1,631
Savings	6		(36)		(30)
Retail certificates of deposit	(147)		792		645
Wholesale/brokered certificates of deposit	3,827		—		3,827
FHLB advances and other borrowings	3,409		70		3,479
Subordinated debentures	5		10		15
Total interest-bearing liabilities	7,035		3,900		10,935
Increase in net interest income	$	6,637	$	5,406	$	12,043



	Nine Months Ended September 30, 2022
	Compared to
	Nine Months Ended September 30, 2021
	Increase (Decrease) Due to
(Dollars in thousands)	Volume		Rate		Net
Interest-earning assets
Cash and cash equivalents	$	(188)	$	3,432	$	3,244
Investment securities	(291)		3,463		3,172
Loans receivable, net	48,675		(24,027)		24,648
Total interest-earning assets	48,196		(17,132)		31,064
Interest-bearing liabilities
Interest checking	228		1,326		1,554
Money market	(321)		(740)		(1,061)
Savings	30		(173)		(143)
Retail certificates of deposit	(905)		647		(258)
Wholesale/brokered certificates of deposit	2,488		1,525		4,013
FHLB advances and other borrowings	6,949		156		7,105
Subordinated debentures	(4,486)		279		(4,207)
Total interest-bearing liabilities	3,983		3,020		7,003
Increase (decrease) in net interest income	$	44,213	$	(20,152)	$	24,061

Provision for Credit Losses

For the third quarter of 2022, the Company recorded a $1.1 million provision expense for credit losses, compared to a $469,000 provision expense during the second quarter of 2022, and a $19.7 million provision recapture during the third quarter of 2021. The provision expense during the third quarter of 2022 was reflective of a combination of factors, including increases due to specific reserves on two individually evaluated loans and higher unfunded commitments in the commercial and industrial loan segment, partially offset by an overall decrease in loans held for investment and changes in the composition of the loan portfolio. With the increasing probability of downside risks due to high inflation, rising interest rates, higher energy prices, volatility observed in equity markets, and the ongoing supply chain challenges, we are carefully monitoring the current and forecasted macroeconomic environment as well as key modeling variables.

The provision expense for the second quarter of 2022 was driven principally by loan growth and net charge-offs, as well as the impact of macroeconomic forecasts, partially offset by a recapture for unfunded commitments which was largely due to favorable changes in the unfunded lending segment mix. The provision recapture for the third quarter of 2021 was primarily due to improved macroeconomic forecasts used in the Company’s ACL model relative to prior periods.

Net loan charge-offs for the three months ended September 30, 2022 totaled $1.1 million, compared with net loan charge-offs of $5.2 million for the three months ended June 30, 2022, and net loan charge-offs of $1.8 million for the three months ending September 30, 2021.


	Three Months Ended						Variance From
	September 30,		June 30,		September 30,		June 30, 2022				September 30, 2021
(Dollars in thousands)	2022		2022		2021		$		%		$		%
Provision for credit losses
Provision for loan losses	$	546	$	3,803	$	(19,543)	$	(3,257)	(85.6)	%	$	20,089	(102.8)	%
Provision for unfunded commitments	549		(3,402)		(194)		3,951		(116.1)	%	743		(383.0)	%

Provision for HTM securities	(18)		68		11		(86)		(126.5)	%	(29)		(263.6)	%
Total provision for credit losses	$	1,077	$	469	$	(19,726)	$	608	129.6	%	$	20,803	(105.5)	%

For the first nine months of 2022, the Company recorded a $2.0 million provision expense for credit losses, compared to a $56.2 million provision recapture recorded for the first nine months of 2021. The provision expense for the first nine months of 2022 was driven principally by loan growth and specific reserves on two individually evaluated loans, partially offset by a provision recapture for unfunded commitments, as well as the favorable impact of macroeconomic forecasts. The provision recapture for unfunded commitments was largely due to changes in the mix of unfunded commitments between various loan segments. The provision recapture for the first nine months of 2021 was reflective of improved macroeconomic forecasts used in the Company’s ACL model relative to prior periods, partially offset by loan growth and net charge-offs.



	Nine Months Ended				Variance From
	September 30,		September 30,		September 30, 2021
(Dollars in thousands)	2022		2021		$		%
Provision for credit losses
Provision for loans and lease losses	$	4,560	$	(52,359)	$	56,919	(108.7)	%
Provision for unfunded commitments	(2,635)		(3,880)		1,245		(32.1)	%

Provision for held-to-maturity securities	69		11		58		527.3	%
Total provision for credit losses	$	1,994	$	(56,228)	$	58,222	(103.5)	%

Noninterest Income

The following table presents the components of noninterest income for the periods indicated:


	Three Months Ended						Variance From
	September 30,		June 30,		September 30,		June 30, 2022				September 30, 2021
(Dollars in thousands)	2022		2022		2021		$		%		$		%
Noninterest income
Loan servicing income	$	397	$	502	$	536	$	(105)	(20.9)	%	$	(139)	(25.9)	%
Service charges on deposit accounts	2,704		2,690		2,375		14		0.5	%	329		13.9	%
Other service fee income	323		366		350		(43)		(11.7)	%	(27)		(7.7)	%
Debit card interchange fee income	808		936		834		(128)		(13.7)	%	(26)		(3.1)	%
Earnings on bank owned life insurance	3,339		3,240		3,266		99		3.1	%	73		2.2	%
Net gain from sales of loans	457		1,136		1,187		(679)		(59.8)	%	(730)		(61.5)	%
Net (loss) gain from sales of investment securities	(393)		(31)		4,190		(362)		1167.7	%	(4,583)		(109.4)	%



Trust custodial account fees	9,951		10,354		11,446		(403)		(3.9)	%	(1,495)		(13.1)	%
Escrow and exchange fees	1,555		1,827		1,867		(272)		(14.9)	%	(312)		(16.7)	%
Other income	1,023		1,173		4,049		(150)		(12.8)	%	(3,026)		(74.7)	%
Total noninterest income	$	20,164	$	22,193	$	30,100	$	(2,029)	(9.1)	%	$	(9,936)	(33.0)	%


	Nine Months Ended				Variance From
	September 30,		September 30,		September 30, 2021
(Dollars in thousands)	2022		2021		$		%
Noninterest income
Loan servicing income	$	1,318	$	1,616	$	(298)	(18.4)	%
Service charges on deposit accounts	8,009		6,629		1,380		20.8	%
Other service fee income	1,056		1,175		(119)		(10.1)	%
Debit card interchange fee income	2,580		2,720		(140)		(5.1)	%
Earnings on bank owned life insurance	9,800		7,778		2,022		26.0	%
Net gain from sales of loans	3,087		3,094		(7)		(0.2)	%
Net gain from sales of investment securities	1,710		13,321		(11,611)		(87.2)	%



Trust custodial account fees	31,884		26,565		5,319		20.0	%
Escrow and exchange fees	5,043		5,065		(22)		(0.4)	%
Other income	3,764		12,606		(8,842)		(70.1)	%
Total noninterest income	$	68,251	$	80,569	$	(12,318)	(15.3)	%

Noninterest income for the third quarter of 2022 was $20.2 million, a decrease of $2.0 million, or 9.1%, from the second quarter of 2022. The decrease was primarily due to a $679,000 decrease in net gain from sales of loans, a $403,000 decrease in trust custodial account fees resulting primarily from a decrease in the market value of custodial assets, and a $362,000 greater net loss from sales of investment securities.

During the third quarter of 2022, the Bank sold $9.6 million of SBA loans for a net gain of $434,000 and $15.0 million of other loans for a net gain of $23,000, compared to the sales of $23.4 million of SBA loans and U.S. Department of Agriculture (“USDA”) loans for a net gain of $1.1 million in the second quarter of 2022. The SBA business has slowed in the third quarter in connection with the higher interest rates.

Additionally, during the third quarter of 2022, the Bank sold $231.1 million of investment securities for a net loss of $393,000, compared to the sales of $45.1 million of investment securities for a net loss of $31,000 in the second quarter of 2022. See “Financial Condition - Investment Securities” for a discussion of the actions the Bank took to reduce the size and duration of its AFS securities which increased the Bank’s asset sensitivity.

Noninterest income for the third quarter of 2022 decreased $9.9 million, or 33.0%, compared to the third quarter of 2021. The decrease was primarily due to a $4.6 million decrease in net gain from sales of investment securities, a $3.0 million decrease in other income, primarily due to lower CRA investment income and the gain from debt extinguishment in the same period last year, a $1.5 million decrease in trust custodial account fees resulting primarily from a decrease in the market value of custodial assets, and a $730,000 decrease in net gain from sales of loans.

The net loss from sales of investment securities of $393,000 for the third quarter of 2022 from the sales of $231.1 million of investment securities reflected the negative impact on the values of AFS investment securities from the rising interest rate environment, compared to sales of $161.6 million of investment securities for a net gain of $4.2 million during the third quarter of 2021.

The net gain from sales of loans for the third quarter of 2022 decreased from the same period last year reflecting lower net gain from the sales of $9.6 million of SBA and USDA loans for a net gain of $434,000, compared with the sales of $12.0 million of SBA loans for a net gain of $1.2 million during the third quarter of 2021.

For the first nine months of 2022, noninterest income totaled $68.3 million, a decrease of $12.3 million, or 15.3%, compared to the first nine months of 2021. The decrease was primarily related to a $11.6 million decrease in net gain from sales of investment securities and a $8.8 million decrease in other income, primarily due to $5.8 million lower CRA investment income and $2.9 million of SBA Paycheck Protection Program loan referral fees in the same period last year, partially offset by a $5.3 million increase in trust custodial account fees, a $2.0 million increase in earnings from bank owned life insurance (“BOLI”), and a $1.4 million increase in service charges on deposit accounts.

Noninterest Expense

The following table presents the components of noninterest expense for the periods indicated:


	Three Months Ended						Variance From
	September 30,		June 30,		September 30,		June 30, 2022				September 30, 2021
(Dollars in thousands)	2022		2022		2021		$		%		$		%
Noninterest expense
Compensation and benefits	$	56,355	$	57,562	$	53,592	$	(1,207)	(2.1)	%	$	2,763	5.2	%
Premises and occupancy	12,011		11,829		12,611		182		1.5	%	(600)		(4.8)	%
Data processing	7,058		6,604		6,296		454		6.9	%	762		12.1	%

FDIC insurance premiums	1,461		1,452		1,392		9		0.6	%	69		5.0	%
Legal and professional services	4,075		4,629		4,563		(554)		(12.0)	%	(488)		(10.7)	%
Marketing expense	1,912		1,926		2,008		(14)		(0.7)	%	(96)		(4.8)	%
Office expense	1,338		1,252		1,076		86		6.9	%	262		24.3	%
Loan expense	789		1,144		1,332		(355)		(31.0)	%	(543)		(40.8)	%
Deposit expense	4,846		4,081		3,974		765		18.7	%	872		21.9	%

Amortization of intangible assets	3,472		3,479		3,912		(7)		(0.2)	%	(440)		(11.2)	%
Other expense	7,549		5,016		5,284		2,533		50.5	%	2,265		42.9	%
Total noninterest expense	$	100,866	$	98,974	$	96,040	$	1,892	1.9	%	$	4,826	5.0	%



	Nine Months Ended				Variance From
	September 30,		September 30,		September 30, 2021
(Dollars in thousands)	2022		2021		$		%
Noninterest expense
Compensation and benefits	$	170,898	$	159,614	$	11,284	7.1	%
Premises and occupancy	35,792		36,831		(1,039)		(2.8)	%
Data processing	19,658		17,889		1,769		9.9	%

FDIC insurance premiums	4,309		3,885		424		10.9	%
Legal and professional services	12,772		12,684		88		0.7	%
Marketing expense	5,647		5,096		551		10.8	%
Office expense	3,793		4,494		(701)		(15.6)	%
Loan expense	3,067		3,612		(545)		(15.1)	%
Deposit expense	12,678		11,818		860		7.3	%
Merger-related expense	—		5		(5)		(100.0)	%
Amortization of intangible assets	10,543		12,056		(1,513)		(12.5)	%
Other expense	18,331		15,041		3,290		21.9	%
Total noninterest expense	$	297,488	$	283,025	$	14,463	5.1	%

Noninterest expense totaled $100.9 million for the third quarter of 2022, an increase of $1.9 million compared to the second quarter of 2022, primarily due to a $2.5 million increase in other expense, largely attributable to a client's unauthorized transaction incident for which the Bank provided a $1.9 million provisional credit pending its pursuit of insurance coverage, and a $765,000 increase in deposit expense, partially offset by a $1.2 million decrease in compensation and benefits as overall staffing decreased.

Noninterest expense increased by $4.8 million compared to the third quarter of 2021. The increase was primarily due to a $2.8 million increase in compensation and benefits attributable to higher compensation due to merit increases and higher stock compensation expense as well as a $2.3 million increase in other expense due to a client's unauthorized transaction incident referenced above.

The Company’s efficiency ratio was 48.3% for the third quarter of 2022, compared to 49.0% for the second quarter of 2022, and 47.5% for the third quarter of 2021.

Noninterest expense totaled $297.5 million for the first nine months of 2022, an increase of $14.5 million, or 5.1%, compared with the first nine months of 2021. The increase was driven primarily by an $11.3 million increase in compensation and benefits attributable to higher compensation from increased staffing and higher stock compensation expense, a $3.3 million increase in other expense, a $1.8 million increase in data processing, and an $860,000 increase in deposit expense, partially offset by a $1.5 million decrease in amortization of intangible assets, a $1.0 million decrease in premises and occupancy, and a $701,000 decrease in office expense.

The Company’s efficiency ratio was 49.3% for the first nine months of 2022, compared to 48.5% for the first nine months of 2021.

Income Taxes

For the three months ended September 30, 2022, June 30, 2022, and September 30, 2021, income tax expense was $26.0 million, $25.7 million, and $32.8 million, respectively, and the effective income tax rate was 26.1%, 26.9%, and 26.7%, respectively. For the nine months ended September 30, 2022 and 2021, income tax expense was $74.4 million and $90.4 million, respectively, and the effective income tax rate was 26.2% and 26.2%, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 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 $1.4 million at September 30, 2022 and December 31, 2021, and was 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 $563,000 at September 30, 2022 and December 31, 2021. 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 $72,000 and $31,000 of such interest at September 30, 2022 and December 31, 2021, respectively. No amounts for penalties were accrued.

The Company and its subsidiaries are subject to U.S. Federal income tax, as well as income and franchise tax in multiple state jurisdictions. The statute of limitations related to the consolidated Federal income tax returns is closed for all tax years up to and including 2017. The expirations of the statutes of limitations related to the various state income and franchise tax returns vary 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 the 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 forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of September 30, 2022 and December 31, 2021.

FINANCIAL CONDITION

At September 30, 2022, assets totaled $21.62 billion, an increase of $524.8 million, or 2.5%, from $21.09 billion at December 31, 2021. The increase was primarily due to increases in total loans of $604.2 million and cash and cash equivalents of $434.5 million, partially offset by a $609.0 million decrease in investment securities. During the first nine months of 2022, we took actions to position the balance sheet to increase our asset sensitivity, which included increasing our liquidity position and reducing the size and duration of the AFS securities portfolio to fund higher yielding loan growth, securing term funding with FHLB, and adding brokered deposits, for an economic environment with higher interest rates and macroeconomic uncertainty.

Loans

Loans held for investment totaled $14.91 billion at September 30, 2022, an increase of $612.9 million, or 4.3%, from $14.30 billion at December 31, 2021. The increase was driven by an increase in loans funded and higher commercial line utilization rates, partially offset by prepayments and maturities during the first nine months of 2022. Commercial line average utilization rate increased from an average rate of 35.2% for the fourth quarter of 2021 to 40.4% for the third quarter of 2022. Since December 31, 2021, investor loans secured by real estate increased $399.4 million, business loans secured by real estate increased $224.4 million, commercial loans increased $79.2 million, and retail loans decreased $22.0 million.

The total end-of-period weighted average interest rate on loans, excluding fees and discounts, at September 30, 2022 was 4.34%, compared to 3.95% at December 31, 2021. The increase reflects the impact of higher rates on new originations and the repricing of loans as a result of the Federal Reserve's interest rate increases since March 2022.

Loans held for sale primarily represent the guaranteed portion of SBA loans, which the Bank originates for sale, and totaled $2.2 million at September 30, 2022, a decrease of $8.7 million from $10.9 million at December 31, 2021.

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, 2022						December 31, 2021
(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	$	2,771,272	18.6	%	4.37	%	$	2,771,137	19.4	%	4.19	%
Multifamily	6,199,581		41.6	%	3.78	%	5,891,934		41.2	%	3.75	%
Construction and land	373,194		2.5	%	7.03	%	277,640		1.9	%	4.88	%
SBA secured by real estate	42,998		0.3	%	6.35	%	46,917		0.3	%	4.98	%
Total investor loans secured by real estate	9,387,045		63.0	%	4.10	%	8,987,628		62.8	%	3.93	%
Business loans secured by real estate
CRE owner-occupied	2,477,530		16.6	%	4.14	%	2,251,014		15.7	%	4.07	%
Franchise real estate secured	383,468		2.6	%	4.69	%	380,381		2.7	%	4.60	%
SBA secured by real estate	64,002		0.4	%	6.30	%	69,184		0.5	%	5.23	%
Total business loans secured by real estate	2,925,000		19.6	%	4.26	%	2,700,579		18.9	%	4.18	%
Commercial loans
Commercial and industrial	2,164,623		14.5	%	5.38	%	2,103,112		14.7	%	3.61	%
Franchise non-real estate secured	409,773		2.8	%	4.82	%	392,576		2.7	%	4.76	%
SBA non-real estate secured	11,557		0.1	%	6.68	%	11,045		0.1	%	5.54	%
Total commercial loans	2,585,953		17.4	%	5.30	%	2,506,733		17.5	%	3.80	%
Retail loans
Single family residential	75,176		0.5	%	4.96	%	95,292		0.7	%	4.01	%
Consumer	3,761		—	%	6.22	%	5,665		0.1	%	4.98	%
Total retail loans	78,937		0.5	%	5.00	%	100,957		0.8	%	4.05	%
Loans held for investment before basis adjustment (1)	14,976,935		100.5	%	4.34	%	14,295,897		100.0	%	3.95	%
Basis adjustment associated with fair value hedge (2)	(68,124)		(0.5)	%	—	%	—		—	%	—	%
Loans held for investment	14,908,811		100.0	%	4.34	%	14,295,897		100.0	%	3.95	%
Allowance for credit losses for loans held for investment	(195,549)						(197,752)
Loans held for investment, net	$	14,713,262					$	14,098,145

Total unfunded loan commitments	$	2,823,555					$	2,507,911
Loans held for sale, at lower of cost or fair value	2,163						10,869

______________________________

(2) Represents the basis adjustment associated with the application of hedge accounting on certain loans.

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 0.28% at September 30, 2022, compared to 0.14% at December 31, 2021. The increase in delinquent loans during the nine months ended September 30, 2022 was primarily due to the addition of $26.3 million of loans that were 90 or more days past due, consisting primarily of a CRE non-owner-occupied loan relationship of $16.4 million, a multifamily loan relationship of $6.1 million, and a C&I loan relationship of $3.7 million, partially offset by principal paydowns, charge-offs, and loans returned to current status.

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, 2022
Investor loans secured by real estate
CRE non-owner-occupied	—	$	—		—	$	—		2	$	16,869		2	$	16,869
Multifamily	—	—			—	—			2	6,074			2	6,074


Total investor loans secured by real estate	—	—			—	—			4	22,943			4	22,943
Business loans secured by real estate
CRE owner-occupied	—	—			2	6,398			3	4,851			5	11,249

SBA secured by real estate	3	1,244			—	—			1	83			4	1,327
Total business loans secured by real estate	3	1,244			2	6,398			4	4,934			9	12,576
Commercial loans
Commercial and industrial	11	240			5	135			5	4,754			21	5,129

SBA non-real estate secured	—	—			—	—			1	607			1	607
Total commercial loans	11	240			5	135			6	5,361			22	5,736
Retail loans

Consumer	—	—			1	2			—	—			1	2
Total retail loans	—	—			1	2			—	—			1	2
Total	14	$	1,484		8	$	6,535		14	$	33,238		36	$	41,257
Delinquent loans to loans held for investment		0.01		%		0.05		%		0.22		%		0.28		%


	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, 2021
Investor loans secured by real estate
CRE non-owner-occupied	—	$	—		—	$	—		3	$	10,255		3	$	10,255
Multifamily	1	1,230			—	—			—	—			1	1,230

SBA secured by real estate	—	—			—	—			1	337			1	337
Total investor loans secured by real estate	1	1,230			—	—			4	10,592			5	11,822
Business loans secured by real estate
CRE owner-occupied	—	—			—	—			3	4,952			3	4,952

SBA secured by real estate	—	—			—	—			1	441			1	441
Total business loans secured by real estate	—	—			—	—			4	5,393			4	5,393
Commercial loans
Commercial and industrial	8	92			—	—			2	1,462			10	1,554

SBA non-real estate secured	1	73			—	—			1	653			2	726
Total commercial loans	9	165			—	—			3	2,115			12	2,280




Total	10	$	1,395		—	$	—		11	$	18,100		21	$	19,495
Delinquent loans to loans held for investment		0.01		%		—		%		0.13		%		0.14		%

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. At September 30, 2022 and December 31, 2021, the Company had five and six loans, respectively, totaling $16.3 million and $17.3 million, respectively, modified as TDRs, which are comprised primarily of three CRE owner-occupied loans and one C&I loan totaling $5.1 million and $5.2 million, respectively, belonging to one borrower relationship with the terms modified due to bankruptcy, and one franchise non-real estate secured loan for $11.2 million and two franchise non-real estate secured loans totaling $12.1 million, respectively, belonging to another borrower relationship with the terms modified for payment deferral. All TDRs were on nonaccrual status as of September 30, 2022 and December 31, 2021.

Nonperforming Assets

Nonperforming assets consist of loans whereby we have ceased accruing interest (nonaccrual loans), OREO, and other repossessed assets owned. Nonaccrual loans generally consist of loans that are 90 days or more past due or loans where, in the opinion of management, there is reasonable doubt as to the collection of principal and interest.

Nonperforming assets totaled $60.5 million, or 0.28% of total assets, at September 30, 2022, an increase from $31.3 million, or 0.15% of total assets, at December 31, 2021. There was no other real estate owned at September 30, 2022 and December 31, 2021. All nonperforming assets consisted of nonperforming loans at September 30, 2022 and December 31, 2021. The increase in nonperforming assets since December 31, 2021 was primarily due to the addition of two CRE non-owner-occupied loan relationships of $22.6 million, a multifamily loan relationship of $8.8 million, two CRE owner-occupied loan relationships of $6.4 million, and a C&I loan relationship of $3.7 million that were placed on nonaccrual status during the first nine months of 2022, partially offset by principal paydowns, charge-offs, and loans returned to accrual status during the third quarter of 2022.

The Company had no loans 90 days or more past due and accruing at September 30, 2022 and December 31, 2021.

The following table sets forth our composition of nonperforming assets at the dates indicated:


(Dollars in thousands)	September 30, 2022			December 31, 2021
Nonperforming assets
Investor loans secured by real estate
CRE non-owner-occupied	$	23,050		$	10,255
Multifamily	8,806			—

SBA secured by real estate	547			937
Total investor loans secured by real estate	32,403			11,192
Business loans secured by real estate
CRE owner-occupied	11,249			4,952

SBA secured by real estate	197			589
Total business loans secured by real estate	11,446			5,541
Commercial loans
Commercial and industrial	4,754			1,798
Franchise non-real estate secured	11,254			12,079
SBA non-real estate secured	607			653
Total commercial loans	16,615			14,530
Retail loans
Single family residential	—			10

Total retail loans	—			10
Total nonperforming loans	60,464			31,273
Other real estate owned	—			—
Other assets owned	—			—
Total	$	60,464		$	31,273

Allowance for credit losses	$	195,549		$	197,752
Allowance for credit losses as a percent of total nonperforming loans	323		%	632		%
Nonperforming loans as a percent of loans held for investment	0.41		%	0.22		%
Nonperforming assets as a percent of total assets	0.28		%	0.15		%
TDRs included in nonperforming loans	$	16,344		$	17,277

Allowance for Credit Losses

The Company maintains an 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, while 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 PD, (ii) the LGD, which represents the estimated severity of the loss when a loan is in default, (iii) estimates for prepayment activity on loans, and (iv) the EAD. In the case of unfunded loan commitments, the Company incorporates estimates for utilization, based on historical loan data. PD and LGD for investor loans secured by real estate are derived from a third party, using proxy loan information, and loan and property level attributes. PD for both investor and business real estate loans, as well as commercial loans is heavily impacted by current and expected economic conditions. Forecasts for PDs and LGDs are made over a two-year period, which we believe is reasonable and supportable, and are based on economic scenarios. Beyond this point, PDs and LGDs revert to their historical long-term averages. The Company has reflected this reversion over a period of three years in the ACL model.

The Company’s ACL includes assumptions concerning current and future economic conditions using reasonable and supportable forecasts from an independent third party. These economic forecast scenarios are based on past events, current conditions, and the likelihood of future events occurring. Management periodically evaluates economic scenarios used in the Company’s ACL model, and thus the scenarios as well as the assumptions within those scenarios, and whether to use a 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. As of September 30, 2022, the Company’s ACL model used three weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The use of three weighted scenarios at September 30, 2022 is consistent with the approach used in the Company’s ACL model at June 30, 2022 and December 31, 2021. The Company’s ACL model at September 30, 2022 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, the potential impact of the ongoing war between Russia and Ukraine, general uncertainty concerning future economic conditions, and the potential for future recessionary conditions.

The Company has identified certain economic variables that have significant influence in the Company’s model for determining the ACL. These key economic variables include the U.S. unemployment rate, U.S. real GDP growth, CRE prices, and the 10-year U.S. Treasury yield. As of September 30, 2022, the Company’s ACL model assumes the following:

•The U.S. unemployment rate will increase to approximately 5.3% over the next two years.

•U.S. real GDP growth will decelerate through the second quarter of 2023, before returning to more consistent and modest levels of growth through the third quarter of 2024.

•CRE index growth decelerates through the remainder of 2022, experiences modest declines in 2023, before returning to modest levels of growth by the second quarter of 2024.

•The 10-year U.S. Treasury yield remains within a range of 2.9% and 3.2% over the next two years.

The Company considers the need for qualitative adjustments to the ACL on a quarterly basis. 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. Qualitative adjustments at September 30, 2022 include those that increase and decrease the level of allocated ACL to these segments of the loan portfolio: investor loans secured by real estate, business loans secured by real estate, and commercial loans.

The following charts quantify certain factors attributing to the changes in the ACL on loans held for investment for the three and nine months ended September 30, 2022 and September 30, 2021:

At September 30, 2022, the Company believes the ACL was adequate to cover current expected credit losses in the loan portfolio. However, 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 recognize changes to the ACL based on judgments different from those of management. 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.

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 loans held for investment in each of the loan categories listed for the periods indicated:


	September 30, 2022						December 31, 2021
(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	$	37,104	1.34	%	18.6	%	$	37,380	1.35	%	19.4	%
Multifamily	56,086		0.90	%	41.6	%	55,209		0.94	%	41.2	%
Construction and land	6,440		1.73	%	2.5	%	5,211		1.88	%	1.9	%
SBA secured by real estate	2,955		6.87	%	0.3	%	3,201		6.82	%	0.3	%
Total investor loans secured by real estate	102,585		1.09	%	63.0	%	101,001		1.12	%	62.8	%
Business loans secured by real estate
CRE owner-occupied	31,826		1.28	%	16.6	%	29,575		1.31	%	15.7	%
Franchise real estate secured	6,710		1.75	%	2.6	%	7,985		2.10	%	2.7	%
SBA secured by real estate	4,785		7.48	%	0.4	%	4,866		7.03	%	0.5	%
Total business loans secured by real estate	43,321		1.48	%	19.6	%	42,426		1.57	%	18.9	%
Commercial loans
Commercial and industrial	35,498		1.64	%	14.5	%	38,136		1.81	%	14.7	%
Franchise non-real estate secured	13,194		3.22	%	2.8	%	15,084		3.84	%	2.7	%
SBA non-real estate secured	440		3.81	%	0.1	%	565		5.12	%	0.1	%
Total commercial loans	49,132		1.90	%	17.4	%	53,785		2.15	%	17.5	%
Retail loans
Single family residential	296		0.39	%	0.5	%	255		0.27	%	0.7	%
Consumer loans	215		5.72	%	—	%	285		5.03	%	0.1	%
Total retail loans	511		0.65	%	0.5	%	540		0.53	%	0.8	%
Total (1)	$	195,549	1.31	%	100.0	%	$	197,752	1.38	%	100.0	%

______________________________

(1) Total loans utilized in the calculation of the ratio of ACL to total loans held for investment includes $68.1 million of the basis adjustment of certain loans included in fair value hedging relationships. Refer to Note 11 – Derivative Instruments for additional information.

At September 30, 2022, the ratio of ACL to loans held for investment was 1.31%, a decrease from 1.38% at December 31, 2021. Our unamortized fair value discount on the loans acquired totaled $59.0 million, or 0.39% of total loans held for investment, at September 30, 2022, compared to $77.1 million, or 0.54% of total loans held for investment, at December 31, 2021.

The following table sets forth the Company’s net charge-offs as a percentage to the average loan held for investment balances in each of the loan categories, as well as other credit related percentages at and for the periods indicated:


	Three Months Ended
	September 30, 2022					June 30, 2022					September 30, 2021
(Dollars in thousands)	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage
Investor loans secured by real estate
CRE non-owner-occupied	$	1,128	$	2,767,511	0.04%	$	—	$	2,777,618	—%	$	—	$	2,794,197	—%
Multifamily	—		6,201,458		—%	—		6,141,536		—%	—		5,562,699		—%
Construction and land	—		359,352		—%	—		310,035		—%	—		301,187		—%
SBA secured by real estate	—		43,336		—%	—		48,494		—%	158		54,254		0.29%
Total investor loans secured by real estate	1,128		9,371,657		0.01%	—		9,277,683		—%	158		8,712,337		—%
Business loans secured by real estate
CRE owner-occupied	(19)		2,491,146		—%	(4)		2,437,740		—%	(14)		2,139,455		—%
Franchise real estate secured	—		383,124		—%	—		385,198		—%	—		355,001		—%
SBA secured by real estate	—		69,205		—%	—		71,260		—%	(50)		75,928		(0.07)%
Total business loans secured by real estate	(19)		2,943,475		—%	(4)		2,894,198		—%	(64)		2,570,384		—%
Commercial loans
Commercial and industrial	47		2,222,550		—%	4,848		2,289,380		0.21%	(645)		1,819,372		(0.04)%
Franchise non-real estate secured	—		407,141		—%	448		405,681		0.11%	2,318		390,864		0.59%
SBA non-real estate secured	(26)		12,718		(0.20)%	(16)		13,396		(0.12)%	(15)		14,092		(0.11)%
Total commercial loans	21		2,642,409		—%	5,280		2,708,457		0.19%	1,658		2,224,328		0.07%
Retail loans
Single family residential	(58)		75,888		(0.08)%	(33)		79,071		(0.04)%	(2)		146,535		—%
Consumer	—		3,844		—%	2		4,518		0.04%	—		6,342		—%
Total retail loans	(58)		79,732		(0.07)%	(31)		83,589		(0.04)%	(2)		152,877		—%
Total (1)	$	1,072	$	14,986,332	0.01%	$	5,245	$	14,918,800	0.04%	$	1,750	$	13,659,926	0.01%

Allowance for credit losses to loans held for investment					1.31%					1.30%					1.51%
Nonperforming loans to loans held for investment					0.41%					0.30%					0.25%
Allowance for credit losses to nonperforming loans					323%					441%					603%

______________________________

(1) Average loan balance includes $50.9 million and $45.1 million of average basis adjustment of certain loans included in fair value hedging relationships for the three months ended September 30, 2022 and June 30, 2022, respectively. Refer to Note 11 – Derivative Instruments for additional information.



	For the Nine Months Ended
	September 30, 2022					September 30, 2021
(Dollars in thousands)	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage		Net Charge-offs (Recoveries)		Average Loan Balance		Percentage
Investor loans secured by real estate
CRE non-owner-occupied	$	1,128	$	2,767,770	0.04%		$	154	$	2,745,965	0.01%
Multifamily	—		6,083,095		—%		—		5,365,091		—%
Construction and land	—		321,860		—%		—		303,852		—%
SBA secured by real estate	70		45,733		0.15%		423		55,692		0.76%
Total investor loans secured by real estate	1,198		9,218,458		0.01%		577		8,470,600		0.01%
Business loans secured by real estate
CRE owner-occupied	(33)		2,399,142		—%		(44)		2,079,927		—%
Franchise real estate secured	—		383,570		—%		—		346,371		—%
SBA secured by real estate	—		71,863		—%		(32)		76,335		(0.04)%
Total business loans secured by real estate	(33)		2,854,575		—%		(76)		2,502,633		—%
Commercial loans
Commercial and industrial	5,233		2,222,749		0.24%		1,225		1,744,845		0.07%
Franchise non-real estate secured	448		400,780		0.11%		2,474		402,239		0.62%
SBA non-real estate secured	6		12,578		0.05%		(19)		14,765		(0.13)%

Total commercial loans	5,687		2,636,107		0.22%		3,680		2,161,849		0.17%
Retail loans
Single family residential	(91)		79,683		(0.11)%		(3)		183,973		—%
Consumer	2		4,399		0.05%		—		6,364		—%
Total retail loans	(89)		84,082		(0.11)%		(3)		190,337		—%
Total (1)	$	6,763	$	14,756,427	0.05%		$	4,178	$	13,325,419	0.03%

Allowance for credit losses to loans held for investment					1.31%						1.51%
Nonperforming loans to loans held for investment					0.41%						0.25%
Allowance for credit losses to nonperforming loans					323%						603%

______________________________

(1) Average loan balance includes $36.8 million of average basis adjustment of certain loans included in fair value hedging relationships for the nine months ended September 30, 2022. Refer to Note 11 – Derivative Instruments for additional information.

Investment Securities

We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled $4.05 billion at September 30, 2022, a decrease of $609.0 million, or 13.1%, from $4.66 billion at December 31, 2021, this decrease is primarily due to securities sales, the proceeds of which were utilized primarily to fund higher-yielding loan growth. The decrease in securities was primarily the result of $934.7 million in sales of AFS investment securities, $341.2 million in principal payments, discounts from the AFS securities transferred to HTM, amortizations, and redemptions, and $319.6 million decrease resulting from mark-to-market fair value adjustments, partially offset by $986.6 million in purchases, primarily collateralized mortgage obligations, U.S. Treasury, and corporate debt securities. In general, the purchase of investment securities is primarily related to investing excess liquidity from our banking operations. During the third quarter of 2022, we have maintained a portion of the AFS securities portfolio in highly-liquid, short-term securities while also continuing to lower the effective duration of this portfolio to 3.2 years at September 30, 2022 from 4.1 years at December 31, 2021. This strategy enhances our interest rate sensitivity profile to the current rate environment and provides us with the flexibility to quickly redeploy these funds into higher-yielding assets as opportunities arise.

At September 30, 2022, AFS and HTM investment securities were $2.66 billion and $1.39 billion, respectively, compared to $4.27 billion and $381.7 million, respectively, at December 31, 2021. Due to rising interest rates driven by the Federal Reserve’s policy to fight against inflation, the unrealized losses of AFS investment securities has increased during 2022.

During the third quarter of 2022, there was no investment securities transfer from AFS to HTM. During the first half of 2022, the Company transferred AFS securities of approximately $831.4 million of municipal bonds and $255.0 million of mortgage-backed securities, both of which the Company intends and has the ability to hold to maturity, to HTM securities. The transfer of these securities was accounted for at fair value on the transfer date. In total, the municipal bonds had a net carrying amount of $780.7 million with a pre-tax unrealized loss of $50.8 million, and the mortgage-backed securities had a net carrying amount of $238.8 million with a pre-tax unrealized loss of $16.2 million, both of which were reflected as discounts on the date of transfer. These discounts are accreted into interest income as yield adjustments 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 accretion of the discount. No gains or losses were recorded at the time of transfer. The AFS securities transferred to HTM were investment grade with no credit-related issues as of the transfer date. The transfer of AFS securities to HTM was part of our interest rate risk management strategy to limit future valuation changes resulting from interest rate increases. See Note 4 – Investment Securities to the consolidated financial statements in this Form 10-Q.

The ACL on investment securities is determined for both the AFS and HTM classifications of the investment portfolio in accordance with ASC 326 and evaluated on a quarterly basis. As of September 30, 2022 and December 31, 2021, the Company had an ACL of $91,000 and $22,000, respectively, for HTM investment securities classified as municipal bonds. The Company recognized $18,000 of provision recapture for HTM investment securities during the three months ended September 30, 2022, and $68,000 and $11,000 of provision for credit losses for HTM investment securities during the three months ended June 30, 2022 and September 30, 2021, respectively, and $69,000 and $11,000 during the nine months ended September 30, 2022 and September 30, 2021, respectively. The Company had no ACL for AFS investment securities at September 30, 2022 and December 31, 2021.

The following table sets forth the fair value of AFS and the amortized cost of HTM investment securities as well as the weighted average yields on our investment security portfolio by contractual maturity as of the date indicated. Weighted average yields are an arithmetic computation of income within each maturity range based on the amortized costs of securities, not on a tax-equivalent basis.


	September 30, 2022
	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)	Amount		Weighted Average Yield		Amount		Weighted Average Yield		Amount		Weighted Average Yield		Amount		Weighted Average Yield		Amount		Weighted Average Yield
Investment securities available-for-sale:
U.S. Treasury	$	9,639	3.72	%	$	24,226	3.94	%	$	12,909	1.33	%	$	—	—	%	$	46,774	3.10	%
Agency	25,329		3.10	%	298,271		1.02	%	79,143		1.34	%	28,120		1.49	%	430,863		1.23	%
Corporate	—		—	%	289,014		3.48	%	266,736		3.26	%	—		—	%	555,750		3.37	%

Collateralized mortgage obligations	34,426		3.32	%	68,834		3.26	%	192,325		2.22	%	495,530		2.95	%	791,115		2.81	%
Mortgage-backed securities	—		—	%	34,770		3.32	%	468,798		1.10	%	333,009		1.71	%	836,577		1.43	%
Total securities available-for-sale	69,394		3.30	%	715,115		2.44	%	1,019,911		1.90	%	856,659		2.42	%	2,661,079		2.21	%
HTM investment securities:
Municipal bonds	$	—	—	%	$	10,484	1.60	%	$	50,556	1.54	%	$	1,087,194	2.08	%	$	1,148,234	2.05	%
Mortgage-backed securities	—		—	%	—		—	%	—		—	%	235,937		1.75	%	235,937		1.75	%
Other	—		—	%	—		—	%	—		—	%	1,422		0.97	%	1,422		0.97	%
Total HTM investment securities	$	—	—	%	$	10,484	1.60	%	$	50,556	1.54	%	$	1,324,553	2.02	%	$	1,385,593	2.00	%
Total securities	$	69,394	3.30	%	$	725,599	2.43	%	$	1,070,467	1.88	%	$	2,181,212	2.18	%	$	4,046,672	2.14	%

The following table presents the fair value of AFS and the amortized cost of HTM investment securities portfolios by Moody’s credit ratings at September 30, 2022.


(Dollars in thousands)	U.S. Treasury		Agency		Corporate Debt		Municipal Bonds		Collateralized Mortgage Obligations		Mortgage-backed Securities		Other		Total		%
Aaa - Aa3	$	46,774	$	430,863	$	19,804	$	1,148,234	$	791,115	$	1,072,514	$	—	$	3,509,304	86.7	%
A1 - A3	—		—		343,219		—		—		—		—		343,219		8.5	%
Baa1 - Baa3	—		—		192,727		—		—		—		1,422		194,149		4.8	%
Total	$	46,774	$	430,863	$	555,750	$	1,148,234	$	791,115	$	1,072,514	$	1,422	$	4,046,672	100.0	%

At September 30, 2022, 95.2% of the Company’s investment securities portfolio was rated “A1 - A3” or higher. We continue to monitor the quality of our investment securities portfolio in accordance with current financial conditions and economic environment.

Liabilities and Stockholders’ Equity

Total liabilities were $18.88 billion at September 30, 2022, compared to $18.21 billion at December 31, 2021. The increase of $675.7 million, or 3.7%, from December 31, 2021 was primarily due to a $630.8 million increase in deposits, a $600.0 million increase in FHLB term advances, and a $2.4 million increase in other liabilities, partially offset by decreases of $550.0 million in FHLB overnight advances and $8.0 million in other short-term borrowings.

100

Deposits. At September 30, 2022, deposits totaled $17.75 billion, an increase of $630.8 million, or 3.7%, from $17.12 billion at December 31, 2021. The increase in deposits included $999.0 million in brokered certificates of deposit, $112.2 million in interest-bearing checking, and an increase of $18.2 million in noninterest-bearing checking, partially offset by a decrease of $312.7 million in money market/savings and $185.9 million in retail certificates of deposit. The addition of brokered certificates of deposit of varying maturities was a result of our interest rate risk management strategy to bolster our liquidity position and provide greater balance sheet flexibility.

The Company considers total deposits excluding all certificates of deposit and all brokered deposits as core deposits. At September 30, 2022, core deposits totaled $15.87 billion, or 89.5% of total deposits, a decrease of $176.8 million, or 1.1%, from December 31, 2021. The decrease compared to the prior year end was primarily due to the decrease in money market/savings, largely from retail and municipal deposits, partially offset by increases in interest-bearing checking and noninterest-bearing checking. Our core deposits reflect our relationship-focused business model that has resulted in 38.2% of noninterest-bearing checking deposits as a percent of total deposits. Given the rising interest rate environment, it is likely that the deposit costs will continue to increase and the deposit pricing impact may lead to deposit balance fluctuations.

Non-maturity deposits totaled $15.87 billion, or 89.5% of total deposits, a decrease of $182.4 million, or 1.1%, from $16.05 billion, or 93.8% of total deposits, at December 31, 2021.

The total end-of-period weighted average rate of deposits at September 30, 2022 was 0.37%, an increase from 0.04% at December 31, 2021, principally driven by the addition of brokered time deposits as part of our interest rate risk management strategy. While incorporating time deposits into our funding mix will increase our deposit costs in the near term, we believe that locking in this longer-term funding ahead of the Federal Reserve’s anticipated additional interest rate increases will provide more funding flexibility and help us control our overall funding costs going forward. The total end-of-period weighted average rate of core deposits at September 30, 2022 was 0.20%, compared to 0.03% at December 31, 2021.

Our ratio of loans held for investment to deposits was 84.0% and 83.6% at September 30, 2022 and December 31, 2021, respectively.

101

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, 2022						December 31, 2021
(Dollars in thousands)	Balance		% of Total Deposits		Weighted Average Rate		Balance		% of Total Deposits		Weighted Average Rate
Noninterest-bearing checking	$	6,775,465	38.2	%	—	%	$	6,757,259	39.5	%	—	%
Interest-bearing checking	3,605,498		20.3	%	0.30	%	3,493,331		20.4	%	0.02	%
Money market	5,061,027		28.5	%	0.41	%	5,381,615		31.4	%	0.07	%
Savings	432,931		2.5	%	0.03	%	419,558		2.5	%	0.02	%
Total core deposits	15,874,921		89.5	%	0.20	%	16,051,763		93.8	%	0.03	%

Brokered money market	30		—	%	0.05	%	5,553		—	%	0.06	%
Time deposit accounts:
Less than 1.00%	555,530		3.1	%	0.15	%	1,012,473		5.9	%	0.18	%
1.00 - 1.99	444,222		2.5	%	1.71	%	39,322		0.3	%	1.49	%
2.00 - 2.99	417,358		2.3	%	2.44	%	6,296		—	%	2.23	%
3.00 - 3.99	454,313		2.6	%	3.37	%	182		—	%	3.45	%
4.00 - 4.99	—		—	%	—	%	—		—	%	—	%
5.00 and greater	—		—	%	—	%	—		—	%	—	%
Total time deposit accounts	1,871,423		10.5	%	1.81	%	1,058,273		6.2	%	0.24	%
Total non-core deposits	1,871,453		10.5	%	1.81	%	1,063,826		6.2	%	0.24	%
Total deposits	$	17,746,374	100.0	%	0.37	%	$	17,115,589	100.0	%	0.04	%

The following table sets forth the estimated deposits exceeding the FDIC insurance limit:


(Dollars in thousands)	September 30, 2022		December 31, 2021
Uninsured deposits	$	6,168,635	$	6,220,802

The estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $297.0 million at September 30, 2022 and $357.1 million at December 31, 2021. The following table sets forth the maturity distribution of the estimated uninsured time deposits:


(Dollars in thousands)	September 30, 2022		December 31, 2021
3 months or less	$	124,538	$	297,595
Over 3 months through 6 months	137,876		28,187
Over 6 months through 12 months	27,248		23,051
Over 12 months	7,337		8,287
Total	$	296,999	$	357,120

Borrowings. At September 30, 2022, total borrowings amounted to $931.0 million, an increase of $42.5 million, or 4.8%, from $888.6 million at December 31, 2021. Total borrowings at September 30, 2022 were comprised of $600.0 million of FHLB term advances and $331.0 million of subordinated debentures. The increase in borrowings at September 30, 2022 as compared to December 31, 2021 was primarily due to an increase of $600.0 million in FHLB term advances, partially offset by a $550.0 million decrease in FHLB overnight advances and an $8.0 million decrease in other short-term borrowings. The increase in FHLB term advances was consistent with the Bank’s strategy to provide liquidity and reduce interest rate risk. At September 30, 2022, total borrowings represented 4.3% of total assets and had an end-of-period weighted average rate of 3.27%, compared with 4.2% of total assets and an end-of-period weighted average rate of 2.12% at December 31, 2021.

102

At September 30, 2022, total subordinated debentures 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 $59.8 million, net of unamortized debt issuance cost of $239,000. 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 $123.3 million, net of unamortized debt issuance cost of $1.7 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 $148.0 million, net of unamortized debt issuance cost of $2.0 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 debentures, see Note 8 – 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, 2022					December 31, 2021
(Dollars in thousands)	Balance			Weighted Average Rate		Balance			Weighted Average Rate
FHLB advances	$	600,000		2.15	%	$	550,000		0.20	%
Other borrowings	—			—	%	8,000			2.15	%
Subordinated debentures	331,045			5.32	%	330,567			5.33	%
Total borrowings	$	931,045		3.27	%	$	888,567		2.12	%

Weighted average cost of borrowings during the quarter	3.31		%			4.59		%
Borrowings as a percent of total assets	4.3		%			4.2		%

Stockholders’ Equity. Total stockholders’ equity was $2.74 billion as of September 30, 2022, a $150.9 million decrease from $2.89 billion at December 31, 2021. The decrease in stockholders’ equity was primarily due to $273.3 million in comprehensive loss from the impact of higher interest rates on our AFS securities portfolio, and $93.8 million in cash dividends, partially offset by $210.1 million net income.

Our book value per share decreased to $28.79 at September 30, 2022 from $30.58 at December 31, 2021. At September 30, 2022, the Company’s tangible common equity to tangible assets ratio was 8.59%, a decrease from 9.52% at December 31, 2021. Our tangible book value per share was $18.68, compared to $20.29 at December 31, 2021. The decreases in the ratio of tangible common equity to tangible assets and tangible book value per share at September 30, 2022 from the prior year-end were primarily driven by the other comprehensive loss from the impact of higher interest rates on our AFS securities portfolio. For additional details, see “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.

103

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, to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit, and payment of operating expenses. 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 market 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 2022 were from:

•Principal payments on loans held for investment of $1.97 billion;

•Proceeds of $1.20 billion from the sale, payments, or maturity of securities;

•Deposit growth of $630.8 million; and

•Increased FHLB advances and other borrowings of $42.0 million.

We used these funds to:

•Originate loans held for investment of $2.58 billion;

•Purchase AFS securities of $987.0 million;

•Return capital to shareholders through $93.8 million in dividends; and

•Originate loans held for sale of $57.7 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. We endeavor to take a prudent, proactive approach to liquidity management, as evidenced by our balance-sheet-oriented initiatives throughout 2022. At September 30, 2022, cash and cash equivalents totaled $739.2 million. If additional liquidity is needed or otherwise desired as part of our liquidity management strategy, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve Board’s lending programs, brokered deposits, as well as loan and investment securities sales. As of September 30, 2022, the Bank had secured borrowing capacity with FHLB of $6.83 billion, of which $5.55 billion was remaining available for borrowing, based on collateral pledged of $8.84 billion at carrying value in qualifying loans. At September 30, 2022, we had $600.0 million in FHLB term borrowings. At September 30, 2022, we also had a $192,000 line with the FRB discount window secured by investment securities, as well as unsecured lines of credit aggregating to $330.0 million with other correspondent banks from which to purchase federal funds, and AFS investment securities with the aggregate market value of $2.66 billion. As of September 30, 2022, our liquidity ratio was 17.8%, 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 2022 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.

The Bank maintains liquidity guidelines in the Company’s Liquidity Policy that permits the purchase of brokered deposit funds, in an amount not to exceed 10% of total deposits or 8% of total assets, as a secondary source for funding. At September 30, 2022, we had $999.0 million in brokered deposits, which constituted 5.63% of total deposits and 4.62% of total assets at that date. During the three and nine months ended September 30, 2022, the Bank added approximately $400.0 million and $1.00 billion, respectively, in brokered certificates of deposit as part of the interest rate risk management strategy to bolster our liquidity position and provide greater balance sheet flexibility.

104

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, 2022, the Bank paid $93.8 million in dividends to the Corporation.

The Corporation maintains a line of credit of $25.0 million with U.S. Bank that will expire on September 26, 2023. The Corporation anticipates renewing the line of credit upon expiration. This line of credit provides an additional source of liquidity at the Corporation level. At September 30, 2022, the Corporation had no outstanding balances against this line.

During the each of the first three quarters of 2022, the Corporation declared a quarterly dividend payment of $0.33 per share. On October 19, 2022, the Company's Board of Directors declared a $0.33 per share dividend, payable on November 10, 2022 to stockholders of record as of October 31, 2022. 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 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 nine months ended September 30, 2022, the Company did not repurchase any shares of common stock. See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for additional information.

Our material cash requirements may include funding existing loan commitments, funding equity investments and affordable housing partnerships for LIHTC, withdrawal/maturity of existing deposits, repayment of borrowings, operating lease payments, and expenditures necessary to maintain current operations.

The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and to meet required capital needs. The following schedule summarizes maturities and principal payments due on our contractual obligations, excluding accrued interest:


	September 30, 2022
(Dollars in thousands)	Less than 1 year		More than 1 year		Total

FHLB advances and other borrowings	$	200,000	$	400,000	$	600,000
Subordinated debentures	—		331,045		331,045
Certificates of deposit	1,466,493		404,930		1,871,423
Operating leases	19,746		49,324		69,070
Affordable housing partnerships commitment	6,914		8,595		15,509
Total contractual cash obligations	$	1,693,153	$	1,193,894	$	2,887,047

We believe that the Company’s liquidity sources will be sufficient to meet the contractual obligations as they become due through the maintenance of adequate liquidity levels.

105

In the ordinary course of business, we enter into various transactions to meet the financing needs of our customers which, in accordance with GAAP, are not included in our consolidated balance sheets. These transactions include off-balance sheet commitments, including commitments to extend credit and standby letters of credit, and commitments to fund investments that qualify for CRA credit. The following table presents a summary of the Company’s commitments to extend credit by expiration period:


	September 30, 2022
(Dollars in thousands)	Less than 1 year		More than 1 year		Total
Loan commitments to extend credit	$	1,359,644	$	1,421,109	$	2,780,753
Standby letters of credit	42,802		—		42,802
Total	$	1,402,446	$	1,421,109	$	2,823,555

Since many commitments to extend credit are expected to expire, the total commitment amounts do not necessarily represent future cash requirements. For further information, see Note 15 - Off-Balance Sheet Arrangements, Commitments, and Contingencies, to the consolidated financial statements of the Company’s 2021 Form 10-K.

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 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. 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, 2022, 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. The regulatory capital ratios of the Company and Bank further strengthened at September 30, 2022 compared to the capital ratios at December 31, 2021.

106

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 the 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 into regulatory capital at 25% per year over a three-year transition period. The final rule was adopted and became effective in September 2020. 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. This cumulative difference at the end of 2021 will be phased in regulatory capital over the three-year period from January 1, 2022 through December 31, 2024.

For regulatory capital purposes, the Corporation’s subordinated debt is included in Tier 2 capital, the eligible amount of which is phased out by 20% of the original amount at the beginning of each of the last five year before maturity. See Note 8 – 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, 2022
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio	10.12%	4.00%	N/A
Common equity tier 1 capital ratio	12.36%	7.00%	N/A
Tier 1 capital ratio	12.36%	8.50%	N/A
Total capital ratio	14.83%	10.50%	N/A

Pacific Premier Bank
Tier 1 leverage ratio	11.64%	4.00%	5.00%
Common equity tier 1 capital ratio	14.23%	7.00%	6.50%
Tier 1 capital ratio	14.23%	8.50%	8.00%
Total capital ratio	15.05%	10.50%	10.00%

107


	Actual	Minimum Required for Capital Adequacy Purposes Inclusive of Capital Conservation Buffer	Minimum Required For Well Capitalized Requirement
December 31, 2021
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio	10.08%	4.00%	N/A
Common equity tier 1 capital ratio	12.11%	7.00%	N/A
Tier 1 capital ratio	12.11%	8.50%	N/A
Total capital ratio	14.62%	10.50%	N/A

Pacific Premier Bank
Tier 1 leverage ratio	11.62%	4.00%	5.00%
Common equity tier 1 capital ratio	13.96%	7.00%	6.50%
Tier 1 capital ratio	13.96%	8.50%	8.00%
Total capital ratio	14.70%	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. 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 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. 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 repricing 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, 2022 and December 31, 2021, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:


September 30, 2022
(Dollars in thousands)
	Earnings at Risk				Projected Net Interest Margin
Change in Rates (Basis Points)	$ Amount	$ Change	% Change		Rate %
200	814,797	23,841	3.0	%	4.18	%
100	803,665	12,709	1.6	%	4.12	%
Static	790,956	—	—	%	4.06	%
-100	775,816	(15,140)	(1.9)	%	3.98	%
-200	745,052	(45,904)	(5.8)	%	3.82	%


December 31, 2021
(Dollars in thousands)
	Earnings at Risk				Projected Net Interest Margin
Change in Rates (Basis Points)	$ Amount	$ Change	% Change		Rate %
200	683,485	19,799	3.0	%	3.60	%
100	672,776	9,090	1.4	%	3.55	%
Static	663,686	—	—	%	3.50	%
-100	641,475	(22,211)	(3.3)	%	3.38	%
-200	608,007	(55,679)	(8.4)	%	3.21	%

The following table shows the EVE and projected change in the EVE of the Company at September 30, 2022 and December 31, 2021, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:


September 30, 2022
(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	3,954,547	42,786	1.1	%	21.59	%
100	3,948,802	37,041	0.9	%	20.95	%
Static	3,911,761	—	—	%	20.16	%
-100	3,789,614	(122,147)	(3.1)	%	18.98	%
-200	3,510,712	(401,049)	(10.3)	%	17.11	%

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December 31, 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	3,146,242	169,608	5.7	%	16.75	%
100	3,088,311	111,677	3.8	%	15.90	%
Static	2,976,634	—	—	%	14.82	%
-100	2,774,297	(202,337)	(6.8)	%	13.37	%
-200	2,349,722	(626,912)	(21.1)	%	10.99	%

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 moderate for rising rates, aided by the addition of interest rate swaps for hedging purposes. 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, 2022 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 2021 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 2021 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 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 2022, the Company did not repurchase any shares of common stock.

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 2022.


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, 2022 to July 31, 2022	—	$	—	—	4,245,056
August 1, 2022 to August 31, 2022	—	—		—	4,245,056
September 1, 2022 to September 30, 2022	—	—		—	4,245,056
Total	—			—

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						Agreement and Plan of Reorganization, dated as of January 31, 2020 by and between Pacific Premier Bancorp, Inc., Pacific Premier Bank and Opus Bank (1)
Exhibit 3.1						Second Amended and Restated Certificate of Incorporation of Pacific Premier Bancorp, Inc. (2)
Exhibit 3.2						Amended and Restated Bylaws of Pacific Premier Bancorp, Inc. (2)
Exhibit 4.1						Specimen Stock Certificate of Pacific Premier Bancorp, Inc. (3)
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 31.1						Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 31.2						Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 32						Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
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, 2022, 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 May 24, 2022.

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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 4, 2022	By:	/s/ Steven R. Gardner
			Steven R. Gardner
			Chairman, Chief Executive Officer, and President
			(Principal Executive Officer)

Date:	November 4, 2022	By:	/s/ Ronald J. Nicolas, Jr.
			Ronald J. Nicolas, Jr.
			Senior Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

114