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 March 31, 2022

OR 

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from _______ to _______ 

Commission File Number 0-22193

 

(Exact name of registrant as specified in its charter) 

Delaware			33-0743196
(State or other jurisdiction of incorporation or organization)			(I.R.S Employer Identification No.)

 

17901 Von Karman Avenue, Suite 1200, Irvine, California 92614

(Address of principal executive offices and zip code)

(949) 864-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer (Do not check if a smaller reporting company)

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

PPBI

NASDAQ Global Select Market

The number of shares outstanding of the registrant’s common stock as of April 29, 2022 was 94,930,357.

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

FOR THE QUARTER ENDED MARCH 31, 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)			7
Notes to Consolidated Financial Statements (Unaudited)			8
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			67
Item 3 - Quantitative and Qualitative Disclosures About Market Risk			104
Item 4 - Controls and Procedures			106
PART II - OTHER INFORMATION			107
Item 1 - Legal Proceedings			107
Item 1A - Risk Factors			107
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			107
Item 3 - Defaults Upon Senior Securities			107
Item 4 - Mine Safety Disclosures			107
Item 5 - Other Information			107
Item 6 - Exhibits			108
SIGNATURE			109

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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)						March 31, 2022						December 31, 2021
ASSETS
Cash and due from banks						$	147,763					$	83,150
Interest-bearing deposits with financial institutions						661,496						221,553
Cash and cash equivalents						809,259						304,703
Interest-bearing time deposits with financial institutions						2,216						2,216
Investments held-to-maturity, at amortized cost, net of allowance for credit losses of $41 and $22 (fair value of $886,050 and $384,423) at March 31, 2022 and December 31, 2021, respectively						996,382						381,674
Investment securities available-for-sale, at fair value						3,222,095						4,273,864
FHLB, FRB, and other stock, at cost						116,973						117,538
Loans held for sale, at lower of cost or fair value						11,646						10,869
Loans held for investment						14,733,755						14,295,897
Allowance for credit losses						(197,517)						(197,752)
Loans held for investment, net						14,536,238						14,098,145
Accrued interest receivable						60,922						65,728
Premises and equipment						70,453						71,908
Deferred income taxes, net						133,938						87,344
Bank owned life insurance						451,968						449,353
Intangible assets						65,978						69,571
Goodwill						901,312						901,312
Other assets						242,916						260,204
Total assets						$	21,622,296					$	21,094,429
LIABILITIES
Deposit accounts:
Noninterest-bearing checking						$	7,106,548					$	6,757,259
Interest-bearing:
Checking						3,679,067						3,493,331
Money market/savings						5,872,597						5,806,726
Retail certificates of deposit						1,031,011						1,058,273
Total interest-bearing						10,582,675						10,358,330
Total deposits						17,689,223						17,115,589
FHLB advances and other borrowings						600,000						558,000
Subordinated debentures						330,726						330,567
Accrued expenses and other liabilities						219,329						203,962
Total liabilities						18,839,278						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 March 31, 2022 and December 31, 2021; 94,945,849 shares and 94,389,543 shares issued and outstanding, respectively						933						929
Additional paid-in capital						2,348,727						2,351,294
Retained earnings						577,591						541,950
Accumulated other comprehensive loss						(144,233)						(7,862)
Total stockholders’ equity						2,783,018						2,886,311
Total liabilities and stockholders’ equity						$	21,622,296					$	21,094,429

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

						Three Months Ended
						March 31,						December 31,						March 31,
(Dollars in thousands, except share data)						2022						2021						2021
INTEREST INCOME
Loans						$	150,604					$	157,418					$	155,225
Investment securities and other interest-earning assets						17,942						19,588						17,769
Total interest income						168,546						177,006						172,994
INTEREST EXPENSE
Deposits						1,673						1,694						4,426
FHLB advances and other borrowings						474						33						65
Subordinated debentures						4,560						4,560						6,851
Total interest expense						6,707						6,287						11,342
Net interest income before provision for credit losses						161,839						170,719						161,652
Provision for credit losses						448						(14,648)						1,974
Net interest income after provision for credit losses						161,391						185,367						159,678
NONINTEREST INCOME
Loan servicing income						419						505						458
Service charges on deposit accounts						2,615						2,590						2,032
Other service fee income						367						391						473
Debit card interchange fee income						836						769						787
Earnings on bank owned life insurance						3,221						3,521						2,233
Net gain from sales of loans						1,494						1,334						361
Net gain from sales of investment securities						2,134						3,585						4,046
Trust custodial account fees						11,579						11,611						7,222
Escrow and exchange fees						1,661						2,221						1,526
Other income						1,568						754						4,602
Total noninterest income						25,894						27,281						23,740
NONINTEREST EXPENSE
Compensation and benefits						56,981						56,076						52,548
Premises and occupancy						11,952						11,403						11,980
Data processing						5,996						5,881						5,828
FDIC insurance premiums						1,396						1,389						1,181
Legal and professional services						4,068						5,870						3,935
Marketing expense						1,809						1,821						1,598
Office expense						1,203						1,463						1,829
Loan expense						1,134						857						1,115
Deposit expense						3,751						3,836						3,859
Merger-related expense						—						—						5
Amortization of intangible assets						3,592						3,880						4,143
Other expense						5,766						4,776						4,468
Total noninterest expense						97,648						97,252						92,489
Net income before income taxes						89,637						115,396						90,929
Income tax expense						22,733						30,565						22,261
Net income						$	66,904					$	84,831					$	68,668
EARNINGS PER SHARE
Basic						$	0.71					$	0.90					$	0.73
Diluted						0.70						0.89						0.72
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic						93,499,695						93,415,304						93,529,147
Diluted						93,946,074						93,906,491						94,093,644

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

						Three Months Ended
						March 31,						December 31,						March 31,
(Dollars in thousands)						2022						2021						2021
Net income						$	66,904					$	84,831					$	68,668
Other comprehensive loss, net of tax:
Unrealized loss on securities available-for-sale arising during the period, net of income taxes (1)						(118,591)						(4,176)						(72,592)
Reclassification adjustment for net gain on sales of securities included in net income, net of income taxes (2)						(1,525)						(2,562)						(2,889)
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (3)						(16,558)						(2,415)						—
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (4)						303						115						—
Other comprehensive loss, net of tax						(136,371)						(9,038)						(75,481)
Comprehensive (loss) income, net of tax						$	(69,467)					$	75,793					$	(6,813)

______________________________

(1) Income tax (benefit) of the unrealized loss on securities was $(47.4) million, $(1.7) million, and $(29.1) million for the three months ended March 31, 2022, December 31, 2021, and March 31, 2021, respectively.

(2) Income tax expense on the reclassification adjustment for net gain on sales of securities included in net income was $609,000, $1.0 million, and $1.2 million for the three months ended March 31, 2022, December 31, 2021, and March 31, 2021, respective.

(3) Income tax (benefit) on the unrealized loss on securities transferred from available-for-sale to held-to maturity was $(6.6) million and $(968,000) for the three months ended March 31, 2022 and December 31, 2021, respectively.

(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 $121,000 and $46,000 for the three months ended March 31, 2022 and December 31, 2021, respectively.

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021

(Unaudited)

(Dollars in thousands, except share data)			Common Stock Shares						Common Stock						Additional Paid-in Capital						Accumulated Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total Stockholders’ Equity
Balance at December 31, 2021			94,389,543						$	929					$	2,351,294					$	541,950					$	(7,862)					$	2,886,311
Net income			—						—						—						66,904						—						66,904
Other comprehensive loss			—						—						—						—						(136,371)						(136,371)
Cash dividends declared ($0.33 per common share)			—						—						—						(31,142)						—						(31,142)
Dividend equivalents declared ($0.33 per restricted stock unit)			—						—						121						(121)						—						—
Share-based compensation expense			—						—						5,530						—						—						5,530
Issuance of restricted stock, net			714,783						4						(4)						—						—						—
Restricted stock surrendered and canceled			(175,219)						—						(8,548)						—						—						(8,548)
Exercise of stock options			16,742						—						334						—						—						334
Balance at March 31, 2022			94,945,849						$	933					$	2,348,727					$	577,591					$	(144,233)					$	2,783,018

Balance at December 31, 2020			94,483,136						$	931					$	2,354,871					$	330,555					$	60,292					$	2,746,649
Net loss			—						—						—						68,668						—						68,668
Other comprehensive loss			—						—						—						—						(75,481)						(75,481)
Repurchase and retirement of common stock			(199,674)						(2)						(4,977)						(1,918)						—						(6,897)
Cash dividends declared ($0.30 per common share)			—						—						—						(28,287)						—						(28,287)
Dividend equivalents declared ($0.30 per restricted stock unit)			—						—						107						(107)						—						—
Share-based compensation expense			—						—						3,105						—						—						3,105
Issuance of restricted stock, net			419,757						2						(2)						—						—						—
Restricted stock surrendered and canceled			(100,550)						—						(5,279)						—						—						(5,279)
Exercise of stock options			41,746						—						620						—						—						620
Balance at March 31, 2021			94,644,415						$	931					$	2,348,445					$	368,911					$	(15,189)					$	2,703,098

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

						Three Months Ended
						March 31,						March 31,
(Dollars in thousands)						2022						2021
Cash flows from operating activities:
Net income						$	66,904					$	68,668
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense						3,726						4,009
Provision for credit losses						448						1,974
Share-based compensation expense						5,530						3,105
Loss on sales and disposals of premises and equipment						37						7
Net amortization on securities						5,023						5,983
Net (accretion) of discounts/premiums for acquired loans and deferred loan fees/costs						(7,353)						(10,833)
Gain on sales of investment securities available-for-sale						(2,134)						(4,046)
Loss on debt extinguishment						—						503
Gain on sales of loans						(1,494)						(361)
Deferred income tax expense						7,887						14,650
Income from bank owned life insurance, net						(2,617)						(1,675)
Amortization of intangible assets						3,592						4,143
Originations of loans held-for-sale						(18,769)						(7,768)
Proceeds from the sales of and principal payments from loans held-for-sale						19,486						970
Change in accrued expenses and other liabilities, net						15,207						(34,203)
Change in accrued interest receivable and other assets, net						36,904						60,176
Net cash provided by operating activities						132,377						105,302
Cash flows from investing activities:
Net decrease in interest-bearing time deposits with financial institutions						—						137
Loan originations and payments, net						(430,951)						128,540
Proceeds from loans held-for-sale previously classified as portfolio loans						—						449
Proceeds from prepayments and maturities of securities held-to-maturity						3,750						1,807
Purchase of securities available-for-sale						(499,168)						(364,542)
Proceeds from prepayments and maturities of securities available-for-sale						77,817						162,568
Proceeds from sales of securities available-for-sale						647,557						179,386
Proceeds from the sales of premises and equipment						—						4
Proceeds from surrender of bank owned life insurance						—						1,307
Purchase of premises and equipment						(2,308)						(1,465)
Change in FHLB, FRB, and other stock, at cost						(95)						(202)
Funding of CRA investments, net						(701)						(3,873)
Net cash (used in) provided by investing activities						(204,099)						104,116
Cash flows from financing activities:
Net increase in deposit accounts						573,634						525,830
Net change in short-term borrowings						(358,000)						—
Proceeds from long-term borrowings						400,000						—
Repayments of long-term borrowings						—						(21,503)
Cash dividends paid						(31,142)						(28,287)
Repurchase and retirement of common stock						—						(6,897)
Proceeds from exercise of stock options						334						620
Restricted stock surrendered and canceled						(8,548)						(5,279)
Net cash provided by financing activities						576,278						464,484
Net increase in cash and cash equivalents						504,556						673,902
Cash and cash equivalents, beginning of period						304,703						880,766
Cash and cash equivalents, end of period						$	809,259					$	1,554,668
Supplemental cash flow disclosures:
Interest paid						$	3,927					$	10,890
Income taxes (refunded) paid, net						(11,944)						77
Noncash investing activities during the period:
Transfers of investment securities from available-for-sale to held-to-maturity						618,678						—
Recognition of operating lease right-of-use assets						(459)						—
Recognition of operating lease liabilities						459						—
Receivable on unsettled security sales						13,464						—
Due on unsettled security purchases						—						(11,286)

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 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 months ended March 31, 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 15 – Variable Interest Entities for additional information.

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Note 2 – Recently Issued Accounting Pronouncements

 

Recent Accounting Guidance Not Yet Effective

In March 2022, the 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 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 (“TDRs”), 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.

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.

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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 became effective upon issuance for all entities.

An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment.

An entity may elect to apply the amendments in this Update to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has not entered into any hedging related transactions that reference LIBOR or another reference rate that is expected to be discontinued, and as such, the amendments included in this Update have not had an impact on the Company’s Consolidated Financial Statements.

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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.

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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. The ACL for investment securities is evaluated 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, such as those guaranteed by the U.S. government or other government enterprises, a zero credit loss assumption is applied.

For available-for-sale investment securities, the Company performs a 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, through 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.

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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 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 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 expected life of the loans. Amortization of deferred loan fees and costs 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 loan interest income in the period of payoff. Loan commitment fees received to originate or purchase a loan are deferred and, if the commitment is exercised, recognized over the life of the loan using the interest method as an adjustment of yield or, if the commitment expires unexercised, recognized as income upon expiration of the commitment.

The Company accrues interest on loans using the interest method and only if deemed collectible. Loans for which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on 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 as such an ACL for accrued interest receivable is not established. Interest income generally is not recognized on nonaccrual loans unless the likelihood of further loss is remote. Interest payments received on nonaccrual loans are applied as a reduction to the loan principal balance. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are 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.

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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 periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not limited to factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization-specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through 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.

Although management uses the best information available to derive estimates necessary to measure an appropriate level of the ACL, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit review process.

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.

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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 March 31, 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.

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•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.

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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.

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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 assets for specific risks, such as interest rate risk resulting from changes in a benchmark interest rate. In a qualifying fair value hedge, the Company records periodic changes in the fair value of the derivative instrument in current period earnings. Simultaneously, periodic changes in the fair value of the hedged risk are also recorded in current period earnings. Together, these periodic changes in the fair value of the derivative instrument and the fair value of the hedged risk are included in the same line item of the statements of income associated with the hedged item (i.e. interest income), and largely offset each other. Interest accruals on both the derivative instrument and the hedged item are also recorded in the same line item, which effectively converts the designated fixed-rate assets to floating-rate assets. The Company structures these swaps to match the critical terms of the hedged items (i.e. fixed-rate loans), thereby maximizing the economic and accounting effectiveness of the hedging relationships and resulting in the expectation that the hedging relationship will be highly effective. If a fair value hedging relationship ceases to qualify for hedge accounting, hedge accounting is discontinued and future changes in the fair value of the derivative instrument are recognized in current period earnings, until the derivative is settled with the counterparty. In addition, all remaining basis adjustments resulting from periodic changes in the fair value of the hedged risk, previously recorded to the carrying amount of the hedged item, are amortized or accreted into interest income using the interest method over the remaining life of the hedged item.

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Leases. The Company accounts for its leases in accordance with ASC 842, which requires the Company to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased asset. Leases with a term of 12 months or less are accounted for using straight-line expense recognition with no right-of-use asset being recorded for such leases. Other than short-term leases, the Company classifies its leases as either finance leases or operating leases. Leases are classified as finance leases when any of the following are met: (a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (b) the lease contains an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (c) the term of the lease represents a major part of the remaining life of the underlying asset, (d) the present value of the future lease payments equals or exceeds substantially all of the fair value of the underlying asset, or (e) the underling leased asset is expected to have no alternative use to the lessor at the end of the lease term due to its specialized nature. When the Company’s assessment of a lease does not meet the foregoing criteria, and the term of the lease is in excess of 12 months, the lease is classified as an operating lease.

Liabilities to make lease payments and right-of-use assets are determined based on the total contractual rents for each lease, discounted at the rate implicit in the lease or at the Company’s estimated incremental borrowing rate if the rate is not implicit in the lease. The Company measures future base rents based on the minimum payments specified in the lease agreement, giving consideration for periodic contractual rent increases which are based on an escalation rate or a specified index. When future rent payments are based on an index, the Company uses the index rate observed at the time of lease commencement to measure future lease payments. Liabilities to make 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 March 31, 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.

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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.

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 market-based restricted stock units 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. Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income 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 or loss. Total comprehensive income (loss) and the components of accumulated other comprehensive income or 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.

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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:
March 31, 2022
U.S. Treasury						$	14,930																	$	—					$	(940)											$	13,990
Agency						406,654																		—						(30,877)												375,777
Corporate debt						612,647																		702						(18,284)												595,065
Municipal bonds						445,537																		58						(30,311)												415,284
Collateralized mortgage obligations						874,382																		1,606						(20,732)												855,256
Mortgage-backed securities						1,040,774																		1						(74,052)												966,723
Total AFS investment securities						$	3,394,924																	$	2,367					$	(175,196)											$	3,222,095

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:
March 31, 2022
Municipal bonds						$	747,887					$	(41)					$	747,846					$	—					$	(101,757)					$	646,089
Mortgage-backed securities						247,050						—						247,050						96						(8,671)						238,475
Other						1,486						—						1,486						—						—						1,486
Total HTM investment securities						$	996,423					$	(41)					$	996,382					$	96					$	(110,428)					$	886,050

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

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The Company reassesses classification of certain investments as part of the ongoing review of the investment securities portfolio. During the first quarter of 2022, the Company transferred approximately $386.8 million of municipal bonds and $255.0 million of mortgage-backed securities with longer durations, both of which the Company intends and has the ability to hold to maturity, from AFS to HTM securities. The transfer of these securities was accounted for at fair value. The municipal bonds had a net carrying amount of $379.9 million with a pre-tax unrealized loss of $6.9 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 unrealized losses were reflected as discounts on the date of transfer. These discounts, as well as the related unrealized losses in accumulated other comprehensive income, will be amortized 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 will offset the effect on interest income of the amortization of the discounts. No gains or losses were recorded at the time of transfer.

Investment securities with carrying values of $56.5 million and $130.7 million as of March 31, 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 March 31, 2022, the Company had an unrealized loss of $172.8 million, or $123.5 million net of tax in accumulated other comprehensive loss, compared to an 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 March 31, 2022, the unrealized loss on investment securities transferred from AFS to HTM that were included in accumulated other comprehensive loss was $20.8 million net of tax.

    

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.

			March 31, 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			1						$	13,990					$	(940)					—						$	—					$	—					1						$	13,990					$	(940)
Agency			9						72,300						(6,489)						26						303,476						(24,388)						35						375,776						(30,877)
Corporate debt			44						449,423						(10,400)						3						52,241						(7,884)						47						501,664						(18,284)
Municipal bonds			85						397,687						(30,158)						1						1,444						(153)						86						399,131						(30,311)
Collateralized mortgage obligations			32						320,962						(10,317)						23						165,246						(10,415)						55						486,208						(20,732)
Mortgage-backed securities.			71						880,417						(66,282)						9						86,208						(7,770)						80						966,625						(74,052)
Total AFS investment securities			242						$	2,134,779					$	(124,586)					62						$	608,615					$	(50,610)					304						$	2,743,394					$	(175,196)

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			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 March 31, 2022, the Company had an ACL of $41,000 for HTM investment securities classified as municipal bonds. These securities were transferred from AFS to HTM during the third and fourth quarters of 2021 and first quarter of 2022. The Company had an ACL of $22,000 for HTM investment securities at December 31, 2021. The Company recognized $19,000 and $11,000 of provision for credit losses for HTM investment securities during the three months ended March 31, 2022 and December 31, 2021, respectively. There was no provision for credit losses recognized for HTM investment securities during the three months ended March 31, 2021.

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 March 31, 2022
(Dollars in thousands)			Balance, December 31, 2021												Provision for Credit Losses																								Balance, March 31, 2022
HTM investment securities:
Municipal bonds			$	22											$	19																							$	41

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The Company had no ACL for AFS investment securities at March 31, 2022 and December 31, 2021. The Company performed a qualitative assessment of these investments as of March 31, 2022 and determined that the increase in unrealized losses was primarily the result of changes in interest rates with inflationary pressure driven by the Federal Reserve’s policy along with recent geopolitical developments, and does not believe the declines in fair value were credit related. As of March 31, 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 March 31, 2022, December 31, 2021, or March 31, 2021.

At March 31, 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 March 31, 2022 and December 31, 2021, there were no securities purchased with deterioration in credit quality since their origination. At March 31, 2022 and December 31, 2021, there were no collateral dependent AFS or HTM securities.

    The following table summarizes the Company’s investment securities portfolio by Moody’s external rating equivalent and by vintage as of March 31, 2022:

			Vintage
(Dollars in thousands)			2022						2021						2020						2019						2018						Prior						Total
AFS Investment securities at fair value:
U.S. Treasury
Aaa - Aa3			$	—					$	13,990					$	—					$	—					$	—					$	—					$	13,990
Agency
Aaa - Aa3			—						22,827						282,195						23,967						33,635						6,603						369,227
Baa1 - Baa3			—						—						—						—						—						6,550						6,550
Corporate debt
Aaa - Aa3			39,946						—						—						—						—						—						39,946
A1 - A3			74,565						203,779						62,222						—						—						—						340,566
Baa1 - Baa3			34,267						52,711						92,122						25,664						—						9,789						214,553
Municipal bonds
Aaa - Aa3			—						43,333						222,497						136,748						—						12,706						415,284
Collateralized mortgage obligations
Aaa - Aa3			173,442						260,990						229,588						74,720						14,839						101,677						855,256
Mortgage-backed securities
Aaa - Aa3			19,610						772,190						113,748						58,778						—						2,397						966,723
Total AFS investment securities			341,830						1,369,820						1,002,372						319,877						48,474						139,722						3,222,095
HTM investment securities at amortized cost:
Municipal bonds
Aaa - Aa3			—						116,523						622,498						8,866						—						—						747,887
Mortgage-backed securities
Aaa - Aa3			—						135,396						101,116						—						2,942						7,596						247,050
Other
Baa1 - Baa3			—						—						—						—						582						904						1,486
Total HTM investment securities			—						251,919						723,614						8,866						3,524						8,500						996,423
Total investment securities			$	341,830					$	1,621,739					$	1,725,986					$	328,743					$	51,998					$	148,222					$	4,218,518

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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 gains for the periods indicated:

						Three Months Ended
						March 31,						December 31,						March 31,
(Dollars in thousands)						2022						2021						2021
Amortized cost of AFS investment securities sold						$	658,505					$	267,114					$	172,320
Gross realized gains						$	13,637					$	4,723					$	4,237
Gross realized losses						(11,503)						(1,138)						(191)
Net realized gains on sales of AFS investment securities						$	2,134					$	3,585					$	4,046

Contractual maturities

The amortized cost and estimated fair value of investment securities at March 31, 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			$	—					$	—					$	—					$	—					$	14,930					$	13,990					$	—					$	—					$	14,930					$	13,990
Agency			—						—						271,342						254,013						97,419						88,539						37,893						33,225						406,654						375,777
Corporate debt			—						—						192,589						190,794						405,058						389,354						15,000						14,917						612,647						595,065
Municipal bonds			—						—						—						—						18,061						16,806						427,476						398,478						445,537						415,284
Collateralized mortgage obligations			—						—						36,738						36,544						243,674						231,495						593,970						587,217						874,382						855,256
Mortgage-backed securities			—						—						—						—						612,287						572,033						428,487						394,690						1,040,774						966,723
Total AFS investment securities			—						—						500,669						481,351						1,391,429						1,312,217						1,502,826						1,428,527						3,394,924						3,222,095
HTM investment securities:
Municipal bonds			—						—						—						—						44,774						42,509						703,113						603,580						747,887						646,089
Mortgage-backed securities			—						—						—						—						—						—						247,050						238,475						247,050						238,475
Other			—						—						—						—						—						—						1,486						1,486						1,486						1,486
Total HTM investment securities			—						—						—						—						44,774						42,509						951,649						843,541						996,423						886,050
Total investment securities			$	—					$	—					$	500,669					$	481,351					$	1,436,203					$	1,354,726					$	2,454,475					$	2,272,068					$	4,391,347					$	4,108,145

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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 March 31, 2022, the Company had $17.3 million in FHLB stock, $74.6 million in FRB stock, and $25.1 million in other stock, all carried at cost. 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. During the three months ended March 31, 2022, December 31, 2021, and March 31, 2021, the FHLB did not repurchase any of the Company’s excess FHLB stock through its stock repurchase program.

The Company periodically evaluates its investments in FHLB, FRB, and other stock for impairment, including their capital adequacy and overall financial condition. No impairment losses have been recorded through March 31, 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.

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

						March 31,						December 31,
(Dollars in thousands)						2022						2021
Investor loans secured by real estate
CRE non-owner-occupied						$	2,774,650					$	2,771,137
Multifamily						6,041,085						5,891,934
Construction and land						303,811						277,640
SBA secured by real estate						42,642						46,917
Total investor loans secured by real estate						9,162,188						8,987,628
Business loans secured by real estate
CRE owner-occupied						2,391,984						2,251,014
Franchise real estate secured						384,267						380,381
SBA secured by real estate						68,466						69,184
Total business loans secured by real estate						2,844,717						2,700,579
Commercial loans
Commercial and industrial						2,242,632						2,103,112
Franchise non-real estate secured						388,322						392,576
SBA non-real estate secured						10,761						11,045
Total commercial loans						2,641,715						2,506,733
Retail loans
Single family residential						79,978						95,292
Consumer						5,157						5,665
Total retail loans						85,135						100,957
Gross loans held for investment (1)						14,733,755						14,295,897
Allowance for credit losses for loans held for investment						(197,517)						(197,752)
Loans held for investment, net						$	14,536,238					$	14,098,145
Total unfunded loan commitments						$	2,940,370					$	2,507,911
Loans held for sale, at lower of cost or fair value						$	11,646					$	10,869

______________________________

(1) Includes net deferred origination fees of $3.9 million and $3.5 million, and unaccreted fair value net purchase discounts of $71.2 million and $77.1 million as of March 31, 2022 and December 31, 2021, respectively.

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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 March 31, 2022 and December 31, 2021, the servicing asset totaled $3.7 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 March 31, 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.

General representations and warranties associated with loan sales and securitization sales require the Company to uphold various assertions that pertain to the underlying loans at the time of the transaction, including, but not limited to, compliance with relevant laws and regulations, absence of fraud, enforcement of liens, no environmental damages, and maintenance of relevant environmental insurance. Such representations and warranties are limited to those that do not meet the quality represented at the transaction date and do not pertain to a decline in value or future payment defaults. In circumstances where the Company breaches its representations and warranties, the Company would generally be required to cure such instances through a repurchase or substitution of the subject loan(s).

To the extent the ultimate resolution of defaulted loans results in contractual principal and interest payments that are deficient, the Company is obligated to reimburse Freddie Mac for such amounts, not to exceed 10% of the original principal amount of the loans comprising the securitization pool at the closing date of December 23, 2016. The liability recorded for Company’s exposure to the reimbursement agreement with Freddie Mac was $338,000 as of March 31, 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 $542.4 million at March 31, 2022 and $565.8 million at December 31, 2021. Included in those totals are multifamily loans transferred through securitization with Freddie Mac of $75.9 million and $78.1 million at March 31, 2022 and December 31, 2021, respectively, and SBA participations serviced for others of $343.9 million and $365.6 million at March 31, 2022 and December 31, 2021, respectively.

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Concentration of Credit Risk

 

As of March 31, 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 $823.3 million for secured loans and $494.0 million for unsecured loans at March 31, 2022. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At March 31, 2022, the Bank’s largest aggregate outstanding balance of loans to one borrower was $235.5 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.

 

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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 credits have all the weaknesses inherent in substandard credits, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

•Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted. Amounts classified as loss are promptly charged off.

The Bank’s portfolio managers also manage loan performance risks, collections, workouts, bankruptcies, and foreclosures. A special department, whose portfolio managers have professional expertise in these areas, typically handles or advises on these types of matters. Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credits when they are identified. Collection efforts commence immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss. When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.

 

When a loan is graded as special mention, substandard, or doubtful, the Company obtains an updated valuation of the underlying collateral. 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.

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The following table stratifies the loans held for investment portfolio by the Company’s internal risk grading, and by year of origination, as of March 31, 2022:

			Term Loans by Vintage
(Dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving						Revolving Converted to Term During the Period						Total
March 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied
Pass			$	176,426					$	670,633					$	257,088					$	403,482					$	348,314					$	870,240					$	9,354					$	—					$	2,735,537
Special mention			—						—						—						—						7,633						2,245						—						—						9,878
Substandard			—						—						—						25,780						—						2,955						500						—						29,235
Multifamily
Pass			465,994						2,279,374						871,658						1,082,386						399,926						940,701						286						—						6,040,325
Substandard			—						—						—						—						—						760						—						—						760
Construction and land
Pass			46,203						132,985						79,651						28,556						9,027						7,389						—						—						303,811
SBA secured by real estate
Pass			1,966						130						496						6,135						6,847						18,215						—						—						33,789
Substandard			—						—						—						—						3,282						5,571						—						—						8,853
Total investor loans secured by real estate			690,589						3,083,122						1,208,893						1,546,339						775,029						1,848,076						10,140						—						9,162,188
Business loans secured by real estate
CRE owner-occupied
Pass			250,202						830,646						263,304						279,071						143,848						597,055						4,719						—						2,368,845
Special mention			—						—						—						—						764						—						—						—						764
Substandard			—						—						4,673						2,516						5,140						10,046						—						—						22,375
Franchise real estate secured
Pass			24,715						156,307						35,974						54,053						36,483						76,735						—						—						384,267
SBA secured by real estate
Pass			6,107						7,452						2,357						7,133						4,760						32,189						—						—						59,998
Substandard			—						—						—						—						1,888						6,580						—						—						8,468
Total loans secured by business real estate			281,024						994,405						306,308						342,773						192,883						722,605						4,719						—						2,844,717
Commercial loans
Commercial and industrial
Pass			77,907						417,259						68,739						185,229						105,770						180,774						1,171,092						2,747						2,209,517
Special mention			—						—						339						—						—						142						530						—						1,011
Substandard			963						2,317						—						12						1,365						1,621						25,826						—						32,104
Franchise non-real estate secured
Pass			23,582						159,709						23,309						76,734						41,700						43,597						661						—						369,292
Substandard			—						—						—						1,550						3,517						13,963						—						—						19,030
SBA non-real estate secured
Pass			663						467						543						1,861						756						4,752						—						—						9,042
Special mention			—						—						—						66						—						—						—						—						66
Substandard			—						—						—						75						244						692						642						—						1,653
Total commercial loans			103,115						579,752						92,930						265,527						153,352						245,541						1,198,751						2,747						2,641,715

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			Term Loans by Vintage
(Dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving						Revolving Converted to Term During the Period						Total
March 31, 2022
Retail loans
Single family residential
Pass			$	—					$	309					$	194					$	—					$	31					$	55,677					$	23,721					$	—					$	79,932
Substandard			—						—						—						—						—						46						—						—						46
Consumer loans
Pass			—						10						25						37						10						1,310						3,761						—						5,153
Substandard			—						—						—						4						—						—						—						—						4
Total retail loans			—						319						219						41						41						57,033						27,482						—						85,135
Totals gross loans			$	1,074,728					$	4,657,598					$	1,608,350					$	2,154,680					$	1,121,305					$	2,873,255					$	1,241,092					$	2,747					$	14,733,755

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
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

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			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
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
Totals gross loans			$	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

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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
March 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied			$	2,762,632					$	—					$	—					$	12,018					$	2,774,650
Multifamily			6,041,085						—						—						—						6,041,085
Construction and land			303,811						—						—						—						303,811
SBA secured by real estate			42,642						—						—						—						42,642
Total investor loans secured by real estate			9,150,170						—						—						12,018						9,162,188
Business loans secured by real estate
CRE owner-occupied			2,387,083						—						—						4,901						2,391,984
Franchise real estate secured			384,267						—						—						—						384,267
SBA secured by real estate			68,025						—						—						441						68,466
Total business loans secured by real estate			2,839,375						—						—						5,342						2,844,717
Commercial loans
Commercial and industrial			2,216,983						25,332						74						243						2,242,632
Franchise non-real estate secured			388,322						—						—						—						388,322
SBA not secured by real estate			10,119						—						—						642						10,761
Total commercial loans			2,615,424						25,332						74						885						2,641,715
Retail loans
Single family residential			79,978						—						—						—						79,978
Consumer loans			5,157						—						—						—						5,157
Total retail loans			85,135						—						—						—						85,135
Totals			$	14,690,104					$	25,332					$	74					$	18,245					$	14,733,755

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
Totals						$	14,276,402					$	1,395					$	—					$	18,100					$	14,295,897

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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 March 31, 2022, $55.3 million of loans were individually evaluated with $1.2 million ACL attributed to such loans. At March 31, 2022, $11.8 million of individually evaluated loans were evaluated using a discounted cash flow approach, and $43.5 million of individually evaluated loans were evaluated based on the underlying value of the collateral. All individually evaluated loans were on nonaccrual status at March 31, 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 March 31, 2022 and December 31, 2021, the Company had six loans totaling $16.9 million and $17.3 million, respectively, modified as TDRs, which are comprised 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 two franchise non-real estate secured loans totaling $11.8 million and $12.1 million, respectively, belonging to another borrower relationship with the terms modified for payment deferral. During the three months ended March 31, 2022, the 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 March 31, 2022 and December 31, 2021. During the three months ended March 31, 2021, there were no loans modified as TDRs and no TDRs that experienced payment defaults after modifications within the previous 12 months.

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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 $542.4 million and $567.6 million at March 31, 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 $55.3 million at March 31, 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 months ended March 31, 2022, December 31, 2021, and March 31, 2021. The Company had one CRE owner-occupied loan of $1.8 million in default for more than 90 days and still accruing interest, pending a legal proceeding with repayment reasonably expected at March 31, 2022. The Company had no loans 90 days or more past due and still accruing at December 31, 2021.

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

			Nonaccrual Loans (1)
(Dollars in thousands)			Collateral Dependent Loans						ACL						Non-Collateral Dependent Loans						ACL						Total Nonaccrual Loans						Nonaccrual Loans with No ACL
March 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied			$	10,243					$	1,152					$	—					$	—					$	10,243					$	2,627
SBA secured by real estate			573						—						—						—						573						573
Total investor loans secured by real estate			10,816						1,152						—						—						10,816						3,200
Business loans secured by real estate
CRE owner-occupied			4,901						—						—						—						4,901						4,901
SBA secured by real estate			575						—						—						—						575						575
Total business loans secured by real estate			5,476						—						—						—						5,476						5,476
Commercial loans
Commercial and industrial			26,588						—						—						—						26,588						26,588
Franchise non-real estate secured			—						—						11,779						—						11,779						11,779
SBA non-real estate secured			642						—						—						—						642						642
Total commercial loans			27,230						—						11,779						—						39,009						39,009
Retail loans
Single family residential			8						—						—						—						8						8
Total retail loans			8						—						—						—						8						8
Total nonaccrual loans			$	43,530					$	1,152					$	11,779					$	—					$	55,309					$	47,693

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 March 31, 2022 or December 31, 2021.

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Collateral Dependent Loans

Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded.

The following tables summarize collateral dependent loans by collateral type as of the dates indicated:

(Dollars in thousands)			Office Properties						Industrial Properties						Retail Properties						Land Properties						Hotel Properties												Residential Properties						Business Assets						Total
March 31, 2022
Investor loan secured by real estate
CRE non-owner-occupied			$	—					$	—					$	500					$	—					$	9,743											$	—					$	—					$	10,243
SBA secured by real estate			—						—						—						—						573												—						—						573
Total investor loans secured by real estate			—						—						500						—						10,316												—						—						10,816
Business loans secured by real estate
CRE owner-occupied			—						—						—						4,901						—												—						—						4,901
SBA secured by real estate			133						442						—						—						—												—						—						575
Total business loans secured by real estate			133						442						—						4,901						—												—						—						5,476
Commercial loans
Commercial and industrial			—						—						—						242						—												—						26,346						26,588
SBA non-real estate secured			—						—						—						—						—												—						642						642
Total commercial loans			—						—						—						242						—												—						26,988						27,230
Retail loans
Single family residential			—						—						—						—						—												8						—						8
Total retail loans			—						—						—						—						—												8						—						8
Total collateral dependent loans			$	133					$	442					$	500					$	5,143					$	10,316											$	8					$	26,988					$	43,530

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

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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.

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The PD for business loans secured by real estate and commercial loans is based on an internally developed PD rating scale that assigns PDs based on the Company’s internal risk grades for loans. This internally developed PD rating scale is based on a combination of the Company’s own historical data and observed historical data from the Company’s peers, which consist of banks that management believes align with our business profile. As credit risk grades change for these loans, the PD assigned to them also changes. As with investor loans secured by real estate, the PD for business loans secured by real estate and commercial loans is also impacted by current and expected economic conditions.

The Company considers loans to be in default when they are 90 days or more past due and still accruing or placed on nonaccrual status.

Loss Given Default

LGDs for commercial real estate loans are derived from a third party, using proxy loan information, and are based on loan and property level characteristics 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.

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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 economic 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: (1) a base-case scenario, (2) an upside scenario, representing slightly better economic conditions than currently experienced, and (3) a downside scenario, representing recessionary conditions. Management periodically evaluates 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 such as the ongoing COVID-19 pandemic, the war between Russia and Ukraine, and ongoing inflationary pressures throughout the U.S. economy. The Company recognizes the non-linearity of credit losses relative to economic performance and thus the Company believes consideration of, and if appropriate under the circumstances, use of multiple probability-weighted economic scenarios is appropriate in estimating credit losses over the forecast period. This approach is based on certain assumptions. The first assumption is that no single forecast of the economy, however detailed or complex, is completely accurate over a reasonable forecast time-frame, and is subject to revisions over time. By considering multiple scenario outcomes and assigning reasonable probability weightings to them, some of the uncertainty associated with a single scenario approach, the Company believes, is mitigated.

As of March 31, 2022, the Company’s ACL model used three weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The weightings assigned to each scenario were as follows: the base-case scenario, or most likely scenario, was assigned a weighting of 40%, while the upside and downside scenarios were each assigned a weighting of 30%. The Company evaluated the weightings of each economic scenario in the current period and determined the current weightings of 40% for the base-case scenario, and 30% for each of the upside and downside scenarios appropriately reflect the likelihood of outcomes for each scenario given the current economic environment. The use of three weighted scenarios at March 31, 2022 and the weighting assigned to each scenario is consistent with the approach used in the Company’s ACL model at December 31, 2021.

Given recent developments in the geopolitical landscape with the war between Russia and Ukraine, ongoing inflationary pressures in the U.S. economy, and general uncertainty surrounding future economic conditions, the Company took into consideration these and other factors when determining the appropriateness of economic scenarios used in the ACL model at March 31, 2022. As a result, the Company used the economic forecast as of December 31, 2021 in the ACL model, which was more reflective of the current economic environment as well as the likelihood of future economic conditions occurring as of March 31, 2022. Further, economic scenarios used in the ACL model include the current and estimated future impact associated with the ongoing COVID-19 pandemic.

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 for each loan the Company does not expect to collect.

It is important to note that the Company’s ACL model relies on multiple economic variables, which are used under several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Company has identified certain economic variables that have significant influence in the Company’s model for determining the ACL.

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As of March 31, 2022, the Company’s ACL model incorporated the following assumptions for key economic variables in the base-case, upside, and downside scenarios, which are largely unchanged from those used in the ACL model at December 31, 2021:

Base-case Scenario:

•U.S. unemployment declines to 3.5% through the end of 2022 and holds relatively constant at approximately 3.5% throughout 2023.

•U.S. real GDP growth decelerates throughout 2022 from approximately 5.4% to approximately 2.8% by the end of 2022. U.S. real GDP growth accelerates slightly from 2.7% from the beginning of 2023 to 2.8% towards the end of 2023.

•CRE index growth accelerates in 2022 from 0.4% in the second quarter of 2022 to approximately 8.3% by the end of 2022. Growth in the CRE index then decelerates from approximately 11.2% at the beginning of 2023 to 6.8% by the end of 2023.

•The 10-year U.S. Treasury yield ends 2022 at approximately 2.4%, and increases to approximately 3.1% by the end of 2023.

Upside Scenario:

•U.S. unemployment rate declines to approximately 3.1% through the end of 2022 and holds relatively constant at approximately 3.0% throughout 2023.

•U.S. real GDP growth decelerates throughout 2022 from approximately 9.3% to approximately 4.2% by the end of 2022. U.S. real GDP growth decelerates from approximately 4.4% in early 2023 to approximately 1.9% by the end of 2023.

•CRE index growth accelerates in 2022 from approximately 1.9% in the second quarter of 2022 to approximately 14.1% by the end of 2022. Growth in the CRE index then decelerates from approximately 15.0% at the beginning of 2023 to approximately 6.9% by the end of 2023.

•The 10-year U.S. Treasury yield ends 2022 at approximately 2.3%, and then increases to approximately 3.0% by the end of 2023.

Downside Scenario:

•U.S. unemployment rate increases to approximately 8.2% through the end of 2022 and then declines moderately to approximately 8.0% by the end of 2023.

•U.S. real GDP declines decelerate in 2022 from approximately -4.0% in the second quarter to approximately -1.9% by the end of 2023. U.S. real GDP then returns to accelerating growth throughout 2023, with growth of approximately 3.4% by the end of 2023.

•CRE index declines accelerate in 2023 from approximately -3.5% in the second quarter of 2023 to approximately -19.5% by the end of 2023. The CRE index declines decelerate through the third quarter of 2023 from approximately -10.9% to -3.8%. The CRE index then returns to growth in the fourth quarter of 2023.

•The 10-year U.S. Treasury yield ends 2022 at approximately 1.2%, and then increases to approximately 2.1% by the end of 2023.

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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, periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.

As of March 31, 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. Qualitative adjustments to the ACL were made for SBA investor loans secured by real estate, construction loans, and franchise loans. 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 provides the allocation of the ACL for loans held for investment as well as the activity in the ACL attributed to various segments in the loan portfolio as of, and for the periods indicated:

			Three Months Ended March 31, 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			$	37,380																	$	—					$	—																	$	(1,406)					$	35,974
Multifamily			55,209																		—						—																		(884)						54,325
Construction and land			5,211																		—						—																		8						5,219
SBA secured by real estate			3,201																		(70)						—																		(81)						3,050
Business loans secured by real estate
CRE owner-occupied			29,575																		—						10																		2,306						31,891
Franchise real estate secured			7,985																		—						—																		(8)						7,977
SBA secured by real estate			4,866																		—						—																		329						5,195
Commercial loans
Commercial and industrial			38,136																		(2,179)						1,841																		800						38,598
Franchise non-real estate secured			15,084																		—						—																		(780)						14,304
SBA non-real estate secured			565																		(50)						2																		(27)						490
Retail loans
Single family residential			255																		—						—																		(22)						233
Consumer loans			285																		—						—																		(24)						261
Totals			$	197,752																	$	(2,299)					$	1,853																	$	211					$	197,517

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			Three Months Ended March 31, 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)					$	—																	$	(3,477)					$	45,545
Multifamily			62,534																		—						—																		17,281						79,815
Construction and land			12,435																		—						—																		828						13,263
SBA secured by real estate			5,159																		(265)						—																		247						5,141
Business loans secured by real estate
CRE owner-occupied			50,517																		—						15																		(8,938)						41,594
Franchise real estate secured			11,451																		—						—																		(575)						10,876
SBA secured by real estate			6,567																		(98)						—																		(18)						6,451
Commercial loans
Commercial and industrial			46,964																		(1,279)						601																		(2,913)						43,373
Franchise non-real estate secured			20,525																		(156)						—																		(1,466)						18,903
SBA non-real estate secured			995																		—						2																		(107)						890
Retail loans
Single family residential			1,204																		—						—																		(382)						822
Consumer loans			491																		—						—																		(165)						326
Totals			$	268,018																	$	(1,952)					$	618																	$	315					$	266,999

The decrease in the ACL for loans held for investment during the three months ended March 31, 2022 of $235,000 was comprised of $446,000 in net charge-offs, partially offset by a $211,000 provision for credit losses. The provision for credit losses for the three months ended March 31, 2022 was reflective of higher loans held for investment and growing economic uncertainties, offset by improved economic forecasts and asset quality.

The decrease in the ACL for loans held for investment during the three months ended March 31, 2021 of $1.0 million is reflective of $1.3 million in net charge-offs, partially offset by a $315,000 provision for credit losses. The provision for credit losses for the three months ended March 31, 2021 was reflective of unfavorable economic conditions and forecasts used in the Company’s ACL model.

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The following tables present PD bands for investor loans secured by real estate, business loans secured by real estate, and commercial loans segments of the loan portfolio as of the dates indicated.

			Term Loans by Vintage
(Dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving						Revolving Converted to Term During the Period						Total
March 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied
0% - 5.00%			$	176,426					$	651,475					$	250,051					$	369,190					$	339,561					$	791,623					$	9,354					$	—					$	2,587,680
>5.00% - 10.00%			—						8,632						1,141						718						16,386						54,229						—						—						81,106
Greater than 10%			—						10,526						5,896						59,354						—						29,588						500						—						105,864
Multifamily
0% - 5.00%			461,776						2,251,232						865,755						1,057,766						398,127						926,880						286						—						5,961,822
>5.00% - 10.00%			4,218						23,077						5,903						24,620						1,799						14,581						—						—						74,198
Greater than 10%			—						5,065						—						—						—						—						—						—						5,065
Construction and Land
0% - 5.00%			45,018						106,397						62,442						15,840						5,618						7,389						—						—						242,704
>5.00% - 10.00%			1,185						23,088						13,821						4,815						—						—						—						—						42,909
Greater than 10%			—						3,500						3,388						7,901						3,409						—						—						—						18,198
SBA secured by real estate
0% - 5.00%			1,966						130						496						6,135						10,129						23,213						—						—						42,069
>5.00% - 10.00%			—						—						—						—						—						—						—						—						—
Greater than 10%			—						—						—						—						—						573						—						—						573
Total investor loans secured by real estate			690,589						3,083,122						1,208,893						1,546,339						775,029						1,848,076						10,140						—						9,162,188
Business loans secured by real estate
CRE owner-occupied
0% - 5.00%			250,202						830,646						263,304						279,071						143,848						597,055						4,719						—						2,368,845
>5.00% - 10.00%			—						—						—						—						764						—						—						—						764
Greater than 10%			—						—						4,673						2,516						5,140						10,046						—						—						22,375
Franchise real estate secured
0% - 5.00%			24,715						152,674						35,974						54,053						35,233						73,922						—						—						376,571
>5.00% - 10.00%			—						1,245						—						—						1,250						2,813						—						—						5,308
Greater than 10%			—						2,388						—						—						—						—						—						—						2,388
SBA secured by real estate
0% - 5.00%			6,107						7,452						1,596						5,785						3,459						22,774						—						—						47,173
>5.00% - 10.00%			—						—						761						1,348						1,302						9,414						—						—						12,825
Greater than 10%			—						—						—						—						1,887						6,581						—						—						8,468
Total business loans secured by real estate			281,024						994,405						306,308						342,773						192,883						722,605						4,719						—						2,844,717

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			Term Loans by Vintage
(Dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving						Revolving Converted to Term During the Period						Total
March 31, 2022
Commercial loans
Commercial and industrial
0% - 5.00%			75,796						410,671						67,470						178,211						101,951						177,185						854,129						1,247						1,866,660
>5.00% - 10.00%			2,111						6,964						1,608						7,018						3,819						3,589						317,797						—						342,906
Greater than 10%			963						1,941						—						12						1,365						1,763						25,522						1,500						33,066
Franchise non-real estate secured
0% - 5.00%			23,120						158,940						15,289						62,490						36,456						35,717						555						—						332,567
>5.00% - 10.00%			462						769						8,020						14,244						5,244						7,306						106						—						36,151
Greater than 10%			—						—						—						1,550						3,517						14,537						—						—						19,604
SBA not secured by real estate
0% - 5.00%			663						467						477						87						266						2,451						—						—						4,411
>5.00% - 10.00%			—						—						66						1,775						490						2,301						—						—						4,632
Greater than 10%			—						—						—						140						244						692						642						—						1,718
Total commercial loans			$	103,115					$	579,752					$	92,930					$	265,527					$	153,352					$	245,541					$	1,198,751					$	2,747					$	2,641,715

			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
0% - 5.00%			$	654,823					$	233,718					$	375,691					$	392,892					$	193,762					$	682,357					$	4,022					$	—					$	2,537,265
>5.00% - 10.00%			37,931						22,965						9,174						2,713						23,559						23,707						5,331						—						125,380
Greater than 10%			15,806						13,261						50,175						—						1,067						27,670						513						—						108,492
Multifamily
0% - 5.00%			2,242,420						929,964						1,174,859						442,410						470,107						548,156						286						—						5,808,202
>5.00% - 10.00%			13,226						7,393						24,646						1,807						8,922						6,676						—						—						62,670
Greater than 10%			5,062						14,770						—						1,230						—						—						—						—						21,062
Construction and land
0% - 5.00%			110,545						81,029						23,030						8,321						3,857						3,559						—						—						230,341
>5.00% - 10.00%			5,500						14,264						9,931						4,094						—						—						—						—						33,789
Greater than 10%			3,487						2,428						7,595						—						—						—						—						—						13,510
SBA secured by real estate
0% - 5.00%			130						497						6,259						12,374						15,149						11,572						—						—						45,981
>5.00% - 10.00%			—						—						—						—						—						—						—						—						—
Greater than 10%			—						—						—						—						600						336						—						—						936
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

46

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			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
0% - 5.00%			853,044						273,469						287,249						161,635						187,130						456,170						6,738						292						2,225,727
>5.00% - 10.00%			—						—						—						—						—						8,101						—						—						8,101
Greater than 10%			—						—						2,553						6,075						2,966						5,592						—						—						17,186
Franchise real estate secured
0% - 5.00%			154,009						36,335						55,091						37,559						53,519						33,635						1,361						—						371,509
>5.00% - 10.00%			843						—						—						2,488						2,769						1,243						—						—						7,343
Greater than 10%			1,529						—						—						—						—						—						—						—						1,529
SBA secured by real estate
0% - 5.00%			6,379						2,364						6,040						8,986						8,718						16,947						—						—						49,434
>5.00% - 10.00%			—						—						1,291						139						2,006						7,681						—						—						11,117
Greater than 10%			—						—						—						2,062						2,700						3,871						—						—						8,633
Total business loans secured by 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
0% - 5.00%			417,780						77,755						192,478						114,593						120,869						67,194						680,662						3,380						1,674,711
>5.00% - 10.00%			8,349						1,880						7,757						2,878						2,476						3,595						375,829						341						403,105
Greater than 10%			1,326						—						159						2,683						863						1,302						18,060						903						25,296
Franchise non-real estate secured
0% - 5.00%			155,064						18,370						64,503						39,389						21,483						21,524						—						—						320,333
>5.00% - 10.00%			8,801						5,573						20,703						5,672						2,189						8,840						—						—						51,778
Greater than 10%			—						—						1,589						3,627						13,346						1,903						—						—						20,465
SBA not secured by real estate
0% - 5.00%			474						564						1,088						370						732						1,636						—						—						4,864
>5.00% - 10.00%			—						—						205						410						2,074						512						—						—						3,201
Greater than 10%			—						—						756						339						685						547						653						—						2,980
Total commercial loans			$	591,794					$	104,142					$	289,238					$	169,961					$	164,717					$	107,053					$	1,075,204					$	4,624					$	2,506,733

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A significant driver in the ACL for loans in the investor real estate secured and business real estate secured segments is estimated LTV ratio. The following tables summarize the amortized cost of loans in these segments by current estimated LTV and by year of origination as of the dates indicated:

			Term Loans by Vintage
(Dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving						Revolving Converted to Term During the Period						Total
March 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied
55% and below			$	80,360					$	370,848					$	138,963					$	182,092					$	166,633					$	592,412					$	9,854					—						$	1,541,162
>55-65%			88,510						238,821						90,596						154,776						54,175						250,482						—						—						877,360
>65-75%			7,556						60,735						27,529						56,266						130,804						27,166						—						—						310,056
Greater than 75%			—						229						—						36,128						4,335						5,380						—						—						46,072
Multifamily
55% and below			111,585						409,021						197,947						256,819						169,113						449,182						286						—						1,593,953
>55-65%			209,094						944,247						367,310						466,705						194,097						348,010						—						—						2,529,463
>65-75%			142,824						896,113						303,401						353,096						36,716						134,308						—						—						1,866,458
Greater than 75%			2,491						29,993						3,000						5,766						—						9,961						—						—						51,211
Construction and land
55% and below			46,203						129,135						79,651						10,675						4,155						7,389						—						—						277,208
>55-65%			—						3,850						—						8,916						4,872						—						—						—						17,638
>65-75%			—						—						—						8,965						—						—						—						—						8,965
Greater than 75%			—						—						—						—						—						—						—						—						—
SBA secured by real estate
55% and below			1,966						—						—						—						1,469						2,908						—						—						6,343
>55-65%			—						—						—						2,392						1,941						4,307						—						—						8,640
>65-75%			—						130						—						2,654						3,113						7,158						—						—						13,055
Greater than 75%			—						—						496						1,089						3,606						9,413						—						—						14,604
Total investor loans secured by real estate			690,589						3,083,122						1,208,893						1,546,339						775,029						1,848,076						10,140						—						9,162,188
Business loan secured by real estate
CRE owner-occupied
55% and below			121,356						401,001						109,427						104,982						79,468						450,860						4,719						—						1,271,813
>55-65%			59,295						202,766						52,624						63,290						29,886						107,522						—						—						515,383
>65-75%			60,334						190,253						105,172						103,746						35,344						32,545						—						—						527,394
Greater than 75%			9,217						36,626						754						9,569						5,054						16,174						—						—						77,394
Franchise real estate secured
55% and below			17,475						39,481						16,725						14,418						12,385						23,380						—						—						123,864
>55-65%			—						45,789						11,986						3,995						7,313						12,726						—						—						81,809
>65-75%			1,792						33,932						5,426						32,540						9,235						35,728						—						—						118,653
Greater than 75%			5,448						37,105						1,837						3,100						7,550						4,901						—						—						59,941
SBA secured by real estate
55% and below			1,040						2,508						589						1,646						962						17,411						—						—						24,156
>55-65%			—						724						555						199						1,454						9,264						—						—						12,196
>65-75%			—						1,178						327						3,465						647						7,823						—						—						13,440
Greater than 75%			5,067						3,042						886						1,823						3,585						4,271						—						—						18,674
Total business loans secured by real estate			$	281,024					$	994,405					$	306,308					$	342,773					$	192,883					$	722,605					$	4,719					$	—					$	2,844,717

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			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
55% and below			$	366,617					$	141,752					$	184,553					$	171,879					$	130,679					$	533,990					$	9,866					$	—					$	1,539,336
>55-65%			277,092						91,539						155,908						86,933						79,043						172,713						—						—						863,228
>65-75%			64,619						36,653						58,350						131,975						5,662						25,446						—						—						322,705
Greater than 75%			232						—						36,229						4,818						3,004						1,585						—						—						45,868
Multifamily
55% and below			397,562						226,129						285,520						181,826						197,276						279,880						286						—						1,568,479
>55-65%			932,115						416,712						510,840						219,710						185,773						198,802						—						—						2,463,952
>65-75%			906,910						306,272						391,686						41,174						94,142						67,964						—						—						1,808,148
Greater than 75%			24,121						3,014						11,459						2,737						1,838						8,186						—						—						51,355
Construction and land
55% and below			116,575						95,293						26,501						4,172						3,857						3,559						—						—						249,957
>55-65%			2,957						2,428						5,095						6,650						—						—						—						—						17,130
>65-75%			—						—						8,960						1,593						—						—						—						—						10,553
Greater than 75%			—						—						—						—						—						—						—						—						—
SBA secured by real estate
55% and below			—						—						—						632						693						2,159						—						—						3,484
>55-65%			—						—						2,399						1,950						1,903						3,595						—						—						9,847
>65-75%			130						—						2,767						3,630						4,444						4,346						—						—						15,317
Greater than 75%			—						497						1,093						6,162						8,709						1,808						—						—						18,269
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
Business loan secured by real estate
CRE owner-occupied
55% and below			400,857						95,504						107,766						87,779						134,184						347,926						6,738						292						1,181,046
>55-65%			214,798						67,639						60,192						32,283						35,513						80,347						—						—						490,772
>65-75%			188,022						78,589						112,217						41,874						12,241						25,460						—						—						458,403
Greater than 75%			49,367						31,737						9,627						5,774						8,158						16,130						—						—						120,793
Franchise real estate secured
55% and below			32,189						16,889						8,954						12,469						9,163						14,552						1,361						—						95,577
>55-65%			47,521						3,603						10,270						7,442						4,749						9,349						—						—						82,934
>65-75%			39,409						13,991						32,743						11,289						29,641						9,768						—						—						136,841
Greater than 75%			37,262						1,852						3,124						8,847						12,735						1,209						—						—						65,029
SBA secured by real estate
55% and below			4,333						590						1,821						1,123						4,512						14,850						—						—						27,229
>55-65%			452						555						199						954						1,524						8,497						—						—						12,181
>65-75%			1,082						328						3,478						5,208						4,853						2,793						—						—						17,742
Greater than 75%			512						891						1,833						3,902						2,535						2,359						—						—						12,032
Total business loans secured by real estate			$	1,015,804					$	312,168					$	352,224					$	218,944					$	259,808					$	533,240					$	8,099					$	292					$	2,700,579

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The following tables present the FICO bands, at origination, for the retail segment of the loan portfolio as of the dates indicated:

			Term Loans by Vintage
(Dollars in thousands)			2022						2021						2020						2019						2018						Prior						Revolving						Revolving Converted to Term During the Period						Total
March 31, 2022
Retail loans
Single family residential
Greater than 740			$	—					$	309					$	194					$	—					$	—					$	30,820					$	18,657					—						$	49,980
>680 - 740			—						—						—						—						31						5,410						4,278						—						9,719
>580 - 680			—						—						—						—						—						6,651						755						—						7,406
Less than 580			—						—						—						—						—						12,842						31						—						12,873
Consumer loans
Greater than 740			—						7						25						26						10						929						1,847						—						2,844
>680 - 740			—						3						—						11						—						330						1,852						—						2,196
>580 - 680			—						—						—						4						—						51						46						—						101
Less than 580			—						—						—						—						—						—						16						—						16
Total retail loans			$	—					$	319					$	219					$	41					$	41					$	57,033					$	27,482					$	—					$	85,135

December 31, 2021
Retail loans
Single family residential
Greater than 740			$	313					$	211					$	—					$	—					$	1,446					$	40,605					$	17,553					—						$	60,128
>680 - 740			—						—						—						32						103						7,602						5,579						—						13,316
>580 - 680			—						—						—						—						450						6,989						756						—						8,195
Less than 580			—						—						—						—						9						13,612						32						—						13,653
Consumer loans
Greater than 740			7						28						32						19						9						944						2,196						—						3,235
>680 - 740			4						—						17						—						2						431						1,859						—						2,313
>580 - 680			—						—						5						—						—						54						42						—						101
Less than 580			—						—						—						—						—						—						16						—						16
Total retail loans			$	324					$	239					$	54					$	51					$	2,019					$	70,237					$	28,033					$	—					$	100,957

Allowance for Credit Losses for Off-Balance Sheet Commitments

The Company maintains an ACL on off-balance sheet commitments related to unfunded loans and lines of credit, which is included in other liabilities of the consolidated statements of financial condition. The allowance for off-balance sheet commitments was $27.5 million at March 31, 2022, $27.3 million at December 31, 2021, and $32.8 million at March 31, 2021. The provision expense for off-balance sheet commitments of $218,000 during the three months ended March 31, 2022 was related primarily to the increase in off-balance sheet commitments. The provision expense of $1.7 million during the three months ended March 31, 2021 related primarily to an increase in outstanding unfunded loan commitments in conjunction with continued unfavorable economic conditions and forecasts reflected in the Company’s CECL model.

The Company applies an expected credit loss estimation methodology for off-balance sheet commitments that is largely commensurate with the methodology applied to each respective segment of the loan portfolio in determining the ACL for loans held-for-investment. The loss estimation process includes assumptions for utilization at default. These assumptions are based on the Company’s own historical internal loan data.

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Note 7 – Goodwill and Other Intangible Assets

The Company had goodwill of $901.3 million at March 31, 2022 and December 31, 2021, respectively. The Company recorded adjustments to goodwill associated with the acquisition of Opus in the amount of $1.6 million during the first three months of 2021, within the one-year measurement period subsequent to the acquisition date of June 1, 2020. These adjustments largely relate to the finalization of the short-year Opus tax returns. During the 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:

			Three Months Ended
			March 31,						December 31,						March 31,
(Dollars in thousands)			2022						2021						2021
Beginning balance			$	901,312					$	901,312					$	898,569
Purchase accounting adjustments			—						—						1,635
Ending balance			$	901,312					$	901,312					$	900,204
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 $66.0 million at March 31, 2022, consisting of $63.4 million in core deposit intangibles and $2.6 million in customer relationship intangibles. At December 31, 2021, other intangibles assets were $69.6 million, consisted 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
			March 31,						December 31,						March 31,
(Dollars in thousands)			2022						2021						2021
Gross amount of intangible assets:
Beginning balance			$	145,212					$	145,212					$	145,212
Additions due to acquisitions			—						—						—
Ending balance			145,212						145,212						145,212
Accumulated amortization:
Beginning balance			(75,641)						(71,761)						(59,705)
Amortization			(3,593)						(3,880)						(4,143)
Ending balance			(79,234)						(75,641)						(63,848)
Net intangible assets			$	65,978					$	69,571					$	81,364

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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 March 31, 2022.

Note 8 – Subordinated Debentures

As of March 31, 2022, the Company had three issuances of subordinated notes with an aggregate carrying value of $330.7 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:

																														March 31, 2022						December 31, 2021
(Dollars in thousands)						Stated Maturity												Current Interest Rate						Current Principal Balance						Carrying Value
Subordinated notes
Subordinated notes due 2024, 5.75% per annum						September 3, 2024												5.75		%				$	60,000					$	59,701					$	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						123,195						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						147,830						147,764
Total subordinated debentures																								$	335,000					$	330,726					$	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 2021 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 fully phased-in capital conservation buffer.

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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)			March 31, 2022						December 31, 2021						March 31, 2021
Basic
Net income			$	66,904					$	84,831					$	68,668
Less: dividends and undistributed earnings allocated to participating securities			(685)						(876)						(665)
Net income allocated to common stockholders			$	66,219					$	83,955					$	68,003
Weighted average common shares outstanding			93,499,695						93,415,304						93,529,147
Basic earnings per common share			$	0.71					$	0.90					$	0.73
Diluted
Net income allocated to common stockholders			$	66,219					$	83,955					$	68,003
Weighted average common shares outstanding			93,499,695						93,415,304						93,529,147
Diluted effect of share-based compensation			446,379						491,187						564,497
Weighted average diluted common shares			93,946,074						93,906,491						94,093,644
Diluted earnings per common share			$	0.70					$	0.89					$	0.72

Shares or stock options are excluded from the computations of dilutive 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 months ended March 31, 2022, December 31, 2021, and March 31, 2021 there were no potential common shares that were anti-dilutive.

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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.

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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following is a description of both the general and specific valuation methodologies used to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.

Investment Securities – Investment securities are generally valued based upon quotes obtained from independent third-party pricing services, which use evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the 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 its investment portfolio within Level 2 of the fair value hierarchy.

    

Interest Rate Swaps – The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certain fixed-rate loans. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a market standard discounted cash flow approach. The Company incorporates credit value adjustments on derivatives to properly reflect the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The Company has determined that the observable nature of the majority of inputs used in deriving the fair value of these derivative contracts fall within Level 2 of the fair value hierarchy, and the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the valuation of interest rate swaps is classified as Level 2 of the fair value hierarchy.

Equity Warrant Assets – The Company acquired equity warrant assets as a result of acquisition of Opus. Opus received equity warrant assets through its lending activities as part of loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The fair value of equity warrant assets is determined using a Black-Scholes option pricing model and are classified as Level 3 with the fair value hierarchy due to the extent of unobservable inputs. The key assumptions used in determining the fair value include the exercise price of the warrants, valuation of the underlying entity's outstanding stock, expected term, risk-free interest rate, marketability discount for private company warrants, and price volatility.

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The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at the dates indicated:

						March 31, 2022
						Fair Value Measurement Using
(Dollars in thousands)						Level 1						Level 2						Level 3						Total Fair Value
Financial assets
AFS investment securities:
U.S. Treasury						$	—					$	13,990					$	—					$	13,990
Agency						—						375,777						—						375,777
Corporate debt						—						595,065						—						595,065
Municipal bonds						—						415,284						—						415,284
Collateralized mortgage obligations						—						855,256						—						855,256
Mortgage-backed securities						—						966,723						—						966,723
Total AFS investment securities						$	—					$	3,222,095					$	—					$	3,222,095
Derivative assets:
Interest rate swaps						$	—					$	42,972					$	—					$	42,972
Equity warrants						—						—						1,908						1,908
Total derivative assets						$	—					$	42,972					$	1,908					$	44,880
Financial liabilities
Derivative liabilities:
Interest rate swaps						$	—					$	4,241					$	—					$	4,241

						December 31, 2021
						Fair Value Measurement Using
(Dollars in thousands)						Level 1						Level 2						Level 3						Total Fair Value
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

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The following table is a reconciliation of the fair value of the equity warrants that are classified as Level 3 and measured on a recurring basis as of:

			Three Months Ended
			March 31,						December 31,						March 31,
(Dollars in thousands)			2022						2021						2021
Beginning balance			$	1,889					$	1,895					$	1,914
Change in fair value (1)			19						(6)						(3)
Ending balance			$	1,908					$	1,889					$	1,911

______________________________

(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.

March 31, 2022

Range

(Dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Min

Max

Weighted Average

Equity warrants

$

1,908

Black-Scholes option pricing model

Volatility Risk free interest rate Marketability discount

30.00% 1.63% 5.50%

35.00% 2.45% 16.00%

31.16% 1.82% 13.56%

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 cost.

The fair value of individually evaluated loans were determined using Level 3 assumptions, and represents individually evaluated loan balances for which a specific reserve has been established or on which a write down has been taken. For real estate loans, generally, the Company obtains third party appraisals (or property valuations) and/or collateral audits in conjunction with internal analysis based on historical experience on its individually evaluated loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for individually evaluated loans, the Company will then discount the valuation to cover both market price fluctuations and selling costs, typically ranging from 7% to 10% of the collateral value, that the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions, and management’s expertise and knowledge of the client and client’s business.

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At March 31, 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 released the related reserves during the three months ended March 31, 2022.     

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

						March 31, 2022
(Dollars in thousands)						Level 1						Level 2						Level 3						Total Fair Value
Financial assets
Collateral dependent loans						$	—					$	—					$	33,869					$	33,869

						December 31, 2021
(Dollars in thousands)						Level 1						Level 2						Level 3						Total Fair Value
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.

March 31, 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

$

8,590

Fair value of collateral

Collateral discount and cost to sell

7.00%

7.00%

7.00%

Commercial loans

Commercial and industrial

25,279

Fair value of collateral

Collateral discount and cost to sell

—%

7.40%

6.35%

Total individually evaluated loans

$

33,869

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%

10.00%

10.00%

Total individually evaluated loans

$

937

______________________________

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

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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 March 31, 2022
(Dollars in thousands)						Carrying Amount						Level 1						Level 2						Level 3						Estimated Fair Value
Assets
Cash and cash equivalents						$	809,259					$	809,259					$	—					$	—					$	809,259
Interest-bearing time deposits with financial institutions						2,216						2,216						—						—						2,216
Investment securities held-to-maturity						996,382						—						886,050						—						886,050
Investment securities available-for-sale						3,222,095						—						3,222,095						—						3,222,095
Loans held for sale						11,646						—						12,622						—						12,622
Loans held for investment, net						14,733,755						—						—						14,623,169						14,623,169
Derivative assets						44,880						—						42,972						1,908						44,880
Accrued interest receivable						60,922						—						60,922						—						60,922
Liabilities
Deposit accounts						$	17,689,223					$	—					$	17,685,458					$	—					$	17,685,458
FHLB advances						600,000						—						598,334						—						598,334
Subordinated debentures						330,726						—						338,603						—						338,603
Derivative liabilities						4,241						—						4,241						—						4,241
Accrued interest payable						5,115						—						5,115						—						5,115

						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

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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 March 31, 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)						March 31, 2022						December 31, 2021						March 31, 2022						December 31, 2021
Loans held for investment(1)						$	1,160,779					$	1,194,702					$	(39,221)					$	(5,298)
Total						$	1,160,779					$	1,194,702					$	(39,221)					$	(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 March 31, 2022 and December 31, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $3.47 billion and $3.61 billion, respectively, the cumulative basis adjustments associated with these hedging relationships was $(39.2) million and $(5.3) million, respectively; and the amounts of the designated hedged items were $1.20 billion and $1.20 billion, respectively.

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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 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 March 31, 2022 and December 31, 2021. The two remaining warrants expire on March 12, 2023 and July 28, 2025, respectively.

The following tables summarize the Company's derivative instruments included in other assets and other liabilities in the consolidated statements of financial condition:

			March 31, 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					$	38,734					$	—					$	—
Total derivative designated as hedging instruments			1,200,000						38,734						—						—
Derivative instruments not designated as hedging instruments:
Interest rate swaps contracts			130,444						4,238						130,444						4,241
Equity warrants			—						1,908						—						—
Total derivative not designated as hedging instruments			130,444						6,146						130,444						4,241
Total derivatives			$	1,330,444					$	44,880					$	130,444					$	4,241

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			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:

												For the Three Months Ended
(Dollars in thousands)						Location of Gain (Loss) Recognized in Income on Derivative Instruments						March 31, 2022						December 31, 2021						March 31, 2021
Gain (loss) on fair value hedging relationships:
Hedged items						Interest Income						$	(33,924)					$	(4,271)					$	—
Derivatives designated as hedging instruments						Interest Income						32,257						3,451						—

The following table summarizes the effect of the derivatives not designated as hedging instruments in the consolidated statements of income.

(Dollars in thousands)												For the Three Months Ended
Derivatives Not Designated as Hedging Instruments:						Location of Gain (Loss) Recognized in Income on Derivative Instruments						March 31, 2022						December 31, 2021						March 31, 2021
Interest rate products						Other income						$	1					$	—					$	7
Equity warrants						Other income						19						(5)						(3)
Total												$	20					$	(5)					$	4

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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. The Company elected to account for centrally-cleared derivative contracts on a gross basis. With regard to derivative contracts not centrally cleared through a clearinghouse, regulations require collateral to be posted by the party with a net liability position. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in 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.

Financial instruments that are eligible for offset in the consolidated statements of financial condition as of the periods indicated are presented below:

																					Gross Amounts Not Offset in the Consolidated Statements of Financial Condition
(Dollars in thousands)			Gross Amounts Recognized						Gross Amounts Offset in the Consolidated Statements of Financial Condition						Net Amounts Presented in the Consolidated Statements of Financial Condition						Financial Instruments (1)						Cash Collateral (2)						Net Amount
March 31, 2022
Derivative assets:
Interest rate swaps			$	42,972					$	—					$	42,972					$	—					$	(25,345)					$	17,627
Total			$	42,972					$	—					$	42,972					$	—					$	(25,345)					$	17,627
Derivative liabilities:
Interest rate swaps			$	4,241					$	—					$	4,241					$	—					$	(172)					$	4,069
Total			$	4,241					$	—					$	4,241					$	—					$	(172)					$	4,069

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 the fair value of securities pledged with counterparty bank.
(2) Represents cash collateral received from or pledged with counterparty bank.

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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 March 31, 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
(Dollars in thousands)						March 31, 2022						December 31, 2021						March 31, 2021
Operating lease						$	4,738					$	4,756					5,012
Short-term lease						490						353						507
Total lease expense						$	5,228					$	5,109					$	5,519

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

(Dollars in thousands)						March 31, 2022						December 31, 2021
Balance Sheet:
Operating lease right-of-use assets						$	60,819					$	64,009
Operating lease liabilities						69,151						72,541
						Three Months Ended
(Dollars in thousands)						March 31, 2022						March 31, 2021
Cash Flows:
Operating cash outflow from operating leases						$	4,959					$	2,000

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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
March 31, 2022
Operating leases			$	14,779					$	19,163					$	17,111					$	11,400					$	5,731					$	9,541					$	77,725
Short-term leases			320						—						—						—						—						—						320
Total contractual base rents (1)			$	15,099					$	19,163					$	17,111					$	11,400					$	5,731					$	9,541					$	78,045
Total liability to make lease payments																																							$	69,151
Difference in undiscounted and discounted future lease payments																																							$	8,574
Weighted average discount rate																																							5.51		%
Weighted average remaining lease term (years)																																							4.6

______________________________

(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 March 31, 2022, December 31, 2021, and March 31, 2021, rental income totaled $125,000, $175,000, and $175,000, respectively.

Note 14 – Variable Interest Entities

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

As of March 31, 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 March 31, 2022 and December 31, 2021 that relate to variable interests in non-consolidated VIEs.

			March 31, 2022																		December 31, 2021
(Dollars in thousands)			Maximum Loss						Assets						Liabilities						Maximum Loss						Assets						Liabilities
Multifamily loan securitization:
Investment securities (1)			$	77,939					$	77,939					$	—					$	81,103					$	81,103					$	—
Reimbursement obligation (2)			50,901						—						338						50,901						—						338
Affordable housing partnership:
Other investments (3)			65,861						82,732						—						68,765						85,994						—
Unfunded equity commitments (2)			—						—						16,871						—						—						17,229
Total			$	194,701					$	160,671					$	17,209					$	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.

.

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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 March 31, 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 March 31, 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 significant influence or decision making capabilities to manage the projects, and therefore, is not the primary beneficiary, and does not consolidate these interests.

The Company’s maximum exposure to loss, exclusive of any potential realization of tax credits, is equal to the commitments invested, adjusted for amortization. The amount of unfunded commitments was included in the investments recognized as assets with a corresponding liability. The table above summarizes the amount of tax credit investments held as assets, the amount of unfunded commitments held as liabilities, and the maximum exposure to loss as of March 31, 2022 and December 31, 2021, respectively.

Note 15 – Subsequent Events

Quarterly cash dividend

On April 22, 2022, the Corporation’s Board of Directors declared a cash dividend of $0.33 per share, payable on May 13, 2022 to shareholders of record on May 6, 2022.

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

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains information and statements that are considered “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phrases of similar meaning.

We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors, which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.

Given the ongoing and dynamic nature of the COVID-19 pandemic, the ultimate extent of the impacts on our business, financial position, results of operations, liquidity and prospects remain uncertain. Although general business and economic conditions have begun to recover, the recovery could be slowed or reversed by a number of factors, including increases in COVID-19 infections, the tight labor market, supply chain disruptions, inflationary pressures, or turbulence in domestic or global financial markets, which could adversely affect our revenues, the values of our assets and liabilities, and our profitability, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill or other intangible assets in future periods. Changes to statutes, regulations, or regulatory policies or practices as a result of, or in response, to the COVID-19 pandemic could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance. In addition to the foregoing, the following additional factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

•The strength of the United States economy in general and the strength of the local economies in which we conduct operations;

•The effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);

•Inflation/deflation, interest rate, market, and monetary fluctuations;

•The effect of changes in accounting policies and practices or accounting standards, as may be adopted from time to time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, 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 has increased the required level of our allowance for credit losses since adoption on January 1, 2020;

•The effect of acquisitions we have made or may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;

•The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

•The impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities, and insurance, and the application thereof by regulatory bodies;

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

•The effectiveness of our risk management framework and quantitative models;

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

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

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

•Changes in consumer spending, borrowing, and savings habits;

•The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;

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

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

•Changes in the financial performance and/or condition of our borrowers;

•Changes in the competitive environment among financial and bank holding companies and other financial service providers;

•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;

•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.

 

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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 months ended March 31, 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 are located in Irvine, California. At March 31, 2022, we primarily conduct business throughout the Western Region of the United States from our 61 full-service depository branches located in Arizona, California, Nevada, Oregon, and Washington.

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As a result of our organic and strategic growth strategy we have developed a variety of banking products and services within our targeted markets in the Western United States tailored to small- and middle-market businesses, corporations, including the owners and employees of those businesses, professionals, entrepreneurs, real estate investors, and non-profit organizations, as well as consumers in the communities we serve. Through our branches and our website, www.ppbi.com, we provide a wide array of banking products and services such as: various types of deposit accounts, digital banking, treasury management services, online bill payment, and a wide array of loan products, including commercial business loans, lines of credit, SBA loans, commercial real estate loans, agribusiness loans, franchise lending, home equity lines of credit, and construction loans throughout the Western United States in major metropolitan markets within Arizona, California, Nevada, Oregon, and Washington. We also have acquired and enhanced nationwide specialty banking products and services for HOA and HOA management companies, as well as experienced owner-operator franchisees in the QSR industry. Most recently, we have expanded our specialty products and services offerings to include commercial escrow services through our Commerce Escrow division, which facilitates commercial escrow services and tax-deferred commercial real estate exchanges under Section 1031 of the Internal Revenue Code, as well as custodial and maintenance services through our Pacific Premier Trust division, which serves as a custodian for self-directed IRAs as well as certain accounts that do not qualify as IRAs pursuant to the Internal Revenue Code.

The Bank funds its lending and investment activities with retail and commercial deposits obtained through its branches, advances from the FHLB, lines of credit, and wholesale and brokered certificates of deposit.

 

Our principal source of income is the net spread between interest earned on loans and investments and the interest costs associated with deposits and borrowings used to finance the loan and investment portfolios. Additionally, the Bank generates fee income from loan and investment sales, and various products and services offered to depository, loan, escrow, and IRA custodial clients.

COVID-19 PANDEMIC

    

The COVID-19 outbreak was declared a Public Health Emergency of International Concern by the World Health Organization (“WHO”) on January 30, 2020 and a pandemic by the WHO on March 11, 2020. The ongoing COVID-19 global pandemic and national health emergency has caused significant disruption in the United States and international economies and financial markets.

While economic conditions have improved, the ongoing COVID-19 pandemic has placed strain on certain businesses and service providers, many of which have not been able to conduct operations in their usual manner. Should the COVID-19 pandemic persist, we anticipate it could have an impact on the following:

•Loan growth and interest income - Economic activity has expanded since the onset of the COVID-19 pandemic, however the economy continues to experience supply chain disruptions, inflationary pressures, and the uncertainty created by recent geopolitical developments. If the economic recovery 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 additional weakness in 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 improved since the onset of the COVID-19 pandemic in the first quarter of 2020, there can be no assurance the recovery will continue. As such, 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.

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•CECL - The Company is required to measure and record credit losses on certain financial assets, such as loans and debt securities, in accordance with the CECL model stipulated under ASC 326. The CECL model for measuring credit losses is highly dependent upon expectations of future economic conditions and requires management judgment. Should the recovery in economic conditions begin to wane and expectations concerning future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses under the CECL model.

•Impairment charges - Should the recovery in economic conditions wane, 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.

The U.S. government as well as other state and local policy makers have responded to the ongoing COVID-19 pandemic with actions geared to support not only the health and well-being of the public, but also consumers, businesses, and the economy as a whole. However, the ultimate impact and overall effectiveness of these actions is difficult to determine at this time.

CRITICAL ACCOUNTING POLICIES

 

Management has established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Certain accounting policies require management to make estimates and assumptions that involve a significant level of estimation uncertainty and are reasonably likely to have a material impact on the carrying value of certain assets and liabilities as well as the Company’s results of operations; management considers these to be critical accounting policies. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of the Company’s assets and liabilities as well as the Company’s results of operations in future reporting periods. Our significant accounting policies are described in the Notes to the consolidated financial statements in our 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.

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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.

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.

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Business Combinations

The Company accounts for business combinations under the acquisition method of accounting. Upon obtaining control of an acquired entity, the Company records all identifiable assets and liabilities at their estimated fair values. Goodwill is recorded when the consideration paid for an acquired entity exceeds the estimated fair value of the net assets acquired. Changes to the acquisition date fair values of assets acquired and liabilities assumed may be made as adjustments to goodwill during a one year measurement period following the date of acquisition. Such adjustments are attributable to additional information obtained related to fair value estimates of the assets acquired and liabilities assumed. Costs associated with business combinations are expensed as incurred.

Income Taxes

The Company is subject to federal and state taxation in various tax jurisdictions within the United States. Current income taxes are based on estimates for amounts payable or receivable on tax returns for the current year. Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the asset-liability method. In estimating future tax consequences, all expected future events other than enactments of changes in tax laws or tax rates are considered. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are to be recognized for temporary differences that will result in deductible amounts in future years and for tax carryforwards if, in the opinion of management, it is more likely than not that the deferred tax assets will be realized. Changes in income taxes can occur when, among other things, there are changes in tax laws, changes in tax rates, and/or changes in statutory or regulatory guidance; any of which may have an impact on current and deferred income taxes, and may have a material impact on our results of operations. The Company’s income tax positions are evaluated quarterly.

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NON-GAAP MEASURES

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position, or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures and may not be comparable to non-GAAP financial measures that may be presented by other companies.

For periods presented below, return on average tangible common equity is a non-GAAP financial measure derived from GAAP-based amounts. We calculate this figure by excluding amortization of intangible assets expense from net income and excluding the average intangible assets and average goodwill from the average stockholders’ equity during the period. Management believes that the exclusion of such items from this financial measure provides useful information to gain an understanding of the operating results of our core business.

						Three Months Ended
						March 31,						December 31,						March 31,
(Dollars in thousands)						2022						2021						2021
Net income						$	66,904					$	84,831					$	68,668
Plus: amortization of intangible assets expense						3,592						3,880						4,143
Less: amortization of intangible assets expense tax adjustment (1)						1,025						1,107						1,185
Net income for average tangible common equity						$	69,471					$	87,604					$	71,626
Average stockholders’ equity						$	2,864,387					$	2,851,000					$	2,749,641
Less: average intangible assets						68,157						71,897						83,946
Less: average goodwill						901,312						901,312						898,587
Average tangible common equity						$	1,894,918					$	1,877,791					$	1,767,108
Return on average equity (2)						9.34		%				11.90		%				9.99		%
Return on average tangible common equity (2)						14.66		%				18.66		%				16.21		%

______________________________

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

(2) Ratio is annualized.

    

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Tangible book value per share and tangible common equity to tangible assets (the “tangible common equity ratio”) are non-GAAP financial measures derived from GAAP-based amounts. We calculate tangible book value per share by dividing tangible common stockholder’s equity by shares outstanding. We calculate the tangible common equity ratio by excluding the balance of intangible assets from common stockholders’ equity and dividing by period end tangible assets, which also excludes intangible assets. We believe that this information is important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk-based ratios.

			March 31,						December 31,
(Dollars in thousands)			2022						2021
Total stockholders’ equity			$	2,783,018					$	2,886,311
Less: intangible assets			967,290						970,883
Tangible common equity			$	1,815,728					$	1,915,428
Total assets			$	21,622,296					$	21,094,429
Less: intangible assets			967,290						970,883
Tangible assets			$	20,655,006					$	20,123,546
Tangible common equity ratio			8.79		%				9.52		%
Common shares issued and outstanding			94,945,849						94,389,543
Book value per share			$	29.31					$	30.58
Less: intangible book value per share			10.19						10.29
Tangible book value per share			$	19.12					$	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
						March 31,						December 31,						March 31,
(Dollars in thousands)						2022						2021						2021
Total noninterest expense						$	97,648					$	97,252					$	92,489
Less: amortization of intangible assets						3,592						3,880						4,143
Less: merger-related expense						—						—						5
Noninterest expense, adjusted						$	94,056					$	93,372					$	88,341
Net interest income before provision for loan losses						$	161,839					$	170,719					$	161,652
Add: total noninterest income						25,894						27,281						23,740
Less: net gain from investment securities						2,134						3,585						4,046
Less: other income - security recoveries						—						1						2
Less: net gain (loss) from debt extinguishment						—						—						(503)
Revenue, adjusted						$	185,599					$	194,414					$	181,847
Efficiency ratio						50.7		%				48.0		%				48.6		%

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Core net interest income and core net interest margin are non-GAAP financial measures derived from GAAP based amounts. We calculate core net interest income by excluding scheduled accretion income, accelerated accretion income, premium amortization on CDs, 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
						March 31,						December 31,						March 31,
(Dollars in thousands)						2022						2021						2021
Net interest income						$	161,839					$	170,719					$	161,652
Less: scheduled accretion income						2,857						3,097						3,878
Less: accelerated accretion income						3,083						4,770						5,988
Less: premium amortization on CDs						96						183						1,751
Less: nonrecurring nonaccrual interest paid						(356)						349						(603)
Less: loss on fair value hedging relationships						(1,667)						(819)						—
Core net interest income						$	157,826					$	163,139					$	150,638
Average interest-earning assets						$	19,240,232					$	19,173,458					$	18,490,426
Net interest margin (1)						3.41		%				3.53		%				3.55		%
Core net interest margin (1)						3.33		%				3.38		%				3.30		%

______________________________

(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 better comparison to the financial results of prior periods.

						Three Months Ended
						March 31,						December 31,						March 31,
(Dollars in thousands)						2022						2021						2021
Interest income						$	168,546					$	177,006					$	172,994
Interest expense						6,707						6,287						11,342
Net interest income						161,839						170,719						161,652
Noninterest income						25,894						27,281						23,740
Revenue						187,733						198,000						185,392
Noninterest expense						97,648						97,252						92,489
Add: merger-related expense						—						—						5
Pre-provision net revenue						90,085						100,748						92,908
Pre-provision net revenue (annualized)						$	360,340					$	402,992					$	371,632
Average assets						$	20,956,791					$	20,867,005					$	19,994,260
Pre-provision net revenue on average assets						0.43		%				0.48		%				0.46		%
Pre-provision net revenue on average assets (annualized)						1.72		%				1.93		%				1.86		%

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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
(Dollar in thousands, except per share data and						March 31,						December 31,						March 31,
percentages)						2022						2021						2021
Operating data
Interest income						$	168,546					$	177,006					$	172,994
Interest expense						6,707						6,287						11,342
Net interest income						161,839						170,719						161,652
Provision for credit losses						448						(14,648)						1,974
Net interest income after provision for credit losses						161,391						185,367						159,678
Net gain from sales of loans						1,494						1,334						361
Other noninterest income						24,400						25,947						23,379
Noninterest expense						97,648						97,252						92,489
Net income before income taxes						89,637						115,396						90,929
Income tax expense						22,733						30,565						22,261
Net income						$	66,904					$	84,831					$	68,668
Pre-provision net revenue (3)						$	90,085					$	100,748					$	92,908
Share data
Earnings per share:
Basic						$	0.71					$	0.90					$	0.73
Diluted						0.70						0.89						0.72
Common equity dividends declared per share						0.33						0.33						0.30
Dividend payout ratio (1)						46.60		%				36.72		%				41.26		%
Performance ratios
Return on average assets (2)						1.28		%				1.63		%				1.37		%
Return on average equity (2)						9.34						11.90						9.99
Return on average tangible common equity (2)(3)						14.66						18.66						16.21
Pre-provision net revenue on average assets (2)(3)						1.72						1.93						1.86
Average equity to average assets						13.67						13.66						13.75
Efficiency ratio (3)						50.7						48.0						48.6

______________________________

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

(2) Ratio is annualized.

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

    

In the first quarter of 2022, we reported net income of $66.9 million, or $0.70 per diluted share. This compares with net income of $84.8 million, or $0.89 per diluted share, for the fourth quarter of 2021. The decrease in net income was primarily due to a $15.1 million decrease in provision recapture, an $8.9 million decrease in net interest income, a $1.4 million decrease in noninterest income, and a $396,000 increase in noninterest expense, partially offset by a $7.8 million decrease in income tax expense. The provision recapture during the fourth quarter of 2021 was reflective of improving economic forecasts used in the Company’s CECL model relative to prior periods, partially offset by an increase in loans held for investment and changes in loan mix.

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Net income of $66.9 million, or $0.70 per diluted share, for the first quarter of 2022 compares to net income for the first quarter of 2021 of $68.7 million, or $0.72 per diluted share. The decrease in net income was primarily due to a $5.2 million increase in noninterest expense, partially offset by a $2.2 million increase in noninterest income, and a $1.5 million decrease in provision for credit losses. The decrease in the provision for credit losses during the first quarter of 2022 was primarily due to higher outstanding unfunded loan commitments in the first quarter of 2021.

For the three months ended March 31, 2022, the Company’s return on average assets was 1.28%, return on average equity was 9.34%, and return on average tangible common equity was 14.66%. For the three months ended December 31, 2021, the return on average assets was 1.63%, the return on average equity was 11.90%, and the return on average tangible common equity was 18.66%. For the three months ended March 31, 2021, the return on average assets was 1.37%, the return on average equity was 9.99%, and the return on average tangible common equity was 16.21%. 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 $161.8 million in the first quarter of 2022, a decrease of $8.9 million, or 5.2%, from the fourth quarter of 2021. The decrease in net interest income was primarily attributable to lower loan-related fees and lower accretion income as a result of slowing prepayment activity, two fewer days of interest, and lower average investment and loan yields, partially offset by an increase in average earning assets and a favorable remix towards higher yielding loans.

The net interest margin for the first quarter of 2022 was 3.41%, compared with 3.53% in the prior quarter. Our core net interest margin, which excludes the impact of loan accretion income, loss on interest rate contract in fair value hedging relationships, and other adjustments, decreased 5 basis points to 3.33%, compared to 3.38% in the prior quarter, reflecting lower loan prepayment fees, lower average investment and loan yields, partially offset by the favorable shift in average earning-asset mix.

Net interest income for the first quarter of 2022 increased $187,000, or 0.1%, compared to the first quarter of 2021. The increase was attributable to higher average loan and investment balances, lower cost of funds, primarily due to a favorable deposit mix from an $894.6 million increase in average noninterest-bearing checking, and redemptions of higher-cost subordinated debentures, partially offset by lower average interest-earning assets yields.

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The following table presents the interest spread, net interest margin, average balances calculated based on daily average, interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, and the average yield/rate by asset and liability component for the periods indicated:

						Average Balance Sheet
						Three Months Ended
						March 31, 2022																		December 31, 2021																		March 31, 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						$	322,236					$	90					0.11		%				$	334,371					$	66					0.08		%				$	1,309,366					$	301					0.09		%
Investment securities						4,546,408						17,852						1.57						4,833,251						19,522						1.62						4,087,451						17,468						1.71
Loans receivable, net (1)(2)						14,371,588						150,604						4.25						14,005,836						157,418						4.46						13,093,609						155,225						4.81
Total interest-earning assets						19,240,232						168,546						3.55						19,173,458						177,006						3.66						18,490,426						172,994						3.79
Noninterest-earning assets						1,716,559																		1,693,547																		1,503,834
Total assets						$	20,956,791																	$	20,867,005																	$	19,994,260
Liabilities and equity
Interest-bearing deposits:
Interest checking						$	3,537,824					$	229					0.03		%				$	3,501,323					$	225					0.03		%				$	3,060,055					$	419					0.06		%
Money market						5,343,973						888						0.07						5,467,559						925						0.07						5,447,909						2,588						0.19
Savings						422,186						26						0.02						418,218						27						0.03						368,288						82						0.09
Retail certificates of deposit						1,047,451						530						0.21						1,084,326						517						0.19						1,425,093						1,201						0.34
Wholesale/brokered certificates of deposit						—						—						—						—						—						—						118,854						136						0.46
Total interest-bearing deposits						10,351,434						1,673						0.07						10,471,426						1,694						0.06						10,420,199						4,426						0.17
FHLB advances and other borrowings						225,250						474						0.85						69,538						33						0.19						22,012						65						1.20
Subordinated debentures						330,629						4,560						5.52						330,476						4,560						5.52						501,553						6,851						5.46
Total borrowings						555,879						5,034						3.63						400,014						4,593						4.59						523,565						6,916						5.36
Total interest-bearing liabilities						10,907,313						6,707						0.25						10,871,440						6,287						0.23						10,943,764						11,342						0.42
Noninterest-bearing deposits						6,928,872																		6,911,702																		6,034,319
Other liabilities						256,219																		232,863																		266,536
Total liabilities						18,092,404																		18,016,005																		17,244,619
Stockholders’ equity						2,864,387																		2,851,000																		2,749,641
Total liabilities and equity						$	20,956,791																	$	20,867,005																	$	19,994,260
Net interest income												$	161,839																	$	170,719																	$	161,652
Net interest margin (3)																		3.41		%																3.53		%																3.55		%
Cost of deposits (4)																		0.04																		0.04																		0.11
Cost of funds (5)																		0.15																		0.14																		0.27
Ratio of interest-earning assets to interest-bearing liabilities																		176.40																		176.37																		168.96

______________________________

(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums.

(2) Interest income includes net discount accretion of $5.9 million, $7.9 million, and $9.9 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.

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Changes in our net interest income are a function of changes in volume, days in a period, and rates of interest-earning assets and interest-bearing liabilities. The following tables present the impact that the volume, days in a period, and rate changes have had on our net interest income for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes to our net interest income with respect to:

 

•Changes in volume (changes in volume multiplied by prior rate);

•Changes in days in a period (changes in days in a period multiplied by daily interest; no changes in days for comparisons of the three months ended March 31, 2022 to the three months ended March 31, 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 March 31, 2022
			Compared to
			Three Months Ended December 31, 2021
			Increase (Decrease) Due to
(Dollars in thousands)			Volume						Days						Rate						Net
Interest-earning assets
Cash and cash equivalents			$	(2)					$	(2)					$	28					$	24
Investment securities			(1,137)						—						(533)						(1,670)
Loans receivable, net			3,890						(3,347)						(7,357)						(6,814)
Total interest-earning assets			2,751						(3,349)						(7,862)						(8,460)
Interest-bearing liabilities
Interest checking			2						(5)						7						4
Money market			(21)						(20)						4						(37)
Savings			—						(1)						—						(1)
Retail certificates of deposit			(16)						(12)						41						13
FHLB advances and other borrowings			176						(11)						276						441
Subordinated debentures			2						—						(2)						—
Total interest-bearing liabilities			143						(49)						326						420
Change in net interest income			$	2,608					$	(3,300)					$	(8,188)					$	(8,880)

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			Three Months Ended March 31, 2022
			Compared to
			Three Months Ended March 31, 2021
			Increase (Decrease) Due to
(Dollars in thousands)			Volume												Rate						Net
Interest-earning assets
Cash and cash equivalents			$	(296)											$	85					$	(211)
Investment securities			1,882												(1,498)						384
Loans receivable, net			14,273												(18,894)						(4,621)
Total interest-earning assets			15,859												(20,307)						(4,448)
Interest-bearing liabilities
Interest checking			48												(238)						(190)
Money market			(48)												(1,652)						(1,700)
Savings			14												(70)						(56)
Retail certificates of deposit			(267)												(404)						(671)
Wholesale/brokered certificates of deposit			(68)												(68)						(136)
FHLB advances and other borrowings			514												(105)						409
Subordinated debentures			(2,358)												67						(2,291)
Total interest-bearing liabilities			(2,165)												(2,470)						(4,635)
Change in net interest income			$	18,024											$	(17,837)					$	187

Provision for Credit Losses

For the first quarter of 2022, the Company recorded a $448,000 provision expense, compared to a $14.6 million provision recapture during the fourth quarter of 2021, and a $2.0 million provision expense during the first quarter of 2021. The provision expense during the first quarter of 2022 was driven principally by loan growth and higher net charge-offs, as well as the impact of growing macroeconomic uncertainties. With the increasing probability of downside risks due to high inflation, the war between Russia and Ukraine and the uncertainty of its economic impact, and the potential that the economy may enter into a period of recession, the Company is carefully monitoring the current and forecasted macroeconomic environment, as well as key modeling variables.

The provision recapture for the fourth quarter of 2021 was primarily reflective of improving economic forecasts employed in the Company’s CECL model, partially offset by the fourth quarter loan growth and changes in loan mix. The provision expense for the first quarter of 2021 was a result of an increase in outstanding unfunded commitments in the commercial and industrial loan segment in conjunction with continued unfavorable, but improving economic conditions and forecasts reflected in the Company’s CECL model.

Net loan charge-offs for the three months ending March 31, 2022 totaled $446,000, compared with net loan recoveries of $981,000 for the three months ending December 31, 2021, and net loan charge-offs of $1.3 million for the three months ending March 31, 2021.

						Three Months Ended																		Variance From
						March 31,						December 31,						March 31,						December 31, 2021												March 31, 2021
(Dollars in thousands)						2022						2021						2021						$						%						$						%
Provision for credit losses
Provision for loan losses						$	211					$	(14,710)					$	315					$	14,921					(101.4)		%				$	(104)					(33.0)		%
Provision for unfunded commitments						218						51						1,659						167						327.5						(1,441)						(86.9)
Provision for HTM securities						19						11						—						8						72.7						19						—
Total provision for credit losses						$	448					$	(14,648)					$	1,974					$	15,096					(103.1)		%				$	(1,526)					(77.3)		%

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Noninterest Income

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

						Three Months Ended																		Variance From
						March 31,						December 31,						March 31,						December 31, 2021												March 31, 2021
(Dollars in thousands)						2022						2021						2021						$						%						$						%
Noninterest income
Loan servicing income						$	419					$	505					$	458					$	(86)					(17.0)		%				$	(39)					(8.5)		%
Service charges on deposit accounts						2,615						2,590						2,032						25						1.0						583						28.7
Other service fee income						367						391						473						(24)						(6.1)						(106)						(22.4)
Debit card interchange fee income						836						769						787						67						8.7						49						6.2
Earnings on bank owned life insurance						3,221						3,521						2,233						(300)						(8.5)						988						44.2
Net gain from sales of loans						1,494						1,334						361						160						12.0						1,133						313.9
Net gain from sales of investment securities						2,134						3,585						4,046						(1,451)						(40.5)						(1,912)						(47.3)
Trust custodial account fees						11,579						11,611						7,222						(32)						(0.3)						4,357						60.3
Escrow and exchange fees						1,661						2,221						1,526						(560)						(25.2)						135						8.8
Other income						1,568						754						4,602						814						108.0						(3,034)						(65.9)
Total noninterest income						$	25,894					$	27,281					$	23,740					$	(1,387)					(5.1)		%				$	2,154					9.1		%

Noninterest income for the first quarter of 2022 was $25.9 million, a decrease of $1.4 million from the fourth quarter of 2021. The decrease was primarily due to a $1.5 million decrease in net gain from sales of investment securities and a $560,000 decrease in escrow and exchange fees, partially offset by an $814,000 increase in other income, which included $530,000 higher CRA investment income.

During the first quarter of 2022, the Bank sold $17.8 million of SBA loans for a net gain of $1.5 million, compared to the sales of $13.3 million of SBA loans for a net gain of $1.3 million during the fourth quarter of 2021.

Additionally, during the first quarter of 2022, the Bank sold $658.5 million of investment securities for a net gain of $2.1 million, compared to the sales of $267.1 million of investment securities for a net gain of $3.6 million in the fourth quarter of 2021.

Noninterest income for the first quarter of 2022 increased $2.2 million, compared to the first quarter of 2021. The increase was primarily due to a $4.4 million increase in trust custodial account fees, a $1.1 million increase in net gain from sales of loans, and a $988,000 increase in earnings on bank owned life insurance (“BOLI”), partially offset by a $3.0 million decrease in other income and a $1.9 million decrease in net gain from sales of investment securities.

The net gain from sales of loans for the first quarter of 2022 increased from the same period last year reflecting higher net gain from the sales of $17.8 million of SBA loans for a net gain of $1.5 million, compared with the sales of $1.3 million of SBA loans for a net gain of $69,000 and fully charged-off loans for a net gain of $292,000 during the first quarter of 2021.

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Noninterest Expense

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

						Three Months Ended																		Variance From
						March 31,						December 31,						March 31,						December 31, 2021												March 31, 2021
(Dollars in thousands)						2022						2021						2021						$						%						$						%
Noninterest expense
Compensation and benefits						$	56,981					$	56,076					$	52,548					$	905					1.6		%				$	4,433					8.4		%
Premises and occupancy						11,952						11,403						11,980						549						4.8						(28)						(0.2)
Data processing						5,996						5,881						5,828						115						2.0						168						2.9
Other real estate owned operations, net						—						—						—						—						—						—						—
FDIC insurance premiums						1,396						1,389						1,181						7						0.5						215						18.2
Legal and professional services						4,068						5,870						3,935						(1,802)						(30.7)						133						3.4
Marketing expense						1,809						1,821						1,598						(12)						(0.7)						211						13.2
Office expense						1,203						1,463						1,829						(260)						(17.8)						(626)						(34.2)
Loan expense						1,134						857						1,115						277						32.3						19						1.7
Deposit expense						3,751						3,836						3,859						(85)						(2.2)						(108)						(2.8)
Merger-related expense						—						—						5						—						—						(5)						(100.0)
Amortization of intangible assets						3,592						3,880						4,143						(288)						(7.4)						(551)						(13.3)
Other expense						5,766						4,776						4,468						990						20.7						1,298						29.1
Total noninterest expense						$	97,648					$	97,252					$	92,489					$	396					0.4		%				$	5,159					5.6		%

Noninterest expense totaled $97.6 million for the first quarter of 2022, an increase of $396,000 compared to the fourth quarter of 2021, primarily driven by a $990,000 increase in other expense mainly attributable to a higher credit loss reserve for trust custodial account fees receivable and higher expenses for Pacific Premier Trust, a $905,000 increase in compensation and benefits, and a $549,000 increase in premises and occupancy expense, partially offset by a $1.8 million decrease in legal and professional services.

Noninterest expense increased by $5.2 million compared to the first quarter of 2021. The increase was primarily due to a $4.4 million increase in compensation and benefits and a $1.3 million increase in other expense, partially offset by a $626,000 decrease in office expense and a $551,000 decrease in amortization of intangible assets.

The Company’s efficiency ratio was 50.7% for the first quarter of 2022, compared to 48.0% for the fourth quarter of 2021, and 48.6% for the first quarter of 2021.

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Income Taxes

For the three months ended March 31, 2022, December 31, 2021, and March 31, 2021, income tax expense was $22.7 million, $30.6 million, and $22.3 million, respectively, and the effective income tax rate was 25.4%, 26.5%, and 24.5%, respectively. Our effective tax rate for the three months ended March 31, 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 March 31, 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 March 31, 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 $42,000 and $31,000 of such interest at March 31, 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 March 31, 2022 and December 31, 2021.

FINANCIAL CONDITION

 

At March 31, 2022, assets totaled $21.62 billion, an increase of $527.9 million, or 2.5%, from $21.09 billion at December 31, 2021. The increase was primarily due to increases in cash and cash equivalents of $504.6 million and total loans of $438.6 million, partially offset by a $437.1 million decrease in investment securities. During the quarter, we took actions to position the balance sheet for a higher interest rate environment and macroeconomic uncertainty, which included increasing our liquidity position and reducing the size and duration of the AFS securities portfolio to fund higher yielding loan growth.

Loans

Loans held for investment totaled $14.73 billion at March 31, 2022, an increase of $437.9 million, or 3.1%, from $14.30 billion at December 31, 2021. The increase was driven by an increase in loans funded and higher commercial line utilization rates and lower levels of prepayments and maturities during the first three months of 2022. Commercial line utilization rates increased from an average rate of 35.2% for the fourth quarter of 2021 to 39.5% for the first quarter of 2022. Since December 31, 2021, investor loans secured by real estate increased $174.6 million, business loans secured by real estate increased $144.1 million, commercial loans increased $135.0 million, and retail loans decreased $15.8 million.

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The total end-of-period weighted average interest rate on loans, net of fees and discounts, at March 31, 2022 was 3.92%, compared to 3.95% at December 31, 2021. The decrease reflects the impact of lower rates on new originations, prepayments of higher rate loans, and the change in the mix of loans.

Loans held for sale primarily represent the guaranteed portion of SBA loans, which the Bank originates for sale, and totaled $11.6 million at March 31, 2022, an increase of $777,000 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: 

			March 31, 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			$	2,774,650					18.8		%				4.16		%				$	2,771,137					19.4		%				4.19		%
Multifamily			6,041,085						41.0						3.70						5,891,934						41.2						3.75
Construction and land			303,811						2.1						4.89						277,640						1.9						4.88
SBA secured by real estate			42,642						0.2						4.98						46,917						0.3						4.98
Total investor loans secured by real estate			9,162,188						62.1						3.89						8,987,628						62.8						3.93
Business loans secured by real estate
CRE owner-occupied			2,391,984						16.2						4.03						2,251,014						15.7						4.07
Franchise real estate secured			384,267						2.7						4.60						380,381						2.7						4.60
SBA secured by real estate			68,466						0.5						5.11						69,184						0.5						5.23
Total business loans secured by real estate			2,844,717						19.4						4.13						2,700,579						18.9						4.18
Commercial loans
Commercial and industrial			2,242,632						15.2						3.62						2,103,112						14.7						3.61
Franchise non-real estate secured			388,322						2.6						4.75						392,576						2.7						4.76
SBA non-real estate secured			10,761						0.1						5.52						11,045						0.1						5.54
Total commercial loans			2,641,715						17.9						3.79						2,506,733						17.5						3.80
Retail loans
Single family residential			79,978						0.5						4.05						95,292						0.7						4.01
Consumer			5,157						0.1						4.87						5,665						0.1						4.98
Total retail loans			85,135						0.6						4.08						100,957						0.8						4.05
Gross loans held for investment (1)			14,733,755						100.0		%				3.92						14,295,897						100.0		%				3.95
Allowance for credit losses for loans held for investment			(197,517)																		(197,752)
Loans held for investment, net			$	14,536,238																	$	14,098,145
Total unfunded loan commitments			$	2,940,370																	$	2,507,911
Loans held for sale, at lower of cost or fair value			$	11,646																	$	10,869

______________________________

(1) Includes net deferred origination fees of $3.9 million and $3.5 million, and unaccreted fair value net purchase discounts of $71.2 million and $77.1 million as of March 31, 2022 and December 31, 2021, respectively.

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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 0.30% at March 31, 2022, compared to 0.14% at December 31, 2021. The quarter-over-quarter increase in loan delinquencies was primarily due to the addition of two C&I loans totaling $25.3 million belonging to a single relationship that were 30 - 59 days delinquent at March 31, 2022.

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 March 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied			—						$	—					—						$	—					4						$	12,018					4						$	12,018
Total investor loans secured by real estate			—						—						—						—						4						12,018						4						12,018
Business loans secured by real estate
CRE owner-occupied			—						—						—						—						3						4,901						3						4,901
SBA secured by real estate			—						—						—						—						1						441						1						441
Total business loans secured by real estate			—						—						—						—						4						5,342						4						5,342
Commercial loans
Commercial and industrial			7						25,332						2						74						1						243						10						25,649
SBA non-real estate secured			—						—						—						—						1						642						1						642
Total commercial loans			7						25,332						2						74						2						885						11						26,291
Retail loans
Total retail loans			—						—						—						—						—						—						—						—
Total			7						$	25,332					2						$	74					10						$	18,245					19						$	43,651
Delinquent loans to loans held for investment									0.17		%										—		%										0.13		%										0.30		%

.

.

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			30 - 59 Days												60 - 89 Days												90 Days or More												Total
(Dollars in thousands)			# of Loans						Principal Balance of Loans						# of Loans						Principal Balance of Loans						# of Loans						Principal Balance of Loans						# of Loans						Principal Balance of Loans
At December 31, 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
Retail loans
Total retail loans			—						—						—						—						—						—						—						—
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 March 31, 2022 and December 31, 2021, the Company had six loans totaling $16.9 million and $17.3 million, respectively, modified as TDRs, which are comprised 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 two franchise non-real estate secured loans totaling $11.8 million and $12.1 million, respectively, belonging to another borrower relationship with the terms modified for payment deferral. All TDRs were on nonaccrual status as of March 31, 2022 and December 31, 2021.

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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 $55.3 million, or 0.26% of total assets, at March 31, 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 March 31, 2022 and December 31, 2021. All nonperforming assets consisted of nonperforming loans at March 31, 2022 and December 31, 2021. The increase in nonperforming assets since December 31, 2021 was primarily due to the addition of two C&I loans totaling $25.3 million belonging to a single relationship that were placed on nonaccrual during first quarter of 2022.

The Company had one CRE owner-occupied loan of $1.8 million that was 90 days or more past due and accruing at March 31, 2022, compared to no loans 90 days or more past due and accruing at December 31, 2021.

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

(Dollars in thousands)						March 31, 2022						December 31, 2021
Nonperforming assets
Investor loans secured by real estate
CRE non-owner-occupied						$	10,243					$	10,255
SBA secured by real estate						573						937
Total investor loans secured by real estate						10,816						11,192
Business loans secured by real estate
CRE owner-occupied						4,901						4,952
SBA secured by real estate						575						589
Total business loans secured by real estate						5,476						5,541
Commercial loans
Commercial and industrial						26,588						1,798
Franchise non-real estate secured						11,779						12,079
SBA non-real estate secured						642						653
Total commercial loans						39,009						14,530
Retail loans
Single family residential						8						10
Total retail loans						8						10
Total nonperforming loans						55,309						31,273
Other real estate owned						—						—
Other assets owned						—						—
Total						$	55,309					$	31,273
Allowance for credit losses						$	197,517					$	197,752
Allowance for credit losses as a percent of total nonperforming loans						357		%				632		%
Nonperforming loans as a percent of loans held for investment						0.38						0.22
Nonperforming assets as a percent of total assets						0.26						0.15
TDRs included in nonperforming loans						$	16,923					$	17,277

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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, and loans that have been deemed collateral dependent are evaluated individually based on the expected estimated fair value of the underlying collateral.

The Company measures the ACL on commercial real estate and commercial loans using a discounted cash flow approach, using the loan’s effective interest rate, while the ACL for retail loans is based on a historical loss rate model. The discounted cash flow methodology relies on several significant components essential to the development of estimates for future cash flows on loans and unfunded commitments. These components consist of: (i) the 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. Additionally, LGD for these loans incorporates an estimate for the loss severity associated with loans where the borrower fails to meet their debt obligation at maturity. External factors that impact PD and LGD for commercial real estate loans include: changes in the index for CRE pricing, GDP growth rate, unemployment rates, and the Consumer Price Index.

For business loans secured by real estate and commercial loans, PD is based on an internally developed rating scale that assigns PD based on the Company’s internal risk grades for each loan. Changes in risk grades for these loans result in changes in PD. The Company obtains LGD for these loans from a third party that has a considerable database of credit related information specific to the financial services industry and the type of loans within these segments.

PD for both investor and business real estate loans, as well as commercial loans is heavily impacted by current and expected economic conditions.

The ACL for retail loans is based on a historical loss rate model, which incorporates loss rates derived from a third party that has a considerable database of credit related information for retail loans. Loss rates for retail loans are dependent upon loan level and external factors such as: FICO, vintage, geography, unemployment rates, and changes in consumer real estate prices.

The Company’s ACL includes assumptions concerning current and future economic conditions using reasonable and supportable forecasts and how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Bank and the ultimate collectability of future cash flows over the life of a loan. The Company uses economic scenarios from 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, determines whether to utilize multiple probability-weighted scenarios, and, if multiple scenarios are utilized, evaluates and determines the weighting for each scenario used in the Company’s ACL model, and thus the scenarios and weightings of each scenario may change in future periods. Economic scenarios chosen, 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 such as the ongoing COVID-19 pandemic, the war between Russia and Ukraine, and ongoing inflationary pressures throughout the U.S. economy.

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As of March 31, 2022, the Company’s ACL model used three weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The weightings assigned to each scenario were as follows: the base-case scenario, or most likely scenario, was assigned a weighting of 40%, while the upside and downside scenarios were each assigned a weighting of 30%. The Company evaluated the weightings of each economic scenario in the current period and determined the current weightings of 40% for the base-case scenario, and 30% for each of the upside and downside scenarios appropriately reflect the likelihood of outcomes for each scenario given the current economic environment. The use of three weighted scenarios at March 31, 2022 and the weighting assigned to each scenario is consistent with the approach used in the Company’s ACL model at December 31, 2021.

Given recent developments in the geopolitical landscape with the war between Russia and Ukraine, ongoing inflationary pressures in the U.S. economy, and general uncertainty surrounding future economic conditions, the Company took into consideration these and other factors when determining the appropriateness of economic scenarios used in the ACL model at March 31, 2022. As a result, the Company used the economic forecast as of December 31, 2021 in the ACL model, which was more reflective of the current economic environment as well as the likelihood of future economic conditions occurring as of March 31, 2022. Further, economic scenarios used in the ACL model include the current and estimated future impact associated with the ongoing COVID-19 pandemic.

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 historical 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 from each loan the Company does not expect to collect.

It is important to note that the Company’s ACL model relies on multiple economic variables, which are used under several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Company has identified certain economic variables that have significant influence in the Company’s model for determining the ACL. As of March 31, 2022, the Company’s ACL model incorporated the following assumptions for key economic variables in the base-case, upside, and downside scenarios:

Base-case Scenario:

•U.S. unemployment declines to 3.5% through the end of 2022 and holds relatively constant at approximately 3.5% throughout 2023.

•U.S. real GDP growth decelerates throughout 2022 from approximately 5.4% to approximately 2.8% by the end of 2022. U.S. real GDP growth accelerates slightly from 2.7% from the beginning of 2023 to 2.8% towards the end of 2023.

•CRE index growth accelerates in 2022 from 0.4% in the second quarter of 2022 to approximately 8.3% by the end of 2022. Growth in the CRE index then decelerates from approximately 11.2% at the beginning of 2023 to 6.8% by the end of 2023.

•The 10-year U.S. Treasury yield ends 2022 at approximately 2.4%, and increases to approximately 3.1% by the end of 2023.

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Upside Scenario:

•U.S. unemployment rate declines to approximately 3.1% through the end of 2022 and holds relatively constant at approximately 3.0% throughout 2023.

•U.S. real GDP growth decelerates throughout 2022 from approximately 9.3% to approximately 4.2% by the end of 2022. U.S. real GDP growth decelerates from approximately 4.4% in early 2023 to approximately 1.9% by the end of 2023.

•CRE index growth accelerates in 2022 from approximately 1.9% in the second quarter of 2022 to approximately 14.1% by the end of 2022. Growth in the CRE index then decelerates from approximately 15.0% at the beginning of 2023 to approximately 6.9% by the end of 2023.

•The 10-year U.S. Treasury yield ends 2022 at approximately 2.3%, and then increases to approximately 3.0% by the end of 2023.

Downside Scenario:

•U.S. unemployment rate increases to approximately 8.2% through the end of 2022 and then declines moderately to approximately 8.0% by the end of 2023.

•U.S. real GDP declines decelerate in 2022 from approximately -4.0% in the second quarter to approximately -1.9% by the end of 2023. U.S. real GDP then returns to accelerating growth throughout 2023, with growth of approximately 3.4% by the end of 2023.

•CRE index declines accelerate in 2023 from approximately -3.5% in the second quarter of 2023 to approximately -19.5% by the end of 2023. The CRE index declines decelerate through the third quarter of 2023 from approximately -10.9% to -3.8%. The CRE index then returns to growth in the fourth quarter of 2023.

•The 10-year U.S. Treasury yield ends 2022 at approximately 1.2%, and then increases to approximately 2.1% by the end of 2023.

The Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL.

As of March 31, 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. Qualitative adjustments to the ACL were made for SBA investor loans secured by real estate, construction loans, and franchise loans. 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.

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The following charts quantify certain factors attributing to the changes in the ACL on loans held for investment for the three months ended March 31, 2022 and March 31, 2021:

The decrease in the ACL for loans held for investment during the three months ended March 31, 2022 of $235,000 was comprised of $446,000 in net charge-offs, partially offset by a $211,000 provision for credit losses. The provision for credit losses for the three months ended March 31, 2022 was reflective of higher loans held for investment and growing economic uncertainties, offset by improved economic forecasts and asset quality.

The decrease in the ACL for loans held for investment during the three months ended March 31, 2021 of $1.0 million is reflective of $1.3 million in net charge-offs, partially offset by a $315,000 provision for credit losses. The provision for credit losses for the three months ended March 31, 2021 was reflective of unfavorable economic conditions and forecasts used in the Company’s ACL model.

No assurance can be given that we will not, in any particular period, sustain credit losses that exceed the amount reserved, or that subsequent evaluation of our loan portfolio, in light of prevailing factors, including economic conditions that may adversely affect our market area or other circumstances, will not require significant increases in the ACL. In addition, regulatory agencies, as an integral part of their examination process, periodically review our ACL and may require us to recognize additional provisions to increase the allowance and record charge-offs in anticipation of future losses. 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.

At March 31, 2022, the Company believes the ACL was adequate to cover current expected credit losses in the loan portfolio.

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The following table sets forth the Company’s ACL, its corresponding percentage of the loan category balance, and the percentage of loan balance to total gross loans in each of the loan categories listed for the periods indicated:

						March 31, 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						$	35,974					1.30		%				18.8		%				$	37,380					1.35		%				19.4		%
Multifamily						54,325						0.90						41.0						55,209						0.94						41.2
Construction and land						5,219						1.72						2.1						5,211						1.88						1.9
SBA secured by real estate						3,050						7.15						0.2						3,201						6.82						0.3
Total investor loans secured by real estate						98,568						1.08						62.1						101,001						1.12						62.8
Business loans secured by real estate
CRE owner-occupied						31,891						1.33						16.2						29,575						1.31						15.7
Franchise real estate secured						7,977						2.08						2.7						7,985						2.10						2.7
SBA secured by real estate						5,195						7.59						0.5						4,866						7.03						0.5
Total business loans secured by real estate						45,063						1.58						19.4						42,426						1.57						18.9
Commercial loans
Commercial and industrial						38,598						1.72						15.2						38,136						1.81						14.7
Franchise non-real estate secured						14,304						3.68						2.6						15,084						3.84						2.7
SBA non-real estate secured						490						4.55						0.1						565						5.12						0.1
Total commercial loans						53,392						2.02						17.9						53,785						2.15						17.5
Retail loans
Single family residential						233						0.29						0.5						255						0.27						0.7
Consumer loans						261						5.06						0.1						285						5.03						0.1
Total retail loans						494						0.58						0.6						540						0.53						0.8
Total						$	197,517					1.34		%				100.0		%				$	197,752					1.38		%				100.0		%

At March 31, 2022, the ratio of allowance for credit losses to loans held for investment was 1.34%, a decrease from 1.38% at December 31, 2021. Our unamortized fair value discount on the loans acquired totaled $71.2 million, or 0.48% of total loans held for investment, at March 31, 2022, compared to $77.1 million, or 0.54% of total loans held for investment, at December 31, 2021.

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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
			March 31, 2022																		December 31, 2021																		March 31, 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			$	—					$	2,758,078					—%						$	(78)					$	2,799,901					—%						$	154					$	2,675,671					0.01%
Multifamily			—						5,903,012						—%						—						5,761,101						—%						—						5,201,868						—%
Construction and land			—						295,490						—%						—						293,937						—%						—						318,632						—%
SBA secured by real estate			70						45,392						0.15%						(2)						50,546						—%						265						56,196						0.47%
Total investor loans secured by real estate			70						9,001,972						—%						(80)						8,905,485						—%						419						8,252,367						0.01%
Business loans secured by real estate
CRE owner-occupied			(10)						2,266,066						—%						(12)						2,243,161						—%						(15)						2,044,442						—%
Franchise real estate secured			—						382,381						—%						—						356,467						—%						—						344,687						—%
SBA secured by real estate			—						75,189						—%						—						72,217						—%						98						77,152						0.13%
Total business loans secured by real estate			(10)						2,723,636						—%						(12)						2,671,845						—%						83						2,466,281						—%
Commercial loans
Commercial and industrial			338						2,155,582						0.02%						(561)						1,913,974						(0.03)%						678						1,692,213						0.04%
Franchise non-real estate secured			—						389,323						—%						(325)						385,922						(0.08)%						156						418,805						0.04%
SBA non-real estate secured			48						11,607						0.41%						(2)						12,107						(0.02)%						(2)						15,312						(0.01)%
Total commercial loans			386						2,556,512						0.02%						(888)						2,312,003						(0.04)%						832						2,126,330						0.04%
Retail loans
Single family residential			—						84,181						—%						—						110,277						—%						—						241,872						—%
Consumer			—						4,846						—%						(1)						5,868						(0.02)%						—						6,612						—%
Total retail loans			—						89,027						—%						(1)						116,145						—%						—						248,484						—%
Total			$	446					$	14,371,147					—%						$	(981)					$	14,005,478					(0.01)%						$	1,334					$	13,093,462					0.01%
Allowance for credit losses to loans held for investment															1.34%																		1.38%																		2.04%
Nonperforming loans to loans held for investment															0.38%																		0.22%																		0.30%
Allowance for credit losses to nonperforming loans															357%																		632%																		686%

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Investment Securities

 

We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled $4.22 billion at March 31, 2022, a decrease of $437.1 million, or 9.4%, from $4.66 billion at December 31, 2021, primarily to fund higher-yielding loan growth. The decrease was primarily the result of $658.5 million in sales, $109.3 million in principal payments, discounts from the AFS securities transferred to HTM, amortization, and redemptions, as well as a $168.1 million decrease in mark-to-market fair value adjustments, partially offset by $498.9 million in purchases, primarily corporate debt securities and collateralized mortgage obligations. In general, the purchase of investment securities is primarily related to investing excess liquidity from our banking operations. During the first 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 4.0 years at March 31, 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 March 31, 2022, AFS and HTM investment securities were $3.22 billion and $996.4 million, respectively, compared to $4.27 billion and $381.7 million, respectively, at December 31, 2021. During the first quarter of 2022, the Company reassessed classification of certain investments with longer duration and transferred approximately $386.8 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, from AFS to HTM securities. The transfer of these securities was accounted for at fair value. The municipal bonds had a net carrying amount of $379.9 million with a pre-tax unrealized loss of $6.9 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, which were reflected as discounts on the date of transfer. These discounts, as well as the related unrealized losses in accumulated other comprehensive income, are amortized 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 amortization of the discount. No gains or losses were recorded at the time of transfer. 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 the guidance ASC 326 and evaluated on a quarterly basis. As of March 31, 2022, the Company had an ACL of $41,000 for HTM investment securities classified as municipal bonds, which were transferred from AFS during the third and fourth quarters of 2021 and first quarter of 2022. The Company had an ACL of $22,000 ACL for HTM investment securities at December 31, 2021. As of March 31, 2022 and December 31, 2021, there was no ACL for the Company’s AFS investment securities. The Company recognized $19,000 and $11,000 of provision for credit losses for HTM investment securities during the three months March 31, 2022 and December 31, 2021, respectively. There was no provision for credit losses recognized for HTM investment securities during the three months March 31, 2021.

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The following table sets forth the amortized costs and weighted average yields on our HTM 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.

						March 31, 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
HTM investment securities:
Municipal bonds						—						—						—						—						$	44,774					1.52		%				$	703,113					2.07		%				$	747,887					2.04		%
Mortgage-backed securities						—						—						—						—						—						—						247,050						1.66						247,050						1.66
Other						—						—						—						—						—						—						1,486						0.97						1,486						0.97
Total HTM investment securities						—						—		%				—						—		%				$	44,774					1.52		%				$	951,649					1.97		%				$	996,423					1.94		%
Total securities						$	—					—		%				$	481,351					0.69		%				$	1,356,991					1.47		%				$	2,380,176					1.65		%				$	4,218,518					1.49		%

    

The following table presents the fair value of AFS and the amortized cost of HTM investment securities portfolios by Moody’s credit ratings at March 31, 2022.

(Dollars in thousands)						U.S. Treasury						Agency						Corporate Debt						Municipal Bonds						Collateralized Mortgage Obligations						Mortgage-backed Securities						Other						Total						%
Aaa - Aa3						$	13,990					$	369,227					$	39,946					$	1,163,171					$	855,256					$	1,213,773					$	—					$	3,655,363					86.6		%
A1 - A3						—						—						340,566						—						—						—						—						340,566						8.1
Baa1 - Baa3						—						6,550						214,553						—						—						—						1,486						222,589						5.3
Total						$	13,990					$	375,777					$	595,065					$	1,163,171					$	855,256					$	1,213,773					$	1,486					$	4,218,518					100.0		%

At March 31, 2022, 94.7% 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 $18.84 billion at March 31, 2022, compared to $18.21 billion at December 31, 2021. The increase of $631.2 million, or 3.5%, from December 31, 2021 was primarily due to a $573.6 million increase in deposits, $42.0 million increase in FHLB advances, and $15.4 million increase in other liabilities.

Deposits.  At March 31, 2022, deposits totaled $17.69 billion, an increase of $573.6 million, or 3.4%, from $17.12 billion at December 31, 2021. Non-maturity deposits totaled $16.66 billion, or 94.2% of total deposits, an increase of $600.9 million, or 3.7%, from December 31, 2021. The increase in deposits included $349.3 million in noninterest-bearing checking, $185.7 million in interest-bearing checking, and $65.9 million in money market/savings, primarily driven by an increase in business deposit account balances, partially offset by a planned decrease of $27.3 million in retail certificates of deposit.

The total end of period weighted average rate of deposits at March 31, 2022 remain unchanged at 0.04%, compared to December 31, 2021.

Our ratio of loans held for investment to deposits was 83.3% and 83.5% at March 31, 2022 and December 31, 2021, respectively.

 

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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:

			March 31, 2022																		December 31, 2021
(Dollars in thousands)			Balance						% of Total Deposits						Weighted Average Rate						Balance						% of Total Deposits						Weighted Average Rate
Noninterest-bearing checking			$	7,106,548					40.2		%				—		%				$	6,757,259					39.5		%				—		%
Interest-bearing deposits:
Checking			3,679,067						20.8						0.04						3,493,331						20.4						0.02
Money market			5,445,870						30.8						0.07						5,387,168						31.5						0.07
Savings			426,727						2.4						0.02						419,558						2.5						0.02
Time deposit accounts:
Less than 1.00%			996,562						5.6						0.22						1,012,473						5.9						0.18
1.00 - 1.99			28,441						0.2						1.52						39,322						0.2						1.49
2.00 - 2.99			6,008						—						2.21						6,296						—						2.23
3.00 - 3.99			—						—						—						182						—						3.45
4.00 - 4.99			—						—						—						—						—						—
5.00 and greater			—						—						—						—						—						—
Total time deposit accounts			1,031,011						5.8						0.26						1,058,273						6.2						0.24
Total interest-bearing deposits			10,582,675						59.8						0.08						10,358,330						60.5						0.07
Total deposits			$	17,689,223					100.0		%				0.04		%				$	17,115,589					100.0		%				0.04		%

 

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

(Dollars in thousands)			March 31, 2022						December 31, 2021
Uninsured deposits			$	6,598,952					$	6,220,802

The estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $352.4 million at March 31, 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)						March 31, 2022						December 31, 2021
3 months or less						$	307,612					$	297,595
Over 3 months through 6 months						18,450						28,187
Over 6 months through 12 months						19,261						23,051
Over 12 months						7,120						8,287
Total						$	352,443					$	357,120

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Borrowings.  At March 31, 2022, total borrowings amounted to $930.7 million, an increase of $42.2 million, or 4.7%, from $888.6 million at December 31, 2021. Total borrowings at March 31, 2022 were comprised of $600.0 million of FHLB advances and $330.7 million of subordinated debentures. The increase in borrowings at March 31, 2022 as compared to December 31, 2021 was primarily due to an increase of $600.0 million in FHLB term advances, offset by repayment of $550.0 million in FHLB overnight advances and $8.0 million in other short-term borrowings. At March 31, 2022, total borrowings represented 4.3% of total assets and had an end-of-period weighted average rate of 3.28%, compared with 4.2% of total assets and an end-of-period weighted average rate of 2.12% at December 31, 2021. 

At March 31, 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 $59.7 million, net of unamortized debt issuance cost of $299,000. 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 $123.2 million, net of unamortized debt issuance cost of $1.8 million. Interest is payable semiannually at an initial fixed rate of 4.875% per annum. From and including May 15, 2024, but excluding the maturity date or the date of earlier redemption, the Notes II will bear interest at a floating rate equal to three-month LIBOR plus a spread of 2.50% per annum, payable quarterly in arrears; and

•Subordinated notes of $150.0 million at 5.375% fixed-to-floating rate due June 15, 2030 (the “Notes III”) and a carrying value of $147.8 million, net of unamortized debt issuance cost of $2.2 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: 

			March 31, 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		%
Subordinated debentures			330,726						5.32						330,567						5.33
Total borrowings			$	930,726					3.28		%				$	888,567					2.12		%
Weighted average cost of borrowings during the quarter			3.63		%										4.59		%
Borrowings as a percent of total assets			4.3												4.2

 

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Stockholders’ Equity.  Total stockholders’ equity was $2.78 billion as of March 31, 2022, a $103.3 million decrease from $2.89 billion at December 31, 2021. The current quarter’s decrease in stockholders’ equity was primarily due to $136.4 million in comprehensive loss from the impact of higher interest rates on our AFS securities portfolio, and $31.1 million in cash dividends, partially offset by $66.9 million net income.

Our book value per share decreased to $29.31 at March 31, 2022 from $30.58 at December 31, 2021. At March 31, 2022, the Company’s tangible common equity to tangible assets ratio was 8.79%, a decrease from 9.52% at December 31, 2021. Our tangible book value per share was $19.12, compared with $20.29 at December 31, 2021, and $18.19 at March 31, 2021. For additional details, see "non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis.

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 three months of 2022 were from:

 

•Proceeds of $725.4 million from the sale, prepayments, or maturity of securities available-for-sale;

•Principal payments on loans held for investment of $690.8 million;

•Deposit growth of $573.6 million;

•Principal payments on securities of $81.6 million; and

•Increased FHLB borrowings of 50.0 million.

We used these funds to:

 

•Originate loans held for investment of $1.05 billion;

•Purchase AFS securities of $499.2 million;

•Return capital to shareholders through $31.1 million in dividends;

•Originate loans held for sale of $18.8 million;

Our most liquid assets are unrestricted cash and short-term investments. The levels of these assets are dependent on our operating, lending, and investing activities during any given period. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. At March 31, 2022, cash and cash equivalents totaled $809.3 million, and the market value of our investment securities AFS totaled $3.22 billion. If additional funds are needed, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve Board’s lending programs, as well as loan and investment securities sales. As of March 31, 2022, the maximum amount we could borrow through the FHLB was $8.44 billion, of which $5.26 billion was remaining available for borrowing based on collateral pledged of $8.45 billion in real estate loans. At March 31, 2022, we had $600.0 million in FHLB term borrowings. At March 31, 2022, we also had a $243,000 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. As of March 31, 2022, our liquidity ratio was 21.8%, 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.

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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 March 31, 2022, we had $5.6 million in brokered money market deposits, which constituted 0.03% of total deposits and 0.03% of total assets at that date.

The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity. The Corporation’s primary sources of liquidity are dividends from the Bank. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation. Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations. During the three months ended March 31, 2022, the Bank paid $31.1 million in dividends to the Corporation.

The Corporation maintains a line of credit with U.S. Bank with availability of $25.0 million line of credit that will expire on September 27, 2022. 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 March 31, 2022, the Corporation had no outstanding balances against this line.

During the first quarter of 2022, the Corporation declared a quarterly dividend payment of $0.33 per share. On April 22, 2022, the Company's Board of Directors declared a $0.33 per share dividend, payable on May 13, 2022 to stockholders of record as of May 6, 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 first quarter of 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:

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			March 31, 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			—						330,726						330,726
Certificates of deposit			911,586						119,425						1,031,011
Operating leases			20,045						58,000						78,045
Affordable housing partnerships commitment			5,439						11,432						16,871
Total contractual cash obligations			$	1,137,070					$	919,583					$	2,056,653

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.

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:

			March 31, 2022
(Dollars in thousands)			Less than 1 year						More than 1 year						Total
Loan commitments to extend credit			$	1,522,948					$	1,373,989					$	2,896,937
Standby letters of credit			43,433						—						43,433
Total			$	1,566,381					$	1,373,989					$	2,940,370

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. 

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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 March 31, 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.

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of CECL accounting standard. Additionally, in March 2020, the U.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the COVID-19 pandemic. The capital relief in the interim is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period using a 25% scaling factor. The cumulative difference at the end of the second year of the transition period is then phased 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. See Note 8 - Subordinated Debentures for additional information.

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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
March 31, 2022
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio						10.10%																		4.00%						N/A
Common equity tier 1 capital ratio						11.80%																		7.00%						N/A
Tier 1 capital ratio						11.80%																		8.50%						N/A
Total capital ratio						14.37%																		10.50%						N/A
Pacific Premier Bank
Tier 1 leverage ratio						11.66%																		4.00%						5.00%
Common equity tier 1 capital ratio						13.61%																		7.00%						6.50%
Tier 1 capital ratio						13.61%																		8.50%						8.00%
Total capital ratio						14.47%																		10.50%						10.00%
						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. The principal objective of the Company’s interest rate risk management function is to maintain an interest rate risk profile close to the desired risk profile in light of the interest rate outlook. Management monitors asset and liability maturities and repricing characteristics on a regular basis and evaluates its interest rate risk as it relates to operational strategies.

Interest Rate Risk Management

The 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 March 31, 2022 and December 31, 2021, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:

March 31, 2022
(Dollars in thousands)
						Earnings at Risk																		Projected Net Interest Margin
Change in Rates (Basis Points)						$ Amount						$ Change						% Change						Rate %
200						718,367						35,619						5.2						3.65
100						702,411						19,663						2.9						3.56
Static						682,748						—						—						3.47
-100						659,380						(23,368)						(3.4)						3.35
-200						635,696						(47,052)						(6.9)						3.23

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 March 31, 2022 and December 31, 2021, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:

 

March 31, 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						3,387,240						197,565						6.2						17.91
100						3,311,634						121,959						3.8						16.98
Static						3,189,675						—						—						15.86
-100						2,999,497						(190,178)						(6.0)						14.48
-200						2,674,241						(515,434)						(16.2)						12.55

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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 March 31, 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 first 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 first 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
January 1, 2022 to January 31, 2022						—						$	—					—						4,245,056
February 1, 2022 to February 28, 2022						—						—						—						4,245,056
March 1, 2022 to March 31, 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 March 31, 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.

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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:			May 6, 2022			By:			/s/ Steven R. Gardner
									Steven R. Gardner
									Chairman, President, and Chief Executive Officer
									(Principal Executive Officer)
Date:			May 6, 2022			By:			/s/ Ronald J. Nicolas, Jr.
									Ronald J. Nicolas, Jr.
									Senior Executive Vice President and Chief Financial Officer
									(Principal Financial Officer)

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