BANC OF CALIFORNIA, INC. The following is management's discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and nine months endedSeptember 30, 2021 . This analysis should be read in conjunction with our Annual Report on Form 10-K for the year endedDecember 31, 2020 and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period endedSeptember 30, 2021 . Executive Overview We are focused on providing core banking products and services, including customized and innovative banking and lending solutions, designed to cater to the unique needs ofCalifornia's diverse businesses, entrepreneurs and communities through our 33 full service branches inOrange ,Los Angeles ,San Diego , andSanta Barbara Counties. Through our over 700 dedicated professionals, we are committed to servicing and building enduring relationships by providing a higher standard of banking. We offer a variety of financial products and services designed around our target clients in order to serve their banking and financial needs. We continue to grow average loans and earning assets, improve our deposit mix, reduce our cost of deposits, and maintain disciplined expense control. Strong loan production helped to offset runoff in certain legacy areas of our portfolio. Our loan pipeline is steadily building which is expected to support continued loan and earning asset growth through the year, assuming improving economic trends continue. OnOctober 18, 2021 , we announced the completion of our merger withPacific Mercantile Bancorp . Through these efforts, we continue to transform our franchise into a relationship-focused community bank, maintaining our credit quality and serving businesses, entrepreneurs and individuals within our footprint. Financial Highlights For the three months endedSeptember 30, 2021 ,June 30, 2021 andSeptember 30, 2020 , net income was$23.2 million ,$19.1 million and$15.9 million . Diluted earnings from operations per common share were$0.42 ,$0.34 and$0.24 for the three months endedSeptember 30, 2021 ,June 30, 2021 andSeptember 30, 2020 . Financial results for the third quarter of 2021 included: •Return on average assets of 1.13% •Annualized loan growth, excluding PPP, of 16% •Period-end total cost of deposits of 0.08%, a 12 basis point decrease from the end of the second quarter •Average cost of total deposits of 0.15%, an 8 basis point decrease from the previous quarter •Net interest margin of 3.28%, a 1 basis point increase from the previous quarter •Noninterest-bearing deposit balances represented 32% of total deposits atSeptember 30, 2021 , up from 24% a year earlier •Allowance for credit losses at 1.26% of total loans and 173% of non-performing loans •Total deferrals/forbearances declined to$54.2 million atSeptember 30, 2021 from$86.6 million atJune 30, 2021 •Common Equity Tier 1 capital at 10.86% Merger withPacific Mercantile Bancorp OnOctober 18, 2021 , the Company completed the acquisition of PMBC, pursuant to which PMBC merged (the "Merger") with and into the Company, with the Company as the surviving corporation. Under the terms and conditions of the Merger Agreement, each outstanding share of PMBC common stock was converted into the right to receive 0.5 of a share of the Company's common stock. This resulted in the issuance of 11,856,713 shares of BOC common stock with an estimated fair value of$222.2 million based upon the$18.74 closing price of BANC's common stock onOctober 18, 2021 . In addition, the cash consideration totaled$3.2 million for all outstanding PMBC share-based awards, including stock options and outstanding shares subject to unvested restricted stock awards, based upon the volume weighted average common stock price of BANC on each of the last 20 trading days ending on the fifth trading day prior to the closing of the Merger. The aggregate purchase price totaled$225.4 million . AtSeptember 30, 2021 , PMBC had total gross loans of$982.4 million and total assets of$1.49 billion . Total deposits were$1.29 billion atSeptember 30, 2021 . COVID-19 Operational Update The markets in which we operate are impacted by continuing uncertainty about the pace and strength of reopening and recovering from the COVID-19 pandemic. Despite the challenges created by the pandemic, we continue to execute on our 45 -------------------------------------------------------------------------------- Table of Contents strategic initiatives and the transformation of our balance sheet. We continue to operate 31 of our 33 branches as we temporarily closed some overlapping areas at the beginning of the pandemic to ensure an adequate balance between employee and client safety and business continuity to meet our clients' banking needs. We have adopted a hybrid workplace environment, allowing many of our employees outside of our branches, the flexibility to continue to work remotely, and providing our vaccinated employees a safe place to return to the workplace within all of our corporate office locations. We encourage our employees to get vaccinated and we continue to monitor all federal, state, and local laws to ensure we are in compliance with the latest health orders. CARES Act Response Efforts OnMarch 27, 2020 , theU.S. federal government signed the CARES Act into law, which provided emergency assistance and health care response for individuals, families, and businesses affected by the COVID-19 pandemic. The CARES Act allocated nearly$660 billion for the PPP and was intended to assist small businesses negatively affected by the pandemic and economic downturn by providing funds for payroll and other qualifying expenses made throughAugust 8, 2020 . The loans are 100% guaranteed by the SBA and the full principal amount of the loans may qualify for loan forgiveness if certain conditions are met. Paycheck Protection Program Flexibility Act of 2020 OnOctober 7, 2020 , the Paycheck Protection Program Flexibility Act of 2020 ("Flexibility Act") extended the deferral period for borrower payments of principal, interest, and fees on all PPP loans to the date that the SBA remits the borrower's loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower's loan forgiveness covered period). The extension of the deferral period under the Flexibility Act automatically applied to all PPP loans. Economic Aid Act The Economic Aid Act became lawDecember 27, 2020 extending the SBA authority to make PPP loans throughMay 31, 2021 . The SBA issued an Interim Final Rule (IFR)January 6, 2021 and eligible applicants were able to obtain a first or second PPP loan. We elected to continue our participation in the PPP and resumed the origination of PPP loans effectiveJanuary 11, 2021 . The PPP has provided an opportunity to differentiate ourselves by demonstrating how true client service can make a meaningful difference. We assisted numerous existing clients with our high touch business framework in addition to successfully attracting many new clients who are consistent with the type of commercial customers that we target in our traditional business development efforts. As ofSeptember 30, 2021 , we have helped businesses through the approvals of$262 million in PPP funds during the first round and$144 million during the second round. We continue to support our clients as we work with them through the forgiveness process. AtSeptember 30, 2021 , PPP loans totaled$116.5 million , net of fees, of which$27.5 million relates to round one and$88.9 million relates to round two of the SBA program. Borrower Payment Relief Efforts We are committed to supporting our existing borrowers and customers during this period of economic uncertainty. We actively engaged with our borrowers seeking payment relief and waived certain fees for impacted clients. One method we deployed was to offer forbearance and deferments to qualified clients. For single family residential mortgage loans, the forbearance period was initially 90 days in length and was patterned after the HUD guidelines where applicable. With respect to our non-SFR loan portfolio, the forbearance and deferment periods were also initially 90 days in length and were permitted to be extended. Although many of our loans on assistance have reached the expiration of their deferral and forbearance periods, we continue to work with our borrowers to provide reasonable solutions to assist each unique situation during this period of economic uncertainty. We are reviewing their current financial condition as we evaluate additional extension requests of deferral periods. For those commercial borrowers that demonstrate a continuing need for a deferral, we generally expect to obtain credit enhancements such as additional collateral, personal guarantees, and/or reserve requirements in order to grant an additional deferral period. We expect the legacy SFR loans to continue with a higher percentage of forbearances due to the applicable consumer regulations, however, the SFR portfolio is well secured with an average portfolio LTV below 70%. For a discussion of the risk factors related to COVID-19, please refer to Part II, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 46 -------------------------------------------------------------------------------- Table of Contents The following table presents the composition of our loan portfolio for borrowers that received payment relief as ofSeptember 30, 2021 andJune 30, 2021 : Deferment & Forbearances(1)(2) September 30, 2021 June 30, 2021 Number of % of Number of % of ($ in thousands) Loans Amount(1)(2) Loan Category Loans Amount(1)(2) Loan Category Commercial: Commercial and industrial 1$ 3,837 0.2 % 5$ 29,246 1.4 % Commercial real estate - - - % 1 1,141 0.1 % SBA 1 279 0.2 % 2 3,315 1.3 % Total commercial 2 4,116 0.1 % 8 33,702 0.7 % Consumer: Single family residential mortgage 40 49,501 3.6 % 46 52,384 4.1 % Other consumer 3 575 2.5 % 2 472 1.9 % Total consumer 43 50,076 3.5 % 48 52,856 4.0 % Total 45$ 54,192 0.9 % 56$ 86,558 1.4 % (1)Excludes loans in forbearance that are current (2)Excludes loans delinquent prior to COVID-19 Loans on deferment or forbearance status decreased$32.4 million during the third quarter of 2021. The Bank is in contact with borrowers to provide additional assistance as needed and we continue to actively monitor and manage all lending relationships in a manner that we believe supports our clients and protects the Bank. Other Efforts To support our community, we continue to meet the immediate needs of our most vulnerable neighbors. We meet these needs by providing donations, grants and sponsorships that support affordable housing, workforce and economic development and community services. Our volunteers have continued to provide financial literacy classes in a virtual environment as well as developing a virtual tour of the Bank's headquarters that introduces students to a variety of different career paths and business unit leaders. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements are prepared in accordance with GAAP and general practices within the banking industry. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, we have established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. Our critical accounting policies are described in Note 1 to Consolidated Financial Statements and in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and in Note 1 Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q. Recent Accounting Pronouncements Not Yet Adopted Our recent accounting pronouncements not yet adopted are described in Note 1 to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and in Note 1 Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q. 47 -------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures Under Item 10(e) of SEC Regulation S-K, public companies disclosing financial measures in filings with theSEC that are not calculated in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a presentation of the most directly comparable GAAP financial measure, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure, as well as a statement of the reasons why the company's management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the company's financial condition and results of operations and, to the extent material, a statement of the additional purposes, if any, for which the company's management uses the non-GAAP financial measure. Tangible assets, tangible equity, tangible common equity, tangible equity to tangible assets, tangible common equity to tangible assets, tangible common equity per common share, return on average tangible common equity, adjusted noninterest income, adjusted noninterest expense, adjusted noninterest expense to average total assets, pre-tax pre-provision (PTPP) income (loss), adjusted PTPP income (loss), PTPP income (loss) ROAA, adjusted PTPP income (loss) ROAA, efficiency ratio, adjusted efficiency ratio, adjusted total revenue, adjusted net income, adjusted net income available to common stockholders, adjusted diluted earnings per share (EPS) and adjusted return on average assets (ROAA) constitute supplemental financial information determined by methods other than in accordance with GAAP. These non-GAAP measures are used by management in its analysis of the Company's performance. Tangible assets and tangible equity are calculated by subtracting goodwill and other intangible assets from total assets and total equity. Tangible common equity is calculated by subtracting preferred stock from tangible equity. Return on average tangible common equity is computed by dividing net income (loss) available to common stockholders, after adjustment for amortization of intangible assets, by average tangible common equity. Banking regulators also exclude goodwill and other intangible assets from stockholders' equity when assessing the capital adequacy of a financial institution. PTPP income is calculated by adding net interest income and noninterest income (total revenue) and subtracting noninterest expense. Adjusted PTPP income is calculated by adding net interest income and adjusted noninterest income (adjusted total revenue) and subtracting adjusted noninterest expense. PTPP income ROAA is computed by dividing annualized PTPP income by average assets. Adjusted PTPP income ROAA is computed by dividing annualized adjusted PTPP income by average assets. Efficiency ratio is computed by dividing noninterest expense by total revenue. Adjusted efficiency ratio is computed by dividing adjusted noninterest expense by adjusted total revenue. Adjusted net income (loss) is calculated by adjusting net income (loss) for tax-effected noninterest income and expense adjustments and the tax impact from the exercise of stock appreciation rights. Adjusted ROAA is computed by dividing annualized adjusted net income by average assets. Adjusted net income (loss) available to common shareholders is computed by removing the impact of preferred stock redemptions from adjusted net income (loss). Management believes the presentation of these non-GAAP financial measures provides useful supplemental information that is essential to a proper understanding of the financial results and operating performance of the Company. This disclosure should not be viewed as a substitute for results determined in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. The following tables provide reconciliations of the non-GAAP measures with financial measures defined by GAAP. 48 -------------------------------------------------------------------------------- Table of Contents (Dollars in thousands, except per share data) September 30, December 31, (Unaudited) 2021 2020 Tangible common equity, and tangible common equity to tangible assets ratio Total assets$ 8,278,741 $ 7,877,334 Less goodwill (37,144) (37,144) Less other intangible assets (1,787) (2,633) Tangible assets(1) $
8,239,810
Total stockholders' equity$ 844,803 $ 897,207 Less goodwill (37,144) (37,144) Less other intangible assets (1,787) (2,633) Tangible equity(1) 805,872 857,430 Less preferred stock (94,956) (184,878) Tangible common equity(1) $
710,916
Total stockholders' equity to total assets 10.20 % 11.39 % Tangible equity to tangible assets(1) 9.78 % 10.94 % Tangible common equity to tangible assets(1) 8.63 % 8.58 % Common shares outstanding 50,321,096 49,767,489 Class B non-voting non-convertible common shares outstanding 477,321 477,321 Total common shares outstanding 50,798,417 50,244,810 Tangible common equity per common share(1)$ 13.99 $ 13.39 Book value per common share$ 14.76 $ 14.18 (1)Non-GAAP measure. 49
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Nine Months Ended
Three Months Ended September 30,
(Dollars in thousands) September 30, June 30, September 30,
(Unaudited) 2021 2021 2020 2021 2020
Return on tangible common equity
Average total stockholders' equity $ 847,941 $ 814,973 $ 865,406 $ 850,215 $ 878,520
Less average preferred stock (94,956) (94,956) (184,910) (118,013) (186,656)
Less average goodwill (37,144) (37,144) (37,144) (37,144) (37,144)
Less average other intangible assets (1,941) (2,224) (3,172) (2,226) (3,581)
Average tangible common equity(1)
$ 640,180 $ 692,832 $ 651,139 Net income (loss) available to common stockholders$ 21,443 $ 17,323 $ 12,084 $ 46,493 $ (19,265) Add amortization of intangible assets 282 282 353 846 1,212 Less tax effect on amortization of intangible assets(2) (59) (59) (74) (178) (255) Net income (loss) available to common stockholders(1)$ 21,666 $ 17,546 $ 12,363 $ 47,161 $ (18,308) Return on average equity 10.84 % 9.38 % 7.32 % 8.90 % (1.39) % Return on average tangible common equity(1) 12.04 % 10.34 % 7.68 % 9.10 % (3.76) % (1)Non-GAAP measure. (2)Adjustments shown net of a statutory Federal tax rate of of 21%.
Nine Months Ended
Three Months Ended September 30,
(Dollars in thousands) September 30, June 30, September 30,
(Unaudited) 2021 2021 2020 2021 2020
Adjusted noninterest income and
expense
Total noninterest income $ 5,519 $ 4,170 $ 3,954 $ 14,070 $ 11,543
Noninterest income adjustments:
Net (gain) loss on securities
available for sale - - - - (2,011)
Net (gain) loss on sale of legacy
SFR loans held for sale - - (272) - (272)
Fair value adjustment on legacy SFR
loans held for sale (160) (20) (24) (180) 1,537
Total noninterest income
adjustments (160) (20) (296) (180) (746)
Adjusted noninterest income(1)
$ 3,658 $ 13,890 $ 10,797 Total noninterest expense$ 37,811 $ 40,559 $ 40,394 $ 125,105 $ 160,083
Noninterest expense adjustments:
Naming rights termination - - - - (26,769) Extinguishment of debt - - - - (2,515) Professional (fees) recoveries 2,152 1,284 (1,172) 2,715 (3,725) Merger-related costs (1,000) (700) - (2,400) - Adjustments to noninterest expense before gain (loss) in alternative energy partnership investments 1,152 584 (1,172) 315 (33,009) Gain (loss) in alternative energy partnership investments 1,785 829 1,430 (1,016) (308) Total noninterest expense adjustments 2,937 1,413 258 (701) (33,317)
Adjusted noninterest expense(1)
$ 40,652 $ 124,404 $ 126,766 Average assets$ 8,141,613 $ 7,827,006 $ 7,687,105 $ 7,944,218 $ 7,663,504 Noninterest expense to average total assets 1.84 % 2.08 % 2.09 % 2.11 % 2.79 % Adjusted noninterest expense to average total assets(1) 1.99 % 2.15 % 2.10 % 2.09 % 2.21 % (1)Non-GAAP measure. 50
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Nine Months Ended
Three Months Ended September 30,
(Dollars in thousands) September 30, June 30, September 30,
(Unaudited) 2021 2021 2020 2021 2020
Adjusted pre-tax pre-provision
income
Net interest income $ 62,976 $ 59,847 $ 55,855 $ 180,739 $ 163,031
Noninterest income 5,519 4,170 3,954 14,070 11,543
Total revenue 68,495 64,017 59,809 194,809 174,574
Noninterest expense 37,811 40,559 40,394 125,105 160,083
Pre-tax pre-provision income
(loss)(1) $ 30,684 $ 23,458 $ 19,415 $ 69,704 $ 14,491
Total revenue $ 68,495 $ 64,017 $ 59,809 $ 194,809 $ 174,574
Total noninterest income
adjustments (160) (20) (296) (180) (746)
Adjusted total revenue(1) 68,335 63,997 59,513 194,629 173,828
Noninterest expense 37,811 40,559 40,394 125,105 160,083
Total noninterest expense
adjustments 2,937 1,413 258 (701) (33,317)
Adjusted noninterest expense(1) 40,748 41,972 40,652 124,404 126,766
Adjusted pre-tax pre-provision
income(1) $ 27,587 $ 22,025 $ 18,861 $ 70,225 $ 47,062
Average assets $ 8,141,613 $ 7,827,006 $ 7,687,105 $ 7,944,218 $ 7,663,504
Pre-tax pre-provision income
ROAA(1) 1.50 % 1.20 % 1.00 % 1.17 % 0.25 %
Adjusted pre-tax pre-provision
income ROAA(1) 1.34 % 1.13 % 0.98 % 1.18 % 0.82 %
Efficiency ratio(1) 55.20 % 63.36 % 67.54 % 64.22 % 91.70 %
Adjusted efficiency ratio(1) 59.63 % 65.58 % 68.31 % 63.92 % 72.93 %
(1)Non-GAAP measure.
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Nine Months Ended
Three Months Ended September 30,
September 30, June 30, September 30,
2021 2021 2020 2021 2020
Adjusted net income (loss)
Net income (loss) $ 23,170 $ 19,050 $ 15,913 $ 56,595 $ (9,129)
Adjustments:
Noninterest income 160 20 296 180 746
Noninterest expense (2,937) (1,413) (258) 701 33,317
Total adjustments (2,777) (1,393) 38 881 34,063
Tax impact of adjustments above(1) 694 348 (10) (220) (8,515)
Tax impact from exercise of stock
appreciation rights - - - (2,093) -
Adjustments to net income (2,083) (1,045) 28 (1,432) 25,548
Adjusted net income(2) $ 21,087 $ 18,005 $ 15,941 $ 55,163 $ 16,419 Average assets$ 8,141,613 $ 7,827,006 $ 7,687,105 $ 7,944,218 $ 7,663,504 ROAA 1.13 % 0.98 % 0.82 % 0.95 % (0.16) % Adjusted ROAA(2) 1.03 % 0.92 % 0.82 % 0.93 % 0.29 % Adjusted net income available to common stockholders Net income (loss) available to common stockholders$ 21,443 $ 17,323 $ 12,084 $ 46,493 $ (19,265) Adjustments to net income (loss) (2,083) (1,045) 28 (1,432) 25,548 Adjustments for impact of preferred stock redemption - - 7 3,347 (568) Adjusted net income available to common stockholders(2)$ 19,360 $ 16,278 $ 12,119 $ 48,408 $ 5,715 Average diluted common shares 50,909,317 50,892,202 50,190,933 50,821,972 50,201,112 Diluted EPS$ 0.42 $ 0.34 $ 0.24 $ 0.91 $ (0.38) Adjusted diluted EPS(2)(3)$ 0.38 $ 0.32 $ 0.24 $ 0.95 $ 0.11 (1)Tax impact of adjustments shown at an effective tax rate of 25%. (2)Non-GAAP measure. (3)Represents adjusted net income available to common stockholders divided by average diluted common shares. 52 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Net Interest Income The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates for the three months endedSeptember 30, 2021 ,June 30, 2021 andSeptember 30, 2020 : Three Months EndedSeptember 30, 2021 June 30, 2021 September 30, 2020 Interest and Interest and Yield/ Interest and ($ in thousands) Average Balance Dividends Yield/Cost Average Balance Dividends Cost Average Balance Dividends
Yield/Cost
Interest-earning assets: Total loans(1)$ 6,059,330 $ 63,837 4.18 %$ 5,771,415 $ 61,900 4.30 %$ 5,533,576 $ 62,019 4.46 % Securities 1,347,317 7,167 2.11 % 1,308,230 6,986 2.14 % 1,190,765 6,766 2.26 % Other interest-earning assets (2) 222,274 787 1.40 % 258,915 791 1.23 % 457,558 881 0.77 % Total interest-earning assets 7,628,921 71,791 3.73 % 7,338,560 69,677 3.81 % 7,181,899 69,666 3.86 % Allowance for loan losses (76,028) (79,103) (89,679) BOLI and noninterest-earning assets (3) 588,720 567,549 594,885 Total assets$ 8,141,613 $ 7,827,006 $ 7,687,105 Interest-bearing liabilities: Interest-bearing checking$ 2,280,429 632 0.11 %$ 2,182,419 679 0.12 %$ 1,919,327 1,660 0.34 % Savings and money market 1,583,791 1,350 0.34 % 1,638,105 2,244 0.55 % 1,630,319 2,998 0.73 % Certificates of deposit 571,822 430 0.30 % 633,101 620 0.39 % 1,030,829 2,906 1.12 % Total interest-bearing deposits 4,436,042 2,412 0.22 % 4,453,625 3,543 0.32 % 4,580,475 7,564 0.66 % FHLB advances 435,984 2,990 2.72 % 418,111 2,944 2.82 % 608,169 3,860 2.52 % Securities sold under repurchase agreements - - - % - - - % 1,309 2 0.61 % Other borrowings 126,352 34 0.11 % 17,920 4 0.09 % 325 2 2.45 % Long-term debt 256,634 3,379 5.22 % 256,492 3,339 5.22 % 173,586 2,383 5.46 % Total interest-bearing liabilities 5,255,012 8,815 0.67 % 5,146,148 9,830 0.77 % 5,363,864 13,811 1.02 % Noninterest-bearing deposits 1,939,912 1,767,711 1,357,411 Noninterest-bearing liabilities 98,748 98,174 100,424 Total liabilities 7,293,672 7,012,033 6,821,699 Total stockholders' equity 847,941 814,973 865,406 Total liabilities and stockholders' equity$ 8,141,613 $ 7,827,006 $ 7,687,105 Net interest income/spread$ 62,976 3.06 %$ 59,847 3.04 %$ 55,855 2.84 % Net interest margin (4) 3.28 % 3.27 % 3.09 % Ratio of interest-earning assets to interest-bearing liabilities 145 % 143 % 134 % Total deposits(5) 6,375,954 2,412 0.15 % 6,221,336 3,543 0.23 % 5,937,886 7,564 0.51 % Total funding (6) 7,194,924 8,815 0.49 % 6,913,859 9,830 0.57 % 6,721,275 13,811 0.82 % (1)Total loans are net of deferred fees, related direct costs, premiums and discounts. Nonaccrual loans are included in the average balance. Net accretion (amortization) of deferred loan fees (costs) of$1.5 million ,$1.0 million and$1.5 million and (amortization) accretion of (premium) discount on purchased loans of$(651) thousand ,$(1.0) million and$6 thousand for the three months endedSeptember 30, 2021 ,June 30, 2021 andSeptember 30, 2020 , respectively, are included in interest income. 53 -------------------------------------------------------------------------------- Table of Contents (2)Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions. (3)Includes average balance of bank-owned life insurance of$113.4 million ,$112.7 million and$110.7 million for the three months endedSeptember 30, 2021 ,June 30, 2021 andSeptember 30, 2020 . (4)Annualized net interest income divided by average interest-earning assets. (5)Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of total deposits is calculated as annualized total interest expense on deposits divided by average total deposits. (6)Total funding is the sum of interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding. Three Months EndedSeptember 30, 2021 Compared to Three Months EndedJune 30, 2021 Net interest income increased$3.1 million to$63.0 million for the third quarter due to higher average interest-earning assets, lower cost of interest-bearing liabilities, and the impact of one additional day in the current quarter. The net interest margin increased 1 basis point to 3.28% for the third quarter as the average earning-assets yield decreased 8 basis points and the average cost of total funding decreased 8 basis points. The yield on average interest-earning assets decreased to 3.73% for the third quarter from 3.81% for the second quarter due mostly to a reduction of prepayment penalties, offset by a higher level of accelerated PPP fees and an improved mix of earning assets. Average loans increased by$287.9 million while average securities and other interest-earning assets decreased$2.4 million . The average yield on loans decreased 12 basis points to 4.18% during the third quarter. The loan yield includes the impact of prepayment penalty fees, the net reversal or recapture of nonaccrual loan interest, accelerated discount accretion on the early payoff of purchased loans, and accelerated fees from PPP loan forgiveness; these items increased the loan yield by 11 basis points in the third quarter and 18 basis points in the second quarter. The average yield on securities decreased 3 basis point to 2.11% between quarters, including a 5 basis points decrease in the average yield on collateralized loan obligations (CLOs) to 1.82% for the third quarter due mostly to an increase in fair value of such investments. The average cost of funds decreased 8 basis points to 0.49% for the third quarter from 0.57% for the second quarter. This decrease was driven by the lower average cost of interest-bearing liabilities and an improved funding mix, including higher average noninterest-bearing deposits. Average noninterest-bearing deposits represented 30% of total average deposits for the third quarter compared to 28% of total average deposits for the second quarter. Average noninterest-bearing deposits were$172.2 million higher in the third quarter compared to the second quarter while average deposits were$154.6 million higher for the linked quarter.Average Federal Home Loan Bank (FHLB) advances and other borrowings increased$126.3 million due to higher average overnight balances from loan portfolio growth during the third quarter. The average cost of interest-bearing liabilities decreased 10 basis points to 0.67% for the third quarter from 0.77% for the second quarter due to our continuing efforts to actively manage down the cost of interest-bearing deposits. The average cost of interest-bearing deposits declined 10 basis points to 0.22% for the third quarter from 0.32% for the second quarter. The average cost of total deposits decreased 8 basis points to 0.15% for the third quarter. The spot rate of total deposits was 0.08% at the end of the third quarter. Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Net interest income for the third quarter of 2021 increased$7.1 million to$63.0 million from$55.9 million for the same 2020 period. Net interest income was positively impacted by higher average interest-earning assets, lower average interest-bearing liabilities and improved funding costs, offset by lower yields on average interest-earning assets. Average interest-earning assets increased$447.0 million to$7.63 billion , and the net interest margin increased 19 basis points to 3.28% for the third quarter of 2021 compared to 3.09% for the same 2020 period.
The net interest margin expanded due to a 33 basis points decrease in the average cost of funds outpacing a 13 basis points decline in average interest-earning assets yield. The average yield on interest-earning assets decreased to 3.73% for the third quarter of 2021 from 3.86% for the same 2020 period due mostly to the impact of lower market
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interest rates on loans and securities yields over this time period. The average
yield on loans was 4.18% for the third quarter of 2021, compared to 4.46% for
the same 2020 period and the average yield on securities decreased 15 basis
points to 2.11% due mostly to CLOs repricing into the lower rate environment.
The average cost of funds decreased to 0.49% for the third quarter of 2021, from
0.82% for the same 2020 period. This decrease was driven by the lower average
cost of interest-bearing liabilities and the improved funding mix, including
higher average noninterest-bearing deposits, to fund loan growth. The average
cost of interest-bearing liabilities decreased 35 basis points to 0.67% for the
third quarter of 2021 from 1.02% for the same 2020 period due to the combination
of actively managing deposit pricing down in the lower interest rate environment
and the overall reduced usage of FHLB advances. Compared to the same 2020
period, the average cost of interest-bearing deposits declined 44 basis points
to 0.22% and the average cost of total deposits decreased 36 basis points to
0.15%. Additionally, average noninterest-bearing deposits increased by $582.5
million , or 42.9%, for the third quarter of 2021 when compared to the same 2020
period, and represented 30% of average deposits for the third quarter of 2021
compared to 23% for the same 2020 period.
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The following table presents interest income, average interest-earning assets,
interest expense, average interest-bearing liabilities, and their corresponding
yields and costs expressed both in dollars and rates, on a consolidated
operations basis, for the nine months ended September 30, 2021 and 2020:
Nine Months Ended September 30,
2021 2020
Interest and Interest and
($ in thousands) Average Balance Dividends Yield/Cost Average Balance Dividends Yield/Cost
Interest-earning assets:
Total loans (1) $ 5,872,604 $ 187,082 4.26 % $ 5,673,488 $ 191,195 4.50 %
Securities 1,297,636 20,654 2.13 % 1,069,668 22,402 2.80 %
Other interest-earning assets (2) 272,126 2,350 1.15 % 393,495 3,480 1.18 %
Total interest-earning assets 7,442,366 210,086 3.77 % 7,136,651 217,077 4.06 %
Allowance for loan losses (78,729) (76,275)
BOLI and noninterest-earning assets (3) 580,581 603,128
Total assets $ 7,944,218 $ 7,663,504
Interest-bearing liabilities:
Interest-bearing checking $ 2,201,568 2,212 0.13 % $ 1,717,483 7,575 0.59 %
Savings and money market 1,625,214 5,985 0.49 % 1,543,291 11,621 1.01 %
Certificates of deposit 641,157 2,044 0.43 % 1,132,058 13,184 1.56 %
Total interest-bearing deposits 4,467,939 10,241 0.31 % 4,392,832 32,380 0.98 %
FHLB advances 433,532 9,046 2.79 % 821,349 14,561 2.37 %
Securities sold under repurchase agreements - - - 779 4 0.69 %
Other borrowings 49,914 40 0.11 % 469 9 2.56 %
Long-term debt 256,497 10,020 5.22 % 173,512 7,092 5.46 %
Total interest-bearing liabilities 5,207,882 29,347 0.75 % 5,388,941 54,046 1.34 %
Noninterest-bearing deposits 1,788,096 1,280,461
Noninterest-bearing liabilities 98,025 115,582
Total liabilities 7,094,003 6,784,984
Total stockholders' equity 850,215 878,520
Total liabilities and stockholders' equity $ 7,944,218 $ 7,663,504
Net interest income/spread $ 180,739 3.02 % $ 163,031 2.72 %
Net interest margin (4) 3.25 % 3.05 %
Ratio of interest-earning assets to
interest-bearing liabilities 143 % 132 %
Total deposits(5) 6,256,035 10,241 0.22 % 5,673,293 32,380 0.76 %
Total funding (6) 6,995,978 29,347 0.56 % 6,669,402 54,046 1.08 %
56-------------------------------------------------------------------------------- Table of Contents (1)Total loans are net of deferred fees, related direct costs, premiums and discounts, but exclude the allowance for credit losses. Nonaccrual loans are included in the average balance. Net accretion (amortization) of deferred loan fees (costs) of$3.9 million and$2.0 million and (amortization) accretion of (premium) discount on purchased loans of$(2.1) million and$361 thousand for the nine months endedSeptember 30, 2021 and 2020, respectively, are included in interest income. (2)Includes average balance of FHLB, FRB and other bank stock at cost and average time deposits with other financial institutions. (3)Includes average balance of bank-owned life insurance of$112.7 million and$110.4 million for the nine months endedSeptember 30, 2021 and 2020. (4)Annualized net interest income divided by average interest-earning assets. (5)Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of total deposits is calculated as annualized total interest expense on deposits divided by average total deposits. (6)Total funding is the sum of interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as annualized total interest expense divided by average total funding. Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Net interest income for the nine months endedSeptember 30, 2021 increased$17.7 million to$180.7 million from$163.0 million for the same 2020 period. Net interest income was positively impacted by higher average interest-earning assets, lower average interest-bearing liabilities and improved funding costs, offset by lower yields on average interest-earning assets. For the nine months endedSeptember 30, 2021 , average interest-earning assets increased$305.7 million to$7.44 billion , and the net interest margin increased 20 basis points to 3.25% compared to 3.05% for the same 2020 period. The net interest margin expanded due to a 52 basis point decrease in the average cost of funds outpacing a 29 basis point decline in the average interest-earning assets yield. The average yield on interest-earning assets decreased to 3.77% for the nine months endedSeptember 30, 2021 , from 4.06% for same 2020 period due mostly to the impact of lower market interest rates on loan and securities yields over this time period. The average fed funds rate for the nine months endedSeptember 30, 2021 was 0.08% compared to 0.47% for the same 2020 period. The average yield on loans was 4.26% for the nine months endedSeptember 30, 2021 , compared to 4.50% for the same 2020 period and the average yield on securities decreased 67 basis points to 2.13% due mostly to CLOs repricing into the lower rate environment. The average cost of funds decreased to 0.56% for the nine months endedSeptember 30, 2021 , from 1.08% for the same 2020 period. This decrease was driven by the lower average cost of interest-bearing liabilities and the improved funding mix, including higher average noninterest-bearing deposits, to fund loan growth. The average cost of interest-bearing liabilities decreased 59 basis points to 0.75% for the nine months endedSeptember 30, 2021 from 1.34% for the same 2020 period due to the combination of actively managing deposit pricing down into the lower interest rate environment and the overall reduced usage of FHLB advances. Compared to the same 2020 period, the average cost of interest-bearing deposits declined 67 basis points to 0.31% and the average cost of total deposits decreased 54 basis points to 0.22%. Additionally, average noninterest-bearing deposits increased by$507.6 million or 39.6% for the nine months endedSeptember 30, 2021 when compared to the same 2020 period. 57 -------------------------------------------------------------------------------- Table of Contents Rate/Volume Analysis The following table presents the changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities. The information provided presents the changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. Three Months Ended Nine Months Ended September 30, 2021 vs. 2020 September 30, 2021 vs. 2020 Increase (Decrease) Due to Increase (Decrease) Due to Net Net Increase Increase ($ In thousands) Volume Rate (Decrease) Volume Rate (Decrease) Interest and dividend income: Total loans$ 5,797 $ (3,979) $ 1,818 $ 6,452 $ (10,565) $ (4,113) Securities 865 (464) 401 4,227 (5,975) (1,748) Other interest-earning assets (597) 503 (94) (1,044) (86) (1,130) Total interest and dividend income$ 6,065 $ (3,940) $ 2,125 $ 9,635 $ (16,626) $ (6,991) Interest expense: Interest-bearing checking$ 260 $ (1,288) $ (1,028) $ 1,714 $ (7,077) $ (5,363) Savings and money market (147) (1,501) (1,648) 306 (5,942) (5,636) Certificates of deposit (936) (1,540) (2,476) (4,172) (6,968) (11,140) FHLB advances (1,159) 289 (870) (7,762) 2,247 (5,515) Securities sold under repurchase agreements (1) (1) (2) (2) (2) (4) Other borrowings 36 (4) 32 49 (18) 31 Long-term debt 1,105 (109) 996 3,252 (324) 2,928 Total interest expense (842) (4,154) (4,996) (6,615) (18,084) (24,699) Net interest income$ 6,907 $ 214$ 7,121 $ 16,250 $ 1,458 $ 17,708 Provision for Credit Losses The provision for credit losses is charged to operations to adjust the allowance for credit losses to the level required to cover current expected credit losses in our loan portfolio and unfunded commitments. The following table presents the components of our provision for credit losses: Three Months Ended Nine Months Ended September 30, September 30, June 30, September 30, ($ in thousands) 2021 2021 2020 2021 2020 (Reversal of) provision for loan losses$ (2,566) $ (2,608) $ 2,130 $ (6,458) $ 28,360 Provision for (reversal of) credit losses - unfunded loan commitments 1,419 454 (989) 2,050 368 Total (reversal of) provision for credit losses$ (1,147) $ (2,154) $ 1,141 $ (4,408) $ 28,728 58
-------------------------------------------------------------------------------- Table of Contents Three Months EndedSeptember 30, 2021 Compared to Three Months EndedJune 30, 2021 There was a reversal of provision for credit losses of$1.1 million for the third quarter, compared to a reversal of$2.2 million for the second quarter. The third quarter reversal was due primarily to improvements in key macro-economic forecast variables, such as unemployment and gross domestic product, and consideration of credit quality metrics, offset partially by higher period end loan balances of$243.1 million . Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 There was a reversal of provision for credit losses of$1.1 million for the third quarter of 2021, compared to a provision of$1.1 million for the same 2020 period. The lower provision for credit losses was due primarily to improvements in key macro-economic forecast variables, such as unemployment and gross domestic product, and consideration of credit quality metrics, offset by higher period end loan balances of$550.6 million . Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 During the nine months endedSeptember 30, 2021 , the provision for credit losses was a reversal of$4.4 million , compared to a provision of$28.7 million during the same 2020 period. The lower provision for credit losses was due primarily to improvements in key macro-economic forecast variables, such as unemployment and gross domestic product, lower specific reserves and consideration of credit quality metrics, offset partially by higher period end loan balances of$550.6 million . The provision for credit losses during the comparable 2020 period also reflected increases from using the new CECL model, the estimated impact of the health crisis on our loans, and higher specific reserves. See further discussion in "Allowance for Credit Losses."
Noninterest Income The following table presents the components of noninterest income for the periods indicated:
Three Months Ended Nine Months Ended September 30,
September 30, June 30, September 30,
($ in thousands) 2021 2021 2020 2021 2020
Customer service fees $ 1,900 $ 1,990 $ 1,498 $ 5,648 $ 3,818
Loan servicing income 170 38 186 476 356
Income from bank owned life
insurance 715 690 629 2,077 1,798
Net gain on sale of securities
available-for-sale - - - - 2,011
Fair value adjustment on loans
held-for-sale 160 20 24 180 (1,537)
Net gain on sale of loans - - 272 - 245
Other income 2,574 1,432 1,345 5,689 4,852
Total noninterest income $ 5,519 $ 4,170 $ 3,954 $ 14,070 $ 11,543
Three Months Ended September 30, 2021 Compared to Three Months Ended June 30,
2021
Noninterest income increased $1.3 million to $5.5 million for the third quarter
due mostly to an increase in all other income. The $1.1 million increase in all
other income was due mostly to an $841 thousand gain related to a sale-leaseback
transaction of one branch location.
Three Months Ended September 30, 2021 Compared to Three Months Ended
September 30, 2020
Noninterest income for the third quarter of 2021 increased $1.6 million to $5.5
million compared to the same 2020 period due mostly to an increase in customer
services fees and other income offset by a decrease in net gain on sale of loans
as there were no sales of loans in the third quarter of 2021. The $402 thousand
increase in customer services fees was due to higher deposit and interchange
fees of $414 thousand . The increase in deposit activity fees is attributed to
higher average deposit balances, and our initiative to bring our service fee
schedules more in line with market. The $1.2 million increase in other income
was due mostly to the aforementioned gain related to the sale-leaseback
transaction and higher rental income.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
Noninterest income for the nine months ended September 30, 2021 increased $2.5
million to $14.1 million compared to the same 2020 period. The increase in
noninterest income was mainly due to higher customer service fees, lower fair
value
59
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adjustment for loans held for sale and higher all other income, offset by lower
net gain on sale of securities and loans. The $1.8 million increase in customer
services fees was due to higher loan fees of $351 thousand and higher deposit
activity fees of $1.5 million . The increase in deposit activity fees is
attributed to higher average deposit balances and our initiative to bring our
service fee schedules more in line with market. Fair value adjustment for loans
held for sale improved $1.7 million as the comparable period included valuation
losses on loans held for sale due to the impact of the decreases in market
interest rates. There were no gains from sale of securities for the nine months
ended September 30, 2021 , compared to $2.0 million in net gains in the same 2020
period from the sale of $20.7 million in securities, primarily consisting of
corporate securities. The $837 thousand increase in all other income is due
mostly to the aforementioned gain related to the sale-leaseback transaction,
higher rental income, interest rate swap income and processing fees, offset by
lower legal settlement income and lower earnout income which ended in the second
quarter of 2020.
Noninterest Expense
The following table presents the breakdown of noninterest expense for the
periods indicated:
Three Months Ended Nine Months Ended September 30,
September 30, June 30, September 30,
($ in thousands) 2021 2021 2020 2021 2020
Salaries and employee benefits
$ 23,277 $ 75,547 $ 70,973 Naming rights termination - - - - 26,769 Occupancy and equipment 7,124 7,277 7,457 21,597 21,790 Professional fees 892 1,749 5,147 6,663 15,707 Data processing 1,646 1,621 1,657 4,922 4,966 Advertising 122 78 219 318 3,132 Regulatory assessments 812 769 784 2,355 1,993 Reversal of provision for loan repurchases (42) (99) (91) (273) (725) Amortization of intangible assets 282 282 353 846 1,212 Merger-related costs 1,000 700 - 2,400 - All other expense 2,974 3,969 3,021 9,714 13,958 Noninterest expense before (gain) loss on investments in alternative energy partnerships 39,596 41,388 41,824 124,089 159,775 (Gain) loss on investments in alternative energy partnerships (1,785) (829) (1,430) 1,016 308 Total noninterest expense$ 37,811 $ 40,559 $ 40,394 $ 125,105 $ 160,083 Three Months EndedSeptember 30, 2021 Compared to Three Months EndedJune 30, 2021 Noninterest expense decreased$2.7 million to$37.8 million for the third quarter compared to the prior quarter. The decrease was due mostly to lower professional fees of$857 thousand , lower all other expense of$995 thousand and higher net gain in alternative energy partnership investments of$956 thousand , offset by higher merger-related costs of$300 thousand . Professional fees included net recoveries of indemnified legal expenses of$2.2 million in the third quarter compared to net recoveries of$1.3 million during the second quarter. The$995 thousand decrease in all other expense was due mostly to the third quarter including a gain on sale of other real estate owned of$365 thousand compared to$0 in the prior quarter, and higher equity investment income as the prior quarter included net losses of$727 thousand compared to$0 in the third quarter. Equity investments without readily determinable fair values include investments in privately held companies and limited partnerships and income or loss from these investments fluctuates based on their underlying performance. Total merger-related costs increased$300 thousand to$1.0 million for the third quarter compared to the prior quarter. Total operating costs, defined as noninterest expense adjusted for certain expense items (refer to section Non-GAAP Measures), decreased$1.2 million to$40.7 million for the third quarter compared to$42.0 million for the prior quarter primarily due to the lower salaries and benefits, higher gain on sale of other real estate owned and lower losses on equity investments. 60 -------------------------------------------------------------------------------- Table of Contents Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Noninterest expense was$37.8 million for the third quarter of 2021, a decrease of$2.6 million from$40.4 million for the comparable 2020 period. The decrease was mainly due to (i) lower professional fees of$4.3 million , due to overall reductions in indemnified legal fees, net of recoveries, for resolved legal proceedings and various other litigations, (ii) lower occupancy and equipment of$333 thousand due to reductions in depreciation and (iii) a higher gain on alternative energy partnerships of$355 thousand from decreased loss sharing allocations. These increases were offset by higher salaries and employee benefits of$1.5 million due to higher commissions and incentive-based compensation and higher merger-related costs of$1.0 million associated with our merger with PMBC. Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Noninterest expense for the nine months endedSeptember 30, 2021 decreased$35.0 million to$125.1 million compared to the prior year. The decrease was primarily due to: (i) the same 2020 period including a$26.8 million one-time charge related to the termination of our LAFC naming rights agreements, (ii) lower professional fees of$9.0 million , due mostly to a$7.6 million decrease in legal fees, net of insurance recoveries, (iii) lower advertising fees of$2.8 million due to the termination of the LAFC agreements inMay 2020 , and (iv) lower all other expense of$4.2 million resulting from the previous year including a$2.5 million debt extinguishment fee for the early repayment of certain FHLB term advances and a$1.2 million charge for two legacy legal settlements combined with overall expense reduction efforts. These decreases were partially offset by higher (i) salaries and employee benefits of$4.6 million due to higher commissions and incentive-based compensation due to higher production and financial performance levels, (ii) merger-related costs of$2.4 million associated with the approved merger with PMBC, and (iii) net losses in alternative energy partnership investments of$708 thousand . Income Tax (Benefit) Expense For the three months endedSeptember 30, 2021 ,June 30, 2021 andSeptember 30, 2020 , income tax expense was$8.7 million ,$6.6 million , and$2.4 million , resulting in an effective tax rate of 27.2%, 25.6% and 12.9%, respectively. Our 27.2% effective tax rate for the three months endedSeptember 30, 2021 differs from the 29.5% statutory rate due to the impact of various permanent tax differences, tax credits and other discrete items. For the nine months endedSeptember 30, 2021 and 2020, income taxes were an expense of$17.5 million and a benefit of$5.1 million , resulting in an effective tax rate of 23.6% and 35.9%, respectively. During the nine months endedSeptember 30, 2021 , income tax expense included a$2.5 million tax benefit from share-based awards, including the exercise of all previously issued outstanding stock appreciation rights in the first quarter of 2021 and other discrete tax items that impacted our effective tax rate.
For additional information, see Note 8 to Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
FINANCIAL CONDITIONInvestment Securities AtSeptember 30, 2021 , all of our investment securities were classified as available-for-sale. The primary goal of our investment securities portfolio is to provide a relatively stable source of interest income while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk, and interest rate risk. Certain investment securities provide a source of liquidity as collateral for FHLB advances, Federal Reserve Discount Window capacity, repurchase agreements, and certain public deposits. 61 -------------------------------------------------------------------------------- Table of Contents The following table presents the amortized cost and fair value of the investment securities portfolio and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income as of the dates indicated: September 30, 2021 December 31, 2020 Unrealized Gain Unrealized Gain ($ in thousands) Amortized Cost Fair Value (Loss) Amortized Cost Fair Value (Loss) Securities available-for-sale: SBA loan pool securities$ 15,489 $ 15,421 $ (68) $ 17,436 $ 17,354 $ (82) U.S. government agency andU.S. government sponsored enterprise residential mortgage-backed securities 190,708 193,286 2,578 99,591 106,384 6,793U.S. government agency andU.S. government sponsored enterprise collateralized mortgage obligations 254,775 255,305 530 209,426 211,831 2,405 Municipal securities 117,955 120,417 2,462 64,355 68,623 4,268 Non-agency residential mortgage-backed securities 149 154 5 156 160 4 Collateralized loan obligations 551,775 549,277 (2,498) 687,505 677,785 (9,720) Corporate debt securities 156,995 169,508 12,513 141,975 149,294 7,319 Total securities available-for-sale$ 1,287,846 $ 1,303,368 $ 15,522 $ 1,220,444 $ 1,231,431 $ 10,987 Securities available-for-sale were$1.30 billion atSeptember 30, 2021 , an increase of$71.9 million , or 5.8%, from$1.23 billion atDecember 31, 2020 . The increase was mainly due to purchases of$226.8 million , including$158.1 million inU.S. government agency and government sponsored enterprise securities,$53.7 million in municipal securities and$15.0 million in corporate securities and higher net unrealized gains of$4.5 million , offset by CLO resets totaling$135.7 million and principal reductions of$22.5 million . The increase in unrealized net gains was due mostly to improved pricing of CLOs and corporate debt securities due to lower credit spreads, offset by decreases in the value of municipal securities and mortgage-backed securities as a result of increases in longer term interest rates during the year. CLOs totaled$549.3 million and$677.8 million and were allAAA and AA rated atSeptember 30, 2021 andDecember 31, 2020 . We perform due diligence and ongoing credit quality review of our CLO holdings, which includes monitoring performance factors such as external credit ratings, collateralization levels, collateral concentration levels, and other performance factors. We did not record credit impairment for any investment securities for the three and nine months endedSeptember 30, 2021 or 2020. We monitor our securities portfolio to ensure it has adequate credit support. As ofSeptember 30, 2021 , we believe there was no credit impairment and we did not have the current intent to sell securities with a fair value below amortized cost atSeptember 30, 2021 , and it is more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost basis. We consider the lowest credit rating for identification of potential credit impairment. As ofSeptember 30, 2021 , all of our investment securities in an unrealized loss position received an investment grade credit rating. The overall net increase in fair value during the year were attributable to a combination of changes in interest rates and credit market conditions. 62 -------------------------------------------------------------------------------- Table of Contents The following table presents maturities, based on the earlier of maturity dates or next repricing dates, and yield information of the investment securities portfolio as ofSeptember 30, 2021 : More than Five
Years through Ten
One Year or Less More than One Year through Five Years Years More than Ten Years Total
Fair Weighted Fair Weighted Fair Weighted Fair Weighted Fair Weighted
($ in thousands) Value Average Yield Value Average Yield Value Average Yield Value Average Yield Value Average Yield
Securities available-for-sale:
SBA loan pools securities $ 15,421 0.93 % $ - - % $ - - % $ - - % $ 15,421 0.93 %
U.S. government agency and U.S.
government sponsored enterprise
residential mortgage-backed
securities - - % - - % 29,294 2.20 % 163,992 2.16 % 193,286 2.17 %
U.S. government agency and U.S.
government sponsored enterprise
collateralized mortgage
obligations 105,662 0.63 % 10,978 1.97 % 42,423 1.34 % 96,242 1.75 % 255,305 1.23 %
Municipal securities - - % - - % 15,425 2.62 % 104,992 2.37 % 120,417 2.40 %
Non-agency residential
mortgage-backed securities - - % - - % - - % 154 6.36 % 154 6.36 %
Collateralized loan obligations 549,277 1.76 % - - % - - % - - % 549,277 1.76 %
Corporate debt securities - - % 151,201 4.82 % 18,307 5.73 % - - % 169,508 4.91 %
Total securities
available-for-sale $ 670,360 1.56 % $ 162,179 4.62 % $ 105,449 2.42 %$ 365,380 2.11 %$ 1,303,368 2.15 % 63
-------------------------------------------------------------------------------- Table of Contents Loans Held-for-Sale Total loans held-for-sale carried at fair value were$3.4 million atSeptember 30, 2021 and$1.4 million atDecember 31, 2020 and consisted mainly of repurchased conforming SFR mortgage loans that were previously sold and repurchased GNMA loans that were previously sold and became delinquent more than 90 days. Loans Receivable, Net The following table presents the composition of our loan and lease portfolio as of the dates indicated: September 30, December 31, ($ in thousands) 2021 2020 Amount Change Percentage Change Commercial: Commercial and industrial(1)$ 2,296,626 $ 2,088,308 $ 208,318 10.0 % Commercial real estate 907,224 807,195 100,029 12.4 % Multifamily 1,295,613 1,289,820 5,793 0.4 % SBA(2) 181,582 273,444 (91,862) (33.6) % Construction 130,536 176,016 (45,480) (25.8) % Consumer: Single family residential mortgage 1,393,696 1,230,236 163,460 13.3 % Other consumer 23,298 33,386 (10,088) (30.2) % Total loans(3) 6,228,575 5,898,405 330,170 5.6 % Allowance for loan losses (73,524) (81,030) 7,506 (9.3) % Total loans receivable, net$ 6,155,051 $ 5,817,375 $ 337,676 5.8 % (1)Includes warehouse lending balances of$1.52 billion and$1.34 billion atSeptember 30, 2021 andDecember 31, 2020 . (2)Includes 566 PPP loans totaling$116.5 million , net of unamortized loan fees totaling$2.0 million atSeptember 30, 2021 and 949 PPP loans totaling$210.0 million , net of unamortized loan fees totaling$1.6 million atDecember 31, 2020 . (3)Total loans include net deferred loan origination costs (fees) and premiums (discounts) of$12.5 million and$6.2 million atSeptember 30, 2021 andDecember 31, 2020 . Held-for-investment loans increased$330.2 million to$6.23 billion fromDecember 31, 2020 , resulting from higher commercial and industrial (C&I) loans of$208.3 million due, in part, to increased utilization of credit facilities, commercial real estate loans of$100.0 million , multifamily loans of$5.8 million and single family residential loans of$163.5 million , offset by lower construction loans of$45.5 million due to prepayment activity. SBA loans also decreased by$91.9 million due mostly from the SBA processing forgiveness requests of$237.0 million offset by$143.7 million in new PPP loans originated. AtSeptember 30, 2021 , SBA loans included$116.5 million of PPP loans, net of fees.
During the year, we purchased
We continue to focus the real estate loan portfolio toward relationship-based multifamily, bridge, light infill construction, and commercial real estate loans. As ofSeptember 30, 2021 , loans secured by residential real estate (single-family, multifamily, single-family construction, and credit facilities) represent approximately 70% of our total loans outstanding. 64 -------------------------------------------------------------------------------- Table of Contents Credit Quality Indicators We categorize loans into risk categories based on relevant information about the ability of borrowers to repay their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We perform a historical loss analysis that is combined with a comprehensive loan to value analysis to analyze the associated risks in the current loan portfolio. We analyze loans individually and grade each loan for credit risk. This analysis includes all loans delinquent over 60 days and non-homogeneous loans such as commercial and commercial real estate loans. The following table presents the risk categories for total loans by class of loans as ofSeptember 30, 2021 andDecember 31, 2020 :
Special
($ in thousands) Pass Mention Substandard Doubtful TotalSeptember 30, 2021 Commercial: Commercial and industrial$ 2,210,325 $ 62,961 $ 23,340 $ -$ 2,296,626 Commercial real estate 876,441 16,695 14,088 - 907,224 Multifamily 1,231,025 62,658 1,930 - 1,295,613 SBA 163,271 4,071 12,203 2,037 181,582 Construction 120,861 9,675 - - 130,536 Consumer: Single family residential mortgage 1,362,616 8,782 22,298 - 1,393,696 Other consumer 23,114 87 97 - 23,298 Total$ 5,987,653 $ 164,929 $ 73,956 $ 2,037 $ 6,228,575 Special ($ in thousands) Pass Mention Substandard Doubtful Total December 31, 2020 Commercial: Commercial and industrial$ 2,019,701 $ 17,232 $ 51,375 $ -$ 2,088,308 Commercial real estate 760,612 30,485 16,098 - 807,195 Multifamily 1,284,995 2,853 1,972 - 1,289,820 SBA 264,851 3,275 4,837 481 273,444 Construction 167,485 8,531 - - 176,016 Consumer: Single family residential mortgage 1,202,758 11,853 15,625 - 1,230,236 Other consumer 31,823 1,215 348 - 33,386 Total$ 5,732,225 $ 75,444 $ 90,255 $ 481 $ 5,898,405 Loans risk rated special mention increased$89.5 million to$164.9 million atSeptember 30, 2021 compared to$75.4 million atDecember 31, 2020 due to downgrades of certain multifamily and commercial and industrial loans offset by loan payoffs and loan amortization. Loans risk rated substandard decreased$16.3 million to$74.0 million atSeptember 30, 2021 compared to$90.3 million atDecember 31, 2020 due mostly to the upgrade and payoff of certain commercial and industrial loans, offset by the downgrade of certain single family residential loans and the repurchase of guaranteed SBA loans pending resolution. Loans risk rated doubtful increased$1.6 million to$2.0 million atSeptember 30, 2021 compared to$481 thousand due mostly to downgrades of one SBA relationship. 65 -------------------------------------------------------------------------------- Table of Contents The C&I portfolio has limited exposure to certain business sectors undergoing severe stress as a result of the pandemic. The C&I industry concentrations in dollars and as a percentage of total outstanding C&I loan balances are summarized below: September 30, 2021 ($ in thousands) Amount % of Portfolio C&I Portfolio by Industry
Finance and Insurance - Warehouse Lending
66 %
Real Estate & Rental Leasing 221,541
10 %
Finance and Insurance - Other 84,569 4 % Gas Stations 73,926 3 % Healthcare 72,252 3 % Television / Motion Pictures 51,097 2 % Manufacturing 47,421 2 % Wholesale Trade 38,770 2 % Other Retail Trade 29,950 1 % Food Services 29,034 1 % Professional Services 15,339 1 % Transportation 4,685 - % Accommodations 2,135 - % All Other 102,962 4 % Total$ 2,296,626 100 % Non-Traditional Mortgage Portfolio ("NTM") Our NTM portfolio is comprised of three interest-only products: Green Loans, Interest Only loans and a small number of additional loans with the potential for negative amortization. As ofSeptember 30, 2021 andDecember 31, 2020 , the NTM portfolio totaled$571.4 million , or 9.2% of the total gross loan portfolio, and$437.1 million , or 7.4% of the total gross loan portfolio. The total NTM portfolio increased by$134.3 million , or 30.7% during the nine months endedSeptember 30, 2021 . The increase was primarily due to loan purchases, offset by principal paydowns and payoffs. We no longer originate NTM loans, however loans were purchased which meet the criteria to be considered NTM loans. NTM loans on nonaccrual status included$3.3 million of Green Loans and$3.3 million of Interest Only loans atSeptember 30, 2021 compared to$4.0 million of Green Loans and$4.7 million of Interest Only loans atDecember 31, 2020 . The initial credit guidelines for the NTM portfolio were established based on the borrower's Fair Isaac Corporation ("FICO") score, loan-to-value ("LTV") ratio, property type, occupancy type, loan amount, and geography. Additionally, from an ongoing credit risk management perspective, we have determined that the most significant performance indicators for NTMs are LTV ratios and FICO scores. We review the NTM loan portfolio at least quarterly, which includes refreshing FICO scores on the Green Loans and HELOCs and ordering third party automated valuation models ("AVMs") to confirm collateral values. Green Loans, including first and second liens, totaled$26.7 million atSeptember 30, 2021 , a decrease of$6.5 million , or 19.6% from$33.2 million atDecember 31, 2020 . The following table presents our Green Loans first lien portfolio atSeptember 30, 2021 by FICO scores that were obtained during the quarter endedSeptember 30, 2021 , compared to the FICO scores for those same loans that were obtained during the quarter endedDecember 31, 2020 : By FICO Scores Obtained By FICO Scores Obtained During the Quarter Ended During the Quarter Ended September 30, 2021 December 31, 2020 Change ($ in thousands) Count Amount Percent Count Amount Percent Count Amount Percent FICO Score 800+ 8$ 2,472 9.9 % 9$ 4,699 18.7 % (1)$ (2,227) (47.4) % 700-799 20 18,024 71.8 % 19 13,907 55.5 % 1 4,117 29.6 % 600-699 5 3,781 15.1 % 5 5,671 22.6 % - (1,890) (33.3) % <600 1 272 1.1 % 1 272 1.1 % - - - % No FICO 2 525 2.1 % 2 525 2.1 % - - - % Totals 36$ 25,074 100.0 % 36$ 25,074 100.0 % - $ - - % 66
-------------------------------------------------------------------------------- Table of Contents Loan-to-Value Ratio LTV ratio represents estimated current loan to value ratio, determined by dividing the current unpaid principal balance by the latest estimated property value received per our policy. The table below represents our single family residential NTM first lien portfolio by LTV ratio ranges as of the dates indicated: ($ in thousands) Green Interest Only Negative Amortization Total LTV ratio range Count Amount Percent Count Amount Percent Count Amount Percent Count Amount PercentSeptember 30, 2021 < 61% 34$ 22,807 91.0 % 181$ 278,990 51.4 % 4$ 1,464 100.0 % 219$ 303,261 53.2 % 61-80% 2 2,267 9.0 % 154 258,419 47.6 % - - - % 156 260,686 45.8 % 81-100% - - - % 1 2,316 0.4 % - - - % 1 2,316 0.4 % > 100% - - - % 1 3,518 0.6 % - - - % 1 3,518 0.6 % Total 36$ 25,074 100.0 % 337$ 543,243 100.0 % 4$ 1,464 100.0 % 377$ 569,781 100.0 %December 31, 2020 < 61% 42$ 25,946 82.1 % 190$ 271,108 67.5 % 8$ 2,288 100.0 % 240$ 299,342 68.7 % 61-80% 6 5,641 17.9 % 91 126,281 31.4 % - - - % 97 131,922 30.3 % 81-100% - - - % 2 4,251 1.1 % - - - % 2 4,251 1.0 % > 100% - - - % - - - % - - - % - - - % Total 48$ 31,587 100.0 % 283$ 401,640 100.0 % 8$ 2,288 100.0 % 339$ 435,515 100.0 % 67
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Nonperforming Assets
The following table presents a summary of total nonperforming assets, excluding
loans held-for-sale, as of the dates indicated:
September 30, December 31,
($ in thousands) 2021 2020 Amount Change Percentage Change
Loans past due 90 days or more still on
accrual $ - $ 728 $ (728) (100.0) %
Nonaccrual loans 45,621 35,900 9,721 27.1 %
Total nonperforming loans 45,621 36,628 8,993 24.6 %
Other real estate owned - - - - %
Total nonperforming assets $ 45,621 $ 36,628 $ 8,993 24.6 %
Performing restructured loans (1) $ 5,835 $ 4,733 $ 1,102 23.3 %
Total nonperforming loans to total loans 0.73 % 0.62 %
Total nonperforming assets to total assets 0.55 % 0.46 %
ALL to nonperforming loans 161.16 % 221.22 %
ACL to nonperforming loans 172.63 % 229.91 %
(1) Excluded from nonperforming loans
Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where we believe the borrower will eventually overcome those circumstances and repay the loan in full. Additional interest income of approximately$724 thousand and$1.9 million would have been recorded during the three and nine months endedSeptember 30, 2021 , had these loans been paid in accordance with their original terms throughout the periods indicated. Non-performing loans increased$9.0 million to$45.6 million as ofSeptember 30, 2021 , of which$22.7 million , or 50%, relates to loans in a current payment status. The increase was due mostly to$36.7 million of loans placed on non-accrual status, including$9.3 million in guaranteed SBA loans that were repurchased and are pending resolution, offset by$25.1 million in cured loans and payoffs. Of the$36.7 million of loans placed on non-accrual status,$23.8 million , related to SFR loans. AtSeptember 30, 2021 , non-performing loans included (i) a legacy relationship totaling$7.0 million that is well-secured by a combination of commercial real estate and SFR properties with an average loan-to-value ratio of 50%, (ii) SFR loans totaling$16.5 million , (iii) SBA loans totaling$12.8 million , of which$8.7 million is guaranteed, and (iv) other commercial loans of$9.2 million . During the three and nine months endedSeptember 30, 2021 , other real estate owned, consisting ofone SFR property totaling$3.3 million , was sold at a gain of$365 thousand . During the three and nine months endedSeptember 30, 2020 , other real estate owned, consisting ofone SFR property totaling$1.1 million , was sold at a loss of$38 thousand . Troubled Debt Restructurings Loans that we modify or restructure where the debtor is experiencing financial difficulties and makes a concession to the borrower in a below-market change in the stated interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a note split with principal forgiveness are classified as troubled debt restructurings ("TDRs"). TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower's financial condition. A workout plan between a borrower and us is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated. AtSeptember 30, 2021 andDecember 31, 2020 , we had 9 and 13 loans classified as TDRs, with an aggregate balance of$8.2 million and$9.0 million . When a loan becomes a TDR, we cease accruing interest, and classify it as nonaccrual until the borrower demonstrates that the loan is again performing. The decrease in TDRs during the nine months endedSeptember 30, 2021 was due mostly to payoffs and paydowns offset by an addition for one single family residential loan totaling$1.8 million . 68 -------------------------------------------------------------------------------- Table of Contents AtSeptember 30, 2021 , of the 9 loans classified as TDRs, 7 loans totaling$5.8 million were making payments according to their modified terms and were less than 90 days delinquent under the modified terms and, as such, were on accruing status. AtDecember 31, 2020 , of the 13 loans classified as TDRs, 10 loans totaling$4.7 million were making payments according to their modified terms and were less than 90 days delinquent under the modified terms and, as such, were on accruing status. Troubled Debt Restructuring (TDR) Relief: In order to encourage banks to work with impacted borrowers, the CARES Act andU.S. banking regulatory agencies have provided relief from TDR accounting. The main benefits of TDR relief include i) a capital benefit in the form of reduced risk-weighted assets, as TDRs are more heavily risk-weighted for capital purposes; ii) a delinquency status benefit, as the aging of loans are frozen, i.e., they will continue to be reported in the same delinquency bucket they were in at the time of modification; and iii) a nonaccrual status benefit as the loans are generally not reported as nonaccrual during the modification period. Refer to "Borrower Payment Relief Efforts" above for additional information regarding CARES Act deferrals. Allowance for Credit Losses (ACL) The ACL methodology uses a nationally recognized, third-party model that includes many assumptions based on historical and peer loss data, current loan portfolio risk profile including risk ratings, and economic forecasts including macroeconomic variables (MEVs) released by our model provider duringSeptember 2021 . TheSeptember 2021 forecasts reflect a more favorable view of the economy (i.e. higher GDP growth rates and lower unemployment rates) compared to theJune 2021 forecasts. While the current forecasts generally reflect an improving economy with the availability of the vaccine and other factors, there continues to be uncertainty regarding the impact of inflation (lasting or transitory), COVID-19 variants, further government stimulus, supply chain issues, and the ultimate pace of the recovery. Accordingly, our economic assumptions, the resulting ACL level and provision reversal consider both the positive assumptions and potential uncertainties. The ACL also incorporated qualitative factors to account for certain loan portfolio characteristics that are not taken into consideration by the third-party model including underlying strengths and weaknesses in various segments of the loan portfolio. As is the case with all estimates, the ACL is expected to be impacted in future periods by economic volatility, changing economic forecasts, underlying model assumptions, and asset quality metrics, all of which may be better than or worse than current estimates. The ACL process involves subjective and complex judgments as well as adjustments for numerous factors including those described in the federal banking agencies' joint interagency policy statement on ALL, which include underwriting experience and collateral value changes, among others. The allowance for expected credit losses (ACL), which includes the reserve for unfunded loan commitments, totaled$78.8 million , or 1.26% of total loans, atSeptember 30, 2021 , compared to$84.2 million , or 1.43% of total loans, atDecember 31, 2020 . The$5.5 million decrease in the ACL was due to: (i) lower general reserves of$6.4 million due to improved economic assumptions and asset quality trends, offset by higher period-end portfolio balances , (ii) net charge-offs of$1.0 million , and (iii) higher specific reserves of$2.0 million . The ACL coverage of non-performing loans was 173% atSeptember 30, 2021 compared to 230% atDecember 31, 2020 . The reserve for unfunded loan commitments was established to cover the current expected credit losses for the estimated level of funding of these loan commitments, except for unconditionally cancellable commitments for which no reserve is required. The following table provides a summary of components of the allowance for credit losses and related ratios as of the dates indicated:September 30 , ($ in thousands) 2021
Allowance for credit losses:
Allowance for loan losses (ALL) $ 73,524 $ 81,030
Reserve for unfunded loan commitments 5,233 3,183
Total allowance for credit losses (ACL) $ 78,757 $ 84,213
ALL to total loans 1.18 % 1.37 %
ACL to total loans 1.26 % 1.43 %
ACL to total loans, excluding PPP loans 1.29 % 1.48 %
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The following tables provide summaries of activity in the allowance for credit
losses for the periods indicated:
Three Months Ended September 30,
($ in thousands) 2021 2020
Allowance Reserve for Allowance Allowance Reserve for Allowance
for Unfunded Loan for for Unfunded Loan for
Loan Losses Commitments Credit Losses Loan Losses Commitments Credit Losses
Balance at beginning of
period $ 75,885 $ 3,814 $ 79,699 $ 90,370 $ 4,195 $ 94,565
Loans charged off (327) - (327) (1,821) - (1,821)
Recoveries of loans
previously charged off 532 - 532 248 - 248
Net recoveries
(charge-offs) 205 - 205 (1,573) - (1,573)
(Reversal of) provision for
credit losses (2,566) 1,419 (1,147) 2,130 (989) 1,141
Balance at end of period $ 73,524 $ 5,233 $ 78,757 $ 90,927 $ 3,206 $ 94,133
Nine Months Ended September 30,
($ in thousands) 2021 2020
Allowance Reserve for Allowance Allowance Reserve for Allowance
for Unfunded Loan for for Unfunded Loan for
Loan Losses Commitments Credit Losses Loan Losses Commitments Credit Losses
Balance at beginning of
period $ 81,030 $ 3,183 $ 84,213 $ 57,649 $ 4,064 $ 61,713
Impact of adopting ASU
2016-13(1) - - - 7,609 (1,226) 6,383
Loans charged off (1,778) - (1,778) (3,897) - (3,897)
Recoveries of loans
previously charged off 730 - 730 1,206 - 1,206
Net charge-offs (1,048) - (1,048) (2,691) - (2,691)
(Reversal of) provision
for credit losses (6,458) 2,050 (4,408) 28,360 368 28,728
Balance at end of period $ 73,524 $ 5,233 $ 78,757 $ 90,927 $ 3,206 $ 94,133
(1)Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit
Losses on January 1, 2020 . As a result of adopting ASU 2016-13, our methodology
to compute our allowance for credit losses is based on a current expected credit
loss methodology, rather that the previously applied incurred loss methodology.
The following table provides a summary of the allocation of the allowance for
loan losses by loan category as well as loans receivable for each category as of
the dates indicated:
September 30, 2021 December 31, 2020
% of % of
Loans in Loans in
Allowance for Category to Allowance for Category to
($ in thousands) Loan Losses Loans Receivable Total Loans Loan Losses Loans Receivable Total Loans
Commercial:
Commercial and industrial$ 20,255 $ 2,296,626 36.8 %$ 20,608 $ 2,088,308 35.3 % Commercial real estate 16,017 907,224 14.6 % 19,074 807,195 13.7 % Multifamily 18,725 1,295,613 20.8 % 22,512 1,289,820 21.9 % SBA 4,735 181,582 2.9 % 3,145 273,444 4.6 % Construction 4,118 130,536 2.1 % 5,849 176,016 3.0 % Consumer: Single family residential mortgage 9,304 1,393,696 22.4 % 9,191 1,230,236 20.9 % Other consumer 370 23,298 0.4 % 651 33,386 0.6 % Total$ 73,524 $ 6,228,575 100.0 %$ 81,030 $ 5,898,405 100.0 % 70
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The following table provides information regarding activity by loan class in the
allowance for loan losses during the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2021 2020 2021 2020
ALL at beginning of period $ 75,885 $
90,370
- - - 7,609
Charge-offs:
Commercial and industrial (115) (1,597) (1,180) (2,761) Commercial real estate (138) - (138) - Multifamily - - - - SBA (74) (224) (460) (580) Single family residential mortgage - - - (552) Other consumer - - - (4) Total charge-offs (327) (1,821) (1,778) (3,897) Recoveries: Commercial and industrial 484 116 553 265 SBA 1 132 130 253 Single family residential mortgage 46 - 46 639 Other consumer 1 - 1 49 Total recoveries 532 248 730 1,206 Net recoveries (charge-offs) 205 (1,573) (1,048) (2,691) (Reversal of) provision for credit losses - loans (2,566) 2,130 (6,458) 28,360 ALL at end of period$ 73,524 $
90,927
$ 6,056,374 $
5,514,032
$ 6,228,575 $ 5,678,002 $ 6,228,575 $ 5,678,002 Ratios: Annualized net charge-offs to average total loans held-for-investment (0.01) % 0.11 % 0.02 % 0.06 % ALL to total loans held-for-investment 1.18 % 1.60 % 1.18 % 1.60 % (1)Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses onJanuary 1, 2020 . As a result of adopting ASU 2016-13, our methodology to compute our allowance for credit losses is based on a current expected credit loss methodology, rather that the previously applied incurred loss methodology. Alternative Energy Partnerships We invest in certain alternative energy partnerships (limited liability companies) formed to provide sustainable energy projects that are designed to generate a return primarily through the realization of federal tax credits (energy tax credits) and other tax benefits. The investment helps promote the development of renewable energy sources and help lower the cost of housing for residents by lowering homeowners' monthly utility costs. As our respective investments in these entities are more than minor, we have significant influence, but not control, over the investee's activities that most significantly impact its economic performance. As a result, we are required to apply the equity method of accounting, which generally prescribes applying the percentage ownership interest to the investee's GAAP net income in order to determine the investor's earnings or losses in a given period. However, because the liquidation rights, tax credit allocations and other benefits to investors can change upon the occurrence of specified events, application of the equity method based on the underlying ownership percentages would not accurately represent our investment. As a result, we apply the Hypothetical Liquidation at Book Value ("HLBV") method of the equity method of accounting. The HLBV method is a balance sheet approach whereby a calculation is prepared at each balance sheet date to estimate the amount that we would receive if the equity investment entity were to liquidate all of its assets (as valued in accordance with GAAP) and distribute that cash to the investors based on the contractually defined liquidation priorities. The difference between the calculated liquidation distribution amounts at the beginning and the end of the reporting period, after adjusting for capital contributions and distributions, is our share of the earnings or losses from the equity investment for the period. 71
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The following table presents the activity related to our investment in
alternative energy partnerships for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2021 2020 2021 2020
Balance at beginning of period $ 24,068 $ 26,967 $ 27,977 $ 29,300
New funding - - - 3,631
Change in unfunded commitments - - - (3,225)
Cash distribution from investments (657) (611) (1,765) (1,612)
Gain (loss) on investments using HLBV
method 1,785 1,430 (1,016) (308)
Balance at end of period $ 25,196 $ 27,786 $ 25,196 $ 27,786
Unfunded equity commitments at end of
period $ - $ - $ - $ -
Our most recent investment in alternative energy partnerships totaling $3.6
million occurred in March 2020 .
During the three months ended September 30, 2021 and 2020, we recognized gains
on investment of $1.8 million and $1.4 million . During the nine months ended
September 30, 2021 and 2020, we recognized losses on investment of $1.0 million
and $308 thousand . The HLBV losses for the nine months ended September 30, 2021
and 2020 were largely driven by accelerated tax depreciation on equipment which
reduces the amount distributable by the investee in a hypothetical liquidation
under the contractual liquidation provisions. From an income tax benefit
perspective, we recognized no investment tax credits during these periods;
however, we recorded income tax expense related to these investments of $491
thousand and $185 thousand for the three months ended September 30, 2021 and
2020 and income tax benefit of $280 thousand and $111 thousand for the nine
months ended September 30, 2021 and 2020.
For additional information, see Note 12 to Consolidated Financial Statements
(unaudited) included in Part I of this Quarterly Report on Form 10-Q.
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Deposits
The following table shows the composition of deposits by type as of the dates
indicated:
September 30, 2021 December 31, 2020
% of Total % of Total
($ in thousands) Amount Deposits Amount Deposits Amount Change
Noninterest-bearing deposits $ 2,107,709 32.2 % $ 1,559,248 25.6 % $ 548,461
Interest-bearing demand deposits 2,214,678 33.8 % 2,107,942 34.6 %
106,736
Savings and money market accounts 1,661,013 25.4 % 1,646,660 27.1 %
14,353
Certificates of deposit of$250,000 or less 221,022 3.4 % 316,585 5.2 %
(95,563)
Certificates of deposit of more than$250,000 338,803 5.2 % 455,365 7.6 % (116,562) Total deposits$ 6,543,225 100.0 %$ 6,085,800 100.0 %$ 457,425 Total deposits were$6.5 billion atSeptember 30, 2021 , an increase of$457.4 million , or 7.5%, from$6.1 billion atDecember 31, 2020 . We continue to focus on growing relationship-based deposits, strategically augmented by wholesale funding, as we actively managed down deposit costs in response to the current interest rate environment. Noninterest-bearing deposits totaled$2.11 billion and represented 32.2% of total deposits atSeptember 30, 2021 compared to$1.56 billion and 25.6% atDecember 31, 2020 . During the nine months endedSeptember 30, 2021 , demand deposits increased by$655.2 million , due to higher noninterest-bearing deposits of$548.5 million and interest-bearing demand deposits of$106.7 million . Savings and money market accounts also increased$14.4 million during the nine months endedSeptember 30, 2021 . These increases were offset by decreases in time deposits of$212.1 million . Brokered deposits were$10.0 million atSeptember 30, 2021 , and$26.2 million atDecember 31, 2020 . The decrease between periods related to maturities of brokered time deposits. The following table presents the scheduled maturities of certificates of deposit as ofSeptember 30, 2021 : Over Three
Over Six Months
Three Months Months Through Through Twelve
($ in thousands) or Less Six Months Months Over One Year Total
Certificates of deposit of
$250,000 or less $ 74,358 $ 59,451
253,133 24,665 53,462 7,543 338,803
Total certificates of deposit $ 327,491 $ 84,116 $ 111,355 $ 36,863 $ 559,825
Borrowings
We utilized FHLB advances to leverage our capital base, to provide funds for
lending and investing activities, as a source of liquidity, and to enhance
interest rate risk management. We also maintained additional borrowing
availabilities from Federal Reserve Discount Window and unsecured federal funds
lines of credit.
During the nine months ended September 30, 2021 , FHLB advances decreased $134.1
million , or 24.8%, to $405.7 million , net of unamortized debt issuance costs of
$5.3 million , as of September 30, 2021 , primarily due to repayment of overnight
borrowings of $85.0 million and maturities of term advances of $50.0 million .
At September 30, 2021 , FHLB advances included no overnight borrowings and $411.0
million in term advances with a weighted average life of 4.2 years and weighted
average interest rate of 2.53%.
We did not utilize repurchase agreements at September 30, 2021 or December 31,
2020 .
The Bank maintained available unsecured federal funds lines with five
correspondent banks totaling $210.0 million , with no outstanding borrowings at
September 30, 2021 .
The Bank also has the ability to perform unsecured overnight borrowing from
various financial institutions through the American Financial Exchange platform
(AFX). The availability of such unsecured borrowings fluctuates regularly and
are
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subject to the counterparties discretion and totaled $441.0 million and
$196.0 million at September 30, 2021 and December 31, 2020 . Borrowings under the
AFX totaled $100.0 million and zero at September 30, 2021 and December 31, 2020 .
For additional information, see Note 6 to Consolidated Financial Statements
(unaudited) included in Part I of this Quarterly Report on Form 10-Q.
Long -term Debt
The following table presents our long-term debt as of the dates indicated:
September 30, 2021 December 31, 2020
Unamortized Debt Unamortized Debt
Issuance Cost and Issuance Cost and
($ in thousands) Par Value Discount Par Value Discount
5.25% senior notes due April 15, 2025 $ 175,000 $
(1,104)
4.375% subordinated notes due October 30, 2030 85,000 (2,190) 85,000 (2,394) Total$ 260,000 $ (3,294)$ 260,000 $ (3,685)
At
Liquidity Management We are required to maintain sufficient liquidity to ensure a safe and sound operation. Liquidity may increase or decrease depending upon availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including both expected and unexpected cash flow needs such as funding loan commitments, potential deposit outflows and dividend payments. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained. As a result of current economic conditions, including government stimulus in response to the pandemic, we have participated in the elevated levels of liquidity in the marketplace. A portion of the additional liquidity is viewed as short-term as it is expected to be used by clients in the near term and, accordingly, we have maintained higher levels of liquid assets. We have not observed a change in the level of clients' credit line usage and we expect additional liquidity as the Bank's PPP loans are forgiven over the next several quarters.Banc of California, N.A. AtSeptember 30, 2021 , the Company had borrowing capacity with theFederal Reserve Bank of San Francisco ("Federal Reserve") of$349.3 million , including the secured borrowing capacity through the Federal Reserve Discount Window and Borrower-in-Custody ("BIC") program. AtSeptember 30, 2021 , the Bank has pledged certain qualifying loans with an unpaid principal balance of$617.4 million and securities with a carrying value of$8.9 million as collateral for these lines of credit. Borrowings under the BIC program are overnight advances with interest chargeable at the discount window ("primary credit") borrowing rate. There were no borrowings under this arrangement for the three and nine months endedSeptember 30, 2021 . The Bank's liquidity, represented by cash and cash equivalents and securities available-for-sale, is a product of its operating, investing, and financing activities. The Bank's primary sources of funds are deposits, payments and maturities of outstanding loans and investment securities; sales of loans and investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and investment securities, and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Bank invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. The Bank also generates cash through borrowings. The Bank mainly utilizes FHLB advances from pre-established secured lines of credit as a secondary source of liquidity to provide funds for its lending activities and to enhance its interest rate risk management. The Bank also has additional sources of secondary liquidity through its ability to obtain brokered deposits or use securities sold under repurchase agreements to leverage its capital base, as well as a pre-established secured line of credit through the Federal Reserve BIC program. Liquidity management is both a daily and long-term function of business management. Any excess liquidity is typically invested in federal funds or investment securities. On a longer-term basis, the Bank maintains a strategy of investing in various lending products. The Bank uses its sources of funds primarily to meet its ongoing loan and other commitments, and to pay maturing certificates of deposit and savings withdrawals. 74 -------------------------------------------------------------------------------- Table of ContentsBanc of California, Inc. The primary sources of funds forBanc of California, Inc. , on a stand-alone holding company basis, are dividends and intercompany tax payments from the Bank, outside borrowing, and our ability to raise capital and issue debt securities. Dividends from the Bank are largely dependent upon the Bank's earnings and are subject to restrictions under certain regulations that limit its ability to transfer funds to the holding company. OCC regulations impose various restrictions on the ability of a bank to make capital distributions, which include dividends, stock redemptions or repurchases, and certain other items. Generally, a well-capitalized bank may make capital distributions during any calendar year equal to up to 100 percent of year-to-date net income plus retained net income for the two preceding years without prior OCC approval. However, any dividend paid by the Bank would be limited by the need to maintain its well-capitalized status plus the capital buffer in order to avoid additional dividend restrictions (Refer to Capital - Dividend Restrictions below for additional information). Currently, the Bank does not have sufficient dividend-paying capacity to declare and pay such dividends to the holding company without obtaining prior approval from the OCC under the applicable regulations. During the nine months endedSeptember 30, 2021 , the Bank paid$36.0 million of dividends toBanc of California, Inc. AtSeptember 30, 2021 ,Banc of California, Inc. had$54.8 million in cash, all of which was on deposit at the Bank. OnFebruary 10, 2020 , we announced that our Board of Directors authorized the repurchase of up to$45 million of our common stock. The repurchase authorization expired inFebruary 2021 . There were no common stock repurchases during the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2021 , we redeemed all outstanding depositary shares representing shares of our Series D. The aggregate total consideration for the Series D depositary shares purchased was$93.3 million . The$3.3 million difference between the consideration paid and the$89.9 million aggregate carrying value of the Series D Preferred Stock was reclassified to retained earnings and resulted in a decrease to net income allocated to common stockholders. On a consolidated basis, cash and cash equivalents totaled$185.8 million , or 2.2% of total assets atSeptember 30, 2021 . This compared to$220.8 million , or 2.8% of total assets, atDecember 31, 2020 . The$35.0 million decrease was mainly due to the net reduction in FHLB advances and other borrowings. AtSeptember 30, 2021 , we had available unused secured borrowing capacities of$894.9 million from the FHLB and$349.3 million from theFederal Reserve , as well as$210.0 million from unsecured federal funds lines of credit. We also maintained repurchase agreements of which none were outstanding atSeptember 30, 2021 . Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and pledging additional investment securities. We also had unpledged securities available-for-sale of$1.27 billion atSeptember 30, 2021 . We also have the ability to perform unsecured overnight borrowing from various financial institutions through the American Financial Exchange platform (AFX). The availability of such unsecured borrowings fluctuates regularly and are subject to the counterparties discretion and totaled$441.0 million atSeptember 30, 2021 . Borrowings under the AFX totaled$100.0 million and zero atSeptember 30, 2021 andDecember 31, 2020 . We believe that our liquidity sources are stable and are adequate to meet our day-to-day cash flow requirements as ofSeptember 30, 2021 . However, in light of the ongoing COVID-19 pandemic, we cannot predict at this time the extent to which the pandemic will negatively affect our business, financial condition, liquidity, capital and results of operations. 75 -------------------------------------------------------------------------------- Table of Contents Commitments and Contractual Obligations The following table presents our commitments and contractual obligations as ofSeptember 30, 2021 :
Commitments and Contractual Obligations
More Than One More Than Three
Total Amount Within Year Through Year Through Over
($ in thousands) Committed One Year Three Years Five Years Five Years
Commitments to extend credit $ 153,410 $ 11,580 $ 94,165 $ 41,399 $ 6,266
Unused lines of credit 1,465,916 1,151,170 230,767 15,610 68,369
Standby letters of credit 8,181 6,095 2,086 - -
Total commitments $ 1,627,507 $ 1,168,845 $ 327,018 $ 57,009 $ 74,635
FHLB advances $ 411,000 $ - $ - $ 311,000 $ 100,000
Other borrowings 100,000 100,000 - - -
Long-term debt 260,000 - - 175,000 85,000
Operating and capital lease
obligations 32,928 6,429 10,962 9,167 6,370
Certificates of deposit 559,825 522,962 34,140 2,723 -
Total contractual obligations $ 1,363,753 $ 629,391
At
Capital
In order to maintain adequate levels of capital, we continuously assess projected sources and uses of capital to support projected asset growth, operating needs and credit risk. We consider, among other things, earnings generated from operations and access to capital from financial markets. In addition, we perform capital stress tests on an annual basis to assess the impact of adverse changes in the economy on our capital base.Regulatory Capital The Company and the Bank are subject to the regulatory capital adequacy guidelines that are established by the Federal banking regulators. InJuly 2013 , the Federal banking regulators approved a final rule to implement the revised capital adequacy standards of the Basel III and to address relevant provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds. The Company and the Bank became subject to the new rule onJanuary 1, 2015 and certain provisions of the new rule were phased in throughJanuary 1, 2019 . Inclusive of the fully phased-in capital conservation buffer, the common equity Tier 1 capital, Tier 1 risk-based capital and total risk-based capital ratio minimums are 7.0%, 8.5% and 10.5%, respectively. 76 -------------------------------------------------------------------------------- Table of Contents The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated: Minimum Required to Be Well-Capitalized Under Prompt Corrective Action Minimum Capital Requirements Provisions ($ in thousands) Amount Ratio Amount Ratio Amount Ratio September 30, 2021Banc of California, Inc. Total risk-based capital$ 943,885 14.73 %$ 512,800 8.00 % N/A N/A Tier 1 risk-based capital 791,367 12.35 % 384,600 6.00 % N/A N/A Common equity tier 1 capital 696,411 10.86 % 288,450 4.50 % N/A N/A Tier 1 leverage 791,367 9.80 % 323,009 4.00 % N/A N/ABanc of California, NA Total risk-based capital$ 1,044,540 16.31 %$ 512,304 8.00 %$ 640,380 10.00 % Tier 1 risk-based capital 974,831 15.22 % 384,228 6.00 % 512,304 8.00 % Common equity tier 1 capital 974,831 15.22 % 288,171 4.50 % 416,247 6.50 % Tier 1 leverage 974,831 12.08 % 322,716 4.00 % 403,395 5.00 % December 31, 2020Banc of California, Inc. Total risk-based capital$ 996,466 17.01 %$ 468,628 8.00 % N/A N/A Tier 1 risk-based capital 840,501 14.35 % 351,471 6.00 % N/A N/A Common equity tier 1 capital 655,623 11.19 % 263,603 4.50 % N/A N/A Tier 1 leverage 840,501 10.90 % 308,555 4.00 % N/A N/ABanc of California, NA Total risk-based capital$ 1,011,587 17.27 %$ 468,698 8.00 %$ 585,873 10.00 % Tier 1 risk-based capital 938,346 16.02 % 351,524 6.00 % 468,698 8.00 % Common equity tier 1 capital 938,346 16.02 % 263,643 4.50 % 380,817 6.50 % Tier 1 leverage 938,346 12.19 % 307,894 4.00 % 384,868 5.00 % OnOctober 30, 2020 , we completed the issuance and sale of$85.0 million aggregate principal amount of 4.375% Fixed-to-Floating Rate Subordinated Notes due 2030, at a public offering price equal to 100% of the aggregate principal amount of the Notes which qualifies as Tier II capital. Dividend Restrictions Payment of dividends by the Company are subject to guidance provided by theFederal Reserve . That guidance provides that bank holding companies that plan to pay dividends that exceed net earnings for a given period should first consult with theFederal Reserve . To the extent future quarterly dividends exceed quarterly net earnings, payment of dividends in respect of the Company's common and preferred stock will be subject to prior consultation and non-objection from theFederal Reserve . Our principal source of funds for dividend payments is dividends received from the Bank. Federal banking laws and regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, in the case of the Bank, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. Accordingly, any dividend granted by the Bank would be limited by the need to maintain its well capitalized status plus the capital buffer in order to avoid additional dividend restrictions. As described above, any near term dividend by the Bank will require OCC approval. During the three and nine months endedSeptember 30, 2021 , the Bank paid$24.0 million and$36.0 million in dividends toBanc of California, Inc. During the three and nine months endedSeptember 30, 2021 , we declared and paid dividends on our common stock of$0.06 and$0.18 per share totaling$3.0 million and$9.1 million in addition to dividends on our preferred stock totaling$1.7 million and$6.6 million . 77
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