BANC OF CALIFORNIA, INC. Critical Accounting Estimates
We follow accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices generally applicable to the financial services industry, the most significant of which are described in Note 1 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8. The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make judgments and accounting estimates that affect the amounts reported for assets, liabilities, revenues and expenses on the Consolidated Financial Statements and accompanying notes, and amounts disclosed as contingent assets and liabilities. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible to significant change. Critical accounting policies are defined as those that require the most complex or subjective judgment and are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management has identified our most critical accounting policies and accounting estimates as: investment securities, allowance for credit losses, business combinations, valuation of acquired loans, goodwill and deferred income taxes. See Note 1 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 for a description of these policies.Investment Securities . Available-for-sale debt securities are carried at fair value. These securities are analyzed for credit losses under ASC 326, which requires the Company to determine whether impairment exists as of the reporting date and whether that impairment is due to credit losses. An allowance for credit losses would be established for losses on available-for-sale debt securities due to credit losses and would be reported as a component of provision for credit losses. The valuation of investment securities considers observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information, and respective terms and conditions for debt instruments. We employ procedures to monitor the pricing service's assumptions and establish processes to challenge the pricing service's valuations that appear unusual or unexpected. Multiple quotes or prices may be obtained in this process and we determine which fair value is most appropriate based on market information and analysis. Quotes obtained through this process are generally non-binding. We follow established procedures to ensure that assets and liabilities are properly classified in the fair value hierarchy. All securities available-for-sale were classified as Level 2 atDecember 31, 2021 and 2020. When a market is illiquid or there is a lack of transparency around the inputs to valuation, including at least one unobservable input, the securities are classified as Level 3 and reliance is placed upon internally developed models and management's judgment and evaluation for valuation. We had no securities available-for-sale classified as Level 3 atDecember 31, 2021 and 2020. The estimates used to determine the fair values of investment securities can be complex and require judgment. These critical estimates are difficult to predict and may result in credit losses in future periods if actual results materially differ from the estimated assumptions utilized in our valuation of these assets. Allowance for Credit Losses ("ACL"). The ACL is estimated on a quarterly basis and represents management's estimate of current expected credit losses in our loan portfolio. The ACL estimate is based on the accounting standard commonly known as CECL, which we adopted onJanuary 1, 2020 . Upon adoption, we recognized a Day 1 increase in the ACL of$6.4 million and a related after-tax decrease to retained earnings of$4.5 million . Our Day 1 ACL under the new CECL model totaled$68.1 million , or 1.14% of total loans, compared to$61.7 million , or 1.04% of total loans, under the incurred loss model atDecember 31, 2019 . Under the CECL method, pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk characteristics with loan pools are evaluated individually. Collective loss estimates are determined by applying loss factors, designed to estimate current expected credit losses, to amortized cost balances over the remaining life of the collectively evaluated portfolio. The allowance for loan losses includes qualitative adjustments to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including those described in the federal banking agencies' joint interagency policy statement on ALL. These factors include, among others, inherent imprecision in forecasting economic variables, including determining the depth and duration of economic cycles and their impact to relevant economic variables; qualitative adjustments based on our evaluation of different forecast scenarios and known recent events impacting relevant economic variables; data factors that address the risk that certain model inputs may not reflect all available information including (i) risk factors that have not been fully addressed in internal risk ratings, (ii) changes in lending policies and procedures, (iii) changes in the level and quality of experience held by lending management, (iv) imprecision in the risk rating system and (v) limitations in data available for certain loan portfolios. The ACL process also includes challenging and calibrating the model and model results against observed information, trends and events within the loan portfolio, among others. The ACL and provision for credit losses include amounts and changes from both the allowance for loan losses and the reserve for unfunded commitments. 38
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Business Combinations. Business combinations are accounted for using the acquisition method of accounting under ASC Topic 805 - Business Combinations. Under the acquisition method, the Company measures the identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in a business combination at fair value on acquisition date.Goodwill is generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. The estimates used to determine the fair values of assets and liabilities acquired in a business combination can be complex and require judgment. For example, we generally value core deposit intangible assets using a discounted cash flow approach, which require a number of critical estimates that include, but are not limited to, future expected cash flows from depositor relationships, expected "decay" rates, and the determination of discount rates. These critical estimates are difficult to predict and may result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our initial valuation of net assets and liabilities acquired.Goodwill .Goodwill represents the excess purchase price of businesses acquired over the fair value of the identifiable net assets acquired.Goodwill is not subject to amortization and is evaluated for impairment at least annually, normally during the fourth fiscal quarter, or more frequently in the interim if events occur or circumstances change indicating impairment may have occurred. The determination of whether impairment has occurred is based on an assessment of several factors, including, but not limited to, operating results, business plans, economic projections, anticipated future cash flows, and current market data. Any impairment identified as part of this testing is recognized through a charge to noninterest expense. The assessment of impairment discussed above incorporate inherent uncertainties, including projected operating results and future market conditions, which are often difficult to predict and may result in impairment charges in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. Acquired Loans. At acquisition date, loans are evaluated to determine whether they meet the criteria of a PCD loan. PCD loans are loans that in management's judgement have experienced more than insignificant deterioration in credit quality since origination. Factors that indicate a loan may have experienced more than insignificant credit deterioration include delinquency, downgrades in credit rating, non-accrual status, and other negative factors identified by management at the time of initial assessment. PCD loans are initially recorded at fair value, with the resulting non-credit discount or premium being amortized or accreted into interest income using the interest method. In addition to the fair value adjustment, at the date of acquisition, an ACL is established with a corresponding increase to the overall acquired loan balance. This initial ACL is determined using the Company's current expected credit losses methodology. Acquired loans that are not considered PCD loans ("non-PCD loans") are also recognized at fair value at the acquisition date, with the resulting credit and non-credit discount or premium being amortized or accreted into interest income using the interest method. In addition to the fair value adjustment, at the time of acquisition, the Company establishes an initial ACL for acquired non-PCD loans through a charge to the provision for credit losses. This initial ACL is determined using the Company's current expected credit losses methodology.
Subsequent to acquisition date, the ACL for both PCD and non-PCD loans is determined using the same methodology to determine current expected credit losses that is applied to all other loans.
The estimates used to determine the fair values of non-PCD and PCD acquired loans can be complex and require significant judgment regarding items such as default rates, timing and amount of future cash flows, prepayment rates and other factors. These critical estimates are difficult to predict and may result in provisions for credit losses in future periods if actual losses materially differ from the estimated assumptions utilized in our initial valuation of acquired loans. Deferred Taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Accounting guidance requires that companies assess whether a valuation allowance should be established against the deferred tax assets based on the consideration of all available evidence using a "more likely than not" standard. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management will continue to evaluate both positive and negative evidence on a quarterly basis, including considering the four possible sources of future taxable income, such as future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback year(s), and future tax planning strategies.
Although we believe our assessments of the realizability of deferred income taxes are reasonable, no assurance can be given that their realizability will not be different from that which is reflected in our net deferred tax asset balance.
Tax positions that are uncertain but meet a more-likely-than-not recognition
threshold are initially and subsequently measured as the largest amount of tax
benefit that has a greater than 50% likelihood of being realized upon settlement
with a taxing
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authority that has full knowledge of all relevant information. The determination of whether or not a tax position meets the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management's judgment. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.
Recent Accounting Pronouncements
See Note 1 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 for information on recent accounting pronouncements and their expected impact, if any, on our consolidated financial statements. 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 stockholders 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. 40
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The following tables provide reconciliations of the non-GAAP measures with financial measures defined by GAAP.
December 31,
(Dollars in thousands, except per share data)(Unaudited) 2021 2020
Tangible common equity and tangible common equity to tangible assets
ratio
Total assets $ 9,393,743 $ 7,877,334
Less goodwill (94,301) (37,144)
Less other intangible assets (6,411) (2,633)
Tangible assets(1) $
9,293,031
Total stockholders' equity$ 1,065,290 $ 897,207 Less goodwill (94,301) (37,144) Less other intangible assets (6,411) (2,633) Tangible equity(1) 964,578 857,430 Less preferred stock (94,956) (184,878) Tangible common equity(1) $
869,622
Total stockholders' equity to total assets 11.34 % 11.39 % Tangible equity to tangible assets(1) 10.38 % 10.94 % Tangible common equity to tangible assets(1) 9.36 % 8.58 % Common shares outstanding 62,188,206 49,767,489 Class B non-voting non-convertible common shares outstanding 477,321 477,321 Total common shares outstanding 62,665,527 50,244,810 Book value per common share$ 15.48 $ 14.18 Tangible common equity per common share(1)$ 13.88 $ 13.39 (1)Non-GAAP measure. 41
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Year Ended December 31,
(Dollars in thousands)(Unaudited) 2021 2020 2019
Return on tangible common equity
Average total stockholders' equity $ 896,988 $ 882,050 $ 948,446
Less average preferred stock (112,201) (186,209) (216,304)
Less average goodwill (49,688) (37,144) (37,144)
Less average other intangible assets (2,924) (3,392) (5,246)
Average tangible common equity(1) $ 732,175 $ 655,305 $ 689,752
Net income $ 62,346 $ 12,574 $ 23,759 Net income (loss) available to common stockholders
$ (1,103) $ 2,624 Add amortization of intangible assets 1,276 1,518 2,195
Less tax effect on amortization of intangible assets(2) (268)
(319) (461)
Net income available to common stockholders(1) $ 51,571
Return on average equity 6.95 % 1.43 % 2.51 %
Return on average tangible common equity(1) 7.04 % 0.01 % 0.63 %
(1)Non-GAAP measure.
(2)Adjustments shown net of a statutory Federal tax rate of 21%.
Year Ended December 31,
(Dollars in thousands)(Unaudited) 2021 2020 2019
Adjusted noninterest income and expense
Total noninterest income $ 18,930 $ 18,518 $ 12,116
Noninterest income adjustments:
Net (gain) loss on securities available for sale - (2,011) 4,852
Net (gain) loss on sale of legacy SFR loans held for sale - (272) 90
Fair value adjustment on legacy SFR loans held for sale (206)
1,501 (106)
Total noninterest income adjustments (206) (782) 4,836
Adjusted noninterest income(1) $ 18,724 Total noninterest expense$ 183,232 $ 199,033 $ 196,472 Noninterest expense adjustments: Naming rights termination - (26,769) - Extinguishment of debt - (2,515) - Indemnified legal fees, net 2,073 673 9,407 Merger-related costs (15,869) - - Restructuring expense - - (4,263)
Adjustments to noninterest expense before gain (loss) on alternative energy partnership investments
(13,796) (28,611) 5,144
Gain (loss) on alternative energy partnership investments 204
365 (1,694)
Total noninterest expense adjustments (13,592) (28,246) 3,450
Adjusted noninterest expense(1) $ 169,640 Average assets$ 8,294,004 $ 7,689,016 $ 9,132,980 Noninterest expense to average total assets 2.21 % 2.59 % 2.15 %
Adjusted noninterest expense to average total assets(1) 2.05 %
2.22 % 2.19 %
(1)Non-GAAP measure.
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Year Ended December 31,
(Dollars in thousands)(Unaudited) 2021 2020 2019
Adjusted pre-tax pre-provision income
Net interest income $ 253,778 $ 224,594 $ 248,163
Noninterest income 18,930 18,518 12,116
Total revenue 272,708 243,112 260,279
Noninterest expense 183,232 199,033 196,472
Pre-tax pre-provision income (1) $ 89,476 Total revenue$ 272,708 $ 243,112 $ 260,279 Total noninterest income adjustments (206) (782) 4,836 Adjusted total revenue(1) 272,502 242,330 265,115 Noninterest expense 183,232 199,033 196,472 Total noninterest expense adjustments (13,592) (28,246) 3,450 Adjusted noninterest expense(1) 169,640 170,787 199,922 Adjusted pre-tax pre-provision income(1)$ 102,862
Average assets$ 8,294,004 $ 7,689,016 $ 9,132,980 Pre-tax pre-provision income ROAA(1) 1.08 % 0.57 % 0.70 % Adjusted pre-tax pre-provision income ROAA(1) 1.24 % 0.93 % 0.71 % Efficiency ratio(1) 67.19 % 81.87 % 75.49 % Adjusted efficiency ratio(1) 62.25 % 70.48 % 75.41 % (1)Non-GAAP measure. 43
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Year Ended December 31,
2021 2020 2019
Adjusted net income
Net income (1) $ 62,346 $ 12,574 $ 23,759
Adjustments:
Deduct: Noninterest income adjustments (206) (782) 4,836
Add: Noninterest expense adjustments 13,592 28,246 (3,450)
Total adjustments 13,386 27,464 1,386
Tax impact of adjustments above(2) (3,347) (6,865) (348)
Tax impact from exercise of stock appreciation rights (2,093)
- -
After-tax adjustments to net income 7,946 20,599 1,038
Adjusted net income(3) $ 70,292 $ 33,173 $ 24,797
Average assets $ 8,294,004 $ 7,689,016 $ 9,132,980
ROAA 0.75 % 0.16 % 0.26 %
Adjusted ROAA(3) 0.85 % 0.43 % 0.27 %
Adjusted net income available to common stockholders
Net income (loss) available to common stockholders
7,946 20,599 1,038
Adjustments for impact of preferred stock redemption 3,347
(568) 5,093
Adjusted net income available to common
stockholders(3) $ 61,856 Average diluted common shares 53,302,926 50,182,096 50,724,951 Diluted EPS$ 0.95 $ (0.02) $ 0.05 Adjusted diluted EPS(3)(4)$ 1.16
(1)Net income for the year endedDecember 31, 2021 includes an$11.3 million pre-tax charge for the expected lifetime credit losses for non-purchased credit deteriorated loans acquired in the PMB Acquisition; there is no similar charge in any of the other periods presented. (2)Tax impact of adjustments shown at an effective tax rate of 25%. (3)Non-GAAP measure. (4)Represents adjusted net income available to common stockholders divided by average diluted common shares. 44
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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 32 full service branches inOrange ,Los Angeles ,San Diego , andSanta Barbara Counties. Through our 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 to serve the banking and financial needs of our target clients. 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. In the fourth quarter of 2021, we completed our merger withPacific Mercantile Bancorp . Through these efforts, we continue to transform our franchise into a relationship-focused business bank, maintaining our credit quality and serving businesses, entrepreneurs and individuals throughoutCalifornia .
Financial Highlights
For the years endedDecember 31, 2021 , 2020 and 2019, net income (loss) available to common stockholders was$50.6 million ,$(1.1) million and$2.6 million . Diluted earnings (loss) per common share were$0.95 ,$(0.02) , and$0.05 for the years endedDecember 31, 2021 , 2020 and 2019. The increase in net income available to common stockholders for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 was mainly due to (i) higher net interest income due to higher average interest-earning assets, lower average interest-bearing liabilities and improved funding costs, partially offset by lower yields on average interest-earning assets, (ii) lower provision for credit losses due to improvement in the economy and its expected impact on lifetime credit losses, (iii) lower noninterest expense despite$15.9 million in merger costs due to the one-time charge of$26.8 million in 2020 related to the termination of our LAFC agreements, and (iv) the overall positive impact of the redemption of all of our Series D Depositary Shares in the first quarter of 2021.
Total assets were
Significant financial highlights include:
•Completed the PMB Acquisition onOctober 18, 2021 , for total purchase consideration of$225.4 million , adding$1.54 billion in total assets,$962.9 million in loans and$1.28 billion in deposits at acquisition date •Completed the system conversion for the PMB Acquisition inNovember 2021 •Return on average assets of 0.75% during 2021, compared to 0.16% during 2020 •Adjusted pre-tax pre-provision return on average assets of 1.24%, up from 0.93% in 2020 •Net interest margin of 3.26%, a 13 basis point increase from 2020 •Period-end total cost of deposits of 0.07% •Average cost of total deposits of 0.19%, a 47 basis point decrease from 2020 •Noninterest-bearing deposit balances represented 37% of total deposits atDecember 31, 2021 , up from 26% a year earlier •Allowance for credit losses at 1.35% of total loans and 187% of non-performing loans atDecember 31, 2021 •Common Equity Tier 1 capital at 11.31% atDecember 31, 2021
Refer to the 2020 Form 10-K filed on
Merger with
OnOctober 18, 2021 , we completed the PMB Acquisition pursuant to whichPacific Mercantile Bancorp merged with and into the Company, with the Company as the surviving corporation. PMB was the bank holding company of the wholly-ownedPacific Mercantile Bank , aCalifornia state chartered commercial bank headquartered inCosta Mesa, California , and operated seven banking offices, including three full service branches, located throughoutSouthern California . PMB's size, business focus, and deposit profile aligned with our operations and is expected to accelerate our growth and operating scale in key markets. 45
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As a result of the PMB Acquisition, we issued approximately 11.9 million shares of common stock and paid$3.2 million in cash for total consideration of$225.4 million . We acquired$1.54 billion in total assets, including$962.9 million in loans and$57.2 million of goodwill, and assumed$1.28 billion in deposits and$17.5 million in trust preferred securities. The PMB Acquisition reduced our tangible book value per share by approximately$0.10 . The system conversion was completed inNovember 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 strategic initiatives and the transformation of our balance sheet. We continue to operate 26 of our 32 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. 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
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
OnDecember 27, 2020 , the Economic Aid Act extended the SBA's authority to make PPP loans throughMay 31, 2021 . 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 ofDecember 31, 2021 , we have helped businesses through the funding of$411 million in PPP loans and continue to support our clients as we work with them through the forgiveness process. Prior to acquisition, PMB originated$390 million in PPP loans. AtDecember 31, 2021 , outstanding PPP loans totaled$123.1 million , net of fees, of which$27.1 million related to round one and$96.0 million related to round two of the SBA program.
Borrower Payment Relief Efforts
We have been committed to supporting our 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. For
those commercial borrowers that demonstrated a continuing need for a deferral,
we generally obtained credit enhancements such as additional collateral,
personal guarantees, and/or reserve requirements in order to grant an additional
deferral period. At this time, we no longer offer COVID-related deferments or
forbearances.
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Loans on deferment or forbearance status decreased$227.4 million during the year endedDecember 31, 2021 . The Bank is in contact with borrowers to provide additional assistance as needed and we continue to actively monitor and manage all lending relationships in a manner that we believe supports our clients and protects the Bank.
The following table presents the composition of our loan portfolio for borrowers
that received payment relief as of
Deferment & Forbearance(1)(2)
December 31, 2021 December 31, 2020
Number of % of Number of % of
($ in thousands) Loans Amount Loan Category Loans Amount Loan Category
Commercial:
Commercial and industrial 1 $ 3,803 0.1 % 8 $ 39,240 1.9 %
Commercial real estate - - - % 12 57,159 7.1 %
Multifamily - - - % 1 803 0.1 %
SBA - - - % 10 15,302 5.6 %
Total commercial 1 3,803 0.1 % 31 112,504 2.4 %
Consumer:
Single family residential
mortgage 19 20,245 1.4 % 123 138,771 11.3 %
Other consumer 2 514 0.5 % 2 659 2.0 %
Total consumer 21 20,759 1.4 % 125 139,430 11.0 %
Total 22 $ 24,562 0.3 % 156 $ 251,934 4.3 %
(1)Excludes loans in forbearance that are current
(2)Excludes loans delinquent prior to COVID-19
Other Efforts
We continue to support and seek to meet the immediate needs of the most vulnerable members of our community. We do this by providing donations, grants and sponsorships that support affordable housing, workforce and economic development and community services. Our employee 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.
For a discussion of the risk factors related to COVID-19, please refer to Part I, Item 1A. - Risk Factors in this Annual Report.
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Results of Operations
The following table presents condensed statements of operations for the periods
indicated:
Year Ended December 31,
($ in thousands, except per share data) 2021 2020 2019
Interest and dividend income $ 291,659 $ 290,607 $ 391,111
Interest expense 37,881 66,013 142,948
Net interest income 253,778 224,594 248,163
Provision for credit losses 6,854 29,719 35,829
Noninterest income 18,930 18,518 12,116
Noninterest expense 183,232 199,033 196,472
Income from operations before income taxes 82,622 14,360 27,978
Income tax expense 20,276 1,786 4,219
Net income 62,346 12,574 23,759
Preferred stock dividends 8,322 13,869 15,559
Less: income allocated to participating securities 114 - -
Less: participating securities dividends - 376 483
Impact of preferred stock redemption 3,347 (568) 5,093
Net income (loss) available to common stockholders
$ (1,103) $ 2,624 Earnings (loss) per common share Basic$ 0.95 $ (0.02) $ 0.05 Diluted$ 0.95 $ (0.02) $ 0.05 Selected financial data: Return on average assets 0.75 % 0.16 % 0.26 % Return on average equity 6.95 % 1.43 % 2.51 % Return on average tangible common equity (1) 7.04 % 0.01 % 0.63 % Dividend payout ratio (2) 25.26 % (1,200.00) % 620.00 % Average equity to average assets 10.81 % 11.47 % 10.38 % December 31, 2021 2020 2019 Book value per common share$ 15.48 $ 14.18 $ 14.10 Tangible common equity per common share (1)$ 13.88 $ 13.39 $ 13.29 Total stockholders' equity to total assets 11.34 % 11.39 % 11.59 % Tangible common equity to tangible assets (1) 9.36 % 8.58 % 8.68 %
(1)Non-GAAP measure. See non-GAAP measures for reconciliation of the calculation.
(2)Ratio of dividends declared per common share to basic earnings per common share.
Management's Discussion and Analysis of Financial Condition and Results of Operations generally includes tables with 3 year financial performance, accompanied by narrative for the years endedDecember 31, 2021 and 2020. For further discussion of prior period financial results presented herein, refer to Item 7 of the 2020 Form 10-K filed onFebruary 26, 2021 . 48
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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, on a consolidated
operations basis, for the years indicated:
Year Ended December 31,
2021 2020 2019
($ in thousands) Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost
Interest-earning assets: Total loans (1)$ 6,143,495 $ 260,687 4.24 %$ 5,691,444 $ 257,300 4.52 %$ 7,015,283 $ 333,934 4.76 % Securities 1,295,879 27,588 2.13 % 1,112,306 29,038 2.61 % 1,245,995 48,134 3.86 % Other interest-earning assets (2) 353,190 3,384 0.96 % 360,532 4,269 1.18 % 339,661 9,043 2.66 % Total interest-earning assets 7,792,564 291,659 3.74 % 7,164,282 290,607 4.06 % 8,600,939 391,111 4.55 % Allowance for loan losses (82,166) (78,152) (60,633) BOLI and noninterest-earning assets (3) 583,606 602,886 592,674 Total assets$ 8,294,004 $ 7,689,016 $ 9,132,980 Interest-bearing liabilities: Interest-bearing checking$ 2,267,059 2,906 0.13 %$ 1,810,152 8,705 0.48 %$ 1,548,067 17,797 1.15 % Savings and money market 1,664,350 7,063 0.42 % 1,559,958 14,164 0.91 % 1,889,073 32,757 1.73 % Certificates of deposit 633,497 2,344 0.37 % 1,063,705 14,947 1.41 % 2,145,363 50,545 2.36 % Total interest-bearing deposits 4,564,906 12,313 0.27 % 4,433,815 37,816 0.85 % 5,582,503 101,099 1.81 % FHLB advances 426,875 12,023 2.82 % 749,195 18,040 2.41 % 1,264,945 32,285 2.55 % Securities sold under repurchase agreements - - - % 584 4 0.68 % 2,166 62 2.86 % Other borrowings 44,214 46 0.10 % 2,369 12 0.51 % 874 68 7.78 % Long-term debt, net 260,122 13,499 5.19 % 187,771 10,141 5.40 % 173,274 9,434 5.44 % Total interest-bearing liabilities 5,296,117 37,881 0.72 % 5,373,734 66,013 1.23 % 7,023,762 142,948 2.04 % Noninterest-bearing deposits 1,996,449 1,322,681 1,053,193 Noninterest-bearing liabilities 104,450 110,551 107,579 Total liabilities 7,397,016 6,806,966 8,184,534 Total stockholders' equity 896,988 882,050 948,446 Total liabilities and stockholders' equity$ 8,294,004 $ 7,689,016 $ 9,132,980 Net interest income/spread$ 253,778 3.02 %$ 224,594 2.83 %$ 248,163 2.51 % Net interest margin (4) 3.26 % 3.13 % 2.89 % Ratio of interest-earning assets to interest-bearing liabilities 147 % 133 % 122 % Total deposits(5)$ 6,561,355 $ 12,313 0.19 %$ 5,756,496 $ 37,816 0.66 %$ 6,635,696 $ 101,099 1.52 % Total funding(6)$ 7,292,566 $ 37,881 0.52 %$ 6,696,415 $ 66,013 0.99 %$ 8,076,955 $ 142,948 1.77 % 49
-------------------------------------------------------------------------------- Table of Contents (1)Total loans are net of deferred fees, related direct costs, premiums, and discounts, but exclude the allowance for loan losses. Nonaccrual loans are included in the average balance. Interest income includes net accretion/(amortization) of$348 thousand ,$3.5 million and$(551) thousand for deferred fees, related direct costs, premiums, and discounts for the years endedDecember 31, 2021 , 2020 and 2019. Total loans includes average loans held for sale of$2.4 million ,$15.8 million and$80.1 million for the years endedDecember 31, 2021 , 2020 and 2019.
(2)Includes average balance of
(3)Includes average balance of BOLI of
(4)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 total interest expense on interest-bearing 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 total interest expense on interest-bearing liabilities divided by average total funding.
Year Ended
Net interest income for the year endedDecember 31, 2021 increased$29.2 million to$253.8 million from$224.6 million for 2020. 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 year endedDecember 31, 2021 , average interest-earning assets increased$628.3 million to$7.79 billion , and the net interest margin increased 13 basis points to 3.26% compared to 3.13% for 2020. The net interest margin expanded due to a 47 basis point decrease in the average cost of funds outpacing a 32 basis point decline in the average interest-earning assets yield. The average yield on interest-earning assets decreased to 3.74% for the year endedDecember 31, 2021 , from 4.06% for 2020 due mostly to the impact of lower average market interest rates on loan and securities yields over these same timeframes. The average fed funds rate for the year endedDecember 31, 2021 was 0.08% compared to 0.38% for 2020. The average yield on loans was 4.24% for the year endedDecember 31, 2021 , compared to 4.52% for 2020 and the average yield on securities decreased 48 basis points to 2.13% due mostly to CLOs repricing during the lower rate environment. The average cost of funds decreased to 0.52% for the year endedDecember 31, 2021 , from 0.99% for 2020. This decrease was driven by the lower average cost of interest-bearing liabilities and the overall improved funding mix, including higher average noninterest-bearing deposits. The average cost of interest-bearing liabilities decreased 51 basis points to 0.72% for the year endedDecember 31, 2021 from 1.23% for 2020 due to the combination of actively managing deposit pricing down into the lower interest rate environment, repricing downward of certain term FHLB advances that were refinanced and the overall reduced usage of overnight FHLB advances to fund loan growth. Compared to 2020, the average cost of interest-bearing deposits declined 58 basis points to 0.27% and the average cost of total deposits decreased 47 basis points to 0.19%. Additionally, average noninterest-bearing deposits increased by$673.8 million , or 50.9%, for the year endedDecember 31, 2021 when compared to 2020. 50
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Rate/Volume Analysis
The following table presents the changes in interest income and interest expense
for major components of interest-earning assets and interest-bearing
liabilities. Information is provided on changes attributable to (i) changes in
volume multiplied by the prior rate and (ii) changes in rate multiplied by the
prior volume. Changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
Year Ended December 31, 2021 vs. 2020 Year Ended December 31, 2020 vs. 2019
Increase (Decrease) Due to Net Increase Increase (Decrease) Due to Net Increase
($ in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Interest-earning assets:
Total loans $ 19,809 $ (16,422) $ 3,387 $ (60,476) $ (16,158) $ (76,634)
Securities 4,364 (5,814) (1,450) (4,752) (14,344) (19,096)
Other interest-earning assets (88) (797) (885) 525 (5,299) (4,774)
Total interest-earning assets 24,085 (23,033) 1,052 (64,703) (35,801)
(100,504)
Interest-bearing liabilities: Interest-bearing checking 1,767 (7,566) (5,799) 2,624 (11,716) (9,092) Savings and money market (199) (6,902) (7,101) (4,939) (13,654) (18,593) Certificates of deposit (4,463) (8,140) (12,603) (19,794) (15,804) (35,598) FHLB advances (8,715) 2,698 (6,017) (12,554) (1,691) (14,245) Securities sold under repurchase agreements (2) (2) (4) (28) (30) (58) Other borrowings 51 (17) 34 47 (103) (56) Long-term debt, net 3,766 (408) 3,358 777 (70) 707 Total interest-bearing liabilities (7,795) (20,337) (28,132) (33,867) (43,068) (76,935) Net interest income$ 31,880 $ (2,696) $ 29,184 $ (30,836) $ 7,267 $ (23,569) 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: Year Ended December 31, ($ in thousands) 2021 2020 2019 Provision for credit losses - loans$ 4,432
2,422 345 (558)
Total provision for credit losses $ 6,854 During the year endedDecember 31, 2021 , the provision for credit losses was$6.9 million , compared to$29.7 million during 2020. 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 provisions for higher period end loan balances of$1.35 billion , including the$11.3 million charge related to the initial allowance for credit losses established for non-PCD loans and unfunded loan commitments acquired in the PMB Acquisition.
The provision for credit losses during the year ended
See further discussion in Allowance for Credit Losses included in this Item 7.
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Noninterest Income
The following table presents noninterest income for the periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 2019
Customer service fees $ 7,685 $ 5,771 $ 5,982
Loan servicing income 595 505 679
Income from bank owned life insurance 2,871 2,489 2,292
Impairment loss on investment securities - - (731)
Net gain (loss) on sale of securities
available-for-sale - 2,011 (4,852)
Fair value adjustment for loans held-for-sale 206 (1,501) 106
Net gain on sale of loans 275 245 7,766
Other income 7,298 8,998 874
Total noninterest income $ 18,930 $ 18,518 $ 12,116 Year Ended
Noninterest income for the year endedDecember 31, 2021 increased$412 thousand to$18.9 million compared to 2020. The increase in noninterest income was mainly due to higher customer service fees, income from bank-owned life insurance, and fair value gain for loans held for sale, offset partially by lower net gain on sale of securities and all other income. The$1.9 million increase in customer services fees was due mostly to higher deposit activity fees of$2.1 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 2020 included valuation losses due to the impact of the decreases in market interest rates. There were no gains from sales of securities for the year endedDecember 31, 2021 , compared to$2.0 million in net gains in 2020 from the sale of$20.7 million in securities, primarily consisting of corporate securities. The$1.7 million decrease in all other income is due mostly to 2020 including legal settlement income of$3.2 million and earnout income of$1.6 million from the 2017 sale of our Banc Home Loans division; there was no similar income in 2021. These increases within other income were partially offset by higher loan processing fees of$1.1 million and interest rate swap income of$502 thousand and an$841 thousand gain related to the sale-leaseback transaction for one of our branch locations, Noninterest Expense
The following table presents noninterest expense for the periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 2019
Salaries and employee benefits $ 103,358 $ 96,809 $ 105,915
Occupancy and equipment 29,452 29,350 31,308
Professional fees 10,584 15,736 12,212
Data processing 6,861 6,574 6,420
Advertising and promotion 491 3,303 8,422
Regulatory assessments 3,395 2,741 7,711
Extinguishment of debt - 2,515 -
(Gain) loss on alternative energy partnership
investments (204) (365) 1,694
Reversal of provision for loan repurchases (948) (697) (660)
Amortization of intangible assets 1,276 1,518 2,195
Merger-related costs 15,869 - -
Restructuring expense - - 4,263
Naming rights termination - 26,769 -
All other expense 13,098 14,780 16,992
Total noninterest expense $ 183,232
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Year Ended
Noninterest expense for the year endedDecember 31, 2021 decreased$15.8 million to$183.2 million compared to the prior year. The decrease was primarily due to: (i) 2020 including a$26.8 million one-time charge related to the termination of our LAFC naming rights agreements and a$2.5 million debt extinguishment fee for the early repayment of certain FHLB term advances, (ii) a$5.2 million decrease in professional fees due mostly to a$3.0 million decrease in legal fees, net of insurance recoveries and a$1.9 million decrease in other professional fees, (iii) a$2.8 million decrease in lower advertising fees due to the termination of the LAFC agreements inMay 2020 , and (iv) a$1.7 million decrease in all other expense resulting from a$1.2 million charge in 2020 for two legacy legal settlements combined with overall expense reduction efforts. These decreases were partially offset by: (i) a$6.5 million increase in salaries and employee benefits due to the increase in personnel from the PMB Acquisition and higher commissions and incentive-based compensation as a result of higher production and financial performance levels, (ii) merger-related costs of$15.9 million , and (iii) higher operating costs in most other categories due to the impact of the PMB Acquisition. Income Tax Expense Income tax expense totaled$20.3 million for the year endedDecember 31, 2021 , representing an effective tax rate of 24.5%, compared to$1.8 million and an effective tax rate of 12.4% for 2020. The effective tax rate for the year endedDecember 31, 2021 differs from the 28.9% combined federal and state statutory rate due primarily to the net tax benefit of$2.5 million resulting from the exercise of all previously issued outstanding stock appreciation rights in the first quarter of 2021, the impact of nondeductible transaction costs in the PMB Acquisition, and other discrete tax items. Our effective tax rate for the year endedDecember 31, 2021 was higher than the effective tax rate for the year endedDecember 31, 2020 due mainly to (i) higher pre-tax income, (ii) lower net tax effects of our qualified affordable housing partnerships and investments in alternative energy partnerships, offset by (iv) higher tax benefit from share-based awards of$2.5 million , primarily from the exercise of all previously issued outstanding stock appreciation rights in the first quarter of 2021. During the year endedDecember 31, 2021 , our qualified affordable housing partnerships resulted in a reduction of our effective tax rate as the tax deductions and credits outpaced the increase in the effective tax rate due to higher proportional amortization.
For additional information, see Note 13 - Income Taxes of the Notes to Consolidated Financial Statements included in Item 8.
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Table of Contents Financial ConditionInvestment Securities
At
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 can be pledged as collateral to obtain public deposits or to provide a secondary source of liquidity in the form of secured borrowings from the FHLB, the Federal Reserve Discount Window, or other financial institutions for repurchase agreements. Investment securities with carrying values of$28.9 million and$43.7 million as ofDecember 31, 2021 and 2020 were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law. The following table presents the amortized cost and fair value of the investment securities portfolio and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated: Gross Gross Unrealized Unrealized ($ in thousands) Amortized Cost Gains Losses Fair ValueDecember 31, 2021 Securities available-for-sale: SBA loan pool securities$ 14,679
$ -
190,382 2,898 (1,311) 191,969
242,458 1,171 (2,088) 241,541
Municipal securities 117,913 2,641 (1,539) 119,015
Non-agency residential mortgage-backed securities 56,014 11 - 56,025
Collateralized loan obligations 521,275 - (2,311) 518,964
Corporate debt securities 162,002 11,603 (7) 173,598
Total securities available-for-sale $ 1,304,723 $ 18,324 $ (7,344) $ 1,315,703
December 31, 2020
Securities available-for-sale:
SBA loan pool securities $ 17,436 $ -
99,591 6,793 - 106,384
209,426 2,571 (166) 211,831
Municipal securities 64,355 4,272 (4) 68,623
Non-agency residential mortgage-backed securities 156 4 - 160
Collateralized loan obligations 687,505 - (9,720) 677,785
Corporate debt securities 141,975 7,319 - 149,294
Total securities available-for-sale $ 1,220,444 Securities available-for-sale totaled$1.32 billion atDecember 31, 2021 , an increase of$84.3 million , or 6.8%, from$1.23 billion atDecember 31, 2020 . The increase was mainly due to purchases of$287.7 million , including$158.1 million inU.S. government agency securities,$55.9 million in non-agency residential mortgage-backed securities,$53.7 million in municipal securities and$20.0 million in corporate debt securities, offset partially by CLO resets totaling$166.2 million and principal reductions of other securities of$35.6 million . AtDecember 31, 2021 , CLOs totaled$519.0 million , or 39.4% of total securities available-for-sale, compared to$677.8 million , or 55.1% of total securities available-for-sale, atDecember 31, 2020 . CLOs are floating rate debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. Underlying loans are generally secured by a company's assets such as inventory, equipment, property, and/or real estate. CLOs are structured to diversify exposure to a broad sector of industries. The payments on these commercial loans support interest and principal on the CLOs across classes that range from AAA-rated to equity-grade tranches. AtDecember 31, 2021 , all of our CLO holdings wereAAA and AA rated. We also perform ongoing credit quality review of our CLO holdings, which includes 54
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monitoring performance factors such as external credit ratings, collateralization levels, collateral concentration levels, and other performance factors. We only acquire CLOs that we believe are Volcker Rule compliant.
We did not record credit impairment for any investment securities for the year
ended
We monitor our securities portfolio to ensure it has adequate credit support. As ofDecember 31, 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 atDecember 31, 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 ofDecember 31, 2021 , all of our investment securities received an investment grade credit rating. 55
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The following table presents maturities, based on the earlier of maturity dates
or next repricing dates, and weighted average yield information of the
investment securities portfolio as of
More than One Year through Five More than Five Years through Ten
One Year or Less 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 $ 14,591 0.91 % $ - - % $ - - % $ - - % $ 14,591 0.91 %
U.S. government agency and U.S.
government sponsored enterprise
residential mortgage-backed
securities - - % - - % 28,920 2.20 % 163,049 2.15 % 191,969 2.16 %
U.S. government agency and U.S.
government sponsored enterprise
collateralized mortgage obligations 97,750 0.64 % 10,692 1.95 % 41,073 1.33 % 92,026 1.84 % 241,541 1.27 %
Municipal securities - - % - - % 15,172 2.62 % 103,843 2.37 % 119,015 2.40 %
Non-agency residential
mortgage-backed securities - - % - - % - - % 56,025 2.51 % 56,025 2.51 %
Collateralized loan obligations 518,964 1.76 % - - % - - % - - % 518,964 1.76 %
Corporate debt securities - - % 155,640 4.76 % 17,958 5.73 % - - % 173,598 4.85 %
Total securities available-for-sale $ 631,305 1.57 % $ 166,332 4.57 % $ 103,123 2.42 % $ 414,943 2.19 % $ 1,315,703 2.19 %
(1)Weighted average yields are based on the amortized cost basis of securities
available-for-sale at
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Loans Held-for-Sale
Total loans held-for-sale carried at fair value were$3.4 million and$1.4 million atDecember 31, 2021 andDecember 31, 2020 and consisted mainly of repurchased conforming SFR mortgage loans and repurchased GNMA loans that were previously sold and became delinquent more than 90 days. The increase was mainly due to repurchases of$1.9 million during the year. During the year endedDecember 31, 2021 ,$14.9 million of loans held for investment were transferred into loans held-for-sale and subsequently sold resulting in a gain of$275 thousand . There were zero and$1.14 billion of transfers of loans into held-for-sale for the years endedDecember 31, 2020 and 2019.
At
Loans Receivable, Net
The following table presents the composition of our loan portfolio as of the
dates indicated:
December 31,
2021 2020
($ in thousands) Amount Percent Amount Percent
Commercial:
Commercial and industrial(1) $ 2,668,984 36.8 % $ 2,088,308 35.3 %
Commercial real estate 1,311,105 18.1 % 807,195 13.7 %
Multifamily 1,361,054 18.8 % 1,289,820 21.9 %
SBA(2) 205,548 2.8 % 273,444 4.6 %
Construction 181,841 2.5 % 176,016 3.0 %
Consumer:
Single family residential mortgage 1,420,023 19.6 % 1,230,236 20.9 %
Other consumer 102,925 1.4 % 33,386 0.6 %
Total loans(3) 7,251,480 100.0 % 5,898,405 100.0 %
Allowance for loan losses (92,584) (81,030)
Total loans receivable, net $ 7,158,896 $ 5,817,375
(1)Includes warehouse lending balances of $1.60 billion and $1.34 billion at
December 31, 2021 and December 31, 2020 .
(2)Includes PPP loans totaling $123.1 million and $210.0 million , which included
$772 thousand and $1.6 million of net unamortized loan fees at December 31, 2021
and 2020.
(3)Total loans includes deferred loan origination costs/(fees), purchased
premiums/(discounts), and fair value adjustments of
Total loans were$7.25 billion atDecember 31, 2021 , an increase of$1.35 billion , or 22.9%, from$5.90 billion atDecember 31, 2020 . The increase was due to the$905.3 million in loans added in the PMB Acquisition and outstanding at the end of the year as well as organic production and loan purchases of$2.17 billion and net growth in the warehouse lending portfolio of$262.5 million , partially offset by repayments and other reductions of$2.02 billion . The$1.35 billion increase included higher commercial and industrial (C&I) loans of$580.7 million , commercial real estate loans of$503.9 million , multifamily loans of$71.2 million , single family residential loans of$189.8 million and construction loans of$5.8 million , offset partially by lower SBA loans of$67.9 million due mostly to SBA PPP activity. The PMB Acquisition added$76.3 million in SBA PPP loans at acquisition date to the additional$143.7 million in new PPP loan originations, which was offset by$300.5 million of PPP loan forgiveness during the year. AtDecember 31, 2021 , SBA loans included$123.1 million of PPP loans, net of fees. During the year, we purchased$825.5 million in loans, comprised of single family residential loans of$795.8 million and multifamily loans of$29.8 million . We ceased originating SFR mortgage loans in 2019, however we have and may continue to purchase these loans as part of an overall strategy to manage portfolio runoff and overall portfolio concentration risk. We continue to focus the real estate loan portfolio toward relationship-based multifamily, bridge, light infill construction, and commercial real estate loans. As ofDecember 31, 2021 , loans secured by residential real estate (single-family, multifamily, single-family construction, and warehouse lending credit facilities) represent approximately 63% of our total loans outstanding. 57
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The C&I portfolio has limited exposure to certain business sectors undergoing
severe stress as a result of the pandemic. The following table summarizes the
balances of the C&I portfolio by industry concentration and the percentage of
total outstanding C&I loan balances:
December 31, 2021
($ in thousands) Amount % of Portfolio
C&I Portfolio by Industry
Finance and Insurance - Warehouse Lending
60 %
Real Estate andRental Leasing 252,610
9 %
Finance and Insurance - Other 108,098 4 % Manufacturing 91,533 3 % Healthcare 85,666 3 % Gas Stations 71,381 3 % Wholesale Trade 54,227 2 % Professional Services 47,924 2 % Television / Motion Pictures 46,762 2 % Other Retail Trade 43,202 2 % Food Services 32,598 1 % Transportation 16,783 1 % Accommodations 2,069 - % All Other 213,644 8 % Total$ 2,668,984 100 % 58
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The following table presents the contractual maturity with the weighted-average
contractual yield of the loan portfolio as of
One year or less More than One Year through Five Years More than Five Years through Fifteen Years More than Fifteen Years Total
($ in thousands) Amount Weighted-Average Yield Amount Weighted-Average Yield Amount Weighted-Average Yield Amount Weighted-Average Yield Amount Weighted-Average Yield
Commercial:
Commercial and industrial $ 1,921,718 3.12 % $ 489,821 4.26 % $ 256,238 3.93 % $ 1,207 4.57 % $ 2,668,984 3.41 %
Commercial real estate 47,194 4.70 % 503,736 4.25 % 720,603 4.06 % 39,572 2.54 % 1,311,105 4.11 %
Multifamily 14,983 5.10 % 124,749 3.70 % 1,018,579 3.95 % 202,743 3.83 % 1,361,054 3.92 %
SBA 19,183 1.25 % 119,473 1.47 % 39,653 5.22 % 27,239 4.54 % 205,548 2.58 %
Construction 131,300 4.43 % 50,541 4.60 % - - % - - % 181,841 4.48 %
Consumer:
Single family residential mortgage 5,349 3.04 % 14,749 3.19 % 7,629 3.10 % 1,392,296 4.09 % 1,420,023 4.07 %
Other consumer 2,800 4.07 % 10,856 5.68 % 71,135 6.24 % 18,134 4.38 % 102,925 5.79 %
Total $ 2,142,527 3.24 % $ 1,313,925 3.96 % $ 2,113,837 4.08 % $ 1,681,191 4.03 % $ 7,251,480 3.80 %
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The following table presents the interest rate profile of the loan portfolio due
after one year at
Due After One Year
($ in thousands) Fixed Rate Variable Rate Total
Commercial:
Commercial and industrial $ 282,375 $ 464,891 $ 747,266
Commercial real estate 744,954 518,957 1,263,911
Multifamily 173,583 1,172,488 1,346,071
SBA 126,067 60,298 186,365
Construction 13,628 36,913 50,541
Consumer:
Single family residential mortgage 716,058 698,616 1,414,674
Other consumer 75,347 24,778 100,125
Total $ 2,132,012 $ 2,976,941 $ 5,108,953 Loan Originations, Purchases, Sales and Repayments
The following table presents loan originations, purchases, sales, and repayment activities, excluding loans originated for sale, for the periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 2019
Origination by rate type:
Variable rate:
Commercial and industrial $ 289,987 $ 272,616 $ 356,052
Commercial real estate 85,430 44,806 141,377
Multifamily 232,950 132,836 442,525
SBA 10,111 6,393 15,313
Construction 36,951 8,139 12,792
Single family residential mortgage - 5,404 315,920
Other consumer 1,115 37 1,350
Total variable rate 656,544 470,231 1,285,329
Fixed rate:
Commercial and industrial 117,474 71,388 93,583
Commercial real estate 284,252 59,565 17,455
Multifamily 120,785 22,773 5,900
SBA 149,353 265,609 11,148
Construction 6,831 12,594 -
Other consumer 6,519 - -
Total fixed rate 685,214 431,929 128,086
Total loans originated 1,341,758 902,160 1,413,415
Acquired in business combination 962,856 - -
Purchases:
Multifamily 29,764 120,900 -
Construction - 14,750 -
Single family residential mortgage 795,773 149,687 -
Total loans purchased 825,537 285,337 -
Transferred to loans held-for-sale (15,205) - (1,139,597)
Other items:
Net repayment activity (1) (2,024,349) (1,640,193) (2,011,889)
Warehouse credit facilities activity, net (2) 262,478 399,216 (10,917)
Total other items (1,761,871) (1,240,977) (2,022,806)
Net increase (decrease) $ 1,353,075
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(1)Amounts represent disbursements on credit lines, principal paydowns and
payoffs and other net activity for loans subsequent to origination (excluding
our warehouse credit facilities).
(2)Amounts represent net disbursement and repayment activity subsequent to
origination for our warehouse credit facilities which are included in commercial
and industrial loans.
Non-Traditional Mortgage ("NTM") Portfolio
As ofDecember 31, 2021 and 2020, the NTM loans totaled$635.3 million , or 8.8% of total loans, and$437.1 million , or 7.4% of total loans, respectively. These loans are included in our consumer portfolio and comprised of three interest only products: interest only loans, Green Loans and a small number of additional loans with the potential for negative amortization. Interest only loans are primarily SFR first mortgage loans with payment features that allow interest only payments in initial periods before converting to a fully amortizing loan. AtDecember 31, 2021 and 2020, interest only loans totaled$613.3 million and$401.6 million . The$211.7 million increase was due to loan purchases during 2021. As ofDecember 31, 2021 and 2020,$4.0 million and$4.7 million of interest only loans were nonperforming. Green Loans are SFR first and second mortgage lines of credit with a linked checking account that allows all types of deposits and withdrawals to be performed. Green Loans are generally interest only for a 15-year term with a balloon payment due at maturity. AtDecember 31, 2021 and 2020, Green Loans totaled$21.5 million and$33.2 million . As ofDecember 31, 2021 , none of our Green Loans were nonperforming compared to$4.0 million atDecember 31, 2020 . Negative amortization loans totaled$473 thousand and$2.3 million atDecember 31, 2021 and 2020. We discontinued origination of negative amortization loans in 2007. AtDecember 31, 2021 and 2020, none of the loans with the potential for negative amortization were nonperforming. We no longer originate SFR loans, however we have and may continue to purchase pools of loans that include NTM loans such as interest only loans with maturities of up to 40 years and flexible initial repricing dates, ranging from 1 to 10 years, and periodic repricing dates through the life of the loan.
Non-Traditional Mortgage Loan Credit Risk Management
We perform detailed reviews of collateral values on loans collateralized by
residential real property included in our NTM portfolio based on appraisals or
estimates from third party Automated Valuation Models ("AVMs") to analyze
property value trends periodically. AVMs are used to identify loans that may
have experienced potential collateral deterioration. Once a loan has been
identified that may have experienced collateral deterioration, we will obtain
updated drive by or full appraisals in order to confirm the valuation. This
information is used to update key monitoring metrics such as LTV ratios.
Additionally, FICO scores are obtained in conjunction with the collateral
analysis. In addition to LTV ratios and FICO scores, we evaluate the portfolio
on a specific loan basis through delinquency and portfolio charge-offs to
determine whether any risk mitigation or portfolio management actions are
warranted. The borrowers may be contacted as necessary to discuss material
changes in loan performance or credit metrics.
Our risk management policy and credit monitoring include reviewing delinquency,
FICO scores, and LTV ratios on the NTM loan portfolio. We also continuously
monitor market conditions for our geographic lending areas. We have determined
that the most significant performance indicators for NTM are LTV ratios and FICO
scores. The loan review provides an effective method of identifying borrowers
who may be experiencing financial difficulty before they fail to make a loan
payment. Upon receipt of the updated FICO scores, an exception report is run to
identify loans with a decrease in FICO score of 10% or more and a resulting FICO
score of 620 or less. The loans are then further analyzed to determine if the
risk rating should be downgraded, which may require an increase in the ALL we
need to establish for potential losses. A report is prepared and regularly
monitored.
NTM loans may entail greater risk than do traditional SFR mortgage loans. For
additional information regarding NTMs, see Note 5 - Loans and Allowance for
Credit Losses of the Notes to Consolidated Financial Statements included in Item
8.
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Asset Quality
Past Due Loans
The following table presents a summary of total loans that were past due as of
the dates indicated:
December 31, 2021 December 31, 2020
Greater than Greater than
30 - 59 Days 60 - 89 Days 89 Days Total 30 - 59 Days 60 - 89 Days 89 Days Total
($ in thousands) Past Due Past Due Past due Past Due Past Due Past Due Past due Past Due Commercial: Commercial and industrial$ 9,342 $ 1,351 $ 9,503 $ 20,196 $ 67 $ -$ 4,284 $ 4,351 Commercial real estate - - - - - - - - Multifamily 786 - - 786 - - - - SBA 987 2,360 15,941 19,288 354 626 3,062 4,042 Construction - - - - - - - - Consumer: Single family residential mortgage 24,867 - 7,076 31,943 11,036 1,621 10,290 22,947 Other consumer 449 - 89 538 216 61 - 277 Total loans$ 36,431 $ 3,711 $ 32,609 $ 72,751 $ 11,673 $ 2,308 $ 17,636 $ 31,617 Total past due loans totaled$72.8 million or 1.00% of total loans atDecember 31, 2021 , compared to$31.6 million or 0.54% of total loans atDecember 31, 2020 . The$41.1 million increase is mostly due to additions of (i)$19.1 million in loans acquired in the PMB Acquisition consisting mostly of$10.1 million in commercial & industrial loans and$8.5 million in SBA PPP loans and (ii) a$9.0 million increase in single-family residential mortgage loans. The$15.9 million of SBA loans greater than 89 days past due includes$5.5 million of loans acquired from PMB and$6.4 million in loans that are guaranteed and were repurchased solely for the purpose of resolving the credit through the SBA. Non-performing Assets
The following table presents a summary of nonperforming assets, excluding loans held-for-sale, as of the dates indicated:
December 31,
($ in thousands) 2021 2020
Commercial:
Commercial and industrial $ 28,594 $ 13,821
Commercial real estate - 4,654
SBA 16,653 3,749
Lease financing - -
Consumer:
Single family residential mortgage 7,076 13,519
Other consumer 235 157
Total nonaccrual loans 52,558 35,900
Loans past due over 90 days or more and still on accrual - 728
Other real estate owned - -
Total nonperforming assets $ 52,558 $ 36,628
Performing troubled debt restructured loans $ 12,538
Nonaccrual loans to total loans 0.72 % 0.61 %
Nonperforming loans to total loans 0.72 % 0.62 %
Nonperforming assets to total assets 0.56 % 0.46 %
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Nonperforming assets totaled$52.6 million or 0.56% of total assets atDecember 31, 2021 , compared to$36.6 million or 0.46% of total assets atDecember 31, 2020 . The$16.7 million increase in nonaccrual loans during the year was primarily due to the addition of$21.6 million in nonaccrual loans from the PMB Acquisition, partially offset by loans returning to accrual status and other pay offs or pay downs. As ofDecember 31, 2021 ,$19.8 million , or 38% of nonperforming loans relates to loans in a current payment status. AtDecember 31, 2021 , nonperforming loans included (i) a$12.8 million commercial & industrial relationship acquired from PMB, (ii) SBA PPP loans of$5.5 million and other SBA loans totaling$11.1 million , of which$14.3 million is guaranteed, (iii) SFR loans totaling$7.1 million , and (iv) other commercial loans of$15.8 million . With respect to loans that were on nonaccrual status as ofDecember 31, 2021 , the gross interest income that would have been recorded during the year endedDecember 31, 2021 had such loans been current in accordance with their original terms and been outstanding throughout the year endedDecember 31, 2021 (or since origination, if held for part of the year endedDecember 31, 2021 ), was$2.3 million . The amount of interest income on such loans that was included in net income for the year endedDecember 31, 2021 was$913 thousand .
Troubled Debt Restructured Loans
Loans that we modify or restructure where the debtor is experiencing financial
difficulties and make a concession to the borrower in the form of changes in the
amortization terms, reductions in the interest rates, the acceptance of interest
only payments and, in limited cases, reductions in the outstanding loan balances
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.
At December 31, 2021 and 2020, we had 18 and 13 loans with an aggregate balance
of $16.7 million and $9.0 million classified as TDRs. 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.
At December 31, 2021 , of the 18 loans classified as TDRs, 11 loans totaling
$12.5 million were making payments according to their modified terms and were
less than 90-days delinquent under the modified terms and were in accruing
status. At December 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 were in accruing
status.
As of December 31, 2021 and 2020, we had $24.6 million and $170.4 million of
loans that would have been considered a TDR under GAAP but were provided relief
from TDR accounting under the CARES Act.
Risk Ratings
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as substandard, doubtful or loss. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve or charge-off is not warranted. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allocation allowances for loan losses in an amount deemed prudent by management and approved by the Board of Directors. General allocation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allocation allowance for losses equal to 100% of that portion of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its specific allocation allowances are subject to review by their regulators, which may order the establishment of additional general or specific loss allocation allowances. In connection with the filing of the Bank's periodic reports with the OCC and in accordance with policies for the Bank's classification of assets, the Bank regularly reviews the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management's review of assets, atDecember 31, 2021 and 2020, we had classified assets totaling$101.4 million and$90.7 million . The total amount classified represented 1.08% and 1.15% of our total assets atDecember 31, 2021 and 2020. 63
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The following table presents the risk categories for total loans as ofDecember 31, 2021 : December 31, 2021 Special ($ in thousands) Pass Mention Substandard Total Commercial: Commercial and industrial$ 2,550,540 $ 65,659 $ 52,785 $ 2,668,984 Commercial real estate 1,292,837 4,845 13,423 1,311,105 Multifamily 1,312,038 46,314 2,702 1,361,054 SBA 181,129 6,040 18,379 205,548 Construction 171,731 10,110 - 181,841 Consumer: Single family residential mortgage 1,395,785 10,423 13,815 1,420,023 Other consumer 102,538 92 295 102,925 Total loans(1)$ 7,006,598 $ 143,483 $ 101,399 $ 7,251,480
(1)There were no loans classified "doubtful" or "loss" at
The following table presents the risk categories for total loans as ofDecember 31, 2020 : December 31, 2020 Special ($ in thousands) Pass Mention Substandard Doubtful Total 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 loans(1)$ 5,732,225 $ 75,444 $ 90,255 $ 481 $ 5,898,405
(1)There were no loans classified "loss" at
Allowance for Credit Losses
The following table provides a summary of components of the ACL and related ratios as of the dates indicated:
December 31,
($ in thousands) 2021 2020
Allowance for credit losses:
Allowance for loan losses (ALL) $ 92,584 $81,030
Reserve for unfunded loan commitments 5,605 3,183
Total allowance for credit losses (ACL) $ 98,189 $ 84,213
ALL to total loans 1.28 % 1.37 %
ACL to total loans 1.35 % 1.43 %
ACL to total loans, excluding PPP loans 1.38 % 1.48 %
ALL to nonaccrual loans 176.16 % 225.71 %
ACL to nonaccrual loans 186.82 % 234.58 %
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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 duringDecember 2021 . TheDecember 2021 forecasts reflect a more favorable view of the economy (i.e. higher GDP growth rates and lower unemployment rates) compared toDecember 2020 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 resulting provision consider all of the potential uncertainties and underlying assumptions, both positive and negative. 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 ACL, which includes the reserve for unfunded loan commitments, totaled$98.2 million , or 1.35% of total loans atDecember 31, 2021 compared to$84.2 million or 1.43% atDecember 31, 2020 . The$14.0 million increase in the ACL during the year endedDecember 31, 2021 was due to (i) a$13.7 million initial allowance for credit losses established for PCD loans from the PMB Acquisition, (ii) an$11.3 million initial charge for all other loans and unfunded commitments acquired from PMB, (iii) higher specific reserves of$3.3 million , (iv) reductions of$7.7 million due to improved economic assumptions and asset quality trends, offset partially by the impact of higher period-end portfolio balances as a result of organic growth, and (v) net charge-offs of$6.5 million , including$2.3 million of net charge-offs related to loans acquired in the PMB Acquisition. The ACL coverage of nonperforming loans was 187% atDecember 31, 2021 compared to 230% atDecember 31, 2020 . The following table presents a summary of net (charge-offs) recoveries and the annualized ratio of net charge-offs to average loans by loan class for the periods indicated: Year Ended December 31, ($ in thousands) 2021 2020 2019 Net Annualized Net Annualized Net Annualized (Charge-offs) (Charge-off) (Charge-offs) (Charge-off) (Charge-offs) (Charge-off) Recoveries Average Loans Receovery Ratio Recoveries Average Loans Receovery Ratio Recoveries Average Loans Receovery Ratio
Commercial:
Commercial and industrial$ (3,059) $ 2,110,492 (0.14) %$ (12,984) $ 1,557,558 (0.83) %$ (36,649) $ 1,829,162 (2.00) % Commercial real estate (576) 998,068 (0.06) % - 859,848 - % - 905,638 - % Multifamily - 1,299,582 - % - 1,449,749 - % (6) 1,905,945 - % SBA (2,648) 223,097 (1.19) % (755) 185,816 (0.41) % (1,904) 33,946 (5.61) % Construction - 159,758 - % - 212,863 - % (371) 221,807 (0.17) % Lease financing - - - % - - - % 12 - #DIV/0! Consumer: Single family residential mortgage (247) 1,310,029 (0.02) % (78) 1,370,861 (0.01) % (2,219) 1,979,957 (0.11) % Other consumer 2 40,046 - % 215 38,941 0.55 % 207 58,752 0.35 % Total loans$ (6,528) $ 6,141,072 (0.11) %$ (13,602) $ 5,675,636 (0.24) %$ (40,930) $ 6,935,207 (0.59) % Net charge-offs decreased to$6.5 million , or 0.11% of average loans for the year endedDecember 31, 2021 from$13.6 million , or 0.24% of average loans for 2020. During 2020, a$16.1 million legacy shared national credit was resolved resulting in a charge-off of$10.7 million . 65
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The following table presents information regarding activity in the ACL for the
periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 2019 (1)
Allowance for loan losses (ALL)
Balance at beginning of year $ 81,030 $ 57,649 $ 62,192
Impact of adopting ASU 2016-13 - 7,609 -
Initial reserve for purchased credit-deteriorated loans(2) 13,650 - -
Charge-offs (9,886) (15,417) (41,766)
Recoveries 3,358 1,815 836
Net charge-offs (6,528) (13,602) (40,930)
Provision for credit losses 4,432 29,374 36,387
Balance at end of year $ 92,584 Reserve for unfunded loan commitments Balance at beginning of year$ 3,183 $ 4,064 $ 4,622 Impact of adopting ASU 2016-13 - (1,226) - Provision for (reversal of) credit losses 2,422 345 (558) Balance at end of year$ 5,605
Allowance for credit losses (ACL)$ 98,189
(1)Prior to the adoption of ASC 326 onJanuary 1, 2020 , we maintained an allowance for loan losses to absorb probable incurred losses inherent in the loan portfolio at the balance sheet date. (2)Represents the amounts, at acquisition date, of expected credit losses on PCD loans and expected recoveries of PCD loans charged-off prior to acquisition date that we have a contractual right to receive. The following table presents the ALL allocation among loans portfolio as of the dates indicated: December 31, 2021 2020 Percentage of Percentage of Loans to Total Loans to Total ($ in thousands) ALL Amount Loans ALL Amount Loans Commercial: Commercial and industrial$ 33,557 36.8 %$ 20,608 35.3 % Commercial real estate 21,727 18.1 % 19,074 13.7 % Multifamily 17,893 18.8 % 22,512 21.9 % SBA 3,017 2.8 % 3,145 4.6 % Construction 5,622 2.5 % 5,849 3.0 % Consumer: Single family residential mortgage 9,608 19.6 % 9,191 20.9 % Other consumer 1,160 1.4 % 651 0.6 % Total$ 92,584 100.0 %$ 81,030 100.0 % 66
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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. These investments help promote the development of renewable energy sources and lower the cost of housing for residents by lowering homeowners' monthly utility costs. The following table presents the activity related to our investment in alternative energy partnerships for the years endedDecember 31, 2021 , 2020 and 2019: Year Ended December 31, ($ in thousands) 2021 2020 2019 Balance at beginning of period$ 27,977 $ 29,300 $ 28,988 New funding - 3,631
806
Change in unfunded equity commitments - (3,225)
3,225
Cash distribution from investments (2,293) (2,094)
(2,025)
Gain (loss) on investments using HLBV method 204 365 (1,694) Balance at end of period$ 25,888 $ 27,977 $ 29,300 Unfunded equity commitments $ - $ -$ 3,225 Our returns on investments in alternative energy partnerships are primarily obtained through the realization of energy tax credits and other tax benefits rather than through distributions or through the sale of the investment. The balance of these investments was$25.9 million and$28.0 million atDecember 31, 2021 and 2020. During the year endedDecember 31, 2021 , we did not fund into our alternative energy partnerships and did not receive any return of capital from our alternative energy partnerships. During the years endedDecember 31, 2020 and 2019, we funded$3.6 million and$806 thousand into these partnerships and we did not receive any return of capital. During the years endedDecember 31, 2021 and 2020 we recognized gains of$204 thousand and$365 thousand and for the year endedDecember 31, 2019 we recognized a loss of$1.7 million through the application of the Hypothetical Liquidation at Book Value ("HLBV") method of accounting. The HLBV gains for the years endedDecember 31, 2021 and 2020 were largely driven by lower tax depreciation on equipment and fewer energy tax credits utilized which reduces the amount distributable to the investee in a hypothetical liquidation under the contractual liquidation provisions. Included in income tax expense are investment tax credits of zero, zero and$3.4 million and the expense/(benefit) related to the gains/(losses) on these investments of$59 thousand ,$45 thousand , and$(362) thousand for the years endedDecember 31, 2021 , 2020 and 2019.
For additional information, see Note 1 - Summary of Significant Accounting Policies and Note 20 - Variable Interest Entities of the Notes to the Consolidated Financial Statements included in Item 8.
Deposits
The following table shows the composition of deposits by type as of the dates
indicated:
December 31, 2021 December 31, 2020
% of Total % of Total
($ in thousands) Amount Deposits Amount Deposits Amount Change
Noninterest-bearing deposits $ 2,788,196 37.5 % $ 1,559,248 25.6 % $ 1,228,948
Interest-bearing demand deposits 2,393,386 32.2 % 2,107,942 34.6 % 285,444 Savings and money market 1,751,135 23.5 % 1,646,660 27.0 % 104,475 Certificates of deposit of$250,000 or less 285,768 3.8 % 316,585 5.2 %
(30,817)
Certificates of deposit of more than$250,000 220,950 3.0 % 455,365 7.6 % (234,415) Total deposits$ 7,439,435 100.0 %$ 6,085,800 100.0 %$ 1,353,635 Total deposits were$7.44 billion atDecember 31, 2021 , compared to$6.09 billion atDecember 31, 2020 . The$1.35 billion increase was due mostly to$1.13 billion in deposits that were added in the PMB Acquisition and outstanding at the end of the year. 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 67
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During the year endedDecember 31, 2021 , demand deposits increased by$1.51 billion , consisting of increases of$1.23 billion in noninterest-bearing deposits and$285.4 million in interest-bearing demand deposits. In addition, savings and money market accounts increased$104.5 million , offset by a decrease of$265.2 million in time deposits.
Uninsured deposits were
Brokered deposits were
The following table presents the scheduled maturities of certificates of deposit as ofDecember 31, 2021 : Over Three Over Six Months Three Months Months Through Through Twelve ($ in thousands) or Less Six Months Months Over One Year Total Certificates of deposit of$250,000 or less$ 96,640 $ 69,354
58,236 123,287 31,204 8,223 220,950
Total certificates of deposit (1)
(1)Total certificates of deposit includes
For additional information, see Note 10 - Deposits of the Notes to Consolidated Financial Statements included in Item 8.
Borrowings
We maintain secured lines of credit with the FHLB and the FRB to leverage our capital base to provide funds for lending and investing activities and to provide secondary sources of liquidity to enhance our interest rate and liquidity risk management. In addition, we maintain unsecured borrowing arrangements from other financial institutions.
During the year endedDecember 31, 2021 , advances from the FHLB decreased$63.7 million , or 11.8%, to$476.1 million , net of unamortized debt issuance costs of$4.9 million , as ofDecember 31, 2021 , primarily due to maturities of term advances of$50.0 million and lower overnight advances of$65.0 million . AtDecember 31, 2021 , FHLB advances included$70.0 million in overnight borrowings and$411.0 million in term advances with a weighted average life of 4.0 years and weighted average interest rate of 2.53%. During the year endedDecember 31, 2020 , we completed the early repayment of$100.0 million in FHLB long-term advances with a weighted average interest rate of 2.07% for which we incurred a$2.5 million extinguishment fee. In addition, during the year endedDecember 31, 2020 , we refinanced$111.0 million of our term advances into the lower market interest rates.
Other borrowings totaled
InDecember 2021 , the holding company entered into a$50.0 million revolving line of credit. The line of credit matures onDecember 19, 2022 . We have the option to select paying interest using either (i) Prime Rate or (ii) LIBOR + 1.75%. The line of credit is also subject to an unused commitment fee of 0.40% per annum. The line of credit is subject to certain operational and financial covenants and we were in compliance with these covenants atDecember 31, 2021 . There were no borrowings under this line of credit atDecember 31, 2021 . For additional information, see Note 11 - Federal Home Loan Bank Advances and Short-term Borrowings of the Notes to Consolidated Financial Statements included in Item 8. 68
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Long-Term Debt
The following table presents our long-term debt as of the dates indicated:
December 31,
2021 2020
Unamortized Debt Unamortized Debt
Interest Maturity Issuance Cost and Issuance Cost and
($ in thousands) Rate Date Par Value Discount Par Value Discount
Senior notes 5.250% 4/15/2025 $ 175,000 $ (1,014) $ 175,000 $ (1,291)
Subordinated notes 4.375% 10/30/2030 85,000 (2,127) 85,000 (2,394)
PMB Statutory Trust III,
junior subordinated
debentures Libor + 3.40% 9/26/2032 7,217 - - -
PMB Capital Trust III, junior subordinated debentures Libor + 2.00% 10/8/2034 10,310 - - - Total long-term debt, net$ 277,527 $ (3,141)$ 260,000 $ (3,685)
At
During the year ended
OnOctober 30, 2020 , we completed the issuance and sale of$85.0 million aggregate principal amount of our 4.375% fixed-to-floating rate subordinated notes dueOctober 30, 2030 (the "Subordinated Notes"). Net proceeds after debt issuance costs were approximately$82.6 million .
For additional information, see Note 12 - Long-Term Debt of the Notes to Consolidated Financial Statements included in Item 8.
Loan Repurchase Reserve
We maintain a reserve for potential losses on loans that are off of our balance sheet, but are subject to certain repurchase provisions, which we refer to as the "Loan Repurchase Reserve."
The following table presents a summary of activity in the loan repurchase reserve for the periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 2019
Balance at beginning of year $ 5,515 $ 6,201 $ 2,506
Initial provision for loan repurchases (1) - 11 4,563
Subsequent change in the reserve (948) (697)
(660)
Utilization of reserve for loan repurchases (219) - (208) Balance at end of year$ 4,348 $ 5,515 $ 6,201
(1)During the year ended
Our loan repurchase reserve totaled$4.3 million atDecember 31, 2021 , compared to$5.5 million atDecember 31, 2020 . The$1.2 million or 21.2% decrease during the year endedDecember 31, 2021 was due to reserve release related to pay downs, run-off of the underlying loan portfolio that is no longer on our balance sheet, and charge-offs. We believe that all repurchase demands received were adequately reserved for atDecember 31, 2021 . For additional information, see Note 14 - Loan Repurchase Reserve of the Notes to Consolidated Financial Statements included in Item 8. 69
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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 observed reductions in average line usage due to the levels of liquidity in the marketplace. We expect to see higher line utilization as liquidity moderates to historical levels.Banc of California, N.A. 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, 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. The Bank also generates cash through secured and unsecured secondary sources of funds. The Bank maintains pre-established secured lines of credit with the FHLB and the FRB as secondary sources of liquidity to provide funds for its lending and investment activities and to enhance its interest rate risk and liquidity risk management. AtDecember 31, 2021 , we had available unused secured borrowing capacities of$1.06 billion from the FHLB and$455.4 million through theFederal Reserve Bank's Discount Window and Borrower-in-Custody ("BIC") programs. AtDecember 31, 2021 and 2020, FHLB advances totaled$476.1 million and$539.8 million , net of unamortized debt issuance costs of$4.9 million and$6.2 million . Borrowings under the BIC program are overnight advances with interest chargeable at the discount window ("primary credit") borrowing rate. There were no borrowings under the FRB's Discount Window and BIC programs atDecember 31, 2021 and 2020. AtDecember 31, 2021 , the Bank had pledged certain qualifying loans with an unpaid principal balance of$813.8 million and securities with a carrying value of$8.9 million as collateral for these FRB programs. The Bank may also utilize securities sold under repurchase agreements to leverage its capital base and while it maintains repurchase agreements, there were none outstanding atDecember 31, 2021 and 2020. Availabilities and terms on repurchase agreements are subject to the counterparties' discretion and our pledging additional investment securities. The Bank had unpledged securities available-for-sale of$1.29 billion atDecember 31, 2021 . In addition, the Bank has additional sources of secondary liquidity through pre-established unsecured fed funds lines with correspondent banks, pre-approved unsecured overnight borrowing lines with various financial institutions through the AFX platform, and our ability to obtain brokered deposits. The availability of unsecured borrowings through the AFX platform fluctuates regularly and is subject to the counterparties' discretion and totaled$441.0 million atDecember 31, 2021 . Borrowings under the AFX platform totaled$25.0 million and zero atDecember 31, 2021 and 2020. AtDecember 31, 2021 , the Bank had$210.0 million in pre-established unsecured federal funds lines of credit with correspondent banks. There were no borrowings with these correspondent banks atDecember 31, 2021 and 2020.Banc 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 its 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 year endedDecember 31, 2021 , the Bank paid$78.0 million of dividends toBanc of California, Inc. AtDecember 31, 2021 ,Banc of California, Inc. had$98.9 million in cash, all of which was on deposit at the Bank. 70
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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 year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , we repurchased 827,584 shares of common stock at a weighted average price of$14.50 per share and an aggregate amount of$12.0 million . During the year endedDecember 31, 2021 , we redeemed all outstanding depositary shares representing interests in shares of our Series D preferred stock. The aggregate redemption price for the Series D depositary shares redeemed was$93.3 million . The$3.3 million difference between the aggregate redemption price paid and the$89.9 million aggregate carrying value of the Series D Preferred Stock was reclassified to retained earnings and resulted in an increase to net income available to common stockholders. OnFebruary 9, 2022 , we announced that the Company will redeem onMarch 15, 2022 all of its outstanding Series E Preferred Stock, and the corresponding depositary shares, each representing a 1/40th interest in a share of the Series E Preferred Stock. The redemption price for the Series E Preferred Stock will be$1,000 per share (equivalent to$25 per Series E Depositary Share). Upon redemption, the Series E Preferred Stock and the Series E Depositary Shares will no longer be outstanding and all rights with respect to such stock and depositary shares will cease and terminate, except the right to payment of the redemption price. Also upon redemption, the Series E Depositary Shares will be delisted from trading on theNew York Stock Exchange . AtDecember 31, 2021 , unamortized issuance costs associated with the Series E Preferred Stock was$3.7 million On a consolidated basis, cash and cash equivalents totaled$228.1 million , or 2.4% of total assets atDecember 31, 2021 . This compared to$220.8 million , or 2.8% of total assets, atDecember 31, 2020 . The$7.3 million increase was due mainly to (i) net income of$62.3 million generated during the year, (ii) cash acquired in the PMB Acquisition of$475.6 million , and (iii) a$68.9 million increase in deposits, offset by (iv) net loan outflows of$414.5 million from originations net of repayments and loan purchases, and (v) net investment securities outflows of$85.9 million from repayments, net of securities purchases. Cash also decreased$154.4 million due to the redemption of our Series D Preferred Stock, repayments of borrowings and payments of common and preferred dividends. InDecember 2021 , the holding company entered into a$50.0 million revolving line of credit. The line of credit matures onDecember 19, 2022 . We have the option to select paying interest using either (i) Prime Rate or (ii) LIBOR + 1.75%. The line of credit is also subject to an unused commitment fee of 0.40% per annum. There were no borrowings under this line of credit atDecember 31, 2021 . We believe that our liquidity sources are stable and are adequate to meet our day-to-day cash flow requirements as ofDecember 31, 2021 . However, in light of the ongoing COVID-19 pandemic, we cannot predict at this time the extent to which the pandemic will negatively affect our business, financial condition, liquidity, capital and results of operations. For a discussion of the related risk factors, please refer to Part I, Item 1A. - Risk Factors.
Commitments
The following table presents information as of
Commitments and Contractual Obligations
Over Three
Total Amount Less Than One One to Three Years to Five More than Five
($ in thousands) Committed Year Years Years Years
Commitments to extend credit $ 174,028 $ 16,205 $ 112,141 $ 35,530 $ 10,152
Unused lines of credit 1,706,827 1,368,134 247,638 51,481 39,574
Standby letters of credit 8,170 7,340 562 268 -
Total commitments $ 1,889,025 $ 1,391,679 $ 360,341 $ 87,279 $ 49,726
FHLB advances $ 481,000 $ 70,000 $ - $ 311,000 $ 100,000
Other borrowings 25,000 25,000 - - -
Long-term debt 277,527 - - 175,000 102,527
Operating and capital lease
obligations 43,327 9,489 17,012 10,733 6,093
Certificates of deposit 506,718 464,625 39,151 2,942 -
Total contractual obligations $ 1,333,572 $ 569,114
At
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Stockholders' Equity
Stockholders' equity totaled$1.07 billion atDecember 31, 2021 , an increase of$168.1 million , or 18.7%, from$897.2 million atDecember 31, 2020 . The increase was primarily the result of the issuance of$222.2 million in shares for the PMB Acquisition, net income of$62.3 million , and share-based compensation of$5.3 million , offset by the redemption of our Series D Preferred Stock for an aggregate amount of$93.3 million , cash dividends for common stock of$12.8 million and cash dividends for preferred stock of$8.3 million . For additional information, see Note 18 - Stockholders' Equity of the Notes to Consolidated Financial Statements included in Item 8.
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.
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 strengthened the definition of regulatory capital, increased risk-based capital requirements, made selected changes to the calculation of risk-weighted assets, and adjusted 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. For additional information on Basel III capital rules, see Note 19 - Regulatory Capital Matters of the Notes to Consolidated Financial Statements included in Item 8.
The following table presents the regulatory capital ratios for the Company and the Bank as of dates indicated:
Banc of California, Minimum Regulatory Well-Capitalized
Inc. Banc of California, NA Requirements Requirements (Bank)
December 31, 2021
Total risk-based capital ratio 14.98 % 15.71 % 8.00 % 10.00 %
Tier 1 risk-based capital ratio 12.55 % 14.60 % 6.00 % 8.00 %
Common equity tier 1 capital ratio 11.31 % 14.60 % 4.50 % 6.50 %
Tier 1 leverage ratio 10.37 % 12.06 % 4.00 % 5.00 %
December 31, 2020
Total risk-based capital ratio 17.01 % 17.27 % 8.00 % 10.00 %
Tier 1 risk-based capital ratio 14.35 % 16.02 % 6.00 % 8.00 %
Common equity tier 1 capital ratio 11.19 % 16.02 % 4.50 % 6.50 %
Tier 1 leverage ratio 10.90 % 12.19 % 4.00 % 5.00 %
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