PACIFIC PREMIER BANCORP, INC. FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains information and statements that are considered "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as "may," "could," "should," "will," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," or words or phrases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors, which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements. Given the ongoing and dynamic nature of the COVID-19 pandemic, the ultimate extent of the impacts on our business, financial position, results of operations, liquidity and prospects remain uncertain. Although general business and economic conditions have begun to recover, the recovery could be slowed or reversed by a number of factors, including increases in COVID-19 infections, the tight labor market, supply chain disruptions, inflationary pressures, or turbulence in domestic or global financial markets, which could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill or other intangible assets in future periods. Changes to statutes, regulations, or regulatory policies or practices as a result of, or in response, to the COVID-19 pandemic could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance. In addition to the foregoing, the following additional factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements: •The strength ofthe United States economy in general and the strength of the local economies in which we conduct operations; •The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of theBoard of Governors of theFederal Reserve System (the "Federal Reserve"); •Inflation/deflation, interest rate, market, and monetary fluctuations; •The effect of changes in accounting policies and practices or accounting standards, as may be adopted from time to time by bank regulatory agencies, theSEC , thePublic Company Accounting Oversight Board , FASB, or other accounting standards setters, including ASU 2016-13 (Topic 326), "Measurement of Credit Losses on Financial Instruments," commonly referenced as the CECL model, which has changed how we estimate credit losses and has increased the required level of our allowance for credit losses since adoption onJanuary 1, 2020 ; •The effect of acquisitions we have made or may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations; •The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers; •The impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities, and insurance, and the application thereof by regulatory bodies; •The transition away from USD LIBOR and uncertainty regarding potential alternative reference rates, including SOFR; •The effectiveness of our risk management framework and quantitative models; 85 -------------------------------------------------------------------------------- •Changes in the level of our nonperforming assets and charge-offs; •Possible credit-related impairments of securities held by us; •The impact of current and possible future governmental efforts to restructure theU.S. financial regulatory system; •Changes in consumer spending, borrowing, and savings habits; •The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; •Our ability to attract deposits and other sources of liquidity; •The possibility that we may reduce or discontinue the payments of dividends on our common stock; •Changes in the financial performance and/or condition of our borrowers; •Changes in the competitive environment among financial and bank holding companies and other financial service providers; •Public health crises and pandemics, including the COVID-19 pandemic, and the effects on the economic and business environments in which we operate, including our credit quality and business operations, as well as the impact on general economic and financial market conditions; •Geopolitical conditions, including acts or threats of terrorism, actions taken bythe United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions inthe United States and abroad; •Cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national, or global level; •Natural disasters, earthquakes, fires, and severe weather; •Unanticipated regulatory, legal, or judicial proceedings; and •Our ability to manage the risks involved in the foregoing. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with theSEC . Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking information and statements to reflect actual results or changes in the factors affecting the forward-looking information and statements. For information on the factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see "Risk Factors" under Part I, Item 1A of our 2020 Form 10-K in addition to Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and other reports as filed with theSEC . Forward-looking information and statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties disclosed in our filings with theSEC , all of which are accessible on theSEC's website at http://www.sec.gov. 86 --------------------------------------------------------------------------------
GENERAL
This discussion should be read in conjunction with our Management Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The results for the three and nine months endedSeptember 30, 2021 are not necessarily indicative of the results expected for the year endingDecember 31, 2021 . The Corporation is aCalifornia -based bank holding company incorporated in 1997 in the state ofDelaware and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"). Our wholly owned subsidiary,Pacific Premier Bank , is aCalifornia state-chartered commercial bank. The Bank was founded in 1983 as a state-chartered thrift and subsequently converted to a federally-chartered thrift in 1991. The Bank converted to aCalifornia -chartered commercial bank and became a member of theFederal Reserve System inMarch 2007 . The Bank is also a member of the FHLB, which is a member of theFederal Home Loan Bank System . As a bank holding company, the Corporation is subject to regulation and supervision by theFederal Reserve . We are required to file with theFederal Reserve quarterly and annual reports and such additional information as theFederal Reserve may require pursuant to the BHCA. TheFederal Reserve may conduct examinations of bank holding companies, such as the Corporation, and its subsidiaries. The Corporation is also a bank holding company within the meaning of the California Financial Code. As such, the Corporation and its subsidiaries are subject to the supervision and examination by, and may be required to file reports with, theCalifornia Department of Financial Protection and Innovation ("DFPI"). A bank holding company, such as the Corporation, is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such a policy. TheFederal Reserve , under the BHCA, has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon theFederal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. As aCalifornia state-chartered commercial bank, which is a member of theFederal Reserve , the Bank is subject to supervision, periodic examination and regulation by the DFPI, theFederal Reserve , theConsumer Financial Protection Bureau ("CFPB"), and theFDIC . The Bank's deposits are insured by theFDIC through theDeposit Insurance Fund . In general terms, insurance coverage is up to$250,000 per depositor for all deposit accounts. As a result of this deposit insurance function, theFDIC also has certain supervisory authority and powers over the Bank. If, as a result of an examination of the Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank's operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators. Such remedies include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict growth, to assess civil monetary penalties, to remove officers and directors, and ultimately, to request theFDIC to terminate the Bank's deposit insurance. As aCalifornia -chartered commercial bank, the Bank is also subject to certain provisions ofCalifornia law. Our corporate headquarters are located inIrvine, California . AtSeptember 30, 2021 , we primarily conduct business throughout theWestern Region ofthe United States from 63 full-service depository branches located inArizona ,California ,Nevada ,Oregon , andWashington . Following the two branch consolidations inSan Diego County andLos Angeles County ofCalifornia in earlyNovember 2021 , the Bank operates 61 full-service depository branches. The branches consolidated were identified largely based on the proximity of neighboring branches, deposit base, historic growth, and market opportunity to improve further the overall efficiency of operations, as well as the Bank's goals related toFair Lending and the Community Reinvestment Act. 87 -------------------------------------------------------------------------------- As a result of our organic and strategic growth strategy we have developed a variety of banking products and services within our targeted markets in theWestern United States tailored to small- and middle-market businesses, corporations, including the owners and employees of those businesses, professionals, entrepreneurs, real estate investors, and non-profit organizations, as well as consumers in the communities we serve. Through our branches and our website, www.ppbi.com, we provide a wide array of banking products and services such as: various types of deposit accounts, digital banking, treasury management services, online bill payment, and a wide array of loan products, including commercial business loans, lines of credit, SBA loans, commercial real estate loans, agribusiness loans, franchise lending, home equity lines of credit, and construction loans throughout theWestern United States in major metropolitan markets withinArizona ,California ,Nevada ,Oregon , andWashington . We also have acquired and enhanced nationwide specialty banking products and services for Homeowners' Associations ("HOA") and HOA management companies, as well as experienced owner-operator franchisees in the quick service restaurant ("QSR") industry. Most recently, we have expanded our specialty products and services offerings to include commercial escrow services through our Commerce Escrow division, which facilitates commercial escrow services and tax-deferred commercial real estate exchanges under Section 1031 of the Internal Revenue Code, as well as custodial and maintenance services through ourPacific Premier Trust division, which serves as a custodian for self-directed IRAs as well as certain accounts that do not qualify as IRAs pursuant to the Internal Revenue Code. The Bank funds its lending and investment activities with retail and commercial deposits obtained through its branches, advances from the FHLB, lines of credit, and wholesale and brokered certificates of deposit. Our principal source of income is the net spread between interest earned on loans and investments and the interest costs associated with deposits and borrowings used to finance the loan and investment portfolios. Additionally, the Bank generates fee income from loan and investment sales, and various products and services offered to depository, loan, escrow, and IRA custodial clients. COVID-19 PANDEMIC The COVID-19 outbreak was declared a Public Health Emergency of International Concern by theWorld Health Organization onJanuary 30, 2020 and a pandemic by theWorld Health Organization onMarch 11, 2020 . The ongoing COVID-19 global pandemic and national health emergency has caused significant disruption inthe United States and international economies and financial markets. The operations and business results of the Company have been and could continue to be materially adversely affected. In earlyMarch 2020 , the Company began preparing for potential disruptions and government limitations of activity in the markets in which we serve. We activated our Business Continuity Program and Pandemic Preparedness Plan, and we were able to quickly execute on multiple initiatives to adjust our operations to protect the health and safety of our employees and clients. We expanded remote-access availability to ensure a greater number of employees have the capability to work from home or other remote locations without impacting our operations while continuing to provide a superior level of customer service. We also reconfigured our corporate headquarters, administrative offices, and branches to promote social distancing for employees by erecting physical barriers. In addition, the Company issued a Company-wide employee appreciation bonus related to the COVID-19 pandemic during the fourth quarter of 2020. BeginningApril 2021 , non-exempt employees will receive up to 4 hours of paid time off for COVID-19 vaccination appointments and exempt employees will receive flexibility for vaccination appointments. 88 -------------------------------------------------------------------------------- Since the beginning of the crisis, we have been in close contact with our clients, assessing the level of impact on their businesses, and implementing a process to evaluate each client's specific situation, and where appropriate, providing relief programs. We also enhanced client awareness of our digital banking offerings to ensure that we continue to provide a superior level of customer service. We have taken steps to comply with various government directives regarding social distancing and use of personal protective equipment in the work place, and we are following the guidance from the Centers of Disease Control ("CDC") to protect our clients and employees. The Company continued its efforts to monitor the loan portfolio to identify potential at-risk segments and line of credit draws for deviations from normal activity, and support our customers affected by the COVID-19 pandemic, including but not limited to the following:
•Participated in the
We were able to quickly establish our process for participating in the SBA PPP program that enabled our clients to utilize this valuable resource beginning inApril 2020 . Our team executed PPP loans in the two rounds of the program, which allowed us to further strengthen and deepen our client relationships, while positively impacting tens of thousands of individuals. InJuly 2020 , the Bank sold its entire SBA PPP loan portfolio with an aggregate amortized cost of$1.13 billion to a seasoned and experienced non-bank lender and servicer of SBA loans, resulting in improved balance sheet liquidity and a gain on sale of approximately$18.9 million , net of net deferred origination fees and net purchase discounts. •Implemented a temporary loan modification program for borrowers affected by the COVID-19 pandemic, including payment deferrals, fee waivers, and extensions of repayment terms In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Bank established a COVID-19 temporary modification program, including interest-only payments, or full payment deferrals for clients that are adversely affected by the COVID-19 pandemic. The CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as ofDecember 31, 2019 are not classified as TDRs. In accordance with interagency guidance issued inApril 2020 , these short-term modifications made to a borrower affected by the COVID-19 pandemic and governmental shutdown orders, including payment deferrals, fee waivers, and extensions of repayment terms, do not need to be identified as TDRs if the loans were current at the time a modification plan was implemented. The CAA, signed into law onDecember 27, 2020 , extended the applicable period to include modification to loans held by financial institutions executed betweenMarch 1, 2020 and the earlier of (i)January 1, 2022 , or (ii) 60 days after the date of termination of the COVID-19 national emergency. AtSeptember 30, 2021 , there were no loans classified as a COVID-19 modification under Section 4013 of the CARES Act and no loans in-process for potential modification. AtDecember 31, 2020 , 52 loans totaling$79.5 million , or 0.60% of loans held for investment, remained within their COVID-19 modification period. Please also see Note 6 - Loans Held for Investment for additional information. Additionally, the CARES Act provides for relief on existing and new SBA loans through the Small Business Debt Relief program. As part of the SBA Small Business Debt Relief program, the SBA will automatically pay principal, interest, and fees of certain SBA loans for a period of six months for both existing loans and new loans issued prior toSeptember 27, 2020 . OnDecember 27, 2020 , the CAA authorized a second round of SBA payments on covered loans approved beforeMarch 27, 2020 , for a two-month period beginning with the first payment due on the loan on or afterFebruary 1, 2021 , and for an additional three-month period for certain eligible borrowers. For new loans approved beginning onFebruary 2, 2021 and ending onSeptember 30, 2021 , the SBA will make the payments for a three-month period subject to the availability of funds. AtSeptember 30, 2021 , approximately 13 loans, representing approximately$9.4 million aggregate reported balance, are eligible for this relief. The CARES Act also provides for mortgage payment relief and a foreclosure moratorium. 89 -------------------------------------------------------------------------------- The extent to which the COVID-19 pandemic impacts the Company's business, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be accurately predicted, including the scope and duration of the COVID-19 pandemic, vaccine adoption rates and the effectiveness of vaccines against variants, and the actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, investments, loans, loan servicing rights, and deferred tax assets. While economic conditions have improved, the ongoing COVID-19 pandemic has placed strain on certain businesses and service providers, many of which have not been able to conduct operations in their usual manner. Should the COVID-19 pandemic persist, we anticipate it may have an impact on the following: •Loan growth and interest income - Economic activity expanded moderately during the first nine months of 2021, but macroeconomic conditions have not yet fully recovered to the levels observed prior to the onset of the COVID-19 pandemic in the first quarter of 2020. If a recovery in economic conditions fails to continue, it may have an impact on our borrowers, the businesses they operate, and their financial condition. Our borrowers may have less demand for credit needed to invest in and expand their businesses and/or support their ongoing operations. Additionally, our borrowers may have less demand for real estate and consumer loans. Further, theFederal Reserve's Federal Open Market Committee continues to maintain the federal funds rate within a range of 0% to 0.25%. Lower levels of interest rates in conjunction with the potential reduction in future loan growth would place pressure on the level of and yield on interest-earning assets, which may negatively impact our interest income. •Credit quality - Elevated levels of unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things, may result in additional weakness in economic conditions, place strain on our borrowers, and ultimately impact the credit quality of our loan portfolio. We expect this would result in increases in the level of past due, nonaccrual, and classified loans, as well as higher net charge-offs. While there has been a recovery in economic conditions since the onset of the COVID-19 pandemic in the first quarter of 2020, there can be no assurance the recovery will continue. As such, future deterioration in credit quality may require us to record additional provisions for credit losses. •CECL - OnJanuary 1, 2020 , the Company adopted ASC 326, which requires the Company to measure credit losses on certain financial assets, such as loans and debt securities, using the CECL model. The CECL model for measuring credit losses is highly dependent upon expectations of future economic conditions and requires management judgment. Should the recovery in economic conditions fail to continue and the expectations concerning future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses under the CECL model. •Impairment charges - Should the recovery in economic conditions fail to continue, it may adversely impact the Company's operating results and the value of certain of our assets. As a result, the Company may be required to write-down the value of certain assets such as goodwill, intangible assets, or deferred tax assets when there is evidence to suggest their value has become impaired or will not be realizable at a future date. TheU.S. government as well as other state and local policy makers have responded to the ongoing COVID-19 pandemic with actions geared to support not only the health and well-being of the public, but also consumers, businesses, and the economy as a whole. In addition, during the first quarter of 2021, the President signed into law the American Rescue Plan Act of 2021 ("American Rescue Plan"), which provides approximately$1.9 trillion in various forms of economic stimulus and aid to individuals and state and local governments that have been affected by the ongoing COVID-19 pandemic. However, the impact and overall effectiveness of these actions is difficult to determine at this time. 90 --------------------------------------------------------------------------------
ACQUISITION OF OPUS
Effective as ofJune 1, 2020 , the Corporation completed the acquisition of Opus, aCalifornia -chartered state bank headquartered inIrvine, California , pursuant to a definitive agreement dated as ofJanuary 31, 2020 . At closing, Opus had$8.32 billion in total assets,$5.94 billion in gross loans, and$6.91 billion in total deposits and operated 46 banking offices located throughoutCalifornia ,Washington ,Oregon , andArizona . As a result of the Opus acquisition, the Corporation acquired specialty lines of business, including trust and escrow services. Pursuant to the terms of the merger agreement, the consideration paid to Opus shareholders consisted of whole shares of the Corporation's common stock and cash in lieu of fractional shares of the Corporation's common stock. Upon consummation of the transaction, (i) each share of Opus common stock issued and outstanding immediately prior to the effective time of the acquisition was canceled and exchanged for the right to receive 0.900 shares of the Corporation's common stock, with cash to be paid in lieu of fractional shares at a rate of$19.31 per share, and (ii) each share of Opus Series A non-cumulative, non-voting preferred stock issued and outstanding immediately prior to the effective time of the acquisition was converted into and canceled in exchange for the right to receive that number of shares of the Corporation's common stock equal to the product of (X) the number of shares of Opus common stock into which such share of Opus preferred stock was convertible in connection with, and as a result of, the acquisition, and (Y) 0.900, in each case, plus cash in lieu of fractional shares of the Corporation's common stock. The Corporation issued 34,407,403 shares of the Corporation's common stock valued at$21.62 per share, which was the closing price of the Corporation's common stock onMay 29, 2020 , the last trading day prior to the consummation of the acquisition, and paid cash in lieu of fractional shares. The Corporation assumed Opus's warrants and options, which represented the issuance of up to approximately 406,778 and 9,538 additional shares of the Corporation's common stock, valued at approximately$1.8 million and$46,000 , respectively, and issued substitute restricted stock units in an aggregate amount of$328,000 . The value of the total transaction consideration paid amounted to approximately$749.6 million . The Opus warrants assumed by the Corporation expired unexercised as ofSeptember 30, 2020 and no longer remain outstanding. The Opus options assumed by the Corporation were fully exercised during the third quarter of 2020.
As a result of the Opus acquisition, the Company acquired Opus and recorded net
assets of
•$5.81 billion of loans •$937.1 million of cash and cash equivalents •$829.9 million of investment securities •$93.0 million of goodwill •$16.1 million of core deposit intangible •$3.2 million of customer relationship intangible •$6.92 billion of deposits The fair values of the assets acquired and liabilities assumed were determined based on the requirements of ASC 820 - Fair Value Measurement. Such fair values are preliminary estimates at the time of acquisition and are subject to adjustment for up to one year after the merger date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Since the acquisition, the Company has made a net adjustment of$146,000 related to loans, deferred tax assets, other assets, and other liabilities. During the second quarter of 2021, the Company finalized its fair values analysis of the acquired assets and assumed liabilities associated with this acquisition. For additional information about the acquisition of Opus, please see Note 4 - Acquisitions. 91 -------------------------------------------------------------------------------- The client account integration and system conversion of Opus was completed inOctober 2020 . At the same time, as a result of the Opus acquisition, the Bank consolidated 20 branch offices primarily inCalifornia ,Washington , andArizona into nearby branch offices. The consolidated branches were identified largely based on the proximity of neighboring branches, historic growth, and market opportunity to improve further the overall efficiency of operations in line with the Bank's ongoing cost reduction initiatives.
CRITICAL ACCOUNTING POLICIES
Management has established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Certain accounting policies require management to make estimates and assumptions that involve a significant level of estimation uncertainty and are reasonably likely to have a material impact on the carrying value of certain assets and liabilities as well as the Company's results of operations; management considers these to be critical accounting policies. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of the Company's assets and liabilities as well as the Company's results of operations in future reporting periods. Our significant accounting policies are described in the Notes to the consolidated financial statements in our 2020 Form 10-K.
Allowance for Credit Losses
The Company accounts for credit losses on loans in accordance with ASC 326,
which requires the Company to record an estimate of expected lifetime credit
losses for loans at the time of origination or acquisition. The ACL is
maintained at a level deemed appropriate by management to provide for current
expected future credit losses in the portfolio as of the date of the
consolidated statements of financial condition. Estimating expected credit
losses requires management to use relevant forward-looking information,
including the use of reasonable and supportable forecasts. The measurement of
the ACL is performed by collectively evaluating loans with similar risk
characteristics. The Company measures the ACL on commercial real estate loans
and commercial loans using a discounted cash flow approach, and a historical
loss rate methodology is used to determine the ACL on retail loans. The
Company's discounted cash flow methodology incorporates a probability of default
and loss given default model, as well as expectations of future economic
conditions, using reasonable and supportable forecasts. The use of reasonable
and supportable forecasts require significant judgment, such as selecting
forecast scenarios and related scenario-weighting, as well as determining the
appropriate length of the forecast horizon. Management leverages economic
projections from a reputable and independent third party to inform and provide
its reasonable and supportable economic forecasts. Other internal and external
indicators of economic forecasts may also be considered by management when
developing the forecast metrics. The Company's ACL model reverts to long-term
average loss rates for purposes of estimating expected cash flows beyond a
period deemed reasonable and supportable. The Company forecasts economic
conditions and expected credit losses over a two-year time horizon before
reverting to long-term average loss rates over a period of three years. The
duration of the forecast horizon, the period over which forecasts revert to
long-term averages, the economic forecasts that management utilizes, as well as
additional internal and external indicators of economic forecasts that
management considers, may change over time depending on the nature and
composition of our loan portfolio. Changes in economic forecasts, in conjunction
with changes in loan specific attributes, impact a loan's probability of default
and loss given default, which can drive changes in the determination of the ACL.
Expectations of future cash flows are discounted at the loan's effective
interest rate. The resulting ACL represents the amount by which the loan's
amortized cost exceeds the net present value of a loan's discounted cash flows.
The ACL is recorded through a charge to provision for credit losses and is
reduced by charge-offs, net of recoveries on loans previously charged-off. It is
the Company's policy to promptly charge-off loan balances at the time they have
been deemed uncollectible. Please also see Note 7 - Allowance for Credit Losses,
of the consolidated financial statements for additional discussion concerning
the Company's ACL methodology, including discussion concerning economic
forecasts used in the determination of the ACL.
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The Company's ACL model also includes adjustments for qualitative factors where
appropriate. Since historical information (such as historical net losses and
economic cycles) may not always, by themselves, provide a sufficient basis for
determining future expected credit losses, the Company periodically considers
the need for qualitative adjustments to the ACL. Qualitative adjustments may be
related to and include, but not limited to, factors such as: (i) management's
assessment of economic forecasts used in the model and how those forecasts align
with management's overall evaluation of current and expected economic
conditions, (ii) organization specific risks such as credit concentrations,
collateral specific risks, regulatory risks, and external factors that may
ultimately impact credit quality, (iii) potential model limitations such as
limitations identified through back-testing, and other limitations associated
with factors such as underwriting changes, acquisition of new portfolios,
changes in portfolio segmentation, and (iv) management's overall assessment of
the adequacy of the ACL, including an assessment of model data inputs used to
determine the ACL.
The Company has a credit portfolio review process designed to detect problem
loans. Problem loans are typically those of a substandard or worse internal risk
grade, and may consist of loans on nonaccrual status, troubled debt
restructurings, loans where the likelihood of foreclosure on underlying
collateral has increased, collateral dependent loans, and other loans where
concern or doubt over the ultimate collectability of all contractual amounts due
has become elevated. Such loans may, in the opinion of management, be deemed to
no longer possess risk characteristics similar to other loans in the loan
portfolio, and as such, may require individual evaluation to determine an
appropriate ACL for the loan. When a loan is individually evaluated, the Company
typically measures the expected credit loss for the loan based on a discounted
cash flow approach, unless the loan has been deemed collateral dependent.
Collateral dependent loans are loans where the repayment of the loan is expected
to come from the operation of and/or eventual liquidation of the underlying
collateral. The ACL for collateral dependent loans is determined using estimates
for the fair value of the underlying collateral, less costs to sell.
Although management uses the best information available to derive estimates
necessary to measure an appropriate level of the ACL, future adjustments to the
ACL may be necessary due to economic, operating, regulatory, and other
conditions that may extend beyond the Company's control. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's ACL and credit risk grading process. Such
agencies may require the Company to recognize additions to the allowance based
on judgments different from those of management.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. Upon obtaining control of the acquired entity, the Company records all identifiable assets and liabilities at their estimated fair values.Goodwill is recorded when the consideration paid for an acquired entity exceeds the estimated fair value of the net assets acquired. Changes to the acquisition date fair values of assets acquired and liabilities assumed may be made as adjustments to goodwill over a 12-month measurement period following the date of acquisition. Such adjustments are attributable to additional information obtained related to fair value estimates of the assets acquired and liabilities assumed. Certain costs associated with business combinations are expensed as incurred. 93
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Goodwill assets arise from the acquisition method of accounting for business combinations and represent the excess value of the consideration paid over the fair value of the net assets acquired.Goodwill assets are deemed to have indefinite lives, are not subject to amortization and instead are tested for impairment at least annually. The Company's policy is to assess goodwill for impairment in the fourth quarter of each year or more frequently if events or circumstances lead management to believe the value of goodwill may be impaired. Impairment testing is performed at the reporting unit level, which is considered the Corporation level as management has identified the Corporation as its sole reporting unit as of the date of the consolidated statements of financial condition. Management's assessment of goodwill is performed in accordance with ASC 350-20 -Goodwill and Other -Goodwill , which allows the Company to first perform a qualitative assessment of goodwill to determine if it is more likely than not the fair value of the Company's equity is below its carrying value. However, GAAP also allows the Company, at its option, to unconditionally forego the qualitative assessment and proceed directly to a quantitative assessment. When performing a qualitative assessment of goodwill, should the results of such analysis indicate it is more likely than not the fair value of the Company's equity is below its carrying value, the Company then performs the quantitative assessment of goodwill to determine the fair value of the reporting unit and compares it to its carrying value. If the fair value of the reporting unit is below its carrying value, the Company would then recognize the amount of impairment as the amount by which the reporting unit's carrying value exceeds its fair value, limited to the total amount of goodwill allocated to the reporting unit. Impairment losses are recorded as a charge to noninterest expense. The Company is required to employ the use of significant judgment in its assessment of goodwill, both in a qualitative assessment and a quantitative assessment, if needed. Assessments of goodwill often require the use of fair value estimates, which are dependent upon various factors including estimates concerning the Company's long term growth prospects. Imprecision in estimates can affect the estimated fair value of the reporting unit in a goodwill assessment. Additionally, various events or circumstances could have a negative effect on the estimated fair value of a reporting unit, including declines in business performance, increases in credit losses, as well as deterioration in economic or market conditions, which may result in a material impairment charge to earnings in future periods.
Acquired Loans
When the Company acquires loans through purchase or a business combination an assessment is first performed to determine if such loans have experienced more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as PCD loans or otherwise classified as non-PCD loans. All acquired loans are recorded at their fair value as of the date of acquisition, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records an ACL based on the Company's methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to provision for credit losses in the period in which the loans were purchased or acquired. Unlike non-PCD loans, the initial ACL for PCD loans is established through an adjustment to the acquired loan balance and not through a charge to provision for credit losses in the period in which the loans were acquired. The ACL for PCD loans is determined with the use of the Company's ACL methodology. Characteristics of PCD loans include: delinquency, downgrade in credit quality since origination, loans on nonaccrual status, loans that had been modified, and/or other factors the Company may become aware of through its initial analysis of acquired loans that may indicate there has been more than insignificant deterioration in credit quality since a loan's origination. Subsequent to acquisition, the ACL for both non-PCD and PCD loans are determined with the use of the Company's ACL methodology in the same manner as all other loans.
In connection with the Opus acquisition on
94
--------------------------------------------------------------------------------Fair Value of Financial Instruments
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Investment securities available-for-sale, derivative instruments, and equity warrant assets are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other financial assets at fair value on a non-recurring basis, such as collateral dependent loans that are individually evaluated and OREO. These non-recurring fair value adjustments typically involve the application of lower of cost or fair value accounting or write-downs of individual assets. Please also see Note 11 - Fair Value of Financial Instruments of the consolidated financial statements for more information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used, and its impact to earnings, as well as the estimated fair value disclosures for financial instruments not recorded at fair value.
Income Taxes
Deferred tax assets and liabilities are recorded for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns using the asset liability method. In estimating future
tax consequences, all expected future events other than enactments of changes in
tax laws or tax rates are considered. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the enactment
date. Deferred tax assets are to be recognized for temporary differences that
will result in deductible amounts in future years and for tax carryforwards if,
in the opinion of management, it is more likely than not that the deferred tax
assets will be realized.
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NON-GAAP MEASURES
The Company uses certain non-GAAP financial measures to provide meaningful
supplemental information regarding the Company's operational performance and to
enhance investors' overall understanding of such financial performance.
Generally, a non-GAAP financial measure is a numerical measure of a company's
financial performance, financial position or cash flows that exclude (or
include) amounts that are included in (or excluded from) the most directly
comparable measure calculated, and presented in accordance with GAAP. However,
these non-GAAP financial measures are supplemental and are not a substitute for
an analysis based on GAAP measures and may not be comparable to non-GAAP
financial measures that may be presented by other companies.
For periods presented below, return on average tangible common equity is a
non-GAAP financial measure derived from GAAP-based amounts. We calculate this
figure by excluding amortization of intangible assets expense from net income
and excluding the average intangible assets and average goodwill from the
average stockholders' equity during the period. Management believes that the
exclusion of such items from this financial measure provides useful information
to gain an understanding of the operating results of our core business.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2021 2020 2021 2020
Net income (loss) $ 90,088 $ 96,302
3,912 4,001 4,538 12,056 12,567
Less: amortization of intangible
assets expense tax adjustment (1) 1,119 1,145 1,301 3,449 3,605
Net income for average tangible
common equity $ 92,881 $ 99,158 Average stockholders' equity$ 2,844,800 $ 2,747,308
75,795 79,784 92,768 79,812 86,244
Less: average goodwill 901,312 900,582 898,430 900,170 848,675
Average tangible common equity
Return on average equity (2) 12.67 % 14.02 % 9.90 % 12.23 % (0.39) % Return on average tangible common equity (2) 19.89 % 22.45 % 16.44 % 19.52 % 0.21 %
______________________________
(1) Amortization of intangible assets expense adjusted by statutory tax rate. (2) Ratio is annualized.
96
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Tangible book value per share and tangible common equity to tangible assets (the
"tangible common equity ratio") are non-GAAP financial measures derived from
GAAP-based amounts. We calculate tangible book value per share by dividing
tangible common stockholder's equity by shares outstanding. We calculate the
tangible common equity ratio by excluding the balance of intangible assets from
common stockholders' equity and dividing by period end tangible assets, which
also excludes intangible assets. We believe that this information is important
to shareholders as tangible equity is a measure that is consistent with the
calculation of capital for bank regulatory purposes, which excludes intangible
assets from the calculation of risk-based ratios.
September 30 ,
(Dollars in thousands) 2021 2020
Total stockholders' equity $ 2,838,116 $ 2,746,649
Less: intangible assets 974,763 984,076
Tangible common equity $ 1,863,353 $ 1,762,573
Total assets $ 21,005,211 $ 19,736,544
Less: intangible assets 974,763 984,076
Tangible assets $ 20,030,448 $ 18,752,468
Tangible common equity ratio 9.30 % 9.40 %
Common shares issued and outstanding 94,354,211 94,483,136
Book value per share $ 30.08 $ 29.07
Less: intangible book value per share 10.33 10.42
Tangible book value per share $ 19.75 $ 18.65
97
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For periods presented below, efficiency ratio is a non-GAAP financial measure
derived from GAAP-based amounts. This figure represents the ratio of noninterest
expense less other real estate owned operations, core deposit intangible
amortization, and merger-related expense to the sum of net interest income
before provision for loan losses and total noninterest income, less gain/(loss)
on sale of securities, other income - security recoveries on investment
securities, gain/(loss) on sale of other real estate owned, and gain/(loss) from
debt extinguishment. Management believes that the exclusion of such items from
this financial measure provides useful information to gain an understanding of
the operating results of our core business.
`
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2021 2020 2021 2020
Total noninterest expense $ 96,040 $ 94,496
3,912 4,001 4,538 12,056 12,567
Less: merger-related expense - - 2,988 5 44,058
Less: other real estate owned
operations, net - - (17) - 6
Noninterest expense, adjusted
$ 91,070 $ 270,964 $ 224,549 Net interest income before provision for loan losses$ 169,069 $ 160,934
30,100 26,729 26,758 80,569 48,131
Less: net gain from investment
securities 4,190 5,085 1,141 13,321 8,880
Less: other income - security
recoveries 1 6 1 9 1
Less: net gain (loss) from other
real estate owned - - 13 - (42)
Less: net gain (loss) from debt
extinguishment 970 (647) - (180) -
Revenue, adjusted $ 194,008 $ 183,219 $ 192,149 $ 559,074 $ 445,305
Efficiency ratio 47.5 % 49.4 % 47.4 % 48.5 % 50.4 %
98
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Core net interest income and core net interest margin are non-GAAP financial
measures derived from GAAP based amounts. We calculate core net interest income
by excluding scheduled accretion income, accelerated accretion income, premium
amortization on CDs, and nonrecurring nonaccrual interest paid from net interest
income. The core net interest margin is calculated as the ratio of core net
interest income to average interest-earning assets. Management believes that the
exclusion of such items from these financial measures provides useful
information to gain an understanding of the operating results of our core
business.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2021 2020 2021 2020
Net interest income $ 169,069 $ 160,934
3,339 3,560 6,858 10,777 12,152
Less: accelerated accretion
income 6,107 5,927 5,338 18,022 9,997
Less: premium amortization on CDs 390 942 2,968 3,083 4,085
Less: nonrecurring nonaccrual
interest paid (74) (216) (275) (893) (417)
Core net interest income $ 159,307 $ 150,721 $ 151,657 $ 460,666 $ 380,196
Less: interest income on SBA PPP
loans - - 838 - 6,220
Core net interest income
excluding SBA PPP loans $ 159,307 $ 150,721 $ 150,819 $ 460,666 $ 373,976 Average interest-earning assets
- - 329,396 - 386,287
Average interest-earning assets
excluding SBA PPP loans $ 19,131,172 $ 18,783,803 $ 18,378,209 $ 18,804,146 $ 13,930,877
Net interest margin (1) 3.51 % 3.44 % 3.54 % 3.50 % 3.79 %
Core net interest margin (1) 3.30 % 3.22 % 3.23 % 3.28 % 3.55 %
Core net interest margin
excluding SBA PPP loans (1) 3.30 % 3.22 % 3.26 % 3.28 % 3.59 %
______________________________
(1) Ratio is annualized.
99
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Pre-provision net revenue is a non-GAAP financial measure derived from
GAAP-based amounts. We calculate the pre-provision net revenue by excluding
income tax, provision for credit losses, and merger-related expenses from net
income. Management believes that the exclusion of such items from this financial
measure provides useful information to gain an understanding of the operating
results of our core business and a better comparison to the financial results of
prior periods.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2021 2020 2021 2020
Interest income $ 176,047 $ 170,692 $ 181,991 $ 519,733 $ 449,902
Interest expense 6,978 9,758 15,445 28,078 43,889
Net interest income 169,069 160,934 166,546 491,655 406,013
Noninterest income 30,100 26,729 26,758 80,569 48,131
Revenue 199,169 187,663 193,304 572,224 454,144
Noninterest expense 96,040 94,496 98,579 283,025 281,180
Add: merger-related expense - - 2,988 5 44,058
Pre-provision net revenue 103,129 93,167 97,713 289,204 217,022
Pre-provision net revenue
(annualized) $ 412,516 $ 372,668 $ 390,852 $ 385,605 $ 289,363
Average assets $ 20,804,903 $ 20,290,415 $ 20,366,761 $ 20,366,162 $ 15,728,468
Pre-provision net revenue on
average assets 0.50 % 0.46 % 0.48 % 1.42 % 1.38 %
Pre-provision net revenue on
average assets (annualized) 1.98 % 1.84 % 1.92 % 1.89 % 1.84 %
100--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table presents the components of results of operations, share data, and performance ratios for the periods indicated:
Three Months Ended Nine Months Ended
(Dollar in thousands, except per share
data and September 30, June 30, September 30, September 30, September 30,
percentages) 2021 2021 2020 2021 2020
Operating data
Interest income $ 176,047 $
170,692
6,978 9,758 15,445 28,078 43,889
Net interest income 169,069 160,934 166,546 491,655 406,013
Provision for credit losses (19,726) (38,476) 4,210 (56,228)
190,299
Net interest income after provision for credit losses 188,795 199,410 162,336 547,883
215,714
Net gain from sales of loans 1,187 1,546 9,542 3,094 8,281 Other noninterest income 28,913 25,183 17,216 77,475 39,850 Noninterest expense 96,040 94,496 98,579 283,025 281,180 Net income (loss) before income taxes 122,855 131,643 90,515 345,427
(17,335)
Income tax expense (benefit) 32,767 35,341 23,949 90,369 (10,550) Net income (loss)$ 90,088 $
96,302
$ 103,129 $ 93,167 $ 97,713 $ 289,204 $ 217,022 Share data Earnings (loss) per share: Basic$ 0.95 $ 1.02 $ 0.71 $ 2.70 $ (0.10) Diluted 0.95 1.01 0.70 2.68 (0.10) Common equity dividends declared per share 0.33 0.33 0.25 0.96 0.75 Dividend payout ratio (1) 34.63 % 32.43 % 35.45 % 35.59 % (759.20) % Performance ratios Return on average assets (2) 1.73 % 1.90 % 1.31 % 1.67 % (0.06) % Return on average equity (2) 12.67 14.02 9.90 12.23 (0.39) Return on average tangible common equity (2)(3) 19.89 22.45 16.44 19.52 0.21 Pre-provision net revenue on average assets (2)(3) 1.98 1.84 1.92 1.89 1.84 Average equity to average assets 13.67 13.54 13.21 13.65 14.76 Efficiency ratio (3) 47.5 49.4 47.4 48.5 50.4
______________________________
(1) Dividend payout ratio is defined as common equity dividends declared per
share divided by basic earnings per share.
(2) Ratio is annualized.
(3) A reconciliation of the non-GAAP measures are set forth in the Non-GAAP
Measures section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-Q.
101
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In the third quarter of 2021, we reported net income of $90.1 million , or $0.95
per diluted share. This compares with net income of $96.3 million , or $1.01 per
diluted share, for the second quarter of 2021. The decrease in net income was
primarily due to $18.8 million lower recapture of provision for credit losses
and an increase of $1.5 million in noninterest expense, partially offset by an
increase of $8.1 million in net interest income, a $3.4 million increase in
noninterest income, and a decrease of $2.6 million in income tax expense. The
provision recaptures during the second and third quarters of 2021 were
reflective of improving economic forecasts used in the Company's CECL model
relative to prior periods and the favorable asset quality profile of the loan
portfolio, partially offset by an increase in loans held for investment.
Net income of $90.1 million , or $0.95 per diluted share, for the third quarter
of 2021 compares to a net income for the third quarter of 2020 of $66.6 million ,
or $0.70 per diluted share. The increase in net income was primarily due to a
$23.9 million decrease in provision for credit losses, a $3.3 million increase
in noninterest income, a $3.0 million decrease in merger-related expense, and a
$2.5 million increase in net interest income, partially offset by an increase of
$8.8 million in income tax expense and a $449,000 increase in noninterest
expense excluding merger-related expenses. The decrease in the provision for
credit losses during the third quarter of 2021 was primarily due to improved
economic forecasts used in the Company's CECL model relative to prior periods
and the favorable asset quality profile of the loan portfolio.
For the three months ended September 30, 2021 , the Company's return on average
assets was 1.73%, return on average equity was 12.67%, and return on average
tangible common equity was 19.89%. For the three months ended June 30, 2021 , the
return on average assets was 1.90%, the return on average equity was 14.02%, and
the return on average tangible common equity was 22.45%. For the three months
ended September 30, 2020 , the return on average assets was 1.31%, the return on
average equity was 9.90%, and the return on average tangible common equity was
16.44%.
For the nine months ended September 30, 2021 , the Company recorded net income of
$255.1 million , or $2.68 per diluted share. This compares with net loss of $6.8
million , or $(0.10) per diluted share, for the nine months ended September 30,
2020 . The increase in net income of $261.8 million was primarily due to a $246.5
million decrease in the provision for credit losses, an $85.6 million increase
in net interest income, a $44.1 million decrease in merger-related expenses, and
a $32.4 million increase in noninterest income, partially offset by a $100.9
million increase in income tax expense and a $45.9 million increase in
noninterest expense excluding merger-related expenses. The decrease in the
provision for credit losses was attributable to higher provision expense from
the Company's adoption of ASC 326 effective January 1, 2020 , the acquisition of
Opus, and unfavorable economic forecasts used in the Company's CECL model driven
by the COVID-19 pandemic, as well as the $38.5 million and $19.7 million
recapture of provision for credit losses during the second and third quarter of
2021, respectively, primarily due to improved economic forecasts used in the
Company's CECL model relative to prior periods and the favorable asset quality
profile of the loan portfolio. The year-over-year increases in net income
reflect the impact of the acquisition of Opus in the second quarter of 2020.
For the nine months ended September 30, 2021 , the Company's return on average
assets was 1.67%, return on average equity was 12.23%, and return on average
tangible common equity was 19.52%, compared with a return on average assets of
(0.06)%, return on average equity of (0.39)%, and a return on average tangible
common equity of 0.21% for the nine months ended September 30, 2020 .
102
--------------------------------------------------------------------------------Net Interest Income
Our primary source of revenue is net interest income, which is the difference
between the interest earned on loans, investment securities, and
interest-earning balances with financial institutions ("interest-earning
assets") and the interest paid on deposits and borrowings ("interest-bearing
liabilities"). Net interest margin is net interest income expressed as a
percentage of average interest-earning assets. Net interest income is affected
by changes in both interest rates and the volume of interest-earning assets and
interest-bearing liabilities.
Net interest income totaled $169.1 million in the third quarter of 2021, an
increase of $8.1 million , or 5.1%, from the second quarter of 2021. The increase
in net interest income was due to higher average interest-earning assets, higher
loan fees, one more day of interest, and a lower cost of funds as compared to
the prior quarter, partially offset by lower average investment securities and
loan yields.
The net interest margin for the third quarter of 2021 was 3.51%, compared with
3.44% in the prior quarter. Our core net interest margin, which excludes the
impact of loan accretion income of $9.4 million , compared to $9.5 million in the
prior quarter, certificates of deposit mark-to-market amortization, and other
adjustments, increased eight basis points to 3.30%, compared to 3.22% in the
prior quarter, reflecting lower cost of funds and higher loan fees, partially
offset by lower average investment and loan yields and fees.
Net interest income for the third quarter of 2021 increased $2.5 million , or
1.5%, compared to the third quarter of 2020. The increase was attributable to a
lower cost of funds, a $1.52 billion increase in average investment securities,
and a $377.5 million decrease in average interest-bearing liabilities, which
primarily resulted from the redemptions of subordinated debentures, partially
offset by lower average interest-earning asset yields and lower average loan
balances.
For the first nine months ended 2021, net interest income increased $85.6
million , or 21.1%, compared to the first nine months ended 2020. The increase
was related to an increase in average interest-earning assets of $4.49 billion ,
which resulted primarily from our acquisition of Opus on June 1, 2020 , and a
lower cost of funds, partially offset by lower average loan and investment
yields and higher average interest-bearing liabilities.
103
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The following table presents the interest spread, net interest margin, average
balances calculated based on daily average, interest income and yields earned on
average interest-earning assets and interest expense and rates paid on average
interest-bearing liabilities, and the average yield/rate by asset and liability
component for the periods indicated:
Average Balance Sheet
Three Months Ended
September 30, 2021 June 30, 2021 September 30, 2020
Average Average Average Average Average Average
(Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
Assets
Interest-earning assets:
Cash and cash equivalents $ 663,076 $ 195 0.12 % $ 1,323,186 $ 315 0.10 % $ 1,388,897 $ 305 0.09 %
Investment securities 4,807,854 18,827 1.57 4,243,644 18,012 1.70 3,283,840 14,231 1.73
Loans receivable, net (1)(2) 13,660,242 157,025 4.56 13,216,973 152,365 4.62 14,034,868 167,455
4.75
Total interest-earning assets 19,131,172 176,047 3.65 18,783,803 170,692 3.64 18,707,605 181,991
3.87
Noninterest-earning assets 1,673,731 1,506,612 1,659,156 Total assets$ 20,804,903 $ 20,290,415 $ 20,366,761 Liabilities and equity Interest-bearing deposits: Interest checking$ 3,383,219 $ 290 0.03 %$ 3,155,935 $ 336 0.04 %$ 3,001,738 $ 1,191 0.16 % Money market 5,554,881 1,309 0.09 5,558,790 2,002 0.14 5,490,541 4,855 0.35 Savings 401,804 58 0.06 384,376 84 0.09 357,768 109 0.12 Retail certificates of deposit 1,196,187 775 0.26 1,294,544 839 0.26 1,587,712 1,857
0.47
Wholesale/brokered certificates of deposit - - - 1,357 4 1.18 265,672 497
0.74
Total interest-bearing deposits 10,536,091 2,432 0.09 10,395,002 3,265 0.13 10,703,431 8,509
0.32
FHLB advances and other borrowings 1,670 1 0.24 6,303 - - 41,041 113 1.10 Subordinated debentures 330,575 4,545 5.50 480,415 6,493 5.41 501,396 6,823 5.44 Total borrowings 332,245 4,546 5.43 486,718 6,493 5.35 542,437 6,936 5.09 Total interest-bearing liabilities 10,868,336 6,978 0.25 10,881,720 9,758 0.36 11,245,868 15,445
0.55
Noninterest-bearing deposits 6,809,211 6,341,063 5,877,619 Other liabilities 282,556 320,324 553,407 Total liabilities 17,960,103 17,543,107 17,676,894 Stockholders' equity 2,844,800 2,747,308 2,689,867 Total liabilities and equity$ 20,804,903 $ 20,290,415 $ 20,366,761 Net interest income$ 169,069 $ 160,934 $ 166,546 Net interest margin (3) 3.51 % 3.44 % 3.54 % Cost of deposits (4) 0.06 0.08 0.20 Cost of funds (5) 0.16 0.23 0.36 Ratio of interest-earning assets to interest-bearing liabilities 176.03 172.62 166.35
______________________________
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums. (2) Interest income includes net discount accretion of$9.4 million ,$9.5 million , and$12.2 million , respectively. (3) Represents annualized net interest income divided by average interest-earning assets. (4) Represents annualized interest expense on deposits divided by the sum of average interest-bearing deposits and noninterest-bearing deposits. (5) Represents annualized total interest expense divided by the sum of average total interest-bearing liabilities and noninterest-bearing deposits. 104 -------------------------------------------------------------------------------- Average Balance Sheet Nine Months Ended September 30, 2021 September 30, 2020 Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Assets Interest-earning assets: Cash and cash equivalents$ 1,096,175 $ 811 0.10 %$ 802,615 $ 736 0.12 % Investment securities 4,382,288 54,307 1.65 % 2,196,929 35,107 2.13 % Loans receivable, net (1)(2) 13,325,683 464,615 4.66 % 11,317,620 414,059 4.89 % Total interest-earning assets 18,804,146 519,733 3.70 % 14,317,164 449,902 4.20 % Noninterest-earning assets 1,562,016 1,411,304 Total assets$ 20,366,162 $ 15,728,468 Liabilities and equity Interest-bearing deposits: Interest checking$ 3,200,920 $ 1,045 0.04 %$ 1,666,723 $ 2,644 0.21 % Money market 5,520,919 5,899 0.14 % 4,302,817 16,606 0.52 % Savings 384,945 224 0.08 % 293,653 307 0.14 % Retail certificates of deposit 1,304,436 2,815 0.29 % 1,225,689 7,710 0.84 % Wholesale/brokered certificates of deposit 39,635 140 0.47 % 178,133 1,384 1.04 % Total interest-bearing deposits 10,450,855 10,123 0.13 % 7,667,015 28,651 0.50 % FHLB advances and other borrowings 9,921 66 0.89 % 173,649 1,411 1.09 % Subordinated debentures 436,888 17,889 5.46 % 335,260 13,827 5.50 % Total borrowings 446,809 17,955 5.37 % 508,909 15,238 4.00 % Total interest-bearing liabilities 10,897,664 28,078 0.34 % 8,175,924 43,889 0.72 % Noninterest-bearing deposits 6,397,703 4,922,726 Other liabilities 289,863 308,680 Total liabilities 17,585,230 13,407,330 Stockholders' equity 2,780,932 2,321,138 Total liabilities and equity$ 20,366,162 $ 15,728,468 Net interest income$ 491,655 $ 406,013 Net interest margin (3) 3.50 % 3.79 % Cost of deposits (4) 0.08 % 0.30 % Cost of funds (5) 0.22 % 0.45 % Ratio of interest-earning assets to interest-bearing liabilities 172.55 % 175.11 % _____________________________ (1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums. (2) Interest income includes net discount accretion of$28.8 million and$22.1 million , respectively. (3) Represents net interest income divided by average interest-earning assets. (4) Represents annualized interest expense on deposits divided by the sum of average interest-bearing deposits and noninterest-bearing deposits. (5) Represents annualized total interest expense divided by the sum of average total interest-bearing liabilities and noninterest-bearing deposits. 105 -------------------------------------------------------------------------------- Changes in our net interest income are a function of changes in volume, days in a period, and rates of interest-earning assets and interest-bearing liabilities. The following tables present the impact that the volume, days in a period, and rate changes have had on our net interest income for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes to our net interest income with respect to: •Changes in volume (changes in volume multiplied by prior rate); •Changes in days in a period (changes in days in a period multiplied by daily interest; no changes in days for comparisons of the three months endedSeptember 30, 2021 to the three months endedSeptember 30, 2020 ); •Changes in interest rates (changes in interest rates multiplied by prior volume and includes the recognition of discounts/premiums and deferred fees/costs); and •The net change or the combined impact of volume, days in a period, and rate changes allocated proportionately to changes in volume, days in a period, and changes in interest rates. Three Months Ended September 30, 2021 Compared to Three Months Ended June 30, 2021 Increase (Decrease) Due to (Dollars in thousands) Volume Days Rate Net Interest-earning assets Cash and cash equivalents$ (204) $ 2 $ 82 $ (120) Investment securities 1,919 - (1,104) 815 Loans receivable, net 4,820 1,707 (1,867) 4,660 Total interest-earning assets 6,535 1,709 (2,889) 5,355 Interest-bearing liabilities Interest checking 20 3 (69) (46) Money market (1) 14 (706) (693) Savings 4 1 (31) (26) Retail certificates of deposit (72) 8 - (64) Wholesale/brokered certificates of deposit (4) - - (4) FHLB advances and other borrowings (3) - 4 1 Subordinated debentures (2,058) - 110 (1,948) Total interest-bearing liabilities (2,114) 26 (692) (2,780) Change in net interest income$ 8,649 $ 1,683 $ (2,197) $ 8,135 106
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Three Months Ended September 30, 2021
Compared to
Three Months Ended September 30, 2020
Increase (Decrease) Due to
(Dollars in thousands) Volume Rate Net
Interest-earning assets
Cash and cash equivalents $ (303) $ 193 $ (110)
Investment securities 5,740 (1,144) 4,596
Loans receivable, net (4,175) (6,255) (10,430)
Total interest-earning assets 1,262 (7,206) (5,944)
Interest-bearing liabilities
Interest checking 154 (1,055) (901)
Money market 57 (3,603) (3,546)
Savings 16 (67) (51)
Retail certificates of deposit (384) (698) (1,082)
Wholesale/brokered certificates of deposit (249) (248) (497)
FHLB advances and other borrowings (62) (50) (112)
Subordinated debentures (2,354) 76 (2,278)
Total interest-bearing liabilities (2,822) (5,645) (8,467)
Change in net interest income $ 4,084 $ (1,561) $ 2,523
Nine Months Ended September 30, 2021
Compared to
Nine Months Ended September 30, 2020
Increase (Decrease) due to
(Dollars in thousands) Volume Days Rate Net
Interest-earning assets
Cash and cash equivalents $ 143 $ (3) $ (65) $ 75
Investment securities 24,846 - (5,646) 19,200
Loans receivable, net 71,109 (1,702) (18,851) 50,556
Total interest-earning assets $ 96,098 $ (1,705) $ (24,562) $ 69,831
Interest-bearing liabilities
Interest checking $ 2,410 $ (4) $ (4,005) $ (1,599)
Money market 6,750 (22) (17,435) (10,707)
Savings 96 (1) (178) (83)
Retail certificates of deposit 532 (10) (5,417) (4,895)
Wholesale/brokered certificates of deposit (727) (1) (516) (1,244)
FHLB advances and other borrowings (1,125) - (220) (1,345)
Subordinated debentures 4,209 - (147) 4,062
Total interest-bearing liabilities $ 12,145 $ (38) $ (27,918) $ (15,811)
Change in net interest income $ 83,953 $ (1,667) $ 3,356 $ 85,642
107--------------------------------------------------------------------------------
Provision for Credit Losses
For the third quarter of 2021, the Company recorded a$19.7 million provision recapture, compared to a$38.5 million provision recapture recognized during the second quarter of 2021, and a$4.2 million provision expense recognized during the third quarter of 2020. The provision recapture for the third quarter of 2021 was comprised of a$19.5 million provision recapture for loan losses, a$194,000 provision recapture for unfunded commitments, and an$11,000 provision expense for held-to-maturity securities that were transferred from available-for-sale during the third quarter. The provision recaptures for loans and unfunded commitments during the third quarter of 2021 were reflective of improving economic forecasts employed in the Company's CECL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment. The provision expense in the third quarter of 2020 reflected unfavorable changes in economic forecasts related to the onset of the COVID-19 pandemic. Three Months Ended September 30, June 30, September 30, (Dollars in thousands) 2021 2021 2020 Provision for credit losses Provision for loan losses$ (19,543) $ (33,131) $ 4,702 Provision for unfunded commitments (194) (5,345) (492) Provision for held-to-maturity securities $ 11 $ - $ - Total provision for credit losses$ (19,726) $
(38,476)
For the first nine months of 2021, the Company recorded a$56.2 million provision recapture, compared to a$190.3 million provision expense recorded for the first nine months of 2020. The provision recapture for the first nine months of 2021, which included a$52.4 million provision recapture for loan losses, a$3.9 million provision recapture for unfunded commitments, and an$11,000 provision expense for held-to-maturity securities was reflective of improving economic forecasts employed in the Company's CECL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the first nine months of 2021. The provision expense for the first nine months of 2020 was driven by unfavorable changes in economic forecasts employed in the Company's CECL model, the Day 1 provision for loan losses of$75.9 million , and the provision for unfunded commitments of$8.6 million resulting from the acquisition of Opus. Nine Months Ended September 30, September 30, (Dollars in thousands) 2021 2020
Provision for credit losses
Provision for loans and lease losses
180,341
Provision for unfunded commitments (3,880) 9,958
Provision for held-to-maturity securities $ 11 $ -
Total provision for credit losses $ (56,228) $ 190,299
108
--------------------------------------------------------------------------------Noninterest Income
The following table presents the components of noninterest income for the
periods indicated:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2021 2020 2021 2020
Noninterest income
Loan servicing income $ 536 $
622 $ 481
2,375 2,222 1,593 6,629 4,707
Other service fee income 350 352 487 1,175 1,095 Debit card interchange fee income 834 1,099 944 2,720
1,749
Earnings on bank-owned life insurance 3,266 2,279 2,270 7,778 4,920 Net gain from sales of loans 1,187 1,546 9,542 3,094 8,281 Net gain from sales of investment securities 4,190 5,085 1,141 13,321
8,880
Trust custodial account fees 11,446 7,897 6,960 26,565
9,357
Escrow and exchange fees 1,867 1,672 1,142 5,065 1,407 Other income 4,049 3,955 2,198 12,606 6,340 Total noninterest income$ 30,100 $
26,729
Noninterest income for the third quarter of 2021 was$30.1 million , an increase of$3.4 million from the second quarter of 2021. The increase was primarily due to a$3.5 million increase in trust custodial account fees attributable to a new pricing initiative and a$987,000 increase in earnings on bank-owned life insurance ("BOLI") largely driven by a$150 million addition to BOLI inJune 2021 , partially offset by a$895,000 decrease in net gain from sales of investment securities. Also, other income included a$970,000 net gain on debt extinguishment compared to a$647,000 loss in the prior quarter, partially offset by$1.1 million lower CRA investment income and$483,000 lower SBA PPP loan referral fees. During the third quarter of 2021, the Bank sold$12.0 million of SBA loans for a net gain of$1.2 million , compared to the sales of$14.7 million of SBA loans for a net gain of$1.5 million during the second quarter of 2021. Additionally, during the third quarter of 2021, the Bank sold$161.6 million of investment securities for a net gain of$4.2 million , compared to the sales of$280.2 million of investment securities for a net gain of$5.1 million in the second quarter of 2021. Noninterest income for the third quarter of 2021 increased$3.3 million , compared to the third quarter of 2020. The increase was primarily due to a$4.5 million increase in trust custodial account fees, a$3.0 million increase in net gain from sales of investment securities, a$1.9 million increase in other income, and a$996,000 increase in earnings on BOLI, partially offset by a$8.4 million decrease in net gain from the sales of loans. The net gain from sales of loans for the third quarter of 2021 decreased from the same period last year primarily due to the sales of$12.0 million of SBA loans for a net gain of$1.2 million , compared with the sales of$1.16 billion SBA PPP loans for a net gain of$19.0 million in the third quarter of 2020, offset by sales of$96.2 million of other loans for a net loss of$9.4 million during the third quarter of 2020. For the first nine months of 2021, noninterest income totaled$80.6 million , an increase of$32.4 million from$48.1 million for the first nine months of 2020. The increase was primarily related to a$17.2 million increase in trust custodial account fees following the Opus acquisition, a$4.4 million increase in net gain from sales of investment securities, a$3.7 million increase in escrow and exchange fee income following the Opus acquisition, a$2.9 million increase in earnings from BOLI largely due to a$150.0 million addition to BOLI, a$1.9 million increase in service charges on deposit accounts, and a$1.0 million increase in debit card interchange fee income, partially offset by a$5.2 million decrease in net gain from the sales of loans. In addition, other income increased$6.3 million primarily due to a$4.3 million increase in equity investment income and$2.9 million of SBA PPP loan referral fees. 109 --------------------------------------------------------------------------------
Noninterest Expense
The following table presents the components of noninterest expense for the periods indicated:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2021 2020 2021 2020
Noninterest expense
Compensation and benefits $ 53,592 $
53,474
12,611 12,240 12,373 36,831 30,028
Data processing 6,296 5,765 6,783 17,889 14,501
Other real estate owned operations, net - - (17) - 6
FDIC insurance premiums 1,392 1,312 1,145 3,885 2,358
Legal and professional services 4,563 4,186 5,108 12,684 11,328
Marketing expense 2,008 1,490 1,718 5,096 4,449
Office expense 1,076 1,589 2,389 4,494 5,025
Loan expense 1,332 1,165 802 3,612 2,447
Deposit expense 3,974 3,985 4,728 11,818 14,674
Merger-related expense - - 2,988 5 44,058
Amortization of intangible assets 3,912 4,001 4,538 12,056 12,567
Other expense 5,284 5,289 5,003 15,041 11,331
Total noninterest expense $ 96,040 $ 94,496 $ 98,579 $ 283,025 $ 281,180 Noninterest expense totaled
Noninterest expense decreased by$2.5 million compared to the third quarter of 2020. The decrease was primarily due to$3.0 million of merger-related expense for the third quarter of 2020 relating to the Opus acquisition. Excluding merger-related expense, noninterest expense increased$449,000 compared to the third quarter of 2020, primarily due to a$2.6 million increase in compensation and benefits, partially offset by a$1.3 million decrease in office expense. Noninterest expense totaled$283.0 million for the first nine months of 2021, an increase of$1.8 million , compared with the first nine months of 2020. The increase was driven primarily by increases of$31.2 million in compensation and benefits,$6.8 million in premises and occupancy,$3.7 million in other expense,$3.4 million in data processing,$1.5 million inFDIC insurance premiums, and$1.4 million in legal and professional services, all impacted by the additional operations, personnel, branches, and divisions retained with the acquisition of Opus, partially offset by a$44.1 million decrease in merger-related expense relating to the Opus acquisition. The Company's efficiency ratio was 47.5% for the third quarter of 2021, compared to 49.4% for the second quarter of 2021 and 47.4% for the third quarter of 2020. The Company's efficiency ratio was 48.5% for the first nine months of 2021, compared to 50.4% for the first nine months of 2020. 110 --------------------------------------------------------------------------------
Income Taxes
For the three months endedSeptember 30, 2021 ,June 30, 2021 , andSeptember 30, 2020 , income tax expense was$32.8 million ,$35.3 million , and$23.9 million , respectively, and the effective income tax rate was 26.7%, 26.8%, and 26.5%, respectively. Our effective tax rate for the three months endedSeptember 30, 2021 differs from the 21% federal statutory rate due to the impact of state taxes as well as various permanent tax differences, including tax-exempt income from municipal securities, BOLI income, tax credits from low-income housing tax credit investments, and the exercise of stock options and vesting of other stock-based compensation. The total amount of unrecognized tax benefits was$1.7 million and$255,000 as ofSeptember 30, 2021 andDecember 31, 2020 , respectively, and was primarily comprised of unrecognized tax benefits related to the Opus acquisition in 2020. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was$749,000 and$184,000 atSeptember 30, 2021 andDecember 31, 2020 , respectively. The Company does not believe that the unrecognized tax benefits will change significantly within the next twelve months. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued for$28,000 and$22,000 of such interest atSeptember 30, 2021 andDecember 31, 2020 , respectively. No amounts for penalties were accrued. The Company and its subsidiaries are subject toU.S. federal income tax, as well as state income and franchise taxes in multiple state jurisdictions. The statute of limitations for the assessment of taxes related to the consolidated federal income tax returns is closed for all tax years up to and including 2016. The expiration of the statute of limitations for the assessment of taxes related to the various state income and franchise tax returns varies by state. The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carryback years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Based on the analysis, the Company has determined that a valuation allowance against capital loss carryforward of$170,000 was required as ofSeptember 30, 2021 as it is more likely that not that the Company would not generate future capital gains to offset the capital loss carryforward. Except for the valuation allowance against the capital loss carryforward of$170,000 , a valuation allowance for deferred tax assets was not required as ofSeptember 30, 2021 andDecember 31, 2020 . 111 --------------------------------------------------------------------------------
FINANCIAL CONDITION
AtSeptember 30, 2021 , assets totaled$21.01 billion , an increase of$1.27 billion , or 6.4%, from$19.74 billion atDecember 31, 2020 . The increase was primarily due to increases in investment securities, total loans, and BOLI of$925.5 million ,$753.9 million , and$154.6 million , respectively, partially offset by a$558.4 million decrease in cash and cash equivalents. The increase in BOLI was due to a$150 million purchase of additional BOLI inJune 2021 .
Loans
Loans held for investment totaled$13.98 billion atSeptember 30, 2021 , an increase of$746.4 million , or 5.6%, from$13.24 billion atDecember 31, 2020 . The increase was driven by an increase in loans funded during the first nine months of 2021, partially offset by loan maturities and prepayments. Business line average utilization rates decreased from 35.28% for the fourth quarter of 2020 to 33.12% for the third quarter of 2021. SinceDecember 31, 2020 , investor loans secured by real estate increased$645.2 million , business loans secured by real estate increased$125.0 million , commercial loans increased$65.0 million , and retail loans decreased$88.8 million . Loans held for sale were$8.1 million atSeptember 30, 2021 , which primarily represent the guaranteed portion of SBA loans that the Bank originates for sale, and increased by$7.5 million from$601,000 atDecember 31, 2020 . The total end-of-period weighted average interest rate on loans, net of fees and discounts, atSeptember 30, 2021 was 4.03%, compared to 4.27% atDecember 31, 2020 . The decrease reflects the impact of lower rates on new originations and the continued impact from prepayments of higher rate loans. 112 -------------------------------------------------------------------------------- The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio, and gives the weighted average interest rate by loan category at the dates indicated: September 30, 2021 December 31, 2020 Weighted Weighted Percent Average Percent Average (Dollars in thousands) Amount of Total Interest Rate Amount of Total Interest Rate Investor loans secured by real estate CRE non-owner-occupied$ 2,823,065 20.2 % 4.24 %$ 2,675,085 20.2 % 4.35 % Multifamily 5,705,666 40.8 3.81 5,171,356 39.1 4.04 Construction and land 292,815 2.1 4.94 321,993 2.4 5.60 SBA secured by real estate 49,446 0.3 4.98 57,331 0.4 5.01 Total investor loans secured by real estate 8,870,992 63.4 3.99 8,225,765 62.1 4.21 Business loans secured by real estate CRE owner-occupied 2,242,164 16.0 4.16 2,114,050 16.0 4.45 Franchise real estate secured 354,481 2.6 4.70 347,932 2.6 5.07 SBA secured by real estate 69,937 0.5 5.28 79,595 0.6 5.21 Total business loans secured by real estate 2,666,582 19.1 4.26 2,541,577 19.2 4.56 Commercial loans Commercial and industrial 1,888,870 13.5 3.64 1,768,834 13.4 3.85 Franchise non-real estate secured 392,950 2.8 4.91 444,797 3.4 5.40 SBA non-real estate secured 12,732 0.1 5.62 15,957 0.1 5.62 Total commercial loans 2,294,552 16.4 3.86 2,229,588 16.9 4.16 Retail loans Single family residential 144,309 1.0 4.14 232,574 1.8 4.28 Consumer 6,426 0.1 4.81 6,929 - 5.56 Total retail loans 150,735 1.1 4.17 239,503 1.8 4.31 Gross loans held for investment (1) 13,982,861 100.0 % 4.03 13,236,433 100.0 % 4.27 Allowance for credit losses for loans held for investment (211,481) (268,018) Loans held for investment, net$ 13,771,380 $ 12,968,415 Total unfunded loan commitments$ 2,504,188 $ 1,947,250 Loans held for sale, at lower of cost or fair value $ 8,100 $ 601
______________________________
(1) Includes net deferred origination fees of$3.0 million and$2.6 million , and unaccreted fair value net purchase discounts of$85.0 million and$113.8 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. 113 -------------------------------------------------------------------------------- Delinquent Loans. When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally initiate proceedings to pursue our remedies under the loan documents. For loans secured by real estate, we record a notice of default and, after providing the required notices to the borrower, commence foreclosure proceedings. If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale where we generally acquire title to the property. Loans delinquent 30 or more days as a percentage of loans held for investment were 0.14% atSeptember 30, 2021 , compared to 0.10% atDecember 31, 2020 . The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated: 30 - 59 Days 60 - 89 Days 90 Days or More Total Principal Principal Principal Principal # of Balance # of Balance # of Balance # of Balance (Dollars in thousands) Loans of Loans Loans of Loans Loans of Loans Loans of Loans AtSeptember 30, 2021 Investor loans secured by real estate CRE non-owner-occupied - $ - - $ - 3$ 10,268 3$ 10,268 SBA secured by real estate - - 1 629 2 347 3 976 Total investor loans secured by real estate - - 1 629 5 10,615 6 11,244 Business loans secured by real estate CRE owner-occupied - - - - 3 4,978 3 4,978 SBA secured by real estate - - - - 1 441 1 441 Total business loans secured by real estate - - - - 4 5,419 4 5,419 Commercial loans Commercial and industrial 4 654 1 14 3 1,816 8 2,484 SBA non-real estate secured 1 74 1 293 1 664 3 1,031 Total commercial loans 5 728 2 307 4 2,480 11 3,515 Total 5$ 728 3$ 936 13$ 18,514 21$ 20,178 Delinquent loans to loans held for investment 0.01 % 0.01 % 0.12 % 0.14 % . . 114
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30 - 59 Days 60 - 89 Days 90 Days or More Total
Principal Principal Principal Principal
# of Balance # of Balance # of Balance # of Balance
(Dollars in thousands) Loans of Loans Loans of Loans Loans of Loans Loans of Loans
At December 31, 2020
Investor loans secured by real
estate
CRE non-owner-occupied - $ - - $ - 2 $ 757 2 $ 757
Multifamily 1 1 - - - - 1 1
SBA secured by real estate - - - - 3 1,257 3 1,257
Total investor loans secured by
real estate 1 1 - - 5 2,014 6 2,015
Business loans secured by real
estate
CRE owner-occupied - - - - 4 5,304 4 5,304
SBA secured by real estate 1 486 - - 5 1,073 6 1,559
Total business loans secured by
real estate 1 486 - - 9 6,377 10 6,863
Commercial loans
Commercial and industrial 10 428 2 57 6 2,898 18 3,383
SBA non-real estate secured 2 338 - - 1 707 3 1,045
Total commercial loans 12 766 2 57 7 3,605 21 4,428
Retail loans
Single family residential 1 15 - - - - 1 15
Consumer 1 1 - - - - 1 1
Total retail loans 2 16 - - - - 2 16
Total 16 $ 1,269 2 $ 57 21 $ 11,996 39 $ 13,322
Delinquent loans to loans held for
investment 0.01 % - % 0.09 % 0.10 %
115--------------------------------------------------------------------------------
Troubled Debt Restructurings
We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest-only payments, and, in limited cases, concessions to the outstanding loan balances. These loans are classified as TDRs. As ofSeptember 30, 2021 , there were$17.6 million loans reported as TDRs, compared with no TDR loans as ofDecember 31, 2020 . During the three and nine months endedSeptember 30, 2021 , there were six loans totaling$17.6 million modified as TDRs, which are comprised of three CRE owner-occupied loans and one C&I loan totaling$5.2 million belonging to one borrower relationship with the terms modified due to bankruptcy and two franchise non-real estate secured loans totaling$12.3 million belonging to another borrower relationship with the terms modified for payment deferral. During the three and nine months endedSeptember 30, 2021 , the three CRE owner-occupied loans and one C&I loan classified as TDRs were in payment default and all TDRs were on nonaccrual status as ofSeptember 30, 2021 . During the three and nine months endedSeptember 30, 2020 , there were no TDRs that experienced payment defaults after modifications within the previous 12 months. In accordance with the CARES Act, the Company implemented various loan modification programs beginning inApril 2020 to provide its borrowers relief from the economic impacts of COVID-19 and determined none of the COVID-19 related loan modifications need to be characterized as TDRs. As ofSeptember 30, 2021 , no loans were classified as a COVID-19 modification under Section 4013 of the CARES Act, and no loans were in-process for potential modification. AtDecember 31, 2020 , 52 loans totaling$79.5 million , or 0.60% of loans held for investment, remained within their modification period, of which$20.2 million of loans had migrated to the substandard risk grade. No loans were in-process for potential modification as ofDecember 31, 2020 . See Note 6 - Loans Held for Investment for additional information.
Nonperforming Assets
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), OREO, and other repossessed assets owned. It is our general policy to place a loan on nonaccrual status when the loan becomes 90 days or more past due or when collection of principal or interest appears doubtful. Nonperforming assets totaled$35.1 million , or 0.17% of total assets, atSeptember 30, 2021 , an increase from$29.2 million , or 0.15% of total assets, atDecember 31, 2020 . There was no other real estate owned atSeptember 30, 2021 andDecember 31, 2020 . The increase in nonperforming assets during the nine month period endingSeptember 30, 2021 was primarily attributable to$11.7 million of nonperforming loans added since the end of 2020, primarily CRE non-owner occupied and franchise non-real estate secured loans, partially offset by loan charge-offs and repayments during the nine months endedSeptember 30, 2021 . The Company had no loans 90 days or more past due and accruing atSeptember 30, 2021 andDecember 31, 2020 . 116 -------------------------------------------------------------------------------- The following table sets forth our composition of nonperforming assets at the dates indicated: (Dollars in thousands) September 30, 2021 December 31, 2020 Nonperforming assets Investor loans secured by real estate CRE non-owner-occupied $ 12,179 $ 2,792 SBA secured by real estate 976 1,257 Total investor loans secured by real estate 13,155 4,049 Business loans secured by real estate CRE owner-occupied 4,978 6,083 SBA secured by real estate 604 1,143 Total business loans secured by real estate 5,582 7,226 Commercial loans Commercial and industrial 2,259 3,974 Franchise non-real estate secured 13,419 13,238 SBA non-real estate secured 664 707 Total commercial loans 16,342 17,919 Retail loans Single family residential 11 15 Total retail loans 11 15 Total nonperforming loans 35,090 29,209 Other real estate owned - - Other assets owned - - Total $ 35,090 $ 29,209 Allowance for credit losses $ 211,481$ 268,018 Allowance for credit losses as a percent of total nonperforming loans 603 % 918 % Nonperforming loans as a percent of loans held for investment 0.25 0.22 Nonperforming assets as a percent of total assets 0.17 0.15 TDRs included in nonperforming loans $ 17,557 - 117
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Allowance for Credit Losses
The Company determines the ACL for loans and unfunded loan commitments in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans and unfunded loan commitments at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. Loans that have been deemed by management to no longer possess similar risk characteristics are evaluated individually under a discounted cash flow approach, and loans that have been deemed collateral dependent are evaluated individually based on the expected estimated fair value of the underlying collateral. The Company measures the ACL on commercial real estate and commercial loans using a discounted cash flow approach, using the loan's effective interest rate, while the ACL for retail loans is based on a historical loss rate model. The discounted cash flow methodology relies on several significant components essential to the development of estimates for future cash flows on loans and unfunded commitments. These components consist of: (i) the estimated probability of default, (ii) the estimated loss given default, which represents the estimated severity of the loss when a loan is in default, (iii) estimates for prepayment activity on loans, and (iv) the estimated exposure to the Company at default. With respect to unfunded loan commitments, the Company's incorporates estimates for utilization, based on historical loan data. Probability of default and loss given default for investor loans secured by real estate are derived from a third party, using proxy loan information, and loan and property level attributes. Additionally, loss given default for these loans incorporates an estimate for the loss severity associated with loans where the borrower fails to meet their debt obligation at maturity. External factors that impact loss given default for commercial real estate loans include: changes in the index for CRE pricing, GDP growth rate, unemployment rates, and the Moody's Baa rating corporate debt interest rate spread. For business loans secured by real estate and commercial loans, probability of default is based on an internally developed rating scale that assigns probability of default based on the Company's internal risk grades for each loan. Changes in risk grades for these loans result in changes in probability of default. The Company obtains loss given default for these loans from a third party that has a considerable database of credit related information specific to the financial services industry and the type of loans within these segments.
Probability of default for both investor and business real estate loans, as well as commercial loans are heavily impacted by current and expected economic conditions.
The ACL for retail loans is based on a historical loss rate model, which incorporates loss rates derived from a third party that has a considerable database of credit related information for retail loans. Loss rates for retail loans are dependent upon loan level and external factors such as: FICO, vintage, geography, unemployment rates, and changes in consumer real estate prices. The Company's ACL includes assumptions concerning current and future economic conditions using reasonable and supportable forecasts and how those forecasts are expected to impact a borrower's ability to satisfy their obligation to the Bank and the ultimate collectability of future cash flows over the life of a loan. The Company uses economic scenarios fromMoody's Analytics . These scenarios are based on past events, current conditions, and the likelihood of future events occurring. Management periodically evaluates economic scenarios, determines whether to utilize multiple probability-weighted scenarios, and if multiple scenarios are utilized, evaluates and determines the weighting for each scenario used in the Company's ACL model, and thus the scenarios and weightings of each scenario may change in future periods. Economic scenarios as well as assumptions within those scenarios can vary based on changes in current and expected economic conditions and due to the occurrence of specific events such as the ongoing COVID-19 pandemic. 118 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , the Company's ACL model used three probability-weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The weightings assigned to each scenario were as follows: the base-case scenario, or most likely scenario, was assigned a weighting of 40%, while the upside and downside scenarios were each assigned a weighting of 30%. These economic scenarios include the current and estimated future impact associated with the ongoing COVID-19 pandemic. The Company evaluated the weightings of each economic scenario in the current period with the assistance ofMoody's Analytics , and determined the current weightings of 40% for the base-case scenario, and 30% for each of the upside and downside scenarios appropriately reflect the likelihood of outcomes for each scenario given the current economic environment. The use of three probability-weighted scenarios atSeptember 30, 2021 and the weighting assigned to each scenario is consistent with the approach used in the Company's ACL model atJune 30, 2021 andDecember 31, 2020 . The Company, with the assistance ofMoody's Analytics , currently forecasts probability of default and loss given default based on economic scenarios over a two-year period, which we believe is a reasonable and supportable period. Beyond this point, probability of default and loss given default revert to their long-term averages. The Company has reflected this reversion over a period of three years in each of its economic scenarios used to generate the overall probability-weighted forecast.
The economic forecasts used in the Company's ACL model cover all states and metropolitan areas in the Unites States, and reflect changes in economic variables such as: GDP growth, interest rates, employment rates, changes in wages, retail sales, industrial production, metrics associated with the single-family and multifamily housing markets, vacancy rates, changes in equity market prices, and energy markets.
It is important to note that the Company's ACL model relies on multiple economic variables, which are used under several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Company has identified certain economic variables that have significant influence in the Company's model for determining the ACL. As ofSeptember 30, 2021 , the Company's ACL model incorporated the following assumptions for key economic variables in the base-case, upside and downside scenarios: Base-case Scenario: •U.S. unemployment declines to approximately 4.5% by the end of 2021. Unemployment continues to decline in 2022 to approximately 3.4% by the end of 2022. The rate of unemployment holds relatively constant at approximately 3.5% throughout 2023. •U.S. real GDP experiences annualized growth of approximately 7% through the remainder of 2021. Growth in real GDP for 2022 under this scenario decelerates from an annualized rate of approximately 5% in early 2022 to approximately 1% by the end of 2022. Annualized real GDP growth of approximately 2-3% in 2023. •CRE index experiences a slight decline throughout the remainder of 2021, with an annualized rate of decline of approximately -2% for 2021. The CRE index returns to moderate levels of growth beginning in the first quarter of 2022, with the annualized rate of growth increasing from 2% in early 2022 to 11% by the end of 2022. The CRE index is anticipated to increase approximately 7-9% on an annualized basis in 2023. 119
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Upside Scenario:
•U.S. unemployment declines to approximately 4.3% by the end of 2021. The unemployment rates holds at approximately 3% throughout all of 2022 and 2023. •U.S. real GDP experiences annualized growth of approximately 11% through the remainder of 2021. Growth in real GDP throughout 2022 decelerates from an annualized rate of approximately 7% in early 2022 to approximately 1% by the end of 2022. Annualized real GDP growth of approximately 1-2% in 2023. •CRE index remains relatively unchanged throughout the remainder of 2021. The CRE index returns growth in 2022, with the annualized rate of growth increasing from 5% in early 2022 to 14% by the end of 2022. The CRE index is anticipated to experience a decelerating annualized rate of growth from approximately 10% in early 2023 to approximately 7% by the end of 2023.
Downside Scenario:
•U.S. unemployment increases to approximately 6.7% by the end of 2021. Unemployment remains elevated in 2022 at approximately 8-9%. Unemployment declines throughout 2023 to approximately 6.8% at the end of 2023. •U.S. real GDP experiences a decline of approximately -3.5% for the remainder of 2021. Real GDP returns to modest annualized growth in the third quarter of 2022, with growth of approximately 1% for the remainder of 2022. Annualized real GDP fluctuates within a range of approximately 2-4% throughout 2023. •CRE index experiences an annualized rate of decline throughout the remainder 2021 of approximately -5%. The CRE index is estimated to experience decelerating declines throughout 2022, with the annualized rate of decline slowing from approximately -16% in early 2022 to approximately -11% by the end of 2022. Under this scenario, the CRE index is anticipated to experience accelerating annualized growth throughout 2023 to approximately 18% by the end of 2023. The Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not be limited to, factors such as: (i) management's assessment of economic forecasts used in the model and how those forecasts align with management's overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management's overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL. As ofSeptember 30, 2021 , qualitative adjustments included in the ACL totaled$6.5 million . These adjustments primarily relate to continued uncertainty concerning the strength of the economic recovery and how it may impact certain classes of loans in the loan portfolio. Management determined through additional review that the uneven recovery and continued government interventions are potentially underestimating the impact the ongoing COVID-19 pandemic may have on certain segments and classes of the loan portfolio, such as loans within the SBA, construction, franchise, and CRE owner-occupied classifications. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods. 120
-------------------------------------------------------------------------------- The decrease in the ACL for loans held for investment during the three months endedSeptember 30, 2021 of$21.3 million was comprised of a$19.5 million provision recapture and$1.8 million in net charge-offs. The provision recapture for the three months endedSeptember 30, 2021 was reflective of improving economic forecasts employed in the Company's ACL model relative to prior periods and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the quarter. The decrease in the ACL for the nine months endedSeptember 30, 2021 of$56.5 million was comprised of a$52.4 million provision recapture and$4.2 million in net charge-offs. The provision recapture for the nine months endedSeptember 30, 2021 was also reflective of improving economic forecasts employed in the Company's ACL model and the favorable asset quality profile of the loan portfolio, partially offset by an increase in loans held for investment during the first nine months of 2021. The increase in the ACL for the three months endedSeptember 30, 2020 of$232,000 was comprised of a$4.7 million provision for credit losses and$4.5 million in net charge-offs. The provision for credit losses for the three months endedSeptember 30, 2020 is reflective of unfavorable, but improving economic forecasts used in the Company's ACL model. The increase in the ACL for the nine months endedSeptember 30, 2020 of$246.8 million is reflective of a$55.7 million addition associated with the Company's adoption of ASC 326 onJanuary 1, 2020 , which was recorded through a cumulative effect adjustment to retained earnings, as well as a$180.3 million provision for credit losses on loans, net charge-offs of$10.5 million , and the establishment of$21.2 million in net ACL for PCD loans previously mentioned. The provision for credit losses of$180.3 million during the nine months endedSeptember 30, 2020 is inclusive of$75.9 million related to the initial ACL required for the acquisition of non-PCD loans in the Opus acquisition. Under ASC 326, the Company is required to record an ACL for estimates of life-time credit losses on loans at the time of acquisition. For non-PCD loans, the initial ACL is established through a charge to provision for credit losses at the time of acquisition. However, the ACL for PCD loans is established through an adjustment to the loan's purchase price (or initial fair value). Excluding the impact of the Opus acquisition, the provision for credit losses for the nine months endedSeptember 30, 2020 is also reflective of unfavorable economic forecasts used in the Company's ACL model driven by the COVID-19 pandemic. No assurance can be given that we will not, in any particular period, sustain credit losses that exceed the amount reserved, or that subsequent evaluation of our loan portfolio, in light of prevailing factors, including economic conditions that may adversely affect our market area or other circumstances, will not require significant increases in the ACL. In addition, regulatory agencies, as an integral part of their examination process, periodically review our ACL and may require us to recognize additional provisions to increase the allowance and record charge-offs in anticipation of future losses. AtSeptember 30, 2021 , the Company believes the ACL was adequate to cover current expected credit losses in the loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the ACL change, including the size and composition of the loan portfolio, the credit quality of the loan portfolio, as well as forecasts of future economic conditions, the Company's estimate of current expected credit losses could also significantly change and affect the level of future provisions for credit losses. 121 -------------------------------------------------------------------------------- The following table sets forth the Company's ACL, its corresponding percentage of the loan category balance, and the percentage of loan balance to total gross loans in each of the loan categories listed for the periods indicated: September 30, 2021 December 31, 2020 Allowance as a % % of Loans in Allowance as a % % of Loans in of Category Category to of Category Category to (Dollars in thousands) Amount Total Total Loans Amount Total Total Loans Investor loans secured by real estate CRE non-owner-occupied$ 42,467 1.50 % 20.2 %$ 49,176 1.84 % 20.2 % Multifamily 52,164 0.91 40.8 62,534 1.21 39.1 Construction and land 8,017 2.74 2.1 12,435 3.86 2.4 SBA secured by real estate 3,879 7.84 0.3 5,159 9.00 0.4 Total investor loans secured by real estate 106,527 1.20 63.4 129,304 1.57 62.1 Business loans secured by real estate CRE owner-occupied 33,679 1.50 16.0 50,517 2.39 16.0 Franchise real estate secured 9,626 2.72 2.6 11,451 3.29 2.6 SBA secured by real estate 5,104 7.30 0.5 6,567 8.25 0.6 Total business loans secured by real estate 48,409 1.82 19.1 68,535 2.70 19.2 Commercial loans Commercial and industrial 37,595 1.99 13.5 46,964 2.66 13.4 Franchise non-real estate secured 17,518 4.46 2.8 20,525 4.61 3.4 SBA non-real estate secured 632 4.96 0.1 995 6.24 0.1 Total commercial loans 55,745 2.43 16.4 68,484 3.07 16.9 Retail loans Single family residential 529 0.37 1.0 1,204 0.52 1.8 Consumer loans 271 4.22 0.1 491 7.09 - Total retail loans 800 0.53 1.1 1,695 0.71 1.8 Total$ 211,481 1.51 % 100.0 %$ 268,018 2.02 % 100.0 % AtSeptember 30, 2021 , the ratio of allowance for credit losses to loans held for investment was 1.51%, a decrease from 2.02% atDecember 31, 2020 . Our unamortized fair value discount on the loans acquired totaled$85.0 million , or 0.60% of total loans held for investment, atSeptember 30, 2021 , compared to$113.8 million , or 0.85% of total loans held for investment, atDecember 31, 2020 . 122
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The following table sets forth the activity within the Company's allowance for
credit losses in each of the loan categories listed for the periods indicated:
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2021 2020 2021 2020
Balance, beginning of period $ 232,774 $ 266,999
- - - - 55,686
Initial ACL recorded for PCD Loans - - - - 21,242
Provision for credit losses (19,543) (33,131) 4,702 (52,359) 180,341Charge-offs
Investor loans secured by real estate CRE non-owner-occupied - - (443) (154) (830) Construction and land - - (377) - (377) SBA secured by real estate (158) - (145) (423) (699) Business loans secured by real estate CRE owner-occupied - - (1,739) - (1,739) SBA secured by real estate - - - (98) (315) Commercial loans Commercial and industrial (84) (3,290) (2,437) (4,653) (5,213) Franchise non-real estate secured (2,398) - (207) (2,554) (1,434) SBA non-real estate secured - - (10) - (803) Retail loans Single family residential - - - - (62) Consumer loans - - (129) - (137) Total charge-offs (2,640) (3,290) (5,487) (7,882) (11,609) Recoveries
Investor loans secured by real estate
SBA secured by real estate - - 34 - 34 Business loans secured by real estate CRE owner-occupied 14 15 21 44 44 SBA secured by real estate 50 80 76 130 147 Commercial loans Commercial and industrial 729 2,098 10 3,428 37 Franchise non-real estate secured 80 - 865 80 865 SBA non-real estate secured 15 2 8 19 13 Retail loans Single family residential 2 1 2 3 3 Consumer loans - - 1 - 2 Total recoveries 890 2,196 1,017 3,704 1,145 Net loan charge-offs (1,750) (1,094) (4,470) (4,178) (10,464) Balance, end of period$ 211,481 $ 232,774 $ 282,503 $ 211,481 $ 282,503 Ratios Annualized net charge-offs to average total loans, net 0.05 % 0.03 % 0.13 % 0.04 % 0.12 % Allowance for loan losses to loans held for investment at end of period 1.51 1.71 2.10 1.51 2.10 Allowance for loan losses to loans held for investment at end of period, excluding SBA PPP loans 1.51 1.71 2.10 1.51 2.10
________________________________________________
(1) EffectiveJanuary 1, 2020 , the allowance for credit losses is accounted for under ASC 326, which is reflective of estimated expected lifetime credit losses. Prior toJanuary 1, 2020 , the allowance was accounted for under ASC 450 and ASC 310, which is reflective of probable incurred losses as of the balance sheet date. 123 --------------------------------------------------------------------------------
We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled$4.88 billion atSeptember 30, 2021 , an increase of$925.5 million , or 23.4%, from$3.95 billion atDecember 31, 2020 . The increase was primarily the result of$2.08 billion in purchases, primarily mortgage-backed securities, partially offset by$617.1 million in sales,$456.8 million in principal payments, amortization, and redemptions, and a$79.7 million decrease in mark-to-market fair value adjustments. During the third quarter of 2021, the Company reassessed classification of certain investment securities and transferred approximately$157.6 million of municipal bonds from available-for-sale to held-to-maturity securities. The transfer of these securities was accounted for at fair value with a net carrying amount of$154.5 million and pre-tax unrealized loss of$3.2 million reflected as a discount on the date of transfer. This discount, as well as the related unrealized loss in accumulated other comprehensive income, is amortized into interest income as a yield adjustment through earnings over the remaining term of the securities. The amortization of the unrealized holding loss reported in accumulated other comprehensive income largely offsets the effect on interest income of the amortization of the discount. No gains or losses were recorded at the time of transfer. See Note 5 -Investment Securities to the consolidated financial statements in this Form 10-Q. EffectiveJanuary 1, 2020 , the Company adopted the new CECL accounting standard. The Company's assessment of held-to-maturity and available-for-sale investment securities as ofJanuary 1, 2020 indicated that an ACL was not required. The Company determined the likelihood of default on held-to-maturity investment securities was remote, and the amount of expected non-repayment on those investments was zero. The Company also analyzed available-for-sale investment securities that were in an unrealized loss position as ofJanuary 1, 2020 and determined the decline in fair value for those securities was not related to credit, but rather related to changes in interest rates and general market conditions. As ofSeptember 30, 2021 , the Company had an ACL of$11,000 for held-to-maturity investment securities. These securities were transferred from available-for-sale to held-to-maturity during the third quarter of 2021. The Company did not record an ACL for held-to-maturity investment securities atDecember 31, 2020 , because the likelihood of non-repayment is remote. As ofSeptember 30, 2021 andDecember 31, 2020 , there was no ACL for the Company's available-for-sale investment securities. There were no investment securities classified as PCD upon acquisition of Opus during the second quarter of 2020. We recorded no allowance for credit losses for available-for-sale or held-to-maturity investment securities during the nine months endedSeptember 30, 2020 . 124 -------------------------------------------------------------------------------- The following table sets forth the fair values and weighted average yields on our investment securities portfolio by contractual maturity at the date indicated: September 30, 2021 One Year More than One More than Five Years More than or Less to Five Years to Ten Years Ten Years Total Weighted Weighted Weighted Weighted Weighted Fair Average Fair Average Fair Average Fair Average Fair
Average
(Dollars in thousands) Value Yield Value Yield Value Yield Value Yield Value Yield Investment securities available-for-sale:U.S. Treasury $ - - %$ 31,734 2.45 %$ 47,608 1.18 % $ - - %$ 79,342 1.68 % Agency - - 353,184 0.92 134,426
1.43 42,483 1.32 530,093
1.08
Corporate 10,029 1.00 21,227 1.03 355,135 2.93 - - 386,391 2.77
Municipal bonds - - 3,731 2.46 96,849
1.81 1,155,286 2.09 1,255,866 2.07
Collateralized mortgage
obligations - - 41,631 0.46 223,612 0.95 396,988 1.19 662,231 1.06
Mortgage-backed securities - - 12,704 2.50 709,155 1.16 1,074,033 1.48 1,795,892 1.36
Total securities
available-for-sale 10,029 1.00 464,211 1.04 1,566,785 1.60 2,668,790 1.70 4,709,815 1.59
Investment securities
held-to-maturity:
Municipal bonds - - - - - - 152,163 2.09 152,163 2.09
Mortgage-backed securities - - - - - - 15,459 2.43 15,459 2.43
Other - - - - - - 1,532 0.97 1,532 0.97
Total securities held-to-maturity - - - - - - 169,154 2.11 169,154 2.11
Total securities $ 10,029 1.00 % $ 464,211 1.04 % $ 1,566,785 1.60 % $ 2,837,944 1.72 % $ 4,878,969 1.61 %
125--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Total liabilities were$18.17 billion atSeptember 30, 2021 , compared to$16.99 billion atDecember 31, 2020 . The increase of$1.18 billion , or 6.9%, fromDecember 31, 2020 was primarily due to a$1.26 billion increase in deposits, and a$119.0 million increase in FHLB advances, partially offset by a decrease of$171.1 million in subordinated debentures. Deposits. AtSeptember 30, 2021 , deposits totaled$17.47 billion , an increase of$1.26 billion , or 7.7%, from$16.21 billion atDecember 31, 2020 . Non-maturity deposits totaled$16.36 billion , or 93.6% of total deposits, an increase of$1.77 billion , or 12.1%, fromDecember 31, 2020 . The increase in deposits included$830.4 million in noninterest-bearing checking,$564.6 million in interest-bearing checking, and$374.6 million in money market/savings, primarily driven by an increase in business deposit account balances, partially offset by decreases of$358.4 million in retail certificates of deposit and$155.3 million in brokered certificates of deposit. The total end of period weighted average rate of deposits atSeptember 30, 2021 was 0.04%, a decrease from 0.18% atDecember 31, 2020 , principally driven by lower pricing across all deposit product categories as well as the improvement in deposit mix.
Our ratio of loans held for investment to deposits was 80.0% and 81.6% at
The following table sets forth the distribution of the Company's deposit accounts at the dates indicated and the weighted average interest rates as of the last day of each period for each category of deposits presented:
September 30, 2021 December 31, 2020
% of Total Weighted Average % of Total Weighted Average
(Dollars in thousands) Balance Deposits Rate Balance Deposits Rate
Noninterest-bearing checking $ 6,841,495 39.2 % - % $ 6,011,106 37.1 % - %
Interest-bearing deposits:
Checking 3,477,902 19.9 0.02 2,913,260 18.0 0.06
Money market 5,625,739 32.2 0.06 5,302,073 32.7 0.23
Savings 411,793 2.4 0.02 360,896 2.2 0.09
Time deposit accounts:
Less than 1.00% 1,054,186 6.0 0.22 928,830 5.7 0.32
1.00 - 1.99 52,383 0.3 1.49 579,570 3.6 1.49
2.00 - 2.99 6,321 - 2.23 118,358 0.7 2.34
3.00 - 3.99 180 - 3.45 46 - 4.00
4.00 - 4.99 - - - 38 - 4.30
5.00 and greater - - - - - -
Total time deposit accounts 1,113,070 6.4 0.29 1,626,842 10.0 0.88
Total interest-bearing deposits 10,628,504 60.8 0.07 10,203,071 62.9 0.28
Total deposits $ 17,469,999 100.0 % 0.04 % $ 16,214,177 100.0 % 0.18 %
At September 30, 2021 , we had $881.3 million in certificates of deposit with
balances of $100,000 or more, and $514.8 million in certificates of deposit with
balances of $250,000 or more with maturities as follows:
126
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At September 30, 2021
(Dollars in thousands) $100,000 through $250,000 Greater than $250,000 Total
Weighted % of Total Weighted % of Total Weighted % of Total
Maturity Period Amount Average Rate Deposits Amount Average Rate Deposits Amount Average Rate Deposits
Certificates of deposit Three months or less$ 75,369 0.37 % 0.43 %$ 336,590 0.15 % 1.93 %$ 411,959 0.19 % 2.36 % Over three months through 6 months 75,502 0.24 0.43 49,171 0.24 0.28 124,673 0.24
0.71
Over 6 months through 12 months 132,311 0.38 0.76 106,684 0.43 0.61 238,995 0.40 1.37 Over 12 months 83,317 0.34 0.48 22,331 0.41 0.13 105,648 0.36 0.60 Total$ 366,499 0.34 % 2.10 %$ 514,776 0.23 % 2.95 %$ 881,275 0.27 % 5.04 % 127
-------------------------------------------------------------------------------- Borrowings. AtSeptember 30, 2021 , total borrowings amounted to$480.4 million , a decrease of$52.1 million , or 9.8%, from$532.5 million atDecember 31, 2020 , primarily due to the redemption of$170.4 million in subordinated debentures, partially offset by increases of$119.0 million in FHLB advances. AtSeptember 30, 2021 , total borrowings represented 2.3% of total assets and had an end of period weighted average rate of 3.71%, compared with 2.7% of total assets at a weighted average rate of 5.16% atDecember 31, 2020 .
At
•Subordinated notes of$60.0 million at a fixed rate of 5.75% dueSeptember 3, 2024 (the "Notes I") and a carrying value of$59.6 million , net of unamortized debt issuance cost of$359,000 . Interest is payable semiannually at 5.75% per annum; •Subordinated notes of$125.0 million at 4.875% fixed-to-floating rate dueMay 15, 2029 (the "Notes II") and a carrying value of$123.1 million , net of unamortized debt issuance cost of$1.9 million . Interest is payable semiannually at an initial fixed rate of 4.875% per annum. From and includingMay 15, 2024 , but excluding the maturity date or the date of earlier redemption, the Notes II will bear interest at a floating rate equal to three-month LIBOR plus a spread of 2.50% per annum, payable quarterly in arrears; and •Subordinated notes of$150.0 million at 5.375% fixed-to-floating rate dueJune 15, 2030 (the "Notes III") and a carrying value of$147.7 million , net of unamortized debt issuance cost of$2.3 million . Interest on the Notes III accrue at a rate equal to 5.375% per annum from and includingJune 15, 2020 to, but excluding,June 15, 2025 , payable semiannually in arrears. From and includingJune 15, 2025 to, but excluding,June 15, 2030 or the earlier redemption date, interest will accrue at a floating rate per annum equal to a benchmark rate, which is expected to be three-month term SOFR, plus a spread of 517 basis points, payable quarterly in arrears.
For additional information about the subordinated notes, subordinated debentures, and trust preferred securities, see Note 9 - Subordinated Debentures to the consolidated financial statements in this Form 10-Q.
The following table sets forth certain information regarding the Company's borrowed funds at the dates indicated:
September 30, 2021 December 31, 2020
Weighted Weighted
(Dollars in thousands) Balance Average Rate Balance Average Rate
FHLB advances $ 150,000 0.15 % $ 31,000 1.53 %
Subordinated debentures 330,408 5.33 501,511 5.38
Total borrowings $ 480,408 3.71 % $ 532,511 5.16 %
Weighted average cost of
borrowings during the quarter 5.43 % 5.12 %
Borrowings as a percent of total assets 2.3 2.7
Stockholders' Equity. Total stockholders' equity was $2.84 billion as of
September 30, 2021 , a $91.5 million increase from $2.75 billion at December 31,
2020 . The current year increase in stockholders' equity was primarily due to
$255.1 million net income, partially offset by $90.7 million in cash dividends,
$59.1 million in comprehensive loss, and $18.1 million in repurchase of common
stock during the nine months ended September 30, 2021 .
Our book value per share increased to $30.08 at September 30, 2021 from $29.07
at December 31, 2020 . At September 30, 2021 , the Company's tangible common
equity to tangible assets ratio was 9.30%, a decrease from 9.40% at December 31,
2020 .
128
--------------------------------------------------------------------------------CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments. While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.
In addition to the interest payments on loans and investments as well as fees collected on the services we provide, our primary sources of funds generated during the first nine months of 2021 were from: •Principal payments on loans held for investment of$2.21 billion ; •Deposit growth of$1.26 billion ; •Proceeds of$630.4 million from the sale or maturity of securities available-for-sale; •Principal payments on securities of$436.7 million ; and •Increased FHLB borrowing of$119.0 million .
We used these funds to:
•Originate loans held for investment of
Our most liquid assets are unrestricted cash and short-term investments. The levels of these assets are dependent on our operating, lending, and investing activities during any given period. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. AtSeptember 30, 2021 , cash and cash equivalents totaled$322.3 million , and the market value of our investment securities available-for-sale totaled$4.71 billion . If additional funds are needed, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, theFederal Reserve Board's lending programs, as well as loan and investment securities sales. As ofSeptember 30, 2021 , the maximum amount we could borrow through the FHLB was$8.21 billion , of which$5.57 billion was remaining available for borrowing based on collateral pledged of$8.31 billion in real estate loans. AtSeptember 30, 2021 , we had$150.0 million in FHLB borrowings. AtSeptember 30, 2021 , we also had a$20.3 million line with the FRB discount window secured by investment securities as well as unsecured lines of credit aggregating to$340.0 million with other financial institutions from which to draw funds. As ofSeptember 30, 2021 , our liquidity ratio was 27.6%, which is above the Company's minimum policy requirement of 10.0%. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis. To the extent that 2021 deposit growth is not sufficient to satisfy our ongoing commitments to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, or make investments, we may access funds through our FHLB borrowing arrangement, unsecured lines of credit, or other sources. 129 -------------------------------------------------------------------------------- The Bank has a policy in place that permits the purchase of brokered funds, in an amount not to exceed 15% of total deposits or 12% of total assets, as a secondary source for funding. AtSeptember 30, 2021 , we had$5.6 million in brokered money market deposits which constituted 0.03% of total deposits and 0.03% of total assets at that date. The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity. The Corporation's primary sources of liquidity are dividends from the Bank. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation. Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations. During the nine months endedSeptember 30, 2021 , the Bank paid$90.5 million in dividends to the Corporation. The Corporation maintained a line of credit withU.S. Bank with availability of$15.0 million that matured inSeptember 2021 . The Corporation renewed the line of credit, extended the maturity date toSeptember 27, 2022 , and increased the aggregate principal amount to$25.0 million . This line of credit provides an additional source of liquidity at the Corporation level and had no outstanding balance atSeptember 30, 2021 .
During the second and third quarters of 2021, the Company redeemed the
subordinated debentures for an aggregate amount of
During 2021, the Corporation declared a quarterly dividend payment of$0.30 per share for the first quarter and$0.33 per share for each subsequent quarter. OnOctober 19, 2021 , the Company's Board of Directors declared a$0.33 per share dividend, payable onNovember 12, 2021 to stockholders of record as ofNovember 1, 2021 . The Corporation's Board of Directors periodically reviews whether to declare or pay cash dividends, taking into account, among other things, general business conditions, the Company's financial results, future prospects, capital requirements, legal and regulatory restrictions, and such other factors as the Corporation's Board of Directors may deem relevant. OnJanuary 11, 2021 , the Company's Board of Directors approved a new stock repurchase program, which authorized the repurchase of up to 4,725,000 shares of its common stock, representing approximately 5% of the Company's issued and outstanding shares of common stock and approximately$150 million of common stock as ofDecember 31, 2020 based on the closing price of the Company's common stock onDecember 31, 2020 . During the third quarter of 2021, the Company purchased 280,270 shares for a total of$11.2 million , or$39.82 per share, under this stock repurchase program. The total number of common stock shares repurchased during the nine months endedSeptember 30, 2021 under the program was 479,944 shares for a total of$18.1 million , or$37.61 per share. See Part II, Item 2 - Unregistered Sales ofEquity Securities and Use of Proceeds for additional information. 130
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Contractual Obligations and Off-Balance Sheet Commitments
Contractual Obligations. The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs.
The following schedule summarizes maturities and payments due on our obligations and commitments, excluding accrued interest, as of the date indicated:
September 30, 2021
More than 5
(Dollars in thousands) Less than 1 year 1 - 3 years 3 - 5 years years Total
Contractual obligations
FHLB advances $ 150,000 $ - $ - $ - $ 150,000
Subordinated debentures - 59,641 - 270,767 330,408
Certificates of deposit 975,205 78,183 7,152 52,530 1,113,070
Operating leases 20,326 37,758 21,643 10,531 90,258
Total contractual cash obligations $ 1,145,531 $
175,582
Off-Balance Sheet Commitments. We utilize off-balance sheet commitments in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate real estate, business, and other loans held for investment, undisbursed loan funds, lines and letters of credit, and commitments to purchase loans and investment securities for portfolio. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Commitments to originate loans held for investment are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit on home equity and commercial loans include committed funds not disbursed. Letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. As ofSeptember 30, 2021 , we had commitments to extend credit on existing lines and letters of credit of$2.50 billion , compared to$1.95 billion atDecember 31, 2020 .
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:
September 30, 2021
Less than 1 More than 5
(Dollars in thousands) year 1 - 3 years 3 - 5 years years Total
Other unused commitments
Commercial and industrial $ 731,497 $ 882,525 $ 99,230 $ 96,328 $ 1,809,580
Construction 44,295 253,621 83,381 - 381,297
Agribusiness and farmland 15,075 36,242 570 14,503 66,390
Home equity lines of credit 3,160 5,813 1,817 54,633 65,423
Standby letters of credit 45,074 - - - 45,074
All other 49,798 27,005 3,447 56,174 136,424
Total commitments $ 888,899 $1,205,206$ 188,445 $ 221,638 $ 2,504,188 131
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Regulatory Capital Compliance
The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from theFederal Reserve , the Company and the Bank was categorized as "well capitalized." There are no conditions or events since that notification that management believes have changed the Bank's categorization. Final comprehensive regulatory capital rules forU.S. banking organizations pursuant to the capital framework of theBasel Committee on Banking Supervision , generally referred to as "Basel III", became effective for the Company and the Bank onJanuary 1, 2015 , subject to phase-in periods for certain of their components and other provisions. The most significant of the provisions of the new capital rules, which apply to the Company and the Bank are as follows: the phase-out of trust preferred securities from Tier 1 capital, the higher risk-weighting of high volatility and past due real estate loans and the capital treatment of deferred tax assets and liabilities above certain thresholds. BeginningJanuary 1, 2016 , Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. The capital conservation buffer fully phased in at 2.50% byJanuary 1, 2019 . AtSeptember 30, 2021 , the Company and Bank are in compliance with the capital conservation buffer requirement and exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of the fully phased-in capital conservation buffer, of 7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as "well-capitalized" for purposes of the federal bank regulatory prompt corrective action regulations. InFebruary 2019 , theU.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase-in over a three-year period the Day 1 adverse regulatory capital effects of CECL accounting standard. Additionally, inMarch 2020 , theU.S. Federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on theU.S. economy as a result of the COVID-19 pandemic. The capital relief in the interim is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two years of the transition period using a 25% scaling factor. The cumulative difference at the end of the second year of the transition period is then phased in to regulatory capital at 25% per year over a three-year transition period. The final rule was adopted and became effective inSeptember 2020 . As a result, entities may gradually phase in the full effect of CECL on regulatory capital over a five-year transition period. The Company implemented the CECL model commencingJanuary 1, 2020 and elected to phase in the full effect of CECL on regulatory capital over the five-year transition period. 132 -------------------------------------------------------------------------------- For regulatory capital purposes, the Corporation's subordinated debt is included in Tier 2 capital. Total capital ratio of the Company and the Bank were impacted by the redemptions of subordinated debentures during the second and third quarter of 2021 and remained above the regulatory minimum required for capital adequacy purposes, inclusive of capital conservation buffer. See Note 9 - Subordinated Debentures for additional information.
As defined in applicable regulations and set forth in the table below, the Corporation and the Bank continue to exceed the regulatory capital minimum requirements and the Bank continues to exceed the "well capitalized" standards and the required conservation buffer at the dates indicated:
Minimum Required
for Capital
Adequacy Purposes
Inclusive of
Capital Minimum Required
Conservation For Well Capitalized
Actual Buffer Requirement
September 30, 2021
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio 9.85% 4.00% N/A
Common equity tier 1 capital ratio 11.96% 7.00% N/A
Tier 1 capital ratio 11.96% 8.50% N/A
Total capital ratio 14.56% 10.50% N/A
Pacific Premier Bank
Tier 1 leverage ratio 11.38% 4.00% 5.00%
Common equity tier 1 capital ratio 13.81% 7.00% 6.50%
Tier 1 capital ratio 13.81% 8.50% 8.00%
Total capital ratio 14.61% 10.50% 10.00%
Minimum Required
for Capital
Adequacy Purposes
Inclusive of
Capital Minimum Required
Conservation For Well Capitalized
Actual Buffer Requirement
December 31, 2020
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio 9.47% 4.00% N/A
Common equity tier 1 capital ratio 12.04% 7.00% N/A
Tier 1 capital ratio 12.04% 8.50% N/A
Total capital ratio 16.31% 10.50% N/A
Pacific Premier Bank
Tier 1 leverage ratio 10.89% 4.00% 5.00%
Common equity tier 1 capital ratio 13.84% 7.00% 6.50%
Tier 1 capital ratio 13.84% 8.50% 8.00%
Total capital ratio 15.89% 10.50% 10.00%
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