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. Deterioration in general business and economic conditions, including the tight labor market, supply chain disruptions, inflationary pressures, the ongoing and dynamic nature of the COVID-19 pandemic and related regulatory policies and practices, and turbulence in domestic or global financial markets could adversely affect our revenues, the values of our assets and liabilities, and our profitability, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill or other intangible assets in future periods. In addition to the foregoing, the following additional factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
•The strength of
•The effects of, and changes in, trade, monetary, and fiscal policies and laws,
including interest rate policies of the
•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 , the FASB, or other accounting standards setters, including ASU 2016-13 (Topic 326), "Measurement of Credit Losses on Financial Instruments," commonly referenced as the CECL model, which has changed how we estimate credit losses and has increased the required level of our allowance for credit losses since adoption 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 related uncertainty as well as, the risks and costs related to our adoption of SOFR;
•The effectiveness of our risk management framework and quantitative models;
•Changes in the level of our nonperforming assets and charge-offs;
•Possible credit-related impairments of securities held by us;
•The impact of current and possible future governmental efforts to restructure
the
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•The impact of any change in the
•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;
•The possibility that we may discontinue, reduce, or otherwise limit the level of repurchases of our common stock we may make from time to time pursuant to our stock repurchase program;
•Changes in the financial performance and/or condition of our borrowers;
•Changes in the competitive environment among financial and bank holding companies and other financial service providers;
•Geopolitical conditions, including acts or threats of terrorism, actions taken
by
•Cybersecurity threats and the cost of defending against them;
•Climate change, including the enhanced regulatory, compliance, credit, and reputational risks and costs;
•Natural disasters, earthquakes, fires, and severe weather;
•Unanticipated regulatory, legal, or judicial proceedings; and
•Our ability to manage the risks involved in the foregoing.
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with 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 2021 Form 10-K in addition to Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and other reports as filed with 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. 65 --------------------------------------------------------------------------------
GENERAL
Management's discussion and analysis of financial condition and results of operations is intended to provide a better understanding of the significant changes in trends relating to the Company's financial condition, results of operations, liquidity, and capital resources. This discussion should be read in conjunction with our 2021 Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The results for the three and six months endedJune 30, 2022 are not necessarily indicative of the results expected for the year endingDecember 31, 2022 . 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 , and theFederal Deposit Insurance Corporation ("FDIC"). 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 is located inIrvine, California . AtJune 30, 2022 , we primarily conduct business throughout theWestern Region ofthe United States from our 61 full-service depository branches located inArizona ,California ,Nevada ,Oregon , andWashington . 66 -------------------------------------------------------------------------------- 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 enhanced nationwide specialty banking products and services for HOA and HOA management companies, as well as experienced owner-operator franchisees in the QSR industry. We have expanded our specialty products and services offerings to include commercial escrow 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 ("WHO") onJanuary 30, 2020 and a pandemic by theWHO 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. While economic conditions have improved since the onset of the COVID-19 pandemic, new variants may continue to impact macroeconomic environment. Inflationary pressures resulting, in part, from various supply chain constraints in many aspects of theU.S. economy, has placed strain on various businesses, service providers and consumers. Should the COVID-19 pandemic as well as the ongoing economic pressures persist, we anticipate it could have an impact on the following: •Loan growth and interest income - Economic activity has expanded since the onset of the COVID-19 pandemic; however, the economy continues to experience supply chain disruptions, inflationary pressures, and the uncertainty created by recent geopolitical developments. If the economic recovery begins to wane, it may have an impact on our borrowers, the businesses they operate, and their financial condition. Our borrowers may have less demand for credit needed to invest in and expand their businesses, as well as less demand for real estate and consumer loans. Such factors would place pressure on the level of interest-earning assets, which may negatively impact our interest income. 67 -------------------------------------------------------------------------------- •Credit quality - Should there be a decline in economic activity, the markets we serve could experience increases in unemployment, declines in consumer confidence, and a reluctance on the part of businesses to invest in and expand their operations, among other things. Such factors may result in additional weakness in economic conditions, place strain on our borrowers, and ultimately impact the credit quality of our loan portfolio. We expect this could result in increases in the level of past due, nonaccrual, and classified loans, as well as higher net charge-offs. While economic conditions have improved since the onset of the COVID-19 pandemic, there can be no assurance the recovery will continue. As such, should we experience future deterioration in the credit quality of our loan portfolio, it may contribute to the need for additional provisions for credit losses. •ACL - The Company is required to measure and record credit losses on certain financial assets, such as loans and debt securities, in accordance with the CECL model stipulated under ASC 326. The CECL model for measuring credit losses is highly dependent upon expectations of future economic conditions and requires management judgment. Should the recovery in economic conditions begin to wane and expectations concerning future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses under the CECL model. •Impairment charges - Should the recovery in economic conditions wane, it could adversely impact the Company's operating results and the value of certain of our assets. As a result, the Company may be required to write-down the value of certain assets such as goodwill, intangible assets, or deferred tax assets when there is evidence to suggest their value has become impaired or will not be realizable at a future date. 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. The Company continues to focus on serving its customers and communities and maintaining the well-being of its employees, monitor the economic environment, and make changes as appropriate.
CRITICAL ACCOUNTING POLICIES
Management has established various accounting policies that govern the
application of GAAP in the preparation of our financial statements. Certain
accounting policies require management to make estimates and assumptions that
involve a significant level of estimation uncertainty and are reasonably likely
to have a material impact on the carrying value of certain assets and
liabilities as well as the Company's results of operations; management considers
these to be critical accounting policies. The estimates and assumptions
management uses are based on historical experience and other factors, which
management believes to be reasonable under the circumstances. Actual results
could differ significantly from these estimates and assumptions, which could
have a material impact on the carrying value of the Company's assets and
liabilities as well as the Company's results of operations in future reporting
periods. Our significant accounting policies are described in Note 1.
Description of Business and Summary of Significant Accounting Policies to the
consolidated financial statements in our 2021 Form 10-K.
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--------------------------------------------------------------------------------Allowance for Credit Losses on Loans and Off-Balance Sheet Commitments
The Company accounts for credit losses on loans and off-balance sheet commitments, such as unfunded loan commitments, in accordance with ASC 326 - Financial Instruments - Credit Losses, which requires the Company to record an estimate of expected lifetime credit losses for loans and unfunded loan commitments at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for current expected future credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The estimation process in determining the ACL involves a significant degree of judgement, requiring management to make numerous estimates and assumptions. These estimates and assumptions are subject to change in future periods, which may have a material impact on the level of the ACL and the Company's results of operations. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics, as well as the individual evaluation of loans that are deemed to no longer possess characteristics similar to others in the loan portfolio. The Company measures the ACL on commercial real estate loans and commercial loans through a discounted cash flow approach using a loan's effective interest rate, while a historical loss rate methodology is used to determine the ACL on retail loans. The Company's discounted cash flow methodology incorporates a PD and LGD model, which is impacted by expectations of future economic conditions. The Company's ACL methodology also incorporates estimates and assumptions concerning loan prepayments, future draws on revolving credit facilities, and the probability an unfunded commitment will be drawn upon. The use of reasonable and supportable forecasts in the ACL methodology requires significant judgment, such as selecting forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management leverages economic projections from a reputable and independent third party to inform and provide its reasonable and supportable economic forecasts. Other internal and external indicators of economic forecasts may also be considered by management when developing forecast metrics. Forecasts of economic conditions and expected credit losses are made over a two-year time horizon, before reverting to long-term average loss rates over a period of three years. Changes in economic forecasts, in conjunction with changes in loan specific attributes, have an impact on a loan's PD and LGD, which can drive changes in the determination of the ACL and can have a significant impact on the provision for credit losses. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the ACL model, the Company, as ofJune 30, 2022 , has identified certain economic variables that have significant influence in the Company's model for determining the ACL. These key economic variables include theU.S. unemployment rate,U.S. real GDP growth, CRE prices, and the 10-yearU.S. Treasury yield. Please also see "Allowance for Credit Losses" under Item 2 - Management's Discussion and Analysis for additional discussion on assumptions concerning economic forecasts and economic variables used in the Company's ACL model as well as the impact of those items on the Company's ACL. The Company's ACL methodology also includes adjustments for qualitative factors where appropriate. Qualitative adjustments may be related to and include, but not limited to, factors such as: (i) management's assessment of economic forecasts used in the model and how those forecasts align with management's overall evaluation of current and expected economic conditions, (ii) organization specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios, changes in portfolio segmentation, and (iv) management's overall assessment of the adequacy of the ACL, including an assessment of model data inputs used to determine the ACL. 69 -------------------------------------------------------------------------------- The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a substandard or worse internal risk grade, and may consist of loans on nonaccrual status, troubled debt restructurings, loans where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans, and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, be deemed to no longer possess risk characteristics similar to other loans in the loan portfolio, and as such, may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent. Collateral dependent loans are loans where the repayment of the loan is expected to come from the operation of and/or eventual liquidation of the underlying collateral. The ACL for collateral dependent loans is determined using estimates for the fair value of the underlying collateral, less costs to sell. Although management uses the best information available to derive estimates necessary to measure an appropriate level of the ACL, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that extend beyond the Company's control. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ACL. Such agencies may require the Company to recognize changes to the ACL based on judgments different from those of management. Further, as the size, complexity, and composition of the loan portfolio changes over time, such as through the acquisition of other financial institutions, new product offerings, client demand for various types of credit, and changes in our geographic footprint, the Company may seek to make additional enhancements to its ACL methodology. Such enhancements may have an impact on the level of the ACL in future periods. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is the Company's policy to promptly charge-off loan balances at the time they have been deemed uncollectible.
Please also see Note 6 - Allowance for Credit Losses, of the Notes to the Consolidated Financial Statements for additional discussion concerning the Company's ACL methodology.
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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 Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Net income $ 69,803 $ 66,904
3,479 3,592 4,001 7,071 8,144
Less: amortization of intangible
assets expense tax adjustment (1) 993 1,025 1,145 2,018 2,330
Net income for average tangible
common equity $ 72,289 $ 69,471 Average stockholders' equity$ 2,764,893 $ 2,864,387
64,583 68,157 79,784 66,360 81,853
Less: average goodwill 901,312 901,312 900,582 901,312 899,590
Average tangible common equity $ 1,798,998 $ 1,894,918 Return on average equity (2) 10.10 % 9.34 % 14.02 % 9.71 % 12.00 % Return on average tangible common equity (2) 16.07 % 14.66 % 22.45 % 15.35 % 19.33 %
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(1) Amortization of intangible assets expense adjusted by statutory tax rate. (2) Ratio is annualized.
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Tangible book value per share and tangible common equity to tangible assets (the
"tangible common equity ratio") are non-GAAP financial measures derived from
GAAP-based amounts. We calculate tangible book value per share by dividing
tangible common stockholder's equity by shares outstanding. We calculate the
tangible common equity ratio by excluding the balance of intangible assets from
common stockholders' equity and dividing by period end tangible assets, which
also excludes intangible assets. We believe that this information is important
to shareholders as tangible equity is a measure that is consistent with the
calculation of capital for bank regulatory purposes, which excludes intangible
assets from the calculation of risk-based ratios.
June 30 ,
(Dollars in thousands) 2022 2021
Total stockholders' equity $ 2,755,219 $ 2,886,311
Less: intangible assets 963,812 970,883
Tangible common equity $ 1,791,407 $ 1,915,428
Total assets $ 21,993,919 $ 21,094,429
Less: intangible assets 963,812 970,883
Tangible assets $ 21,030,107 $ 20,123,546
Tangible common equity ratio 8.52 % 9.52 %
Common shares issued and outstanding 94,976,605 94,389,543
Book value per share $ 29.01 $ 30.58
Less: intangible book value per share 10.15 10.29
Tangible book value per share $ 18.86 $ 20.29
For periods presented below, efficiency ratio is a non-GAAP financial measure
derived from GAAP-based amounts. This figure represents the ratio of noninterest
expense less other real estate owned operations, core deposit intangible
amortization, and merger-related expense to the sum of net interest income
before provision for loan losses and total noninterest income, less gain/(loss)
on sale of securities, other income - security recoveries on investment
securities, gain/(loss) on sale of other real estate owned, and gain/(loss) from
debt extinguishment. Management believes that the exclusion of such items from
this financial measure provides useful information to gain an understanding of
the operating results of our core business.
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Total noninterest expense $ 98,974 $ 97,648
3,479 3,592 4,001 7,071 8,144
Less: merger-related expense - - - - 5
Noninterest expense, adjusted $ 95,495 $ 94,056 Net interest income before provision for loan losses$ 172,765 $ 161,839
22,193 25,894 26,729 48,087 50,469
Less: net (loss) gain from
investment securities (31) 2,134 5,085 2,103 9,131
Less: other income - security
recoveries - - 6 - 8
Less: net loss from debt
extinguishment - - (647) - (1,150)
Revenue, adjusted $ 194,989 $ 185,599 $ 183,219 $ 380,588 $ 365,066
Efficiency ratio 49.0 % 50.7 % 49.4 % 49.8 % 49.0 %
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Core net interest income and core net interest margin are non-GAAP financial
measures derived from GAAP based amounts. We calculate core net interest income
by excluding scheduled accretion income, accelerated accretion income, premium
amortization on CDs, nonrecurring nonaccrual interest paid, and gain (loss) on
interest rate in fair value hedging relationships from net interest income. The
core net interest margin is calculated as the ratio of core net interest
income to average interest-earning assets. Management believes that the
exclusion of such items from these financial measures provides useful
information to gain an understanding of the operating results of our core
business.
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Net interest income $ 172,765 $
161,839
2,626 2,857 3,560 5,483 7,438
Less: accelerated accretion income 4,918 3,083 5,927 8,001 11,915
Less: premium amortization on CDs 60 96 942 156 2,693
Less: nonrecurring nonaccrual
interest paid 48 (356) (216) (308) (819)
Less: gain (loss) on fair value
hedging relationships 128 (1,667) - (1,539) -
Core net interest income $ 164,985 $ 157,826 $ 150,721 $ 322,811 $ 301,359
Average interest-earning assets $ 19,876,806 $
19,240,232
Net interest margin (1) 3.49 % 3.41 % 3.44 % 3.45 % 3.49 % Core net interest margin (1) 3.33 % 3.33 % 3.22 % 3.33 % 3.26 %
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(1) Ratio is annualized.
Pre-provision net revenue is a non-GAAP financial measure derived from
GAAP-based amounts. We calculate the pre-provision net revenue by excluding
income tax, provision for credit losses, and merger-related expenses from net
income. Management believes that the exclusion of such items from this financial
measure provides useful information to gain an understanding of the operating
results of our core business and a consistent comparison to the financial
results of prior periods.
Three Months Ended Six Months Ended
June 30, March 31, June 30, June 30, June 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Interest income $ 183,226 $ 168,546 $ 170,692 $ 351,772 $ 343,686
Interest expense 10,461 6,707 9,758 17,168 21,100
Net interest income 172,765 161,839 160,934 334,604 322,586
Noninterest income 22,193 25,894 26,729 48,087 50,469
Revenue 194,958 187,733 187,663 382,691 373,055
Noninterest expense 98,974 97,648 94,496 196,622 186,985
Add: merger-related expense - - - - 5
Pre-provision net revenue $ 95,984 $ 90,085 $ 93,167 $ 186,069 $ 186,075
Pre-provision net revenue
(annualized) $ 383,936 $ 360,340 $ 372,668 $ 372,138 $ 372,150
Average assets $ 21,670,153 $ 20,956,791 $ 20,290,415 $ 21,315,443 $ 20,143,156
Pre-provision net revenue to
average assets 0.44 % 0.43 % 0.46 % 0.87 % 0.92 %
Pre-provision net revenue to
average assets (annualized) 1.77 % 1.72 % 1.84 % 1.75 % 1.85 %
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RESULTS OF OPERATIONS
The following table presents the components of results of operations, share data, and performance ratios for the periods indicated:
Three Months Ended Six Months Ended
(Dollar in thousands, except per share data
and June 30, March 31, June 30, June 30, June 30,
percentages) 2022 2022 2021 2022 2021
Operating data
Interest income $ 183,226 $ 168,546 $ 170,692 $ 351,772 $ 343,686
Interest expense 10,461 6,707 9,758 17,168 21,100
Net interest income 172,765 161,839 160,934 334,604 322,586
Provision for credit losses 469 448 (38,476) 917 (36,502)
Net interest income after provision for
credit losses 172,296 161,391 199,410 333,687 359,088
Net gain from sales of loans 1,136 1,494 1,546 2,630 1,907
Other noninterest income 21,057 24,400 25,183 45,457 48,562
Noninterest expense 98,974 97,648 94,496 196,622 186,985
Net income before income taxes 95,515 89,637 131,643 185,152 222,572
Income tax expense 25,712 22,733 35,341 48,445 57,602
Net income $ 69,803 $
66,904
$ 95,984 $ 90,085 $ 93,167 $ 186,069 $ 186,075 Share data Earnings per share: Basic$ 0.74 $ 0.71 $ 1.02 $ 1.44 $ 1.74 Diluted 0.73 0.70 1.01 1.44 1.73 Common equity dividends declared per share 0.33 0.33 0.33 0.66 0.63 Dividend payout ratio (1) 44.89 % 46.60 % 32.43 % 45.72 % 36.10 % Performance ratios Return on average assets (2) 1.29 % 1.28 % 1.90 % 1.28 % 1.64 % Return on average equity (2) 10.10 % 9.34 % 14.02 % 9.71 % 12.00 % Return on average tangible common equity (2)(3) 16.07 % 14.66 % 22.45 % 15.35 % 19.33 % Pre-provision net revenue on average assets (2)(3) 1.77 % 1.72 % 1.84 % 1.75 % 1.85 % Average equity to average assets 12.76 % 13.67 % 13.54 % 13.20 % 13.64 % Efficiency ratio (3) 49.0 % 50.7 % 49.4 % 49.8 % 49.0 %
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(1) Dividend payout ratio is defined as common equity dividends declared per
share divided by basic earnings per share.
(2) Ratio is annualized.
(3) Reconciliations of the non-GAAP measures are set forth in the Non-GAAP
Measures section of Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-Q.
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In the second quarter of 2022, we reported net income of $69.8 million , or $0.73
per diluted share. This compares with net income of $66.9 million , or $0.70 per
diluted share, for the first quarter of 2022. The increase in net income was
primarily due to a $10.9 million increase in net interest income, partially
offset by a $3.7 million decrease in noninterest income, a $3.0 million increase
in income tax expense, and a $1.3 million increase in noninterest expense.
Net income of $69.8 million , or $0.73 per diluted share, for the second quarter
of 2022 compares to net income for the second quarter of 2021 of $96.3 million ,
or $1.01 per diluted share. The decrease in net income was primarily due to a
$38.9 million decrease in provision recapture for credit losses, a $4.5 million
decrease in noninterest income, and a $4.5 million increase in noninterest
expense, partially offset by an $11.8 million increase in net interest income.
The provision recapture during the second quarter of 2021 was reflective of
improved economic forecasts used in the Company's CECL model relative to prior
periods.
For the three months ended June 30, 2022 , the Company's return on average assets
was 1.29%, return on average equity was 10.10%, and return on average tangible
common equity was 16.07%. For the three months ended March 31, 2022 , the return
on average assets was 1.28%, the return on average equity was 9.34%, and the
return on average tangible common equity was 14.66%. 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 additional details, see "Non-GAAP measures" presented under Item 2 -
Management's Discussion and Analysis.
For the six months ended June 30, 2022 , the Company recorded net income of
$136.7 million , or $1.44 per diluted share. This compares with net income of
$165.0 million or $1.73 per diluted share for the six months ended June 30,
2021 . The decrease in net income of $28.3 million was mostly due to the $37.4
million decrease in provision recapture for credit losses, a $9.6 million
increase in noninterest expense excluding merger-related expenses, and a $2.4
million decrease in noninterest income, partially offset by a $12.0 million
increase in net interest income and a $9.2 million decrease in income tax
expense. The provision recapture during the six months of June 30, 2021 was
reflective of improved economic forecasts used in the Company's CECL model
relative to prior periods.
For the six months ended June 30, 2022 , the Company's return on average assets
was 1.28%, return on average equity was 9.71%, and return on average tangible
common equity was 15.35%, compared with a return on average assets of 1.64%,
return on average equity of 12.00%, and a return on average tangible common
equity of 19.33% for the six months ended June 30, 2021 . For additional details,
see "Non-GAAP measures" presented under Item 2 - Management's Discussion and
Analysis.
75--------------------------------------------------------------------------------
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 $172.8 million in the second quarter of 2022, an
increase of $10.9 million , or 6.8%, from the first quarter of 2022. The increase
in net interest income was primarily attributable to higher average
interest-earning assets and yields, higher loan-related fees, and accretion
income as a result of increased prepayment activity, a favorable interest impact
from fair value hedges, and one more day of interest, partially offset by a
higher cost of funds, largely as a result of higher average interest-bearing
liabilities.
The net interest margin for the second quarter of 2022 was 3.49%, compared with
3.41% in the prior quarter. The core net interest margin, which excludes the
impact of loan accretion income and other adjustments, was unchanged at 3.33%,
compared to the prior quarter, reflecting a favorable remix towards higher
yielding loans, higher loan-related fees, and a favorable interest impact from
fair value hedges, partially offset by higher cost of funds due to the full
quarter impact of the $600.0 million of FHLB term advances added in March 2022 .
For additional details of the core net interest margin, see "Non-GAAP measures"
presented under Item 2 - Management's Discussion and Analysis.
Net interest income for the second quarter of 2022 increased $11.8 million , or
7.4%, compared to the second quarter of 2021. The increase was attributable to
higher average loan balances and lower cost of funds, primarily due to an
improved deposit mix from a $689.1 million increase in average
noninterest-bearing checking, lower rates paid on money market and savings
accounts, and redemptions of higher-cost subordinated debentures, partially
offset by lower average loan yield.
For the six months ended 2022, net interest income increased $12.0 million , or
3.7%, compared to the six months ended 2021. The increase was related to an
increase in average interest-earning assets, and lower cost of funds, partially
offset by lower average loan and investment yields and higher average
interest-bearing liabilities. For the six months ended 2022, the net interest
margin was 3.45%, compared with 3.49% for the same period last year. The core
net interest margin, which excludes the impact of loan accretion income,
certificates of deposit mark-to-market amortization, and other adjustments, was
3.33%, compared with 3.26% for the same period last year, reflecting higher
average interest-earning assets balance and lower cost of funds. For additional
details of the core net interest margin, see "Non-GAAP measures" presented under
Item 2 - Management's Discussion and Analysis.
76
--------------------------------------------------------------------------------
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
June 30, 2022 March 31, 2022 June 30, 2021
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 $ 702,663 $ 1,211 0.69 % $ 322,236 $ 90 0.11 % $ 1,323,186 $ 315 0.10 %
Investment securities 4,254,961 17,560 1.65 % 4,546,408 17,852 1.57 % 4,243,644 18,012 1.70 %
Loans receivable, net (1)(2) 14,919,182 164,455 4.42 % 14,371,588 150,604 4.25 % 13,216,973 152,365 4.62 %
Total interest-earning assets 19,876,806 183,226 3.70 % 19,240,232 168,546 3.55 % 18,783,803 170,692 3.64 %
Noninterest-earning assets 1,793,347 1,716,559 1,506,612
Total assets $ 21,670,153 $ 20,956,791 $ 20,290,415
Liabilities and equity
Interest-bearing deposits:
Interest checking $ 4,055,506 $ 712 0.07 % $ 3,537,824 $ 229 0.03 % $ 3,155,935 $ 336 0.04 %
Money market 5,231,464 1,010 0.08 % 5,343,973 888 0.07 % 5,558,790 2,002 0.14 %
Savings 432,586 27 0.03 % 422,186 26 0.02 % 384,376 84 0.09 %
Retail certificates of deposit 922,784 607 0.26 % 1,047,451 530 0.21 % 1,294,544 839 0.26 %
Wholesale/brokered certificates of
deposit 80,182 326 1.63 % - - - % 1,357 4 1.18 %
Total interest-bearing deposits 10,722,522 2,682 0.10 % 10,351,434 1,673 0.07 % 10,395,002 3,265 0.13 %
FHLB advances and other borrowings 602,621 3,217 2.14 % 225,250 474 0.85 % 6,303 - - %
Subordinated debentures 330,796 4,562 5.52 % 330,629 4,560 5.52 % 480,415 6,493 5.41 %
Total borrowings 933,417 7,779 3.34 % 555,879 5,034 3.63 % 486,718 6,493 5.35 %
Total interest-bearing liabilities 11,655,939 10,461 0.36 % 10,907,313 6,707 0.25 % 10,881,720 9,758 0.36 %
Noninterest-bearing deposits 7,030,205 6,928,872 6,341,063
Other liabilities 219,116 256,219 320,324
Total liabilities 18,905,260 18,092,404 17,543,107
Stockholders' equity 2,764,893 2,864,387 2,747,308
Total liabilities and equity $ 21,670,153 $ 20,956,791 $ 20,290,415
Net interest income $ 172,765 $ 161,839 $ 160,934
Net interest margin (3) 3.49 % 3.41 % 3.44 %
Cost of deposits (4) 0.06 % 0.04 % 0.08 %
Cost of funds (5) 0.22 % 0.15 % 0.23 %
Ratio of interest-earning assets to interest-bearing liabilities 170.53 % 176.40 % 172.62 %
______________________________
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums, and the basis adjustment of certain loans included in fair value hedging relationships, where applicable. (2) Interest income includes net discount accretion of$7.5 million ,$5.9 million , and$9.5 million , respectively. (3) Represents annualized net interest income divided by average interest-earning assets. (4) Represents annualized interest expense on deposits divided by the sum of average interest-bearing deposits and noninterest-bearing deposits. (5) Represents annualized total interest expense divided by the sum of average total interest-bearing liabilities and noninterest-bearing deposits. 77 -------------------------------------------------------------------------------- Average Balance Sheet Six Months Ended June 30, 2022 June 30, 2021 Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Assets Interest-earning assets: Cash and cash equivalents$ 513,500 $ 1,301 0.51 %$ 1,316,314 $ 616 0.09 % Investment securities 4,399,880 35,412 1.61 % 4,165,979 35,480 1.70 % Loans receivable, net (1)(2) 14,639,980 315,059 4.34 % 13,155,631 307,590 4.71 % Total interest-earning assets 19,553,360 351,772 3.63 % 18,637,924 343,686 3.72 % Noninterest-earning assets 1,762,083 1,505,232 Total assets$ 21,315,443 $ 20,143,156 Liabilities and equity Interest-bearing deposits: Interest checking$ 3,798,095 $ 941 0.05 %$ 3,108,260 $ 755 0.05 % Money market 5,287,408 1,898 0.07 % 5,503,656 4,590 0.17 % Savings 427,414 53 0.03 % 376,376 166 0.09 % Retail certificates of deposit 984,773 1,137 0.23 % 1,359,458 2,040 0.30 % Wholesale/brokered certificates of deposit 40,312 326 1.63 % 59,781 140 0.47 % Total interest-bearing deposits 10,538,002 4,355 0.08 % 10,407,531 7,691 0.15 % FHLB advances and other borrowings 414,978 3,691 1.79 % 14,115 65 0.93 % Subordinated debentures 330,713 9,122 5.52 % 490,925 13,344 5.44 % Total borrowings 745,691 12,813 3.44 % 505,040 13,409 5.35 % Total interest-bearing liabilities 11,283,693 17,168 0.31 % 10,912,571 21,100 0.39 % Noninterest-bearing deposits 6,979,818 6,188,539 Other liabilities 237,567 293,578 Total liabilities 18,501,078 17,394,688 Stockholders' equity 2,814,365 2,748,468 Total liabilities and equity$ 21,315,443 $ 20,143,156 Net interest income$ 334,604 $ 322,586 Net interest margin (3) 3.45 % 3.49 % Cost of deposits (4) 0.05 % 0.09 % Cost of funds (5) 0.19 % 0.25 % Ratio of interest-earning assets to interest-bearing liabilities 173.29 % 170.79 % _____________________________ (1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums, and the basis adjustment of certain loans included in fair value hedging relationships, where applicable. (2) Interest income includes net discount accretion of$13.5 million and$19.4 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. 78 -------------------------------------------------------------------------------- Changes in our net interest income are a function of changes in volume, days in a period, and rates of interest-earning assets and interest-bearing liabilities. The following tables present the impact that the volume, days in a period, and rate changes have had on our net interest income for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes to our net interest income with respect to:
•Changes in volume (changes in volume multiplied by prior rate);
•Changes in days in a period (changes in days in a period multiplied by daily interest; no changes in days for comparisons of the three and six months endedJune 30, 2022 to the three and six months endedJune 30, 2021 );
•Changes in interest rates (changes in interest rates multiplied by prior volume and includes the recognition of discounts/premiums and deferred fees/costs); and
•The net change or the combined impact of volume, days in a period, and rate
changes allocated proportionately to changes in volume, days in a period, and
changes in interest rates.
Three Months Ended June 30, 2022
Compared to
Three Months Ended March 31, 2022
Increase (Decrease) Due to
(Dollars in thousands) Volume Days Rate Net
Interest-earning assets
Cash and cash equivalents $ 209 $ 13 $ 899 $ 1,121
Investment securities (1,174) - 882 (292)
Loans receivable, net 5,851 1,807 6,193 13,851
Total interest-earning assets 4,886 1,820 7,974 14,680
Interest-bearing liabilities
Interest checking 38 8 437 483 Money market (18) 11 129 122 Savings 1 - - 1 Retail certificates of deposit (51) 7 121 77 Wholesale/brokered certificates of deposit 326 - - 326 FHLB advances and other borrowings 1,429 35
1,279 2,743
Subordinated debentures 2 - - 2 Total interest-bearing liabilities 1,727 61
1,966 3,754
Change in net interest income$ 3,159 $ 1,759
79
--------------------------------------------------------------------------------
Three Months Ended June 30, 2022
Compared to
Three Months Ended June 30, 2021
Increase (Decrease) Due to
(Dollars in thousands) Volume Rate Net
Interest-earning assets
Cash and cash equivalents $ (74) $ 970 $ 896
Investment securities 48 (500) (452)
Loans receivable, net 18,320 (6,230) 12,090
Total interest-earning assets 18,294 (5,760) 12,534
Interest-bearing liabilities
Interest checking 115 261 376
Money market (112) (880) (992)
Savings 13 (70) (57)
Retail certificates of deposit (244) 12 (232)
Wholesale/brokered certificates of deposit 319 3 322
FHLB advances and other borrowings 3,183 34 3,217
Subordinated debentures (2,066) 135 (1,931)
Total interest-bearing liabilities 1,208 (505) 703
Change in net interest income $ 17,086 $ (5,255) $ 11,831
Six Months Ended June 30, 2022
Compared to
Six Months Ended June 30, 2021
Increase (Decrease) Due to
(Dollars in thousands) Volume Rate Net
Interest-earning assets
Cash and cash equivalents $ (111) $ 796 $ 685
Investment securities 1,937 (2,005) (68)
Loans receivable, net 25,332 (17,863) 7,469
Total interest-earning assets 27,158 (19,072) 8,086
Interest-bearing liabilities
Interest checking 171 15 186
Money market (174) (2,518) (2,692)
Savings 26 (139) (113)
Retail certificates of deposit (492) (411) (903)
Wholesale/brokered certificates of deposit (29) 215 186
FHLB advances and other borrowings 3,513 113 3,626
Subordinated debentures (4,495) 273 (4,222)
Total interest-bearing liabilities (1,480) (2,452) (3,932)
Change in net interest income $ 28,638 $ (16,620) $ 12,018
80--------------------------------------------------------------------------------
Provision for Credit Losses
For the second quarter of 2022, the Company recorded a$469,000 provision expense for credit losses, compared to a$448,000 provision expense during the first quarter of 2022, and a$38.5 million provision recapture during the second quarter of 2021. The provision expense during the second quarter of 2022 was driven principally by loan growth and net charge-offs, as well as the impact of macroeconomic uncertainties, offset by a recapture for unfunded commitments largely due to favorable changes in unfunded lending segment mix. With the increasing probability of downside risks due to high inflation and the ongoing supply chain challenges, we are carefully monitoring the current and forecasted macroeconomic environment as well as key modeling variables. The provision expense for the first quarter of 2022 was primarily reflective of loan growth and net charge-offs, as well as the impact of macroeconomic uncertainties. The provision recapture for the second quarter of 2021 was primarily due to improved economic forecasts used in the Company's CECL model relative to prior periods. Net loan charge-offs for the three months endedJune 30, 2022 totaled$5.2 million , compared with net loan charge-offs of$446,000 for the three months endedMarch 31, 2022 , and net loan charge-offs of$1.1 million for the three months endingJune 30, 2021 . Three Months Ended Variance From June 30, March 31, June 30, March 31, 2022 June 30, 2021 (Dollars in thousands) 2022 2022 2021 $ % $ % Provision for credit losses Provision for loan losses$ 3,803 $ 211 $ (33,131) $ 3,592 1,702.4 %$ 36,934 (111.5) % Provision for unfunded commitments (3,402) 218 (5,345) (3,620) (1,660.6) % 1,943 (36.4) % Provision for HTM securities 68 19 - 49 257.9 % 68 - % Total provision for credit losses$ 469 $ 448 $ (38,476) $ 21 4.7 %$ 38,945 (101.2) % For the first six months of 2022, the Company recorded a$917,000 provision expense, compared to a$36.5 million provision recapture recorded for the first six months of 2021. The provision expense for the first six months of 2022, was driven principally by loan growth and net charge-offs, as well as the impact of macroeconomic uncertainties, partially offset by a recapture for unfunded commitments largely due to changes in unfunded lending segment mix. The provision expense for the first six months of 2021 was driven by improved economic forecasts used in the Company's CECL model relative to prior periods. Six Months Ended Variance From June 30, June 30, June 30, 2021 (Dollars in thousands) 2022 2021 $ %
Provision for credit losses
Provision for loans and lease losses
(112.2) %
Provision for unfunded commitments (3,184) (3,686) 502 (13.6) %
Provision for held-to-maturity
securities 87 - 87 - %
Total provision for credit losses $ 917 $ (36,502) $ 37,419 (102.5) %
81
--------------------------------------------------------------------------------Noninterest Income
The following table presents the components of noninterest income for the
periods indicated:
Three Months Ended Variance From
June 30, March 31, June 30, March 31, 2022 June 30, 2021
(Dollars in thousands) 2022 2022 2021 $ % $ %
Noninterest income
Loan servicing income $ 502 $ 419 $ 622 $ 83 19.8 % $ (120) (19.3) %
Service charges on deposit
accounts 2,690 2,615 2,222 75 2.9 % 468 21.1 %
Other service fee income 366 367 352 (1) (0.3) % 14 4.0 %
Debit card interchange fee
income 936 836 1,099 100 12.0 % (163) (14.8) %
Earnings on bank owned life
insurance 3,240 3,221 2,279 19 0.6 % 961 42.2 %
Net gain from sales of
loans 1,136 1,494 1,546 (358) (24.0) % (410) (26.5) %
Net (loss) gain from sales
of investment securities (31) 2,134 5,085 (2,165) (101.5) % (5,116) (100.6) %
Trust custodial account fees 10,354 11,579 7,897 (1,225) (10.6) % 2,457 31.1 % Escrow and exchange fees 1,827 1,661 1,672 166 10.0 % 155 9.3 % Other income 1,173 1,568 3,955 (395) (25.2) % (2,782) (70.3) % Total noninterest income$ 22,193 $ 25,894 $ 26,729 $ (3,701) (14.3) %$ (4,536) (17.0) % Six Months Ended Variance From June 30, June 30, June 30, 2021 (Dollars in thousands) 2022 2021 $ % Noninterest income Loan servicing income$ 921 $ 1,080 $ (159) (14.7) % Service charges on deposit accounts 5,305 4,254 1,051 24.7 % Other service fee income 733 825 (92) (11.2) % Debit card interchange fee income 1,772 1,886 (114) (6.0) % Earnings on bank owned life insurance 6,461 4,512 1,949 43.2 % Net gain from sales of loans 2,630 1,907 723 37.9 % Net gain from sales of investment securities 2,103 9,131 (7,028) (77.0) % Trust custodial account fees 21,933 15,119 6,814 45.1 % Escrow and exchange fees 3,488 3,198 290 9.1 % Other income 2,741 8,557 (5,816) (68.0) % Total noninterest income$ 48,087 $ 50,469 $ (2,382) (4.7) % Noninterest income for the second quarter of 2022 was$22.2 million , a decrease of$3.7 million , or 14.3%, from the first quarter of 2022. The decrease was primarily due to a$2.2 million decrease in net gain from sales of investment securities, a$1.2 million decrease in trust custodial account fees due primarily to the seasonal annual tax fees recognized in the first quarter of 2022, a$358,000 decrease in net gain from sales of loans, as well as a$395,000 decrease in other income, which included$677,000 lower recoveries on pre-acquisition charged-off loans, offset in part by$322,000 higher CRA investment income. During the second quarter of 2022, the Bank sold$45.1 million of investment securities for a net loss of$31,000 , compared to the sales of$658.5 million of investment securities for a net gain of$2.1 million in the first quarter of 2022. Additionally, during the second quarter of 2022, the Bank sold$23.4 million ofSmall Business Administration ("SBA") andU.S. Department of Agriculture ("USDA") loans for a net gain of$1.1 million , compared to the sales of$17.8 million of SBA loans for a net gain of$1.5 million in the first quarter of 2022. Higher interest rates lowered sales premiums in the second quarter. 82 -------------------------------------------------------------------------------- Noninterest income for the second quarter of 2022 decreased$4.5 million , or 17.0%, compared to the second quarter of 2021. The decrease was primarily due to a$5.1 million decrease in net gain from sales of investment securities and a$2.8 million decrease in other income, primarily from lower CRA investment income, partially offset by a$2.5 million increase in trust custodial account fees. The net gain from sales of loans for the second quarter of 2022 decreased from the same period last year reflecting lower net gain from the sales of$23.4 million of SBA andUSDA loans for a net gain of$1.1 million , compared with the sales of$14.7 million of SBA loans for a net gain of$1.5 million during the second quarter of 2021. For the first six months of 2022, noninterest income totaled$48.1 million , a decrease of$2.4 million , or 4.7%, compared to the first six months of 2021. The decrease was primarily related to a$7.0 million decrease in net gain from sales of investment securities and a$5.8 million decrease in other income, primarily due to$4.2 million lower CRA investment income and$2.8 million lower SBA PPP loan referral fees, partially offset by a$6.8 million increase in trust custodial account fees, a$1.9 million increase in earnings from bank owned life insurance ("BOLI"), a$1.1 million increase in service charges on deposit accounts, and a$723,000 higher net gain from the sales of loans.
Noninterest Expense
The following table presents the components of noninterest expense for the
periods indicated:
Three Months Ended Variance From
June 30, March 31, June 30, March 31, 2022 June 30, 2021
(Dollars in thousands) 2022 2022 2021 $ % $ %
Noninterest expense
Compensation and benefits $ 57,562 $ 56,981 $ 53,474 $ 581 1.0 % $ 4,088 7.6 %
Premises and occupancy 11,829 11,952 12,240 (123) (1.0) % (411) (3.4) %
Data processing 6,604 5,996 5,765 608 10.1 % 839 14.6 %
FDIC insurance premiums 1,452 1,396 1,312 56 4.0 % 140 10.7 %
Legal and professional
services 4,629 4,068 4,186 561 13.8 % 443 10.6 %
Marketing expense 1,926 1,809 1,490 117 6.5 % 436 29.3 %
Office expense 1,252 1,203 1,589 49 4.1 % (337) (21.2) %
Loan expense 1,144 1,134 1,165 10 0.9 % (21) (1.8) %
Deposit expense 4,081 3,751 3,985 330 8.8 % 96 2.4 %
Amortization of intangible
assets 3,479 3,592 4,001 (113) (3.1) % (522) (13.0) %
Other expense 5,016 5,766 5,289 (750) (13.0) % (273) (5.2) %
Total noninterest expense $ 98,974 $ 97,648 $ 94,496 $ 1,326 1.4 % $ 4,478 4.7 %
83--------------------------------------------------------------------------------
Six Months Ended Variance From
June 30, June 30, June 30, 2021
(Dollars in thousands) 2022 2021 $ %
Noninterest expense
Compensation and benefits $ 114,543 $ 106,022 $ 8,521 8.0 %
Premises and occupancy 23,781 24,220 (439) (1.8) %
Data processing 12,600 11,593 1,007 8.7 %
FDIC insurance premiums 2,848 2,493 355 14.2 %
Legal and professional services 8,697 8,121 576 7.1 %
Marketing expense 3,735 3,088 647 21.0 %
Office expense 2,455 3,418 (963) (28.2) %
Loan expense 2,278 2,280 (2) (0.1) %
Deposit expense 7,832 7,844 (12) (0.2) %
Merger-related expense - 5 (5) (100.0) %
Amortization of intangible assets 7,071 8,144 (1,073) (13.2) %
Other expense 10,782 9,757 1,025 10.5 %
Total noninterest expense $ 196,622 $ 186,985 $ 9,637 5.2 %
Noninterest expense totaled $99.0 million for the second quarter of 2022, an
increase of $1.3 million , or 1.4%, compared to the first quarter of 2022,
primarily driven by a $608,000 increase in data processing largely related to
software and system expense, a $581,000 increase in compensation and benefits
attributable to higher compensation and business incentives, and a $561,000
increase in legal and professional services, partially offset by a $750,000
decrease in other expense mainly attributable to a higher credit loss reserve
for trust custodial account fees receivable and higher expenses for Pacific
Premier Trust in the prior quarter.
Noninterest expense increased by $4.5 million , or 4.7%, compared to the second
quarter of 2021. The increase was primarily due to a $4.1 million increase in
compensation and benefits due to higher compensation and business incentives and
increased staffing.
The Company's efficiency ratio was 49.0% for the second quarter of 2022, compared to 50.7% for the first quarter of 2022, and 49.4% for the second quarter of 2021.
Noninterest expense totaled$196.6 million for the first six months of 2022, an increase of$9.6 million , or 5.2%, compared with the first six months of 2021. The increase was driven primarily by an$8.5 million increase in compensation and benefits attributable to higher compensation and business incentives, increased staffing, and higher stock compensation expense, a$1.0 million increase in other expense, a$1.0 million increase in data processing, a$647,000 increase in marketing expense, and a$576,000 increase in legal and professional services, partially offset by a$1.1 million decrease in amortization of intangible assets and a$963,000 decrease in office expense.
The Company's efficiency ratio was 49.8% for the first six months of 2022, compared to 49.0% for the first six months of 2021.
84
--------------------------------------------------------------------------------Income Taxes
For the three months endedJune 30, 2022 ,March 31, 2022 , andJune 30, 2021 , income tax expense was$25.7 million ,$22.7 million , and$35.3 million , respectively, and the effective income tax rate was 26.9%, 25.4%, and 26.8%, respectively. For the six months endedJune 30, 2022 and 2021, income tax expense was$48.4 million and$57.6 million , respectively, and the effective income tax rate was 26.2% and 25.9%, respectively. Our effective tax rate for the three and six months endedJune 30, 2022 differs from the 21% federal statutory rate due to the impact of state taxes as well as various permanent tax differences, including tax-exempt income from municipal securities, BOLI income, tax credits from low-income housing tax credit investments, and the exercise of stock options and vesting of other stock-based compensation. The total amount of unrecognized tax benefits was$1.4 million atJune 30, 2022 andDecember 31, 2021 , and was comprised of unrecognized tax benefits related to the Opus acquisition in 2020. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was$563,000 atJune 30, 2022 andDecember 31, 2021 . The Company does not believe that the unrecognized tax benefits will change significantly within the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax
benefits in income tax expense. The Company had accrued for
The Company and its subsidiaries are subject toU.S. Federal income tax, as well as income and franchise tax in multiple state jurisdictions. The statute of limitations related to the consolidated Federal income tax returns is closed for all tax years up to and including 2017. The expirations of the statutes of limitations related to the various state income and franchise tax returns vary by state. The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and the tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as ofJune 30, 2022 andDecember 31, 2021 . 85 --------------------------------------------------------------------------------
FINANCIAL CONDITION
AtJune 30, 2022 , assets totaled$21.99 billion , an increase of$899.5 million , or 4.3%, from$21.09 billion atDecember 31, 2021 . The increase was primarily due to increases in total loans of$743.8 million and cash and cash equivalents of$668.1 million , partially offset by a$585.8 million decrease in investment securities. During the first half of 2022, we took actions to position the balance sheet to increase our asset sensitivity, which included increasing our liquidity position and reducing the size and duration of the AFS securities portfolio to fund higher yielding loan growth, for an economic environment with higher interest rates and macroeconomic uncertainty.
Loans
Loans held for investment totaled$15.05 billion atJune 30, 2022 , an increase of$751.7 million , or 5.3%, from$14.30 billion atDecember 31, 2021 . The increase was driven by an increase in loans funded and higher commercial line utilization rates, partially offset by prepayments and maturities during the first half of 2022. Commercial line utilization rates increased from an average rate of 35.2% for the fourth quarter of 2021 to 41.6% for the second quarter of 2022. SinceDecember 31, 2021 , investor loans secured by real estate increased$365.1 million , business loans secured by real estate increased$241.0 million , commercial loans increased$215.5 million , and retail loans decreased$18.9 million . The total end-of-period weighted average interest rate on loans, excluding fees and discounts, atJune 30, 2022 was 4.06%, compared to 3.95% atDecember 31, 2021 . The increase reflects the impact of higher rates on new originations and the repricing of loans as a result of theFederal Reserve Bank's interest rate increases sinceMarch 2022 , partially offset by prepayments of higher rate loans. Loans held for sale primarily represent the guaranteed portion of SBA loans, which the Bank originates for sale, and totaled$3.0 million atJune 30, 2022 , a decrease of$7.9 million from$10.9 million atDecember 31, 2021 . 86 -------------------------------------------------------------------------------- The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio, and gives the weighted average interest rate by loan category at the dates indicated: June 30, 2022 December 31, 2021 Weighted Weighted Percent Average Percent Average (Dollars in thousands) Amount of Total Interest Rate Amount of Total Interest Rate Investor loans secured by real estate CRE non-owner-occupied$ 2,788,715 18.5 % 4.21 %$ 2,771,137 19.4 % 4.19 % Multifamily 6,188,086 41.1 % 3.70 % 5,891,934 41.2 % 3.75 % Construction and land 331,734 2.2 % 5.67 % 277,640 1.9 % 4.88 % SBA secured by real estate 44,199 0.3 % 5.27 % 46,917 0.3 % 4.98 % Total investor loans secured by real estate 9,352,734 62.1 % 3.93 % 8,987,628 62.8 % 3.93 % Business loans secured by real estate CRE owner-occupied 2,486,747 16.5 % 4.06 % 2,251,014 15.7 % 4.07 % Franchise real estate secured 387,683 2.6 % 4.62 % 380,381 2.7 % 4.60 % SBA secured by real estate 67,191 0.4 % 5.30 % 69,184 0.5 % 5.23 % Total business loans secured by real estate 2,941,621 19.5 % 4.16 % 2,700,579 18.9 % 4.18 % Commercial loans Commercial and industrial 2,295,421 15.3 % 4.31 % 2,103,112 14.7 % 3.61 % Franchise non-real estate secured 415,830 2.8 % 4.79 % 392,576 2.7 % 4.76 % SBA non-real estate secured 11,008 0.1 % 5.66 % 11,045 0.1 % 5.54 % Total commercial loans 2,722,259 18.2 % 4.39 % 2,506,733 17.5 % 3.80 % Retail loans Single family residential 77,951 0.5 % 4.40 % 95,292 0.7 % 4.01 % Consumer 4,130 - % 5.79 % 5,665 0.1 % 4.98 % Total retail loans 82,081 0.5 % 4.45 % 100,957 0.8 % 4.05 % Loans held for investment before basis adjustment (1) 15,098,695 100.3 % 4.06 % 14,295,897 100.0 % 3.95 % Basis adjustment associated with fair value hedge (2) (51,087) (0.3) % - % - - % - % Loans held for investment 15,047,608 100.0 % 4.06 % 14,295,897 100.0 % 3.95 % Allowance for credit losses for loans held for investment (196,075) (197,752) Loans held for investment, net$ 14,851,533 $ 14,098,145 Total unfunded loan commitments$ 2,872,934 $ 2,507,911 Loans held for sale, at lower of cost or fair value 2,957 10,869
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(1) Includes net deferred origination fees of$3.1 million and$3.5 million , and unaccreted fair value net purchase discounts of$63.6 million and$77.1 million as ofJune 30, 2022 andDecember 31, 2021 , respectively. (2) Represents the basis adjustment associated with the application of hedge accounting on certain loans. 87 -------------------------------------------------------------------------------- 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 0.24% atJune 30, 2022 , compared to 0.14% atDecember 31, 2021 . The increase in delinquent loans during the six months endedJune 30, 2022 was primarily due to the addition of a multifamily loan relationship of$8.9 million , a CRE non-owner-occupied relationship of$6.4 million , and a C&I loan relationship of$4.5 million that were 90 days or more delinquent atJune 30, 2022 . The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated: 30 - 59 Days 60 - 89 Days 90 Days or More Total Principal Principal Principal Principal # of Balance # of Balance # of Balance # of Balance (Dollars in thousands) Loans of Loans Loans of Loans Loans of Loans Loans of Loans At June 30, 2022 Investor loans secured by real estate CRE non-owner-occupied 1$ 6,359 - $ - 3$ 10,230 4$ 16,589 Multifamily - - - - 3 8,873 3 8,873 Total investor loans secured by real estate 1 6,359 - - 6 19,103 7 25,462 Business loans secured by real estate CRE owner-occupied - - - - 3 4,889 3 4,889 SBA secured by real estate 1 83 - - - - 1 83 Total business loans secured by real estate 1 83 - - 3 4,889 4 4,972 Commercial loans Commercial and industrial 2 473 - - 3 4,744 5 5,217 SBA non-real estate secured - - - - 1 624 1 624 Total commercial loans 2 473 - - 4 5,368 6 5,841 Total 4$ 6,915 - $ - 13$ 29,360 17$ 36,275 Delinquent loans to loans held for investment 0.05 % - % 0.19 % 0.24 % 88
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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, 2021
Investor loans secured by real
estate
CRE non-owner-occupied - $ - - $ - 3 $ 10,255 3 $ 10,255
Multifamily 1 1,230 - - - - 1 1,230
SBA secured by real estate - - - - 1 337 1 337
Total investor loans secured by
real estate 1 1,230 - - 4 10,592 5 11,822
Business loans secured by real
estate
CRE owner-occupied - - - - 3 4,952 3 4,952
SBA secured by real estate - - - - 1 441 1 441
Total business loans secured by
real estate - - - - 4 5,393 4 5,393
Commercial loans
Commercial and industrial 8 92 - - 2 1,462 10 1,554
SBA non-real estate secured 1 73 - - 1 653 2 726
Total commercial loans 9 165 - - 3 2,115 12 2,280
Total 10 $ 1,395 - $ - 11 $ 18,100 21 $ 19,495
Delinquent loans to loans held for
investment 0.01 % - % 0.13 % 0.14 %
Troubled Debt Restructurings
We sometimes modify or restructure loans when the borrower is experiencing
financial difficulties by making a concession to the borrower in the form of
changes in the amortization terms, reductions in the interest rates, the
acceptance of interest-only payments, and, in limited cases, concessions to the
outstanding loan balances. These loans are classified as TDRs. At June 30, 2022
and December 31, 2021 , the Company had five and six loans, respectively,
totaling $16.6 million and $17.3 million , respectively, modified as TDRs, which
are comprised primarily of three CRE owner-occupied loans and one C&I loan
totaling $5.1 million and $5.2 million , respectively, belonging to one borrower
relationship with the terms modified due to bankruptcy, and one franchise
non-real estate secured loan for $11.5 million and two franchise non-real estate
secured loans totaling $12.1 million , respectively, belonging to another
borrower relationship with the terms modified for payment deferral. All TDRs
were on nonaccrual status as of June 30, 2022 and December 31, 2021 .
89
--------------------------------------------------------------------------------Nonperforming Assets
Nonperforming assets consist of loans whereby we have ceased accruing interest (nonaccrual loans), OREO, and other repossessed assets owned. Nonaccrual loans generally consist of loans that are 90 days or more past due or loans where, in the opinion of management, there is reasonable doubt as to the collection of principal and interest. Nonperforming assets totaled$44.4 million , or 0.20% of total assets, atJune 30, 2022 , an increase from$31.3 million , or 0.15% of total assets, atDecember 31, 2021 . There was no other real estate owned atJune 30, 2022 andDecember 31, 2021 . All nonperforming assets consisted of nonperforming loans atJune 30, 2022 andDecember 31, 2021 . The increase in nonperforming assets sinceDecember 31, 2021 was primarily due to the addition of a multifamily loan relationship of$8.9 million , a C&I loan relationship of$4.5 million , and a franchise non-real estate secured loan relationship of$2.8 million that were placed on nonaccrual status during the second quarter of 2022.
The Company had no loans 90 days or more past due and accruing at
The following table sets forth our composition of nonperforming assets at the dates indicated:
(Dollars in thousands) June 30, 2022 December 31, 2021 Nonperforming assets Investor loans secured by real estate CRE non-owner-occupied$ 10,230 $ 10,255 Multifamily 8,873 - SBA secured by real estate 562 937 Total investor loans secured by real estate 19,665 11,192 Business loans secured by real estate CRE owner-occupied 4,889 4,952 SBA secured by real estate 206 589 Total business loans secured by real estate 5,095 5,541 Commercial loans Commercial and industrial 4,744 1,798 Franchise non-real estate secured 14,311 12,079 SBA non-real estate secured 624 653 Total commercial loans 19,679 14,530 Retail loans Single family residential 6 10 Total retail loans 6 10 Total nonperforming loans
44,445 31,273 Other real estate owned - - Other assets owned - - Total$ 44,445 $ 31,273 Allowance for credit losses$ 196,075 $ 197,752 Allowance for credit losses as a percent of total nonperforming loans 441 % 632 % Nonperforming loans as a percent of loans held for investment 0.30 % 0.22 % Nonperforming assets as a percent of total assets 0.20 % 0.15 % TDRs included in nonperforming loans $
16,647 $ 17,277
90
--------------------------------------------------------------------------------Allowance for Credit Losses
The Company maintains an ACL for loans and unfunded loan commitments in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans and unfunded loan commitments at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. Loans that have been deemed by management to no longer possess similar risk characteristics are evaluated individually under a discounted cash flow approach, and loans that have been deemed collateral dependent are evaluated individually based on the expected estimated fair value of the underlying collateral. The Company measures the ACL on commercial real estate and commercial loans using a discounted cash flow approach, using the loan's effective interest rate, while the ACL for retail loans is based on a historical loss rate model. The discounted cash flow methodology relies on several significant components essential to the development of estimates for future cash flows on loans and unfunded commitments. These components consist of: (i) the PD, (ii) the LGD, which represents the estimated severity of the loss when a loan is in default, (iii) estimates for prepayment activity on loans, and (iv) the EAD. In the case of unfunded loan commitments, the Company incorporates estimates for utilization, based on historical loan data. PD and LGD for investor loans secured by real estate are derived from a third party, using proxy loan information, and loan and property level attributes. PD for both investor and business real estate loans, as well as commercial loans is heavily impacted by current and expected economic conditions. Forecasts for PDs and LGDs are made over a two-year period, which we believe is reasonable and supportable, and are based on economic scenarios. Beyond this point, PDs and LGDs revert to their historical long-term averages. The Company has reflected this reversion over a period of three years in the ACL model. The Company's ACL includes assumptions concerning current and future economic conditions using reasonable and supportable forecasts from an independent third party. These economic forecast scenarios are based on past events, current conditions, and the likelihood of future events occurring. Management periodically evaluates economic scenarios used in the Company's ACL model, and thus the scenarios as well as the assumptions within those scenarios, and whether to use a weighted multiple scenario approach, can vary from one period to the next based on changes in current and expected economic conditions, and due to the occurrence of specific events. As ofJune 30, 2022 , the Company's ACL model used three weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The use of three weighted scenarios atJune 30, 2022 is consistent with the approach used in the Company's ACL model atMarch 31, 2022 andDecember 31, 2021 . The Company's ACL model atJune 30, 2022 includes assumptions concerning the ongoing COVID-19 pandemic, the potential impact of the ongoing war betweenRussia andUkraine , ongoing inflationary pressures throughout theU.S. economy, general uncertainty concerning future economic conditions, and the potential for recessionary conditions. The Company has identified certain economic variables that have significant influence in the Company's model for determining the ACL. These key economic variables include theU.S. unemployment rate,U.S. real GDP growth, CRE prices, and the 10-yearU.S. Treasury yield. As ofJune 30, 2022 , the Company's ACL model assumes the following:
•The
•U.S real GDP growth will decelerate through the remainder of 2022, before returning to more consistent and modest levels of growth through the second quarter of 2024.
•CRE index growth decelerates through the remainder of 2022, experiences modest declines in 2023, before returning to modest levels of growth in 2024.
•The 10-year
91
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The Company periodically considers the need for qualitative adjustments to the
ACL. Qualitative adjustments may be related to and include, but not be limited
to, factors such as: (i) management's assessment of economic forecasts used in
the model and how those forecasts align with management's overall evaluation of
current and expected economic conditions, (ii) organization specific risks such
as credit concentrations, collateral specific risks, regulatory risks, and
external factors that may ultimately impact credit quality, (iii) potential
model limitations such as limitations identified through back-testing, and other
limitations associated with factors such as underwriting changes, acquisition of
new portfolios and changes in portfolio segmentation, and (iv) management's
overall assessment of the adequacy of the ACL, including an assessment of model
data inputs used to determine the ACL.
As of June 30, 2022 , qualitative adjustments primarily relate to certain
segments of the loan portfolio deemed by management to be of a higher-risk
profile where management believes the quantitative component of the Company's
ACL model may not have fully captured the associated impact to the ACL. In
addition, qualitative adjustments also relate to heightened uncertainty as to
future macroeconomic conditions and the related impact on certain loan segments.
Qualitative adjustments to the ACL were made for various classes of commercial
loans, construction loans, CRE owner-occupied loans, SBA investor loans secured
by real estate, franchise loans secured by real estate, multifamily and CRE
non-owner-occupied loans. Management reviews the need for an appropriate level
of qualitative adjustments on a quarterly basis, and as such, the amount and
allocation of qualitative adjustments may change in future periods.
The following charts quantify certain factors attributing to the changes in the
ACL on loans held for investment for the three and six months ended June 30,
2022 and June 30, 2021 :
[[Image Removed: ppbi-20220630_g2.jpg]][[Image Removed: ppbi-20220630_g3.jpg]]
[[Image Removed: ppbi-20220630_g4.jpg]][[Image Removed: ppbi-20220630_g5.jpg]]
92
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The decrease in the ACL for loans held for investment during the three months
ended June 30, 2022 of $1.4 million was comprised of $5.2 million in net
charge-offs, partially offset by a $3.8 million provision for credit losses. The
decrease in the ACL for loans held for investment during the six months ended
June 30, 2022 of $1.7 million was comprised of $5.7 million in net charge-offs,
partially offset by a $4.0 million provision for credit losses. The provision
expense for the three and six months ended June 30, 2022 was driven principally
by loan growth and higher net charge-offs, as well as the impact of
macroeconomic uncertainties.
The decrease in the ACL for loans held for investment during the three months
ended June 30, 2021 of $34.2 million was comprised of a $33.1 million provision
recapture and $1.1 million in net charge-offs. The decrease in the ACL for loans
held for investment during the six months ended June 30, 2021 of $35.2 million
was comprised of a $32.8 million provision recapture and $2.4 million in net
charge-offs. The provision recapture for the three and six months ended June 30,
2021 was reflective of improving economic forecasts used in the Company's ACL
model and the continued strong asset quality profile of the loan portfolio
relative to prior periods, partially offset by an increase in loans held for
investment.
At June 30, 2022 , the Company believes the ACL was adequate to cover current
expected credit losses in the loan portfolio. However, no assurance can be given
that we will not, in any particular period, sustain credit losses that exceed
the amount reserved, or that subsequent evaluation of our loan portfolio, in
light of prevailing factors, including economic conditions that may adversely
affect our market area or other circumstances, will not require significant
increases in the ACL. In addition, regulatory agencies, as an integral part of
their examination process, periodically review our ACL and may require us to
recognize additional provisions to increase the allowance and record charge-offs
in anticipation of future losses. Should any of the factors considered by
management in evaluating the appropriate level of the ACL change, including the
size and composition of the loan portfolio, the credit quality of the loan
portfolio, as well as forecasts of future economic conditions, the Company's
estimate of current expected credit losses could also significantly change and
affect the level of future provisions for credit losses.
93
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The following table sets forth the Company's ACL, its corresponding percentage
of the loan category balance, and the percentage of loan balance to total loans
held for investment in each of the loan categories listed for the periods
indicated:
June 30, 2022 December 31, 2021
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 $ 37,221 1.33 % 18.5 % $ 37,380 1.35 % 19.4 %
Multifamily 56,293 0.91 % 41.1 % 55,209 0.94 % 41.2 %
Construction and land 5,436 1.64 % 2.2 % 5,211 1.88 % 1.9 %
SBA secured by real estate 2,865 6.48 % 0.3 % 3,201 6.82 % 0.3 %
Total investor loans secured by real estate 101,815 1.09 % 62.1 % 101,001 1.12 % 62.8 %
Business loans secured by real estate
CRE owner-occupied 31,461 1.27 % 16.5 % 29,575 1.31 % 15.7 %
Franchise real estate secured 6,530 1.68 % 2.6 % 7,985 2.10 % 2.7 %
SBA secured by real estate 5,149 7.66 % 0.4 % 4,866 7.03 % 0.5 %
Total business loans secured by real estate 43,140 1.47 % 19.5 % 42,426 1.57 % 18.9 %
Commercial loans
Commercial and industrial 37,048 1.61 % 15.3 % 38,136 1.81 % 14.7 %
Franchise non-real estate secured 13,124 3.16 % 2.8 % 15,084 3.84 % 2.7 %
SBA non-real estate secured 452 4.11 % 0.1 % 565 5.12 % 0.1 %
Total commercial loans 50,624 1.86 % 18.2 % 53,785 2.15 % 17.5 %
Retail loans
Single family residential 278 0.36 % 0.5 % 255 0.27 % 0.7 %
Consumer loans 218 5.28 % - % 285 5.03 % 0.1 %
Total retail loans 496 0.60 % 0.5 % 540 0.53 % 0.8 %
Total (1) $ 196,075 1.30 % 100.0 % $ 197,752 1.38 % 100.0 %
______________________________
(1) Total loans utilized in the calculation of the ratio of ACL to total loans held for investment includes$51.1 million of the basis adjustment of certain loans included in fair value hedging relationships. Refer to Note 11 - Derivative Instruments for additional information. AtJune 30, 2022 , the ratio of ACL to loans held for investment was 1.30%, a decrease from 1.38% atDecember 31, 2021 . Our unamortized fair value discount on the loans acquired totaled$63.6 million , or 0.42% of total loans held for investment, atJune 30, 2022 , compared to$77.1 million , or 0.54% of total loans held for investment, atDecember 31, 2021 . 94 -------------------------------------------------------------------------------- The following table sets forth the Company's net charge-offs as a percentage to the average loan held for investment balances in each of the loan categories, as well as other credit related percentages at and for the periods indicated: Three Months EndedJune 30, 2022 March 31, 2022 June 30, 2021 Net Charge-offs Average Loan Net Charge-offs Average Loan Net Charge-offs Average Loan (Dollars in thousands) (Recoveries) Balance Percentage (Recoveries) Balance Percentage (Recoveries) Balance Percentage Investor loans secured by real estate CRE non-owner-occupied $ -$ 2,777,618 -% $ -$ 2,758,078 -% $ -$ 2,766,725 -% Multifamily - 6,141,536 -% - 5,903,012 -% - 5,326,740 -% Construction and land - 310,035 -% - 295,490 -% - 291,929 -% SBA secured by real estate - 48,494 -% 70 45,392 0.15% - 56,648 -% Total investor loans secured by real estate - 9,277,683 -% 70 9,001,972 -% - 8,442,042 -% Business loans secured by real estate CRE owner-occupied (4) 2,437,740 -% (10) 2,266,066 -% (15) 2,054,840 -% Franchise real estate secured - 385,198 -% - 382,381 -% - 339,313 -% SBA secured by real estate - 71,260 -% - 75,189 -% (80) 75,938 (0.11)% Total business loans secured by real estate (4) 2,894,198 -% (10) 2,723,636 -% (95) 2,470,091 -% Commercial loans Commercial and industrial 4,848 2,289,380 0.21% 338 2,155,582 0.02% 1,192 1,721,554 0.07% Franchise non-real estate secured 448 405,681 0.11% - 389,323 -% - 397,354 -% SBA non-real estate secured (16) 13,396 (0.12)% 48 11,607 0.41% (2) 14,904 (0.01)% Total commercial loans 5,280 2,708,457 0.19% 386 2,556,512 0.02% 1,190 2,133,812 0.06% Retail loans Single family residential (33) 79,071 (0.04)% - 84,181 -% (1) 164,561 -% Consumer 2 4,518 0.04% - 4,846 -% - 6,141 -% Total retail loans (31) 83,589 (0.04)% - 89,027 -% (1) 170,702 -% Total (1) $ 5,245$ 14,918,800 0.04% $ 446$ 14,371,147 -% $ 1,094$ 13,216,647 0.01% Allowance for credit losses to loans held for investment 1.30% 1.34% 1.71% Nonperforming loans to loans held for investment 0.30% 0.38% 0.25% Allowance for credit losses to nonperforming loans 441% 357% 677%
______________________________
(1) Average loan balance includes$45.1 million of average basis adjustment of certain loans included in fair value hedging relationships for the three months endedJune 30, 2022 . Refer to Note 11 - Derivative Instruments for additional information. 95 --------------------------------------------------------------------------------
For the Six Months Ended
June 30, 2022 June 30, 2021
Net Charge-offs Average Loan Net Charge-offs Average Loan
(Dollars in thousands) (Recoveries) Balance Percentage (Recoveries) Balance Percentage
Investor loans secured by real estate
CRE non-owner-occupied $ - $ 2,767,902 -% $ 154 $ 2,721,450 0.01%
Multifamily - 6,022,933 -% - 5,264,649 -%
Construction and land - 302,803 -% - 305,207 -%
SBA secured by real estate 70 46,952 0.15% 265 56,423 0.47%
Total investor loans secured by real estate 70 9,140,590 -% 419 8,347,729 0.01%
Business loans secured by real estate
CRE owner-occupied (14) 2,352,377 -% (30) 2,049,670 -%
Franchise real estate secured - 383,797 -% - 341,985 -%
SBA secured by real estate - 73,214 -% 18 76,542 0.02%
Total business loans secured by real estate (14) 2,809,388 -% (12) 2,468,197 -%
Commercial loans
Commercial and industrial 5,186 2,222,851 0.23% 1,870 1,706,965 0.11%
Franchise non-real estate secured 448 397,547 0.11% 156 408,020 0.04%
SBA non-real estate secured 32 12,506 0.26% (4) 15,107 (0.03)%
Total commercial loans 5,666 2,632,904 0.22% 2,022 2,130,092 0.09%
Retail loans
Single family residential (33) 81,612 (0.04)% (1) 203,003 -%
Consumer 2 4,681 0.04% - 6,375 -%
Total retail loans (31) 86,293 (0.04)% (1) 209,378 -%
Total (1) $ 5,691 $ 14,639,570 0.04% $ 2,428 $ 13,155,396 0.02%
Allowance for credit losses to loans held for
investment 1.30% 1.71%
Nonperforming loans to loans held for investment 0.30% 0.25%
Allowance for credit losses to nonperforming loans 441% 677%
______________________________
(1) Average loan balance includes$29.6 million of average basis adjustment of certain loans included in fair value hedging relationships for the six months endedJune 30, 2022 . Refer to Note 11 - Derivative Instruments for additional information. 96 --------------------------------------------------------------------------------
We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled$4.07 billion atJune 30, 2022 , a decrease of$585.8 million , or 12.6%, from$4.66 billion atDecember 31, 2021 , primarily to fund higher-yielding loan growth. The decrease was primarily the result of$703.6 million in sales of AFS investment securities,$270.3 million in principal payments, discounts from the AFS securities transferred to HTM, amortizations, and redemptions, and$224.7 million decrease resulting from mark-to-market fair value adjustments, partially offset by$612.9 million in purchases, primarily corporate debt securities and collateralized mortgage obligations. In general, the purchase of investment securities is primarily related to investing excess liquidity from our banking operations. During the second quarter of 2022, we have maintained a portion of the AFS securities portfolio in highly-liquid, short-term securities while also continuing to lower the effective duration of this portfolio to 3.4 years atJune 30, 2022 from 4.1 years atDecember 31, 2021 . This strategy enhances our interest rate sensitivity profile to the current rate environment and provides us with the flexibility to quickly redeploy these funds into higher-yielding assets as opportunities arise. AtJune 30, 2022 , AFS and HTM investment securities were$2.68 billion and$1.39 billion , respectively, compared to$4.27 billion and$381.7 million , respectively, atDecember 31, 2021 . During the second quarter of 2022, the Company reassessed classification of certain investments with longer duration and transferred approximately$444.6 million of the remaining AFS municipal bond portfolio, which the Company intends and has the ability to hold to maturity, to HTM securities. The transfer of these securities was accounted for at fair value on the transfer date. The municipal bonds had a net carrying amount of$400.8 million with a pre-tax unrealized loss of$43.8 million , which were reflected as discounts on the date of transfer. During the first six months of 2022, the Company transferred AFS securities of approximately$831.4 million of municipal bonds and$255.0 million of mortgage-backed securities, both of which the Company intends and has the ability to hold to maturity, to HTM securities. The transfer of these securities was accounted for at fair value on the transfer date. The municipal bonds had a net carrying amount of$780.7 million with a pre-tax unrealized loss of$50.8 million , and the mortgage-backed securities had a net carrying amount of$238.8 million with a pre-tax unrealized loss of$16.2 million , which were reflected as discounts on the date of transfer. These discounts are accreted into interest income as yield adjustments through earnings over the remaining term of the securities. The amortization of the unrealized holding loss reported in accumulated other comprehensive income largely offsets the effect on interest income of the accretion of the discount. No gains or losses were recorded at the time of transfer. The AFS securities transferred to HTM during the six months endedJune 30, 2022 were investment grade with no credit-related issues as of the transfer date. The transfer of AFS securities to HTM was part of our interest rate risk management strategy to limit future valuation changes resulting from interest rate increases. See Note 4 -Investment Securities to the consolidated financial statements in this Form 10-Q. The ACL on investment securities is determined for both the AFS and HTM classifications of the investment portfolio in accordance with ASC 326 and evaluated on a quarterly basis. As ofJune 30, 2022 , the Company had an ACL of$109,000 for HTM investment securities classified as municipal bonds, which were transferred from AFS since the third quarter of 2021. The Company had an ACL of$22,000 for HTM investment securities atDecember 31, 2021 . The Company recognized$68,000 and$19,000 of provision for credit losses for HTM investment securities during the three months endedJune 30, 2022 andMarch 31, 2022 , respectively, and$87,000 during the six months endedJune 30, 2022 . The Company did not recognize any provision for credit losses for HTM investment securities during the three and six months endedJune 30, 2021 . 97 -------------------------------------------------------------------------------- The following table sets forth the amortized costs and weighted average yields on our HTM investment security portfolio by contractual maturity as of the date indicated. Weighted average yields are an arithmetic computation of income within each maturity range based on the amortized costs of securities, not on a tax-equivalent basis. June 30, 2022 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 Average Average Average Average Average (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield HTM investment securities: Municipal bonds $ - - % $ - - %$ 60,867 1.56 %$ 1,087,544 2.08 %$ 1,148,411 2.05 % Mortgage-backed securities - - % - - % - - % 240,918 1.75 % 240,918 1.75 % Other - - % - - % - - % 1,462 0.97 % 1,462 0.97 % Total HTM investment securities $ - - % $ - - %$ 60,867 1.56 %$ 1,329,924 2.02 %$ 1,390,791 2.00 % The following table presents the fair value of AFS and the amortized cost of HTM investment securities portfolios by Moody's credit ratings atJune 30, 2022 . Collateralized Mortgage-backed (Dollars in thousands) U.S. Treasury Agency
Corporate Debt Municipal Bonds Mortgage Obligations Securities Other Total % Aaa - Aa3$ 33,360 $ 406,483 $ 19,635 $ 1,148,411 $ 789,786$ 1,115,132 $ -$ 3,512,807 86.3 % A1 - A3 - - 345,032 - - - - 345,032 8.5 % Baa1 - Baa3 - 5,812 204,748 - - - 1,462 212,022 5.2 % Total$ 33,360 $ 412,295 $ 569,415 $ 1,148,411 $ 789,786$ 1,115,132 $ 1,462 $ 4,069,861 100.0 % AtJune 30, 2022 , 94.8% of the Company's investment securities portfolio was rated "A1 -A3" or higher. We continue to monitor the quality of our investment securities portfolio in accordance with current financial conditions and economic environment.
Liabilities and Stockholders' Equity
Total liabilities were$19.24 billion atJune 30, 2022 , compared to$18.21 billion atDecember 31, 2021 . The increase of$1.03 billion , or 5.7%, fromDecember 31, 2021 was primarily due to a$969.0 million increase in deposits, a$600.0 million increase in FHLB term advances and a$19.2 million increase in other liabilities, partially offset by decreases of$550.0 million FHLB overnight advances and$8.0 million in other short-term borrowing. Deposits. AtJune 30, 2022 , deposits totaled$18.08 billion , an increase of$969.0 million , or 5.7%, from$17.12 billion atDecember 31, 2021 . The increase in deposits included$656.1 million in interest-bearing checking,$599.7 million in brokered certificates of deposit and an increase of$177.1 million in noninterest-bearing checking, partially offset by a decrease of$261.5 million in money market/savings and$202.3 million in retail certificates of deposit. The addition of brokered certificates of deposit was a result of our interest rate risk management strategy to bolster our liquidity position and provide greater balance sheet flexibility. The Company considers total deposits excluding all certificates of deposit and all brokered deposits as core deposits. AtJune 30, 2022 , core deposits totaled$16.63 billion , or 91.9% of total deposits, an increase of$574.2 million , or 3.58%, fromDecember 31, 2021 . The increase compared to the prior year end was primarily due to the increases in interest-bearing checking and noninterest-bearing checking, partially offset by the decrease in money market/savings. 98 --------------------------------------------------------------------------------
Non-maturity deposits totaled
The total end-of-period weighted average rate of deposits atJune 30, 2022 was 0.13%, an increase from 0.04% atDecember 31, 2021 , principally driven by the addition of brokered time deposits as part of our interest rate risk management strategy. The total end-of-period weighted average rate of core deposits atJune 30, 2022 was 0.06% compared to 0.03% atDecember 31, 2021 .
Our ratio of loans held for investment to deposits was 83.2% and 83.5% 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:
June 30, 2022 December 31, 2021
% of Total Weighted Average % of Total Weighted Average
(Dollars in thousands) Balance Deposits Rate Balance Deposits Rate
Core deposits
Noninterest-bearing checking $ 6,934,318 38.4 % - % $ 6,757,259 39.5 % - %
Interest-bearing checking 4,149,432 22.9 % 0.12 % 3,493,331 20.4 % 0.02 %
Money market 5,104,384 28.2 % 0.09 % 5,381,615 31.4 % 0.07 %
Savings 437,846 2.4 % 0.02 % 419,558 2.5 % 0.02 %
Total core deposits 16,625,980 91.9 % 0.06 % 16,051,763 93.8 % 0.03 %
Brokered money market 3,000 - % 0.03 % 5,553 - % 0.06 %
Time deposit accounts:
Less than 1.00% 700,695 3.9 % 0.18 % 1,012,473 5.9 % 0.18 %
1.00 - 1.99 543,953 3.0 % 1.53 % 39,322 0.3 % 1.49 %
2.00 - 2.99 210,985 1.2 % 2.20 % 6,296 - % 2.23 %
3.00 - 3.99 - - % - % 182 - % 3.45 %
4.00 - 4.99 - - % - % - - % - %
5.00 and greater - - % - % - - % - %
Total time deposit accounts 1,455,633 8.1 % 0.98 % 1,058,273 6.2 % 0.24 %
Total non-core deposits 1,458,633 8.1 % 0.98 % 1,063,826 6.2 % 0.24 %
Total deposits $ 18,084,613 100.0 % 0.13 % $ 17,115,589 100.0 % 0.04 %
The following table sets forth the estimated deposits exceeding the
The estimated aggregate amount of time deposits in excess of theFDIC insurance limit is$248.4 million atJune 30, 2022 and$357.1 million atDecember 31, 2021 . The following table sets forth the maturity distribution of the estimated uninsured time deposits: (Dollars in thousands) June 30, 2022 December 31, 2021 3 months or less$ 156,176 $ 297,595 Over 3 months through 6 months 65,706 28,187 Over 6 months through 12 months 21,311 23,051 Over 12 months 5,235 8,287 Total$ 248,428 $ 357,120 99
-------------------------------------------------------------------------------- Borrowings. AtJune 30, 2022 , total borrowings amounted to$930.9 million , an increase of$42.3 million , or 4.8%, from$888.6 million atDecember 31, 2021 . Total borrowings atJune 30, 2022 were comprised of$600.0 million of FHLB term advances and$330.9 million of subordinated debentures. The increase in borrowings atJune 30, 2022 as compared toDecember 31, 2021 was primarily due to an increase of$600.0 million in FHLB term advances, partially offset by a$550.0 million decrease in FHLB overnight advances and an$8.0 million decrease in other short-term borrowings. AtJune 30, 2022 , total borrowings represented 4.2% of total assets and had an end-of-period weighted average rate of 3.27%, compared with 4.2% of total assets and an end-of-period weighted average rate of 2.12% atDecember 31, 2021 .
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$59.7 million , net of unamortized debt issuance cost of$269,000 . 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$123.3 million , net of unamortized debt issuance cost of$1.7 million . Interest is payable semiannually at an initial fixed rate of 4.875% per annum. From and 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$147.9 million , net of unamortized debt issuance cost of$2.1 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 debentures, see Note 8 - Subordinated Debentures to the Consolidated Financial Statements in this Form 10-Q.
The following table sets forth certain information regarding the Company's borrowed funds at the dates indicated:
June 30, 2022 December 31, 2021
Weighted Weighted
(Dollars in thousands) Balance Average Rate Balance Average Rate
FHLB advances $ 600,000 2.15 % $ 550,000 0.20 %
Other borrowings - - % 8,000 2.15 %
Subordinated debentures 330,886 5.32 % 330,567 5.33 %
Total borrowings $ 930,886 3.27 % $ 888,567 2.12 %
Weighted average cost of borrowings during the
quarter 3.34 % 4.59 %
Borrowings as a percent of total assets 4.2 % 4.2 %
100-------------------------------------------------------------------------------- Stockholders' Equity. Total stockholders' equity was$2.76 billion as ofJune 30, 2022 , a$131.1 million decrease from$2.89 billion atDecember 31, 2021 . The current quarter's decrease in stockholders' equity was primarily due to$207.2 million in comprehensive loss from the impact of higher interest rates on our AFS securities portfolio, and$62.5 million in cash dividends, partially offset by$136.7 million net income. Our book value per share decreased to$29.01 atJune 30, 2022 from$30.58 atDecember 31, 2021 . AtJune 30, 2022 , the Company's tangible common equity to tangible assets ratio was 8.52%, a decrease from 9.52% atDecember 31, 2021 . Our tangible book value per share was$18.86 , compared to$20.29 atDecember 31, 2021 . The decreases in the ratio of tangible common equity to tangible assets and tangible book value per share atJune 30, 2022 from the prior quarter were primarily driven by the other comprehensive loss from the impact of higher interest rates on our AFS securities portfolio. For additional details, see "Non-GAAP measures" presented under Item 2 - Management's Discussion and Analysis.
CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments, to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit, and payment of operating expenses. While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by market interest rates, economic conditions, and competition. In addition to the interest payments on loans and investments as well as fees collected on the services we provide, our primary sources of funds generated during the first six months of 2022 were from:
•Principal payments on loans held for investment of
•Proceeds of
•Deposit growth of
•Increased FHLB borrowings of
We used these funds to:
•Originate loans held for investment of
•Purchase AFS securities of
•Return capital to shareholders through
•Originate loans held for sale 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. AtJune 30, 2022 , cash and cash equivalents totaled$972.8 million , and the market value of our investment securities AFS totaled$2.68 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 ofJune 30, 2022 , the maximum amount we could borrow through the FHLB was$8.65 billion , of which$5.68 billion was remaining available for borrowing based on collateral pledged of$8.87 billion in real estate loans. AtJune 30, 2022 , we had$600.0 million in FHLB term borrowings. AtJune 30, 2022 , we also had a$214,390 line with the FRB discount window secured by investment securities, as well as unsecured lines of credit aggregating to$330.0 million with other correspondent banks from which to purchase federal funds. As ofJune 30, 2022 , our liquidity ratio was 19.3%, 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. 101 -------------------------------------------------------------------------------- To the extent that 2022 deposit growth is not sufficient to satisfy our ongoing commitments to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, or make investments, we may access funds through our FHLB borrowing arrangement, unsecured lines of credit, or other sources. The Bank maintains liquidity guidelines in the Company's Liquidity Policy that permits the purchase of brokered deposit funds, in an amount not to exceed 10% of total deposits or 8% of total assets, as a secondary source for funding. AtJune 30, 2022 , we had$602.7 million in brokered deposits, which constituted 3.33% of total deposits and 2.74% of total assets at that date. During the second quarter of 2022, the Bank added approximately$600.0 million in brokered certificates of deposit as part of the interest rate risk management strategy to bolster our liquidity position and provide greater balance sheet flexibility. 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 six months endedJune 30, 2022 , the Bank paid$62.5 million in dividends to the Corporation. The Corporation maintains a line of credit of$25.0 million withU.S. Bank that will expire onSeptember 27, 2022 . The Corporation anticipates renewing the line of credit upon expiration. This line of credit provides an additional source of liquidity at the Corporation level. AtJune 30, 2022 , the Corporation had no outstanding balances against this line. During the first and second quarter of 2022, the Corporation declared a quarterly dividend payment of$0.33 per share. OnJuly 19, 2022 , the Company's Board of Directors declared a$0.33 per share dividend, payable onAugust 12, 2022 to stockholders of record as ofJuly 1, 2022 . The Corporation's Board of Directors periodically reviews whether to declare or pay cash dividends, taking into account, among other things, general business conditions, the Company's financial results, future prospects, capital requirements, legal and regulatory restrictions, and such other factors as the Corporation's Board of Directors may deem relevant. OnJanuary 11, 2021 , the Company's Board of Directors approved a stock repurchase program, which authorized the repurchase of up to 4,725,000 shares of its common stock, representing approximately 5% of the Company's issued and outstanding shares of common stock and approximately$150 million of common stock as ofDecember 31, 2020 based on the closing price of the Company's common stock onDecember 31, 2020 . During the first half of 2022, the Company did not repurchase any shares of common stock. See Part II, Item 2 - Unregistered Sales ofEquity Securities and Use of Proceeds for additional information. Our material cash requirements may include funding existing loan commitments, funding equity investments and affordable housing partnerships for LIHTC, withdrawal/maturity of existing deposits, repayment of borrowings, operating lease payments, and expenditures necessary to maintain current operations. The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and to meet required capital needs. The following schedule summarizes maturities and principal payments due on our contractual obligations, excluding accrued interest: 102 --------------------------------------------------------------------------------
June 30, 2022
(Dollars in thousands) Less than 1 year More than 1 year Total
FHLB advances and other borrowings $ 200,000 $ 400,000 $ 600,000
Subordinated debentures - 330,886 330,886
Certificates of deposit 1,308,180 147,453 1,455,633
Operating leases 19,759 52,804 72,563
Affordable housing partnerships commitment 5,851 10,915 16,766
Total contractual cash obligations $ 1,533,790 $ 942,058
We believe that the Company's liquidity sources will be sufficient to meet the
contractual obligations as they become due through the maintenance of adequate
liquidity levels.
In the ordinary course of business, we enter into various transactions to meet
the financing needs of our customers, which, in accordance with GAAP, are not
included in our consolidated balance sheets. These transactions include
off-balance sheet commitments, including commitments to extend credit and
standby letters of credit, and commitments to fund investments that qualify for
CRA credit. The following table presents a summary of the Company's commitments
to extend credit by expiration period:
June 30, 2022
(Dollars in thousands) Less than 1 year More than 1 year Total
Loan commitments to extend credit$ 1,406,887 $ 1,422,559 $ 2,829,446 Standby letters of credit 43,488 - 43,488 Total$ 1,450,375 $ 1,422,559 $ 2,872,934 Since many commitments to extend credit are expected to expire, the total commitment amounts do not necessarily represent future cash requirements. For further information, see Note 15 - Off-Balance Sheet Arrangements, Commitments, and Contingencies, to the consolidated financial statements of the Company's 2021 Form 10-K. 103 --------------------------------------------------------------------------------
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 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. 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 . AtJune 30, 2022 , the Company and Bank are in compliance with the capital conservation buffer requirement and exceeded the minimum common equity Tier 1, Tier 1, and total capital ratio, inclusive of the fully phased-in capital conservation buffer, of 7.00%, 8.50%, and 10.50%, respectively, and the Bank qualified as "well-capitalized" for purposes of the federal bank regulatory prompt corrective action regulations. 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 the 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 into regulatory capital at 25% per year over a three-year transition period. The final rule was adopted and became effective inSeptember 2020 . 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. This cumulative difference at the end of 2021 will be phased in regulatory capital over the three-year period fromJanuary 1, 2022 throughDecember 31, 2024 .
For regulatory capital purposes, the Corporation's subordinated debt is included in Tier 2 capital. See Note 8 - Subordinated Debentures for additional information.
104
--------------------------------------------------------------------------------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
June 30, 2022
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio 9.90% 4.00% N/A
Common equity tier 1 capital ratio 11.91% 7.00% N/A
Tier 1 capital ratio 11.91% 8.50% N/A
Total capital ratio 14.41% 10.50% N/A
Pacific Premier Bank
Tier 1 leverage ratio 11.41% 4.00% 5.00%
Common equity tier 1 capital ratio 13.72% 7.00% 6.50%
Tier 1 capital ratio 13.72% 8.50% 8.00%
Total capital ratio 14.54% 10.50% 10.00%
Minimum Required
for Capital
Adequacy Purposes
Inclusive of
Capital Minimum Required
Conservation For Well Capitalized
Actual Buffer Requirement
December 31, 2021
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio 10.08% 4.00% N/A
Common equity tier 1 capital ratio 12.11% 7.00% N/A
Tier 1 capital ratio 12.11% 8.50% N/A
Total capital ratio 14.62% 10.50% N/A
Pacific Premier Bank
Tier 1 leverage ratio 11.62% 4.00% 5.00%
Common equity tier 1 capital ratio 13.96% 7.00% 6.50%
Tier 1 capital ratio 13.96% 8.50% 8.00%
Total capital ratio 14.70% 10.50% 10.00%
105--------------------------------------------------------------------------------
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