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.
The following 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; •Our ability to attract and retain deposits and to access other sources of liquidity;
•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; •Possible impairment charges to goodwill, including any impairment that may result from increased volatility in our stock price;
•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 effectiveness of our risk management framework and quantitative models; •The transition away from USD LIBOR and related uncertainty as well as, the risks and costs related to our adoption of SOFR; •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 may further increase the required level of our allowance for credit losses in future periods; •Possible credit-related impairments of securities held by us;
•Changes in the level of our nonperforming assets and charge-offs;
•The impact of governmental efforts to restructure the
•The impact of recent or future changes in the
•Changes in consumer spending, borrowing, and savings habits;
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--------------------------------------------------------------------------------•The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
•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 bythe United States or other governments in response to acts or threats of terrorism and/or military conflicts, including the war betweenRussia andUkraine , which could impact business and economic conditions inthe United States and abroad; •Public health crises and pandemics, including the COVID-19 pandemic, and their effects on the economic and business environments in which we operate, including on our credit quality and business operations, as well as the impact on general economic and financial market conditions;
•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. 66 --------------------------------------------------------------------------------
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 nine months endedSeptember 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 . AtSeptember 30, 2022 , we primarily conduct business throughout theWestern Region ofthe United States from our 59 full-service depository branches located inArizona ,California ,Nevada , andWashington . 67 -------------------------------------------------------------------------------- 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 and exchange 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.
RECENT DEVELOPMENTS
While economic conditions have generally improved since the onset of the COVID-19 pandemic in early 2020, such as with favorable trends in employment metrics and increased economic activity, the strong demand for goods and services in recent years in conjunction with supply chain constraints have contributed to higher levels of inflation throughout theU.S. economy, including within the Company's market area. Inflation has resulted in higher prices for food, energy, housing, and various supply chain inputs, among others. These inflationary pressures have persisted throughout 2022, resulting in higher costs for consumers and businesses. To address the persistent levels of inflation, theFederal Open Market Committee ("FOMC") has taken steps to tighten monetary policy through a cumulative 375 basis point increase to the federal funds rate sinceMarch 2022 , as well as by beginning to reduce the size of theFederal Reserve's balance sheet. TheFOMC has stated that it remains committed to monetary policy measures that are designed to bring inflation down. The impact of these measures, including future actions taken by theFOMC , on the Company's business are uncertain. While the recent increases in interest rates have generally resulted in higher levels of interest income for the Company, they may also reduce economic activity overall or result in recessionary conditions in future periods. Should these ongoing economic pressures persist, we anticipate it could have an impact on the following: •Loan growth and interest income - If economic activity 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. 68 -------------------------------------------------------------------------------- •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 weakened 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 generally been favorable thus far, notwithstanding higher levels of inflation, there can be no assurance favorable economic conditions 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 record credit losses on certain financial assets in accordance with the CECL model stipulated under ASC 326, which is highly dependent upon expectations of future economic conditions and requires management judgment. Should expectations of future economic conditions deteriorate, the Company may be required to record additional provisions for credit losses. •Impairment charges - If economic conditions deteriorate, 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. •Accumulated other comprehensive income (loss) - Unrealized gains and losses on AFS investment securities are recognized in stockholders' equity as accumulated other comprehensive income (loss). If economic conditions deteriorate, and/or if the interest rates continue to increase, the valuation of the Company's AFS investment securities could be negatively impacted, which may lead to increases in other comprehensive loss, the potential for credit losses, decreases to the Company's stockholders' equity, and declines in the Company's tangible book value per share. See "Non-GAAP measures" for additional details. •Deposits and deposit costs - Given the expectation for further rate increases by theFOMC in the near future, it is likely that deposit costs will continue to increase and it may become more challenging for the Company to retain and attract deposit relationships. •Liquidity - Consistent with our prudent, proactive approach to liquidity management, we may take certain actions to further enhance our liquidity, including but not limited to, increasing our FHLB borrowings, increasing our brokered deposits, and liquidating loans and AFS investment securities. In the event that we liquidate AFS securities having an unrealized loss position, those losses would become realized.
The Company continues to focus on serving its customers and communities, maintaining the well-being of its employees, and executing its strategic initiatives. The Company continues to monitor the economic environment and will 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 ofSeptember 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. 70 -------------------------------------------------------------------------------- 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 Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Net income $ 73,363 $ 69,803
3,472 3,479 3,912 10,543 12,056
Less: amortization of intangible
assets expense tax adjustment (1) 991 993 1,119 3,009 3,449
Net income for average tangible
common equity $ 75,844 $ 72,289 $ 92,881 $ 217,604 $ 263,665
Average stockholders' equity $ 2,775,124 $ 2,764,893
61,101 64,583 75,795 64,588 79,812
Less: average goodwill 901,312 901,312 901,312 901,312 900,170
Average tangible common equity $ 1,812,711 $ 1,798,998 Return on average equity (2) 10.57 % 10.10 % 12.67 % 10.00 % 12.23 % Return on average tangible common equity (2) 16.74 % 16.07 % 19.89 % 15.81 % 19.52 %
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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.
September 30 ,
(Dollars in thousands) 2022 2021
Total stockholders' equity $ 2,735,396 $ 2,886,311
Less: intangible assets 960,340 970,883
Tangible common equity $ 1,775,056 $ 1,915,428
Total assets $ 21,619,201 $ 21,094,429
Less: intangible assets 960,340 970,883
Tangible assets $ 20,658,861 $ 20,123,546
Tangible common equity ratio 8.59 % 9.52 %
Common shares issued and outstanding 95,016,767 94,389,543
Book value per share $ 28.79 $ 30.58
Less: intangible book value per share 10.11 10.29
Tangible book value per share $ 18.68 $ 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 Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Total noninterest expense $ 100,866 $ 98,974 $ 96,040 $ 297,488 $ 283,025
Less: amortization of intangible
assets 3,472 3,479 3,912 10,543 12,056
Less: merger-related expense - - - - 5
Noninterest expense, adjusted $ 97,394 $ 95,495 $ 92,128 $ 286,945 $ 270,964
Net interest income before
provision for loan losses $ 181,112 $ 172,765 $ 169,069 $ 515,716 $ 491,655
Add: total noninterest income 20,164 22,193 30,100 68,251 80,569
Less: net (loss) gain from
investment securities (393) (31) 4,190 1,710 13,321
Less: other income - security
recoveries - - 1 - 9
Less: net gain (loss) from debt
extinguishment - - 970 - (180)
Revenue, adjusted $ 201,669 $ 194,989 $ 194,008 $ 582,257 $ 559,074
Efficiency ratio 48.3 % 49.0 % 47.5 % 49.3 % 48.5 %
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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 Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Net interest income $ 181,112 $
172,765
2,377 2,626 3,339 7,860 10,777
Less: accelerated accretion income 2,269 4,918 6,107 10,270 18,022
Less: premium amortization on CDs 39 60 390 195 3,083
Less: nonrecurring nonaccrual
interest paid (848) 48 (74) (1,156) (893)
Less: gain (loss) on fair value
hedging relationships 4,240 128 (95) 2,701 (95)
Core net interest income $ 173,035 $ 164,985 $ 159,402 $ 495,846 $ 460,761
Average interest-earning assets $ 19,929,636 $
19,876,806
Net interest margin (1) 3.61 % 3.49 % 3.51 % 3.50 % 3.50 % Core net interest margin (1) 3.44 % 3.33 % 3.31 % 3.37 % 3.28 %
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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 Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Interest income $ 199,025 $ 183,226 $ 176,047 $ 550,797 $ 519,733
Interest expense 17,913 10,461 6,978 35,081 28,078
Net interest income 181,112 172,765 169,069 515,716 491,655
Noninterest income 20,164 22,193 30,100 68,251 80,569
Revenue 201,276 194,958 199,169 583,967 572,224
Noninterest expense 100,866 98,974 96,040 297,488 283,025
Add: merger-related expense - - - - 5
Pre-provision net revenue $ 100,410 $ 95,984 $ 103,129 $ 286,479 $ 289,204
Pre-provision net revenue
(annualized) $ 401,640 $ 383,936 $ 412,516 $ 381,972 $ 385,605
Average assets $ 21,687,436 $ 21,670,153 $ 20,804,903 $ 21,440,803 $ 20,366,162
Pre-provision net revenue to
average assets 0.46 % 0.44 % 0.50 % 1.34 % 1.42 %
Pre-provision net revenue to
average assets (annualized) 1.85 % 1.77 % 1.98 % 1.78 % 1.89 %
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Cost of core deposits is a non-GAAP financial measure derived from GAAP-based amounts. Cost of core deposits is calculated as the ratio of core deposit interest expense to average core deposits. We calculate core deposit interest expense by excluding interest expense for certificates of deposit and brokered deposits from total deposit expense, and we calculate average core deposits by excluding certificates of deposit and brokered deposits from total deposits. Management believes cost of core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
(Dollars in thousands) 2022 2022 2021 2022 2021
Total deposits interest
expense $ 9,873 $ 2,682 $ 2,432 $ 14,228 $ 10,123
Less: certificates of deposit
interest expense 1,420 607 775 2,557 2,815
Less: brokered deposits
interest expense 3,827 327 2 4,155 148
Core deposits expense $ 4,626 $ 1,748 $ 1,655 $ 7,516 $ 7,160
Total average deposits $ 17,732,822 $ 17,752,727 $ 17,345,302 $ 17,590,276 $ 16,848,558
Less: average certificates of
deposit 835,645 922,784 1,196,187 934,518 1,304,436
Less: average brokered
deposits 703,848 85,131 5,551 268,812 45,181
Average core deposits $ 16,193,329 $ 16,744,812 $ 16,143,564 $ 16,386,946 $ 15,498,941
Cost of core deposits 0.11 % 0.04 % 0.04 % 0.06 % 0.06 %
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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 Nine Months Ended
(Dollar in thousands, except per share
data and September 30, June 30, September 30, September 30, September 30,
percentages) 2022 2022 2021 2022 2021Operating data Interest income$ 199,025 $ 183,226 $ 176,047 $ 550,797 $ 519,733 Interest expense 17,913 10,461 6,978 35,081 28,078 Net interest income 181,112 172,765 169,069 515,716 491,655 Provision for credit losses 1,077 469 (19,726) 1,994 (56,228) Net interest income after provision for credit losses 180,035 172,296 188,795 513,722
547,883
Net gain from sales of loans 457 1,136 1,187 3,087 3,094 Other noninterest income 19,707 21,057 28,913 65,164 77,475 Noninterest expense 100,866 98,974 96,040 297,488 283,025 Net income before income taxes 99,333 95,515 122,855 284,485 345,427 Income tax expense 25,970 25,712 32,767 74,415 90,369 Net income$ 73,363 $
69,803
$ 100,410 $ 95,984 $ 103,129 $ 286,479 $ 289,204 Share data Earnings per share: Basic$ 0.77 $ 0.74 $ 0.95 $ 2.22 $ 2.70 Diluted 0.77 0.73 0.95 2.21 2.68 Common equity dividends declared per share 0.33 0.33 0.33 0.99 0.96 Dividend payout ratio (1) 42.72 % 44.89 % 34.63 % 44.68 % 35.59 % Book value per share$ 28.79 $
29.01
18.68 18.86 19.75 18.68 19.75
Performance ratios
Return on average assets (3) 1.35 % 1.29 % 1.73 % 1.31 % 1.67 %
Return on average equity (3) 10.57 10.10 12.67 10.00 12.23
Return on average tangible common equity
(2)(3) 16.74 16.07 19.89 15.81 19.52
Pre-provision net revenue on average
assets (2)(3) 1.85 1.77 1.98 1.78 1.89
Net interest margin 3.61 3.49 3.51 3.50 3.50
Cost of deposits 0.22 0.06 0.06 0.11 0.08
Average equity to average assets 12.80 12.76 13.67 13.06 13.65
Efficiency ratio (2) 48.3 49.0 47.5 49.3 48.5
______________________________
(1) Dividend payout ratio is defined as common equity dividends declared per
share divided by basic earnings per share.
(2) 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.
(3) Ratio is annualized.
76
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In the third quarter of 2022, we reported net income of $73.4 million , or $0.77
per diluted share. This compares with net income of $69.8 million , or $0.73 per
diluted share, for the second quarter of 2022. The increase in net income was
primarily due to an $8.3 million increase in net interest income, partially
offset by a $2.0 million decrease in noninterest income, a $1.9 million increase
in noninterest expense, and a $608,000 increase in provision for credit losses.
Net income of $73.4 million , or $0.77 per diluted share, for the third quarter
of 2022 compares to net income for the third quarter of 2021 of $90.1 million ,
or $0.95 per diluted share. The decrease in net income was primarily due to a
$1.1 million provision expense for credit losses for the third quarter of 2022,
compared to a $19.7 million provision recapture for the third quarter of 2021, a
$9.9 million decrease in noninterest income, and a $4.8 million increase in
noninterest expense, partially offset by a $12.0 million increase in net
interest income and a $6.8 million decrease in income tax expense. The provision
recapture during the third quarter of 2021 was reflective of improved
macroeconomic forecasts used in the Company's ACL model relative to prior
periods.
For the third quarter of 2022, the Company's return on average assets was 1.35%,
return on average equity was 10.57%, and return on average tangible common
equity was 16.74%, compared to 1.29%, 10.10%, and 16.07%, respectively, for the
second quarter of 2022, and 1.73%, 12.67%, and 19.89%, respectively, for the
third quarter of 2021. For additional details, see "Non-GAAP measures" presented
under Item 2 - Management's Discussion and Analysis.
For the nine months ended September 30, 2022 , the Company recorded net income of
$210.1 million , or $2.21 per diluted share. This compares with net income of
$255.1 million or $2.68 per diluted share for the nine months ended
September 30, 2021 . The decrease in net income of $45.0 million was mostly due
to a $2.0 million provision expense for credit losses for the nine months ended
September 30, 2022 , compared to a $56.2 million provision recapture for the nine
months ended September 30, 2021 , a $14.5 million increase in noninterest expense
excluding merger-related expenses, and a $12.3 million decrease in noninterest
income, partially offset by a $24.1 million increase in net interest income and
a $16.0 million decrease in income tax expense. The provision recapture during
the nine months ended September 30, 2021 was reflective of improved
macroeconomic forecasts used in the Company's ACL model relative to prior
periods, partially offset by loan growth and net charge-offs.
For the nine months ended September 30, 2022 , the Company's return on average
assets was 1.31%, return on average equity was 10.00%, and return on average
tangible common equity was 15.81%, compared with 1.67%, 12.23%, and 19.52%,
respectively, for the nine months ended September 30, 2021 . For additional
details, see "Non-GAAP measures" presented under Item 2 - Management's
Discussion and Analysis.
77
--------------------------------------------------------------------------------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 $181.1 million in the third quarter of 2022, an
increase of $8.3 million , or 4.8%, from the second quarter of 2022. The increase
in net interest income was primarily attributable to higher yields on average
interest-earning assets and slightly higher average loan balances, a favorable
interest impact from fair value hedges on fixed-rate loans of $4.2 million , as
well as one more day of interest, partially offset by higher cost of funds and
lower loan-related fees and accretion income as a result of decreased prepayment
activity.
The net interest margin for the third quarter of 2022 increased 12 basis points
to 3.61%, from 3.49% in the prior quarter. The core net interest margin, which
excludes the impact of loan accretion income, certificates of deposit
mark-to-market amortization, interest impact from fair value hedge, and other
adjustments, increased 11 basis points to 3.44%, compared to 3.33% in the prior
quarter, reflecting higher yields on interest-earning assets and a favorable
remix of earning-assets towards higher yielding loans, partially offset by
higher cost of funds and lower loan prepayment fees. 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 third quarter of 2022 increased $12.0 million , or
7.1%, compared to the third quarter of 2021. The increase was attributable to
higher yields on average interest-earning assets and higher average loan
balances, as well as a favorable impact from fair value hedges on fixed-rate
loans, partially offset by higher cost of funds and lower loan-related fees and
accretion income as a result of decreased prepayment activity.
For the nine months ended 2022, net interest income increased $24.1 million , or
4.9%, compared to the nine months ended 2021. The increase was related to an
increase in average interest-earning assets, partially offset by lower average
loan yields, higher average interest-bearing liabilities, and higher cost of
funds. For the nine months ended 2022, the net interest margin was 3.50%,
unchanged from 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, interest impact from fair value hedge, and other
adjustments, was 3.37%, compared with 3.28% for the same period last year,
reflecting higher average interest-earning assets balance. For additional
details of the core net interest margin, see "Non-GAAP measures" presented under
Item 2 - Management's Discussion and Analysis.
78
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The following table presents the net interest margin, average balances
calculated based on daily average, interest income and yields earned on average
interest-earning assets and interest expense and rates paid on average
interest-bearing liabilities, and the average yield/rate by asset and liability
component for the periods indicated:
Average Balance Sheet
Three Months Ended
September 30, 2022 June 30, 2022 September 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 $ 665,510 $ 2,754 1.64 % $ 702,663 $ 1,211 0.69 % $ 663,076 $ 195 0.12 %
Investment securities 4,277,444 22,067 2.06 % 4,254,961 17,560 1.65 % 4,807,854 18,827 1.57 %
Loans receivable, net (1)(2) 14,986,682 174,204 4.61 % 14,919,182 164,455 4.42 % 13,660,242 157,025 4.56 %
Total interest-earning assets 19,929,636 199,025 3.96 % 19,876,806 183,226 3.70 % 19,131,172 176,047 3.65 %
Noninterest-earning assets 1,757,800 1,793,347 1,673,731
Total assets $ 21,687,436 $ 21,670,153 $ 20,804,903
Liabilities and equity
Interest-bearing deposits:
Interest checking $ 3,812,448 $ 1,658 0.17 % $ 4,055,506 $ 712 0.07 % $ 3,383,219 $ 290 0.03 %
Money market 5,053,890 2,940 0.23 % 5,231,464 1,010 0.08 % 5,554,881 1,309 0.09 %
Savings 434,591 28 0.03 % 432,586 27 0.03 % 401,804 58 0.06 %
Retail certificates of deposit 835,645 1,420 0.67 % 922,784 607 0.26 % 1,196,187 775 0.26 %
Wholesale/brokered certificates of
deposit 702,785 3,827 2.16 % 80,182 326 1.63 % - - - %
Total interest-bearing deposits 10,839,359 9,873 0.36 % 10,722,522 2,682 0.10 % 10,536,091 2,432 0.09 %
FHLB advances and other borrowings 636,006 3,480 2.17 % 602,621 3,217 2.14 % 1,670 1 0.24 %
Subordinated debentures 330,975 4,560 5.51 % 330,796 4,562 5.52 % 330,575 4,545 5.50 %
Total borrowings 966,981 8,040 3.31 % 933,417 7,779 3.34 % 332,245 4,546 5.43 %
Total interest-bearing liabilities 11,806,340 17,913 0.60 % 11,655,939 10,461 0.36 % 10,868,336 6,978 0.25 %
Noninterest-bearing deposits 6,893,463 7,030,205 6,809,211
Other liabilities 212,509 219,116 282,556
Total liabilities 18,912,312 18,905,260 17,960,103
Stockholders' equity 2,775,124 2,764,893 2,844,800
Total liabilities and equity $ 21,687,436 $ 21,670,153 $ 20,804,903
Net interest income $ 181,112 $ 172,765 $ 169,069
Net interest margin (3) 3.61 % 3.49 % 3.51 %
Cost of deposits (4) 0.22 % 0.06 % 0.06 %
Cost of funds (5) 0.38 % 0.22 % 0.16 %
Cost of core deposits (6) 0.11 % 0.04 % 0.04 %
Ratio of interest-earning assets to interest-bearing liabilities 168.80 % 170.53 % 176.03 %
______________________________
(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$4.6 million ,$7.5 million , and$9.4 million , respectively. (3) Represents annualized net interest income divided by average interest-earning assets. (4) Represents annualized interest expense on deposits divided by the sum of average interest-bearing deposits and noninterest-bearing deposits. (5) Represents annualized total interest expense divided by the sum of average total interest-bearing liabilities and noninterest-bearing deposits. (6) Reconciliation of the "Non-GAAP measures" presented under Item 2 - Management's Discussion and Analysis. 79 -------------------------------------------------------------------------------- Average Balance Sheet Nine Months Ended September 30, 2022 September 30, 2021 Average Average Average Average (Dollars in thousands) Balance Interest Yield/Cost Balance Interest Yield/Cost Assets Interest-earning assets: Cash and cash equivalents$ 564,727 $ 4,055 0.96 %$ 1,096,175 $ 811 0.10 % Investment securities 4,358,619 57,479 1.76 % 4,382,288 54,307 1.65 % Loans receivable, net (1)(2) 14,756,817 489,263 4.43 % 13,325,683 464,615 4.66 % Total interest-earning assets 19,680,163 550,797 3.74 % 18,804,146 519,733 3.70 % Noninterest-earning assets 1,760,640 1,562,016 Total assets$ 21,440,803 $ 20,366,162 Liabilities and equity Interest-bearing deposits: Interest checking$ 3,802,932 $ 2,599 0.09 %$ 3,200,920 $ 1,045 0.04 % Money market 5,208,713 4,838 0.12 % 5,520,919 5,899 0.14 % Savings 429,833 81 0.03 % 384,945 224 0.08 % Retail certificates of deposit 934,518 2,557 0.37 % 1,304,436 2,815 0.29 % Wholesale/brokered certificates of deposit 263,563 4,153 2.11 % 39,635 140 0.47 % Total interest-bearing deposits 10,639,559 14,228 0.18 % 10,450,855 10,123 0.13 % FHLB advances and other borrowings 489,464 7,171 1.96 % 9,921 66 0.89 % Subordinated debentures 330,801 13,682 5.51 % 436,888 17,889 5.46 % Total borrowings 820,265 20,853 3.39 % 446,809 17,955 5.37 % Total interest-bearing liabilities 11,459,824 35,081 0.41 % 10,897,664 28,078 0.34 % Noninterest-bearing deposits 6,950,717 6,397,703 Other liabilities 229,121 289,863 Total liabilities 18,639,662 17,585,230 Stockholders' equity 2,801,141 2,780,932 Total liabilities and equity$ 21,440,803 $ 20,366,162 Net interest income$ 515,716 $ 491,655 Net interest margin (3) 3.50 % 3.50 % Cost of deposits (4) 0.11 % 0.08 % Cost of funds (5) 0.25 % 0.22 % Cost of core deposits (6) 0.06 % 0.06 % Ratio of interest-earning assets to interest-bearing liabilities 171.73 % 172.55 % _____________________________ (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$18.1 million and$28.8 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. (6) Reconciliation of the "Non-GAAP measures" presented under Item 2 - Management's Discussion and Analysis. 80 -------------------------------------------------------------------------------- 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 nine months endedSeptember 30, 2022 to the three and nine months endedSeptember 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 September 30, 2022
Compared to
Three Months Ended June 30, 2022
Increase (Decrease) Due to
(Dollars in thousands) Volume Days Rate Net
Interest-earning assets
Cash and cash equivalents $ (61) $ 30 $ 1,574 $ 1,543
Investment securities 93 - 4,414 4,507
Loans receivable, net 746 1,894 7,109 9,749
Total interest-earning assets 778 1,924 13,097 15,799
Interest-bearing liabilities
Interest checking (40) 18 968 946
Money market (33) 32 1,931 1,930
Savings - - 1 1
Retail certificates of deposit (52) 15 850 813
Wholesale/brokered certificates of deposit 3,320 42 139 3,501
FHLB advances and other borrowings 180 38 45 263
Subordinated debentures 2 - (4) (2)
Total interest-bearing liabilities 3,377 145 3,930 7,452
Increase (decrease) in net interest income
81
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Three Months Ended September 30, 2022
Compared to
Three Months Ended September 30, 2021
Increase (Decrease) Due to
(Dollars in thousands) Volume Rate Net
Interest-earning assets
Cash and cash equivalents $ 1 $ 2,558 $ 2,559
Investment securities (1,728) 4,968 3,240
Loans receivable, net 15,399 1,780 17,179
Total interest-earning assets 13,672 9,306 22,978
Interest-bearing liabilities
Interest checking 41 1,327 1,368
Money market (106) 1,737 1,631
Savings 6 (36) (30)
Retail certificates of deposit (147) 792 645
Wholesale/brokered certificates of deposit 3,827 - 3,827
FHLB advances and other borrowings 3,409 70 3,479
Subordinated debentures 5 10 15
Total interest-bearing liabilities 7,035 3,900 10,935
Increase in net interest income $ 6,637 $ 5,406 $ 12,043
Nine Months Ended September 30, 2022
Compared to
Nine Months Ended September 30, 2021
Increase (Decrease) Due to
(Dollars in thousands) Volume Rate Net
Interest-earning assets
Cash and cash equivalents $ (188) $ 3,432 $ 3,244
Investment securities (291) 3,463 3,172
Loans receivable, net 48,675 (24,027) 24,648
Total interest-earning assets 48,196 (17,132) 31,064
Interest-bearing liabilities
Interest checking 228 1,326 1,554
Money market (321) (740) (1,061)
Savings 30 (173) (143)
Retail certificates of deposit (905) 647 (258)
Wholesale/brokered certificates of deposit 2,488 1,525 4,013
FHLB advances and other borrowings 6,949 156 7,105
Subordinated debentures (4,486) 279 (4,207)
Total interest-bearing liabilities 3,983 3,020 7,003
Increase (decrease) in net interest income $ 44,213
82
--------------------------------------------------------------------------------Provision for Credit Losses
For the third quarter of 2022, the Company recorded a$1.1 million provision expense for credit losses, compared to a$469,000 provision expense during the second quarter of 2022, and a$19.7 million provision recapture during the third quarter of 2021. The provision expense during the third quarter of 2022 was reflective of a combination of factors, including increases due to specific reserves on two individually evaluated loans and higher unfunded commitments in the commercial and industrial loan segment, partially offset by an overall decrease in loans held for investment and changes in the composition of the loan portfolio. With the increasing probability of downside risks due to high inflation, rising interest rates, higher energy prices, volatility observed in equity markets, 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 second quarter of 2022 was driven principally by loan growth and net charge-offs, as well as the impact of macroeconomic forecasts, partially offset by a recapture for unfunded commitments which was largely due to favorable changes in the unfunded lending segment mix. The provision recapture for the third quarter of 2021 was primarily due to improved macroeconomic forecasts used in the Company's ACL model relative to prior periods. Net loan charge-offs for the three months endedSeptember 30, 2022 totaled$1.1 million , compared with net loan charge-offs of$5.2 million for the three months endedJune 30, 2022 , and net loan charge-offs of$1.8 million for the three months endingSeptember 30, 2021 . Three Months Ended Variance From September 30, June 30, September 30, June 30, 2022 September 30, 2021 (Dollars in thousands) 2022 2022 2021 $ % $ % Provision for credit losses Provision for loan losses $ 546$ 3,803 $ (19,543) $ (3,257) (85.6) %$ 20,089 (102.8) % Provision for unfunded commitments 549 (3,402) (194) 3,951 (116.1) % 743 (383.0) % Provision for HTM securities (18) 68 11 (86) (126.5) % (29) (263.6) % Total provision for credit losses$ 1,077 $ 469 $ (19,726) $ 608 129.6 %$ 20,803 (105.5) % For the first nine months of 2022, the Company recorded a$2.0 million provision expense for credit losses, compared to a$56.2 million provision recapture recorded for the first nine months of 2021. The provision expense for the first nine months of 2022 was driven principally by loan growth and specific reserves on two individually evaluated loans, partially offset by a provision recapture for unfunded commitments, as well as the favorable impact of macroeconomic forecasts. The provision recapture for unfunded commitments was largely due to changes in the mix of unfunded commitments between various loan segments. The provision recapture for the first nine months of 2021 was reflective of improved macroeconomic forecasts used in the Company's ACL model relative to prior periods, partially offset by loan growth and net charge-offs. Nine Months Ended Variance From September 30, September 30, September 30, 2021 (Dollars in thousands) 2022 2021 $ % Provision for credit losses Provision for loans and lease losses$ 4,560 $ (52,359) $ 56,919 (108.7) % Provision for unfunded commitments (2,635) (3,880) 1,245 (32.1) % Provision for held-to-maturity securities 69 11 58 527.3 % Total provision for credit losses$ 1,994 $ (56,228) $ 58,222 (103.5) % 83 --------------------------------------------------------------------------------
Noninterest Income
The following table presents the components of noninterest income for the
periods indicated:
Three Months Ended Variance From
September 30, June 30, September 30, June 30, 2022 September 30, 2021
(Dollars in thousands) 2022 2022 2021 $ % $ %
Noninterest income
Loan servicing income $ 397 $ 502 $ 536 $ (105) (20.9) % $ (139) (25.9) %
Service charges on deposit
accounts 2,704 2,690 2,375 14 0.5 % 329 13.9 %
Other service fee income 323 366 350 (43) (11.7) % (27) (7.7) %
Debit card interchange fee
income 808 936 834 (128) (13.7) % (26) (3.1) %
Earnings on bank owned life
insurance 3,339 3,240 3,266 99 3.1 % 73 2.2 %
Net gain from sales of
loans 457 1,136 1,187 (679) (59.8) % (730) (61.5) %
Net (loss) gain from sales
of investment securities (393) (31) 4,190 (362) 1167.7 % (4,583) (109.4) %
Trust custodial account
fees 9,951 10,354 11,446 (403) (3.9) % (1,495) (13.1) %
Escrow and exchange fees 1,555 1,827 1,867 (272) (14.9) % (312) (16.7) %
Other income 1,023 1,173 4,049 (150) (12.8) % (3,026) (74.7) %
Total noninterest income $ 20,164 $ 22,193 $ 30,100 $ (2,029) (9.1) % $ (9,936) (33.0) %
Nine Months Ended Variance From
September 30, September 30, September 30, 2021
(Dollars in thousands) 2022 2021 $ %
Noninterest income
Loan servicing income $ 1,318 $ 1,616 $ (298) (18.4) %
Service charges on deposit accounts 8,009 6,629 1,380 20.8 %
Other service fee income 1,056 1,175 (119) (10.1) %
Debit card interchange fee income 2,580 2,720 (140) (5.1) %
Earnings on bank owned life insurance 9,800 7,778 2,022 26.0 %
Net gain from sales of loans 3,087 3,094 (7) (0.2) %
Net gain from sales of investment securities 1,710 13,321 (11,611) (87.2) %
Trust custodial account fees 31,884 26,565 5,319 20.0 %
Escrow and exchange fees 5,043 5,065 (22) (0.4) %
Other income 3,764 12,606 (8,842) (70.1) %
Total noninterest income $ 68,251 $ 80,569 $ (12,318) (15.3) %
Noninterest income for the third quarter of 2022 was $20.2 million , a decrease
of $2.0 million , or 9.1%, from the second quarter of 2022. The decrease was
primarily due to a $679,000 decrease in net gain from sales of loans, a $403,000
decrease in trust custodial account fees resulting primarily from a decrease in
the market value of custodial assets, and a $362,000 greater net loss from sales
of investment securities.
During the third quarter of 2022, the Bank sold $9.6 million of SBA loans for a
net gain of $434,000 and $15.0 million of other loans for a net gain of $23,000 ,
compared to the sales of $23.4 million of SBA loans and U.S. Department of
Agriculture ("USDA") loans for a net gain of $1.1 million in the second quarter
of 2022. The SBA business has slowed in the third quarter in connection with the
higher interest rates.
Additionally, during the third quarter of 2022, the Bank sold $231.1 million of
investment securities for a net loss of $393,000 , compared to the sales of $45.1
million of investment securities for a net loss of $31,000 in the second quarter
of 2022. See "Financial Condition - Investment Securities " for a discussion of
the actions the Bank took to reduce the size and duration of its AFS securities
which increased the Bank's asset sensitivity.
84
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Noninterest income for the third quarter of 2022 decreased $9.9 million , or
33.0%, compared to the third quarter of 2021. The decrease was primarily due to
a $4.6 million decrease in net gain from sales of investment securities, a $3.0
million decrease in other income, primarily due to lower CRA investment income
and the gain from debt extinguishment in the same period last year, a $1.5
million decrease in trust custodial account fees resulting primarily from a
decrease in the market value of custodial assets, and a $730,000 decrease in net
gain from sales of loans.
The net loss from sales of investment securities of $393,000 for the third
quarter of 2022 from the sales of $231.1 million of investment securities
reflected the negative impact on the values of AFS investment securities from
the rising interest rate environment, compared to sales of $161.6 million of
investment securities for a net gain of $4.2 million during the third quarter of
2021.
The net gain from sales of loans for the third quarter of 2022 decreased from
the same period last year reflecting lower net gain from the sales of $9.6
million of SBA and USDA loans for a net gain of $434,000 , compared with the
sales of $12.0 million of SBA loans for a net gain of $1.2 million during the
third quarter of 2021.
For the first nine months of 2022, noninterest income totaled $68.3 million , a
decrease of $12.3 million , or 15.3%, compared to the first nine months of 2021.
The decrease was primarily related to a $11.6 million decrease in net gain from
sales of investment securities and a $8.8 million decrease in other income,
primarily due to $5.8 million lower CRA investment income and $2.9 million of
SBA Paycheck Protection Program loan referral fees in the same period last year,
partially offset by a $5.3 million increase in trust custodial account fees, a
$2.0 million increase in earnings from bank owned life insurance ("BOLI"), and a
$1.4 million increase in service charges on deposit accounts.
Noninterest Expense
The following table presents the components of noninterest expense for the
periods indicated:
Three Months Ended Variance From
September 30, June 30, September 30, June 30, 2022 September 30, 2021
(Dollars in thousands) 2022 2022 2021 $ % $ %
Noninterest expense
Compensation and benefits $ 56,355 $ 57,562 $ 53,592 $ (1,207) (2.1) % $ 2,763 5.2 %
Premises and occupancy 12,011 11,829 12,611 182 1.5 % (600) (4.8) %
Data processing 7,058 6,604 6,296 454 6.9 % 762 12.1 %
FDIC insurance premiums 1,461 1,452 1,392 9 0.6 % 69 5.0 %
Legal and professional
services 4,075 4,629 4,563 (554) (12.0) % (488) (10.7) %
Marketing expense 1,912 1,926 2,008 (14) (0.7) % (96) (4.8) %
Office expense 1,338 1,252 1,076 86 6.9 % 262 24.3 %
Loan expense 789 1,144 1,332 (355) (31.0) % (543) (40.8) %
Deposit expense 4,846 4,081 3,974 765 18.7 % 872 21.9 %
Amortization of intangible
assets 3,472 3,479 3,912 (7) (0.2) % (440) (11.2) %
Other expense 7,549 5,016 5,284 2,533 50.5 % 2,265 42.9 %
Total noninterest expense $ 100,866 $ 98,974 $ 96,040 $ 1,892 1.9 % $ 4,826 5.0 %
85--------------------------------------------------------------------------------
Nine Months Ended Variance From
September 30, September 30, September 30, 2021
(Dollars in thousands) 2022 2021 $ %
Noninterest expense
Compensation and benefits $ 170,898 $ 159,614 $ 11,284 7.1 %
Premises and occupancy 35,792 36,831 (1,039) (2.8) %
Data processing 19,658 17,889 1,769 9.9 %
FDIC insurance premiums 4,309 3,885 424 10.9 %
Legal and professional services 12,772 12,684 88 0.7 %
Marketing expense 5,647 5,096 551 10.8 %
Office expense 3,793 4,494 (701) (15.6) %
Loan expense 3,067 3,612 (545) (15.1) %
Deposit expense 12,678 11,818 860 7.3 %
Merger-related expense - 5 (5) (100.0) %
Amortization of intangible assets 10,543 12,056 (1,513) (12.5) %
Other expense 18,331 15,041 3,290 21.9 %
Total noninterest expense $ 297,488 $ 283,025 $ 14,463 5.1 %
Noninterest expense totaled $100.9 million for the third quarter of 2022, an
increase of $1.9 million compared to the second quarter of 2022, primarily due
to a $2.5 million increase in other expense, largely attributable to a client's
unauthorized transaction incident for which the Bank provided a $1.9 million
provisional credit pending its pursuit of insurance coverage, and a $765,000
increase in deposit expense, partially offset by a $1.2 million decrease in
compensation and benefits as overall staffing decreased.
Noninterest expense increased by $4.8 million compared to the third quarter of
2021. The increase was primarily due to a $2.8 million increase in compensation
and benefits attributable to higher compensation due to merit increases and
higher stock compensation expense as well as a $2.3 million increase in other
expense due to a client's unauthorized transaction incident referenced above.
The Company's efficiency ratio was 48.3% for the third quarter of 2022, compared to 49.0% for the second quarter of 2022, and 47.5% for the third quarter of 2021.
Noninterest expense totaled$297.5 million for the first nine months of 2022, an increase of$14.5 million , or 5.1%, compared with the first nine months of 2021. The increase was driven primarily by an$11.3 million increase in compensation and benefits attributable to higher compensation from increased staffing and higher stock compensation expense, a$3.3 million increase in other expense, a$1.8 million increase in data processing, and an$860,000 increase in deposit expense, partially offset by a$1.5 million decrease in amortization of intangible assets, a$1.0 million decrease in premises and occupancy, and a$701,000 decrease in office expense.
The Company's efficiency ratio was 49.3% for the first nine months of 2022, compared to 48.5% for the first nine months of 2021.
86
--------------------------------------------------------------------------------Income Taxes
For the three months endedSeptember 30, 2022 ,June 30, 2022 , andSeptember 30, 2021 , income tax expense was$26.0 million ,$25.7 million , and$32.8 million , respectively, and the effective income tax rate was 26.1%, 26.9%, and 26.7%, respectively. For the nine months endedSeptember 30, 2022 and 2021, income tax expense was$74.4 million and$90.4 million , respectively, and the effective income tax rate was 26.2% and 26.2%, respectively. Our effective tax rate for the three and nine months endedSeptember 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 atSeptember 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 atSeptember 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$72,000 and$31,000 of such interest atSeptember 30, 2022 andDecember 31, 2021 , respectively. No amounts for penalties were accrued. 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 ofSeptember 30, 2022 andDecember 31, 2021 . 87 --------------------------------------------------------------------------------
FINANCIAL CONDITION
AtSeptember 30, 2022 , assets totaled$21.62 billion , an increase of$524.8 million , or 2.5%, from$21.09 billion atDecember 31, 2021 . The increase was primarily due to increases in total loans of$604.2 million and cash and cash equivalents of$434.5 million , partially offset by a$609.0 million decrease in investment securities. During the first nine months 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, securing term funding with FHLB, and adding brokered deposits, for an economic environment with higher interest rates and macroeconomic uncertainty.
Loans
Loans held for investment totaled$14.91 billion atSeptember 30, 2022 , an increase of$612.9 million , or 4.3%, 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 nine months of 2022. Commercial line average utilization rate increased from an average rate of 35.2% for the fourth quarter of 2021 to 40.4% for the third quarter of 2022. SinceDecember 31, 2021 , investor loans secured by real estate increased$399.4 million , business loans secured by real estate increased$224.4 million , commercial loans increased$79.2 million , and retail loans decreased$22.0 million . The total end-of-period weighted average interest rate on loans, excluding fees and discounts, atSeptember 30, 2022 was 4.34%, 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's interest rate increases sinceMarch 2022 . Loans held for sale primarily represent the guaranteed portion of SBA loans, which the Bank originates for sale, and totaled$2.2 million atSeptember 30, 2022 , a decrease of$8.7 million from$10.9 million atDecember 31, 2021 . 88 -------------------------------------------------------------------------------- The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio, and gives the weighted average interest rate by loan category at the dates indicated: September 30, 2022 December 31, 2021 Weighted Weighted Percent Average Percent Average (Dollars in thousands) Amount of Total Interest Rate Amount of Total Interest Rate Investor loans secured by real estate CRE non-owner-occupied$ 2,771,272 18.6 % 4.37 %$ 2,771,137 19.4 % 4.19 % Multifamily 6,199,581 41.6 % 3.78 % 5,891,934 41.2 % 3.75 % Construction and land 373,194 2.5 % 7.03 % 277,640 1.9 % 4.88 % SBA secured by real estate 42,998 0.3 % 6.35 % 46,917 0.3 % 4.98 % Total investor loans secured by real estate 9,387,045 63.0 % 4.10 % 8,987,628 62.8 % 3.93 % Business loans secured by real estate CRE owner-occupied 2,477,530 16.6 % 4.14 % 2,251,014 15.7 % 4.07 % Franchise real estate secured 383,468 2.6 % 4.69 % 380,381 2.7 % 4.60 % SBA secured by real estate 64,002 0.4 % 6.30 % 69,184 0.5 % 5.23 % Total business loans secured by real estate 2,925,000 19.6 % 4.26 % 2,700,579 18.9 % 4.18 % Commercial loans Commercial and industrial 2,164,623 14.5 % 5.38 % 2,103,112 14.7 % 3.61 % Franchise non-real estate secured 409,773 2.8 % 4.82 % 392,576 2.7 % 4.76 % SBA non-real estate secured 11,557 0.1 % 6.68 % 11,045 0.1 % 5.54 % Total commercial loans 2,585,953 17.4 % 5.30 % 2,506,733 17.5 % 3.80 % Retail loans Single family residential 75,176 0.5 % 4.96 % 95,292 0.7 % 4.01 % Consumer 3,761 - % 6.22 % 5,665 0.1 % 4.98 % Total retail loans 78,937 0.5 % 5.00 % 100,957 0.8 % 4.05 % Loans held for investment before basis adjustment (1) 14,976,935 100.5 % 4.34 % 14,295,897 100.0 % 3.95 % Basis adjustment associated with fair value hedge (2) (68,124) (0.5) % - % - - % - % Loans held for investment 14,908,811 100.0 % 4.34 % 14,295,897 100.0 % 3.95 % Allowance for credit losses for loans held for investment (195,549) (197,752) Loans held for investment, net$ 14,713,262 $ 14,098,145 Total unfunded loan commitments$ 2,823,555 $ 2,507,911 Loans held for sale, at lower of cost or fair value 2,163 10,869
______________________________
(1) Includes net deferred origination fees of$3.0 million and$3.5 million , and unaccreted fair value net purchase discounts of$59.0 million and$77.1 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. (2) Represents the basis adjustment associated with the application of hedge accounting on certain loans. 89 -------------------------------------------------------------------------------- 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 0.28% atSeptember 30, 2022 , compared to 0.14% atDecember 31, 2021 . The increase in delinquent loans during the nine months endedSeptember 30, 2022 was primarily due to the addition of$26.3 million of loans that were 90 or more days past due, consisting primarily of a CRE non-owner-occupied loan relationship of$16.4 million , a multifamily loan relationship of$6.1 million , and a C&I loan relationship of$3.7 million , partially offset by principal paydowns, charge-offs, and loans returned to current status. The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated: 30 - 59 Days 60 - 89 Days 90 Days or More Total Principal Principal Principal Principal # of Balance # of Balance # of Balance # of Balance (Dollars in thousands) Loans of Loans Loans of Loans Loans of Loans Loans of Loans AtSeptember 30, 2022 Investor loans secured by real estate CRE non-owner-occupied - $ - - $ - 2$ 16,869 2$ 16,869 Multifamily - - - - 2 6,074 2 6,074 Total investor loans secured by real estate - - - - 4 22,943 4 22,943 Business loans secured by real estate CRE owner-occupied - - 2 6,398 3 4,851 5 11,249 SBA secured by real estate 3 1,244 - - 1 83 4 1,327 Total business loans secured by real estate 3 1,244 2 6,398 4 4,934 9 12,576 Commercial loans Commercial and industrial 11 240 5 135 5 4,754 21 5,129 SBA non-real estate secured - - - - 1 607 1 607 Total commercial loans 11 240 5 135 6 5,361 22 5,736 Retail loans Consumer - - 1 2 - - 1 2 Total retail loans - - 1 2 - - 1 2 Total 14$ 1,484 8$ 6,535 14$ 33,238 36$ 41,257 Delinquent loans to loans held for investment 0.01 % 0.05 % 0.22 % 0.28 % 90
--------------------------------------------------------------------------------
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 September 30,
2022 and December 31, 2021 , the Company had five and six loans, respectively,
totaling $16.3 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 $11.2 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 September 30, 2022 and December 31, 2021 .
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.
91-------------------------------------------------------------------------------- Nonperforming assets totaled$60.5 million , or 0.28% of total assets, atSeptember 30, 2022 , an increase from$31.3 million , or 0.15% of total assets, atDecember 31, 2021 . There was no other real estate owned atSeptember 30, 2022 andDecember 31, 2021 . All nonperforming assets consisted of nonperforming loans atSeptember 30, 2022 andDecember 31, 2021 . The increase in nonperforming assets sinceDecember 31, 2021 was primarily due to the addition of two CRE non-owner-occupied loan relationships of$22.6 million , a multifamily loan relationship of$8.8 million , two CRE owner-occupied loan relationships of$6.4 million , and a C&I loan relationship of$3.7 million that were placed on nonaccrual status during the first nine months of 2022, partially offset by principal paydowns, charge-offs, and loans returned to accrual status during the third 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) September 30, 2022 December 31, 2021 Nonperforming assets Investor loans secured by real estate CRE non-owner-occupied $ 23,050 $ 10,255 Multifamily 8,806 - SBA secured by real estate 547 937 Total investor loans secured by real estate 32,403 11,192 Business loans secured by real estate CRE owner-occupied 11,249 4,952 SBA secured by real estate 197 589 Total business loans secured by real estate 11,446 5,541 Commercial loans Commercial and industrial 4,754 1,798 Franchise non-real estate secured 11,254 12,079 SBA non-real estate secured 607 653 Total commercial loans 16,615 14,530 Retail loans Single family residential - 10 Total retail loans - 10 Total nonperforming loans 60,464 31,273 Other real estate owned - - Other assets owned - - Total $ 60,464 $ 31,273 Allowance for credit losses $ 195,549$ 197,752 Allowance for credit losses as a percent of total nonperforming loans 323 % 632 %
Nonperforming loans as a percent of loans held for investment
0.41 % 0.22 %
Nonperforming assets as a percent of total assets 0.28 % 0.15 %
TDRs included in nonperforming loans $ 16,344 $ 17,277
92
--------------------------------------------------------------------------------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, while 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 ofSeptember 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 atSeptember 30, 2022 is consistent with the approach used in the Company's ACL model atJune 30, 2022 andDecember 31, 2021 . The Company's ACL model atSeptember 30, 2022 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout theU.S. economy, higher energy prices, the potential impact of the ongoing war betweenRussia andUkraine , general uncertainty concerning future economic conditions, and the potential for future 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 ofSeptember 30, 2022 , the Company's ACL model assumes the following:
•The
•U.S. real GDP growth will decelerate through the second quarter of 2023, before returning to more consistent and modest levels of growth through the third quarter of 2024.
•CRE index growth decelerates through the remainder of 2022, experiences modest declines in 2023, before returning to modest levels of growth by the second quarter of 2024.
•The 10-year
93
--------------------------------------------------------------------------------
The Company considers the need for qualitative adjustments to the ACL on a
quarterly basis. 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.
Qualitative adjustments at September 30, 2022 include those that increase and
decrease the level of allocated ACL to these segments of the loan portfolio:
investor loans secured by real estate, business loans secured by real estate,
and commercial loans.
The following charts quantify certain factors attributing to the changes in the
ACL on loans held for investment for the three and nine months ended
[[Image Removed: ppbi-20220930_g2.jpg]][[Image Removed: ppbi-20220930_g3.jpg]]
[[Image Removed: ppbi-20220930_g4.jpg]][[Image Removed: ppbi-20220930_g5.jpg]]
94
--------------------------------------------------------------------------------
The decrease in the ACL for loans held for investment during the three months
ended September 30, 2022 of $526,000 was comprised of $1.1 million in net
charge-offs, partially offset by a $546,000 provision for credit losses. The
provision for credit losses for the three months ended September 30, 2022 was
reflective of a combination of factors, including an increase due to specific
reserves on two individually evaluated loans, and a decrease due to an overall
decrease in loans held for investment, changes in the composition of the loan
portfolio, and an overall lower balance of qualitative adjustments included in
the ACL. The decrease in the ACL for loans held for investment during the nine
months ended September 30, 2022 of $2.2 million can be attributed to net
charge-offs of $6.8 million , partially offset by a $4.6 million provision for
credit losses. The provision for credit losses during the nine months ended
September 30, 2022 is largely attributed to an increase in loans held for
investment and specific reserves on two individually evaluated loans, partially
offset by the favorable impact of macroeconomic forecasts and an overall lower
balance of qualitative adjustments included in the ACL. Charge-offs during the
three months ended September 30, 2022 are largely attributed to one CRE
non-owner-occupied relationship, while charge-offs during the nine months ended
September 30, 2022 can be attributed to one C&I lending relationship, as well as
one CRE non-owner-occupied lending relationship.
The decrease in the ACL for loans held for investment during the three months
ended September 30, 2021 of $21.3 million was comprised of a $19.5 million
provision recapture and $1.8 million in net charge-offs. The provision recapture
for the three months ended September 30, 2021 was reflective of improving
macroeconomic forecasts employed in the Company's ACL model relative to prior
periods and the favorable asset quality profile of the loan portfolio, partially
offset by an increase in loans held for investment during the quarter. The
decrease in the ACL for the nine months ended September 30, 2021 of
$56.5 million was comprised of a $52.4 million provision recapture and
$4.2 million in net charge-offs. The provision recapture for the nine months
ended September 30, 2021 was also reflective of improving macroeconomic
forecasts employed in the Company's ACL model and the favorable asset quality
profile of the loan portfolio, partially offset by an increase in loans held for
investment during the first nine months of 2021
At September 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
recognize changes to the ACL based on judgments different from those of
management. 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.
95
--------------------------------------------------------------------------------
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:
September 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 $ 37,104 1.34 % 18.6 % $ 37,380 1.35 % 19.4 %
Multifamily 56,086 0.90 % 41.6 % 55,209 0.94 % 41.2 %
Construction and land 6,440 1.73 % 2.5 % 5,211 1.88 % 1.9 %
SBA secured by real estate 2,955 6.87 % 0.3 % 3,201 6.82 % 0.3 %
Total investor loans secured by real estate 102,585 1.09 % 63.0 % 101,001 1.12 % 62.8 %
Business loans secured by real estate
CRE owner-occupied 31,826 1.28 % 16.6 % 29,575 1.31 % 15.7 %
Franchise real estate secured 6,710 1.75 % 2.6 % 7,985 2.10 % 2.7 %
SBA secured by real estate 4,785 7.48 % 0.4 % 4,866 7.03 % 0.5 %
Total business loans secured by real estate 43,321 1.48 % 19.6 % 42,426 1.57 % 18.9 %
Commercial loans
Commercial and industrial 35,498 1.64 % 14.5 % 38,136 1.81 % 14.7 %
Franchise non-real estate secured 13,194 3.22 % 2.8 % 15,084 3.84 % 2.7 %
SBA non-real estate secured 440 3.81 % 0.1 % 565 5.12 % 0.1 %
Total commercial loans 49,132 1.90 % 17.4 % 53,785 2.15 % 17.5 %
Retail loans
Single family residential 296 0.39 % 0.5 % 255 0.27 % 0.7 %
Consumer loans 215 5.72 % - % 285 5.03 % 0.1 %
Total retail loans 511 0.65 % 0.5 % 540 0.53 % 0.8 %
Total (1) $ 195,549 1.31 % 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$68.1 million of the basis adjustment of certain loans included in fair value hedging relationships. Refer to Note 11 - Derivative Instruments for additional information. AtSeptember 30, 2022 , the ratio of ACL to loans held for investment was 1.31%, a decrease from 1.38% atDecember 31, 2021 . Our unamortized fair value discount on the loans acquired totaled$59.0 million , or 0.39% of total loans held for investment, atSeptember 30, 2022 , compared to$77.1 million , or 0.54% of total loans held for investment, atDecember 31, 2021 . 96 -------------------------------------------------------------------------------- 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 EndedSeptember 30, 2022 June 30, 2022 September 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 $ 1,128$ 2,767,511 0.04% $ -$ 2,777,618 -% $ -$ 2,794,197 -% Multifamily - 6,201,458 -% - 6,141,536 -% - 5,562,699 -% Construction and land - 359,352 -% - 310,035 -% - 301,187 -% SBA secured by real estate - 43,336 -% - 48,494 -% 158 54,254 0.29% Total investor loans secured by real estate 1,128 9,371,657 0.01% - 9,277,683 -% 158 8,712,337 -% Business loans secured by real estate CRE owner-occupied (19) 2,491,146 -% (4) 2,437,740 -% (14) 2,139,455 -% Franchise real estate secured - 383,124 -% - 385,198 -% - 355,001 -% SBA secured by real estate - 69,205 -% - 71,260 -% (50) 75,928 (0.07)% Total business loans secured by real estate (19) 2,943,475 -% (4) 2,894,198 -% (64) 2,570,384 -% Commercial loans Commercial and industrial 47 2,222,550 -% 4,848 2,289,380 0.21% (645) 1,819,372 (0.04)% Franchise non-real estate secured - 407,141 -% 448 405,681 0.11% 2,318 390,864 0.59% SBA non-real estate secured (26) 12,718 (0.20)% (16) 13,396 (0.12)% (15) 14,092 (0.11)% Total commercial loans 21 2,642,409 -% 5,280 2,708,457 0.19% 1,658 2,224,328 0.07% Retail loans Single family residential (58) 75,888 (0.08)% (33) 79,071 (0.04)% (2) 146,535 -% Consumer - 3,844 -% 2 4,518 0.04% - 6,342 -% Total retail loans (58) 79,732 (0.07)% (31) 83,589 (0.04)% (2) 152,877 -% Total (1) $ 1,072$ 14,986,332 0.01% $ 5,245$ 14,918,800 0.04% $ 1,750$ 13,659,926 0.01% Allowance for credit losses to loans held for investment 1.31% 1.30%
1.51%
Nonperforming loans to loans held for investment 0.41% 0.30%
0.25%
Allowance for credit losses to nonperforming loans 323% 441% 603%
______________________________
(1) Average loan balance includes$50.9 million and$45.1 million of average basis adjustment of certain loans included in fair value hedging relationships for the three months endedSeptember 30, 2022 andJune 30, 2022 , respectively. Refer to Note 11 - Derivative Instruments for additional information. 97 --------------------------------------------------------------------------------
For the Nine Months Ended
September 30, 2022 September 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 $ 1,128 $ 2,767,770 0.04% $ 154 $ 2,745,965 0.01%
Multifamily - 6,083,095 -% - 5,365,091 -%
Construction and land - 321,860 -% - 303,852 -%
SBA secured by real estate 70 45,733 0.15% 423 55,692 0.76%
Total investor loans secured by real estate 1,198 9,218,458 0.01% 577 8,470,600 0.01%
Business loans secured by real estate
CRE owner-occupied (33) 2,399,142 -% (44) 2,079,927 -%
Franchise real estate secured - 383,570 -% - 346,371 -%
SBA secured by real estate - 71,863 -% (32) 76,335 (0.04)%
Total business loans secured by real estate (33) 2,854,575 -% (76) 2,502,633 -%
Commercial loans
Commercial and industrial 5,233 2,222,749 0.24% 1,225 1,744,845 0.07%
Franchise non-real estate secured 448 400,780 0.11% 2,474 402,239 0.62%
SBA non-real estate secured 6 12,578 0.05% (19) 14,765 (0.13)%
Total commercial loans 5,687 2,636,107 0.22% 3,680 2,161,849 0.17%
Retail loans
Single family residential (91) 79,683 (0.11)% (3) 183,973 -%
Consumer 2 4,399 0.05% - 6,364 -%
Total retail loans (89) 84,082 (0.11)% (3) 190,337 -%
Total (1) $ 6,763 $ 14,756,427 0.05% $ 4,178 $ 13,325,419 0.03%
Allowance for credit losses to loans held for
investment 1.31% 1.51%
Nonperforming loans to loans held for investment 0.41% 0.25%
Allowance for credit losses to nonperforming loans 323% 603%
______________________________
(1) Average loan balance includes$36.8 million of average basis adjustment of certain loans included in fair value hedging relationships for the nine months endedSeptember 30, 2022 . Refer to Note 11 - Derivative Instruments for additional information. 98 --------------------------------------------------------------------------------
We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled$4.05 billion atSeptember 30, 2022 , a decrease of$609.0 million , or 13.1%, from$4.66 billion atDecember 31, 2021 , this decrease is primarily due to securities sales, the proceeds of which were utilized primarily to fund higher-yielding loan growth. The decrease in securities was primarily the result of$934.7 million in sales of AFS investment securities,$341.2 million in principal payments, discounts from the AFS securities transferred to HTM, amortizations, and redemptions, and$319.6 million decrease resulting from mark-to-market fair value adjustments, partially offset by$986.6 million in purchases, primarily collateralized mortgage obligations,U.S. Treasury , and corporate debt securities. In general, the purchase of investment securities is primarily related to investing excess liquidity from our banking operations. During the third 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 3.2 years atSeptember 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. AtSeptember 30, 2022 , AFS and HTM investment securities were$2.66 billion and$1.39 billion , respectively, compared to$4.27 billion and$381.7 million , respectively, atDecember 31, 2021 . Due to rising interest rates driven by theFederal Reserve's policy to fight against inflation, the unrealized losses of AFS investment securities has increased during 2022. During the third quarter of 2022, there was no investment securities transfer from AFS to HTM. During the first half 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. In total, 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 , both of 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 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 ofSeptember 30, 2022 andDecember 31, 2021 , the Company had an ACL of$91,000 and$22,000 , respectively, for HTM investment securities classified as municipal bonds. The Company recognized$18,000 of provision recapture for HTM investment securities during the three months endedSeptember 30, 2022 , and$68,000 and$11,000 of provision for credit losses for HTM investment securities during the three months endedJune 30, 2022 andSeptember 30, 2021 , respectively, and$69,000 and$11,000 during the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. The Company had no ACL for AFS investment securities atSeptember 30, 2022 andDecember 31, 2021 . 99 -------------------------------------------------------------------------------- The following table sets forth the fair value of AFS and the amortized cost of HTM investment securities as well as the weighted average yields on our 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. September 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 Investment securities available-for-sale:U.S. Treasury $ 9,639 3.72 %$ 24,226 3.94 %$ 12,909 1.33 % $ - - %$ 46,774 3.10 % Agency 25,329 3.10 % 298,271 1.02 % 79,143
1.34 % 28,120 1.49 % 430,863
1.23 %
Corporate - - % 289,014 3.48 % 266,736 3.26 % - - % 555,750 3.37 %
Collateralized mortgage
obligations 34,426 3.32 % 68,834 3.26 % 192,325
2.22 % 495,530 2.95 % 791,115 2.81 %
Mortgage-backed securities - - % 34,770 3.32 % 468,798 1.10 % 333,009 1.71 % 836,577 1.43 %
Total securities
available-for-sale 69,394 3.30 % 715,115 2.44 % 1,019,911 1.90 % 856,659 2.42 % 2,661,079 2.21 %
HTM investment securities:
Municipal bonds $ - - % $ 10,484 1.60 % $ 50,556 1.54 % $ 1,087,194 2.08 % $ 1,148,234 2.05 %
Mortgage-backed securities - - % - - % - - % 235,937 1.75 % 235,937 1.75 %
Other - - % - - % - - % 1,422 0.97 % 1,422 0.97 %
Total HTM investment securities $ - - % $ 10,484 1.60 % $ 50,556 1.54 % $ 1,324,553 2.02 % $ 1,385,593 2.00 %
Total securities $ 69,394 3.30 % $ 725,599 2.43 % $ 1,070,467 1.88 % $ 2,181,212 2.18 % $ 4,046,672 2.14 %
The following table presents the fair value of AFS and the amortized cost of HTM
investment securities portfolios by Moody's credit ratings at September 30,
2022 .
Collateralized Mortgage-backed
(Dollars in thousands) U.S. Treasury Agency Corporate Debt Municipal Bonds Mortgage Obligations Securities Other Total %
Aaa - Aa3 $ 46,774 $ 430,863 $ 19,804 $ 1,148,234 $ 791,115 $ 1,072,514 $ - $ 3,509,304 86.7 %
A1 - A3 - - 343,219 - - - - 343,219 8.5 %
Baa1 - Baa3 - - 192,727 - - - 1,422 194,149 4.8 %
Total $ 46,774 $ 430,863 $ 555,750 $ 1,148,234 $ 791,115 $ 1,072,514 $ 1,422 $ 4,046,672 100.0 %
At September 30, 2022 , 95.2% of the Company's investment securities portfolio
was rated "A1 - A3" or higher. We continue to monitor the quality of our
investment securities portfolio in accordance with current financial conditions
and economic environment.
Liabilities and Stockholders' Equity
Total liabilities were$18.88 billion atSeptember 30, 2022 , compared to$18.21 billion atDecember 31, 2021 . The increase of$675.7 million , or 3.7%, fromDecember 31, 2021 was primarily due to a$630.8 million increase in deposits, a$600.0 million increase in FHLB term advances, and a$2.4 million increase in other liabilities, partially offset by decreases of$550.0 million in FHLB overnight advances and$8.0 million in other short-term borrowings. 100 -------------------------------------------------------------------------------- Deposits. AtSeptember 30, 2022 , deposits totaled$17.75 billion , an increase of$630.8 million , or 3.7%, from$17.12 billion atDecember 31, 2021 . The increase in deposits included$999.0 million in brokered certificates of deposit,$112.2 million in interest-bearing checking, and an increase of$18.2 million in noninterest-bearing checking, partially offset by a decrease of$312.7 million in money market/savings and$185.9 million in retail certificates of deposit. The addition of brokered certificates of deposit of varying maturities 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. AtSeptember 30, 2022 , core deposits totaled$15.87 billion , or 89.5% of total deposits, a decrease of$176.8 million , or 1.1%, fromDecember 31, 2021 . The decrease compared to the prior year end was primarily due to the decrease in money market/savings, largely from retail and municipal deposits, partially offset by increases in interest-bearing checking and noninterest-bearing checking. Our core deposits reflect our relationship-focused business model that has resulted in 38.2% of noninterest-bearing checking deposits as a percent of total deposits. Given the rising interest rate environment, it is likely that the deposit costs will continue to increase and the deposit pricing impact may lead to deposit balance fluctuations.
Non-maturity deposits totaled
The total end-of-period weighted average rate of deposits atSeptember 30, 2022 was 0.37%, 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. While incorporating time deposits into our funding mix will increase our deposit costs in the near term, we believe that locking in this longer-term funding ahead of theFederal Reserve's anticipated additional interest rate increases will provide more funding flexibility and help us control our overall funding costs going forward. The total end-of-period weighted average rate of core deposits atSeptember 30, 2022 was 0.20%, compared to 0.03% atDecember 31, 2021 .
Our ratio of loans held for investment to deposits was 84.0% and 83.6% at
101
--------------------------------------------------------------------------------The following table sets forth the distribution of the Company's deposit accounts at the dates indicated and the weighted average interest rates as of the last day of each period for each category of deposits presented:
September 30, 2022 December 31, 2021
% of Total Weighted Average % of Total Weighted Average
(Dollars in thousands) Balance Deposits Rate Balance Deposits Rate
Noninterest-bearing checking $ 6,775,465 38.2 % - % $ 6,757,259 39.5 % - %
Interest-bearing checking 3,605,498 20.3 % 0.30 % 3,493,331 20.4 % 0.02 %
Money market 5,061,027 28.5 % 0.41 % 5,381,615 31.4 % 0.07 %
Savings 432,931 2.5 % 0.03 % 419,558 2.5 % 0.02 %
Total core deposits 15,874,921 89.5 % 0.20 % 16,051,763 93.8 % 0.03 %
Brokered money market 30 - % 0.05 % 5,553 - % 0.06 %
Time deposit accounts:
Less than 1.00% 555,530 3.1 % 0.15 % 1,012,473 5.9 % 0.18 %
1.00 - 1.99 444,222 2.5 % 1.71 % 39,322 0.3 % 1.49 %
2.00 - 2.99 417,358 2.3 % 2.44 % 6,296 - % 2.23 %
3.00 - 3.99 454,313 2.6 % 3.37 % 182 - % 3.45 %
4.00 - 4.99 - - % - % - - % - %
5.00 and greater - - % - % - - % - %
Total time deposit accounts 1,871,423 10.5 % 1.81 % 1,058,273 6.2 % 0.24 %
Total non-core deposits 1,871,453 10.5 % 1.81 % 1,063,826 6.2 % 0.24 %
Total deposits $ 17,746,374 100.0 % 0.37 % $ 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$297.0 million atSeptember 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) September 30, 2022 December 31, 2021 3 months or less $ 124,538 $ 297,595 Over 3 months through 6 months 137,876
28,187
Over 6 months through 12 months 27,248 23,051 Over 12 months 7,337 8,287 Total $ 296,999 $ 357,120 Borrowings. AtSeptember 30, 2022 , total borrowings amounted to$931.0 million , an increase of$42.5 million , or 4.8%, from$888.6 million atDecember 31, 2021 . Total borrowings atSeptember 30, 2022 were comprised of$600.0 million of FHLB term advances and$331.0 million of subordinated debentures. The increase in borrowings atSeptember 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. The increase in FHLB term advances was consistent with the Bank's strategy to provide liquidity and reduce interest rate risk. AtSeptember 30, 2022 , total borrowings represented 4.3% 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 . 102 --------------------------------------------------------------------------------
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$59.8 million , net of unamortized debt issuance cost of$239,000 . 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$148.0 million , net of unamortized debt issuance cost of$2.0 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:
September 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 331,045 5.32 % 330,567 5.33 %
Total borrowings $ 931,045 3.27 % $ 888,567 2.12 %
Weighted average cost of borrowings during the
quarter 3.31 % 4.59 %
Borrowings as a percent of total assets 4.3 % 4.2 %
Stockholders' Equity. Total stockholders' equity was $2.74 billion as of
September 30, 2022 , a $150.9 million decrease from $2.89 billion at December 31,
2021 . The decrease in stockholders' equity was primarily due to $273.3 million
in comprehensive loss from the impact of higher interest rates on our AFS
securities portfolio, and $93.8 million in cash dividends, partially offset by
$210.1 million net income.
Our book value per share decreased to $28.79 at September 30, 2022 from $30.58
at December 31, 2021 . At September 30, 2022 , the Company's tangible common
equity to tangible assets ratio was 8.59%, a decrease from 9.52% at December 31,
2021 . Our tangible book value per share was $18.68 , compared to $20.29 at
December 31, 2021 . The decreases in the ratio of tangible common equity to
tangible assets and tangible book value per share at September 30, 2022 from the
prior year-end 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.
103
--------------------------------------------------------------------------------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 nine months of 2022 were from: •Principal payments on loans held for investment of$1.97 billion ; •Proceeds of$1.20 billion from the sale, payments, or maturity of securities; •Deposit growth of$630.8 million ; and •Increased FHLB advances and other borrowings of$42.0 million .
We used these funds to:
•Originate loans held for investment of
Our most liquid assets are unrestricted cash and short-term investments. The levels of these assets are dependent on our operating, lending, and investing activities during any given period. We endeavor to take a prudent, proactive approach to liquidity management, as evidenced by our balance-sheet-oriented initiatives throughout 2022. AtSeptember 30, 2022 , cash and cash equivalents totaled$739.2 million . If additional liquidity is needed or otherwise desired as part of our liquidity management strategy, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, theFederal Reserve Board's lending programs, brokered deposits, as well as loan and investment securities sales. As ofSeptember 30, 2022 , the Bank had secured borrowing capacity with FHLB of$6.83 billion , of which$5.55 billion was remaining available for borrowing, based on collateral pledged of$8.84 billion at carrying value in qualifying loans. AtSeptember 30, 2022 , we had$600.0 million in FHLB term borrowings. AtSeptember 30, 2022 , we also had a$192,000 line with the FRB discount window secured by investment securities, as well as unsecured lines of credit aggregating to$330.0 million with other correspondent banks from which to purchase federal funds, and AFS investment securities with the aggregate market value of$2.66 billion . As ofSeptember 30, 2022 , our liquidity ratio was 17.8%, which is above the Company's minimum policy requirement of 10.0%. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis. 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. AtSeptember 30, 2022 , we had$999.0 million in brokered deposits, which constituted 5.63% of total deposits and 4.62% of total assets at that date. During the three and nine months endedSeptember 30, 2022 , the Bank added approximately$400.0 million and$1.00 billion , respectively, 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. 104 -------------------------------------------------------------------------------- The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity. The Corporation's primary sources of liquidity are dividends from the Bank. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation. Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations. During the nine months endedSeptember 30, 2022 , the Bank paid$93.8 million in dividends to the Corporation. The Corporation maintains a line of credit of$25.0 million withU.S. Bank that will expire onSeptember 26, 2023 . The Corporation anticipates renewing the line of credit upon expiration. This line of credit provides an additional source of liquidity at the Corporation level. AtSeptember 30, 2022 , the Corporation had no outstanding balances against this line. During the each of the first three quarters of 2022, the Corporation declared a quarterly dividend payment of$0.33 per share. OnOctober 19, 2022 , the Company's Board of Directors declared a$0.33 per share dividend, payable onNovember 10, 2022 to stockholders of record as ofOctober 31, 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 nine months endedSeptember 30, 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: September 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 - 331,045 331,045 Certificates of deposit 1,466,493 404,930 1,871,423 Operating leases 19,746 49,324 69,070 Affordable housing partnerships commitment 6,914 8,595 15,509 Total contractual cash obligations$ 1,693,153
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.
105
--------------------------------------------------------------------------------
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:
September 30, 2022
(Dollars in thousands) Less than 1 year More than 1 year Total
Loan commitments to extend credit$ 1,359,644 $ 1,421,109 $ 2,780,753 Standby letters of credit 42,802 - 42,802 Total$ 1,402,446 $ 1,421,109 $ 2,823,555 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.
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 . AtSeptember 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. The regulatory capital ratios of the Company and Bank further strengthened atSeptember 30, 2022 compared to the capital ratios atDecember 31, 2021 . 106 -------------------------------------------------------------------------------- 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, the eligible amount of which is phased out by 20% of the original amount at the beginning of each of the last five year before maturity. See Note 8 - Subordinated Debentures for additional information.
As defined in applicable regulations and set forth in the table below, the Corporation and the Bank continue to exceed the regulatory capital minimum requirements, and the Bank continues to exceed the "well capitalized" standards and the required conservation buffer at the dates indicated:
Minimum Required for
Capital Adequacy
Purposes Inclusive of Minimum Required
Capital Conservation For Well Capitalized
Actual Buffer Requirement
September 30, 2022
Pacific Premier Bancorp, Inc.
Consolidated
Tier 1 leverage ratio 10.12% 4.00% N/A
Common equity tier 1 capital ratio 12.36% 7.00% N/A
Tier 1 capital ratio 12.36% 8.50% N/A
Total capital ratio 14.83% 10.50% N/A
Pacific Premier Bank
Tier 1 leverage ratio 11.64% 4.00% 5.00%
Common equity tier 1 capital ratio 14.23% 7.00% 6.50%
Tier 1 capital ratio 14.23% 8.50% 8.00%
Total capital ratio 15.05% 10.50% 10.00%
107--------------------------------------------------------------------------------
Minimum Required for
Capital Adequacy
Purposes Inclusive of Minimum Required
Capital 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%
108--------------------------------------------------------------------------------
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