BANC OF CALIFORNIA, INC. Forward-Looking Information
This Form 10-Q contains certain "forward-looking statements" about the Company and its subsidiaries within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our expectations regarding our operating expenses, profitability, allowance for loan and lease losses, net interest margin, net interest income, deposit growth, loan and lease portfolio growth and production, acquisitions, maintaining capital adequacy, liquidity, goodwill, and interest rate risk management. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words "anticipate," "assume," "intend," "believe," "forecast," "expect," "estimate," "plan," "continue," "will," "should," "look forward" and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such forward-looking statements for a variety of factors, including without limitation: •the ongoing COVID-19 pandemic continues to affect the Company, its employees, customers and third-party service providers, and the ultimate extent of the impacts of the pandemic and related government stimulus programs on its business, financial position, results of operations, liquidity and prospects is still uncertain, due in part to the new variants of COVID-19; •weaker than expected general business and economic conditions, including a recession, could adversely affect the Company's revenues, the values of its assets and liabilities, negatively impact loan and deposit growth, and may impact our borrowers ability to repay their loans; •our ability to compete effectively against other financial service providers in our markets; •the impact of changes in interest rates or levels of market activity, especially on the fair value of our loan and investment portfolios; •deterioration, weaker than expected improvement, the rate of inflation, or other changes in the state of the economy or the markets in which we conduct business (including the levels of initial public offerings and mergers and acquisitions), which may affect the ability of borrowers to repay their loans and the value of real property or other property held as collateral for such loans; •changes in credit quality and the effect of credit quality and the current expected credit loss accounting standard on our provision for credit losses and allowance for credit losses; •our ability to attract deposits and other sources of funding or liquidity; •our ability to efficiently deploy excess liquidity; •the need to retain capital for strategic or regulatory reasons; •compression of the net interest margin due to changes in the interest rate environment, forward yield curves, loan products offered, spreads on newly originated loans and leases, changes in our asset or liability mix, and/or changes to the cost of deposits and borrowings; •impact of the benchmark interest rate reform in theU.S. including the transition away from theU.S. dollar London Inter-bank Offering Rate ("LIBOR") to alternative reference rates; •reduced demand for our services due to strategic or regulatory reasons or reduced demand for our products due to legislative changes such as new rent control laws; •our ability to successfully execute on initiatives relating to enhancements of our technology infrastructure, including client-facing systems and applications; •legislative or regulatory requirements or changes, including an increase of capital requirements, and increased political and regulatory uncertainty; •the impact on our reputation and business from our interactions with business partners, counterparties, service providers and other third parties; •the impact of climate change, public health issues, natural or man-made disasters such as wildfires, droughts and earthquakes, all of which are particularly common inCalifornia ; •higher than anticipated increases in operating expenses; 58 -------------------------------------------------------------------------------- •lower than expected dividends paid from the Bank to the holding company; •the amount and exact timing of any common stock repurchases will depend upon market conditions and other factors; •a deterioration in the overall macroeconomic conditions or the state of the banking industry that could warrant further analysis of the carrying value of goodwill and could result in an adjustment to its carrying value resulting in a non-cash charge; •the effectiveness of our risk management framework and quantitative models; •the costs and effects of legal, compliance, and regulatory actions, changes and developments, including the impact of adverse judgments or settlements in litigation, the initiation and resolution of regulatory or other governmental inquiries or investigations, and/or the results of regulatory examinations or reviews; •the impact of changes made to tax laws or regulations affecting our business, including the disallowance of tax benefits by tax authorities and/or changes in tax filing jurisdictions or entity classifications; and •our success at managing risks involved in the foregoing items and all other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and other documents filed or furnished by PacWest with theSEC . All forward-looking statements included in this Form 10-Q are based on information available at the time the statement is made. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.
Overview
PacWest Bancorp , aDelaware corporation, is a bank holding company registered under the BHCA, with our corporate headquarters located inBeverly Hills, California . Our principal business is to serve as the holding company for our wholly-owned subsidiary,Pacific Western Bank . References to "Pacific Western" or the "Bank" refer toPacific Western Bank together with its wholly-owned subsidiaries. References to "we," "us," or the "Company" refer toPacWest Bancorp together with its subsidiaries on a consolidated basis. When we refer to "PacWest" or to the "holding company," we are referring toPacWest Bancorp , the parent company, on a stand-alone basis. In managing the top line of our business, we focus on loan growth, loan yield, deposit cost, and net interest margin. Net interest income, on a year-to-date basis in 2022, accounted for 92.0% of net revenue (net interest income plus noninterest income). AtJune 30, 2022 , the Company had total assets of$41.0 billion , including$26.5 billion of total loans and leases, net of deferred fees,$6.8 billion of securities available-for-sale,$2.3 billion of securities held-to-maturity, and$2.2 billion of interest-earning deposits in financial institutions compared to$40.4 billion of total assets atDecember 31, 2021 , including$22.9 billion of total loans and leases, net of deferred fees,$10.7 billion of securities available-for-sale, no securities held-to-maturity, and$3.9 billion of interest-earning deposits in financial institutions. The$507.4 million increase in total assets since year-end was due primarily to a$3.6 billion increase in loans and leases, net of deferred fees, and a$2.3 billion increase in securities held-to-maturity, offset partially by a$3.9 billion decrease in securities available-for-sale and a$1.8 billion decrease in interest-earning deposits in financial institutions. The changes in securities available-for-sale and securities held-to-maturity was due mainly to a$2.3 billion transfer from available-for-sale to held-to-maturity during the second quarter of 2022. AtJune 30, 2022 , the Company had total liabilities of$37.0 billion , including total deposits of$34.0 billion and borrowings of$1.6 billion , compared to$36.4 billion of total liabilities atDecember 31, 2021 , including$35.0 billion of total deposits and no borrowings. The$528.6 million increase in total liabilities since year-end was due mainly to increases of$1.0 billion in overnight FHLB borrowings,$1.3 billion in non-core non-maturity deposits, and$1.2 billion in time deposits, offset partially by a decrease of$3.5 billion in core deposits. The decrease in core deposits was due primarily to a$3.4 billion decline in balances from our venture banking clients. AtJune 30, 2022 , core deposits totaled$29.2 billion , or 86% of total deposits, including$13.3 billion of noninterest-bearing demand deposits, or 39% of total deposits. 59 -------------------------------------------------------------------------------- AtJune 30, 2022 , the Company had total stockholders' equity of$4.0 billion which was virtually unchanged compared toDecember 31, 2021 . The$21.2 million decrease in stockholders' equity since year-end was due mainly to a$710.7 million decrease in accumulated other comprehensive income (loss) attributable to the investment securities portfolio going from a net unrealized gain of$66.0 million to a net unrealized loss of$644.8 million , and$60.0 million of cash dividends paid, offset partially by$498.5 million in net proceeds from our Series A preferred stock issuance inJune 2022 and$242.5 million in net earnings. Our consolidated Tier 1 capital and total capital ratios increased to 10.15%, and 13.12% atJune 30, 2022 due primarily to the Series A preferred stock issuance, while our consolidated common equity Tier 1 capital ratio decreased to 8.24% due to risk-weighted assets growing at a higher percentage than Tier 1 capital and the exclusion of Series A preferred stock from this capital calculation. Recent Events Preferred Stock Issuance OnJune 6, 2022 , the Company issued and sold 20,530,000 depositary shares (the "Depositary Shares"), each representing a 1/40th ownership interest in a share of the Company's 7.75% fixed rate reset non-cumulative, non-convertible, perpetual preferred stock, Series A, par value$0.01 per share (the "Series A preferred stock"), with a liquidation preference of$1,000 per share of Series A preferred stock (equivalent to$25.00 per Depositary Share). The Series A preferred stock qualifies as Tier 1 capital for purposes of the regulatory capital calculations. The gross proceeds were$513.3 million while net proceeds from the issuance of the Series A preferred stock, after deducting$14.7 million of offering costs including the underwriting discount and other expenses, were$498.5 million . A total of 513,250 shares of Series A preferred stock was issued. For additional information regarding the Series A preferred stock issuance, see Note 15. Stockholders' Equity.
Stock Repurchase Program
OnFebruary 15, 2022 , PacWest's Board of Directors authorized a new Stock Repurchase Program, effectiveMarch 1, 2022 , to repurchase shares of its common stock for an aggregate purchase price not to exceed$100 million with a program maturity date ofFebruary 28, 2023 .
Key Performance Indicators
Among other factors, our operating results generally depend on the following key performance indicators:
The Level of Net Interest Income
Net interest income is the excess of interest earned on our interest-earning
assets over the interest paid on our interest-bearing liabilities. Net interest
margin is net interest income (annualized if related to a quarterly period)
expressed as a percentage of average interest-earning assets. Tax equivalent net
interest income is net interest income increased by an adjustment for tax-exempt
interest on certain loans and investment securities based on a 21% federal
statutory tax rate. Tax equivalent net interest margin is calculated as tax
equivalent net interest income divided by average interest-earning assets.
Net interest income is affected by changes in both interest rates and the volume
of average interest-earning assets and interest-bearing liabilities. Our primary
interest-earning assets are loans and investment securities, and our primary
interest-bearing liabilities are deposits and borrowings. Contributing to our
strong net interest margin is our strong yield on loans and leases and
competitive cost of deposits. While our deposit balances will fluctuate
depending on deposit holders' perceptions of alternative yields available in the
market, we seek to minimize the impact of these variances by attracting a high
percentage of noninterest-bearing deposits.
60
--------------------------------------------------------------------------------Loan and Lease Growth
We actively seek new lending opportunities in an array of lending products. Our lending activities include real estate mortgage loans, real estate construction and land loans, commercial loans and leases, and a small amount of consumer lending. Our commercial real estate loans and real estate construction loans are secured by a range of property types. Our commercial loans and leases portfolio is diverse and generally includes various asset-secured loans, equipment-secured loans and leases, venture capital loans to support venture capital firms' operations and the operations of entrepreneurial and venture-backed companies during the various phases of their early life cycles, and secured business loans. Our loan origination process emphasizes credit quality. On occasion, to augment our internal loan production, we have purchased loans such as multi-family loans from other banks, private student loans from third-party lenders, and, most recently, single-family residential mortgage loans. Prior to our acquisition of Civic, we also purchased loans from Civic. These loan purchases help us manage the concentrations in our portfolio as they diversify the geographic, interest-rate risk, credit risk, and product composition of our loan portfolio. Achieving net loan growth is subject to many factors, including maintaining strict credit standards, competition from other lenders, and borrowers that opt to prepay loans.
The Magnitude of Credit Losses
We emphasize credit quality in originating and monitoring our loans and leases, and we measure our success by the levels of our classified loans and leases, nonaccrual loans and leases, and net charge-offs. We maintain an allowance for credit losses on loans and leases, which is the sum of the allowance for loan and lease losses and the reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off-balance sheet credit exposures. Loans and leases that are deemed uncollectable are charged off and deducted from the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are added to the allowance for loan and lease losses. The provision for credit losses on the loan and lease portfolio is based on our allowance methodology, which considers the impact of assumptions and is reflective of historical experience, economic forecasts viewed to be reasonable and supportable by management, the current loan and lease composition, and relative credit risks known as of the balance sheet date. For originated and acquired credit-deteriorated loans, a provision for credit losses may be recorded to reflect credit deterioration after the origination date or after the acquisition date, respectively. We regularly review loans and leases to determine whether there has been any deterioration in credit quality resulting from borrower operations or changes in collateral value or other factors which may affect collectability of our loans and leases. Changes in economic conditions, such as the rate of economic growth, the unemployment rate, rate of inflation, increases in the general level of interest rates, declines in real estate values, changes in commodity prices, and adverse conditions in borrowers' businesses, could negatively impact our borrowers and cause us to adversely classify loans and leases. An increase in classified loans and leases generally results in increased provisions for credit losses and an increased allowance for credit losses. Any deterioration in the commercial real estate market may lead to increased provisions for credit losses because our loans are concentrated in commercial real estate loans.
The Level of Noninterest Expense
Our noninterest expense includes fixed and controllable overhead, the largest
components of which are compensation and occupancy expense. It also includes
costs that tend to vary based on the volume of activity, such as loan and lease
production and the number and complexity of foreclosed assets. We measure
success in controlling both fixed and variable costs through monitoring of the
efficiency ratio, which is calculated by dividing noninterest expense (less
intangible asset amortization, net foreclosed assets expense (income), goodwill
impairment, and acquisition, integration and reorganization costs) by net
revenues (the sum of tax equivalent net interest income plus noninterest income,
less gain (loss) on sale of securities and gain (loss) on sales of assets other
than loans and leases).
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The following table presents the calculation of our efficiency ratio for the
periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
Efficiency Ratio 2022 2021 2022 2021
(Dollars in thousands)
Noninterest expense $ 183,645 $ 151,750$ 351,071 $ 301,886 Less: Intangible asset amortization 3,649 2,889 7,298 5,968 Foreclosed assets income, net (28) (119) (3,381) (118) Acquisition, integration and reorganization costs - 200 - 3,625 Noninterest expense used for efficiency ratio$ 180,024 $ 148,780 $ 347,154 $ 292,411 Net interest income (tax equivalent)$ 327,801 $ 270,083 $ 640,452 $ 534,718 Noninterest income 34,346 40,371 55,164 85,200 Net revenues 362,147 310,454 695,616 619,918 Less: (Loss) gain on sale of securities (1,209) - (1,105) 101 Net revenues used for efficiency ratio$ 363,356 $ 310,454 $ 696,721 $ 619,817 Efficiency ratio 49.5 % 47.9 % 49.8 % 47.2 %
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies and estimates relate to the allowance for credit losses on loans and leases held for investment, the carrying value of goodwill and other intangible assets, and the realization of deferred income tax assets and liabilities.
Our critical accounting policies and estimates are described in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K.
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--------------------------------------------------------------------------------Non-GAAP Measurements
We use 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. The methodology
for determining these non-GAAP measures may differ among companies. We used the
following non-GAAP measures in this Form 10-Q:
•Return on average tangible common equity, tangible common equity ratio, and
tangible book value per common share: Given that the use of these measures is
prevalent among banking regulators, investors, and analysts, we disclose them in
addition to the related GAAP measures of return on average equity, equity to
assets ratio, and book value per common share, respectively. The reconciliations
of these non-GAAP measurements to the GAAP measurements are presented in the
following tables for and as of the periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
Return on Average Tangible Common Equity 2022 2021 2022 2021
(Dollars in thousands)
Net earnings $ 122,360 $ 180,512 $ 242,488 $ 330,918
Add: Intangible asset amortization 3,649 2,889 7,298 5,968
Adjusted net earnings used for return on
average
tangible common equity $ 126,009 $ 183,401 $ 249,786 $ 336,886
Average stockholders' equity $ 3,652,368 $ 3,739,042 $ 3,749,386 $ 3,678,481
Less: Average intangible assets 1,445,333 1,224,208 1,447,184 1,208,581
Less: Average preferred stock 137,100 - 68,929 -
Average tangible common equity $ 2,069,935 $ 2,514,834 $ 2,233,273 $ 2,469,900
Return on average equity (1) 13.44 % 19.36 % 13.04 % 18.14 %
Return on average tangible common equity (2) 24.42 % 29.25 % 22.55 % 27.51 %
___________________________________
(1) Annualized net earnings divided by average stockholders' equity. (2) Annualized adjusted net earnings divided by average tangible common equity.
Tangible Common Equity Ratio and June 30, December 31,
Tangible Book Value Per Common Share 2022 2021
(Dollars in thousands, except per share
data)
Stockholders' equity $ 3,978,403 $ 3,999,630
Less: Preferred stock 498,516 -
Total common equity 3,479,887 3,999,630
Less: Intangible assets 1,443,395 1,450,693
Tangible common equity $ 2,036,492 $ 2,548,937
Total assets $ 40,950,723 $ 40,443,344
Less: Intangible assets 1,443,395 1,450,693
Tangible assets $ 39,507,328 $ 38,992,651
Equity to assets ratio 9.72 % 9.89 %
Tangible common equity ratio (1) 5.15 % 6.54 %
Book value per common share $ 28.93 $ 33.45
Tangible book value per common share (2) $ 16.93 $ 21.31
Shares outstanding 120,288,024 119,584,854
_______________________________________
(1) Tangible common equity divided by tangible assets. (2) Tangible common equity divided by shares outstanding.
63
--------------------------------------------------------------------------------Results of Operations
Earnings Performance
The following table presents performance metrics for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands, except per share data)
Earnings Summary:
Interest income $ 350,518 $ 280,505 $ 673,422 $ 553,842
Interest expense (26,593) (14,197) (40,780) (26,265)
Net interest income 323,925 266,308 632,642 527,577
Provision for credit losses (11,500) 88,000 (11,500) 136,000
Noninterest income 34,346 40,371 55,164 85,200
Noninterest expense (183,645) (151,750) (351,071) (301,886)
Earnings before income taxes 163,126 242,929 325,235 446,891
Income tax expense (40,766) (62,417) (82,747) (115,973)
Net earnings $ 122,360 $ 180,512 $ 242,488 $ 330,918
Per Common Share Data:
Diluted earnings per common share $ 1.02 $ 1.52 $ 2.03 $ 2.78
Book value per common share $ 28.93 $ 32.17
Tangible book value per common share (1)$ 16.93 $ 21.95 Performance Ratios: Return on average assets 1.23 % 2.11 % 1.22 % 2.03 % Return on average tangible common equity (1) 24.42 % 29.25 % 22.55 % 27.51 % Net interest margin (tax equivalent) 3.56 % 3.40 % 3.50 % 3.53 % Yield on average loans and leases (tax equivalent) 4.65 % 5.18 % 4.66 % 5.19 % Cost of average total deposits 0.18 % 0.10 % 0.13 % 0.11 % Efficiency ratio 49.5 % 47.9 % 49.8 % 47.2 % Capital Ratios (consolidated): Common equity tier 1 capital ratio 8.24 % 10.41 % Tier 1 capital ratio 10.15 % 10.41 % Total capital ratio 13.12 % 14.99 % Risk-weighted assets$ 33,009,455 $ 24,274,256 _____________________________
(1) See "- Non-GAAP Measurements."
64
--------------------------------------------------------------------------------Second Quarter of 2022 Compared to Second Quarter of 2021
Net earnings for the second quarter of 2022 were$122.4 million , or$1.02 per diluted share, compared to net earnings for the second quarter of 2021 of$180.5 million , or$1.52 per diluted share. The$58.2 million decrease in net earnings from the second quarter of 2021 was due mainly to a higher provision for credit losses of$99.5 million , lower noninterest income of$6.0 million and higher noninterest expense of$31.9 million , offset partially by higher net interest income of$57.6 million and lower income tax expense of$21.7 million . The increase in the provision for credit losses for the second quarter of 2022 from the second quarter of 2021 was due to an$11.5 million provision in the second quarter of 2022 compared to a provision benefit of$88.0 million in the second quarter of 2021. The provision in the second quarter of 2022 was due primarily to the growth in unfunded loan commitments of$2.0 billion in the quarter. The provision benefit in the second quarter of 2021 was due mainly to improvement in both macroeconomic forecast variables and loan portfolio credit quality metrics along with decreased provisions for individually evaluated loans and unfunded loan commitments. Noninterest income decreased due primarily to decreases of$4.0 million in warrant income,$1.3 million in dividends and gains (losses) on equity investments, and$1.4 million in gain on sale of loans and leases, with the first two items attributable mostly to a decrease in capital markets activity in 2022. Noninterest expense increased primarily due to an increase of$11.7 million in compensation expense, due mostly to the incremental expense of the higher headcount in 2022 from the acquired operations of the HOA Business in 2021 and increased levels of loan production in 2022. Net interest income increased due mainly to higher income on loans and leases and investment securities due primarily to higher average balances, offset partially by higher interest expense on interest-bearing liabilities due mainly to higher average balances and rates. The decrease in income tax expense was due primarily to lower pre-tax earnings in the second quarter of 2022 compared to the second quarter of 2021.
Six Months Ended
Net earnings for the six months endedJune 30, 2022 were$242.5 million , or$2.03 per diluted share, compared to a net earnings for the six months endedJune 30, 2021 of$330.9 million , or$2.78 per diluted share. The$88.4 million decrease in net earnings from the year-ago period was due mainly to a higher provision for credit losses of$147.5 million , lower noninterest income of$30.0 million , and higher noninterest expense of$49.2 million , offset partially by higher net interest income of$105.1 million and lower income tax expense of$33.2 million . The increase in the provision for credit losses for the six months endedJune 30, 2022 from the year-ago period was due to an$11.5 million provision in the six months endedJune 30, 2022 compared to a provision benefit of$136.0 million in the six months endedJune 30, 2021 . The provision in the six months endedJune 30, 2022 was due primarily to the growth in unfunded loan commitments of$2.9 billion during the period. The provision benefit in the six months endedJune 30, 2021 was due mainly to improvement in both macroeconomic forecast variables and loan portfolio credit quality metrics. Noninterest income decreased due primarily to decreases of$23.6 million in dividends and gains (losses) on equity investments and$9.5 million in warrant income, attributable mostly to a decrease in capital markets activity in 2022. Noninterest expense increased primarily due to an increase of$24.1 million in compensation expense, due mostly to the incremental expense of the higher headcount in 2022 from the acquired operations of Civic and the HOA Business in 2021 and increased levels of loan production in 2022. Net interest income increased due mainly to higher income on loans and leases and investment securities due primarily to higher average balances, offset partially by higher interest expense on interest-bearing liabilities due mainly to higher average balances and rates. The decrease in income tax expense was due primarily to lower pre-tax earnings in the six months endedJune 30, 2022 compared to the year-ago period. 65 --------------------------------------------------------------------------------
Net Interest Income
The following tables summarize the distribution of average assets, liabilities,
and stockholders' equity, as well as interest income and yields earned on
average interest-earning assets and interest expense and rates paid on average
interest-bearing liabilities, presented on a tax equivalent basis, for the
periods indicated:
Three Months Ended
June 30, 2022 June 30, 2021
Interest Yields Interest Yields
Average Income/ and Average Income/ and
Balance Expense Rates Balance Expense Rates
(Dollars in thousands)
ASSETS:
Loans and leases (1)(2)(3) $ 25,449,773 $ 295,154 4.65 % $ 19,057,420 $ 246,147 5.18 %
Investment securities (2)(4) 9,488,653 54,910 2.32 % 6,492,721 36,111 2.23 %
Deposits in financial institutions 1,984,751 4,330
0.88 % 6,347,764 2,022 0.13 %
Total interestearning assets (2) 36,923,177 354,394
3.85 % 31,897,905 284,280 3.57 % Other assets 3,108,714 2,428,207 Total assets$ 40,031,891 $ 34,326,112 LIABILITIES AND STOCKHOLDERS' EQUITY: Interest checking$ 6,517,381 3,816 0.23 %$ 7,235,726 2,394 0.13 % Money market 10,553,942 8,448 0.32 % 8,484,933 3,318 0.16 % Savings 650,479 41 0.03 % 598,225 36 0.02 % Time 1,939,816 3,057 0.63 % 1,498,169 1,521 0.41 % Total interestbearing deposits 19,661,618 15,362 0.31 % 17,817,053 7,269 0.16 % Borrowings 1,356,616 2,441 0.72 % 225,446 265 0.47 % Subordinated debt 863,653 8,790 4.08 % 735,725 6,663 3.63 %
Total interestbearing liabilities 21,881,887 26,593
0.49 % 18,778,224 14,197 0.30 % Noninterestbearing demand deposits 13,987,398 11,304,757 Other liabilities 510,238 504,089 Total liabilities 36,379,523 30,587,070 Stockholders' equity 3,652,368 3,739,042 Total liabilities and stockholders' equity$ 40,031,891 $ 34,326,112 Net interest income (2)$ 327,801 $ 270,083 Net interest rate spread (2) 3.36 % 3.27 % Net interest margin (2) 3.56 % 3.40 % Total deposits (5)$ 33,649,016 $ 15,362 0.18 %$ 29,121,810 $ 7,269 0.10 % _____________________ (1) Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans. (2) Tax equivalent. (3) Includes net loan premium amortization of$5.8 million and$1.5 million for the three months endedJune 30, 2022 and 2021, respectively. (4) Includes tax-equivalent adjustments of$2.0 million and$2.2 million for the three months endedJune 30, 2022 and 2021, respectively, related to tax-exempt interest on investment securities. The federal statutory rate utilized was 21%. (5) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits. 66 --------------------------------------------------------------------------------
Six Months Ended
June 30, 2022 June 30, 2021
Interest Yields Interest Yields
Average Income/ and Average Income/ and
Balance Expense Rates Balance Expense Rates
(Dollars in thousands)
ASSETS:
Loans and leases (1)(2)(3) $ 24,446,967 $ 564,675 4.66 % $ 18,992,727 $ 488,993 5.19 %
Investment securities (2)(4) 9,940,670 110,504 2.24 % 5,940,995 68,440 2.32 %Deposits in financial institutions 2,530,921 6,053
0.48 % 5,573,300 3,550 0.13 %
Total interestearning assets (2) 36,918,558 681,232
3.72 % 30,507,022 560,983 3.71 % Other assets 3,039,450 2,372,015 Total assets$ 39,958,008 $ 32,879,037 LIABILITIES AND STOCKHOLDERS' EQUITY: Interest checking$ 6,804,407 5,592 0.17 %$ 6,821,101 4,626 0.14 % Money market 10,702,374 11,909 0.22 % 8,231,870 6,596 0.16 % Savings 646,615 80 0.02 % 585,662 71 0.02 % Time 1,611,039 3,989 0.50 % 1,495,731 3,476 0.47 % Total interestbearing deposits 19,764,435 21,570 0.22 % 17,134,364 14,769 0.17 % Borrowings 830,453 2,602 0.63 % 225,748 458 0.41 % Subordinated debt 863,613 16,608 3.88 % 601,658 11,038 3.70 %
Total interestbearing liabilities 21,458,501 40,780
0.38 % 17,961,770 26,265 0.29 % Noninterestbearing demand deposits 14,224,217 10,742,233 Other liabilities 525,904 496,553 Total liabilities 36,208,622 29,200,556 Stockholders' equity 3,749,386 3,678,481 Total liabilities and stockholders' equity$ 39,958,008 $ 32,879,037 Net interest income (2)$ 640,452 $ 534,718 Net interest rate spread (2) 3.34 % 3.42 % Net interest margin (2) 3.50 % 3.53 % Total deposits (5)$ 33,988,652 $ 21,570 0.13 %$ 27,876,597 $ 14,769 0.11 % _____________________ (1) Includes nonaccrual loans and leases and loan fees. Includes tax-equivalent adjustments related to tax-exempt interest on loans. (2) Tax equivalent. (3) Includes net loan premium amortization of$11.5 million and$2.7 million for the six months endedJune 30, 2022 and 2021, respectively. (4) Includes tax-equivalent adjustments of$4.2 million and$4.2 million for the six months endedJune 30, 2022 and 2021, respectively, related to tax-exempt interest on investment securities. The federal statutory rate utilized was 21%. (5) Total deposits is the sum of interest-bearing deposits and noninterest-bearing demand deposits. The cost of total deposits is calculated as annualized interest expense on total deposits divided by average total deposits. 67 --------------------------------------------------------------------------------
Second Quarter of 2022 Compared to Second Quarter of 2021
Net interest income increased by$57.6 million to$323.9 million for the second quarter of 2022 compared to$266.3 million for the second quarter of 2021 due mainly to higher income on loans and leases and investment securities, offset partially by higher interest expense. The increase in interest income on loans and leases was attributable to a higher average balance, offset partially by a lower yield on average loans and leases. The tax equivalent yield on average loans and leases was 4.65% for the second quarter of 2022, compared to 5.18% for the same quarter of 2021. The increase in interest income on investment securities was due to a higher average balance. The increase in interest expense was due to a higher cost and balance of average interest-bearing liabilities. The tax equivalent NIM was 3.56% for the second quarter of 2022 compared to 3.40% for the comparable quarter last year. The increase in the tax equivalent NIM was due mostly to the change in the mix of average interest-earning assets, offset partially by the lower yield on average loans and leases. The change in the mix of average interest-earning assets was due to the increase in the balance of average loans and leases and investment securities as a percentage of average interest-earning assets from 80% to 95% and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets from 20% to 5%. The balance of average loans and leases increased by$6.4 billion , the balance of average investment securities increased by$3.0 billion , and the balance of average deposits in financial institutions declined by$4.4 billion . The cost of average total deposits increased to 0.18% for the second quarter of 2022 from 0.10% for the second quarter of 2021 due mainly to higher average balances and rates on higher-cost wholesale and brokered time deposits, as well as higher market rates on our deposit products. Average wholesale and brokered time deposits increased by$630.1 million to$1.9 billion for the second quarter of 2022 from$1.2 billion for the second quarter of 2021.
Six Months Ended
Net interest income increased by$105.1 million to$632.6 million for the six months endedJune 30, 2022 compared to$527.6 million for the six months endedJune 30, 2021 due mainly to higher income on loans and leases and investment securities, offset partially by higher interest expense. The increase in interest income on loans and leases was attributable to a higher average balance, offset partially by a lower yield on average loans and leases. The tax equivalent yield on average loans and leases was 4.66% for the six months endedJune 30, 2022 compared to 5.19% for the same period in 2021. The increase in interest income on investment securities was due to a higher average balance. The increase in interest expense was due to a higher balance and cost of average interest-bearing liabilities. The tax equivalent NIM was 3.50% for the six months endedJune 30, 2022 compared to 3.53% for the same period last year. The decrease in the tax equivalent NIM was due mostly to the lower yields on average loans and leases and investment securities, offset partially by the change in the mix of average interest-earning assets. The change in the mix of average interest-earning assets was due to the increase in the balance of average loans and leases and investment securities as a percentage of average interest-earning assets from 82% to 93% and the decrease in the balance of average deposits in financial institutions as a percentage of average interest-earning assets from 18% to 7%. The balance of average loans and leases increased by$5.5 billion , the balance of average investment securities increased by$4.0 billion , and the balance of average deposits in financial institutions declined by$3.0 billion .
The cost of average total deposits increased to 0.13% for the six months ended
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--------------------------------------------------------------------------------Provision for Credit Losses
The following table sets forth the details of the provision for credit losses on loans and leases held for investment and held-to-maturity securities and information regarding credit quality metrics for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in thousands)
Provision For Credit Losses:
(Reduction in) addition to allowance for
loan and lease losses $ (10,000) $ (72,000) $ (12,000) $ (125,000)
Addition to (reduction in) reserve for
unfunded
loan commitments 20,000 (16,000) 22,000 (11,000)
Total loan-related provision $ 10,000 $ (88,000) Addition to allowance for held-to-maturity securities 1,500 - 1,500 - Total provision for credit losses$ 11,500 $ (88,000)
Credit Quality Metrics: Net recoveries on loans and leases held for investment (1)$ (1,307) $ (5,155) $ (141) $ (2,419) Annualized net recoveries to average loans and leases (0.02) % (0.11) % - % (0.03) % At quarter-end: Allowance for credit losses$ 283,776 $ 300,171 Allowance for credit losses to loans and leases held for investment 1.07 % 1.54 % Allowance for credit losses to nonaccrual loans and leases held for investment 361.4 % 528.4 % Nonaccrual loans and leases held for investment$ 78,527 $ 56,803
Performing TDRs held for investment
$ 104,264 $ 147,267 Special mention loans and leases held for investment$ 480,261 $ 536,052
______________________
(1) See "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and
Leases Held for Investment" for detail of charge-offs and recoveries by loan
portfolio segment, class, and subclass for the periods presented.
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Provisions for credit losses are charged to earnings for the allowance for loan
and lease losses, the reserve for unfunded loan commitments, and the allowance
for credit losses on held-to-maturity securities. The provision for credit
losses on our loans and leases held for investment is based on our allowance
methodology and is an expense that, in our judgment, is required to maintain an
adequate allowance for credit losses. For further details on our loan-related
allowance for credit losses methodology, see "- Balance Sheet Analysis -
Allowance for Credit Losses on Loans and Leases Held for Investment" contained
herein.
Second Quarter of 2022 Compared to Second Quarter of 2021
The provision for credit losses increased by$99.5 million to a provision of$11.5 million for the second quarter of 2022 compared to a provision benefit of$88.0 million for the second quarter of 2021. During the second quarter of 2022, the$10.0 million loan-related provision was primarily attributable to growth in unfunded loan commitments. We also recorded a$1.5 million provision on held-to-maturity securities related to the$2.3 billion transfer from available-for-sale securities during the quarter and the estimated current expected credit loss on those held-to-maturity securities. During the second quarter of 2021, a provision benefit was recorded as a result of improvement in both macro-economic forecast variables and loan portfolio credit quality metrics.
Six Months Ended
The provision for credit losses increased by$147.5 million to a provision of$11.5 million for the six months endedJune 30, 2022 compared to a provision benefit of$136.0 million for the six months endedJune 30, 2021 . During the six months endedJune 30, 2022 , the$10.0 million loan-related provision was primarily attributable to growth in unfunded loan commitments. We also recorded a$1.5 million provision on held-to-maturity securities related to the$2.3 billion transfer from available-for-sale securities during the second quarter of 2022 and the estimated current expected credit loss on those held-to-maturity securities. During the six months endedJune 30, 2021 , a provision benefit was recorded as a result of improvement in both macro-economic forecast variables and loan portfolio credit quality metrics. Certain circumstances may lead to increased provisions for credit losses in the future. Examples of such circumstances include deterioration in economic conditions and forecasts, an increased amount of classified and/or criticized loans and leases, and net loan and lease and unfunded commitment growth. Deterioration in economic conditions and forecasts include the rate of economic growth, the unemployment rate, the rate of inflation, changes in the general level of interest rates, changes in real estate values, and adverse conditions in borrowers' businesses. See further discussion in "- Balance Sheet Analysis - Allowance for Credit Losses on Loans and Leases Held for Investment" contained herein. 70 --------------------------------------------------------------------------------
Noninterest Income
The following table summarizes noninterest income by category for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
Noninterest Income 2022 2021 2022 2021
(In thousands)
Leased equipment income $ 12,335 $ 10,847 $ 25,429 $ 22,201
Other commissions and fees 10,813 10,704 22,393 19,862
Service charges on deposit accounts 3,634 3,452 7,205 6,386
Gain on sale of loans and leases 12 1,422 72 1,561
(Loss) gain on sale of securities (1,209) - (1,105) 101
Dividends and gains (losses) on equity
investments 4,097 5,394 (7,278) 16,298
Warrant income 1,615 5,650 2,244 11,773
Other 3,049 2,902 6,204 7,018
Total noninterest income $ 34,346 $ 40,371 $ 55,164 $ 85,200 Second Quarter of 2022 Compared to Second Quarter of 2021
Noninterest income decreased by$6.0 million to$34.3 million for the second quarter of 2022 compared to$40.4 million for the second quarter of 2021 due mainly to decreases of$4.0 million in warrant income,$1.3 million in dividends and gains (losses) on equity investments, and$1.4 million in gain on sale of loans and leases. The first two items decreased due to decreased capital market activity in 2022 and volatility resulting from geopolitical tensions and inflationary pressures. Warrant income decreased due principally to fewer gains from exercised warrants, driven by the less active capital markets in 2022. The decrease in dividends and gains (losses) on equity investments was due primarily to lower gains on sales of equity investments, offset partially by higher fair value gains on equity investments still held. The decrease in gain on sale of loans and leases resulted from the sale of$4.3 million of loans for a gain of$12,000 for the second quarter of 2022 compared to sales of$52.2 million of loans for a gain of$1.4 million for the second quarter of 2021.
Six Months Ended
Noninterest income decreased by$30.0 million to$55.2 million for the six months endedJune 30, 2022 compared to$85.2 million for the six months endedJune 30, 2021 due mainly to decreases of$23.6 million in dividends and gains (losses) on equity investments and$9.5 million in warrant income. These two items declined due to decreased capital market activity in 2022 and volatility resulting from geopolitical tensions and inflationary pressures. The decrease in dividends and gains (losses) on equity investments was due primarily to lower gains on sales of equity investments. Warrant income decreased due principally to fewer gains from exercised warrants, driven by the less active capital markets in 2022. 71 --------------------------------------------------------------------------------
Noninterest Expense
The following table summarizes noninterest expense by category for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
Noninterest Expense 2022 2021 2022 2021
(In thousands)
Compensation $ 102,542 $ 90,807 $ 194,782 $ 170,689
Occupancy 15,268 14,784 30,468 28,838
Customer related expense 11,748 4,973 24,403 9,791
Data processing 9,258 7,758 18,887 14,715
Leased equipment depreciation 8,934 8,614 18,123 17,583
Loan expense 7,037 4,031 12,194 7,224
Other professional services 6,726 5,256 12,680 10,382
Insurance and assessments 5,632 3,745 11,122 8,648
Intangible asset amortization 3,649 2,889 7,298 5,968
Acquisition, integration and
reorganization costs - 200 - 3,625
Foreclosed assets income, net (28) (119) (3,381) (118)
Other 12,879 8,812 24,495 24,541
Total noninterest expense $ 183,645 $ 151,750 $ 351,071 $ 301,886 Second Quarter of 2022 Compared to Second Quarter of 2021
Noninterest expense increased by$31.9 million to$183.6 million for the second quarter of 2022 compared to$151.8 million for the second quarter of 2021 due primarily to increases of$11.7 million in compensation expense,$6.8 million in customer related expense,$4.1 million in other expense, and$3.0 million in loan expense attributable mostly to the incremental expense related to the increased headcount and operations in 2022 due to the HOA Business operation that was acquired in 2021and increased levels of loan production in 2022.
Six Months Ended
Noninterest expense increased by$49.2 million to$351.1 million for the six months endedJune 30, 2022 compared to$301.9 million for the six months endedJune 30, 2021 due mainly to increases of$24.1 million in compensation expense,$14.6 million customer related expense,$5.0 million in loan expense, and$4.2 million in data processing expense attributable mostly to the incremental expense related to the increased headcount and operations in 2022 due to the Civic and HOA Business operations that were acquired in 2021 and increased levels of loan production in 2022.
Income Taxes
The effective tax rate for the second quarter of 2022 was 25.0% compared to 25.7% for the second quarter of 2021. The effective tax rate for the six months endedJune 30, 2022 was 25.4% compared to 26.0% for the six months endedJune 30, 2021 . The lower effective tax rates in 2022 were due primarily to the higher tax credits in the second quarter of 2022. The Company's blended statutory tax rate for federal and state is 27.5% and the effective tax rate for the full year 2022 is estimated to be in the range of 25-27%. 72
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