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 Securities Exchange Act of 1934, as amended. 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
•Recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity, and regulatory responses to these developments;
•The effects of, and changes in, trade, monetary, and fiscal policies and laws,
including interest rate policies of the
•Interest rate, liquidity, economic, market, credit, operational and inflation risks associated with our business, including the speed and predictability of changes in these risks; •Our ability to attract and retain deposits and to access other sources of liquidity; •Business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic markets, including the tight labor market, ineffective management of theU.S. Federal budget or debt or turbulence or uncertainty in domestic or foreign financial markets; •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;
•Compliance risks, including the costs of monitoring, testing, and maintaining compliance with complex laws and regulations;
•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 , the Public Company Accounting Oversight 56 -------------------------------------------------------------------------------- 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 Current Expected Credit Loss ("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 inFederal Deposit Insurance Corporation (the "FDIC") insurance assessment rate or the rules and regulations related to the calculation of theFDIC insurance assessment amount;
•Changes in consumer spending, borrowing, and savings habits;
•The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
•The possibility that we may reduce or discontinue the payments of dividends on our common stock;
•The possibility that we may discontinue, reduce, or otherwise limit the level of repurchases of our common stock we may make from time to time pursuant to our stock repurchase program;
•Changes in the financial performance and/or condition of our borrowers;
•Changes in the competitive environment among financial and bank holding companies and other financial service providers;
•Geopolitical conditions, including acts or threats of terrorism, actions taken by theU.S. 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 in theU.S. and abroad; •Public health crises and pandemics, including with respect to COVID-19, 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 2022 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. 57 --------------------------------------------------------------------------------
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 2022 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 months endedMarch 31, 2023 are not necessarily indicative of the results expected for the year endingDecember 31, 2023 . 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 . AtMarch 31, 2023 , we primarily conduct business throughout theWestern Region ofthe United States from our 59 full-service depository branches located inArizona ,California ,Nevada , andWashington . 58
-------------------------------------------------------------------------------- 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 Homeowners' Associations ("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 persisted throughout 2022 and into 2023, 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 475 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 full extent of these measures, including future actions taken by theFOMC , on the Company's business are uncertain. While 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. DuringMarch 2023 , two largeU.S. banks,Silicon Valley Bank and Signature Bank, were placed in receivership by regulators, creating significant industry-wide market turmoil as well as concerns about the health of the overall banking system. 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. 59 -------------------------------------------------------------------------------- •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. In addition, a higher interest rate environment may impact the ability of our borrowers with adjustable rate loans to meet their debt service requirements. 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 increase the ACL through 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. "Non-GAAP measures" presented under Item 2 - Management's Discussion and Analysis. Rising interest rates would also decrease the value of the Company's HTM investment securities and increase the unrealized losses embedded in these securities. •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. In connection with high-profile bank failures, if the adverse developments and significant market volatility continue in the Banking sector, 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, or obtaining borrowing from theFederal Reserve's discount window or the Bank Term Funding Program. Additional liquidity could be obtained by liquidating loans and AFS investment securities. In the event that we liquidate AFS securities having an unrealized loss position, those losses would become realized. While the Company does not currently intend to sell HTM securities, if the Company were required to sell such securities to meet liquidity needs, it may recognize the unrealized losses.
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, including recent disruptions in the banking sector, and will make changes as appropriate.
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--------------------------------------------------------------------------------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, which management
considers 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. The Company's critical accounting policies consist of the allowance for
credit losses on loans and off-balance sheet commitments. Please see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the Company's 2022 Form 10-K for additional discussion concerning
this critical accounting policy. Also, 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 2022 Form
10-K.
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
March 31, December 31, March 31,
(Dollars in thousands) 2023 2022 2022
Net income $ 62,562 $ 73,673 $ 66,904
Plus: amortization of intangible assets expense 3,171 3,440 3,592
Less: amortization of intangible assets expense tax adjustment (1)
901 978 1,025
Net income for average tangible common equity $ 64,832 Average stockholders' equity$ 2,822,392 $ 2,751,161 $ 2,864,387 Less: average intangible assets 54,310 57,624 68,157 Less: average goodwill 901,312 901,312 901,312 Average tangible common equity$ 1,866,770
Return on average equity 8.87 % 10.71 % 9.34 % Return on average tangible common equity 13.89 % 16.99 % 14.66 %
______________________________
(1) Amortization of intangible assets expense adjusted by statutory tax rate.
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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.
March 31 ,
(Dollars in thousands) 2023 2022
Total stockholders' equity $ 2,831,161 $ 2,798,389
Less: intangible assets 953,729 956,900
Tangible common equity $ 1,877,432 $ 1,841,489
Total assets $ 21,361,564 $ 21,688,017
Less: intangible assets 953,729 956,900
Tangible assets $ 20,407,835 $ 20,731,117
Tangible common equity ratio 9.20 % 8.88 %
Common shares issued and outstanding 95,714,777 95,021,760
Book value per share $ 29.58 $ 29.45
Less: intangible book value per share 9.96 10.07
Tangible book value per share $ 19.61 $ 19.38
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 amortization of intangible assets and other real estate owned
operations, where applicable, to the sum of net interest income before provision
for loan losses and total noninterest income less gain on sales of investment
securities. 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
March 31, December 31, March 31,
(Dollars in thousands) 2023 2022 2022
Total noninterest expense $ 101,352 $ 99,182 $ 97,648
Less: amortization of intangible assets 3,171 3,440 3,592
Less: other real estate owned operations, net 108 - -
Noninterest expense, adjusted $ 98,073
Net interest income before provision for credit losses
$ 181,396 $ 161,839 Add: total noninterest income 21,186 20,497 25,894 Less: net gain from sales of investment securities 138 - 2,134 Revenue, adjusted$ 189,658 $ 201,893 $ 185,599 Efficiency ratio 51.7 % 47.4 % 50.7 % 62
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Pre-provision net revenue is a non-GAAP financial measure derived from
GAAP-based amounts. We calculate the pre-provision net revenue by excluding
income tax and provision for credit losses 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
March 31, December 31, March 31,
(Dollars in thousands) 2023 2022 2022
Interest income $ 221,343 $ 217,781 $ 168,546
Interest expense 52,733 36,385 6,707
Net interest income 168,610 181,396 161,839
Noninterest income 21,186 20,497 25,894
Revenue 189,796 201,893 187,733
Noninterest expense 101,352 99,182 97,648
Pre-provision net revenue $ 88,444 $ 102,711 $ 90,085
Pre-provision net revenue (annualized) $ 353,776 $ 410,844 $ 360,340
Average assets $ 21,684,873 $ 21,728,933 $ 20,956,791
Pre-provision net revenue to average assets 0.41 % 0.47 % 0.43 %
Pre-provision net revenue to average assets
(annualized) 1.63 % 1.89 % 1.72 %
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
March 31, December 31, March 31,
(Dollars in thousands) 2023 2022 2022
Total deposits interest expense $ 40,234 $ 25,865 $ 1,673
Less: certificates of deposit interest expense 7,775 3,941 530
Less: brokered deposits interest expense 13,056 9,965 1
Core deposits expense $ 19,403 $ 11,959 $ 1,142
Total average deposits $ 17,324,442 $ 17,608,783 $ 17,280,306
Less: average certificates of deposit 1,206,966 975,958 1,047,451
Less: average brokered deposits 1,443,827 1,283,567 5,553
Average core deposits $ 14,673,649 $ 15,349,258 $ 16,227,302
Cost of core deposits 0.54 % 0.31 % 0.03 %
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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
(Dollar in thousands, except per share data and March 31, December 31, March 31,
percentages) 2023 2022 2022
Operating data
Interest income $ 221,343 $ 217,781 $ 168,546
Interest expense 52,733 36,385 6,707
Net interest income 168,610 181,396 161,839
Provision for credit losses 3,016 2,838 448
Net interest income after provision for credit losses 165,594 178,558 161,391
Net gain from sales of loans 29 151 1,494
Other noninterest income 21,157 20,346 24,400
Noninterest expense 101,352 99,182 97,648
Net income before income taxes 85,428 99,873 89,637
Income tax expense 22,866 26,200 22,733
Net income $ 62,562 $ 73,673 $ 66,904
Pre-provision net revenue (3) $ 88,444 $ 102,711 $ 90,085
Share data
Earnings per share:
Basic $ 0.66 $ 0.78 $ 0.71
Diluted 0.66 0.77 0.70
Common equity dividends declared per share 0.33 0.33 0.33
Dividend payout ratio (1) 50.17 % 42.56 % 46.60 %
Book value per share $ 29.58 $ 29.45 $ 29.31
Tangible book value per share (2) 19.61 19.38 19.12
Performance ratios
Return on average assets (3) 1.15 % 1.36 % 1.28 %
Return on average equity (3) 8.87 10.71 9.34
Return on average tangible common equity (2)(3) 13.89 16.99 14.66
Pre-provision net revenue on average assets (2)(3) 1.63 1.89 1.72
Net interest margin 3.44 3.61 3.41
Cost of deposits 0.94 0.58 0.04
Average equity to average assets 13.02 12.66 13.67
Efficiency ratio (2) 51.7 47.4 50.7
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(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 Quarterly Report on Form 10-Q.
(3) Ratio is annualized.
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In the first quarter of 2023, we reported net income of $62.6 million , or $0.66
per diluted share. This compares with net income of $73.7 million , or $0.77 per
diluted share, for the fourth quarter of 2022. The decrease in net income was
primarily due to a $12.8 million decrease in net interest income, a $2.2 million
increase in noninterest expense and a $178,000 increase in provision for credit
losses, partially offset by a $3.3 million decrease in income tax expense and a
$689,000 increase in noninterest income.
Net income of $62.6 million , or $0.66 per diluted share, for the first quarter
of 2023 compares to net income for the first quarter of 2022 of $66.9 million ,
or $0.70 per diluted share. The decrease in net income was primarily due to a
$4.7 million decrease in noninterest income, a $3.7 million increase in
noninterest expense, and a $2.6 million increase in provision for credit losses,
partially offset by a $6.8 million increase in net interest income.
For the first quarter of 2023, the Company's return on average assets was 1.15%,
return on average equity was 8.87%, and return on average tangible common equity
was 13.89%, compared to 1.36%, 10.71%, and 16.99%, respectively, for the fourth
quarter of 2022, and 1.28%, 9.34%, and 14.66%, respectively, for the first
quarter of 2022. For additional details, see "Non-GAAP measures" presented under
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 $168.6 million in the first quarter of 2023, a
decrease of $12.8 million , or 7.0%, from the fourth quarter of 2022. The
decrease in net interest income was primarily attributable to a higher cost of
funds reflecting an increase in deposit pricing as a result of the higher
interest rate environment, an increase in brokered certificates of deposit as
part of our liquidity management strategy, and two fewer days of interest,
partially offset by higher yields on average interest-earning assets.
The net interest margin for the first quarter of 2023 decreased 17 basis points
to 3.44%, from 3.61% in the prior quarter. The lower net interest margin was due
to higher cost of funds, partially offset by higher yields on interest-earning
assets.
Net interest income for the first quarter of 2023 increased $6.8 million , or
4.2%, compared to the first quarter of 2022. The increase was attributable to
higher yields on average interest-earning assets, partially offset by a higher
cost of funds, higher average interest-bearing liabilities, and lower
loan-related fees and accretion income as a result of decreased prepayment
activity.
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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
March 31, 2023 December 31, 2022 March 31, 2022
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 $ 1,335,611 $ 13,594 4.13 % $ 1,015,197 $ 8,636 3.37 % $ 322,236 $ 90 0.11 %
Investment securities 4,165,681 26,791 2.57 % 4,130,042 24,688 2.39 % 4,546,408 17,852 1.57 %
Loans receivable, net (1)(2) 14,394,775 180,958 5.10 % 14,799,417 184,457 4.94 % 14,371,588 150,604 4.25 %
Total interest-earning assets 19,896,067 221,343 4.51 % 19,944,656 217,781 4.33 % 19,240,232 168,546 3.55 %
Noninterest-earning assets 1,788,806 1,784,277 1,716,559
Total assets $ 21,684,873 $ 21,728,933 $ 20,956,791
Liabilities and equity
Interest-bearing deposits:
Interest checking $ 3,008,712 $ 5,842 0.79 % $ 3,320,146 $ 3,752 0.45 % $ 3,537,824 $ 229 0.03 %
Money market 4,992,084 13,053 1.06 % 4,998,726 7,897 0.63 % 5,343,973 888 0.07 %
Savings 453,079 508 0.45 % 443,016 310 0.28 % 422,186 26 0.02 %
Retail certificates of deposit 1,206,966 7,775 2.61 % 975,958 3,941 1.60 % 1,047,451 530 0.21 %
Wholesale/brokered certificates of
deposit 1,443,783 13,056 3.67 % 1,283,537 9,965 3.08 % - - - %
Total interest-bearing deposits 11,104,624 40,234 1.47 % 11,021,383 25,865 0.93 % 10,351,434 1,673 0.07 %
FHLB advances and other borrowings 987,817 7,938 3.26 % 826,125 5,960 2.86 % 225,250 474 0.85 %
Subordinated debentures 331,297 4,561 5.51 % 331,133 4,560 5.51 % 330,629 4,560 5.52 %
Total borrowings 1,319,114 12,499 3.83 % 1,157,258 10,520 3.62 % 555,879 5,034 3.63 %
Total interest-bearing liabilities 12,423,738 52,733 1.72 % 12,178,641 36,385 1.19 % 10,907,313 6,707 0.25 %
Noninterest-bearing deposits 6,219,818 6,587,400 6,928,872
Other liabilities 218,925 211,731 256,219
Total liabilities 18,862,481 18,977,772 18,092,404
Stockholders' equity 2,822,392 2,751,161 2,864,387
Total liabilities and equity $ 21,684,873 $ 21,728,933 $ 20,956,791
Net interest income $ 168,610 $ 181,396 $ 161,839
Net interest margin (3) 3.44 % 3.61 % 3.41 %
Cost of deposits (4) 0.94 % 0.58 % 0.04 %
Cost of funds (5) 1.15 % 0.77 % 0.15 %
Cost of core deposits (6) 0.54 % 0.31 % 0.03 %
Ratio of interest-earning assets to interest-bearing liabilities 160.15 % 163.77 % 176.40 %
______________________________
(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$2.5 million ,$3.5 million , and$5.9 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 of Financial Condition and Results of Operations. 66 -------------------------------------------------------------------------------- Changes in our net interest income are a function of changes in volume, days in a period, and rates of interest-earning assets and interest-bearing liabilities. The following tables present the impact that the volume, days in a period, and rate changes have had on our net interest income for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes to our net interest income with respect to:
•Changes in volume (changes in volume multiplied by prior rate);
•Changes in days in a period (changes in days in a period multiplied by daily interest; no changes in days for comparisons of the three months endedMarch 31, 2023 to the three months endedMarch 31, 2022 );
•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 March 31, 2023
Compared to
Three
Months Ended
Increase (Decrease) Due to
(Dollars in thousands) Volume Days Rate Net
Interest-earning assets
Cash and cash equivalents $ 3,081 $ (302) $ 2,179 $ 4,958
Investment securities 215 - 1,888 2,103
Loans receivable, net (3,879) (4,021) 4,401 (3,499)
Total interest-earning assets (583) (4,323) 8,468 3,562
Interest-bearing liabilities
Interest checking (314) (130) 2,534 2,090
Money market (10) (290) 5,456 5,156
Savings 7 (11) 202 198
Retail certificates of deposit 1,092 (173) 2,915 3,834
Wholesale/brokered certificates of deposit 1,339 (290) 2,042 3,091
FHLB advances and other borrowings 1,259 (176) 895 1,978
Subordinated debentures 1 - - 1
Total interest-bearing liabilities 3,374 (1,070) 14,044 16,348
Decrease in net interest income $ (3,957) $
(3,253)
67
--------------------------------------------------------------------------------
Three Months Ended March 31, 2023
Compared to
Three Months Ended March 31, 2022
Increase (Decrease) Due to
(Dollars in thousands) Volume Rate Net
Interest-earning assets
Cash and cash equivalents $ 1,085 $ 12,419 $ 13,504
Investment securities (1,352) 10,291 8,939
Loans receivable, net 243 30,111 30,354
Total interest-earning assets (24) 52,821 52,797
Interest-bearing liabilities
Interest checking (24) 5,637 5,613
Money market (58) 12,223 12,165
Savings 2 480 482
Retail certificates of deposit 90 7,155 7,245
Wholesale/brokered certificates of deposit 13,056 - 13,056
FHLB advances and other borrowings 4,093 3,371 7,464
Subordinated debentures 9 (8) 1
Total interest-bearing liabilities 17,168 28,858 46,026
(Decrease) Increase in net interest income $ (17,192) $ 23,963 $ 6,771
Provision for Credit Losses
For the first quarter of 2023, the Company recorded a $3.0 million provision
expense for credit losses, compared to a $2.8 million provision expense during
the fourth quarter of 2022, and a $448,000 provision expense during the first
quarter of 2022. The provision expense for loans during the first quarter of
2023 can be attributed to increases associated with economic forecast and other
model updates, as well as changes in asset quality, including specific reserves,
offset by lower loans held for investment. The provision recapture for
off-balance sheet commitments was attributable to lower unfunded commitments and
changes in the mix of unfunded commitments between various loan segments, as
well as qualitative adjustments during the quarter. The provision expense for
HTM investment securities was impacted by the weighted macroeconomic forecasts
on HTM investment securities classified as municipal bonds during the quarter.
The provision expense for the fourth quarter of 2022 was comprised of a $3.9
million provision expense for loan losses, a $1.0 million provision recapture
for unfunded commitments, and a $48,000 provision recapture for HTM investment
securities. The provision expense for loans during the fourth quarter of 2022
was largely impacted by changes to the overall size, composition, and asset
quality trends of the loan portfolio. The recapture of the provision for
unfunded commitments was reflective of favorable changes in the mix of unfunded
commitments between various loan segments, as well as qualitative adjustments
during the fourth quarter of 2022. The provision expense for the first quarter
of 2022 was comprised of a $211,000 provision expense for loan losses, a
$218,000 provision expense for unfunded commitments, and a $19,000 provision
expense for HTM investment securities.
Net loan charge-offs for the three months ended
68
--------------------------------------------------------------------------------
Three Months Ended Variance From
March 31, December 31, March 31, December 31, 2022 March 31, 2022
(Dollars in thousands) 2023 2022 2022 $ % $ %
Provision for credit
losses
Provision for loan
losses $ 3,021 $ 3,899 $ 211 $ (878) (22.5) % $ 2,810 1331.8 %
Provision for unfunded
commitments (189) (1,013) 218 824 (81.3) % (407) (186.7) %
Provision for HTM
securities 184 (48) 19 232 (483.3) % 165 868.4 %
Total provision for
credit losses $ 3,016 $ 2,838 $ 448 $ 178 6.3 % $ 2,568 573.2 %
Noninterest Income
The following table presents the components of noninterest income for the
periods indicated:
Three Months Ended Variance From
March 31, December 31, March 31, December 31, 2022 March 31, 2022
(Dollars in thousands) 2023 2022 2022 $ % $ %
Noninterest income
Loan servicing income $ 573 $ 346 $ 419 $ 227 65.6 % $ 154 36.8 %
Service charges on deposit
accounts 2,629 2,689 2,615 (60) (2.2) % 14 0.5 %
Other service fee income 296 295 367 1 0.3 % (71) (19.3) %
Debit card interchange fee
income 803 1,048 836 (245) (23.4) % (33) (3.9) %
Earnings on bank owned life
insurance 3,374 3,359 3,221 15 0.4 % 153 4.8 %
Net gain from sales of
loans 29 151 1,494 (122) (80.8) % (1,465) (98.1) %
Net (loss) gain from sales
of investment securities 138 - 2,134 138 - % (1,996) (93.5) %
Trust custodial account
fees 11,025 9,722 11,579 1,303 13.4 % (554) (4.8) %
Escrow and exchange fees 1,058 1,282 1,661 (224) (17.5) % (603) (36.3) %
Other income 1,261 1,605 1,568 (344) (21.4) % (307) (19.6) %
Total noninterest income $ 21,186 $ 20,497 $ 25,894 $ 689 3.4 % $ (4,708) (18.2) %
Noninterest income for the first quarter of 2023 was $21.2 million , an increase
of $689,000 , or 3.4% from the fourth quarter of 2022. The increase was primarily
due to a $1.3 million increase in trust custodial account fees driven by
seasonal, annual tax fees earned during the first quarter. Additionally, the
Bank sold $304.2 million of investment securities for a net gain of $138,000
during the first quarter of 2023 to provide additional liquidity. These
increases were offset in part by a $344,000 decrease in other income, which was
driven by lower recoveries on pre-acquisition charged-off loans, partially
offset by CRA investment income, as well as a $245,000 decrease in debit card
interchange fee income, and a $224,000 decrease in escrow and exchange fees.
During the first quarter of 2023, the Bank sold $753,000 of Small Business
Administration ("SBA") loans for a net gain of $29,000 and $6.5 million of
nonperforming loans for no gain, compared to the sales of $3.6 million of SBA
loans for a net gain of $151,000 and $6.4 million of other loans for no gain in
the fourth quarter of 2022.
Noninterest income for the first quarter of 2023 decreased $4.7 million , or
18.2%, compared to the first quarter of 2022. The decrease was primarily due to
a $2.0 million decrease in net gain from sales of investment securities, a $1.5
million decrease in net gain from loan sales, a $603,000 decrease in escrow and
exchange fees attributable to the lower transaction activity in the commercial
real estate market, a $554,000 decrease in trust custodial account fees
resulting primarily from a decrease in the market value of custodial assets, and
a $307,000 decrease in other income.
69
--------------------------------------------------------------------------------Noninterest Expense
The following table presents the components of noninterest expense for the
periods indicated:
Three Months Ended Variance From
March 31, December 31, March 31, December 31, 2022 March 31, 2022
(Dollars in thousands) 2023 2022 2022 $ % $ %
Noninterest expense
Compensation and benefits $ 54,293 $ 54,347 $ 56,981 $ (54) (0.1) % $ (2,688) (4.7) %
Premises and occupancy 11,742 11,641 11,952 101 0.9 % (210) (1.8) %
Data processing 7,265 6,991 5,996 274 3.9 % 1,269 21.2 %
Other real estate owned
operations, net 108 - - 108 100.0 % 108 100.0 %
FDIC insurance premiums 2,425 1,463 1,396 962 65.8 % 1,029 73.7 %
Legal and professional
services 5,501 5,175 4,068 326 6.3 % 1,433 35.2 %
Marketing expense 1,838 1,985 1,809 (147) (7.4) % 29 1.6 %
Office expense 1,232 1,310 1,203 (78) (6.0) % 29 2.4 %
Loan expense 646 743 1,134 (97) (13.1) % (488) (43.0) %
Deposit expense 8,436 6,770 3,751 1,666 24.6 % 4,685 124.9 %
Amortization of intangible
assets 3,171 3,440 3,592 (269) (7.8) % (421) (11.7) %
Other expense 4,695 5,317 5,766 (622) (11.7) % (1,071) (18.6) %
Total noninterest expense $ 101,352 $ 99,182 $ 97,648 $ 2,170 2.2 % $ 3,704 3.8 %
Noninterest expense totaled $101.4 million for the first quarter of 2023, an
increase of $2.2 million , or 2.2% from the fourth quarter of 2022, primarily due
to a $1.7 million increase in deposit expense driven by growth in HOA deposits
and higher deposit earnings credit rates, a $962,000 increase in FDIC insurance
premiums due to the increase of initial base deposit insurance assessment rates
that became effective in January 2023 , a $326,000 increase legal and
professional services, and a $274,000 increase in data processing, partially
offset by a $622,000 decrease in other expense.
Noninterest expense increased by $3.7 million , or 3.8%, compared to the first
quarter of 2022. The increase was primarily due to a $4.7 million increase in
deposit expense driven by growth in HOA deposits and higher deposit earnings
credit rates, a $1.4 million increase in legal and professional services, a $1.3
million increase in data processing, and a $1.0 million increase in FDIC
insurance premiums, partially offset by a $2.7 million decrease in compensation
and benefits from decreased staffing levels, as well as a $1.1 million decrease
in other expense.
The Company's efficiency ratio was 51.7% for the first quarter of 2023, compared
to 47.4% for the fourth quarter of 2022, and 50.7% for the first quarter of
2022. "Non-GAAP measures" presented under Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
70
--------------------------------------------------------------------------------Income Taxes
For the three months endedMarch 31, 2023 ,December 31, 2022 , andMarch 31, 2022 , income tax expense was$22.9 million ,$26.2 million , and$22.7 million , respectively, and the effective income tax rate was 26.8%, 26.2%, and 25.4%, respectively. Our effective tax rate for the three months endedMarch 31, 2023 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 atMarch 31, 2023 andDecember 31, 2022 , 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 atMarch 31, 2023 andDecember 31, 2022 . The Company does not believe that the unrecognized tax benefits will change significantly within the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax
benefits in income tax expense. The Company had accrued for
The Company and its subsidiaries are subject toU.S. Federal income tax, as well as income and franchise tax in multiple state jurisdictions. The statute of limitations related to the consolidated Federal income tax returns is closed for all tax years up to and including 2018. 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 assets 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 ofMarch 31, 2023 andDecember 31, 2022 . 71 --------------------------------------------------------------------------------
FINANCIAL CONDITION
AtMarch 31, 2023 , assets totaled$21.36 billion , a decrease of$326.5 million , or 1.5%, from$21.69 billion atDecember 31, 2022 . The decrease was primarily due to a$505.9 million decrease in total loans and a$127.2 million decrease in investment securities, partially offset by a$323.6 million increase in cash and cash equivalents. To address the rising interest rate environment, dislocation in credit, funding, and capital markets, and industry-wide turmoil experienced during the first quarter of 2023, we took strategic actions to increase loan pricing and tighten underwriting standards to manage the level of new loan demand, increased our deposit pricing to mitigate deposit outflows, and bolstered our liquidity position by reducing the size of the AFS securities portfolio and adding retail and brokered deposits. As a result of our proactive liquidity management, we were able to reduce FHLB term borrowings during the quarter, and we did not need to utilize either theFederal Reserve's discount window or the new Bank Term Funding Program.
Loans
Loans held for investment totaled$14.17 billion atMarch 31, 2023 , a decrease of$504.5 million , or 3.4%, from$14.68 billion atDecember 31, 2022 . The decrease was a result of lower loan originations due to our disciplined approach around credit risk management and loan pricing along with lower loan demand, as well as increased loan payoffs and maturities during the first quarter of 2023. The commercial line average utilization rate decreased from an average rate of 39.6% for the fourth quarter of 2022 to 39.0% for the first quarter of 2023. SinceDecember 31, 2022 , commercial loans decreased$210.6 million , investor loans secured by real estate decreased$206.7 million , business loans secured by real estate decreased$97.0 million , and retail loans decreased$2.2 million . The decline in loans from prior year end reflects the strategic actions we have taken to maintain a disciplined approach to our loan production and pricing as well as tightened the underwriting standards to manage the level of new loan demand. The total end-of-period weighted average interest rate on loans, excluding fees and discounts, atMarch 31, 2023 was 4.68%, compared to 4.61% atDecember 31, 2022 . The increase reflects the impact of higher rates on new originations and the repricing of floating rate loans as a result of the increases in benchmark interest rates. Loans held for sale primarily represent the guaranteed portion of SBA loans, which the Bank originates for sale, and totaled$1.2 million atMarch 31, 2023 , a decrease of$1.4 million from$2.6 million atDecember 31, 2022 . 72 -------------------------------------------------------------------------------- The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio, and gives the weighted average interest rate by loan category at the dates indicated: March 31, 2023 December 31, 2022 Weighted Weighted Percent Average Percent Average (Dollars in thousands) Amount of Total Interest Rate Amount of Total Interest Rate Investor loans secured by real estate CRE non-owner-occupied$ 2,590,824 18.3 % 4.56 %$ 2,660,321 18.1 % 4.51 % Multifamily 5,955,239 42.0 % 3.87 % 6,112,026 41.6 % 3.86 % Construction and land 420,079 3.0 % 8.69 % 399,034 2.7 % 8.24 % SBA secured by real estate 40,669 0.3 % 8.62 % 42,135 0.3 % 7.61 % Total investor loans secured by real estate 9,006,811 63.6 % 4.32 % 9,213,516 62.7 % 4.25 % Business loans secured by real estate CRE owner-occupied 2,342,175 16.6 % 4.27 % 2,432,163 16.6 % 4.22 % Franchise real estate secured 371,902 2.6 % 4.76 % 378,057 2.6 % 4.75 % SBA secured by real estate 60,527 0.4 % 8.31 % 61,368 0.4 % 7.45 % Total business loans secured by real estate 2,774,604 19.6 % 4.43 % 2,871,588 19.6 % 4.36 % Commercial loans Commercial and industrial 1,967,128 13.9 % 6.60 % 2,160,948 14.7 % 6.32 % Franchise non-real estate secured 388,722 2.7 % 4.92 % 404,791 2.8 % 4.91 % SBA non-real estate secured 10,437 0.1 % 8.87 % 11,100 0.1 % 7.83 % Total commercial loans 2,366,287 16.7 % 6.34 % 2,576,839 17.6 % 6.11 % Retail loans Single family residential 70,913 0.5 % 6.11 % 72,997 0.5 % 5.51 % Consumer 3,174 - % 6.36 % 3,284 - % 6.29 % Total retail loans 74,087 0.5 % 6.12 % 76,281 0.5 % 5.53 % Loans held for investment before basis adjustment (1) 14,221,789 100.4 % 4.68 % 14,738,224 100.4 % 4.61 % Basis adjustment associated with fair value hedge (2) (50,005) (0.4) % (61,926) (0.4) % Loans held for investment 14,171,784 100.0 % 14,676,298 100.0 % Allowance for credit losses for loans held for investment (195,388) (195,651) Loans held for investment, net$ 13,976,396 $ 14,480,647 Total unfunded loan commitments$ 2,413,169 $ 2,489,203 Loans held for sale, at lower of cost or fair value 1,247 2,643
______________________________
(1) Includes net deferred origination fees of$745,000 and$1.9 million , and unaccreted fair value net purchase discounts of$52.2 million and$54.8 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively. (2) Represents the basis adjustment associated with the application of hedge accounting on certain loans. Refer to Note 11 - Derivative Instruments for additional information. 73 -------------------------------------------------------------------------------- Delinquent Loans. When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally initiate proceedings to pursue our remedies under the loan documents. For loans secured by real estate, we provide the required notices to the borrower and make any required filings, and commence foreclosure proceedings if necessary. If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale. At these foreclosure sales, we generally acquire title to the property. AtMarch 31, 2023 , loans delinquent 30 or more days as a percentage of total loans held for investment was 0.15%, compared to 0.30% atDecember 31, 2022 . The decrease in delinquent loans during the three months endedMarch 31, 2023 was primarily due to decreases in loans that are 30-59 days past due, and decreases in loans that were 90 days or more past due. The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated: 30 - 59 Days 60 - 89 Days 90 Days or More Total Principal Principal Principal Principal # of Balance # of Balance # of Balance # of Balance (Dollars in thousands) Loans of Loans Loans of Loans Loans of Loans Loans of Loans At March 31, 2023 Investor loans secured by real estate CRE non-owner-occupied 1$ 6 1$ 1,129 2$ 4,416 4$ 5,551 Multifamily - - - - 2 3,708 2 3,708 Total investor loans secured by real estate 1 6 1 1,129 4 8,124 6 9,259 Business loans secured by real estate CRE owner-occupied - - - - 3 4,762 3 4,762 SBA secured by real estate 2 308 - - 3 1,190 5 1,498 Total business loans secured by real estate 2 308 - - 6 5,952 8 6,260 Commercial loans Commercial and industrial 12 447 5 69 2 4,236 19 4,752 SBA non-real estate secured - - - - 1 572 1 572 Total commercial loans 12 447 5 69 3 4,808 20 5,324 Total 15$ 761 6$ 1,198 13$ 18,884 34$ 20,843 Delinquent loans to loans held for investment 0.01 % 0.01 % 0.13 % 0.15 % 74
--------------------------------------------------------------------------------
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, 2022
Investor loans secured by real
estate
CRE non-owner-occupied - $ - - $ - 2 $ 4,429 2 $ 4,429
Multifamily 1 2,723 - - 2 6,057 3 8,780
Total investor loans secured by
real estate 1 2,723 - - 4 10,486 5 13,209
Business loans secured by real
estate
CRE owner-occupied 3 1,434 - - 4 6,555 7 7,989
Franchise real estate secured 2 7,073 - - - - 2 7,073
SBA secured by real estate - - 1 104 2 1,087 3 1,191
Total business loans secured by
real estate 5 8,507 1 104 6 7,642 12 16,253
Commercial loans
Commercial and industrial 9 4,657 9 81 4 3,908 22 8,646
Franchise non-real estate secured 5 3,592 - - - - 5 3,592
SBA non-real estate secured - - - - 1 589 1 589
Total commercial loans 14 8,249 9 81 5 4,497 28 12,827
Retail loans
Single family residential 2 1,057 - - - - 2 1,057
Consumer 1 2 - - - - 1 2
Total retail loans 3 1,059 - - - - 3 1,059
Total 23 $ 20,538 10 $ 185 15 $ 22,625 48 $ 43,348
Delinquent loans to loans held for
investment 0.14 % - % 0.16 % 0.30 %
Troubled Debt Restructurings
Prior to the Company's adoption of ASU 2022-02, Financial Instruments - Credit
Losses (Topic 326) - Troubled Debt Restructurings and Vintage Disclosures on
January 1, 2023 , the Company, in infrequent situations, would modify or
restructure loans when the borrower was experiencing financial difficulties by
making a concession to the borrower. Such concessions typically were in the form
of changes in the amortization terms, reductions in the interest rates,
acceptance of interest-only payments, and, in very few cases, reduction of the
outstanding loan balances. These loans were classified as TDRs. ASU 2022-02
eliminated the concept of TDRs in current GAAP, and therefore, beginning January
1, 2023 , the Company no longer reports loans modified as TDRs except for those
loans modified and reported as TDRs in prior period financial information under
previous GAAP. Please see "Modified Loans to Troubled Borrowers" below for
discussion on modifications of loans to borrowers experiencing financial
difficulty following the Company's adoption of ASU 2022-02 on January 1, 2023 .
At December 31, 2022 , the Company had five loans modified as TDRs totaling
$16.1 million , which comprised three CRE owner-occupied loans and one C&I loan
totaling $5.1 million belonging to one borrower relationship with the terms
modified due to bankruptcy, and a franchise non-real estate secured loan for
$11.0 million belonging to another borrower relationship with the terms modified
for payment deferral. During the quarter ended December 31, 2022 , the three CRE
owner-occupied loans and one C&I loan classified as TDRs were in payment default
and on nonaccrual status. The franchise non-real estate secured loan was
performing in accordance with the restructured contractual terms and was
returned to accrual status as of December 31, 2022 .
75
--------------------------------------------------------------------------------Modified Loans to Troubled Borrowers
OnJanuary 1, 2023 , the Company adopted ASU 2022-02, which introduces new reporting requirements for modifications of loans to borrowers experiencing financial difficulty, which the Company also refers to as modified loans to troubled borrowers. A MLTB arises from a modification made to a loan in response to a borrower's financial difficulty, in order to alleviate temporary impairments in the borrower's financial condition and/or constraints on the borrower's ability to repay the loan, and to minimize potential losses to the Company. GAAP requires that certain types of modifications be reported, which consist of the following: •Principal forgiveness •Interest rate reduction •Other-than-insignificant payment delay •Term extension •Any combination of the above Please also see Note 3 - Significant Accounting Policies, of the consolidated financial statements for additional discussion on modified loans to troubled borrowers. As ofMarch 31, 2023 , the Company had one CRE owner-occupied MLTB with an amortized cost of$851,000 to a borrower experiencing financial difficulty, the modification of which involved the extension of the term by four months. Since modification, this MLTB did not have a payment default during the three months endedMarch 31, 2023 . Nonperforming Assets Nonperforming assets consist of loans whereby we have ceased accruing interest (i.e., nonaccrual loans), OREO, and other repossessed assets owned. Nonaccrual loans generally consist of loans that are 90 days or more past due and loans where, in the opinion of management, there is reasonable doubt as to the collection of principal and interest. Nonperforming assets totaled$30.4 million , or 0.14% of total assets, atMarch 31, 2023 , relatively flat compared to$30.9 million , or 0.14% of total assets, atDecember 31, 2022 . AtMarch 31, 2023 , nonperforming assets consisted of nonperforming loans of$24.9 million and OREO of$5.5 million . AtDecember 31, 2022 , all nonperforming assets consisted of nonperforming loans.
At
OREO was$5.5 million atMarch 31, 2023 , compared to no OREO atDecember 31, 2022 . During the first quarter of 2023, the Company took possession of two single family residential properties totaling$6.9 million that were cross-collateralized for two C&I nonperforming loans belonging to one relationship. Of this total, one of the OREO of$1.4 million was sold shortly after possession during the same quarter.
The Company had no loans 90 days or more past due and accruing at
76
--------------------------------------------------------------------------------The following table sets forth our composition of nonperforming assets at the dates indicated:
(Dollars in thousands) March 31, 2023 December 31, 2022 Nonperforming assets Investor loans secured by real estate CRE non-owner-occupied$ 5,545 $ 4,429 Multifamily 3,708 8,780 SBA secured by real estate 519 533 Total investor loans secured by real estate 9,772 13,742 Business loans secured by real estate CRE owner-occupied 9,102 11,475 SBA secured by real estate 1,190 1,191 Total business loans secured by real estate 10,292 12,666 Commercial loans Commercial and industrial 4,236 3,908 SBA non-real estate secured 572 589 Total commercial loans 4,808 4,497 Total nonperforming loans 24,872 30,905 Other real estate owned 5,499 - Total$ 30,371 $ 30,905 Allowance for credit losses$ 195,388 $ 195,651 Allowance for credit losses as a percent of total nonperforming loans 786 % 633 %
Nonperforming loans as a percent of loans held for investment
0.18 % 0.21 %
Nonperforming assets as a percent of total assets 0.14 % 0.14 %
TDRs included in nonperforming loans N/A $ 5,051
77
--------------------------------------------------------------------------------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, except those that have been deemed collateral dependent are evaluated individually based on the expected estimated fair value of the underlying collateral. The Company measures the ACL on commercial real estate and commercial loans using a discounted cash flow approach, using the loan's effective interest rate, while the ACL for retail loans is based on a historical loss rate model. The discounted cash flow methodology relies on several significant components essential to the development of estimates for future cash flows on loans and unfunded commitments. These components consist of: (i) the estimated PD, (ii) the estimated 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 estimated 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 loans 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 ofMarch 31, 2023 , 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 atMarch 31, 2023 is consistent with the approach used in the Company's ACL model atDecember 31, 2022 . The Company's ACL model atMarch 31, 2023 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 changes in theU.S. unemployment rate,U.S. real GDP growth, CRE prices, and the interest rates. 78 -------------------------------------------------------------------------------- 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 served to increase or 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 months endedMarch 31, 2023 andMarch 31, 2022 : [[Image Removed: Q12023 Attribution.jpg]] [[Image Removed: Q12022 Attribution.jpg]] AtMarch 31, 2023 , the ACL on loans was$195.4 million , a decrease of$263,000 from$195.7 million atDecember 31, 2022 . The decrease in the ACL for loans held for investment during the three months endedMarch 31, 2023 can be attributed to net charge-offs of$3.3 million , partially offset by$3.0 million in provisions for credit losses. The provision for credit losses during the three months endedMarch 31, 2023 can be attributed to increases associated with economic forecast and other model updates, as well as changes in asset quality, including specific reserves, offset by lower loans held for investment. Charge-offs during the three months endedMarch 31, 2023 are largely attributed to one CRE owner occupied lending relationship, as well as charge-offs on several loans sold in the current quarter, and charge-offs on other smaller C&I lending relationships. The decrease in the ACL for loans held for investment during the three months endedMarch 31, 2022 of$235,000 can be attributed to net charge-offs of$446,000 , partially offset by$211,000 in provisions for credit losses. The provision for credit losses for the three months endedMarch 31, 2022 was reflective of growing economic uncertainties, offset by improved economic forecasts used in the Company's ACL model, as well as favorable asset quality metrics. 79 -------------------------------------------------------------------------------- AtMarch 31, 2023 , the Company believes the ACL was adequate to cover current expected credit losses in the loan portfolio. However, no assurance can be given that we will not, in any particular period, sustain credit losses that exceed the amount reserved, or that subsequent evaluation of our loan portfolio, in light of prevailing factors, including economic conditions that may adversely affect our market area or other circumstances, will not require significant increases in the ACL. In addition, regulatory agencies, as an integral part of their examination process, periodically review our ACL and may require us to recognize changes to the ACL based on judgments different from those of management. Should any of the factors considered by management in evaluating the appropriate level of the ACL change, including the size and composition of the loan portfolio, the credit quality of the loan portfolio, as well as forecasts of future economic conditions, the Company's estimate of current expected credit losses could also significantly change and affect the level of future provisions for credit losses. The following table sets forth the Company's ACL, its corresponding percentage of the loan category balance, and the percent of loan balance to total loans held for investment in each of the loan categories listed as of the dates indicated: March 31, 2023 December 31, 2022 Allowance as a % % of Loans in Allowance as a % % of Loans in of Category Category to of Category Category to (Dollars in thousands) Amount Total Total Loans Amount Total Total Loans Investor loans secured by real estate CRE non-owner-occupied$ 31,715 1.22 % 18.3 %$ 33,692 1.27 % 18.1 % Multifamily 57,787 0.97 % 42.0 % 56,334 0.92 % 41.6 % Construction and land 7,672 1.83 % 3.0 % 7,114 1.78 % 2.7 % SBA secured by real estate 2,291 5.63 % 0.3 % 2,592 6.15 % 0.3 % Total investor loans secured by real estate 99,465 1.10 % 63.6 % 99,732 1.08 % 62.7 % Business loans secured by real estate CRE owner-occupied 29,334 1.25 % 16.6 % 32,340 1.33 % 16.6 % Franchise real estate secured 7,790 2.09 % 2.6 % 7,019 1.86 % 2.6 % SBA secured by real estate 4,415 7.29 % 0.4 % 4,348 7.09 % 0.4 % Total business loans secured by real estate 41,539 1.50 % 19.6 % 43,707 1.52 % 19.6 % Commercial loans Commercial and industrial 37,659 1.91 % 13.9 % 35,169 1.63 % 14.7 % Franchise non-real estate secured 15,721 4.04 % 2.7 % 16,029 3.96 % 2.8 % SBA non-real estate secured 401 3.84 % 0.1 % 441 3.97 % 0.1 % Total commercial loans 53,781 2.27 % 16.7 % 51,639 2.00 % 17.6 % Retail loans Single family residential 392 0.55 % 0.5 % 352 0.48 % 0.5 % Consumer loans 211 6.65 % - % 221 6.73 % - % Total retail loans 603 0.81 % 0.5 % 573 0.75 % 0.5 % Total (1)$ 195,388 1.38 % 100.0 %$ 195,651 1.33 % 100.0 %
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(1) Total loans utilized in the calculation of the ratio of ACL to total loans held for investment includes$50.0 million and$61.9 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively, of the basis adjustment of certain loans included in fair value hedging relationships. Refer to Note 11 - Derivative Instruments for additional information. AtMarch 31, 2023 , the ratio of ACL to loans held for investment was 1.38%, an increase from 1.33% atDecember 31, 2022 . Our unamortized fair value discount on the loans acquired totaled$52.2 million , or 0.37% of total loans held for investment, atMarch 31, 2023 , compared to$54.8 million , or 0.37% of total loans held for investment, atDecember 31, 2022 . 80 -------------------------------------------------------------------------------- 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 EndedMarch 31, 2023 December 31, 2022 March 31, 2022 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 $ 51$ 2,622,150 -% $ 3,632$ 2,728,432 0.13% $ -$ 2,758,078 -% Multifamily 217 6,039,264 -% - 6,154,796 -% - 5,903,012 -% Construction and land - 420,558 -% - 403,593 -% - 295,490 -% SBA secured by real estate - 41,023 -% - 42,348 -% 70 45,392 0.15% Total investor loans secured by real estate 268 9,122,995 -% 3,632 9,329,169 0.04% 70 9,001,972 -% Business loans secured by real estate CRE owner-occupied 2,151 2,372,678 0.09% (23) 2,449,181 -% (10) 2,266,066 -% Franchise real estate secured - 376,836 -% - 379,506 -% - 382,381 -% SBA secured by real estate - 61,439 -% - 66,529 -% - 75,189 -% Total business loans secured by real estate 2,151 2,810,953 0.08% (23) 2,895,216 -% (10) 2,723,636 -% Commercial loans Commercial and industrial 912 2,038,633 0.04% 250 2,144,741 0.01% 338 2,155,582 0.02% Franchise non-real estate secured (100) 395,557 (0.03)% - 407,030 -% - 389,323 -% SBA non-real estate secured (6) 11,814 (0.05)% (7) 12,229 (0.06)% 48 11,607 0.41% Total commercial loans 806 2,446,004 0.03% 243 2,564,000 0.01% 386 2,556,512 0.02% Retail loans Single family residential 89 71,995 0.12% (57) 74,010 (0.08)% - 84,181 -% Consumer (30) 3,255 (0.92)% 2 3,502 0.06% - 4,846 -% Total retail loans 59 75,250 0.08% (55) 77,512 (0.07)% - 89,027 -% Total (1) $ 3,284$ 14,394,642 0.02% $ 3,797$ 14,799,237 0.03% $ 446$ 14,371,147 -% Allowance for credit losses to loans held for investment 1.38% 1.33% 1.34% Nonperforming loans to loans held for investment 0.18% 0.21% 0.38% Allowance for credit losses to nonperforming loans 786% 633% 357%
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(1) Average loan balance includes$60.6 million and$66.7 million of average basis adjustment of certain loans included in fair value hedging relationships for the three months endedMarch 31, 2023 andDecember 31, 2022 , respectively. There was no basis adjustment associated with fair value hedging relationships included in average loan balances during the three months endedMarch 31, 2022 . Refer to Note 11 - Derivative Instruments for additional information. 81 --------------------------------------------------------------------------------
We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled$3.86 billion atMarch 31, 2023 , a decrease of$127.2 million , or 3.2%, from$3.99 billion atDecember 31, 2022 . The decrease in securities was primarily the result of$304.2 million in sales of AFS investment securities and$105.9 million in principal payments, discounts from the AFS securities transferred to HTM, amortizations, and redemptions, partially offset by$232.3 million in purchases ofU.S. Treasury securities and a mark-to-market fair value loss reduction of$50.7 million . In general, the purchase of investment securities is primarily related to investing excess liquidity from our banking operations. During the first quarter of 2023, we have maintained a portion of the AFS securities portfolio in highly-liquid, short-term securities. 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. The effective duration of this portfolio was 3.5 years atMarch 31, 2023 and 3.1 years atDecember 31, 2022 . AtMarch 31, 2023 , AFS and HTM investment securities were$2.11 billion and$1.75 billion , respectively, compared to$2.60 billion and$1.39 billion , respectively, atDecember 31, 2022 . During the first quarter of 2023, the Company transferred AFS securities of approximately$410.7 million of collateralized mortgage obligations to HTM securities. The Company intends and has the ability to hold the securities transferred to maturity. The transfer of these securities was accounted for at fair value on the transfer date. In total, the collateralized mortgage obligations securities had a net carrying amount of$360.3 million with pre-tax unrealized losses of$50.4 million , which are accreted into interest income as yield adjustments through earnings over the remaining term of the securities. The amortization of the related net after-tax unrealized losses reported in accumulated other comprehensive loss 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 management strategy to limit interest rate impact to accumulated other comprehensive income. See Note 4 -Investment Securities to the Notes to the consolidated financial statements in this Quarterly Report on 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 ofMarch 31, 2023 andDecember 31, 2022 , the Company had an ACL of$227,000 and$43,000 , respectively, for HTM investment securities classified as municipal bonds. The Company recognized$184,000 and$19,000 of provision for credit losses for HTM investment securities during the three months endedMarch 31, 2023 andMarch 31, 2022 , respectively, and$48,000 of provision recapture for HTM investment securities during the three months endedDecember 31, 2022 . The Company had no ACL for AFS investment securities atMarch 31, 2023 andDecember 31, 2022 . 82 -------------------------------------------------------------------------------- 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. March 31, 2023 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 $ - - % $ - - %$ 13,355 1.33 % $ - - %$ 13,355 1.33 % Agency 16,966 3.34 % 292,224 0.94 % 89,306
1.41 % 19,235 1.42 % 417,731
1.16 %
Corporate - - % 280,121 5.25 % 228,068 3.17 % - - % 508,189 4.24 %
Collateralized mortgage
obligations 31,174 2.66 % 70,731 4.45 % 178,056
2.97 % 92,671 4.37 % 372,632 3.55 %
Mortgage-backed securities 19,617 3.09 % 14,656 3.43 % 452,677 1.15 % 313,995 1.75 % 800,945 1.47 %
Total securities
available-for-sale 67,757 2.95 % 657,732 3.21 % 961,462 1.99 % 425,901 2.30 % 2,112,852 2.42 %
HTM investment securities:
Municipal bonds $ - - % $ 10,589 1.59 % $ 53,233 1.55 % $ 1,084,000 2.07 % $ 1,147,822 2.04 %
Collateralized mortgage
obligations - - % 151 5.04 % - - % 356,284 4.13 % 356,435 4.13 %
Mortgage-backed securities - - % - - % - - % 228,624 1.83 % 228,624 1.83 %
Other - - % - - % - - % 16,376 2.83 % 16,376 2.83 %
Total HTM investment securities $ - - % $ 10,740 1.64 % $ 53,233 1.55 % $ 1,685,284 2.48 % $ 1,749,257 2.45 %
Total securities $ 67,757 2.95 % $ 668,472 3.18 % $ 1,014,695 1.97 % $ 2,111,185 1.75 % $ 3,862,109 2.05 %
The following table presents the fair value of AFS and the amortized cost of HTM
investment securities portfolios by Moody's credit ratings at March 31, 2023 .
Collateralized Mortgage-backed
(Dollars in thousands) U.S. Treasury Agency Corporate Debt Municipal Bonds Mortgage Obligations Securities Other Total %
Aaa - Aa3 $ 13,355 $ 417,731 $ 19,645 $ 1,147,822 $ 729,067 $ 1,029,569 $ - $ 3,357,189 86.9 %
A1 - A3 - - 308,556 - - - - 308,556 8.0 %
Baa1 - Baa3 - - 179,988 - - - 16,376 196,364 5.1 %
Total $ 13,355 $ 417,731 $ 508,189 $ 1,147,822 $ 729,067 $ 1,029,569 $ 16,376 $ 3,862,109 100.0 %
At March 31, 2023 , 94.9% 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
83
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Deposits. At March 31, 2023 , deposits totaled $17.21 billion , a decrease of
$144.6 million , or 0.8%, from $17.35 billion at December 31, 2022 . The decrease
in deposits included decreases of $293.8 million in money market/savings, $248.0
million in interest-bearing checking, and $97.7 million in noninterest-bearing
checking, partially offset by increases of $324.2 million in brokered
certificates of deposit to provide additional liquidity and interest rate
protection, and $170.7 million in retail certificates of deposit. The
linked-quarter decrease was largely driven by the industry-wide turmoil due to
high profile bank failures experienced during the quarter and partially by
clients redeploying funds into higher yielding alternatives.
The Company considers core deposits to be total deposits excluding all
certificates of deposit and all brokered deposits. At March 31, 2023 , core
deposits totaled $14.21 billion , or 82.6% of total deposits, a decrease of
$639.5 million , or 4.3%, from December 31, 2022 . The decrease compared to the
prior year-end was attributable mostly to the Bank's treasury and branch-based
deposits as well as Pacific Premier Trust deposits. The effort to manage the
increase in our deposit costs, competition for deposits, and reduced funding
needs all contributed to the core deposit decline in the rapidly rising rate
environment. Our core deposits reflect our well-diversified and
relationship-focused business model that has resulted in 36.1% of
noninterest-bearing checking deposits as a percent of total deposits as of
March 31, 2023 . As of March 31, 2023 , no individual depositor represented more
than 1.6% of our total deposits, and our top 50 depositors represented 10.8% of
our total deposits. Given the rising interest rate environment, for the near
term, it is likely that the deposit costs will continue to increase and the
deposit pricing impact may lead to deposit balance fluctuations.
The total end-of-period weighted average rate of deposits at March 31, 2023 was
1.15%, an increase from 0.79% at December 31, 2022 , principally driven by higher
pricing across all deposit categories. 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 the Federal 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 at March 31, 2023 was
0.61%, compared to 0.43% at December 31, 2022 .
Our ratio of loans held for investment to deposits was 82.4% and 84.6% at
84
--------------------------------------------------------------------------------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:
March 31, 2023 December 31, 2022
% of Total Weighted Average % of Total Weighted Average
(Dollars in thousands) Balance Deposits Rate Balance Deposits Rate
Noninterest-bearing checking $ 6,209,104 36.1 % - % $ 6,306,825 36.4 % - %
Interest-bearing checking 2,871,812 16.7 % 0.98 % 3,119,850 18.0 % 0.63 %
Money market 4,758,267 27.6 % 1.18 % 4,945,989 28.5 % 0.85 %
Savings 370,560 2.2 % 0.10 % 476,588 2.7 % 0.49 %
Total core deposits 14,209,743 82.6 % 0.61 % 14,849,252 85.6 % 0.43 %
Brokered money market 30 - % 0.05 % 30 - % 0.05 %
Time deposit accounts:
Less than 1.00% 287,237 1.7 % 0.18 % 398,777 2.3 % 0.15 %
1.00 - 1.99 49,941 0.3 % 1.47 % 193,529 1.1 % 1.78 %
2.00 - 2.99 381,412 2.2 % 2.45 % 431,042 2.5 % 2.47 %
3.00 - 3.99 545,731 3.2 % 3.47 % 645,228 3.7 % 3.44 %
4.00 - 4.99 1,225,716 7.1 % 4.41 % 834,543 4.8 % 4.42 %
5.00 and greater 508,000 2.9 % 5.22 % - - % - %
Total time deposit accounts 2,998,037 17.4 % 3.67 % 2,503,119 14.4 % 2.95 %
Total non-core deposits 2,998,067 17.4 % 3.67 % 2,503,149 14.4 % 2.95 %
Total deposits $ 17,207,810 100.0 % 1.15 % $ 17,352,401 100.0 % 0.79 %
The following table sets forth the estimated deposits exceeding the
Insured and collateralized deposits comprised 65% of total deposits atMarch 31, 2023 . This includes federally-insured deposits,$605.5 million of collateralized municipal and tribal deposits, and$70.0 million of privately insured deposits. The estimated aggregate amount of time deposits in excess of theFDIC insurance limit is$420.7 million atMarch 31, 2023 and$382.0 million atDecember 31, 2022 . The following table sets forth the maturity distribution of the estimated uninsured time deposits: (Dollars in thousands) March 31, 2023 December 31, 2022 3 months or less$ 187,634 $ 199,742 Over 3 months through 6 months 99,824
109,659
Over 6 months through 12 months 83,679 50,707 Over 12 months 49,557 21,903 Total$ 420,694 $ 382,011 Borrowings. AtMarch 31, 2023 , total borrowings amounted to$1.13 billion , a decrease of$199.8 million , or 15.0%, from$1.33 billion atDecember 31, 2022 . Total borrowings atMarch 31, 2023 were comprised of$800.0 million of FHLB term advances and$331.4 million of subordinated debentures. The decrease in borrowings atMarch 31, 2023 as compared toDecember 31, 2022 was primarily due to the maturity of$200.0 million in FHLB term advances during the first quarter of 2023, partially offset by the amortization of the subordinated debt issuance cost. AtMarch 31, 2023 , total borrowings represented 5.3% of total assets and had an end-of-period weighted average rate of 4.09%, compared with 6.1% of total assets and an end-of-period weighted average rate of 3.72% atDecember 31, 2022 . 85 --------------------------------------------------------------------------------
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$179,000 . 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$123.5 million , net of unamortized debt issuance cost of$1.6 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$148.1 million , net of unamortized debt issuance cost of$1.9 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 Quarterly Report on Form 10-Q.
The following table sets forth certain information regarding the Company's borrowed funds at the dates indicated:
March 31, 2023 December 31, 2022
Weighted Weighted
(Dollars in thousands) Balance Average Rate Balance Average Rate
FHLB advances $ 800,000 3.59 % $ 1,000,000 3.19 %
Subordinated debentures 331,364 5.31 % 331,204 5.32 %
Total borrowings $ 1,131,364 4.09 % $ 1,331,204 3.72 %
Weighted average cost of borrowings during the
quarter 3.83 % 3.62 %
Borrowings as a percent of total assets 5.3 % 6.1 %
As of March 31, 2023 , our unused borrowing capacity was $8.55 billion , which
consisted of available lines of credit with FHLB and other correspondent banks
as well as access through the Federal Reserve Bank's discount window and the new
Bank Term Funding Program. As a result of our proactive liquidity management, we
were able to reduce FHLB borrowings by $200 million during the first quarter of
2023, and did not need to utilize either the Federal Reserve Bank's discount
window or the Bank Term Funding Program.
The Company maintains additional sources of liquidity at the Corporation level.
Our Corporation maintains a $25.0 million line of credit with U.S. Bank and had
no outstanding balance against it at March 31, 2023 and December 31, 2022 .
86
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Stockholders' Equity. Total stockholders' equity was $2.83 billion as of
March 31, 2023 , a $32.8 million increase from $2.80 billion at December 31,
2022 . The increase in stockholders' equity was primarily due to $62.6 million of
net income and $2.5 million of other comprehensive income, partially offset by
$31.4 million in cash dividends.
Our book value per share increased to $29.58 at March 31, 2023 from $29.45 at
December 31, 2022 . At March 31, 2023 , the Company's tangible common equity to
tangible assets ratio was 9.20%, an increase from 8.88% at December 31, 2022 .
Our tangible book value per share was $19.61 , compared to $19.38 at December 31,
2022 . The increases in tangible common equity ratio and tangible book value per
share at March 31, 2023 from the prior year-end were primarily driven by net
income and other comprehensive income, partially offset by dividends paid during
the three months ended March 31, 2023 . The decrease in tangible assets also
contributed to the increase in tangible common equity ratio. For additional
details, see "Non-GAAP measures" presented under Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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 three months of 2023 were from:
•Principal payments on loans held for investment of
We used these funds to:
•Purchase AFS securities of$224.3 million ; •Decrease FHLB borrowings of$200.0 million ; •Originate loans held for investment of$65.3 million ; and •Return capital to shareholders through$31.4 million in dividends. Our most liquid assets are unrestricted cash, short-term investments, and unpledged AFS investments securities. 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 and the first quarter of 2023. AtMarch 31, 2023 , cash and cash equivalents totaled$1.42 billion . 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 ofMarch 31, 2023 , the Bank had secured borrowing capacity with FHLB of$6.40 billion , of which$4.85 billion was remaining available for borrowing, based on collateral pledged of$8.27 billion at carrying value in qualifying loans. AtMarch 31, 2023 , we had$800.0 million in FHLB term borrowings. AtMarch 31, 2023 , we also had a$1.22 billion line with the FRB discount window secured by investment securities, a$2.09 billion line with the FRB's Bank Term Funding Program, unsecured lines of credit aggregating to$395.0 million with other correspondent banks from which to purchase federal funds, and AFS investment securities with the aggregate market value of$2.11 billion . AtMarch 31, 2023 , our unused borrowing capacity was$8.55 billion and the combined readily available liquidity with cash and cash equivalents of$1.42 billion was approximately$10 billion , with a coverage ratio of 166% to uninsured and uncollateralized deposits. 87 -------------------------------------------------------------------------------- We believe our level of liquid assets is sufficient to meet current anticipated funding needs. As ofMarch 31, 2023 , our liquidity ratio was 21.0%, 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 2023 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, FRB discount window and Bank Term Funding Program, 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 15% of total deposits or 12% of total assets, as a secondary source for funding. AtMarch 31, 2023 , we had$1.74 billion in brokered deposits, which constituted 10.12% of total deposits and 8.15% of total assets at that date. During three months endedMarch 31, 2023 , the Bank added approximately$324.3 million in brokered certificates of deposit and$170.7 million in retail certificates of deposit, which are part of the interest rate risk management strategy to bolster our liquidity position and provide greater balance sheet flexibility. The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity. The Corporation's primary sources of liquidity are dividends from the Bank. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation. Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations. During the three months endedMarch 31, 2023 , the Bank paid$36.4 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. AtMarch 31, 2023 , the Corporation had no outstanding balances against this line. During the first quarter of 2023, the Corporation declared a quarterly dividend payment of$0.33 per share. OnApril 24, 2023 , the Company's Board of Directors declared a$0.33 per share dividend, payable onMay 15, 2023 to stockholders of record as ofMay 8, 2023 . 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 three months endedMarch 31, 2023 , 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. 88 -------------------------------------------------------------------------------- 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: March 31, 2023 (Dollars in thousands) Less than 1 year More than 1 year Total FHLB advances and other borrowings $ 200,000 $ 600,000$ 800,000 Subordinated debentures - 331,364 331,364 Certificates of deposit 2,447,884 550,153 2,998,037 Operating leases 19,673 43,727 63,400 Affordable housing partnerships commitment 10,306 4,908 15,214 Total contractual cash obligations$ 2,677,863
We believe that the Company's liquidity sources will be sufficient to meet the
contractual obligations as they become due through the maintenance of adequate
liquidity levels.
In the ordinary course of business, we enter into various transactions to meet
the financing needs of our customers which, in accordance with GAAP, are not
included in our consolidated balance sheets. These transactions include
off-balance sheet commitments, including commitments to extend credit and
standby letters of credit, and commitments to fund investments that qualify for
CRA credit. The following table presents a summary of the Company's commitments
to extend credit by expiration period:
March 31, 2023
(Dollars in thousands) Less than 1 year More than 1 year Total
Loan commitments to extend credit$ 1,152,240 $ 1,215,173 $ 2,367,413 Standby letters of credit 45,756 - 45,756 Total$ 1,197,996 $ 1,215,173 $ 2,413,169 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 2022 Form 10-K. 89 --------------------------------------------------------------------------------
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 of 2.5% above the minimum risk-based capital requirements, which fully phased in byJanuary 1, 2019 , 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. AtMarch 31, 2023 , 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 atMarch 31, 2023 compared to the capital ratios atDecember 31, 2022 . 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. The capital relief 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. 90 --------------------------------------------------------------------------------
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
March 31, 2023
Pacific Premier Bancorp, Inc.
Consolidated
Tier 1 leverage ratio 10.41% 4.00% N/A
Common equity tier 1 capital ratio 13.54% 7.00% N/A
Tier 1 capital ratio 13.54% 8.50% N/A
Total capital ratio 16.33% 10.50% N/A
Pacific Premier Bank
Tier 1 leverage ratio 11.93% 4.00% 5.00%
Common equity tier 1 capital ratio 15.52% 7.00% 6.50%
Tier 1 capital ratio 15.52% 8.50% 8.00%
Total capital ratio 16.55% 10.50% 10.00%
December 31, 2022
Pacific Premier Bancorp, Inc.
Consolidated
Tier 1 leverage ratio 10.29% 4.00% N/A
Common equity tier 1 capital ratio 12.99% 7.00% N/A
Tier 1 capital ratio 12.99% 8.50% N/A
Total capital ratio 15.53% 10.50% N/A
Pacific Premier Bank
Tier 1 leverage ratio 11.80% 4.00% 5.00%
Common equity tier 1 capital ratio 14.89% 7.00% 6.50%
Tier 1 capital ratio 14.89% 8.50% 8.00%
Total capital ratio 15.74% 10.50% 10.00%
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