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Pacific Premier Bancorp
PPBI
#4399
Rank
$2.37 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$24.49
Share price
0.00%
Change (1 day)
5.42%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Pacific Premier Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q1

Pacific Premier Bancorp - 10-Q quarterly report FY2023 Q1


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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
FORM 10-Q
(Mark One)
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR 
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from _______ to _______ 
Commission File Number 0-22193
 image0a03.jpg
(Exact name of registrant as specified in its charter) 
Delaware33-0743196
(State or other jurisdiction of incorporation or organization)(I.R.S Employer Identification No.)
 
17901 Von Karman Avenue, Suite 1200, Irvine, California 92614
(Address of principal executive offices and zip code)
(949) 864-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer☒Accelerated filer☐Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, par value $0.01 per sharePPBINASDAQ Global Select Market
The number of shares outstanding of the registrant’s common stock as of April 21, 2023 was 95,799,986.


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED MARCH 31, 2023
Item 1 - Financial Statements
Consolidated Statements of Financial Condition (Unaudited)
3
Consolidated Statements of Income (Unaudited)
4
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
5
Consolidated Statements of Stockholders’ Equity (Unaudited)
6
Consolidated Statements of Cash Flows (Unaudited)
7
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
56
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
92
Item 4 - Controls and Procedures
94
95
Item 1 - Legal Proceedings
95
Item 1A - Risk Factors
95
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
96
Item 3 - Defaults Upon Senior Securities
96
Item 4 - Mine Safety Disclosures
96
Item 5 - Other Information
96
Item 6 - Exhibits
97
98
2

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(Dollars in thousands, except par value and share data)
March 31,
2023		December 31,
2022
ASSETS
Cash and due from banks$132,441 $135,207 
Interest-bearing deposits with financial institutions1,292,455 966,042 
Cash and cash equivalents1,424,896 1,101,249 
Interest-bearing time deposits with financial institutions1,734 1,734 
Investments securities held-to-maturity, at amortized cost, net of allowance for credit losses of $227 and $43 (fair value of $1,496,494 and $1,097,096) at March 31, 2023 and December 31, 2022, respectively
1,749,030 1,388,103 
Investment securities available-for-sale, at fair value2,112,852 2,601,013 
FHLB, FRB, and other stock105,479 119,918 
Loans held for sale, at lower of cost or fair value1,247 2,643 
Loans held for investment14,171,784 14,676,298 
Allowance for credit losses(195,388)(195,651)
Loans held for investment, net13,976,396 14,480,647 
Accrued interest receivable69,660 73,784 
Other real estate owned5,499 — 
Premises and equipment, net63,450 64,543 
Deferred income taxes, net177,778 183,602 
Bank owned life insurance462,732 460,010 
Intangible assets52,417 55,588 
Goodwill901,312 901,312 
Other assets257,082 253,871 
Total assets$21,361,564 $21,688,017 
LIABILITIES 
Deposit accounts: 
Noninterest-bearing checking$6,209,104 $6,306,825 
Interest-bearing: 
Checking2,871,812 3,119,850 
Money market/savings5,128,857 5,422,607 
Retail certificates of deposit1,257,146 1,086,423 
Wholesale/brokered certificates of deposit1,740,891 1,416,696 
Total interest-bearing10,998,706 11,045,576 
Total deposits17,207,810 17,352,401 
FHLB advances and other borrowings800,000 1,000,000 
Subordinated debentures331,364 331,204 
Accrued expenses and other liabilities191,229 206,023 
Total liabilities18,530,403 18,889,628 
STOCKHOLDERS’ EQUITY 
Preferred stock, $0.01 par value; 1,000,000 authorized; no shares issued and outstanding
— — 
Common stock, $0.01 par value; 150,000,000 shares authorized at March 31, 2023 and December 31, 2022; 95,714,777 shares and 95,021,760 shares issued and outstanding, respectively
937 933 
Additional paid-in capital2,361,830 2,362,663 
Retained earnings731,123 700,040 
Accumulated other comprehensive loss(262,729)(265,247)
Total stockholders’ equity2,831,161 2,798,389 
Total liabilities and stockholders’ equity$21,361,564 $21,688,017 
Accompanying notes are an integral part of these consolidated financial statements.
3

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 Three Months Ended
 March 31,March 31,
(Dollars in thousands, except share data)
20232022
INTEREST INCOME
Loans$180,958 $150,604 
Investment securities and other interest-earning assets40,385 17,942 
Total interest income221,343 168,546 
INTEREST EXPENSE
Deposits40,234 1,673 
FHLB advances and other borrowings7,938 474 
Subordinated debentures4,561 4,560 
Total interest expense52,733 6,707 
Net interest income before provision for credit losses168,610 161,839 
Provision for credit losses3,016 448 
Net interest income after provision for credit losses165,594 161,391 
NONINTEREST INCOME
Loan servicing income573 419 
Service charges on deposit accounts2,629 2,615 
Other service fee income296 367 
Debit card interchange fee income803 836 
Earnings on bank owned life insurance3,374 3,221 
Net gain from sales of loans29 1,494 
Net gain from sales of investment securities138 2,134 
Trust custodial account fees11,025 11,579 
Escrow and exchange fees1,058 1,661 
Other income1,261 1,568 
Total noninterest income21,186 25,894 
NONINTEREST EXPENSE
Compensation and benefits54,293 56,981 
Premises and occupancy11,742 11,952 
Data processing7,265 5,996 
Other real estate owned operations, net108 — 
FDIC insurance premiums2,425 1,396 
Legal and professional services5,501 4,068 
Marketing expense1,838 1,809 
Office expense1,232 1,203 
Loan expense646 1,134 
Deposit expense8,436 3,751 
Amortization of intangible assets3,171 3,592 
Other expense4,695 5,766 
Total noninterest expense101,352 97,648 
Net income before income taxes85,428 89,637 
Income tax expense22,866 22,733 
Net income$62,562 $66,904 
EARNINGS PER SHARE
Basic$0.66 $0.71 
Diluted0.66 0.70 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic93,857,812 93,499,695 
Diluted94,182,522 93,946,074 

Accompanying notes are an integral part of these consolidated financial statements.
4

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 Three Months Ended
 March 31,March 31,
(Dollars in thousands)20232022
Net income$62,562 $66,904 
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available-for-sale, net of income taxes (1)
36,400 (118,591)
Reclassification adjustment for net gain on sales of securities included in net income, net of income taxes (2)
(99)(1,525)
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (3)
(36,076)(16,558)
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (4)
2,293 303 
Other comprehensive income (loss), net of tax2,518 (136,371)
Comprehensive income (loss), net of tax$65,080 $(69,467)
______________________________
(1) Income tax expense (benefit) of the unrealized gain (loss) on securities was $14.4 million and $(47.4) million for the three months ended March 31, 2023 and March 31, 2022, respectively.
(2) Income tax expense on the reclassification adjustment for net gain on sales of securities included in net income was $39,000 and $609,000 for the three months ended March 31, 2023 and March 31, 2022, respectively.
(3) Income tax (benefit) expense on the unrealized loss on securities transferred from available-for-sale to held-to-maturity was $(14.3) million and $(6.6) million for the three months ended March 31, 2023 and March 31, 2022, respectively.
(4) Income tax expense on the amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity included in net income was $915,000 and $121,000 for the three months ended March 31, 2023 and March 31, 2022, respectively.

Accompanying notes are an integral part of these consolidated financial statements.

5

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS MARCH 31, 2023 AND 2022
(Unaudited)
(Dollars in thousands, except share data)Common Stock
Shares		Common StockAdditional Paid-in CapitalAccumulated Retained
Earnings		Accumulated Other Comprehensive LossTotal Stockholders’ Equity
Balance at December 31, 202295,021,760 $933 $2,362,663 $700,040 $(265,247)$2,798,389 
Net income— — — 62,562 — 62,562 
Other comprehensive income— — — — 2,518 2,518 
Cash dividends declared ($0.33 per common share)
— — — (31,357)— (31,357)
Dividend equivalents declared ($0.33 per restricted stock unit)
— — 122 (122)— — 
Share-based compensation expense— — 4,729 — — 4,729 
Issuance of restricted stock, net834,724 4 (4)— — — 
Restricted stock surrendered and canceled(142,175)— (5,691)— — (5,691)
Exercise of stock options468 — 11 — — 11 
Balance at March 31, 202395,714,777 $937 $2,361,830 $731,123 $(262,729)$2,831,161 

Balance at December 31, 202194,389,543 $929 $2,351,294 $541,950 $(7,862)$2,886,311 
Net income— — — 66,904 — 66,904 
Other comprehensive loss— — — — (136,371)(136,371)
Cash dividends declared ($0.33 per common share)
— — — (31,142)— (31,142)
Dividend equivalents declared ($0.33 per restricted stock unit)
— — 121 (121)— — 
Share-based compensation expense— — 5,530 — — 5,530 
Issuance of restricted stock, net714,783 4 (4)— — — 
Restricted stock surrendered and canceled(175,219)— (8,548)— — (8,548)
Exercise of stock options16,742 — 334 — — 334 
Balance at March 31, 202294,945,849 $933 $2,348,727 $577,591 $(144,233)$2,783,018 
    

Accompanying notes are an integral part of these consolidated financial statements.
6

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended
 March 31,March 31,
(Dollars in thousands)20232022
Cash flows from operating activities:  
Net income$62,562 $66,904 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization expense3,552 3,726 
Provision for credit losses3,016 448 
Share-based compensation expense4,729 5,530 
Loss on sales and disposals of premises and equipment4 37 
Net amortization on securities3,481 5,023 
Net (accretion) of discounts/premiums for acquired loans and deferred loan fees/costs(4,254)(7,353)
Net gain on sales of investment securities available-for-sale(138)(2,134)
Net gain on sales of loans(29)(1,494)
Deferred income tax expense4,824 7,887 
Income from bank owned life insurance, net(2,722)(2,617)
Amortization of intangible assets3,171 3,592 
Originations of loans held for sale(766)(18,769)
Proceeds from the sales of and principal payments from loans held for sale833 19,486 
Change in accrued expenses and other liabilities, net(15,519)15,207 
Change in accrued interest receivable and other assets, net12,427 36,904 
Net cash provided by operating activities75,171 132,377 
Cash flows from investing activities:  
Proceeds from sales of other real estate owned1,241 — 
Loan originations and payments, net506,197 (430,951)
Proceeds from loans held for sale previously classified as portfolio loans5,778 — 
Purchase of securities held-to-maturity (8,000)— 
Proceeds from prepayments and maturities of securities held-to-maturity8,238 3,750 
Purchase of securities available-for-sale(224,347)(499,168)
Proceeds from prepayments and maturities of securities available-for-sale47,016 77,817 
Proceeds from sales of securities available-for-sale304,320 647,557 
Purchase of premises and equipment(2,463)(2,308)
Change in FHLB, FRB, and other stock1,875 (95)
Funding of CRA investments, net(9,751)(701)
Net cash provided by (used in) investing activities630,104 (204,099)
Cash flows from financing activities:  
Net (decrease) increase in deposit accounts$(144,591)$573,634 
Net change in short-term borrowings(200,000)(358,000)
Proceeds from long-term borrowings— 400,000 
Cash dividends paid(31,357)(31,142)
Proceeds from exercise of stock options11 334 
Restricted stock surrendered and canceled(5,691)(8,548)
Net cash (used in) provided by financing activities(381,628)576,278 
Net increase in cash and cash equivalents323,647 504,556 
Cash and cash equivalents, beginning of period1,101,249 304,703 
Cash and cash equivalents, end of period$1,424,896 $809,259 
Supplemental cash flow disclosures:  
Interest paid$44,138 $3,927 
Income taxes paid, net(800)(11,944)
Noncash investing activities during the period:
Transfers from portfolio loans to loans held for sale5,707 — 
Transfers from loans held for sale to portfolio loans1,287 — 
Transfers from loans to other real estate owned6,886 — 
Transfers of investment securities from available-for-sale to held-to-maturity360,347 618,678 
Transfer of CRA investment securities from other stock to other assets12,601 — 
Recognition of operating lease right-of-use assets(1,337)(459)
Recognition of operating lease liabilities1,337 459 
Receivable on unsettled security sales— 13,464 


Accompanying notes are an integral part of these consolidated financial statements.
7

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)

Note 1 – Basis of Presentation
 
The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiaries, including Pacific Premier Bank (the “Bank”) (collectively, the “Company,” “we,” “our,” or “us”). All significant intercompany accounts and transactions have been eliminated in consolidation.
 
In the opinion of management, the unaudited consolidated financial statements reflect all normal recurring adjustments and accruals that are necessary for a fair presentation of the statement of financial position and the results of operations for the interim periods presented. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2023.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).
 
The Company consolidates voting entities in which the Company has control through voting interests or entities through which the Company has a controlling financial interest in a variable interest entity (“VIE”). The Company evaluates its interests in these entities to determine whether they meet the definition of a VIE and whether the Company is required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size, and form of the Company's involvement with the VIE. See Note 13 – Variable Interest Entities for additional information.


8

Note 2 – Recently Issued Accounting Pronouncements
 
Accounting Standards Adopted in 2022

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. The FASB issued this Update in response to feedback the FASB received from various stakeholders in its post-implementation review process related to the issuance of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was effective for the Company on January 1, 2020. The amendments in this Update include the elimination of accounting guidance for troubled debt restructurings (“TDRs”) in Subtopic 310-40 - Receivables - Troubled Debt Restructurings by Creditors, and introduce new disclosures and enhance existing disclosures concerning certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. Under the provisions of this Update, an entity must determine whether a modification results in a new loan or the continuation of an existing loan. Further, the amendments in this Update require that a public business entity disclose current period gross charge-offs on financing receivables within the scope of ASC 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost, by year of origination and class of financing receivable. The amendments in this Update became effective for the Company on January 1, 2023 for all interim and annual periods. The adoption of the provisions in this Update are applied prospectively and have resulted in additional disclosures concerning modifications of loans to borrowers experiencing financial difficulty, as well as disaggregated disclosure of charge-offs on loans. Please also see Note 5 – Loans Held for Investment for added disclosure concerning modifications of loans to borrowers experiencing financial difficulty, as well as current period gross charge-offs on financing receivables within by year of origination and class of financing receivable.

In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815) Fair Value Hedging - Portfolio Layer Method. The amendments in this Update make targeted improvements to fair value hedge accounting and more specifically to the last-of-layer hedge accounting method. This Update expands the last-of-layer hedge accounting method to allow for multiple hedged layers to be designated for a single closed portfolio of prepayable financial assets, and renames this accounting method the “portfolio layer method.” The provisions of this Update also include: (i) expanding the scope of the portfolio layer method to nonprepayable financial assets, (ii) specifying that eligible hedging instruments in a single layer hedge may include spot-starting or forward-starting constant-notional or amortizing-notional swaps and that the number of hedged layers corresponds with the number of hedges designated, (iii) specifies that an entity hedging multiple amounts in a closed portfolio using a single amortizing-notional swap is executing a single-layer hedge, (iv) provides additional guidance on the accounting for and disclosure of hedge basis adjustments resulting from a fair value hedge under the portfolio layer method by requiring such basis adjustments be maintained at the portfolio level and not allocated to individual assets, and to disclose basis adjustments as a reconciling item in certain disclosures, such as those for loans, and (v) specifies that an entity is to exclude hedge basis adjustments in the determination of credit losses on the assets within the closed portfolio. The provisions of this Update became effective for the Company on January 1, 2023 for all interim and annual periods. The adoption of the provisions in this Update did not have a material impact on the Company’s consolidated financial statements. Please also see Note 11 – Derivative Instruments, for disclosure concerning the Company’s portfolio layer method fair value hedges.

Recent Accounting Guidance Not Yet Effective

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842), Common Control Arrangements. The amendments in this Update clarify the accounting for leasehold improvements associated with common control leases. This Update has been issued in order to address current diversity in practice associated with the accounting for leasehold improvements associated with a lease between entities under common control. The amendments in this Update apply to all lessees that are a party to a lease between entities under common control in which there are leasehold improvements. The amendments in this Update are effective for interim and annual periods beginning after December 15, 2023. The Company is currently evaluating the provisions of this Update, but does not anticipate the adoption will have a material impact on the Company’s consolidated financial statements.
9

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force. The amendments in this Update allow the option for an entity to apply the proportional amortization method of accounting to other equity investments that are made for the primary purpose of receiving tax credits or other income tax benefits, if certain conditions are met. Prior to this Update, the application of the proportional amortization method of accounting was limited to investments in low income housing tax credit structures. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line in the statements of income, income tax expense. Under this Update, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit-program basis. In addition, the amendments in this Update require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph 323-740-25-3, requiring a liability be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. Under this Update, low income housing tax credit investments for which the proportional amortization method is not applied can no longer be accounted for using the delayed equity contribution guidance. Further, this Update specifies that impairment of low income housing tax credit investments not accounted for using the equity method must apply the impairment guidance in Subtopic 323-10 - Investments - Equity Method and Joint Ventures - Overall. This Update also clarifies that for low income housing tax credit investments not accounted for under the proportional amortization method or the equity method, an entity shall account for them under Topic 321 - Investments - Equity Securities. The amendments in this Update also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including (i) the nature of tax equity investments, and (ii) the effect of tax equity investments and related income tax credits and other income tax benefits on the financial position and results of operations. The provisions of this Update are effective for the Company for interim and annual periods beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of this Update on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In response to concerns about structural risks of Interbank Offered Rates (“IBORs”), and particularly, the risk of cessation of the London Interbank Offered Rate (“LIBOR”), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting as well as optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this Update are elective and become effective upon issuance for all entities.

An entity may elect to apply the amendments in this Update to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has not entered into any hedging related transactions that reference LIBOR or another reference rate that is expected to be discontinued, and as such, the amendments included in this Update have not had an impact on the Company’s Consolidated Financial Statements.

10

The Company has created a cross-functional working group to manage the transition away from LIBOR. This working group is comprised of senior leadership and staff from functional areas that include: finance, treasury, lending, loan servicing, enterprise risk management, information technology, legal, and other internal stakeholders integral to the Bank’s transition away from LIBOR. The working group monitors developments related to transition and uncertainty surrounding reference rate reform and guides the Bank’s response. The working group continues to regularly assess the population of financial instruments that reference LIBOR, confirming our loan documents that reference LIBOR have been appropriately amended, ensuring that our internal systems are prepared for the transition, and managing the transition process with our customers. The Company has chosen to use the Secured Overnight Financing Rate (“SOFR”) as an alternative to LIBOR. However, the Company will also use other alternative reference rates, such as the Constant Maturity Treasury index and Prime rate based on the individual needs of its customers as well as the types of credit being extended.

Note 3 – Significant Accounting Policies

Our accounting policies are described in Note 1 - Description of Business and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2022 Form 10-K. Significant changes to accounting policies from those disclosed in our audited consolidated financial statements included in our 2022 Form 10-K are presented below.

Modified Loans to Borrowers Experiencing Financial Difficulty. Infrequently, the Company makes modifications to certain loans in order to alleviate temporary difficulties 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. The Company also refers to these modifications as modified loans to troubled borrowers (“MLTB”). Modifications may include: changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and, in very limited cases, reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status when there is doubt concerning the full repayment of principal and interest or the loan has been in default for a period of 90 days or more. Such loans may be returned to accrual status when all contractual amounts past due have been brought current, and the borrower’s performance under the modified terms of the loan agreement and the ultimate collectability of all contractual amounts due under the modified terms is no longer in doubt. The Company typically measures the allowance for credit losses (“ACL”) on MLTB on an individual basis when the loans are deemed to no longer share risk characteristics that are similar with other loans in the portfolio. The determination of the ACL for these loans is based on a discounted cash flow approach for both those measured collectively and individually, unless the loan is deemed collateral dependent, which requires measurement of the ACL based on the estimated expected fair value of the underlying collateral, less costs to sell. GAAP requires the Company to make certain disclosures related to these loans, including certain types of modifications, as well as how such loans have performed since their modifications. Please see Note 5 – Loans Held for Investment for additional information concerning modified loans to troubled borrowers.

Other Real Estate Owned (“OREO”). Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at fair value, less cost to sell, with any excess of the loan’s amortized cost balance over the fair value of the property recorded as a charge against the ACL. The Company obtains an appraisal and/or market valuation on all other real estate owned at the time of possession. After foreclosure, valuations are periodically performed by management. Any subsequent declines in fair value are recorded as a charge to noninterest expense in current period earnings with a corresponding write-down to the asset. All legal fees and direct costs, including foreclosure and other related costs, are expensed as incurred.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from those estimates.

11

Note 4 – Investment Securities
 
The amortized cost and estimated fair value of available-for-sale (“AFS”) investment securities were as follows:
(Dollars in thousands)Amortized
 Cost		Gross Unrealized
Gain		Gross Unrealized
Loss		Estimated
Fair Value
AFS investment securities:
March 31, 2023    
U.S. Treasury$14,941 $— $(1,586)$13,355 
Agency464,491 — (46,760)417,731 
Corporate561,380 — (53,191)508,189 
Collateralized mortgage obligations401,105 — (28,473)372,632 
Mortgage-backed securities923,956 — (123,011)800,945 
Total AFS investment securities$2,365,873 $— $(253,021)$2,112,852 
December 31, 2022
U.S. Treasury$49,156 $— $(2,139)$47,017 
Agency485,331 — (53,893)431,438 
Corporate586,652 — (44,104)542,548 
Collateralized mortgage obligations829,928 — (65,699)764,229 
Mortgage-backed securities953,678 — (137,897)815,781 
Total AFS investment securities$2,904,745 $— $(303,732)$2,601,013 

The carrying amount and estimated fair value of held-to-maturity (“HTM”) investment securities were as follows:
(Dollars in thousands)Amortized
 Cost		Allowance for Credit LossesNet Carrying AmountGross Unrecognized
Gain		Gross Unrecognized
Loss		Estimated
Fair Value
HTM investment securities:
March 31, 2023
Municipal bonds$1,147,822 $(227)$1,147,595 $398 $(223,030)$924,963 
Collateralized mortgage obligations356,435 — 356,435 1,198 (481)357,152 
Mortgage-backed securities228,624 — 228,624 — (30,621)198,003 
Other16,376 — 16,376 — — 16,376 
Total HTM investment securities$1,749,257 $(227)$1,749,030 $1,596 $(254,132)$1,496,494 
December 31, 2022
Municipal bonds$1,148,055 $(43)$1,148,012 $44 $(257,430)$890,626 
Mortgage-backed securities231,692 — 231,692 — (33,621)198,071 
Other8,399 — 8,399 — — 8,399 
Total HTM investment securities$1,388,146 $(43)$1,388,103 $44 $(291,051)$1,097,096 

12

The Company reassesses classification of certain investments as part of the ongoing review of the investment securities portfolio. During the first quarter of 2023, the Company transferred $410.7 million of AFS 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. These collateralized mortgage obligations securities had a net carrying amount of $360.3 million with a pre-tax unrealized loss of $50.4 million, which are accreted into interest income as yield adjustments 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 discounts. No gains or losses were recorded at the time of transfer.
During the first quarter of 2022, the Company transferred approximately $386.8 million of municipal bonds and $255.0 million of mortgage-backed securities with longer durations to HTM securities. The Company intends and has the ability to hold the securities transferred to maturity. The municipal bonds had a net carrying amount of $379.9 million with a pre-tax unrealized loss of $6.9 million, and the mortgage-backed securities had a net carrying amount of $238.8 million with a pre-tax unrealized loss of $16.2 million, both of which are accreted into interest income as yield adjustments over the remaining term of the securities. No gains or losses were recorded at the time of transfer.
Investment securities with carrying values of $3.61 billion and $195.6 million as of March 31, 2023 and December 31, 2022, respectively, were pledged to other borrowings, secure public deposits, and for other purposes as required or permitted by law. The increase in the investment securities pledged during the first quarter of 2023 was primarily due to the additional investment securities with carrying values of $1.53 billion pledged to the Federal Reserve's discount window and $1.89 billion pledged to the Federal Reserve's new Bank Term Funding Program launched in March 2023 to increase the Company’s access to funding and provide liquidity.

Unrealized Gains and Losses

Unrealized gains and losses on AFS investment securities are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At March 31, 2023, the Company had a net unrealized loss on AFS investment securities of $253.0 million, or $181.1 million net of tax in accumulated other comprehensive loss, compared to a net unrealized loss of $303.7 million, or $217.4 million net of tax in accumulated other comprehensive loss, at December 31, 2022.

For investment securities transferred from AFS to HTM, the unrealized gains and losses at the date of transfer continue to be reported in stockholders’ equity as accumulated other comprehensive income or loss and are amortized over the remaining lives of the securities with an offsetting entry to interest income as an adjustment of yield. At March 31, 2023, the unrealized loss on investment securities transferred from AFS to HTM was $114.1 million, or $81.6 million net of tax in accumulated other comprehensive loss.
    
The table below summarizes the number, fair value, and gross unrealized holding losses of the Company’s AFS investment securities in an unrealized loss position for which an allowance for credit losses has not been recorded as of the dates indicated, aggregated by investment category and length of time in a continuous loss position.
13

 March 31, 2023
 Less than 12 Months12 Months or LongerTotal
(Dollars in thousands)NumberFair
Value		Gross
Unrealized
Losses		NumberFair
Value		Gross
Unrealized
Losses		NumberFair
Value		Gross
Unrealized
Losses
AFS investment securities:
U.S. Treasury14 $13,355 $(1,586)— $— $— 14 $13,355 $(1,586)
Agency13 142,489 (12,151)30 275,242 (34,609)43 417,731 (46,760)
Corporate19 158,469 (14,917)37 349,720 (38,274)56 508,189 (53,191)
Collateralized mortgage obligations20 185,232 (9,004)34 187,400 (19,469)54 372,632 (28,473)
Mortgage-backed securities.17 141,007 (12,813)64 659,938 (110,198)81 800,945 (123,011)
Total AFS investment securities83 $640,552 $(50,471)165 $1,472,300 $(202,550)248 $2,112,852 $(253,021)

 December 31, 2022
 Less than 12 Months12 Months or LongerTotal
(Dollars in thousands)NumberFair
Value		Gross
Unrealized
Losses		NumberFair
Value		Gross
Unrealized
Losses		NumberFair
Value		Gross
Unrealized
Losses
AFS investment securities:
U.S. Treasury5 $33,982 $(237)1 $13,036 $(1,902)6 $47,018 $(2,139)
Agency8 79,895 (1,265)35 351,543 (52,628)43 431,438 (53,893)
Corporate35 327,984 (20,840)21 214,565 (23,264)56 542,549 (44,104)
Collateralized mortgage obligations41 522,955 (33,318)40 241,229 (32,381)81 764,184 (65,699)
Mortgage-backed securities13 91,762 (6,987)68 724,019 (130,910)81 815,781 (137,897)
Total AFS investment securities102 $1,056,578 $(62,647)165 $1,544,392 $(241,085)267 $2,600,970 $(303,732)

Allowance for Credit Losses on Investment Securities

The Company reviews individual securities classified as AFS to determine whether a decline in fair value below the amortized cost basis is deemed credit related or due to other factors such as changes in interest rates and general market conditions. An ACL on AFS investment securities is recorded when the fair value of the investment is below its amortized cost and the decline in fair value has been deemed, through the Company’s qualitative assessment, to be credit related. Non-credit related declines in fair value of AFS investment securities, which may be attributed to changes in interest rates and other market-related factors, are not recorded through an ACL. Such declines are recorded as an adjustment to accumulated other comprehensive income, net of tax. In the event the Company is required to sell or has the intent to sell an AFS security that has experienced a decline in fair value below its amortized cost, the Company writes the amortized cost of the security down to fair value in the current period.

Credit losses on HTM investment securities are representative of current expected credit losses that may be incurred over the life of the investment and are recorded at the time of purchase or acquisition and when the Company has designated securities as HTM.

The Company determines credit losses on both AFS and HTM investment securities through the use of a discounted cash flow approach using the security’s effective interest rate. The ACL is measured as the amount by which an investment security’s amortized cost exceeds the net present value of expected future cash flows. However, the amount of credit losses for AFS investment securities is limited to the amount of a security’s unrealized loss. The ACL is established through a charge to provision for credit losses in current period earnings.


14

At March 31, 2023 and December 31, 2022, the Company had an ACL of $227,000 and $43,000, respectively, for HTM investment securities classified as municipal bonds. The following table presents a rollforward by major security type of the allowance for credit losses on the Company's HTM debt securities as of and for the periods indicated:
Three Months Ended March 31, 2023
(Dollars in thousands)
 Balance,
December 31, 2022
Provision for Credit Losses
Balance,
March 31, 2023
HTM investment securities:
Municipal bonds$43 $184 $227 
Three Months Ended March 31, 2022
(Dollars in thousands) Balance,
December 31, 2021		Provision for Credit Losses
Balance,
March 31, 2022
HTM investment securities:
Municipal bonds$22 $19 $41 

The Company had no ACL for AFS investment securities at March 31, 2023 and December 31, 2022. The Company performed a qualitative assessment of these investments as of March 31, 2023 and determined that the decrease in unrealized losses was the result of general market conditions, including changes in interest rates driven by the Federal Reserve’s policy to fight against inflation, and does not believe the declines in fair value were credit related. As of March 31, 2023, the Company had not recorded credit losses on certain AFS securities that were in an unrealized loss position due to the high quality of the investments, with investment grade ratings, and many of them issued by U.S. government agencies. As of March 31, 2023, 50% of our AFS securities are U.S. Treasury, U.S. government agency, and U.S. government-sponsored enterprise securities. Additionally, the Company continues to receive contractual principal and interest payments in a timely manner. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell the securities prior to their anticipated recoveries. There was no provision for credit losses recognized for AFS investment securities during the three months ended March 31, 2023, December 31, 2022, or March 31, 2022.

At March 31, 2023 and December 31, 2022, there were no AFS or HTM securities in nonaccrual status. All securities in the portfolio were current with their contractual principal and interest payments. At March 31, 2023 and December 31, 2022, there were no securities purchased with deterioration in credit quality since their origination. At March 31, 2023 and December 31, 2022, there were no collateral dependent AFS or HTM securities.
    
Realized Gains and Losses

The following table presents the amortized cost of securities sold with related gross realized gains, gross realized losses, and net realized gains or losses for the periods indicated:
Three Months Ended
March 31,March 31,
(Dollars in thousands)20232022
Amortized cost of AFS investment securities sold$304,182 $658,505 
Gross realized gains$986 $13,637 
Gross realized (losses)(848)(11,503)
Net realized gains on sales of AFS investment securities$138 $2,134 


15

Contractual Maturities

The amortized cost and estimated fair value of investment securities at March 31, 2023, by contractual maturity, are shown in the table below.
Due in One Year
or Less		Due after One Year
through Five Years		Due after Five Years
through Ten Years		Due after
Ten Years		Total
(Dollars in thousands)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
AFS investment securities:          
U.S. Treasury$— $— $— $— $14,941 $13,355 $— $— $14,941 $13,355 
Agency17,140 16,966 314,788 292,224 107,278 89,306 25,285 19,235 464,491 417,731 
Corporate— — 288,259 280,121 273,121 228,068 — — 561,380 508,189 
Collateralized mortgage obligations31,382 31,174 71,997 70,731 199,472 178,056 98,254 92,671 401,105 372,632 
Mortgage-backed securities19,902 19,617 14,886 14,656 512,674 452,677 376,494 313,995 923,956 800,945 
Total AFS investment securities68,424 67,757 689,930 657,732 1,107,486 961,462 500,033 425,901 2,365,873 2,112,852 
HTM investment securities:
Municipal bonds— — 10,589 10,224 53,233 47,646 1,084,000 867,093 1,147,822 924,963 
Collateralized mortgage obligations— — 151 151 — — 356,284 357,001 356,435 357,152 
Mortgage-backed securities— — — — — — 228,624 198,003 228,624 198,003 
Other— — — — — — 16,376 16,376 16,376 16,376 
Total HTM investment securities— — 10,740 10,375 53,233 47,646 1,685,284 1,438,473 1,749,257 1,496,494 
Total investment securities$68,424 $67,757 $700,670 $668,107 $1,160,719 $1,009,108 $2,185,317 $1,864,374 $4,115,130 $3,609,346 


FHLB, FRB, and Other Stock

The Company’s equity securities primarily consist of Federal Home Loan Bank of San Francisco (“FHLB”) and Federal Reserve Bank of San Francisco (“FRB”) stock, which are considered restricted securities and held as a condition of membership of the FHLB and the Board of Governors of the Federal Reserve System. These equity securities without readily determinable fair values are carried at cost less impairment. At March 31, 2023, the Company had $25.7 million in FHLB stock, $74.9 million in FRB stock, and $4.9 million in other stock. At December 31, 2022, the Company had $27.7 million in FHLB stock, $74.8 million in FRB stock, and $17.4 million in other stock.

The Company periodically evaluates its investments in FHLB, FRB, and other stock for impairment, including their capital adequacy and overall financial condition. No impairment losses have been recorded through March 31, 2023.


16

Note 5 – Loans Held for Investment
 
The Company’s loan portfolio is segmented according to loans that share similar attributes and risk characteristics.

Investor loans secured by real estate includes commercial real estate (“CRE”), non-owner-occupied, multifamily, construction, and land, as well as Small Business Administration (“SBA”) loans secured by investor real estate, which are loans collateralized by hotel/motel real property.

Business loans secured by real estate are loans to businesses that are collateralized by real estate where the operating cash flow of the business is the primary source of repayment. This loan portfolio includes CRE owner-occupied, franchise loans secured by real estate, and SBA loans secured by real estate, which are collateralized by real property other than hotel/motel real property.

Commercial loans are loans to businesses where the operating cash flow of the business is the primary source of repayment. This loan portfolio includes commercial and industrial (“C&I”), franchise loans non-real estate secured, and SBA loans non-real estate secured.

Retail loans include single family residential and consumer loans. Single family residential includes home equity lines of credit, as well as second trust deeds.


17

The following table presents the composition of the loan portfolio for the periods indicated:
March 31,December 31,
(Dollars in thousands)20232022
Investor loans secured by real estate
CRE non-owner-occupied$2,590,824 $2,660,321 
Multifamily5,955,239 6,112,026 
Construction and land420,079 399,034 
SBA secured by real estate40,669 42,135 
Total investor loans secured by real estate9,006,811 9,213,516 
Business loans secured by real estate
CRE owner-occupied2,342,175 2,432,163 
Franchise real estate secured371,902 378,057 
SBA secured by real estate60,527 61,368 
Total business loans secured by real estate2,774,604 2,871,588 
Commercial loans
Commercial and industrial1,967,128 2,160,948 
Franchise non-real estate secured388,722 404,791 
SBA non-real estate secured10,437 11,100 
Total commercial loans2,366,287 2,576,839 
Retail loans
Single family residential70,913 72,997 
Consumer3,174 3,284 
Total retail loans74,087 76,281 
Loans held for investment before basis adjustment (1)
14,221,789 14,738,224 
Basis adjustment associated with fair value hedge (2)
(50,005)(61,926)
Loans held for investment14,171,784 14,676,298 
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 value1,247 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 of March 31, 2023 and December 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.

The Company originates SBA loans with the intent to sell the guaranteed portion of the loans prior to maturity and, therefore, designates them as held for sale. From time to time, the Company may purchase or sell other types of loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns, and generate liquidity.
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Loans Serviced for Others and Loan Securitization

The Company generally retains the servicing rights of the guaranteed portion of SBA loans sold, for which the Company initially records a servicing asset at fair value within its other assets category. Servicing assets are subsequently measured using the amortization method and amortized to noninterest income. At March 31, 2023 and December 31, 2022, the servicing asset totaled $2.6 million and $3.0 million, respectively, and were included in other assets in the Company’s consolidated statement of financial condition. Servicing assets are evaluated for impairment based upon the fair value of the servicing rights as compared to carrying amount. Impairment is recognized through a valuation allowance, to the extent the fair value is less than the carrying amount. At March 31, 2023 and December 31, 2022, the Company determined that no valuation allowance was necessary.
    
In connection with the acquisition of Opus Bank (“Opus”), the Company acquired Federal Home Loan Mortgage Corporation (“Freddie Mac”) guaranteed structured pass-through certificates, which were issued as a result of Opus’s securitization sale of $509 million in originated multifamily loans through a Freddie Mac-sponsored transaction in December 2016. The Company's continuing involvement includes sub-servicing responsibilities, general representations and warranties, and reimbursement obligations. Servicing responsibilities on loan sales generally include obligations to collect and remit payments of principal and interest, provide foreclosure services, manage payments of taxes and insurance premiums, and otherwise administer the underlying loans. In connection with the securitization transaction, Freddie Mac was designated as the master servicer and appointed the Company to perform sub-servicing responsibilities, which generally include the servicing responsibilities described above with the exception of the servicing of foreclosed or defaulted loans. The overall management, servicing, and resolution of defaulted loans and foreclosed loans are separately designated to the special servicer, a third-party institution that is independent of the master servicer and the Company. The master servicer has the right to terminate the Company in its role as sub-servicer and direct such responsibilities accordingly.

To the extent the ultimate resolution of defaulted loans results in contractual principal and interest payments that are deficient, the Company is obligated to reimburse Freddie Mac for such amounts, not to exceed 10% of the original principal amount of the loans comprising the securitization pool at the closing date of December 23, 2016. The liability recorded for Company’s exposure to the reimbursement agreement with Freddie Mac was $334,000 as of March 31, 2023 and December 31, 2022.

Loans sold and serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of loans and participations serviced for others were $444.4 million at March 31, 2023 and $463.4 million at December 31, 2022, respectively. Included in those totals are multifamily loans transferred through securitization with Freddie Mac of $53.7 million and $54.2 million at March 31, 2023 and December 31, 2022, respectively, and SBA participations serviced for others of $303.9 million and $315.3 million at March 31, 2023 and December 31, 2022, respectively.

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Concentration of Credit Risk
 
As of March 31, 2023, the Company’s loan portfolio was primarily collateralized by various forms of real estate and business assets located predominately in California. The Company’s loan portfolio contains concentrations of credit in multifamily, CRE non-owner-occupied, CRE owner-occupied, and C&I business loans. The Bank maintains policies approved by the Bank’s Board of Directors (the “Bank Board”) that address these concentrations and diversifies its loan portfolio through loan originations, purchases, and sales to meet approved concentration levels.

Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of the Bank’s unimpaired capital plus surplus, and likewise in excess of 15% of the Bank’s unimpaired capital plus surplus for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $836.5 million for secured loans and $501.9 million for unsecured loans at March 31, 2023. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At March 31, 2023, the Bank’s largest aggregate outstanding balance of loans to one borrower was $171.2 million secured by multifamily properties.
 
Credit Quality and Credit Risk Management
 
The Company’s credit quality and credit risk are controlled in two distinct areas. The first is the loan origination process, wherein the Bank underwrites credit and chooses which types and levels of risk it is willing to accept. The Company maintains a credit policy which addresses many related topics, sets forth maximum tolerances for key elements of loan risk, and indicates appropriate protocols for identifying and analyzing these risk elements. The policy sets forth specific guidelines for analyzing each of the loan products the Company offers from both an individual and portfolio-wide basis. The credit policy is reviewed annually by the Bank Board. The Bank’s underwriters ensure all key risk factors are analyzed, with most underwriting including a global cash flow analysis of the prospective borrowers. 
    
The second area is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and appropriate fashion. Credit risk is monitored and managed within the loan portfolio by the Company’s portfolio managers based on both the credit policy and a credit and portfolio review policy. This latter policy requires a program of financial data collection and analysis, thorough loan reviews, property and/or business inspections, monitoring of portfolio concentrations and trends, and incorporation of current business and economic conditions. The portfolio managers also monitor asset-based lines of credit, loan covenants, and other conditions associated with the Company’s business loans as a means to help identify potential credit risk. Most individual loans, excluding the homogeneous loan portfolio, are reviewed at least annually, including the assignment or confirmation of a risk grade.
 
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful, and Loss classifications, as such classifications are defined by the federal banking regulatory agencies. The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are reviewed regularly with the Company’s Credit and Portfolio Review Committee, and the portfolio management and risk grading process is reviewed on an ongoing basis by an independent loan review function and periodic internal audits, as well as by regulatory agencies during scheduled examinations.
 
20

The following provides brief definitions for risk grades assigned to loans in the portfolio:
 
•Pass assets carry an acceptable level of credit quality that contains no well-defined deficiencies or weaknesses.
•Special Mention assets do not currently expose the Bank to a sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiencies or potential weaknesses deserving management’s close attention.
•Substandard assets are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. These assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. OREO acquired through foreclosure is also classified as substandard.
•Doubtful assets have all the weaknesses inherent in substandard assets, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
•Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted. Amounts classified as loss are promptly charged off.

The Bank’s portfolio managers also manage loan performance risks, collections, workouts, bankruptcies, and foreclosures. A special department, whose portfolio managers have professional expertise in these areas, typically handles or advises on these types of matters. Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credits when they are identified. Collection efforts commence immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss. When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.
 
When a loan is graded as special mention, substandard, or doubtful, the Company obtains an updated valuation of the underlying collateral. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate properties, and/or cash. If, through the Company’s credit risk management process, it is determined the ultimate repayment of a loan will come from the foreclosure upon and ultimate sale of the underlying collateral, the loan is deemed collateral dependent and evaluated individually to determine an appropriate ACL for the loan. The ACL for such loans is measured as the amount by which the fair value of the underlying collateral, less estimated costs to sell, is less than the amortized cost of the loan. The Company typically continues to obtain or confirm updated valuations of underlying collateral for special mention and classified loans on an annual or biennial basis in order to have the most current indication of fair value of the underlying collateral securing the loan. Additionally, once a loan is identified as collateral dependent, due to the likelihood of foreclosure, and repayment of the loan is expected to come from the eventual sale of the underlying collateral, an analysis of the underlying collateral is performed at least quarterly. Changes in the estimated fair value of the collateral are reflected in the lifetime ACL for the loan. Balances deemed to be uncollectable are promptly charged-off. However, if a loan is not considered collateral dependent and management determines that the loan no longer possesses risk characteristics similar to other loans in the loan portfolio, the loan is individually evaluated, and the associated ACL is determined through the use of a discounted cash flow analysis.



21

The following table stratifies the loans held for investment portfolio by the Company’s internal risk grading, and by year of origination, as well as the gross charge-offs on a year-to-date basis by year of origination as of March 31, 2023:
Term Loans by Vintage
(Dollars in thousands)20232022202120202019PriorRevolvingRevolving Converted to Term During the PeriodTotal
March 31, 2023
Investor loans secured by real estate
CRE non-owner-occupied
Pass$10,306 $526,084 $604,909 $199,161 $318,943 $913,142 $— $— $2,572,545 
Special mention— — — — — 5,104 — — 5,104 
Substandard— 450 — — — 12,725 — — 13,175 
Multifamily
Pass11,931 1,216,585 2,158,819 778,678 885,448 886,728 — — 5,938,189 
Special mention— — — — 12,604 — — — 12,604 
Substandard— — 985 — 2,723 738 — — 4,446 
Construction and land
Pass24,682 213,034 153,359 16,609 4,876 6,077 1,442 — 420,079 
SBA secured by real estate
Pass— 6,546 130 493 5,363 19,211 — — 31,743 
Substandard— — — — — 8,926 — — 8,926 
Total investor loans secured by real estate46,919 1,962,699 2,918,202 994,941 1,229,957 1,852,651 1,442 — 9,006,811 
Current period gross charge-offs— — 217 — — 66 — — 283 
Business loans secured by real estate
CRE owner-occupied
Pass8,779 579,514 689,292 234,096 233,804 512,531 5,795 — 2,263,811 
Special mention— 3,920 2,836 — — 11,623 — — 18,379 
Substandard— 11,078 1,007 11,339 — 36,561 — — 59,985 
Franchise real estate secured
Pass8,551 45,691 125,282 33,145 40,580 85,108 — — 338,357 
Special mention729 7,766 17,015 — 836 — — — 26,346 
Substandard— 958 — — 5,941 300 — — 7,199 
SBA secured by real estate
Pass116 10,724 8,168 2,131 5,648 28,285 — — 55,072 
Special mention— — — — — 195 — — 195 
Substandard— — — — — 5,260 — — 5,260 
Total loans secured by business real estate18,175 659,651 843,600 280,711 286,809 679,863 5,795 — 2,774,604 
Current period gross charge-offs— — 318 — — 1,845 — — 2,163 
22

Term Loans by Vintage
(Dollars in thousands)20232022202120202019PriorRevolvingRevolving Converted to Term During the PeriodTotal
Commercial loans
Commercial and industrial
Pass23,116 274,813 251,865 54,249 150,173 188,547 942,518 334 1,885,615 
Special mention— 1,804 1,626 — 595 1,501 24,140 — 29,666 
Substandard— 15,900 3,294 746 4 1,255 30,648 — 51,847 
Franchise non-real estate secured
Pass5,573 93,172 121,323 17,959 43,011 67,423 777 — 349,238 
Special mention— 2,699 15,876 — 12,142 — — — 30,717 
Substandard— 1,683 369 2,783 2,103 1,829 — — 8,767 
SBA non-real estate secured
Pass18 3,386 357 270 1,597 3,341 — — 8,969 
Substandard— 572 — — 127 769 — — 1,468 
Total commercial loans28,707 394,029 394,710 76,007 209,752 264,665 998,083 334 2,366,287 
Current period gross charge-offs— 177 48 5 289 30 574 — 1,123 
Retail loans
Single family residential
Pass$— $— $— $174 $— $47,453 $23,282 $— $70,909 
Substandard— — — — — 4 — — 4 
Consumer loans
Pass— — 3 14 10 914 2,233 — 3,174 
Total retail loans— — 3 188 10 48,371 25,515 — 74,087 
Current period gross charge-offs— — — — — 93 2 — 95 
Loans held for investment before basis adjustment (1)
$93,801 $3,016,379 $4,156,515 $1,351,847 $1,726,528 $2,845,550 $1,030,835 $334 $14,221,789 
Total current period gross charge-offs— 177 583 5 289 2,034 576 — 3,664 
______________________________
(1) Excludes the basis adjustment of $50.0 million to the carrying amount of certain loans included in fair value hedging relationships. Refer to Note 11 – Derivative Instruments for additional information.

The following table stratifies the loans held for investment portfolio by the Company’s internal risk grading, and by year of origination, as of December 31, 2022:
Term Loans by Vintage
(Dollars in thousands)20222021202020192018PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied
Pass$523,895 $607,153 $208,760 $347,889 $308,317 $651,593 $— $— $2,647,607 
Special mention— — — — 7,487 — — — 7,487 
Substandard— — — — 194 4,570 — 463 5,227 
Multifamily
Pass1,230,359 2,187,255 786,436 889,737 263,241 732,808 — — 6,089,836 
Special mention— — — 12,667 — — — — 12,667 
Substandard— 6,057 — 2,723 — 743 — — 9,523 
23

Term Loans by Vintage
(Dollars in thousands)20222021202020192018PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2022
Construction and land
Pass187,567 154,231 38,760 9,615 1,843 7,018 — — 399,034 
SBA secured by real estate
Pass6,571 130 493 5,407 7,361 13,199 — — 33,161 
Substandard— — — — 2,416 6,558 — — 8,974 
Total investor loans secured by real estate1,948,392 2,954,826 1,034,449 1,268,038 590,859 1,416,489 — 463 9,213,516 
Business loans secured by real estate
CRE owner-occupied
Pass593,826 718,223 242,125 240,772 114,581 448,531 5,661 — $2,363,719 
Special mention334 1,015 — — 675 327 — — 2,351 
Substandard10,838 2,541 11,970 2,403 4,676 33,665 — — 66,093 
Franchise real estate secured
Pass54,654 131,541 33,513 44,229 32,815 55,893 — — 352,645 
Special mention4,891 13,145 — — — — — — 18,036 
Substandard980 — — 6,092 — 304 — — 7,376 
SBA secured by real estate
Pass10,993 6,978 2,329 5,710 4,440 25,415 — — 55,865 
Special mention— — — — — 118 — — 118 
Substandard— — — — 1,354 4,031 — — 5,385 
Total loans secured by business real estate676,516 873,443 289,937 299,206 158,541 568,284 5,661 — 2,871,588 
Commercial loans
Commercial and industrial
Pass282,131 262,044 55,659 155,310 78,684 121,918 1,134,568 3,412 2,093,726 
Special mention15,105 3,567 798 — 1,864 41 9,898 — 31,273 
Substandard2,590 80 — 3,867 562 1,029 27,680 141 35,949 
Franchise non-real estate secured
Pass102,542 128,030 18,486 46,027 28,664 43,486 778 — 368,013 
Special mention1,372 14,382 — 11,829 — — — — 27,583 
Substandard1,757 385 2,852 2,256 1,637 308 — — 9,195 
SBA non-real estate secured
Pass3,444 435 276 1,638 633 3,124 — — 9,550 
Special mention— — — — — — — — — 
Substandard— — — 130 224 606 — 590 1,550 
Total commercial loans408,941 408,923 78,071 221,057 112,268 170,512 1,172,924 4,143 2,576,839 
Retail loans
Single family residential
Pass— — 176 — 22 49,729 23,065 — 72,992 
Substandard— — — — — 5 — — 5 
Consumer loans
Pass— 6 17 11 — 969 2,254 — 3,257 
Substandard— — — — — 27 — — 27 
Total retail loans— 6 193 11 22 50,730 25,319 — 76,281 
Loans held for investment$3,033,849 $4,237,198 $1,402,650 $1,788,312 $861,690 $2,206,015 $1,203,904 $4,606 $14,738,224 
______________________________
(1) Excludes the basis adjustment of $61.9 million to the carrying amount of certain loans included in fair value hedging relationships. Refer to Note 11 – Derivative Instruments for additional information.
24

The following tables stratify the loans held for investment portfolio by delinquency as of the periods indicated:
Days Past Due
(Dollars in thousands)Current30-5960-8990+Total
March 31, 2023
Investor loans secured by real estate
CRE non-owner-occupied$2,585,273 $6 $1,129 $4,416 $2,590,824 
Multifamily5,951,531 — — 3,708 5,955,239 
Construction and land420,079 — — — 420,079 
SBA secured by real estate40,669 — — — 40,669 
Total investor loans secured by real estate8,997,552 6 1,129 8,124 9,006,811 
Business loans secured by real estate
CRE owner-occupied2,337,413 — — 4,762 2,342,175 
Franchise real estate secured371,902 — — — 371,902 
SBA secured by real estate59,029 308 — 1,190 60,527 
Total business loans secured by real estate2,768,344 308 — 5,952 2,774,604 
Commercial loans
Commercial and industrial1,962,376 447 69 4,236 1,967,128 
Franchise non-real estate secured388,722 — — — 388,722 
SBA not secured by real estate9,865 — — 572 10,437 
Total commercial loans2,360,963 447 69 4,808 2,366,287 
Retail loans
Single family residential70,913 — — — 70,913 
Consumer loans3,174 — — — 3,174 
Total retail loans74,087 — — — 74,087 
Loans held for investment before basis adjustment (1)
$14,200,946 $761 $1,198 $18,884 $14,221,789 

December 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied$2,655,892 $— $— $4,429 $2,660,321 
Multifamily6,103,246 2,723 — 6,057 6,112,026 
Construction and land399,034 — — — 399,034 
SBA secured by real estate42,135 — — — 42,135 
Total investor loans secured by real estate9,200,307 2,723 — 10,486 9,213,516 
Business loans secured by real estate
CRE owner-occupied2,424,174 1,434 — 6,555 2,432,163 
Franchise real estate secured370,984 7,073 — — 378,057 
SBA secured by real estate60,177 — 104 1,087 61,368 
Total business loans secured by real estate2,855,335 8,507 104 7,642 2,871,588 
Commercial loans
Commercial and industrial2,152,302 4,657 81 3,908 2,160,948 
Franchise non-real estate secured401,199 3,592 — — 404,791 
SBA not secured by real estate10,511 — — 589 11,100 
Total commercial loans2,564,012 8,249 81 4,497 2,576,839 
Retail loans
Single family residential71,940 1,057 — — 72,997 
Consumer loans3,282 2 — — 3,284 
Total retail loans75,222 1,059 — — 76,281 
Loans held for investment before basis adjustment (1)
$14,694,876 $20,538 $185 $22,625 $14,738,224 
______________________________
(1) Excludes the basis adjustment of $50.0 million and $61.9 million to the carrying amount of certain loans included in fair value hedging relationships as of March 31, 2023 and December 31, 2022, respectively. Refer to Note 11 – Derivative Instruments for additional information.

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Individually Evaluated Loans

The Company evaluates loans collectively for purposes of determining the ACL in accordance with ASC 326. Collective evaluation is based on aggregating loans deemed to possess similar risk characteristics. In certain instances, the Company may identify loans that it believes no longer possess risk characteristics similar to other loans in the portfolio. These loans are typically identified from a substandard or worse internal risk grade, since the specific attributes and risks associated with such loans tend to become unique as the credit deteriorates. Such loans are typically nonperforming, modified loans made to borrowers experiencing financial difficulty, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio are evaluated individually for purposes of determining an appropriate lifetime ACL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated costs to sell. The Company may increase or decrease the ACL for collateral dependent individually evaluated loans based on changes in the estimated expected fair value of the collateral. Changes in the ACL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans.

As of March 31, 2023, $24.9 million of loans were individually evaluated with $4.0 million ACL attributed to such loans. At March 31, 2023, all individually evaluated loans were evaluated based on the underlying value of the collateral and none were evaluated using a discounted cash flow approach. All individually evaluated loans were on nonaccrual status at March 31, 2023.

As of December 31, 2022, $30.9 million of loans were individually evaluated, and the ACL attributed to such loans totaled $1.7 million. At December 31, 2022, all individually evaluated loans were evaluated based on the underlying value of the collateral and none were evaluated using a discounted cash flow approach. All individually evaluated loans were on nonaccrual status at December 31, 2022.

Purchased Credit Deteriorated Loans
 
The Company analyzed acquired loans for more-than-insignificant deterioration in credit quality since their origination. Such loans are classified as purchased credit deteriorated loans. Please see Note 1 - Description of Business and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2022 Form 10-K for more information concerning the accounting for purchased credit deterioration (“PCD”) loans. The Company had PCD loans of $413.0 million and $422.7 million at March 31, 2023 and December 31, 2022, respectively.

Acquired loans classified as PCD are recorded at an initial amortized cost, which is comprised of the purchase price of the loans (or initial fair value) and the initial ACL determined for the loans, which is added to the purchase price, as well as any resulting discount or premium related to factors other than credit. The Company accounts for interest income on PCD loans using the interest method, whereby any purchase discounts or premiums are accreted or amortized into interest income as an adjustment of the loan’s yield. Subsequent to acquisition, the ACL for PCD loans is measured in accordance with the Company’s ACL methodology. Please also see Note 6 – Allowance for Credit Losses for more information concerning the Company’s ACL methodology.

Nonaccrual Loans

When loans are placed on nonaccrual status, previously accrued but unpaid interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is remote, the Company may recognize interest on a cash basis. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.
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The Company typically does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the timely collection of principal or interest. However, when such loans are well secured and in the process of collection, the Company may continue with the accrual of interest. The Company had loans on nonaccrual status of $24.9 million at March 31, 2023 and $30.9 million at December 31, 2022. The Company did not record income from the receipt of cash payments related to nonaccruing loans during the three months ended March 31, 2023 and March 31, 2022. The Company had no loans 90 days or more past due and still accruing at March 31, 2023 and December 31, 2022, respectively.

The following tables provide a summary of nonaccrual loans as of the dates indicated:
Nonaccrual Loans (1)
Collateral Dependent LoansNon-Collateral Dependent LoansTotal Nonaccrual LoansNonaccrual Loans with No ACL
(Dollars in thousands)BalanceACLBalanceACL
March 31, 2023
Investor loans secured by real estate
CRE non-owner-occupied$5,545 $— $— $— $5,545 $5,545 
Multifamily3,708 — — — 3,708 3,708 
SBA secured by real estate519 — — — 519 519 
Total investor loans secured by real estate9,772 — — — 9,772 9,772 
Business loans secured by real estate
CRE owner-occupied9,102 — — — 9,102 9,102 
SBA secured by real estate1,190 — — — 1,190 1,190 
Total business loans secured by real estate10,292 — — — 10,292 10,292 
Commercial loans
Commercial and industrial4,236 3,999 — — 4,236 237 
SBA non-real estate secured572 — — — 572 572 
Total commercial loans4,808 3,999 — — 4,808 809 
Total nonaccrual loans$24,872 $3,999 $— $— $24,872 $20,873 

December 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied$4,429 $— $— $— $4,429 $4,429 
Multifamily8,780 — — — 8,780 8,780 
SBA secured by real estate533 — — — 533 533 
Total investor loans secured by real estate13,742 — — — 13,742 13,742 
Business loans secured by real estate
CRE owner-occupied11,475 1,742 — — 11,475 9,733 
SBA secured by real estate1,191 — — — 1,191 1,191 
Total business loans secured by real estate12,666 1,742 — — 12,666 10,924 
Commercial loans
Commercial and industrial3,908 — — — 3,908 3,908 
SBA non-real estate secured589 — — — 589 589 
Total commercial loans4,497 — — — 4,497 4,497 
Total nonaccrual loans$30,905 $1,742 $— $— $30,905 $29,163 
______________________________
(1) The ACL for nonaccrual loans is determined based on a discounted cash flow methodology unless the loan is considered collateral dependent; otherwise, the ACL for collateral dependent nonaccrual loans is determined based on the estimated fair value of the underlying collateral.

Residential Real Estate Loans In Process of Foreclosure

The Company had no consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of March 31, 2023 or December 31, 2022.

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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, the acceptance of interest-only payments, and, in very few cases, reductions to the outstanding loan balances. These modifications were classified as TDRs and were made for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower was designed to provide a bridge for borrower cash flow shortfalls in the near term. In most cases, the Company initially placed TDRs on nonaccrual status, and they could be returned to accrual status when the loans were brought current, performed in accordance with the restructured contractual terms for a period of at least six months, and the ultimate collectability of the total contractual restructured principal and interest payments were no longer in doubt. 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.

At December 31, 2022, there were five loans totaling $16.1 million modified as TDRs, consisting of 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 one franchise non-real estate secured loans totaling $11.0 million belonging to another borrower relationship with the terms modified for payment deferral. During the three months ended March 31, 2022, the three CRE owner-occupied loans and one C&I loan classified as TDRs experienced payment default after modification within the previous 12 months and were in payment default. All TDRs were on nonaccrual status as of March 31, 2022.

Modified Loans to Troubled Borrowers
    
On January 1, 2023, the Company adopted ASU 2022-02, which introduces new reporting requirements for modifications of loans to borrowers experiencing financial difficulty. The Company also refers to these loans as modified loans to troubled borrowers. A MLTB arises from a modification made to a loan in order to alleviate temporary difficulties 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: (i) principal forgiveness, (ii) interest rate reduction, (iii) other-than-insignificant payment delay, (iv) term extension, or any combination of the foregoing. The ACL for a MLTB is measured on a collective basis, as with other loans in the loan portfolio, unless management determines that such loans no longer possess risk characteristics similar to others in the loan portfolio. In those instances, the ACL for a MLTB is determined through individual evaluation.

During the three months ended March 31, 2023, there was one CRE owner-occupied MLTB.

The following table shows the amortized cost of the MLTB by class and type of modification, as well as the percentage of the loan modified to total loans in each class at and during the period indicated:
For the Three Months Ended March 31, 2023
Term Extension
(Dollars in thousands)BalancePercent of Total Class of Loans
Business loans secured by real estate
CRE owner-occupied$851 0.04 %
Total business loans secured by real estate851 

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The following table describes the financial effect of the loan modification made for the borrower experiencing financial difficulty during the three months ended March 31, 2023:
Term Extension
Business loans secured by real estate
CRE owner-occupied
Extended term by 4 months

The following table depicts the performance of the MLTB under ASU 2022-02 in the last three months as of the date indicated:
Days Past Due
(Dollars in thousands)Current30-5960-8990+Total
March 31, 2023
Business loans secured by real estate
CRE owner-occupied$851 $— $— $— $851 
Total business loans secured by real estate851 — — — 851 
Total$851 $— $— $— $851 
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Collateral Dependent Loans

Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded.

The following tables summarize collateral dependent loans by collateral type as of the dates indicated:
(Dollars in thousands)Office PropertiesIndustrial PropertiesRetail PropertiesLand PropertiesHotel PropertiesMultifamily PropertiesOther CRE PropertiesBusiness AssetsTotal
March 31, 2023
Investor loan secured by real estate
CRE non-owner-occupied$1,129 $— $450 $— $— $— $3,966 $— $5,545 
Multifamily— — — — — 3,708 — — 3,708 
SBA secured by real estate— — — — 519 — — — 519 
Total investor loans secured by real estate1,129 — 450 — 519 3,708 3,966 — 9,772 
Business loans secured by real estate
CRE owner-occupied4,341 — — 4,761 — — — — 9,102 
SBA secured by real estate104 1,086 — — — — — — 1,190 
Total business loans secured by real estate4,445 1,086 — 4,761 — — — — 10,292 
Commercial loans
Commercial and industrial— — — 237 — — — 3,999 4,236 
SBA non-real estate secured— — — — — — — 572 572 
Total commercial loans— — — 237 — — — 4,571 4,808 
Total collateral dependent loans$5,574 $1,086 $450 $4,998 $519 $3,708 $3,966 $4,571 $24,872 

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(Dollars in thousands)Office PropertiesIndustrial PropertiesRetail PropertiesLand PropertiesHotel PropertiesMultifamily PropertiesOther CRE PropertiesBusiness AssetsTotal
December 31, 2022
Investor loan secured by real estate
CRE non-owner-occupied$— $— $463 $— $— $— $3,966 $— $4,429 
Multifamily— — — — — 8,780 — — 8,780 
SBA secured by real estate— — — — 533 — — — 533 
Total investor loans secured by real estate— — 463 — 533 8,780 3,966 — 13,742 
Business loans secured by real estate
CRE owner-occupied4,417 — — 4,813 — — 2,245 — 11,475 
SBA secured by real estate104 1,087 — — — — — — 1,191 
Total business loans secured by real estate4,521 1,087 — 4,813 — — 2,245 — 12,666 
Commercial loans
Commercial and industrial— — — 238 — — 490 3,180 3,908 
SBA non-real estate secured— — — — — — — 589 589 
Total commercial loans— — — 238 — — 490 3,769 4,497 
Total collateral dependent loans$4,521 $1,087 $463 $5,051 $533 $8,780 $6,701 $3,769 $30,905 
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Note 6 – Allowance for Credit Losses
 
The Company maintains an ACL for loans and unfunded loan commitments in accordance with ASC 326 - Financial Instruments - Credit Losses. ASC 326 requires the Company to recognize estimates for lifetime credit losses on loans and unfunded loan commitments at the time of origination or acquisition. The recognition of credit losses at origination or acquisition represents the Company’s best estimate of lifetime expected credit losses, given the facts and circumstances associated with a particular loan or group of loans with similar risk characteristics. Determining the ACL involves the use of significant management judgement and estimates, which are subject to change based on management’s ongoing assessment of the credit quality of the loan portfolio and changes in economic forecasts used in the model. The Company uses a discounted cash flow model when determining estimates for the ACL for commercial real estate loans and commercial loans, which comprise the majority of the loan portfolio, and uses a historical loss rate model for retail loans. The Company also utilizes proxy loan data in its ACL model where the Company’s own historical data is not sufficiently available.

The discounted cash flow model is applied on an instrument-by-instrument basis, and for loans with similar risk characteristics, to derive estimates for the lifetime ACL for each loan. The discounted cash flow methodology relies on several significant components essential to the development of estimates for future cash flows on loans and unfunded loan commitments. These components consist of: (i) the estimated probability of default (“PD”), (ii) the estimated loss given default (“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 exposure to the Company at default (“EAD”). These components are heavily influenced by changes in economic forecasts employed in the model over a reasonable and supportable period. The Company’s ACL methodology for unfunded loan commitments also includes assumptions concerning the probability an unfunded commitment will be drawn upon by the borrower. These assumptions are based on the Company’s historical experience.

The Company’s discounted cash flow ACL model for commercial real estate and commercial loans uses internally derived estimates for prepayments in determining the amount and timing of future contractual cash flows expected to be collected. The estimate of future cash flows also incorporates estimates for contractual amounts the Company believes may not be collected, which are based on assumptions for PD, LGD, and EAD. The EAD is determined by the contractual payment schedule and expected payment profile of the loan, incorporating estimates for expected prepayments and future draws on revolving credit facilities. The Company discounts cash flows using the effective interest rate on the loan. The effective interest rate represents the contractual rate on the loan; adjusted for any purchase premiums, or discounts, and deferred fees and costs associated with an originated loan. The Company has made an accounting policy election to adjust the effective interest rate to take into consideration the effects of estimated prepayments. The ACL for loans is determined by measuring the amount by which a loan’s amortized cost exceeds its discounted cash flows expected to be collected. The ACL for credit facilities is determined by discounting estimates for cash flows not expected to be collected.

Probability of Default

The PD for investor loans secured by real estate is based largely on a model provided by a third party, using proxy loan information. The PDs generated by this model are reflective of current and expected economic conditions in the commercial real estate market, and how they are expected to impact loan level and property level attributes, and ultimately the likelihood of a default event occurring. This model incorporates assumptions for PD at a loan’s maturity. Significant loan and property level attributes include: loan-to-value ratios, debt service coverage, loan size, loan vintage, and property types.


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The PD for business loans secured by real estate and commercial loans is based on an internally developed PD rating scale that assigns PDs based on the Company’s internal credit risk grades for loans. This internally developed PD rating scale is based on a combination of the Company’s own historical data and observed historical data from the Company’s peers, which consist of banks that management believes align with our business profile. As credit risk grades change for these loans, the PD assigned to them also changes. As with investor loans secured by real estate, the PD for business loans secured by real estate and commercial loans is also impacted by current and expected economic conditions.

The Company considers loans to be in default when they are 90 days or more past due and still accruing or placed on nonaccrual status.

Loss Given Default

LGDs for commercial real estate loans are derived from a third party, using proxy loan information, and are based on loan and property level characteristics for loans in the Company’s loan portfolio, such as: loan-to-value ratios (“LTV”), estimated time to resolution, property size, and current and estimated future market price changes for underlying collateral. The LGD is highly dependent upon LTV ratios, and incorporates estimates for the expense associated with managing the loan through to resolution. LGDs also incorporate an estimate for the loss severity associated with loans where the borrower fails to meet their debt obligation at maturity, such as through a balloon payment or the refinancing of the loan through another lender. External factors that have an impact on LGDs include: changes in the index for CRE pricing, GDP growth rate, unemployment rates, and the Consumer Price Index. LGDs are applied to each loan in the commercial real estate portfolio, and in conjunction with the PD, produce estimates for net cash flows not expected to be collected over the estimated term of the loan.

LGDs for commercial loans are also derived from a third party that has a considerable database of credit related information specific to the financial services industry and the type of loans within this segment, and is used to generate annual default information for commercial loans. These proxy LGDs are dependent upon data inputs such as: credit quality, borrower industry, region, borrower size, and debt seniority. LGDs are then applied to each loan in the commercial segment, and in conjunction with the PD, produce estimates for net cash flows not expected to be collected over the estimated term of the loan.

Historical Loss Rates for Retail Loans
The historical loss rate model for retail loans is derived from a third party that has a considerable database of credit related information for retail loans. Key loan level attributes and economic drivers in determining the loss rate for retail loans include FICO scores, vintage, as well as geography, unemployment rates, and changes in consumer real estate prices.


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Economic Forecasts

In order to develop reasonable and supportable forecasts of future conditions, the Company estimates how those forecasts are expected to impact a borrower’s ability to satisfy their obligation to the Bank and the ultimate collectability of future cash flows over the life of a loan. The Company uses macroeconomic scenarios from an independent third party, which are based on past events, current conditions, and the likelihood of future events occurring. These scenarios are typically comprised of: a base-case scenario, an upside scenario, representing slightly better economic conditions than currently experienced and, a downside scenario, representing recessionary conditions. Management periodically evaluates appropriateness of economic scenarios and may decide that a particular economic scenario or a combination of probability-weighted economic scenarios should be used in the Company’s ACL model. The economic scenarios chosen for the model, the extent to which more than one scenario is used, and the weights that are assigned to them, are based on the likelihood that the economy would perform better than each scenario, which is based in part on analysis performed by an independent third party. Economic scenarios chosen, as well as the assumptions within those scenarios, and whether to use a probability-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. The Company’s ACL model at March 31, 2023 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, the potential impact of the ongoing war between Russia and Ukraine, general uncertainty concerning future economic conditions, and the potential for recessionary conditions.

The Company currently forecasts PDs and LGDs based on economic scenarios over a two-year period, which we believe is a reasonable and supportable period. Beyond this point, PDs and LGDs revert to their long-term averages. The Company has reflected this reversion over a period of three years in each of its economic scenarios used to generate the overall probability-weighted forecast. Changes in economic forecasts impact the PD, LGD, and EAD for each loan, and therefore influence the amount of future cash flows the Company does not expect to collect for each loan.

It is important to note that the Company’s ACL model relies on multiple economic variables, which are used in several economic scenarios. Although no one economic variable can fully demonstrate the sensitivity of the ACL calculation to changes in the economic variables used in the model, the Company has identified certain economic variables that have significant influence in the Company’s model for determining the ACL. These key economic variables include changes in the U.S. unemployment rate, U.S. real GDP growth, CRE prices, and interest rates.

Qualitative Adjustments

The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by itself, provide a sufficient basis for determining future expected credit losses. The Company, therefore, 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.


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Qualitative adjustments primarily relate to certain segments of the loan portfolio deemed by management to be of a higher-risk profile or other factors where management believes the quantitative component of the Company’s ACL model may not be fully reflective of levels deemed adequate in the judgement of management. Certain qualitative adjustments also relate to heightened uncertainty as to future macroeconomic conditions and the related impact on certain loan segments. Management reviews the need for an appropriate level of qualitative adjustments on a quarterly basis, and as such, the amount and allocation of qualitative adjustments may change in future periods.

The following tables provide the allocation of the ACL for loans held for investment as well as the activity in the ACL attributed to various segments in the loan portfolio as of, and for the periods indicated:

Three Months Ended March 31, 2023
(Dollars in thousands) Beginning ACL Balance  Charge-offs  Recoveries Provision for Credit Losses Ending
ACL Balance
Investor loans secured by real estate
CRE non-owner occupied$33,692 $(66)$15 $(1,926)$31,715 
Multifamily56,334 (217)— 1,670 57,787 
Construction and land7,114 — — 558 7,672 
SBA secured by real estate2,592 — — (301)2,291 
Business loans secured by real estate
CRE owner-occupied32,340 (2,163)12 (855)29,334 
Franchise real estate secured7,019 — — 771 7,790 
SBA secured by real estate4,348 — — 67 4,415 
Commercial loans
Commercial and industrial35,169 (1,123)211 3,402 37,659 
Franchise non-real estate secured16,029 — 100 (408)15,721 
SBA non-real estate secured441 — 6 (46)401 
Retail loans
Single family residential352 (90)1 129 392 
Consumer loans221 (5)35 (40)211 
Totals$195,651 $(3,664)$380 $3,021 $195,388 

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Three Months Ended March 31, 2022
(Dollars in thousands) Beginning ACL Balance Charge-offs Recoveries Provision for Credit Losses  Ending
ACL Balance
Investor loans secured by real estate
CRE non-owner occupied$37,380 $— $— $(1,406)$35,974 
Multifamily55,209 — — (884)54,325 
Construction and land5,211 — — 8 5,219 
SBA secured by real estate3,201 (70)— (81)3,050 
Business loans secured by real estate
CRE owner-occupied29,575 — 10 2,306 31,891 
Franchise real estate secured7,985 — — (8)7,977 
SBA secured by real estate4,866 — — 329 5,195 
Commercial loans
Commercial and industrial38,136 (2,179)1,841 800 38,598 
Franchise non-real estate secured15,084 — — (780)14,304 
SBA non-real estate secured565 (50)2 (27)490 
Retail loans
Single family residential255 — — (22)233 
Consumer loans285 — — (24)261 
Totals$197,752 $(2,299)$1,853 $211 $197,517 
The decrease in the ACL for loans held for investment during the three months ended March 31, 2023 of $263,000 is reflective of $3.3 million in net charge-offs, partially offset by a $3.0 million in provision for credit losses. The provision for credit losses during the three months ended March 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 ended March 31, 2023 were 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 ended March 31, 2022 of $235,000 was comprised of net charge-offs of $446,000, partially offset by a $211,000 provision for credit losses. The provision for credit losses for the three months ended March 31, 2022 was reflective of higher loans held for investment and growing economic uncertainties, partially offset by improved economic forecasts and asset quality.

Allowance for Credit Losses for Off-Balance Sheet Commitments

The Company maintains an ACL for off-balance sheet commitments related to unfunded loans and lines of credit, which is included in other liabilities of the consolidated statements of financial condition. The allowance for off-balance sheet commitments was $23.5 million at March 31, 2023, relatively unchanged compared to $23.6 million at December 31, 2022. The provision recapture for off-balance sheet commitments of $189,000 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 ACL for off-balance sheet commitments was $27.5 million at March 31, 2022. The provision for credit losses on off-balance sheet commitments of $218,000 during the first quarter of 2022 can be attributed to an increase in off-balance sheet commitments during that period.


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The following table summarizes the activities in the ACL for off-balance sheet commitments for the periods indicated:
Three Months Ended
March 31,March 31,
(Dollars in thousands)20232022
Beginning ACL balance$23,641 $27,290 
Provision for credit losses on off-balance sheet commitments(189)218 
Ending ACL balance$23,452 $27,508 


Note 7 – Goodwill and Other Intangible Assets

The Company had goodwill of $901.3 million at March 31, 2023 and December 31, 2022. The Company did not record any adjustments to goodwill during the three months ended March 31, 2023 and March 31, 2022.

The Company’s policy is to assess goodwill for impairment on an annual basis during the fourth quarter of each year, and more frequently if events or circumstances lead management to believe the value of goodwill may be impaired. Due to the recent market volatility experienced in the banking sector, the Company assessed goodwill for impairment at March 31, 2023, by performing a quantitative assessment of goodwill as of March 31, 2023, in accordance with ASC 350-20, Intangibles - Goodwill and Other - Goodwill. The quantitative assessment was performed with the assistance of an independent third party, and the results of this assessment indicated the value of goodwill assets were not impaired as of March 31, 2023. If the recent market volatility continues, the Company may again assess goodwill for impairment prior to the fourth quarter of 2023.

Other intangible assets with definite lives were $52.4 million at March 31, 2023, consisting of $50.1 million in core deposit intangibles and $2.3 million in customer relationship intangibles. At December 31, 2022, other intangibles assets were $55.6 million, consisting of $53.2 million in core deposit intangibles and $2.4 million in customer relationship intangibles. The following table summarizes the change in the balance of core deposit intangibles and customer relationship intangibles, and the related accumulated amortization for the periods indicated below:
Three Months Ended
March 31,March 31,
(Dollars in thousands)20232022
Gross amount of intangible assets:
Beginning balance$145,212 $145,212 
Additions due to acquisitions— — 
Ending balance145,212 145,212 
Accumulated amortization:
Beginning balance(89,624)(75,641)
Amortization(3,171)(3,593)
Ending balance(92,795)(79,234)
Net intangible assets$52,417 $65,978 


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The Company amortizes core deposit intangibles and customer relationship intangibles based on the projected useful lives of the related deposits in the case of core deposit intangibles, and over the projected useful lives of the related client relationships in the case of customer relationship intangibles. The amortization periods typically range from six to eleven years. The estimated aggregate amortization expense related to our core deposit intangible and customer relationship intangible assets for each of the next five years succeeding December 31, 2022, in order from the present, is $12.3 million, $11.1 million, $10.0 million, $8.9 million, and $7.2 million. The Company’s core deposit and customer relationship intangibles are evaluated annually for impairment or more frequently if events and circumstances lead management to believe their value may not be recoverable. Factors that may ultimately attribute to impairment include customer attrition and run-off. The Company believes core deposit relationships in the current interest rate environment continue to provide a significant benefit to the Company relative to other sources of alternative funding, and thus does not believe the value of core deposit intangible assets are impaired at March 31, 2023. In addition, the Company is unaware of any events and/or circumstances that would indicate the value of customer relationship intangible assets are impaired as of March 31, 2023.

Note 8 – Subordinated Debentures

As of March 31, 2023, the Company had three subordinated notes with an aggregate carrying value of $331.4 million and a weighted interest rate of 5.31%, compared to $331.2 million with a weighted interest rate of 5.32% at December 31, 2022. The increase of $160,000 was primarily due to amortization of debt issuance costs.

The following table summarizes our outstanding subordinated debentures as of the dates indicated:
 Carrying Value
(Dollars in thousands)Stated MaturityCurrent Interest RateCurrent Principal BalanceMarch 31, 2023December 31, 2022
Subordinated notes
Subordinated notes due 2024, 5.75% per annum
September 3, 20245.75 %$60,000 $59,821 $59,791 
Subordinated notes due 2029, 4.875% per annum until May 15, 2024, 3-month LIBOR +2.5% thereafter
May 15, 20294.875 %125,000 123,450 123,386 
Subordinated notes due 2030, 5.375% per annum until June 15, 2025, 3-month SOFR +5.170% thereafter
June 15, 20305.375 %150,000 148,093 148,027 
Total subordinated debentures$335,000 $331,364 $331,204 

In connection with the various issuances of subordinated notes, the Corporation obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned investment grade ratings of BBB+ and BBB for the Corporation’s senior unsecured debt and subordinated debt, respectively, and a deposit and senior unsecured debt rating of A- and subordinated debt of BBB+ for the Bank. The Corporation’s and Bank’s ratings were reaffirmed in June 2022 by KBRA.

For additional information on the Company’s subordinated debentures, see “Note 13 — Subordinated Debentures” to the Consolidated Financial Statements of the Company’s 2022 Form 10-K. 

For regulatory capital purposes, subordinated notes qualify as Tier 2 capital, subject to limitations. Per applicable Federal Reserve rules and regulations, the amount of the subordinated notes qualifying as Tier 2 regulatory capital is phased out by 20 % of the original amount of the subordinated notes in each of the five years beginning on the fifth anniversary preceding the maturity date of the subordinated notes. The regulatory total capital ratios of the Company and the Bank continued to exceed regulatory minimums, inclusive of the fully phased-in capital conservation buffer.

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Note 9 – Earnings Per Share
 
The Company’s restricted stock awards contain non-forfeitable rights to dividends and therefore are considered participating securities. The Company calculates basic and diluted earnings per common share using the two-class method.

Under the two-class method, distributed and undistributed earnings allocable to participating securities are deducted from net income to determine net income allocable to common shareholders, which is then used in the numerator of both basic and diluted earnings per share calculations. Basic earnings per common share is computed by dividing net income allocable to common shareholders by the weighted average number of common shares outstanding for the reporting period, excluding outstanding participating securities. Diluted earnings per common share is computed by dividing net income allocable to common shareholders by the weighted average number of common shares outstanding over the reporting period, adjusted to include the effect of potentially dilutive common shares, but excludes awards considered participating securities. The computation of diluted earnings per common share excludes the impact of the assumed exercise or issuance of securities that would have an anti-dilutive effect.

The following tables set forth the Corporation’s earnings per share calculations for the periods indicated:
 Three Months Ended
(Dollars in thousands, except per share data)March 31, 2023March 31, 2022
Basic
Net income $62,562 $66,904 
Less: dividends and undistributed earnings allocated to participating securities(823)(685)
Net income allocated to common stockholders$61,739 $66,219 
Weighted average common shares outstanding93,857,812 93,499,695 
Basic earnings per common share$0.66 $0.71 
Diluted
Net income allocated to common stockholders$61,739 $66,219 
Weighted average common shares outstanding93,857,812 93,499,695 
Dilutive effect of share-based compensation324,710 446,379 
Weighted average diluted common shares94,182,522 93,946,074 
Diluted earnings per common share$0.66 $0.70 

Shares or stock options are excluded from the computations of diluted earnings per share when their inclusion have an anti-dilutive effect. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases. For the three months ended March 31, 2023 and March 31, 2022, there were no potential common shares that were anti-dilutive.

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Note 10 – Fair Value of Financial Instruments
 
The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value are discussed below.

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.), or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.
 
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.


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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the fair value hierarchy.

AFS Investment Securities – Investment securities are generally valued based upon quotes obtained from independent third-party pricing services, which use evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the marketplace and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and, accordingly, the Company categorized these securities within Level 2 of the fair value hierarchy.

Equity Securities With Readily Determinable Fair Values – The Company’s equity securities with readily determinable fair values consist of investments in public companies and qualify for CRA purposes. The fair value is based on the closing price on nationally recognized securities exchanges at the end of each period and classified as Level 1 of the fair value hierarchy.
    
Interest Rate Swaps – The Company originates a variable rate loan and enters into a variable-to-fixed interest rate swap with the customer. The Company also enters into an offsetting swap with a correspondent bank. These back-to-back swap agreements are intended to offset each other and allow the Company to originate a variable rate loan, while providing a contract for fixed interest payments for the customer. The Company also enters into interest rate swap contracts with institutional counterparties to hedge against certain fixed-rate loans. The net cash flow for the Company is equal to the interest income received from a variable rate loan originated with the customer. The fair value of these derivatives is based on a market standard discounted cash flow approach. The Company incorporates credit value adjustments on derivatives to properly reflect the respective counterparty’s nonperformance risk in the fair value measurements of its derivatives. The Company has determined that the observable nature of the majority of inputs used in deriving the fair value of these derivative contracts fall within Level 2 of the fair value hierarchy, and the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the valuation of interest rate swaps is classified as Level 2 of the fair value hierarchy.


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Equity Warrant Assets – The Company acquired equity warrant assets as a result of the acquisition of Opus. Opus received equity warrant assets through its lending activities as part of loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The fair value of equity warrant assets is determined using a Black-Scholes option pricing model and are classified as Level 3 within the fair value hierarchy due to the extent of unobservable inputs. The key assumptions used in determining the fair value include the exercise price of the warrants, valuation of the underlying entity's outstanding stock, expected term, risk-free interest rate, marketability discount for private company warrants, and price volatility.

Foreign Exchange Contracts – The Company enters into foreign exchange contracts to accommodate the business needs of its customers. The Company also enters into offsetting contracts with institutional counterparties to mitigate the Company’s foreign exchange exposure with its customers, or enters into bilateral collateral and master netting agreements with certain customer counterparties to manage its credit exposure. The Company measures the fair value of foreign exchange contracts based on quoted prices for identical instruments in active markets, a Level 1 measurement.


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The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at the dates indicated:
March 31, 2023
 Fair Value Measurement Using Total Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets
AFS investment securities:    
U.S. Treasury$— $13,355 $— $13,355 
Agency— 417,731 — 417,731 
Corporate— 508,189 — 508,189 
Collateralized mortgage obligations— 372,632 — 372,632 
Mortgage-backed securities— 800,945 — 800,945 
Total AFS investment securities$— $2,112,852 $— $2,112,852 
Equity securities$962 $— $— $962 
Derivative assets:
Foreign exchange contracts$37 $— $— $37 
Interest rate swaps (1)
— 5,630 — 5,630 
Equity warrants— — 412 412 
Total derivative assets$37 $5,630 $412 $6,079 
Financial liabilities
Derivative liabilities:
Foreign exchange$8 $— $— $8 
Interest rate swaps— 10,569 — 10,569 
Total derivative liabilities$8 $10,569 $— $10,577 
______________________________
(1) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.
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December 31, 2022
 Fair Value Measurement UsingTotal Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets
AFS investment securities:    
U.S. Treasury$— $47,017 $— $47,017 
Agency— 431,438 — 431,438 
Corporate— 542,548 — 542,548 
Collateralized mortgage obligations— 764,229 — 764,229 
Mortgage-backed securities— 815,781 — 815,781 
Total AFS investment securities$— $2,601,013 $— $2,601,013 
Equity securities (1)
$925 $— $— $13,526 
Derivative assets:
Foreign exchange contracts$1 $— $— $1 
Interest rate swaps (2)
— 7,053 — 7,053 
Equity warrants— — 1,894 1,894 
Total derivative assets$1 $7,053 $1,894 $8,948 
Financial liabilities
Derivative liabilities:
Foreign exchange$1 $— $— $1 
Interest rate swaps— 12,530 — 12,530 
Total derivative liabilities$1 $12,530 $— $12,531 
(1) Includes equity securities that are measured at net asset value per share (or its equivalent) as a practical expedient of $12.6 million at December 31, 2022 and are excluded from the fair value hierarchy.
(2) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.

The following table is a reconciliation of the fair value of the equity warrants that are classified as Level 3 and measured on a recurring basis as of:
Three Months Ended
March 31,March 31,
(Dollars in thousands)20232022
Beginning balance$1,894 $1,889 
Change in fair value (1)
(20)19 
Net exercise(1,462)— 
Ending balance$412 $1,908 
______________________________
(1) The changes in fair value are included in other income on the consolidated statement of income.


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The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a recurring basis at the dates indicated.
 March 31, 2023
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
Equity warrants$412 Black-Scholes
option pricing
model		Volatility
Risk free interest rate
Marketability discount
35.00%
3.94%
5.50%
35.00%
3.94%
5.50%
35.00%
3.94%
5.50%
 December 31, 2022
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
Equity warrants$1,894 Black-Scholes
option pricing
model		Volatility
Risk free interest rate
Marketability discount
30.00%
4.32%
6.00%
35.00%
4.41%
16.00%
31.14%
4.39%
13.60%

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Individually Evaluated Loans – A loan is individually evaluated for expected credit losses when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement and it does not share similar risk characteristics with other loans. Individually evaluated loans are measured based on the fair value of the underlying collateral or the discounted expected future cash flows. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate, and cash. The Company measures impairment on all nonaccrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling costs.

Other Real Estate Owned – OREO is initially recorded at the fair value less estimated costs to sell at the date of transfer. This amount becomes the property’s new basis. Any fair value adjustments based on the property’s fair value less estimated costs to sell at the date of acquisition are charged to the allowance for credit losses.

The fair value of individually evaluated collateral dependent loans and other real estate owned were determined using Level 3 assumptions, and represents individually evaluated loan for which a specific reserve has been established or on which a write down has been taken. For real estate loans, generally, the Company obtains third party appraisals (or property valuations) and/or collateral audits in conjunction with internal analysis based on historical experience on its individually evaluated loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for individually evaluated loans, the Company then discounts the valuation to cover both market price fluctuations and selling costs, typically ranging from 7% to 10% of the collateral value, that the Company expects would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions, and management’s expertise and knowledge of the client and client’s business.

At March 31, 2023, the Company’s individually evaluated collateral dependent loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisals available to management. The Company completed partial charge-offs on certain individually evaluated loans based on recent real estate or property appraisals and recorded the related reserves where applicable during the three months ended March 31, 2023.     

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The following table presents our assets measured at fair value on a nonrecurring basis at the dates indicated.
 March 31, 2023
Fair Value Measurement UsingTotal
Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets   
Collateral dependent loans$— $— $985 $985 
Other real estate owned— — 5,499 5,499 
Total assets$— $— $6,484 $6,484 
 December 31, 2022
Fair Value Measurement UsingTotal
Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets    
Collateral dependent loans$— $— $3,180 $3,180 
The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a nonrecurring basis at the dates indicated.
 March 31, 2023
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
Investor loans secured by real estate
Multifamily$985 Fair value of collateralCost to sell7.00%7.00%7.00%
Total individually evaluated loans$985 
Other real estate owned5,499 Fair value of propertyCost to sell6.00%6.00%6.00%
Total assets$6,484 
 December 31, 2022
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
Commercial loans
Commercial and industrial3,180 Fair value of collateralCollateral discount and cost to sell6.00%6.00%6.00%
Total individually evaluated loans$3,180 
______________________________
(1) SBA loans that are collateralized by hotel/motel real property.
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Fair Values of Financial Instruments
    
The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated, representing an exit price.
 At March 31, 2023
(Dollars in thousands)Carrying
Amount		Level 1Level 2Level 3Estimated
Fair Value
Assets     
Cash and cash equivalents$1,424,896 $1,424,896 $— $— $1,424,896 
Interest-bearing time deposits with financial institutions1,734 1,734 — — 1,734 
HTM investment securities1,749,030 — 1,496,494 — 1,496,494 
AFS investment securities2,112,852 — 2,112,852 — 2,112,852 
Equity securities962 962 — — 962 
Loans held for sale1,247 — 1,296 — 1,296 
Loans held for investment, net14,171,784 — — 13,412,607 13,412,607 
Derivative assets (1)
6,079 37 5,630 412 6,079 
Accrued interest receivable69,660 — 69,660 — 69,660 
Liabilities     
Deposit accounts$17,207,810 $— $17,204,363 $— $17,204,363 
FHLB advances800,000 — 788,132 — 788,132 
Subordinated debentures331,364 — 325,170 — 325,170 
Derivative liabilities10,577 8 10,569 — 10,577 
Accrued interest payable23,261 — 23,261 — 23,261 
______________________________
(1) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.
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 At December 31, 2022
(Dollars in thousands)Carrying
Amount		Level 1Level 2Level 3Estimated
Fair Value
Assets     
Cash and cash equivalents$1,101,249 $1,101,249 $— $— $1,101,249 
Interest-bearing time deposits with financial institutions1,734 1,734 — — 1,734 
HTM investment securities1,388,103 — 1,097,096 — 1,097,096 
AFS investment securities2,601,013 — 2,601,013 — 2,601,013 
Equity securities (1)
13,526 925 — — 13,526 
Loans held for sale2,643 — 2,755 — 2,755 
Loans held for investment, net14,676,298 — — 13,846,403 13,846,403 
Derivative assets (2)
8,948 1 7,053 1,894 8,948 
Accrued interest receivable73,784 — 73,784 — 73,784 
Liabilities     
Deposit accounts$17,352,401 $— $17,334,219 $— $17,334,219 
FHLB advances1,000,000 — 982,695 — 982,695 
Subordinated debentures331,204 — 327,609 — 327,609 
Derivative liabilities12,531 1 12,530 — 12,531 
Accrued interest payable14,661 — 14,661 — 14,661 
______________________________
(1) Includes equity securities that are measured at net asset value per share (or its equivalent) as a practical expedient of $12.6 million at December 31, 2022 and are excluded from the fair value hierarchy.
(2) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.

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Note 11 – Derivative Instruments

The Company uses derivative instruments to manage its exposure to market risks, including interest rate risk, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship, while other derivatives serve as economic hedges that do not qualify for hedge accounting.

Derivatives Designated as Hedging Instruments

Fair Value Hedges – The Company is exposed to changes in the fair value of fixed-rate assets due to changes in benchmark interest rates. The Company entered into pay-fixed and receive-floating interest rate swaps associated with certain fixed rate loans, primarily commercial real estate loans, to manage its exposure to changes in fair value on these instruments attributable to changes in the designated SOFR benchmark interest rate. These interest rate swaps are designated as fair value hedges using the portfolio layer method. The Company receives variable-rate interest payments in exchange for making fixed-rate payments over the lives of the contracts without exchanging the notional amounts. The fair value hedges are recorded as components of other assets and other liabilities in the Company’s consolidated statements of financial condition. The gain or loss on these derivatives, as well as the offsetting loss or gain on the hedged items attributable to the hedged risk are recognized in interest income in the Company’s consolidated statements of income. At March 31, 2023 and December 31, 2022, interest rate swaps with an aggregate notional amount of $1.20 billion were designated as fair value hedges.

The following amounts were recorded on the consolidated statement of financial condition related to cumulative basis adjustment for fair value hedges as of the dates indicated:

Line Item in the Statement of Financial Position in Which the Hedged Item is IncludedCarrying Amount of the Hedged AssetsCumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(Dollars in thousands)March 31, 2023December 31, 2022March 31, 2023December 31, 2022
Loans held for investment (1)
$1,149,995 $1,138,074 $(50,005)$(61,926)
Total$1,149,995 $1,138,074 $(50,005)$(61,926)
______________________________
(1) These amounts were included in the amortized cost basis of closed portfolios of loans held for investment used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolios anticipated to be outstanding for the designated hedge period. At March 31, 2023 and December 31, 2022, the amortized cost basis of the closed portfolios used in these hedging relationships was $3.27 billion and $3.35 billion, respectively, the cumulative basis adjustments associated with these hedging relationships was $(50.0) million and $(61.9) million, respectively; and the amounts of the designated hedged items were $1.20 billion and $1.20 billion, respectively.


49

Derivatives Not Designated as Hedging Instruments

Interest Rate Swap Contracts – From time to time, the Company enters into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company. At the same time, the Company enters into identical offsetting interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements it enters into with its borrowers. The Company had over-the-counter derivative instruments and centrally-cleared derivative instruments with matched terms. The fair values of these agreements are determined through a third-party valuation model used by the Company’s swap advisory firm, which uses observable market data such as interest rates, prices of Eurodollar futures contracts, and market swap rates. The fair values of these swaps are recorded as components of other assets and other liabilities in the Company’s consolidated balance sheet. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s income statement as a component of noninterest income.
    
Over-the-counter contracts are tailored to meet the needs of the counterparties involved and, therefore, generally contain a greater degree of credit risk and liquidity risk than centrally-cleared contracts, which have standardized terms. Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of the swap agreements. Offsetting over-the-counter swap agreements the Company has with other financial institutions are collateralized with cash, and swap agreements with borrowers are secured by the collateral arrangements for the underlying loans these borrowers have with the Company. All interest rate swap agreements entered into by the Company are free-standing derivatives and are not designated as hedging instruments.

Foreign Exchange Contracts – The Company offers foreign exchange spot and forward contracts as accommodations to its customers to purchase and/or sell foreign currencies at a contractual price. In conjunction with these products the Company also enters into offsetting contracts with institutional counterparties to mitigate the Company’s foreign exchange exposure with its customers, or enters into bilateral collateral and master netting agreements with certain customer counterparties to manage its credit exposure. These contracts allow the Company to offer its customers foreign exchange products while minimizing its exposure to foreign exchange rate fluctuations. These foreign exchange contracts are not designated as hedging instruments and are recorded at fair value in other assets and other liabilities in the Company’s consolidated statements of financial condition. Changes in the fair value of these contracts are recorded in the Company’s consolidated statements of income as a component of noninterest income.

Equity Warrant Assets – The Company acquired equity warrant assets as a result of the acquisition of Opus. Opus received equity warrant assets through its lending activities, which were accounted for as loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The Company no longer has loans associated with these borrowers. Changes in the fair value of the warrants are recognized as a component of noninterest income with a corresponding offset within other assets. The total fair value of the warrants was $412,000 and $1.9 million in other assets as of March 31, 2023 and December 31, 2022, respectively. The remaining warrant expires on July 28, 2025.

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The following tables summarize the Company's derivative instruments included in “other assets” and “other liabilities” in the consolidated statements of financial condition as of the dates indicated:
March 31, 2023
Derivative AssetsDerivative Liabilities
(Dollars in thousands)NotionalFair ValueNotionalFair Value
Derivative instruments designated as hedging instruments:
Fair value hedge - interest rate swap contracts$900,000 $52,195 $300,000 $24 
Total derivative designated as hedging instruments900,000 52,195 300,000 24 
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts1,913 37 2,197 8 
Interest rate swaps contracts110,599 10,067 110,599 10,068 
Equity warrants— 412 — — 
Total derivative not designated as hedging instruments112,512 10,516 112,796 10,076 
Total derivatives$1,012,512 62,711 $412,796 10,100 
Netting adjustments - cleared positions (1)
56,632 477 
Total derivatives in the Balance Sheet$6,079 $10,577 
______________________________
(1) Netting adjustments represents the variation margin payments that are considered legal settlements of derivative exposure and applied to net the fair value of the respective derivative contracts in accordance with the applicable accounting guidance on the settle-to-market rule for cleared derivatives.

December 31, 2022
Derivative AssetsDerivative Liabilities
(Dollars in thousands)NotionalFair ValueNotionalFair Value
Derivative instruments designated as hedging instruments:
Fair value hedge - interest rate swap contracts$900,000 $63,710 $300,000 $72 
Total derivative designated as hedging instruments900,000 63,710 300,000 72 
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts22 1 143 1 
Interest rate swaps contracts112,124 12,524 112,124 12,525 
Equity warrants— 1,894 — — 
Total derivative not designated as hedging instruments112,146 14,419 112,267 12,526 
Total derivatives$1,012,146 $78,129 $412,267 $12,598 
Netting adjustments - cleared positions (1)
69,181 67 
Total derivatives in the Balance Sheet$8,948 $12,531 
______________________________
(1) Netting adjustments represents the variation margin payments that are considered legal settlements of derivative exposure and applied to net the fair value of the respective derivative contracts in accordance with the applicable accounting guidance on the settle-to-market rule for cleared derivatives.

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The following table presents the effect of fair value hedge accounting on the consolidated statements of income:
Three Months Ended
(Dollars in thousands)Location of Gain (Loss) Recognized in Income on Derivative InstrumentsMarch 31, 2023March 31, 2022
Gain (loss) on fair value hedging relationships:
Hedged itemsInterest Income$11,921 $(33,924)
Derivatives designated as hedging instrumentsInterest Income(3,586)32,257 

The following table summarizes the effect of the derivatives not designated as hedging instruments in the consolidated statements of income.
(Dollars in thousands)Three Months Ended
Derivatives Not Designated as Hedging Instruments:Location of Gain (Loss) Recognized in Income on Derivative InstrumentsMarch 31, 2023March 31, 2022
Foreign exchange contractsOther income$220 $46 
Interest rate productsOther income— 1 
Equity warrantsOther income(251)19 
Total$(31)$66 
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Note 12 – Balance Sheet Offsetting

Derivative financial instruments may be eligible for offset in the consolidated statements of financial condition, such as those subject to enforceable master netting arrangements or a similar agreement. Under these agreements, the Company has the right to net settle multiple contracts with the same counterparty. The Company offers an interest rate swap product to qualified customers, which are then paired with derivative contracts the Company enters into with a counterparty bank. While derivative contracts entered into with counterparty banks may be subject to enforceable master netting agreements, derivative contracts with customers may not be subject to enforceable master netting arrangements. With regard to derivative contracts not centrally cleared through a clearinghouse, regulations require collateral to be posted by the party with a net liability position. Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in the value of the derivative. These payments are commonly referred to as variation margin and are treated as settlements of derivative exposure rather than as collateral. The Company elected to account for centrally-cleared derivative contracts on a gross basis, even when the right for setoff are in place. However, for derivative contracts cleared through certain central clearing parties, the fair value of the respective derivative contracts is reported net of the variation margin payments.

Financial instruments that are eligible for offset in the consolidated statements of financial condition as of the periods indicated are presented below:
Gross Amounts Not Offset in the Consolidated
Statements of Financial Condition
(Dollars in thousands)
Gross Amounts Recognized (1)
Gross Amounts Offset in the Consolidated Statements of Financial ConditionNet Amounts Presented in the Consolidated Statements of Financial Condition
Financial Instruments (2)
Cash Collateral (3)
Net Amount
March 31, 2023
Derivative assets:
Interest rate swaps$5,630 $— $5,630 $— $(4,720)$910 
Total$5,630 $— $5,630 $— $(4,720)$910 
Derivative liabilities:
Interest rate swaps$10,569 $— $10,569 $— $— $10,569 
Total$10,569 $— $10,569 $— $— $10,569 
December 31, 2022
Derivative assets:
Interest rate swaps$7,053 $— $7,053 $— $(5,440)$1,613 
Total$7,053 $— $7,053 $— $(5,440)$1,613 
Derivative liabilities:
Interest rate swaps$12,530 $— $12,530 $— $— $12,530 
Total$12,530 $— $12,530 $— $— $12,530 
______________________________
(1) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable.
(2) Represents the fair value of securities pledged with counterparty bank.
(3) Represents cash collateral received from or pledged with counterparty bank. Amounts are limited to the derivative asset or liability balance and, accordingly, do not include excess collateral, if any, received or pledged.

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Note 13 – Variable Interest Entities

The Company is involved with VIEs through its loan securitization activities and affordable housing investments that qualify for the low-income housing tax credit (“LIHTC”). The Company has determined that its interests in these entities meet the definition of variable interests.

As of March 31, 2023 and December 31, 2022, the Company determined it was not the primary beneficiary of the VIEs and did not consolidate its interests in VIEs. The following table provides a summary of the carrying amount of assets and liabilities in the Company’s consolidated statements of financial condition and maximum exposure to loss as of March 31, 2023 and December 31, 2022 that relate to variable interests in non-consolidated VIEs.

March 31, 2023December 31, 2022
(Dollars in thousands)Maximum LossAssetsLiabilitiesMaximum LossAssetsLiabilities
Multifamily loan securitization:
Investment securities (1)
$53,716 $53,716 $— $56,784 $56,784 $— 
Reimbursement obligation (2)
50,901 — 334 50,901 — 334 
Affordable housing partnership:
Other investments (3)
54,350 69,564 — 60,531 75,959 — 
Unfunded equity commitments (2)
— — 15,214 — — 15,428 
Total$158,967 $123,280 $15,548 $168,216 $132,743 $15,762 
______________________________
(1) Included in investment securities AFS on the consolidated statement of financial condition.
(2) Included in accrued expenses and other liabilities on the consolidated statement of financial condition.
(3) Included in other assets on the consolidated statement of financial condition.

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Multifamily Loan Securitization

With respect to the securitization transaction with Freddie Mac discussed in Note 5 – Loans Held for Investment, the Company’s variable interests reside with the underlying Freddie Mac-issued guaranteed, structured pass-through certificates that were held as AFS investment securities at fair value as of March 31, 2023. Additionally, the Company has variable interests through a reimbursement agreement executed by Freddie Mac that obligates the Company to reimburse Freddie Mac for any defaulted contractual principal and interest payments identified after the ultimate resolution of the defaulted loans. Such reimbursement obligations are not to exceed 10% of the original principal amount of the loans comprising the securitization pool.

As part of the securitization transaction, the Company released all servicing obligations and rights to Freddie Mac who was designated as the Master Servicer. In its capacity as Master Servicer, Freddie Mac can terminate the Company’s role as sub-servicer and direct such responsibilities accordingly. In evaluating our variable interests and continuing involvement in the VIE, we determined that we do not have the power to make significant decisions or direct the activities that most significantly impact the economic performance of the VIE’s assets and liabilities. As sub-servicer of the loans, the Company does not have the authority to make significant decisions that influence the value of the VIE’s net assets and, therefore, the Company is not the primary beneficiary of the VIE. As a result, we determined that the VIE associated with the multifamily securitization should not be included in the consolidated financial statements of the Company.

We believe that our maximum exposure to loss as a result of our involvement with the VIE associated with the securitization is the carrying value of the investment securities issued by Freddie Mac and purchased by the Company. Additionally, our maximum exposure to loss under the reimbursement agreement executed with Freddie Mac is 10% of the original principal amount of the loans comprising the securitization pool, or $50.9 million. Based upon our analysis of quantitative and qualitative data over the underlying loans included in the securitization pool, as of March 31, 2023 and December 31, 2022, our reserve for estimated losses with respect to the reimbursement obligation was $334,000.

Investments in Qualified Affordable Housing Partnerships

The Company has variable interests through its affordable housing partnership investments. These investments are fundamentally designed to provide a return through the generation of income tax credits. The Company has evaluated its involvement with the low-income housing projects and determined it does not have the ability to exercise significant influence over or participate in the decision-making activities related to the management of the projects, and therefore, is not the primary beneficiary, and does not consolidate these interests.

The Company’s maximum exposure to loss, exclusive of any potential realization of tax credits, is equal to the commitments invested, adjusted for amortization. The amount of unfunded commitments was included in the investments recognized as assets with a corresponding liability. The table above summarizes the amount of tax credit investments held as assets, the amount of unfunded commitments held as liabilities, and the maximum exposure to loss as of March 31, 2023 and December 31, 2022, respectively.

Note 14 – Subsequent Events

Quarterly Cash Dividend

On April 24, 2023, the Corporation’s Board of Directors declared a cash dividend of $0.33 per share, payable on May 15, 2023 to stockholders of record as of May 8, 2023.



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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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 the United States (“U.S.”) economy in general and the strength of the local economies in which we conduct operations;
•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 Board of Governors of the Federal Reserve System (the “Federal Reserve”);
•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 the U.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, the SEC, the Public Company Accounting Oversight
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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 U.S. financial regulatory system;
•The impact of recent or future changes in Federal Deposit Insurance Corporation (the “FDIC”) insurance assessment rate or the rules and regulations related to the calculation of the FDIC 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 the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, including the war between Russia and Ukraine, which could impact business and economic conditions in the U.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 the SEC. 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 the SEC.
 
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 the SEC, all of which are accessible on the SEC’s website at http://www.sec.gov.
 
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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 ended March 31, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023.
 
The Corporation is a California-based bank holding company incorporated in 1997 in the state of Delaware 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 a California 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 a California-chartered commercial bank and became a member of the Federal Reserve System in March 2007. The Bank is also a member of the FHLB, which is a member of the Federal Home Loan Bank System. As a bank holding company, the Corporation is subject to regulation and supervision by the Federal Reserve. We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal 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, the California 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. The Federal 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 the Federal 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 a California state-chartered commercial bank, which is a member of the Federal Reserve, the Bank is subject to supervision, periodic examination, and regulation by the DFPI, the Federal Reserve, the Consumer Financial Protection Bureau, and the Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are insured by the FDIC through the Deposit 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, the FDIC 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 the FDIC to terminate the Bank’s deposit insurance. As a California-chartered commercial bank, the Bank is also subject to certain provisions of California law.
 
Our corporate headquarters is located in Irvine, California. At March 31, 2023, we primarily conduct business throughout the Western Region of the United States from our 59 full-service depository branches located in Arizona, California, Nevada, and Washington.


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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 the Western 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 the Western United States in major metropolitan markets within Arizona, California, Nevada, Oregon, and Washington. 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 our Pacific 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 the U.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, the Federal Open Market Committee (“FOMC”) has taken steps to tighten monetary policy through a cumulative 475 basis point increase to the federal funds rate since March 2022, as well as by beginning to reduce the size of the Federal Reserve’s balance sheet. The FOMC 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 the FOMC, 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. During March 2023, two large U.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.


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•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 the FOMC 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 the Federal 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)202320222022
Net income$62,562 $73,673 $66,904 
Plus: amortization of intangible assets expense3,171 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 $76,135 $69,471 
Average stockholders’ equity$2,822,392 $2,751,161 $2,864,387 
Less: average intangible assets54,310 57,624 68,157 
Less: average goodwill901,312 901,312 901,312 
Average tangible common equity$1,866,770 $1,792,225 $1,894,918 
Return on average equity8.87 %10.71 %9.34 %
Return on average tangible common equity13.89 %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,December 31,
(Dollars in thousands)20232022
Total stockholders’ equity$2,831,161 $2,798,389 
Less: intangible assets953,729 956,900 
Tangible common equity$1,877,432 $1,841,489 
Total assets$21,361,564 $21,688,017 
Less: intangible assets953,729 956,900 
Tangible assets$20,407,835 $20,731,117 
Tangible common equity ratio9.20 %8.88 %
Common shares issued and outstanding95,714,77795,021,760
Book value per share$29.58 $29.45 
Less: intangible book value per share9.96 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)202320222022
Total noninterest expense$101,352 $99,182 $97,648 
Less: amortization of intangible assets3,171 3,440 3,592 
Less: other real estate owned operations, net108 — — 
Noninterest expense, adjusted$98,073 $95,742 $94,056 
Net interest income before provision for credit losses$168,610 $181,396 $161,839 
Add: total noninterest income21,186 20,497 25,894 
Less: net gain from sales of investment securities138 — 2,134 
Revenue, adjusted$189,658 $201,893 $185,599 
Efficiency ratio51.7 %47.4 %50.7 %

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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)202320222022
Interest income$221,343 $217,781 $168,546 
Interest expense52,733 36,385 6,707 
Net interest income168,610 181,396 161,839 
Noninterest income21,186 20,497 25,894 
Revenue189,796 201,893 187,733 
Noninterest expense101,352 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 assets0.41 %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)202320222022
Total deposits interest expense$40,234 $25,865 $1,673 
Less: certificates of deposit interest expense7,775 3,941 530 
Less: brokered deposits interest expense13,056 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 deposit1,206,966 975,958 1,047,451 
Less: average brokered deposits1,443,827 1,283,567 5,553 
Average core deposits$14,673,649 $15,349,258 $16,227,302 
Cost of core deposits0.54 %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 andMarch 31,December 31,March 31,
percentages)202320222022
Operating data
Interest income$221,343 $217,781 $168,546 
Interest expense52,733 36,385 6,707 
Net interest income168,610 181,396 161,839 
Provision for credit losses3,016 2,838 448 
Net interest income after provision for credit losses165,594 178,558 161,391 
Net gain from sales of loans29 151 1,494 
Other noninterest income21,157 20,346 24,400 
Noninterest expense101,352 99,182 97,648 
Net income before income taxes85,428 99,873 89,637 
Income tax expense22,866 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 
Diluted0.66 0.77 0.70 
Common equity dividends declared per share0.33 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 margin3.44 3.61 3.41 
Cost of deposits0.94 0.58 0.04 
Average equity to average assets13.02 12.66 13.67 
Efficiency ratio (2)
51.7 47.4 50.7 
______________________________
(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, 2023December 31, 2022March 31, 2022
(Dollars in thousands)Average
Balance		InterestAverage
Yield/Cost		Average
Balance		InterestAverage
Yield/Cost		Average
Balance		InterestAverage
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 securities4,165,681 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 assets19,896,067 221,343 4.51 %19,944,656 217,781 4.33 %19,240,232 168,546 3.55 %
Noninterest-earning assets1,788,806 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 market4,992,084 13,053 1.06 %4,998,726 7,897 0.63 %5,343,973 888 0.07 %
Savings453,079 508 0.45 %443,016 310 0.28 %422,186 26 0.02 %
Retail certificates of deposit1,206,966 7,775 2.61 %975,958 3,941 1.60 %1,047,451 530 0.21 %
Wholesale/brokered certificates of deposit1,443,783 13,056 3.67 %1,283,537 9,965 3.08 %— — — %
Total interest-bearing deposits11,104,624 40,234 1.47 %11,021,383 25,865 0.93 %10,351,434 1,673 0.07 %
FHLB advances and other borrowings987,817 7,938 3.26 %826,125 5,960 2.86 %225,250 474 0.85 %
Subordinated debentures331,297 4,561 5.51 %331,133 4,560 5.51 %330,629 4,560 5.52 %
Total borrowings1,319,114 12,499 3.83 %1,157,258 10,520 3.62 %555,879 5,034 3.63 %
Total interest-bearing liabilities12,423,738 52,733 1.72 %12,178,641 36,385 1.19 %10,907,313 6,707 0.25 %
Noninterest-bearing deposits6,219,818 6,587,400 6,928,872 
Other liabilities218,925 211,731 256,219 
Total liabilities18,862,481 18,977,772 18,092,404 
Stockholders’ equity2,822,392 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 liabilities160.15 %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.

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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 ended March 31, 2023 to the three months ended March 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 December 31, 2022
Increase (Decrease) Due to
(Dollars in thousands)VolumeDaysRateNet
Interest-earning assets   
Cash and cash equivalents$3,081 $(302)$2,179 $4,958 
Investment securities215 — 1,888 2,103 
Loans receivable, net(3,879)(4,021)4,401 (3,499)
Total interest-earning assets(583)(4,323)8,468 3,562 
Interest-bearing liabilities   
Interest checking(314)(130)2,534 2,090 
Money market(10)(290)5,456 5,156 
Savings7 (11)202 198 
Retail certificates of deposit1,092 (173)2,915 3,834 
Wholesale/brokered certificates of deposit1,339 (290)2,042 3,091 
FHLB advances and other borrowings1,259 (176)895 1,978 
Subordinated debentures1 — — 1 
Total interest-bearing liabilities3,374 (1,070)14,044 16,348 
Decrease in net interest income$(3,957)$(3,253)$(5,576)$(12,786)
67

Three Months Ended March 31, 2023
Compared to
Three Months Ended March 31, 2022
Increase (Decrease) Due to
(Dollars in thousands)VolumeRateNet
Interest-earning assets   
Cash and cash equivalents$1,085 $12,419 $13,504 
Investment securities(1,352)10,291 8,939 
Loans receivable, net243 30,111 30,354 
Total interest-earning assets(24)52,821 52,797 
Interest-bearing liabilities   
Interest checking(24)5,637 5,613 
Money market(58)12,223 12,165 
Savings2 480 482 
Retail certificates of deposit90 7,155 7,245 
Wholesale/brokered certificates of deposit13,056 — 13,056 
FHLB advances and other borrowings4,093 3,371 7,464 
Subordinated debentures9 (8)1 
Total interest-bearing liabilities17,168 28,858 46,026 
(Decrease) Increase in net interest income$(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 March 31, 2023 totaled $3.3 million, compared with net loan charge-offs of $3.8 million for the three months ended December 31, 2022, and net loan charge-offs of $446,000 for the three months ended March 31, 2022.

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Three Months EndedVariance From
March 31,December 31,March 31,December 31, 2022March 31, 2022
(Dollars in thousands)202320222022$%$%
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 securities184 (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 EndedVariance From
 March 31,December 31,March 31,December 31, 2022March 31, 2022
(Dollars in thousands)202320222022$%$%
Noninterest income
Loan servicing income$573 $346 $419 $227 65.6 %$154 36.8 %
Service charges on deposit accounts2,629 2,689 2,615 (60)(2.2)%14 0.5 %
Other service fee income296 295 367 1 0.3 %(71)(19.3)%
Debit card interchange fee income803 1,048 836 (245)(23.4)%(33)(3.9)%
Earnings on bank owned life insurance3,374 3,359 3,221 15 0.4 %153 4.8 %
Net gain from sales of loans29 151 1,494 (122)(80.8)%(1,465)(98.1)%
Net (loss) gain from sales of investment securities138 — 2,134 138 — %(1,996)(93.5)%
Trust custodial account fees11,025 9,722 11,579 1,303 13.4 %(554)(4.8)%
Escrow and exchange fees1,058 1,282 1,661 (224)(17.5)%(603)(36.3)%
Other income1,261 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 EndedVariance From
 March 31,December 31,March 31,December 31, 2022March 31, 2022
(Dollars in thousands)202320222022$%$%
Noninterest expense
Compensation and benefits$54,293 $54,347 $56,981 $(54)(0.1)%$(2,688)(4.7)%
Premises and occupancy11,742 11,641 11,952 101 0.9 %(210)(1.8)%
Data processing7,265 6,991 5,996 274 3.9 %1,269 21.2 %
Other real estate owned operations, net108 — — 108 100.0 %108 100.0 %
FDIC insurance premiums2,425 1,463 1,396 962 65.8 %1,029 73.7 %
Legal and professional services5,501 5,175 4,068 326 6.3 %1,433 35.2 %
Marketing expense1,838 1,985 1,809 (147)(7.4)%29 1.6 %
Office expense1,232 1,310 1,203 (78)(6.0)%29 2.4 %
Loan expense646 743 1,134 (97)(13.1)%(488)(43.0)%
Deposit expense8,436 6,770 3,751 1,666 24.6 %4,685 124.9 %
Amortization of intangible assets3,171 3,440 3,592 (269)(7.8)%(421)(11.7)%
Other expense4,695 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.

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Income Taxes

For the three months ended March 31, 2023, December 31, 2022, and March 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 ended March 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 at March 31, 2023 and December 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 at March 31, 2023 and December 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 $115,000 and $89,000 of such interest at March 31, 2023 and December 31, 2022, respectively. No amounts for penalties were accrued.

The Company and its subsidiaries are subject to U.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 of March 31, 2023 and December 31, 2022.

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FINANCIAL CONDITION
 
At March 31, 2023, assets totaled $21.36 billion, a decrease of $326.5 million, or 1.5%, from $21.69 billion at December 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 the Federal Reserve's discount window or the new Bank Term Funding Program.


Loans

Loans held for investment totaled $14.17 billion at March 31, 2023, a decrease of $504.5 million, or 3.4%, from $14.68 billion at December 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. Since December 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, at March 31, 2023 was 4.68%, compared to 4.61% at December 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 at March 31, 2023, a decrease of $1.4 million from $2.6 million at December 31, 2022.

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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, 2023December 31, 2022
(Dollars in thousands)AmountPercent
of Total		Weighted
Average
Interest Rate		AmountPercent
of Total		Weighted
Average
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 %
Multifamily5,955,239 42.0 %3.87 %6,112,026 41.6 %3.86 %
Construction and land420,079 3.0 %8.69 %399,034 2.7 %8.24 %
SBA secured by real estate40,669 0.3 %8.62 %42,135 0.3 %7.61 %
Total investor loans secured by real estate9,006,811 63.6 %4.32 %9,213,516 62.7 %4.25 %
Business loans secured by real estate
CRE owner-occupied2,342,175 16.6 %4.27 %2,432,163 16.6 %4.22 %
Franchise real estate secured371,902 2.6 %4.76 %378,057 2.6 %4.75 %
SBA secured by real estate60,527 0.4 %8.31 %61,368 0.4 %7.45 %
Total business loans secured by real estate2,774,604 19.6 %4.43 %2,871,588 19.6 %4.36 %
Commercial loans
Commercial and industrial1,967,128 13.9 %6.60 %2,160,948 14.7 %6.32 %
Franchise non-real estate secured388,722 2.7 %4.92 %404,791 2.8 %4.91 %
SBA non-real estate secured10,437 0.1 %8.87 %11,100 0.1 %7.83 %
Total commercial loans2,366,287 16.7 %6.34 %2,576,839 17.6 %6.11 %
Retail loans
Single family residential70,913 0.5 %6.11 %72,997 0.5 %5.51 %
Consumer3,174 — %6.36 %3,284 — %6.29 %
Total retail loans74,087 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 investment14,171,784 100.0 %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 value1,247 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 of March 31, 2023 and December 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.


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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. At March 31, 2023, loans delinquent 30 or more days as a percentage of total loans held for investment was 0.15%, compared to 0.30% at December 31, 2022. The decrease in delinquent loans during the three months ended March 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 Days60 - 89 Days90 Days or MoreTotal
(Dollars in thousands)# of
Loans		Principal
Balance
of Loans		# of
Loans		Principal
Balance
of Loans		# of
Loans		Principal
Balance
of Loans		# of
Loans		Principal
Balance
of Loans
At March 31, 2023        
Investor loans secured by real estate        
CRE non-owner-occupied1 $6 1 $1,129 2 $4,416 4 $5,551 
Multifamily— — — — 2 3,708 2 3,708 
Total investor loans secured by real estate1 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 estate2 308 — — 3 1,190 5 1,498 
Total business loans secured by real estate2 308 — — 6 5,952 8 6,260 
Commercial loans
Commercial and industrial12 447 5 69 2 4,236 19 4,752 
SBA non-real estate secured— — — — 1 572 1 572 
Total commercial loans12 447 5 69 3 4,808 20 5,324 
Total15 $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 %

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 30 - 59 Days60 - 89 Days90 Days or MoreTotal
(Dollars in thousands)# of
Loans		Principal
Balance
of Loans		# of
Loans		Principal
Balance
of Loans		# of
Loans		Principal
Balance
of Loans		# of
Loans		Principal
Balance
of Loans
At December 31, 2022
Investor loans secured by real estate
CRE non-owner-occupied— $— — $— 2 $4,429 2 $4,429 
Multifamily1 2,723 — — 2 6,057 3 8,780 
Total investor loans secured by real estate1 2,723 — — 4 10,486 5 13,209 
Business loans secured by real estate
CRE owner-occupied3 1,434 — — 4 6,555 7 7,989 
Franchise real estate secured2 7,073 — — — — 2 7,073 
SBA secured by real estate— — 1 104 2 1,087 3 1,191 
Total business loans secured by real estate5 8,507 1 104 6 7,642 12 16,253 
Commercial loans
Commercial and industrial9 4,657 9 81 4 3,908 22 8,646 
Franchise non-real estate secured5 3,592 — — — — 5 3,592 
SBA non-real estate secured— — — — 1 589 1 589 
Total commercial loans14 8,249 9 81 5 4,497 28 12,827 
Retail loans
Single family residential2 1,057 — — — — 2 1,057 
Consumer1 2 — — — — 1 2 
Total retail loans3 1,059 — — — — 3 1,059 
Total23 $20,538 10 $185 15 $22,625 48 $43,348 
Delinquent loans to loans held for investment0.14 %— %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.

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Modified Loans to Troubled Borrowers

On January 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 of March 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 ended March 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, at March 31, 2023, relatively flat compared to $30.9 million, or 0.14% of total assets, at December 31, 2022. At March 31, 2023, nonperforming assets consisted of nonperforming loans of $24.9 million and OREO of $5.5 million. At December 31, 2022, all nonperforming assets consisted of nonperforming loans.

At March 31, 2023, nonperforming loans totaled $24.9 million, or 0.18% of loans held for investment, a decrease from $30.9 million, 0.21% of loans held for investment, at December 31, 2022.

OREO was $5.5 million at March 31, 2023, compared to no OREO at December 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 March 31, 2023 and December 31, 2022.


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The following table sets forth our composition of nonperforming assets at the dates indicated:
(Dollars in thousands)March 31, 2023December 31, 2022
Nonperforming assets
Investor loans secured by real estate
CRE non-owner-occupied$5,545 $4,429 
Multifamily3,708 8,780 
SBA secured by real estate519 533 
Total investor loans secured by real estate9,772 13,742 
Business loans secured by real estate
CRE owner-occupied9,102 11,475 
SBA secured by real estate1,190 1,191 
Total business loans secured by real estate10,292 12,666 
Commercial loans
Commercial and industrial4,236 3,908 
SBA non-real estate secured572 589 
Total commercial loans4,808 4,497 
Total nonperforming loans24,872 30,905 
Other real estate owned5,499 — 
Total$30,371 $30,905 
Allowance for credit losses$195,388 $195,651 
Allowance for credit losses as a percent of total nonperforming loans786 %633 %
Nonperforming loans as a percent of loans held for investment0.18 %0.21 %
Nonperforming assets as a percent of total assets0.14 %0.14 %
TDRs included in nonperforming loansN/A$5,051 
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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 of March 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 at March 31, 2023 is consistent with the approach used in the Company’s ACL model at December 31, 2022. The Company’s ACL model at March 31, 2023 includes assumptions concerning the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, higher energy prices, the potential impact of the ongoing war between Russia and Ukraine, 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 the U.S. unemployment rate, U.S. real GDP growth, CRE prices, and the interest rates.


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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 ended March 31, 2023 and March 31, 2022:

Q12023 Attribution.jpg Q12022 Attribution.jpg


At March 31, 2023, the ACL on loans was $195.4 million, a decrease of $263,000 from $195.7 million at December 31, 2022. The decrease in the ACL for loans held for investment during the three months ended March 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 ended March 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 ended March 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 ended March 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 ended March 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.

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At March 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, 2023December 31, 2022
(Dollars in thousands)AmountAllowance as a % of Category Total% of Loans in Category to
Total Loans		AmountAllowance as a % of Category Total% of Loans in Category to
Total Loans
Investor loans secured by real estate      
CRE non-owner-occupied$31,715 1.22 %18.3 %$33,692 1.27 %18.1 %
Multifamily57,787 0.97 %42.0 %56,334 0.92 %41.6 %
Construction and land7,672 1.83 %3.0 %7,114 1.78 %2.7 %
SBA secured by real estate2,291 5.63 %0.3 %2,592 6.15 %0.3 %
Total investor loans secured by real estate99,465 1.10 %63.6 %99,732 1.08 %62.7 %
Business loans secured by real estate
CRE owner-occupied29,334 1.25 %16.6 %32,340 1.33 %16.6 %
Franchise real estate secured7,790 2.09 %2.6 %7,019 1.86 %2.6 %
SBA secured by real estate4,415 7.29 %0.4 %4,348 7.09 %0.4 %
Total business loans secured by real estate41,539 1.50 %19.6 %43,707 1.52 %19.6 %
Commercial loans
Commercial and industrial37,659 1.91 %13.9 %35,169 1.63 %14.7 %
Franchise non-real estate secured15,721 4.04 %2.7 %16,029 3.96 %2.8 %
SBA non-real estate secured401 3.84 %0.1 %441 3.97 %0.1 %
Total commercial loans53,781 2.27 %16.7 %51,639 2.00 %17.6 %
Retail loans
Single family residential392 0.55 %0.5 %352 0.48 %0.5 %
Consumer loans211 6.65 %— %221 6.73 %— %
Total retail loans603 0.81 %0.5 %573 0.75 %0.5 %
Total (1)
$195,388 1.38 %100.0 %$195,651 1.33 %100.0 %
______________________________
(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 of March 31, 2023 and December 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.

At March 31, 2023, the ratio of ACL to loans held for investment was 1.38%, an increase from 1.33% at December 31, 2022. Our unamortized fair value discount on the loans acquired totaled $52.2 million, or 0.37% of total loans held for investment, at March 31, 2023, compared to $54.8 million, or 0.37% of total loans held for investment, at December 31, 2022.


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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 Ended
March 31, 2023December 31, 2022March 31, 2022
(Dollars in thousands)Net Charge-offs (Recoveries)Average Loan BalancePercentageNet Charge-offs (Recoveries)Average Loan BalancePercentageNet Charge-offs (Recoveries)Average Loan BalancePercentage
Investor loans secured by real estate
CRE non-owner-occupied$51 $2,622,150 —%$3,632 $2,728,432 0.13%$— $2,758,078 —%
Multifamily217 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 estate268 9,122,995 —%3,632 9,329,169 0.04%70 9,001,972 —%
Business loans secured by real estate
CRE owner-occupied2,151 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 estate2,151 2,810,953 0.08%(23)2,895,216 —%(10)2,723,636 —%
Commercial loans
Commercial and industrial912 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 loans806 2,446,004 0.03%243 2,564,000 0.01%386 2,556,512 0.02%
Retail loans
Single family residential89 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 loans59 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 investment1.38%1.33%1.34%
Nonperforming loans to loans held for investment0.18%0.21%0.38%
Allowance for credit losses to nonperforming loans786%633%357%
______________________________
(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 ended March 31, 2023 and December 31, 2022, respectively. There was no basis adjustment associated with fair value hedging relationships included in average loan balances during the three months ended March 31, 2022. Refer to Note 11 – Derivative Instruments for additional information.
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Investment Securities
 
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 at March 31, 2023, a decrease of $127.2 million, or 3.2%, from $3.99 billion at December 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 of U.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 at March 31, 2023 and 3.1 years at December 31, 2022.

At March 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, at December 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 of March 31, 2023 and December 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 ended March 31, 2023 and March 31, 2022, respectively, and $48,000 of provision recapture for HTM investment securities during the three months ended December 31, 2022. The Company had no ACL for AFS investment securities at March 31, 2023 and December 31, 2022.

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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
or Less		More than One
to Five Years		More than Five Years
to Ten Years		More than
Ten Years		Total
(Dollars in thousands)AmountWeighted
Average
Yield		AmountWeighted
Average
Yield		AmountWeighted
Average
Yield		AmountWeighted
Average
Yield		AmountWeighted
Average
Yield
Investment securities available-for-sale:          
U.S. Treasury$— — %$— — %$13,355 1.33 %$— — %$13,355 1.33 %
Agency16,966 3.34 %292,224 0.94 %89,306 1.41 %19,235 1.42 %417,731 1.16 %
Corporate— — %280,121 5.25 %228,068 3.17 %— — %508,189 4.24 %
Collateralized mortgage obligations31,174 2.66 %70,731 4.45 %178,056 2.97 %92,671 4.37 %372,632 3.55 %
Mortgage-backed securities19,617 3.09 %14,656 3.43 %452,677 1.15 %313,995 1.75 %800,945 1.47 %
Total securities available-for-sale67,757 2.95 %657,732 3.21 %961,462 1.99 %425,901 2.30 %2,112,852 2.42 %
HTM investment securities:          
Municipal bonds$— — %$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.

(Dollars in thousands)U.S. TreasuryAgencyCorporate DebtMunicipal BondsCollateralized Mortgage ObligationsMortgage-backed SecuritiesOtherTotal%
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 $18.53 billion at March 31, 2023, compared to $18.89 billion at December 31, 2022. The decrease of $359.2 million, or 1.9%, from December 31, 2022 was primarily due to decreases of $200.0 million in FHLB term advances, $144.6 million in deposits, and $14.8 million in other liabilities.


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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 March 31, 2023 and December 31, 2022, respectively.
 
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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, 2023December 31, 2022
(Dollars in thousands)Balance% of Total DepositsWeighted Average RateBalance% of Total DepositsWeighted Average Rate
Noninterest-bearing checking$6,209,104 36.1 %— %$6,306,825 36.4 %— %
Interest-bearing checking2,871,812 16.7 %0.98 %3,119,850 18.0 %0.63 %
Money market4,758,267 27.6 %1.18 %4,945,989 28.5 %0.85 %
Savings370,560 2.2 %0.10 %476,588 2.7 %0.49 %
Total core deposits14,209,743 82.6 %0.61 %14,849,252 85.6 %0.43 %
Brokered money market30 — %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 - 1.9949,941 0.3 %1.47 %193,529 1.1 %1.78 %
2.00 - 2.99381,412 2.2 %2.45 %431,042 2.5 %2.47 %
3.00 - 3.99545,731 3.2 %3.47 %645,228 3.7 %3.44 %
4.00 - 4.991,225,716 7.1 %4.41 %834,543 4.8 %4.42 %
5.00 and greater508,000 2.9 %5.22 %— — %— %
Total time deposit accounts2,998,037 17.4 %3.67 %2,503,119 14.4 %2.95 %
Total non-core deposits2,998,067 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 FDIC insurance limit:
(Dollars in thousands)March 31, 2023December 31, 2022
Uninsured deposits$6,680,247 $5,756,162 

Insured and collateralized deposits comprised 65% of total deposits at March 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 the FDIC insurance limit is $420.7 million at March 31, 2023 and $382.0 million at December 31, 2022. The following table sets forth the maturity distribution of the estimated uninsured time deposits:
(Dollars in thousands)March 31, 2023December 31, 2022
3 months or less$187,634 $199,742 
Over 3 months through 6 months99,824 109,659 
Over 6 months through 12 months83,679 50,707 
Over 12 months49,557 21,903 
Total$420,694 $382,011 


Borrowings.  At March 31, 2023, total borrowings amounted to $1.13 billion, a decrease of $199.8 million, or 15.0%, from $1.33 billion at December 31, 2022. Total borrowings at March 31, 2023 were comprised of $800.0 million of FHLB term advances and $331.4 million of subordinated debentures. The decrease in borrowings at March 31, 2023 as compared to December 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. At March 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% at December 31, 2022. 
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At March 31, 2023, total subordinated debentures were comprised of the following:
 
•Subordinated notes of $60.0 million at a fixed rate of 5.75% due September 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 due May 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 including May 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 due June 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 including June 15, 2020 to, but excluding, June 15, 2025, payable semiannually in arrears. From and including June 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, 2023December 31, 2022
(Dollars in thousands)BalanceWeighted
Average Rate		BalanceWeighted
Average Rate
FHLB advances$800,000 3.59 %$1,000,000 3.19 %
Subordinated debentures331,364 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 quarter3.83 % 3.62 % 
Borrowings as a percent of total assets5.3 % 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.

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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 $402.0 million; and
•Proceeds of $359.6 million from the sale, payments, or maturity of securities;

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. At March 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, the Federal Reserve Board’s lending programs, brokered deposits, as well as loan and investment securities sales. As of March 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. At March 31, 2023, we had $800.0 million in FHLB term borrowings. At March 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. At March 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.


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We believe our level of liquid assets is sufficient to meet current anticipated funding needs. As of March 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. At March 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 ended March 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 ended March 31, 2023, the Bank paid $36.4 million in dividends to the Corporation.

The Corporation maintains a line of credit of $25.0 million with U.S. Bank that will expire on September 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. At March 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. On April 24, 2023, the Company's Board of Directors declared a $0.33 per share dividend, payable on May 15, 2023 to stockholders of record as of May 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.

On January 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 of December 31, 2020 based on the closing price of the Company’s common stock on December 31, 2020. During the three months ended March 31, 2023, the Company did not repurchase any shares of common stock. See Part II, Item 2 - Unregistered Sales of Equity 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.


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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 yearMore than 1 yearTotal
FHLB advances and other borrowings$200,000 $600,000 $800,000 
Subordinated debentures— 331,364 331,364 
Certificates of deposit2,447,884 550,153 2,998,037 
Operating leases19,673 43,727 63,400 
Affordable housing partnerships commitment10,306 4,908 15,214 
Total contractual cash obligations$2,677,863 $1,530,152 $4,208,015 

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 yearMore than 1 yearTotal
Loan commitments to extend credit$1,152,240 $1,215,173 $2,367,413 
Standby letters of credit45,756 — 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. 

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Regulatory Capital Compliance
 
The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the Corporation’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal 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 for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III,” became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Beginning January 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 by January 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. At March 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 at March 31, 2023 compared to the capital ratios at December 31, 2022.

In February 2019, the U.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, in March 2020, the U.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 in September 2020. The Company implemented the CECL model commencing January 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 from January 1, 2022 through December 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.


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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:
ActualMinimum Required for Capital Adequacy Purposes Inclusive of Capital Conservation BufferMinimum Required
For Well Capitalized Requirement
March 31, 2023
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio10.41%4.00%N/A
Common equity tier 1 capital ratio13.54%7.00%N/A
Tier 1 capital ratio13.54%8.50%N/A
Total capital ratio16.33%10.50%N/A
Pacific Premier Bank
Tier 1 leverage ratio11.93%4.00%5.00%
Common equity tier 1 capital ratio15.52%7.00%6.50%
Tier 1 capital ratio15.52%8.50%8.00%
Total capital ratio16.55%10.50%10.00%
December 31, 2022
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio10.29%4.00%N/A
Common equity tier 1 capital ratio12.99%7.00%N/A
Tier 1 capital ratio12.99%8.50%N/A
Total capital ratio15.53%10.50%N/A
Pacific Premier Bank
Tier 1 leverage ratio11.80%4.00%5.00%
Common equity tier 1 capital ratio14.89%7.00%6.50%
Tier 1 capital ratio14.89%8.50%8.00%
Total capital ratio15.74%10.50%10.00%
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Item 3.  Quantitative and Qualitative Disclosure about Market Risk
 
Asset/Liability Management and Market Risk

Market risk is the risk of loss in value or reduced earnings from adverse changes in market prices and interest rates. The Bank’s market risk arises primarily from interest rate risk in our lending and deposit taking activities. Interest rate risk primarily occurs to the degree that the Bank’s interest-bearing liabilities reprice or mature on a different basis and frequency than its interest-earning assets. The Bank actively monitors and manages its portfolios to limit the adverse effects on net interest income and economic value due to changes in interest rates. The Asset Liability Committee is responsible for implementing the Bank’s interest rate risk management policy established by the board of directors that sets forth limits of acceptable changes in net interest income (“NII”) and economic value of equity (“EVE”) due to specified changes in interest rates. Management monitors asset and liability maturities and repricing characteristics on a regular basis and evaluates its interest rate risk as it relates to operational strategies.

Interest Rate Risk Management

The principal objective of the Company’s interest rate risk management function is to maintain an interest rate risk profile close to the desired risk profile in light of the interest rate outlook. The Bank measures the interest rate risk included in the major balance sheet portfolios and compares the current risk profile to the desired risk profile and to policy limits set by the Board of Directors. Management then implements strategies consistent with the desired risk profile. Asset duration is compared to liability, with the desired mix of fixed and floating rate determined based upon the Company’s risk profile and outlook. Likewise, the Bank seeks to raise non-maturity deposits. Management often implements these strategies through pricing actions. Finally, management structures its security portfolio and borrowings to offset some of the interest rate sensitivity created by the repricing characteristics of customer loans and deposits.

Management monitors asset and liability maturities and repricing characteristics on a regular basis and evaluates its interest rate risk as it relates to operational strategies. Management analyzes potential strategies for their impact on the interest rate risk profile. Each quarter the Corporation’s Board of Directors reviews the Bank’s asset/liability position, including simulations showing the impact on the Bank’s EVE in various interest rate scenarios. Interest rate moves, up or down, may subject the Bank to interest rate spread compression, which adversely impacts its net interest income. This is primarily due to the lag in repricing of the indices, to which adjustable rate loans and mortgage-backed securities are tied, as well as their repricing frequencies. Furthermore, large rate moves show the impact of interest rate caps and floors on adjustable rate transactions. This is partly offset by lags in repricing for deposit products. The extent of the interest rate spread compression depends on the direction and severity of interest rate moves and features in the Bank’s product portfolios.

The Company’s interest rate sensitivity is monitored by management through the use of both a simulation model that quantifies the estimated impact to earnings (“Earnings at Risk”) for a twelve- and twenty-four-month period, and a model that estimates the change in the Company’s EVE under alternative interest rate scenarios, primarily instantaneous parallel interest rate shifts in 100 basis point increments. The simulation model estimates the impact on NII from changing interest rates on interest-earning assets and interest expense paid on interest- bearing liabilities. The EVE model computes the net present value of equity by discounting all expected cash flows on assets and liabilities under each rate scenario. For each scenario, the EVE is the present value of all assets less the present value of all liabilities. The EVE ratio is defined as the EVE divided by the market value of assets within the same scenario.


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The following table shows the projected NII and net interest margin of the Company at March 31, 2023 and December 31, 2022, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:
March 31, 2023
(Dollars in thousands)
Earnings at RiskProjected Net Interest Margin
Change in Rates (Basis Points)$ Amount$ Change% ChangeRate %
300769,633 57,132 8.0 3.94 
200753,676 41,175 5.8 3.85 
100735,366 22,865 3.2 3.76 
Static712,501 — — 3.64 
-100674,400 (38,101)(5.3)3.45 
-200628,331 (84,170)(11.8)3.21 
-300576,874 (135,627)(19.0)2.95 
December 31, 2022
(Dollars in thousands)
Earnings at RiskProjected Net Interest Margin
Change in Rates (Basis Points)$ Amount$ Change% ChangeRate %
200787,390 32,342 4.3 4.03 
100772,657 17,609 2.3 3.95 
Static755,048 — — 3.86 
-100727,456 (27,592)(3.7)3.72 
-200681,562 (73,486)(9.7)3.49 

The following table shows the EVE and projected change in the EVE of the Company at March 31, 2023 and December 31, 2022, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:
 
March 31, 2023
(Dollars in thousands)
Economic Value of Equity EVE as % of market value of portfolio assets
Change in Rates (Basis Points)$ Amount$ Change% ChangeEVE Ratio
3003,645,168 44,763 1.2 19.81 
2003,694,042 93,637 2.6 19.46 
1003,679,064 78,659 2.2 18.78 
Static3,600,405 — — 17.79 
-1003,457,934 (142,471)(4.0)16.55 
-2003,243,854 (356,551)(9.9)15.04 
-3002,955,944 (644,461)(17.9)13.27 
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December 31, 2022
(Dollars in thousands)
Economic Value of Equity EVE as % of market value of portfolio assets
Change in Rates (Basis Points)$ Amount$ Change% ChangeEVE Ratio
2003,910,396 9,655 0.2 20.39 
1003,949,678 48,937 1.3 19.95 
Static3,900,741 — — 19.09 
-1003,770,385 (130,356)(3.3)17.88 
-2003,554,253 (346,488)(8.9)16.34 

Based on the modeling of the impact on earnings and EVE from changes in interest rates, the Company’s sensitivity to changes in interest rates is moderate for rising rates, aided by the addition of interest rate swaps for hedging purposes. Both the Earnings at Risk and the EVE increase as rates rise. It is important to note the above tables are forecasts based on several assumptions and that actual results may vary. The forecasts are based on estimates of historical behavior and assumptions by management that may change over time and may turn out to be different. Factors affecting these estimates and assumptions include, but are not limited to (1) competitor behavior, (2) economic conditions both locally and nationally, (3) actions taken by the Federal Reserve Board, (4) customer behavior, and (5) management’s responses to the foregoing. Changes that vary significantly from the assumptions and estimates may have significant effects on the Company’s earnings and EVE.

The Company has minimal direct market risk from foreign exchange and no exposure from commodities.

Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Controls over Financial Reporting
 
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings

The Company is involved in legal proceedings occurring in the ordinary course of business. Management believes that none of the legal proceedings occurring in the ordinary course of business, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.

Item 1A.  Risk Factors
    
The section titled Risk Factors in Part I, Item 1A of our 2022 Form 10-K included a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2022 Form 10-K.

Adverse developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system and could have a material effect on the Company’s operations and/or stock price.

The recent high-profile bank failures of Silicon Valley Bank and Signature Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional banks. These market developments have negatively impacted customer confidence in the safety and soundness of regional banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital, and results of operations. In connection with high-profile bank failures, uncertainty and concern has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional banks and the banking system more broadly. In addition, the banking operating environment and public trading prices of banking institutions can be highly correlated, in particular during times of stress, which could adversely impact the trading prices of our common stock and potentially our results of operations.


95

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
On January 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. The stock repurchase program may be limited or terminated at any time without notice. During the first quarter of 2023, the Company did not repurchase any shares of common stock.

The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the first quarter of 2023.
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2023 to January 31, 2023— $— — 4,245,056 
February 1, 2023 to February 28, 2023— — — 4,245,056 
March 1, 2023 to March 31, 2023— — — 4,245,056 
Total— — 
Item 3.  Defaults Upon Senior Securities
 
None.
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
Item 5.  Other Information
 
None.
 
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Item 6.  Exhibits
Exhibit 2.1
Exhibit 3.1
Exhibit 3.2
Exhibit 4.1
Exhibit 4.2Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the SEC upon request.
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Exhibit 101.SCHInline XBRL Taxonomy Extension Schema Document
Exhibit 101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEFInline XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LABInline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
The cover page of Pacific Premier Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (contained in Exhibit 101)
(1) Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 6, 2020.
(2) Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on May 15, 2018.
(3) Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (Registration No. 333-20497) filed with the SEC on January 27, 1997.
97

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PACIFIC PREMIER BANCORP, INC.,
Date:April 28, 2023By:/s/ Steven R. Gardner
 Steven R. Gardner
  Chairman, Chief Executive Officer, and President
  (Principal Executive Officer)
   
Date:April 28, 2023By:/s/ Ronald J. Nicolas, Jr.
 Ronald J. Nicolas, Jr.
  Senior Executive Vice President and Chief Financial Officer
  (Principal Financial Officer)

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