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Pacific Premier Bancorp
PPBI
#4396
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 Q3

Pacific Premier Bancorp - 10-Q quarterly report FY2023 Q3


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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 September 30, 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 October 20, 2023 was 95,899,972.


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 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)
8
Notes to Consolidated Financial Statements (Unaudited)
9
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
57
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
100
Item 4 - Controls and Procedures
102
103
Item 1 - Legal Proceedings
103
Item 1A - Risk Factors
103
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
103
Item 3 - Defaults Upon Senior Securities
103
Item 4 - Mine Safety Disclosures
103
Item 5 - Other Information
103
Item 6 - Exhibits
104
105
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)
September 30,
2023		December 31,
2022
ASSETS
Cash and due from banks$153,976 $135,207 
Interest-bearing deposits with financial institutions1,246,300 966,042 
Cash and cash equivalents1,400,276 1,101,249 
Interest-bearing time deposits with financial institutions1,242 1,734 
Investments securities held-to-maturity, at amortized cost, net of allowance for credit losses of $128 and $43 (fair value of $1,354,434 and $1,097,096) at September 30, 2023 and December 31, 2022, respectively
1,737,866 1,388,103 
Investment securities available-for-sale, at fair value1,914,599 2,601,013 
FHLB, FRB, and other stock105,505 119,918 
Loans held for sale, at lower of cost or fair value641 2,643 
Loans held for investment13,270,120 14,676,298 
Allowance for credit losses(188,098)(195,651)
Loans held for investment, net13,082,022 14,480,647 
Accrued interest receivable68,131 73,784 
Other real estate owned450 — 
Premises and equipment, net59,396 64,543 
Deferred income taxes, net192,208 183,602 
Bank owned life insurance468,191 460,010 
Intangible assets46,307 55,588 
Goodwill901,312 901,312 
Other assets297,574 253,871 
Total assets$20,275,720 $21,688,017 
LIABILITIES 
Deposit accounts: 
Noninterest-bearing checking$5,782,305 $6,306,825 
Interest-bearing: 
Checking2,598,449 3,119,850 
Money market/savings4,873,582 5,422,607 
Retail certificates of deposit1,525,919 1,086,423 
Wholesale/brokered certificates of deposit1,227,192 1,416,696 
Total interest-bearing10,225,142 11,045,576 
Total deposits16,007,447 17,352,401 
FHLB advances and other borrowings800,000 1,000,000 
Subordinated debentures331,682 331,204 
Accrued expenses and other liabilities281,057 206,023 
Total liabilities17,420,186 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 September 30, 2023 and December 31, 2022; 95,900,847 shares and 95,021,760 shares issued and outstanding, respectively
937 933 
Additional paid-in capital2,371,941 2,362,663 
Retained earnings771,285 700,040 
Accumulated other comprehensive loss(288,629)(265,247)
Total stockholders’ equity2,855,534 2,798,389 
Total liabilities and stockholders’ equity$20,275,720 $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 EndedNine Months Ended
 September 30,September 30,September 30,September 30,
(Dollars in thousands, except share data)
2023202220232022
INTEREST INCOME
Loans$177,032 $174,204 $540,842 $489,263 
Investment securities and other interest-earning assets47,030 24,821 129,951 61,534 
Total interest income224,062 199,025 670,793 550,797 
INTEREST EXPENSE  
Deposits62,718 9,873 156,532 14,228 
FHLB advances and other borrowings7,235 3,480 22,328 7,171 
Subordinated debentures4,561 4,560 13,683 13,682 
Total interest expense74,514 17,913 192,543 35,081 
Net interest income before provision for credit losses149,548 181,112 478,250 515,716 
Provision for credit losses3,918 1,077 8,433 1,994 
Net interest income after provision for credit losses145,630 180,035 469,817 513,722 
NONINTEREST INCOME  
Loan servicing income533 397 1,599 1,318 
Service charges on deposit accounts2,673 2,704 7,972 8,009 
Other service fee income280 323 891 1,056 
Debit card interchange fee income924 808 2,641 2,580 
Earnings on bank owned life insurance3,579 3,339 10,440 9,800 
Net gain from sales of loans45 457 419 3,087 
Net (loss) gain from sales of investment securities
— (393)138 1,710 
Trust custodial account fees9,356 9,951 29,741 31,884 
Escrow and exchange fees938 1,555 2,920 5,043 
Other income223 1,023 3,515 3,764 
Total noninterest income18,551 20,164 60,276 68,251 
NONINTEREST EXPENSE  
Compensation and benefits54,068 56,355 161,785 170,898 
Premises and occupancy11,382 12,011 34,739 35,792 
Data processing7,517 7,058 22,270 19,658 
Other real estate owned operations, net(4)— 112 — 
FDIC insurance premiums2,324 1,461 7,106 4,309 
Legal and professional services4,243 4,075 14,460 12,772 
Marketing expense1,635 1,912 5,352 5,647 
Office expense1,079 1,338 3,591 3,793 
Loan expense476 789 1,689 3,067 
Deposit expense10,811 4,846 28,441 12,678 
Amortization of intangible assets3,055 3,472 9,281 10,543 
Other expense5,599 7,549 15,355 18,331 
Total noninterest expense102,185 100,866 304,181 297,488 
Net income before income taxes61,996 99,333 225,912 284,485 
Income tax expense15,966 25,970 59,684 74,415 
Net income$46,030 $73,363 $166,228 $210,070 
EARNINGS PER SHARE  
Basic$0.48 $0.77 $1.74 $2.22 
Diluted0.48 0.77 1.74 2.21 
WEIGHTED AVERAGE SHARES OUTSTANDING  
Basic94,189,844 93,793,502 94,072,463 93,687,230 
Diluted94,283,008 94,120,637 94,214,846 94,055,116 

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 EndedNine Months Ended
 September 30,September 30,September 30,September 30,
(Dollars in thousands)2023202220232022
Net income$46,030 $73,363 $166,228 $210,070 
Other comprehensive income (loss), net of tax:
Unrealized (loss) gain on securities available-for-sale, net of income taxes (1)
(15,684)(68,070)5,166 (227,135)
Reclassification adjustment for net loss (gain) on sales of securities included in net income, net of income taxes (2)
— 281 (99)(1,222)
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (3)
— — (36,076)(47,884)
Amortization of unrealized loss on securities transferred from available-for-sale to held-to-maturity, net of income taxes (4)
2,522 1,694 7,627 2,990 
Other comprehensive loss, net of tax
(13,162)(66,095)(23,382)(273,251)
Comprehensive income (loss), net of tax$32,868 $7,268 $142,846 $(63,181)
______________________________
(1) Income tax (benefit) expense of the unrealized (loss) gain on securities was $(6.2) million and $(27.2) million for the three months ended September 30, 2023 and 2022, respectively, and $2.0 million and $(90.7) million for the nine months ended September 30, 2023 and 2022, respectively.
(2) Income tax (benefit) expense on the reclassification adjustment for net loss (gain) on sales of securities included in net income was $0 and $(112,000) for the three months ended September 30, 2023 and 2022, respectively, and $39,000 and $488,000 for the nine months ended September 30, 2023 and 2022, respectively.
(3) Income tax (benefit) expense on the unrealized loss on securities transferred from available-for-sale to held-to-maturity was $0 and $0 for the three months ended September 30, 2023 and 2022, respectively, and $(14.3) million and $(19.1) million for the nine months ended September 30, 2023 and 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 $1.0 million and $677,000 for the three months ended September 30, 2023 and 2022, respectively, and $3.0 million and $1.2 million for the nine months ended September 30, 2023 and 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 NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2023
(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— — — 166,228 — 166,228 
Other comprehensive loss— — — — (23,382)(23,382)
Cash dividends declared ($0.99 per common share)
— — — (94,616)— (94,616)
Dividend equivalents declared ($0.99 per restricted stock unit)
— — 367 (367)— — 
Share-based compensation expense— — 14,622 — — 14,622 
Issuance of restricted stock, net1,085,234 4 (4)— — — 
Restricted stock surrendered and canceled(221,617)— (5,953)— — (5,953)
Exercise of stock options15,470 — 246 — — 246 
Balance at September 30, 202395,900,847 $937 $2,371,941 $771,285 $(288,629)$2,855,534 

Balance at June 30, 202395,906,217 $937 $2,366,639 $757,025 $(275,467)$2,849,134 
Net income— — — 46,030 — 46,030 
Other comprehensive loss— — — — (13,162)(13,162)
Cash dividends declared ($0.33 per common share)
— — — (31,647)— (31,647)
Dividend equivalents declared ($0.33 per restricted stock unit)
— — 123 (123)— — 
Share-based compensation expense— — 5,350 — — 5,350 
Issuance of restricted stock, net11,161 — — — — — 
Restricted stock surrendered and canceled(16,531)— (171)— — (171)
Exercise of stock options— — — — — — 
Balance at September 30, 202395,900,847 $937 $2,371,941 $771,285 $(288,629)$2,855,534 

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




6


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2022

(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, 202194,389,543 $929 $2,351,294 $541,950 $(7,862)$2,886,311 
Net income— — — 210,070 — 210,070 
Other comprehensive loss— — — — (273,251)(273,251)
Cash dividends declared ($0.99 per common share)
— — — (93,806)— (93,806)
Dividend equivalents declared ($0.99 per restricted stock unit)
— — 369 (369)— — 
Share-based compensation expense— — 14,171 — — 14,171 
Issuance of restricted stock, net818,229 4 (4)— — — 
Restricted stock surrendered and canceled(234,851)— (8,858)— — (8,858)
Exercise of stock options43,846 — 759 — — 759 
Balance at September 30, 202295,016,767 $933 $2,357,731 $657,845 $(281,113)$2,735,396 

Balance at June 30, 202294,976,605 $933 $2,353,361 $615,943 $(215,018)$2,755,219 
Net income— — — 73,363 — 73,363 
Other comprehensive loss— — — — (66,095)(66,095)
Cash dividends declared ($0.33 per common share)
— — — (31,337)— (31,337)
Dividend equivalents declared ($0.33 per restricted stock unit)
— — 124 (124)— — 
Share-based compensation expense— — 4,336 — — 4,336 
Issuance of restricted stock, net56,452 — — — — — 
Restricted stock surrendered and canceled(22,348)— (184)— — (184)
Exercise of stock options6,058 — 94 — — 94 
Balance at September 30, 202295,016,767 $933 $2,357,731 $657,845 $(281,113)$2,735,396 

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

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine Months Ended
 September 30,September 30,
(Dollars in thousands)20232022
Cash flows from operating activities:  
Net income$166,228 $210,070 
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization expense10,617 11,164 
Provision for credit losses8,433 1,994 
Share-based compensation expense14,622 14,171 
Loss on sales and disposals of premises and equipment131 54 
Net gain on sales of other real estate owned(106)— 
Net amortization on securities11,244 14,127 
Net accretion of discounts/premiums for acquired loans and deferred loan fees/costs(11,573)(22,328)
Net gain on sales of investment securities available-for-sale(138)(1,710)
Net gain on sales of loans(419)(3,087)
Deferred income tax expense677 5,561 
Income from bank owned life insurance, net(8,453)(7,949)
Amortization of intangible assets9,281 10,543 
Origination of loans held for sale(1,370)(57,685)
Proceeds from the sales of and principal payments from loans held for sale2,085 69,478 
Change in accrued expenses and other liabilities, net78,202 6,075 
Change in accrued interest receivable and other assets, net(10,970)82,719 
Net cash provided by operating activities268,491 333,197 
Cash flows from investing activities:  
Net decrease in interest-bearing time deposits with financial institutions492 483 
Proceeds from sales of other real estate owned3,307 — 
Loan originations and payments, net1,330,911 (664,678)
Proceeds from loans held for sale previously classified as loans held for investment84,472 — 
Purchase of loans held for investment— (797)
Purchase of securities held-to-maturity (21,357)— 
Proceeds from prepayments and maturities of securities held-to-maturity35,748 15,570 
Purchase of securities available-for-sale(224,347)(986,997)
Proceeds from prepayments and maturities of securities available-for-sale198,433 248,629 
Proceeds from sales of securities available-for-sale304,320 936,413 
Proceeds from the sales of premises and equipment3 — 
Proceeds from surrender of bank owned life insurance272 — 
Purchase of premises and equipment(5,604)(4,961)
Change in FHLB, FRB, and other stock1,784 (2,321)
Funding of Community Reinvestment Act (“CRA”) investments, net(32,621)(10,910)
Net cash provided by (used in) investing activities1,675,813 (469,569)
Cash flows from financing activities:  
Net (decrease) increase in deposit accounts$(1,344,954)$630,785 
Net change in short-term borrowings(200,000)(358,000)
Proceeds from long-term borrowings— 400,000 
Cash dividends paid(94,616)(93,806)
Proceeds from exercise of stock options246 759 
Restricted stock surrendered and canceled(5,953)(8,858)
Net cash (used in) provided by financing activities(1,645,277)570,880 
Net increase in cash and cash equivalents299,027 434,508 
Cash and cash equivalents, beginning of period1,101,249 304,703 
Cash and cash equivalents, end of period$1,400,276 $739,211 
Supplemental cash flow disclosures:  
Interest paid$177,393 $28,638 
Income taxes paid, net1,610 47,932 
Noncash investing activities during the period:
Transfers from loans held for investment to loans held for sale84,993 — 
Transfers from loans held for sale to loans held for investment2,227 — 
Other real estate owned transferred from loans held for investment7,336 — 
Transfers of investment securities from available-for-sale to held-to-maturity360,347 1,019,472 
Transfers of CRA investment securities from FHLB, FRB, and other stock to other assets12,601 — 
Recognition of operating lease right-of-use assets(4,259)(1,183)
Recognition of operating lease liabilities4,336 1,183 


Accompanying notes are an integral part of these consolidated financial statements.
8

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 nine months ended September 30, 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.


9

Note 2 – Recently Issued Accounting Pronouncements
 
Accounting Standards Adopted in 2023

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) 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 loans by year of origination and loan classification.

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.

10

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.

The use of LIBOR was discontinued after June 30, 2023. In anticipation of this, the Company previously created a cross-functional working group to manage the transition away from LIBOR. This working group was 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 monitored developments related to transition and uncertainty surrounding reference rate reform and guided the Bank’s response. The working group performed regular assessments of the population of financial instruments that referenced LIBOR and worked to transition such instruments away from LIBOR. The working group also worked to confirm the Bank’s loan documents that referenced LIBOR have been appropriately amended, ensuring that our internal systems were prepared for the transition, and managed 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 may also use other alternative reference rates, such as the Constant Maturity Treasury index and Prime rate based on the individual needs of our customers as well as the types of credit being extended.

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 has evaluated the provisions of this Update, and does not anticipate the adoption will have a material impact on the Company’s consolidated financial statements.


11

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 income 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, that is 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 tax equity investments 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.





12

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.

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.

13

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:
September 30, 2023    
U.S. Treasury$14,947 $— $(2,033)$12,914 
Agency457,694 — (52,180)405,514 
Corporate560,873 57 (56,122)504,808 
Collateralized mortgage obligations337,195 — (32,865)304,330 
Mortgage-backed securities840,545 — (153,512)687,033 
Total AFS investment securities$2,211,254 $57 $(296,712)$1,914,599 
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:
September 30, 2023
Municipal bonds$1,146,583 $(128)$1,146,455 $— $(321,595)$824,860 
Collateralized mortgage obligations341,238 — 341,238 1,064 (17,902)324,400 
Mortgage-backed securities233,881 — 233,881 — (44,999)188,882 
Other16,292 — 16,292 — — 16,292 
Total HTM investment securities$1,737,994 $(128)$1,737,866 $1,064 $(384,496)$1,354,434 
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 
The Company reassesses classification of certain investments as part of the ongoing review of the investment securities portfolio. During the first nine months 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. No gains or losses were recorded at the time of transfer.
14

During the first nine months of 2022, the Company transferred an AFS municipal bond portfolio of $831.4 million and mortgage-backed securities of $255.0 million 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. The municipal bonds had a net carrying amount of $780.7 million with a pre-tax unrealized loss of $50.8 million, and the mortgage-backed securities had a net carrying amount of $238.8 million with a pre-tax unrealized loss of $16.2 million, both of which 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 $3.59 billion and $195.6 million as of September 30, 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 nine months of 2023 was primarily due to the additional investment securities with carrying values of $1.66 billion pledged to the Federal Reserve's discount window and $1.73 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, net of tax, are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At September 30, 2023, the Company had a net unrealized loss on AFS investment securities of $296.7 million, or $212.3 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 net after-tax unrealized gains and losses at the date of transfer continue to be reported in stockholders’ equity as accumulated other comprehensive loss and are amortized over the remaining lives of the securities as an adjustment of yield in a manner consistent with the amortization of a premium or discount, with an offsetting entry to interest income for the accretion of the unrealized loss associated with the transferred securities. At September 30, 2023, the unrealized loss on investment securities transferred from AFS to HTM was $106.6 million, or $76.3 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.
 September 30, 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. Treasury— $— $— 1 $12,914 $(2,033)1 $12,914 $(2,033)
Agency— — — 40 405,514 (52,180)40 405,514 (52,180)
Corporate1 16,623 (3,377)51 473,191 (52,745)52 489,814 (56,122)
Collateralized mortgage obligations1 4,786 (61)49 299,544 (32,804)50 304,330 (32,865)
Mortgage-backed securities.— — — 79 687,033 (153,512)79 687,033 (153,512)
Total AFS investment securities2 $21,409 $(3,438)220 $1,878,196 $(293,274)222 $1,899,605 $(296,712)

15

 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 unrealized losses are 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 unrealized losses have been deemed, through the Company’s qualitative assessment, to be credit related. Non-credit related unrealized losses on 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.

The ACL for HTM investment securities is estimated on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Credit losses on HTM investment securities are representative of the amount needed to reduce the amortized cost basis to reflect the net amount expected to be collected.

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.

For additional information concerning allowance for credit losses on investment securities, refer to Note 1 - Description of Business and Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our 2022 Form 10-K.

At September 30, 2023 and December 31, 2022, the Company had an ACL of $128,000 and $43,000, respectively, for HTM investment securities classified as municipal bonds. The following table presents a rollforward by major security type of the ACL on the Company's HTM debt securities as of and for the periods indicated:
Three Months Ended September 30, 2023
(Dollars in thousands)
 Balance,
June 30, 2023
Provision for Credit Losses
Balance,
September 30, 2023
HTM investment securities:
Municipal bonds$113 $15 $128 
16

Three Months Ended September 30, 2022
(Dollars in thousands)
 Balance,
June 30, 2022
Provision for Credit Losses
Balance,
September 30, 2022
HTM investment securities:
Municipal bonds$109 $(18)$91 
Nine Months Ended September 30, 2023
(Dollars in thousands)
 Balance,
December 31, 2022
Provision for Credit Losses
Balance,
September 30, 2023
HTM investment securities:
Municipal bonds$43 $85 $128 
Nine Months Ended September 30, 2022
(Dollars in thousands)
 Balance,
December 31, 2021
Provision for Credit Losses
Balance,
September 30, 2022
HTM investment securities:
Municipal bonds$22 $69 $91 

The Company had no ACL for AFS investment securities at September 30, 2023 and December 31, 2022. The Company performed a qualitative assessment of these investments as of September 30, 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 reduce levels of inflation, and does not believe the declines in fair value were credit related. As of September 30, 2023, the Company had not recorded credit losses on 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 September 30, 2023, 74% of our AFS securities were 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. It is more likely than not that the Company will not be required to sell the securities prior to their anticipated recoveries, and at this time the Company does not intend to sell these securities. There was no provision for credit losses recognized for AFS investment securities during the three and nine months ended September 30, 2023 and 2022.

At September 30, 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 September 30, 2023 and December 31, 2022, there were no securities purchased with deterioration in credit quality since their origination. At September 30, 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 and losses, as well as net realized gains or losses for the periods indicated:
Three Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(Dollars in thousands)2023202220232022
Amortized cost of AFS investment securities sold$— $231,076 $304,182 $934,703 
Gross realized gains$— $— $986 $13,645 
Gross realized (losses)— (393)(848)(11,935)
Net realized (losses) gains on sales of AFS investment securities
$— $(393)$138 $1,710 


17

Contractual Maturities

The amortized cost and estimated fair value of investment securities at September 30, 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$— $— $14,947 $12,914 $— $— $— $— $14,947 $12,914 
Agency80,578 78,561 245,493 224,454 106,631 84,760 24,992 17,739 457,694 405,514 
Corporate13,000 12,974 275,068 270,367 272,805 221,467 — — 560,873 504,808 
Collateralized mortgage obligations— — 57,210 56,349 187,343 162,195 92,642 85,786 337,195 304,330 
Mortgage-backed securities5,596 5,538 — — 483,857 410,229 351,092 271,266 840,545 687,033 
Total AFS investment securities99,174 97,073 592,718 564,084 1,050,636 878,651 468,726 374,791 2,211,254 1,914,599 
HTM investment securities:
Municipal bonds— — 26,176 23,682 37,903 32,366 1,082,504 768,812 1,146,583 824,860 
Collateralized mortgage obligations— — 116 116 — — 341,122 324,284 341,238 324,400 
Mortgage-backed securities— — — — 3,489 3,395 230,392 185,487 233,881 188,882 
Other— — — — — — 16,292 16,292 16,292 16,292 
Total HTM investment securities— — 26,292 23,798 41,392 35,761 1,670,310 1,294,875 1,737,994 1,354,434 
Total investment securities$99,174 $97,073 $619,010 $587,882 $1,092,028 $914,412 $2,139,036 $1,669,666 $3,949,248 $3,269,033 

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.


18

The following table presents the composition of the loan portfolio for the periods indicated:
September 30,December 31,
(Dollars in thousands)20232022
Investor loans secured by real estate
CRE non-owner-occupied$2,514,056 $2,660,321 
Multifamily5,719,210 6,112,026 
Construction and land444,576 399,034 
SBA secured by real estate37,754 42,135 
Total investor loans secured by real estate8,715,596 9,213,516 
Business loans secured by real estate
CRE owner-occupied2,228,802 2,432,163 
Franchise real estate secured313,451 378,057 
SBA secured by real estate53,668 61,368 
Total business loans secured by real estate2,595,921 2,871,588 
Commercial loans
Commercial and industrial1,588,771 2,160,948 
Franchise non-real estate secured335,053 404,791 
SBA non-real estate secured10,667 11,100 
Total commercial loans1,934,491 2,576,839 
Retail loans
Single family residential70,984 72,997 
Consumer1,958 3,284 
Total retail loans72,942 76,281 
Loans held for investment before basis adjustment (1)
13,318,950 14,738,224 
Basis adjustment associated with fair value hedge (2)
(48,830)(61,926)
Loans held for investment13,270,120 14,676,298 
Allowance for credit losses for loans held for investment(188,098)(195,651)
Loans held for investment, net$13,082,022 $14,480,647 
Total unfunded loan commitments$2,110,565 $2,489,203 
Loans held for sale, at lower of cost or fair value641 2,643 
______________________________
(1) Includes net deferred origination costs (fees) of $451,000 and $(1.9) million, and unaccreted fair value net purchase discounts of $46.2 million and $54.8 million as of September 30, 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.
19

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 September 30, 2023 and December 31, 2022, the servicing assets totaled $2.0 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 September 30, 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 September 30, 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 was $406.0 million at September 30, 2023 and $463.4 million at December 31, 2022, respectively. Included in those totals are multifamily loans transferred through securitization with Freddie Mac of $50.8 million and $54.2 million at September 30, 2023 and December 31, 2022, respectively, and SBA participations serviced for others of $272.5 million and $315.3 million at September 30, 2023 and December 31, 2022, respectively.

20

Concentration of Credit Risk
 
As of September 30, 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 $825.8 million for secured loans and $495.5 million for unsecured loans at September 30, 2023. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At September 30, 2023, the Bank’s largest aggregate outstanding balance of loans to one borrower was $169.2 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, and 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.
 
21

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.



22

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 September 30, 2023:
Term Loans by Vintage
(Dollars in thousands)20232022202120202019PriorRevolvingRevolving Converted to Term During the PeriodTotal
September 30, 2023
Investor loans secured by real estate
CRE non-owner-occupied
Pass$67,798 $506,175 $568,747 $194,206 $317,648 $820,980 $— $— $2,475,554 
Special mention— 3,829 2,550 — — 626 — — 7,005 
Substandard— 425 — — — 31,072 — — 31,497 
Multifamily
Pass79,680 1,199,616 2,076,199 733,724 841,189 776,086 — — 5,706,494 
Special mention— — — — — 234 — — 234 
Substandard— — — — 12,482 — — — 12,482 
Construction and land
Pass50,005 270,767 113,473 2,215 4,585 3,531 — — 444,576 
SBA secured by real estate
Pass— 6,500 130 493 4,814 17,406 — — 29,343 
Substandard— — — — 535 7,876 — — 8,411 
Total investor loans secured by real estate197,483 1,987,312 2,761,099 930,638 1,181,253 1,657,811 — — 8,715,596 
Current period gross charge-offs— — 217 — — 2,838 — — 3,055 
Business loans secured by real estate
CRE owner-occupied
Pass16,141 558,149 672,134 228,971 219,389 471,819 919 — 2,167,522 
Special mention— 15,406 — — 4,062 15,343 — — 34,811 
Substandard— 10,270 2,178 4,131 324 9,566 — — 26,469 
Franchise real estate secured
Pass10,650 39,567 126,459 26,929 16,453 74,462 — — 294,520 
Special mention— 7,635 3,793 — 809 1,634 — — 13,871 
Substandard— 943 — — 3,824 293 — — 5,060 
SBA secured by real estate
Pass114 9,375 7,944 2,127 4,124 24,050 — — 47,734 
Special mention— 535 — — — 84 — — 619 
Substandard— — — — — 5,315 — — 5,315 
Total loans secured by business real estate26,905 641,880 812,508 262,158 248,985 602,566 919 — 2,595,921 
Current period gross charge-offs— — 318 191 — 1,861 — — 2,370 
Commercial loans
Commercial and industrial
Pass46,478 188,940 177,244 45,146 115,645 155,222 711,808 5,343 1,445,826 
Special mention— 28,423 12,402 155 27 2,163 58,905 77 102,152 
Substandard— 6,795 2,931 642 179 1,184 11,093 13,000 35,824 
Doubtful
— 4,187 — — — — — 782 4,969 
23

Term Loans by Vintage
(Dollars in thousands)20232022202120202019PriorRevolvingRevolving Converted to Term During the PeriodTotal
September 30, 2023
Franchise non-real estate secured
Pass$6,963 $76,818 $116,268 $16,897 $36,419 $58,279 $— $774 $312,418 
Special mention442 866 1,702 — 651 735 — — 4,396 
Substandard— 2,914 338 2,517 10,875 1,595 — — 18,239 
SBA non-real estate secured
Pass508 4,559 347 116 1,518 2,628 — — 9,676 
Substandard— 538 — 144 55 254 — — 991 
Total commercial loans54,391 314,040 311,232 65,617 165,369 222,060 781,806 19,976 1,934,491 
Current period gross charge-offs56 3,003 62 5 356 37 4,779 503 8,801 
Retail loans
Single family residential
Pass20 — — 170 — 44,607 26,186 — 70,983 
Substandard— — — — — 1 — — 1 
Consumer loans
Pass— — 3 11 7 808 1,129 — 1,958 
Total retail loans20 — 3 181 7 45,416 27,315 — 72,942 
Current period gross charge-offs— — — — — 983 2 — 985 
Loans held for investment before basis adjustment (1)
$278,799 $2,943,232 $3,884,842 $1,258,594 $1,595,614 $2,527,853 $810,040 $19,976 $13,318,950 
Total current period gross charge-offs56 3,003 597 196 356 5,719 4,781 503 15,211 
______________________________
(1) Excludes the basis adjustment of $48.8 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 
Construction and land
Pass187,567 154,231 38,760 9,615 1,843 7,018 — — 399,034 
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Term Loans by Vintage
(Dollars in thousands)20222021202020192018PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2022
SBA secured by real estate
Pass$6,571 $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 
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.


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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
September 30, 2023
Investor loans secured by real estate
CRE non-owner-occupied$2,513,631 $— $— $425 $2,514,056 
Multifamily5,719,210 — — — 5,719,210 
Construction and land444,576 — — — 444,576 
SBA secured by real estate37,002 — 332 420 37,754 
Total investor loans secured by real estate8,714,419 — 332 845 8,715,596 
Business loans secured by real estate
CRE owner-occupied2,224,107 — — 4,695 2,228,802 
Franchise real estate secured313,451 — — — 313,451 
SBA secured by real estate52,495 — — 1,173 53,668 
Total business loans secured by real estate2,590,053 — — 5,868 2,595,921 
Commercial loans
Commercial and industrial1,585,718 2,677 143 233 1,588,771 
Franchise non-real estate secured335,053 — — — 335,053 
SBA not secured by real estate9,840 289 — 538 10,667 
Total commercial loans1,930,611 2,966 143 771 1,934,491 
Retail loans
Single family residential70,984 — — — 70,984 
Consumer loans1,957 1 — — 1,958 
Total retail loans72,941 1 — — 72,942 
Loans held for investment before basis adjustment (1)
$13,308,024 $2,967 $475 $7,484 $13,318,950 

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 $48.8 million and $61.9 million to the carrying amount of certain loans included in fair value hedging relationships as of September 30, 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 September 30, 2023, $25.5 million of loans were individually evaluated with no ACL attributed to such loans. At September 30, 2023, $12.5 million of individually evaluated loans were evaluated based on the underlying value of the collateral and $13.0 million were evaluated using a discounted cash flow approach. All individually evaluated loans were on nonaccrual status at September 30, 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 (“PCD”) 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 PCD loans. The Company had PCD loans of $387.4 million and $422.7 million at September 30, 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.
27

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 $25.5 million at September 30, 2023 and $30.9 million at December 31, 2022. During the three months ended September 30, 2023, we had non-relationship syndicated C&I participation loans to one lending relationship totaling $13.0 million being placed on nonaccrual status that resulted in an interest accrual reversal of $1.7 million against interest income. These loans were modified with a partial charge-off during the three months ended September 30, 2023. Subsequent to the loan modification, all loans were paid current as of September 30, 2023.

The Company did not record income from the receipt of cash payments related to nonaccruing loans during the three and nine months ended September 30, 2023 and 2022. The Company had no loans 90 days or more past due and still accruing at September 30, 2023 and December 31, 2022.

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
September 30, 2023
Investor loans secured by real estate
CRE non-owner-occupied$425 $— $— $— $425 $425 
SBA secured by real estate1,242 — — — 1,242 1,242 
Total investor loans secured by real estate1,667 — — — 1,667 1,667 
Business loans secured by real estate
CRE owner-occupied8,826 — — — 8,826 8,826 
SBA secured by real estate1,173 — — — 1,173 1,173 
Total business loans secured by real estate9,999 — — — 9,999 9,999 
Commercial loans
Commercial and industrial233 — 13,021 — 13,254 13,254 
SBA non-real estate secured538 — — — 538 538 
Total commercial loans771 — 13,021 — 13,792 13,792 
Total nonaccrual loans$12,437 $— $13,021 $— $25,458 $25,458 
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.


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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 September 30, 2023 or December 31, 2022.

Modified Loans to Troubled Borrowers
    
On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures, 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. An 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 an 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 an MLTB is determined through individual evaluation.

During the three months ended September 30, 2023, there were two syndicated C&I participation loan modifications to one borrower experiencing financial difficulty.

The following table shows the amortized cost of the MLTBs 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 periods indicated:
Three and Nine Months Ended
September 30, 2023
Other-than-Insignificant Payment Delay
(Dollars in thousands)Balance
Percent of Total Class of Loans
Commercial loans
Commercial and industrial$13,021 0.82 %
Total commercial loans$13,021 

The following table describes the financial effect of the loan modification made for the borrower experiencing financial difficulty during the three and nine months ended September 30, 2023:
Other-than-Insignificant Payment Delay
Commercial loans
Commercial and industrial
1 year of interest-only payments

During the first quarter of 2023, there was one CRE owner-occupied MLTB with an amortized cost of $851,000 as of March 31, 2023. The loan modification involved extending the term by four months. This MLTB matured and was paid off during the second quarter of 2023.

During the three and nine months ended September 30, 2023, there were no MLTBs that had a payment default and had been modified within the 12 months preceding the payment default (90 days or more past due).

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The following table depicts the performance of the MLTB under ASU 2022-02 as of the date indicated:
Days Past Due
(Dollars in thousands)Current30-5960-8990+Total
September 30, 2023
Commercial loans
Commercial and industrial$13,021 $— $— $— $13,021 
Total commercial loans$13,021 $— $— $— $13,021 
Troubled Debt Restructurings

Prior to the Company’s adoption of ASU 2022-02 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 loan totaling $11.0 million belonging to another borrower relationship with the terms modified for payment deferral. All TDRs were on nonaccrual status as of December 31, 2022. During the three and nine months ended September 30, 2022, the three CRE owner-occupied loans and one C&I loan classified as TDRs were in payment default after modification within the previous 12 months.

30

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
September 30, 2023
Investor loan secured by real estate
CRE non-owner-occupied$— $— $425 $— $— $— $— $— $425 
SBA secured by real estate— — — — 1,242 — — — 1,242 
Total investor loans secured by real estate— — 425 — 1,242 — — — 1,667 
Business loans secured by real estate
CRE owner-occupied4,131 — — 4,695 — — — — 8,826 
SBA secured by real estate— 979 194 — — — — — 1,173 
Total business loans secured by real estate4,131 979 194 4,695 — — — — 9,999 
Commercial loans
Commercial and industrial— — — 233 — — — — 233 
SBA non-real estate secured— — — — — — — 538 538 
Total commercial loans— — — 233 — — — 538 771 
Total collateral dependent loans$4,131 $979 $619 $4,928 $1,242 $— $— $538 $12,437 
December 31, 2022
Investor loan secured by real estate
CRE non-owner-occupied$— $— $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”). The PD and LGD 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 September 30, 2023 includes assumptions concerning the rising interest rate environment, 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 September 30, 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$31,545 $— $51 $(13)$31,583 
Multifamily55,648 — — (427)55,221 
Construction and land7,707 — — 799 8,506 
SBA secured by real estate2,331 (108)— (24)2,199 
Business loans secured by real estate
CRE owner-occupied28,515 — 12 559 29,086 
Franchise real estate secured6,855 — — 711 7,566 
SBA secured by real estate4,511 — 128 (77)4,562 
Commercial loans
Commercial and industrial39,586 (7,386)565 (268)32,497 
Franchise non-real estate secured14,642 — 50 1,087 15,779 
SBA non-real estate secured399 (67)3 137 472 
Retail loans
Single family residential455 — — 36 491 
Consumer loans139 — — (3)136 
Totals$192,333 $(7,561)$809 $2,517 $188,098 


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Nine Months Ended September 30, 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 $(2,657)$66 $482 $31,583 
Multifamily56,334 (290)1 (824)55,221 
Construction and land7,114 — — 1,392 8,506 
SBA secured by real estate2,592 (108)— (285)2,199 
Business loans secured by real estate
CRE owner-occupied32,340 (2,370)36 (920)29,086 
Franchise real estate secured7,019 — — 547 7,566 
SBA secured by real estate4,348 — 208 6 4,562 
Commercial loans
Commercial and industrial35,169 (8,734)945 5,117 32,497 
Franchise non-real estate secured16,029 — 150 (400)15,779 
SBA non-real estate secured441 (67)68 30 472 
Retail loans
Single family residential352 (90)1 228 491 
Consumer loans221 (895)35 775 136 
Totals$195,651 $(15,211)$1,510 $6,148 $188,098 

Three Months Ended September 30, 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$37,221 $(1,128)$— $1,011 $37,104 
Multifamily56,293 — — (207)56,086 
Construction and land5,436 — — 1,004 6,440 
SBA secured by real estate2,865 — — 90 2,955 
Business loans secured by real estate
CRE owner-occupied31,461 — 19 346 31,826 
Franchise real estate secured6,530 — — 180 6,710 
SBA secured by real estate5,149 — — (364)4,785 
Commercial loans
Commercial and industrial37,048 (190)143 (1,503)35,498 
Franchise non-real estate secured13,124 — — 70 13,194 
SBA non-real estate secured452 — 26 (38)440 
Retail loans
Single family residential278 — 58 (40)296 
Consumer loans218 — — (3)215 
Totals$196,075 $(1,318)$246 $546 $195,549 

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Nine Months Ended September 30, 2022
(Dollars in thousands)Beginning ACL BalanceCharge-offsRecoveriesProvision for Credit LossesEnding
ACL Balance
Investor loans secured by real estate
CRE non-owner occupied$37,380 $(1,128)$— $852 $37,104 
Multifamily55,209 — — 877 56,086 
Construction and land5,211 — — 1,229 6,440 
SBA secured by real estate3,201 (70)— (176)2,955 
Business loans secured by real estate
CRE owner-occupied29,575 — 33 2,218 31,826 
Franchise real estate secured7,985 — — (1,275)6,710 
SBA secured by real estate4,866 — — (81)4,785 
Commercial loans
Commercial and industrial38,136 (7,750)2,517 2,595 35,498 
Franchise non-real estate secured15,084 (448)— (1,442)13,194 
SBA non-real estate secured565 (50)44 (119)440 
Retail loans
Single family residential255 — 91 (50)296 
Consumer loans285 (2)— (68)215 
Totals$197,752 $(9,448)$2,685 $4,560 $195,549 
The decrease in the ACL for loans held for investment during the three months ended September 30, 2023 of $4.2 million was reflective of $6.8 million in net charge-offs, partially offset by $2.5 million in provision for credit losses. The provision for credit losses during the three months ended September 30, 2023 was largely attributed to increases associated with economic forecasts, offset by a decrease in the balance of loans held of investment. For the nine months ended September 30, 2023, the ACL decreased $7.6 million. The decline in the ACL during this period was reflective of $13.7 million in net charge-offs, partially offset by $6.1 million in provision for credit losses. The provision for credit losses during the nine months ended September 30, 2023 was largely attributed to increases associated with economic forecasts, as well as changes in asset quality, offset by a decrease in loans held for investment. Charge-offs during the three months ended September 30, 2023 were largely attributed to one C&I lending relationship that already had a specific reserve as well as two syndicated C&I loans to one lending relationship that were modified with a partial charge-off. Charge-offs during the nine months ended September 30, 2023 were largely attributed to two C&I lending relationships, one CRE non-owner-occupied lending relationship, and one CRE owner-occupied lending relationship.

The decrease in the ACL for loans held for investment during the three months ended September 30, 2022 of $526,000 was comprised of $1.1 million in net charge-offs, partially offset by a $546,000 provision for credit losses. The provision for credit losses for the three months ended September 30, 2022 was reflective of a combination of factors, including an increase due to specific reserves on two individually evaluated loans, a decrease due to an overall decline in loans held for investment and changes in the composition of the loan portfolio. The decrease in the ACL for loans held for investment during the nine months ended September 30, 2022 of $2.2 million was attributed to net charge-offs of $6.8 million, partially offset by a $4.6 million provision for credit losses. The provision for credit losses during the nine months ended September 30, 2022 was largely attributed to an increase in loans held for investment and specific reserves on two individually evaluated loans, partially offset by the favorable impact of macroeconomic forecasts. Charge-offs during the three months ended September 30, 2022 were largely attributed to one CRE non-owner-occupied relationship, while charge-offs during the nine months ended September 30, 2022 were attributed to one C&I lending relationship and one CRE non-owner-occupied lending relationship.

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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 $25.8 million at September 30, 2023, representing an increase of $1.4 million from $24.5 million at June 30, 2023, and an increase of approximately $2.2 million from $23.6 million at December 31, 2022. The provision expense for off-balance sheet commitments of $1.4 million during the three months ended September 30, 2023 was attributed, in large part, to changes in economic forecasts, partially offset by a decline in the balance of unfunded commitments. The provision expense during the nine months ended September 30, 2023 was largely attributed to economic forecasts, partially offset by changes in the mix of unfunded commitments between various loan segments, and a decrease in the balance of unfunded commitments.

The Company recorded a provision for credit losses on off-balance sheet commitments of $549,000 during the three months ended September 30, 2022, and a provision recapture for off-balance sheet commitments of $2.6 million during the nine months ended September 30, 2022. The provision for credit losses in the third quarter of 2022 was largely due to higher unfunded commitments in the commercial and industrial loan segment. The provision recapture during the first nine months of 2022 was largely reflective of slightly favorable macroeconomic forecasts reflected in the Company’s ACL model and changes in the mix of unfunded commitments between various loan segments.
The following table summarizes the activities in the ACL for off-balance sheet commitments for the periods indicated:
Three Months EndedNine Months Ended
September 30,September 30,September 30,September 30,
(Dollars in thousands)2023202220232022
Beginning ACL balance$24,455 $24,106 $23,641 $27,290 
Provision for credit losses on off-balance sheet commitments1,386 549 2,200 (2,635)
Ending ACL balance$25,841 $24,655 $25,841 $24,655 


Note 7 – Goodwill and Other Intangible Assets

The Company had goodwill of $901.3 million at September 30, 2023 and December 31, 2022. The Company did not record any adjustments to goodwill during the three and nine months ended September 30, 2023 and September 30, 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 market volatility experienced in the banking sector in 2023, the Company assessed goodwill for impairment at September 30, 2023, by performing a quantitative assessment of goodwill as of September 30, 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 September 30, 2023.

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Other intangible assets with definite lives were $46.3 million at September 30, 2023, consisting of $44.2 million in core deposit intangibles and $2.1 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 EndedNine Months Ended
September 30,September 30,September 30,September 30,
(Dollars in thousands)2023202220232022
Gross amount of intangible assets:
Beginning balance$145,212 $145,212 $145,212 $145,212 
Additions due to acquisitions— — — — 
Ending balance145,212 145,212 145,212 145,212 
Accumulated amortization:
Beginning balance(95,850)(82,712)(89,624)(75,641)
Amortization(3,055)(3,472)(9,281)(10,543)
Ending balance(98,905)(86,184)(98,905)(86,184)
Net intangible assets$46,307 $59,028 $46,307 $59,028 

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 September 30, 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 September 30, 2023.

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Note 8 – Subordinated Debentures

As of September 30, 2023, the Company had three subordinated notes with an aggregate carrying value of $331.7 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 $478,000 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 BalanceSeptember 30, 2023December 31, 2022
Subordinated notes
Subordinated notes due 2024, 5.75% per annum
September 3, 20245.75 %$60,000 $59,880 $59,791 
Subordinated notes due 2029, 4.875% per annum until May 15, 2024, 3-month term SOFR +2.762% thereafter
May 15, 20294.875 %125,000 123,577 123,386 
Subordinated notes due 2030, 5.375% per annum until June 15, 2025, 3-month term SOFR +5.170% thereafter
June 15, 20305.375 %150,000 148,225 148,027 
Total subordinated debentures$335,000 $331,682 $331,204 

Upon the cessation of LIBOR on June 30, 2023, the LIBOR-based benchmark rate after May 15, 2024 for our subordinated notes due 2029 transitioned to 3-month term SOFR as successor base rate plus the relevant spread adjustment.

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 2023 by KBRA.

For additional information on the Company’s subordinated debentures, see “Note 13 — Subordinated Debentures” to the consolidated financial statements in 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)September 30, 2023September 30, 2022
Basic
Net income $46,030 $73,363 
Less: dividends and undistributed earnings allocated to participating securities(823)(917)
Net income allocated to common stockholders$45,207 $72,446 
Weighted average common shares outstanding94,189,844 93,793,502 
Basic earnings per common share$0.48 $0.77 
Diluted
Net income allocated to common stockholders$45,207 $72,446 
Weighted average common shares outstanding94,189,844 93,793,502 
Dilutive effect of share-based compensation93,164 327,135 
Weighted average diluted common shares94,283,008 94,120,637 
Diluted earnings per common share$0.48 $0.77 
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 Nine Months Ended
(Dollars in thousands, except per share data)September 30, 2023September 30, 2022
Basic
Net income $166,228 $210,070 
Less: dividends and undistributed earnings allocated to participating securities(2,674)(2,467)
Net income allocated to common stockholders$163,554 $207,603 
Weighted average common shares outstanding94,072,463 93,687,230 
Basic earnings per common share$1.74 $2.22 
Diluted
Net income allocated to common stockholders$163,554 $207,603 
Weighted average common shares outstanding94,072,463 93,687,230 
Dilutive effect of share-based compensation142,383 367,886 
Weighted average diluted common shares94,214,846 94,055,116 
Diluted earnings per common share$1.74 $2.21 

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. There were no potential common shares that were anti-dilutive for the three months ended September 30, 2023. For the nine months ended September 30, 2023, there were 48,808 weighted average common shares that were anti-dilutive. There were no potential common shares that were anti-dilutive for the three and nine months ended September 30, 2022.

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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 - Financial Instruments, 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 ASC Topic 820 - Fair Value Measurement, 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 - Derivatives and Hedging. 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.

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:
September 30, 2023
 Fair Value Measurement Using Total Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets
AFS investment securities:    
U.S. Treasury$— $12,914 $— $12,914 
Agency— 405,514 — 405,514 
Corporate— 504,808 — 504,808 
Collateralized mortgage obligations— 304,330 — 304,330 
Mortgage-backed securities— 687,033 — 687,033 
Total AFS investment securities$— $1,914,599 $— $1,914,599 
Equity securities$898 $— $— $898 
Derivative assets:
Foreign exchange contracts$22 $— $— $22 
Interest rate swaps (1)
— 8,198 — 8,198 
Equity warrants— — 391 391 
Total derivative assets$22 $8,198 $391 $8,611 
Financial liabilities
Derivative liabilities:
Interest rate swaps$— $15,176 $— $15,176 
Total derivative liabilities$— $15,176 $— $15,176 
______________________________
(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.
45

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 EndedNine Months Ended
September 30,September 30,September 30,September 30,
(Dollars in thousands)2023202220232022
Beginning balance$407 $1,906 $1,894 $1,889 
Change in fair value (1)
(16)5 (41)22 
Net exercise— — (1,462)— 
Ending balance$391 $1,911 $391 $1,911 
______________________________
(1) The changes in fair value are included in other income on the consolidated statement of income.


46

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.
 September 30, 2023
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
Equity warrants$391 Black-Scholes
option pricing
model		Volatility
Risk free interest rate
Marketability discount
35.00%
5.03%
5.50%
35.00%
5.03%
5.50%
35.00%
5.03%
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 at fair value when they are deemed collateral dependent. Fair value on such loans is measured based on the underlying collateral. Collateral generally consists of accounts receivable, inventory, fixed assets, real estate, and cash. The Company measures impairment on all individually evaluated 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 September 30, 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 nine months ended September 30, 2023.     

47

The following table presents our assets measured at fair value on a nonrecurring basis at the dates indicated.
 September 30, 2023
Fair Value Measurement UsingTotal
Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets   
Collateral dependent loans$— $— $419 $419 
Other real estate owned— — 450 450 
Total assets$— $— $869 $869 
 December 31, 2022
Fair Value Measurement UsingTotal
Fair Value
(Dollars in thousands)Level 1Level 2Level 3
Financial assets    
Collateral dependent loans$— $— $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.
 September 30, 2023
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
Investor loans secured by real estate
SBA secured by real estate (1)
$419 Fair value of collateralCost to sell10.00%10.00%10.00%
Total individually evaluated loans419 
Other real estate owned450 Fair value of propertyCost to sell10.00%10.00%10.00%
Total assets$869 
 December 31, 2022
   Range
(Dollars in thousands)Fair ValueValuation Technique(s)Unobservable Input(s)MinMaxWeighted Average
Commercial loans
Commercial and industrial$3,180 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.
48

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 September 30, 2023
(Dollars in thousands)Carrying
Amount		Level 1Level 2Level 3Estimated
Fair Value
Assets     
Cash and cash equivalents$1,400,276 $1,400,276 $— $— $1,400,276 
Interest-bearing time deposits with financial institutions1,242 1,242 — — 1,242 
HTM investment securities1,737,866 — 1,354,434 — 1,354,434 
AFS investment securities1,914,599 — 1,914,599 — 1,914,599 
Equity securities898 898 — — 898 
Loans held for sale641 — 666 — 666 
Loans held for investment, net13,270,120 — — 12,405,677 12,405,677 
Derivative assets (1)
8,611 22 8,198 391 8,611 
Accrued interest receivable68,131 — 68,131 — 68,131 
Liabilities     
Deposit accounts$16,007,447 $— $16,010,816 $— $16,010,816 
FHLB advances800,000 — 786,086 — 786,086 
Subordinated debentures331,682 — 319,637 — 319,637 
Derivative liabilities15,176 — 15,176 — 15,176 
Accrued interest payable29,822 — 29,822 — 29,822 
______________________________
(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.
 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.

49

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 multifamily and 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. During the three months ended September 30, 2023, as part of its interest rate sensitivity management, the Company entered into two $150.0 million in notional amount, $300.0 million in aggregate, of pay-fixed and receive-floating interest rate swaps associated with certain fixed rate loans to replenish interest rate swaps that matured during the current quarter and interest rate swaps that are maturing later in 2023. At September 30, 2023 and December 31, 2022, interest rate swaps with an aggregate notional amount of $1.40 billion and $1.20 billion respectively, 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)September 30, 2023December 31, 2022September 30, 2023December 31, 2022
Loans held for investment (1)
$1,351,170 $1,138,074 $(48,830)$(61,926)
Total$1,351,170 $1,138,074 $(48,830)$(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 September 30, 2023 and December 31, 2022, the amortized cost basis of the closed portfolios used in these hedging relationships was $3.59 billion and $3.35 billion, respectively, the cumulative basis adjustments associated with these hedging relationships was $(48.8) million and $(61.9) million, respectively, and the amounts of the designated hedged items were $1.40 billion and $1.20 billion, respectively.


50

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 statement of financial condition. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s statement of income as a component of noninterest income. Upon the cessation of LIBOR on June 30, 2023, our LIBOR-indexed interest rate swap contracts transitioned to SOFR as successor rate for both valuations and settlements.
    
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.
51

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:
September 30, 2023
Derivative AssetsDerivative Liabilities
(Dollars in thousands)NotionalFair ValueNotionalFair Value
Derivative instruments designated as hedging instruments:
Fair value hedge - interest rate swap contracts$1,400,000 $50,918 $— $— 
Total derivative designated as hedging instruments1,400,000 50,918 — — 
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts2,948 22 — — 
Interest rate swaps contracts107,508 15,019 107,508 15,030 
Equity warrants— 391 — — 
Total derivative not designated as hedging instruments110,456 15,432 107,508 15,030 
Total derivatives$1,510,456 66,350 $107,508 15,030 
Netting adjustments - cleared positions (1)
57,739 146 
Total derivatives in the Statement of Financial Condition$8,611 $15,176 
______________________________
(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 Statement of Financial Condition
$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.

52

The following table presents the effect of fair value hedge accounting on the consolidated statements of income:
Three Months EndedNine Months Ended
(Dollars in thousands)Location of Gain (Loss) Recognized in Income on Derivative InstrumentsSeptember 30, 2023September 30, 2022September 30, 2023September 30, 2022
Gain (loss) on fair value hedging relationships:
Hedged itemsInterest Income$4,300 $(17,037)$13,096 $(62,826)
Derivatives designated as hedging instrumentsInterest Income6,268 21,582 15,578 65,921 

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 EndedNine Months Ended
Derivatives Not Designated as Hedging Instruments:Location of Gain (Loss) Recognized in Income on Derivative InstrumentsSeptember 30, 2023September 30, 2022September 30, 2023September 30, 2022
Foreign exchange contractsOther income$205 $141 $688 $264 
Interest rate productsOther income(9)1 (9)4 
Equity warrantsOther income(16)5 (802)22 
Total$180 $147 $(123)$290 
53

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 Recognized (1)
Gross Amounts Offset in the Consolidated Statements of Financial ConditionNet Amounts Presented in the Consolidated Statements of Financial ConditionGross Amounts Not Offset in the Consolidated
Statements of Financial Condition		Net Amount
(Dollars in thousands)
Financial Instruments (2)
Cash Collateral (3)
September 30, 2023
Derivative assets:
Interest rate swaps$8,198 $— $8,198 $— $(6,730)$1,468 
Total$8,198 $— $8,198 $— $(6,730)$1,468 
Derivative liabilities:
Interest rate swaps$15,176 $— $15,176 $— $— $15,176 
Total$15,176 $— $15,176 $— $— $15,176 
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.

54

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 September 30, 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 September 30, 2023 and December 31, 2022 that relate to variable interests in non-consolidated VIEs.

September 30, 2023December 31, 2022
(Dollars in thousands)Maximum LossAssetsLiabilitiesMaximum LossAssetsLiabilities
Multifamily loan securitization:
Investment securities (1)
$51,055 $51,055 $— $56,784 $56,784 $— 
Reimbursement obligation (2)
50,901 — 334 50,901 — 334 
Affordable housing partnership:
Other investments (3)
56,349 92,267 — 60,531 75,959 — 
Unfunded equity commitments (2)
— — 35,917 — — 15,428 
Total$158,305 $143,322 $36,251 $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.

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 September 30, 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.


55

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 September 30, 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 and other income tax benefits. 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 preceding table summarizes the amount of tax credit investments held as assets, the amount of unfunded commitments recognized as liabilities, and the maximum exposure to loss as of September 30, 2023 and December 31, 2022, respectively.

Note 14 – Subsequent Events

Quarterly Cash Dividend

On October 23, 2023, the Corporation’s Board of Directors declared a cash dividend of $0.33 per share, payable on November 13, 2023 to stockholders of record as of November 3, 2023.

Prepayment of FHLB Advance

On October 6, 2023, in light of a stabilizing deposit base and as part of its balance sheet and liquidity management, the Company deployed excess cash to pay down a $200 million higher cost FHLB term advance. Prior to the redemption, such FHLB term advance carried a fixed interest rate of 4.84% with a maturity date in May 2024. Total payment in aggregate was $199.4 million, including principal and accrued and unpaid interest expense, net of a prepayment credit of $793,000, which was recorded as a net gain on debt extinguishment. Management anticipates the deleverage strategy will positively impact the Company’s cost of funds, net interest margin, and FHLB available borrowing capacity.

56

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD-LOOKING STATEMENTS

All references to “we,” “us,” “our,” “Pacific Premier,” or the “Company” mean Pacific Premier Bancorp, Inc. and our consolidated subsidiaries, including Pacific Premier Bank, our primary operating subsidiary. All references to the “Bank” refer to Pacific Premier Bank. All references to the “Corporation” refer to Pacific Premier Bancorp, Inc.
 
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, particularly in a rising or high interest rate environment, and the quality and composition of our deposits;
•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;
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•The effectiveness of our risk management framework and quantitative models;
•The transition away from USD     London Interbank Offered Rate (“LIBOR”) and related uncertainty, as well as the risks and costs related to our adoption of Secured Overnight Financing Rate (“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 Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”), or other accounting standards setters;
•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, including any special assessments;
•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 and the war in the Middle East, 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 incidents, and related potential costs and risks, including reputation, financial, and litigation risks;
•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 Annual Report on Form 10-K for the year ended December 31, 2022 (the “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.
 

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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.
 
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 and nine months ended September 30, 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 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 September 30, 2023, we primarily conduct business throughout the Western Region of the United States from our 58 full-service depository branches located in California, Washington, Arizona, and Nevada.
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In support of our organic and strategic growth strategy we have developed a variety of banking products and services within our targeted markets in the Western U.S. 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, Small Business Administration (“SBA”) loans, commercial real estate loans, agribusiness loans, quick-service restaurant (“QSR”) franchise lending, home equity lines of credit, and construction loans throughout the Western U.S. in major metropolitan markets within Arizona, California, Nevada, and Washington. We also offer 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. Our specialty products and services offerings 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 been favorable with lower levels of unemployment 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 since March 2022 to tighten monetary policy through a cumulative 525 basis point increase to the federal funds rate as of September 30, 2023, as well as by reducing 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. While increases in interest rates have generally resulted in higher levels of interest income for the banking industry, interest expense also increased due to competition for deposits and higher borrowing costs for liquidity. Higher interest rates may also reduce economic activity overall or result in recessionary conditions in future periods. During the first half of 2023, high-profile bank failures created significant industry-wide market turmoil as well as concerns about the health of the overall banking system. Recent economic data indicates that the pace of inflation has moderated in recent months. However, the inflation rate remains above FOMC’s 2% target. The full extent of these measures, including future actions taken by the FOMC, on the Company’s business are uncertain. 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 impacts 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. Higher interest rates may also lower the rate of return on commercial real estate values that could result in higher charge offs and provision for credit losses.

•Allowance for Credit Losses (“ACL”) - The Company is required to record credit losses on certain financial assets in accordance with the Current Expected Credit Loss (“CECL”) model as 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 or headwinds within the banking industry persist, it could adversely impact the Company’s operating results and/or 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 available-for-sale (“AFS”) investment securities are recognized in stockholders’ equity, net of tax, 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 continue to 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. For additional information, see “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company’s held-to-maturity (“HTM”) investment securities are carried at amortized cost. Rising interest rates would also decrease the fair value of the Company’s HTM investment securities and increase the unrecognized losses embedded in these securities.

•Deposits and deposit costs - Given the expectation in the near-term for interest rates to remain elevated through restrictive monetary policy by the FOMC, it is likely that deposit costs will continue to increase. In connection with high-profile bank failures in the first half of 2023, if 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 realize the unrecognized losses of these securities.

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The Company continues to focus on serving its customers and communities, maintaining the well-being of its employees, and executing its strategic initiatives. The Company continues to monitor the economic environment and industry conditions and will make changes as appropriate.

CRITICAL ACCOUNTING POLICIES
 
Management has established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Certain accounting policies require management to make estimates and assumptions that involve a significant level of estimation uncertainty and are reasonably likely to have a material impact on the carrying value of certain assets and liabilities as well as the Company’s results of operations, 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.
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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 EndedNine Months Ended
September 30,June 30,September 30,September 30,September 30,
(Dollars in thousands)20232023202220232022
Net income$46,030 $57,636 $73,363 $166,228 $210,070 
Plus: amortization of intangible assets expense3,055 3,055 3,472 9,281 10,543 
Less: amortization of intangible assets expense tax adjustment (1)
868 868 991 2,638 3,009 
Net income for average tangible common equity$48,217 $59,823 $75,844 $172,871 $217,604 
Average stockholders’ equity$2,861,965 $2,843,361 $2,775,124 $2,842,718 $2,801,141 
Less: average intangible assets48,150 51,180 61,101 51,191 64,588 
Less: average goodwill901,312 901,312 901,312 901,312 901,312 
Average tangible common equity$1,912,503 $1,890,869 $1,812,711 $1,890,215 $1,835,241 
Return on average equity6.43 %8.11 %10.57 %7.80 %10.00 %
Return on average tangible common equity10.08 %12.66 %16.74 %12.19 %15.81 %
______________________________
(1) Amortization of intangible assets expense adjusted by statutory tax rate.
    
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 stockholders’ equity by shares outstanding. We calculate the tangible common equity ratio by excluding the balance of intangible assets from common stockholders’ equity and dividing by period end tangible assets, which also excludes intangible assets. We believe that this information is important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk-based ratios.

 September 30,December 31,
(Dollars in thousands)20232022
Total stockholders’ equity$2,855,534 $2,798,389 
Less: intangible assets947,619 956,900 
Tangible common equity$1,907,915 $1,841,489 
Total assets$20,275,720 $21,688,017 
Less: intangible assets947,619 956,900 
Tangible assets$19,328,101 $20,731,117 
Tangible common equity ratio9.87 %8.88 %
Common shares issued and outstanding95,900,84795,021,760
Book value per share$29.78 $29.45 
Less: intangible book value per share9.88 10.07 
Tangible book value per share$19.89 $19.38 
    
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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 from sales of investment securities and gain from other real estate owned. 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 EndedNine Months Ended
September 30,June 30,September 30,September 30,September 30,
(Dollars in thousands)20232023202220232022
Total noninterest expense$102,185 $100,644 $100,866 $304,181 $297,488 
Less: amortization of intangible assets3,055 3,055 3,472 9,281 10,543 
Less: other real estate owned operations, net(4)8 — 112 — 
Noninterest expense, adjusted$99,134 $97,581 $97,394 $294,788 $286,945 
Net interest income before provision for credit losses$149,548 $160,092 $181,112 $478,250 $515,716 
Add: total noninterest income18,551 20,539 20,164 60,276 68,251 
Less: net gain (loss) from sales of investment securities— — (393)138 1,710 
Less: net gain from other real estate owned— 106 — 106 — 
Revenue, adjusted$168,099 $180,525 $201,669 $538,282 $582,257 
Efficiency ratio59.0 %54.1 %48.3 %54.8 %49.3 %

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 EndedNine Months Ended
September 30,June 30,September 30,September 30,September 30,
(Dollars in thousands)20232023202220232022
Interest income$224,062 $225,388 $199,025 $670,793 $550,797 
Interest expense74,514 65,296 17,913 192,543 35,081 
Net interest income149,548 160,092 181,112 478,250 515,716 
Noninterest income18,551 20,539 20,164 60,276 68,251 
Revenue168,099 180,631 201,276 538,526 583,967 
Noninterest expense102,185 100,644 100,866 304,181 297,488 
Pre-provision net revenue$65,914 $79,987 $100,410 $234,345 $286,479 
Pre-provision net revenue (annualized)$263,656 $319,948 $401,640 $312,460 $381,972 
Average assets$20,805,787 $21,058,006 $21,687,436 $21,179,669 $21,440,803 
Pre-provision net revenue to average assets0.32 %0.38 %0.46 %1.11 %1.34 %
Pre-provision net revenue to average assets (annualized)
1.27 %1.52 %1.85 %1.48 %1.78 %

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Cost of non-maturity deposits is a non-GAAP financial measure derived from GAAP-based amounts. Cost of non-maturity deposits is calculated as the ratio of non-maturity deposit interest expense to average non-maturity deposits. We calculate non-maturity deposit interest expense by excluding interest expense for all certificates of deposit from total deposit expense, and we calculate average non-maturity deposits by excluding all certificates of deposit from total deposits. Management believes the cost of non-maturity deposits is a useful measure to assess the Company's deposit base, including its potential volatility.

Three Months EndedNine Months Ended
September 30,June 30,September 30,September 30,September 30,
(Dollars in thousands)20232023202220232022
Total deposits interest expense$62,718 $53,580 $9,873 $156,532 $14,228 
Less: certificates of deposit interest expense13,398 10,306 1,420 31,479 2,557 
Less: brokered certificates of deposit interest expense19,174 18,869 3,827 51,099 4,153 
Non-maturity deposit expense$30,146 $24,405 $4,626 $73,954 $7,518 
Total average deposits$16,543,917 $16,876,251 $17,732,822 $16,912,012 $17,590,276 
Less: average certificates of deposit1,439,531 1,286,160 835,645 1,311,737 934,518 
Less: average brokered certificates of deposit1,611,726 1,767,970 702,785 1,608,442 263,563 
Average non-maturity deposits$13,492,660 $13,822,121 $16,194,392 $13,991,833 $16,392,195 
Cost of non-maturity deposits0.89 %0.71 %0.11 %0.71 %0.06 %
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RESULTS OF OPERATIONS

The following table presents the components of results of operations, share data, and performance ratios for the periods indicated:
 Three Months EndedNine Months Ended
(Dollar in thousands, except per share data andSeptember 30,June 30,September 30,September 30,September 30,
percentages)20232023202220232022
Operating data
Interest income$224,062 $225,388 $199,025 $670,793 $550,797 
Interest expense74,514 65,296 17,913 192,543 35,081 
Net interest income149,548 160,092 181,112 478,250 515,716 
Provision for credit losses3,918 1,499 1,077 8,433 1,994 
Net interest income after provision for credit losses145,630 158,593 180,035 469,817 513,722 
Net gain from sales of loans45 345 457 419 3,087 
Other noninterest income18,506 20,194 19,707 59,857 65,164 
Noninterest expense102,185 100,644 100,866 304,181 297,488 
Net income before income taxes61,996 78,488 99,333 225,912 284,485 
Income tax expense15,966 20,852 25,970 59,684 74,415 
Net income$46,030 $57,636 $73,363 $166,228 $210,070 
Pre-provision net revenue
$65,914 $79,987 $100,410 $234,345 $286,479 
Share data
Earnings per share:
Basic$0.48 $0.60 $0.77 $1.74 $2.22 
Diluted0.48 0.60 0.77 1.74 2.21 
Common equity dividends declared per share0.33 0.33 0.33 0.99 0.99 
Dividend payout ratio (1)
68.76 %54.86 %42.72 %56.94 %44.68 %
Book value per share$29.78 $29.71 $28.79 $29.78 $28.79 
Tangible book value per share (2)
19.89 19.79 18.68 19.89 18.68 
Performance ratios
Return on average assets (3)
0.88 %1.09 %1.35 %1.05 %1.31 %
Return on average equity (3)
6.43 8.11 10.57 7.80 10.00 
Return on average tangible common equity (2)(3)
10.08 12.66 16.74 12.19 15.81 
Pre-provision net revenue on average assets (2)(3)
1.27 1.52 1.85 1.48 1.78 
Net interest margin3.12 3.33 3.61 3.30 3.50 
Cost of deposits1.50 1.27 0.22 1.24 0.11 
Average equity to average assets13.76 13.50 12.80 13.42 13.06 
Efficiency ratio (2)
59.0 54.1 48.3 54.8 49.3 
______________________________
(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.


In the third quarter of 2023, we reported net income of $46.0 million, or $0.48 per diluted share. This compares with net income of $57.6 million, or $0.60 per diluted share, for the second quarter of 2023. The decrease in net income was primarily due to a $10.5 million decrease in net interest income, a $2.4 million increase in provision for credit losses, a $2.0 million decrease in noninterest income, and a $1.5 million increase in noninterest expense, partially offset by a $4.9 million decrease in income tax expense.

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Net income of $46.0 million, or $0.48 per diluted share, for the third quarter of 2023 compares to net income for the third quarter of 2022 of $73.4 million, or $0.77 per diluted share. The decrease in net income was primarily due to a $31.6 million decrease in net interest income, a $2.8 million increase in provision for credit losses, a $1.6 million decrease in noninterest income, and a $1.3 million increase in noninterest expense, partially offset by a $10.0 million decrease in income tax expenses.

For the third quarter of 2023, the Company’s return on average assets was 0.88%, return on average equity was 6.43%, and return on average tangible common equity was 10.08%, compared to 1.09%, 8.11%, and 12.66%, respectively, for the second quarter of 2023, and 1.35%, 10.57%, and 16.74%, respectively, for the third 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.

For the nine months ended September 30, 2023, the Company recorded net income of $166.2 million, or $1.74 per diluted share. This compares with net income of $210.1 million, or $2.21 per diluted share, for the nine months ended September 30, 2022. The decrease in net income of $43.8 million was mostly due to a $37.5 million decrease in net interest income, an $8.0 million decrease in noninterest income, a $6.7 million increase in noninterest expense, and a $6.4 million increase in provision for credit losses, partially offset by $14.7 million decrease in income tax expense.

For the nine months ended September 30, 2023, the Company’s return on average assets was 1.05%, return on average equity was 7.80%, and return on average tangible common equity was 12.19%, compared with a return on average assets of 1.31%, return on average equity of 10.00%, and return on average tangible common equity of 15.81% for the nine months ended September 30, 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 $149.5 million in the third quarter of 2023, a decrease of $10.5 million, or 6.6%, from the second quarter of 2023. The decrease in net interest income was primarily attributable to a higher cost of funds as a result of the higher interest rate environment, lower average loans and investment securities balances, and lower loan prepayment fees, partially offset by one more day of interest.

The net interest margin for the third quarter of 2023 decreased 21 basis points to 3.12%, from 3.33% in the prior quarter. The lower net interest margin was due to a higher cost of funds and lower loan prepayment fees, partially offset by higher yields on interest-bearing cash balances due from banks and investment securities.

Net interest income for the third quarter of 2023 decreased $31.6 million, or 17.4%, compared to the third quarter of 2022. The decrease was attributable to a higher cost of funds and lower average loans and investment securities balances, partially offset by higher yields on average interest-earning assets and higher average interest-bearing cash balances due from banks.

For the first nine months ended 2023, net interest income decreased $37.5 million, or 7.3%, compared to the first nine months ended 2022. The decrease was primarily attributable to a higher cost of funds, an increase in average brokered and retail certificates of deposit balances and average borrowings, and lower average loans and investment securities balances, partially offset by higher yields on average interest-earning assets.

67

The following table presents the net interest margin, average balances calculated based on daily average, interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, and the average yield/rate by asset and liability component for the periods indicated:
 Average Balance Sheet
Three Months Ended
September 30, 2023June 30, 2023September 30, 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$1,695,508 $21,196 4.96 %$1,433,137 $16,600 4.65 %$665,510 $2,754 1.64 %
Investment securities3,828,766 25,834 2.70 %3,926,568 25,936 2.64 %4,277,444 22,067 2.06 %
Loans receivable, net (1)(2)
13,475,194 177,032 5.21 %13,927,145 182,852 5.27 %14,986,682 174,204 4.61 %
Total interest-earning assets18,999,468 224,062 4.68 %19,286,850 225,388 4.69 %19,929,636 199,025 3.96 %
Noninterest-earning assets1,806,319 1,771,156 1,757,800 
Total assets$20,805,787 $21,058,006 $21,687,436 
Liabilities and equity
Interest-bearing deposits:
Interest checking$2,649,203 $10,849 1.62 %$2,746,578 $8,659 1.26 %$3,812,448 $1,658 0.17 %
Money market4,512,740 19,182 1.69 %4,644,623 15,644 1.35 %5,053,890 2,940 0.23 %
Savings329,684 115 0.14 %352,377 102 0.12 %434,591 28 0.03 %
Retail certificates of deposit1,439,531 13,398 3.69 %1,286,160 10,306 3.21 %835,645 1,420 0.67 %
Wholesale/brokered certificates of deposit1,611,726 19,174 4.72 %1,767,970 18,869 4.28 %702,785 3,827 2.16 %
Total interest-bearing deposits10,542,884 62,718 2.36 %10,797,708 53,580 1.99 %10,839,359 9,873 0.36 %
FHLB advances and other borrowings800,049 7,235 3.59 %800,016 7,155 3.59 %636,006 3,480 2.17 %
Subordinated debentures331,607 4,561 5.50 %331,449 4,561 5.50 %330,975 4,560 5.51 %
Total borrowings1,131,656 11,796 4.15 %1,131,465 11,716 4.15 %966,981 8,040 3.31 %
Total interest-bearing liabilities11,674,540 74,514 2.53 %11,929,173 65,296 2.20 %11,806,340 17,913 0.60 %
Noninterest-bearing deposits6,001,033 6,078,543 6,893,463 
Other liabilities268,249 206,929 212,509 
Total liabilities17,943,822 18,214,645 18,912,312 
Stockholders’ equity2,861,965 2,843,361 2,775,124 
Total liabilities and equity$20,805,787 $21,058,006 $21,687,436 
Net interest income$149,548 $160,092 $181,112 
Net interest margin (3)
3.12 %3.33 %3.61 %
Cost of deposits (4)
1.50 %1.27 %0.22 %
Cost of funds (5)
1.67 %1.45 %0.38 %
Cost of non-maturity deposits (6)
0.89 %0.71 %0.11 %
Ratio of interest-earning assets to interest-bearing liabilities162.74 %161.68 %168.80 %
______________________________
(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 $2.2 million, $2.9 million, and $4.6 million for the three months ended September 30, 2023, June 30, 2023, and September 30, 2022, 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.
68


Average Balance Sheet
Nine Months Ended
September 30, 2023September 30, 2022
(Dollars in thousands)Average
Balance		InterestAverage
Yield/Cost		Average
Balance		InterestAverage
Yield/Cost
Assets
Interest-earning assets:
Cash and cash equivalents$1,489,404 $51,390 4.61 %$564,727 $4,055 0.96 %
Investment securities3,972,437 78,561 2.64 %4,358,619 57,479 1.76 %
Loans receivable, net (1)(2)
13,929,002 540,842 5.19 %14,756,817 489,263 4.43 %
Total interest-earning assets19,390,843 670,793 4.63 %19,680,163 550,797 3.74 %
Noninterest-earning assets1,788,826 1,760,640 
Total assets$21,179,669 $21,440,803 
Liabilities and equity
Interest-bearing deposits:
Interest checking$2,800,181 $25,350 1.21 %$3,802,932 $2,599 0.09 %
Money market4,714,727 47,879 1.36 %5,208,713 4,838 0.12 %
Savings377,928 725 0.26 %429,833 81 0.03 %
Retail certificates of deposit1,311,737 31,479 3.21 %934,518 2,557 0.37 %
Wholesale/brokered certificates of deposit1,608,442 51,099 4.25 %263,563 4,153 2.11 %
Total interest-bearing deposits10,813,015 156,532 1.94 %10,639,559 14,228 0.18 %
FHLB advances and other borrowings861,940 22,328 3.46 %489,464 7,171 1.96 %
Subordinated debentures331,452 13,683 5.50 %330,801 13,682 5.51 %
Total borrowings1,193,392 36,011 4.03 %820,265 20,853 3.39 %
Total interest-bearing liabilities12,006,407 192,543 2.14 %11,459,824 35,081 0.41 %
Noninterest-bearing deposits6,098,997 6,950,717 
Other liabilities231,547 229,121 
Total liabilities18,336,951 18,639,662 
Stockholders’ equity2,842,718 2,801,141 
Total liabilities and equity$21,179,669 $21,440,803 
Net interest income$478,250 $515,716 
Net interest margin (3)
3.30 %3.50 %
Cost of deposits (4)
1.24 %0.11 %
Cost of funds (5)
1.42 %0.25 %
Cost of non-maturity deposits (6)
0.71 %0.06 %
Ratio of interest-earning assets to interest-bearing liabilities161.50 %171.73 %
_____________________________
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees/costs and discounts/premiums, and the basis adjustment of certain loans included in fair value hedging relationships, where applicable.
(2) Interest income includes net discount accretion of $7.6 million and $18.1 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.
(3) Represents net interest income divided by average interest-earning assets.
(4) Represents annualized interest expense on deposits divided by the sum of average interest-bearing deposits and noninterest-bearing deposits.
(5) Represents annualized total interest expense divided by the sum of average total interest-bearing liabilities and noninterest-bearing deposits.
(6) Reconciliation of the “Non-GAAP measures” presented under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.
69

Changes in our net interest income are a function of changes in volume and rates of interest-earning assets and interest-bearing liabilities. Changes in net interest income that are not a function of changes in volume and rates of interest-earning assets and interest-bearing liabilities are allocated proportionately to the change due to volume and the change due to rate. The following tables present the impact that the volume 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 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 and rate changes allocated proportionately to changes in volume and changes in interest rates.
Three Months Ended September 30, 2023
Compared to
Three Months Ended June 30, 2023
Increase (Decrease) Due to
(Dollars in thousands)VolumeRateNet
Interest-earning assets   
Cash and cash equivalents$3,356 $1,240 $4,596 
Investment securities(653)551 (102)
Loans receivable, net(4,964)(856)(5,820)
Total interest-earning assets(2,261)935 (1,326)
Interest-bearing liabilities   
Interest checking(311)2,501 2,190 
Money market(457)3,995 3,538 
Savings(7)20 13 
Retail certificates of deposit1,374 1,718 3,092 
Wholesale/brokered certificates of deposit(1,669)1,974 305 
FHLB advances and other borrowings4 76 80 
Subordinated debentures(1)1 — 
Total interest-bearing liabilities(1,067)10,285 9,218 
Decrease in net interest income$(1,194)$(9,350)$(10,544)
70

Three Months Ended September 30, 2023
Compared to
Three Months Ended September 30, 2022
Increase (Decrease) Due to
(Dollars in thousands)VolumeRateNet
Interest-earning assets   
Cash and cash equivalents$7,966 $10,476 $18,442 
Investment securities(1,945)5,712 3,767 
Loans receivable, net(18,713)21,541 2,828 
Total interest-earning assets(12,692)37,729 25,037 
Interest-bearing liabilities   
Interest checking(336)9,527 9,191 
Money market(275)16,517 16,242 
Savings(5)92 87 
Retail certificates of deposit1,669 10,309 11,978 
Wholesale/brokered certificates of deposit7,999 7,348 15,347 
FHLB advances and other borrowings1,062 2,693 3,755 
Subordinated debentures9 (8)1 
Total interest-bearing liabilities10,123 46,478 56,601 
(Decrease) Increase in net interest income$(22,815)$(8,749)$(31,564)

Nine Months Ended September 30, 2023
Compared to
Nine Months Ended September 30, 2022
Increase (Decrease) Due to
(Dollars in thousands)VolumeRateNet
Interest-earning assets   
Cash and cash equivalents$14,219 $33,116 $47,335 
Investment securities(4,533)25,615 21,082 
Loans receivable, net(25,141)76,720 51,579 
Total interest-earning assets(15,455)135,451 119,996 
Interest-bearing liabilities
Interest checking(518)23,269 22,751 
Money market(413)43,454 43,041 
Savings(9)653 644 
Retail certificates of deposit1,433 27,489 28,922 
Wholesale/brokered certificates of deposit39,065 7,881 46,946 
FHLB advances and other borrowings7,553 7,604 15,157 
Subordinated debentures27 (26)1 
Total interest-bearing liabilities47,138 110,324 157,462 
Increase (decrease) in net interest income$(62,593)$25,127 $(37,466)
71

Provision for Credit Losses

For the third quarter of 2023, the Company recorded a $3.9 million provision expense for credit losses, compared to a $1.5 million provision expense during the second quarter of 2023, and a $1.1 million provision expense during the third quarter of 2022. The provision expense for loans during the third quarter of 2023 was largely attributed to increases associated with economic forecasts, offset by lower loans held for investment. The provision expense for off-balance sheet commitments was attributable, in large part, to changes in economic forecasts, offset by lower unfunded commitments during the quarter. The provision expense for HTM investment securities was due to the changes in economic forecasts on HTM investment securities classified as municipal bonds during the quarter.

The provision expense for the second quarter of 2023 was largely attributed to increases associated with the impact of economic forecasts on loans and on HTM investment securities classified as municipal bonds, offset by lower loans held for investment and lower unfunded commitments. The provision expense for the third quarter of 2022 was reflective of a combination of factors, including increases due to specific reserves on two individually evaluated loans and higher unfunded commitments in the commercial and industrial (“C&I”) loan segment, partially offset by an overall decrease in loans held for investment and changes in the composition of the loan portfolio.

Three Months EndedVariance From
September 30,June 30,September 30,June 30, 2023September 30, 2022
(Dollars in thousands)202320232022$%$%
Provision for credit losses
Provision for loan losses$2,517 $610 $546 $1,907 312.6 %$1,971 361.0 %
Provision for unfunded commitments1,386 1,003 549 383 38.2 %837 152.5 %
Provision for HTM securities15 (114)(18)129 (113.2)%33 (183.3)%
Total provision for credit losses$3,918 $1,499 $1,077 $2,419 161.4 %$2,841 263.8 %

For the first nine months of 2023, the Company recorded a $8.4 million provision expense for credit losses, compared to a $2.0 million provision expense recorded for the first nine months of 2022. The provision expense for the first nine months of 2023 was driven principally by increases associated with changes in economic forecasts and changes in asset quality, partially offset by lower loans held for investment and lower unfunded commitments. The provision expense for the first nine months of 2022 was driven principally by loan growth and specific reserves on individually evaluated loans, as well as the impact of macroeconomic uncertainties, partially offset by a recapture for unfunded commitments largely due to changes in unfunded lending segment mix.

Nine Months EndedVariance From
September 30,September 30,September 30, 2022
(Dollars in thousands)20232022$%
Provision for credit losses
Provision for loans losses
$6,148 $4,560 $1,588 34.8 %
Provision for unfunded commitments2,200 (2,635)4,835 (183.5)%
Provision for held-to-maturity securities85 $69 $16 23.2 %
Total provision for credit losses$8,433 $1,994 $6,439 322.9 %
72

Noninterest Income

The following table presents the components of noninterest income for the periods indicated:
 Three Months EndedVariance From
 September 30,June 30,September 30,June 30, 2023September 30, 2022
(Dollars in thousands)202320232022$%$%
Noninterest income
Loan servicing income$533 $493 $397 $40 8.1 %$136 34.3 %
Service charges on deposit accounts2,673 2,670 2,704 3 0.1 %(31)(1.1)%
Other service fee income280 315 323 (35)(11.1)%(43)(13.3)%
Debit card interchange fee income924 914 808 10 1.1 %116 14.4 %
Earnings on bank owned life insurance3,579 3,487 3,339 92 2.6 %240 7.2 %
Net gain from sales of loans45 345 457 (300)(87.0)%(412)(90.2)%
Net gain (loss) from sales of investment securities— — (393)— — %393 100.0 %
Trust custodial account fees9,356 9,360 9,951 (4)— %(595)(6.0)%
Escrow and exchange fees938 924 1,555 14 1.5 %(617)(39.7)%
Other income223 2,031 1,023 (1,808)(89.0)%(800)(78.2)%
Total noninterest income$18,551 $20,539 $20,164 $(1,988)(9.7)%$(1,613)(8.0)%
 Nine Months EndedVariance From
 September 30,September 30,September 30, 2022
(Dollars in thousands)20232022$%
Noninterest income
Loan servicing income$1,599 $1,318 $281 21.3 %
Service charges on deposit accounts7,972 8,009 (37)(0.5)%
Other service fee income891 1,056 (165)(15.6)%
Debit card interchange fee income2,641 2,580 61 2.4 %
Earnings on bank owned life insurance10,440 9,800 640 6.5 %
Net gain from sales of loans419 3,087 (2,668)(86.4)%
Net gain from sales of investment securities138 1,710 (1,572)(91.9)%
Trust custodial account fees29,741 31,884 (2,143)(6.7)%
Escrow and exchange fees2,920 5,043 (2,123)(42.1)%
Other income3,515 3,764 (249)(6.6)%
Total noninterest income$60,276 $68,251 $(7,975)(11.7)%

Noninterest income for the third quarter of 2023 was $18.6 million, a decrease of $2.0 million from the second quarter of 2023. The decrease was primarily due to a $1.8 million decrease in other income attributable to decreases in Community Reinvestment Act (“CRA”) investment income and income on other equity investments as well as various sundry fees.

During the third quarter of 2023, the Bank sold $1.2 million of SBA loans for a net gain of $45,000, compared to the sales of $78.0 million of non-relation-based C&I syndicated loans for a net gain of $345,000, and $1.5 million of nonperforming loans for no gain in the second quarter of 2023.

Noninterest income for the third quarter of 2023 decreased $1.6 million, compared to the third quarter of 2022. The decrease was primarily due to an $800,000 decrease in other income primarily due to lower income on CRA and other equity investments, a $617,000 decrease in escrow and exchange fees attributable to lower commercial real estate transaction activity, and a $595,000 decrease in trust custodial account fees resulting primarily from a decrease in custodial accounts.


73

For the first nine months of 2023, noninterest income totaled $60.3 million, a decrease from $68.3 million for the first nine months of 2022. The decrease was primarily related to a $2.7 million decrease in net gain from sales of loans, a $2.1 million decrease in trust custodial account fees resulting primarily from a decrease in custodial accounts, a $2.1 million decrease in escrow and exchange fees attributable to the lower transaction activity in the commercial real estate market, and a $1.6 million decrease in net gain from sales of investment securities.

Noninterest Expense

The following table presents the components of noninterest expense for the periods indicated:
 Three Months EndedVariance From
 September 30,June 30,September 30,June 30, 2023September 30, 2022
(Dollars in thousands)202320232022$%$%
Noninterest expense
Compensation and benefits$54,068 $53,424 $56,355 $644 1.2 %$(2,287)(4.1)%
Premises and occupancy11,382 11,615 12,011 (233)(2.0)%(629)(5.2)%
Data processing7,517 7,488 7,058 29 0.4 %459 6.5 %
Other real estate owned operations, net(4)8 — (12)(150.0)%(4)(100.0)%
FDIC insurance premiums2,324 2,357 1,461 (33)(1.4)%863 59.1 %
Legal and professional services4,243 4,716 4,075 (473)(10.0)%168 4.1 %
Marketing expense1,635 1,879 1,912 (244)(13.0)%(277)(14.5)%
Office expense1,079 1,280 1,338 (201)(15.7)%(259)(19.4)%
Loan expense476 567 789 (91)(16.0)%(313)(39.7)%
Deposit expense10,811 9,194 4,846 1,617 17.6 %5,965 123.1 %
Amortization of intangible assets3,055 3,055 3,472 — — %(417)(12.0)%
Other expense5,599 5,061 7,549 538 10.6 %(1,950)(25.8)%
Total noninterest expense$102,185 $100,644 $100,866 $1,541 1.5 %$1,319 1.3 %

 Nine Months EndedVariance From
 September 30,September 30,September 30, 2022
(Dollars in thousands)20232022$%
Noninterest expense
Compensation and benefits$161,785 $170,898 $(9,113)(5.3)%
Premises and occupancy34,739 35,792 (1,053)(2.9)%
Data processing22,270 19,658 2,612 13.3 %
Other real estate owned operations, net112 — 112 100.0 %
FDIC insurance premiums7,106 4,309 2,797 64.9 %
Legal and professional services14,460 12,772 1,688 13.2 %
Marketing expense5,352 5,647 (295)(5.2)%
Office expense3,591 3,793 (202)(5.3)%
Loan expense1,689 3,067 (1,378)(44.9)%
Deposit expense28,441 12,678 15,763 124.3 %
Amortization of intangible assets9,281 10,543 (1,262)(12.0)%
Other expense15,355 18,331 (2,976)(16.2)%
Total noninterest expense$304,181 $297,488 $6,693 2.2 %

74

Noninterest expense totaled $102.2 million for the third quarter of 2023, an increase of $1.5 million compared to the second quarter of 2023, primarily due to a $1.6 million increase in deposit expense driven by higher deposit earnings credit rates, a $644,000 increase in compensation and benefits from higher payroll taxes and stock compensation, and a $538,000 increase in other expense, primarily due to higher charitable contributions, partially offset by a $473,000 decrease in legal and professional services, a $244,000 decrease in marketing expense, and a $233,000 decrease in premises and occupancy.

Noninterest expense increased by $1.3 million compared to the third quarter of 2022. The increase was primarily due to a $6.0 million increase in deposit expense driven by higher deposit earnings credit rates, partially offset by a $2.3 million decrease in compensation and benefits from reduced staffing levels and a $2.0 million decrease in other expense largely attributable to a client's unauthorized transaction incident in the same quarter last year.

The Company’s efficiency ratio was 59.0% for the third quarter of 2023, compared to 54.1% for the second quarter of 2023, and 48.3% for the third 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.

Noninterest expense totaled $304.2 million for the first nine months of 2023, an increase of $6.7 million, or 2.2%, compared with the first nine months of 2022. The increase was driven primarily by a $15.8 million increase in deposit expense driven by growth in HOA deposits and higher deposit earnings credit rates, a $2.8 million increase in FDIC insurance premiums, a $2.6 million increase in data processing, and a $1.7 million increase in legal and professional services, partially offset by a $9.1 million decrease in compensation and benefits from reduced staffing levels and lower incentives, a $3.0 million decrease in other expense, primarily due to a client's unauthorized transaction incident in the same period last year referenced above, a $1.4 million decrease in loan expense, a $1.3 million decrease in amortization of intangible assets, and a $1.1 million decrease in premises and occupancy.

The Company’s efficiency ratio was 54.8% for the first nine months of 2023, compared to 49.3% for the first nine months 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.

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Income Taxes

For the three months ended September 30, 2023, June 30, 2023, and September 30, 2022, income tax expense was $16.0 million, $20.9 million, and $26.0 million, respectively, and the effective income tax rate was 25.8%, 26.6%, and 26.1%, respectively. For the nine months ended September 30, 2023 and 2022, income tax expense was $59.7 million and $74.4 million, respectively, and the effective income tax rate was 26.4% and 26.2%, respectively. Our effective tax rate for the three and nine months ended September 30, 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, Bank Owned Life Insurance income, tax credits from low-income housing tax credit investments, Section 162(m) limitation on the deduction of executive compensation, 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 September 30, 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 September 30, 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 $168,000 and $89,000 of such interest at September 30, 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 September 30, 2023 and December 31, 2022.

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FINANCIAL CONDITION
 
At September 30, 2023, assets totaled $20.28 billion, a decrease of $1.41 billion, or 6.5%, from $21.69 billion at December 31, 2022. The decrease was primarily due to a $1.41 billion decrease in total loans and a $336.7 million decrease in investment securities, partially offset by a $299.0 million increase in cash and cash equivalents.

Total liabilities were $17.42 billion at September 30, 2023, compared to $18.89 billion at December 31, 2022. The decrease of $1.47 billion, or 7.8%, from December 31, 2022 was primarily due to decreases of $1.34 billion in deposits and $200.0 million in FHLB term advances, partially offset by an increase of $75.0 million in other liabilities.

Total stockholders’ equity was $2.86 billion as of September 30, 2023, a $57.1 million increase from $2.80 billion at December 31, 2022. The increase in stockholders’ equity was primarily due to $166.2 million of net income, partially offset by $94.6 million in cash dividends and $23.4 million of other comprehensive loss.

To address the rising interest rate environment, dislocation in credit, funding, and capital markets, and industry-wide turmoil experienced during the first half of 2023, we took strategic actions to increase loan pricing and continued our commitment to conservative underwriting standards to manage the lower level of new loan demand, increase our deposit pricing to mitigate deposit outflows, further enhance our capital, and bolster our liquidity position by reducing the size of the AFS securities portfolio and adding retail deposits. As a result of our prudent and proactive capital and liquidity management, we were able to reduce FHLB term borrowings during the first quarter of 2023. During the third quarter of 2023, customer deposit flows continued to stabilize and enabled us to reduce brokered deposits while also maintaining ample liquidity levels. During the nine months ended September 30, 2023, we did not utilize either the Federal Reserve's discount window or the Bank Term Funding Program. We continued to prioritize capital accumulation over balance sheet growth in light of the uncertain economic outlook. The strength of our capital position provides us with greater optionality and flexibility in terms of balance sheet management.

Our book value per share increased to $29.78 at September 30, 2023 from $29.45 at December 31, 2022. At September 30, 2023, the Company’s tangible common equity to tangible assets ratio was 9.87%, an increase from 8.88% at December 31, 2022. Our tangible book value per share was $19.89, compared to $19.38 at December 31, 2022. The increases in tangible common equity ratio and tangible book value per share at September 30, 2023 from the prior year-end were primarily driven by net income, partially offset by dividends paid and the increase in other comprehensive loss from the impact of higher interest rates on our AFS securities portfolio. 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.

Loans

Loans held for investment totaled $13.27 billion at September 30, 2023, a decrease of $1.41 billion, or 9.6%, 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, partially offset by lower loan maturities and prepayments during the first nine months of 2023. The commercial line average utilization rate decreased from an average rate of 39.6% for the fourth quarter of 2022 to 36.2% for the third quarter of 2023. Since December 31, 2022, commercial loans decreased $642.3 million, investor loans secured by real estate decreased $497.9 million, business loans secured by real estate decreased $275.7 million, and retail loans decreased $3.3 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 in order to manage our balance sheet and capital position, as well as prudent credit underwriting standards to manage the lower level of new loan demand.

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The total end-of-period weighted average interest rate on loans, excluding fees and discounts, at September 30, 2023 was 4.76%, 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 $641,000 at September 30, 2023, a decrease of $2.0 million from $2.6 million at December 31, 2022.

The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio, and gives the weighted average interest rate by loan category at the dates indicated: 
 September 30, 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$2,514,056 18.9 %4.69 %$2,660,321 18.1 %4.51 %
Multifamily5,719,210 43.1 %3.93 %6,112,026 41.6 %3.86 %
Construction and land444,576 3.4 %9.11 %399,034 2.7 %8.24 %
SBA secured by real estate37,754 0.3 %9.19 %42,135 0.3 %7.61 %
Total investor loans secured by real estate8,715,596 65.7 %4.44 %9,213,516 62.7 %4.25 %
Business loans secured by real estate
CRE owner-occupied2,228,802 16.8 %4.32 %2,432,163 16.6 %4.22 %
Franchise real estate secured313,451 2.4 %4.73 %378,057 2.6 %4.75 %
SBA secured by real estate53,668 0.4 %8.85 %61,368 0.4 %7.45 %
Total business loans secured by real estate2,595,921 19.6 %4.46 %2,871,588 19.6 %4.36 %
Commercial loans
Commercial and industrial1,588,771 12.0 %6.84 %2,160,948 14.7 %6.32 %
Franchise non-real estate secured335,053 2.5 %4.97 %404,791 2.8 %4.91 %
SBA non-real estate secured10,667 0.1 %9.67 %11,100 0.1 %7.83 %
Total commercial loans1,934,491 14.6 %6.53 %2,576,839 17.6 %6.11 %
Retail loans
Single family residential70,984 0.5 %6.79 %72,997 0.5 %5.51 %
Consumer1,958 — %6.62 %3,284 — %6.29 %
Total retail loans72,942 0.5 %6.79 %76,281 0.5 %5.53 %
Loans held for investment before basis adjustment (1)
13,318,950 100.4 %4.76 %14,738,224 100.4 %4.61 %
Basis adjustment associated with fair value hedge (2)
(48,830)(0.4)%(61,926)(0.4)%
Loans held for investment13,270,120 100.0 %14,676,298 100.0 %
Allowance for credit losses for loans held for investment(188,098)(195,651)
Loans held for investment, net$13,082,022 $14,480,647 
Total unfunded loan commitments$2,110,565 $2,489,203 
Loans held for sale, at lower of cost or fair value641 2,643 
______________________________
(1) Includes net deferred origination costs (fees) of $451,000 and $(1.9) million, and unaccreted fair value net purchase discounts of $46.2 million and $54.8 million as of September 30, 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 to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q 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 September 30, 2023, loans delinquent 30 or more days as a percentage of total loans held for investment was 0.08%, compared to 0.30% at December 31, 2022. The decrease in delinquent loans during the nine months ended September 30, 2023 was primarily due to decreases in loans that are 30-59 days past due and 90 days or more past due largely from loans returning to current status, payoffs, and charge-offs.

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
Loan Balance
# of
Loans
Loan Balance
# of
Loans
Loan Balance
# of
Loans
Loan Balance
At September 30, 2023        
Investor loans secured by real estate        
CRE non-owner-occupied— $— — $— 1 $425 1 $425 
SBA secured by real estate— — 1 332 1 420 2 752 
Total investor loans secured by real estate— — 1 332 2 845 3 1,177 
Business loans secured by real estate
CRE owner-occupied— — — — 3 4,695 3 4,695 
SBA secured by real estate— — — — 2 1,173 2 1,173 
Total business loans secured by real estate— — — — 5 5,868 5 5,868 
Commercial loans
Commercial and industrial10 2,677 7 143 1 233 18 3,053 
SBA non-real estate secured2 289 — — 1 538 3 827 
Total commercial loans12 2,966 7 143 2 771 21 3,880 
Retail loans
Consumer1 1 — — — — 1 1 
Total retail loans1 1 — — — — 1 1 
Total13 $2,967 8 $475 9 $7,484 30 $10,926 
Delinquent loans to loans held for investment 0.02 % — % 0.06 %0.08 %

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 30 - 59 Days60 - 89 Days90 Days or MoreTotal
(Dollars in thousands)# of
Loans
Loan Balance
# of
Loans
Loan Balance
# of
Loans
Loan Balance
# of
Loans
Loan Balance
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 %
    
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 (“MLTB”). An 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 to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q for additional discussion on MLTBs.


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As of September 30, 2023, the Company had two syndicated C&I participation loan modifications to one borrower experiencing financial difficulty totaling $13.0 million, the modification of which involved other-than-insignificant payment delays. During the three and nine months ended September 30, 2023, there were no MLTBs that had a payment default and had been modified within the 12 months preceding the payment default.

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 troubled debt restructurings (“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 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 commercial real estate (“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. All TDRs were on nonaccrual status as of December 31, 2022. During the three and nine months ended September 30, 2022, the three CRE owner-occupied loans and one C&I loan classified as TDRs were in payment default after modification within the previous 12 months.

Credit Quality

We separate our loans by type, and we segregate the loans into various risk grade categories of “Pass,” “Special Mention,” “Substandard,” “Doubtful,” or “Loss.” Classified loans consists of those with a credit risk rating of substandard, doubtful, or loss. For additional information on the Company’s credit quality and credit risk grades, see Note 5 – Loans Held for Investment to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q.

Classified loans totaled $149.3 million, or 1.12% of loans held for investment, at September 30, 2023, compared with $149.3 million, or 1.02% of loans held for investment, at December 31, 2022. As of September 30, 2023, we had non-relationship syndicated C&I participation loans to one lending relationship totaling $13.0 million being placed on nonaccrual status, consisting of two loans amounting to $8.0 million classified as substandard and two loans amounting to $5.0 million classified as doubtful. These loans were modified as MLTBs during the three months ended September 30, 2023. Subsequent to the loan modification, all loans were paid current as of September 30, 2023.
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The following tables stratify the loan portfolio by the Company’s internal risk grading as of the dates indicated:
Credit Risk Grades
(Dollars in thousands)PassSpecial
Mention		SubstandardDoubtfulTotal Gross
Loans
September 30, 2023
Investor loans secured by real estate    
CRE non-owner-occupied$2,475,554 $7,005 $31,497 $— $2,514,056 
Multifamily5,706,494 234 12,482 — 5,719,210 
Construction and land444,576 — — — 444,576 
SBA secured by real estate29,343 — 8,411 — 37,754 
Total investor loans secured by real estate8,655,967 7,239 52,390 — 8,715,596 
Business loans secured by real estate
CRE owner-occupied2,167,522 34,811 26,469 — 2,228,802 
Franchise real estate secured294,520 13,871 5,060 — 313,451 
SBA secured by real estate47,734 619 5,315 — 53,668 
Total business loans secured by real estate2,509,776 49,301 36,844 — 2,595,921 
Commercial loans
Commercial and industrial1,445,826 102,152 35,824 4,969 1,588,771 
Franchise non-real estate secured312,418 4,396 18,239 — 335,053 
SBA non-real estate secured9,676 — 991 — 10,667 
Total commercial loans1,767,920 106,548 55,054 4,969 1,934,491 
Retail loans
Single family residential70,983 — 1 — 70,984 
Consumer loans1,958 — — — 1,958 
Total retail loans72,941 — 1 — 72,942 
Loans held for investment before basis adjustment (1)
$13,006,604 $163,088 $144,289 $4,969 $13,318,950 
December 31, 2022
Investor loans secured by real estate    
CRE non-owner-occupied$2,647,607 $7,487 $5,227 $— $2,660,321 
Multifamily6,089,836 12,667 9,523 — 6,112,026 
Construction and land399,034 — — — 399,034 
SBA secured by real estate33,161 — 8,974 — 42,135 
Total investor loans secured by real estate9,169,638 20,154 23,724 — 9,213,516 
Business loans secured by real estate
CRE owner-occupied2,363,719 2,351 66,093 — 2,432,163 
Franchise real estate secured352,645 18,036 7,376 — 378,057 
SBA secured by real estate55,865 118 5,385 — 61,368 
Total business loans secured by real estate2,772,229 20,505 78,854 — 2,871,588 
Commercial loans
Commercial and industrial2,093,726 31,273 35,949 — 2,160,948 
Franchise non-real estate secured368,013 27,583 9,195 — 404,791 
SBA non-real estate secured9,550 — 1,550 — 11,100 
Total commercial loans2,471,289 58,856 46,694 — 2,576,839 
Retail loans
Single family residential72,992 — 5 — 72,997 
Consumer loans3,257 — 27 — 3,284 
Total retail loans76,249 — 32 — 76,281 
Loans held for investment before basis adjustment (1)
$14,489,405 $99,515 $149,304 $— $14,738,224 
______________________________
(1) Excludes the basis adjustment of $48.8 million and $61.9 million to the carrying amount of certain loans included in fair value hedging relationships at September 30, 2023 and December 31, 2022. Refer to Note 11 – Derivative Instruments to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.


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Nonperforming Assets
 
Nonperforming assets consist of loans whereby we have ceased accruing interest (i.e., nonaccrual loans), other real estate owned (“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 decreased by $5.0 million to $25.9 million, or 0.13% of total assets, at September 30, 2023, compared to $30.9 million, or 0.14% of total assets, at December 31, 2022. At September 30, 2023, nonperforming assets consisted of nonperforming loans of $25.5 million and OREO of $450,000. At December 31, 2022, all nonperforming assets consisted of nonperforming loans.

At September 30, 2023, nonperforming loans totaled $25.5 million, or 0.19% of loans held for investment, a decrease from $30.9 million, or 0.21% of loans held for investment, at December 31, 2022.

OREO was $450,000 at September 30, 2023, compared to no OREO at December 31, 2022.

The Company had no loans 90 days or more past due and still accruing at September 30, 2023 and December 31, 2022.

The following table sets forth the composition of nonperforming assets at the dates indicated:
(Dollars in thousands)September 30, 2023December 31, 2022
Nonperforming assets
Investor loans secured by real estate
CRE non-owner-occupied$425 $4,429 
Multifamily— 8,780 
SBA secured by real estate1,242 533 
Total investor loans secured by real estate1,667 13,742 
Business loans secured by real estate
CRE owner-occupied8,826 11,475 
SBA secured by real estate1,173 1,191 
Total business loans secured by real estate9,999 12,666 
Commercial loans
Commercial and industrial13,254 3,908 
SBA non-real estate secured538 589 
Total commercial loans13,792 4,497 
Total nonperforming loans25,458 30,905 
Other real estate owned450 — 
Total$25,908 $30,905 
Allowance for credit losses$188,098 $195,651 
Allowance for credit losses as a percent of total nonperforming loans739 %633 %
Nonperforming loans as a percent of loans held for investment0.19 %0.21 %
Nonperforming assets as a percent of total assets0.13 %0.14 %
MLTBs/TDRs included in nonperforming loans
$13,021$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 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”). 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 September 30, 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 September 30, 2023 is consistent with the approach used in the Company’s ACL model at June 30, 2023. The Company’s ACL model at September 30, 2023 includes assumptions concerning the rising interest rate environment, 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 the factors attributing to the changes in the ACL on loans held for investment for the three and nine months ended September 30, 2023 and September 30, 2022:
Attribution_QTD Q3 2023 v3.jpg Attribution_QTD Q3 2022 v3.jpg

Attribution_YTD Q3 2023 v3.jpg Attribution_YTD Q3 2022 v3.jpg
______________________________
(1) Certain factors attributing to the changes in the ACL for 2022 have been reclassified to conform to the 2023 presentation
85

At September 30, 2023, the ACL on loans was $188.1 million, a decrease of $4.2 million from $192.3 million at June 30, 2023. The decrease in the ACL for loans held for investment during the three months ended September 30, 2023 can be attributed to net charge-offs of $6.8 million, partially offset by $2.5 million in provision for credit losses. Charge-offs during the three months ended September 30, 2023 are largely attributed to one C&I lending relationship that already had a specific reserve as well as two syndicated C&I loans to one lending relationship that were modified with a partial charge-off. The ACL on loans held for investment decreased $7.6 million from $195.7 million at December 31, 2022. The decrease in the ACL for loans held for investment during the nine months ended September 30, 2023 can be attributed to net charge-offs of $13.7 million, partially offset by $6.1 million in provision for credit losses. Charge-offs during the nine months ended September 30, 2023 are largely attributed to two C&I lending relationships, one CRE non-owner-occupied lending relationship, and one CRE owner-occupied lending relationship.

The decrease in the ACL for loans held for investment during the three months ended September 30, 2022 of $526,000 was attributed to net charge-offs of $1.1 million, partially offset by $546,000 in provision for credit losses. The decrease in the ACL for loans held for investment during the nine months ended September 30, 2022 of $2.2 million was attributed to net charge-offs of $6.8 million, partially offset by a $4.6 million provision for credit losses. Charge-offs during the three months ended September 30, 2022 were largely attributed to one CRE non-owner-occupied relationship, while charge-offs during the nine months ended September 30, 2022 were attributed to one C&I lending relationship and one CRE non-owner-occupied lending relationship.

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 $25.8 million at September 30, 2023, representing an increase of $1.4 million from $24.5 million at June 30, 2023, and an increase of approximately $2.2 million from $23.6 million at December 31, 2022. The provision expense for off-balance sheet commitments of $1.4 million during the three months ended September 30, 2023 was attributed, in large part, to changes in economic forecasts, partially offset by a decline in the balance of unfunded commitments. The provision expense during the nine months ended September 30, 2023 was largely attributed to economic forecasts, partially offset by changes in the mix of unfunded commitments between various loan segments, and a decrease in the balance of unfunded commitments.

The Company recorded a provision for credit losses on off-balance sheet commitments of $549,000 during the three months ended September 30, 2022, and a provision recapture for off-balance sheet commitments of $2.6 million during the nine months ended September 30, 2022. The provision for credit losses in the third quarter of 2022 was largely due to higher unfunded commitments in the C&I loan segment. The provision recapture during the first nine months of 2022 was largely reflective of slightly favorable macroeconomic forecasts reflected in the Company’s ACL model and changes in the mix of unfunded commitments between various loan segments.

For additional information on the provision for credit losses and ACL on loans and ACL for off-balance sheet commitments related to unfunded loans and lines of credit, refer to “Provision for Credit Losses” presented under Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 6 – Allowance for Credit Losses to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q.

At September 30, 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.
86


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:
 September 30, 2023December 31, 2022
(Dollars in thousands)Amount
Allowance as a % of Segment
% of
Total Loans
Amount
Allowance as a % of Segment
% of
Total Loans
Investor loans secured by real estate      
CRE non-owner-occupied$31,583 1.26 %18.9 %$33,692 1.27 %18.1 %
Multifamily55,221 0.97 %43.1 %56,334 0.92 %41.6 %
Construction and land8,506 1.91 %3.4 %7,114 1.78 %2.7 %
SBA secured by real estate2,199 5.82 %0.3 %2,592 6.15 %0.3 %
Total investor loans secured by real estate97,509 1.12 %65.7 %99,732 1.08 %62.7 %
Business loans secured by real estate
CRE owner-occupied29,086 1.31 %16.8 %32,340 1.33 %16.6 %
Franchise real estate secured7,566 2.41 %2.4 %7,019 1.86 %2.6 %
SBA secured by real estate4,562 8.50 %0.4 %4,348 7.09 %0.4 %
Total business loans secured by real estate41,214 1.59 %19.6 %43,707 1.52 %19.6 %
Commercial loans
Commercial and industrial32,497 2.05 %12.0 %35,169 1.63 %14.7 %
Franchise non-real estate secured15,779 4.71 %2.5 %16,029 3.96 %2.8 %
SBA non-real estate secured472 4.42 %0.1 %441 3.97 %0.1 %
Total commercial loans48,748 2.52 %14.6 %51,639 2.00 %17.6 %
Retail loans
Single family residential491 0.69 %0.5 %352 0.48 %0.5 %
Consumer loans136 6.95 %— %221 6.73 %— %
Total retail loans627 0.86 %0.5 %573 0.75 %0.5 %
Total (1)
$188,098 1.42 %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 $48.8 million and $61.9 million as of September 30, 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 to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.

At September 30, 2023, the ratio of ACL to loans held for investment was 1.42%, an increase from 1.33% at December 31, 2022. Our unamortized fair value discount on the loans acquired totaled $46.2 million, or 0.35% of total loans held for investment, at September 30, 2023, compared to $54.8 million, or 0.37% of total loans held for investment, at December 31, 2022.


87

The following table sets forth the Company’s net charge-offs as a percentage to the average loans 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
September 30, 2023June 30, 2023September 30, 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)$2,547,595 —%$2,591 $2,611,462 0.10%$1,128 $2,767,511 0.04%
Multifamily— 5,751,877 —%72 5,845,595 —%— 6,201,458 —%
Construction and land— 424,498 —%— 429,916 —%— 359,352 —%
SBA secured by real estate108 38,473 0.28%— 39,212 —%— 43,336 —%
Total investor loans secured by real estate57 8,762,443 —%2,663 8,926,185 0.03%1,128 9,371,657 0.01%
Business loans secured by real estate
CRE owner-occupied(12)2,247,742 —%195 2,312,704 0.01%(19)2,491,146 —%
Franchise real estate secured— 314,310 —%— 343,306 —%— 383,124 —%
SBA secured by real estate(128)55,115 (0.23)%(80)59,033 (0.14)%— 69,205 —%
Total business loans secured by real estate(140)2,617,167 (0.01)%115 2,715,043 —%(19)2,943,475 —%
Commercial loans
Commercial and industrial6,821 1,720,368 0.40%56 1,873,094 —%47 2,222,550 —%
Franchise non-real estate secured(50)341,418 (0.01)%— 376,106 —%— 407,141 —%
SBA non-real estate secured64 11,841 0.54%(59)11,086 (0.53)%(26)12,718 (0.20)%
Total commercial loans6,835 2,073,627 0.33%(3)2,260,286 —%21 2,642,409 —%
Retail loans
Single family residential— 70,679 —%— 70,889 —%(58)75,888 (0.08)%
Consumer— 2,123 —%890 3,121 28.52%— 3,844 —%
Total retail loans— 72,802 —%890 74,010 1.20%(58)79,732 (0.07)%
Total (1)
$6,752 $13,475,128 0.05%$3,665 $13,926,258 0.03%$1,072 $14,986,332 0.01%
Allowance for credit losses to loans held for investment1.42%1.41%1.31%
Nonperforming loans to loans held for investment0.19%0.12%0.41%
Allowance for credit losses to nonperforming loans739%1148%323%
______________________________
(1) Average loan balance includes $50.9 million, $49.3 million, and $50.9 million of average basis adjustment of certain loans included in fair value hedging relationships for the three months ended September 30, 2023, June 30, 2023, and September 30, 2022, respectively. Refer to Note 11 – Derivative Instruments to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.




88

For the Nine Months Ended
September 30, 2023September 30, 2022
(Dollars in thousands)Net Charge-offs (Recoveries)Average Loan BalancePercentageNet Charge-offs (Recoveries)Average Loan BalancePercentage
Investor loans secured by real estate
CRE non-owner-occupied$2,591 $2,593,463 0.10%$1,128 $2,767,770 0.04%
Multifamily289 5,877,859 —%— 6,083,095 —%
Construction and land— 425,005 —%— 321,860 —%
SBA secured by real estate108 39,560 0.27%70 45,733 0.15%
Total investor loans secured by real estate2,988 8,935,887 0.03%1,198 9,218,458 0.01%
Business loans secured by real estate
CRE owner-occupied2,334 2,310,584 0.10%(33)2,399,142 —%
Franchise real estate secured— 344,588 —%— 383,570 —%
SBA secured by real estate(208)58,506 (0.36)%— 71,863 —%
Total business loans secured by real estate2,126 2,713,678 0.08%(33)2,854,575 —%
Commercial loans
Commercial and industrial7,789 1,876,199 0.42%5,233 2,222,749 0.24%
Franchise non-real estate secured(150)370,829 (0.04)%448 400,780 0.11%
SBA non-real estate secured(1)11,580 (0.01)%6 12,578 0.05%
Total commercial loans7,638 2,258,608 0.34%5,687 2,636,107 0.22%
Retail loans
Single family residential89 71,183 0.13%(91)79,683 (0.11)%
Consumer860 2,829 30.40%2 4,399 0.05%
Total retail loans949 74,012 1.28%(89)84,082 (0.11)%
Total (1)
$13,701 $13,928,641 0.10%$6,763 $14,756,427 0.05%
Allowance for credit losses to loans held for investment1.42%1.31%
Nonperforming loans to loans held for investment0.19%0.41%
Allowance for credit losses to nonperforming loans739%323%
______________________________
(1) Average loan balance includes $53.5 million and $36.8 million of average basis adjustment of certain loans included in fair value hedging relationships for the nine months ended September 30, 2023 and September 30, 2022, respectively. Refer to Note 11 – Derivative Instruments to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.
89

Investment Securities
 
We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled $3.65 billion at September 30, 2023, a decrease of $336.7 million, or 8.4%, 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 $285.2 million in principal payments, fair value discounts from the AFS securities transferred to HTM, amortizations, and redemptions, partially offset by $245.7 million in purchases, and an AFS securities mark-to-market unrealized loss reduction of $7.1 million. In general, the purchase of investment securities is primarily related to investing excess liquidity from our banking operations. During the first nine months 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 AFS securities portfolio was 3.3 years at September 30, 2023 and 3.1 years at December 31, 2022.

At September 30, 2023, AFS and HTM investment securities were $1.91 billion and $1.74 billion, respectively, compared to $2.60 billion and $1.39 billion, respectively, at December 31, 2022. AFS securities are carried at fair value with unrealized gains or losses on these securities recognized in stockholders’ equity as accumulated other comprehensive income or loss. HTM securities are carried at amortized cost.

During the first nine months of 2023, the Company transferred approximately $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 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 offsets the effect on interest income for the accretion of the unrealized losses associated with the transferred securities. 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 loss. 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 September 30, 2023 and December 31, 2022, the Company had an ACL of $128,000 and $43,000, respectively, for HTM investment securities classified as municipal bonds. The Company recognized $15,000 of provision expense for credit losses during the three months ended September 30, 2023 and $114,000 and $18,000 of provision recapture for HTM investment securities for the three months ended June 30, 2023 and September 30, 2022, respectively. The Company recognized $85,000 and $69,000 of provision for credit losses for the nine months ended September 30, 2023 and September 30, 2022, respectively. The Company had no ACL for AFS investment securities at September 30, 2023 and December 31, 2022.

90

The following table sets forth the fair value of AFS and the amortized cost of HTM investment securities as well as the weighted average yields on our investment security portfolio by contractual maturity as of the date indicated. Weighted average yields are an arithmetic computation of income within each maturity range based on the amortized costs of securities, not on a tax-equivalent basis.
 September 30, 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$— — %$12,914 1.33 %$— — %$— — %$12,914 1.33 %
Agency78,561 2.32 %224,454 0.60 %84,760 1.42 %17,739 1.58 %405,514 1.14 %
Corporate12,974 5.81 %270,367 5.68 %221,467 3.18 %— — %504,808 4.47 %
Collateralized mortgage obligations— — %56,349 4.99 %162,195 2.99 %85,786 3.56 %304,330 3.49 %
Mortgage-backed securities5,538 3.47 %— — %410,229 1.16 %271,266 1.72 %687,033 1.41 %
Total securities available-for-sale97,073 2.85 %564,084 3.49 %878,651 2.03 %374,791 2.13 %1,914,599 2.44 %
HTM investment securities:          
Municipal bonds$— — %$26,176 1.45 %$37,903 1.62 %$1,082,504 2.07 %$1,146,583 2.04 %
Collateralized mortgage obligations— — %116 5.70 %— — %341,122 4.17 %341,238 4.17 %
Mortgage-backed securities— — %— — %3,489 4.92 %230,392 1.94 %233,881 1.99 %
Other— — %— — %— — %16,292 2.84 %16,292 2.84 %
Total HTM investment securities$— — %$26,292 1.47 %$41,392 1.90 %$1,670,310 2.49 %$1,737,994 2.46 %
Total securities$97,073 2.85 %$590,376 3.40 %$920,043 2.02 %$2,045,101 2.42 %$3,652,593 2.45 %
    
The following table presents the fair value of AFS and the amortized cost of HTM investment securities portfolios by Moody’s credit ratings at September 30, 2023.

(Dollars in thousands)U.S. TreasuryAgencyCorporate DebtMunicipal BondsCollateralized Mortgage ObligationsMortgage-backed SecuritiesOtherTotal%
Aaa - Aa3$12,914 $405,514 $19,876 $1,146,583 $645,568 $920,914 $— $3,151,369 86.2 %
A1 - A3— — 309,129 — — — — 309,129 8.5 %
Baa1 - Baa3— — 175,803 — — — 16,292 192,095 5.3 %
Total$12,914 $405,514 $504,808 $1,146,583 $645,568 $920,914 $16,292 $3,652,593 100.0 %

At September 30, 2023, 94.7% 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.

91

Deposits.  At September 30, 2023, deposits totaled $16.01 billion, a decrease of $1.34 billion, or 7.8%, from $17.35 billion at December 31, 2022. The decrease in deposits included decreases of $549.0 million in money market/savings, $524.5 million in noninterest-bearing checking, $521.4 million in interest-bearing checking, and $189.5 million in brokered certificates of deposit, partially offset by an increase of $439.5 million in retail certificates of deposit. The deposits decrease was largely driven by clients redeploying funds into higher yielding alternatives, prepaying or paying down loans, and, to a lesser extent, shifting depositor behavior following the industry-wide turmoil experienced in the first half of 2023.

At September 30, 2023, non-maturity deposits totaled $13.25 billion or 82.8% of total deposits, a decrease of $1.59 billion, or 10.7%, from December 31, 2022. The decrease from the prior year-end was attributable to the management’s strategic deposits pricing to manage the increase in our deposit costs, competition for deposits, and reduced funding needs in the rapidly rising rate environment. Our non-maturity 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 September 30, 2023.

At September 30, 2023, maturity deposits totaled $2.75 billion, an increase of $250.0 million, or 10.0%, from December 31, 2022. The increase was primarily driven by the increase in retail certificates of deposit, offset in part by the decrease in brokered certificates of deposit.

The total end-of-period weighted average rate of deposits at September 30, 2023 was 1.52%, an increase from 0.79% at December 31, 2022, principally driven by higher pricing across all deposit categories and a greater mix of maturity deposits. At September 30, 2023, the end-of-period weighted average rate of non-maturity deposits was 0.96%, compared to 0.43% at December 31, 2022. While incorporating time deposits into our funding mix during the first half of 2023 increased our deposit costs in the near term, locking in the longer-term funding ahead of the Federal Reserve’s anticipated additional interest rate increases would provide more funding flexibility and help us control our overall funding costs going forward. During the third quarter of 2023, client deposit flows continued to stabilize in the face of significant pricing competition and we reduced brokered deposits by $489.5 million. Given the rising interest rate environment, for the near term, it is likely that deposit costs will continue to increase and the deposit pricing impact may lead to deposit balance fluctuations.

As of September 30, 2023, no individual depositor represented more than 1.1% of our total deposits, and our top 50 depositors represented 8.8% of our total deposits.

Our ratio of loans held for investment to deposits was 82.9% and 84.6% at September 30, 2023 and December 31, 2022, respectively.

92

The following table sets forth the distribution of the Company’s deposit accounts at the dates indicated and the weighted average interest rates as of the last day of each period for each category of deposits presented:
 September 30, 2023December 31, 2022
(Dollars in thousands)Balance% of Total DepositsWeighted Average RateBalance% of Total DepositsWeighted Average Rate
Noninterest-bearing checking$5,782,305 36.1 %— %$6,306,825 36.4 %— %
Interest-bearing deposits:
Interest-bearing checking2,598,449 16.2 %1.34 %3,119,850 18.0 %0.63 %
Money market4,556,574 28.5 %1.82 %4,946,019 28.5 %0.85 %
Savings317,008 2.0 %0.22 %476,588 2.7 %0.49 %
Total non-maturity deposits13,254,336 82.8 %0.96 %14,849,282 85.6 %0.43 %
Time deposit accounts:
Less than 1.00%130,670 0.8 %0.13 %398,777 2.3 %0.15 %
1.00 - 1.9922,804 0.1 %1.69 %193,529 1.1 %1.78 %
2.00 - 2.9973,508 0.5 %2.59 %431,042 2.5 %2.47 %
3.00 - 3.99474,962 3.0 %3.53 %645,228 3.7 %3.44 %
4.00 - 4.991,325,205 8.3 %4.42 %834,543 4.8 %4.42 %
5.00 and greater725,962 4.5 %5.31 %— — %— %
Total time deposit accounts2,753,111 17.2 %4.22 %2,503,119 14.4 %2.95 %
Total deposits$16,007,447 100.0 %1.52 %$17,352,401 100.0 %0.79 %
 
The following table sets forth the estimated deposits exceeding the FDIC insurance limit:
(Dollars in thousands)September 30, 2023December 31, 2022
Uninsured deposits$6,161,799 $5,756,162 

At September 30, 2023, the Company’s FDIC-insured deposits as a percentage of total deposits was 62%. Insured and collateralized deposits comprised 66% of total deposits at September 30, 2023, which includes federally-insured deposits, $595.7 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 $464.5 million at September 30, 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)September 30, 2023December 31, 2022
3 months or less$224,876 $199,742 
Over 3 months through 6 months136,077 109,659 
Over 6 months through 12 months84,867 50,707 
Over 12 months18,726 21,903 
Total$464,546 $382,011 


Borrowings.  At September 30, 2023, total borrowings amounted to $1.13 billion, a decrease of $199.5 million, or 15.0%, from $1.33 billion at December 31, 2022. Total borrowings at September 30, 2023 were comprised of $800.0 million of FHLB term advances and $331.7 million of subordinated debentures. The decrease in borrowings at September 30, 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 September 30, 2023, total borrowings represented 5.6% 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. 


93

At September 30, 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 $59.9 million, net of unamortized debt issuance cost of $120,000. 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 $123.6 million, net of unamortized debt issuance cost of $1.4 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 term SOFR, plus a spread of 2.762% 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 $148.2 million, net of unamortized debt issuance cost of $1.8 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 Notes 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 as of and during the periods indicated: 
 September 30, 2023December 31, 2022
(Dollars in thousands)BalanceWeighted
Average Rate		BalanceWeighted
Average Rate
FHLB advances$800,000 3.59 %$1,000,000 3.19 %
Subordinated debentures331,682 5.31 %331,204 5.32 %
Total borrowings$1,131,682 4.09 %$1,331,204 3.72 %
Weighted average cost of borrowings during the quarter4.15 % 3.62 % 
Borrowings as a percent of total assets5.6 % 6.1 % 

As of September 30, 2023, our unused borrowing capacity was $8.20 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 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 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 September 30, 2023 and December 31, 2022.

94

CAPITAL RESOURCES AND LIQUIDITY

Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments, to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit, and payment of operating expenses. While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by market interest rates, economic conditions, and competition.

In addition to the interest payments on loans and investments as well as fees collected on the services we provide, our primary sources of funds generated during the first nine months of 2023 were from:
 
•Principal payments on loans held for investment of $1.13 billion; and
•Proceeds of $538.5 million from the sale, payment, or maturity of securities;

We used these funds to:
 
•Decrease deposits of $1.34 billion;
•Purchase investment securities of $245.7 million;
•Decrease FHLB borrowings of $200.0 million;
•Originate loans held for investment of $161.9 million; and
•Return capital to shareholders through $94.6 million in dividends.

Our most liquid assets are unrestricted cash, short-term investments, and unpledged AFS investment 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 2023. At September 30, 2023, cash and cash equivalents totaled $1.40 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 September 30, 2023, the Bank had secured borrowing capacity with FHLB of $6.12 billion, of which $4.57 billion remained available for borrowing, based on collateral pledged of $7.90 billion at carrying value in qualifying loans, and we had $800.0 million in FHLB term borrowings. We also had a $1.26 billion line with the FRB discount window secured by investment securities, a $1.97 billion line with the FRB’s Bank Term Funding Program, unsecured lines of credit aggregating to $390.0 million with other correspondent banks from which to purchase federal funds, and AFS investment securities with the aggregate market value of $1.91 billion. Our unused borrowing capacity was $8.20 billion and the combined readily available liquidity with cash and cash equivalents of $1.40 billion was approximately $9.60 billion, with a coverage ratio of 174.7% to uninsured and uncollateralized deposits. In October 2023, in addition to the investment securities already pledged to the FRB discount window, the Bank also pledged $2.58 billion in qualifying loans under the FRB’s Borrower-in-Custody program and increased the borrowing capacity with the FRB discount window by $1.77 billion.

We believe our level of liquid assets is sufficient to meet current anticipated funding needs. As of September 30, 2023, our liquidity ratio was 20.3%, which is above the Company’s minimum policy requirement of 10.0%. The Company regularly monitors liquidity, models liquidity stress scenarios to ensure that adequate liquidity is available, and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.

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.


95

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 September 30, 2023, we had $1.23 billion in brokered deposits, which constituted 7.67% of total deposits and 6.05% of total assets at that date. During nine months ended September 30, 2023, the Bank added approximately $439.5 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 nine months ended September 30, 2023, the Bank paid $168.0 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, 2024. 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 September 30, 2023, the Corporation had no outstanding balances against this line.

During each of the first three quarters of 2023, the Corporation declared a quarterly dividend payment of $0.33 per share. On October 23, 2023, the Company's Board of Directors declared a $0.33 per share dividend, payable on November 13, 2023 to stockholders of record as of November 3, 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 nine months ended September 30, 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 low-income housing tax credit, withdrawal/maturity of existing deposits, repayment of borrowings, operating lease payments, and expenditures necessary to maintain current operations.

The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and to meet required capital needs. The following schedule summarizes maturities and principal payments due on our contractual obligations, excluding accrued interest:

 September 30, 2023
(Dollars in thousands)Less than 1 yearMore than 1 yearTotal
FHLB advances and other borrowings$400,000 $400,000 $800,000 
Subordinated debentures59,880 271,802 331,682 
Certificates of deposit2,700,495 52,616 2,753,111 
Operating leases19,144 35,604 54,748 
Affordable housing partnerships commitment12,348 23,569 35,917 
Total contractual cash obligations$3,191,867 $783,591 $3,975,458 

96

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:

 September 30, 2023
(Dollars in thousands)Less than 1 yearMore than 1 yearTotal
Loan commitments to extend credit$1,356,752 $706,248 $2,063,000 
Standby letters of credit47,565 — 47,565 
Total$1,404,317 $706,248 $2,110,565 

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 Notes to the consolidated financial statements in the Company’s 2022 Form 10-K. 

97

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 September 30, 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 September 30, 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 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 years before maturity. See Note 8 – Subordinated Debentures to the Notes to the consolidated financial statements in this Quarterly Report on Form 10-Q for additional information.


98

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
September 30, 2023
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio11.13%4.00%N/A
Common equity tier 1 capital ratio14.87%7.00%N/A
Tier 1 capital ratio14.87%8.50%N/A
Total capital ratio17.74%10.50%N/A
Pacific Premier Bank
Tier 1 leverage ratio12.42%4.00%5.00%
Common equity tier 1 capital ratio16.59%7.00%6.50%
Tier 1 capital ratio16.59%8.50%8.00%
Total capital ratio17.66%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%
99

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 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.


100

The following table shows the projected NII and net interest margin of the Company at September 30, 2023 and December 31, 2022, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:
September 30, 2023
(Dollars in thousands)
Earnings at RiskProjected Net Interest Margin
Change in Rates (Basis Points)$ Amount$ Change% ChangeRate %
300645,486 22,786 3.7 3.57 
200640,202 17,502 2.8 3.54 
100633,093 10,393 1.7 3.50 
Static622,700 — — 3.44 
-100599,995 (22,705)(3.6)3.32 
-200569,128 (53,572)(8.6)3.15 
-300535,011 (87,689)(14.1)2.96 
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 September 30, 2023 and December 31, 2022, assuming instantaneous parallel interest rate shifts in the first month of the following quarter:
 
September 30, 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
3003,290,008 (87,985)(2.6)19.18 
2003,356,730 (21,263)(0.6)18.99 
1003,403,117 25,124 0.7 18.66 
Static3,377,993 — — 17.95 
-1003,288,581 (89,412)(2.6)16.93 
-2003,139,280 (238,713)(7.1)15.66 
-3002,924,831 (453,162)(13.4)14.14 
101

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 September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

102

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. There are no material changes to our risk factors as previously described under Item 1A of our 2022 Form 10-K and our Form 10-Q for the first quarter of 2023.

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 third 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 third 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
July 1, 2023 to July 31, 2023— $— — 4,245,056 
August 1, 2023 to August 31, 2023— — — 4,245,056 
September 1, 2023 to September 30, 2023— — — 4,245,056 
Total— — 
Item 3.  Defaults Upon Senior Securities
 
None.
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
Item 5.  Other Information
 
Rule 10b5-1 Trading Plans

During the quarter ended September 30, 2023, no officer or director of the Company adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the Company’s common stock that is intended to satisfy the affirmative defense conditions of Securities Exchange Act Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement as defined in 17 CFR § 229.408(c).
103

Item 6.  Exhibits
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 September 30, 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 May 15, 2018.
(2) 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.
104

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:October 26, 2023By:/s/ Steven R. Gardner
 Steven R. Gardner
  Chairman, Chief Executive Officer, and President
  (Principal Executive Officer)
   
Date:October 26, 2023By:/s/ Ronald J. Nicolas, Jr.
 Ronald J. Nicolas, Jr.
  Senior Executive Vice President and Chief Financial Officer
  (Principal Financial Officer)

105

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