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

 

(Exact name of registrant as specified in its charter) 

Delaware	33-0743196
(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 Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	PPBI	NASDAQ 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

PART I - FINANCIAL INFORMATION
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
PART II - OTHER INFORMATION	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
SIGNATURE	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 institutions	1,246,300		966,042
Cash and cash equivalents	1,400,276		1,101,249
Interest-bearing time deposits with financial institutions	1,242		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 value	1,914,599		2,601,013
FHLB, FRB, and other stock	105,505		119,918
Loans held for sale, at lower of cost or fair value	641		2,643
Loans held for investment	13,270,120		14,676,298
Allowance for credit losses	(188,098)		(195,651)
Loans held for investment, net	13,082,022		14,480,647
Accrued interest receivable	68,131		73,784
Other real estate owned	450		—
Premises and equipment, net	59,396		64,543
Deferred income taxes, net	192,208		183,602
Bank owned life insurance	468,191		460,010
Intangible assets	46,307		55,588
Goodwill	901,312		901,312
Other assets	297,574		253,871
Total assets	$	20,275,720	$	21,688,017
LIABILITIES
Deposit accounts:
Noninterest-bearing checking	$	5,782,305	$	6,306,825
Interest-bearing:
Checking	2,598,449		3,119,850
Money market/savings	4,873,582		5,422,607
Retail certificates of deposit	1,525,919		1,086,423
Wholesale/brokered certificates of deposit	1,227,192		1,416,696
Total interest-bearing	10,225,142		11,045,576
Total deposits	16,007,447		17,352,401
FHLB advances and other borrowings	800,000		1,000,000
Subordinated debentures	331,682		331,204
Accrued expenses and other liabilities	281,057		206,023
Total liabilities	17,420,186		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 capital	2,371,941		2,362,663
Retained earnings	771,285		700,040
Accumulated other comprehensive loss	(288,629)		(265,247)
Total stockholders’ equity	2,855,534		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 Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands, except share data)	2023		2022		2023		2022
INTEREST INCOME
Loans	$	177,032	$	174,204	$	540,842	$	489,263
Investment securities and other interest-earning assets	47,030		24,821		129,951		61,534
Total interest income	224,062		199,025		670,793		550,797
INTEREST EXPENSE
Deposits	62,718		9,873		156,532		14,228
FHLB advances and other borrowings	7,235		3,480		22,328		7,171
Subordinated debentures	4,561		4,560		13,683		13,682
Total interest expense	74,514		17,913		192,543		35,081
Net interest income before provision for credit losses	149,548		181,112		478,250		515,716
Provision for credit losses	3,918		1,077		8,433		1,994
Net interest income after provision for credit losses	145,630		180,035		469,817		513,722
NONINTEREST INCOME
Loan servicing income	533		397		1,599		1,318
Service charges on deposit accounts	2,673		2,704		7,972		8,009
Other service fee income	280		323		891		1,056
Debit card interchange fee income	924		808		2,641		2,580
Earnings on bank owned life insurance	3,579		3,339		10,440		9,800
Net gain from sales of loans	45		457		419		3,087
Net (loss) gain from sales of investment securities	—		(393)		138		1,710
Trust custodial account fees	9,356		9,951		29,741		31,884
Escrow and exchange fees	938		1,555		2,920		5,043
Other income	223		1,023		3,515		3,764
Total noninterest income	18,551		20,164		60,276		68,251
NONINTEREST EXPENSE
Compensation and benefits	54,068		56,355		161,785		170,898
Premises and occupancy	11,382		12,011		34,739		35,792
Data processing	7,517		7,058		22,270		19,658
Other real estate owned operations, net	(4)		—		112		—
FDIC insurance premiums	2,324		1,461		7,106		4,309
Legal and professional services	4,243		4,075		14,460		12,772
Marketing expense	1,635		1,912		5,352		5,647
Office expense	1,079		1,338		3,591		3,793
Loan expense	476		789		1,689		3,067
Deposit expense	10,811		4,846		28,441		12,678
Amortization of intangible assets	3,055		3,472		9,281		10,543
Other expense	5,599		7,549		15,355		18,331
Total noninterest expense	102,185		100,866		304,181		297,488
Net income before income taxes	61,996		99,333		225,912		284,485
Income tax expense	15,966		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
Diluted	0.48		0.77		1.74		2.21
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	94,189,844		93,793,502		94,072,463		93,687,230
Diluted	94,283,008		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 Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2023		2022		2023		2022
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 Stock		Additional Paid-in Capital		Accumulated Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
Balance at December 31, 2022	95,021,760	$	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, net	1,085,234	4		(4)		—		—		—
Restricted stock surrendered and canceled	(221,617)	—		(5,953)		—		—		(5,953)
Exercise of stock options	15,470	—		246		—		—		246
Balance at September 30, 2023	95,900,847	$	937	$	2,371,941	$	771,285	$	(288,629)	$	2,855,534

Balance at June 30, 2023	95,906,217	$	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, net	11,161	—		—		—		—		—
Restricted stock surrendered and canceled	(16,531)	—		(171)		—		—		(171)
Exercise of stock options	—	—		—		—		—		—
Balance at September 30, 2023	95,900,847	$	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 Stock		Additional Paid-in Capital		Accumulated Retained Earnings		Accumulated Other Comprehensive Loss		Total Stockholders’ Equity
Balance at December 31, 2021	94,389,543	$	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, net	818,229	4		(4)		—		—		—
Restricted stock surrendered and canceled	(234,851)	—		(8,858)		—		—		(8,858)
Exercise of stock options	43,846	—		759		—		—		759
Balance at September 30, 2022	95,016,767	$	933	$	2,357,731	$	657,845	$	(281,113)	$	2,735,396

Balance at June 30, 2022	94,976,605	$	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, net	56,452	—		—		—		—		—
Restricted stock surrendered and canceled	(22,348)	—		(184)		—		—		(184)
Exercise of stock options	6,058	—		94		—		—		94
Balance at September 30, 2022	95,016,767	$	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)	2023		2022
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 expense	10,617		11,164
Provision for credit losses	8,433		1,994
Share-based compensation expense	14,622		14,171
Loss on sales and disposals of premises and equipment	131		54
Net gain on sales of other real estate owned	(106)		—
Net amortization on securities	11,244		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 expense	677		5,561
Income from bank owned life insurance, net	(8,453)		(7,949)
Amortization of intangible assets	9,281		10,543
Origination of loans held for sale	(1,370)		(57,685)
Proceeds from the sales of and principal payments from loans held for sale	2,085		69,478
Change in accrued expenses and other liabilities, net	78,202		6,075
Change in accrued interest receivable and other assets, net	(10,970)		82,719
Net cash provided by operating activities	268,491		333,197
Cash flows from investing activities:
Net decrease in interest-bearing time deposits with financial institutions	492		483
Proceeds from sales of other real estate owned	3,307		—
Loan originations and payments, net	1,330,911		(664,678)
Proceeds from loans held for sale previously classified as loans held for investment	84,472		—
Purchase of loans held for investment	—		(797)
Purchase of securities held-to-maturity	(21,357)		—
Proceeds from prepayments and maturities of securities held-to-maturity	35,748		15,570
Purchase of securities available-for-sale	(224,347)		(986,997)
Proceeds from prepayments and maturities of securities available-for-sale	198,433		248,629
Proceeds from sales of securities available-for-sale	304,320		936,413
Proceeds from the sales of premises and equipment	3		—
Proceeds from surrender of bank owned life insurance	272		—
Purchase of premises and equipment	(5,604)		(4,961)
Change in FHLB, FRB, and other stock	1,784		(2,321)
Funding of Community Reinvestment Act (“CRA”) investments, net	(32,621)		(10,910)
Net cash provided by (used in) investing activities	1,675,813		(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 options	246		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 equivalents	299,027		434,508
Cash and cash equivalents, beginning of period	1,101,249		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, net	1,610		47,932
Noncash investing activities during the period:
Transfers from loans held for investment to loans held for sale	84,993		—
Transfers from loans held for sale to loans held for investment	2,227		—
Other real estate owned transferred from loans held for investment	7,336		—
Transfers of investment securities from available-for-sale to held-to-maturity	360,347		1,019,472
Transfers of CRA investment securities from FHLB, FRB, and other stock to other assets	12,601		—
Recognition of operating lease right-of-use assets	(4,259)		(1,183)
Recognition of operating lease liabilities	4,336		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.

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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.

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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.

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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.

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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
Agency	457,694		—		(52,180)		405,514
Corporate	560,873		57		(56,122)		504,808
Collateralized mortgage obligations	337,195		—		(32,865)		304,330
Mortgage-backed securities	840,545		—		(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
Agency	485,331		—		(53,893)		431,438
Corporate	586,652		—		(44,104)		542,548
Collateralized mortgage obligations	829,928		—		(65,699)		764,229
Mortgage-backed securities	953,678		—		(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 Losses		Net Carrying Amount		Gross 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 obligations	341,238		—		341,238		1,064		(17,902)		324,400
Mortgage-backed securities	233,881		—		233,881		—		(44,999)		188,882
Other	16,292		—		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 securities	231,692		—		231,692		—		(33,621)		198,071
Other	8,399		—		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.

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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 Months					12 Months or Longer					Total
(Dollars in thousands)	Number	Fair Value		Gross Unrealized Losses		Number	Fair Value		Gross Unrealized Losses		Number	Fair 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)
Corporate	1	16,623		(3,377)		51	473,191		(52,745)		52	489,814		(56,122)
Collateralized mortgage obligations	1	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 securities	2	$	21,409	$	(3,438)	220	$	1,878,196	$	(293,274)	222	$	1,899,605	$	(296,712)

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	December 31, 2022
	Less than 12 Months					12 Months or Longer					Total
(Dollars in thousands)	Number	Fair Value		Gross Unrealized Losses		Number	Fair Value		Gross Unrealized Losses		Number	Fair Value		Gross Unrealized Losses
AFS investment securities:
U.S. Treasury	5	$	33,982	$	(237)	1	$	13,036	$	(1,902)	6	$	47,018	$	(2,139)
Agency	8	79,895		(1,265)		35	351,543		(52,628)		43	431,438		(53,893)
Corporate	35	327,984		(20,840)		21	214,565		(23,264)		56	542,549		(44,104)
Collateralized mortgage obligations	41	522,955		(33,318)		40	241,229		(32,381)		81	764,184		(65,699)
Mortgage-backed securities	13	91,762		(6,987)		68	724,019		(130,910)		81	815,781		(137,897)
Total AFS investment securities	102	$	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

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	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 Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2023		2022		2023		2022
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

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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
Agency	80,578		78,561		245,493		224,454		106,631		84,760		24,992		17,739		457,694		405,514
Corporate	13,000		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 securities	5,596		5,538		—		—		483,857		410,229		351,092		271,266		840,545		687,033
Total AFS investment securities	99,174		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.

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The following table presents the composition of the loan portfolio for the periods indicated:

	September 30,		December 31,
(Dollars in thousands)	2023		2022
Investor loans secured by real estate
CRE non-owner-occupied	$	2,514,056	$	2,660,321
Multifamily	5,719,210		6,112,026
Construction and land	444,576		399,034
SBA secured by real estate	37,754		42,135
Total investor loans secured by real estate	8,715,596		9,213,516
Business loans secured by real estate
CRE owner-occupied	2,228,802		2,432,163
Franchise real estate secured	313,451		378,057
SBA secured by real estate	53,668		61,368
Total business loans secured by real estate	2,595,921		2,871,588
Commercial loans
Commercial and industrial	1,588,771		2,160,948
Franchise non-real estate secured	335,053		404,791
SBA non-real estate secured	10,667		11,100
Total commercial loans	1,934,491		2,576,839
Retail loans
Single family residential	70,984		72,997
Consumer	1,958		3,284
Total retail loans	72,942		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 investment	13,270,120		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 value	641		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)	2023		2022		2021		2020		2019		Prior		Revolving		Revolving Converted to Term During the Period		Total
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
Pass	79,680		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
Pass	50,005		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 estate	197,483		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
Pass	16,141		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
Pass	10,650		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
Pass	114		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 estate	26,905		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
Pass	46,478		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)	2023		2022		2021		2020		2019		Prior		Revolving		Revolving Converted to Term During the Period		Total
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 mention	442		866		1,702		—		651		735		—		—		4,396
Substandard	—		2,914		338		2,517		10,875		1,595		—		—		18,239
SBA non-real estate secured
Pass	508		4,559		347		116		1,518		2,628		—		—		9,676
Substandard	—		538		—		144		55		254		—		—		991
Total commercial loans	54,391		314,040		311,232		65,617		165,369		222,060		781,806		19,976		1,934,491
Current period gross charge-offs	56		3,003		62		5		356		37		4,779		503		8,801
Retail loans
Single family residential
Pass	20		—		—		170		—		44,607		26,186		—		70,983
Substandard	—		—		—		—		—		1		—		—		1
Consumer loans
Pass	—		—		3		11		7		808		1,129		—		1,958
Total retail loans	20		—		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-offs	56		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)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term During the Period		Total
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
Pass	1,230,359		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
Pass	187,567		154,231		38,760		9,615		1,843		7,018		—		—		399,034

24

	Term Loans by Vintage
(Dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving		Revolving Converted to Term During the Period		Total
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 estate	1,948,392		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
Pass	593,826		718,223		242,125		240,772		114,581		448,531		5,661		—		2,363,719
Special mention	334		1,015		—		—		675		327		—		—		2,351
Substandard	10,838		2,541		11,970		2,403		4,676		33,665		—		—		66,093
Franchise real estate secured
Pass	54,654		131,541		33,513		44,229		32,815		55,893		—		—		352,645
Special mention	4,891		13,145		—		—		—		—		—		—		18,036
Substandard	980		—		—		6,092		—		304		—		—		7,376
SBA secured by real estate
Pass	10,993		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 estate	676,516		873,443		289,937		299,206		158,541		568,284		5,661		—		2,871,588
Commercial loans
Commercial and industrial
Pass	282,131		262,044		55,659		155,310		78,684		121,918		1,134,568		3,412		2,093,726
Special mention	15,105		3,567		798		—		1,864		41		9,898		—		31,273
Substandard	2,590		80		—		3,867		562		1,029		27,680		141		35,949
Franchise non-real estate secured
Pass	102,542		128,030		18,486		46,027		28,664		43,486		778		—		368,013
Special mention	1,372		14,382		—		11,829		—		—		—		—		27,583
Substandard	1,757		385		2,852		2,256		1,637		308		—		—		9,195
SBA non-real estate secured
Pass	3,444		435		276		1,638		633		3,124		—		—		9,550
Substandard	—		—		—		130		224		606		—		590		1,550
Total commercial loans	408,941		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.

25

The following tables stratify the loans held for investment portfolio by delinquency as of the periods indicated:

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+		Total
September 30, 2023
Investor loans secured by real estate
CRE non-owner-occupied	$	2,513,631	$	—	$	—	$	425	$	2,514,056
Multifamily	5,719,210		—		—		—		5,719,210
Construction and land	444,576		—		—		—		444,576
SBA secured by real estate	37,002		—		332		420		37,754
Total investor loans secured by real estate	8,714,419		—		332		845		8,715,596
Business loans secured by real estate
CRE owner-occupied	2,224,107		—		—		4,695		2,228,802
Franchise real estate secured	313,451		—		—		—		313,451
SBA secured by real estate	52,495		—		—		1,173		53,668
Total business loans secured by real estate	2,590,053		—		—		5,868		2,595,921
Commercial loans
Commercial and industrial	1,585,718		2,677		143		233		1,588,771
Franchise non-real estate secured	335,053		—		—		—		335,053
SBA not secured by real estate	9,840		289		—		538		10,667
Total commercial loans	1,930,611		2,966		143		771		1,934,491
Retail loans
Single family residential	70,984		—		—		—		70,984
Consumer loans	1,957		1		—		—		1,958
Total retail loans	72,941		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
Multifamily	6,103,246		2,723		—		6,057		6,112,026
Construction and land	399,034		—		—		—		399,034
SBA secured by real estate	42,135		—		—		—		42,135
Total investor loans secured by real estate	9,200,307		2,723		—		10,486		9,213,516
Business loans secured by real estate
CRE owner-occupied	2,424,174		1,434		—		6,555		2,432,163
Franchise real estate secured	370,984		7,073		—		—		378,057
SBA secured by real estate	60,177		—		104		1,087		61,368
Total business loans secured by real estate	2,855,335		8,507		104		7,642		2,871,588
Commercial loans
Commercial and industrial	2,152,302		4,657		81		3,908		2,160,948
Franchise non-real estate secured	401,199		3,592		—		—		404,791
SBA not secured by real estate	10,511		—		—		589		11,100
Total commercial loans	2,564,012		8,249		81		4,497		2,576,839
Retail loans
Single family residential	71,940		1,057		—		—		72,997
Consumer loans	3,282		2		—		—		3,284
Total retail loans	75,222		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.

26

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.

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The Company typically does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the timely collection of principal or interest. However, when such loans are well-secured and in the process of collection, the Company may continue with the accrual of interest. The Company had loans on nonaccrual status of $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 Loans				Non-Collateral Dependent Loans				Total Nonaccrual Loans		Nonaccrual Loans with No ACL
(Dollars in thousands)	Balance		ACL		Balance		ACL
September 30, 2023
Investor loans secured by real estate
CRE non-owner-occupied	$	425	$	—	$	—	$	—	$	425	$	425
SBA secured by real estate	1,242		—		—		—		1,242		1,242
Total investor loans secured by real estate	1,667		—		—		—		1,667		1,667
Business loans secured by real estate
CRE owner-occupied	8,826		—		—		—		8,826		8,826
SBA secured by real estate	1,173		—		—		—		1,173		1,173
Total business loans secured by real estate	9,999		—		—		—		9,999		9,999
Commercial loans
Commercial and industrial	233		—		13,021		—		13,254		13,254
SBA non-real estate secured	538		—		—		—		538		538
Total commercial loans	771		—		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
Multifamily	8,780		—		—		—		8,780		8,780
SBA secured by real estate	533		—		—		—		533		533
Total investor loans secured by real estate	13,742		—		—		—		13,742		13,742
Business loans secured by real estate
CRE owner-occupied	11,475		1,742		—		—		11,475		9,733
SBA secured by real estate	1,191		—		—		—		1,191		1,191
Total business loans secured by real estate	12,666		1,742		—		—		12,666		10,924
Commercial loans
Commercial and industrial	3,908		—		—		—		3,908		3,908
SBA non-real estate secured	589		—		—		—		589		589
Total commercial loans	4,497		—		—		—		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)	Current		30-59		60-89		90+		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.

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Collateral Dependent Loans

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

The following tables summarize collateral dependent loans by collateral type as of the dates indicated:

(Dollars in thousands)	Office Properties		Industrial Properties		Retail Properties		Land Properties		Hotel Properties		Multifamily Properties		Other CRE Properties		Business Assets		Total
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-occupied	4,131		—		—		4,695		—		—		—		—		8,826
SBA secured by real estate	—		979		194		—		—		—		—		—		1,173
Total business loans secured by real estate	4,131		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-occupied	4,417		—		—		4,813		—		—		2,245		—		11,475
SBA secured by real estate	104		1,087		—		—		—		—		—		—		1,191
Total business loans secured by real estate	4,521		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
Multifamily	55,648		—		—		(427)		55,221
Construction and land	7,707		—		—		799		8,506
SBA secured by real estate	2,331		(108)		—		(24)		2,199
Business loans secured by real estate
CRE owner-occupied	28,515		—		12		559		29,086
Franchise real estate secured	6,855		—		—		711		7,566
SBA secured by real estate	4,511		—		128		(77)		4,562
Commercial loans
Commercial and industrial	39,586		(7,386)		565		(268)		32,497
Franchise non-real estate secured	14,642		—		50		1,087		15,779
SBA non-real estate secured	399		(67)		3		137		472
Retail loans
Single family residential	455		—		—		36		491
Consumer loans	139		—		—		(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
Multifamily	56,334		(290)		1		(824)		55,221
Construction and land	7,114		—		—		1,392		8,506
SBA secured by real estate	2,592		(108)		—		(285)		2,199
Business loans secured by real estate
CRE owner-occupied	32,340		(2,370)		36		(920)		29,086
Franchise real estate secured	7,019		—		—		547		7,566
SBA secured by real estate	4,348		—		208		6		4,562
Commercial loans
Commercial and industrial	35,169		(8,734)		945		5,117		32,497
Franchise non-real estate secured	16,029		—		150		(400)		15,779
SBA non-real estate secured	441		(67)		68		30		472
Retail loans
Single family residential	352		(90)		1		228		491
Consumer loans	221		(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
Multifamily	56,293		—		—		(207)		56,086
Construction and land	5,436		—		—		1,004		6,440
SBA secured by real estate	2,865		—		—		90		2,955
Business loans secured by real estate
CRE owner-occupied	31,461		—		19		346		31,826
Franchise real estate secured	6,530		—		—		180		6,710
SBA secured by real estate	5,149		—		—		(364)		4,785
Commercial loans
Commercial and industrial	37,048		(190)		143		(1,503)		35,498
Franchise non-real estate secured	13,124		—		—		70		13,194
SBA non-real estate secured	452		—		26		(38)		440
Retail loans
Single family residential	278		—		58		(40)		296
Consumer loans	218		—		—		(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 Balance		Charge-offs		Recoveries		Provision for Credit Losses		Ending ACL Balance
Investor loans secured by real estate
CRE non-owner occupied	$	37,380	$	(1,128)	$	—	$	852	$	37,104
Multifamily	55,209		—		—		877		56,086
Construction and land	5,211		—		—		1,229		6,440
SBA secured by real estate	3,201		(70)		—		(176)		2,955
Business loans secured by real estate
CRE owner-occupied	29,575		—		33		2,218		31,826
Franchise real estate secured	7,985		—		—		(1,275)		6,710
SBA secured by real estate	4,866		—		—		(81)		4,785
Commercial loans
Commercial and industrial	38,136		(7,750)		2,517		2,595		35,498
Franchise non-real estate secured	15,084		(448)		—		(1,442)		13,194
SBA non-real estate secured	565		(50)		44		(119)		440
Retail loans
Single family residential	255		—		91		(50)		296
Consumer loans	285		(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 Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2023		2022		2023		2022
Beginning ACL balance	$	24,455	$	24,106	$	23,641	$	27,290
Provision for credit losses on off-balance sheet commitments	1,386		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 Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2023		2022		2023		2022
Gross amount of intangible assets:
Beginning balance	$	145,212	$	145,212	$	145,212	$	145,212
Additions due to acquisitions	—		—		—		—
Ending balance	145,212		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 Maturity	Current Interest Rate		Current Principal Balance		September 30, 2023		December 31, 2022
Subordinated notes
Subordinated notes due 2024, 5.75% per annum	September 3, 2024	5.75	%	$	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, 2029	4.875	%	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, 2030	5.375	%	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, 2023		September 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 outstanding	94,189,844		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 outstanding	94,189,844		93,793,502
Dilutive effect of share-based compensation	93,164		327,135
Weighted average diluted common shares	94,283,008		94,120,637
Diluted earnings per common share	$	0.48	$	0.77

41

	Nine Months Ended
(Dollars in thousands, except per share data)	September 30, 2023		September 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 outstanding	94,072,463		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 outstanding	94,072,463		93,687,230
Dilutive effect of share-based compensation	142,383		367,886
Weighted average diluted common shares	94,214,846		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.

43

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 1		Level 2		Level 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.

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	December 31, 2022
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
AFS investment securities:
U.S. Treasury	$	—	$	47,017	$	—	$	47,017
Agency	—		431,438		—		431,438
Corporate	—		542,548		—		542,548
Collateralized mortgage obligations	—		764,229		—		764,229
Mortgage-backed securities	—		815,781		—		815,781
Total AFS investment securities	$	—	$	2,601,013	$	—	$	2,601,013
Equity securities (1)	$	925	$	—	$	—	$	13,526
Derivative assets:
Foreign exchange contracts	$	1	$	—	$	—	$	1
Interest rate swaps (2)	—		7,053		—		7,053
Equity warrants	—		—		1,894		1,894
Total derivative assets	$	1	$	7,053	$	1,894	$	8,948
Financial liabilities
Derivative liabilities:
Foreign exchange	$	1	$	—	$	—	$	1
Interest rate swaps	—		12,530		—		12,530
Total derivative liabilities	$	1	$	12,530	$	—	$	12,531

______________________________

(1) Includes equity securities that are measured at net asset value per share (or its equivalent) as a practical expedient of $12.6 million at December 31, 2022 and are excluded from the fair value hierarchy.

(2) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.

The following table is a reconciliation of the fair value of the equity warrants that are classified as Level 3 and measured on a recurring basis as of:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(Dollars in thousands)	2023		2022		2023		2022
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.

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The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a recurring basis at the dates indicated.

	September 30, 2023
					Range
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Min	Max	Weighted 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 Value		Valuation Technique(s)	Unobservable Input(s)	Min	Max	Weighted 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.     

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The following table presents our assets measured at fair value on a nonrecurring basis at the dates indicated.

	September 30, 2023
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 3
Financial assets
Collateral dependent loans	$	—	$	—	$	419	$	419
Other real estate owned	—		—		450		450
Total assets	$	—	$	—	$	869	$	869

	December 31, 2022
	Fair Value Measurement Using						Total Fair Value
(Dollars in thousands)	Level 1		Level 2		Level 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 Value		Valuation Technique(s)	Unobservable Input(s)	Min	Max	Weighted Average
Investor loans secured by real estate
SBA secured by real estate (1)	$	419	Fair value of collateral	Cost to sell	10.00%	10.00%	10.00%
Total individually evaluated loans	419
Other real estate owned	450		Fair value of property	Cost to sell	10.00%	10.00%	10.00%
Total assets	$	869

	December 31, 2022
					Range
(Dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Min	Max	Weighted Average
Commercial loans
Commercial and industrial	$	3,180	Fair value of collateral	Collateral discount and cost to sell	6.00%	6.00%	6.00%
Total individually evaluated loans	$	3,180

______________________________

(1) SBA loans that are collateralized by hotel/motel real property.

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Fair Values of Financial Instruments

The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated, representing an exit price.

	At September 30, 2023
(Dollars in thousands)	Carrying Amount		Level 1		Level 2		Level 3		Estimated Fair Value
Assets
Cash and cash equivalents	$	1,400,276	$	1,400,276	$	—	$	—	$	1,400,276
Interest-bearing time deposits with financial institutions	1,242		1,242		—		—		1,242
HTM investment securities	1,737,866		—		1,354,434		—		1,354,434
AFS investment securities	1,914,599		—		1,914,599		—		1,914,599
Equity securities	898		898		—		—		898
Loans held for sale	641		—		666		—		666
Loans held for investment, net	13,270,120		—		—		12,405,677		12,405,677
Derivative assets (1)	8,611		22		8,198		391		8,611
Accrued interest receivable	68,131		—		68,131		—		68,131
Liabilities
Deposit accounts	$	16,007,447	$	—	$	16,010,816	$	—	$	16,010,816
FHLB advances	800,000		—		786,086		—		786,086
Subordinated debentures	331,682		—		319,637		—		319,637
Derivative liabilities	15,176		—		15,176		—		15,176
Accrued interest payable	29,822		—		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 1		Level 2		Level 3		Estimated Fair Value
Assets
Cash and cash equivalents	$	1,101,249	$	1,101,249	$	—	$	—	$	1,101,249
Interest-bearing time deposits with financial institutions	1,734		1,734		—		—		1,734
HTM investment securities	1,388,103		—		1,097,096		—		1,097,096
AFS investment securities	2,601,013		—		2,601,013		—		2,601,013
Equity securities (1)	13,526		925		—		—		13,526
Loans held for sale	2,643		—		2,755		—		2,755
Loans held for investment, net	14,676,298		—		—		13,846,403		13,846,403
Derivative assets (2)	8,948		1		7,053		1,894		8,948
Accrued interest receivable	73,784		—		73,784		—		73,784
Liabilities
Deposit accounts	$	17,352,401	$	—	$	17,334,219	$	—	$	17,334,219
FHLB advances	1,000,000		—		982,695		—		982,695
Subordinated debentures	331,204		—		327,609		—		327,609
Derivative liabilities	12,531		1		12,530		—		12,531
Accrued interest payable	14,661		—		14,661		—		14,661

______________________________

(1) Includes equity securities that are measured at net asset value per share (or its equivalent) as a practical expedient of $12.6 million at December 31, 2022 and are excluded from the fair value hierarchy.

(2) Represents amounts after the application of variation margin payments as settlements with central counterparties, where applicable. See Note 11 – Derivative Instruments for additional information.

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Note 11 – Derivative Instruments

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

Derivatives Designated as Hedging Instruments

Fair Value Hedges – The Company is exposed to changes in the fair value of fixed-rate assets due to changes in benchmark interest rates. The Company entered into pay-fixed and receive-floating interest rate swaps associated with certain fixed rate loans, primarily 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 Included	Carrying Amount of the Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(Dollars in thousands)	September 30, 2023		December 31, 2022		September 30, 2023		December 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.

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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.

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The following tables summarize the Company's derivative instruments included in “other assets” and “other liabilities” in the consolidated statements of financial condition as of the dates indicated:

	September 30, 2023
	Derivative Assets				Derivative Liabilities
(Dollars in thousands)	Notional		Fair Value		Notional		Fair Value
Derivative instruments designated as hedging instruments:
Fair value hedge - interest rate swap contracts	$	1,400,000	$	50,918	$	—	$	—
Total derivative designated as hedging instruments	1,400,000		50,918		—		—
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	2,948		22		—		—
Interest rate swaps contracts	107,508		15,019		107,508		15,030
Equity warrants	—		391		—		—
Total derivative not designated as hedging instruments	110,456		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 Assets				Derivative Liabilities
(Dollars in thousands)	Notional		Fair Value		Notional		Fair 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 instruments	900,000		63,710		300,000		72
Derivative instruments not designated as hedging instruments:
Foreign exchange contracts	22		1		143		1
Interest rate swaps contracts	112,124		12,524		112,124		12,525
Equity warrants	—		1,894		—		—
Total derivative not designated as hedging instruments	112,146		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.

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The following table presents the effect of fair value hedge accounting on the consolidated statements of income:

		Three Months Ended				Nine Months Ended
(Dollars in thousands)	Location of Gain (Loss) Recognized in Income on Derivative Instruments	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Gain (loss) on fair value hedging relationships:
Hedged items	Interest Income	$	4,300	$	(17,037)	$	13,096	$	(62,826)
Derivatives designated as hedging instruments	Interest Income	6,268		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 Ended				Nine Months Ended
Derivatives Not Designated as Hedging Instruments:	Location of Gain (Loss) Recognized in Income on Derivative Instruments	September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Foreign exchange contracts	Other income	$	205	$	141	$	688	$	264
Interest rate products	Other income	(9)		1		(9)		4
Equity warrants	Other income	(16)		5		(802)		22
Total		$	180	$	147	$	(123)	$	290

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Note 12 – Balance Sheet Offsetting

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

Financial instruments that are eligible for offset in the consolidated statements of financial condition as of the periods indicated are presented below:

	Gross Amounts Recognized (1)		Gross Amounts Offset in the Consolidated Statements of Financial Condition		Net Amounts Presented in the Consolidated Statements of Financial Condition		Gross 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.

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Note 13 – Variable Interest Entities

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

As of 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, 2023						December 31, 2022
(Dollars in thousands)	Maximum Loss		Assets		Liabilities		Maximum Loss		Assets		Liabilities
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.

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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.

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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 Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in thousands)	2023			2023			2022			2023			2022
Net income	$	46,030		$	57,636		$	73,363		$	166,228		$	210,070
Plus: amortization of intangible assets expense	3,055			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 assets	48,150			51,180			61,101			51,191			64,588
Less: average goodwill	901,312			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 equity	6.43		%	8.11		%	10.57		%	7.80		%	10.00		%
Return on average tangible common equity	10.08		%	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)	2023			2022
Total stockholders’ equity	$	2,855,534		$	2,798,389
Less: intangible assets	947,619			956,900
Tangible common equity	$	1,907,915		$	1,841,489
Total assets	$	20,275,720		$	21,688,017
Less: intangible assets	947,619			956,900
Tangible assets	$	19,328,101		$	20,731,117
Tangible common equity ratio	9.87		%	8.88		%
Common shares issued and outstanding	95,900,847			95,021,760
Book value per share	$	29.78		$	29.45
Less: intangible book value per share	9.88			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 Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in thousands)	2023			2023			2022			2023			2022
Total noninterest expense	$	102,185		$	100,644		$	100,866		$	304,181		$	297,488
Less: amortization of intangible assets	3,055			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 income	18,551			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 ratio	59.0		%	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 Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in thousands)	2023			2023			2022			2023			2022
Interest income	$	224,062		$	225,388		$	199,025		$	670,793		$	550,797
Interest expense	74,514			65,296			17,913			192,543			35,081
Net interest income	149,548			160,092			181,112			478,250			515,716
Noninterest income	18,551			20,539			20,164			60,276			68,251
Revenue	168,099			180,631			201,276			538,526			583,967
Noninterest expense	102,185			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 assets	0.32		%	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 Ended									Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in thousands)	2023			2023			2022			2023			2022
Total deposits interest expense	$	62,718		$	53,580		$	9,873		$	156,532		$	14,228
Less: certificates of deposit interest expense	13,398			10,306			1,420			31,479			2,557
Less: brokered certificates of deposit interest expense	19,174			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 deposit	1,439,531			1,286,160			835,645			1,311,737			934,518
Less: average brokered certificates of deposit	1,611,726			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 deposits	0.89		%	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 Ended									Nine Months Ended
(Dollar in thousands, except per share data and	September 30,			June 30,			September 30,			September 30,			September 30,
percentages)	2023			2023			2022			2023			2022
Operating data
Interest income	$	224,062		$	225,388		$	199,025		$	670,793		$	550,797
Interest expense	74,514			65,296			17,913			192,543			35,081
Net interest income	149,548			160,092			181,112			478,250			515,716
Provision for credit losses	3,918			1,499			1,077			8,433			1,994
Net interest income after provision for credit losses	145,630			158,593			180,035			469,817			513,722
Net gain from sales of loans	45			345			457			419			3,087
Other noninterest income	18,506			20,194			19,707			59,857			65,164
Noninterest expense	102,185			100,644			100,866			304,181			297,488
Net income before income taxes	61,996			78,488			99,333			225,912			284,485
Income tax expense	15,966			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
Diluted	0.48			0.60			0.77			1.74			2.21
Common equity dividends declared per share	0.33			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 margin	3.12			3.33			3.61			3.30			3.50
Cost of deposits	1.50			1.27			0.22			1.24			0.11
Average equity to average assets	13.76			13.50			12.80			13.42			13.06
Efficiency ratio (2)	59.0			54.1			48.3			54.8			49.3

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(1) Dividend payout ratio is defined as common equity dividends declared per share divided by basic earnings per share.

(2) Reconciliations of the non-GAAP measures are set forth in the Non-GAAP measures section of Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.

(3) Ratio is annualized.

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.

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The following table presents the net interest margin, average balances calculated based on daily average, interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, and the average yield/rate by asset and liability component for the periods indicated:

	Average Balance Sheet
	Three Months Ended
	September 30, 2023						June 30, 2023						September 30, 2022
(Dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average 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 securities	3,828,766		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 assets	18,999,468		224,062		4.68	%	19,286,850		225,388		4.69	%	19,929,636		199,025		3.96	%
Noninterest-earning assets	1,806,319						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 market	4,512,740		19,182		1.69	%	4,644,623		15,644		1.35	%	5,053,890		2,940		0.23	%
Savings	329,684		115		0.14	%	352,377		102		0.12	%	434,591		28		0.03	%
Retail certificates of deposit	1,439,531		13,398		3.69	%	1,286,160		10,306		3.21	%	835,645		1,420		0.67	%
Wholesale/brokered certificates of deposit	1,611,726		19,174		4.72	%	1,767,970		18,869		4.28	%	702,785		3,827		2.16	%
Total interest-bearing deposits	10,542,884		62,718		2.36	%	10,797,708		53,580		1.99	%	10,839,359		9,873		0.36	%
FHLB advances and other borrowings	800,049		7,235		3.59	%	800,016		7,155		3.59	%	636,006		3,480		2.17	%
Subordinated debentures	331,607		4,561		5.50	%	331,449		4,561		5.50	%	330,975		4,560		5.51	%
Total borrowings	1,131,656		11,796		4.15	%	1,131,465		11,716		4.15	%	966,981		8,040		3.31	%
Total interest-bearing liabilities	11,674,540		74,514		2.53	%	11,929,173		65,296		2.20	%	11,806,340		17,913		0.60	%
Noninterest-bearing deposits	6,001,033						6,078,543						6,893,463
Other liabilities	268,249						206,929						212,509
Total liabilities	17,943,822						18,214,645						18,912,312
Stockholders’ equity	2,861,965						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 liabilities					162.74	%					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, 2023						September 30, 2022
(Dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets
Interest-earning assets:
Cash and cash equivalents	$	1,489,404	$	51,390	4.61	%	$	564,727	$	4,055	0.96	%
Investment securities	3,972,437		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 assets	19,390,843		670,793		4.63	%	19,680,163		550,797		3.74	%
Noninterest-earning assets	1,788,826						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 market	4,714,727		47,879		1.36	%	5,208,713		4,838		0.12	%
Savings	377,928		725		0.26	%	429,833		81		0.03	%
Retail certificates of deposit	1,311,737		31,479		3.21	%	934,518		2,557		0.37	%
Wholesale/brokered certificates of deposit	1,608,442		51,099		4.25	%	263,563		4,153		2.11	%
Total interest-bearing deposits	10,813,015		156,532		1.94	%	10,639,559		14,228		0.18	%
FHLB advances and other borrowings	861,940		22,328		3.46	%	489,464		7,171		1.96	%
Subordinated debentures	331,452		13,683		5.50	%	330,801		13,682		5.51	%
Total borrowings	1,193,392		36,011		4.03	%	820,265		20,853		3.39	%
Total interest-bearing liabilities	12,006,407		192,543		2.14	%	11,459,824		35,081		0.41	%
Noninterest-bearing deposits	6,098,997						6,950,717
Other liabilities	231,547						229,121
Total liabilities	18,336,951						18,639,662
Stockholders’ equity	2,842,718						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 liabilities					161.50	%					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)	Volume		Rate		Net
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 deposit	1,374		1,718		3,092
Wholesale/brokered certificates of deposit	(1,669)		1,974		305
FHLB advances and other borrowings	4		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)	Volume		Rate		Net
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 deposit	1,669		10,309		11,978
Wholesale/brokered certificates of deposit	7,999		7,348		15,347
FHLB advances and other borrowings	1,062		2,693		3,755
Subordinated debentures	9		(8)		1
Total interest-bearing liabilities	10,123		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)	Volume		Rate		Net
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 deposit	1,433		27,489		28,922
Wholesale/brokered certificates of deposit	39,065		7,881		46,946
FHLB advances and other borrowings	7,553		7,604		15,157
Subordinated debentures	27		(26)		1
Total interest-bearing liabilities	47,138		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 Ended						Variance From
	September 30,		June 30,		September 30,		June 30, 2023				September 30, 2022
(Dollars in thousands)	2023		2023		2022		$		%		$		%
Provision for credit losses
Provision for loan losses	$	2,517	$	610	$	546	$	1,907	312.6	%	$	1,971	361.0	%
Provision for unfunded commitments	1,386		1,003		549		383		38.2	%	837		152.5	%
Provision for HTM securities	15		(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 Ended				Variance From
	September 30,		September 30,		September 30, 2022
(Dollars in thousands)	2023		2022		$		%
Provision for credit losses
Provision for loans losses	$	6,148	$	4,560	$	1,588	34.8	%
Provision for unfunded commitments	2,200		(2,635)		4,835		(183.5)	%
Provision for held-to-maturity securities	85		$	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 Ended						Variance From
	September 30,		June 30,		September 30,		June 30, 2023				September 30, 2022
(Dollars in thousands)	2023		2023		2022		$		%		$		%
Noninterest income
Loan servicing income	$	533	$	493	$	397	$	40	8.1	%	$	136	34.3	%
Service charges on deposit accounts	2,673		2,670		2,704		3		0.1	%	(31)		(1.1)	%
Other service fee income	280		315		323		(35)		(11.1)	%	(43)		(13.3)	%
Debit card interchange fee income	924		914		808		10		1.1	%	116		14.4	%
Earnings on bank owned life insurance	3,579		3,487		3,339		92		2.6	%	240		7.2	%
Net gain from sales of loans	45		345		457		(300)		(87.0)	%	(412)		(90.2)	%
Net gain (loss) from sales of investment securities	—		—		(393)		—		—	%	393		100.0	%
Trust custodial account fees	9,356		9,360		9,951		(4)		—	%	(595)		(6.0)	%
Escrow and exchange fees	938		924		1,555		14		1.5	%	(617)		(39.7)	%
Other income	223		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 Ended				Variance From
	September 30,		September 30,		September 30, 2022
(Dollars in thousands)	2023		2022		$		%
Noninterest income
Loan servicing income	$	1,599	$	1,318	$	281	21.3	%
Service charges on deposit accounts	7,972		8,009		(37)		(0.5)	%
Other service fee income	891		1,056		(165)		(15.6)	%
Debit card interchange fee income	2,641		2,580		61		2.4	%
Earnings on bank owned life insurance	10,440		9,800		640		6.5	%
Net gain from sales of loans	419		3,087		(2,668)		(86.4)	%
Net gain from sales of investment securities	138		1,710		(1,572)		(91.9)	%
Trust custodial account fees	29,741		31,884		(2,143)		(6.7)	%
Escrow and exchange fees	2,920		5,043		(2,123)		(42.1)	%
Other income	3,515		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 Ended						Variance From
	September 30,		June 30,		September 30,		June 30, 2023				September 30, 2022
(Dollars in thousands)	2023		2023		2022		$		%		$		%
Noninterest expense
Compensation and benefits	$	54,068	$	53,424	$	56,355	$	644	1.2	%	$	(2,287)	(4.1)	%
Premises and occupancy	11,382		11,615		12,011		(233)		(2.0)	%	(629)		(5.2)	%
Data processing	7,517		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 premiums	2,324		2,357		1,461		(33)		(1.4)	%	863		59.1	%
Legal and professional services	4,243		4,716		4,075		(473)		(10.0)	%	168		4.1	%
Marketing expense	1,635		1,879		1,912		(244)		(13.0)	%	(277)		(14.5)	%
Office expense	1,079		1,280		1,338		(201)		(15.7)	%	(259)		(19.4)	%
Loan expense	476		567		789		(91)		(16.0)	%	(313)		(39.7)	%
Deposit expense	10,811		9,194		4,846		1,617		17.6	%	5,965		123.1	%
Amortization of intangible assets	3,055		3,055		3,472		—		—	%	(417)		(12.0)	%
Other expense	5,599		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 Ended				Variance From
	September 30,		September 30,		September 30, 2022
(Dollars in thousands)	2023		2022		$		%
Noninterest expense
Compensation and benefits	$	161,785	$	170,898	$	(9,113)	(5.3)	%
Premises and occupancy	34,739		35,792		(1,053)		(2.9)	%
Data processing	22,270		19,658		2,612		13.3	%
Other real estate owned operations, net	112		—		112		100.0	%
FDIC insurance premiums	7,106		4,309		2,797		64.9	%
Legal and professional services	14,460		12,772		1,688		13.2	%
Marketing expense	5,352		5,647		(295)		(5.2)	%
Office expense	3,591		3,793		(202)		(5.3)	%
Loan expense	1,689		3,067		(1,378)		(44.9)	%
Deposit expense	28,441		12,678		15,763		124.3	%
Amortization of intangible assets	9,281		10,543		(1,262)		(12.0)	%
Other expense	15,355		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.

75

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, 2023						December 31, 2022
(Dollars in thousands)	Amount		Percent of Total		Weighted Average Interest Rate		Amount		Percent 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	%
Multifamily	5,719,210		43.1	%	3.93	%	6,112,026		41.6	%	3.86	%
Construction and land	444,576		3.4	%	9.11	%	399,034		2.7	%	8.24	%
SBA secured by real estate	37,754		0.3	%	9.19	%	42,135		0.3	%	7.61	%
Total investor loans secured by real estate	8,715,596		65.7	%	4.44	%	9,213,516		62.7	%	4.25	%
Business loans secured by real estate
CRE owner-occupied	2,228,802		16.8	%	4.32	%	2,432,163		16.6	%	4.22	%
Franchise real estate secured	313,451		2.4	%	4.73	%	378,057		2.6	%	4.75	%
SBA secured by real estate	53,668		0.4	%	8.85	%	61,368		0.4	%	7.45	%
Total business loans secured by real estate	2,595,921		19.6	%	4.46	%	2,871,588		19.6	%	4.36	%
Commercial loans
Commercial and industrial	1,588,771		12.0	%	6.84	%	2,160,948		14.7	%	6.32	%
Franchise non-real estate secured	335,053		2.5	%	4.97	%	404,791		2.8	%	4.91	%
SBA non-real estate secured	10,667		0.1	%	9.67	%	11,100		0.1	%	7.83	%
Total commercial loans	1,934,491		14.6	%	6.53	%	2,576,839		17.6	%	6.11	%
Retail loans
Single family residential	70,984		0.5	%	6.79	%	72,997		0.5	%	5.51	%
Consumer	1,958		—	%	6.62	%	3,284		—	%	6.29	%
Total retail loans	72,942		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 investment	13,270,120		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 value	641						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 Days				60 - 89 Days				90 Days or More				Total
(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 industrial	10	2,677			7	143			1	233			18	3,053
SBA non-real estate secured	2	289			—	—			1	538			3	827
Total commercial loans	12	2,966			7	143			2	771			21	3,880
Retail loans
Consumer	1	1			—	—			—	—			1	1
Total retail loans	1	1			—	—			—	—			1	1
Total	13	$	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 Days				60 - 89 Days				90 Days or More				Total
(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
Multifamily	1	2,723			—	—			2	6,057			3	8,780
Total investor loans secured by real estate	1	2,723			—	—			4	10,486			5	13,209
Business loans secured by real estate
CRE owner-occupied	3	1,434			—	—			4	6,555			7	7,989
Franchise real estate secured	2	7,073			—	—			—	—			2	7,073
SBA secured by real estate	—	—			1	104			2	1,087			3	1,191
Total business loans secured by real estate	5	8,507			1	104			6	7,642			12	16,253
Commercial loans
Commercial and industrial	9	4,657			9	81			4	3,908			22	8,646
Franchise non-real estate secured	5	3,592			—	—			—	—			5	3,592
SBA non-real estate secured	—	—			—	—			1	589			1	589
Total commercial loans	14	8,249			9	81			5	4,497			28	12,827
Retail loans
Single family residential	2	1,057			—	—			—	—			2	1,057
Consumer	1	2			—	—			—	—			1	2
Total retail loans	3	1,059			—	—			—	—			3	1,059
Total	23	$	20,538		10	$	185		15	$	22,625		48	$	43,348
Delinquent loans to loans held for investment		0.14		%		—		%		0.16		%		0.30		%

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)	Pass		Special Mention		Substandard		Doubtful		Total 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
Multifamily	5,706,494		234		12,482		—		5,719,210
Construction and land	444,576		—		—		—		444,576
SBA secured by real estate	29,343		—		8,411		—		37,754
Total investor loans secured by real estate	8,655,967		7,239		52,390		—		8,715,596
Business loans secured by real estate
CRE owner-occupied	2,167,522		34,811		26,469		—		2,228,802
Franchise real estate secured	294,520		13,871		5,060		—		313,451
SBA secured by real estate	47,734		619		5,315		—		53,668
Total business loans secured by real estate	2,509,776		49,301		36,844		—		2,595,921
Commercial loans
Commercial and industrial	1,445,826		102,152		35,824		4,969		1,588,771
Franchise non-real estate secured	312,418		4,396		18,239		—		335,053
SBA non-real estate secured	9,676		—		991		—		10,667
Total commercial loans	1,767,920		106,548		55,054		4,969		1,934,491
Retail loans
Single family residential	70,983		—		1		—		70,984
Consumer loans	1,958		—		—		—		1,958
Total retail loans	72,941		—		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
Multifamily	6,089,836		12,667		9,523		—		6,112,026
Construction and land	399,034		—		—		—		399,034
SBA secured by real estate	33,161		—		8,974		—		42,135
Total investor loans secured by real estate	9,169,638		20,154		23,724		—		9,213,516
Business loans secured by real estate
CRE owner-occupied	2,363,719		2,351		66,093		—		2,432,163
Franchise real estate secured	352,645		18,036		7,376		—		378,057
SBA secured by real estate	55,865		118		5,385		—		61,368
Total business loans secured by real estate	2,772,229		20,505		78,854		—		2,871,588
Commercial loans
Commercial and industrial	2,093,726		31,273		35,949		—		2,160,948
Franchise non-real estate secured	368,013		27,583		9,195		—		404,791
SBA non-real estate secured	9,550		—		1,550		—		11,100
Total commercial loans	2,471,289		58,856		46,694		—		2,576,839
Retail loans
Single family residential	72,992		—		5		—		72,997
Consumer loans	3,257		—		27		—		3,284
Total retail loans	76,249		—		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, 2023			December 31, 2022
Nonperforming assets
Investor loans secured by real estate
CRE non-owner-occupied	$	425		$	4,429
Multifamily	—			8,780
SBA secured by real estate	1,242			533
Total investor loans secured by real estate	1,667			13,742
Business loans secured by real estate
CRE owner-occupied	8,826			11,475
SBA secured by real estate	1,173			1,191
Total business loans secured by real estate	9,999			12,666
Commercial loans
Commercial and industrial	13,254			3,908
SBA non-real estate secured	538			589
Total commercial loans	13,792			4,497
Total nonperforming loans	25,458			30,905
Other real estate owned	450			—
Total	$	25,908		$	30,905
Allowance for credit losses	$	188,098		$	195,651
Allowance for credit losses as a percent of total nonperforming loans	739		%	633		%
Nonperforming loans as a percent of loans held for investment	0.19		%	0.21		%
Nonperforming assets as a percent of total assets	0.13		%	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:

______________________________

(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, 2023						December 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	%
Multifamily	55,221		0.97	%	43.1	%	56,334		0.92	%	41.6	%
Construction and land	8,506		1.91	%	3.4	%	7,114		1.78	%	2.7	%
SBA secured by real estate	2,199		5.82	%	0.3	%	2,592		6.15	%	0.3	%
Total investor loans secured by real estate	97,509		1.12	%	65.7	%	99,732		1.08	%	62.7	%
Business loans secured by real estate
CRE owner-occupied	29,086		1.31	%	16.8	%	32,340		1.33	%	16.6	%
Franchise real estate secured	7,566		2.41	%	2.4	%	7,019		1.86	%	2.6	%
SBA secured by real estate	4,562		8.50	%	0.4	%	4,348		7.09	%	0.4	%
Total business loans secured by real estate	41,214		1.59	%	19.6	%	43,707		1.52	%	19.6	%
Commercial loans
Commercial and industrial	32,497		2.05	%	12.0	%	35,169		1.63	%	14.7	%
Franchise non-real estate secured	15,779		4.71	%	2.5	%	16,029		3.96	%	2.8	%
SBA non-real estate secured	472		4.42	%	0.1	%	441		3.97	%	0.1	%
Total commercial loans	48,748		2.52	%	14.6	%	51,639		2.00	%	17.6	%
Retail loans
Single family residential	491		0.69	%	0.5	%	352		0.48	%	0.5	%
Consumer loans	136		6.95	%	—	%	221		6.73	%	—	%
Total retail loans	627		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, 2023					June 30, 2023					September 30, 2022
(Dollars in thousands)	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage
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 estate	108		38,473		0.28%	—		39,212		—%	—		43,336		—%
Total investor loans secured by real estate	57		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 industrial	6,821		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 secured	64		11,841		0.54%	(59)		11,086		(0.53)%	(26)		12,718		(0.20)%
Total commercial loans	6,835		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 investment					1.42%					1.41%					1.31%
Nonperforming loans to loans held for investment					0.19%					0.12%					0.41%
Allowance for credit losses to nonperforming loans					739%					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.

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	For the Nine Months Ended
	September 30, 2023					September 30, 2022
(Dollars in thousands)	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage	Net Charge-offs (Recoveries)		Average Loan Balance		Percentage
Investor loans secured by real estate
CRE non-owner-occupied	$	2,591	$	2,593,463	0.10%	$	1,128	$	2,767,770	0.04%
Multifamily	289		5,877,859		—%	—		6,083,095		—%
Construction and land	—		425,005		—%	—		321,860		—%
SBA secured by real estate	108		39,560		0.27%	70		45,733		0.15%
Total investor loans secured by real estate	2,988		8,935,887		0.03%	1,198		9,218,458		0.01%
Business loans secured by real estate
CRE owner-occupied	2,334		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 estate	2,126		2,713,678		0.08%	(33)		2,854,575		—%
Commercial loans
Commercial and industrial	7,789		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 loans	7,638		2,258,608		0.34%	5,687		2,636,107		0.22%
Retail loans
Single family residential	89		71,183		0.13%	(91)		79,683		(0.11)%
Consumer	860		2,829		30.40%	2		4,399		0.05%
Total retail loans	949		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 investment					1.42%					1.31%
Nonperforming loans to loans held for investment					0.19%					0.41%
Allowance for credit losses to nonperforming loans					739%					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.

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Investment Securities

We primarily use our investment portfolio for liquidity purposes, capital preservation, and to support our interest rate risk management strategies. Investments totaled $3.65 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.

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The following table sets forth the fair value of AFS and the amortized cost of HTM investment securities as well as the weighted average yields on our investment security portfolio by contractual maturity as of the date indicated. Weighted average yields are an arithmetic computation of income within each maturity range based on the amortized costs of securities, not on a tax-equivalent basis.

	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)	Amount		Weighted Average Yield		Amount		Weighted Average Yield		Amount		Weighted Average Yield		Amount		Weighted Average Yield		Amount		Weighted Average Yield
Investment securities available-for-sale:
U.S. Treasury	$	—	—	%	$	12,914	1.33	%	$	—	—	%	$	—	—	%	$	12,914	1.33	%
Agency	78,561		2.32	%	224,454		0.60	%	84,760		1.42	%	17,739		1.58	%	405,514		1.14	%
Corporate	12,974		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 securities	5,538		3.47	%	—		—	%	410,229		1.16	%	271,266		1.72	%	687,033		1.41	%
Total securities available-for-sale	97,073		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. Treasury		Agency		Corporate Debt		Municipal Bonds		Collateralized Mortgage Obligations		Mortgage-backed Securities		Other		Total		%
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, 2023						December 31, 2022
(Dollars in thousands)	Balance		% of Total Deposits		Weighted Average Rate		Balance		% of Total Deposits		Weighted Average Rate
Noninterest-bearing checking	$	5,782,305	36.1	%	—	%	$	6,306,825	36.4	%	—	%
Interest-bearing deposits:
Interest-bearing checking	2,598,449		16.2	%	1.34	%	3,119,850		18.0	%	0.63	%
Money market	4,556,574		28.5	%	1.82	%	4,946,019		28.5	%	0.85	%
Savings	317,008		2.0	%	0.22	%	476,588		2.7	%	0.49	%
Total non-maturity deposits	13,254,336		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 - 1.99	22,804		0.1	%	1.69	%	193,529		1.1	%	1.78	%
2.00 - 2.99	73,508		0.5	%	2.59	%	431,042		2.5	%	2.47	%
3.00 - 3.99	474,962		3.0	%	3.53	%	645,228		3.7	%	3.44	%
4.00 - 4.99	1,325,205		8.3	%	4.42	%	834,543		4.8	%	4.42	%
5.00 and greater	725,962		4.5	%	5.31	%	—		—	%	—	%
Total time deposit accounts	2,753,111		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, 2023		December 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, 2023		December 31, 2022
3 months or less	$	224,876	$	199,742
Over 3 months through 6 months	136,077		109,659
Over 6 months through 12 months	84,867		50,707
Over 12 months	18,726		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, 2023					December 31, 2022
(Dollars in thousands)	Balance			Weighted Average Rate		Balance			Weighted Average Rate
FHLB advances	$	800,000		3.59	%	$	1,000,000		3.19	%
Subordinated debentures	331,682			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 quarter	4.15		%			3.62		%
Borrowings as a percent of total assets	5.6		%			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.

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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.

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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 year		More than 1 year		Total
FHLB advances and other borrowings	$	400,000	$	400,000	$	800,000
Subordinated debentures	59,880		271,802		331,682
Certificates of deposit	2,700,495		52,616		2,753,111
Operating leases	19,144		35,604		54,748
Affordable housing partnerships commitment	12,348		23,569		35,917
Total contractual cash obligations	$	3,191,867	$	783,591	$	3,975,458

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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 year		More than 1 year		Total
Loan commitments to extend credit	$	1,356,752	$	706,248	$	2,063,000
Standby letters of credit	47,565		—		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. 

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Regulatory Capital Compliance

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.

Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III,” became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital requirements, which fully phased in by January 1, 2019, in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At 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.

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As defined in applicable regulations and set forth in the table below, the Corporation and the Bank continue to exceed the regulatory capital minimum requirements, and the Bank continues to exceed the “well capitalized” standards and the required conservation buffer at the dates indicated:

	Actual	Minimum Required for Capital Adequacy Purposes Inclusive of Capital Conservation Buffer	Minimum Required For Well Capitalized Requirement
September 30, 2023
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio	11.13%	4.00%	N/A
Common equity tier 1 capital ratio	14.87%	7.00%	N/A
Tier 1 capital ratio	14.87%	8.50%	N/A
Total capital ratio	17.74%	10.50%	N/A
Pacific Premier Bank
Tier 1 leverage ratio	12.42%	4.00%	5.00%
Common equity tier 1 capital ratio	16.59%	7.00%	6.50%
Tier 1 capital ratio	16.59%	8.50%	8.00%
Total capital ratio	17.66%	10.50%	10.00%
December 31, 2022
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 leverage ratio	10.29%	4.00%	N/A
Common equity tier 1 capital ratio	12.99%	7.00%	N/A
Tier 1 capital ratio	12.99%	8.50%	N/A
Total capital ratio	15.53%	10.50%	N/A
Pacific Premier Bank
Tier 1 leverage ratio	11.80%	4.00%	5.00%
Common equity tier 1 capital ratio	14.89%	7.00%	6.50%
Tier 1 capital ratio	14.89%	8.50%	8.00%
Total capital ratio	15.74%	10.50%	10.00%

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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 Risk			Projected Net Interest Margin
Change in Rates (Basis Points)	$ Amount	$ Change	% Change	Rate %
300	645,486	22,786	3.7	3.57
200	640,202	17,502	2.8	3.54
100	633,093	10,393	1.7	3.50
Static	622,700	—	—	3.44
-100	599,995	(22,705)	(3.6)	3.32
-200	569,128	(53,572)	(8.6)	3.15
-300	535,011	(87,689)	(14.1)	2.96

December 31, 2022
(Dollars in thousands)
	Earnings at Risk			Projected Net Interest Margin
Change in Rates (Basis Points)	$ Amount	$ Change	% Change	Rate %
200	787,390	32,342	4.3	4.03
100	772,657	17,609	2.3	3.95
Static	755,048	—	—	3.86
-100	727,456	(27,592)	(3.7)	3.72
-200	681,562	(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	% Change	EVE Ratio
300	3,290,008	(87,985)	(2.6)	19.18
200	3,356,730	(21,263)	(0.6)	18.99
100	3,403,117	25,124	0.7	18.66
Static	3,377,993	—	—	17.95
-100	3,288,581	(89,412)	(2.6)	16.93
-200	3,139,280	(238,713)	(7.1)	15.66
-300	2,924,831	(453,162)	(13.4)	14.14

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December 31, 2022
(Dollars in thousands)
	Economic Value of Equity			EVE as % of market value of portfolio assets
Change in Rates (Basis Points)	$ Amount	$ Change	% Change	EVE Ratio
200	3,910,396	9,655	0.2	20.39
100	3,949,678	48,937	1.3	19.95
Static	3,900,741	—	—	19.09
-100	3,770,385	(130,356)	(3.3)	17.88
-200	3,554,253	(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.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

The section titled Risk Factors in Part I, Item 1A of our 2022 Form 10-K included a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. 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.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum 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).

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Item 6.  Exhibits

Exhibit 3.1	Second Amended and Restated Certificate of Incorporation of Pacific Premier Bancorp, Inc. (1)
Exhibit 3.2	Amended and Restated Bylaws of Pacific Premier Bancorp, Inc. (1)
Exhibit 4.1	Specimen Stock Certificate of Pacific Premier Bancorp, Inc. (2)
Exhibit 4.2	Long-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	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS	XBRL 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.SCH	Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF	Inline XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE	Inline 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.

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

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