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PPBI Pacific Premier Bancorp

Filed: 7 May 21, 5:20pm
0001028918us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberus-gaap:CorporateDebtSecuritiesMember2020-12-31

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
FORM 10-Q 
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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
 ppbi-20210331_g1.jpg
(Exact name of registrant as specified in its charter) 
Delaware33-0743196
(State or other jurisdiction of incorporation or organization)(I.R.S Employer Identification No.)
 
17901 Von Karman Avenue, Suite 1200, Irvine, California 92614
(Address of principal executive offices and zip code)
(949) 864-8000
(Registrant’s telephone number, including area code)

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, par value $0.01 per sharePPBINASDAQ Global Select Market
The number of shares outstanding of the registrant’s common stock as of April 30, 2021 was 94,650,895.



PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED MARCH 31, 2021
2


PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
(Unaudited)
March 31,
2021
December 31,
2020
ASSETS
Cash and due from banks$118,258 $135,429 
Interest-bearing deposits with financial institutions1,436,410 745,337 
Cash and cash equivalents1,554,668 880,766 
Interest-bearing time deposits with financial institutions2,708 2,845 
Investments held-to-maturity, at amortized cost (fair value of $23,004 and $25,013 as of March 31, 2021 and December 31, 2020, respectively)21,931 23,732 
Investment securities available-for-sale, at fair value3,857,337 3,931,115 
FHLB, FRB, and other stock, at cost117,843 117,055 
Loans held for sale, at lower of cost or fair value7,311 601 
Loans held for investment13,117,392 13,236,433 
Allowance for credit losses(266,999)(268,018)
Loans held for investment, net12,850,393 12,968,415 
Accrued interest receivable65,098 74,574 
Premises and equipment76,329 78,884 
Deferred income taxes, net104,450 89,056 
Bank owned life insurance292,932 292,564 
Intangible assets81,364 85,507 
Goodwill900,204 898,569 
Other assets240,730 292,861 
Total assets$20,173,298 $19,736,544 
LIABILITIES 
Deposit accounts: 
Noninterest-bearing checking$6,302,703 $6,011,106 
Interest-bearing: 
Checking3,155,071 2,913,260 
Money market/savings5,911,417 5,662,969 
Retail certificates of deposit1,353,431 1,471,512 
Wholesale/brokered certificates of deposit17,385 155,330 
Total interest-bearing10,437,304 10,203,071 
Total deposits16,740,007 16,214,177 
FHLB advances and other borrowings10,000 31,000 
Subordinated debentures501,611 501,511 
Accrued expenses and other liabilities218,582 243,207 
Total liabilities17,470,200 16,989,895 
STOCKHOLDERS’ EQUITY 
Preferred stock, $0.01 par value; 1,000,000 authorized; 0ne issued and outstanding
Common stock, $0.01 par value; 150,000,000 shares authorized at March 31, 2021 and December 31, 2020; 94,644,415 shares and 94,483,136 shares issued and outstanding, respectively.931 931 
Additional paid-in capital2,348,445 2,354,871 
Retained earnings368,911 330,555 
Accumulated other comprehensive (loss) income(15,189)60,292 
Total stockholders’ equity2,703,098 2,746,649 
Total liabilities and stockholders’ equity$20,173,298 $19,736,544 
Accompanying notes are an integral part of these consolidated financial statements.
3


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data)
(Unaudited)
 Three Months Ended
 March 31,December 31,March 31,
202120202020
INTEREST INCOME
Loans$155,225 $163,499 $113,265 
Investment securities and other interest-earning assets17,769 17,325 10,524 
Total interest income172,994 180,824 123,789 
INTEREST EXPENSE
Deposits4,426 5,685 10,487 
FHLB advances and other borrowings65 121 1,081 
Subordinated debentures6,851 6,820 3,046 
Total interest expense11,342 12,626 14,614 
Net interest income before provision for credit losses161,652 168,198 109,175 
Provision for credit losses1,974 1,517 25,454 
Net interest income after provision for credit losses159,678 166,681 83,721 
NONINTEREST INCOME
Loan servicing income458 633 480 
Service charges on deposit accounts2,032 2,005 1,715 
Other service fee income473 459 311 
Debit card interchange fee income787 777 348 
Earnings on bank-owned life insurance2,233 2,240 1,336 
Net gain from sales of loans361 328 771 
Net gain from sales of investment securities4,046 5,002 7,760 
Trust custodial account fees7,222 7,296 
Escrow and exchange fees1,526 1,257 
Other income4,602 3,197 1,754 
Total noninterest income23,740 23,194 14,475 
NONINTEREST EXPENSE
Compensation and benefits52,548 52,044 34,376 
Premises and occupancy11,980 13,268 8,168 
Data processing5,828 5,990 3,253 
Other real estate owned operations, net(5)14 
FDIC insurance premiums1,181 1,213 367 
Legal and professional services3,935 4,305 3,126 
Marketing expense1,598 1,442 1,412 
Office expense1,829 2,191 1,103 
Loan expense1,115 1,084 822 
Deposit expense3,859 5,026 4,988 
Merger-related expense5,071 1,724 
Amortization of intangible assets4,143 4,505 3,965 
Other expense4,468 3,805 3,313 
Total noninterest expense92,489 99,939 66,631 
Net income before income taxes90,929 89,936 31,565 
Income tax expense22,261 22,800 5,825 
Net income$68,668 $67,136 $25,740 
EARNINGS PER SHARE
Basic$0.73 $0.71 $0.43 
Diluted0.72 0.71 0.43 
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic93,529,147 93,568,994 59,007,191 
Diluted94,093,644 93,969,188 59,189,717 
Accompanying notes are an integral part of these consolidated financial statements.
4


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(Dollars in thousands)
(Unaudited)
 Three Months Ended
 March 31,December 31,March 31,
 202120202020
Net income$68,668 $67,136 $25,740 
Other comprehensive income (loss), net of tax:
Unrealized (loss) gain on securities available-for-sale arising during the period, net of income taxes (1)
(72,592)18,201 28,420 
Reclassification adjustment for net gain on sales of securities included in net income, net of income taxes (2)
(2,889)(3,572)(5,534)
Other comprehensive (loss) income, net of tax(75,481)14,629 22,886 
Comprehensive (loss) income, net of tax$(6,813)$81,765 $48,626 
______________________________
(1) Income tax (benefit) expense on the unrealized (loss) gain on securities was $(29.1) million for the three months ended March 31, 2021, $7.2 million for the three months ended December 31, 2020, and $11.4 million for the three months ended March 31, 2020.
(2) Income tax expense (benefit) on the reclassification adjustment for net gain (loss) on sales of securities included in net income was $1.2 million for the three months ended March 31, 2021, $1.4 million for the three months ended December 31, 2020, and $2.2 million for the three months ended March 31, 2020.


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

5


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2021 and 2020
(Dollars in thousands, except share data)
(Unaudited)
 Common Stock
Shares
Common StockAdditional Paid-in CapitalAccumulated Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
Balance at December 31, 202094,483,136 $931 $2,354,871 $330,555 $60,292 $2,746,649 
Net income— — — 68,668 — 68,668 
Other comprehensive loss— — — — (75,481)(75,481)
Repurchase and retirement of common stock(199,674)(2)(4,977)(1,918)— (6,897)
Cash dividends declared ($0.30 per common share)— — — (28,287)— (28,287)
Dividend equivalents declared ($0.30 per restricted stock unit)— — 107 (107)— 
Share-based compensation expense— — 3,105 — — 3,105 
Issuance of restricted stock, net419,757 (2)— — 
Restricted stock surrendered and canceled(100,550)— (5,279)— — (5,279)
Exercise of stock options41,746 — 620 — — 620 
Balance at March 31, 202194,644,415 $931 $2,348,445 $368,911 $(15,189)$2,703,098 

Balance at December 31, 201959,506,057 $586 $1,594,434 $396,051 $21,523 $2,012,594 
Net income— — — 25,740 — 25,740 
Other comprehensive income— — — — 22,886 22,886 
Cash dividends declared ($0.25 per common share)— — — (14,882)— (14,882)
Dividend equivalents declared ($0.25 per restricted stock unit)— — 42 (42)— 
Share-based compensation expense— — 2,309 — — 2,309 
Issuance of restricted stock, net446,815 — — — — 
Restricted stock surrendered and canceled(29,474)— (1,008)— — (1,008)
Exercise of stock options51,883 — 903 — — 903 
Cumulative effect of the change in accounting principle (1)
— — — (45,625)— (45,625)
Balance at March 31, 202059,975,281 $586 $1,596,680 $361,242 $44,409 $2,002,917 
__________________
(1) Related to the adoption of Accounting Standards Update 2016-13Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

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


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 Three Months Ended
 March 31,
 20212020
Cash flows from operating activities:  
Net income$68,668 $25,740 
Adjustments to net income:  
Depreciation and amortization expense4,009 2,580 
Provision for credit losses1,974 25,454 
Share-based compensation expense3,105 2,309 
Loss on sales and disposals of premises and equipment10 
Net amortization on securities5,983 1,238 
Net (accretion) of discounts/premiums for acquired loans and deferred loan fees/costs(10,833)(5,604)
Gain on sales of investment securities available-for-sale(4,046)(7,760)
Loss on debt extinguishment503 
Originations of loans held for sale(7,768)(10,491)
Proceeds from the sales of and principal payments from loans held for sale970 13,961 
Gain on sales of loans(361)(771)
Deferred income tax expense (benefit)14,650 (7,476)
Change in accrued expenses and other liabilities, net(34,203)(5,058)
Income from bank owned life insurance, net(1,675)(1,129)
Amortization of intangible assets4,143 3,965 
Change in accrued interest receivable and other assets, net60,176 8,953 
Net cash provided by operating activities105,302 45,921 
Cash flows from investing activities:  
Net decrease in interest-bearing time deposits with financial institutions137 
Loan originations and payments, net128,540 11,902 
Proceeds from loans held for sale previously classified as portfolio loans449 25,038 
Purchase of loans held for investment(66,470)
Proceeds from prepayments and maturities of securities held-to-maturity1,807 3,234 
Purchase of securities available-for-sale(364,542)(104,725)
Proceeds from prepayments and maturities of securities available-for-sale162,568 18,737 
Proceeds from sale of securities available-for-sale179,386 97,886 
Proceeds from the sales of premises and equipment38 
Proceeds from bank owned life insurance settlements1,307 
Purchases of premises and equipment(1,465)(5,242)
Change in FHLB, FRB, and other stock, at cost(202)(8)
Funding of CRA investments, net(3,873)(2,705)
Net cash provided by (used in) investing activities104,116 (22,315)
Cash flows from financing activities:  
Net increase in deposit accounts525,830 194,563 
Net change in short-term borrowings9,000 
Repayment of long-term FHLB borrowings(21,503)(5,000)
Cash dividends paid(28,287)(14,882)
Repurchase and retirement of common stock(6,897)
Proceeds from exercise of stock options620 903 
Restricted stock surrendered and canceled(5,279)(1,008)
Net cash provided by financing activities464,484 183,576 
Net increase in cash and cash equivalents673,902 207,182 
Cash and cash equivalents, beginning of period880,766 326,850 
Cash and cash equivalents, end of period$1,554,668 $534,032 
Supplemental cash flow disclosures:  
Interest paid$10,890 $13,618 
Income taxes paid77 84 
Noncash investing activities during the period:
Transfers from portfolio loans to loans held for sale26,176 
Recognition of operating lease right-of-use assets(10,706)
Recognition of operating lease liabilities10,706 
Receivable on unsettled security sales57,385 
Due on unsettled security purchases(11,286)
Accompanying notes are an integral part of these consolidated financial statements.
7


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(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 that are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2021. Certain items in the prior year financial statements were reclassified to conform to the current year presentation. Reclassification had no effect on prior year net income or stockholders’ equity.
 
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, 2020 (the “2020 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 16 - Variable Interest Entities for additional information.

Effective June 1, 2020, the Corporation completed the acquisition of Opus Bank (“Opus”), a California-chartered state bank headquartered in Irvine, California, for a total consideration of approximately $749.6 million. See further discussion in Note 4 – Acquisitions.



8


Note 2 – Recently Issued Accounting Pronouncements
 
Accounting Standards Adopted in 2021
    
In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. The amendments included in this Update are intended to clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period. The guidance in paragraph 310-20-35-33 relates to amortization of premiums on individual callable debt securities and the period over which the premium shall be amortized in relation to the date the security is callable. For public business entities, the amendments in this Update became effective for fiscal years beginning after December 15, 2020, and interim periods within those years. The Company’s adoption of this Update did not have a material impact on its financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this Update clarify the interaction of the accounting for equity securities under Topic 321 and investments under the equity method of accounting in Topic 323, as well as the accounting for certain forward contracts and purchased options accounted for under Topic 815. The amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments within this Update also clarify that when applying the guidance in paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. The amendments within this Update became effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company’s adoption of this Update did not have a material impact on its financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which include updates to Topic 740 - Income Taxes. The amendments to this Update include the removal of the following exceptions included in Topic 740:

(1) Exception to the general intra-period tax allocation principle when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income);
(2) Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;
(3) Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and
(4) Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

The amendments included in this update also require the following:

(1) Requiring that an entity recognize a franchise tax by (i) accounting for the amount based on income under ASC 740 and (ii) accounting for any residual amount as a non-income-based tax.
(2) Requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
9


(3) Specifying that an entity is not required to allocate any portion of the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority.
(4) Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date.
(5) Making minor Codification improvements for tax benefits related to tax-deductible dividends on employee stock ownership plan shares and investments in qualified affordable housing projects accounted for using the equity method.

The amendments within this Update became effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company’s adoption of this Update did not have a material impact on its financial statements.

Recent Accounting Guidance Not Yet Effective

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The amendments included in this Update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the worldwide transition to new reference rates (commonly referred to as the “discounting transition”).

Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this Update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this Update are effective immediately for all entities that elect to apply the optional guidance in Topic 848.

An entity may elect to apply the amendments in this Update on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that financial statements are available to be issued. The Company is currently evaluating the impact of this Update on its consolidated financial statements, upon which this accounting guidance is not expected to have a material impact.

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 became effective upon issuance for all entities.


10


An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. The Company has not yet made a determination on whether it will make this election and is currently tracking the exposure as of each reporting period and assessing the significance of impact towards implementing any necessary modification in consideration of the election of this amendment.

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 does not currently engage in hedging related transactions, and as such, the amendments included in this Update have not had an impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The FASB issued this Update to address complexities associated with the accounting for certain financial instruments that possess characteristics of liabilities and equity, and to amend guidance for the derivatives scope exception for contracts in an entity’s own equity in an effort to reduce disparate accounting results for certain economically similar contracts. With respect to convertible instruments, this Update eliminates certain accounting models with the intent to simplify the accounting for convertible instruments and reduce the complexity for preparers and users of an entity’s financial statements. Convertible instruments primarily affected by this Update are those issued with beneficial conversion features or cash conversion features, because the accounting models for those specific features are removed. For contracts in an entity’s own equity, the type of contracts primarily affected by this Update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This Update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. This Update also makes targeted improvements to the disclosures for convertible instruments and earnings per share guidance. Entities may adopt the provisions of this Update using either the modified retrospective method or a fully retrospective method. Under the modified retrospective method, entities are required to apply the guidance to transactions outstanding as of the beginning of the fiscal year in which the amendments in this Update are adopted. Any cumulative effect of the change should be recognized as an adjustment to the opening balance of retained earnings in the year of adoption for entities applying the modified retrospective method. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The Company is evaluating the impact of this Update on its financial statements.




11


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 2020 Form 10-K. Select policies have been reiterated below that have a particular affiliation to our interim financial statements.

Revenue Recognition. The Company accounts for certain of its revenue streams deemed to arise from contracts with customers in accordance with ASC 606 - Revenue from Contracts with Customers. Revenue streams within the scope of and accounted for under ASC 606 include: service charges and fees on deposit accounts, debit card interchange fees, custodial account fees, fees from other services the Bank provides its customers, and gains and losses from the sale of other real estate owned and property, premises and equipment. ASC 606 requires revenue to be recognized when the Company satisfies related performance obligations by transferring to the customer a good or service. The recognition of revenue under ASC 606 requires the Company to first identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the transaction price to the performance obligations, and finally recognize revenue when the performance obligations have been satisfied and the good or service has been transferred. The majority of the Company’s contracts with customers associated with revenue streams that are within the scope of ASC 606 are considered short-term in nature and can be canceled at any time by the customer or the Bank, such as a deposit account agreement. Other more significant revenue streams for the Company such as interest income on loans and investment securities are specifically excluded from the scope of ASC 606 and are accounted for under other applicable GAAP.

Goodwill and Other Intangible Assets. Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have indefinite useful lives are not amortized, but are tested for impairment at least annually or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired. Impairment testing is performed at the reporting unit level, which is considered the Company level as management has identified the Company is its sole reporting unit as of March 31, 2021. Management’s assessment of goodwill is performed in accordance with ASC 350-20 - Intangibles - Goodwill and Other - Goodwill, which allows the Company to first perform a qualitative assessment of goodwill to determine if it is more likely than not the fair value of the Company’s equity is below its carrying value. However, GAAP also allows the Company, at its option, to unconditionally forego the qualitative assessment and proceed directly to a quantitative assessment. When performing a qualitative assessment of goodwill, should the results of such analysis indicate it is more likely than not the fair value of the Company’s equity is below its carrying value, the Company then performs the quantitative assessment of goodwill to determine the fair value of the reporting unit and compares it to its carrying value. If the fair value of the reporting unit is below its carrying value, the Company would then recognize the amount of impairment as the amount by which the reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill allocated to the reporting unit. Impairment losses are recorded as a charge to noninterest expense.

Other intangible assets consist of core deposit intangible (“CDI”) and customer relationship intangible assets arising from whole bank acquisitions, and are amortized on either an accelerated basis, reflecting the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, or on a straight-line amortization method over their estimated useful lives, which range from 6 to 11 years. 


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Leases. The Company accounts for its leases in accordance with ASC 842, which requires the Company to record liabilities for future lease obligations as well as assets representing the right to use the underlying leased asset. Leases with a term of 12 months or less are accounted for using straight-line expense recognition with no liability or asset being recorded for such leases. Other than short-term leases, the Company classifies its leases as either finance leases or operating leases. Leases are classified as finance leases when any of the following are met: (a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term, (b) the lease contains an option to purchase the underlying asset that the lessee is reasonably certain to exercise, (c) the term of the lease represents a major part of the remaining life of the underlying asset, (d) the present value of the future lease payments equals or exceeds substantially all of the fair value of the underlying asset, or (e) the underling leased asset is expected to have no alternative use to the lessor at the end of the lease term due to its specialized nature. When the Company’s assessment of a lease does not meet the foregoing criteria, and the term of the lease is in excess of 12 months, the lease is classified as an operating lease.    

Liabilities to make lease payments and right-of-use assets are determined based on the total contractual base rents for each lease, discounted at the rate implicit in the lease or at the Company’s estimated incremental borrowing rate if the rate is not implicit in the lease. The Company measures future base rents based on the minimum payments specified in the lease agreement, giving consideration for periodic contractual rent increases which are based on an escalation rate or a specified index. When future rent payments are based on an index, the Company uses the index rate observed at the time of lease commencement to measure future lease payments. Liabilities to make lease payments are accounted for using the interest method, which are reduced by periodic rent payments, net of interest accretion. Right-of-use assets for finance leases are amortized on a straight-line basis over the term of the lease, while right-of-use assets for operating leases are amortized over the term of the lease by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion on the related liability to make lease payments. Expense recognition for finance leases is representative of the sum of periodic amortization of the associated right-of-use asset as well as the periodic interest accretion on the liability to make lease payments. Expense recognition for operating leases is recorded on a straight-line basis. As of March 31, 2021, all of the Company’s leases were classified as either operating leases or short-term leases.

From time to time the Company leases portions of the space it leases to other parties through sublease transactions. Income received from these transactions is recorded on a straight-line basis over the term of the sublease.

Securities. The Company has established written guidelines and objectives for its investing activities. At the time of purchase, management designates the security as either held to maturity, available-for-sale or held for trading based on the Company’s investment objectives, operational needs, and intent. The investments are monitored to ensure that those activities are consistent with the established guidelines and objectives.
 
Securities Held-to-Maturity. Investments in debt securities that management has the positive intent and ability to hold to maturity are reported at cost and adjusted for periodic principal payments and the amortization of premiums and accretion of discounts, which are recognized in interest income using the interest method over the period of time remaining to investment’s maturity. 

Securities Available-for-Sale. Investments in debt securities that management has no immediate plan to sell, but which may be sold in the future, are carried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to the call date for premiums or contractual maturity for discounts and, in the case of mortgage-backed securities, the estimated average life, which can fluctuate based on the anticipated prepayments on the underlying collateral of the securities. Unrealized holding gains and losses, net of tax, are recorded in a separate component of stockholders’ equity as accumulated other comprehensive income. Realized gains and losses on the sales of securities are determined on the specific identification method, recorded on a trade date basis based on the amortized cost basis of the specific security and are included in noninterest income as net gain (loss) on investment securities.

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Allowance for Credit Losses on Investment Securities. The ACL on investment securities is determined for both the held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326. For available-for-sale investment securities, the Company performs a quarterly qualitative evaluation for securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments, and (vi) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that the unrealized loss can be attributed to credit loss, the Company records the amount of credit loss through a charge to provision for credit losses in current period earnings. However, the amount of credit loss recorded in current period earnings is limited to the amount of the total unrealized loss on the security, which is measured as the amount by which the security’s fair value is below its amortized cost. If it is likely the Company will be required to sell the security in an unrealized loss position, the total amount of the loss is recognized in current period earnings. Unrealized losses deemed non-credit related are recorded, net of tax, through accumulated other comprehensive income.
    
The Company determines expected credit losses on available-for-sale and held-to-maturity securities through a discounted cash flow approach, using the security’s effective interest rate. However, as previously mentioned, the measurement of credit losses on available-for-sale securities only occurs when, through the Company’s qualitative assessment, it is determined all or a portion of the unrealized loss is deemed to be credit related. The Company’s discounted cash flow approach incorporates assumptions about the collectability of future cash flows. The amount of credit loss is measured as the amount by which the security’s amortized cost exceeds the present value of expected future cash flows. Credit losses on available-for-sale securities are measured on an individual basis, while credit losses on held-to-maturity securities are measured on a collective basis according to shared risk characteristics. Credit losses on held-to-maturity securities are only recognized at the individual security level when the Company determines a security no longer possesses risk characteristics similar to others in the portfolio. The Company does not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverses from current period earnings the amount of accrued interest that is no longer deemed collectable. Accrued interest receivable for investment securities is included in accrued interest receivable balances in the consolidated statements of financial condition.

Loans Held for Investment. Loans held for investment are loans the Company has the ability and intent to hold until their maturity. These loans are carried at amortized cost, including discounts and premiums on purchased and acquired loans, and net deferred loan origination fees and costs. Purchase discounts and premiums and net deferred loan origination fees and costs on loans are accreted or amortized as an adjustment of yield, using the interest method, over the expected lives of the loans. Income recognition of deferred loan fees and costs is discontinued for loans placed on nonaccrual. Any remaining discounts, premiums, deferred fees or costs, and prepayment fees associated with loan payoffs prior to contractual maturity are included in loan interest income in the period of payoff. Loan commitment fees received to originate or purchase a loan are deferred and, if the commitment is exercised, recognized over the life of the loan using the interest method as an adjustment of yield or, if the commitment expires unexercised, recognized as income upon expiration of the commitment. 


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The Company accrues interest on loans using the interest method and only if deemed collectible. Loans for which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days or more based on contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collection of principal and or interest. When loans are placed on nonaccrual status, previously accrued and uncollected interest is promptly reversed against current period interest income, and as such an ACL for accrued interest receivable is not established. Interest income generally is not recognized on nonaccrual loans unless the likelihood of further loss is remote. Interest payments received on nonaccrual loans are applied as a reduction to the loan principal balance. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.

Allowance for Credit Losses on Loans. The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans 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. The Company measures the ACL on commercial real estate loans and commercial loans using a discounted cash flow approach, and a historical loss rate methodology is used to determine the ACL on retail loans. The Company’s discounted cash flow methodology incorporates a probability of default and loss given default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. Together, the probability of default and loss given default model with the use of reasonable and supportable forecasts generate estimates for cash flows expected to be collected over the estimated life of a loan. Estimates of future expected cash flows ultimately reflect assumptions made concerning net credit losses over the life of a loan. The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management leverages economic projections from a reputable and independent third party to inform and provide its reasonable and supportable economic forecasts. Other internal and external indicators of economic forecasts may also be considered by management when developing the forecast metrics. The Company’s ACL model reverts to long-term average loss rates for purposes of estimating expected cash flows beyond a period deemed reasonable and supportable. The Company forecasts economic conditions and expected credit losses over a two-year time horizon before reverting to long-term average loss rates. The duration of the forecast horizon, the period over which forecasts revert to long-term averages, the economic forecasts that management utilizes, as well as additional internal and external indicators of economic forecasts that management considers, may change over time depending on the nature and composition of our loan portfolio. Changes in economic forecasts, in conjunction with changes in loan specific attributes, impact a loan’s probability of default and loss given default, which can drive changes in the determination of the ACL.

Expectations of future cash flows are discounted at the loan’s effective interest rate. The resulting ACL represents the amount by which the loan’s amortized cost exceeds the net present value of a loan’s discounted cash flows. The ACL is recorded through a charge to provision for credit losses and is reduced by charge-offs, net of recoveries on loans previously charged-off. It is the Company’s policy to charge-off loan balances at the time they have been deemed uncollectible. Please also see Note 7 - Allowance for Credit Losses, of these consolidated financial statements for additional discussion concerning the Company’s ACL methodology.


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The Company’s ACL model also includes adjustments for qualitative factors, where appropriate. Since historical information (such as historical net losses and economic cycles) may not always, by itself, provide a sufficient basis for determining future expected credit losses, the Company periodically considers the need for qualitative adjustments to the ACL. Qualitative adjustments may be related to and include, but not 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 backtesting, 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.

The Company has a credit portfolio review process designed to detect problem loans. Problem loans are typically those of a substandard or worse internal risk grade, and may consist of loans on nonaccrual status, troubled debt restructurings (“TDRs”), loans where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. Such loans may, in the opinion of management, be deemed to no longer possess risk characteristics similar to other loans in the loan portfolio, and as such may require individual evaluation to determine an appropriate ACL for the loan. When a loan is individually evaluated, the Company typically measures the expected credit loss for the loan based on a discounted cash flow approach, unless the loan has been deemed collateral dependent. Collateral dependent loans are loans where the repayment of the loan is expected to come from the operation of and/or eventual liquidation of the underlying collateral. The ACL for collateral dependent loans is determined using estimates for the expected fair value of the underlying collateral, less costs to sell.

Although management uses the best information available to derive estimates necessary to measure an appropriate level of ACL, future adjustments to the ACL may be necessary due to economic, operating, regulatory, and other conditions that may extend beyond the Company’s control. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ACL and credit review process. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

The Company has segmented the loan portfolio according to loans that share similar attributes and risk characteristics. Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. These segment groupings are: investor loans secured by real estate, business loans secured by real estate, commercial loans, and retail loans. Within each segment grouping there are various classes of loans as disclosed below. The Company determines the ACL for loans based on this more detailed loan segmentation and classification.

At March 31, 2021, the Company had the following detailed segmentation on classes of loans:

Investor Loans Secured by Real Estate:

Commercial real estate non-owner-occupied - Commercial real estate (“CRE”) non-owner-occupied includes loans for which the Company holds real property as collateral, but where the borrower does not occupy the underlying property. The primary risks associated with these loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, significant increases in interest rates, changes in market rents, and vacancy of the underlying property, any of which may make the real estate loan unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

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Multifamily - Multifamily loans are secured by multi-tenant (5 or more units) residential real properties. Payments on multifamily loans are dependent on the successful operation or management of the properties, and repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

Construction and land - We originate loans for the construction of one-to-four family and multifamily residences and CRE properties in our primary market area. We concentrate our efforts on single homes and small infill projects in established neighborhoods where there is not abundant land available for development. Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, government regulation of real property, and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. We occasionally originate land loans located predominantly in California for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

Business Loans Secured by Real Estate:

Commercial real estate owner-occupied - CRE owner-occupied includes loans for which the Company holds real property as collateral and where the underlying property is occupied by the borrower, such as with a place of business. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. The primary risks associated with CRE owner-occupied loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may make the real estate loan unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Franchise secured by real estate - Franchise real estate secured loans are business loans secured by real property occupied by franchised restaurants, generally quick-service restaurants. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. Risks associated with these loans include material decreases in the value of real estate being held as collateral, and the borrower’s inability to pay as a result of increases in interest rates or decreases in cash flow from the underlying business.

Small Business Administration (“SBA”) - We are approved to originate loans under the SBA’s Preferred Lenders Program (“PLP”). The PLP lending status affords us a higher level of delegated credit autonomy, translating to a significantly shorter turnaround time from application to funding, which is critical to our marketing efforts. We originate loans nationwide under the SBA’s 7(a), SBAExpress, International Trade, and 504(a) loan programs, in conformity with SBA underwriting and documentation standards. SBA loans are similar to commercial business loans, but have additional credit enhancement provided by the U.S. Small Business Administration, for up to 85% of the loan amount for loans up to $150,000 and 75% of the loan amount for loans of more than $150,000. The Company originates SBA loans with the intent to sell the guaranteed portion into the secondary market on a quarterly basis. Certain loans classified as SBA are secured by commercial real estate property. SBA loans secured by hotels are included in the segment investor loans secured by real estate, and SBA loans secured by all other forms of real estate are included in the business loans secured by real estate segment. All other SBA loans are included in the commercial loans segment below, and are secured by business assets.


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Commercial Loans:

Commercial and industrial (including franchise commercial loans) (“C&I”) - Loans to businesses, secured by business assets including inventory, receivables, and machinery and equipment. Loan types includes revolving lines or credit, term loans, seasonal loans, and loans secured by liquid collateral such as cash deposits or marketable securities. Franchise credit facilities not secured by real estate and Home Owners’ Association (“HOA”) credit facilities are included in C&I loans. We also issue letters of credit on behalf of our customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

Retail Loans:

One-to-four family - Although we do not originate, we have acquired first lien single family loans through bank acquisitions. The primary risks of one-to-four family loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may make loans unprofitable to the borrower.

Consumer loans - In addition to consumer loans acquired through our various bank acquisitions, we originate a limited number of consumer loans, generally for banking clients only, which consist primarily of home equity lines of credit, savings account secured loans and auto loans. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral.

Troubled Debt Restructurings (“TDRs”). From time to time, the Company makes modifications to certain loans when a borrower is experiencing financial difficulty. These modifications are made 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. Modifications typically include: changes in the amortization terms of the loan, reductions in interest rates, acceptance of interest only payments, and, in limited cases, reductions to the outstanding loan balance. Such loans are typically placed on nonaccrual status and are returned to accrual status when all contractual amounts past due have been brought current, the loan has performed under the modified terms of the loan agreement for a period of at least six months, and the ultimate collectability of all contractual amounts due under the modified terms of the loan agreement is no longer in doubt. The Company typically measures the ACL for TDRs on an individual basis when the loans are deemed to no longer share similar risk characteristics with other loans in the portfolio. The determination of the ACL for TDRs 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 fair value of the collateral less cost to sell.

The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The Consolidated Appropriations Act (“CAA”), signed into law on December 27, 2020, extends the applicable period to include modification to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022, or (ii) 60 days after the date of termination of the COVID-19 national emergency. The Company has elected to apply this guidance to qualifying loan modifications. For such modifications, in the form of payment deferrals, the delinquency status will not advance and loans that were accruing at the time that the relief is provided will generally not be placed on nonaccrual status during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. However, the Company, through its credit portfolio management activities, has continued to monitor facts and circumstances associated with the underlying credit quality of loans modified under the provisions of the
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CARES Act in an effort to identify any loans where the accrual of interest during the modification period is no longer appropriate. In such cases, the Company ceases the accrual of interest and all previously accrued and uncollected interest is promptly reversed against current period interest income. For additional information, see Note 6 - Loans Held for Investment.

Acquired Loans. Loans acquired through a purchase or a business combination are recorded at their fair value at the acquisition date. The Company performs an assessment of acquired loans to first determine if such loans have experienced more than insignificant deterioration in credit quality since their origination and thus should be classified and accounted for as purchased credit deteriorated (“PCD”) loans. For loans that have not experienced more than insignificant deterioration in credit quality since origination, referred to as non-PCD loans, the Company records such loans at fair value, with any resulting discount or premium accreted or amortized into interest income over the remaining life of the loan using the interest method. Additionally, upon the purchase or acquisition of non-PCD loans, the Company measures and records an ACL based on the Company’s methodology for determining the ACL. The ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans were purchased or acquired.

Acquired loans that are classified as PCD are acquired at fair value, which includes any resulting discounts or premiums. Discounts and premiums are accreted or amortized into interest income over the remaining life of the loan using the interest method. Unlike non-PCD loans, the initial ACL for PCD loans is established through an adjustment to the acquired loan balance and not through a charge to the provision for credit losses in the period in which the loans were acquired. The ACL for PCD loans is determined with the use of the Company’s ACL methodology. Characteristics of PCD loans include: delinquency, downgrade in credit quality since origination, loans on nonaccrual status, and/or other factors the Company may become aware of through its initial analysis of acquired loans that may indicate there has been more than insignificant deterioration in credit quality since a loan’s origination. In connection with the Opus acquisition on June 1, 2020, the Company acquired PCD loans with an aggregate fair value of approximately $841.2 million, and recorded an ACL of approximately $21.2 million, which was added to the amortized cost of the loans on the date of acquisition.

Subsequent to acquisition, the ACL for both non-PCD and PCD loans are determined with the use of the Company’s ACL methodology in the same manner as all other loans.

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

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

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Note 4 – Acquisitions

Acquisition of Opus
    
Effective as of June 1, 2020, the Corporation completed the acquisition of Opus, a California-chartered state bank headquartered in Irvine, California, pursuant to a definitive agreement dated as of January 31, 2020. At closing, Opus had $8.32 billion in total assets, $5.94 billion in gross loans, and $6.91 billion in total deposits and operated 46 banking offices located throughout California, Washington, Oregon, and Arizona. As a result of the Opus acquisition, the Corporation acquired specialty lines of business, including trust and escrow services.

Prior to the Opus acquisition, PENSCO Trust Company LLC, a Colorado-chartered non-depository trust company (“PENSCO”), operated as an indirect, wholly-owned subsidiary of Opus and served as a custodian for self-directed IRAs, the funds of which account owners used for self-directed investments in various alternative asset classes. Immediately following the Opus acquisition, PENSCO merged with and into the Bank and operates its custodial business under the name of Pacific Premier Trust as a division of the Bank. As of May 31, 2020, PENSCO had approximately $14.48 billion of custodial assets and approximately 44,000 client accounts.

Prior to the Opus acquisition, Commerce Escrow operated as a division of Opus, offering commercial escrow services and facilitating tax-deferred commercial exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). Following the acquisition of Opus, Commerce Escrow operates as a division of the Bank, which created synergies with the Company’s existing escrow deposit business.

The acquisition of Opus expands the Company’s presence in major metropolitan markets with greater operational scale, diversifies business lines, banking products and services, as well as deposit base and clients by adding a new channel of stable, low-cost deposits and fee income from Opus’s trust and escrow businesses, improves revenue, and accelerates the Company’s ability to invest in technology solutions and increase efficiencies.

Pursuant to the terms of the merger agreement, the consideration paid to Opus shareholders consisted of whole shares of the Corporation’s common stock and cash in lieu of fractional shares of the Corporation’s common stock. Upon consummation of the transaction, (i) each share of Opus common stock issued and outstanding immediately prior to the effective time of the acquisition was canceled and exchanged for the right to receive 0.900 shares of the Corporation’s common stock, with cash to be paid in lieu of fractional shares at a rate of $19.31 per share, and (ii) each share of Opus Series A non-cumulative, non-voting preferred stock issued and outstanding immediately prior to the effective time of the acquisition was converted into and canceled in exchange for the right to receive that number of shares of the Corporation’s common stock equal to the product of (X) the number of shares of Opus common stock into which such share of Opus preferred stock was convertible in connection with, and as a result of, the acquisition, and (Y) 0.900, in each case, plus cash in lieu of fractional shares of the Corporation’s common stock.

The Corporation issued 34,407,403 shares, net of 165,136 shares for tax withholding from Opus equity award holders, of the Corporation’s common stock valued at $21.62 per share, which was the closing price of the Corporation’s common stock on May 29, 2020, the last trading day prior to the consummation of the acquisition, and paid cash in lieu of fractional shares. The Corporation assumed Opus’s warrants and options, which represented the issuance of up to approximately 406,778 and 9,538 additional shares of the Corporation’s common stock, valued at approximately $1.8 million and $46,000, respectively, and issued substitute restricted stock units in an aggregate amount of $328,000. The value of the total transaction consideration paid amounted to approximately $749.6 million. The Opus warrants assumed by the Corporation expired unexercised as of September 30, 2020 and no longer remain outstanding. The Opus options assumed by the Corporation were fully exercised during the third quarter of 2020.

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May 29, 2020
Merger consideration(Dollars in thousands)
Value of stock consideration paid to shareholders$747,458 
Cash paid in lieu of fractional shares
Value of restricted stock awards328 
Value of options and warrants (1)
1,817 
Total merger consideration$749,605 
______________________________
(1) The Opus warrants assumed by the Corporation expired unexercised on September 30, 2020 and no longer remain outstanding. The Opus options assumed by the Corporation were fully exercised during the third quarter of 2020.

CDI of $16.1 million, customer relationship intangible of $3.2 million, and goodwill of $91.9 million were recognized as a result of the acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed of Opus as of June 1, 2020 under the acquisition method of accounting, net of purchase accounting adjustments:

Identifiable net assets acquired, at fair valueJune 1, 2020
(Dollars in thousands)
Assets acquired
Cash and cash equivalents$937,102 
Interest bearing time deposits with financial institutions137 
Investment securities829,891 
Loans5,809,451 
Allowance for credit losses(21,242)
Premises and equipment22,121 
Intangible assets19,267 
Deferred tax assets44,835 
Other assets368,837 
Total assets acquired$8,010,399 
Liabilities assumed
Deposits$6,915,990 
FHLB advances and other borrowings213,491 
Subordinated debt138,653 
Other liabilities84,542 
Total liabilities assumed7,352,676 
Total fair value of identifiable net assets657,723 
Total merger consideration749,605 
Goodwill recognized$91,882 



21


The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed and consideration exchanged to be recorded at their respective estimated fair values at the date of acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the acquisition, and other future events that are highly subjective in nature and subject to refinement for up to one year after the closing date of acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Since the acquisition, the Company has made a net adjustment of $962,000 related to loans, deferred tax assets, other assets, and other liabilities.

As of March 31, 2021, the final purchase price remains subject to final adjustments and fair value measurements remain preliminary due to the timing of the acquisition. The Company continues to review information relating to events or circumstances existing at the acquisition date and expects to finalize its analysis of the acquired assets and assumed liabilities not later than one year after the acquisition. Management anticipates that this review could result in adjustments to the acquisition date valuation amounts presented herein but does not anticipate that these adjustments, if any, would be material.

The Company determined the fair value of loans, intangible assets, investment securities, real property, leases, deposits, and borrowings with the assistance of third-party valuations.

Loans

Opus’s loan portfolio was recorded at fair value at the date of acquisition. A valuation of Opus’s loan portfolio was performed by a third party as of the acquisition date in accordance with ASC 820 to assess the fair value of the loan portfolio, considering adjustments for interest rate risk, required equity return, servicing, credit, and liquidity risk. The loan portfolio was segmented into two groups: non-PCD loans and PCD loans. The non-PCD loans were pooled based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The PCD loans were valued at the loan level with similar characteristics noted above. The fair value was calculated using a discounted cash flow analysis. The discount rate utilized to analyze fair value considered the cost of funds rate, capital charge, servicing costs, and liquidity premium, mostly based on industry standards.

At the acquisition date, non-PCD loans and PCD loans had a fair value of $4.94 billion and $841.2 million, respectively, and a contractual balance of $5.05 billion and $896.5 million, respectively. In accordance with GAAP, there was no carryover of the allowance for credit losses that had been previously recorded by Opus. The Company recorded an ACL of $75.9 million through an increase to the provision for credit losses. The initial ACL for PCD loans of $21.2 million is established through an adjustment to the acquired loan balance and goodwill.

Core deposit intangible

The CDI on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates and maintenance costs, and costs of alternative funding using the discounted cash flow approach. The core deposit intangibles represent the costs saved by the Company between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base.


22


Customer relationship intangible

PENSCO operated as the legal trustee for its clients to provide recurring trust services over the life of client’s trust, and as a custodian for certain accounts that do not qualify as individual retirement accounts pursuant to the Internal Revenue Code. PENSCO could separately identify each of its customer relationships through the trustee agreement between each customer and PENSCO, as well as account-level specific information, and has a history and pattern of conducting business with them as their legal trustee. In the event that PENSCO (or its successor trust division within the Bank) were to merge, reorganize, get acquired, or change its name, the surviving entity will become the trustee or custodian of the IRAs provided that the surviving entity is authorized to serve in that capacity pursuant to the Internal Revenue Code. Accordingly, such PENSCO client relationships met the contractual or other legal rights criterion for identification as a recognizable intangible asset separate from goodwill. The fair value of the customer relationship intangible asset was determined through the use of an excess earnings model associated with the expected fee income associated with underlying client relationships.

Fixed maturity deposits

In determining the fair value of certificates of deposit, the cash flows of the contractual interest payments during the specific period of the certificates of deposit and scheduled principal payout were discounted to present value at market-based interest rates.

FHLB advances

The fair value of fixed rate Federal Home Loan Bank of San Francisco (“FHLB”) advances was determined using a discounted cash flow approach. The cash flows of the advances were projected based on scheduled payments of the fixed rate advances, factoring in prepayment fees. The cash flows were then discounted to present value using the FHLB rates as of May 29, 2020.

Subordinated debt

The fair value of subordinated debt was determined by using a discounted cash flow method using a market participant discount rate for similar instruments.

The Company incurred $5,000 of expenses in connection with the Opus acquisition during the three months ended March 31, 2021 compared with $1.7 million during the three months ended March 31, 2020. Merger-related expenses are included in other expense in the Company's consolidated statements of income.

The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three months ended March 31, 2021 and 2020 as if Opus had been acquired on January 1, 2020. This unaudited pro forma information combines the historical results of Opus with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented, and the differences could be significant.
Three Months Ended
March 31, 2021March 31, 2020
(Dollar in thousands, except per share data)
Net interest and other income$185,392 $197,117 
Net income68,668 43,128 
Basic earnings per share0.73 0.47 
Diluted earnings per share0.72 0.47 
23


Note 5 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
 March 31, 2021
 Amortized
 Cost
Gross Unrealized
Gain
Gross Unrealized
Loss
Estimated
Fair Value
 (Dollars in thousands)
Investment securities available-for-sale:    
U.S. Treasury$30,144 $1,919 $$32,063 
Agency660,582 12,956 (10,379)663,159 
Corporate360,617 2,128 (4,911)357,834 
Municipal bonds1,432,169 22,287 (32,394)1,422,062 
Collateralized mortgage obligations514,250 431 (5,710)508,971 
Mortgage-backed securities880,903 9,309 (16,964)873,248 
Total investment securities available-for-sale3,878,665 49,030 (70,358)3,857,337 
Investment securities held-to-maturity:
Mortgage-backed securities20,353 1,073 21,426 
Other1,578 1,578 
Total investment securities held-to-maturity21,931 1,073 23,004 
Total investment securities$3,900,596 $50,103 $(70,358)$3,880,341 
 December 31, 2020
 Amortized
Cost
Gross Unrealized
Gain
Gross Unrealized
Loss
Estimated
Fair Value
 (Dollars in thousands)
Investment securities available-for-sale:    
U.S. Treasury$30,153 $2,380 $$32,533 
Agency666,702 24,292 (608)690,386 
Corporate412,223 3,591 (506)415,308 
Municipal bonds1,412,012 37,260 (3,253)1,446,019 
Collateralized mortgage obligations513,259 819 (712)513,366 
Mortgage-backed securities812,384 21,662 (543)833,503 
Total investment securities available-for-sale3,846,733 90,004 (5,622)3,931,115 
Investment securities held-to-maturity:
Mortgage-backed securities22,124 1,281 23,405 
Other1,608 1,608 
Total investment securities held-to-maturity23,732 1,281 25,013 
Total investment securities$3,870,465 $91,285 $(5,622)$3,956,128 

Unrealized gains and losses on investment securities available-for-sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At March 31, 2021, the Company had accumulated other comprehensive loss of $21.3 million, or $15.2 million net of tax, compared to an accumulated other comprehensive income of $84.4 million, or $60.3 million net of tax, at December 31, 2020.

    
24


At March 31, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

The Company reviews individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is deemed credit related or due to other factors such as changes in interest rates and general market conditions. The Company recognizes credit losses in current period earnings, through a change to provision for credit losses, when declines in the fair value of individual available-for-sale securities are below their amortized cost, and the decline in fair value is deemed to be credit related. Declines in fair value below amortized cost not deemed credit related are recorded net of tax in accumulated other comprehensive income. In the event the Company is required to sell or has the intent to sell an available-for-sale 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.

During the second quarter of 2020, the Company acquired $829.9 million of available-for-sale securities in connection with the acquisition of Opus. Such securities were evaluated and it was determined that there were 0 investment securities classified as purchase credit deteriorated upon acquisition and, as a result, 0 allowance for credit losses was recorded.

As of March 31, 2021, the Company has not recorded credit losses on certain available-for-sale securities that were in an unrealized loss position due to the high quality of the investments, with investment grade ratings, and many of them are issued by U.S. government agencies. Additionally, the Company continues to receive contractual principal and interest payments in a timely manner. The Company performed a qualitative assessment of these investments as of March 31, 2021, and does not believe the declines in fair value are credit related. There was 0 provision for credit losses recognized for investment securities during the three months ended March 31, 2021, December 31, 2020, and March 31, 2020.

At March 31, 2021 and December 31, 2020, there were 0 available-for-sale or held-to-maturity securities in nonaccrual status. All securities in the portfolio were current with their contractual principal and interest payments. At March 31, 2021 and December 31, 2020, there were 0 securities purchased with deterioration in credit quality since their origination. At March 31, 2021 and December 31, 2020, there were 0 collateral dependent available-for-sale or held-to-maturity securities.

    
25


The table below shows the number, fair value, and gross unrealized holding losses of the Company’s investment securities by investment category and length of time that the securities have been in a continuous loss position.
 March 31, 2021
 Less than 12 Months12 Months or LongerTotal
NumberFair
Value
Gross
Unrealized
Losses
NumberFair
Value
Gross
Unrealized
Losses
NumberFair
Value
Gross
Unrealized
Losses
 (Dollars in thousands)
Investment securities available-for-sale:
Agency28 $389,387 $(10,094)$9,947 $(285)37 $399,334 $(10,379)
Corporate18 152,134 (4,911)— 18 152,134 (4,911)
Municipal bonds173 921,332 (32,394)173 921,332 (32,394)
Collateralized mortgage obligations32 309,975 (5,708)388 (2)33 310,363 (5,710)
Mortgage-backed securities.70 671,400 (16,964)70 671,400 (16,964)
Total investment securities available-for-sale321 $2,444,228 $(70,071)10 $10,335 $(287)331 $2,454,563 $(70,358)

 December 31, 2020
 Less than 12 Months12 Months or LongerTotal
NumberFair
Value
Gross
Unrealized
Losses
NumberFair
Value
Gross
Unrealized
Losses
NumberFair
Value
Gross
Unrealized
Losses
 (Dollars in thousands)
Investment securities available-for-sale:
Agency$74,194 $(307)$10,434 $(301)13 $84,628 $(608)
Corporate71,226 (506)71,226 (506)
Municipal bonds56 312,894 (3,253)56 312,894 (3,253)
Collateralized mortgage obligations21 215,603 (710)431 (2)22 216,034 (712)
Mortgage-backed securities16 139,071 (543)16 139,071 (543)
Total investment securities available-for-sale106 $812,988 $(5,319)10 $10,865 $(303)116 $823,853 $(5,622)

26


The amortized cost and estimated fair value of investment securities at March 31, 2021, 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
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
 (Dollars in thousands)
Investment securities available-for-sale:          
U.S. Treasury$$$30,144 $32,063 $$$$$30,144 $32,063 
Agency322,038 325,584 251,286 252,084 87,258 85,491 660,582 663,159 
Corporate94,711 94,917 9,683 9,645 218,847 218,536 37,376 34,736 360,617 357,834 
Municipal bonds11,286 11,286 4,622 4,912 36,182 38,652 1,380,079 1,367,212 1,432,169 1,422,062 
Collateralized mortgage obligations27,394 27,373 211,472 207,662 275,384 273,936 514,250 508,971 
Mortgage-backed securities2,144 2,283 190,923 195,067 687,836 675,898 880,903 873,248 
Total investment securities available-for-sale105,997 106,203 396,025 401,860 908,710 912,001 2,467,933 2,437,273 3,878,665 3,857,337 
Investment securities held-to-maturity:
Mortgage-backed securities20,353 21,426 20,353 21,426 
Other1,578 1,578 1,578 1,578 
Total investment securities held-to-maturity21,931 23,004 21,931 23,004 
Total investment securities$105,997 $106,203 $396,025 $401,860 $908,710 $912,001 $2,489,864 $2,460,277 $3,900,596 $3,880,341 
    
During the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, the Company recognized gross gains on sales of available-for-sale securities in the amount of $4.2 million, $5.3 million, and $8.0 million, respectively. During the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, the Company recognized gross losses on sales of available-for-sale securities in the amount of $191,000, $285,000, and $204,000, respectively. The Company had net proceeds from the sales of available-for-sale securities of $179.4 million, $207.6 million, and $97.9 million, during the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, respectively.
        
Investment securities with carrying values of $128.1 million and $147.3 million as of March 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits, other borrowings, and for other purposes as required or permitted by law.

27


FHLB, FRB, and Other Stock

The Company’s equity securities primarily consist of FHLB and Federal Reserve Bank of San Francisco (“FRB”) stock, which are considered restricted securities and held as a condition of membership of the FHLB and the Board of Governors of the Federal Reserve System. These equity securities without readily determinable fair values are carried at cost less impairment. At March 31, 2021, the Company had $17.3 million in FHLB stock, $74.5 million in FRB stock and $26.1 million in other stock, all carried at cost. During the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, the FHLB did 0t repurchase any of the Company’s excess FHLB stock through its stock repurchase program.

The Company evaluates its investments in FHLB, FRB, and other stock for impairment periodically, including their capital adequacy and overall financial condition. NaN impairment losses have been recorded through March 31, 2021.

Allowance for Credit Losses on Investment Securities

The Company accounts for credit losses on debt securities in accordance with ASC 326, which requires the Company to record an ACL on held-to-maturity investment securities at the time of purchase or acquisition. The ACL for held-to-maturity investment securities represents the Company’s current estimate of expected credit losses that may be incurred over the life of the investment. An ACL on available-for-sale investment securities is recorded when the fair value of the investment is below its amortized cost and the decline in fair value has been deemed to be credit related through the Company’s qualitative assessment. Non-credit related declines in fair value of available-for-sale investment securities are not recorded through an ACL, but rather recorded as an adjustment to accumulated other comprehensive income, net of tax. The Company determines credit losses on both available-for-sale and held-to-maturity 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 available-for-sale 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.

The Company did not record an ACL for available-for-sale or held-to-maturity investment securities during the three months ended March 31, 2021, December 31, 2020, and March 31, 2020. For available-for-sale securities where estimated fair value was below amortized cost, such declines were deemed non-credit related and recorded as an adjustment to accumulated other comprehensive income, net of tax. Non-credit related decline in fair value of available-for-sale investment securities can be attributed to changes in interest rates and other market related factors. The Company did not record an ACL for held-to maturity securities during the three months ended March 31, 2021, December 31, 2020, and March 31, 2020 because the likelihood of non-repayment is remote.

28


The following table summarizes the Company’s investment securities portfolio by Moody’s external rating equivalent and by vintage as of March 31, 2021:
Vintage
20212020201920182017PriorTotal
(Dollars in thousands)
Investment securities available-for-sale:
U.S. Treasury
Aaa - Aa3$$$$21,510 $10,553 $$32,063 
Agency
Aaa - Aa3352,414 73,090 151,364 9,075 77,216 663,159 
Corporate debt
A1 - A356,760 93,295 150,055 
Baa1 - Baa398,707 69,231 17,919 21,922 207,779 
Municipal bonds
Aaa - Aa311,286 994,512 285,174 32,304 59,458 35,689 1,418,423 
A1 - A32,313 2,313 
Baa1 - Baa31,326 1,326 
Collateralized mortgage obligations
Aaa - Aa317,334 241,843 93,697 25,311 14,634 116,152 508,971 
Mortgage-backed securities
Aaa - Aa3185,205 458,327 109,257 13,155 47,529 59,775 873,248 
Total investment securities available-for-sale213,825 2,202,563 630,449 243,644 159,168 407,688 3,857,337 
Investment securities held-to-maturity:
Mortgage-backed securities
Aaa - Aa35,822 5,186 9,345 20,353 
Other
Baa1 - Baa3617 961 1,578 
Total investment securities held-to-maturity6,439 5,186 10,306 21,931 
Total investment securities$213,825 $2,202,563 $630,449 $250,083 $164,354 $417,994 $3,879,268 

29


Note 6 – 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 CRE non-owner-occupied, multifamily, construction, and land, as well as SBA loans secured by 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, 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.


30


The following table presents the composition of the loan portfolio for the periods indicated:
March 31,December 31,
20212020
(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner-occupied$2,729,785 $2,675,085 
Multifamily5,309,592 5,171,356 
Construction and land316,458 321,993 
SBA secured by real estate56,381 57,331 
Total investor loans secured by real estate8,412,216 8,225,765 
Business loans secured by real estate
CRE owner-occupied2,029,984 2,114,050 
Franchise real estate secured340,805 347,932 
SBA secured by real estate73,967 79,595 
Total business loans secured by real estate2,444,756 2,541,577 
Commercial loans
Commercial and industrial1,656,098 1,768,834 
Franchise non-real estate secured399,041 444,797 
SBA non-real estate secured14,908 15,957 
Total commercial loans2,070,047 2,229,588 
Retail loans
Single family residential184,049 232,574 
Consumer6,324 6,929 
Total retail loans190,373 239,503 
Gross loans held for investment (1)
13,117,392 13,236,433 
Allowance for credit losses for loans held for investment(266,999)(268,018)
Loans held for investment, net$12,850,393 $12,968,415 
Loans held for sale, at lower of cost or fair value$7,311 $601 
______________________________
(1) Includes unaccreted fair value net purchase discounts of $103.9 million and $113.8 million as of March 31, 2021 and December 31, 2020, respectively.


31


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 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. Servicing assets are evaluated for impairment based on the fair value of the assets as compared to carrying amount. At March 31, 2021 and December 31, 2020, the servicing asset totaled $4.6 million and $5.3 million, respectively, and was included in other assets in the Company’s consolidated statement of financial condition. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is recognized through a valuation allowance, to the extent the fair value is less than the carrying amount. At March 31, 2021 and December 31, 2020, the Company determined that no valuation allowance was necessary.
    
Opus entered into securitization sales on December 23, 2016 with the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The transaction involved the sale of $509 million in originated multifamily loans through a Freddie Mac-sponsored transaction. One class of Freddie Mac guaranteed structured pass-through certificates was issued and purchased entirely by Opus. In connection with the Opus acquisition, 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.

General representations and warranties associated with loan sales and securitization sales require the Company to uphold various assertions that pertain to the underlying loans at the time of the transaction, including, but not limited to, compliance with relevant laws and regulations, absence of fraud, enforcement of liens, no environmental damages, and maintenance of relevant environmental insurance. Such representations and warranties are limited to those that do not meet the quality represented at the transaction date and do not pertain to a decline in value or future payment defaults. In circumstances where the Company breaches its representations and warranties, the Company would generally be required to cure such instances through a repurchase or substitution of the subject
loan(s).

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 $448,000 as of March 31, 2021 and December 31, 2020.

Loans sold and serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of loans and participations serviced for others were $637.4 million at March 31, 2021 and $686.0 million at December 31, 2020. Included within the balances were loans transferred through securitization with Freddie Mac of $95.5 million and SBA participations serviced for others of $398.2 million at March 31, 2021, and loans transferred through securitization with Freddie Mac of $99.4 million and SBA participations serviced for others of $421.7 million at December 31, 2020.


32


Concentration of Credit Risk
 
As of March 31, 2021, 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 real estate, commercial non-owner-occupied real estate, commercial owner-occupied real estate loans, and commercial and industrial 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. While management believes that the collateral presently securing these loans is adequate, there can be no assurances that a significant deterioration in the California real estate market or economy would not expose the Company to significantly greater credit risk.

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 $812.9 million for secured loans and $487.8 million for unsecured loans at March 31, 2021. In order to manage concentration risk, the Bank maintains a house lending limit well below these statutory maximums. At March 31, 2021, the Bank’s largest aggregate outstanding balance of loans to one borrower was $184.2 million secured by multifamily properties.
 
Credit Quality and Credit Risk Management
 
The Company’s credit quality and credit risk are controlled in 2 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 nearly all 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 6-grade Pass scale, along with Special Mention, Substandard, Doubtful, and Loss classifications, as such classifications are defined by the 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, as well as by regulatory agencies during scheduled examinations.
 
33


The following provides brief definitions for risk grades assigned to loans in the portfolio:
 
Pass classifications represent assets with a level of credit quality, in which no well-defined deficiency or weakness exists.
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 from foreclosure is also classified as Substandard.
Doubtful credits have all the weaknesses inherent in Substandard credits, 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. 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.

34


The following table stratifies the loans held for investment portfolio by the Company’s internal risk grading, and by year of origination, as of March 31, 2021:
Term Loans by Vintage
20212020201920182017PriorRevolvingRevolving Converted to Term During the PeriodTotal
March 31, 2021(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner-occupied
Pass$124,225 $272,001 $501,036 $482,052 $278,439 $972,783 $10,779 $$2,641,315 
Special mention2,004 8,619 438 43,694 54,755 
Substandard25,740 1,856 5,571 548 33,715 
Multifamily
Pass405,022 1,005,928 1,626,859 791,365 629,525 834,458 1,426 5,294,583 
Special mention1,755 2,629 9,294 13,678 
Substandard559 772 1,331 
Construction and land
Pass12,496 76,486 133,997 53,795 12,264 26,377 1,043 316,458 
SBA secured by real estate
Pass7,409 8,991 15,383 12,485 44,268 
Special mention498 1,033 1,161 1,002 1,124 4,818 
Substandard1,168 2,365 1,091 2,671 7,295 
Total investor loans secured by real estate541,743 1,354,913 2,301,001 1,352,833 938,701 1,909,229 13,796 8,412,216 
Business loans secured by real estate
CRE owner-occupied
Pass108,753 283,401 373,667 280,703 304,938 638,844 8,946 1,999,252 
Special mention2,190 3,792 3,045 4,319 13,346 
Substandard4,143 5,884 7,109 250 17,386 
Franchise real estate secured
Pass23,192 43,635 71,269 62,905 81,819 52,837 335,657 
Special mention878 1,650 2,620 5,148 
SBA secured by real estate
Pass510 3,237 7,587 12,262 13,155 27,937 64,688 
Special mention1,186 1,175 2,361 
Substandard161 2,111 4,646 6,918 
Total loans secured by business real estate132,455 333,341 454,173 367,772 410,952 736,867 9,196 2,444,756 
35


Term Loans by Vintage
20212020201920182017PriorRevolvingRevolving Converted to Term During the PeriodTotal
March 31, 2021(Dollars in thousands)
Commercial Loans
Commercial and industrial
Pass62,622 112,135 272,585 142,706 195,658 112,930 694,022 1,699 1,594,357 
Special mention655 2,219 177 1,460 16,377 20,888 
Substandard1,389 2,936 3,619 218 3,622 29,069 40,853 
Franchise non-real estate secured
Pass15,398 27,216 138,064 86,988 43,294 50,126 1,361 362,447 
Special mention7,028 1,984 216 2,605 11,833 
Substandard2,071 3,637 18,181 872 24,761 
SBA non-real estate secured
Pass72 422 2,212 1,511 2,816 4,337 11,370 
Special mention1,456 1,456 
Substandard81 353 270 686 692 2,082 
Total commercial loans78,092 141,817 424,977 243,017 262,286 176,638 741,521 1,699 2,070,047 
Retail Loans
Single family residential
Pass6,582 7,624 4,349 10,708 11,169 120,675 22,662 183,769 
Substandard280 280 
Consumer loans
Pass47 101 35 22 3,998 2,073 6,278 
Substandard39 46 
Total retail loans6,584 7,671 4,457 10,743 11,191 124,992 24,735 190,373 
Totals gross loans$758,874 $1,837,742 $3,184,608 $1,974,365 $1,623,130 $2,947,726 $789,248 $1,699 $13,117,392 


36


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, 2020:
Term Loans by Vintage
20202019201820172016PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2020(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner-occupied
Pass$265,901 $541,994 $440,351 $287,580 $279,238 $791,477 $11,114 $$2,617,655 
Special mention6,669 437 2,516 29,738 39,360 
Substandard9,732 2,045 516 5,218 559 18,070 
Multifamily
Pass1,027,644 1,677,716 899,123 665,939 354,859 531,287 420 5,156,988 
Special mention1,758 2,630 8,649 13,037 
Substandard559 772 1,331 
Construction and land
Pass57,309 144,759 73,313 18,625 20,531 6,672 784 321,993 
SBA secured by real estate
Pass8,306 9,029 13,418 6,305 7,696 44,754 
Special mention496 1,032 1,159 1,000 373 306 4,366 
Substandard1,220 2,959 1,091 400 2,541 8,211 
Total investor loans secured by real estate1,351,350 2,386,517 1,437,278 988,649 674,159 1,374,935 12,877 8,225,765 
Business loans secured by real estate
CRE owner-occupied
Pass293,324 409,758 332,672 327,475 225,098 469,704 14,268 246 2,072,545 
Special mention2,190 15,917 3,802 4,153 201 26,263 
Substandard3,636 4,214 1,169 5,973 250 15,242 
Franchise real estate secured
Pass44,413 81,438 66,241 96,999 24,673 27,020 340,784 
Special mention878 1,650 2,652 5,180 
Substandard1,968 1,968 
SBA secured by real estate
Pass3,253 7,637 12,608 16,058 8,488 23,624 71,668 
Special mention1,200 137 1,337 
Substandard184 1,987 1,376 3,043 6,590 
Total loans secured by business real estate344,058 516,400 422,995 446,733 267,062 529,565 14,518 246 2,541,577 
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Term Loans by Vintage
20202019201820172016PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2020(Dollars in thousands)
Commercial Loans
Commercial and industrial
Pass127,082 260,368 159,001 210,163 51,800 82,291 801,752 9,315 1,701,772 
Special mention735 2,331 185 1,320 243 17,890 37 22,741 
Substandard3,310 2,737 610 1,333 2,446 32,858 1,027 44,321 
Franchise non-real estate secured
Pass27,607 164,025 94,494 46,174 40,829 27,745 1,361 502 402,737 
Special mention7,267 2,037 230 480 2,321 12,335 
Substandard6,690 3,706 18,425 700 204 29,725 
SBA non-real estate secured
Pass407 2,257 1,558 2,674 610 4,449 259 12,214 
Special mention1,574 1,574 
Substandard83 357 282 340 400 707 2,169 
Total commercial loans155,831 444,000 266,221 280,317 97,412 120,099 854,568 11,140 2,229,588 
Retail Loans
Single family residential
Pass10,794 7,714 13,982 14,039 33,968 124,248 27,172 231,917 
Substandard657 657 
Consumer loans
Pass52 112 37 25 3,145 3,508 6,881 
Substandard41 48 
Total retail loans10,846 7,833 14,019 14,064 33,970 128,091 30,680 239,503 
Totals gross loans$1,862,085 $3,354,750 $2,140,513 $1,729,763 $1,072,603 $2,152,690 $912,643 $11,386 $13,236,433 



38


The following tables stratify loans held for investment by delinquencies in the Company’s loan portfolio at the dates indicated:
Days Past Due
Current30-5960-8990+Total
(Dollars in thousands)
March 31, 2021
Investor loans secured by real estate
CRE non-owner-occupied$2,719,494 $9,743 $$548 $2,729,785 
Multifamily5,309,592 5,309,592 
Construction and land316,458 316,458 
SBA secured by real estate55,941 440 56,381 
Total investor loans secured by real estate8,401,485 9,743 988 8,412,216 
Business loans secured by real estate
CRE owner-occupied2,024,680 5,304 2,029,984 
Franchise real estate secured340,805 340,805 
SBA secured by real estate73,307 660 73,967 
Total business loans secured by real estate2,438,792 5,964 2,444,756 
Commercial loans
Commercial and industrial1,651,203 3,068 61 1,766 1,656,098 
Franchise non-real estate secured399,041 399,041 
SBA not secured by real estate13,911 305 692 14,908 
Total commercial loans2,064,155 3,373 61 2,458 2,070,047 
Retail loans
Single family residential184,049 184,049 
Consumer loans6,324 6,324 
Total retail loans190,373 190,373 
Totals$13,094,805 $13,116 $61 $9,410 $13,117,392 
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  Days Past Due 
 Current30-5960-8990+Total Gross Loans
(Dollars in thousands)
December 31, 2020
Investor loans secured by real estate
CRE non-owner-occupied$2,674,328 $$$757 $2,675,085 
Multifamily5,171,355 5,171,356 
Construction and land321,993 321,993 
SBA secured by real estate56,074 1,257 57,331 
Total investor loans secured by real estate8,223,750 2,014 8,225,765 
Business loans secured by real estate
CRE owner-occupied2,108,746 5,304 2,114,050 
Franchise real estate secured347,932 347,932 
SBA secured by real estate78,036 486 1,073 79,595 
Total business loans secured by real estate2,534,714 486 6,377 2,541,577 
Commercial loans
Commercial and industrial1,765,451 428 57 2,898 1,768,834 
Franchise non-real estate secured444,797 444,797 
SBA not secured by real estate14,912 338 707 15,957 
Total commercial loans2,225,160 766 57 3,605 2,229,588 
Retail loans
Single family residential232,559 15 232,574 
Consumer loans6,928 6,929 
Total retail loans239,487 16 239,503 
Totals loans$13,223,111 $1,269 $57 $11,996 $13,236,433 

Individually Evaluated Loans

Beginning on January 1, 2020, 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 through a TDR, and/or are deemed collateral dependent, where the ultimate repayment of the loan is expected to come from the operation of or eventual sale of the collateral. Loans that are deemed by management to no longer possess risk characteristics similar to other loans in the portfolio are evaluated individually for purposes of determining an appropriate lifetime ACL. The Company uses a discounted cash flow approach, using the loan’s effective interest rate, for determining the ACL on individually evaluated loans, unless the loan is deemed collateral dependent, which requires evaluation based on the estimated fair value of the underlying collateral, less estimated costs to sell. The Company may increase or decrease the ACL for collateral dependent individually evaluated loans based on changes in the estimated expected fair value of the collateral. Changes in the ACL for all other individually evaluated loans is based substantially on the Company’s evaluation of cash flows expected to be received from such loans.

As of March 31, 2021, $38.9 million of loans were individually evaluated, and the ACL attributed to such loans totaled $688,000. At March 31, 2021, $16.9 million of individually evaluated loans were evaluated using a discounted cash flow approach and $22.0 million of individually evaluated loans were evaluated based on the underlying value of the collateral.
40


As of December 31, 2020, $29.2 million of loans were individually evaluated, and the ACL attributed to such loans totaled $126,000. At December 31, 2020, $15.2 million of individually evaluated loans were evaluated using a discounted cash flow approach and $14.0 million of individually evaluated loans were evaluated based on the underlying value of the collateral.

The Company had individually evaluated loans on nonaccrual status of $38.9 million and $29.2 million at March 31, 2021 and December 31, 2020, respectively.

Troubled Debt Restructurings

We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances. These loans are classified as TDRs. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. In most cases, the Company initially places TDRs on nonaccrual status, and may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a period of at least six months, and the ultimate collectability of the total contractual restructured principal and interest in no longer in doubt. At March 31, 2021 and December 31, 2020, there were 0 loans modified as TDRs. During the three months ended March 31, 2021, there were 0 loans modified as TDRs and 0 TDRs that experienced payment defaults after modifications within the previous 12 months. During the three months ended March 31, 2020, 1 TDR of $1.3 million experienced a payment default and was placed on nonaccrual.

The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. On April 7, 2020, federal bank regulators issued a joint interagency statement that allows lenders to conclude that a borrower is not experiencing financial difficulty if short-term (e.g., six months or less) modifications are made in response to the COVID-19 pandemic, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The CAA signed into law on December 27, 2020, extends the applicable period to include modification to loans held by financial institutions executed between March 1, 2020 and the earlier of (i) January 1, 2022, or (ii) 60 days after the date of termination of the COVID-19 national emergency.

For COVID-19 related loan modifications in the form of payment deferrals, the delinquency status will not advance and loans that were accruing at the time that the relief is provided will generally not be placed on nonaccrual status during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. However, the Company, through its credit portfolio management activities, has continued to monitor facts and circumstances associated with the underlying credit quality of loans modified under the provisions of the CARES Act in an effort to identify any loans where the accrual of interest during the modification period is no longer appropriate. In such cases, the Company ceases the accrual of interest and all previously accrued and uncollected interest is promptly reversed against current period interest income. At March 31, 2021, there were no loans remaining within their modification period due to COVID-19 hardship under the CARES Act. Additionally, as of March 31, 2021, there were no loans in-process for potential modification. At December 31, 2020, 52 loans totaling $79.5 million, or 0.60% of loans held for investment, remained within their COVID-19 hardship modification period, of which $20.2 million of loans had migrated to the substandard risk grade. No loans were in-process for potential modification as of December 31, 2020.

41


Purchased Credit Deteriorated Loans
 
Following the adoption of ASC 326 on January 1, 2020, the Company analyzed acquired loans for more-than-insignificant deterioration in credit quality since their origination. Such loans are classified as purchased credit deteriorated loans. Please see Note 3 - Significant Accounting Policies for more information concerning the accounting for PCD loans.

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.

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 of the loans, and any resulting discount or premium related to factors other than credit. Subsequent changes (favorable and unfavorable) in expected cash flows are recognized immediately in net income by adjusting the related ACL.

Nonaccrual Loans

When loans are placed on nonaccrual status, previously accrued but unpaid interest is promptly reversed from 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 will recognize interest on a cash basis only. 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.

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 accruing of interest. The Company had no loans 90 days or more past due and still accruing at March 31, 2021 and December 31, 2020. Nonaccrual loans totaled $38.9 million at March 31, 2021 and $29.2 million as of December 31, 2020. No interest income was recognized on nonaccrual loans during the three months ended March 31, 2021 and March 31, 2020.


42


The following tables provide a summary of nonaccrual loans as of the dates indicated:
Nonaccrual Loans (1)
Collateral Dependent LoansACLNon-Collateral Dependent LoansACLTotal Nonaccrual LoansNonaccrual Loans with No ACL
(Dollars in thousands)
March 31, 2021
Investor loans secured by real estate
CRE non-owner-occupied$12,284 $$$$12,284 $12,284 
SBA secured by real estate440 440 440 
Total investor loans secured by real estate12,724 12,724 12,724 
Business loans secured by real estate
CRE owner-occupied6,060 6,060 6,060 
SBA secured by real estate727 727 727 
Total business loans secured by real estate6,787 6,787 6,787 
Commercial loans
Commercial and industrial1,767 3,843 688 5,610 2,132 
Franchise non-real estate secured13,082 13,082 13,082 
SBA non-real estate secured692 692 692 
Total commercial loans2,459 16,925 688 19,384 15,906 
Retail loans
Single family residential14 14 14 
Total retail loans14 14 14 
Totals nonaccrual loans$21,984 $$16,925 $688 $38,909 $35,431 
______________________________
(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.


43


Nonaccrual Loans (1)
Collateral Dependent LoansACLNon-Collateral Dependent LoansACLTotal Nonaccrual LoansNonaccrual Loans with No ACL
(Dollars in thousands)
December 31, 2020
Investor loans secured by real estate
CRE non-owner-occupied$2,792 $$$$2,792 $2,792 
SBA secured by real estate1,257 1,257 1,257 
Total investor loans secured by real estate4,049 4,049 4,049 
Business loans secured by real estate
CRE owner-occupied6,083 6,083 6,083 
SBA secured by real estate1,143 1,143 1,143 
Total business loans secured by real estate7,226 7,226 7,226 
Commercial loans
Commercial and industrial2,040 1,934 126 3,974 2,733 
Franchise non-real estate secured13,238 13,238 13,238 
SBA non-real estate secured707 707 707 
Total commercial loans2,747 15,172 126 17,919 16,678 
Retail loans
Single family residential15 15 15 
Total retail loans15 15 15 
Totals nonaccrual loans$14,037 $$15,172 $126 $29,209 $27,968 
______________________________
(1) The ACL for nonaccrual loans is determined based on a discounted cash flow methodology unless the loan is considered collateral dependent; otherwise, the ACL for collateral dependent nonaccrual loans is determined based on the estimated fair value of the underlying collateral.

Residential Real Estate Loans In Process of Foreclosure

The Company had 0 consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of March 31, 2021 or December 31, 2020.
44


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:
March 31, 2021
Office PropertiesIndustrial PropertiesRetail PropertiesLand PropertiesHotel PropertiesResidential PropertiesBusiness AssetsTotal
(Dollars in thousands)
Investor loan secured by real estate
CRE non-owner-occupied$$$2,542 $$9,742 $$$12,284 
SBA secured by real estate440 440 
Total investor loans secured by real estate2,542 10,182 12,724 
Business loans secured by real estate
CRE owner-occupied756 5,304 6,060 
SBA secured by real estate270 457 727 
Total business loans secured by real estate270 1,213 5,304 6,787 
Commercial loans
Commercial and industrial1,767 1,767 
SBA non-real estate secured692 692 
Total commercial loans2,459 2,459 
Retail loans
Single family residential14 14 
Total retail loans14 14 
Totals collateral dependent loans$270 $1,213 $2,542 $5,304 $10,182 $14 $2,459 $21,984 
45



December 31, 2020
Office PropertiesIndustrial PropertiesRetail PropertiesLand PropertiesHotel PropertiesResidential PropertiesBusiness AssetsTotal
(Dollars in thousands)
Investor loan secured by real estate
CRE non-owner-occupied$$$2,594 $$198 $$$2,792 
SBA secured by real estate1,257 1,257 
Total investor loans secured by real estate2,594 1,455 4,049 
Business loans secured by real estate
CRE owner-occupied779 5,304 6,083 
SBA secured by real estate288 757 98 1,143 
Total business loans secured by real estate288 1,536 5,304 98 7,226 
Commercial loans
Commercial and industrial2,040 2,040 
SBA non-real estate secured707 707 
Total commercial loans2,747 2,747 
Retail loans
Single family residential15 15 
Total retail loans15 15 
Totals collateral dependent loans$288 $1,536 $2,594 $5,304 $1,455 $113 $2,747 $14,037 


46


Note 7 – Allowance for Credit Losses
 
The Company accounts for credit losses on loans and unfunded loan commitments in accordance with ASC 326 - Financial Instruments - Credit Losses, to determine the ACL. 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 losses at origination or acquisition represents the Company’s best estimate of the lifetime expected credit loss associated with a loan given the facts and circumstances associated with the particular loan, and 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 commitments. These components consist of: (i) the estimated probability of default, (ii) the estimated loss given default, which represents the estimated severity of the loss when a loan is in default, (iii) estimates for prepayment activity on loans, and (iv) the estimated exposure to the Company at default (“EAD”). These components are also 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 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. EAD is the estimated outstanding balance of the loan at the time of default. It 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, purchase discounts, and deferred fees and costs associated with the origination of the 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.

Probability of Default

The PD for commercial real estate loans 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 changes in economic conditions and 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. Significant loan and property level attributes include: loan to value ratios, debt service coverage, loan size, loan vintage and property types.

The PD for commercial loans is based on an internally developed PD rating scale that assigns PDs based on the Company’s internal 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 loans in the commercial segment, the PD assigned to them also changes. As with commercial real estate loans, the PD for commercial loans is also impacted by current and expected economic conditions.

47


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 in the Company’s loan portfolio, such as: loan to values, estimated time to resolution, property size, and current and estimated future market price changes for underlying collateral. The LGD is highly dependent upon loan to value 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 Moody’s Baa rating corporate debt interest rate spread. 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 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.

Historical Loss Rates for Retail Loans
The historical loss rate model for retail loans are 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.

Forecasts

GAAP requires the Company to develop reasonable and supportable forecasts of future conditions, and estimate 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 the loan. The Company uses economic scenarios from an independent third party, Moody’s Analytics, in its estimation of a borrower’s ability to repay a loan in future periods. These scenarios are based on past events, current conditions, and the likelihood of future events occurring. These scenarios typically are comprised of: (1) a base-case scenario, (2) an upside scenario, representing slightly better economic conditions than currently experienced, and (3) a downside scenario, representing recessionary conditions. Management periodically evaluates 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 Company’s estimate of the probability of each scenario occurring, 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 such as the ongoing COVID-19 pandemic. The Company recognizes the non-linearity of credit losses relative to economic performance and thus the Company believes consideration of and, if appropriate under the circumstances, use of multiple probability-weighted economic scenarios is appropriate in estimating credit losses over the forecast period. This approach is based on certain assumptions. The first assumption is that no single forecast of the economy, however detailed or complex, is completely accurate over a reasonable forecast time-frame, and is subject to revisions over time. By considering multiple scenario outcomes
48


and assigning reasonable probability weightings to them, some of the uncertainty associated with a single scenario approach, the Company believes, is mitigated.

As of March 31, 2021, the Company’s ACL model used three probability-weighted scenarios representing a base-case scenario, an upside scenario, and a downside scenario. The weightings assigned to each scenario were as follows: the base-case scenario, or most likely scenario, was assigned a weighting of 40%, while the upside and downside scenarios were each assigned weightings of 30%. These economic scenarios include the current and estimated future impact associated with the ongoing COVID-19 pandemic. The Company evaluated the weightings of each economic scenario in the current period with the assistance of Moody's Analytics, and determined the current weightings of 40% for the base-case scenario, and 30% for each of the upside and downside scenarios appropriately reflect the likelihood of outcomes for each scenario given the current economic environment. The use of three probability-weighted scenarios in the first quarter of 2021 is consistent with the approach used in the Company���s ACL model during the fourth quarter of 2020.

As of March 31, 2020, and in response to the onset of the COVID-19 pandemic, the Company with the assistance of an independent third party, determined it appropriate to include an economic scenario in its ACL model that was reflective of the estimated economic effects of the pandemic, including the responses to contain the pandemic. This scenario was referred to as the critical pandemic scenario. Additionally, the Company evaluated the weightings of each economic scenario in the first quarter of 2020 with the assistance of an independent third party, and revised those weightings to levels it believed appropriate to reflect the likelihood of outcomes for each scenario given the change in economic environment during the first quarter of 2020. As such, for the three months ended March 31, 2020, the Company’s ACL model incorporated three economic scenarios comprised of: the critical pandemic scenario weighted 30%, the more severe (as compared to the critical pandemic scenario) downside scenario weighted 32.5% and the base-case scenario weighted 37.5%. These weightings were reflective of rapidly changing economic conditions, economic uncertainty and volatility in financial markets due to the onset of the COVID-19 pandemic, and the estimated likelihood that each scenario may occur as of March 31, 2020.

The Company currently forecasts economic conditions over a two-year period, which we believe is a reasonable and supportable period. Beyond the point which the Company can provide for a reasonable and supportable forecast, economic variables 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 for each loan the Company does not expect to collect.

The Company derives the economic forecasts it uses in its ACL model from Moody's Analytics that has a large team of economists, data-base managers and operational engineers with a history of producing monthly economic forecasts for over 25 years. The forecasts produced by this third party have been widely used by banks, credit unions, government agencies and real estate developers. These economic forecasts cover all states and metropolitan areas in the Unites States, and reflect changes in economic variables such as: GDP growth, interest rates, employment rates, changes in wages, retail sales, industrial production, metrics associated with the single-family and multifamily housing markets, vacancy rates, changes in equity market prices, and energy markets.

It is important to note that the Company’s ACL model relies on multiple economic variables, which are used under 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.


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As of March 31, 2021, the Company’s ACL model incorporated the following assumptions for key economic variables in the base-case, upside and downside scenarios:

Base-case Scenario:

CRE Price Index experiences declines throughout 2021, with the estimated annualized rate of decline slowing from approximately -13% in early 2021 to approximately -3% by the end of 2021. This scenario also assumes the CRE Price Index returns to modest levels of growth beginning in the first quarter of 2022, with the rate of growth increasing through the end of 2022.
U.S. real GDP experiences growth within a range of 6-7% on an annualized basis throughout 2021. This scenario also assumes decelerating growth in real GDP throughout 2022, from the levels estimated for 2021. Growth in real GDP for 2022 under this scenario decelerates from approximately 7% annualized in early 2022 to approximately 2% annualized by the end of 2022.
U.S. unemployment declining from approximately 6% in early 2021 to approximately 5% by the end of 2021. This scenario also assumes unemployment continues to decline in 2022 from approximately 5% in early 2022 to approximately 4% by the end of 2022.

Upside Scenario:

CRE Price Index experiences a decline in first half of 2021, and then returning to growth of approximately 5% on an annualized basis during the second half of 2021.
U.S. real GDP experiences accelerating growth within a range of 5-10% on an annualized basis throughout 2021. This scenario also assumes decelerating growth in real GDP throughout 2022, from the levels estimated for 2021. Growth in real GDP for 2022 under this scenario decelerates from approximately 10% annualized in early 2022 to approximately 1% annualized by the end of 2022.
U.S. unemployment declining from approximately 6% in early 2021 to approximately 3% by the end of 2021. This scenario also assumes unemployment of 3% throughout all of 2022.

Downside Scenario:

CRE Price Index experiences accelerating declines throughout 2021. Annualized declines of approximately -13% in Q1 2021 and accelerating to approximately -23% by the end of 2021. For 2022, the CRE Price Index is estimated to continue to decline through Q3 2022, before returning to growth in Q4 2022.
U.S. real GDP experiences growth of approximately 5% in Q1 2021, followed by decreases of -3% for Q2, -2% for Q3 and -1% for Q4 of 2021. This scenario also assumes modest annualized growth in real GDP in 2022 of approximately 2-3%.
U.S. unemployment increases throughout 2021 from approximately 6% in early 2021 to approximately 8% by the end of 2021. This scenario also assumes unemployment remains elevated in 2022 at approximately 8%.


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Qualitative Adjustments

The Company recognizes that historical information used as the basis for determining future expected credit losses may not always, by themselves, provide a sufficient basis for determining future expected credit losses. The Company, therefore, periodically considers the need for qualitative adjustments to the ACL. 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. As of March 31, 2021, qualitative adjustments included in the ACL totaled $8.0 million. These adjustments relate to potential limitations in the model, as well as continued uncertainty concerning the strength of the economic recovery. Management determined through additional review that certain key model drivers are potentially underestimating the impact the ongoing COVID-19 pandemic may have on certain segments and classes of the loan portfolio, such as commercial real estate, franchise real estate secured loans, and SBA hotel loans. 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 provides the allocation of the ACL for loans held for investment as well as the activity in the ACL attributed to various segments in the loan portfolio as of, and for the periods indicated:

Three Months Ended March 31, 2021
 Beginning ACL Balance Charge-offs RecoveriesProvision for Credit Losses Ending
ACL Balance
(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner occupied$49,176 $(154)$$(3,477)$45,545 
Multifamily62,534 17,281 79,815 
Construction and land12,435 828 13,263 
SBA secured by real estate5,159 (265)247 5,141 
Business loans secured by real estate
CRE owner-occupied50,517 15 (8,938)41,594 
Franchise real estate secured11,451 (575)10,876 
SBA secured by real estate6,567 (98)(18)6,451 
Commercial loans
Commercial and industrial46,964 (1,279)601 (2,913)43,373 
Franchise non-real estate secured20,525 (156)(1,466)18,903 
SBA non-real estate secured995 (107)890 
Retail loans
Single family residential1,204 (382)822 
Consumer loans491 (165)326 
Totals$268,018 $(1,952)$618 $315 $266,999 

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Three Months Ended March 31, 2020
Beginning ACL Balance (1)
Adoption of ASC 326Charge-offsRecoveriesProvision for Credit LossesEnding
ACL Balance
(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner occupied$1,899 $8,423 $(387)$$5,961 $15,896 
Multifamily729 9,174 4,819 14,722 
Construction and land4,484 (124)4,862 9,222 
SBA secured by real estate1,915 (1,401)421 935 
Business loans secured by real estate
CRE owner-occupied2,781 20,166 12 3,834 26,793 
Franchise real estate secured592 5,199 1,712 7,503 
SBA secured by real estate2,119 2,207 (315)71 (38)4,044 
Commercial loans
Commercial and industrial13,857 87 (490)2,283 15,742 
Franchise non-real estate secured5,816 9,214 1,586 16,616 
SBA non-real estate secured445 218 (236)85 516 
Retail loans
Single family residential655 541 (59)1,137 
Consumer loans406 1,982 (8)(84)2,296 
Totals$35,698 $55,686 $(1,436)$92 $25,382 $115,422 
(1) Beginning ACL balance represents the ALLL accounted for under ASC 450 and ASC 310, which is reflective of probable incurred losses as of the balance sheet date. The ending ACL balance is reflective of current expected credit losses, accounted for under ASC 326.

The decrease in the ACL for loans held for investment during the three months ended March 31, 2021 of $1.0 million is reflective of a $315,000 in provision for credit losses and $1.3 million in net charge-offs. The provision for credit losses for the three months ended March 31, 2021 is reflective of continued unfavorable, but improving economic conditions and forecasts used in the Company’s ACL model.

The change in the ACL for the three months ended March 31, 2020 of $79.7 million is reflective of a $55.7 million addition associated with the Company’s adoption of ASC 326 on January 1, 2020, which was recorded through a cumulative effect adjustment to retained earnings, a $25.4 million provision for credit losses on loans, and net charge-offs of $1.3 million. The provision for credit losses for the three months ended March 31, 2020 is reflective of unfavorable changes in economic forecasts used in the Company’s ACL model driven by the COVID-19 pandemic.

Allowance for Credit Losses for Off-Balance Sheet Commitments

The Company maintains an allowance for credit losses on 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 $32.8 million at March 31, 2021 and $31.1 million at December 31, 2020. The change in the allowance for off-balance sheet commitments can be attributed to a $1.7 million in provision for credit losses during the three months ended March 31, 2021 related primarily to an increase in unfunded lines of credit in conjunction with continued unfavorable, but improving economic conditions and forecasts reflected in the Company’s CECL model.

The allowance for off-balance sheet commitments totaled $11.6 million as of March 31, 2020. The provision for credit losses attributable to unfunded loan commitments was $72,000 for the three month ended March 31, 2020.


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The Company applies an expected credit loss estimation methodology for off-balance sheet commitments that is commensurate with the methodology applied to each respective segment of the loan portfolio in determining the ACL for loans held-for-investment. The loss estimation process includes assumptions for the probability that a loan will fund, as well as the expected amount of funding. These assumptions are based on the Company’s own historical internal loan data.

The following tables present PD bands for commercial real estate and commercial loan segments of the loan portfolio as of the dates indicated.

Commercial Real Estate Term Loans by Vintage
20212020201920182017PriorRevolvingRevolving Converted to Term During the PeriodTotal
March 31, 2021(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner-occupied
0% - 5.00%$124,225 $244,225 $447,464 $445,435 $223,077 $927,154 $10,779 $$2,422,359 
>5.00% - 10.00%25,477 9,581 14,151 12,408 73,255 134,872 
Greater than 10%2,299 71,735 32,941 43,392 21,639 548 172,554 
Multifamily
0% - 5.00%372,435 946,666 1,564,508 763,445 611,026 812,130 1,426 5,071,636 
>5.00% - 10.00%32,587 5,858 51,975 17,181 6,602 17,328 131,531 
Greater than 10%53,404 12,131 13,368 12,456 15,066 106,425 
Construction and Land
0% - 5.00%12,496 65,447 28,996 1,425 4,081 5,139 1,043 118,627 
>5.00% - 10.00%7,462 45,561 3,785 71 56,879 
Greater than 10%3,577 59,440 52,370 4,398 21,167 140,952 
SBA secured by real estate
0% - 5.00%498 9,508 12,517 17,476 15,942 55,941 
>5.00% - 10.00%
Greater than 10%102 338 440 
Total investor loans secured by real estate541,743 1,354,913 2,301,001 1,352,833 938,701 1,909,229 13,796 8,412,216 
Business loans secured by real estate
CRE owner-occupied
0% - 5.00%108,753 274,558 358,652 251,081 274,570 588,999 8,946 1,865,559 
>5.00% - 10.00%11,033 15,015 31,674 30,254 51,484 139,460 
Greater than 10%5,883 9,043 9,789 250 24,965 
Franchise real estate secured
0% - 5.00%23,192 36,483 69,701 58,245 80,716 36,800 305,137 
>5.00% - 10.00%7,588 3,218 7,280 1,103 16,037 35,226 
Greater than 10%442 442 
SBA secured by real estate
0% - 5.00%510 3,237 7,517 11,357 11,448 21,384 55,453 
>5.00% - 10.00%70 905 1,694 6,502 9,171 
Greater than 10%1,347 2,124 5,872 9,343 
Total business loans secured by real estate132,455 333,341 454,173 367,772 410,952 736,867 9,196 2,444,756 
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Commercial Real Estate Term Loans by Vintage
20212020201920182017PriorRevolvingRevolving Converted to Term During the PeriodTotal
March 31, 2021(Dollars in thousands)
Commercial Loans
Commercial and industrial
0% - 5.00%61,115 76,872 223,574 101,069 182,673 90,115 316,224 1,113 1,052,755 
>5.00% - 10.00%1,507 28,732 31,098 25,613 10,383 16,090 305,405 101 418,929 
Greater than 10%8,575 20,849 21,862 2,997 11,807 117,839 485 184,414 
Franchise non-real estate secured
0% - 5.00%15,398 21,160 102,790 78,320 34,932 31,020 283,620 
>5.00% - 10.00%6,056 35,273 8,527 8,362 18,588 76,806 
Greater than 10%9,100 5,762 18,397 3,995 1,361 38,615 
SBA not secured by real estate
0% - 5.00%72 422 2,212 1,021 1,299 3,230 8,256 
>5.00% - 10.00%490 1,518 1,102 3,110 
Greater than 10%81 353 1,725 691 692 3,542 
Total commercial loans$78,092 $141,817 $424,977 $243,017 $262,286 $176,638 $741,521 $1,699 $2,070,047 

Commercial Real Estate Term Loans by Vintage
20202019201820172016PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2020(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner-occupied
0% - 5.00%$261,885 $491,522 $431,791 $266,942 $254,527 $763,101 $11,114 $$2,480,882 
>5.00% - 10.00%4,016 34,360 5,794 10,558 16,961 33,734 105,423 
Greater than 10%25,844 11,480 10,517 10,782 29,598 559 88,780 
Multifamily
0% - 5.00%950,089 1,610,011 878,233 634,268 349,549 516,452 4,938,602 
>5.00% - 10.00%38,892 59,500 12,181 19,751 10,917 13,606 154,847 
Greater than 10%38,663 9,963 11,339 12,479 3,814 1,229 420 77,907 
Construction and Land
0% - 5.00%55,785 40,860 4,604 11,238 6,412 784 119,683 
>5.00% - 10.00%1,123 41,046 9,197 3,601 260 55,227 
Greater than 10%401 62,853 59,512 3,786 20,531 147,083 
SBA secured by real estate
0% - 5.00%496 10,400 12,558 14,497 7,078 10,032 55,061 
>5.00% - 10.00%1,012 1,012 
Greater than 10%158 589 511 1,258 
Total investor loans secured by real estate1,351,350 2,386,517 1,437,278 988,649 674,159 1,374,935 12,877 8,225,765 
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Commercial Real Estate Term Loans by Vintage
20202019201820172016PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2020(Dollars in thousands)
Business loans secured by real estate
CRE owner-occupied
0% - 5.00%286,745 367,269 274,512 295,809 202,282 422,614 10,393 246 1,859,870 
>5.00% - 10.00%8,769 42,310 60,222 28,421 23,875 44,855 3,875 212,327 
Greater than 10%16,096 5,376 7,459 4,263 8,409 250 41,853 
Franchise real estate secured
0% - 5.00%37,262 79,926 65,619 96,672 19,046 22,927 321,452 
>5.00% - 10.00%7,587 1,650 3,274 327 5,627 4,093 22,558 
Greater than 10%442 1,512 1,968 3,922 
SBA secured by real estate
0% - 5.00%3,253 7,637 11,840 15,069 5,707 18,742 62,248 
>5.00% - 10.00%768 989 2,780 4,882 9,419 
Greater than 10%1,384 1,987 1,514 3,043 7,928 
Total business loans secured by real estate344,058 516,400 422,995 446,733 267,062 529,565 14,518 246 2,541,577 
Commercial Loans
Commercial and industrial
0% - 5.00%70,233 205,395 99,178 193,046 36,957 62,682 394,124 5,051 1,066,666 
>5.00% - 10.00%49,883 50,743 35,813 13,427 12,922 13,948 322,123 2,469 501,328 
Greater than 10%7,701 7,540 29,078 4,485 4,574 8,350 136,253 2,859 200,840 
Franchise non-real estate secured
0% - 5.00%21,409 145,392 88,171 38,010 21,956 23,479 502 338,919 
>5.00% - 10.00%6,198 15,754 5,454 8,164 18,415 3,626 57,611 
Greater than 10%16,836 6,612 18,655 1,638 3,165 1,361 48,267 
SBA not secured by real estate
0% - 5.00%407 2,257 910 1,078 441 2,782 7,875 
>5.00% - 10.00%648 1,596 169 1,652 259 4,324 
Greater than 10%83 357 1,856 340 415 707 3,758 
Total commercial loans$155,831 $444,000 $266,221 $280,317 $97,412 $120,099 $854,568 $11,140 $2,229,588 
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A significant driver in the ACL for loans in the investor real estate secured and business real estate secured segments is estimated loan to value (“LTV”). The following tables summarize the amortized cost of loans in these segments by current estimated LTV and by year of origination as of the dates indicated:
Term Loans by Vintage
20212020201920182017PriorRevolvingRevolving Converted to Term During the PeriodTotal
March 31, 2021(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner-occupied
55% and below$64,538 $130,003 $213,339 $220,420 $130,687 $709,045 $10,779 $1,478,811 
>55-65%31,752 116,313 197,381 105,577 130,405 266,760 548 848,736 
>65-75%27,935 25,685 97,297 153,854 13,411 44,463 362,645 
Greater than 75%20,763 12,676 4,374 1,780 39,593 
Multifamily
55% and below59,772 219,912 344,043 261,109 231,004 356,028 1,426 1,473,294 
>55-65%173,282 389,105 716,453 359,851 211,357 328,477 2,178,525 
>65-75%169,340 396,911 553,451 162,499 185,854 155,480 1,623,535 
Greater than 75%2,628 14,667 10,535 1,869 4,539 34,238 
Construction and land
55% and below12,496 76,486 106,181 27,368 12,264 26,377 1,043 262,215 
>55-65%19,603 18,590 38,193 
>65-75%8,213 7,837 16,050 
Greater than 75%
SBA secured by real estate
55% and below102 645 669 1,088 2,504 
>55-65%2,420 1,633 3,991 5,449 13,493 
>65-75%3,888 4,641 3,477 6,619 18,625 
Greater than 75%498 3,200 5,598 9,339 3,124 21,759 
Total investor loans secured by real estate541,743 1,354,913 2,301,001 1,352,833 938,701 1,909,229 13,796 8,412,216 
Business loan secured by real estate
CRE owner-occupied
55% and below41,757 100,507 148,303 122,790 173,168 433,778 9,196 1,029,499 
>55-65%28,552 64,442 75,112 87,262 101,484 131,991 488,843 
>65-75%17,278 71,694 143,725 72,734 25,938 63,635 395,004 
Greater than 75%21,166 48,948 6,527 5,852 13,277 20,868 116,638 
Franchise real estate secured
55% and below1,884 20,715 9,853 15,109 13,479 25,410 86,450 
>55-65%2,666 9,905 14,514 14,248 7,615 48,948 
>65-75%11,298 15,452 42,286 17,909 14,740 16,607 118,292 
Greater than 75%10,010 5,680 10,875 17,993 39,352 3,205 87,115 
SBA secured by real estate
55% and below510 1,813 1,601 5,265 5,442 16,620 31,251 
>55-65%247 512 1,740 999 8,073 11,571 
>65-75%263 3,129 1,293 3,695 4,824 13,204 
Greater than 75%914 2,345 5,311 5,130 4,241 17,941 
Total business loans secured by real estate$132,455 $333,341 $454,173 $367,772 $410,952 $736,867 $9,196 $$2,444,756 
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Term Loans by Vintage
20202019201820172016PriorRevolvingRevolving Converted to Term During the PeriodTotal
December 31, 2020(Dollars in thousands)
Investor loans secured by real estate
CRE non-owner-occupied
55% and below$138,007 $229,272 $182,385 $136,355 $189,848 $588,230 $11,114 $$1,475,211 
>55-65%101,434 217,210 92,015 130,024 78,470 204,161 559 823,873 
>65-75%26,460 102,494 169,878 18,876 13,952 29,506 361,166 
Greater than 75%2,750 4,787 2,762 4,536 14,835 
Multifamily
55% and below218,833 345,519 294,464 233,997 84,530 269,906 1,447,249 
>55-65%381,737 731,408 381,282 215,170 152,066 189,151 420 2,051,234 
>65-75%427,074 583,078 215,389 215,452 127,684 66,457 1,635,134 
Greater than 75%19,469 10,618 1,879 5,773 37,739 
Construction and land
55% and below57,309 105,308 36,068 18,625 20,531 6,672 784 245,297 
>55-65%36,113 23,770 59,883 
>65-75%3,338 13,475 16,813 
Greater than 75%
SBA secured by real estate
55% and below2,066 649 673 317 778 4,483 
>55-65%2,427 1,639 4,008 879 4,354 13,307 
>65-75%3,897 3,882 3,482 4,519 1,884 17,664 
Greater than 75%496 2,168 6,977 7,346 1,363 3,527 21,877 
Total investor loans secured by real estate1,351,350 2,386,517 1,437,278 988,649 674,159 1,374,935 12,877 8,225,765 
Business loan secured by real estate
CRE owner-occupied
55% and below96,803 160,605 157,868 179,791 131,795 328,188 14,518 246 1,069,814 
>55-65%72,044 91,028 98,176 94,712 65,120 90,548 511,628 
>65-75%71,692 152,920 79,106 43,832 31,303 31,493 410,346 
Greater than 75%54,975 21,122 4,960 13,354 2,202 25,649 122,262 
Franchise real estate secured
55% and below20,801 10,470 13,864 20,956 9,189 16,213 91,493 
>55-65%2,689 9,955 16,001 19,102 6,855 2,333 56,935 
>65-75%19,349 51,719 23,258 9,153 10,597 7,236 121,312 
Greater than 75%2,452 10,944 15,770 47,788 1,238 78,192 
SBA secured by real estate
55% and below1,825 1,626 5,332 5,495 3,615 13,582 31,475 
>55-65%246 513 1,795 1,094 3,586 5,448 12,682 
>65-75%264 3,142 1,515 3,968 1,586 4,043 14,518 
Greater than 75%918 2,356 5,350 7,488 1,214 3,594 20,920 
Total business loans secured by real estate$344,058 $516,400 $422,995 $446,733 $267,062 $529,565 $14,518 $246 $2,541,577 
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The following tables present the FICO bands, at origination, for the retail segment of the loan portfolio as of the dates indicated:
Term Loans by Vintage
20212020201920182017PriorRevolvingRevolving Converted to Term During the PeriodTotal
(Dollars in thousands)
March 31, 2021
Retail Loans
Single family residential
Greater than 740$6,582 $7,624 $3,480 $10,341 $6,559 $78,694 $15,850 $129,130 
>680 - 740869 367 4,119 14,654 5,915 25,924 
>580 - 680491 9,561 863 10,915 
Less than 58018,046 34 18,080 
Consumer loans
Greater than 74047 63 30 19 3,476 531 4,168 
>680 - 74032 459 1,461 1,960 
>580 - 68013 90 57 160 
Less than 58012 24 36 
Total retail loans$6,584 $7,671 $4,457 $10,743 $11,191 $124,992 $24,735 $$190,373 

Term Loans by Vintage
20202019201820172016PriorRevolvingRevolving Converted to Term During the PeriodTotal
(Dollars in thousands)
December 31, 2020
Retail Loans
Single family residential
Greater than 740$10,794 $6,531 $12,679 $8,846 $28,222 $81,838 $19,588 $168,498 
>680 - 7401,183 1,303 4,732 2,614 15,624 6,685 32,141 
>580 - 680461 3,132 7,473 864 11,930 
Less than 58019,970 35 20,005 
Consumer loans
Greater than 74052 69 31 22 2,609 2,198 4,982 
>680 - 74035 469 1,227 1,740 
>580 - 68015 95 56 167 
Less than 58013 27 40 
Total retail loans$10,846 $7,833 $14,019 $14,064 $33,970 $128,091 $30,680 $$239,503 


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Note 8 – Goodwill and Other Intangible Assets

The Company had goodwill of $900.2 million and $898.6 million at March 31, 2021 and December 31, 2020, respectively. The Company recorded adjustments to goodwill associated with the acquisition of Opus in the amount of $1.6 million during the three months ended March 31, 2021, within the one-year measurement period subsequent to the acquisition date of June 1, 2020.
March 31,March 31,
 20212020
 (Dollars in thousands)
Balance, beginning of year$898,569 $808,322 
Purchase accounting adjustments1,635 
Balance, end of year$900,204 $808,322 
Accumulated impairment losses at end of year$$

The amount of goodwill is subject to change, as the Company’s fair value estimates associated with the Opus acquisition are considered estimates and are subject to refinement for a period of one year after the closing date of the acquisition as additional information related to those fair value estimates becomes available and such information is considered final.

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.

The Company had other intangible assets of $81.4 million at March 31, 2021, consisting of $78.4 million in core deposit intangibles and $2.9 million in customer relationship intangibles. The Company had other intangibles assets of $85.5 million at December 31, 2020, consisting of $82.5 million in core deposit intangibles and $3.0 million in customer relationship intangibles. The following table summarizes the change in the balance of core deposit intangibles and customer relationship intangibles, and the related accumulated amortization for the periods indicated below:

Three Months Ended
March 31,December 31,March 31,
202120202020
(Dollars in thousands)
Gross amount of intangible assets:
Beginning balance$145,212 $145,212 $125,945 
Additions due to acquisitions
Ending balance145,212 145,212 125,945 
Accumulated amortization:
Beginning balance(59,705)(55,200)(42,633)
Amortization(4,143)(4,505)(3,963)
Ending balance(63,848)(59,705)(46,596)
Net intangible assets$81,364 $85,507 $79,349 
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The Company amortizes core deposit intangibles and customer relationship intangibles based on the projected useful lives of the related deposits in the case of core deposit intangibles, and over the projected useful lives of the related client relationships in the case of customer relationship intangibles. The amortization periods typically range from six to eleven years. The estimated aggregate amortization expense related to our core deposit intangible and customer relationship intangible assets for each of the next five years succeeding December 31, 2020, in order from the present, is $15.9 million, $14.0 million, $12.3 million, $11.1 million, and $10.0 million. The Company analyzes core deposit intangibles and customer relationship intangibles annually for impairment, or sooner if events and circumstances indicate possible impairment. Factors that may contribute to impairment include customer attrition and run-off. Management is unaware of any events and/or circumstances that would indicate a possible impairment to the core deposit intangibles or customer relationship intangibles as of March 31, 2021.

Note 9 – Subordinated Debentures

As of March 31, 2021, the Company had 5 issuances of subordinated notes and 2 issuances of junior subordinated debt securities, with an aggregate carrying value of $501.6 million and a weighted interest rate of 5.38%, compared with an aggregate carrying value of $501.5 million and a weighted interest rate of 5.38% at December 31, 2020.

The following table summarizes our outstanding subordinated debentures as of the dates indicated:
 March 31, 2021December 31, 2020
Stated MaturityCurrent Interest RateCurrent Principal BalanceCarrying Value
 (Dollars in thousands)
Subordinated notes
Subordinated notes due 2024, 5.75% per annumSeptember 3, 20245.75 %$60,000 $59,581 $59,552 
Subordinated notes due 2029, 4.875% per annum until May 15, 2024, 3-month LIBOR +2.5% thereafterMay 15, 20294.875 %125,000 122,941 122,877 
Subordinated notes due 2030, 5.375% per annum until June 15, 2025, 3-month SOFR +5.170% thereafterJune 15, 20305.375 %150,000 147,567 147,501 
Subordinated notes due 2025, 7.125% per annumJune 26, 20257.125 %25,000 25,103 25,109 
Subordinated notes due 2026, 5.50% per annum until June 30 2021, 3-month LIBOR +4.285% thereafterJuly 1, 20265.50 %135,000 138,282 138,371 
Total subordinated notes495,000 493,474 493,410 
Subordinated debt
Heritage Oaks Capital Trust II (junior subordinated debt), 3-month LIBOR+1.72%January 1, 20371.96 %5,248 4,138 4,121 
Santa Lucia Bancorp (CA) Capital Trust (junior subordinated debt), 3-month LIBOR+1.48%July 7, 20361.72 %5,155 3,999 3,980 
Total subordinated debt10,403 8,137 8,101 
Total subordinated debentures$505,403 $501,611 $501,511 
    
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 rating of A- and subordinated debt of
BBB+ for the Bank. The Corporation’s and Bank’s ratings were reaffirmed in June 2020 by KBRA following the announcement of the consummated acquisition of Opus.


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As of March 31, 2021, the Corporation has two unconsolidated Delaware statutory trust subsidiaries, Heritage Oaks Capital Trust II and Santa Lucia Bancorp (CA) Capital Trust. Both are used as business trusts for the purpose of issuing trust preferred securities to third party investors. The junior subordinated debt was issued in connection with the trust preferred securities offerings. The Corporation is not allowed to consolidate any trust preferred securities into the Company’s consolidated financial statements. The resulting effect on the Company’s consolidated financial statements is to report the subordinated debentures as a component of the Company’s liabilities, and its ownership interest in the trusts as a component of other assets on the Company’s consolidated financial statements.

For additional information on the Company’s subordinated debentures, see “Note 14 — Subordinated Debentures” to the consolidated financial statements of the Company’s 2020 Form 10-K. 

For regulatory capital purposes, the trust preferred securities are included in Tier 2 capital at March 31, 2021. Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 require that if a depository institution holding company exceeds $15 billion in total consolidated assets due to an acquisition, then trust preferred securities are to be excluded from Tier 1 capital beginning in the period in which the transaction occurred. During the second quarter of 2020, the Company’s acquisition of Opus resulted in total consolidated assets exceeding $15 billion; accordingly, trust preferred securities are excluded from the Company’s Tier 1 capital. The Company and the Bank also has subordinated debt that qualifies as Tier 2 capital.


Note 10 – 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.

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The following tables set forth the Corporation’s earnings per share calculations for the periods indicated:
 Three Months Ended
March 31, 2021December 31, 2020March 31, 2020
 (Dollars in thousands, except per share data)
Basic
Net income$68,668 $67,136 $25,740 
Less: Dividends and undistributed earnings allocated to participating securities(665)(629)(232)
Net income allocated to common stockholders$68,003 $66,507 $25,508 
Weighted average common shares outstanding93,529,147 93,568,994 59,007,191 
Basic earnings per common share$0.73 $0.71 $0.43 
Diluted
Net income allocated to common stockholders$68,003 $66,507 $25,508 
Weighted average common shares outstanding93,529,147 93,568,994 59,007,191 
Diluted effect of share-based compensation564,497 400,194 182,526 
Weighted average diluted common shares94,093,644 93,969,188 59,189,717 
Diluted earnings per common share$0.72 $0.71 $0.43 

The impact of stock options, which are anti-dilutive, are excluded from the computations of diluted earnings per share. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases. For the three months ended March 31, 2021, December 31, 2020, and March 31, 2020, there were no potential common shares that were anti-dilutive.

Note 11 – Fair Value of Financial Instruments
 
The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value are discussed below.

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

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


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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.

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 to measure financial assets and liabilities on a recurring basis, as well as the general classification of these instruments pursuant to the fair value hierarchy.

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 market place 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 its investment portfolio within Level 2 of the fair value hierarchy.
    
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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 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.

Equity warrant assets – The Company acquired equity warrant assets as a result of acquisition of Opus. Opus received equity warrant assets through its lending activities as part of loan origination fees. The warrants provide the Bank the right to purchase a specific number of equity shares of the underlying company’s equity at a certain price before expiration and contain net settlement terms qualifying as derivatives under ASC Topic 815. The fair value of equity warrant assets is determined using a Black-Scholes option pricing model and are classified as Level 3 with 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.

The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at the dates indicated:
March 31, 2021
 Fair Value Measurement Using 
 Level 1Level 2Level 3Total Fair Value
 (Dollars in thousands)
Financial assets
Investment securities available-for-sale:    
U.S. Treasury$$32,063 $$32,063 
Agency663,159 663,159 
Corporate357,834 357,834 
Municipal bonds1,422,062 1,422,062 
Collateralized mortgage obligations508,971 508,971 
Mortgage-backed securities873,248 873,248 
Total securities available-for-sale$$3,857,337 $$3,857,337 
Derivative assets:
Interest rate swaps$$5,326 $$5,326 
Equity warrants1,911 1,911 
Total derivative assets$$5,326 $1,911 $7,237 
Financial liabilities<