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EX-32 - EXHIBIT 32 - PACIFIC PREMIER BANCORP INCppbi-06302016xex32.htm
EX-31.2 - EXHIBIT 31.2 - PACIFIC PREMIER BANCORP INCppbi-06302016xex312.htm
EX-31.1 - EXHIBIT 31.1 - PACIFIC PREMIER BANCORP INCppbi-06302016xex311.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
FORM 10-Q 
(Mark One)
(X)    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR 
( )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from _______ to _______ 
Commission File Number 0-22193
 
(Exact name of registrant as specified in its charter) 
DELAWARE
33-0743196
(State or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification No.)
 

17901 VON KARMAN AVENUE, SUITE 1200, IRVINE, CALIFORNIA 92614
(Address of principal executive offices and zip code)

(949) 864-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer
[ ]
Accelerated filer
[X]
Non-accelerated filer
(Do not check if a smaller
 reporting company)
[ ]
Smaller reporting company
[  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes [ ] No [X]
The number of shares outstanding of the registrant’s common stock as of August 5, 2016 was 27,656,533.

1


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED JUNE 30, 2016

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)
(unaudited)
ASSETS
 
June 30,
2016
 
December 31,
2015
Cash and due from banks
 
$
15,444

 
$
14,935

Interest bearing deposits with financial institutions
 
169,855

 
63,482

Cash and cash equivalents
 
185,299

 
78,417

Interest bearing time deposits with financial institutions
 
3,944

 
1,972

Investments held to maturity, at amortized cost (fair value of $9,390 and $9,572 as of June 30, 2016 and December 31, 2015, respectively)
 
9,292

 
9,642

Investment securities available for sale, at fair value
 
245,471

 
280,273

FHLB, FRB and other stock, at cost
 
26,984

 
22,292

Loans held for sale, at lower of cost or market
 
10,116

 
8,565

Loans held for investment
 
2,920,619

 
2,254,315

Allowance for loan losses
 
(18,955
)
 
(17,317
)
Loans held for investment, net
 
2,901,664

 
2,236,998

Accrued interest receivable
 
12,143

 
9,315

Other real estate owned
 
711

 
1,161

Premises and equipment
 
11,014

 
9,248

Deferred income taxes, net
 
16,552

 
11,511

Bank owned life insurance
 
39,824

 
39,245

Intangible assets
 
10,500

 
7,170

Goodwill
 
101,939

 
50,832

Other assets
 
23,200

 
24,005

Total Assets
 
$
3,598,653

 
$
2,790,646

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES:
 
 

 
 

Deposit accounts:
 
 

 
 

Noninterest bearing checking
 
$
1,043,361

 
$
711,771

Interest-bearing:
 
 

 
 

Checking
 
168,669

 
134,999

Money market/savings
 
1,099,445

 
827,378

Retail certificates of deposit
 
420,673

 
365,911

Wholesale/brokered certificates of deposit
 
198,853

 
155,064

Total interest-bearing
 
1,887,640

 
1,483,352

Total deposits
 
2,931,001

 
2,195,123

FHLB advances and other borrowings
 
120,252

 
196,125

Subordinated debentures
 
70,310

 
70,310

Accrued expenses and other liabilities
 
36,460

 
30,108

Total Liabilities
 
3,158,023

 
2,491,666

STOCKHOLDERS’ EQUITY:
 
 

 
 

Preferred stock, $.01 par value; 1,000,000 authorized; none issued and outstanding
 

 

Common stock, $.01 par value; 100,000,000 shares authorized; 27,650,533 shares at June 30, 2016 and 21,510,746 shares at December 31, 2015
 
273

 
215

Additional paid-in capital
 
342,388

 
221,487

Retained earnings
 
95,869

 
76,946

Accumulated other comprehensive income, net of tax
 
2,100

 
332

Total Stockholder's Equity
 
440,630

 
298,980

Total Liabilities and Stockholder's Equity
 
$
3,598,653

 
$
2,790,646

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

3


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
Loans
 
$
39,035

 
$
35,407

 
$
27,912

 
$
74,442

 
$
52,982

Investment securities and other interest-earning assets
 
1,839

 
2,098

 
2,158

 
3,937

 
3,715

Total interest income
 
40,874

 
37,505

 
30,070

 
78,379

 
56,697

INTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Deposits
 
2,010

 
2,069

 
1,589

 
4,079

 
3,195

FHLB advances and other borrowings
 
324

 
325

 
407

 
649

 
782

Subordinated debentures
 
979

 
910

 
982

 
1,889

 
1,953

Total interest expense
 
3,313

 
3,304

 
2,978

 
6,617

 
5,930

Net Interest Provision Before Provision for Loan Losses
 
37,561

 
34,201

 
27,092

 
71,762

 
50,767

Provision for loan losses
 
1,589

 
1,120

 
1,833

 
2,709

 
3,663

Net Interest Income After Provision For Loan Losses
 
35,972

 
33,081

 
25,259

 
69,053

 
47,104

NONINTEREST INCOME
 
 
 
 
 
 
 
 

 
 

Loan servicing fees
 
302

 
327

 
393

 
629

 
737

Deposit fees
 
817

 
842

 
634

 
1,659

 
1,216

Net gain from sales of loans
 
2,124

 
1,906

 
2,721

 
4,030

 
2,721

Net gain from sales of investment securities
 
532

 
753

 
139

 
1,285

 
255

Other-than-temporary-impairment loss on investment securities
 

 
(207
)
 

 
(207
)
 

Other income
 
675

 
1,241

 
494

 
1,916

 
921

Total noninterest income
 
4,450

 
4,862

 
4,381

 
9,312

 
5,850

NONINTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Compensation and benefits
 
13,095

 
11,770

 
9,171

 
24,865

 
18,416

Premises and occupancy
 
2,597

 
2,391

 
2,082

 
4,988

 
3,911

Data processing and communications
 
887

 
911

 
716

 
1,798

 
1,418

Other real estate owned operations, net
 
(15
)
 
8

 
56

 
(7
)
 
104

FDIC insurance premiums
 
401

 
382

 
363

 
783

 
677

Legal, audit and professional expense
 
446

 
865

 
661

 
1,311

 
1,182

Marketing expense
 
775

 
630

 
615

 
1,405

 
1,218

Office and postage expense
 
573

 
481

 
505

 
1,054

 
1,004

Loan expense
 
540

 
403

 
263

 
943

 
456

Deposit expense
 
1,196

 
1,019

 
982

 
2,215

 
1,787

Merger-related expense
 
497

 
3,119

 

 
3,616

 
3,992

CDI amortization
 
645

 
344

 
344

 
989

 
658

Other expense
 
2,058

 
1,324

 
1,456

 
3,382

 
2,860

Total noninterest expense
 
23,695

 
23,647

 
17,214

 
47,342

 
37,683

Net Income Before Income Taxes
 
16,727

 
14,296

 
12,426

 
31,023

 
15,271

Income tax
 
6,358

 
5,742

 
4,601

 
12,100

 
5,658

Net Income
 
$
10,369

 
$
8,554

 
$
7,825

 
$
18,923

 
$
9,613

EARNINGS PER SHARE
 
 
 
 
 
 
 
 

 
 

Basic
 
$
0.38

 
$
0.33

 
$
0.36

 
$
0.72

 
$
0.46

Diluted
 
0.37

 
0.33

 
0.36

 
$
0.70

 
$
0.46

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
 

 
 

Basic
 
27,378,930

 
25,555,654

 
21,493,641

 
26,467,292

 
20,796,655

Diluted
 
27,845,490

 
25,952,184

 
21,828,876

 
26,901,627

 
21,126,542

 
 
 
 
 
 
 
 
 
 
 

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

4


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2016
 
2016
 
2015
 
2016
 
2015
Net income
$
10,369

 
$
8,554

 
$
7,825

 
$
18,923

 
$
9,613

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period, net of income taxes (1)
947

 
1,565

 
(1,628
)
 
2,512

 
(793
)
Reclassification adjustment for net gain on sale of securities included in net income, net of income taxes (2)
(308
)
 
(436
)
 
(82
)
 
(744
)
 
(150
)
Net unrealized gain on securities, net of income taxes
639

 
1,129

 
(1,710
)
 
1,768

 
(943
)
Comprehensive income
$
11,008

 
$
9,683

 
$
6,115

 
$
20,691

 
$
8,670

______________________________
(1) Income tax (benefit) on the unrealized gains (losses) on securities was $736,000 for the three months ended June 30, 2016, $1.1 million for the three months ended March 31, 2016, $(1.1) million for the three months ended June 30, 2015, $1.8 million for the six months ended June 30, 2016 and $(556,000) for the six months ended June 30, 2015.
(2) Income tax (benefit) on the reclassification adjustment for net (gains) losses on sale of securities included in net income was $224,000 for the three months ended June 30, 2016, $317,000 for the three months ended March 31, 2016, $57,000 for the three months ended June 30, 2015, $541,000 for the six months ended June 30, 2016 and $105,000 for the six months ended June 30, 2015.

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 SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(dollars in thousands)
(unaudited)

 
Common Stock
Shares
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Retained
Earnings
 
Accumulated Other Comprehensive Income
 
Total Stockholders’ Equity
Balance at December 31, 2015
21,570,746

 
$
215

 
$
221,487

 
$
76,946

 
$
332

 
$
298,980

Net income

 

 

 
18,923

 

 
18,923

Other comprehensive income

 

 

 

 
1,768

 
1,768

Share-based compensation expense

 

 
1,048

 

 

 
1,048

Issuance of restricted stock, net
218,236

 

 

 

 

 

Common stock issued
5,815,051

 
58

 
119,325

 

 

 
119,383

Exercise of stock options
46,500

 

 
528

 

 

 
528

Balance at June 30, 2016
27,650,533

 
$
273

 
$
342,388

 
$
95,869

 
$
2,100

 
$
440,630

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
16,903,884

 
$
169

 
$
147,474

 
$
51,431

 
$
518

 
$
199,592

Net income

 

 

 
9,613

 

 
9,613

Other comprehensive income

 

 

 

 
(943
)
 
(943
)
Share-based compensation expense

 

 
435

 

 

 
435

Common stock issued
4,480,645

 
45

 
72,207

 

 

 
72,252

Warrants exercised
125,196

 
1

 
688

 

 

 
689

Repurchase of common stock
(5,833
)
 

 
(93
)
 

 

 
(93
)
Exercise of stock options
6,666

 

 
48

 

 

 
48

Balance at June 30, 2015
21,510,558

 
$
215

 
$
220,759

 
$
61,044

 
$
(425
)
 
$
281,593


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


6


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended
 
 
June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
18,923

 
$
9,613

Adjustments to net income:
 
 

 
 

Depreciation and amortization expense
 
1,348

 
1,244

Provision for loan losses
 
2,709

 
3,663

Share-based compensation expense
 
1,048

 
435

Loss on sale of or write down of other real estate owned
 
(18
)
 
92

Net amortization on securities held for sale, net
 
7,080

 
1,763

Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs
 
(6,713
)
 
(967
)
Gain on sale of investment securities available for sale
 
(1,285
)
 
(255
)
Originations of loans held for sale
 
(44,463
)
 

Proceeds from the sales of and principal payments from loans held for sale
 
47,487

 

Gain on sale of loans
 
(4,030
)
 
(2,721
)
Deferred income tax benefit
 
(977
)
 
1,706

Change in accrued expenses and other liabilities, net
 
(1,700
)
 
(1,840
)
Income from bank owned life insurance, net
 
(579
)
 
(643
)
Amortization of core deposit intangible
 
989

 

Change in accrued interest receivable and other assets, net
 
5,904

 
(5,159
)
Net cash provided by operating activities
 
25,723

 
6,931

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Increase in loans, net
 
(204,505
)
 
(154,121
)
Change in other real estate owned from sales and writedowns
 
468

 
234

Principal payments on securities available for sale
 
18,234

 
15,907

Purchase of securities available for sale
 
(5,135
)
 
(60,132
)
Proceeds from sale or maturity of securities available for sale
 
211,303

 
16,070

Proceeds from the sale of premises and equipment
 
6,987

 
(842
)
Purchases of premises and equipment
 
(5,745
)
 

Change in FHLB, FRB, and other stock, at cost
 
(4,692
)
 
(3,407
)
Cash acquired in acquisitions
 
40,303

 
2,961

Net cash provided by (used in) investing activities
 
57,218

 
(183,330
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Net increase in deposit accounts
 
99,286

 
129,139

Change in FHLB advances and other borrowings, net
 
(75,873
)
 
17,446

Proceeds from issuance of common stock, net of issuance cost
 

 
1,323

Proceeds from exercise of stock options and warrants
 
528

 
48

Warrants exercised
 

 
688

Repurchase of common stock
 

 
(93
)
Net cash provided by financing activities
 
23,941

 
148,551

Net increase (decrease) in cash and cash equivalents
 
106,882

 
(27,848
)
Cash and cash equivalents, beginning of year
 
78,417

 
110,925

Cash and cash equivalents, end of year
 
$
185,299

 
$
83,077

 
 
 
 
 
 
 
 
 
 
Supplemental cash flow disclosures:
 
 

 
 

Interest paid
 
$
6,586

 
$
5,979

Income taxes paid
 
12,958

 
7,450

Assets acquired (liabilities assumed and capital created) in acquisitions (See Note 4):
 
 

 
 

Investment securities
 
190,254

 
53,752

FHLB and Other Stock
 
3,671

 
2,369

Loans
 
456,158

 
332,893

Core deposit intangible
 
4,319

 
2,903

Deferred income tax
 
7,069

 
4,794

Bank owned life insurance
 

 
11,276

Goodwill
 
51,106

 
27,882

Fixed assets
 
4,502

 
2,134

Other assets
 
5,610

 
2,402

Deposits
 
(636,591
)
 
(336,018
)
Other borrowings
 

 
(33,300
)
Other liabilities
 
(8,843
)
 
(1,796
)
Common stock and additional paid-in capital
 
(119,383
)
 
(70,929
)

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

7


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(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 consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2016 and December 31, 2015, the results of its operations and comprehensive income for the three months ended June 30, 2016, March 31, 2016 and June 30, 2015 and the six months ended June 30, 2016 and June 30, 2015 and the changes in stockholders’ equity and cash flows for the six months ended June 30, 2016 and 2015. Operating results or comprehensive income for the six months ended June 30, 2016 are not necessarily indicative of the results or comprehensive income that may be expected for any other interim period or the full year ending December 31, 2016.
 
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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, 2015 (the “2015 Annual Report”).
 
The Company accounts for its investments in its wholly owned special purpose entity, PPBI Trust I, under the equity method whereby the subsidiary’s net earnings are recognized in the Company’s statement of operations.
 
Note 2 – Recently Issued Accounting Pronouncements
 
Accounting Standards Pending Adoption

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit lossses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public business entities, the amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures.


8


Note 3 – Significant Accounting Policies
 
Certain Acquired Loans:  As part of business acquisitions, the Bank acquires certain loans that have shown evidence of credit deterioration since origination. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. Such acquired loans are accounted for individually. The Bank estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
 
Goodwill and Core Deposit Intangible: 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 an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
 
Core deposit intangible assets arising from whole bank acquisitions are amortized on a straight-line amortization method over their estimated useful lives, which range from 6 to 10 years
 
Use of Estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. The allowance for loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly subject to change.
 
Note 4 –  Acquisitions
 
The Company accounted for the following transactions under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of the loans, core deposit intangible, securities and deposits with the assistance of third party valuations.
 
The estimated fair values in these acquisitions are subject to refinement as additional information relative to the closing date fair values become available through the measurement period, which can extend for up to one year after the closing date of the transaction. While additional significant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date. During the measurement period, any such changes will be recorded as part of the closing date fair value.


9


Security California Bancorp Acquisition

On January 31, 2016, the Company completed its acquisition of Security California Bancorp (“SCAF”) whereby we acquired $715 million in total assets, $456 million in loans and $637 million in total deposits. Under the terms of the merger agreement, each share of SCAF common stock was converted into the right to receive 0.9629 shares of the Corporation’s common stock. The value of the total deal consideration was $120 million, which includes $788,000 of aggregate cash consideration to the holders of SCAF stock options and the issuance of 5,815,051 shares of the Corporation’s common stock, valued at $119.4 million based on a closing stock price of $20.53 per share on January 29, 2016.

SCAF was the holding company of Security Bank of California, a Riverside, California, based state-chartered bank with six branches located in Riverside County, San Bernardino County and Orange County.

Goodwill in the amount of $51.1 million was recognized in the SCAF 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 represents the assets acquired and liabilities assumed of SCAF as of January 31, 2016 and the provisional fair value adjustments and amounts recorded by the Company in 2016 under the acquisition method of accounting: 

 
SCAF
Book Value
 
Fair Value
Adjustments
 
Fair
Value
ASSETS ACQUIRED
(in thousands)
Cash and cash equivalents
$
40,947

 
$

 
$
40,947

Interest bearing deposits with financial institutions
1,972

 

 
1,972

Investment securities
191,881

 
(1,627
)
 
190,254

Loans, gross
467,197

 
(11,039
)
 
456,158

Allowance for loan losses
(7,399
)
 
7,399

 

Fixed assets
5,335

 
(833
)
 
4,502

Core deposit intangible
493

 
3,826

 
4,319

Deferred tax assets
5,618

 
1,451

 
7,069

Other assets
10,589

 
(1,308
)
 
9,281

Total assets acquired
$
716,633

 
$
(2,131
)
 
$
714,502

LIABILITIES ASSUMED
 

 
 

 
 

Deposits
$
636,450

 
$
141

 
$
636,591

Other Liabilities
9,063

 
(220
)
 
8,843

Total liabilities assumed
645,513

 
(79
)
 
645,434

Excess of assets acquired over liabilities assumed
$
71,120

 
$
(2,052
)
 
69,068

Consideration paid
 

 
 

 
120,174

Goodwill recognized
 

 
 

 
$
51,106


The fair values are preliminary estimates and are subject to adjustment for up to one year after the merger date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. In the second quarter of 2016, the Company made a $146,000 adjustment to fixed assets and goodwill.


10


Independence Bank Acquisition
 
On January 26, 2015, the Company completed its acquisition of Independence Bank (“IDPK”) in exchange for consideration valued at $79.8 million, which consisted of $6.1 million of cash consideration for IDPK common stockholders, $1.5 million of aggregate cash consideration to the holders of IDPK stock options and warrants, $1.3 million fair market value of warrants assumed and the issuance of 4,480,645 shares of the Corporation’s common stock, which was valued at $70.9 million based on the closing stock price of the Corporation’s common stock on January 26, 2015 of $15.83 per share.
 
IDPK was a Newport Beach, California based state-chartered bank. The acquisition was an opportunity for the Company to strengthen its competitive position as one of the premier community banks headquartered in Southern California. Additionally, the IDPK acquisition enhanced and connected the Company’s footprint in Southern California. 
 
Goodwill in the amount of $27.9 million was recognized in the IDPK 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.
 

11



The following table represents the assets acquired and liabilities assumed of IDPK as of January 26, 2015 and the fair value adjustments and amounts recorded by the Company in 2015 under the acquisition method of accounting: 
 
IDPK
Book Value
 
Fair Value
Adjustments
 
Fair
Value
 
(in thousands)
ASSETS ACQUIRED
 
 
 
 
 
Cash and cash equivalents
$
10,486

 
$

 
$
10,486

Investment securities
56,503

 
(382
)
 
56,121

Loans, gross
339,502

 
(6,609
)
 
332,893

Allowance for loan losses
(3,301
)
 
3,301

 

Deferred income taxes
5,266

 
(472
)
 
4,794

Bank owned life insurance
11,276

 

 
11,276

Core deposit intangible
904

 
1,999

 
2,903

Other assets
3,756

 
780

 
4,536

Total assets acquired
$
424,392

 
$
(1,383
)
 
$
423,009

 
 
 
 
 
 
LIABILITIES ASSUMED
 

 
 

 
 

Deposits
$
335,685

 
$
333

 
$
336,018

FHLB advances
33,300

 

 
33,300

Other liabilities
1,916

 
(120
)
 
1,796

Total liabilities assumed
370,901

 
213

 
371,114

Excess of assets acquired over liabilities assumed
$
53,491

 
$
(1,596
)
 
51,895

Consideration paid
 

 
 

 
79,777

Goodwill recognized
 

 
 

 
$
27,882


For loans acquired from SCAF and IDPK, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows:

 
Acquired Loans
 
SCAF
 
IDPK
 
(in thousands)
Contractual amounts due
$
539,806

 
$
453,987

Cash flows not expected to be collected
2,765

 
3,795

Expected cash flows
537,041

 
450,192

Interest component of expected cash flows
80,883

 
117,299

Fair value of acquired loans
$
456,158

 
$
332,893


In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan losses that had been previously recorded by SCAF or IDPK.








12



 
The operating results of the Company for the six months ending June 30, 2016 include the operating results of SCAF and IDPK since their respective acquisition dates. The operating results of the Company for the six months ending June 30, 2015 include the operating results of IDPK since its acquisition date. The following table presents the net interest and other income, net income and earnings per share as if the acquisitions of SCAF and IDPK were effective as of January 1, 2016 and 2015. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

 
Six Months Ended June 30,
 
2016
 
2015
 
(dollars in thousands)
Net interest and other income
$
80,512

 
$
67,729

Net income
16,952

 
11,137

Basic earnings per share
0.62

 
0.41

Diluted earnings per share
0.61

 
0.40



13


Note 5 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
 
 
 
June 30, 2016
 
 
Amortized
 Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Available-for-sale:
 
 

 
 
 
 
 
 
Municipal bonds
 
$
115,755

 
$
3,044

 
$

 
$
118,799

Collateralized mortgage obligation
 
22,570

 
274

 

 
22,844

Mortgage-backed securities
 
103,512

 
604

 
(288
)
 
103,828

Total available-for-sale
 
241,837

 
3,922

 
(288
)
 
245,471

Held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
8,076

 
98

 

 
8,174

Other
 
1,216

 

 

 
1,216

Total held-to-maturity
 
9,292

 
98

 

 
9,390

Total securities
 
$
251,129

 
$
4,020

 
$
(288
)
 
$
254,861


 
 
December 31, 2015
 
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Available-for-sale:
 
 

 
 
 
 
 
 
Municipal bonds
 
$
128,546

 
$
1,796

 
$
(97
)
 
$
130,245

Collateralized mortgage obligation
 
24,722

 
4

 
(183
)
 
24,543

Mortgage-backed securities
 
126,443

 
153

 
(1,111
)
 
125,485

Total available-for-sale
 
279,711

 
1,953

 
(1,391
)
 
$
280,273

Held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
8,400

 

 
(70
)
 
8,330

Other
 
1,242

 

 

 
1,242

Total held-to-maturity
 
9,642

 

 
(70
)
 
9,572

Total securities
 
$
289,353

 
$
1,953

 
$
(1,461
)
 
$
289,845


At June 30, 2016, mortgage-backed securities (“MBS”) with an estimated par value of $59.6 million and a fair value of $62.1 million were pledged as collateral for the Bank’s three reverse repurchase agreements which totaled $28.5 million and homeowner’s association (“HOA”) reverse repurchase agreements which totaled $16.8 million.

The Company reviews individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is temporary because (i) those declines were due to interest rate changes and not to a deterioration in the creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values or until their maturity.

If it is probable that the Company will be unable to collect all amounts due according to contractual terms of the debt security not impaired at acquisition, an other-than-temporary ("OTTI") shall be considered to have occurred. If an OTTI occurs, the cost basis of the security will be written down to its fair value as the new cost basis and the write down accounted for as a realized loss.

14


The Company did not realize any OTTI losses for the three months ended June 30, 2016 or June 30, 2015. The Company realized OTTI losses of $207,000 for the three months ended March 31, 2016. The OTTI loss relates to a CRA investment purchased in June of 2014 with a par value of $50, and a book value of $500,000. In March of 2016 the shareholders of the investment voted to approve a sale of the institution at a per share acquisition price less the Bank's book value, with an expected closing by mid-2016. As a result, the Bank's current holdings were written down and the loss recognized.

During the six months ended June 30, 2016, the Company realized OTTI losses of $207,000. The Company did not realize any OTTI losses for the six months ended June 30, 2015.

During the three months ended June 30, 2016, March 31, 2016 and June 30, 2015, the Company recognized gross gains on sales of available-for-sale securities in the amount of $532,000, $762,000 and $146,000, respectively. During the three months ended June 30, 2016, the Company did not recognize any gross losses on the sales of available-for sale securities. During the three months ended March 31, 2016 and June 30, 2015, the Company recognized gross losses on sales of available-for-sale securities in the amount of $9,000 and $7,000, respectively. The Company had net proceeds from the sale of available-for-sale securities of $21.1 million and $186 million and $7.3 million during the three months ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively.

During the six months ended June 30, 2016 and June 30, 2015, the Company recognized gross gains on sales of available-for-sale securities in the amount of $1.3 million and $264,000. During the six months ended June 30, 2016 and June 30, 2015, the Company recognized gross losses on sales of available-for-sale securities in the amount of $9,000 and $9,000. The Company had net proceeds from the sale of available-for-sale securities of $207 million and $16.1 million during the six months ended June 30, 2016 and June 30, 2015, respectively.

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.
 
June 30, 2016
 
Less than 12 months
 
12 months or Longer
 
Total
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
(dollars in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
9

 
16,209

 
(77
)
 
8

 
21,940

 
(211
)
 
17

 
38,149

 
(288
)
Total securities
9

 
$
16,209

 
$
(77
)
 
8

 
$
21,940

 
$
(211
)
 
17

 
$
38,149

 
$
(288
)


15


 
December 31, 2015
 
Less than 12 months
 
12 months or Longer
 
Total
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
(dollars in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
32

 
$
15,516

 
$
(61
)
 
6

 
$
3,349

 
$
(36
)
 
38

 
$
18,865

 
$
(97
)
Collateralized mortgage obligation

5

 
22,771

 
(183
)
 

 

 

 
5

 
22,771

 
(183
)
Mortgage-backed securities
34

 
83,488

 
(679
)
 
3

 
12,935

 
(432
)
 
37

 
96,423

 
(1,111
)
Total securities available-for-sale
71

 
121,775

 
(923
)
 
9

 
16,284

 
(468
)
 
80

 
138,059

 
(1,391
)
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
1

 
8,330

 
(70
)
 

 

 

 
1

 
8,330

 
(70
)
Total securities held-to-maturity
1

 
8,330

 
(70
)
 

 

 

 
1

 
8,330

 
(70
)
Total securities
72

 
$
130,105

 
$
(993
)
 
9

 
$
16,284

 
$
(468
)
 
81

 
$
146,389

 
$
(1,461
)

The amortized cost and estimated fair value of investment securities at June 30, 2016, by contractual maturity are shown in the table below.

 
One Year
or Less
 
More than One
Year to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 
Total
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(in thousands)
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
1,415

 
$
1,416

 
$
28,380

 
$
28,806

 
$
37,618

 
$
38,956

 
$
48,342

 
$
49,621

 
$
115,755

 
$
118,799

Collateralized mortgage obligation


 

 

 

 

 

 
22,570

 
22,844

 
22,570

 
22,844

Mortgage-backed securities

 

 

 

 
20,961

 
21,143

 
82,551

 
82,685

 
103,512

 
103,828

Total securities available-for-sale
1,415

 
1,416

 
28,380

 
28,806

 
58,579

 
60,099

 
153,463

 
155,150

 
241,837

 
245,471

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities

 

 

 

 

 

 
8,076

 
8,174

 
8,076

 
8,174

Other

 

 

 

 

 

 
1,216

 
1,216

 
1,216

 
1,216

Total securities held-to-maturity

 

 

 

 

 

 
9,292

 
9,390

 
9,292

 
9,390

Total securities
$
1,415

 
$
1,416

 
$
28,380

 
$
28,806

 
$
58,579

 
$
60,099

 
$
162,755

 
$
164,540

 
$
251,129

 
$
254,861



16


Unrealized gains and losses on investment securities available for sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At June 30, 2016, the Company had accumulated other comprehensive income of $3.6 million, or $2.1 million net of tax, compared to accumulated other comprehensive income of $562,000, or $332,000 net of tax, at December 31, 2015.

FHLB, FRB and other stock

At June 30, 2016, the Company had $14.4 million in Federal Home Loan Bank (“FHLB”) stock, $7.9 million in Federal Reserve Bank of San Francisco (“FRB”) stock, and $4.7 million in other stock, all carried at cost. During the three months ended June 30, 2016 and December 31, 2015, FHLB did not repurchase any of the Company’s excess FHLB stock through their stock repurchase program. The Company evaluates its investments in FHLB and other stock for impairment periodically, including their capital adequacy and overall financial condition. No impairment losses have been recorded through June 30, 2016.
 

 

17



Note 6 – Loans Held for Investment
 
The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:
 
June 30, 2016
 
December 31, 2015
 
(in thousands)
Business loans:
 
 
 
Commercial and industrial
$
508,141

 
$
309,741

Franchise
403,855

 
328,925

Commercial owner occupied (1)
443,060

 
294,726

SBA
86,076

 
62,256

Warehouse facilities

 
143,200

Real estate loans:
 

 
 
Commercial non-owner occupied
526,362

 
421,583

Multi-family
613,573

 
429,003

One-to-four family (2)
106,538

 
80,050

Construction
215,786

 
169,748

Land
18,341

 
18,340

Other loans
5,822

 
5,111

Total gross loans (3)
2,927,554

 
2,262,683

Less Loans held for sale, net
10,116

 
8,565

   Total gross loans held for investment
2,917,438

 
2,254,118

Less:
 
 
 
   Deferred loan origination costs/(fees) and premiums/(discounts), net
3,181

 
197

   Allowance for loan losses
(18,955
)
 
(17,317
)
   Loans held for investment, net
$
2,901,664

 
$
2,236,998

______________________________
(1) Majority secured by real estate.
(2) Includes second trust deeds.
(3) Total gross loans for June 30, 2016 are net of the unaccreted mark-to-market discounts of $12.7 million.

From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.
 
The Company makes residential and commercial loans held for investment to customers located primarily in California. Consequently, the underlying collateral for our loans and a borrower’s ability to repay may be impacted unfavorably by adverse changes in the economy and real estate market in the region.
 
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% for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $128.4 million for secured loans and $77.0 million for unsecured loans at June 30, 2016. At June 30, 2016, the Bank’s largest aggregate outstanding balance of loans to one borrower was $40.0 million of secured credit.
 

18


Purchased Credit Impaired
 
The following table provides a summary of the Company’s principal investment in purchased credit impaired loans, acquired from Canyon National Bank, IDPK and SCAF as of the period indicated: 

 
June 30, 2016
 
Canyon National
 
IDPK
 
SCAF
 
Total
 
(in thousands)
Business loans:
 
 
 
 
 
 
 
Commercial and industrial
$
87

 
$
159

 
$
4,162

 
$
4,408

Commercial owner occupied
517

 

 
1,105

 
1,622

Real estate loans:
 

 
 

 
 

 


Commercial non-owner occupied
879

 
626

 

 
1,505

Other loans

 

 
418

 
418

Total purchase credit impaired
$
1,483

 
$
785

 
$
5,685

 
$
7,953


On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield.” The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan. At June 30, 2016, the Company had $8.0 million of purchased credit impaired loans, of which $580,000 were placed on nonaccrual status.

The following table summarizes the accretable yield on the purchased credit impaired loans for the six months ended June 30, 2016:

 
Six Months Ended
 
June 30, 2016
 
Canyon National
 
IDPK
 
SCAF
 
Total
 
(in thousands)
Balance at the beginning of period
$
1,130

 
$
1,596

 
$

 
$
2,726

Accretable yield at acquisition

 

 
788

 
788

Accretion
(98
)
 
(8
)
 
(170
)
 
(276
)
Disposals and other
(30
)
 
(419
)
 

 
(449
)
Change in accretable yield

 
192

 

 
192

Balance at the end of period
$
1,002

 
$
1,361

 
$
618

 
$
2,981

 

19


Impaired Loans
 
The following tables provide a summary of the Company’s investment in impaired loans as of the period indicated:

 
 
Impaired Loans
 
 
Contractual
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
 
(in thousands)
June 30, 2016
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,519

 
$
1,051

 
$

 
$
1,051

 
$

Franchise
 
2,225

 
1,461

 
1,461

 

 
731

Commercial owner occupied
 
865

 
486

 

 
486

 

SBA
 
1,394

 
328

 

 
329

 

Real estate loans:
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 

 

 

 

 

One-to-four family
 
181

 
137

 

 
137

 

Land
 
37

 
18

 

 
18

 

Totals
 
$
6,221

 
$
3,481

 
$
1,461

 
$
2,021

 
$
731

  

 
 
Impaired Loans
 
 
Contractual
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
Average Recorded Investment
 
Interest Income Recognized
 
 
(in thousands)
December 31, 2015