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EX-32 - EXHIBIT 32 - PACIFIC PREMIER BANCORP INCppbi-09302016xex32.htm
EX-31.2 - EXHIBIT 31.2 - PACIFIC PREMIER BANCORP INCppbi-09302016xex312.htm
EX-31.1 - EXHIBIT 31.1 - PACIFIC PREMIER BANCORP INCppbi-09302016xex311.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 September 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
 pacificpremeirelogoa05.jpg
(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 November 7, 2016 was 27,656,533.

1


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 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, except share data)
(unaudited)
ASSETS
 
September 30,
2016
 
December 31,
2015
Cash and due from banks
 
$
18,543

 
$
14,935

Interest-bearing deposits with financial institutions
 
85,361

 
63,482

Cash and cash equivalents
 
103,904

 
78,417

Interest-bearing time deposits with financial institutions
 
3,944

 
1,972

Investments held to maturity, at amortized cost (fair value of $9,004 and $9,572 as of September 30, 2016 and December 31, 2015, respectively)
 
8,900

 
9,642

Investment securities available for sale, at fair value
 
313,200

 
280,273

FHLB, FRB and other stock, at cost
 
29,966

 
22,292

Loans held for sale, at lower of cost or fair value
 
9,009

 
8,565

Loans held for investment
 
3,090,839

 
2,254,315

Allowance for loan losses
 
(21,843
)
 
(17,317
)
Loans held for investment, net
 
3,068,996

 
2,236,998

Accrued interest receivable
 
11,642

 
9,315

Other real estate owned
 
711

 
1,161

Premises and equipment
 
11,314

 
9,248

Deferred income taxes, net
 
20,001

 
11,511

Bank owned life insurance
 
40,116

 
39,245

Intangible assets
 
9,976

 
7,170

Goodwill
 
101,939

 
50,832

Other assets
 
21,213

 
22,958

Total Assets
 
$
3,754,831

 
$
2,789,599

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES:
 
 

 
 

Deposit accounts:
 
 

 
 

Noninterest-bearing checking
 
$
1,160,394

 
$
711,771

Interest-bearing:
 
 

 
 

Checking
 
170,057

 
134,999

Money market/savings
 
1,157,086

 
827,378

Retail certificates of deposit
 
384,083

 
365,911

Wholesale/brokered certificates of deposit
 
188,132

 
155,064

Total interest-bearing
 
1,899,358

 
1,483,352

Total deposits
 
3,059,752

 
2,195,123

FHLB advances and other borrowings
 
136,213

 
196,125

Subordinated debentures
 
69,353

 
69,263

Accrued expenses and other liabilities
 
39,548

 
30,108

Total Liabilities
 
3,304,866

 
2,490,619

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; 27,656,533 shares at September 30, 2016 and 21,570,746 shares at December 31, 2015
 
273

 
215

Additional paid-in capital
 
343,231

 
221,487

Retained earnings
 
105,098

 
76,946

Accumulated other comprehensive income, net of tax
 
1,363

 
332

Total Stockholders' Equity
 
449,965

 
298,980

Total Liabilities and Stockholders' Equity
 
$
3,754,831

 
$
2,789,599

 
 
 
 
 
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 share data)
(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2016
 
June 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
Loans
 
$
40,487

 
$
39,035

 
$
27,935

 
$
114,929

 
$
80,917

Investment securities and other interest-earning assets
 
1,942

 
1,839

 
1,812

 
5,879

 
5,527

Total interest income
 
42,429

 
40,874

 
29,747

 
120,808

 
86,444

INTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Deposits
 
2,136

 
2,010

 
1,719

 
6,215

 
4,914

FHLB advances and other borrowings
 
314

 
324

 
339

 
963

 
1,121

Subordinated debentures
 
970

 
979

 
993

 
2,859

 
2,946

Total interest expense
 
3,420

 
3,313

 
3,051

 
10,037

 
8,981

Net Interest Provision Before Provision for Loan Losses
 
39,009

 
37,561

 
26,696

 
110,771

 
77,463

Provision for loan losses
 
4,013

 
1,589

 
1,062

 
6,722

 
4,725

Net Interest Income After Provision For Loan Losses
 
34,996

 
35,972

 
25,634

 
104,049

 
72,738

NONINTEREST INCOME
 
 
 
 
 
 
 
 

 
 

Loan servicing fees
 
288

 
257

 
248

 
769

 
156

Deposit fees
 
829

 
817

 
629

 
2,488

 
1,845

Net gain from sales of loans
 
3,122

 
2,124

 
2,544

 
7,152

 
5,265

Net gain from sales of investment securities
 
512

 
532

 
38

 
1,797

 
293

Other-than-temporary-impairment recovery/(loss) on investment securities
 
2

 

 

 
(205
)
 

Other income
 
1,215

 
720

 
919

 
3,279

 
2,669

Total noninterest income
 
5,968

 
4,450

 
4,378

 
15,280

 
10,228

NONINTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Compensation and benefits
 
14,179

 
13,098

 
9,066

 
39,017

 
27,439

Premises and occupancy
 
2,633

 
2,559

 
2,120

 
7,550

 
5,980

Data processing and communications
 
1,223

 
887

 
681

 
3,021

 
2,099

Other real estate owned operations, net
 
5

 
(15
)
 
9

 
(2
)
 
113

FDIC insurance premiums
 
442

 
401

 
355

 
1,225

 
1,032

Legal, audit and professional expense
 
676

 
446

 
505

 
1,987

 
1,687

Marketing expense
 
1,591

 
775

 
567

 
2,996

 
1,785

Office and postage expense
 
612

 
573

 
525

 
1,666

 
1,529

Loan expense
 
534

 
540

 
370

 
1,477

 
826

Deposit expense
 
1,315

 
1,196

 
917

 
3,530

 
2,704

Merger-related expense
 

 
497

 
400

 
3,616

 
4,392

CDI amortization
 
525

 
645

 
344

 
1,514

 
1,002

Other expense
 
2,125

 
2,093

 
1,515

 
5,603

 
4,469

Total noninterest expense
 
25,860

 
23,695

 
17,374

 
73,200

 
55,057

Net Income Before Income Taxes
 
15,104

 
16,727

 
12,638

 
46,129

 
27,909

Income tax
 
5,877

 
6,358

 
4,801

 
17,977

 
10,459

Net Income
 
$
9,227

 
$
10,369

 
$
7,837

 
$
28,152

 
$
17,450

EARNINGS PER SHARE
 
 
 
 
 
 
 
 

 
 

Basic
 
$
0.34

 
$
0.38

 
$
0.36

 
$
1.05

 
$
0.83

Diluted
 
0.33

 
0.37

 
0.36

 
$
1.03

 
$
0.82

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
 

 
 

Basic
 
27,387,123

 
27,378,930

 
21,510,678

 
26,776,140

 
21,037,345

Diluted
 
27,925,351

 
27,845,490

 
21,866,840

 
27,245,108

 
21,342,204

 
 
 
 
 
 
 
 
 
 
 

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
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2016
 
2016
 
2015
 
2016
 
2015
Net income
$
9,227

 
$
10,369

 
$
7,837

 
$
28,152

 
$
17,450

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Unrealized holding gains on securities arising during the period, net of income taxes (1)
(441
)
 
947

 
1,126

 
2,071

 
333

Reclassification adjustment for net gain on sale of securities included in net income, net of income taxes (2)
(296
)
 
(308
)
 
(22
)
 
(1,040
)
 
(172
)
Net unrealized gain on securities, net of income taxes
(737
)
 
639

 
1,104

 
1,031

 
161

Comprehensive income
$
8,490

 
$
11,008

 
$
8,941

 
$
29,183

 
$
17,611

______________________________
(1) Income tax (benefit) on the unrealized gains (losses) on securities was $(0.4) million for the three months ended September 30, 2016, $0.7 million for the three months ended June 30, 2016, $0.8 million for the three months ended September 30, 2015, $1.5 million for the nine months ended September 30, 2016 and $2.2 million for the nine months ended September 30, 2015.
(2) Income tax (benefit) on the reclassification adjustment for net (gains) losses on sale of securities included in net income was $0.2 million for the three months ended September 30, 2016, $0.2 million for the three months ended June 30, 2016, $16,000 for the three months ended September 30, 2015, $0.8 million for the nine months ended September 30, 2016 and $0.1 million for the nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 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

 

 

 
28,152

 

 
28,152

Other comprehensive income

 

 

 

 
1,031

 
1,031

Share-based compensation expense

 

 
1,831

 

 

 
1,831

Issuance of restricted stock, net
218,236

 

 

 

 

 

Common stock issued
5,815,051

 
58

 
119,325

 

 

 
119,383

Exercise of stock options
52,500

 

 
588

 

 

 
588

Balance at September 30, 2016
27,656,533

 
$
273

 
$
343,231

 
$
105,098

 
$
1,363

 
$
449,965

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
16,903,884

 
$
169

 
$
147,474

 
$
51,431

 
$
518

 
$
199,592

Net income

 

 

 
17,450

 

 
17,450

Other comprehensive income

 

 

 

 
161

 
161

Share-based compensation expense

 

 
670

 

 

 
670

Common stock issued
4,480,645

 
45

 
72,207

 

 

 
72,252

Warrants exercised
125,316

 
1

 
688

 

 

 
689

Repurchase of common stock
(7,165
)
 

 
(116
)
 

 

 
(116
)
Exercise of stock options
7,998

 

 
69

 

 

 
69

Balance at September 30, 2015
21,510,678

 
$
215

 
$
220,992

 
$
68,881

 
$
679

 
$
290,767


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)
 
 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
28,152

 
$
17,450

Adjustments to net income:
 
 

 
 

Depreciation and amortization expense
 
2,107

 
1,718

Provision for loan losses
 
6,722

 
4,725

Share-based compensation expense
 
1,831

 
670

Loss (gain) on sale and disposal of premises and equipment
 
420

 
(15
)
(Gain) loss on sale of or write down of other real estate owned
 
(18
)
 
92

Net amortization on securities held for sale, net
 
8,060

 
2,804

Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs
 
(8,832
)
 
(1,964
)
Gain on sale of investment securities available for sale
 
(1,797
)
 
(293
)
Originations of loans held for sale
 
(76,570
)
 

Proceeds from the sales of and principal payments from loans held for sale
 
83,317

 

Gain on sale of loans
 
(7,152
)
 
(5,265
)
Deferred income tax benefit
 
(1,756
)
 
1,006

Change in accrued expenses and other liabilities, net
 
1,388

 
209

Income from bank owned life insurance, net
 
(871
)
 
(855
)
Amortization of core deposit intangible
 
1,513

 
1,003

Change in accrued interest receivable and other assets, net
 
3,272

 
(6,905
)
Net cash provided by operating activities
 
39,786

 
14,380

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Increase in loans, net
 
(370,196
)
 
(199,527
)
Change in other real estate owned from sales and write-downs
 
468

 

Principal payments on securities available for sale
 
27,434

 
25,517

Purchase of securities available for sale
 
(102,010
)
 
(90,032
)
Proceeds from sale or maturity of securities available for sale
 
229,855

 
26,520

Proceeds from the sale of premises and equipment
 
10,263

 
1,623

Purchases of premises and equipment
 
(10,499
)
 
(1,097
)
Change in FHLB, FRB, and other stock, at cost
 
(7,674
)
 
(3,054
)
Cash acquired in acquisitions
 
40,304

 
2,961

Net cash used in investing activities
 
(182,055
)
 
(237,089
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Net increase in deposit accounts
 
228,037

 
172,363

Change in FHLB advances and other borrowings, net
 
(60,869
)
 
41,540

Proceeds from exercise of stock options and warrants
 
588

 
69

Warrants exercised
 

 
689

Repurchase of common stock
 

 
(116
)
Net cash provided by financing activities
 
167,756

 
214,545

Net increase (decrease) in cash and cash equivalents
 
25,487

 
(8,164
)
Cash and cash equivalents, beginning of period
 
78,417

 
110,925

Cash and cash equivalents, end of period
 
$
103,904

 
$
102,761

 
 
 
 
 
 
 
 
 
 
Supplemental cash flow disclosures:
 
 

 
 

Interest paid
 
$
10,956

 
$
9,877

Income taxes paid
 
13,139

 
11,962

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
)
 
(72,252
)

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

7


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 2016 and December 31, 2015, the results of its operations and comprehensive income for the three months ended September 30, 2016, June 30, 2016 and September 30, 2015 and the nine months ended September 30, 2016 and September 30, 2015 and the changes in stockholders’ equity and cash flows for the nine months ended September 30, 2016 and 2015. Operating results or comprehensive income for the nine months ended September 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 October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The Update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset upon transfer other than inventory, eliminating the current recognition exception. Prior to Update, GAAP prohibited the recognition of current and deferred income taxes for intra-entity asset transfers until the asset was sold to an outside party. The amendments in this Update do not include new disclosure requirement; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. For public business entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is currently evaluating the effects of ASU 2016-16 on its financial statements and disclosures.


8


In October 2016, The FASB issued ASU 2016-15, Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The Update provides guidance on eight specific cash flow classification issues, which include: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investments; 7) beneficial interest in securitization transactions; and 8) separately identifiable cash flows and the application of the predominance principle. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period; however, an entity is required to adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the effects of ASU 2016-15 on its financial statements and disclosures.
 
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 losses 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.

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.
 

9


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.

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 $120.2 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.


10


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. As of September 30, 2016, the Company has not yet finalized its fair values with this acquisition.

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 nine months ending September 30, 2016 include the operating results of SCAF and IDPK since their respective acquisition dates. The operating results of the Company for the nine months ending September 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, 2015. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

 
Nine Months Ended September 30,
 
2016
 
2015
 
(dollars in thousands)
Net interest and other income
$
121,476

 
$
104,315

Net income
26,179

 
20,343

Basic earnings per share
0.98

 
0.76

Diluted earnings per share
0.96

 
0.75



13


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

 
 
 
 
 
 
Corporate
 
$
23,255

 
$
75

 
$

 
$
23,330

Municipal bonds
 
114,954

 
1,923

 
(39
)
 
116,838

Collateralized mortgage obligation
 
33,644

 
228

 
(6
)
 
33,866

Mortgage-backed securities
 
139,032

 
525

 
(391
)
 
139,166

Total available-for-sale
 
310,885

 
2,751

 
(436
)
 
313,200

Held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
7,697

 
104

 

 
7,801

Other
 
1,203

 

 

 
1,203

Total held-to-maturity
 
8,900

 
104

 

 
9,004

Total securities
 
$
319,785

 
$
2,855

 
$
(436
)
 
$
322,204


 
 
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 September 30, 2016, mortgage-backed securities (“MBS”) with an estimated par value of $61.1 million and a fair value of $63.8 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 $17.7 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 impairment ("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 realized OTTI recovery of $2,000 for the three months ended September 30, 2016, which relates to investment income from previously charged-off investments. The Company did not realize any OTTI recoveries or losses for the three months ended June 30, 2016 and September 30, 2015.

During the nine months ended September 30, 2016, the Company realized OTTI losses net of recoveries of $205,000. A $207,000 OTTI was taken in the first quarter of 2016, related 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. The Company did not realize any OTTI losses for the nine months ended September 30, 2015.

During the three months ended September 30, 2016, June 30, 2016 and September 30, 2015, the Company recognized gross gains on sales of available-for-sale securities in the amount of $512,000, $532,000 and $52,000, respectively. During the three months ended September 30, 2016 and June 30, 2016, the Company did not recognize any gross losses on the sales of available-for sale securities. During the three months ended September 30, 2015, the Company recognized gross losses on sales of available-for-sale securities in the amount of$14,000. The Company had net proceeds from the sale of available-for-sale securities of $16.6 million, $21 million and $10.4 million during the three months ended September 30, 2016, June 30, 2016 and September 30, 2015, respectively.

During the nine months ended September 30, 2016 and September 30, 2015, the Company recognized gross gains on sales of available-for-sale securities in the amount of $1.8 million and $316,000. During the nine months ended September 30, 2016 and September 30, 2015, the Company recognized gross losses on sales of available-for-sale securities in the amount of $9,000 and $23,000. The Company had net proceeds from the sale of available-for-sale securities of $223 million and $26.5 million during the nine months ended September 30, 2016 and September 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.
 
September 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
17

 
$
8,376

 
$
(39
)
 

 
$

 
$

 
17

 
$
8,376

 
$
(39
)
Collateralized mortgage obligation
1

 
4,863

 
(6
)
 

 

 

 
1

 
4,863

 
(6
)
Mortgage-backed securities
19

 
51,088

 
(216
)
 
5

 
15,117

 
(175
)
 
24

 
66,205

 
(391
)
Total securities available-for-sale
37

 
$
64,327

 
$
(261
)
 
5

 
$
15,117

 
$
(175
)
 
42

 
$
79,444

 
$
(436
)


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
)


16


The amortized cost and estimated fair value of investment securities at September 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$

 
$

 
$

 
$

 
$
17,255

 
$
17,330

 
$
6,000

 
$
6,000

 
$
23,255

 
$
23,330

Municipal bonds
1,023

 
1,024

 
29,030

 
29,338

 
37,980

 
38,870

 
46,921

 
47,606

 
114,954

 
116,838

Collateralized mortgage obligation


 

 

 

 
1,493

 
1,497

 
32,151

 
32,369

 
33,644

 
33,866

Mortgage-backed securities

 

 

 

 
19,366

 
19,464

 
119,666

 
119,702

 
139,032

 
139,166

Total securities available-for-sale
1,023

 
1,024

 
29,030

 
29,338

 
76,094

 
77,161

 
204,738

 
205,677

 
310,885

 
313,200

Held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities

 

 

 

 

 

 
7,697

 
7,801

 
7,697

 
7,801

Other

 

 

 

 

 

 
1,203

 
1,203

 
1,203

 
1,203

Total securities held-to-maturity

 

 

 

 

 

 
8,900

 
9,004

 
8,900

 
9,004

Total securities
$
1,023

 
$
1,024

 
$
29,030

 
$
29,338

 
$
76,094

 
$
77,161

 
$
213,638

 
$
214,681

 
$
319,785

 
$
322,204


Unrealized gains and losses on investment securities available for sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At September 30, 2016, the Company had accumulated other comprehensive income of $2.3 million, or $1.4 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 September 30, 2016, the Company had $14.4 million in Federal Home Loan Bank (“FHLB”) stock, $10.9 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 September 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 September 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:
 
September 30, 2016
 
December 31, 2015
 
(in thousands)
Business loans:
 
 
 
Commercial and industrial
$
537,809

 
$
309,741

Franchise
431,618

 
328,925

Commercial owner occupied (1)
460,068

 
294,726

SBA
92,195

 
62,256

Warehouse facilities

 
143,200

Real estate loans:
 

 
 
Commercial non-owner occupied
527,412

 
421,583

Multi-family
689,813

 
429,003

One-to-four family (2)
101,377

 
80,050

Construction
231,098

 
169,748

Land
18,472

 
18,340

Other loans
5,678

 
5,111

Total gross loans (3)
3,095,540

 
2,262,683

Less Loans held for sale, net
9,009

 
8,565

   Total gross loans held for investment
3,086,531

 
2,254,118

Plus (less):
 
 
 
   Deferred loan origination costs/(fees) and premiums/(discounts), net
4,308

 
197

   Allowance for loan losses
(21,843
)
 
(17,317
)
   Loans held for investment, net
$
3,068,996

 
$
2,236,998

______________________________
(1) Secured by real estate.
(2) Includes second trust deeds.
(3) Total gross loans for September 30, 2016 are net of the unaccreted mark-to-market discounts of $9.1 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 $131.5 million for secured loans and $78.9 million for unsecured loans at September 30, 2016. At September 30, 2016, the Bank’s largest aggregate outstanding balance of loans to one borrower was $32.0 million of secured credit.
 

18


Purchased Credit Impaired
 
The Company has purchased loans from Canyon National Bank, IDPK and SCAF, for which there was at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:
 
September 30, 2016
 
Canyon National
 
IDPK
 
SCAF
 
Total
 
(in thousands)
Business loans:
 
 
 
 
 
 
 
Commercial and industrial
$
11

 
$
406

 
$
7,226

 
$
7,643

Commercial owner occupied
281

 

 
1,013

 
1,294

Real estate loans:
 

 
 

 
 

 


Commercial non-owner occupied
418

 
282

 

 
700

Other loans

 

 
378

 
378

Outstanding balance
$
710

 
$
688

 
$
8,617

 
$
10,015

 
 
 
 
 
 
 
 
Carrying amount, net of allowance of $71, $25, and $5, respectively
$
1,450

 
$
310

 
$
5,708

 
$
7,468


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 September 30, 2016, the Company had $10.0 million of purchased credit impaired loans, of which none were placed on nonaccrual status.

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

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

 
$
1,596

 
$

 
$
2,726

Additions

 

 
788

 
788

Accretion
(33
)
 
(38
)
 
(594
)
 
(665
)
Disposals

 

 
(27
)
 
(27
)
Reclassification from (to) nonaccretable difference
(351
)
 
(1,068
)
 
676

 
(743
)
Balance at the end of period
$
746

 
$
490

 
$
843

 
$
2,079

 

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)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,990

 
$
1,990

 
$
1,990

 
$

 
$
1,990

Commercial owner occupied
 
1,003

 
606

 
146

 
460

 
73

SBA
 
2,814

 
503