Attached files

file filename
EX-32 - EXHIBIT 32 - PACIFIC PREMIER BANCORP INCppbi-09302017xex32.htm
EX-31.2 - EXHIBIT 31.2 - PACIFIC PREMIER BANCORP INCppbi-09302017xex312.htm
EX-31.1 - EXHIBIT 31.1 - PACIFIC PREMIER BANCORP INCppbi-09302017xex311.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, 2017
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
 pacificpremeirelogoa09.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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act).
Large accelerated filer
[ ]
Accelerated filer
[X]
Non-accelerated filer
(Do not check if a smaller
 reporting company)
[ ]
Smaller reporting company
[  ]
Emerging growth company
[  ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

The number of shares outstanding of the registrant’s common stock as of November 6, 2017 was 46,219,559.

1


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2017

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
2017
 
December 31,
2016
Cash and due from banks
 
$
35,713

 
$
14,706

Interest-bearing deposits with financial institutions
 
85,649

 
142,151

Cash and cash equivalents
 
121,362

 
156,857

Interest-bearing time deposits with financial institutions
 
4,437

 
3,944

Investments held-to-maturity, at amortized cost (fair value of $18,577 as of September 30, 2017 and $8,461 as of December 31, 2016)
 
18,627

 
8,565

Investment securities available-for-sale, at fair value
 
703,944

 
380,963

FHLB, FRB and other stock, at cost
 
58,344

 
37,304

Loans held for sale, at lower of cost or fair value
 
44,343

 
7,711

Loans held for investment
 
5,009,317

 
3,241,613

Allowance for loan losses
 
(27,143
)
 
(21,296
)
Loans held for investment, net
 
4,982,174

 
3,220,317

Accrued interest receivable
 
20,527

 
13,145

Other real estate owned
 
372

 
460

Premises and equipment
 
45,725

 
12,014

Deferred income taxes, net
 
22,023

 
16,807

Bank owned life insurance
 
75,482

 
40,409

Intangible assets
 
33,545

 
9,451

Goodwill
 
371,677

 
102,490

Other assets
 
29,752

 
25,874

Total Assets
 
$
6,532,334

 
$
4,036,311

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES:
 
 

 
 

Deposit accounts:
 
 

 
 

Noninterest-bearing checking
 
$
1,890,241

 
$
1,185,768

Interest-bearing:
 
 

 
 

Checking
 
304,295

 
182,893

Money market/savings
 
2,009,781

 
1,202,361

Retail certificates of deposit
 
573,652

 
375,203

Wholesale/brokered certificates of deposit
 
240,184

 
199,356

Total interest-bearing
 
3,127,912

 
1,959,813

Total deposits
 
5,018,153

 
3,145,581

FHLB advances and other borrowings
 
382,173

 
327,971

Subordinated debentures
 
79,871

 
69,383

Accrued expenses and other liabilities
 
70,477

 
33,636

Total Liabilities
 
5,550,674

 
3,576,571

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; 40,162,026 shares at September 30, 2017 and 27,798,283 shares at December 31, 2016
 
397

 
274

Additional paid-in capital
 
817,809

 
345,138

Retained earnings
 
160,978

 
117,049

Accumulated other comprehensive income (loss), net of tax
 
2,476

 
(2,721
)
Total Stockholders' Equity
 
981,660

 
459,740

Total Liabilities and Stockholders' Equity
 
$
6,532,334

 
$
4,036,311

 
 
 
 
 
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
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
September 30,
 
 
2017
 
2017
 
2016
 
2017
 
2016
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
Loans
 
$
64,915

 
$
63,554

 
$
40,487

 
$
170,905

 
$
114,929

Investment securities and other interest-earning assets
 
5,246

 
5,179

 
1,942

 
13,416

 
5,879

Total interest income
 
70,161

 
68,733

 
42,429

 
184,321

 
120,808

INTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Deposits
 
3,557

 
3,081

 
2,136

 
8,774

 
6,215

FHLB advances and other borrowings
 
1,162

 
1,175

 
314

 
2,940

 
963

Subordinated debentures
 
1,151

 
1,139

 
970

 
3,275

 
2,859

Total interest expense
 
5,870

 
5,395

 
3,420

 
14,989

 
10,037

Net interest income before provision for loan losses
 
64,291

 
63,338

 
39,009

 
169,332

 
110,771

Provision for loan losses
 
2,049

 
1,904

 
4,013

 
6,455

 
6,722

Net interest income after provision for loan losses
 
62,242

 
61,434

 
34,996

 
162,877

 
104,049

NONINTEREST INCOME
 
 
 
 
 
 
 
 

 
 

Loan servicing fees
 
276

 
143

 
288

 
641

 
769

Deposit fees
 
1,117

 
986

 
422

 
2,521

 
1,267

Net gain from sales of loans
 
3,439

 
2,887

 
3,122

 
9,137

 
7,152

Net gain from sales of investment securities
 
896

 
2,093

 
512

 
2,989

 
1,797

Net gain from other real estate owned
 

 
94

 

 
94

 
18

Other income
 
2,493

 
2,556

 
1,624

 
6,281

 
4,282

Total noninterest income
 
8,221

 
8,759

 
5,968

 
21,663

 
15,285

NONINTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Compensation and benefits
 
21,707

 
21,625

 
14,181

 
58,218

 
39,018

Premises and occupancy
 
4,016

 
3,733

 
2,576

 
10,202

 
7,306

Data processing
 
2,082

 
2,439

 
1,223

 
5,708

 
3,021

Other real estate owned operations, net
 
3

 
44

 
5

 
59

 
16

FDIC insurance premiums
 
379

 
818

 
442

 
1,652

 
1,225

Legal, audit and professional expense
 
1,978

 
1,281

 
737

 
4,177

 
2,149

Marketing expense
 
1,248

 
1,006

 
1,683

 
3,072

 
3,116

Office, telecommunications and postage expense
 
835

 
922

 
612

 
2,190

 
1,666

Loan expense
 
1,017

 
1,068

 
534

 
2,553

 
1,477

Deposit expense
 
1,655

 
1,663

 
1,315

 
4,762

 
3,516

Merger-related expense
 
503

 
10,117

 

 
15,566

 
3,616

CDI amortization
 
1,761

 
1,761

 
525

 
4,033

 
1,514

Other expense
 
2,428

 
2,019

 
2,027

 
5,663

 
5,565

Total noninterest expense
 
39,612

 
48,496

 
25,860

 
117,855

 
73,205

Net income before income taxes
 
30,851

 
21,697

 
15,104

 
66,685

 
46,129

Income tax
 
10,619

 
7,521

 
5,877

 
22,756

 
17,977

Net Income
 
$
20,232

 
$
14,176

 
$
9,227

 
$
43,929

 
$
28,152

EARNINGS PER SHARE
 
 
 
 
 
 
 
 

 
 

Basic
 
$
0.51

 
$
0.36

 
$
0.34

 
$
1.23

 
$
1.05

Diluted
 
$
0.50

 
$
0.35

 
$
0.33

 
$
1.20

 
$
1.03

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
 

 
 

Basic
 
39,709,565

 
39,586,524

 
27,387,123

 
35,652,626

 
26,776,140

Diluted
 
40,486,114

 
40,394,236

 
27,925,351

 
36,455,945

 
27,245,108

 
 
 
 
 
 
 
 
 
 
 
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,
 
2017
 
2017
 
2016
 
2017
 
2016
Net income
$
20,232

 
$
14,176

 
$
9,227

 
$
43,929

 
$
28,152

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Unrealized holding gains/(loss) on securities arising during the period, net of income taxes (1)
(196
)
 
6,336

 
(441
)
 
7,153

 
2,071

Reclassification adjustment for net (gains)/losses on sale of securities included in net income, net of income taxes (2)
(588
)
 
(1,368
)
 
(296
)
 
(1,956
)
 
(1,040
)
  Other comprehensive income, net of tax
(784
)
 
4,968

 
(737
)
 
5,197

 
1,031

Comprehensive income, net of tax
$
19,448

 
$
19,144

 
$
8,490

 
$
49,126

 
$
29,183

______________________________
(1) Income tax (benefit) on the unrealized gains (losses) on securities was $(253,000) for the three months ended September 30, 2017, $4.3 million for the three months ended June 30, 2017, $(366,000) for the three months ended September 30, 2016, $4.7 million for the nine months ended September 30, 2017 and $1.5 million for the nine months ended September 30, 2016.

(2) Income tax (benefit) on the reclassification adjustment for net (gains) losses on sale of securities included in net income was $308,000 for the three months ended September 30, 2017, $725,000 for the three months ended June 30, 2017, $216,000 for the three months ended September 30, 2016, $1,033,000 for the nine months ended September 30, 2017 and $756,000 for the nine months ended September 30, 2016.

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, 2017 AND 2016
(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, 2016
27,798,283

 
$
274

 
$
345,138

 
$
117,049

 
$
(2,721
)
 
$
459,740

Net income

 

 

 
43,929

 

 
43,929

Other comprehensive income

 

 

 

 
5,197

 
5,197

Share-based compensation expense

 

 
4,246

 

 

 
4,246

Issuance of restricted stock, net
4,085

 

 

 

 

 

Common stock issued
11,971,917

 
120

 
464,862

 

 

 
464,982

Goodwill adjustment

 

 
500

 

 

 
500

Repurchase of common stock

 

 
(1,259
)
 

 

 
(1,259
)
Exercise of stock options
387,741

 
3

 
4,322

 

 

 
4,325

Balance at September 30, 2017
40,162,026

 
$
397

 
$
817,809

 
$
160,978

 
$
2,476

 
$
981,660

 
 
 
 
 
 
 
 
 
 
 
 
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


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)
 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
43,929

 
$
28,152

Adjustments to net income:
 
 

 
 

Depreciation and amortization expense
 
3,378

 
2,107

Provision for loan losses
 
6,455

 
6,722

Share-based compensation expense
 
4,246

 
1,831

(Gain) loss on sale and disposal of premises and equipment
 
235

 
420

Gain on sale of or write down of other real estate owned
 
(94
)
 
(18
)
Net amortization on securities available-for-sale, net
 
5,693

 
8,060

Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs
 
1,373

 
(8,832
)
Gain on sale of investment securities available-for-sale
 
(2,989
)
 
(1,797
)
Other-than-temporary impairment recovery on investment securities, net
 
(1
)
 

Originations of loans held for sale
 
(130,040
)
 
(76,570
)
Proceeds from the sales of and principal payments from loans held for sale
 
100,938

 
83,317

Gain on sale of loans
 
(9,137
)
 
(7,152
)
Deferred income tax expense (benefit)
 
1,651

 
(1,756
)
Change in accrued expenses and other liabilities, net
 
9,930

 
1,388

Income from bank owned life insurance, net
 
(1,349
)
 
(871
)
Amortization of core deposit intangible
 
4,033

 
1,513

Change in accrued interest receivable and other assets, net
 
1,665

 
3,272

Net cash provided by operating activities
 
39,916

 
39,786

Cash flows from investing activities:
 
 

 
 

Net increase in interest-bearing time deposits with financial institutions
 
(493
)
 

Proceeds from sale of real estate owned
 
182

 

Increase in loans, net
 
(404,768
)
 
(370,196
)
Change in other real estate owned from sales and write-downs
 

 
468

Principal payments on securities available-for-sale
 
55,473

 
27,434

Purchase of securities available-for-sale
 
(168,697
)
 
(102,010
)
Proceeds from sale or maturity of securities available-for-sale
 
248,043

 
229,855

Proceeds from the sale of premises and equipment
 

 
10,263

Proceeds from bank owned life insurance death benefit
 
199

 

Purchases of premises and equipment
 
(2,421
)
 
(10,499
)
Change in FHLB, FRB, and other stock, at cost
 
(11,301
)
 
(7,674
)
Cash acquired in acquisitions, net
 
76,531

 
40,304

Net cash used in investing activities
 
(207,252
)
 
(182,055
)
Cash flows from financing activities:
 
 

 
 

Net increase in deposit accounts
 
203,119

 
228,037

Change in FHLB advances and other borrowings, net
 
(74,344
)
 
(60,869
)
Proceeds from exercise of stock options and warrants
 
4,325

 
588

Repurchase of common stock
 
(1,259
)
 

Net cash provided by financing activities
 
131,841

 
167,756

Net increase in cash and cash equivalents
 
(35,495
)
 
25,487

Cash and cash equivalents, beginning of period
 
156,857

 
78,417

Cash and cash equivalents, end of period
 
$
121,362

 
$
103,904

 
 
 
 
 
Supplemental cash flow disclosures:
 
 

 
 

Interest paid
 
$
12,696

 
$
10,956

Income taxes paid
 
1,405

 
13,139

Noncash investing activities during the period:
 
 
 
 
Security purchases settled in subsequent period
 
18,755

 

Transfers from portfolio loans to loans held for sale
 
31,685

 

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

 
 

Investment securities
 
442,923

 
190,254

FHLB and Other Stock
 
9,739

 
3,671

Loans
 
1,364,649

 
456,158

Core deposit intangible
 
28,123

 
4,319

Deferred income tax
 
9,986

 
6,748

Goodwill
 
269,187

 
51,658

Fixed assets
 
34,902

 
4,190

Other assets
 
45,475

 
5,691

Deposits
 
(1,669,550
)
 
(636,591
)
Other borrowings
 
(139,034
)
 

Other liabilities
 
(8,061
)
 
(8,843
)
Common stock and additional paid-in capital
 
(465,482
)
 
(120,174
)

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, 2017
(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, 2017 and December 31, 2016, the results of its operations and comprehensive income for the three months ended September 30, 2017, June 30, 2017 and September 30, 2016 and the nine months ended September 30, 2017 and September 30, 2016 and the changes in stockholders’ equity and cash flows for the nine months ended September 30, 2017 and 2016. Operating results or comprehensive income for the nine months ended September 30, 2017 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, 2017.
 
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, 2016 (the “2016 Annual Report”).
 
The Company accounts for its investments in its wholly owned special purpose entities, PPBI Trust I, Heritage Oaks Capital Trust II, Mission Community Capital Trust I, and Santa Lucia Bancorp (CA) Capital Trust, under the equity method whereby the subsidiary’s net earnings are recognized in the Company’s statement of income.
 
Note 2 – Recently Issued Accounting Pronouncements
 
Accounting Standards Adopted in 2017

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting. The amendments simplify several aspects of the accounting for share-based payment award transactions, including accounting for excess tax benefits and tax deficiencies, classifying excess tax benefits on the statement of cash flows, accounting for forfeitures, classifying awards that permit share repurchases to satisfy statutory tax-withholding requirements and classifying tax payments on behalf of employees on the statement of cash flows. For public business entities, the amendment is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. As a result of the adoption of ASU 2016-09, the Company began recognizing the tax effects of exercised or vested awards as discrete items in the reporting period in which they occur, resulting in a $355,000 and a $2.0 million tax benefit to the Company for the three and nine months ended September 30, 2017, respectively.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments clarify that a change in the counterparty to a derivative instrument designated as a hedging instrument does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria remain the same. The

8


Update is effective for public business entities for fiscal years beginning after December 31, 2016, including interim periods within those years. The adoption of this standard did not have a material effect on the Company's operating results or financial condition.

Recent Accounting Guidance Not Yet Effective

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Modification accounting will apply unless all of the following are the same immediately before and after the modification:

The award’s fair value – or calculated value or intrinsic value, if an alternative method is used. If the modification does not affect any inputs to the valuation of the award, estimating the value immediately before and after the modification is not required.

The award’s vesting provisions

The award’s classification as an equity instrument or a liability instrument
  
The Update is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. The amendments should be applied prospectively to awards modified on or after the effective date. The adoption of this standard will not material effect the Company's operating results or financial condition, as historically the Company has not modified share-based awards.

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. The Company is in the process of compiling key data elements and considering software models that will meet the requirements of the new guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The Update is generally effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the early stages of its implementation assessment, which includes identifying the population of the Company's leases that are within the scope of the new guidance and gathering all key lease data that will facilitate application of the new accounting requirements.

ASU 2014-09, Revenue From Contracts With Customers (Topic 606), ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives ad Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20 Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements to Topic 606. The FASB amended existing guidance related to revenue from contracts with customers, superseding and replacing nearly all existing revenue recognition guidance, including industry-specific guidance, establishing a new control-based revenue recognition model, changing the basis for deciding when revenue is recognized over time or at

9


a point in time, providing new and more detailed guidance on specific topics and expanding and improving disclosures about revenue. In addition, this guidance specifies the accounting for some costs to obtain or fulfill a contract with a customer. The amendments are effective for public entities for annual reporting periods beginning after December 15, 2017. A substantial portion of the Company’s revenues represent interest and fee income generated from financial instruments such as loans and investment securities. Revenues generated from financial instruments such as these are not within the scope of this guidance. Revenue sources that are within the scope of this guidance include service charges and fees on deposit accounts. The Company is in the process of reviewing non-interest income revenue sources to determine if they are within the scope of the new guidance. The Company does not expect the adoption will have a significant impact on its Consolidated Financial Statements.
 
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 Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the Securities and Exchange Commission ("Form 10-K"). Select policies have been reiterated below that have a particular affiliation to our interim financial statements.

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 November 30 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 either an accelerated basis, reflecting the pattern in which the economic benefits of the intangible assets is consumed or otherwise used up, or 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.
 

10


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.

Heritage Oaks Bancorp Acquisition

Effective as of April 1, 2017, the Company completed the acquisition of Heritage Oaks Bancorp ("HEOP"), the holding company of Heritage Oaks Bank, a Paso Robles, California based state-chartered bank (“Heritage Oaks Bank”) with $2.0 billion in total assets, $1.4 billion in gross loans and $1.7 billion in total deposits at March 31, 2017. Heritage Oaks Bank operates branches within San Luis Obispo and Santa Barbara Counties and a loan production office in Ventura County.

Pursuant to the terms of the merger agreement, each outstanding share of HEOP common stock was converted into the right to receive 0.3471 shares of corporate common stock. The value of the total deal consideration was approximately $465 million, which included approximately $3.9 million of aggregate cash consideration payable to holders of Heritage Oaks share-based compensation awards, and the issuance of 11,959,022 shares of the Corporation's common stock, which had a value of $38.55 per share, which was the closing price of the Corporation's common stock on March 31, 2017, the last trading day prior to the consummation of the acquisition.

Goodwill in the amount of $269 million was recognized in the HEOP 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 HEOP as of April 1, 2017 and the fair value adjustments and amounts recorded by the Company in 2017 under the acquisition method of accounting: 


11


 
HEOP
Book Value
 
Fair Value
Adjustments
 
Fair
Value
ASSETS ACQUIRED
(dollars in thousands)
Cash and cash equivalents
$
78,728

 
$

 
$
78,728

Investment securities
447,520

 
(4,597
)
 
442,923

FHLB stock
9,739

 

 
9,739

Loans, gross
1,387,949

 
(23,300
)
 
1,364,649

Allowance for loan losses
(17,200
)
 
17,200

 

Fixed assets
35,567

 
(665
)
 
34,902

Core deposit intangible

 
28,123

 
28,123

Deferred tax assets
17,850

 
(7,864
)
 
9,986

Other assets
45,484

 
(9
)
 
45,475

Total assets acquired
$
2,005,637

 
$
8,888

 
$
2,014,525

LIABILITIES ASSUMED
 

 
 

 
 

Deposits
1,668,079

 
1,471

 
1,669,550

Borrowings
141,996

 
(2,962
)
 
139,034

Other Liabilities
7,290

 
771

 
8,061

Total liabilities assumed
1,817,365

 
(720
)
 
1,816,645

Excess of assets acquired over liabilities assumed
$
188,272

 
$
9,608

 
197,880

Consideration paid
 

 
 

 
465,482

Capitalized merger-related expense
 
 
 
 
1,585

Goodwill recognized
 

 
 

 
$
269,187


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 third quarter of 2017, the Company made a $1.1 million adjustment to deferred tax assets and the deal consideration.

Security California Bancorp Acquisition

On January 31, 2016, the Company completed its acquisition of Security California Bancorp (“SCAF”), whereby we acquired $714 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 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 $51.7 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.


12


The following table represents the assets acquired and liabilities assumed of SCAF as of January 31, 2016 and the 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
(dollars 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

 
(1,145
)
 
4,190

Core deposit intangible
493

 
3,826

 
4,319

Deferred tax assets
5,618

 
1,130

 
6,748

Other assets
10,589

 
(1,227
)
 
9,362

Total assets acquired
$
716,633

 
$
(2,683
)
 
$
713,950

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

 
$
(2,604
)
 
68,516

Consideration paid
 

 
 

 
120,174

Goodwill recognized
 

 
 

 
$
51,658


The fair values are 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 March 31, 2017, the Company finalized its fair values with this acquisition.

For loans acquired from SCAF and HEOP, 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
 
HEOP
 
(dollars in thousands)
Contractual amounts due
$
539,806

 
$
1,717,230

Cash flows not expected to be collected
2,765

 
4,442

Expected cash flows
537,041

 
1,712,788

Interest component of expected cash flows
80,883

 
348,100

Fair value of acquired loans
$
456,158

 
$
1,364,688


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

13


The operating results of the Company for the three months ended September 30, 2017, June 30, 2017 and September 30, 2016 and the nine months ended September 30, 2017 and September 30, 2016 include the operating results of SCAF and HEOP since its acquisition date. The following table presents the net interest and other income, net income and earnings per share as if the acquisition of SCAF and HEOP were effective as of January 1, 2016. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
September 30,
 
2017
 
2017
 
2016
 
2017
 
2016
 
(dollars in thousands)
Net interest and other income
$
70,463

 
$
70,193

 
$
60,538

 
$
203,018

 
$
179,958

Net income
20,232

 
14,176

 
13,410

 
44,492

 
38,562

Basic earnings per share
0.51

 
0.36

 
0.34

 
1.12

 
0.98

Diluted earnings per share
0.50

 
0.35

 
0.34

 
1.10

 
0.97



14


Note 5 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
 
 
 
September 30, 2017
 
 
Amortized
 Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(dollars in thousands)
Investment securities available-for-sale:
 
 

 
 
 
 
 
 
Agency
 
$
49,969

 
$
433

 
$
(23
)
 
$
50,379

Corporate
 
61,040

 
1,275

 
(140
)
 
62,175

Municipal bonds
 
224,332

 
4,481

 
(386
)
 
228,427

Collateralized mortgage obligation: residential
 
43,254

 
255

 
(105
)
 
43,404

Mortgage-backed securities: residential
 
321,158

 
688

 
(2,287
)
 
319,559

Total investment securities available-for-sale
 
699,753

 
7,132

 
(2,941
)
 
703,944

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
 
17,476

 

 
(50
)
 
17,426

Other
 
1,151

 

 

 
1,151

Total investment securities held-to-maturity
 
18,627

 

 
(50
)
 
18,577

Total investment securities
 
$
718,380

 
$
7,132

 
$
(2,991
)
 
$
722,521


 
 
December 31, 2016
 
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(dollars in thousands)
Investment securities available-for-sale:
 
 

 
 
 
 
 
 
Corporate
 
$
37,475

 
$
372

 
$
(205
)
 
$
37,642

Municipal bonds
 
120,155

 
338

 
(1,690
)
 
118,803

Collateralized mortgage obligation: residential
 
31,536

 
25

 
(173
)
 
31,388

Mortgage-backed securities: residential
 
196,496

 
69

 
(3,435
)
 
193,130

Total investment securities available-for-sale
 
385,662

 
804

 
(5,503
)
 
380,963

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
 
7,375

 

 
(104
)
 
7,271

Other
 
1,190

 

 

 
1,190

Total investment securities held-to-maturity
 
8,565

 

 
(104
)
 
8,461

Total investment securities
 
$
394,227

 
$
804

 
$
(5,607
)
 
$
389,424


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, 2017, the Company had an accumulated other comprehensive income of $4.2 million, or $2.5 million net of tax, compared to an accumulated other comprehensive loss of $4.7 million, or $2.7 million net of tax, at December 31, 2016.

At September 30, 2017, mortgage-backed securities ("MBS ") with an estimated par value of $62.4 million and a fair value of $64.2 million were pledged as collateral for the Bank’s three repurchase agreements, which totaled $28.5 million, and homeowner’s association (“HOA”) reverse repurchase agreements, which totaled $18.5 million.


15


At December 31, 2016, MBS with an estimated par value of $63.6 million and a fair value of $65.3 million were pledged as collateral for the Bank’s three repurchase agreements, which totaled $28.5 million, and HOA reverse repurchase agreements, which totaled $21.5 million.

At September 30, 2017 and December 31, 2016, there were not holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' 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 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.

The Company did not realize any OTTI recoveries or losses for the three months ended September 30, 2017 and June 30, 2017. However, the Company did realize an OTTI recovery of $2,000 for the three months ended September 30, 2016, which relates to investment income from a previously charge-off investment. 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 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, and the sale closed in July 2016. The Company is currently waiting to receive the proceeds for its outstanding shares. As a result, the Company's current holdings were written down and the loss recognized.

16



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, 2017
 
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)
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
1

 
$
1,598

 
$
(23
)
 

 
$

 
$

 
1

 
$
1,598

 
$
(23
)
Corporate
3

 
7,625

 
(134
)
 
1

 
1,014

 
(6
)
 
4

 
8,639

 
(140
)
Municipal bonds
16

 
8,179

 
(112
)
 
24

 
12,488

 
(274
)
 
40

 
20,667

 
(386
)
Collateralized mortgage obligation: residential
5

 
15,197

 
(105
)
 

 

 

 
5

 
15,197

 
(105
)
Mortgage-backed securities: residential
46

 
116,678

 
(1,105
)
 
18

 
61,565

 
(1,182
)
 
64

 
178,243

 
(2,287
)
Total investment securities available-for-sale
71

 
149,277

 
(1,479
)
 
43

 
75,067

 
(1,462
)
 
114

 
224,344

 
(2,941
)
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
1

 
6,502

 
(50
)
 

 

 

 
1

 
6,502

 
(50
)
Total investment securities held-to-maturity
1

 
6,502

 
(50
)
 

 

 

 
1

 
6,502

 
(50
)
Total investment securities
72

 
$
155,779

 
$
(1,529
)
 
43

 
$
75,067

 
$
(1,462
)
 
115

 
$
230,846

 
$
(2,991
)


17


 
December 31, 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)
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
3

 
$
7,609

 
$
(205
)
 

 
$

 
$

 
3

 
$
7,609

 
$
(205
)
Municipal bonds
152

 
85,750

 
(1,690
)
 

 

 

 
152

 
85,750

 
(1,690
)
Collateralized mortgage obligation: residential
5

 
19,092

 
(173
)
 

 

 

 
5

 
19,092

 
(173
)
Mortgage-backed securities: residential
55

 
149,740

 
(2,916
)
 
4

 
16,039

 
(519
)
 
59

 
165,779

 
(3,435
)
Total investment securities available-for-sale
215

 
262,191

 
(4,984
)
 
4

 
16,039

 
(519
)
 
219

 
278,230

 
(5,503
)
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
1

 
7,271

 
(104
)
 

 

 

 
1

 
7,271

 
(104
)
Total investment securities held-to-maturity
1

 
7,271

 
(104
)
 

 

 

 
1

 
7,271

 
(104
)
Total investment securities
216

 
$
269,462

 
$
(5,088
)
 
4

 
$
16,039

 
$
(519
)
 
220

 
$
285,501

 
$
(5,607
)


18


The amortized cost and estimated fair value of investment securities at September 30, 2017, 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
 
(dollars in thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
$

 
$

 
$

 
$

 
$
16,085

 
$
16,176

 
$
33,884

 
$
34,203

 
$
49,969

 
$
50,379

Corporate

 

 

 

 
56,040

 
57,175

 
5,000

 
5,000

 
61,040

 
62,175

Municipal bonds
4,592

 
4,598

 
32,249

 
32,569

 
72,854

 
73,907

 
114,637

 
117,353

 
224,332

 
228,427

Collateralized mortgage obligation: residential

 

 

 

 
3,361

 
3,406

 
39,893

 
39,998

 
43,254

 
43,404

Mortgage-backed securities: residential
2,614

 
2,603

 
5,302

 
5,295

 
54,838

 
54,797

 
258,404

 
256,864

 
321,158

 
319,559

Total investment securities available-for-sale
7,206

 
7,201

 
37,551

 
37,864

 
203,178

 
205,461

 
451,818

 
453,418

 
699,753

 
703,944

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential

 

 

 

 

 

 
17,476

 
17,426

 
17,476

 
17,426

Other

 

 

 

 

 

 
1,151

 
1,151

 
1,151

 
1,151

Total investment securities held-to-maturity

 

 

 

 

 

 
18,627

 
18,577

 
18,627

 
18,577

Total investment securities
$
7,206

 
$
7,201

 
$
37,551

 
$
37,864

 
$
203,178

 
$
205,461

 
$
470,445

 
$
471,995

 
$
718,380

 
$
722,521


During the three months ended September 30, 2017, June 30, 2017 and September 30, 2016, the Company recognized gross gains on sales of available-for-sale securities in the amount of $897,000, $2.1 million and $512,000, respectively. During the three months ended September 30, 2017 and June 30, 2017, the Company recognized gross losses on the sales of available-for-sale securities in the amount of $1,000 and $50,000, respectively. The Company did not recognize any gross losses on the sales of available-for sale securities during the three months ended September 30, 2016. The Company had net proceeds from the sale of available-for-sale securities of $3.7 million, $215 million and $16.6 million during the three months ended September 30, 2017, June 30, 2017 and September 30, 2016.

During the nine months ended September 30, 2017 and September 30, 2016, the Company recognized gross gains on sales of available-for-sale securities in the amount of $3.0 million and $1.8 million, respectively. During the nine months ended September 30, 2017 and September 30, 2016, the Company recognized gross losses on sales of available-for-sale securities in the amount of $51,000 and $9,000, respectively. The Company had net proceeds from the sale of available-for-sale securities of $243 million during the nine months ended September 30, 2017 and $223 million during the nine months ended September 30, 2016.


19


FHLB, FRB and other stock

At September 30, 2017, the Company had $17.3 million in Federal Home Loan Bank (“FHLB”) stock, $25.0 million in Federal Reserve Bank of San Francisco (“FRB”) stock, and $16.1 million in other stock, all carried at cost. During the three months ended September 30, 2016 and December 31, 2016, the FHLB did not repurchase any of the Company’s excess FHLB stock through their 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. No impairment losses have been recorded through September 30, 2017.
 

 

20



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, 2017
 
December 31, 2016
 
(dollars in thousands)
Business loans:
 
 
 
Commercial and industrial
$
763,091

 
$
563,169

Franchise
626,508

 
459,421

Commercial owner occupied (1)
805,137

 
454,918

SBA
107,211

 
88,994

Agriculture
86,466

 

    Total business loans
2,388,413

 
1,566,502

Real estate loans:
 

 
 
Commercial non-owner occupied
1,098,995

 
586,975