Attached files

file filename
EX-32 - EXHIBIT 32 - PACIFIC PREMIER BANCORP INCppbi-09302018xex32.htm
EX-31.2 - EXHIBIT 31.2 - PACIFIC PREMIER BANCORP INCppbi-09302018xex312.htm
EX-31.1 - EXHIBIT 31.1 - PACIFIC PREMIER BANCORP INCppbi-09302018xex311.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, 2018
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
 image0.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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [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
[X]
Accelerated filer
[  ]
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, 2018 was 62,472,897.

1


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
2018
 
December 31,
2017
Cash and due from banks
 
$
39,485

 
$
39,606

Interest-bearing deposits with financial institutions
 
223,727

 
157,558

Cash and cash equivalents
 
263,212

 
197,164

Interest-bearing time deposits with financial institutions
 
6,386

 
6,633

Investments held-to-maturity, at amortized cost (fair value of $45,138 as of September 30, 2018 and $18,082 as of December 31, 2017, respectively)
 
46,385

 
18,291

Investment securities available-for-sale, at fair value
 
1,054,877

 
787,429

FHLB, FRB and other stock, at cost
 
112,649

 
65,881

Loans held for sale, at lower of cost or fair value
 
52,880

 
23,426

Loans held for investment
 
8,759,204

 
6,196,224

Allowance for loan losses
 
(33,306
)
 
(28,936
)
Loans held for investment, net
 
8,725,898

 
6,167,288

Accrued interest receivable
 
37,683

 
27,060

Other real estate owned
 
356

 
326

Premises and equipment
 
66,103

 
53,155

Deferred income taxes, net
 
26,848

 
13,265

Bank owned life insurance
 
110,354

 
75,976

Intangible assets
 
105,187

 
43,014

Goodwill
 
807,892

 
493,329

Other assets
 
87,171

 
52,264

Total assets
 
$
11,503,881

 
$
8,024,501

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

LIABILITIES
 
 

 
 

Deposit accounts:
 
 

 
 

Noninterest-bearing checking
 
$
3,434,674

 
$
2,226,876

Interest-bearing:
 
 

 
 

Checking
 
495,483

 
365,193

Money market/savings
 
3,261,544

 
2,409,007

Retail certificates of deposit
 
1,045,334

 
714,751

Wholesale/brokered certificates of deposit
 
265,110

 
370,059

Total interest-bearing
 
5,067,471

 
3,859,010

Total deposits
 
8,502,145

 
6,085,886

FHLB advances and other borrowings
 
861,972

 
536,287

Subordinated debentures
 
110,244

 
105,123

Accrued expenses and other liabilities
 
113,143

 
55,209

Total liabilities
 
9,587,504

 
6,782,505

STOCKHOLDERS’ EQUITY
 
 

 
 

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

 

Common stock, $.01 par value; 150,000,000 shares authorized; 62,472,721 shares at September 30, 2018 and 46,245,050 shares at December 31, 2017 issued and outstanding
 
617

 
458

Additional paid-in capital
 
1,671,673

 
1,063,974

Retained earnings
 
260,764

 
177,149

Accumulated other comprehensive (loss) income
 
(16,677
)
 
415

Total stockholders' equity
 
1,916,377

 
1,241,996

Total liabilities and stockholders' equity
 
$
11,503,881

 
$
8,024,501

 
 
 
 
 
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,
 
 
2018
 
2018
 
2017
 
2018
 
2017
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
Loans
 
$
119,271

 
$
85,625

 
$
64,915

 
$
289,069

 
$
170,905

Investment securities and other interest-earning assets
 
9,605

 
7,074

 
5,246

 
23,333

 
13,416

Total interest income
 
128,876

 
92,699

 
70,161

 
312,402

 
184,321

INTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Deposits
 
11,942

 
7,756

 
3,557

 
25,612

 
8,774

FHLB advances and other borrowings
 
2,494

 
2,125

 
1,162

 
6,642

 
2,940

Subordinated debentures
 
1,727

 
1,647

 
1,151

 
4,983

 
3,275

Total interest expense
 
16,163

 
11,528

 
5,870

 
37,237

 
14,989

Net interest income before provision for credit losses
 
112,713

 
81,171

 
64,291

 
275,165

 
169,332

Provision for credit losses
 
1,981

 
1,761

 
2,049

 
5,995

 
6,238

Net interest income after provision for credit losses
 
110,732

 
79,410

 
62,242

 
269,170

 
163,094

NONINTEREST INCOME
 
 
 
 
 
 
 
 

 
 

Loan servicing fees
 
400

 
292

 
276

 
1,037

 
641

Service charges on deposit accounts
 
874

 
1,057

 
946

 
3,081

 
2,153

Other service fee income
 
317

 
169

 
851

 
632

 
1,725

Debit card interchange fee income
 
1,061

 
1,090

 
248

 
3,187

 
994

Earnings on bank-owned life insurance
 
1,270

 
617

 
629

 
2,498

 
1,654

Net gain from sales of loans
 
2,029

 
3,843

 
3,439

 
8,830

 
9,137

Net gain from sales of investment securities
 
1,063

 
330

 
896

 
1,399

 
2,989

Other income
 
530

 
753

 
936

 
2,697

 
2,370

Total noninterest income
 
7,544

 
8,151

 
8,221

 
23,361

 
21,663

NONINTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Compensation and benefits
 
37,901

 
29,274

 
21,707

 
96,048

 
58,218

Premises and occupancy
 
7,214

 
5,045

 
4,016

 
17,040

 
10,202

Data processing
 
4,095

 
2,747

 
2,082

 
9,544

 
5,708

Other real estate owned operations, net
 

 
2

 
3

 
3

 
59

FDIC insurance premiums
 
1,060

 
581

 
379

 
2,252

 
1,652

Legal, audit and professional expense
 
3,280

 
1,816

 
1,978

 
6,935

 
4,177

Marketing expense
 
1,569

 
1,352

 
1,248

 
4,451

 
3,072

Office, telecommunications and postage expense
 
1,538

 
1,115

 
835

 
3,733

 
2,190

Loan expense
 
1,139

 
594

 
1,017

 
2,324

 
2,553

Deposit expense
 
2,137

 
2,302

 
1,655

 
6,115

 
4,762

Merger-related expense
 
13,978

 
943

 
503

 
15,857

 
15,566

CDI amortization
 
4,693

 
1,996

 
1,761

 
8,963

 
4,033

Other expense
 
3,482

 
2,309

 
2,428

 
8,705

 
5,880

Total noninterest expense
 
82,086

 
50,076

 
39,612

 
181,970

 
118,072

Net income before income taxes
 
36,190

 
37,485

 
30,851

 
110,561

 
66,685

Income tax
 
7,798

 
10,182

 
10,619

 
26,864

 
22,756

Net income
 
$
28,392

 
$
27,303

 
$
20,232

 
$
83,697

 
$
43,929

EARNINGS PER SHARE
 
 
 
 
 
 
 
 

 
 

Basic
 
$
0.46

 
$
0.59

 
$
0.51

 
$
1.63

 
$
1.23

Diluted
 
0.46

 
0.58

 
0.50

 
1.61

 
1.20

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
 

 
 

Basic
 
61,727,030

 
46,053,077

 
39,709,565

 
51,282,533

 
35,652,626

Diluted
 
62,361,804

 
46,702,968

 
40,486,114

 
51,965,647

 
36,455,945

 
 
 
 
 
 
 
 
 
 
 
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,
 
 
2018
 
2018
 
2017
 
2018
 
2017
Net income
 
$
28,392

 
$
27,303

 
$
20,232

 
$
83,697

 
$
43,929

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
Unrealized holding (loss)/gain on securities arising during the period, net of income taxes (1)
 
(3,630
)
 
(3,122
)
 
(196
)
 
(16,095
)
 
7,153

Reclassification adjustment for net (gains) losses on sale of securities included in net income, net of income taxes (2)
 
(834
)
 
(240
)
 
(588
)
 
(1,079
)
 
(1,956
)
Other comprehensive (loss) income, net of tax
 
(4,464
)
 
(3,362
)
 
(784
)
 
(17,174
)
 
5,197

Comprehensive income, net of tax
 
$
23,928

 
$
23,941

 
$
19,448

 
$
66,523

 
$
49,126

______________________________
(1) Income tax (benefit) expense on the unrealized (loss)/gain on securities was $(1.6) million for the three months ended September 30, 2018, $(1.3) million for the three months ended June 30, 2018, $(253,000) for the three months ended September 30, 2017, $(6.8) million for the nine months ended September 30, 2018 and $4.7 million for the nine months ended September 30, 2017.

(2) Income tax (benefit) expense on the reclassification adjustment for net (gains) losses on sale of securities included in net income was $229,000 for the three months ended September 30, 2018, $90,000 for the three months ended June 30, 2018, $308,000 for the three months ended September 30, 2017, $320,000 for the nine months ended September 30, 2018 and $1.0 million for the nine months ended September 30, 2017.

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, 2018 AND 2017
(dollars in thousands)
(unaudited)

 
Common Stock
Shares
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Retained
Earnings
 
Accumulated Other Comprehensive (Loss) Income
 
Total Stockholders’ Equity
Balance at December 31, 2017
46,245,050

 
$
458

 
$
1,063,974

 
$
177,149

 
$
415

 
$
1,241,996

Net income

 

 

 
83,697

 

 
83,697

Other comprehensive income

 

 

 

 
(17,174
)
 
(17,174
)
Share-based compensation expense

 

 
6,362

 

 

 
6,362

Issuance of restricted stock, net
264,420

 

 

 

 

 

Common stock issued
15,758,039

 
158

 
601,013

 

 

 
601,171

Restricted stock surrendered and canceled
(28,849
)
 

 
(1,586
)
 

 

 
(1,586
)
Exercise of stock options
234,061

 
1

 
1,910

 

 

 
1,911

Reclassification of certain tax effects of the Tax Cuts and Jobs Act

 

 

 
(82
)
 
82

 

Balance at September 30, 2018
62,472,721

 
$
617

 
$
1,671,673

 
$
260,764

 
$
(16,677
)
 
$
1,916,377

 
 
 
 
 
 
 
 
 
 
 
 
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
149,197

 

 

 

 

 

Common stock issued
11,904,901

 
120

 
464,862

 

 

 
464,982

Restricted stock surrendered and canceled
(21,506
)
 

 
(1,259
)
 

 

 
(1,259
)
Exercise of stock options
331,151

 
3

 
4,322

 

 

 
4,325

Balance at September 30, 2017
40,162,026

 
$
397

 
$
817,309

 
$
160,978

 
$
2,476

 
$
981,160


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,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
83,697

 
$
43,929

Adjustments to net income:
 
 

 
 

Depreciation and amortization expense
 
5,487

 
3,378

Provision for credit losses
 
5,995

 
6,238

Share-based compensation expense
 
6,362

 
4,246

Loss on sale and disposal of premises and equipment
 
52

 
235

Loss (gain) on sale of or write down of other real estate owned
 
21

 
(94
)
Net amortization on securities
 
5,326

 
5,693

Net accretion of deferred loan fees/costs and discounts/premiums for loans acquired
 
3,936

 
1,373

Gain on sale of investment securities available-for-sale
 
(1,399
)
 
(2,989
)
Originations of loans held for sale
 
(108,071
)
 
(130,040
)
Proceeds from the sales of and principal payments from loans held for sale
 
126,329

 
100,938

Gain on sale of loans
 
(8,830
)
 
(9,137
)
Deferred income tax expense
 
26,864

 
1,651

Change in accrued expenses and other liabilities, net
 
20,004

 
10,147

Income from bank owned life insurance, net
 
(2,038
)
 
(1,349
)
Amortization of core deposit intangible
 
8,963

 
4,033

Change in accrued interest receivable and other assets, net
 
(20,511
)
 
1,664

Net cash provided by operating activities
 
152,187

 
39,916

Cash flows from investing activities:
 
 

 
 

Net decrease (increase) in interest-bearing time deposits with financial institutions
 
247

 
(493
)
Proceeds from sale of other real estate owned
 
496

 
182

Increase in loans, net
 
(196,416
)
 
(391,186
)
Purchase of loans held for investment
 
(61,562
)
 
(13,582
)
Purchase of held-to-maturity securities
 
(29,002
)
 
(10,924
)
Principal payments on held-to-maturity securities
 
839

 
849

Purchase of securities available-for-sale
 
(390,459
)
 
(157,773
)
Principal payments on securities available-for-sale
 
103,179

 
54,624

Proceeds from sale or maturity of securities available-for-sale
 
394,536

 
248,043

Proceeds from bank owned life insurance death benefit
 

 
199

Purchases of premises and equipment
 
(9,365
)
 
(2,421
)
Change in FHLB, FRB, and other stock, at cost
 
(30,586
)
 
(11,301
)
Change in cash acquired in acquisitions, net
 
146,571

 
76,531

Net cash used in investing activities
 
(71,522
)
 
(207,252
)
Cash flows from financing activities:
 
 

 
 

Net (decrease) increase in deposit accounts
 
(90,653
)
 
203,119

Net change in short-term borrowings
 
86,211

 
(74,344
)
Repayment of long-term FHLB borrowings
 
(10,500
)
 

Proceeds from exercise of stock options and warrants
 
1,911

 
4,325

Restricted stock surrendered and canceled
 
(1,586
)
 
(1,259
)
Net cash (used in) provided by financing activities
 
(14,617
)
 
131,841

Net (decrease) increase in cash and cash equivalents
 
66,048

 
(35,495
)
Cash and cash equivalents, beginning of period
 
197,164

 
156,857

Cash and cash equivalents, end of period
 
$
263,212

 
$
121,362

 
 
 
 
 
Supplemental cash flow disclosures:
 
 

 
 

Interest paid
 
$
33,290

 
$
12,696

Income taxes paid
 
27,806

 
1,405

Noncash investing activities during the period:
 
 
 
 
Transfers from loans to other real estate owned
 
15

 

Security settled (purchases) in subsequent period
 
(9,988
)
 
18,755

Transfers from portfolio loans to loans held for sale
 
662

 
31,685

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

 
 

Investment securities
 
392,858

 
442,923

FHLB and other stock
 
16,768

 
9,739

Loans
 
2,352,388

 
1,364,688

Core deposit intangible
 
71,943

 
28,123

Deferred income tax
 
4,536

 
11,623

Goodwill
 
312,239

 
268,075

Fixed assets
 
9,122

 
34,902

Other assets
 
80,478

 
45,475

Deposits
 
(2,506,929
)
 
(1,669,550
)
Other borrowings
 
(254,923
)
 
(139,034
)
Other liabilities
 
(24,859
)
 
(8,352
)
Common stock and additional paid-in capital
 
(601,172
)
 
(464,982
)
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, 2018
(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, 2018 and December 31, 2017, the results of its operations and comprehensive income for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017 and the nine months ended September 30, 2018 and 2017 and the changes in stockholders’ equity and cash flows for the nine months ended September 30, 2018 and 2017. Operating results or comprehensive income for the nine months ended September 30, 2018 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, 2018.
 
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, 2017 (the “2017 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, Santa Lucia Bancorp (CA) Capital Trust and First Commerce Bancorp Trust I, 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 2018

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU" or "Update") 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, which among other things reduced the maximum federal corporate tax rate from 35% to 21%. This Update addresses concerns about the guidance in current U.S. GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income ("AOCI") were originally recognized in other comprehensive income (rather than in income from continuing operations). As a result of the adjustment of deferred taxes being required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of this Update) did not reflect the appropriate tax rate. This Update allows for an election to reclassify between retained earnings and AOCI the impact of the federal income tax rate change. The amendments in this Update are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption of the amendments of this Update is permitted. The Company elected to early adopt in the first quarter of 2018. Accordingly, the Company recorded an increase to AOCI and a decrease to

8


retain earnings of approximately $82,000 for stranded tax effects on available for sale investment securities in the first quarter of 2018.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the Company has developed more stringent criteria for sets without outputs. Lastly, the amendments in this Update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this standard did not have a material effect on the Company's operating results or financial condition.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This Update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this standard did not have a material effect on the Company's operating results or financial condition.

In August 2016, the FASB issued ASU 2016-15, Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This 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 or debt with coupon interest rates that are insignificant in relation to the effective interest rate; 3) contingent consideration payments made soon 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 adoption of this standard did not have a material effect on the Company's operating results or financial condition.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2018-04, Investments-Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No.33-9273 (SEC Update), ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes made to the current measurement model primarily affect the

9


accounting for equity securities with readily determinable fair values, where changes in fair value are included in earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. This Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This Update is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material effect on the Company's operating results or financial condition. In accordance with the guidance, the Company measures the fair value of financial instruments reported at amortized cost on the statement of financial condition using the exit price notion. For further details, refer to Note 10 - Fair Value of Financial instruments.

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 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.

The Company adopted the provisions of ASU 2014-09 and its related amendments effective January 1, 2018 utilizing the modified retrospective transition method and determined the adoption was insignificant to the financial statements. Since the impact upon adoption of ASU 2014-09 and its related amendments was insignificant to the financial statements, a cumulative effect adjustment to retained earnings was not deemed necessary.
 
The Company's review of its various revenue streams indicated that approximately 99% of the Company’s revenue is out of the scope of ASU 2014-09 and its related amendments, including all of the Company’s net interest income and a significant portion of non-interest income. For those revenue streams that are within the scope of ASU 2014-09 and its related amendments, the Company reviewed the associated customer contracts and agreements to determine the appropriate accounting for revenues under those contracts. The Company’s review did not identify any significant changes in the timing of revenue recognition under those contracts within the scope of ASU 2014-09 and its related amendments. Significant revenue streams that are within scope primarily relate to service charges and fees associated customer deposit accounts, as well as fees for various other services the Company provides its customers. As a result of the implementation of ASU 2014-09 and its related amendments, the Company will conduct a detailed review of its revenue streams at least annually, or more frequently if deemed necessary.

Recent Accounting Guidance Not Yet Effective

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement.

The following disclosure requirements for public companies were removed from Topic 820:

The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy

10


The policy for timing of transfers between levels
The valuation processes for Level 3 fair value measurements

The following disclosure requirements for public companies were modified in Topic 820:
    
The amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date

The following disclosure requirements for public companies were added to Topic 820:

The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period
The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements

The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The Company is currently evaluating the effects of ASU 2018-13 on its financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchase Callable Debt Securities. This Update amends guidance on the amortization period of premiums on certain purchased callable debt securities. The amendments shorten the amortization period of premiums on purchased callable debt securities to the earliest call date. This Update should be applied on a modified retrospective basis through a cumulative-effect adjustment to beginning retained earnings. The effective date of ASU 2017-08 is for interim and annual reporting periods beginning after December 15, 2018. The adoption of this standard is not expected to have a material effect on the Company's operating results or financial condition.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This Update replaces the incurred loss impairment model in current U.S. GAAP with a model that reflects current expected credit losses (“CECL”). The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures. The Update requires that all expected credit losses for financial assets held at the reporting date be measured based on historical experience, current conditions and reasonable and supportable forecasts. The Update also requires enhanced disclosure, including qualitative and quantitative disclosures that provide additional information about significant estimates and judgments used in estimating credit losses. For public business entities, the Update is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The Company is currently evaluating the effects of ASU 2016-13 on its financial statements and disclosures. The Company has formed a committee made up of members of finance, credit and risk management that are in the process of compiling and analyzing key data elements and implementing a software model that will meet the requirements of the new guidance. The magnitude of the adjustment and the overall impact of the new guidance on the consolidated financial statements cannot yet be reasonably estimated.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), ASU 2018-11, Leases (Topic 842): Targeted Improvements, ASU 2018-10, Codification Improvements to Topic 842, Leases. This Update is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be recorded in the consolidated statements of financial condition, accompanied by

11


enhanced qualitative and quantitative disclosures in the notes to the financial statements. The Update provides an optional transition method where only the most recent period presented will reflect the adoption with a cumulative-effect adjustment to the opening balance of retained earnings, and the comparative prior periods will be reported under the previous guidance in Topic 840. 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 currently in the process of finalizing its identification and evaluation of lease obligations and service agreements under the provisions of the new standard. This evaluation includes an assessment of the appropriate classification and related accounting of each lease agreement under the new standard, a review of applicability of the new standard to existing service agreements and gathering all essential lease data that will facilitate the application of the new standard. Upon adoption of the new standard articulated in this Update, the Company will record a liability representing an obligation to make future lease payments and will also record an asset representing rights to use the underlying leased assets. As of September 30, 2018, the Company believes these assets and liabilities to be recognized under the new standard will amount to less than 1% of the Company's total assets.
 
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, 2017 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.

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

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 the fourth quarter as the period to

12


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 U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
 
Note 4 – Acquisitions

Grandpoint Capital, Inc. Acquisition

Effective as of July 1, 2018, the Company completed the acquisition of Grandpoint Capital, Inc. (“Grandpoint”), the holding company of Grandpoint Bank, a California-chartered bank, with $3.1 billion in total assets, $2.4 billion in gross loans and $2.5 billion in total deposits at June 30, 2018.
Pursuant to the terms of the merger agreement, each outstanding share of Grandpoint voting common stock and Grandoint non-voting common stock was converted into the right to receive 0.4750 shares of the Corporation's common stock. The value of the total transaction consideration was approximately $629 million, which included approximately $28.1 million in aggregate cash consideration payable to holders of Grandpoint share-based compensation awards and the issuance of 15,758,039 shares of the Corporation's common stock, valued at $38.15 per share, which was the closing price of the Corporation's common stock on June 29, 2018, the last trading day prior to the consummation of the Merger.
Goodwill in the amount of $312 million was recognized in the Grandpoint 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.

13


The following table represents the assets acquired and liabilities assumed of Grandpoint as of July 1, 2018 and the fair value adjustments and amounts recorded by the Company in 2018 under the acquisition method of accounting, which are subject to adjustment for up to one year after the merger date: 
 
Grandpoint Book Value
 
Fair Value Adjustments
 
Fair Value
ASSETS ACQUIRED
(dollars in thousands)
Cash and cash equivalents
$
147,551

 
$

 
$
147,551

Investment securities
395,905

 
(3,047
)
 
392,858

Loans, gross
2,404,042

 
(51,654
)
 
2,352,388

Allowance for loan losses
(18,665
)
 
18,665

 

Fixed assets
6,015

 
3,107

 
9,122

Core deposit intangible
5,093

 
66,850

 
71,943

Deferred tax assets
14,185

 
(9,649
)
 
4,536

Other assets
97,441

 
(195
)
 
97,246

Total assets acquired
$
3,051,567

 
$
24,077

 
$
3,075,644

LIABILITIES ASSUMED
 
 
 
 
 
Deposits
$
2,506,663

 
$
266

 
$
2,506,929

Borrowings
255,155

 
(232
)
 
254,923

Other liabilities
23,687

 
1,172

 
24,859

Total liabilities assumed
2,785,505

 
1,206

 
2,786,711

Excess of assets acquired over liabilities assumed
$
266,062

 
$
22,871

 
288,933

Consideration paid
 
 
 

 
601,172

Goodwill recognized
 

 
 

 
$
312,239


Plaza Bancorp Acquisition

Effective as of November 1, 2017, the Company completed the acquisition of Plaza Bancorp (“Plaza”), the holding company of Plaza Bank, a California-chartered bank with $1.3 billion in total assets, $1.1 billion in gross loans and $1.1 billion in total deposits at October 31, 2017.
Pursuant to the terms of the merger agreement, each outstanding share of Plaza common stock was converted into the right to receive 0.2000 shares of the Corporation's common stock. The value of the total deal consideration was approximately $246 million, which included approximately $6.5 million of aggregate cash consideration payable to holders of unexercised options and warrants exercisable for shares of Plaza common stock, and the issuance of 6,049,373 shares of the Corporation's common stock, which had a value of $40.40 per share, which was the closing price of the Corporation's common stock on October 31, 2017, the last trading day prior to the consummation of the acquisition.
Goodwill in the amount of $123 million was recognized in the Plaza 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.

14


The following table represents the assets acquired and liabilities assumed of Plaza as of November 1, 2017 and the fair value adjustments and amounts recorded by the Company in 2017 under the acquisition method of accounting: 
 
Plaza
Book Value
 
Fair Value
Adjustments
 
Fair
Value
ASSETS ACQUIRED
(dollars in thousands)
Cash and cash equivalents
$
150,459

 
$

 
$
150,459

Loans, gross
1,069,359

 
(6,458
)
 
1,062,901

Allowance for loan losses
(13,009
)
 
13,009

 

Fixed assets
7,389

 
(194
)
 
7,195

Core deposit intangible
198

 
10,575

 
10,773

Deferred tax assets
11,849

 
(6,343
)
 
5,506

Other assets
19,495

 
(589
)
 
18,906

Total assets acquired
$
1,245,740

 
$
10,000

 
$
1,255,740

LIABILITIES ASSUMED
 

 
 

 
 

Deposits
$
1,081,727

 
$
1,224

 
$
1,082,951

Borrowings
40,755

 
397

 
41,152

Other liabilities
8,956

 
(451
)
 
8,505

Total liabilities assumed
1,131,438

 
1,170

 
1,132,608

Excess of assets acquired over liabilities assumed
$
114,302

 
$
8,830

 
123,132

Consideration paid
 

 
 

 
245,761

Goodwill recognized
 

 
 

 
$
122,629

The fair values are estimates and are subject to adjustment for up to one year after the merger date. Since the acquisition, the Company has made net adjustments of $1.3 million related to core deposit intangibles, deferred tax assets, loans and other assets and liabilities.

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 California-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.

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 the Corporation's common stock. The value of the total deal consideration was approximately $467 million, which included approximately $3.9 million of aggregate cash consideration payable to holders of HEOP 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 $270 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.


15


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

 
$

 
$
78,728

Investment securities
445,299

 
(2,376
)
 
442,923

Loans, gross
1,384,949

 
(20,261
)
 
1,364,688

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

 

Fixed assets
35,567

 
(665
)
 
34,902

Core deposit intangible
3,207

 
24,916

 
28,123

Deferred tax assets
17,850

 
(7,606
)
 
10,244

Other assets
55,235

 
(21
)
 
55,214

Total assets acquired
$
2,003,635

 
$
11,187

 
$
2,014,822

LIABILITIES ASSUMED
 

 
 

 
 

Deposits
$
1,668,085

 
$
1,465

 
$
1,669,550

Borrowings
139,150

 
(116
)
 
139,034

Other Liabilities
8,059

 
293

 
8,352

Total liabilities assumed
1,815,294

 
1,642

 
1,816,936

Excess of assets acquired over liabilities assumed
$
188,341

 
$
9,545

 
197,886

Consideration paid
 

 
 

 
467,439

Goodwill recognized
 

 
 

 
$
269,553


The fair values are estimates and are subject to adjustment for up to one year after the merger date. In the third quarter of 2017, the Company made a $1.1 million adjustment to deferred tax assets and the deal consideration. During the quarter ended June 30, 2018, the Company finalized its fair values with this acquisition.

The Company accounted for these transactions under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

The loan portfolios of Grandpoint, Plaza and HEOP were recorded at fair value at the date of each acquisition. A valuation of Grandpoint's, Plaza's and HEOP's loan portfolios was performed by a third party as of the acquisition dates to assess the fair value of the loan portfolio. The loan portfolios were both segmented into two groups; loan with credit deterioration and loans without credit deterioration, and then split further by loan type. The fair value was calculated on an individual loan basis using a discounted cash flow analysis. The discount rate utilized was based on a weighted average cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery periods and prepayment rates based on industry standards.

The Company also determined the fair value of the core deposit intangible, securities, real property, leases, deposits and long-term borrowings with the assistance of third-party valuations. The fair value of other real estate owned ("OREO") was based on recent appraisals of the properties less estimated costs to sell.

The core deposit intangible on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets are calculated as if they were stand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to

16


take advantage of potential tax benefits resulting from the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount rate applicable to the asset.
 
In determining the fair value of certificates of deposit, a discounted cash flow analysis was used, which involved present valuing the contractual payments over the remaining life of the certificates of deposit at market-based interest rates.

For loans acquired from Grandpoint, Plaza and HEOP, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of their respective acquisition dates were as follows:
 
Acquired Loans
 
Grandpoint
 
Plaza
 
HEOP
 
 
 
(dollars in thousands)
Contractual amounts due
$
3,496,905

 
$
1,708,685

 
$
1,717,191

Cash flows not expected to be collected
39,230

 
20,152

 
4,442

Expected cash flows
3,457,675

 
1,688,533

 
1,712,749

Interest component of expected cash flows
1,105,287

 
625,632

 
348,061

Fair value of acquired loans
$
2,352,388

 
$
1,062,901

 
$
1,364,688


In accordance with U.S. GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by Grandpoint, Plaza and HEOP.
 
The operating results of the Company for the three months ended September 30, 2018, June 30, 2018 and September 30, 2017 and the nine months ended September 30, 2018 and September 30, 2017 include the operating results of Grandpoint, Plaza and HEOP since their acquisition dates. The following table presents the net interest and other income, net income and earnings per share as if the acquisition of Grandpoint, Plaza and HEOP were effective as of January 1, 2017. 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,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Net interest and other income
$
118,276

 
$
117,652

 
$
118,364

 
$
352,546

 
$
326,968

Net income
28,392

 
28,835

 
32,897

 
93,922

 
76,913

Basic earnings per share
0.46

 
0.47

 
0.53

 
1.52

 
1.25

Diluted earnings per share
0.46

 
0.46

 
0.53

 
1.50

 
1.24



17


Note 5 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
 
 
September 30, 2018
 
 
Amortized
 Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(dollars in thousands)
Investment securities available-for-sale:
 
 

 
 
 
 
 
 
U.S. Treasury
 
$
59,659

 
$
13

 
$
(329
)
 
$
59,343

Agency
 
113,628

 
20

 
(877
)
 
112,771

Corporate
 
102,761

 
235

 
(1,402
)
 
101,594

Municipal bonds
 
234,910

 
584

 
(4,293
)
 
231,201

Collateralized mortgage obligation: residential
 
25,897

 
50

 
(741
)
 
25,206

Mortgage-backed securities: residential
 
541,660

 
33

 
(16,931
)
 
524,762

Total investment securities available-for-sale
 
1,078,515

 
935

 
(24,573
)
 
1,054,877

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
 
45,287

 
22

 
(1,269
)
 
44,040

Other
 
1,098

 

 

 
1,098

Total investment securities held-to-maturity
 
46,385

 
22

 
(1,269
)
 
45,138

Total investment securities
 
$
1,124,900

 
$
957

 
$
(25,842
)
 
$
1,100,015


 
 
December 31, 2017
 
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(dollars in thousands)
Investment securities available-for-sale:
 
 

 
 
 
 
 
 
Agency
 
$
47,051

 
$
236

 
$
(78
)
 
$
47,209

Corporate
 
78,155

 
1,585

 
(194
)
 
79,546

Municipal bonds
 
228,929

 
3,942

 
(743
)
 
232,128

Collateralized mortgage obligation: residential
 
33,984

 
132

 
(335
)
 
33,781

Mortgage-backed securities: residential
 
398,664

 
266

 
(4,165
)
 
394,765

Total investment securities available-for-sale
 
786,783

 
6,161

 
(5,515
)
 
787,429

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
 
17,153

 

 
(209
)
 
16,944

Other
 
1,138

 

 

 
1,138

Total investment securities held-to-maturity
 
18,291

 

 
(209
)
 
18,082

Total investment securities
 
$
805,074

 
$
6,161

 
$
(5,724
)
 
$
805,511


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, 2018, the Company had an accumulated other comprehensive loss of $23.6 million, or $16.7 million net of tax, compared to an accumulated other comprehensive income of $646,000, or $415,000 net of tax, at December 31, 2017.

At September 30, 2018, mortgage-backed securities ("MBS") with an estimated par value of $21.7 million and a fair value of $22.2 million were pledged as collateral for the Bank’s homeowner’s association (“HOA”) reverse repurchase agreements, which totaled $2.3 million.


18


At December 31, 2017, MBS with an estimated par value of $55.6 million and a fair value of $57.0 million were pledged as collateral for the Bank’s three repurchase agreements, which totaled $28.5 million, and HOA reverse repurchase agreements, which totaled $17.6 million.

At September 30, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders' equity.

The Company reviews individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is 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 losses for the three months ended September 30, 2018, June 30, 2018 or September 30, 2017, or the nine months ended September 30, 2018 and 2017.

19



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, 2018
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
5

 
$
39,925

 
$
(329
)
 

 
$

 
$

 
5

 
$
39,925

 
$
(329
)
Agency
28

 
90,499

 
(859
)
 
1

 
1,121

 
(18
)
 
29

 
91,620

 
(877
)
Corporate
17

 
61,221

 
(1,076
)
 
4

 
8,942

 
(326
)
 
21

 
70,163

 
(1,402
)
Municipal bonds
173

 
150,294

 
(2,817
)
 
42

 
22,161

 
(1,476
)
 
215

 
172,455

 
(4,293
)
Collateralized mortgage obligation: residential
2

 
3,023

 
(54
)
 
7

 
16,537

 
(687
)
 
9

 
19,560

 
(741
)
Mortgage-backed securities: residential
85

 
323,466

 
(7,531
)
 
79

 
195,039

 
(9,400
)
 
164

 
518,505

 
(16,931
)
Total investment securities available-for-sale
310

 
668,428

 
(12,666
)
 
133

 
243,800

 
(11,907
)
 
443

 
912,228

 
(24,573
)
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
13

 
33,318

 
(949
)
 
1

 
5,849

 
(320
)
 
14

 
39,167

 
(1,269
)
Total investment securities held-to-maturity
13

 
33,318

 
(949
)
 
1

 
5,849

 
(320
)
 
14

 
39,167

 
(1,269
)
Total investment securities
323

 
$
701,746

 
$
(13,615
)
 
134

 
$
249,649

 
$
(12,227
)
 
457

 
$
951,395

 
$
(25,842
)


20


 
December 31, 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
6

 
$
13,754

 
$
(78
)
 

 
$

 
$

 
6

 
$
13,754

 
$
(78
)
Corporate
4

 
10,079

 
(64
)
 
2

 
6,076

 
(130
)
 
6

 
16,155

 
(194
)
Municipal bonds
103

 
61,313

 
(268
)
 
30

 
15,658

 
(475
)
 
133

 
76,971

 
(743
)
Collateralized mortgage obligation: residential
5

 
13,971

 
(149
)
 
3

 
8,943

 
(186
)
 
8

 
22,914

 
(335
)
Mortgage-backed securities: residential
66

 
220,951

 
(1,600
)
 
41

 
110,062

 
(2,565
)
 
107

 
331,013

 
(4,165
)
Total investment securities available-for-sale
184

 
320,068

 
(2,159
)
 
76

 
140,739

 
(3,356
)
 
260

 
460,807

 
(5,515
)
Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities: residential
2

 
10,745

 
(133
)
 
1

 
6,198

 
(76
)
 
3

 
16,943

 
(209
)
Total investment securities held-to-maturity
2

 
10,745

 
(133
)
 
1

 
6,198

 
(76
)
 
3

 
16,943

 
(209
)
Total investment securities
186

 
$
330,813

 
$
(2,292
)
 
77

 
$
146,937

 
$
(3,432
)
 
263

 
$
477,750

 
$
(5,724
)


21


The amortized cost and estimated fair value of investment securities at September 30, 2018, 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$

 
$

 
$
10,401

 
$
10,403

 
$
49,258

 
$
48,940