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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.

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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.

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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.

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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.


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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.


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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.

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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

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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

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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

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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

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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

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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.

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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.

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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.


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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

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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



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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

Table of Contents

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

Table of Contents


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

Table of Contents

 
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

Table of Contents

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

 
$

 
$

 
$
59,659

 
$
59,343

Agency
10,977

 
10,977

 
12,111

 
12,125

 
68,902

 
68,379

 
21,638

 
21,290

 
113,628

 
112,771

Corporate

 

 

 

 
102,761

 
101,594

 

 

 
102,761

 
101,594

Municipal bonds
3,017

 
3,013

 
31,511

 
31,334

 
70,926

 
69,156

 
129,456

 
127,698

 
234,910

 
231,201

Collateralized mortgage obligation: residential

 

 

 

 
872

 
871

 
25,025

 
24,335

 
25,897

 
25,206

Mortgage-backed securities: residential

 

 
1,793

 
1,727

 
141,006

 
137,770

 
398,861

 
385,265

 
541,660

 
524,762

Total investment securities available-for-sale
13,994

 
13,990

 
55,816

 
55,589

 
433,725

 
426,710

 
574,980

 
558,588

 
1,078,515

 
1,054,877

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

 

 

 

 
933

 
932

 
44,354

 
43,108

 
45,287

 
44,040

Other

 

 

 

 

 

 
1,098

 
1,098

 
1,098

 
1,098

Total investment securities held-to-maturity

 

 

 

 
933

 
932

 
45,452

 
44,206

 
46,385

 
45,138

Total investment securities
$
13,994

 
$
13,990

 
$
55,816

 
$
55,589

 
$
434,658

 
$
427,642

 
$
620,432

 
$
602,794

 
$
1,124,900

 
$
1,100,015



22

Table of Contents

During the three months ended September 30, 2018, June 30, 2018 and September 30, 2017, the Company recognized gross gains on sales of available-for-sale securities in the amount of $1.3 million, $330,000 and $897,000, respectively. During the three months ended September 30, 2018 and September 30, 2017, the Company recognized gross losses on sales of available-for-sale securities in the amount of $208,000 and $1,000, respectively. The Company did not recognize any gross losses on the sales of available-for sale securities during the three months ended June 30, 2018. The Company had net proceeds from the sale of available-for-sale securities of $379 million, $16.2 million and $28.4 million during the the three months ended September 30, 2018, June 30, 2018 and September 30, 2017.

During the nine months ended September 30, 2018 and September 30, 2017, the Company recognized gross gains on sales of available-for-sale securities in the amount of $1.6 million and $3.0 million, respectively. During the nine months ended September 30, 2018 and September 30, 2017, the Company recognized gross losses on the sales of available-for sale securities in the amount of $208,000 and $51,000, respectively. The Company had net proceeds from the sale of available-for-sale securities of $395 million during the nine months ended September 30, 2018 and $243 million during the nine months ended September 30, 2017.

FHLB, FRB and other stock

At September 30, 2018, the Company had $23.2 million in Federal Home Loan Bank of San Francisco (“FHLB”) stock, $51.4 million in Federal Reserve Bank of San Francisco (“FRB”) stock, and $38.0 million in other stock, all carried at cost. During the three months ended September 30, 2018, the FHLB repurchased $15.0 million of the Company’s excess FHLB stock through their stock repurchase program. During the three months ended December 31, 2017, the FHLB did not repurchase any of the Company’s excess FHLB stock through their stock repurchase program.

During the nine months ended September 30, 2018 and September 30, 2017, the FHLB repurchased $15.0 million and $5.0 million respectively.

The Company evaluates its investments in FHLB, FRB and other stock for impairment periodically, including their capital adequacy and overall financial condition. The Company recorded a net loss on Community Reinvestment Act ("CRA") equity investments of $600,000 during the three months ended September 30, 2018.
 

23

Table of Contents


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, 2018
 
December 31, 2017
 
(dollars in thousands)
Business loans
 
 
 
Commercial and industrial
$
1,359,841

 
$
1,086,659

Franchise
735,366

 
660,414

Commercial owner occupied (1)
1,675,528

 
1,289,213

SBA
193,487

 
185,514

Agribusiness
133,241

 
116,066

    Total business loans
4,097,463

 
3,337,866

Real estate loans
 

 
 
Commercial non-owner occupied
1,931,165

 
1,243,115

Multi-family
1,554,692

 
794,384

One-to-four family (2)
376,617

 
270,894

Construction
504,708

 
282,811

Farmland
138,479

 
145,393

Land
49,992

 
31,233

    Total real estate loans
4,555,653

 
2,767,830

Consumer loans
 
 
 
Consumer loans
114,736

 
92,931

Gross loans held for investment (3)
8,767,852

 
6,198,627

Deferred loan origination costs/(fees) and premiums/(discounts), net
(8,648
)
 
(2,403
)
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

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

 
$
23,426

______________________________
(1) Secured by real estate.
(2) Includes second trust deeds.
(3) Total gross loans held for investment for September 30, 2018 and December 31, 2017 are net of the unaccreted fair value net purchase discounts of $71.7 million and $29.1 million, respectively.


Loans Serviced for Others

The Company generally retains the servicing rights of the guaranteed portion of Small Business Administration ("SBA") loans sold, for which the Company records a servicing asset at fair value within its other assets category. At September 30, 2018 and December 31, 2017, the servicing asset totaled $8.8 million and $8.8 million, respectively, and was included in other assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is recognized through a valuation allowance, to the extent the fair value is less than the carrying amount. At September 30, 2018 and December 31, 2017, the Company determined that no valuation allowance was necessary.
 

24

Table of Contents

Loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of loans and participations serviced for others were $627 million at September 30, 2018 and $635 million at December 31, 2017, including SBA participations serviced for others totaling $504 million at September 30, 2018 and $320 million at December 31, 2017.

Concentration of Credit Risk
 
As of September 30, 2018, the Company’s loan portfolio was primarily collateralized by various forms of real estate and business assets located predominately in California. The Company’s loan portfolio contains concentrations of credit in multi-family real estate, commercial non-owner occupied real estate and commercial owner occupied real estate and business loans. The Bank maintains policies approved by the Bank’s Board of Directors (the “Bank Board”) that address these concentrations and continues to diversify its loan portfolio through loan originations, purchases and sales to meet approved concentration levels. While management believes that the collateral presently securing these loans is adequate, there can be no assurances that a significant deterioration in the California real estate market or economy would not expose the Company to significantly greater credit risk.

Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of the Bank’s unimpaired capital plus surplus and likewise in excess of 15% of the Bank's unimpaired capital plus surplus for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $512 million for secured loans and $307 million for unsecured loans at September 30, 2018. At September 30, 2018, the Bank’s largest aggregate outstanding balance of loans to one borrower was $81.7 million of secured credit.
 
Credit Quality and Credit Risk Management
 
The Company’s credit quality and credit risk is controlled in two distinct areas. The first is the loan origination process, wherein the Bank underwrites credit quality and chooses which risks it is willing to accept. The second is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and comprehensive fashion.
 
The Company maintains a comprehensive credit policy, which sets forth minimum and maximum tolerances for key elements of loan risk. The policy identifies and sets forth specific guidelines for analyzing each of the loan products the Company offers from both an individual and portfolio wide basis. The credit policy is reviewed annually by the Bank Board. The Bank’s underwriters ensure key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis of the prospective borrowers.
 
Credit risk is managed within the loan portfolio by the Company’s portfolio managers based on a comprehensive credit and portfolio review policy. This policy requires a program of financial data collection and analysis, comprehensive loan reviews, property and/or business inspections and monitoring of portfolio concentrations and trends. The portfolio managers also monitor asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help identify potential credit risk. Individual loans, excluding the homogeneous loan portfolio, are reviewed at least every two years and in most cases, more often, including the assignment of a risk grade.
 
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications, as such classifications are defined by the regulatory agencies. The assignment of risk grades allows the Company to, among other things; identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio. Risk grades are reviewed regularly by the Company’s Credit and Portfolio Review Committee, and are reviewed annually by an independent third party, as well as by regulatory agencies during scheduled examinations.
 

25

Table of Contents

The following provides brief definitions for risk grades assigned to loans in the portfolio:
 
Pass classifications represent assets with a level of credit quality, in which no well-defined deficiency or weakness exists.
Special Mention assets do not currently expose the Bank to a sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiencies or potential weaknesses deserving management’s close attention.
Substandard assets are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. These assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. OREO acquired from foreclosure is also classified as Substandard.
Doubtful credits have all the weaknesses inherent in Substandard credits, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted. Amounts classified as loss are promptly charged off.

The Bank's portfolio managers also manage loan performance risks, collections, workouts, bankruptcies and foreclosures. Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credits when they are identified. Collection efforts commence immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss. When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.
 
When a loan is graded as Special Mention, Substandard or Doubtful, the Company obtains an updated valuation of the underlying collateral. If the credit in question is also identified as impaired, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses (“ALLL”) if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable. The Company typically continues to obtain or confirm updated valuations of underlying collateral for Special Mention and classified loans on an annual basis in order to have the most current indication of fair value. Once a loan is identified as impaired, an analysis of the underlying collateral is performed at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.
 

26

Table of Contents

The following tables stratify the loan portfolio by the Company’s internal risk grading as of the periods indicated:

 
 
Credit Risk Grades
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Gross
Loans
September 30, 2018
 
(dollars in thousands)
Business loans
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,325,912

 
$
14,380

 
$
19,549

 
$

 
$
1,359,841

Franchise
 
735,157

 

 
209

 

 
735,366

Commercial owner occupied
 
1,690,912

 
1,348

 
24,890

 

 
1,717,150

SBA
 
195,527

 
1,810

 
5,892

 

 
203,229

Agribusiness
 
126,695

 

 
6,546

 

 
133,241

Real estate loans
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
1,924,416

 
163

 
8,102

 

 
1,932,681

Multi-family
 
1,553,437

 

 
1,255

 

 
1,554,692

One-to-four family
 
368,270

 
1,066

 
7,281

 

 
376,617

Construction
 
504,708

 

 

 

 
504,708

Farmland
 
138,356

 

 
123

 

 
138,479

Land
 
49,292

 

 
700

 

 
49,992

Consumer loans
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
114,598

 
5

 
133

 

 
114,736

     Totals
 
$
8,727,280

 
$
18,772

 
$
74,680

 
$

 
$
8,820,732


 
 
Credit Risk Grades
 
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total Gross
Loans
December 31, 2017
 
(dollars in thousands)
Business loans
 
 

 
 

 
 

 
 
 
 

Commercial and industrial
 
$
1,063,452

 
$
8,163

 
$
15,044

 
$

 
$
1,086,659

Franchise
 
660,414

 

 

 

 
660,414

Commercial owner occupied
 
1,273,381

 
654

 
21,180

 

 
1,295,215

SBA
 
199,468

 
1

 
3,469

 

 
202,938

Agribusiness
 
108,143

 
4,079

 
3,844

 

 
116,066

Real estate loans
 
 

 
 

 
 

 
 
 
 
Commercial non-owner occupied
 
1,242,045

 

 
1,070

 

 
1,243,115

Multi-family
 
794,156

 

 
228

 

 
794,384

One-to-four family
 
268,776

 
154

 
1,964

 

 
270,894

Construction
 
282,294

 
517

 

 

 
282,811

Farmland
 
144,234

 
44

 
1,115

 

 
145,393

Land
 
30,979

 

 
254

 

 
31,233

Consumer loans
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
92,794

 

 
137

 

 
92,931

Totals
 
$
6,160,136

 
$
13,612

 
$
48,305

 
$

 
$
6,222,053



27

Table of Contents

The following tables set forth delinquencies in the Company’s loan portfolio at the dates indicated:

 
 
 
 
Days Past Due
 
 
 
 
 
 
Current
 
30-59
 
60-89
 
90+
 
Total Gross Loans
 
Non-accruing
September 30, 2018
 
(dollars in thousands)
Business loans
 
 
 
 

 
 

 
 

 
 
 
 
Commercial and industrial
 
$
1,358,766

 
$
334

 
$
636

 
$
105

 
$
1,359,841

 
$
1,027

Franchise
 
735,157

 

 

 
209

 
735,366

 
209

Commercial owner occupied
 
1,716,146

 
793

 

 
211

 
1,717,150

 

SBA
 
200,596

 
4

 

 
2,629

 
203,229

 
2,748

  Agribusiness
 
133,241

 

 

 

 
133,241

 

Real estate loans
 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
1,931,391

 

 

 
1,290

 
1,932,681

 
1,290

Multi-family
 
1,554,103

 

 

 
589

 
1,554,692

 
589

One-to-four family
 
375,694

 
836

 
76

 
11

 
376,617

 
1,388

Construction
 
504,708

 

 

 

 
504,708

 

Farmland
 
138,479

 

 

 

 
138,479

 

Land
 
49,988

 

 

 
4

 
49,992

 
4

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
114,718

 
10

 
8

 

 
114,736

 
13

Totals
 
$
8,812,987

 
$
1,977

 
$
720

 
$
5,048

 
$
8,820,732

 
$
7,268


 
 
 

 
Days Past Due
 
 

 
 
 
 
Current
 
30-59
 
60-89
 
90+
 
Total Gross Loans
 
Non-accruing
December 31, 2017
 
(dollars in thousands)
Business loans
 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
1,085,770

 
$
84

 
$
570

 
$
235

 
$
1,086,659

 
$
1,160

Franchise
 
660,414

 

 

 

 
660,414

 

Commercial owner occupied
 
1,291,255

 
3,474

 
486

 

 
1,295,215

 
97

SBA
 
200,821

 
177

 

 
1,940

 
202,938

 
1,201

Agribusiness
 
116,066

 

 

 

 
116,066

 

Real estate loans
 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
1,243,115

 

 

 

 
1,243,115

 

Multi-family
 
792,603

 
1,781

 

 

 
794,384

 

One-to-four family
 
269,725

 
354

 

 
815

 
270,894

 
817

Construction
 
282,811

 

 

 

 
282,811

 

Farmland
 
145,393

 

 

 

 
145,393

 

Land
 
31,141

 
83

 

 
9

 
31,233

 
9

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
92,880

 
11

 

 
40

 
92,931

 

Totals
 
$
6,211,994

 
$
5,964

 
$
1,056

 
$
3,039

 
$
6,222,053

 
$
3,284


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Table of Contents


Impaired Loans

The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or it is determined that the likelihood of the Company receiving all scheduled payments, including interest, when due is remote. The Company has no commitments to lend additional funds to debtors whose loans have been impaired.
 
The Company reviews loans for impairment when the loan is classified as Substandard or worse, delinquent 90 days, or determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt restructuring (“TDR”). Measurement of impairment is based on the loan’s expected future cash flows discounted at the loan’s effective interest rate, measured by reference to an observable market value, if one exists, or the fair value of the collateral if the loan is deemed collateral dependent. Loans are generally charged-off at such time the loan is classified as a loss. Valuation allowances are determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics.

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

 
 
Impaired Loans
 
 
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
 
(dollars in thousands)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Business loans
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,515

 
$
1,027

 
$

 
$
1,027

 
$

Franchise
 
205

 
209

 

 
209

 

SBA
 
7,618

 
2,748

 
488

 
2,260

 
250

Real estate loans
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
1,287

 
1,290

 

 
1,290

 

Multi-family
 
589

 
589

 

 
589

 

One-to-four family
 
1,476

 
1,388

 

 
1,388

 

Land
 
34

 
4

 

 
4

 

Consumer loans
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
15

 
13

 

 
13

 

Totals
 
$
12,739

 
$
7,268

 
$
488

 
$
6,780

 
$
250

  


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Table of Contents

 
 
Impaired Loans
 
 
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
 
(dollars in thousands)
December 31, 2017
 
 

 
 

 
 

 
 

 
 

Business loans
 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
1,585

 
$
1,160

 
$

 
$
1,160

 
$

Commercial owner occupied
 
98

 
97

 
97

 

 
55

SBA
 
4,329

 
1,201

 

 
1,201

 

Real estate loans
 
 

 
 

 
 

 
 

 
 

One-to-four family
 
849

 
817

 

 
817

 

Land
 
35

 
9

 

 
9

 

Totals
 
$
6,896

 
$
3,284

 
$
97

 
$
3,187

 
$
55

  

 
 
Impaired Loans
 
 
Three Months Ended
 
 
September 30, 2018
 
June 30, 2018
 
September 30, 2017
 
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
 
(dollars in thousands)
Business loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,030

 
$

 
$
1,272

 
$

 
$
446

 
$
7

Franchise
 
209

 

 
70

 

 

 

Commercial owner occupied
 

 

 
2,317

 

 
170

 
3

SBA
 
1,914

 

 
1,360

 

 
85

 
2

Real estate loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
1,290

 

 
430

 

 
342

 
7

Multi-family
 
589

 

 
589

 

 

 

One-to-four family
 
1,406

 

 
1,343

 

 
103

 
3

Land
 
5

 

 
6

 

 
11

 

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
13

 
$

 
15

 

 

 

Totals
 
$
6,456

 
$

 
$
7,402

 
$

 
$
1,157

 
$
22

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Cash basis and accrual basis is materially the same.



30

Table of Contents

 
 
Impaired Loans
 
 
Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
 
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
Average Recorded Investment
 
Interest Income Recognized (1)
 
 
(dollars in thousands)
Business loans:
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
1,161

 
$

 
$
218

 
$
12

Franchise
 
93

 

 

 

Commercial owner occupied
 
1,931

 

 
162

 
8

SBA
 
1,505

 

 
204

 
10

Real estate loans:
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
573

 

 
114

 
7

Multi-family
 
666

 

 

 

One-to-four family
 
1,258

 

 
108

 
9

Land
 
6

 

 
13

 
1

Consumer loans:
 
 
 
 
 
 
 
 
Consumer loans
 
41

 

 

 

Totals
 
$
7,234

 
$

 
$
819

 
$
47

 
 
 
 
 
 
 
 
 
(1) Cash basis and accrual basis is materially the same.


The following table provides additional detail on the components of impaired loans at the period end indicated: 
 
September 30, 2018
 
December 31, 2017
 
(dollars in thousands)
Nonaccruing loans
$
7,268

 
$
3,284

Accruing loans

 

Total impaired loans
$
7,268

 
$
3,284


When loans are placed on nonaccrual status, previously accrued but unpaid interest is reversed from earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.
 
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the timely collection of principal or interest. The Company had impaired loans on nonaccrual status of $7.3 million at September 30, 2018 and $3.3 million at December 31, 2017. The Company had no loans 90 days or more past due and still accruing at September 30, 2018, compared to $1.8 million at December 31, 2017.
 

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Table of Contents

There were no TDRs at September 30, 2018 and $97,000 at December 31, 2017. The Company had no consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of September 30, 2018. This compares to $73,000 at December 31, 2017.
 
Purchased Credit Impaired Loans
 
The Company has purchased loans that have experienced deterioration of credit quality between origination and acquisition and for which it was probable, at acquisition, that not all contractually required payments would be collected. The carrying amount of those loans is as follows:
 
September 30, 2018
 
December 31, 2017
 
(dollars in thousands)
Business loans
 
 
 
Commercial and industrial
$
1,700

 
$
3,310

Commercial owner occupied
2,808

 
1,262

SBA
1,304

 
1,802

Real estate loans
 

 
 

Commercial non-owner occupied
1,077

 
1,650

One-to-four family
909

 
255

   Construction

 
517

   Land
76

 
83

   Consumer loans
8

 
10

Total purchase credit impaired
$
7,882

 
$
8,889


On each acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield.” The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan. At September 30, 2018, the Company had $7.9 million of purchased credit impaired loans, of which none were placed on nonaccrual status.

The following table summarizes the accretable yield on the purchased credit impaired loans for the three and nine month periods indicated.
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
June 30,
 
 
2018
 
2018
 
2017
 
2018
 
2017
 
 
(dollars in thousands)
Balance at the beginning of period
 
$
1,473

 
$
1,709

 
$
3,497

 
$
3,019

 
$
3,747

Additions
 
483

 

 

 
483

 
2,036

Accretion
 
(162
)
 
(270
)
 
(388
)
 
(668
)
 
(1,729
)
Payoffs
 
(1
)
 
32

 
39

 
(1,819
)
 
39

Reclassification from (to) nonaccretable difference
 
195

 
2

 

 
973

 
(945
)
Balance at the end of period
 
$
1,988

 
$
1,473

 
$
3,148

 
$
1,988

 
$
3,148




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Table of Contents

Note 7 – Allowance for Loan Losses
 
The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable incurred losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.
 
The loan portfolio is segmented into groups of loans with similar risk characteristics. Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated using the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

The Company’s base ALLL factors are determined by management using the Bank’s annualized actual trailing charge-off data over a full credit cycle with the loss emergence period extending from 1 year to 1.4 years. Adjustments to those base factors are made for relevant internal and external factors. Those factors may include:
 
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
Changes in the nature and volume of the loan portfolio, including new types of lending,
Changes in volume and severity of past due loans, the volume of nonaccrual loans and the volume and severity of adversely classified or graded loans and
The existence and effect of concentrations of credit, and changes in the level of such concentrations.

For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on a migration analysis of risk grading and net charge-offs.
 


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Table of Contents

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio as of and for the three and nine months ended for the periods indicated:
 
Three Months Ended September 30, 2018
 
Commercial and industrial
 
Franchise
 
Commercial owner occupied
 
SBA
 
Agribusiness
 
Commercial non-owner occupied
 
Multi-family
 
One-to-four family
 
Construction
 
Farmland
 
Land
 
Consumer loans
 
Total
 
(dollars in thousands)
Balance, June 30, 2018
$
10,164

 
$
6,181

 
$
1,137

 
$
2,575

 
$
2,694

 
$
1,450

 
$
563

 
$
698

 
$
4,809

 
405

 
$
972

 
$
99

 
$
31,747

Charge-offs
(100
)
 

 

 
(44
)
 

 

 

 

 

 

 

 
(85
)
 
(229
)
Recoveries
120

 

 
8

 
8

 

 

 

 

 

 

 

 
6

 
142

Provisions for (reduction in) loan losses
200

 
151

 
68

 
288

 
871

 
33

 
60

 
21

 
11

 
(30
)
 
(104
)
 
77

 
1,646

Balance, September 30, 2018
$
10,384

 
$
6,332

 
$
1,213

 
$
2,827

 
$
3,565

 
$
1,483

 
$
623

 
$
719

 
$
4,820

 
$
375

 
$
868

 
$
97

 
$
33,306


 
Three Months Ended September 30, 2017
 
Commercial and industrial
 
Franchise
 
Commercial owner occupied
 
SBA
 
Agribusiness
 
Commercial non-owner occupied
 
Multi-family
 
One-to-four family
 
Construction
 
Farmland
 
Land
 
Consumer loans
 
Total
 
(dollars in thousands)
Balance, June 30, 2017
$
7,644

 
$
5,367

 
$
672

 
$
2,519

 
$
206

 
$
1,204

 
$
611

 
$
724

 
$
5,036

 
28

 
$
959

 
$
85

 
$
25,055

Charge-offs
(32
)
 

 

 

 

 

 

 

 

 

 

 

 
(32
)
Recoveries
15

 

 
12

 
42

 

 

 

 
2

 

 

 

 

 
71

Provisions for (reduction in) loan losses
682

 
452

 
131

 
409

 
(37
)
 
116

 
47

 
120

 
104

 
64

 
(15
)
 
(24
)
 
2,049

Balance, September 30, 2017
$
8,309

 
$
5,819

 
$
815

 
$
2,970

 
$
169

 
$
1,320

 
$
658

 
$
846

 
$
5,140

 
$
92

 
$
944

 
$
61

 
$
27,143


34

Table of Contents

 
Nine Months Ended September 30, 2018
 
Commercial and industrial
 
Franchise
 
Commercial owner occupied
 
SBA
 
Agribusiness
 
Commercial non-owner occupied
 
Multi-family
 
One-to-four family
 
Construction
 
Farmland
 
Land
 
Consumer loans
 
Total
 
(dollars in thousands)
Balance, December 31, 2017
$
9,721

 
$
5,797

 
$
767

 
$
2,890

 
$
1,291

 
$
1,266

 
$
607

 
$
803

 
$
4,569

 
$
137

 
$
993

 
$
95

 
$
28,936

Charge-offs
(1,011
)
 

 

 
(100
)
 

 

 

 

 

 

 

 
(137
)
 
(1,248
)
Recoveries
283

 

 
32

 
43

 

 

 

 
1

 

 

 

 
7

 
366

Provisions for (reduction in) loan losses
1,391

 
535

 
414

 
(6
)
 
2,274

 
217

 
16

 
(85
)
 
251

 
238

 
(125
)
 
132

 
5,252

Balance, September 30, 2018
$
10,384

 
$
6,332

 
$
1,213

 
$
2,827

 
$
3,565

 
$
1,483

 
$
623

 
$
719

 
$
4,820

 
$
375

 
$
868

 
$
97

 
$
33,306

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of allowance attributed to:
 

 
 
 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

Specifically evaluated impaired loans
$

 
$

 
$

 
$
250

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
250

General portfolio allocation
10,384

 
6,332

 
1,213

 
2,577

 
3,565

 
1,483

 
623

 
719

 
4,820

 
375

 
868

 
97

 
33,056

Loans individually evaluated for impairment
1,027

 
209

 

 
2,748

 

 
1,290

 
589

 
1,388

 

 

 
4

 
13

 
7,268

Specific reserves to total loans individually evaluated for impairment
%
 
%
 
%
 
9.10
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
3.44
%
Loans collectively evaluated for impairment
$
1,358,814

 
$
735,157

 
$
1,675,528

 
$
190,739

 
$
133,241

 
$
1,929,875

 
$
1,554,103

 
$
375,229

 
$
504,708

 
$
138,479

 
$
49,988

 
$
114,723

 
$
8,760,584

General reserves to total loans collectively evaluated for impairment
0.76
%
 
0.86
%
 
0.07
%
 
1.35
%
 
2.68
%
 
0.08
%
 
0.04
%
 
0.19
%
 
0.96
%
 
0.27
%
 
1.74
%
 
0.08
%
 
0.38
%
Total gross loans held for investment
$
1,359,841

 
$
735,366

 
$
1,675,528

 
$
193,487

 
$
133,241

 
$
1,931,165

 
$
1,554,692

 
$
376,617

 
$
504,708

 
$
138,479

 
$
49,992

 
$
114,736

 
$
8,767,852

Total allowance to gross loans held for investment
0.76
%
 
0.86
%
 
0.07
%
 
1.46
%
 
2.68
%
 
0.08
%
 
0.04
%
 
0.19
%
 
0.96
%
 
0.27
%
 
1.74
%
 
0.08
%
 
0.38
%

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Table of Contents

 
Nine Months Ended September 30, 2017
 
Commercial and industrial
 
Franchise
 
Commercial owner occupied
 
SBA
 
Agribusiness
 
Commercial non-owner occupied
 
Multi-family
 
One-to-four family
 
Construction
 
Farmland
 
Land
 
Consumer loans
 
Total
 
(dollars in thousands)
Balance, December 31, 2016
$
6,362

 
$
3,845

 
$
1,193

 
$
1,039

 
$

 
$
1,715

 
$
2,927

 
$
365

 
$
3,632

 

 
$
198

 
$
20

 
$
21,296

Charge-offs
(894
)
 

 

 
(8
)
 

 

 

 

 

 

 

 

 
(902
)
Recoveries
70

 

 
94

 
125

 

 

 

 
4

 

 

 

 
1

 
294

Provisions for (reduction in) loan losses
2,771

 
1,974

 
(472
)
 
1,814

 
169

 
(395
)
 
(2,269
)
 
477

 
1,508

 
92

 
746

 
40

 
6,455

Balance, September 30, 2017
$
8,309

 
$
5,819

 
$
815

 
$
2,970

 
$
169

 
$
1,320

 
$
658

 
$
846

 
$
5,140

 
$
92

 
$
944

 
$
61

 
$
27,143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of allowance attributed to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Specifically evaluated impaired loans
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 

 
$

 
$

 
$

General portfolio allocation
8,309

 
5,819

 
815

 
2,970

 
169

 
1,320

 
658

 
846

 
5,140

 
92

 
944

 
61

 
27,143

Loans individually evaluated for impairment
228

 

 
83

 
90

 

 

 

 
103

 
11

 

 

 

 
515

Specific reserves to total loans individually evaluated for impairment
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 

 
%
 
%
 
%
Loans collectively evaluated for impairment
$
762,863

 
$
626,508

 
$
805,054

 
$
107,121

 
$
86,466

 
$
1,098,995

 
$
797,370

 
$
246,145

 
$
301,323

 
140,581

 
$
30,719

 
$
6,228

 
$
5,009,373

General reserves to total loans collectively evaluated for impairment
1.09
%
 
0.93
%
 
0.10
%
 
2.77
%
 
0.20
%
 
0.12
%
 
0.08
%
 
0.34
%
 
1.71
%
 
0.07
%
 
3.07
%
 
0.98
%
 
0.54
%
Total gross loans held for investment
$
763,091

 
$
626,508

 
$
805,137

 
$
107,211

 
$
86,466

 
$
1,098,995

 
$
797,370

 
$
246,248

 
$
301,334

 
140,581

 
$
30,719

 
$
6,228

 
$
5,009,888

Total allowance to gross loans held for investment
1.09
%
 
0.93
%
 
0.10
%
 
2.77
%
 
0.20
%
 
0.12
%
 
0.08
%
 
0.34
%
 
1.71
%
 
0.07
%
 
3.07
%
 
0.98
%
 
0.54
%



36

Table of Contents

Note 8 – Subordinated Debentures
 
In August 2014, the Corporation issued $60 million in aggregate principal amount of 5.75% Subordinated Notes Due 2024 (the “Notes”) in a private placement transaction to institutional accredited investors (the “Private Placement”). The Corporation contributed $50 million of net proceeds from the Private Placement to the Bank to support general corporate purposes. The Notes bear interest at an annual fixed rate of 5.75%, and the first interest payment on the Notes occurred on March 3, 2015, and will continue to be payable semiannually each March 3rd and September 3rd until September 3, 2024. The Notes can only be redeemed, partially or in whole, prior to the maturity date if the notes do not constitute Tier 2 Capital (for purposes of capital adequacy guidelines of the Board of Governors of the Federal Reserve). Outstanding principal and accrued and unpaid interest are due upon early redemption.
 
In connection with the Private Placement, the Corporation obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned investment grade ratings of BBB+ and BBB for the Corporation’s senior unsecured debt and subordinated debt, respectively, and a senior deposit rating of A- for the Bank. These ratings were reaffirmed by KBRA on October 26, 2018.
 
In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) to PPBI Trust I, statutory trust created under the laws of the State of Delaware. The Subordinated Debentures are subordinated to effectively all borrowings of the Corporation and are due and payable on April 6, 2034. Interest is payable quarterly on the Subordinated Debentures at three-month LIBOR plus 2.75% per annum, for an effective rate of 5.09% per annum, as of September 30, 2018. The Subordinated Debentures may be redeemed, in part or whole, on or after April 7, 2009 at the option of the Corporation, at par. The Subordinated Debentures can also be redeemed at par if certain events occur that impact the tax treatment or the capital treatment of the issuance. The Corporation also purchased a 3% minority interest totaling $310,000 in PPBI Trust I. The balance of equity of PPBI Trust I is comprised of mandatorily redeemable securities (“Trust Preferred Securities”) and is included in the Corporation's other assets category. PPBI Trust I sold $10,000,000 of Trust Preferred Securities to investors in a private offering.

On April 1, 2017, as part of the HEOP acquisition, the Corporation assumed $5.2 million of floating rate junior subordinated debt securities associated with Heritage Oaks Capital Trust II. Interest is payable quarterly at three-month LIBOR plus 1.72% per annum, for an effective rate of 4.06% per annum as of September 30, 2018. At September 30, 2018, the carrying value of these debentures was $4.0 million, which reflects purchase accounting fair value adjustments of $1.3 million. The Corporation also assumed $3.1 million and $5.2 million of floating rate junior subordinated debt associated with Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust, respectively. At September 30, 2018, the carrying value of Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust were $2.8 million and $3.8 million, respectively, which reflects purchase accounting fair value adjustments of $311,000 and $1.3 million, respectively. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 5.29% per annum as of September 30, 2018 for Mission Community Capital Trust I. Interest is payable quarterly at three-month LIBOR plus 1.48% per annum, for an effective rate of 3.82% per annum as of September 30, 2018 for Santa Lucia Bancorp (CA) Capital Trust. These three debentures are callable by the Corporation at par.

On November 1, 2017, as part of the Plaza acquisition, the Corporation assumed three subordinated notes totaling $25 million at a fixed interest rate of 7.125% payable in arrears on a quarterly basis. The notes have a maturity date of June 26, 2025 and are also redeemable in whole or in part beginning on June 26, 2020 at an amount equal to 103.0% of principal plus accrued unpaid interest. The redemption price decreases 50 basis points each subsequent year.

On July 1, 2018, as part of the Grandpoint acquisition, the Corporation assumed $5.2 million of floating rate junior subordinated debt securities associated with First Commerce Bancorp Statutory Trust I. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 5.28% per annum as of

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September 30, 2018. At September 30, 2018, the carrying value of these debentures was $4.9 million, which reflects purchase accounting fair value adjustments of $228,000.
 
The Corporation is not allowed to consolidate any trust preferred securities into the Company’s consolidated financial statements. The resulting effect on the Company’s consolidated financial statements is to report only the subordinated debentures relating to trust preferred securities as a component of the Company’s liabilities.

Note 9 – Earnings Per Share
 
Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common shares in treasury. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings and excludes common shares in treasury. Stock options exercisable for shares of common stock are excluded from the computation of diluted earnings per share if they are anti-dilutive due to their exercise price exceeding the average market price during the period. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases. The following table sets forth the weighted average number of stock options excluded for the periods indicated:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
 
2018
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
Weighted average stock options excluded
 

 

 
10,036

 
7,530

 
12,192


The following tables set forth the Company’s earnings per share calculations for the periods indicated:
 
 
Three Months Ended
 
September 30, 2018
 
June 30, 2018
 
September 30, 2017
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
 
(dollars in thousands, except per share data)
Net income
$
28,392

 
 
 
 
 
$
27,303

 
 
 
 
 
$
20,232

 
 
 
 
Basic income available to common stockholders
28,392

 
61,727,030

 
$
0.46

 
27,303

 
46,053,077

 
$
0.59

 
20,232

 
39,709,565

 
$
0.51

Dilutive effect of share-based compensation

 
634,774

 
 
 

 
649,891

 
 
 

 
776,549

 
 
Diluted income available to common stockholders plus assumed conversions
$
28,392

 
62,361,804

 
$
0.46

 
$
27,303

 
46,702,968

 
$
0.58

 
$
20,232

 
40,486,114

 
$
0.50



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Nine Months Ended September 30,
 
2018
 
2017
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
 
(dollars in thousands, except per share data)
Net income
$
83,697

 
 
 
 
 
$
43,929

 
 
 
 
Basic income available to common stockholders
83,697

 
51,282,533

 
$
1.63

 
43,929

 
35,652,626

 
$
1.23

Effect of dilutive stock options and warrants
 
 
683,114

 
 
 
 
 
803,319

 
 
Diluted income available to common stockholders plus assumed conversions
$
83,697

 
51,965,647

 
$
1.61

 
$
43,929

 
36,455,945

 
$
1.20


Note 10 – Fair Value of Financial Instruments
 
The fair value of an asset or liability is the exchange price that would be received to sell that asset or paid to transfer that liability (exit price) in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value are discussed below.

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

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

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.
 
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly

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affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements.

Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

Investment securities – Investment securities are generally valued based upon quotes obtained from independent third-party pricing services, which uses evaluated pricing applications and model processes. Observable market inputs, such as, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data are considered as part of the evaluation. The inputs are related directly to the security being evaluated, or indirectly to a similarly situated security. Market assumptions and market data are utilized in the valuation models. The Company reviews the market prices provided by the third-party pricing service for reasonableness based on the Company’s understanding of the market place and credit issues related to the securities. The Company has not made any adjustments to the market quotes provided by them and, accordingly, the Company categorized its investment portfolio within Level 2 of the fair value hierarchy.

Impaired Loans and Other Real Estate Owned – A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows. The Company measures impairment on all non-accrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost. As such, the Company records impaired loans as Level 3. At September 30, 2018 and December 31, 2017, substantially all the Company’s impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to management and has recorded a specific reserve on one loan in the amount of $250,000 with a principal balance of $488,000.

The fair value of impaired loans and other real estate owned were determined using Level 3 assumptions, and represents impaired loan and other real estate owned balances for which a specific reserve has been established or on which a write down has been taken. Generally, the Company obtains third party appraisals (or property valuations) and/or collateral audits in conjunction with internal analysis based on historical experience on its impaired loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for impaired loans, the Company will then discount the valuation to cover both market price fluctuations and selling costs the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral.
 

 

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The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated, representing an exit price.
 
 
 
At September 30, 2018
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(dollars in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
263,212

 
$
263,212

 
$

 
$

 
$
263,212

Interest-bearing time deposits with financial institutions
 
6,386

 
6,386

 

 

 
6,386

Investments held-to-maturity
 
46,385

 

 
45,138

 

 
45,138

Investment securities available-for-sale
 
1,054,877

 

 
1,054,877

 

 
1,054,877

FHLB, FRB and other stock
 
112,649

 
N/A

 
N/A

 
N/A

 
N/A

Loans held for sale
 
52,880

 

 
52,880

 

 
52,880

Loans held for investment, net
 
8,759,204

 

 

 
8,694,408

 
8,694,408

Derivative asset
 
3,858

 

 
3,272

 

 
3,272

Accrued interest receivable
 
37,683

 
37,683

 

 

 
37,683

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
8,502,145

 
7,193,880

 
1,310,444

 

 
8,504,324

FHLB advances
 
859,622

 

 
859,622

 

 
859,622

Other borrowings
 
2,350

 

 
2,350

 

 
2,350

Subordinated debentures
 
110,244

 

 
122,177

 

 
122,177

Derivative liability
 
3,858

 

 
3,272

 

 
3,272

Accrued interest payable
 
3,303

 
3,303

 

 

 
3,303



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At December 31, 2017
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(dollars in thousands)
Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
197,164

 
$
197,164

 
$

 
$

 
$
197,164

Interest-bearing time deposits with financial institutions
 
6,633

 
6,633

 

 

 
6,633

Investments held-to-maturity
 
18,291

 

 
18,082

 

 
18,082

Investment securities available-for-sale
 
787,429

 

 
787,429

 

 
787,429

FHLB, FRB and other stock
 
65,881

 
N/A

 
N/A

 
N/A

 
N/A

Loans held for sale
 
23,426

 

 
23,524

 

 
23,524

Loans held for investment, net (1)
 
6,167,288

 

 

 
6,269,366

 
6,269,366

Derivative asset
 
1,135

 

 
1,135

 

 
$
1,135

Accrued interest receivable
 
27,060

 
27,060

 

 

 
27,060

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
6,085,886

 
5,001,053

 
1,074,564

 

 
6,075,617

FHLB advances
 
490,148

 

 
489,823

 

 
489,823

Other borrowings
 
46,139

 

 
46,373

 

 
46,373

Subordinated debentures
 
105,123

 

 
115,159

 

 
115,159

Derivative liability
 
1,135

 

 
1,135

 

 
1,135

Accrued interest payable
 
2,131

 
2,131

 

 

 
2,131

(1) The estimated fair value of loans held for investment, net for December 31, 2017 is not based on an exit price assumption.


The following fair value hierarchy table presents information about the Company’s financial instruments measured at fair value on a recurring basis at the dates indicated:
 
 
 
September 30, 2018
 
 
Fair Value Measurement Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
 
 
(dollars in thousands)
Financial assets
 
 
 
 
 
 
 
 
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$

 
$
59,343

 
$

 
$
59,343

Agency
 

 
112,771

 

 
112,771

Corporate
 

 
101,594

 

 
101,594

Municipal bonds
 

 
231,201

 

 
231,201

Collateralized mortgage obligation
 

 
25,206

 

 
25,206

Mortgage-backed securities
 

 
524,762

 

 
524,762

Total securities available-for-sale
 
$

 
$
1,054,877

 
$

 
$
1,054,877

 
 
 
 
 
 
 
 
 
Derivative assets
 
$

 
$
3,858

 
$

 
$
3,858

 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
Derivative liabilities
 
$

 
$
3,858

 
$

 
$
3,858


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December 31, 2017
 
 
Fair Value Measurement Using
 
 

 
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
 
(dollars in thousands)
Financial assets
 
 
 
 
 
 
 
 
Investment securities available-for-sale:
 
 

 
 

 
 

 
 

Agency
 
$

 
$
47,209

 
$

 
$
47,209

Corporate
 

 
79,546

 

 
79,546

Municipal bonds
 

 
232,128

 

 
232,128

Collateralized mortgage obligation
 

 
33,781

 

 
33,781

Mortgage-backed securities
 

 
394,765

 

 
394,765

Total securities available-for-sale
 
$

 
$
787,429

 
$

 
$
787,429

 
 
 
 
 
 
 
 
 
Derivative assets
 
$

 
$
1,135

 
$

 
$
1,135

 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
Derivative liabilities
 
$

 
$
1,135

 
$

 
$
1,135

 
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 

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Table of Contents

Note 11 – Derivative Instruments

From time to time, the Company enters into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company. At the same time, the Company enters into identical interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements it enters into with its borrowers. The Company had swaps with matched terms with an aggregate notional amount of $61.6 million and a fair value of $3.9 million at September 30, 2018 compared with an aggregate notional amount of $58.6 million and a fair value of $1.1 million at December 31, 2017. The fair value of these agreements are determined through a third party valuation model used by the Company's counterparty bank, which uses observable market data such as cash LIBOR rates, prices of Eurodollar future contracts and market swap rates. The fair values of these swaps are recorded as components of other assets and other liabilities in the Company’s condensed consolidated balance sheet. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s income statement as a component of noninterest income. Since the terms of the swap agreements between the Company and its borrowers have been matched with the terms of swap agreements with another financial institution, the adjustments for the change in their fair value offset each other in non-interest income.
Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of these swap agreements. Offsetting swap agreements the Company has with other financial institutions are collateralized with cash, and swap agreements with borrowers are secured by the collateral arrangements for the underlying loans these borrowers have with the Company. During the nine months ended September 30, 2018 and year ended December 31, 2017, there were no losses recorded on swap agreements attributable to the change in credit risk associated with a counterparty. All interest rate swap agreements entered into by the Company as of September 30, 2018 and December 31, 2017 are not designated as hedging instruments.
The following tables summarize the Company's derivative instruments, included in "other assets" and "other liabilities" in the consolidated statements of financial condition:
 
September 30, 2018
 
Derivative Assets
 
Derivative Liabilities
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
(dollars in thousands)
Derivative instruments not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$
61,642

 
$
3,858

 
$
61,642

 
$
3,858

Total derivative instruments
$
61,642

 
$
3,858

 
$
61,642

 
$
3,858


 
December 31, 2017
 
Derivative Assets
 
Derivative Liabilities
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
(dollars in thousands)
Derivative instruments not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap contracts
$
58,599

 
$
1,135

 
$
58,599

 
$
1,135

Total derivative instruments
$
58,599

 
$
1,135

 
$
58,599

 
$
1,135





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Table of Contents

Note 12 – Balance Sheet Offsetting

Derivative financial instruments may be eligible for offset in the consolidated balance sheets, such as those subject to enforceable master netting arrangements or a similar agreement. Under these agreements, the Company has the right to net settle multiple contracts with the same counterparty. The Company offers an interest rate swap product to qualified customers, which are then paired with derivative contracts the Company enters into with a counterparty bank. While derivative contracts entered into with counterparty banks may be subject to enforceable master netting agreements, derivative contracts with customers may not be subject to enforceable master netting arrangements.
Financial instruments that are eligible for offset in the consolidated statements of financial condition as of September 30, 2018 are presented in the table below:
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated
Balance Sheets
 
 
 
Gross Amounts Recognized in the Consolidated Balance Sheets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral (1)
 
Net Amount
 
(dollars in thousands)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
hedging instruments
$
3,917

 
$
(59
)
 
$
3,858

 
$

 
$

 
$
3,858

Total
$
3,917

 
$
(59
)
 
$
3,858

 
$

 
$

 
$
3,858

 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
hedging instruments
$
3,858

 
$

 
$
3,858

 
$

 
$

 
$
3,858

Total
$
3,858

 
$

 
$
3,858

 
$

 
$

 
$
3,858

 
 
 
 
 
 
 
 
 
 
 
 
(1) Represents cash collateral held with counterparty bank.

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Table of Contents

Financial instruments that are eligible for offset in the consolidated statements of financial condition as of December 31, 2017 are presented in the table below:
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated
Balance Sheets
 
 
 
Gross Amounts Recognized in the Consolidated Balance Sheets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts Presented in the Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral (1)
 
Net Amount
 
(dollars in thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
hedging instruments
$
1,833

 
$
(698
)
 
$
1,135

 
$

 
$

 
$
1,135

Total
$
1,833

 
$
(698
)
 
$
1,135

 
$

 
$

 
$
1,135

 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
hedging instruments
$
1,135

 
$

 
$
1,135

 
$

 
$

 
$
1,135

Total
$
1,135

 
$

 
$
1,135

 
$

 
$

 
$
1,135

 
 
 
 
 
 
 
 
 
 
 
 
(1) Represents cash collateral held with counterparty bank.



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Table of Contents

Note 13 – Revenue Recognition

The Company earns revenue from a variety of sources. The Company’s principal source of revenue is interest income on loans, investment securities and other interest earning assets, while the remainder of the Company’s revenue is earned from a variety of fees, service charges, gains and losses, and other income, all of which are classified as noninterest income. Revenue from interest on loans and investment securities is accounted for on an accrual basis using the interest method, while revenue from other sources is accounted for under other applicable U.S. GAAP as well as 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 Company 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 the 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 associated 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 Company without penalty, such as a deposit account agreement. These revenue streams are included in non-interest income.

The following tables provide a summary of the Company’s revenue streams, including those that are within the scope of ASC 606 and those that are accounted for under other applicable U.S. GAAP:
 
Three Months Ended
 
September 30, 2018
 
June 30, 2018
 
September 30, 2017
 
Within Scope (1)
 
Out of Scope (2)
 
Within Scope (1)
 
Out of Scope (2)
 
Within Scope (1)
 
Out of Scope (2)
 
(dollars in thousands)
Interest income:
 
 
 
 
 
 
 
 
 
 
 
Loans
$

 
$
119,271

 
$

 
$
85,625

 
$

 
$
64,915

Investment securities and other interest-earning assets

 
9,605

 

 
7,074

 

 
5,246

Total interest income

 
128,876

 

 
92,699

 

 
70,161

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Loan servicing fees

 
400

 

 
292

 

 
276

Service charges on deposit accounts
874

 

 
1,057

 

 
946

 

Other service fee income
317

 

 
169

 

 
851

 

Debit card interchange income
1,061

 

 
1,090

 

 
248

 

Earnings on bank-owned life insurance

 
1,270

 

 
617

 

 
629

Net gain from sales of loans

 
2,029

 

 
3,843

 

 
3,439

Net gain from sales of investment securities

 
1,063

 

 
330

 

 
896

Other income
(446
)
 
976

 
293

 
460

 
163

 
773

Total noninterest income
1,806

 
5,738

 
2,609

 
5,542

 
2,208

 
6,013

Total revenues
$
1,806

 
$
134,614

 
$
2,609

 
$
98,241

 
$
2,208

 
$
76,174

______________________________

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(1) Revenues from contracts with customers accounted for under ASC 606.
(2) Revenues not within the scope of ASC 606 and accounted for under other applicable U.S. GAAP requirements.

 
Nine Months Ended September 30,
 
2018
 
2017
 
Within Scope (1)
 
Out of Scope (2)
 
Within Scope (1)
 
Out of Scope (2)
 
(dollars in thousands)
Interest income:
 
 
 
 
 
 
 
Loans
$

 
$
289,069

 
$

 
$
170,905

Investment securities and other interest-earning assets

 
23,333

 

 
13,416

Total interest income

 
312,402

 

 
184,321

Noninterest income:
 
 
 
 
 
 
 
Loan servicing fees

 
1,037

 

 
641

Service charges on deposit accounts
3,081

 

 
2,153

 

Other service fee income
632

 

 
1,725

 

Debit card interchange income
3,187

 

 
994

 

Earnings on bank-owned life insurance

 
2,498

 

 
1,654

Net gain from sales of loans

 
8,830

 

 
9,137

Net gain from sales of investment securities

 
1,399

 

 
2,989

Other income
84

 
2,613

 
301

 
2,069

Total noninterest income
6,984

 
16,377

 
5,173

 
16,490

Total revenues
$
6,984

 
$
328,779

 
$
5,173

 
$
200,811

______________________________
(1) Revenues from contracts with customers accounted for under ASC 606.
(2) Revenues not within the scope of ASC 606 and accounted for under other applicable U.S. GAAP requirements.

The following provides information concerning the major components of the Company’s revenue:

Interest Income

Interest income is comprised of interest on loans, investment securities and other interest-earning assets. Interest is recognized using the interest method, which reflects the contractual yield on loans and coupon yield for investment securities. These yields are adjusted for purchase discounts, premiums and net deferred loan origination fees for newly originated loans.

Loan Servicing Fees

Loan servicing fees generally consist of fees related to servicing of loans for others, as well as the net impact of related serving asset amortization. ASC 606 stipulates that income streams generated through the transfer and servicing of financial instruments shall be accounted for under ASC 860 - Transfers and Servicing and is therefore excluded from the scope of ASC 606.

Service Charges on Deposit Accounts and Other Service Fee Income

Service charges on deposit accounts and other service fee income consists of periodic service charges on deposit accounts and transaction based fees such as those related to overdrafts, ATM charges and wire transfer fees. The majority of these revenues are accounted for under ASC 606. Performance obligations for periodic service charges on deposit accounts are typically short-term in nature and are generally satisfied on a monthly basis, while

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performance obligations for other transaction based fees are typically satisfied at a point in time (which may consist of only a few moments to perform the service or transaction) with no further obligations on behalf of the Company to the customer. Periodic service charges are generally collected monthly directly from the customer's deposit account, and at the end of a statement cycle, while transaction based service charges are typically collected at the time of or soon after the service is performed.

Debit Card Interchange Income

Debit card interchange fee income consists of transaction processing fees associated with customer debit card transactions processed through a payment network and are accounted for under ASC 606. These fees are earned each time a request for payment is originated by a customer debit cardholder at a merchant. In these transactions, the Company transfers funds from the debit cardholder’s account to a merchant through a payment network at the request of the debit cardholder by way of the debit card transaction. The related performance obligations are generally satisfied when the transfer of funds is complete, which is generally a point in time when the debit card transaction is processed. Debit card interchange fees are typically received and recorded as revenue on a daily basis.

Earnings on Bank-Owned Life Insurance

Earnings on bank-owned life insurance relates to the periodic increase in the cash surrender value of bank-owned life insurance policies on certain key employees of the Company for which the Company is the owner and beneficiary of the related policies. This revenue stream is excluded from the scope of ASC 606, and is accounted for under other applicable U.S. GAAP provisions (ASC 325-30).

Gains and (Losses) from Sales of Loans and Investment Securities

ASC 606 stipulates that gains and (losses) from the periodic sale of loans and investment securities are excluded from ASC 606 and are accounted for under other applicable U.S. GAAP provisions.

Other Income

Other income generally consists of recoveries on acquired loans, which were fully charged off and had no book value prior to their acquisition. This revenue stream is excluded from the scope of ASC 606 and is accounted for under other applicable U.S. GAAP provisions. Other income also consists of other miscellaneous fees, which are accounted for under ASC 606; however, much like service charges on deposit accounts, these fees have performance obligations that are very short-term in nature and are typically satisfied at a point in time. Revenue is typically recorded at the time these fees are collected, which is generally upon the completion the related transaction or service provided.

Other revenue streams that may be applicable to the Company include gains and losses from the sale of non-financial assets such as other real estate owned and property premises and equipment. The Company accounts for these revenue streams in accordance with ASC 610-20, which requires the Company to look to guidance in ASC 606 in the application of certain measurement and recognition concepts. The Company records gains and losses on the sale of non-financial assets when control of the asset has been surrendered to the buyer, which generally occurs at a specific point in time.

Practical Expedient

The Company also employs a practical expedient with respect to contract acquisition costs, which are generally capitalized and amortized into expense. These costs relate to expenses incurred directly attributable to the efforts to obtain a contract. The practical expedient allows the Company to immediately recognize contract acquisition costs in current period earnings when these costs would have been amortized over a period of one year or less.

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At September 30, 2018 the Company did not have any material contract assets or liabilities in its consolidated financial statements related to revenue streams within the scope of ASC 606, and there were no material changes in those balances during the reporting period.

Note 14 – Subsequent Events

Adoption of Stock Repurchase Program

On October 26, 2018, the Company announced that its Board of Directors had approved a new stock repurchase program. Under the stock repurchase program, management is authorized to repurchase up to $100 million of the Company’s common stock. The stock repurchase program may be limited or terminated at any time without prior notice. The stock repurchase program is intended to replace and supersede the Company’s prior stock repurchase program, which was approved in June 2012 and authorized the repurchase of up to 1,000,000 shares of the Company’s common stock. An aggregate of 237,455 shares of the Company’s common stock were repurchased under that program.

Under the stock repurchase program, the Company may repurchase shares of common stock from time to time in open market transactions or in privately negotiated transactions as permitted under applicable rules and regulations. Repurchases may be conducted from time to time and may be suspended or terminated at any time without notice. The extent to which the Company repurchases its shares of common stock and the timing of such purchases will depend upon market conditions and other considerations as may be considered in the Company’s sole discretion. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phrases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors, which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.


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The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

The strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;
The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
Inflation/deflation, interest rate, market and monetary fluctuations;
The effect of acquisitions we may make, such as our recent acquisition of Grandpoint, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;
The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
The impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
Technological and social media changes;
Changes in the level of our nonperforming assets and charge-offs;
The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB or other accounting standards setters;
Possible OTTI of securities held by us;
The impact of current governmental efforts to restructure the U.S. financial regulatory system;
Changes in consumer spending, borrowing and savings habits;
The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
Ability to attract deposits and other sources of liquidity;
Changes in the financial performance and/or condition of our borrowers;
Changes in the competitive environment among financial and bank holding companies and other financial service providers;
Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
Unanticipated regulatory or judicial proceedings; and
Our ability to manage the risks involved in the foregoing.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking information and statements to reflect actual results or changes in the factors affecting the forward-looking information and statements. For information on the factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our 2017 Annual Report.
 

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Forward-looking information and statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us. Any investor in our common stock should consider all risks and uncertainties disclosed in our filings with the SEC, all of which are accessible on the SEC’s website at http://www.sec.gov.
 
GENERAL
 
This discussion should be read in conjunction with our Management Discussion and Analysis of Financial Condition and Results of Operations included in our 2017 Annual Report, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018.
 
The Corporation is a California-based bank holding company incorporated in the state of Delaware and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”). Our wholly owned subsidiary, Pacific Premier Bank, is a California state-chartered commercial bank. As a bank holding company, the Corporation is subject to regulation and supervision by the Federal Reserve. We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve may conduct examinations of bank holding companies, such as the Corporation, and its subsidiaries. The Corporation is also a bank holding company within the meaning of the California Financial Code. As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Business Oversight-Division of Financial Institutions (“DBO”).
 
A bank holding company, such as the Corporation, is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such a policy. The Federal Reserve, under the BHCA, has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
 
As a California state-chartered commercial bank, which is a member of the Federal Reserve, the Bank is subject to supervision, periodic examination and regulation by the DBO and the Federal Reserve. The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund. In general, terms insurance coverage is up to $250,000 per depositor for all deposit accounts. As a result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank. If, as a result of an examination of the Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators. Such remedies include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict growth, to assess civil monetary penalties, to remove officers and directors and ultimately to request the FDIC to terminate the Bank’s deposit insurance. As a California-chartered commercial bank, the Bank is also subject to certain provisions of California law.
 
We provide banking services within our targeted markets in California to businesses, including the owners and employees of those businesses, professionals, real estate investors and non-profit organizations, as well as consumers in the communities we serve. Additionally, through our HOA Banking and Lending and Franchise Capital units we can provide customized cash management, electronic banking services and credit facilities to HOAs, HOA management companies and quick service restaurant ("QSR") franchise owners nationwide. Our corporate headquarters are located in Irvine, California. At September 30, 2018, the Bank operated 47 full-service depository branches located in California in the counties of Orange, Los Angeles, Riverside, San Bernardino, San Diego, San Luis Obispo and Santa Barbara, California as well as in the states of Arizona, Nevada and Washington.

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Through our branches and our web site at www.ppbi.com, we offer a broad array of deposit products and services for both business and consumer customers, including checking, money market and savings accounts, cash management services, electronic banking and on-line bill payment. We also offer a variety of loan products, including commercial business loans, lines of credit, commercial real estate loans, SBA loans, residential home loans and home equity loans. The Bank funds its lending and investment activities with retail and commercial deposits obtained through its branches, advances from the FHLB, lines of credit and wholesale and brokered certificates of deposits.
 
Our principal source of income is the net spread between interest earned on loans and investments and the interest costs associated with deposits and borrowings used to finance the loan and investment portfolios. Additionally, the Bank generates fee income from loan and investment sales and various products and services offered to both depository and loan customers.
 
CRITICAL ACCOUNTING POLICIES
 
Management has established various accounting policies that govern the application of U.S. GAAP in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the Consolidated Financial Statements in our 2017 Annual Report. There have been no significant changes to our Critical Accounting Policies as described in our 2017 Annual Report.
 
Certain accounting policies require management to make estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities; management considers these to be critical accounting policies. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at balance sheet dates and our results of operations for future reporting periods.
 
We consider the ALLL to be a critical accounting policy that requires judicious estimates and assumptions in the preparation of our financial statements that is particularly susceptible to significant change. For further information, see “Allowance for Loan Losses” discussed in Note 7 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q and Note 5 to the Consolidated Financial Statements in our 2017 Annual Report.

GRANDPOINT ACQUISITION
 
Effective July 1, 2018, the Company acquired Grandpoint and its wholly-owned bank subsidiary, Grandpoint Bank, a California-chartered bank headquartered in Los Angeles, California, pursuant to the terms of a definitive agreement entered into by the Corporation and Grandpoint on February 9, 2018. As a result of the Grandpoint acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $3.1 billion, including:
 
$2.4 billion of gross loans;
$312 million in goodwill;
$148 million of cash and cash equivalents;
$97.2 million of other types of assets;
$9.1 million in fixed assets; and
$71.9 million of a core deposit intangible.


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Also as a result of the Grandpoint acquisition, the Company recorded $629 million of equity in connection with the Corporation’s stock issued to Grandpoint shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $2.8 billion, including:
 
$2.5 billion in deposit transaction accounts; and
$24.9 million other liabilities.

The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures. Such 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.
 
The integration and system conversion of Grandpoint was completed in October 2018.

PLAZA ACQUISITION
 
Effective November 1, 2017, the Company acquired Plaza, and its wholly-owned bank subsidiary, Plaza Bank, a California-chartered bank headquartered in Irvine, California, pursuant to the terms of a definitive agreement entered into by the Corporation and Plaza on August 8, 2017. As a result of the Plaza acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $1.3 billion, including:
 
$1.1 billion of gross loans;
$123 million in goodwill;
$150 million of cash and cash equivalents;
$18.9 million of other types of assets;
$7.2 million in fixed assets; and
$10.8 million of a core deposit intangible.

Also as a result of the Plaza acquisition, the Company recorded $251 million of equity in connection with the Corporation’s stock issued to Plaza shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $1.1 billion, including:
 
$1.1 billion in deposit transaction accounts; and
$8.5 million other liabilities.

The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures. Such 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.
 
The integration and system conversion of Plaza was completed in May 2018.

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HEOP ACQUISITION
 
Effective April 1, 2017, the Company acquired HEOP, and its wholly-owned bank subsidiary, Heritage Oaks Bank, a California-chartered bank headquartered in Paso Robles, California, pursuant to the terms of a definitive agreement entered into by the Corporation and HEOP on December 12, 2016. As a result of the HEOP acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $2.0 billion, including:
 
$1.4 billion of gross loans;
$443 million in investment securities;
$270 million in goodwill;
$78.7 million of cash and cash equivalents;
$55.2 million of other types of assets;
$34.9 million in fixed assets; and
$28.1 million of a core deposit intangible.

Also as a result of the HEOP acquisition, the Company recorded $465 million of equity in connection with the Corporation’s stock issued to HEOP shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $1.8 billion, including:
 
$1.7 billion in deposit accounts; and
$147 million in other liabilities.

The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures. Such 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. During the quarter ended June 30, 2018, the Company finalized its fair values with this acquisition.
 
The integration and system conversion of HEOP was completed in July 2017.


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NON-U.S. GAAP MEASURES

For periods presented below, return on average tangible common equity is a non-U.S. GAAP financial measure derived from U.S. GAAP-based amounts. We calculate these figures by excluding core deposit intangible ("CDI") amortization expense and exclude the average CDI and average goodwill from the average stockholders’ equity during the period. Management believes that the exclusion of such items from these financial measures provides useful information to an understanding of the operating results of our core business. However, these non-U.S. GAAP financial measures are supplemental and are not a substitute for an analysis based on U.S. GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
June 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
 
 
 
 
 
 
(dollars in thousands)
Net income
 
$
28,392

 
$
27,303

 
$
20,232

 
$
83,697

 
$
43,929

Plus CDI amortization expense
 
4,693

 
1,996

 
1,761

 
8,963

 
4,033

Less CDI amortization expense tax adjustment (1)
 
1,011

 
542

 
606

 
2,178

 
1,376

Net income for average tangible common equity
 
$
32,074

 
$
28,757

 
$
21,387

 
$
90,482

 
$
46,586

 
 
 
 
 
 
 
 
 
 
 
Average stockholders’ equity
 
$
1,908,398

 
$
1,279,932

 
$
976,081

 
$
1,483,711

 
$
799,760

Less average CDI
 
108,258

 
39,766

 
34,699

 
63,657

 
26,899

Less average goodwill
 
805,116

 
494,070

 
371,651

 
598,656

 
282,554

Average tangible common equity
 
$
995,024

 
$
746,096

 
$
569,731

 
$
821,398

 
$
490,307

Return on average tangible common equity (2)
 
12.89
%
 
15.42
%
 
15.02
%
 
14.69
%
 
12.67
%
______________________________
(1) CDI amortization expense adjusted by quarterly effective tax rate.
(2) Ratio is annualized.


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RESULTS OF OPERATIONS
     
In the third quarter of 2018, we reported net income of $28.4 million, or $0.46 per diluted share. This compares with net income of $27.3 million, or $0.58 per diluted share, for the second quarter of 2018. The increase in net income in the third quarter compared to the second quarter was primarily driven by an increase in net interest income of $31.5 million and a decrease in income tax of $2.4 million. These increases were partially offset by an increase in noninterest expense of $32.0 million, including $14.0 million of merger-related expense, and provision for credit losses of $220,000, as well as a decrease in noninterest income of $607,000.

Net income of $28.4 million, or $0.46 per diluted share, for the third quarter of 2018 compares to net income for the third quarter of 2017 of $20.2 million, or $0.50 per diluted share. The increase in net income of $8.2 million during the third quarter of 2018 compared to the prior comparable quarter in 2017 was primarily due to the $48.4 million increase in net interest income resulting from average interest-earning asset growth of $4.3 billion and a decrease in income tax of $2.8 million when compared to the third quarter of 2017. The increase in average interest-earning assets was primarily from the acquisition of Grandpoint in the third quarter of 2018 and Plaza in the fourth quarter of 2017, as well as organic loan growth since the end of the third quarter of 2017. These increases were partially offset by a $42.5 million increase in noninterest expense and a $677,000 decrease in noninterest income. The increase in noninterest expense included increases in all major categories, including $16.2 million in compensation and benefits expense, and $13.5 million in merger-related expense. Prior period comparison was impacted by the acquisition of Grandpoint in the third quarter of 2018.

For the three months ended September 30, 2018, the Company’s return on average assets was 1.00% and return on average tangible common equity was 12.89%. For the three months ended June 30, 2018, the return on average assets was 1.35% and the return on average tangible common equity was 15.42%. For the three months ended September 30, 2017, the return on average assets was 1.26% and the return on average tangible common equity was 15.02%.

For the nine months ended September 30, 2018, the Company recorded net income of $83.7 million, or $1.61 per diluted share. This compares with net income of $43.9 million or $1.20 per diluted share for the nine months ended September 30, 2017. The increase in net income of $39.8 million was mostly due to the $106 million increase in net interest income resulting from earning asset growth, primarily from the acquisitions of Grandpoint and Plaza and organic loan growth. These increases were partially offset by growth in non-interest expense of $63.9 million, including increases in all major categories, including $37.8 million in compensation and benefits expenses. Prior period comparisons for the year-to-date results are impacted by the acquisitions of Grandpoint in the third quarter of 2018 and Plaza in the fourth quarter of 2017.
    
For the nine months ended September 30, 2018, the Company’s return on average assets was 1.21% and return on average tangible common equity was 14.69%, compared with a return on average assets of 1.04% and a return on average tangible common equity of 12.67% for the nine months ended September 30, 2017.

Net Interest Income
 
Our primary source of revenue is net interest income, which is the difference between the interest earned on loans, investment securities, and interest earning balances with financial institutions (“interest-earning assets”) and the interest paid on deposits and borrowings (“interest-bearing liabilities”). Net interest margin is net interest income expressed as a percentage of average interest earning assets. Net interest income is affected by changes in both interest rates and the volume of interest-earning assets and interest-bearing liabilities.
 
Net interest income totaled $113 million in the third quarter of 2018, an increase of $31.5 million, or 39%, from the second quarter of 2018. The increase in net interest income reflected higher average interest-earning assets of $2.8 billion, primarily related to the acquisition of Grandpoint, which at acquisition added $2.4 billion of loans, and organic loan growth from new loan originations and commitments of $605 million.


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Net interest margin for the third quarter was 4.38%, compared with 4.41% in the prior quarter. The decrease was primarily the result of the impact of lower loan yields with the acquisition of Grandpoint, which lowered the net interest margin 9 basis points, and lower loan-related fees. These decreases were partially offset by higher accretion income of $4.1 million in the third quarter of 2018 compared to $1.9 million in the second quarter of 2018, and the favorable impact of loan repricing as a result of the Federal Reserve Bank's interest rate hike in June. Our core net interest margin, which we calculate as net interest margin excluding the impact of accretion, certificates of deposit mark-to-market amortization, and one-time adjustments, decreased to 4.19%, compared to 4.29% in the prior quarter.

Net interest income for the third quarter of 2018 increased $48.4 million, or 75%, compared to the third quarter of 2017. The increase was primarily related to an increase in average interest-earning assets of $4.3 billion, which resulted primarily from our acquisitions of Grandpoint in the third quarter of 2018 and Plaza in the fourth quarter of 2017, as well as organic loan growth since the end of the third quarter of 2017.
 
For the first nine months ended 2018, net interest income increased $106 million, or 63%, compared to the first nine months ended 2017. The increase was related to an increase in average interest-earning assets of $3.1 billion, which resulted primarily from our acquisitions of Grandpoint in the third quarter of 2018 and Plaza in the fourth quarter of 2017, and organic loan growth since the end of the first nine months ended 2017.

The following tables present for the periods indicated the average dollar amounts from selected balance sheet categories calculated from daily average balances and the total dollar amount, including adjustments to yields and costs, of:
 
Interest income earned from average interest-earning assets and the resultant yields; and
Interest expense incurred from average interest-bearing liabilities and resultant costs, expressed as rates.

The tables below also set forth our net interest income, net interest rate spread and net interest rate margin for the periods indicated. The net interest rate margin reflects the relative level of interest-earning assets to interest-bearing liabilities and equals our net interest rate spread divided by average interest-earning assets for the periods indicated.

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Average Balance Sheet
 
Three Months Ended
 
September 30, 2018
 
June 30, 2018
 
September 30, 2017
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
Assets
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
339,064

 
$
694

 
0.81
%
 
$
146,279

 
$
277

 
0.76
%
 
$
167,745

 
$
265

 
0.63
%
Investment securities
1,198,362

 
8,911

 
2.97

 
980,334

 
6,797

 
2.77

 
765,537

 
4,981

 
2.60

Loans receivable, net
8,664,796

 
119,271

 
5.46

 
6,253,987

 
85,625

 
5.49

 
4,937,733

 
64,915

 
5.22

Total interest-earning assets
10,202,222

 
128,876

 
5.01

 
7,380,600

 
92,699

 
5.04

 
5,871,015

 
70,161

 
4.74

Noninterest-earning assets
1,185,882

 
 
 
 
 
726,922

 
 
 
 
 
573,373

 
 
 
 
Total assets
$
11,388,104

 
 
 
 
 
$
8,107,522

 
 
 
 
 
$
6,444,388

 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest checking
$
532,246

 
$
480

 
0.36

 
$
349,721

 
$
117

 
0.13

 
$
318,412

 
$
103

 
0.13

Money market
3,143,556

 
6,391

 
0.81

 
2,185,310

 
3,943

 
0.72

 
1,802,834

 
1,767

 
0.39

Savings
264,453

 
97

 
0.15

 
219,035

 
83

 
0.15

 
211,404

 
68

 
0.13

Retail certificates of deposit
1,059,416

 
3,417

 
1.28

 
784,902

 
2,290

 
1.17

 
571,669

 
1,052

 
0.73

Wholesale/brokered certificates of deposit
316,524

 
1,557

 
1.95

 
349,585

 
1,323

 
1.52

 
243,001

 
567

 
0.93

Total interest-bearing deposits
5,316,195

 
11,942

 
0.89

 
3,888,553

 
7,756

 
0.80

 
3,147,320

 
3,557

 
0.45

FHLB advances and other borrowings
473,197

 
2,494

 
2.09

 
455,488

 
2,125

 
1.87

 
319,373

 
1,162

 
1.44

Subordinated debentures
110,203

 
1,727

 
6.27

 
105,218

 
1,647

 
6.26

 
79,833

 
1,151

 
5.77

Total borrowings
583,400

 
4,221

 
2.87

 
560,706

 
3,772

 
2.70

 
399,206

 
2,313

 
2.30

Total interest-bearing liabilities
5,899,595

 
16,163

 
1.09

 
4,449,259

 
11,528

 
1.04

 
3,546,526

 
5,870

 
0.66

Noninterest-bearing deposits
3,473,056

 
 
 
 
 
2,310,714

 
 
 
 
 
1,860,177

 
 
 
 
Other liabilities
107,055

 
 
 
 
 
67,617

 
 
 
 
 
61,604

 
 
 
 
Total liabilities
9,479,706

 
 
 
 
 
6,827,590

 
 
 
 
 
5,468,307

 
 
 
 
Stockholders’ equity
1,908,398

 
 
 
 
 
1,279,932

 
 
 
 
 
976,081

 
 
 
 
Total liabilities and equity
$
11,388,104

 
 
 
 
 
$
8,107,522

 
 
 
 
 
$
6,444,388

 
 
 
 
Net interest income
 
 
$
112,713

 
 
 
 
 
$
81,171

 
 
 
 
 
$
64,291

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
4.38
%
 
 
 
 
 
4.41
%
 
 
 
 
 
4.34
%
Cost of deposits
 
 
 
 
0.54

 
 
 
 
 
0.50

 
 
 
 
 
0.28

Ratio of interest-earning assets to interest-bearing liabilities
 
 
 
 
172.93

 
 
 
 
 
165.88

 
 
 
 
 
165.54


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Average Balance Sheet
 
Nine Months Ended
 
September 30,
 
2018
 
2017
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
Assets
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
218,156

 
$
1,285

 
0.79
%
 
$
129,537

 
$
509

 
0.53
%
Investment securities
1,035,464

 
22,048

 
2.84

 
682,819

 
12,907

 
2.52

Loans receivable, net
7,061,139

 
289,069

 
5.47

 
4,362,259

 
170,905

 
5.24

Total interest-earning assets
8,314,759

 
312,402

 
5.02

 
5,174,615

 
184,321

 
4.76

Noninterest-earning assets
877,794

 
 
 
 
 
455,310

 
 
 
 
Total assets
$
9,192,553

 
 
 
 
 
$
5,629,925

 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest checking
$
410,700

 
$
711

 
0.23

 
$
281,491

 
$
246

 
0.12

Money market
2,509,753

 
13,493

 
0.72

 
1,574,292

 
4,321

 
0.37

Savings
235,975

 
259

 
0.15

 
178,309

 
174

 
0.13

Retail certificates of deposit
853,803

 
7,096

 
1.11

 
504,806

 
2,648

 
0.70

Wholesale/brokered certificates of deposit
347,663

 
4,053

 
1.56

 
219,123

 
1,385

 
0.85

Total interest-bearing deposits
4,357,894

 
25,612

 
0.79

 
2,758,021

 
8,774

 
0.43

FHLB advances and other borrowings
478,814

 
6,642

 
1.85

 
323,426

 
2,940

 
1.22

Subordinated debentures
106,877

 
4,983

 
6.22

 
76,366

 
3,275

 
5.72

Total borrowings
585,691

 
11,625

 
2.65

 
399,792

 
6,215

 
2.08

Total interest-bearing liabilities
4,943,585

 
37,237

 
1.01

 
3,157,813

 
14,989

 
0.63

Noninterest-bearing deposits
2,686,654

 
 
 
 
 
1,626,047

 
 
 
 
Other liabilities
78,603

 
 
 
 
 
46,305

 
 
 
 
Total liabilities
7,708,842

 
 
 
 
 
4,830,165

 
 
 
 
Stockholders' equity
1,483,711

 
 
 
 
 
799,760

 
 
 
 
Total liabilities and equity
$
9,192,553

 
 
 
 
 
$
5,629,925

 
 
 
 
Net interest income
 
 
$
275,165

 
 
 
 
 
$
169,332

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
4.42
%
 
 
 
 
 
4.38
%
Cost of deposits
 
 
 
 
0.49

 
 
 
 
 
0.27

Ratio of interest-earning assets to interest-bearing liabilities
 
 
 
 
168.19

 
 
 
 
 
163.87



Changes in our net interest income are a function of changes in volumes, days in a period and rates of interest-earning assets and interest-bearing liabilities. The following table presents the impact the volume, days in a period and rate changes have had on our net interest income for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes to our net interest income with respect to:
 
Changes in volume (changes in volume multiplied by prior rate);

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Changes in days in a period (changes in days in a period multiplied by daily interest);
Changes in interest rates (changes in interest rates multiplied by prior volume) (includes the recognition of deferred fees/costs and discounts/premiums; and
The net change or the combined impact of volume, days in a period and rate changes allocated proportionately to changes in volume, days in a period and changes in interest rates.
 
Three Months Ended September 30, 2018
Compared to
Three Months Ended June 30, 2018
Increase (decrease) due to
 
Volume
 
Days
 
Rate
 
Net
 
(dollars in thousands)
Interest-earning assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
390

 
$
8

 
$
19

 
$
417

Investment securities
1,344

 

 
770

 
2,114

Loans receivable, net
32,818

 
1,296

 
(468
)
 
33,646

Total interest-earning assets
34,552

 
1,304

 
321

 
36,177

Interest-bearing liabilities
 

 
 
 
 

 
 

Interest checking
82

 
5

 
276

 
363

Money market
1,851

 
69

 
528

 
2,448

Savings
13

 
1

 

 
14

Retail certificates of deposit
859

 
37

 
231

 
1,127

Wholesale/brokered certificates of deposit
(109
)
 
17

 
326

 
234

FHLB advances and other borrowings
84

 
27

 
258

 
369

Subordinated debentures
75

 

 
5

 
80

Total interest-bearing liabilities
2,855

 
156

 
1,624

 
4,635

Change in net interest income
$
31,697

 
$
1,148

 
$
(1,303
)
 
$
31,542



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Three Months Ended September 30, 2018
Compared to
Three Months Ended September 30, 2017
Increase (decrease) due to
 
Volume
 
Rate
 
Net
 
(dollars in thousands)
Interest-earning assets
 
 
 
 
 
Cash and cash equivalents
$
335

 
$
94

 
$
429

Investment securities
3,143

 
787

 
3,930

Loans receivable, net
51,229

 
3,127

 
54,356

Total interest-earning assets
54,707

 
4,008

 
58,715

Interest-bearing liabilities
 

 
 

 
 

Interest checking
104

 
273

 
377

Money market
1,891

 
2,733

 
4,624

Savings
18

 
11

 
29

Retail certificates of deposit
1,255

 
1,110

 
2,365

Wholesale/brokered certificates of deposit
214

 
776

 
990

FHLB advances and other borrowings
689

 
643

 
1,332

Subordinated debentures
469

 
107

 
576

Total interest-bearing liabilities
4,640

 
5,653

 
10,293

Change in net interest income
$
50,067

 
$
(1,645
)
 
$
48,422


 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
Compared to
Nine Months Ended September 30, 2017
Increase (decrease) due to
 
Volume
 
Rate
 
Net
 
(dollars in thousands)
Interest-earning assets
 
 
 
 
 
Cash and cash equivalents
$
451

 
$
325

 
$
776

Investment securities
7,335

 
1,806

 
9,141

Loans receivable, net
110,318

 
7,846

 
118,164

Total interest-earning assets
118,104

 
9,977

 
128,081

Interest-bearing liabilities
 

 
 

 
 

Interest checking
155

 
310

 
465

Money market
3,549

 
5,623

 
9,172

Savings
57

 
28

 
85

Retail certificates of deposit
2,406

 
2,042

 
4,448

Wholesale/brokered certificates of deposit
1,099

 
1,569

 
2,668

FHLB advances and other borrowings
1,783

 
1,919

 
3,702

Subordinated debentures
1,271

 
437

 
1,708

Total interest-bearing liabilities
10,320

 
11,928

 
22,248

Change in net interest income
$
107,784

 
$
(1,951
)
 
$
105,833



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Provision for Credit Losses

A provision for credit losses of $2.0 million was recorded for the third quarter of 2018, compared with a provision for credit losses of $1.8 million for the quarter ended June 30, 2018. The third quarter of 2018 provision for credit losses includes a $335,000 provision for unfunded commitments compared to $400,000 in the second quarter of 2018. The increase in our provision for credit losses was primarily due to higher loan growth, partially offset by a lower loss rate. Net charge-offs were $87,000 in the third quarter of 2018 compared to $108,000 in the second quarter of 2018.

The $2.0 million provision for credit losses during the third quarter of 2018 decreased by $68,000 from the third quarter of 2017. The third quarter of 2018 included $335,000 of provision for unfunded commitments. The third quarter of 2017 did not include a provision for unfunded commitments. Net loan charge-offs were $87,000 for the third quarter of 2018, compared with net loan recoveries of $39,000 from the third quarter of 2017.

For the first nine months of 2018, we recorded a $6.0 million provision for credit losses, a decrease from $6.2 million recorded for the first nine months of 2017. The first nine months ended 2018 included $743,000 of provision for unfunded commitments. The first nine months ended 2017 included included a $216,000 reduction of provision for unfunded commitments. Net loan charge-offs amounted to $882,000 for the first nine months of 2018, an increase from $608,000 for the first nine months of 2017.

For purchased credit impaired loans, charge-offs are recorded when there is a decrease in the estimated cash flows of the credit from original cash flow estimates. Purchased credit impaired loans were recorded at their estimated fair value, which incorporated our estimated expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses or charge-offs will be recognized into earnings or against the allowance, if applicable. To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in loan interest income. Due to the accounting rules associated with our purchased credit impaired loans, each quarter we are required to re-estimate cash flows, which could cause volatility in our reported net interest margin and provision for loan losses. During the three months ended September 30, 2018, June 30, 2018 and September 30, 2017, no additional allowance was recorded associated with certain purchased credit impaired loans. During the nine months ended September 30, 2018, an additional allowance of $143,000 was recorded. No additional allowance was recorded in the nine months ended September 30, 2017. See “Allowance for Loan Losses” discussed below in this Quarterly Report on Form 10-Q.
 
Noninterest Income

Noninterest income for the third quarter of 2018 was $7.5 million, a decrease of $607,000, or 7.4%, from the second quarter of 2018. The decrease from the second quarter of 2018 was related to a $1.8 million decrease in net gain from the sales of loans, as well as a net loss on CRA related equity investments of $600,000, partially offset by an increase in net gains on sales of investment securities of $733,000 and higher bank-owned life insurance ("BOLI") earnings of $653,000. The increase in BOLI income was primarily the result of a death benefit received in the third quarter of 2018 of approximately $400,000.

During the third quarter of 2018, the Bank sold $29.9 million of SBA loans for a gain of $2.0 million, compared with $31.9 million of SBA loans for a net gain of $2.9 million in the second quarter of 2018. Additionally, the Bank sold $20.4 million of commercial real estate loans during the second quarter of 2018 for a gain of $927,000 and did not sell any commercial real estate loans during the third quarter of 2018.

Noninterest income for the third quarter of 2018 decreased $677,000, or 8.2%, compared to the third quarter of 2017. The decrease from the third quarter of 2017 was primarily related to a $1.4 million decrease in net gain from sales of loans.
For the first nine months of 2018, noninterest income totaled $23.4 million, an increase from $21.7 million for the first nine months of 2017. The increase was primarily related to higher debit card interchange fee

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income and service charges on deposit accounts and lower other service fee income, totaling $2.0 million, as well as an $844,000 increase in earnings from BOLI. The increase in BOLI income was primarily the result of a death benefit received in the third quarter of 2018 of approximately $400,000 and, to a lesser extent, additional BOLI acquired with the Grandpoint and Plaza acquisitions. These increases were partially offset by lower net gain from sales of investment securities of $1.6 million.

Noninterest Expense

 Noninterest expense totaled $82.1 million for the third quarter of 2018, an increase of $32.0 million, or 64%, compared with the second quarter of 2018. The increase was driven primarily by merger-related expense of $14.0 million in the third quarter of 2018 compared with $943,000 in the second quarter of 2018. Excluding merger-related expense, noninterest expense increased $19.0 million to $68.1 million, primarily attributable to increases in compensation and benefits of $8.6 million, core deposit intangible ("CDI") amortization of $2.7 million, premises and occupancy of $2.2 million, data processing of $1.3 million, loan expense of $545,000, FDIC insurance premiums of $479,000 and office, telecommunications and postage expense of $423,000, are as a result of the addition of operations, personnel and branches retained from the acquisition of Grandpoint.

Noninterest expense grew by $42.5 million, or 107%, compared to the third quarter of 2017. The increase was primarily related to the additional costs from operations, personnel and branches retained from the acquisitions of Grandpoint and Plaza, combined with our continued investment in personnel to support our organic growth in loans and deposits. The third quarter of 2017 included merger-related expense of $503,000.

Noninterest expense totaled $182 million for the first nine months of 2018, an increase of $63.9 million, or 54%, compared with the first nine months of 2017. The increase was primarily driven by increases of $37.8 million in compensation and benefits expenses, $6.8 million in premises and occupancy expense, $4.9 million in CDI amortization and $3.8 million in data processing. Prior period comparisons for the year-to-date results are impacted by the acquisitions of Grandpoint in the third quarter of 2018 and Plaza in the fourth quarter of 2017.

The Company’s efficiency ratio was 53.2% for the third quarter of 2018, compared to 53.0% for the second quarter of 2018 and 52.1% for the third quarter of 2017. The Company's efficiency ratio was 52.9% for the first nine months of 2018, compared to 52.3% for the first nine months of 2017.

Income Taxes
 
For the three months ended September 30, 2018, June 30, 2018 and September 30, 2017, income tax expense was $7.8 million, $10.2 million and $10.6 million, respectively, and the effective income tax rate was 21.5%, 27.2% and 34.4%, respectively. The change in the effective rate for the third quarter as compared to the second quarter of 2018 was favorably impacted by the combination of the impact from one-time adjustments associated with the finalization of the 2017 federal and state tax returns and additional re-measurement of deferred tax amounts that existed at December 31, 2017 due to the reduction in the federal income tax rate associated with the enactment of the Tax Cuts and Jobs Act (“Tax Act”). The combination of these adjustments totaled approximately $2.3 million for the three months ended September 30, 2018, of which approximately $1.7 million related to the re-measurement of deferred tax items. In addition to the one-time adjustments recorded in the third quarter of 2018, the change in the effective tax rate for the third quarter of 2018 as compared to the third quarter of 2017 can also be attributed to the reduction in the federal income tax rate from 35% to 21% due to the enactment of the Tax Act.

U.S. GAAP requires the Company to measure the effects of the Tax Act in the period of its enactment, which was the fourth quarter of 2017. As a result, the Company performed an initial assessment and reasonably estimated the effects of the Tax Act on its deferred tax amounts to be approximately $5.6 million, which was recorded as a charge to income tax expense in the fourth quarter of 2017. However, SEC Staff Accounting Bulletin 118 (“SAB 118”) allows the Company to continue to reassess and refine its initial estimate of the impact the Tax Act on its deferred tax amounts for a period not to exceed one year as new information concerning those deferred

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tax amounts that existed at December 31, 2017 becomes available to the Company. As a result, during the nine months ended September 30, 2018, the Company recorded an income tax benefit of approximately $1.6 million, of which approximately $1.4 million was recorded during the three months ended September 30, 2018. The Company is still completing its analysis of the impact of the Tax Act and will record any adjustments to the provisional amount as a component of income tax expense during the measurement period provided for under SAB 118.

The total amount of unrecognized tax benefits was $2.9 million and $2.9 million as of September 30, 2018 and December 31, 2017, respectively, primarily comprised of unrecognized tax benefits from an acquisition during 2017. There was no amount of tax benefits that, if recognized, would favorably impact the effective tax rate at September 30, 2018 and December 31, 2017. As of September 30, 2018, the Company does not believe the unrecognized tax benefits will change within the next twelve months.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued for $208,000 and $104,000 of the interest at September 30, 2018 and December 31, 2017, respectively. No amounts for penalties were accrued.

The Company and its subsidiaries are subject to U.S. federal income tax, as well as state income and franchise taxes in multiple state jurisdictions. The statute of limitations for the assessment of taxes related to the consolidated federal income tax returns is closed for all tax years up to and including 2014. The expiration of the statute of limitations for the assessment of taxes related to the various state income and franchise tax returns varies by state.

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has a valuation allowance of $140,000 against a capital loss carryover deferred tax asset as of September 30, 2018, as the Company believes it may not generate sufficient capital gain before the capital loss carryover expires.

FINANCIAL CONDITION
 
At September 30, 2018, assets totaled $11.5 billion, an increase of $3.5 billion, or 43%, from December 31, 2017. The increase was primarily due to the acquisition of Grandpoint in the third quarter of 2018, which added $2.4 billion in gross loans, $396 million of investment securities and $312 million of goodwill.

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Loans
 
Loans held for investment totaled $8.8 billion at September 30, 2018, an increase of $2.6 billion, or 41%, from December 31, 2017. The increase from December 31, 2017 was primarily the result of the acquisition of Grandpoint, which added $2.4 billion of loans. Since December 31, 2017, real estate loans increased $1.8 billion, business loans increased $760 million and consumer loans increased $21.8 million. Loans held for sale, which primarily represent the guaranteed portion of SBA loans, which the Bank originates for sale, increased $29.5 million from December 31, 2017. The total end-of-period weighted average interest rate on loans at September 30, 2018 was 5.08%, compared to 4.95% at December 31, 2017.
 
The following table sets forth the composition of our loan portfolio in dollar amounts, as a percentage of the portfolio and gives the weighted average interest rate by loan category at the dates indicated: 

 
September 30, 2018
 
December 31, 2017
 
Amount
 
Percent
of Total
 
Weighted
Average
Interest Rate
 
Amount
 
Percent
of Total
 
Weighted
Average
Interest Rate
 
(dollars in thousands)
Business loans
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,359,841

 
15.5
%
 
5.70
%
 
$
1,086,659

 
17.5
%
 
5.18
%
Franchise
735,366

 
8.4

 
5.35

 
660,414

 
10.7

 
5.23

Commercial owner occupied (1)
1,675,528

 
19.1

 
4.95

 
1,289,213

 
20.8

 
5.01

SBA
193,487

 
2.2

 
6.94

 
185,514

 
3.0

 
6.30

Agribusiness
133,241

 
1.5

 
5.23

 
116,066

 
1.9

 
4.62

Total business loans
4,097,463

 
46.7

 
5.37

 
3,337,866

 
53.9

 
5.16

Real estate loans
 
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
1,931,165

 
22.0

 
4.66

 
1,243,115

 
20.0

 
4.60

Multi-family
1,554,692

 
17.7

 
4.28

 
794,384

 
12.8

 
4.29

One-to-four family (2)
376,617

 
4.3

 
4.95

 
270,894

 
4.4

 
4.63

Construction
504,708

 
5.8

 
6.54

 
282,811

 
4.6

 
6.13

Farmland
138,479

 
1.6

 
4.67

 
145,393

 
2.3

 
4.52

Land
49,992

 
0.6

 
5.56

 
31,233

 
0.5

 
5.72

Total real estate loans
4,555,653

 
52.0

 
4.77

 
2,767,830

 
44.6

 
4.68

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
114,736

 
1.3

 
6.96

 
92,931

 
1.5

 
5.63

Gross loans held for investment (3)
8,767,852

 
100.0
%
 
5.08
%
 
6,198,627

 
100.0
%
 
4.95
%
Deferred loan origination costs/(fees) and premiums/(discounts), net
(8,648
)
 
 

 
 

 
(2,403
)
 
 

 
 

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

 
 

 
 

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

 
 

 
 

 
$
23,426

 
 

 
 

______________________________
(1) Secured by real estate.
(2) Includes second trust deeds.
(3) Total gross loans held for investment for September 30, 2018 and December 31, 2017 are net of the unaccreted fair value net purchase discounts of $71.7 million and $29.1 million, respectively.


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Delinquent Loans.  When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally record a notice of default and, after providing the required notices to the borrower, commence foreclosure proceedings. If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale. At these foreclosure sales, we generally acquire title to the property. Loans delinquent 30 or more days as a percentage of loans held for investment were 0.09% at September 30, 2018, compared to 0.16% at December 31, 2017.
 

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The following table sets forth delinquencies in the Company’s loan portfolio at the dates indicated:

 
30 - 59 Days
 
60 - 89 Days
 
90 Days or More (1)
 
Total
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 
(dollars in thousands)
At September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
3

 
$
334

 
6

 
$
636

 
2

 
$
105

 
11

 
$
1,075

Franchise

 

 

 

 
1

 
209

 
1

 
209

Commercial owner occupied
4

 
793

 

 

 
3

 
211

 
7

 
1,004

SBA
1

 
4

 

 

 
4

 
2,629

 
5

 
2,633

Real estate loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied

 

 

 

 
1

 
1,290

 
1

 
1,290

Multi-family

 

 

 

 
1

 
589

 
1

 
589

One-to-four family
2

 
836

 
2

 
76

 
1

 
11

 
5

 
923

Land

 

 

 

 
1

 
4

 
1

 
4

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
3

 
10

 
1

 
8

 

 

 
4

 
18

Total
13

 
$
1,977

 
9

 
$
720

 
14

 
$
5,048

 
36

 
$
7,745

Delinquent loans to loans held for investment
 

 
0.02
%
 
 

 
0.01
%
 
 

 
0.06
%
 
 
 
0.09
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
3

 
$
84

 
4

 
$
570

 
4

 
$
235

 
11

 
$
889

Commercial owner occupied
1

 
3,474

 
1

 
486

 

 

 
2

 
3,960

SBA
2

 
177

 

 

 
5

 
1,940

 
7

 
2,117

Real estate loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
3

 
1,781

 

 

 

 

 
3

 
1,781

One-to-four family
1

 
354

 

 

 
4

 
815

 
5

 
1,169

Land
1

 
83

 

 

 
1

 
9

 
2

 
92

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
2

 
11

 

 

 
2

 
40

 
4

 
51

Total
13

 
$
5,964

 
5

 
$
1,056

 
16

 
$
3,039

 
34

 
$
10,059

Delinquent loans to loans held for investment
 
 
0.10
%
 
 
 
0.02
%
 
 
 
0.05
%
 
 
 
0.16
%
______________________________
(1) All loans that are delinquent 90 days or more are on nonaccrual status and reported as part of nonperforming loans.
 

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Allowance for Loan Losses.  The ALLL represents an estimate of probable incurred losses inherent in our loan portfolio and is based on our continual review of credit quality of the loan portfolio. The allowance contains a specific reserve component for loans that are determined to be impaired and a general reserve component for loans without credit impairment. The general reserve is determined by applying a systematically derived loss factor to individual segments of the loan portfolio. The adequacy and appropriateness of the ALLL and the individual loss factors are reviewed each quarter by management.
 
The loss factor for each segment of our loan portfolio is generally based on our actual historical loss rate experience supplemented by industry data where we lack loss historical experience. The loss factor is adjusted by qualitative adjustment factors to arrive at a final loss factor for each loan portfolio segment. For additional information regarding the qualitative adjustments, please see “Allowances for Loan Losses” as discussed in our 2017 Annual Report. The qualitative factors allow management to assess current trends within our loan portfolio and the economic environment to incorporate their effect when calculating the ALLL. The final loss factors are applied to pass graded loans within our loan portfolio. Higher factors are applied to loans graded below pass, including classified and criticized assets.
 
No assurance can be given that we will not, in any particular period, sustain loan losses that exceed the amount reserved, or that subsequent evaluation of our loan portfolio, in light of the prevailing factors, including economic conditions, which may adversely affect our market area or other circumstances, will not require significant increases in the loan loss allowance. In addition, regulatory agencies, as an integral part of their examination process, periodically review our ALLL and may require us to recognize additional provisions to increase the allowance or take charge-offs in anticipation of future losses.
 
At September 30, 2018, our ALLL was $33.3 million, an increase of $4.4 million from December 31, 2017. The increase in the allowance for loan losses at September 30, 2018 was primarily due to increased organic loan growth in areas of the portfolio with higher attributable loss factors and to lesser extent higher net charge-offs of $882,000. At September 30, 2018, given the composition of our loan portfolio, as well as the unamortized fair value discount of loans acquired, the ALLL was considered adequate to cover probable incurred losses inherent in the loan portfolio. Should any of the factors considered by management in evaluating the appropriate level of the ALLL change, the Company’s estimate of probable incurred loan losses could also change, which could affect the level of future provisions for loan losses.
 

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The following table sets forth the Company’s ALLL and its corresponding percentage of the loan category balance and the percent of loan balance to total gross loans in each of the loan categories listed for the periods indicated:
 
 
September 30, 2018
 
December 31, 2017
Balance at End of Period Applicable to
 
Amount
 
Allowance as a % of Category Total
 
% of Loans in Category to
Total Loans
 
Amount
 
Allowance as a % of Category Total
 
% of Loans in Category to
Total Loans
 
 
(dollars in thousands)
Business loans
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
10,384

 
0.76
%
 
15.5
%
 
$
9,721

 
0.89
%
 
17.5
%
Franchise
 
6,332

 
0.86

 
8.4

 
5,797

 
0.88

 
10.7

Commercial owner occupied
 
1,213

 
0.07

 
19.1

 
767

 
0.06

 
20.8

SBA
 
2,827

 
1.46

 
2.2

 
2,890

 
1.56

 
3.0

Agribusiness
 
3,565

 
2.68

 
1.5

 
1,291

 
1.11

 
1.9

Real estate loans
 
 
 
 
 
 
 
 

 
 

 
 

Commercial non-owner occupied
 
1,483

 
0.08

 
22.0

 
1,266

 
0.10

 
20.0

Multi-family
 
623

 
0.04

 
17.7

 
607

 
0.08

 
12.8

One-to-four family
 
719

 
0.19

 
4.3

 
803

 
0.30

 
4.4

Construction
 
4,820

 
0.96

 
5.8

 
4,569

 
1.62

 
4.6

Farmland
 
375

 
0.27

 
1.6

 
137

 
0.09

 
2.3

Land
 
868

 
1.74

 
0.6

 
993

 
3.18

 
0.5

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
97

 
0.08

 
1.3

 
95

 
0.10

 
1.5

Total
 
$
33,306

 
0.38
%
 
100.0
%
 
$
28,936

 
0.47
%
 
100.0
%

At September 30, 2018, the ratio of ALLL to loans held for investment was 0.38%, a decrease from 0.47% at December 31, 2017. The decrease was primarily due to the addition of Grandpoint loans acquired on July 1, 2018 and recorded at fair value, for which no additional material reserve was required. Our remaining unamortized fair value discount on the loans acquired totaled $71.7 million at September 30, 2018, compared to $29.1 million at December 31, 2017.


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The following table sets forth the activity within the Company’s ALLL in each of the loan categories listed for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
June 30,
 
September 30,
 
September 30,
 
2018
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
Balance, beginning of period
$
31,747

 
$
30,502

 
$
25,055

 
$
28,936

 
$
21,296

Provision for loan losses
1,646

 
1,353

 
2,049

 
5,252

 
6,455

Charge-offs:
 

 
 
 
 
 
 
 
 
Business loans:
 

 
 
 
 
 
 
 
 
Commercial and industrial
(100
)
 
(246
)
 
(32
)
 
(1,011
)
 
(894
)
SBA
(44
)
 
(27
)
 

 
(100
)
 
(8
)
Real estate:
 

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
 
 
Consumer loans
(85
)
 

 

 
(137
)
 

Total charge-offs
(229
)
 
(273
)
 
(32
)
 
(1,248
)
 
(902
)
Recoveries:
 

 
 
 
 
 
 
 
 
Business loans:
 

 
 
 
 
 
 
 
 
Commercial and industrial
120

 
138

 
15

 
283

 
70

Commercial owner occupied
8

 
16

 
12

 
32

 
94

SBA
8

 
9

 
42

 
43

 
125

Real estate:
 
 
 
 
 
 
 
 
 
One-to-four family

 
1

 
2

 
1

 
4

Consumer loans:
 
 
 
 
 
 
 
 
 
Consumer loans
6

 
1

 

 
7

 
1

Total recoveries
142

 
165

 
71

 
366

 
294

Net loan (charge-offs) recoveries
(87
)
 
(108
)
 
39

 
(882
)
 
(608
)
Balance at end of period
$
33,306

 
$
31,747

 
$
27,143

 
$
33,306

 
$
27,143

 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 
 
Net charge-offs (recoveries) to average total loans, net
%
 
%
 
 %
 
0.01
%
 
0.01
%
Allowance for loan losses to loans held for investment at end of period
0.38
%
 
0.51
%
 
0.54
 %
 
0.38
%
 
0.54
%

Investment Securities
 
We primarily use our investment portfolio for liquidity purposes and to support our interest rate risk management strategies. Investments totaled $1.1 billion at September 30, 2018, an increase of $296 million from December 31, 2017. The increase in the third quarter of 2018 was primarily the result of $396 million of investment securities acquired from Grandpoint and $234 million in purchases, which was partially offset by $377 million in sales and $48.6 million in principal payments/amortization/redemptions.

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The following tables set forth the amortized cost, unrealized gains and losses, and estimated fair value of our investment securities portfolio at the dates indicated:

 
 
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 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




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The following table sets forth the fair values and weighted average yields on our investment securities available-for-sale portfolio by contractual maturity at the date indicated:

 
 
September 30, 2018
 
 
One Year
or Less
 
More than One
to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 
Total
 
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
(dollars in thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$

 
%
 
$
10,403

 
2.93
%
 
$
48,940

 
2.92
%
 
$

 
%
 
$
59,343

 
2.93
%
Agency
 
10,977

 
0.23

 
12,125

 
3.05

 
68,379

 
3.02

 
21,290

 
2.65

 
112,771

 
2.68

Corporate
 

 

 

 

 
101,594

 
4.58

 

 

 
101,594

 
4.58

Municipal bonds
 
3,013

 
2.07

 
31,334

 
2.01

 
69,156

 
2.07

 
127,698

 
2.66

 
231,201

 
2.39

Collateralized mortgage obligation
 

 

 


 

 
871

 
2.51

 
24,335

 
2.51

 
25,206

 
2.51

Mortgage-backed securities
 

 

 
1,727

 
0.98

 
137,770

 
2.55

 
385,265

 
2.42

 
524,762

 
2.45

Total securities available-for-sale
 
13,990

 
0.63

 
55,589

 
2.38

 
426,710

 
3.07

 
558,588

 
2.49

 
1,054,877

 
2.69

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

 

 

 

 
932

 
3.13

 
43,108

 
3.47

 
44,040

 
3.46

Other
 

 

 

 

 

 

 
1,098

 
0.93

 
1,098

 
0.93

Total securities held-to-maturity
 

 

 

 

 
932

 
3.13

 
44,206

 
3.40

 
45,138

 
3.40

Total securities
 
$
13,990

 
0.63
%
 
$
55,589

 
2.38
%
 
$
427,642

 
3.07
%
 
$
602,794

 
2.55
%
 
$
1,100,015

 
2.72
%

Each quarter, we review individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. If it is probable that we will be unable to collect all amounts due according to the contractual terms of the debt security, an OTTI write-down is recorded against the security and a loss recognized.
 
In determining if a security has an OTTI loss, we consider the 1) length of time and the extent to which the fair value has been less then amortized cost; 2) financial condition and near term prospects of the issuer; 3) impact of changes in market interest rates; and 4) intent and ability of the Company to retain its investment for a period of time sufficient to allow any anticipated recovery in fair value and whether it is not more likely than not the Company would be required to sell the security. We estimate OTTI losses on a security primarily through:
 
An evaluation of the present value of estimated cash flows from the security using the current yield to accrete beneficial interest and including assumptions in the prepayment rate, default rate, delinquencies, loss severity and percentage of nonperforming assets;
An evaluation of the estimated payback period to recover principal;
An analysis of the credit support available in the underlying security to absorb losses; and
A review of the financial condition and near term prospects of the issuer.

We recorded no impairment credit losses on available-for-sale securities in our consolidated statements of income for the three months ended September 30, 2018, December 31, 2017 and September 30, 2017 or the nine months ended September 30, 2018 and 2017.

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Nonperforming Assets
 
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), restructured loans, OREO and other assets owned. It is our general policy to account for a loan as nonaccrual when the loan becomes 90 days delinquent or when collection of interest appears doubtful.
 
Nonperforming assets totaled $7.8 million, or 0.07% of total assets at September 30, 2018, an increase from $3.6 million, or 0.04% of total assets at December 31, 2017. At September 30, 2018, nonperforming loans totaled $7.3 million, or 0.08% of loans held for investment, an increase from $3.3 million, or 0.05% of loans held for investment at December 31, 2017. Other real estate owned increased slightly to $356,000 at September 30, 2018 compared to $326,000 at December 31, 2017 and other assets owned totaled $129,000 at September 30, 2018.
 
      The following table sets forth our composition of nonperforming assets at the dates indicated:
 
 
September 30, 2018
 
December 31, 2017
 
 
(dollars in thousands)
Nonperforming assets
 
 
 
 
Business loans:
 
 
 
 
Commercial and industrial
 
$
1,027

 
$
1,160

Franchise
 
209

 

Commercial owner occupied
 

 
97

SBA
 
2,748

 
1,201

Real estate:
 
 

 
 

Commercial non-owner occupied
 
1,290

 

Multi-family
 
589

 

One-to-four family
 
1,388

 
817

Land
 
4

 
9

Consumer loans:
 
 
 
 
Consumer loans
 
13

 

Total nonperforming loans
 
7,268

 
3,284

Other real estate owned
 
356

 
326

Other assets owned
 
129

 

Total nonperforming assets
 
$
7,753

 
$
3,610

 
 
 
 
 
Allowance for loan losses
 
$
33,306

 
$
28,936

Allowance for loan losses as a percent of total nonperforming loans
 
458
%
 
881
%
Nonperforming loans as a percent of loans held for investment
 
0.08

 
0.05

Nonperforming assets as a percent of total assets
 
0.07

 
0.04


Liabilities and Stockholders’ Equity
 
Total liabilities were $9.6 billion at September 30, 2018, compared to $6.8 billion at December 31, 2017. The increase of $2.8 billion, or 41.4%, from December 31, 2017 was primarily related to a $2.4 billion, or 40%, increase in deposits from December 31, 2017 and a $331 million, or 52%, increase in total borrowings from December 31, 2017.
 
Deposits.  At September 30, 2018, deposits totaled $8.5 billion, an increase of $2.4 billion, or 40%, from December 31, 2017. Non-maturity deposits totaled $7.2 billion, or 85% of total deposits, an increase of $2.2 billion, or 44%, from December 31, 2017, highlighted by increases of $1.2 billion in noninterest-bearing checking, $853

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million increase in money market/savings deposits, $331 million in retail certificates of deposit, $130 million in interest checking, partially offset by $105 million decrease in wholesale/brokered certificates of deposit. The increase in deposits during 2018 was primarily due to the acquisition of Grandpoint in the third quarter of 2018, which contributed $2.5 billion of deposits at the time of acquisition, before purchase accounting adjustments.

The total end of period weighted average rate of deposits at September 30, 2018 was 0.54%, an increase from 0.33% December 31, 2017.
 
Our ratio of loans held for investment to deposits was 103.0% and 101.8% at September 30, 2018 and December 31, 2017, respectively.
 
The following table sets forth the distribution of the Company’s deposit accounts at the dates indicated and the weighted average interest rates as of the last day of each period for each category of deposits presented:
 
 
September 30, 2018
 
December 31, 2017
 
Balance
 
% of Total Deposits
 
Weighted Average Rate
 
Balance
 
% of Total Deposits
 
Weighted Average Rate
 
(dollars in thousands)
Noninterest-bearing checking
$
3,434,674

 
40.4
%
 
%
 
$
2,226,876

 
36.7
%
 
%
Interest-bearing deposits:
 
 
 
 
 
 
 

 
 

 
 

Checking
495,483

 
5.8

 
0.36

 
365,193

 
6.0

 
0.13

Money market
2,998,877

 
35.3

 
0.75

 
2,181,571

 
35.8

 
0.48

Savings
262,667

 
3.1

 
0.14

 
227,436

 
3.7

 
0.13

Time deposit accounts:
 
 
 
 
 
 
 

 
 

 
 

Less than 1.00%
179,326

 
2.1

 
0.46

 
292,553

 
4.8

 
0.57

1.00 - 1.99
620,837

 
7.3

 
1.56

 
783,235

 
12.9

 
1.29

2.00 - 2.99
510,131

 
6.0

 
2.15

 
8,793

 
0.1

 
2.12

3.00 - 3.99
16

 

 
3.73

 
60

 

 
3.87

4.00 - 4.99
2

 

 
4.93

 
2

 

 
4.93

5.00 and greater
132

 

 
5.07

 
167

 

 
5.07

Total time deposit accounts
1,310,444

 
15.4

 
1.64

 
1,084,810

 
17.8

 
1.10

Total interest-bearing deposits
5,067,471

 
59.6

 
0.91

 
3,859,010

 
63.4

 
0.60

Total deposits
$
8,502,145

 
100.0
%
 
0.54
%
 
$
6,085,886

 
100.0
%
 
0.33
%
 
Borrowings.  At September 30, 2018, total borrowings amounted to $972 million, an increase of $331 million, or 52%, from December 31, 2017. At September 30, 2018, total borrowings represented 8.5% of total assets and had an end of period weighted average rate of 2.7%, compared with 8.0% of total assets at a weighted average rate of 2.2% at December 31, 2017.
 
At September 30, 2018, total borrowings were comprised of the following:
 
FHLB advances of $860 million at 2.32%;
Subordinated notes of $60 million at 5.75% due September 3, 2024. For additional information about the subordinated notes, see Note 8 to the Consolidated Financial Statements in this report;
HOA reverse repurchase agreements totaling $2.3 million at a weighted average rate of .01% and secured by government sponsored entity mortgage-backed securities with a par value of $21.7 million and a fair value of $22.2 million;
Subordinated debentures used to fund the issuance of trust preferred securities in 2004 of $10.3 million at 5.09% due April 7, 2034. For additional information about the subordinated debentures and trust preferred securities, see Note 8 to the Consolidated Financial Statements in this report;

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$5.2 million of floating rate junior subordinated debt securities to Heritage Oaks Capital Trust II. Interest is payable quarterly at three-month LIBOR plus 1.72% per annum, for an effective rate of 4.06% per annum as of September 30, 2018. At September 30, 2018, the carrying value of these debentures was $4.0 million, which reflects purchase accounting fair value adjustments of $1.3 million;
$3.1 million of floating rate junior subordinated debt associated with Mission Community Capital Trust I. The carrying value of Mission Community Capital Trust I was $2.8 million, which reflects purchase accounting fair value adjustments of $311,000. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 5.29% per annum as of September 30, 2018;
$5.2 million of floating rate junior subordinated debt associated Santa Lucia Bancorp (CA) Capital Trust. The carrying value of Santa Lucia Bancorp (CA) Capital Trust was $3.8 million, which reflects purchase accounting fair value adjustments $1.3 million. Interest is payable quarterly at three-month LIBOR plus 1.48% per annum, for an effective rate of 3.82% per annum as of September 30, 2018;
$25 million of subordinated notes at a fixed rate of 7.25% payable in arrears on a quarterly basis inherited as part of the Plaza 2017 acquisition; and
$5.2 million of floating rate junior subordinated debt securities associated with First Commerce Bancorp Statutory Trust I. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 5.28% per annum as of September 30, 2018. At September 30, 2018, the carrying value of these debentures was $4.9 million, which reflects purchase accounting fair value adjustments of 228,000.

The following table sets forth certain information regarding the Company’s borrowed funds at the dates indicated: 

 
September 30, 2018
 
December 31, 2017
 
Balance
 
Weighted
Average Rate
 
Balance
 
Weighted
Average Rate
 
(dollars in thousands)
FHLB advances
$
859,622

 
2.32
%
 
$
490,148

 
1.49
%
Reverse repurchase agreements
2,350

 
0.01

 
46,139

 
2.02

Subordinated debentures
110,244

 
5.39

 
105,123

 
5.60

Total borrowings
$
972,216

 
2.66
%
 
$
641,410

 
2.21
%
 
 
 
 
 
 
 
 
Weighted average cost of
borrowings during the quarter
2.87
%
 
 

 
2.35
%
 
 

Borrowings as a percent of total assets
8.5

 
 

 
8.0

 
 

 
Stockholders’ Equity.  Total stockholders’ equity was $1.9 billion as of September 30, 2018, an increase from $1.2 billion at December 31, 2017. The current year increase of $674 million in stockholders’ equity was primarily related to net income for the first nine months of 2018 of $83.7 million and an increase of $601 million, primarily as a result of the issuance of common stock in the Grandpoint acquisition, which was offset by a decrease in accumulated other comprehensive income of $17.1 million.
 
Our book value per share increased to $30.68 at September 30, 2018 from $26.86 at December 31, 2017. At September 30, 2018, the Company’s tangible common equity to tangible assets ratio was 9.47%, an increase from 9.42% at December 31, 2017.
 

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Tangible common equity to tangible assets (the “tangible common equity ratio”) is a non-U.S. GAAP financial measure derived from U.S. GAAP-based amounts. We calculate the tangible common equity ratio by deducting the balance of intangible assets from common stockholders’ equity and dividing by period end tangible assets, which also deducts intangible assets. We believe that this information is important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk-based ratios.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
U.S. GAAP Reconciliation
 
September 30,
 
December 31,
 
2018
 
2017
 
(dollars in thousands)
Total stockholders’ equity
$
1,916,377

 
$
1,241,996

Less: Intangible assets
913,079

 
536,343

Tangible common equity
$
1,003,298

 
$
705,653

 
 
 
 
Total assets
$
11,503,881

 
$
8,024,501

Less: Intangible assets
913,079

 
536,343

Tangible assets
$
10,590,802

 
$
7,488,158

 
 
 
 
Tangible common equity ratio
9.47
%
 
9.42
%

CAPITAL RESOURCES AND LIQUIDITY
 
Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments. While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.
 
Our primary sources of funds generated during the first nine months of 2018 were from:
 
Proceeds of $395 million from the sale or maturity of securities available-for-sale;
Proceeds of $126 million from the sale and principal payments on loans held for sale;
Cash acquired in acquisition, net of $147 million;
Principal payments on securities available-for-sale of $103 million; and
Net income of $83.7 million.

We used these funds to:
 
Originate loans of $440 million;
Purchase available-for-sale securities of $390 million; and
Originate loans held for sale of $108 million.


Our most liquid assets are unrestricted cash and short-term investments. The levels of these assets are dependent on our operating, lending and investing activities during any given period. Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate. At September 30, 2018, cash and cash equivalents totaled $263 million, and the market value of our investment securities available-for-sale totaled $1.1 billion. If additional funds are needed, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve’s lending programs and loan sales. As of September 30, 2018, the maximum amount we could borrow through the

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FHLB was $3.7 billion, of which $2.5 billion was available for borrowing based on collateral pledged of $2.9 billion in real estate loans. At September 30, 2018, we had $860 million in FHLB borrowings against that available balance. At September 30, 2018, we also had unsecured lines of credit aggregating $221 million, which consisted of $168 million with other financial institutions from which to draw funds, $3.3 million with the FRB and one reverse repurchase line with a correspondent bank of $50 million. For the quarter ended September 30, 2018, our average liquidity ratio was 12.27%, which is above the Company's policy of 10.0%. The Company regularly monitors liquidity and models liquidity stress scenarios to ensure that adequate liquidity is available and has contingency funding plans in place, which are reviewed and tested on a regular, recurring basis.
 
To the extent that 2018 deposit growth is not sufficient to satisfy our ongoing commitments to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, or make investments, we may access funds through our FHLB borrowing arrangement, unsecured lines of credit or other sources.
 
The Bank has a policy in place that permits the purchase of brokered funds, in an amount not to exceed 15% of total deposits or 12% of total assets, as a secondary source for funding. At September 30, 2018, we had $343 million in brokered time and money market deposits, which constituted 4.0% of total deposits at that date.
 
The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity. The Corporation's primary sources of liquidity are dividends from the Bank. In addition, the Corporation maintains a line of credit with Wells Fargo, with availability of $25 million. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation. Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations.
 
During the periods presented, the Corporation did not pay any dividends on its common stock. It has been the Corporation's current to retain earnings to provide funds for use in its business. Although the Corporation has never declared or paid dividends on its common stock, the Corporation's board periodically reviews whether to declare or pay cash dividends, taking into account, among other things, general business conditions, the Company's financial results, future prospects, capital requirements, legal and regulatory restrictions, and such other factors as the Corporation's board may deem relevant.

On October 26, 2018, the Company announced that its Board of Directors had approved a new stock repurchase program. Under the stock repurchase program, management is authorized to repurchase up to $100 million of the Company’s common stock. The stock repurchase program may be limited or terminated at any time without prior notice. The stock repurchase program is intended to replace and supersede the Company’s prior stock repurchase program, which was approved in June 2012 and authorized the repurchase of up to 1,000,000 shares of the Company’s common stock. An aggregate of 237,455 shares of the Company’s common stock were repurchased under that program. 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, no shares were repurchased. Also, please see Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for additional information.
 
Contractual Obligations and Off-Balance Sheet Commitments
 
Contractual Obligations.  The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs.
 

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The following schedule summarizes maturities and payments due on our obligations and commitments, excluding accrued interest, as of the date indicated:

 
September 30, 2018
 
Less than 1 year
 
1 - 3 years
 
3 - 5 years
 
More than 5 years
 
Total
 
(dollars in thousands)
Contractual obligations
 
 
 

 
 

 
 
 
 
FHLB advances
$
808,000

 
$
18,500

 
$
33,122

 
$

 
$
859,622

Other borrowings
2,350

 

 

 

 
2,350

Subordinated debentures

 

 

 
110,244

 
110,244

Certificates of deposit
835,028

 
390,405

 
16,999

 
68,012

 
1,310,444

Operating leases
3,023

 
16,904

 
8,082

 
3,547

 
31,556

Total contractual cash obligations
$
1,648,401

 
$
425,809

 
$
58,203

 
$
181,803

 
$
2,314,216

 
Off-Balance Sheet Commitments.  We utilize off-balance sheet commitments in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate real estate, business and other loans held for investment, undisbursed loan funds, lines and letters of credit, and commitments to purchase loans and investment securities for portfolio. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
 
Commitments to originate loans held for investment are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit on home equity and commercial loans include committed funds not disbursed. Letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party. As of September 30, 2018, we had commitments to extend credit on existing lines and letters of credit of $1.8 billion, compared to $1.2 billion at December 31, 2017 and $1.0 billion at September 30, 2017.
 
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated: 
 
September 30, 2018
 
Less than 1 year
 
1 - 3 years
 
3 - 5 years
 
More than 5 years
 
Total
 
(dollars in thousands)
Other commitments
 
 
 

 
 

 
 
 
 
Commercial and industrial
$
716,144

 
$
286,009

 
$
20,868

 
$
64,587

 
$
1,087,608

Construction
175,147

 
154,037

 
8,335

 
110,989

 
448,508

Agribusiness and farmland
25,388

 
15,027

 
9,435

 
1,476

 
51,326

Home equity lines of credit
12,318

 
14,026

 
3,736

 
62,778

 
92,858

Standby letters of credit
38,272

 
714

 

 
155

 
39,141

Credit card lines

 

 

 
1,746

 
1,746

All other
42,211

 
9,933

 
14,789

 
30,072

 
97,005

Total other commitments
$
1,009,480

 
$
479,746

 
$
57,163

 
$
271,803

 
$
1,818,192



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Regulatory Capital Compliance
 
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Company and the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.

Final comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III”, became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. The most significant of the provisions of the new capital rules, which apply to the Company and the Bank are as follows: the phase-out of trust preferred securities from Tier 1 capital, the higher risk-weighting of high volatility and past due real estate loans and the capital treatment of deferred tax assets and liabilities above certain thresholds.

Beginning January 1, 2016, Basel III implemented a requirement for all banking organizations to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively comprised of common equity tier 1 capital, and it applies to each of the three risk-based capital ratios but not to the leverage ratio. At September 30, 2018, the Company and Bank are in compliance with the capital conservation buffer requirement. The capital conservation buffer will increase by 0.625% each year starting in 2016 through 2019, at which point, the common equity tier 1, tier 1 and total capital ratio minimums inclusive of the capital conservation buffer will be 7.0%, 8.5% and 10.5%, respectively.

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As defined in applicable regulations and set forth in the table below, the Company and the Bank continue to exceed the regulatory capital minimum requirements and the Bank continues to exceed the “well capitalized” standards at the dates indicated:
 
 
Actual
 
Minimum Required
For Capital Adequacy Purposes
 
Minimum Required Plus Capital Conservation Buffer
Phase-In
for 2018
 
Minimum Required Plus Capital Conservation Buffer
Fully
Phased-In
 
Minimum Required
For Well Capitalized Requirement
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Pacific Premier Bancorp, Inc. Consolidated
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
10.15%
 
4.00%
 
4.00%
 
4.00%
 
N/A
Common equity tier 1 capital ratio
 
10.55%
 
4.50%
 
6.38%
 
7.00%
 
N/A
Tier 1 capital ratio
 
10.81%
 
6.00%
 
7.88%
 
8.50%
 
N/A
Total capital ratio
 
12.05%
 
8.00%
 
9.88%
 
10.50%
 
N/A
 
 
 
 
 
 
 
 
 
 
 
Pacific Premier Bank
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
10.83%
 
4.00%
 
4.00%
 
4.00%
 
5.00%
Common equity tier 1 capital ratio
 
11.53%
 
4.50%
 
6.38%
 
7.00%
 
6.50%
Tier 1 capital ratio
 
11.53%
 
6.00%
 
7.88%
 
8.50%
 
8.00%
Total capital ratio
 
11.92%
 
8.00%
 
9.88%
 
10.50%
 
10.00%
 
 
 
 
 
 
 
 
 
 
 
 
 
Actual
 
Minimum Required
For Capital Adequacy Purposes
 
Minimum Required Plus Capital Conservation Buffer
Phase-In
for 2017
 
Minimum Required Plus Capital Conservation Buffer
Fully
Phased-In
 
Minimum Required
For Well Capitalized Requirement
At December 31, 2017
 
 
 
 
 
 
 
 
 
 
Pacific Premier Bancorp, Inc. Consolidated
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
10.61%
 
4.00%
 
4.00%
 
4.00%
 
N/A
Common equity tier 1 capital ratio
 
10.48%
 
4.50%
 
5.75%
 
7.00%
 
N/A
Tier 1 capital ratio
 
10.78%
 
6.00%
 
7.25%
 
8.50%
 
N/A
Total capital ratio
 
12.46%
 
8.00%
 
9.25%
 
10.50%
 
N/A
 
 
 
 
 
 
 
 
 
 
 
Pacific Premier Bank
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
11.59%
 
4.00%
 
4.00%
 
4.00%
 
5.00%
Common equity tier 1 capital ratio
 
11.77%
 
4.50%
 
5.75%
 
7.00%
 
6.50%
Tier 1 capital ratio
 
11.77%
 
6.00%
 
7.25%
 
8.50%
 
8.00%
Total capital ratio
 
12.22%
 
8.00%
 
9.25%
 
10.50%
 
10.00%

Item 3.  Quantitative and Qualitative Disclosure About Market Risk
 
Management believes that there have been no material changes in our quantitative and qualitative information about market risk since December 31, 2017. For a complete discussion of our quantitative and qualitative market risk, see “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our 2017 Annual Report.
 

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Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Controls
 
There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business. Management believes that none of the legal proceedings occurring in the ordinary course of business, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.
 
Item 1A. Risk Factors
 
There are no material changes to the risk factors as previously disclosed under Item 1A of our 2017 Annual Report.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
On October 26, 2018, the Company announced that its Board of Directors had approved a new stock repurchase program. Under the stock repurchase program, management is authorized to repurchase up to $100 million of the Company’s common stock. The stock repurchase program may be limited or terminated at any time without prior notice. The stock repurchase program is intended to replace and supersede the Company’s prior stock repurchase program, which was approved in June 2012 and authorized the repurchase of up to 1,000,000 shares of the Company’s common stock. An aggregate of 237,455 shares of the Company’s common stock were repurchased under that program.
Month of Purchase
 
Total Number of shares purchased/ returned
 
Average price paid per share
 
Total number of shares repurchased as part of the publicly announced program
 
Maximum number of shares that may yet be purchased under the program at end of month
June-2018
 

 

 

 
762,545

July-2018
 

 

 

 
762,545

August-2018
 

 

 

 
762,545

September-2018
 

 

 

 
762,545

Total/Average
 

 

 

 
762,545


Item 3.  Defaults Upon Senior Securities
 
None
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
Item 5.  Other Information
 
None
 

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Item 6.  Exhibits
 
Exhibit 2.1
 
Exhibit 3.1
 
Exhibit 3.2
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32
 
Exhibit 101.INS
 
XBRL Instance Document
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
(1) Incorporated by reference from the Registrant's Form 8-K filed with the SEC on February 12, 2018.
(2) Incorporated by reference from the Registrant's Form 8-K filed with the SEC on May 15, 2018.



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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
PACIFIC PREMIER BANCORP, INC.,
 
 
 
 
November 8, 2018
 
By:
/s/ Steven R. Gardner
Date
 
 
Steven R. Gardner
 
 
 
Chairman, President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
November 8, 2018
 
By:
/s/ Ronald J. Nicolas, Jr.
Date
 
 
Ronald J. Nicolas, Jr.
 
 
 
Sr. Executive Vice President and Chief Financial Officer
 
 
 
(principal financial officer)



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