Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission File No.: 0-22193
(Exact name of registrant as specified in its charter)
Delaware 33-0743196
(State of Incorporation) (I.R.S. Employer Identification No)
17901 Von Karman Avenue, Suite 1200, Irvine, California 92614
(Address of Principal Executive Offices and Zip Code)
Registrant’s telephone number, including area code: (949) 864-8000
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Securities registered pursuant to Section 12(b) of the Act:
Title of class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [__] No [X]
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [__] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer
Non-accelerated filer
[ X ]
[ ]
(Do not check if a smaller reporting company)
Accelerated filer
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 Rule 12b-2 of the Act). Yes [__] No [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant, was
approximately $1.5 billion and was based upon the last sales price as quoted on the NASDAQ Stock Market as of June 30, 2017, the last business day of the most recently
completed second fiscal quarter.
As of February 27, 2018, the Registrant had 46,241,238 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its
2018 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated
herein by this reference.
INDEX
INDEX
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
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33
34
34
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34
34
38
39
70
72
136
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ITEM 1. BUSINESS
Forward-Looking Statements
PART I
All references to “we,” “us,” “our,” “Pacific Premier” or the “Company” mean Pacific Premier Bancorp, Inc. and our consolidated
subsidiaries, including Pacific Premier Bank, our primary operating subsidiary. All references to ‘‘Bank’’ refer to Pacific Premier Bank. All
references to the “Corporation” refer to Pacific Premier Bancorp, Inc.
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (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 phases 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.
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 United States 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 currently pending acquisition of Grandpoint Capital Inc., 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 U.S. Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial
Accounting Standards Board or other accounting standards setters;
• Possible other-than-temporary impairments (“OTTI”) of securities held by us;
• The impact of current governmental efforts to restructure the U.S. financial regulatory system, including enactment of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”);
• 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;
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• 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 Annual Report on Form 10-K. Therefore, we caution you not to place undue reliance on our forward-looking information and
statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking
statements.
Overview
We are a California-based bank holding company incorporated in 1997 in the State of Delaware and a registered 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. The Bank was founded in 1983 as a state-chartered thrift and subsequently converted to a
federally chartered thrift in 1991. The Bank converted to a California-chartered commercial bank and became a Federal Reserve member in
March of 2007. The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”), which is a member bank of the FHLB
System. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount
currently allowable under federal law. The Bank is currently subject to examination and regulation by the Federal Reserve Bank (“FRB”), the
California Department of Business Oversight (“DBO”) and the FDIC.
We are a growth company keenly focused on building shareholder value through consistent earnings and creating franchise value.
Our growth is derived both organically and through acquisitions of financial institutions and lines of business that complement our business
banking strategy. The Bank’s primary target market is small and middle market businesses.
We primarily conduct business throughout California from our 33 full-service depository branches in the counties of Orange, Los
Angeles, Riverside, San Bernardino, San Diego, San Luis Obispo and Santa Barbara, California as well as Clark County, Nevada.
We provide banking services within our targeted markets to businesses, including the owners and employees of those businesses,
professionals, real estate investors and non-profit organizations. Additionally, we provide certain banking services nationwide. We provide
customized cash management, electronic banking services and credit facilities to Home Owners’ Associations (“HOA”) and HOA
management companies nationwide. We provide U.S. Small Business Administration (“SBA”) loans nationwide, which provide entrepreneurs
and small business owners access to loans needed for working capital and continued growth. In addition, we offer loans and other services
nationwide to experienced owner-operator franchisees in the quick service restaurant ("QSR") industry.
Through our branches and our Internet website at www.ppbi.com, we offer a broad array of deposit products and services,
including checking, money market and savings accounts, cash management services, electronic banking services, and on-line bill payment. We
also offer a wide array of loan products, such as commercial business loans, lines of credit, SBA loans, commercial real estate loans,
agribusiness loans, home equity lines of credit, construction loans, farmland and consumer loans. At December 31, 2017, we had consolidated
total assets of $8.0 billion, net loans of $6.2 billion, total deposits of $6.1 billion, and consolidated
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total stockholders’ equity of $1.2 billion. At December 31, 2017, the Bank was considered a “well-capitalized” financial institution for
regulatory capital purposes.
The Corporation's common stock is traded on the NASDAQ Global Select Market under the ticker symbol “PPBI.” There are 100
million authorized shares of the Corporation’s common stock, with approximately 46.2 million shares outstanding as of December 31, 2017.
The Corporation has an additional 1.0 million authorized shares of preferred stock, none of which has been issued to date.
Our executive offices are located at 17901 Von Karman Avenue, Suite 1200, Irvine, California 92614, and our telephone number is
(949) 864-8000. Our Internet website address is www.ppbi.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, and all amendments thereto, from 2012 to present that have been filed with the SEC are available free of
charge on our Internet website. Also on our website are our Code of Business Conduct, Insider Trading and Beneficial Ownership forms, and
Corporate Governance Policy. The information contained in our website or in any websites linked by our website is not a part of this Annual
Report on Form 10-K.
Recent Developments
Pending Acquisition of Grandpoint Capital, Inc.—On February 9, 2018, we entered into a definitive agreement with Grandpoint
Capital, Inc. ("Grandpoint") to acquire Grandpoint and its wholly-owned, California-chartered state bank subsidiary, Grandpoint Bank.
Grandpoint is headquartered in Los Angeles, California with $3.2 billion in total assets, $2.4 billion in gross loans and $2.4 billion in total deposits
at December 31, 2017. Grandpoint operates 14 regional offices in Southern California, Arizona and Vancouver, Washington. Under the terms
of the definitive agreement, holders of Grandpoint common stock will have the right to receive 0.4750 shares of Company common stock.
The proposed transaction is expected to close in the third quarter of 2018, subject to satisfaction of customary closing conditions,
including regulatory approvals and approval of Grandpoint’s and the Corporation’s shareholders. Certain Grandpoint shareholders, as well as
Grandpoint's directors and executive officers have entered into agreements with the Corporation pursuant to which they have committed to
provide written consents with respect to shares of Grandpoint common stock in favor of the acquisition. For additional information about the
proposed acquisition of Grandpoint, see the Corporation’s Current Report on Form 8-K filed with the SEC on February 12, 2018 and the
definitive agreement which is filed as an exhibit to the Current Report on Form 8-K.
Our Strategic Plan
Our strategic plan is focused on generating organic growth through our high performing sales culture. Additionally, we seek to grow
through mergers and acquisitions of California-based banks and the acquisition of lines of business that complement our business banking
strategy.
Our two key operating strategies are summarized as follows:
• Expansion through Organic Growth. Over the past several years, we have developed a high performing sales culture that
places a premium on business bankers that have the ability to consistently generate business with new and existing clients.
Business unit managers that possess in-depth product knowledge and expertise in their respective lines of business
systematically manage the business development efforts through the use of sales and relationship management technology
tools.
• Expansion through Acquisitions. Our acquisition strategy is twofold; first we seek to acquire whole banks within and
contiguous to the State of California to expand geographically and/or to consolidate in our existing markets and, second, we
seek to acquire lines of business that will complement our existing business banking strategy. We have completed nine
acquisitions since
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2010, of which the first two were FDIC-assisted transactions and all other bank transactions were open bank, arm's length
negotiated transactions: Canyon National Bank (“CNB”) (geographic expansion, closed February 2011), Palm Desert National
Bank (“PDNB”) (in market consolidation, closed April 2012), First Associations Bank (“FAB”) (nationwide HOA line of
business, closed March 2013), San Diego Trust Bank (“SDTB”) (geographic expansion, closed June 2013), Infinity Franchise
Holdings, LLC and Infinity Franchise Capital (collectively, "Infinity") (nationwide lender to franchisees in the QSR industry,
closed January 2014), Independence Bank ("IDPK") (geographic expansion, closed January 2015), Security Bank of California
("SCAF") (geographic expansion, closed January 2016), Heritage Oaks Bancorp ("HEOP") (geographic expansion, closed April
2017), and Plaza Bancorp ("PLZZ") (geographic expansion, closed November 2017). In addition, on February 9, 2018, we
entered into a definitive agreement with Grandpoint to acquire Grandpoint and its wholly-owned, California-chartered state
bank subsidiary, Grandpoint Bank. That transaction is expected to close in the third quarter of 2018, subject to the receipt of all
regulatory and shareholder approvals and the satisfaction or waiver, if applicable, of all closing conditions. We will continue to
pursue acquisitions of open banks and other non-depository businesses that meet our criteria, though there can be no
assurances that we will identify or consummate any such acquisitions, and if we do, that any or all of those acquisitions will
produce the intended results.
Lending Activities
General. In 2017, we maintained our commitment to a high level of credit quality in our lending activities. Our core lending
business continues to focus on meeting the financial needs of local businesses and their owners. To that end, the Company offers a full
complement of flexible and structured loan products tailored to meet the diverse needs of our customers.
During 2017, we made or purchased loans to borrowers secured by real property and business assets located principally in
California, our primary market area. We made select loans, primarily QSR franchise loans, SBA guaranteed loans and loans to HOAs,
throughout the United States. We emphasize relationship lending and focus on generating loans with customers who also maintain full
depository relationships with us. These efforts assist us in establishing and expanding depository relationships consistent with the Company’s
strategic direction. We maintain an internal lending limit below our $340.9 million legal lending limit for secured loans and $204.5 million for
unsecured loans as of December 31, 2017. At December 31, 2017, the Bank's largest aggregate outstanding balance of loans to one borrower
was $44.9 million of secured credit. Historically, we have managed loan concentrations by selling certain loans, primarily commercial non-
owner occupied CRE and multi-family residential loan production. In recent periods, we have also focused on selling the guaranteed portion of
SBA loans due to the attractive premiums in the market, which gains on sale increase our noninterest income. Other types of loan sales remain
a strategic option for us.
During 2017, we originated $2.2 billion of loans and loan commitments, including $490 million of commercial and industrial (“C&I”)
loans, $344 million of construction loans, $313 million of franchise loans, $267 million of non-owner occupied CRE loans, $246 million of owner
occupied CRE loans, $189 million of SBA loans, $186 million of multi-family real estate loans, $37.8 million of agribusiness loans, $35.9 million
of one-to-four family real estate loans, $32.8 million of consumer loans and $10.3 million of farmland loans. During the same period, the
acquisition of PLZZ added $1.1 billion of loans in the fourth quarter of 2017, and the acquisition of HEOP added $1.4 billion of loans in the
second quarter of 2017, both before fair value adjustments. At December 31, 2017, we had $6.2 billion in total gross loans held for investment
outstanding.
Commercial and Industrial Lending. We originate C&I loans secured by business assets including inventory, receivables, and
machinery and equipment to businesses located in our primary market area. Loan types include revolving lines of credit, term loans, seasonal
loans and loans secured by liquid collateral such as cash deposits or marketable securities. HOA credit facilities are included in C&I loans. We
also issue letters of credit on behalf of our customers, backed by loans or deposits with the Company. At December 31, 2017, C&I loans
totaled
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$1.1 billion, constituting 17.5% of our gross loans held for investment. At December 31, 2017, we had commitments to extend additional credit
on C&I loans of $707 million.
Franchise Lending. We originate loans to franchises in the QSR industry nationwide, including financing for equipment, real estate,
new store development, remodeling, refinancing, acquisition and partnership restructuring. At December 31, 2017, Franchise loans totaled $660
million, constituting 10.7% of our gross loans held for investment.
Commercial Owner-Occupied Business Lending. We originate and purchase loans secured by owner-occupied CRE, such
as small office and light industrial buildings, and mixed-use commercial properties located predominantly in California. We also make loans
secured by special purpose properties, such as gas stations and churches. Pursuant to our underwriting policies, owner-occupied commercial
real estate ("CRE") loans may be made in amounts of up to 80% of the lesser of the appraised value or the purchase price of the collateral
property. Loans are generally made for terms up to 25 years with amortization periods up to 25 years. At December 31, 2017, we had $1.3
billion of owner-occupied CRE secured loans, constituting 20.8% of our gross loans held for investment.
SBA Lending. We are approved to originate loans under the SBA’s Preferred Lenders Program (“PLP”). The PLP lending status
affords us a higher level of delegated credit autonomy, translating to a significantly shorter turnaround time from application to funding, which
is critical to our marketing efforts. We originate loans nationwide under the SBA’s 7(a), SBAExpress, International Trade and 504 loan
programs, in conformity with SBA underwriting and documentation standards. The guaranteed portion of the 7(a) loans is typically sold on the
secondary market. At December 31, 2017, we had $186 million of SBA loans, constituting 3.0% of our gross loans held for investment.
Agribusiness and Farmland. We originate loans to the agricultural community to fund seasonal production and longer term
investments in land, buildings, equipment, crops and livestock. Agribusiness loans are for the purpose of financing agricultural production to
finance crops and livestock. Farmland loans include all land known to be used or usable for agricultural purposes, such as crop and livestock
production, and is secured by the land and improvements thereon. At December 31, 2017, agribusiness loans totaled $116 million, constituting
1.9% of our gross loans held for investment. At December 31, 2017, we had $145 million of farmland loans, constituting 2.3% of our gross
loans held for investment.
Commercial Non-Owner Occupied Real Estate Lending. We originate and purchase loans that are secured by CRE, such as
retail centers, small office and light industrial buildings, and mixed-use commercial properties located predominantly in California that are not
occupied by the borrower. We also make loans secured by special purpose properties, such as hotels and self-storage facilities. Pursuant to
our underwriting practices, non-owner occupied CRE loans may be made in amounts up to 75% of the lesser of the appraised value or the
purchase price of the collateral property. We consider the net operating income of the property and typically require a stabilized debt service
coverage ratio of at least 1.20:1, based on the qualifying loan interest rate. Loans are generally made for terms from 10 years up to 25 years,
with amortization periods up to 25 years. At December 31, 2017, we had $1.2 billion of non-owner occupied CRE secured loans, constituting
20.0% of our gross loans held for investment.
Multi-family Residential Lending. We originate and purchase loans secured by multi-family residential properties (five units and
greater) located predominantly in California. Pursuant to our underwriting practices, multi-family residential loans may be made in an amount
up to 75% of the lesser of the appraised value or the purchase price of the collateral property. In addition, we generally require a stabilized
minimum debt service coverage ratio of at least 1.15:1, based on the qualifying loan interest rate. Loans are made for terms of up to 30 years
with amortization periods up to 30 years. At December 31, 2017, we had $794 million of multi-family real estate secured loans, constituting
12.8% of our gross loans held for investment.
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One-to-Four Family Real Estate Lending. Although we do not originate, through our bank acquisitions, we have acquired first
lien single family mortgages. Our portfolio of one-to-four family loans at December 31, 2017 totaled $271 million, constituting 4.4% of our
gross loans held for investment, of which $223 million consists of loans secured by first liens on real estate and $48.0 million consists of loans
secured by second or junior liens on real estate.
Construction Lending. We originate loans for the construction of 1-4 family, multi-family residences and CRE properties in our
market area. We concentrate our efforts on single homes and small infill projects in established neighborhoods where there is not abundant
land available for development. Pursuant to our underwriting practices, construction loans may be made in an amount up to the lesser of 80%
of the completed value of or 85% of the cost to build the collateral property. Loans are made solely for the term of construction, generally less
than 24 months. We require that the owner’s equity is injected prior to the funding of the loan. At December 31, 2017, construction loans
totaled $283 million, constituting 4.6% of our gross loans, and we had commitments to extend additional construction credit of $306 million.
Land Loans. We occasionally originate land loans located predominantly in California for the purpose of facilitating the ultimate
construction of a home or commercial building. We do not originate loans to facilitate the holding of land for speculative purposes. At
December 31, 2017, land loans totaled $31.2 million, constituting 0.5% of our gross loans.
Consumer Loans. We originate a limited number of consumer loans, generally for banking customers only, which consist primarily
of home equity lines of credit and savings account secured loans. Before we make a consumer loan, we assess the applicant’s ability to repay
the loan and, if applicable, the value of the collateral securing the loan. At December 31, 2017, we had $92.9 million in consumer loans that
represented 1.5% of our gross loans.
Warehouse Repurchase Facilities. In 2015, we provided warehouse repurchase facilities for qualified mortgage bankers
operating principally in California. These facilities provided short-term funding for one-to-four family mortgage loans via a mechanism whereby
the mortgage banker sold us closed loans on an interim basis, to be repurchased in conjunction with the sale of each loan on the secondary
market. We generally purchased only conforming/conventional (Federal National Mortgage Association (“FNMA”), Federal Home Loan
Mortgage Corporation (“FHLMC”)) and government guaranteed (Federal Housing Administration (“FHA”), Veterans Administration (“VA”)
and U.S. Department of Agriculture (“USDA”)) credits, and only after due diligence that we believed was thorough and sophisticated. We
notified our borrowers that we will no longer provide funding under the repurchase facilities after March 15, 2016, and at December 31, 2017
and 2016, we had no warehouse loans.
Sources of Funds
General. Deposits, loan repayments and prepayments, and cash flows generated from operations and borrowings are the primary
sources of the Company’s funds for use in lending, investing and other general purposes.
Deposits. Deposits represent our primary source of funds for our lending and investing activities. The Company offers a variety of
deposit accounts with a range of interest rates and terms. The deposit accounts are offered through our 33 full depository branch network in
California and Nevada, and nationwide through our HOA Banking unit located in Irvine, California. The Company’s deposits consist of
checking accounts, money market accounts, passbook savings, and certificates of deposit. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest rates and competition. The terms of the fixed-rate certificates
of deposit offered by the Company vary from three months to five years. Specific terms of an individual account vary according to the type of
account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors. Total deposits
at December 31, 2017 were $6.1 billion, compared to $3.1 billion at December 31, 2016. At December 31, 2017, certificates of deposit
constituted 17.8% of
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total deposits, compared to 18.3% at the year-end 2016. At December 31, 2017, we had $848 million of certificate of deposit accounts
maturing in one year or less.
We primarily rely on customer service, sales and marketing efforts, business development, cross selling of deposit products to loan
customers, and long-standing relationships with customers to attract and retain local deposits. However, market interest rates and rates offered
by competing financial institutions significantly affect the Company’s ability to attract and retain deposits. Additionally, from time to time, we
will utilize both wholesale and brokered deposits to supplement our generation of deposits from businesses and consumers. At December 31,
2017, we had $386 million in brokered deposits that were raised to supplement and diversify our deposit funding and support our interest rate
risk management strategies. The brokered deposits had a weighted average maturity of 7 months and an all-in cost of 143 basis points.
Subsidiaries
At December 31, 2017, we had five operating subsidiaries, the Bank, a wholly-owned consolidated subsidiary with no subsidiaries of
its own, and PPBI Statutory Trust I, Heritage Oaks Capital Trust II, Mission Community Capital Trust I and Santa Lucia Bancorp (CA)
Capital Trust which are wholly-owned special purpose entities. The Company accounts for its investments in its wholly-owned special purpose
entities under the equity method, whereby the subsidiary’s net earnings are recognized in the Company’s Statement of Income and the
investment in these entities is included in Other Assets on the Company’s Consolidated Statements of Financial Condition.
Personnel
As of December 31, 2017, we had 842 full-time employees and 4 part-time employees. The employees are not represented by a
collective bargaining unit and we consider our relationship with our employees to be satisfactory.
Competition
We consider our Bank to be a community bank focused on the commercial banking business, with our primary market
encompassing California. To a lesser extent, we also compete in several broader regional and national markets through our HOA Banking,
SBA, Franchise Lending and Income Property lines of business.
The banking business is highly competitive with respect to virtually all products and services. The industry continues to consolidate,
and unregulated competitors in the banking markets have focused products targeted at highly profitable customer segments. Many largely
unregulated competitors are able to compete across geographic boundaries, and provide customers increasing access to meaningful
alternatives to nearly all significant banking services and products.
The banking business is dominated by a relatively small number of major banks with many offices operating over a wide
geographical area. These banks have, among other advantages, the ability to finance wide-ranging and effective advertising campaigns, and to
allocate their resources to regions of highest yield and demand. Many of the national or super-regional banks operating in our primary market
area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater
total capitalization, the national or super-regional banks also have substantially higher lending limits than us.
In addition to other local community banks, our competitors include commercial banks, savings banks, credit unions, and numerous
non-banking institutions, such as finance companies, leasing companies, insurance companies, brokerage firms and investment banking firms.
Increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and
other consumer finance services, including on-line banking services and personal financial software. Strong competition for deposit and loan
products affects the rates of those products, as well as the terms on which they are offered to customers.
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Mergers between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce
expenses, and increase revenues to remain competitive.
Technological innovations have also resulted in increased competition in the financial services market. Such innovation has, for
example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously were
considered traditional banking products. In addition, many customers now expect a choice of delivery systems and channels, including
telephone, mobile phones, mail, home computer, ATMs, self-service branches, and/or in-store branches. The sources of competition in such
products include commercial banks, as well as credit unions, brokerage firms, money market and other mutual funds, asset management
groups, finance and insurance companies, internet-only financial intermediaries and mortgage banking firms.
We work to anticipate and adapt to competitive conditions, whether developing and marketing innovative products and services,
adopting or developing new technologies that differentiate our products and services, or providing highly personalized banking services. We
strive to distinguish ourselves from other community banks and financial services providers in our marketplace by providing a high level of
service to enhance customer loyalty and to attract and retain business. However, no assurances can be given that our efforts to compete in our
market areas will continue to be successful.
Supervision and Regulation
General. Bank holding companies, such as the Corporation, and banks, such as the Bank, are subject to extensive regulation and
supervision by federal and state regulators. Various requirements and restrictions under state and federal law affect our operations, including
reserves against deposits, ownership of deposit accounts, loans, investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital requirements. The following is a summary of certain statutes and rules applicable to us. This summary is qualified in
its entirety by reference to the particular statute and regulatory provision referred to below and is not intended to be an exhaustive description
of all applicable statutes and regulations.
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 and their subsidiaries. The Corporation is also a bank
holding company within the meaning of the California Financial Code (the “Financial Code”). As such, the Corporation and its subsidiaries are
subject to examination by, and may be required to file reports with, the DBO.
Under changes made by the Dodd-Frank Act, a bank holding company must act as a source of financial and managerial strength to
each of its subsidiary banks and to commit resources to support each such subsidiary bank. In order to fulfill its obligations as a source of
strength, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the
Federal Reserve may charge the bank holding company with engaging in unsafe and unsound practices if the bank holding company fails to
commit resources to a subsidiary bank or if it undertakes actions that the Federal Reserve believes might jeopardize the bank holding
company’s ability to commit resources to such subsidiary bank. The Federal Reserve also 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 (“DIF”). Pursuant to the Dodd-Frank Act, federal deposit insurance coverage was permanently increased to $250,000 per
depositor for all insured depository institutions. As a result of this deposit insurance function, the FDIC also has certain supervisory authority
and
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powers over the Bank as well as all other FDIC insured institutions. 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.
Legislative and regulatory initiatives are from time-to-time introduced, which necessarily impacts the regulation of the financial
services industry. We cannot predict whether or when potential legislation or new regulations will be enacted, and if enacted, the effect that
new legislation or any implemented regulations and supervisory policies would have on our financial condition and results of operations.
Moreover, bank regulatory agencies can be more aggressive in responding to concerns and trends identified in examinations, which could result
in an increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management
and capital adequacy, as well as other safety and soundness concerns.
Dodd-Frank Act
The Dodd-Frank Act, which was signed into law in July 2010, implemented far-reaching changes across the financial regulatory
landscape, including provisions that, among other things, repealed the federal prohibitions on the payment of interest on demand deposits,
thereby permitting depository institutions to pay interest on business transaction and other accounts, and increased the authority of the Federal
Reserve to examine bank holding companies, such as the Corporation, and their non-bank subsidiaries.
Many aspects of the Dodd-Frank Act continue to be subject to rulemaking and have yet to take full effect, making it difficult to
anticipate the overall financial impact on the Company, its customers or the financial industry generally. Provisions in the legislation that affect
deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits
as well as place limitations on certain revenues those deposits may generate.
In 2017, both the House of Representatives and the Senate introduced legislation that would repeal or modify provisions of the
Dodd-Frank Act and significantly impact financial services regulation. Although the bills vary in content, certain key aspects include revisions
to rules related to mortgage loans, delayed implementation of rules related to the Home Mortgage Disclosure Act, reform and simplification of
certain Volcker Rule requirements, and raising the threshold for applying enhanced prudential standards to bank holding companies with total
consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion.
Activities of Bank Holding Companies. The activities of bank holding companies are generally limited to the business of
banking, managing or controlling banks, and other activities that the Federal Reserve has determined to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Bank holding companies that qualify and register as “financial holding
companies” are also able to engage in certain additional financial activities, such as merchant banking and securities and insurance
underwriting, subject to limitations set forth in federal law. We are not at this date a “financial holding company.”
The BHCA requires a bank holding company to obtain prior approval of the Federal Reserve before: (i) taking any action that
causes a bank to become a controlled subsidiary of the bank holding company; (ii) acquiring direct or indirect ownership or control of voting
shares of any bank or bank holding company, if the acquisition results in the acquiring bank holding company having control of more than 5%
of the outstanding shares of any class of voting securities of such bank or bank holding company, unless such bank or bank holding company is
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majority-owned by the acquiring bank holding company before the acquisition; (iii) acquiring all or substantially all the assets of a bank; or (iv)
merging or consolidating with another bank holding company.
Permissible Activities of the Bank. Because California permits commercial banks chartered by the state to engage in any
activity permissible for national banks, the Bank can form subsidiaries to engage in activates “closely related to banking” or “nonbanking”
activities and expanded financial activities. However, to form a financial subsidiary, the Bank must be well capitalized and would be subject to
the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. Generally, a financial subsidiary is
permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank to
conduct directly within the bank. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a
market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in
underwriting insurance (other than credit life insurance), issue annuities or engage in real estate development, investment or merchant banking.
Incentive Compensation. Federal banking agencies have issued guidance on incentive compensation policies intended to ensure
that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by
encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an
organization, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives
that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective
internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the
organization’s board of directors. In accordance with the Dodd-Frank Act, the federal banking agencies prohibit incentive-based compensation
arrangements that encourage inappropriate risk taking by covered financial institutions (generally institutions that have over $1 billion in assets)
and are deemed to be excessive, or that may lead to material losses.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be
tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation
arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the
organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions
may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct
the deficiencies.
The scope and content of the U.S. banking regulators’ policies on executive compensation may continue to evolve in the near
future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain
and motivate its key employees.
Capital Requirements. Bank holding companies and banks are subject to various regulatory capital requirements administered by
state and federal agencies. These agencies may establish higher minimum requirements if, for example, a banking organization previously has
received special attention or has a high susceptibility to interest rate risk. Risk-based capital requirements determine the adequacy of capital
based on the risk inherent in various classes of assets and off-balance sheet items. Under the Dodd-Frank Act, the Federal Reserve must
apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to
depository institutions. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of
capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.
Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements. Effective as of
January 1, 2015, the Basel III final capital framework, among other things, (i)
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introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional
Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital
measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing
regulations. Beginning January 1, 2016, financial institutions are required to maintain a minimum capital conservation buffer to avoid restrictions
on capital distributions and other payments. The minimum capital conservation buffer is phased in over a four year transition period with
minimum buffers of 0.625%, 1.25%, 1.875%, and 2.50% during 2016, 2017, 2018, and 2019, respectively.
When fully phased-in by January 1, 2019, Basel III requires banks will be subject to the following risk-based capital requirements:
•
•
•
•
a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”;
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%;
a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation
buffer, or 10.5%; and
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance
sheet exposures.
The Basel III final framework provides for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-
consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in
the aggregate exceed 15% of CET1. Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions
include the amount of Additional Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available
for sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital.
Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first regulatory report following
January 1, 2015. As permitted by Basel III, the Company and the Bank have elected to exclude AOCI from CET1.
Basel III also includes the following significant provisions:
• An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their
discretion, with advance notice, that would be a CET1 add-on to the capital conservation buffer in the range of 0% and 2.5%
when fully implemented;
• Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone;
• Deduction from common equity of deferred tax assets that depend on future profitability to be realized; and
• For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement that the
instrument must be written off or converted to common equity if a triggering event occurs, either pursuant to applicable law or
at the direction of the banking regulator. A triggering event is an event that would cause the banking organization to become
nonviable without the write off or conversion, or without an injection of capital from the public sector.
Banking institutions that do not satisfy the minimum capital conservation buffer (or below the combined capital conservation buffer
and countercyclical capital buffer, when the latter is applied) may face constraints on its ability to pay dividends, effect equity repurchases and
pay discretionary bonuses to executive officers, which constraints vary based on the amount of the shortfall.
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The Dodd-Frank Act excludes trust preferred securities issued after May 19, 2010, from being included in Tier 1 capital, unless the
issuing company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will
continue to count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, such as the Corporation. The trust
preferred securities issued by our unconsolidated subsidiary capital trusts qualify as Tier 1 capital up to a maximum limit of 25% of total Tier 1
capital. Any additional portion of our trust preferred securities would qualify as “Tier 2 capital.” As of December 31, 2017, our subsidiary trust,
PPBI Trust I, had $10.3 million in trust preferred securities outstanding, of which $10.0 million qualifies as Tier 1 capital. As a result of the
Heritage Oaks acquisition, the Company assumed three unconsolidated subsidiaries with floating rate junior subordinated debt securities of $5.2
million associated with Heritage Oaks Capital Trust II, $3.1 million, associated with Mission Community Capital Trust I and $5.2 million
associated with the Santa Lucia Bancorp (CA) Capital Trust of which $10.0 million qualifies as Tier 1 capital. The Company also holds $85
million in subordinated notes that qualifies as Tier 2 capital. Also, goodwill and most intangible assets are deducted from Tier 1 capital. For
purposes of applicable the total risk-based capital regulatory guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is
defined to include, subject to limitations: perpetual preferred stock not included in Tier 1 capital, intermediate-term preferred stock and any
related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities, allowances for loan and lease
losses, and intermediate-term subordinated debt instruments. The maximum amount of qualifying Tier 2 capital is 100% of qualifying Tier 1
capital. For purposes of determining total capital under federal guidelines, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus
investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other
deductions.
Basel III changed the manner of calculating risk-weighted assets. New methodologies for determining risk-weighted assets in the
general capital rules are included, including revisions to recognition of credit risk mitigation, including a greater recognition of financial collateral
and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past due loans; and higher (greater than
100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity
components. In particular, loans categorized as “high-volatility commercial real estate” loans (“HVCRE loans”) are required to be assigned a
150% risk weighting, and require additional capital support. HVCRE loans are defined to include any credit facility that finances or has
financed the acquisition, development or construction of real property, unless it finances: 1-4 family residential properties; certain community
development investments; agricultural land used or usable for, and whose value is based on, agricultural use; or commercial real estate projects
in which: (i) the loan to value is less than the applicable maximum supervisory loan to value ratio established by the bank regulatory agencies;
(ii) the borrower has contributed cash or unencumbered readily marketable assets, or has paid development expenses out of pocket, equal to at
least 15% of the appraised “as completed” value; (iii) the borrower contributes its 15% before the bank advances any funds; and (iv) the
capital contributed by the borrower, and any funds internally generated by the project, is contractually required to remain in the project until the
facility is converted to permanent financing, sold or paid in full.
In addition to the uniform risk-based capital guidelines and regulatory capital ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines
and ratios. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy.
Such a change could affect our ability to grow and could restrict the amount of profits, if any, available for the payment of dividends.
In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address the risks that the
activities of an institution poses to the institution and the public and private stakeholders, including risks arising from certain enumerated
activities.
Basel III became applicable to the Corporation and the Bank on January 1, 2015. Overall, the Corporation believes that
implementation of the Basel III Rule has not had and will not have a material adverse effect on the Corporation’s or the Bank’s capital ratios,
earnings, shareholder’s equity, or its ability to pay dividends, effect stock repurchases or pay discretionary bonuses to executive officers.
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In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax assets,
mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the
Corporation and the Bank, that are not subject to the advanced approaches requirements. In November 2017, the federal banking regulators
revised the Basel III Rules to extend the current transitional treatment of these items for non-advanced approaches banking organizations until
the September 2017 proposal is finalized. The September 2017 proposal would also change the capital treatment of certain commercial real
estate loans under the standardized approach, which we use to calculate our capital ratios.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel
Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain
“unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for
operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output
floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply
only to advanced approaches institutions, and not to the Corporation or the Bank. The impact of Basel IV on us will depend on the manner in
which it is implemented by the federal bank regulators. We will be assessing the impact on us of these new regulations, as they are proposed
and implemented.
Prompt Corrective Action Regulations. The federal banking regulators are required to take “prompt corrective action” with
respect to capital-deficient institutions. Federal banking regulations define, for each capital category, the levels at which institutions are “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under regulations
effective through December 31, 2017, the Bank was “well capitalized”, which means it had a common equity Tier 1 capital ratio of 6.5% or
higher; a Tier I risk-based capital ratio of 8.0% or higher; a total risk-based capital ratio of 10.0% or higher; a leverage ratio of 5.0% or higher;
and was not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure.
As noted above, Basel III integrates the new capital requirements into the prompt corrective action category definitions. The
following capital requirements have applied to the Corporation since January 1, 2015.
Capital Category
Well Capitalized
Adequately Capitalized
Undercapitalized
Significantly
Undercapitalized
Critically Undercapitalized
Common
Equity
Tier 1 (CET1)
Capital Ratio
Tier 1 Risk-
Based
Capital Ratio
Total Risk-
Based
Capital Ratio
10% or greater 8% or greater 6.5% or greater 5% or greater
8% or greater 6% or greater 4.5% or greater 4% or greater
Less than 4.5% Less than 4%
Less than 8%
Less than 3% Less than 3%
Less than 6%
Less than 6%
Less than 4%
Leverage
Ratio
Tangible
Equity
to Assets
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Less than 2%
Supplemental
Leverage Ratio
n/a
3% or greater
Less than 3%
n/a
n/a
As of December 31, 2017, the Bank was “well capitalized” according to the guidelines as generally discussed above. As of
December 31, 2017, the Corporation had a consolidated ratio of 12.57% of total capital to risk-weighted assets, a consolidated ratio of 10.88%
of Tier 1 capital to risk-weighted assets, and a consolidated ratio of 10.59% of common equity Tier 1 capital, and the Bank had a ratio of
12.33% of total capital to risk-
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weighted assets, a ratio of 11.88% of common equity Tier 1 capital and a ratio of 11.88% of Tier 1 capital to risk-weighted assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. An
institution’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may
not constitute an accurate representation of the institution’s overall financial condition or prospects for other purposes.
In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not
be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance
with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is
entitled to a priority of payment in bankruptcy. The aggregate liability of the holding company of an undercapitalized bank is limited to the
lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately
capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized
or fails to submit a capital restoration plan. In addition to requiring undercapitalized institutions to submit a capital restoration plan, bank
regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch
establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making
capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution’s capital decreases, the regulators’ enforcement powers become more severe. A significantly undercapitalized
institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of
management, and other restrictions. A regulator has limited discretion in dealing with a critically undercapitalized institution and is virtually
required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative
actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the
event the institution has no tangible capital.
In addition to the federal regulatory capital requirements described above, the DBO has authority to take possession of the business
and properties of a bank in the event that the tangible stockholders’ equity of a bank is less than the greater of (i) 4% of the bank’s total assets
or (ii) $1.0 million.
Dividends. It is the Federal Reserve’s policy that bank holding companies, such as the Corporation, should generally pay dividends
on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not
maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the
current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their
dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
It is our policy to retain earnings, if any, to provide funds for use in our business. We have never declared or paid dividends on our common
stock.
The Bank’s ability to pay dividends to the Corporation is subject to restrictions set forth in the Financial Code. The Financial Code
provides that a bank may not make a cash distribution to its stockholders in excess of the lesser of a bank’s (1) retained earnings; or (2) net
income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to
the stockholders of the bank during such period. However, a bank may, with the approval of the DBO, make a distribution to its stockholders in
an amount not exceeding the greatest of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its
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INDEX
net income for its current fiscal year. In the event that bank regulators determine that the stockholders' equity of a bank is inadequate or that
the making of a distribution by the bank would be unsafe or unsound, the regulators may order the bank to refrain from making a proposed
distribution. The payment of dividends could, depending on the financial condition of a bank, be deemed to constitute an unsafe or unsound
practice. Under the foregoing provision of the Financial Code, the amount available for distribution from the Bank to the Corporation was
approximately $142.7 million at December 31, 2017.
Approval of the Federal Reserve is required for payment of any dividend by a state chartered bank that is a member of the Federal
Reserve, such as the Bank, if the total of all dividends declared by the bank in any calendar year would exceed the total of its retained net
income for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not pay a
dividend in an amount greater than its undivided profits without regulatory and stockholder approval. The Bank is also prohibited under federal
law from paying any dividend that would cause it to become undercapitalized.
FDIC Insurance of Certain Accounts and Regulation by the FDIC. The Bank is an FDIC insured financial institution
whereby the FDIC provides deposit insurance for a certain maximum dollar amount per customer. The Bank, as is the case with all FDIC
insured banks, is subject to deposit insurance assessments as determined by the FDIC. The amount of the deposit insurance assessment for
institutions with less than $10.0 billion in assets, which includes the Bank, is based on its risk category, with certain adjustments for any
unsecured debt or brokered deposits held by the insured bank. Institutions assigned to higher risk categories (that is, institutions that pose a
higher risk of loss to the DIF) pay assessments at higher rates than institutions that pose a lower risk. An institution’s risk classification is
assigned based on a combination of its financial ratios and supervisory ratings, reflecting, among other things, its capital levels and the level of
supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances.
Deposit insurance assessments fund the DIF.
The Dodd-Frank Act changed the way that deposit insurance premiums are calculated. The assessment base is no longer the
institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. The Dodd-Frank Act also increased
the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured deposits by 2020, eliminates
the upper limit for the reserve ratio designated by the FDIC each year, and eliminates the requirement that the FDIC pay dividends to
depository institutions when the reserve ratio exceeds certain thresholds. Continued action by the FDIC to replenish the DIF, as well as the
changes contained in the Dodd Frank Act, may result in higher assessment rates, which could reduce our profitability or otherwise negatively
impact our operations. Based on the current FDIC insurance assessment methodology, our FDIC insurance premium expense was $2.2 million
for 2017, $1.5 million for 2016 and $1.4 million in 2015.
Transactions with Related Parties. Depository institutions are subject to the restrictions contained in the Federal Reserve Act
(the “FRA”) with respect to loans to directors, executive officers and principal stockholders. Under the FRA, loans to directors, executive
officers and stockholders who own more than 10% of a depository institution and certain affiliated entities of any of the foregoing, may not
exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit as discussed
in the above section. Federal regulations also prohibit loans above amounts prescribed by the appropriate federal banking agency to directors,
executive officers, and stockholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in
advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The proscribed
loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus up to $500,000. The Federal Reserve also requires that loans to directors, executive officers,
and principal stockholders be made on terms substantially the same as offered in comparable transactions to non-executive employees of the
bank and must not involve more than the normal risk of repayment. There are additional limits on the amount a bank can loan to an executive
officer.
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Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under Sections 23A and 23B of the
FRA. Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the
financial institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the institution’s capital and surplus.
Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the
purchase of low quality assets from affiliates are generally prohibited. Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. The Federal
Reserve has promulgated Regulation W, which codifies prior interpretations under Sections 23A and 23B of the FRA and provides interpretive
guidance with respect to affiliate transactions. Affiliates of a bank include, among other entities, a bank’s holding company and companies that
are under common control with the bank. We are considered to be an affiliate of the Bank.
The Dodd-Frank Act generally enhanced the restrictions on transactions with affiliates under Section 23A and 23B of the FRA,
including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements
regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan
restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase
agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset
sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved
by the institution's board of directors.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines designed to assist the federal banking
agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits.
In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and for
evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. These
guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem
assets; (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses; (iii) compare
problem asset totals to capital; (iv) take appropriate corrective action to resolve problem assets; (v) consider the size and potential risks of
material asset concentrations; and (vi) provide periodic asset quality reports with adequate information for management and the board of
directors to assess the level of asset risk.
Loans to One Borrower. Under California law, our ability to make aggregate secured and unsecured loans-to-one-borrower is
limited to 25% and 15%, respectively, of unimpaired capital and surplus. At December 31, 2017, the Bank’s limit on aggregate secured loans-
to-one-borrower was $341 million and unsecured loans-to-one borrower was $204.5 million. The Bank has established internal loan limits,
which are lower than the legal lending limits for a California bank.
Community Reinvestment Act and the Fair Lending Laws. The Bank is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally
requires the federal banking regulators to evaluate the record of a financial institution in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating
and supervising other activities. A bank’s compliance with its CRA obligations is based on a performance-based evaluation system, which
bases CRA ratings on an institution’s lending, service and
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investment performance, resulting in a rating by the appropriate bank regulator of “outstanding,” “satisfactory,” “needs to improve” or
“substantial noncompliance.” Based on its last CRA examination, the Bank received a “satisfactory” rating.
Bank Secrecy Act and Money Laundering Control Act. In 1970, Congress passed the Currency and Foreign Transactions
Reporting Act, otherwise known as the Bank Secrecy Act (the “BSA”), which established requirements for recordkeeping and reporting by
banks and other financial institutions. The BSA was designed to help identify the source, volume and movement of currency and other
monetary instruments into and out of the U.S. in order to help detect and prevent money laundering connected with drug trafficking, terrorism
and other criminal activities. The primary tool used to implement BSA requirements is the filing of Suspicious Activity Reports. Today, the
BSA requires that all banking institutions develop and provide for the continued administration of a program reasonably designed to assure and
monitor compliance with certain recordkeeping and reporting requirements regarding both domestic and international currency transactions.
These programs must, at a minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of
such systems and compliance, designate individuals responsible for such compliance and provide appropriate personnel training.
USA Patriot Act. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act, commonly referred to as the USA Patriot Act or the Patriot Act, financial institutions are subject to prohibitions
against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to detect, and prevent,
the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires financial
institutions, including banks, to establish anti-money laundering programs, including employee training and independent audit requirements, meet
minimum standards specified by the act, follow minimum standards for customer identification and maintenance of customer identification
records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The costs or
other effects of the compliance burdens imposed by the Patriot Act or future anti-terrorist, homeland security or anti-money laundering
legislation or regulation cannot be predicted with certainty.
Consumer Laws and Regulations. The Bank is also subject to certain consumer laws and regulations that are designed to
protect consumers in transactions with banks. These laws include, among others: Truth in Lending Act; Truth in Savings Act; Electronic Funds
Transfer Act; Expedited Funds Availability Act; Equal Credit Opportunity Act; Fair and Accurate Credit Transactions Act; Fair Housing Act;
Fair Credit Reporting Act; Fair Debt Collection Act; Home Mortgage Disclosure Act; Real Estate Settlement Procedures Act; laws regarding
unfair and deceptive acts and practices; and usury laws. These laws and regulations mandate certain disclosure requirements and regulate the
manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must
comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations. Many
states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. Failure to comply with these laws
and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general, and civil or
criminal liability.
Pursuant to the Dodd-Frank Act, the Consumer Financial Protection Bureau (the "CFPB") has broad authority to regulate and
supervise the retail consumer financial products and services activities of banks and various non-bank providers. The CFPB has authority to
promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to
consumer financial products and services. Notwithstanding the foregoing, banks with assets of $10.0 billion or less will continue to be examined
for consumer compliance by their primary federal banking regulator. Following the closing of the acquisition of Grandpoint, the Bank’s assets
will exceed $10.0 billion, and the Bank will be examined for consumer compliance by the CFPB. The creation of the CFPB by the Dodd-Frank
Act has led to, and is likely to continue to lead to, enhanced and strengthened enforcement of consumer financial protection laws.
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In addition, federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial
institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and
procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain
limited exceptions, a financial institution may not provide such personal information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure.
Federal and State Taxation
The Corporation and the Bank report their income on a consolidated basis using the accrual method of accounting, and are subject
to federal income taxation in the same manner as other corporations with some exceptions. The Company has not been audited by the Internal
Revenue Service ("IRS"). For its 2017, 2016 and 2015 tax years, the Company was subject to a maximum federal income tax rate of 35.00%
and California state income tax rate of 10.84%.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act includes a number
of provisions that impact us, including the following:
• Tax Rate. The Tax Act replaces the graduated corporate income tax rates applicable under prior law, which imposed a maximum
corporate income tax rate of 35%, with a reduced 21% flat corporate income tax rate. Although the reduced corporate income tax
rate generally should be favorable to us, resulting in increased earnings and capital, it decreased the value of our existing deferred tax
assets. Generally accepted accounting principles (“GAAP”) requires that the impact of the provisions of the Tax Act be accounted for
in the period of enactment. Accordingly, the incremental income tax expense recorded by the Corporation in the fourth quarter of 2017
related to the Tax Act was $5.6 million, resulting primarily from a re-measurement of deferred tax assets.
• FDIC Insurance Premiums. The Tax Act prohibits taxpayers with consolidated assets over $50 billion from deducting any FDIC
insurance premiums and prohibits taxpayers with consolidated assets between $10 and $50 billion from deducting the portion of their
FDIC premiums equal to the ratio, expressed as a percentage, that (i) the taxpayer’s total consolidated assets over $10 billion, as of
the close of the taxable year, bears to (ii) $40 billion. If we consummate our proposed acquisition of Grandpoint Capital, Inc. during
2018, our ability to fully deduct our FDIC premiums will be limited, as our total consolidated assets will exceed $10 billion.
• Employee Compensation. A “publicly held corporation” is not permitted to deduct compensation in excess of $1 million per year paid to
certain employees. The Tax Act eliminates certain exceptions to the $1 million limit applicable under prior law related to performance-
based compensation (for example, equity grants and cash bonuses paid only on the attainment of performance goals). As a result, our
ability to deduct certain compensation paid to our most highly compensated employees will now be limited.
• Business Asset Expensing. The Tax Act allows taxpayers to immediately expense the entire cost (instead of only 50%, as under prior
law) of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017
and before January 1, 2023 (with an additional year for certain property). This 100% “bonus” depreciation is phased out
proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for
certain property).
•
Interest Expense. The Tax Act limits a taxpayer’s annual deduction of business interest expense to the sum of (i) business interest
income, and (ii) 30% of “adjusted taxable income,” defined as a business’s taxable income without taking into account business
interest income or expense, net operating losses, and, for 2018
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through 2021, depreciation, amortization and depletion. Because we generate significant amounts of net interest income, we do not
expect to be impacted by this limitation.
ITEM 1A. RISK FACTORS
Ownership of our common stock involves certain risks. The risks and uncertainties described below are not the only ones
we face. You should carefully consider the risks described below, as well as all other information contained in this Annual Report on
Form 10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our
business operations. If any of these risks actually occurs, our business, financial condition or results of operations could be
materially, adversely affected.
Risks Related to Our Business
The economic environment could pose significant challenges for the Company and could adversely affect our financial condition
and results of operations.
Although the U.S. economy continues a gradual expansion following the severe recession that ended in 2009, financial stress on
borrowers as a result of an uncertain future economic environment could have an adverse effect on the Company’s borrowers and their ability
to repay their loans to us, which could adversely affect the Company’s business, financial condition and results of operations. A weakening of
these conditions in the markets in which we operate would likely have an adverse effect on us and others in the financial institutions industry.
For example, deterioration in economic conditions in our markets could drive losses beyond that which is provided for in our allowance for loan
losses ("ALLL"). We may also face the following risks in connection with these events:
• Economic conditions that negatively affect real estate values and the job market may result, in the deterioration of the credit
quality of our loan portfolio, and such deterioration in credit quality could have a negative impact on our business.
• A decrease in the demand for loans and other products and services offered by us.
• A decrease in deposit balances due to overall reductions in the accounts of customers.
• A decrease in the value of our loans or other assets secured by commercial or residential real estate.
• A decrease in net interest income derived from our lending and deposit gathering activities.
• Sustained weakness in our markets may affect consumer confidence levels and may cause adverse changes in payment
patterns, causing increases in delinquencies and default rates on loans and other credit facilities.
• The processes we use to estimate ALLL and reserves may no longer be reliable because they rely on complex judgments,
including forecasts of economic conditions, which may no longer be capable of accurate estimation.
• Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select,
manage, and underwrite its customers become less predictive of future charge-offs.
• We expect to face increased regulation of its industry, and compliance with such regulation may increase our costs, limit our
ability to pursue business opportunities and increase compliance challenges.
As these conditions or similar ones exist or worsen, we could experience adverse effects on our business, financial condition and
results of operations.
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Our business is subject to various lending and other economic risks that could adversely impact our results of operations and
financial condition.
There was significant disruption and volatility in the financial and capital markets in 2008 and 2009. The financial markets and the
financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or require government
intervention to avoid failure. These conditions were largely the result of the erosion of the U.S. and global credit markets, including a significant
and rapid deterioration in the mortgage lending and related real estate markets. While economic conditions have improved, there can be no
assurance that the economic conditions that adversely affected the financial services industry, and the capital, credit and real estate markets
generally, will not deteriorate in the near or long term, in which case, we could experience losses and write-downs of assets, and could face
capital and liquidity constraints or other business challenges. If economic conditions were to deteriorate, particularly within our geographic
region, it could result in the following additional consequences, any of which could have a material adverse effect on our business, results of
operations and financial condition:
• Loan delinquencies may increase causing increases in our provision and allowance for loan losses.
• Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select,
manage, and underwrite our customers become less predictive of future charge-offs.
• Collateral for loans, especially real estate, may continue to decline in value, in turn reducing a client’s borrowing power, and
reducing the value of assets and collateral associated with our loans held for investment.
• Consumer confidence levels may decline and cause adverse changes in payment patterns, resulting in increased delinquencies
and default rates on loans and other credit facilities and decreased demand for our products and services.
• Performance of the underlying loans in mortgage backed securities may deteriorate to potentially cause OTTI markdowns to
our investment portfolio.
We may suffer losses in our loan portfolio in excess of our allowance for loan losses.
Our total nonperforming assets amounted to $3.6 million, or 0.04% of our total assets, at December 31, 2017, an increase from $1.6
million or 0.04% at December 31, 2016. We had $1.0 million of net loan charge-offs for 2017, a decrease from $4.8 million in 2016. Our
provision for loan losses was $8.6 million in 2017, a decrease from $8.8 million in 2016. If increases in our nonperforming assets occur in the
future, our net loan charge-offs and/or provision for loan losses may also increase which may have an adverse effect upon our future results of
operations.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. These practices generally
include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of collateral based on
reports of independent appraisers and liquid asset verifications. Although we believe that our underwriting criteria are appropriate for the
various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts
set aside as reserves in our ALLL. Our allowance for probable incurred losses is based on analysis of the following:
Industry historical losses as reported by the FDIC;
• Historical experience with our loans;
•
• Evaluation of economic conditions;
• Regular reviews of the quality, mix and size of the overall loan portfolio;
• Regular reviews of delinquencies;
• The quality of the collateral underlying our loans; and
• The effect of external factors, such as competition, legal developments and regulatory requirements.
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Although we maintain an ALLL at a level that we believe is adequate to absorb probable incurred losses inherent in our loan
portfolio, changes in economic, operating and other conditions, including a sharp decline in real estate values and changes in interest rates,
which are beyond our control, may cause our actual loan losses to exceed our current allowance estimates. If the actual loan losses exceed the
amount reserved, it will adversely affect our financial condition and results of operations.
In addition, the Federal Reserve and the DBO, as part of their supervisory function, periodically review our ALLL. Either agency
may require us to increase our provision for loan losses or to recognize further loan losses, based on their judgments, which may be different
from those of our management. Any increase in the allowance required by them could also adversely affect our financial condition and results
of operations.
Risks related to specific segments of our loan portfolio may result in losses that could affect our results of operations and financial
condition.
General economic conditions and local economic conditions affect our entire loan portfolio. Lending risks vary by the type of loan
extended.
In our C&I and SBA lending activities, collectability of loans may be adversely affected by risks generally related to small and
middle market businesses, such as:
• Changes or weaknesses in specific industry segments, including weakness affecting the business’ customer base;
• Changes in consumer behavior;
• Changes in a business’ personnel;
Increases in supplier costs that cannot be passed along to customers;
•
•
Increases in operating expenses (including energy costs);
• Changes in governmental rules, regulations and fiscal policies;
•
Increases in interest rates, tax rates; and
In our investor real estate loans, payment performance and the liquidation values of collateral properties may be adversely affected
by risks generally incidental to interests in real property, such as:
• Declines in real estate values;
• Declines in rental rates;
• Declines in occupancy rates;
•
• The availability of property financing;
• Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and
Increases in other operating expenses (including energy costs);
taxation;
Increases in interest rates, real estate and personal property tax rates; and
•
In our HOA and consumer loans, collectability of the loans may be adversely affected by risks generally related to consumers, such
as:
• Changes or weakness in employment and wage income;
• Changes in consumer behavior;
• Declines in real estate values;
• Declines in rental rates;
•
• The availability of property financing;
• Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and
Increases in association operating expenses (including energy costs);
taxation;
Increases in interest rates, real estate and personal property tax rates; and
•
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In our construction loans, collectability and the liquidation values of collateral properties may be adversely affected by risks
generally related to consumers (for single family residence construction loans) or incidental to interests in real property (for CRE construction
loans), such as:
• Declines in real estate values;
• Declines in rental rates;
• Declines in occupancy rates;
•
• The availability of property financing;
• Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and
Increases in other operating expenses (including energy costs);
taxation;
Increases in interest rates, real estate and personal property tax rates; and
•
In our agribusiness and farmland loans, collectability of the loans may be adversely affected by risks generally related to agriculture
production and farmlands, such as:
• The cyclical nature of the agriculture industry;
• Fluctuating commodity prices and changing climatic conditions;
• Drought conditions, which adversely impact agricultural customers’ operating costs, crop yields and crop quality and could
impact such customers’ ability to repay loans;
Increases in operating expenses; and
•
• Changes in real estate values.
Adverse economic conditions in California may cause us to suffer higher default rates on our loans and reduce the value of the
assets we hold as collateral.
Our business activities and credit exposure are concentrated in California. Difficult economic conditions, including state and local
government deficits, in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan
portfolio. In addition, demand for our products and services may decline. Declines in the California real estate market could hurt our business,
because the vast majority of our loans are secured by real estate located within California. As of December 31, 2017, approximately 61% of
our loans secured by real estate were located in California. If real estate values were to decline, especially in California, the collateral for our
loans provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate would be diminished, and
we would be more likely to suffer losses on defaulted loans.
Our level of credit risk could increase due to our focus on commercial lending and the concentration on small and middle market
business customers with heightened vulnerability to economic conditions.
As of December 31, 2017, our commercial real estate loans amounted to $2.2 billion, or 35.7% of our total loan portfolio, and our
commercial business loans amounted to $3.3 billion, or 53.8% of our total loan portfolio. At such date, our largest outstanding commercial
business loan was $40.3 million, our largest multiple borrower relationship was $82.8 million and our largest outstanding commercial real estate
loan was $31.5 million. Commercial real estate and commercial business loans generally are considered riskier than single-family residential
loans because they have larger balances to a single borrower or group of related borrowers. Commercial real estate and commercial business
loans involve risks because the borrowers’ ability to repay the loans typically depends primarily on the successful operation of the businesses
or the properties securing the loans. Most of the Company’s commercial business loans are made to small business or middle market
customers who may have a heightened vulnerability to economic conditions. Moreover, a portion of these loans have been made or acquired by
us in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our
borrowers’ businesses may hinder their ability to repay their loans with us, which could adversely affect our results of operations.
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Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.
Nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on
nonperforming loans or other real estate owned ("OREO"), which adversely affects our income. When we take collateral in foreclosures and
similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a
loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels our regulators believe are
appropriate in light of the ensuing risk profile. While we reduce problem assets through loan sales, workouts, restructurings and otherwise,
decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic
and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the
resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to
the performance of their other responsibilities. There can be no assurance that we will not experience future increases in nonperforming
assets.
We may be unable to successfully compete in our industry.
We face direct competition from a significant number of financial institutions, many with a state-wide or regional presence, and in
some cases, a national presence, in both originating loans and attracting deposits. Competition in originating loans comes primarily from other
banks and finance companies that make loans in our primary market areas. We also face substantial competition in attracting deposits from
other banking institutions, money market and mutual funds, credit unions and other investment vehicles. In addition banks with larger
capitalizations and non-bank financial institutions that are not governed by bank regulatory restrictions have larger lending limits and are better
able to serve the needs of larger customers. Many of these financial institutions are also significantly larger than us, have greater financial
resources than we have, have established customer bases and name recognition. We compete for loans principally on the basis of interest
rates and loan fees, the types of loans we offer and the quality of service that we provide to our borrowers. Our ability to attract and retain
deposits requires that we provide customers with competitive investment opportunities with respect to rate of return, liquidity, risk and other
factors. To effectively compete, we may have to pay higher rates of interest to attract deposits, resulting in reduced profitability. In addition,
we rely upon local promotional activities, personal relationships established by our officers, directors and employees and specialized services
tailored to meet the individual needs of our customers in order to compete. If we are not able to effectively compete in our market area, our
profitability may be negatively affected.
Interest rate changes, increases or decreases, which are out of our control, could harm profitability.
Our profitability depends to a large extent upon net interest income, which is the difference between interest income and dividends
on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings.
Any change in general market interest rates, whether as a result of changes in the monetary policy of the Federal Reserve or otherwise, may
have a significant effect on net interest income.
Our assets and liabilities may react differently to changes in overall interest rates or conditions. In general, higher interest rates are
associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Further, if
interest rates decline, our loans may be refinanced at lower rates or paid off and our investments may be prepaid earlier than expected. If that
occurs, we may have to redeploy the loan or investment proceeds into lower yielding assets, which might also decrease our income. Also, as
many of our loans currently have interest rate floors, a rise in rates may increase the cost of our deposits while the rates on the loans remain at
their floors, which could decrease our net interest margin.
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Accordingly, changes in levels of market interest rates could materially and adversely affect our financial condition, loan origination
volumes, net interest margin, results of operations and profitability.
Since December 2015, the Federal Reserve has started to gradually increase interest rates after maintaining rates at historically low
levels during the financial crisis and its aftermath. Since that date and through December 31, 2017, the Federal Reserve increased its federal
funds benchmark rate five times, from near zero to a range of 1.25% to 1.5%. Moreover, since December 2015, the Federal Reserve has
removed reserves from the banking system, which also puts upward pressure on market rates of interest.
The prohibition restricting depository institutions from paying interest on demand deposits, such as checking accounts, was repealed
as part of the Dodd-Frank Act. At December 31, 2017, we had $365 million in interest-bearing demand deposits. In addition, at December 31,
2017, we had $2.4 billion in money market and savings deposits. Currently, interest rates for these types of deposit accounts are very low
because of existing market conditions. If we need to offer additional interest-bearing demand deposit products or higher interest rates on our
current interest-bearing demand, money market or savings deposit accounts in order to maintain current clients or attract new clients, our
interest expense will increase, perhaps materially. Furthermore, if we fail to offer competitive rates sufficient to retain these accounts, our core
deposits may be reduced, which would require us to seek alternative funding sources or risk slowing our future asset growth.
Changes in the fair value of our investment securities may reduce our stockholders’ equity and net income.
At December 31, 2017, $787 million of our securities were classified as available-for-sale. At such date, the aggregate net
unrealized gain on our available-for-sale securities was $646,000. We increase or decrease stockholders’ equity by the amount of change from
the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of our available-for-sale securities portfolio,
net of the related tax, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of
this portfolio will result in a decline in reported stockholders’ equity, as well as book value per common share and tangible book value per
common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never
sold and there are no credit impairments, the decrease will be recovered over the life of the securities. In the case of equity securities, which
have no stated maturity, the declines in fair value may or may not be recovered over time. As of December 31, 2017, the Company realized
OTTI recoveries of $2,000.
At December 31, 2017, we had stock holdings in the FHLB of San Francisco totaling $17.3 million, $25.3 million in FRB stock, and
$23.3 million in other stock, all carried at cost. The stock held by us is carried at cost and is subject to recoverability testing under applicable
accounting standards. For the year ended December 31, 2017, we did not recognize an impairment charge related to our stock holdings. There
can be no assurance that future negative changes to the financial condition of the issuers may require us to recognize an impairment charge
with respect to such stock holdings.
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Changes in the value of goodwill and intangible assets could reduce our earnings.
When the Company acquires a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and
other identifiable intangible assets. The amount of the purchase price, which is allocated to goodwill and other intangible assets is determined
by the excess of the purchase price over the fair value of the net identifiable assets acquired. As of December 31, 2017, the Company had
approximately $536 million of goodwill and intangible assets, which includes goodwill of approximately $493 million resulting from the
acquisitions the Company has consummated since 2011. The Company accounts for goodwill and intangible assets in accordance with GAAP,
which, in general, requires that goodwill not be amortized, but rather that it is tested for impairment at least annually at the reporting unit level.
Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the
estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. Changes in
the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest
rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great
unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a
future date. If we were to conclude that a future write-down of our goodwill or intangible assets is necessary, we would record the appropriate
charge, which could have a material adverse effect on our business, results of operations or financial condition.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An
inability to raise funds through deposits, repurchase agreements, federal funds purchased, FHLB advances, the sale or pledging as collateral of
loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance
our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general.
Factors that could negatively affect our access to liquidity sources include a reduction in our credit ratings, if any, an increase in costs of
capital in financial capital markets, negative operating results, a decrease in the level of our business activity due to a market downturn, a
decrease in depositor or investor confidence or adverse regulatory action against us. Our ability to borrow could also be impaired by factors
that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the
financial services industry as a whole.
The financial condition of other financial institutions could negatively affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure
to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry,
including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to
credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us
cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any
such losses could have a material adverse effect on our financial condition and results of operations.
We are subject to extensive regulation, which could adversely affect our business.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is
highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are currently proposed
laws, rules and regulations that, if adopted, would impact our operations. These proposed laws, rules and regulations, or any other laws, rules or
regulations, may be adopted in the future, which could (1) make compliance much more
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difficult or expensive, (2) restrict our ability to originate, broker or sell loans or accept certain deposits, (3) further limit or restrict the amount of
commissions, interest or other charges earned on loans originated or sold by us, or (4) otherwise adversely affect our business or prospects for
business.
Moreover, banking regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or
violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties.
The exercise of regulatory authority may have a negative impact on our financial condition and results of operations.
Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be
no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.
The Dodd-Frank Act continues to materially affect our operations.
The Dodd-Frank Act, which was enacted in 2010, imposed significant regulatory and compliance changes. The key provisions of
the Dodd-Frank Act that have affected our operations include:
• Changes to regulatory capital requirements and how we plan capital and liquidity levels;
• Creation of new government regulatory agencies, including the CFPB, which possesses broad rule-making and enforcement
authorities;
• Restrictions that will impact the nature of our incentive compensation programs for executive officers;
• Changes in insured depository institution regulations and assessments;
• Mortgage loan origination and risk retention; and
• Potential new and different litigation and regulatory enforcement risks.
While several provisions of the Dodd-Frank Act became effective immediately upon its enactment and others have come into effect
over the last few years, many provisions still require regulations to be promulgated by various federal agencies in order to be implemented.
Some of these regulations have been proposed by the applicable federal agencies but not yet finalized.
In addition, on February 3, 2017, the President of the United States issued an executive order identifying “core principles” for the
administration’s financial services regulatory policy and directing the Secretary of the Treasury, in consultation with the heads of other
financial regulatory agencies, to evaluate how the current regulatory framework promotes or inhibits the principles and what actions have been,
and are being, taken to promote the principles. In response to the executive order, on June 12, 2017, October 6, 2017 and October 26, 2017,
respectively, the U.S. Department of the Treasury issued the first three of four reports recommending a number of comprehensive changes in
the current regulatory system for U.S. depository institutions, the U.S. capital markets and the U.S. asset management and insurance
industries.
It is not clear whether the referenced executive order issued by President Trump will result in material changes to the current laws
and rules, or those that are in process, applicable to financial institutions and financial services or products like ours.
Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various
regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The
changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business
practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These
changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply
with new statutory and regulatory requirements. Failure to comply with the new
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INDEX
requirements or with any future changes in laws or regulations may negatively impact our results of operations and financial condition.
Changes in laws, government regulation and monetary policy may have a material effect on our results of operations.
Financial institutions have been the subject of substantial legislative and regulatory changes and may be the subject of further
legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of,
existing laws or regulations may cause our results of operations to differ materially. In addition, the cost and burden of compliance with
applicable laws and regulations have significantly increased and could adversely affect our ability to operate profitably. Further, federal
monetary policy significantly affects credit conditions for us, as well as for our borrowers, particularly as implemented by the Federal Reserve,
primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A
material change in any of these conditions could have a material impact on us or our borrowers, and therefore on our results of operations.
Federal and state banking agencies periodically conduct examinations of our business, including compliance with laws and
regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such
examinations may adversely affect us.
Federal and state banking agencies, including the Federal Reserve, the DBO and the FDIC, periodically conduct examinations of
our business, including compliance with laws and regulations. If, as a result of an examination, a federal banking agency were to determine that
the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had
become unsatisfactory, or that the Company or its management was in violation of any law or regulation, it may take a number of different
remedial actions as it deems appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative
actions 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 our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers
and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our
deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively
impacted.
Our HOA business is substantially dependent upon its relationship with Associa, which is the entity that owns and controls the HOA
management companies that manage the HOAs from which we receive a majority of our HOA deposits.
In March 2013, we acquired FAB, which is exclusively focused on providing deposit and other services to HOAs and HOA
management companies nationwide. Some of our HOA customers are also customers of the HOA management companies controlled by
Associations, Inc. (“Associa”). At December 31, 2017, approximately 41% of the HOA transaction deposits we held were derived from our
relationship with Associa. We will continue to rely on the relationship with Associa to solicit HOA deposits as deemed necessary. If Associa
or its HOA management companies lose some or all of their HOA customers, fall into financial or legal difficulty or elect to reduce the amount
of HOA customers that it directs to us, it could have a material and adverse effect upon our business, including the decline or total loss of all of
the deposits from the HOA management companies and the HOAs. We cannot assure you that we would be able to replace the relationship
with Associa and its HOA management companies if any of these events occurred, which could have a material and adverse impact on our
business, financial condition and results of operations. In connection with the closing of the FAB acquisition, we appointed John Carona to the
boards of directors of the Company and the Bank. Mr. Carona is the President and Chief Executive Officer of Associa.
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INDEX
Existing and potential acquisitions may disrupt our business.
On April 1, 2017, we completed the acquisition of HEOP, the holding company of Heritage Oaks Bank, a California state-chartered
bank with $2.0 billion in total assets. On November 1, 2017, we completed the acquisition of PLZZ, the holding company of Plaza Bank, a
California-chartered banking corporation with $1.3 billion in total assets.
On February 9, 2018, we entered into a definitive agreement to acquire Grandpoint, the holding company of Grandpoint Bank, a
California state-chartered bank with $3.2 billion in total assets. That transaction is expected to close in the third quarter of 2018, subject to the
receipt all required regulatory and stockholder approvals and the satisfaction or waiver, applicable, of all closing conditions.
The success of these mergers will depend on, among other things, our ability to realize the anticipated revenue enhancements and
efficiencies and to combine the businesses of Pacific Premier with those of HEOP, PLZZ and Grandpoint, if the acquisition is completed, in a
manner that does not materially disrupt the existing customer relationships of HEOP, PLZZ or Grandpoint, if applicable, or result in decreased
revenues resulting from any loss of customers, and that permits growth opportunities to occur. If we are not able to successfully achieve these
objectives, the anticipated benefits of the mergers may not be realized fully or at all or may take longer to realize than expected.
It is possible that the ongoing HEOP integration process, the PLZZ integration process or the Grandpoint integration process when
and if applicable, could result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls,
procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to
achieve the anticipated benefits of the mergers. Integration efforts could also divert management attention and resources. These integration
matters could have an adverse effect on the combined company.
Existing and potential acquisitions may dilute stockholder value.
In addition, we issued 11,959,022 shares of our common stock in connection with the HEOP acquisition and 6,049,373 shares of our
common stock in connection with the acquisition of PLZZ. All of the shares of our common stock issued to former HEOP and PLZZ
shareholders in the mergers are freely tradable without restrictions under the Securities Act. If former HEOP and PLZZ holders sell
substantial amounts of our common stock, it may cause the market price of our common stock to decrease. We are expected to issue
approximately 15,758,089 shares of our common stock in the Grandpoint acquisition.
We continue to evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions
with other financial institutions on an ongoing basis. As a result, merger or acquisition discussions and, in some cases, negotiations may take
place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the
payment of a premium over book and market values, and, therefore, some dilution of our stock’s tangible book value and net income per
common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost
savings, increases in geographic or product presence, and/or other projected benefits from recent or future acquisitions could have a material
adverse effect on our financial condition and results of operations.
We cannot say with any certainty that we will be able to consummate, or if consummated, successfully integrate future acquisitions
or that we will not incur disruptions or unexpected expenses in integrating such acquisitions. In attempting to make such future acquisitions, we
anticipate competing with other financial institutions, many of which have greater financial and operational resources. Acquiring other banks,
businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:
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INDEX
• Potential exposure to unknown or contingent liabilities of the target company;
• Exposure to potential asset quality issues of the target company;
• Potential disruption to our business;
• Potential diversion of management’s time and attention;
• The possible loss of key employees and customers of the target company;
• Difficulty in estimating the value of the target company; and
• Potential changes in banking or tax laws or regulations that may affect the target company.
Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide
only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and
procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business,
results of operations and financial condition.
Environmental liabilities with respect to properties on which we take title may have a material effect on our results of operations.
We could be subject to environmental liabilities on real estate properties we foreclose and take title in the normal course of our
business. In connection with environmental contamination, we may be held liable to governmental entities or to third parties for property
damage, personal injury, investigation and clean-up costs incurred by these parties, or we may be required to investigate or clean-up hazardous
or toxic substances at a property. The investigation or remediation costs associated with such activities could be substantial. Furthermore, we
may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination even if we
were the former owner of a contaminated site. The incurrence of a significant environmental liability could adversely affect our business,
financial condition and results of operations.
A breach in the security of our systems, or those of contracted partners, could disrupt our business, result in the disclosure of
confidential information, damage our reputation, and create significant financial and legal exposure.
Although we devote significant resources to maintain and regularly update our systems and processes that are designed to protect
the security of our computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of
information belonging to us and our customers, there is no assurance that all of our security measures will provide absolute security.
Like many financial institutions, we can be subject to attempts to infiltrate the security of our websites or other systems which can
involve sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt service,
sabotage systems or cause other damage, including through the introduction of computer viruses or malware, cyberattacks and other means.
We can be targeted by individuals and groups using malicious code and viruses, and can be exposed to distributed denial-of-service attacks
with the objective of disrupting on-line banking services.
Despite efforts to ensure the security and integrity of our systems, it is possible that we may not be able to anticipate, detect or
recognize threats to our systems or to implement effective preventive measures against all security breaches of these types inside or outside
our business, especially because the techniques used frequently are not recognized until launched, and because cyberattacks can originate from
a wide variety of sources, including individuals or groups who are or may be involved in organized crime, hostile foreign governments or linked
to terrorist organizations. These risks may increase in the future as our web-based product offerings grow or we expand internal usage of
web-based applications.
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INDEX
A successful penetration or circumvention of the security of our systems or the systems of another market participant could cause
serious negative consequences, including significant disruption of our operations, misappropriation of confidential information, or damage to
computers or systems, and may result in violations of applicable privacy and other laws, financial loss, loss of confidence, customer
dissatisfaction, significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on our business,
financial condition, results of operations, and future prospects.
We are dependent on our key personnel.
Our future operating results depend in large part on the continued services of our key personnel, including Steven R. Gardner, our
Chairman, President and Chief Executive Officer, who developed and implemented our business strategy. The loss of Mr. Gardner could have
a negative impact on the success of our business strategy. In addition, we rely upon the services of Edward Wilcox, President, and our ability
to attract and retain highly skilled personnel. We do not maintain key-man life insurance on any employee other than Mr. Gardner. We cannot
assure you that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business. The
unexpected loss of services of our key personnel could have a material adverse impact on our business because of their skills, knowledge of
our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In addition, recent regulatory
proposals and guidance relating to compensation may negatively impact our ability to retain and attract skilled personnel.
A natural disaster or recurring energy shortage, especially in California, could harm our business.
We are based in Irvine, California, and approximately 61% of our loans secured by real estate were located in California at
December 31, 2017. In addition, the computer systems that operate our Internet websites and some of their back-up systems are located in
Irvine and San Diego, California. Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of
natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters could harm our operations directly through
interference with communications, including the interruption or loss of our websites, which would prevent us from gathering deposits,
originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational,
financial and management information systems. A natural disaster or recurring power outages may also impair the value of our largest class of
assets, our loan portfolio, which is comprised substantially of real estate loans. Uninsured or underinsured disasters may reduce borrowers’
ability to repay mortgage loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on
defaulted loans through foreclosure and making it more likely that we would suffer losses on defaulted loans. California has also experienced
energy shortages, which, if they recur, could impair the value of the real estate in those areas affected. Although we have implemented several
back-up systems and protections (and maintain business interruption insurance), these measures may not protect us fully from the effects of a
natural disaster. The occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business
prospects, financial condition and results of operations.
Risks Related to Ownership of Our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell your shares of common
stock at times or at prices you find attractive.
Stock price volatility may make it difficult for holders of our common stock to resell their common stock when desired and at
desirable prices. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
• Actual or anticipated variations in quarterly results of operations;
• Recommendations by securities analysts;
• Operating and stock price performance of other companies that investors deem comparable to us;
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INDEX
• News reports relating to trends, concerns and other issues in the financial services industry, including the failures of other
financial institutions in the current economic downturn;
• Perceptions in the marketplace regarding us and/or our competitors;
• Cyber security breaches;
• New technology used, or services offered, by competitors;
• Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us
or our competitors;
• Failure to integrate acquisitions or realize anticipated benefits from acquisitions;
• Changes in government regulations; and
• Geopolitical conditions such as acts or threats of terrorism or military conflicts.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic
slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating
results as evidenced by the current volatility and disruption of capital and credit markets.
We have retained earnings, if any, to provide funds for use in our business.
It is our policy to retain earnings, if any, to provide funds for use in our business. We have never declared or paid dividends on our
common stock. In addition, in order to pay cash dividends over time to our stockholders, we would most likely need to obtain funds from the
Bank. The Bank’s ability, in turn, to pay dividends to us is subject to restrictions set forth in the Financial Code. The Financial Code provides
that a bank may not make a cash distribution to its stockholders in excess of the lesser of (1) a bank’s retained earnings; or (2) a bank’s net
income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to
the stockholders of the bank during such period. However, a bank may, with the approval of the DBO, make a distribution to its stockholders in
an amount not exceeding the greatest of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current
fiscal year. In the event that banking regulators determine that the stockholders’ equity of a bank is inadequate or that the making of a
distribution by the bank would be unsafe or unsound, the regulators may order the bank to refrain from making a proposed distribution.
Approval of the Federal Reserve is required for payment of any dividend by a state chartered bank that is a member of the Federal
Reserve Board System, such as the Bank, if the total of all dividends declared by the bank in any calendar year would exceed the total of its
retained net income for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not
pay a dividend in an amount greater than its undivided profits without regulatory and stockholder approval. The Bank is also prohibited under
federal law from paying any dividend that would cause it to become undercapitalized.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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INDEX
ITEM 2. PROPERTIES
The headquarters of the Company and the Bank are located in Irvine, California at 17901 Von Karman Avenue. As of December 31,
2017, our properties include 11 administrative offices and 33 branches. We owned 13 properties and leased the remaining properties
throughout Orange, Los Angeles, Riverside, San Bernardino, San Diego, San Luis Obispo and Santa Barbara, California as well as Clark
County, Nevada. The lease terms are not individually material and range from month to month to ten years from inception date.
All of our existing facilities are considered to be adequate for our present and anticipated future use. In the opinion of management, all
properties are adequately covered by insurance.
For additional information regarding properties of the Company and the Bank, see Note 7. Premises and Equipment of the Notes to
the Consolidate Financial Statements contained in "Item 8. Financial Statements and Supplementary."
ITEM 3. LEGAL PROCEEDINGS
The Corporation was named as a defendant in a lawsuit brought in California state court (San Luis Obispo County) entitled, Garfield v.
Heritage Oaks Bancorp, et al. This lawsuit was brought by Robert Garfield, a shareholder of HEOP, parent corporation of Heritage Oaks
Bank. Mr. Garfield challenged the share price and other financial benefits to shareholders in the Corporation’s proposed acquisition of HEOP.
Mr. Garfield purported to bring this claim on behalf of a class of similarly-situated HEOP shareholders, although no class was certified by the
court. Mr. Garfield was unsuccessful in obtaining a preliminary injunction in advance of the acquisition. He later filed an amended complaint,
which did not name the Corporation. As a result, the Corporation was dismissed from the action in October 2017.
The Corporation also was named as a defendant in a lawsuit brought in the U.S. District Court for the Central District of California
entitled Parshall v. Heritage Oaks Bancorp, et al. In relevant part, Mr. Parshall alleged that the Corporation, as a “control person” of HEOP,
should be liable for what Mr. Parshall claimed to be inadequate disclosures in the joint proxy statement/prospectus HEOP sent to its
shareholders in connection with soliciting approval of the Corporation’s acquisition of HEOP. Mr. Parshall purported to bring this claim on
behalf of a class of similarly-situated HEOP shareholders, although no class was certified by the court. Mr. Parshall voluntarily dismissed the
action in June 2017.
In addition to the lawsuits described above, the Company is involved in legal proceedings occurring in the ordinary course of business.
Management believes that neither the lawsuits described above nor any 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 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Price Range by Quarters
The common stock of the Corporation has been publicly traded since 1997 and is currently traded on the NASDAQ Global Market
under the symbol PPBI.
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INDEX
As of February 27, 2018, there were approximately 964 holders of record of our common stock. The following table summarizes the
range of the high and low closing sale prices per share of our common stock as quoted by the NASDAQ Global Select Market for the periods
indicated.
$
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Sale Price of Common Stock
High
Low
21.66 $
25.07
27.39
35.85
41.90
38.75
38.70
42.55
18.63
20.32
23.68
24.75
34.35
33.15
32.05
36.25
Stock Performance Graph. The graph below compares the performance of our common stock with that of the NASDAQ
Composite Index (U.S. companies) and the NASDAQ Bank Stocks Index from December 31, 2012 through December 31, 2017. The graph is
based on an investment of $100 in our common stock at its closing price on December 31, 2012. The Corporation has not paid any dividends on
its common stock.
35
INDEX
Total Return to Stockholders
(Assumes $100 investment on 12/31/2012)
Total Return Analysis
Pacific Premier Bancorp, Inc.
NASDAQ Composite Index
NASDAQ Bank Stocks Index
Dividends
$
12/31/2012
100.00
100.00
100.00
$
12/31/2013
153.71
138.32
138.90
$
12/31/2014
169.24
156.85
142.85
$
12/31/2015
207.52
165.84
152.31
$
12/30/2016
345.21
178.28
205.66
$
12/29/2017
390.63
228.63
212.88
It is our policy to retain earnings, if any, to provide funds for use in our business. Although we have never declared or paid dividends
on our common stock, our board of directors periodically reviews whether to declare or pay cash dividends taking into account, among other
things, general business conditions, our financial results, future prospects, capital requirements, legal and regulatory restrictions, and such other
factors as our board may deem relevant.
Our ability to pay dividends on our common stock is dependent on the Bank’s ability to pay dividends to the Corporation. Various
statutory provisions restrict the amount of dividends that the Bank can pay without regulatory approval. For information on the statutory and
regulatory limitations on the ability of the Corporation to pay dividends to its stockholders and on the Bank to pay dividends to the Corporation,
see “Item 1. Business-Supervision and Regulation—Dividends” and “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Liquidity.”
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INDEX
Unregistered Sales of Equity Securities and Use of Proceeds
On June 25, 2012, the board of directors authorized its second stock repurchase program. Under the repurchase program,
management is authorized to repurchase up to 1,000,000 shares of the Company’s common stock. The program may be limited or terminated
at any time without prior notice. The following table provides information with respect to purchases made by or on behalf of us or any
“affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the fourth quarter of 2017.
Month of Purchase
October 1, 2017 to October 31, 2017
November 1, 2017 to November 30, 2017
December 1, 2017 to December 31, 2017
Total/Average
Total Number of
shares purchased/
returned
Average price paid
per share
Total number of
shares repurchased
as part of the
publicly
announced
program
—
—
—
—
37
—
—
—
—
—
—
—
—
Maximum number
of shares that may
yet be purchased
under the program
at end of month
762,545
762,545
762,545
762,545
INDEX
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain of our financial and statistical information at or for each of the years presented. This data
should be read in conjunction with our audited consolidated financial statements as of December 31, 2017 and 2016, and for each of the years
in the three-year period ended December 31, 2017 and related Notes to Consolidated Financial Statements contained in “Item 8. Financial
Statements and Supplementary Data.”
2017
2016
2015
2014
2013
For the Years Ended December 31,
$
$
$
$
$
Operating Data
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loans losses
Net gains from loan sales
Other noninterest income
Noninterest expense
Income before income tax
Income tax
Net income
Share Data
Net income per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Book value per share (basic)
Book value per share (diluted)
Selected Balance Sheet Data
Total assets
Securities and FHLB stock
Loans held for sale, net
Loans held for investment, net
Allowance for loan losses
Total deposits
Total borrowings
Total stockholders' equity
Performance Ratios
Return on average assets
Return on average equity
Average equity to average assets
Equity to total assets at end of period
Average interest rate spread
Net interest margin
Efficiency ratio (1)
270,005
22,503
247,502
8,640
238,862
12,468
18,646
167,750
102,226
42,126
60,100
$
$
$
$
(dollars in thousands, except per share data)
166,605
13,530
153,075
8,776
144,299
9,539
10,063
98,583
65,318
25,215
40,103
118,356
12,057
106,299
6,425
99,874
7,970
6,418
73,538
40,724
15,209
25,515
81,339
7,704
73,635
4,684
68,951
6,300
7,077
54,993
27,335
10,719
16,616
$
$
$
$
63,800
5,356
58,444
1,860
56,584
3,228
5,583
50,815
14,580
5,587
8,993
$
1.59
1.56
$
1.49
1.46
$
1.21
1.19
$
0.97
0.96
0.57
0.54
$
$
37,705,556
38,511,261
26.86
26.73
8,024,501
871,601
23,426
6,167,532
28,936
6,085,868
641,410
1,241,996
$
$
$
$
26,931,634
27,439,159
16.54
16.78
4,036,311
426,832
7,711
3,220,317
21,296
3,145,581
397,354
459,740
21,156,668
21,488,698
13.86
13.78
2,789,599
312,207
8,565
2,236,998
17,317
2,195,123
265,388
298,980
$
$
17,046,660
17,343,977
11.81
11.73
2,037,731
218,705
—
1,616,422
12,200
1,630,826
185,787
199,592
15,798,885
16,609,954
10.52
10.44
1,714,187
271,539
3,147
1,231,923
8,200
1,306,286
214,401
175,226
0.99 %
6.75
14.62
15.48
4.18
4.43
50.9
1.11 %
9.30
11.97
11.39
4.22
4.48
53.6
0.97 %
9.31
10.45
10.72
4.01
4.25
55.9
0.91 %
8.76
10.38
9.79
4.01
4.21
61.3
0.62 %
5.61
11.13
10.22
3.99
4.18
64.7
Average interest-earnings assets to average interest-bearing deposits
and borrowings
164.66
166.42
149.17
145.45
147.58
Pacific Premier Bank Capital Ratios
Tier 1 leverage ratio
Common equity tier 1 risk-weighted capital ratio
Tier 1 capital to total risk-weighted assets
Total capital to total risk-weighted assets
Pacific Premier Bancorp, Inc. Capital Ratios
Tier 1 leverage ratio
11.68 %
11.88
11.88
12.33
10.94 %
11.65
11.65
12.29
11.41 %
12.35
12.35
13.07
11.29 %
N/A
12.72
13.45
10.03 %
N/A
12.34
12.97
10.70 %
9.78 %
9.52 %
9.18 %
10.29 %
Common equity tier 1 risk-weighted capital ratio
Tier 1 capital to total risk-weighted assets
Total capital to total risk-weighted assets
Asset Quality Ratios
Nonperforming loans to loans held for investment
Nonperforming assets as a percent of total assets
Net charge-offs to average total loans, net
Allowance for loan losses to gross loans at period end
Allowance for loan losses as a percent of nonperforming loans,
gross at period end
10.59
10.88
12.57
0.05 %
0.04
0.02
0.47
10.12
10.41
12.72
0.04 %
0.04
0.17
0.66
881
1,868
9.91
10.28
13.43
0.18 %
0.18
0.06
0.77
436
N/A
10.30
14.46
0.09 %
0.12
0.05
0.75
845
N/A
12.54
13.17
0.18 %
0.20
0.16
0.66
364
(1) Represents the ratio of noninterest expense less OREO operations, core deposit intangible amortization and merger-related and litigation expenses to the sum of net
interest income before provision for loan losses and total noninterest income less gains/(loss) on sale of securities, gain/(loss) on sale of OREO. OTTI recovery (loss) on
investment securities, and gain on acquisitions.
38
INDEX
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis of financial condition and results of operations is intended to provide a better understanding
of the significant changes in trends relating to the Company's financial condition, results of operation, liquidity and capital resources. This
section should be read in conjunction with the disclosures regarding "Forward-Looking Statements" set forth in "Item I. Business-Forward
Looking Statements", as well as the discussion set forth in "Item 8. Financial Statements and Supplementary Data," including the notes to
consolidated financial statements.
Merger Agreement
On February 12, 2018, the Corporation announced that, on February 9, 2018, it had entered into a definitive agreement to acquire
Grandpoint and its wholly-owned bank subsidiary, Grandpoint Bank, a California-chartered state bank subsidiary. At December 31, 2017,
Grandpoint had $3.2 billion in total assets, $2.4 billion in gross loans and $2.4 billion in total deposits. Grandpoint operates 14 regional offices in
Southern California, Arizona and Vancouver, Washington.
Upon consummation of the acquisition, holders of Grandpoint common stock will have the right to receive 0.4750 shares of the
Corporation's common stock for each share of Grandpoint common stock they own. Based on a $39.10 closing price of the Corporation's
common stock on February 9, 2018, the aggregate merger consideration payable to Grandpoint's shareholders is approximately $641 million.
Summary
Our principal business is attracting deposits from small and middle market businesses and consumers and investing those deposits,
together with funds generated from operations and borrowings, primarily in commercial business loans and various types of commercial real
estate loans. The Company expects to fund substantially all of the loans that it originates or purchases through deposits, FHLB advances and
other borrowings and internally generated funds. Deposit flows and cost of funds are influenced by prevailing market rates of interest primarily
on competing investments, account maturities and the levels of savings in the Company’s market area. The Company generates the majority of
its revenues from interest income on loans that it originates and purchases, income from investment in securities and service charges on
customer accounts. The Company’s revenues are partially offset by interest expense paid on deposits and borrowings, the provision for loan
losses and noninterest expenses, such as operating expenses. The Company’s operating expenses primarily consist of employee compensation
and benefit expenses, premises and occupancy expenses, data processing and communication expenses and other general expenses. The
Company's results of operations are also affected by prevailing economic conditions, competition, government policies and other actions of
regulatory agencies.
Critical Accounting Policies and Estimates
We have established various accounting policies that govern the application of accounting principles generally accepted in the
United States of America in the preparation of the Company’s financial statements in Item 8 hereof. The Company’s significant accounting
policies are described in Note 1 to the Consolidated Financial Statements. Certain accounting policies require management to make estimates
and assumptions that 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 consolidated statements of financial condition dates and the
Company’s results of operations for future reporting periods.
39
INDEX
Allowance for Loan Losses
We consider the determination of ALLL to be among our critical accounting policies that require judicious estimates and
assumptions in the preparation of the Company’s financial statements that is particularly susceptible to significant change. The Company
maintains an ALLL at a level deemed appropriate by management to provide for known or probable incurred losses in the portfolio at the
consolidated statements of financial condition date. The Company has implemented and adheres to an internal asset review system and loss
allowance methodology designed to provide for the detection of problem assets and an adequate allowance to cover loan losses.
Management’s determination of the adequacy of ALLL is based on an evaluation of the composition of the portfolio, actual loss experience,
industry charge-off experience on income property loans, current economic conditions, and other relevant factors in the areas in which the
Company’s lending and real estate activities are based. These factors may affect the borrowers’ ability to pay and the value of the underlying
collateral. The allowance is calculated by applying loss factors to loans held for investment according to loan type and loan credit classification.
The loss factors are evaluated on a quarterly basis and established based primarily upon the Bank’s historical loss experience and, to a lesser
extent, the industry charge-off experience. Various regulatory agencies, as an integral part of their examination process, periodically review
the Company’s ALLL. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those
of management. In the opinion of management, and in accordance with the credit loss allowance methodology, the present allowance is
considered adequate to absorb estimable and probable credit losses. Additions and reductions to the allowance are reflected in current
operations. Charge-offs to the allowance are made when specific assets are considered uncollectible or are transferred to OREO and the fair
value of the property is less than the loan’s recorded investment. Recoveries are credited to the allowance.
Although management uses the best information available to make these estimates, future adjustments to the allowance may be
necessary due to economic, operating, regulatory and other conditions that may be beyond the Company’s control. For further information on
the ALLL, see Notes 1 and 5 to the Consolidated Financial Statements in Item 8 hereof.
Business Combinations
We account for acquisitions under the acquisition method. All identifiable assets acquired and liabilities assumed are recorded at fair
value. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as
goodwill. Identifiable intangible assets include core deposit intangibles, which have a definite life. Core deposit intangibles ("CDI") are
subsequently amortized over the estimated life up to 10 years and are tested for impairment annually. Goodwill generated from business
combinations is deemed to have an indefinite life and is not subject to amortization, and instead is tested for impairment at least annually.
As part of the estimation of fair value, we review each loan or loan pool acquired to determine whether there is evidence of
deterioration in credit quality since inception and if it is probable that the Company will be unable to collect all amounts due under the
contractual loan agreements. We consider expected prepayments and estimated cash flows including principal and interest payments at the
date of acquisition. If a loan is determined to be a purchased credit impaired ("PCI") loan, the amount in excess of the estimated future cash
flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into
interest income over the remaining life of the loan (accretable yield). The Company records these loans on the acquisition date at their net
realizable value. Thus, an allowance for estimated future losses is not established on the acquisition date. Losses or a reduction in cash flow,
which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected
cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan.
40
INDEX
Income Taxes
Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in the
Company’s financial statements or tax returns using the asset liability method. In estimating future tax consequences, all expected future
events other than enactments of changes in the tax laws or rates are considered. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred tax assets are to be recognized for temporary differences that
will result in deductible amounts in future years and for tax carryforwards if, in the opinion of management, it is more likely than not that the
deferred tax assets will be realized. See also Note 14 of the Consolidated Financial Statements in Item 8 hereof this Form 10-K.
Fair Value of Financial Instruments
We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value
disclosures. Investment securities available-for-sale are financial instruments recorded at fair value on a recurring basis. Additionally, from
time to time, we may be required to record at fair value other financial assets on a non-recurring basis, such as impaired loans and OREO.
These non-recurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual
assets. Further, we include in Note 18 to the Consolidated Financial Statements information about the extent to which fair value is used to
measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded
at fair value we disclose the estimate of their fair value.
Operating Results
Overview. The comparability of financial information is affected by our acquisitions. On April 1, 2017 and November 1, 2017, the
Company completed the acquisition of HEOP and PLZZ, respectively.
Non-GAAP Measurements
The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the
Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The non-GAAP
measures used in this Form 10-K include the following:
• Tangible common equity: Total stockholders' equity is reduced by the amount of intangible assets, including goodwill.
• Tangible common equity amounts and ratios, tangible assets, and tangible book value per share: Given that the use of these
measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to equity-to-assets ratio,
total assets, and book value per share, respectively.
41
INDEX
Total stockholders' equity
Less: Intangible assets
Tangible common equity
Total assets
Less: Intangible assets
Tangible assets
Common Equity ratio
Less: Intangible equity ratio
Tangible common equity ratio
Basic shares outstanding
Book value per share
Less: Intangible book value per share
Tangible book value per share
$
$
$
$
$
$
For the Years ended December 31,
2017
2016
2015
(dollars in thousands)
$
$
1,241,996
536,343
705,653
8,024,501
536,343
7,488,158
$
$
$
459,740
111,941
347,799
4,036,311
111,941
3,924,370
$
$
$
298,980
58,002
240,978
2,789,599
58,002
2,731,597
15.48%
6.06
9.42%
11.39%
2.53
8.86%
10.72%
1.90
8.82%
46,245,050
27,798,283
21,570,746
26.86
11.60
15.26
$
$
16.54
4.03
12.51
$
$
13.86
2.69
11.17
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.
For 2017, net interest income totaled $248 million, an increase of $94.4 million or 62% over 2016. The increase reflected an
increase in average interest-earning assets of $2.2 billion, primarily due to the acquisitions of HEOP and PLZZ in the second and fourth
quarter of 2017, respectively. Net interest margin decreased 5 basis points to 4.43%, primarily due to the yield on interest-earning assets
decreasing 4 basis points and a slight increase in cost of funds.
For 2016, net interest income totaled $153 million, an increase of $46.8 million or 44% over 2015. The increase reflected an
increase in average interest-earning assets of $912 million and an increase in the average yield of 15 basis points, resulting in an increase in the
net interest margin of 23 basis points to 4.48%. The 23 basis point expansion in net interest margin was a result of the increase in the yield on
earning assets coupled with a 6 basis point decrease in the cost of interest bearing liabilities, as well as the $440 million increase in non-interest
bearing deposits. The increase in interest-earning assets was primarily related to organic loan growth, the acquisition of SCAF in early 2016,
and the purchase of $265 million of multi-family loans in 2016.
The following table presents 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 table also sets forth our net interest income, net interest rate spread and net interest rate margin for the periods indicated. The
net interest rate spread represents the difference between the yield on interest-earning
42
INDEX
assets and the cost of interest-bearing liabilities. The net interest rate margin reflects the ratio of net interest income as a percentage of
interest-earning assets for the year.
Average
Balance
2017
Interest
Average
Yield/Cost
Average
Balance
2016
Interest
Average
Yield/Cost
Average
Balance
2015
Interest
Average
Yield/Cost
For the Years Ended December 31,
(dollars in thousands)
842
18,136
251,027
270,005
$
140,402
718,564
4,724,970
5,583,936
510,947
6,094,883
$
293,450
1,701,209
189,408
556,121
227,822
365
6,720
251
3,390
2,645
Assets
Interest-earning assets:
Cash and cash equivalents
$
Investment securities
Loans receivable, net (1)
Total interest-earning
assets
Noninterest-earning assets
Total assets
Liabilities and Equity
Interest-bearing deposits:
Interest checking
Money market
Savings
Retail certificates of
deposit
Wholesale/brokered
certificates of deposit
$
$
Total interest-bearing
deposits
FHLB advances and other
borrowings
Subordinated debentures
Total borrowings
Total interest-bearing
liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and equity $
Net interest income
Net interest rate spread
Net interest margin
0.60% $
2.52
5.31
$
180,185
334,283
2,900,379
4.84%
$
3,414,847
186,564
3,601,411
762
7,908
157,935
166,605
0.42% $
2.37
5.45
$
141,454
299,767
2,061,788
4.88%
$
2,503,009
118,536
2,621,545
310
6,949
111,097
118,356
0.12% $
0.40
0.13
0.61
1.16
$
176,508
1,003,861
98,224
416,232
180,209
2,968,010
13,371
0.45%
1,875,034
341,782
81,466
423,248
3,391,258
1,758,730
54,039
5,204,027
890,856
6,094,883
4,411
4,721
9,132
22,503
1.29
5.80
2.16%
0.66%
$
107,519
69,346
176,865
2,051,899
1,086,814
31,682
3,170,395
431,016
3,601,411
203
3,638
151
3,084
1,315
8,391
1,295
3,844
5,139
13,530
165
2,426
141
3,209
689
6,630
1,490
3,937
5,427
12,057
0.11% $
0.36
0.15
0.74
0.73
$
141,962
696,747
88,247
390,797
102,950
0.45%
1,420,703
1.20
5.54
2.91%
0.66%
$
188,032
69,199
257,231
1,677,934
646,931
22,678
2,347,543
274,002
2,621,545
Ratio of interest-earning assets to interest-
bearing liabilities
$
247,502
$
153,075
$
106,299
4.18%
4.43%
164.66%
4.22%
4.48%
166.42%
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums.
Changes in our net interest income are a function of changes in both volumes and rates of interest-earning assets and interest-
bearing liabilities. The following table presents the impact the volume and rate changes have had on our net interest income for the years
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 the prior period rate);
• Changes in interest rates (changes in interest rates multiplied by the prior period volume); and
• The change or the combined impact of volume and rate changes allocated proportionately to changes in volume and changes in
interest rates.
43
0.22%
2.32
5.39
4.73%
0.12%
0.35
0.16
0.82
0.67
0.47%
0.79
5.69
2.11%
0.72%
4.01%
4.25%
149.17%
INDEX
Year Ended December 31, 2017
compared to
Year Ended December 31, 2016
Increase (decrease) due to
Year Ended December 31, 2016
compared to
Year Ended December 31, 2015
Increase (decrease) due to
Volume
Days
Rate
Net
Volume
Days
Rate
Net
(dollars in thousands)
Interest-Earning Assets
Cash and cash equivalents
$
Investment securities
Loans receivable, net
Total interest-earning assets
Interest-Bearing Liabilities
Transaction accounts
Time deposits
FHLB advances and other
borrowings
Subordinated debentures
Total interest-bearing liabilities
Changes in net interest income
$
(193) $
9,696
97,907
107,410
(2) $
—
(688)
(690)
$
275
532
(4,127)
(3,320)
$
80
10,228
93,092
103,400
2,935
1,330
3,020
602
7,887
99,523
(20)
(17)
(12)
—
(49)
$
(641) $
429
323
108
275
1,135
(4,455) $
3,344
1,636
3,116
877
8,973
94,427
$
$
105
808
45,168
46,081
1,196
753
(787)
4
1,166
44,915
$
2
—
432
434
11
12
4
—
27
407
$
$
345
151
1,238
1,734
53
(264)
588
(97)
280
1,454
$
$
452
959
46,838
48,249
1,260
501
(195)
(93)
1,473
46,776
Provision for Loan Losses. For 2017, we recorded an $8.6 million provision for loan losses compared to $8.8 million recorded in
2016. The $136,000 decrease in the provision for loan losses was primarily attributable to a lower level of net charge-offs for the year, partially
offset by the growth in our loan portfolio. Net loan charge-offs for 2017 amounted to $1.0 million, a decrease from $4.8 million in 2016.
For 2016, we recorded an $8.8 million provision for loan losses compared to $6.4 million recorded in 2015. The $2.4 million increase
in the provision for loan losses was primarily attributable to the growth in our loan portfolio during the year and, to a lesser extent, the change in
our loan composition and net charge-offs. Net loan charge-offs for 2016 amounted to $4.8 million, which increased from $1.3 million in 2015.
Noninterest Income. For 2017, non-interest income totaled $31.1 million, an increase of $11.5 million or 59% from 2016. The
increase was primarily due to an increase in other income of $5.8 million, which is primarily attributable to higher recoveries of $2.0 million
from pre-acquisition charge-offs, higher ATM and debit card fees of $1.7 million, and higher bank-owned life insurance ("BOLI") income of
$926,000. Also, the Bank had a $2.9 million increase on the gain on sale of loans, from $9.5 million in 2016 to $12.5 million in 2017. During
2017, we sold $127 million of SBA loans at an overall premium of 11.4% and $96.6 million in various other loans at an overall premium of 1%,
compared to 2016 in which we sold $110 million of SBA loans at an overall premium of 8.3% and $2.6 million in commercial and industrial
loans at an overall premium of 17.4%. Deposit related fees grew $2.1 million in 2017, as growth in core transaction deposit accounts from both
organic growth and the acquisition of HEOP and PLZZ contributed to the increase in deposit fees from $1.7 million in 2016 to $3.8 million in
2017. Lastly, gain on sale of investments increased $940,000 as the Bank sold $261 million of securities during 2017 compared to $222 million
in 2016.
For 2016, non-interest income totaled $19.6 million, an increase of $5.2 million or 36% from 2015. The increase was primarily
related to an increase of $1.6 million on gain on sale of loans from $8.0 million in 2015 to $9.5 million. During 2016, we sold $110 million of
SBA loans at an overall premium of 8.3% and $2.6 million in commercial and industrial loans at an overall premium of 17.4%, compared to
2015 in which we sold $79.3 million of SBA loans at an overall premium of 9% and $69.1 million in commercial real estate and multi-family
loans at an
44
INDEX
overall premium of 1%. Gain on sale of investments increased $1.5 million as the Bank sold a limited number of securities during 2015. Deposit
related fees and loan servicing fees grew by a combined $1.5 million in 2015, as growth in core transaction deposit accounts from both organic
growth and the acquisition of SCAF contributed to the increase in deposit fees from $2.5 million in 2015 to $3.4 million in 2016 and loan
servicing fees from $371,000 in 2015 to $1.0 million in 2016. Finally, other income increased $735,000 as the Bank saw higher recoveries of
$1.7 million from pre-acquisition charge-offs, partially offset by a $641,000 decrease in other loans fees and asset write-offs of $366,000.
For the Years ended December 31,
2017
2016
2015
Noninterest Income
Loan servicing fees
Deposit fees
Net gain from sales of loans
Net gain from sales of investment securities
Other income
Total noninterest income
$
$
787 $
(dollars in thousands)
1,032 $
1,697
9,539
1,797
5,537
19,602 $
3,809
12,468
2,737
11,313
31,114 $
371
1,274
7,970
290
4,483
14,388
Noninterest Expense. For 2017, noninterest expense totaled $168 million, an increase of $69.2 million or 70.2% from 2016. The
increase in noninterest expense was primarily due to higher compensation and benefits of $31.3 million, primarily related to an increase in staff
from our acquisitions of HEOP in April 2017, PLZZ in November 2017, and internal growth in staff to support our growth. Merger-related
expense increased $16.6 million in 2017 reflecting costs from both the HEOP and PLZZ acquisitions. Occupancy expense grew by $4.9 million
in 2017, mostly due to the acquisitions and the additional branches retained from the mergers. The remaining expense categories grew by $16.3
million or 52% in 2017, due to both a combination of expense growth related to the acquisitions of HEOP and PLZZ and increased expenses to
support the Company's organic growth in loans and deposits. The most significant increase in expense from these remaining categories is a
$4.1 million increase in CDI expenses, $3.9 million increase in data processing, $3.1 million increase in legal, audit, and professional expenses,
and a $1.3 million increase in deposit related expenses, which include expenses such as lock box services, to support our continued growth in
core transaction deposits.
For 2016, noninterest expense totaled $98.6 million, an increase of $25.0 million or 34% from 2015. The increase in noninterest
expense was primarily due to higher compensation and benefits of $15.7 million, primarily related to an increase in staff from our acquisition of
SCAF and internal growth in staff to support our growth. Occupancy expense grew by $2.0 million in 2016, mostly due to the acquisition of
SCAF and the additional branches retained from the merger. Marketing expense grew by approximately $1.7 million in 2016, as the Company
increased its investment in sponsorships and other marketing areas to support its continued efforts to organically grow its customer base. The
remaining expense categories grew by $5.5 million or 21% in 2016, due to both a combination of expense growth related to the acquisition of
SCAF and increased expenses to support the Company's organic growth in loans and deposits. The most significant increase in expense from
these remaining categories is a $1.4 million increase in data processing and $1.3 increase in deposit related expenses, which include expenses
such as lock box services, to support our continued growth in core transaction deposits. merger-related expense in 2016 reflects costs from
both the SCAF merger in January 2016 as well as the acquisition of HEOP.
Our efficiency ratio was 50.9% for 2017, compared to 53.6% for 2016 and 55.9% for 2015. The improvement in the efficiency ratio
in 2017 compared to 2016 was related to revenues growing faster than expenses, as the Company's growing asset size creates greater scale of
efficiencies.
45
INDEX
Noninterest Expense
Compensation and benefits
Premises and occupancy
Data processing
Other real estate owned operations, net
FDIC insurance premiums
Legal, audit and professional expense
Marketing expense
Office, telecommunications and postage expense
Loan expense
Deposit expense
Merger-related expense
CDI amortization
Other expense
Total noninterest expense
For the Years ended December 31,
2017
2016
2015
(dollars in thousands)
$
$
$
$
84,138
14,742
8,206
72
2,151
6,101
4,436
3,117
3,299
6,240
21,002
6,144
8,102
167,750
52,836
9,838
4,261
385
1,545
3,041
3,981
2,107
2,191
4,904
4,388
2,039
7,067
98,583
37,108
7,810
2,816
68
1,376
2,514
2,305
2,005
1,268
3,643
4,799
1,350
6,476
73,538
$
$
Income Taxes. The Company recorded income taxes of $42.1 million in 2017, compared with $25.2 million in 2016 and $15.2
million in 2015. Our effective tax rate was 41.2% for 2017, 38.6% for 2016, and 37.3% for 2015. The effective tax rate in each year is
affected by various items, including changes in tax law, tax exempt income from municipal securities, BOLI, tax credits from investments in
low income housing tax credits ("LIHTC") and merger-related expense.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (the "Tax Act"). The effective tax rate for 2017 increased from 2016 primarily due to the inclusion of $5.6 million of income tax
expense related to the revaluation of the deferred tax assets and liabilities due to the reduction of the U.S. corporate tax rate from 35% to 21%
under the Tax Act. Additional information on the Tax Act is presented in Item 1. Business - Federal and State Taxation.
See Note 14 to the Consolidated Financial Statements included in Item 8 hereof for further discussion of income taxes and an
explanation of the factors, which impact our effective tax rate.
Financial Condition
At December 31, 2017, total assets of the Company were $8.0 billion, up $4.0 billion or 99% from total assets of $4.0 billion at
December 31, 2016. The increase in assets since year-end 2016 was primarily related to the increase in loans held for investment of $3.0
billion associated with organic loan growth and the acquisitions of PLZZ and HEOP. The acquisition of PLZZ added $1.1 billion of loans in the
fourth quarter of 2017, and the acquisition of HEOP added $1.4 billion of loans in the second quarter of 2017, both before fair value
adjustments.
Investment Activities
Our investment policy, as established by our board of directors, attempts to provide and maintain liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk and complement our lending activities. Specifically, our investment
policy generally limits our investments to U.S. government securities, federal agency-backed securities, government-sponsored guaranteed
mortgage-backed securities (“MBS”) and collateralized mortgage obligations ("CMO"), municipal bonds, and corporate bonds. The Bank has
designated all investment securities as available-for-sale outside of investments made for CRA purposes.
46
INDEX
Below is a breakdown of the portfolio for the past three years by investment type and designation.
Amortized
Cost
2017
Fair
Value
% Portfolio
Amortized
Cost
2016
Fair
Value
% Portfolio
Amortized
Cost
2015
Fair
Value
% Portfolio
(dollars in thousands)
At December 31,
Investment Securities
Available-for-Sale
Agency
Corporate
Municipal bonds
Collateralized mortgage
obligation: residential
Mortgage-backed securities:
residential
Total investment securities
available-for-sale
Investment Securities Held-to-
Maturity
Mortgage-backed securities:
residential
Other
$
47,051 $
78,155
228,929
47,209
79,546
232,128
$
5.9 % $
9.9
28.8
—
37,475
120,155
—
37,642
118,803
$
— % $
9.7
30.5
—
—
128,546
—
—
130,245
33,984
33,781
398,664
394,765
786,783
787,429
17,153
1,138
16,944
1,138
4.2
49.0
97.8
2.1
0.1
31,536
31,388
196,496
193,130
385,662
380,963
7,375
1,190
7,271
1,190
8.1
49.5
97.8
1.9
0.3
24,722
24,543
126,443
125,485
279,711
280,273
8,400
1,242
8,330
1,242
2.2
8,565
100 % $ 394,227
8,461
$ 389,424
2.2
9,642
100 % $ 289,353
9,572
$ 289,845
— %
—
44.9
8.5
43.3
96.7
2.9
0.4
3.3
100 %
Total investment securities
held-to-maturity
18,082
Total investment securities $ 805,074 $ 805,511
18,291
Our investment securities portfolio amounted to $806 million at December 31, 2017, as compared to $389 million at December 31,
2016, representing a 107% increase. The increase in securities since year-end 2016 was primarily due to the acquisition of HEOP, which
increased securities by $443 million and purchases of $317 million, partially offset by sales/calls of $222 million, and principal pay downs of
$76.1 million. In general, the purchase of investment securities primarily related to investing excess liquidity from our banking operations, while
the sales were made to help fund loan production, which improved our interest-earning asset mix by deploying investment securities dollars into
higher yielding loans.
47
INDEX
The following table sets forth the fair values and weighted average yields on our investment security portfolio by contractual
maturity as of the date indicated:
At December 31, 2017
One Year
or Less
More than One Year
to Five Years
More than Five Years
to Ten Years
More than
Ten Years
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Total
Fair
Value
(dollars in thousands)
Investment
Securities
Available-for-
Sale
Agency
$
Corporate
Municipal
bonds
Collateralized
mortgage
obligation:
residential
Mortgage-
backed
securities:
residential
Total
investment
securities
available-for-
sale
Investment
Securities
Held-to-
Maturity
Mortgage-
backed
securities:
residential
Other
Total
investment
securities
held-to-
maturity
Total
investment
securities
$
—
—
—% $
—
—
—
—% $
—
15,164
79,546
2.11% $
5.01
32,045
—
2.01% $
—
47,209
79,546
4,121
1.44
32,424
1.83
73,312
2.04
122,271
2.51
232,128
—
—
—
—
1,071
1.83
32,710
2.48
33,781
2,583
2.30
2,611
1.13
65,014
2.13
324,557
2.22
394,765
6,704
1.77
35,035
1.78
234,107
3.08
511,583
2.29
787,429
—
—
—
—
—
—
—
—
—
—
—
—
16,944
1,138
3.04
0.93
16,944
1,138
—
—
—
—
—
—
18,082
2.90
18,082
6,704
1.77% $
35,035
1.78% $
234,107
3.08% $
529,665
2.31% $
805,511
As of December 31, 2017, our investment securities portfolio consisted of $412 million in government-sponsored enterprise ("GSE")
mortgage-backed securities ("MBS"), $232 million in municipal bonds, $79.5 million in corporate bonds, $47.2 million of agency bonds, $33.8
million in GSE collateralized mortgage obligations ("CMO") and $1.1 million in other securities. At December 31, 2017, we had an estimated
par value of $55.6 million of the GSE securities that were pledged as collateral for the Company’s $28.5 million of reverse repurchase
agreements (“Repurchase Agreements”). The total end of period weighted average interest rate on investments at December 31, 2017 was
2.69%, compared to 2.45% at December 31, 2016, reflecting the increased investment in higher yielding corporate bonds.
The following table lists the percentage of our portfolio exposure to any one issuer as a percentage of capital. The only issuers with
greater than ten percent exposure are the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"). No single municipal issuer exceeds two percent of capital.
48
INDEX
Issuer
GNMA
FNMA
FHLMC
Amortized
Cost
2017
Fair
Value
At December 31,
% Capital
Amortized
Cost
(dollars in thousands)
2016
Fair
Value
% Capital
$
30,497 $
216,530
185,621
30,008
214,685
183,853
2.4 % $
17.3
14.8
33,062 $
117,716
77,254
32,672
115,968
75,878
7.1 %
25.2
16.5
All of the municipal bond securities in our portfolio have an underlying rating of investment grade, with the majority insured by the
largest bond insurance companies to bring each of these securities to a Moody’s A+ rating or better. The Company has only purchased
general obligation bonds that are risk-weighted at 20% for regulatory capital purposes. The Company reduces its exposure to any single
adverse event by holding securities from geographically diversified municipalities. We are continually monitoring the quality of our municipal
bond portfolio in accordance with current financial conditions. To our knowledge, none of the municipalities in which we hold bonds are
exhibiting financial problems that would require us to record an OTTI charge.
The following is a listing of the breakdown by state for our municipal holdings, with all states with greater than nine percent of the
portfolio listed. Eighty-one percent of the Texas issues are insured by The Texas Permanent School Fund.
Issuer
Texas
California
Other
Total municipal securities
Loans
At December 31, 2017
Amortized
Cost
Fair
Value
% Municipal
(dollars in thousands)
$
$
97,109
38,737
93,083
228,929
$
$
98,127
39,750
94,251
232,128
42.3%
17.1
40.6
100%
Loans held for investment, net totaled $6.2 billion at December 31, 2017, an increase of $2.9 billion or 92% from December 31,
2016. The increase in loans from December 31, 2016 includes loans acquired from PLZZ, which added $1.1 billion of loans in the fourth
quarter of 2017, and HEOP, which added $1.4 billion of loans in the second quarter of 2017, both before fair value adjustments, as well as our
organic loan originations. The increase in loans included increases in commercial owner occupied of $834 million, commercial non-owner
occupied of $656 million, C&I loans of $523 million, franchise loans of $201 million, one-to-four family loans of $170 million, farmland loans of
$145 million, agriculture loans of $116 million, multi-family of $103 million, SBA loans of $97 million and consumer loans of $88.8 million. The
total end of period weighted average interest rate on loans as of December 31, 2017 was 4.95% and 4.81% as of December 31, 2016.
Loans held for sale totaled $23.4 million at December 31, 2017. Loans held for sale primarily represent the guaranteed portion of
SBA loans, which the Bank originates for sale. As of December 31, 2016, loans held for sale totaled $7.7 million.
49
INDEX
The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated:
Business Loans
2017
At December 31,
2016
2015
Amount
% of Total
Weighted
Average
Interest
Rate
Amount
% of Total
Weighted
Average
Interest
Rate
(dollars in thousands)
Amount
% of Total
Weighted
Average
Interest
Rate
Commercial and industrial $ 1,086,659
660,414
Franchise
17.5 %
10.7
5.18 % $
5.23
563,169
459,421
17.4 %
14.2
4.82 % $
5.24
309,741
328,925
13.7 %
14.6 %
4.95 %
5.45
Commercial owner
occupied (1)
SBA
Warehouse facilities
Agribusiness
Total business loans
Real Estate Loans
Commercial non-owner
occupied
Multi-family
One-to-four family (2)
Construction
Farmland
Land
Total real estate loans
Consumer Loans
Consumer loans
Gross loans held for
investment
Plus: Deferred loan
origination costs/(fees) and
premiums/(discounts), net
Loans held for investment
Allowance for loan losses
Loans held for
investment, net
1,289,213
185,514
—
116,066
3,337,866
1,243,115
794,384
270,894
282,811
145,393
31,233
2,767,830
20.8
3.0
—
1.9
53.9
20.0
12.8
4.4
4.6
2.3
0.5
44.6
92,931
1.5
5.01
6.30
—
4.62
5.16
4.60
4.29
4.63
6.13
4.52
5.72
4.68
5.63
454,918
88,994
—
—
1,566,502
586,975
690,955
100,451
269,159
—
19,829
1,667,369
14.1
2.8
—
—
48.5
18.1
21.3
3.1
8.3
—
0.6
51.4
4,112
0.1
4.76
5.63
—
—
4.97
4.63
4.28
4.62
5.57
—
5.36
4.65
5.60
294,726
53,691
143,200
—
1,130,283
421,583
429,003
80,050
169,748
—
18,340
1,118,724
13.1
2.4
6.4
—
50.2
18.7
19.0
3.6
7.5
—
0.8
49.6
5,111
0.2
4.98
5.49
3.88
—
4.99
4.91
4.56
4.51
5.42
—
5.16
4.83
5.21
6,198,627
100 %
4.95 %
3,237,983
100 %
4.81 %
2,254,118
100 %
4.91 %
(2,159 )
6,196,468
(28,936 )
3,630
3,241,613
(21,296 )
197
2,254,315
(17,317 )
$ 6,167,532
$ 3,220,317
$ 2,236,998
Loans held for sale, at lower
of cost or fair value
$
23,426
$
7,711
$
8,565
50
INDEX
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied (1)
SBA
Warehouse facilities
Total business loans
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family (2)
Construction
Land
Total real estate loans
Consumer Loans
Consumer loans
Gross loans held for investment
Plus: Deferred loan origination costs/(fees) and premiums/
(discounts), net
Loans held for investment
Allowance for loan losses
Loans held for investment, net
2014
2013
Amount
% of Total
Weighted
Average
Interest
Rate
Amount
% of Total
Weighted
Average
Interest
Rate
(dollars in thousands)
$
228,979
199,228
210,995
28,404
113,798
781,404
359,213
262,965
122,795
89,682
9,088
843,743
14.1%
12.2
13.0
1.7
7.0
48.0
22.1
16.1
7.5
5.5
0.6
51.8
4.80% $
5.70
5.10
5.60
4.20
5.05
5.00
4.60
4.40
5.20
4.80
4.81
187,035
—
221,089
7,512
87,517
503,153
333,544
233,689
145,235
13,040
7,605
733,113
15.1%
—
17.8
0.6
7.1
40.6
26.9
18.8
11.7
1.1
0.6
59.1
5.00%
—
5.30
5.90
4.10
4.99
5.30
4.80
4.40
5.20
4.70
4.95
3,298
1,628,445
0.2
100%
6.10
4.90%
3,839
1,240,105
0.3
100%
5.80
5.00%
177
1,628,622
(12,200)
$ 1,616,422
18
1,240,123
(8,200)
$ 1,231,923
3,147
Loans held for sale, at lower of cost or fair value
—
(1) Secured by real estate.
(2) Includes second trust deeds.
51
INDEX
The following table shows the contractual maturity of the Company's loans without consideration to prepayment assumptions at the
date indicated:
Commercial
and
Industrial
Commercial
Owner
Occupied
Franchise
SBA
Agribusiness
At December 31, 2017
Commercial
Non-owner
Occupied
Multi-
family
One-to-
four
Family
(dollars in thousands)
Construction Farmland Land
Consumer
Loans
Total
Amounts
Due
One year
or less
More
than one
year to
three
years
More
than
three
years to
five years
More
than five
years to
10 years
More
than 10
years to
20 years
More
than 20
years
$ 463,630 $ 21,646 $
27,921 $
145 $ 67,508
$
53,372 $ 27,058 $ 22,682 $ 229,625
$
7,517 $17,458 $18,620
$ 957,182
213,645
18,612
33,536
630
6,951
88,833
8,475
10,304
49,454
10,435
4,057
1,424
446,356
191,918
49,184
64,959
1,989
33,350
109,185
17,097
8,264
950
8,914
1,741
4,886
492,437
156,755 444,034
458,781
17,874
7,788
713,157
87,736
35,960
2,782
105,279
5,615 34,756
2,070,517
49,437 100,298
179,526
23,434
469
152,441
45,953
26,412
11,274
26,641
530,491 158,866
—
126,127 608,065 167,272
—
—
9,287
2,362 30,516
620,135
3,961
—
2,729
1,635,426
Total
gross
loans $1,086,659 $660,415 $1,295,214 $202,938 $ 116,066
$1,243,115 $794,384 $270,894 $ 282,811
$145,393 $31,233 $92,931
$6,222,053
52
INDEX
The following table sets forth at December 31, 2017 the dollar amount of gross loans receivable contractually due after December
31, 2018 and whether such loans have fixed interest rates or adjustable interest rates.
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Agribusiness
Total business loans
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Construction
Farmland
Land
Total real estate loans
Consumer Loans
Consumer loans
Total gross loans
At December 31, 2017
Loans Due After December 31, 2018
Fixed
Adjustable
(dollars in thousands)
Total
$
$
253,761
87,424
216,670
5,507
40,631
603,993
242,495
24,067
41,779
2,122
93,773
2,925
407,161
369,268 $
551,345
1,050,623
197,286
7,927
2,176,449
947,248
743,259
206,433
51,064
44,103
10,850
2,002,957
$
72,699
1,083,853
$
1,612
4,181,018 $
623,029
638,769
1,267,293
202,793
48,558
2,780,442
1,189,743
767,326
248,212
53,186
137,876
13,775
2,410,118
74,311
5,264,871
Delinquent Loans. When a borrower fails to make required payments on a loan and does not cure the delinquency within 30
days, we normally initiate formal collection activities including, for loans secured by real estate, recording a notice of default and, after
providing the required notices to the borrower, commencing 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. At December 31,
2017, loans delinquent 60 or more days as a percentage of total loans held for investment was 7 basis points, up from 2 basis points at year-end
2016.
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 December 31, 2017
Business Loans
Commercial and
industrial
Commercial owner
occupied
SBA
Real Estate Loans
Multi-family
3
$
1
2
3
84
3,474
177
1,781
570
486
—
—
4
$
1
—
—
53
4
$
—
5
—
235
—
1,940
—
11
$
2
7
3
889
3,960
2,117
1,781
INDEX
One-to-four family
Land
Consumer Loans
Consumer loans
Total
Delinquent loans to total
loans held for investment
At December 31, 2016
Business Loans
Commercial and
industrial
SBA
Real Estate Loans
One-to-four family
Land
Total
Delinquent loans to total
loans held for investment
At December 31, 2015
Business Loans
Commercial and
industrial
Franchise
Commercial owner
occupied
Real Estate Loans
Commercial non-owner
occupied
One-to-four family
Land
Total
Delinquent loans to total
loans held for investment
At December 31, 2014
Business Loans
Commercial and
industrial
Real Estate Loans
One-to-four family
Consumer Loans
Consumer loans
Total
Delinquent loans to total
loans held for investment
5
2
4
34 $
4 $
3
5
1
13 $
1,169
92
51
10,059
0.16%
364
316
137
15
832
1
1
2
13 $
354
83
11
5,964
—
—
—
5 $
—
—
—
1,056
4
1
2
16 $
815
9
40
3,039
0.10%
0.02%
0.05%
2 $
—
1
—
3 $
2 $
—
—
1
1
—
4 $
— $
1
1
2 $
104
—
18
—
122
— $
—
1
—
1 $
—
—
71
—
71
2 $
3
3
1
9 $
260
316
48
15
639
—%
—%
0.02%
0.03%
20
—
—
214
89
—
323
— $
—
1
—
—
—
1 $
—
—
355
—
—
—
355
1 $
3
—
—
2
1
7 $
257
1,630
—
—
46
21
1,954
3 $
3
1
1
3
1
12 $
277
1,630
355
214
135
21
2,632
0.01%
0.02%
0.09%
0.12%
—
19
1
20
1 $
—
—
1 $
24
—
—
24
— $
3
—
3 $
—
54
—
54
1 $
4
1
6 $
24
73
1
98
—%
—%
—%
0.01%
54
INDEX
At December 31, 2013
Business Loans
Commercial owner
occupied
SBA
Real Estate Loans
Commercial non-owner
occupied
One-to-four family
Consumer Loans
Consumer loans
Total
Delinquent loans to total
loans held for investment
2 $
—
—
3
3
8 $
768
—
—
71
130
969
— $
—
—
—
—
— $
—
—
—
—
—
—
0.08%
—%
1 $
1
2
4
—
8 $
446
14
560
123
—
1,143
0.09%
3 $
1
2
7
3
16 $
1,214
14
560
194
130
2,112
0.17%
(1) All 90 day or greater delinquencies are on nonaccrual status and are reported as part of nonperforming loans.
Nonperforming Assets
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), troubled debt restructured
loans and OREO. Nonaccrual loans consisted of all loans 90 days or more past due and on loans where, in the opinion of management, there is
reasonable doubt as to the collection of principal and interest. A “restructured loan” is one where the terms of the loan were renegotiated to
provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. We had one troubled
debt restructured loan with a recorded balance of $97,000 at December 31, 2017 and no troubled debt restructured loans at December 31,
2016. At December 31, 2017, we had $3.6 million of nonperforming assets, which consisted of $3.3 million of net nonperforming loans and
$326,000 of OREO. At December 31, 2016, we had $1.6 million of nonperforming assets, which consisted of $1.1 million of nonperforming
loans and $460,000 of OREO. It is our policy to take appropriate, timely and aggressive action when necessary to resolve nonperforming
assets. When resolving problem loans, it is our policy to determine collectability under various circumstances, which are intended to result in
our maximum financial benefit. We accomplish this by working with the borrower to bring the loan current, selling the loan to a third party or
by foreclosing and selling the asset.
At December 31, 2017, OREO consisted of one commercial owner occupied property and one land property, compared to one
commercial non-owner occupied property and one land property at December 31, 2016. Properties acquired through or in lieu of foreclosure
are recorded at fair value less cost to sell. The Company generally obtains an appraisal and/or a market evaluation on all OREO prior to
obtaining possession. After foreclosure, valuations are periodically performed by management as needed due to changing market conditions or
factors specifically attributable to the property’s condition. If the carrying value of the property exceeds its fair value, less estimated cost to
sell, the asset is written down and a charge to operations is recorded.
We recognized loan interest income on nonperforming loans of $640,000 in 2017, $740,000 in 2016 and $467,000 in 2015. If these
loans had paid in accordance with their original loan terms, we would have recorded additional loan interest income of $155,000 in 2017,
$360,000 in 2016 and $279,000 in 2015.
55
INDEX
The following table sets forth composition of nonperforming assets at the date indicated:
Nonperforming Assets
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Total business loans
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Land
Total real estate loans
Consumer Loans
Consumer loans
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Allowance for loan losses
Allowance for loan losses as a percent of total nonperforming
loans, gross
Nonperforming loans as a percent of loans held for investment
Nonperforming assets as a percent of total assets
At December 31,
2017
2016
2015
2014
2013
(dollars in thousands)
$
$
$
$
1,160
—
97
1,201
2,458
—
—
817
9
826
—
3,284
326
3,610
28,936
$
$
881%
0.05
0.04
$
250
—
436
316
1,002
—
—
124
15
139
—
1,141
460
1,601
21,296
$
$
1,866%
0.04
0.04
$
463
1,630
536
—
2,629
1,164
—
155
21
1,340
1
3,970
1,161
5,131
17,317
$
$
436%
0.18
0.18
$
—
—
514
—
514
848
—
82
—
930
—
1,444
1,037
2,481
12,200
$
$
845%
0.09
0.12
—
—
747
14
761
983
—
507
—
1,490
—
2,251
1,186
3,437
8,200
364%
0.18
0.20
Allowance for Loan Losses. The allowance for loan losses is established as management's estimate of probable incurred losses
inherent in the loan receivable portfolio. Management evaluates the adequacy of the allowance quarterly to maintain the allowance at levels
sufficient to provide for these inherent losses. The ALLL is based upon the total loans evaluated individually and collectively, and is reported as
a reduction of loans held for investment. The allowance is increased by a provision for loan losses which is charged to expense and reduced by
charge-offs, net of recoveries.
We separate our assets, largely loans, by type, and we use various asset classifications to segregate the assets into various risk
grade categories. We use the various asset classifications as a means of measuring risk for determining the valuation allowance for groups and
individual assets at a point in time. Currently, we designate our assets into a category of “Pass,” “Special Mention,” “Substandard,” “Doubtful”
or “Loss.” A brief description of these classifications follows:
• Pass classifications represent assets with a level of credit quality, which contain no well-defined deficiency or weakness.
• 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 deficiency 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.
56
INDEX
• 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.
Our determination as to the classification of assets and the amount of valuation allowances necessary are subject to review by bank
regulatory agencies, which can order a change in a classification or an increase to the allowance. While we believe that an adequate
allowance for estimated loan losses has been established, there can be no assurance that our regulators, in reviewing assets including the loan
portfolio, will not request us to materially increase our allowance for estimated loan losses, thereby negatively affecting our financial condition
and earnings at that time. In addition, actual losses are dependent upon future events and, as such, further increases to the level of allowances
for estimated loan losses may become necessary.
At December 31, 2017, we had $48.6 million of assets classified as substandard, compared to $13.3 million at December 31, 2016,
with the increase primarily attributable to acquired loans. There were no loans classified as doubtful as of year-end 2017, compared to
$250,000 as of year-end 2016.
57
INDEX
The following tables set forth information concerning substandard and doubtful assets at the dates indicated:
At December 31, 2017
Loans
OREO
Total Substandard
Assets
Doubtful
Gross
Balance
# of
Loans
Balance
# of
Properties
Balance
# of
Assets
Balance
# of
Loans
(dollars in thousands)
Business Loans
Commercial and industrial
$
Commercial owner occupied
SBA
Agribusiness
Total business loans
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Farmland
Land
Total real estate loans
Consumer Loans
Consumer loans
Total substandard assets
15,044
21,180
3,469
3,844
43,537
1,070
228
1,964
1,115
254
4,631
$
91
32
34
6
163
7
1
16
3
4
31
137
48,305
$
14
208
$
—
121
—
—
121
—
—
—
—
205
205
—
326
—
1
—
—
1
—
—
—
—
1
1
—
2
$
15,044
21,301
3,469
3,844
43,658
1,070
228
1,964
1,115
459
4,836
$
91
33
34
6
164
7
1
16
3
5
32
137
48,631
$
14
210
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
At December 31, 2016
Loans
OREO
Total Substandard
Assets
Doubtful
Gross
Balance
# of
Loans
Balance
# of
Properties
Balance
# of
Assets
Balance
# of
Loans
(dollars in thousands)
Business Loans
Commercial and industrial
$
Commercial owner occupied
SBA
Total business loans
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Land
Total real estate loans
Consumer Loans
Consumer loans
Total substandard assets
3,784
4,221
462
8,467
1,072
2,403
441
15
3,931
393
12,791
$
21
14
5
40
3
6
9
1
19
2
61
$
$
88
—
—
88
—
—
—
372
372
—
460
1
—
—
1
—
—
—
1
1
—
2
$
3,872
4,221
462
8,555
1,072
2,403
441
387
4,303
393
13,251
$
22
14
5
41
3
6
9
2
20
2
63
$
$
250
—
—
250
—
—
—
—
—
—
250
1
—
—
1
—
—
—
—
—
—
1
In determining the ALLL, we evaluate loan credit losses on an individual basis in accordance with the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") 310, Accounting by
58
INDEX
Creditors for Impairment of a Loan, and on a collective basis based on FASB ASC 450, Accounting for Contingencies. For loans
evaluated on an individual basis, we analyze the borrower’s creditworthiness, cash flows and financial status, and the condition and estimated
value of the collateral. Loans evaluated individually that are deemed to be impaired are separated from our collective credit loss analysis.
Unless an individual borrower relationship warrants a separate analysis, the majority of our loans are evaluated for credit losses on
a collective basis through a quantitative analysis to arrive at base loss factors that are adjusted through a qualitative analysis for internal and
external identified risks. The adjusted factor is applied against the loan risk category to determine the appropriate allowance. Then adjustments
for the following internal and external risk factors are added to the base factors:
Internal Factors
• Changes in lending policies and procedures, including underwriting standards and collection, charge-offs, and recovery
practices;
• Changes in the nature and volume of the loan portfolio and the terms of loans, as well as new types of lending;
• Changes in the experience, ability, and depth of lending management and other relevant staff that may have an impact on our
loan portfolio;
• Changes in the volume and severity of past due and classified loans, and in the volume of non-accruals, troubled debt
restructurings, and other loan modifications;
• Changes in the quality of our loan review system and the degree of oversight by our board of directors; and
• The existence and effect of any concentrations of credit and changes in the level of such concentrations.
External Factors
• Changes in national, state and local economic and business conditions and developments that affect the collectability of the
portfolio, including the condition of various market segments (includes trends in real estate values and the interest rate
environment);
• Changes in the value of the underlying collateral for collateral-dependent loans; and
• The effect of external factors, such as competition, legal developments and regulatory requirements on the level of estimated
credit losses in our current loan portfolio.
Loans acquired through bank acquisition are recorded at fair value at acquisition date without a carryover of the related ALLL.
Loans acquired with deteriorated credit quality are loans that have evidence of credit deterioration since origination and it is probable at the
date of acquisition that the Company will not collect principal and interest payments according to contractual terms. These loans are accounted
for under ASC Subtopic 310-30 Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.
As of December 31, 2017, the ALLL totaled $28.9 million, an increase of $7.6 million from December 31, 2016 and $11.6 million
from December 31, 2015. At December 31, 2017, the ALLL as a percent of nonperforming loans was 881%, compared with 1,866% at
December 31, 2016 and 436% at December 31, 2015.
At December 31, 2017, the ALLL as a percent of loans held for investment was 0.47%, a decrease from 0.66% at December 31,
2016, and 0.77% at December 31, 2015. The decrease in the 2017 ratio was primarily attributable to the loans acquired from HEOP and
PLZZ, recorded at fair value with no ALLL carried over. At December 31, 2017, management deems the ALLL to be sufficient to provide
for probable incurred losses within the loan portfolio.
59
INDEX
The following table sets forth the activity in the Company’s ALLL for the periods indicated:
Allowance for Loan Losses
Balance at beginning of period
Provision for loan losses
Charge-offs:
Business loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Real Estate loans
Commercial non-owner occupied
Multi-family
One-to-four family
Consumer loans
Consumer loans
Total charge-offs
Recoveries:
Business loans
Commercial and industrial
Commercial owner occupied
SBA
Real Estate loans
Commercial non-owner occupied
One-to-four family
Consumer loans
Consumer loans
Total recoveries
Net loan charge-offs
Balance at end of period
For the Year Ended December 31,
2017
2016
2015
(dollars in thousands)
2014
2013
$
$
21,296
8,640
$
17,317
8,776
$
12,200
6,425
$
8,200
4,684
7,994
1,860
1,344
—
—
8
—
—
10
—
1,362
94
105
127
—
35
$
$
2,802
980
329
980
—
—
151
—
5,242
177
25
193
21
25
$
$
484
764
—
—
116
—
16
—
1,380
47
—
8
3
13
$
$
223
—
—
—
365
—
195
—
783
42
—
4
—
34
$
$
1
362
1,000
28,936
$
4
445
4,797
21,296
$
1
72
1,308
17,317
$
19
99
684
12,200
$
$
$
$
509
—
232
143
756
101
272
18
2,031
138
—
50
—
47
142
377
1,654
8,200
Ratios
Net charge-offs to average total loans, net
Allowance for loan losses to loans held for investment
0.02 %
0.47 %
0.17 %
0.66 %
0.06 %
0.77 %
0.05 %
0.75 %
0.16 %
0.66 %
60
INDEX
The following table sets forth the Company’s ALLL and the percent of gross loans to total gross loans in each of the categories
listed and the allowance as a percentage of the loan category balance at the dates indicated:
Balance at End
of Period
Applicable to
Amount
2017
% of Loans in
Category to
Total Loans
Allowance as
a % of Loan
Category
Balance
Amount
At December 31,
2016
% of Loans in
Category to
Total Loans
Allowance as
a % of Loan
Category
Balance
(dollars in thousands)
2015
% of Loans in
Category to
Total Loans
Allowance as
a % of Loan
Category
Balance
Amount
Business
Loans
Commercial
and industrial $
Franchise
Commercial
owner
occupied
SBA
Agribusiness
Warehouse
facilities
Real Estate
Loans
Commercial
non-owner
occupied
Multi-family
One-to-four
family
Construction
Farmland
Land
Consumer
Loans
Consumer
loans
Total
$
9,721
5,797
767
2,890
1,291
—
1,266
607
803
4,569
137
993
17.5%
10.7
0.89% $
0.88
6,362
3,845
17.4%
14.1
1.13% $
0.84
3,449
3,124
13.7%
14.5
1.11%
0.95
20.8
3.0
1.9
—
20.0
12.8
4.4
4.6
2.3
0.5
0.06
1.56
1.11
—
0.10
0.08
0.30
1.62
0.09
3.18
1,193
1,039
—
—
1,715
2,927
365
3,632
—
198
14.0
3.0
—
—
18.1
21.3
3.1
8.3
—
0.6
0.26
1.17
—
—
0.29
0.42
0.36
1.35
—
1.00
1,870
1,500
—
759
2,048
1,583
698
2,030
—
233
13.0
2.8
—
6.3
18.7
19.0
3.5
7.5
—
0.8
0.63
2.79
—
0.53
0.49
0.37
0.87
1.20
—
1.27
95
28,936
1.5
100.0%
0.10
0.47% $
20
21,296
0.1
100.0%
0.49
0.66% $
23
17,317
0.2
100.0%
0.45
0.77%
61
INDEX
Balance at End of
Period Applicable to
Amount
2014
2013
% of Loans
in Category
to Total
Loans
Allowance as
a % of Loan
Category
Balance
Amount
% of Loans
in Category
to Total
Loans
Allowance as
a % of Loan
Category
Balance
(dollars in thousands)
Business Loans
Commercial and
industrial
$
Franchise
Commercial owner
occupied
SBA
Warehouse facilities
Real estate Loans
Commercial non-
owner occupied
Multi-family
One-to-four family
Construction
Land
Consumer Loans
Consumer loans
Total
2,646
1,554
1,757
568
546
2,007
1,060
842
1,088
108
14.1 %
12.2
1.16 % $
0.78
13.0
1.7
7.0
22.1
16.1
7.5
5.5
0.6
0.83
2.00
0.48
0.56
0.40
0.69
1.21
1.19
24
12,200
$
0.2
100.0 %
0.73
0.75 % $
1,968
—
1,818
151
392
1,658
817
1,099
136
127
34
8,200
15.0 %
—
1.05 %
—
17.8
0.9
7.0
26.9
18.8
11.7
1.0
0.6
0.82
2.01
0.45
0.50
0.35
0.76
1.04
1.67
0.3
100.0 %
0.89
0.66 %
The following table sets forth the ALLL amounts calculated by the categories listed at the dates indicated:
At December 31,
2017
2016
2015
2014
2013
Balance at End
of Period
Applicable to
Amount
% of
Allowance
to Total
Amount
% of
Allowance
to Total
Amount
% of
Allowance
to Total
Amount
% of
Allowance
to Total
Amount
% of
Allowance
to Total
(dollars in thousands)
Allocated
allowance
Specific
allowance
Total
$ 28,881
99.8 % $ 21,046
98.8 % $ 16,586
95.9 % $ 12,200
100.0 % $
8,095
55
$ 28,936
0.2
250
100.0 % $ 21,296
1.2
731
100.0 % $ 17,317
4.1
—
100.0 % $ 12,200
—
100.0 % $
105.0
8,200
98.7 %
1.3
100.0 %
62
INDEX
Deposits
At December 31, 2017, total deposits were $6.1 billion, an increase of $2.9 billion or 93% from December 31, 2016. The increase in
deposits since year-end 2016 included increases in money market and savings of $1.2 billion, noninterest bearing checking of $1.0 billion, time
deposits of $510 million and interest-bearing checking of $182 million. The increase in deposits during 2017 was primarily due to the acquisition
of PLZZ in the fourth quarter of 2017, which contributed $1.1 billion of deposits at the time of acquisition, before purchasing accounting
adjustments and the acquisition of HEOP in the second quarter of 2017, which contributed $1.4 billion of deposits at the time of acquisition,
before purchase accounting adjustments, as well as organic deposit growth. The total end of period weighted average interest rate on deposits
was 0.33% at December 31, 2017 and 0.27% at December 31, 2016.
The following table sets forth the distribution of the Company’s deposit accounts on average for the periods indicated and the
weighted average interest rates on each category of deposits presented:
For the years ended December 31,
2017
2016
2015
Average
Balance
Average
Yield/Cost
Average
Balance
Average
Yield/Cost
Average
Balance
Average
Yield/Cost
(dollars in thousands)
Deposits
Noninterest bearing checking
$
Interest bearing checking
Money market
Savings
Retail certificates of deposit
Wholesale/brokered certificates of deposit
Total deposits
$
1,758,730
293,450
1,701,209
189,408
556,121
227,822
4,726,740
— % $
0.12
0.40
0.13
0.61
1.16
0.28 % $
1,086,814
176,508
1,003,861
98,224
416,232
180,209
2,961,848
— % $
0.11
0.36
0.15
0.74
0.73
0.28 % $
646,931
141,962
696,747
88,247
390,797
102,950
2,067,634
— %
0.12
0.35
0.16
0.82
0.67
0.32 %
At December 31, 2017, we had $892 million in certificate accounts with balances of greater than $100,000, and of that amount, we
had $523 million in certificate of deposit accounts with balances of greater than $250,000 maturing as follows:
$100,000 through $250,000
Greater than $250,000
December 31, 2017
Maturity Period
Amount
Weighted
Average
Rate
% of Total
Deposits
Amount
Weighted
Average Rate
% of Total
Deposits
Amount
(dollars in thousands)
Total
Weighted
Average
Rate
% of Total
Deposits
Three months or less
$ 164,359
1.00%
2.70% $ 165,731
1.14%
2.72% $ 330,090
1.07%
5.42%
Over three months through 6
months
Over 6 months through 12
months
Over 12 months
Total
57,816
0.77
0.95
153,775
1.29
2.53
211,591
1.14
3.48
76,376
71,197
$ 369,748
1.00
1.24
1.01%
151,038
1.25
1.17
52,118
6.07% $ 522,662
1.36
1.31
1.26%
227,414
2.48
0.86
123,315
8.59% $ 892,410
1.24
1.27
1.16%
3.74
2.03
14.66%
63
INDEX
Borrowings. Borrowings represent a secondary source of funds for our lending and investing activities. The Company has a
variety of borrowing relationships that it can draw upon to fund its activities. At December 31, 2017, total borrowings amounted to $641 million,
an increase of $244 million or 61% from December 31, 2016. The increase in borrowings at December 31, 2017 from December 31, 2016 was
primarily related to an increase in FHLB overnight advances. At December 31, 2017, total borrowings represented 8.0% of total assets and
had an end of period weighted average rate of 2.21%, compared with 9.8% of total assets at a weighted average rate of 1.95% at
December 31, 2016.
FHLB Advances. The FHLB system functions as a source of credit to financial institutions that are members. Advances are
secured by certain real estate loans, investment securities, and the capital stock of the FHLB owned by the Company. Subject to the FHLB’s
advance policies and requirements, these advances can be requested for any business purpose in which the Company is authorized to engage.
In granting advances, the FHLB considers a member’s creditworthiness and other relevant factors. The Company has a line of credit with the
FHLB, which provides for advances totaling up to 45% of its assets, equating to a credit line of $2.9 billion as of December 31, 2017. At
December 31, 2017, we had borrowing capacity of $1.2 billion with the FHLB. At December 31, 2017, the Company had $180 million term
FHLB advances and $310 million in overnight FHLB advances, compared to no term FHLB advances, which matured within one year, and
$278 million in overnight FHLB advances at December 31, 2016. The FHLB advances at December 31, 2017 were collateralized by real
estate loans and securities with an aggregate balance of $1.4 billion and FHLB stock of $17.3 million. With this pledged collateral, the
Company has additional available advances of $677 million as of December 31, 2017.
Other Borrowings. The Company maintains lines of credit to purchase federal funds and a reverse repurchase facility together
totaling $218 million with eight correspondent banks and has access through the Federal Reserve Bank discount window to borrow $3.3 million
to be utilized as business needs dictate. Federal funds purchased and reverse repurchase facilities are short-term in nature and utilized to meet
short-term funding needs.
As of December 31, 2017, the Company has three Repurchase Agreements totaling $28.5 million with a weighted average interest
rate of 3.26% as of December 31, 2017 secured by GSE MBS totaling an estimated par value of $26.5 million. The Repurchase Agreements
were entered into in 2008 at a term of 10 years each with the buyers of the Repurchase Agreements having the option to terminate the
Repurchase Agreements after the fixed interest rate period has expired. The interest rates reset quarterly with the maximum reset rate being
2.89% on one $10.0 million Repurchase Agreement, 3.47% on the other $10.0 million Repurchase Agreement, and 3.45% on the $8.5 million
Repurchase Agreement.
The Company sells certain securities under agreements to repurchase. The agreements are treated as overnight borrowings with
the obligations to repurchase securities sold reflected as a liability. The dollar amount of investment securities underlying the agreements
remain in the asset accounts. The Company enters into these debt agreements as a service to certain HOA depositors to add protection for
deposit amounts above FDIC insurance levels. At December 31, 2017, the Company sold securities under agreement to repurchase of $17.6
million with weighted average rate of 0.01% and collateralized by investment securities with fair value of approximately $29.7 million.
Debentures. On March 2004, the Corporation issued $10,310,000 of Floating Rate Junior Subordinated Deferrable Interest
Debentures (the “Debt Securities”) to PPBI Trust I, a statutory trust created under the laws of the State of Delaware. The Debt Securities
are subordinated to effectively all borrowings of the Corporation and are due and payable on April 7, 2034. Interest is payable quarterly on the
Debt Securities at three-month London Interbank Offered Rate ("LIBOR") plus 2.75% for an effective rate of 4.11% as of December 31,
2017.
In the third quarter of 2014, the Company completed a private placement of $60 million in aggregate principal amount of
subordinated notes to certain accredited investors. The subordinated notes bear a fixed interest rate of 5.75% per annum, payable semi-
annually, and mature on September 3, 2024. The net proceeds from the sale
64
INDEX
of the notes were $59 million, and the notes qualify as Tier 2 capital for regulatory purposes. The Bank received $50.0 million of contributed
capital in 2014.
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 3.06% per annum as of December 31, 2017. At December 31, 2017, the carrying value of these debentures was $3.9 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 December 31, 2017, 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 $332,000 and $1.4 million,
respectively. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 4.31% per annum as of
December 31, 2017 for Mission Community Capital Trust I. Interest is payable quarterly at three-month LIBOR plus 1.48% per annum, for an
effective rate of 2.84% per annum as of December 31, 2017 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 PLZZ acquisition, the Company 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 from time to time beginning in 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.
65
INDEX
The following table sets forth certain information regarding the Company's borrowed funds at or for the years ended on the dates
indicated:
FHLB Advances
Balance outstanding at end of year
Weighted average interest rate at end of year
Average balance outstanding
Weighted average interest rate during the year
Maximum amount outstanding at any month-end during the year
Other Borrowings
Balance outstanding at end of year
Weighted average interest rate at end of year
Average balance outstanding
Weighted average interest rate during the year
Maximum amount outstanding at any month-end during the year
Debentures
Balance outstanding at end of year
Weighted average interest rate at end of year
Average balance outstanding
Weighted average interest rate during the year
Maximum amount outstanding at any month-end during the year
Total Borrowings
Balance outstanding at end of year
Weighted average interest rate at end of year
Average balance outstanding
Weighted average interest rate during the year
Maximum amount outstanding at any month-end during the year
Stockholders' Equity
At or For Year Ended December 31,
2017
2016
2015
(dollars in thousands)
490,148
$
1.49%
290,839
$
1.19%
490,148
$
46,139
$
2.02%
50,866
$
1.86%
52,996
$
105,123
$
5.60%
81,466
$
5.80%
105,123
$
641,410
$
2.21%
423,248
$
2.16%
648,267
$
278,000
$
0.55%
58,814
$
0.59%
278,000
$
49,971
$
1.94%
48,732
$
1.95%
53,586
$
69,383
$
5.35%
69,347
$
5.54%
69,383
$
397,354
$
1.56%
176,893
$
2.91%
397,354
$
148,000
0.42%
139,542
0.39%
340,000
48,125
1.94%
48,490
1.95%
49,925
69,263
5.34%
69,199
5.69%
69,263
265,388
1.98%
257,231
2.11%
454,008
$
$
$
$
$
$
$
$
$
$
$
$
At December 31, 2017, our stockholders’ equity amounted to $1.2 billion, compared with $460 million at December 31, 2016. The
increase of $782 million or 170% is primarily due to net income in 2017 of $60.1 million and an increase of $719 million, primarily as a result of
the issuance of common stock in the PLZZ and HEOP acquisitions.
Liquidity
Our primary sources of funds are deposits, principal and interest payments on loans, FHLB advances and other borrowings. While
maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. We seek to maintain a level of liquid assets to ensure a safe and sound operation.
Our liquid assets are comprised of cash and unpledged investments. As part of our daily monitoring, we calculate a liquidity ratio by dividing
the sum of cash balances plus unpledged securities by the sum of deposits that mature in one year or less plus transaction accounts and FHLB
advances. At December 31, 2017, our liquidity ratio was 11.59%, compared with 13.15% at December 31, 2016.
66
INDEX
We believe our level of liquid assets is sufficient to meet current anticipated funding needs. At December 31, 2017, liquid assets of
the Company represented approximately 9.2% of total assets, compared to 11.1% at December 31, 2016. At December 31, 2017, the
Company had eight unsecured lines of credit with other correspondent banks to purchase federal funds totaling $168 million, one reverse repo
line with a correspondent bank of $50 million and access through the Federal Reserve Bank discount window to borrow $3.3 million, as
business needs dictate. We also have a line of credit with the FHLB allowing us to borrow up to 45% of the Bank’s total assets. At
December 31, 2017, we had a borrowing capacity of $1.25 billion, based on collateral pledged at the FHLB, with $490 million outstanding in
FHLB borrowing. The FHLB advance line is collateralized by eligible loans and FHLB stock. At December 31, 2017, we had approximately
$1.45 billion of collateral pledged to secure FHLB borrowings.
At December 31, 2017, the Company’s loan to deposit and borrowing ratio was 92.5%, compared with 91.7% at December 31,
2016. The increase was primarily associated with our loans increasing at a faster rate relative to our deposits and borrowings during the
period. Certificates of deposit, which are scheduled to mature in one year or less from December 31, 2017, totaled $911 million. We expect to
retain a substantial portion of the maturing certificates of deposit at maturity.
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 December 31, 2017, the Company had $317 million, or 4.0% of total assets, in
brokered time deposits. At December 31, 2016, the Company had $199 million, or 4.9% of total assets, in brokered time deposits.
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. 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.
The Financial Code provides that a bank may not make a cash distribution to its stockholders in excess of the lesser of a (i) bank’s
retained earnings; or (ii) bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank or by any
majority-owned subsidiary of the bank to the stockholders of the bank during such period. However, a bank may, with the approval of the
DBO, make a distribution to its stockholders in an amount not exceeding the greatest of (x) its retained earnings; (y) its net income for its last
fiscal year; or (z) its net income for its current fiscal year. In the event that the DBO determines that the stockholders’ equity of a bank is
inadequate or that the making of a distribution by the bank would be unsafe or unsound, the DBO may order the bank to refrain from making a
proposed distribution. Under these provisions, the amount available for distribution from the Bank to the Corporation was approximately $142.7
million at December 31, 2017.
Capital Resources
The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies.
Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on our financial condition and results of operations. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts
and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
At December 31, 2017, the Bank’s leverage capital amounted to $812 million and risk-weighted capital amounted to $843 million. At
December 31, 2016, the Bank’s leverage capital was $411 million and risk-weighted capital was $433 million. Pursuant to regulatory guidelines
under prompt corrective action rules, a bank must have
67
INDEX
total risk-weighted capital of 10.00% or greater, Tier 1 risk-weighted capital of 8.00% or greater, common equity tier 1 capital ratio of 6.5%
and Tier I capital to adjusted tangible assets of 5.00% or greater to be considered "well capitalized." At December 31, 2017, the Bank’s total
risk-weighted capital ratio was 12.33%, Tier 1 risk-weighted capital ratio was 11.88%, common equity Tier 1 risk-weighted capital ratio was
11.88%, and Tier I capital to adjusted tangible assets capital ratio was 11.68%. See Note 2 to the Consolidated Financial Statements included
in Item 8 hereof for a discussion of the Bank’s and Company’s capital ratios.
Contractual Obligations and Commitments
The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and to
meet required capital needs. The following schedule summarizes maturities and payments due on our obligations and commitments, excluding
accrued interest, at the date indicated:
Less than 1
year
At December 31, 2017
1 - 3 years
3 - 5 years
(dollars in thousands)
More than 5
years
Total
$
$
428,500 $
46,139
—
911,033
7,170
1,392,842 $
23,500 $
—
—
146,893
8,151
178,544 $
38,148 $
—
—
17,297
3,308
58,753 $
— $
—
105,123
9,597
2,312
117,032 $
490,148
46,139
105,123
1,084,820
20,941
1,747,171
Contractual Obligations
FHLB advances
Other borrowings
Subordinated debentures
Certificates of deposit
Operating leases
Total contractual cash obligations
Off-Balance Sheet Arrangements
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:
Other Unused Commitments
Commercial and industrial
Construction
Agriculture and farmland
Home equity lines of credit
Standby letters of credit
All other
Total commitments
Less than 1
year
At December 31, 2017
1 - 3 years
3 - 5 years
(dollars in thousands)
More than 5
years
Total
$
$
488,734 $
119,276
37,958
2,006
30,876
18,968
697,818 $
158,715 $
178,774
2,683
8,044
50
3,181
351,447 $
28,261 $
7,550
10,335
4,916
—
5,724
56,786 $
31,308 $
—
2,973
64,057
—
21,338
119,676 $
707,018
305,600
53,949
79,023
30,926
49,211
1,225,727
See Note 17 to the Consolidated Financial Statements in Item 8 hereof for narrative disclosure regarding off-balance sheet
arrangements.
68
INDEX
Impact of Inflation and Changing Prices
Our consolidated financial statements and related data presented in this annual report on Form 10-K have been prepared in
accordance with accounting principles generally accepted in the United States which require the measurement of financial position and
operating results in terms of historical dollar amounts (except with respect to securities classified as available for sale which are carried at
market value) without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same magnitude as the price of goods and services.
Impact of New Accounting Standards
See Note 1 to the Consolidated Financial Statements included in Item 8 hereof for a listing of recently issued accounting
pronouncements and the impact of them on the Company.
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INDEX
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management and Market Risk
Market risk is the risk of loss in value or reduced earnings from adverse changes in market prices and interest rates. The Bank’s
market risk arises primarily from interest rate risk in our lending and deposit taking activities. Interest rate risk primarily occurs to the degree
that the Bank’s interest-bearing liabilities reprice or mature on a different basis and frequency than its interest-earning assets. The Bank’s
earnings depend primarily on net interest income, which is the difference between the interest and dividends earned on interest-earning assets
and the interest paid on interest-bearing liabilities. Therefore, the Bank actively monitors and manages its portfolios to limit the adverse effects
on net interest income and economic value due to changes in interest rates.
The Asset/Liability Committee is responsible for implementing the Bank’s interest rate risk management policy established by the
board of directors that sets forth limits of acceptable changes in net interest income (“NII”) and economic value of equity (“EVE”) due to
specified changes in interest rates. The Asset/Liability Committee reviews, among other items, economic conditions, the interest rate outlook,
the demand for loans, the availability of deposits and borrowings, and the Bank’s current operating results, liquidity, capital and interest rate
exposure. Based on these reviews, the Asset/Liability Committee formulates strategies to implement the objectives set forth in the business
plan while complying with the net interest income and economic value limits approved by the Bank’s board of directors.
Interest Rate Risk Management. The principal objective of the Company’s interest rate risk management function is to
maintain an interest rate risk profile close to the desired risk profile in light of the interest rate outlook. The Bank measures the interest rate
risk included in the major balance sheet portfolios and compares the current risk profile to the desired risk profile and to policy limits set by the
board of directors. Management then implements strategies consistent with the desired risk profile. Currently the Bank’s primary strategy in
managing interest rate risk is to focus originations for investment on adjustable rate loans or loans with relatively short maturities. Interest rates
on adjustable rate loans are mainly tied to Prime and 1-month LIBOR indexes. Likewise, the Bank seeks to raise non-maturity deposits.
Management often implements these strategies through pricing actions. Finally, management structures its security portfolio and borrowings to
offset some of the interest rate sensitivity created by the re-pricing characteristics of customer loans and deposits.
Management monitors asset and liability maturities and repricing characteristics on a regular basis and evaluates its interest rate risk as
it relates to operational strategies. Management analyzes potential strategies for their impact on the interest rate risk profile. Each quarter the
Company’s board of directors reviews the Bank’s asset/liability position, including simulations showing the impact on the Bank’s economic
value of equity in various interest rate scenarios. Interest rate moves, up or down, may subject the Bank to interest rate spread compression,
which adversely impacts its net interest income. This is primarily due to the lag in repricing of the indices, to which adjustable rate loans and
mortgage-backed securities are tied, as well as their repricing frequencies. Furthermore, large rate moves show the impact of interest rate
caps and floors on adjustable rate transactions. This is partly offset by lags in repricing for deposit products. The extent of the interest rate
spread compression depends on the direction and severity of interest rate moves and features in the Bank’s product portfolios.
The Company’s interest rate sensitivity is monitored by management through the use of both a simulation model that quantifies the
estimated impact to earnings (Earnings at Risk) for a twelve and twenty-four month period, and a model that estimates the change in the
Company’s EVE under alternative interest rate scenarios, primarily instantaneous parallel interest rate shifts in 100 basis point increments. The
simulation model estimates the impact on net interest income (NII) from changing interest rates on interest earning assets and interest expense
paid on interest bearing liabilities. The EVE model computes the net present value of equity by discounting all expected cash flows on assets
and liabilities under each rate scenario. For each scenario, the EVE is the present value of all assets less the present value of all liabilities. The
EVE ratio is defined as the EVE divided by the market value of assets within the same scenario.
70
INDEX
The following table shows the projected net interest income and net interest margin of the Company at December 31, 2017,
assuming instantaneous parallel interest rate shifts in the first period:
As of December 31, 2017
(dollars in thousands)
Change in Rates
$ Amount
$ Change
% Change
$ Amount
% Change
Earnings at Risk
Projected Net Interest Margin
+200 BP
+100 BP
Static
-100 BP
-200 BP
342,622
339,239
335,259
331,508
333,498
7,363
3,980
—
(3,751 )
(1,761 )
2.2
1.2
—
(1.1 )
(0.5 )
4.70
4.65
4.60
4.54
4.57
2.2
1.2
—
(1.1 )
(0.5 )
The following table shows the EVE and projected change in the EVE of the Company at December 31, 2017, assuming various
non-parallel interest rate shifts over a twelve month period:
As of December 31, 2017
(dollars in thousands)
Economic Value of Equity
EVE as % of Portfolio
Value of Assets
Change in Rates
$ Amount
$ Change
% Change
EVE Ratio
% Change (BP)
+200 BP
+100 BP
Static
-100 BP
-200 BP
1,953,748
1,940,220
1,915,184
1,886,490
1,864,246
38,564
25,036
—
(28,694 )
(50,938 )
2.0
1.3
—
(1.5 )
(2.7 )
25.06
24.41
23.66
22.83
22.02
140 BP
76 BP
0
-83 BP
-164 BP
Based on the modeling of the impact on earnings and EVE from changes in interest rates, the Company's sensitivity to changes in
interest rates is low for rising rates. Both the earnings at risk and the EVE increase as rates rise. It is important to note the above tables are
forecasts based on several assumptions and that actual results may vary. The forecasts are based on estimates of historical behavior and
assumptions by management that may change over time and may turn out to be different. Factors affecting these estimates and assumptions
include, but are not limited to (1) competitor behavior, (2) economic conditions both locally and nationally, (3) actions taken by the Federal
Reserve, (4) customer behavior and (5) Management’s responses. Changes that vary significantly from the assumptions and estimates may
have significant effects on the Company’s earnings and EVE.
The Company does not have any direct market risk from foreign exchange or commodity exposures.
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INDEX
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Pacific Premier Bancorp, Inc.
Irvine, California
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Pacific Premier Bancorp, Inc. (the "Company") as of
December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for
the years ending December 31, 2017 and 2016, and the related notes (collectively referred to as the "financial statements"). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the
results of its operations and its cash flows for the years ending December 31, 2017 and 2016, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated
Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
February 28, 2018 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Crowe Horwath LLP
We have served as the Company's auditor since 2016.
Los Angeles, California
February 28, 2018
72
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Pacific Premier Bancorp, Inc. and Subsidiaries
Irvine, California
We have audited the accompanying consolidated statement of income, comprehensive income, stockholders’ equity, and cash flows of Pacific
Premier Bancorp, Inc. and Subsidiaries (the "Company") for the year ended December 31, 2015. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of its operations and its
cash flows for the year ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of
America.
/s/ Vavrinek, Trine, Day & Co., LLP
Laguna Hills, California
March 4, 2016
73
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Pacific Premier Bancorp, Inc.
Irvine, California
Opinion on Internal Control over Financial Reporting
We have audited Pacific Premier Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2017, based on
criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the
consolidated statements of financial condition of the Company as of December 31, 2017 and 2016, the related consolidated statements of
income, comprehensive income, stockholders’ equity, and cash flows for the years ending December 31, 2017 and 2016, and the related notes
(collectively referred to as the "financial statements") and our report dated February 28, 2018, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. As
permitted, the Company has excluded the operations of Plaza Bancorp, acquired during 2017, which is described in Note 23 of the consolidated
financial statements, from the scope of management’s report on internal control over financial reporting. As such, it has also been excluded
from the scope of our audit of internal control over financial reporting. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ Crowe Horwath LLP
Los Angeles, California
February 28, 2018
74
INDEX
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)
ASSETS
Cash and due from banks
Interest-bearing deposits with financial institutions
Cash and cash equivalents
Interest-bearing time deposits with financial institutions
Investments held-to-maturity, at amortized cost (fair value of $18,082 and $8,461 as of December 31, 2017 and December 31,
2016, respectively)
Investment securities available-for-sale, at fair value
FHLB, FRB and other stock, at cost
Loans held for sale, at lower of cost or fair value
Loans held for investment
Allowance for loan losses
Loans held for investment, net
Accrued interest receivable
Other real estate owned
Premises and equipment
Deferred income taxes, net
Bank owned life insurance
Intangible assets
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts:
Noninterest-bearing checking
Interest-bearing:
Checking
Money market/savings
Retail certificates of deposit
Wholesale/brokered certificates of deposit
Total interest-bearing
Total deposits
FHLB advances and other borrowings
Subordinated debentures
Accrued expenses and other liabilities
Total liabilities
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued and outstanding
Common stock, $.01 par value; 100,000,000 shares authorized; 46,245,050 shares at December 31, 2017 and 100,000,000 shares
authorized; 27,798,283 shares at December 31, 2016 issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax (benefit) of $231 at December 31, 2017 and $(1,978) at December 31,
2016
Total stockholders' equity
Total liabilities and stockholders' equity
Accompanying notes are an integral part of these consolidated financial statements.
75
At December 31,
2017
2016
$
$
$
79,284
120,780
200,064
3,693
18,291
787,429
65,881
23,426
6,196,468
(28,936 )
6,167,532
27,053
326
53,155
13,265
75,976
43,014
493,329
52,067
8,024,501
$
14,706
142,151
156,857
3,944
8,565
380,963
37,304
7,711
3,241,613
(21,296 )
3,220,317
13,145
460
12,014
16,807
40,409
9,451
102,490
25,874
4,036,311
$
2,226,848
$
1,185,768
365,193
2,409,007
767,651
317,169
3,859,020
6,085,868
536,287
105,123
55,227
6,782,505
182,893
1,202,361
375,203
199,356
1,959,813
3,145,581
327,971
69,383
33,636
3,576,571
—
—
458
1,063,974
177,149
415
1,241,996
8,024,501
$
274
345,138
117,049
(2,721 )
459,740
4,036,311
$
INDEX
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
For the Years ended December 31,
2017
2016
2015
INTEREST INCOME
Loans
Investment securities and other interest-earning assets
Total interest income
INTEREST EXPENSE
Deposits
FHLB advances and other borrowings
Subordinated debentures
Total interest expense
Net interest income before provision for loan losses
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME
Loan servicing fees
Deposit fees
Net gain from sales of loans
Net gain from sales of investment securities
Other income
Total noninterest income
NONINTEREST EXPENSE
Compensation and benefits
Premises and occupancy
Data processing
Other real estate owned operations, net
FDIC insurance premiums
Legal, audit and professional expense
Marketing expense
Office, telecommunications and postage expense
Loan expense
Deposit expense
Merger-related expense
CDI amortization
Other expense
Total noninterest expense
Net income before income taxes
Income tax
Net income
EARNINGS PER SHARE
Basic
Diluted
$
$
$
$
251,027
18,978
270,005
13,371
4,411
4,721
22,503
247,502
8,640
238,862
787
3,809
12,468
2,737
11,313
31,114
84,138
14,742
8,206
72
2,151
6,101
4,436
3,117
3,299
6,240
21,002
6,144
8,102
167,750
102,226
42,126
60,100
$
$
157,935
8,670
166,605
8,391
1,295
3,844
13,530
153,075
8,776
144,299
1,032
1,697
9,539
1,797
5,537
19,602
52,836
9,838
4,261
385
1,545
3,041
3,981
2,107
2,191
4,904
4,388
2,039
7,067
98,583
65,318
25,215
40,103
$
$
1.59
1.56
$
$
1.49
1.46
$
$
111,097
7,259
118,356
6,630
1,490
3,937
12,057
106,299
6,425
99,874
371
1,274
7,970
290
4,483
14,388
37,108
7,810
2,816
68
1,376
2,514
2,305
2,005
1,268
3,643
4,799
1,350
6,476
73,538
40,724
15,209
25,515
1.21
1.19
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
Diluted
37,705,556
38,511,261
26,931,634
27,439,159
21,156,668
21,488,698
Accompanying notes are an integral part of these consolidated financial statements.
76
INDEX
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Net Income
Other comprehensive income (loss), net of tax:
For the Years ended December 31,
2017
2016
2015
$
60,100
$
40,103
$
25,515
Unrealized holding gains/(losses) on securities arising during the period, net of income tax (benefit) (1)
Reclassification adjustment for net gain on sale of securities included in net income, net of income tax
(2)
Other comprehensive income (loss), net of tax
Comprehensive income, net of tax
$
4,937
(2,013)
(15)
(1,801)
3,136
63,236
$
(1,040)
(3,053)
37,050
$
(171)
(186)
25,329
(1) Income tax (benefit) on unrealized holding gains (losses) on securities was $3.1 million for 2017, $(1.5 million) for 2016, and $(13,000) for 2015.
(2) Income tax on reclassification adjustment for net gain on sale of securities included in net income was $936,000 for 2017, $757,000 for 2016, and $119,000
for 2015.
Accompanying notes are an integral part of these consolidated financial statements.
77
INDEX
Balance at December 31, 2014
Net Income
Other comprehensive income
Share-based compensation expense
Issuance of restricted stock, net
Issuance of common stock
Warrants exercised
Repurchase of common stock
Exercise of stock options
Balance at December 31, 2015
Net Income
Other comprehensive loss
Share-based compensation expense
Issuance of restricted stock, net
Issuance of common stock
Goodwill adjustment
Repurchase of common stock
Exercise of stock options
Balance at December 31, 2016
Net Income
Other comprehensive income
Share-based compensation expense
Issuance of restricted stock, net
Issuance of common stock
Goodwill adjustment
Repurchase of common stock
Exercise of stock options
Balance at December 31, 2017
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Common Stock
Additional
Paid-in Capital
Accumulated
Retained
Earnings
$
$
$
Total
Stockholders’
Equity
Common
Stock
Shares
16,903,884
—
—
—
60,000
4,480,645
125,316
(7,165 )
8,066
21,570,746
—
—
—
296,236
5,815,051
—
—
116,250
27,798,283
—
—
—
166,397
17,954,274
—
(21,537 )
347,633
46,245,050
$
$
$
$
$
Accumulated
Other
Comprehensive
Income (Loss)
518
—
(186 )
—
—
—
—
—
—
332
—
(3,053 )
—
—
—
—
—
—
(2,721 ) $
—
3,136
—
—
—
—
—
—
415
$
51,431
25,515
—
—
—
—
—
—
—
76,946
40,103
—
—
—
—
—
—
—
117,049
60,100
—
—
—
—
—
—
—
177,149
199,592
25,515
(186 )
1,165
—
72,252
689
(116 )
69
298,980
40,103
(3,053 )
2,729
—
119,383
379
(126 )
1,345
459,740
60,100
3,136
5,809
—
709,377
500
(1,258 )
4,592
1,241,996
169
—
—
—
—
45
1
—
—
215
—
—
—
—
58
—
—
1
274
—
—
—
—
181
—
—
3
458
$
$
$
$
147,474
—
—
1,165
—
72,207
688
(116 )
69
221,487
—
—
2,729
—
119,325
379
(126 )
1,344
345,138
—
—
5,809
—
709,196
500
(1,258 )
4,589
1,063,974
$
$
$
$
$
$
Accompanying notes are an integral part of these consolidated financial statements.
78
INDEX
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to net income:
Depreciation and amortization expense
Provision for loan losses
Share-based compensation expense
Loss on sale and disposal of premises and equipment
(Gain) loss on sale of or write down of other real estate owned
Net amortization on securities available-for-sale
Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs
Gain on sale of investment securities available-for-sale
Other-than-temporary impairment recovery on investment securities, net
Originations of loans held for sale
Proceeds from the sales of and principal payments from loans held for sale
Gain on sale of loans
Deferred income tax expense (benefit)
Change in accrued expenses and other liabilities, net
Income from bank owned life insurance, net
Amortization of core deposit intangible
Change in accrued interest receivable and other assets, net
Net cash provided by operating activities
Cash flows from investing activities:
Net increase in interest-bearing time deposits with financial institutions
Increase in loans, net
Purchase of loans held for investment
Change in other real estate owned from sales
Purchase of held-to-maturity securities
Principal payments on securities available-for-sale
Purchase of securities available-for-sale
Proceeds from sale of securities available-for-sale
Proceeds from the sale of premises and equipment
Investment in bank owned life insurance
Purchases of premises and equipment
Change in FHLB, FRB, and other stock, at cost
Cash acquired in acquisitions
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposit accounts
Net change in federal funds purchased
Net change in short-term borrowings
Proceeds from long-term borrowings
Repayment of long-term borrowings
Proceeds from exercise of stock options and warrants
Repurchase of common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow disclosures:
Interest paid
For the Years ended December 31,
2017
2016
2015
$
60,100
$
40,103
$
25,515
4,888
8,640
5,809
234
(46 )
7,601
1,627
(2,737 )
—
(142,104 )
140,012
(12,468 )
16,866
5,003
(1,842 )
6,144
(13,728 )
83,999
251
(519,407 )
(13,582 )
507
—
76,057
(317,441 )
268,596
—
198
(4,165 )
(12,838 )
225,945
(295,879 )
2,854
8,776
2,729
656
321
9,157
1,832
(1,797 )
(205 )
(103,883 )
115,877
(9,539 )
3,887
(4,428 )
(1,164 )
2,039
(3,768 )
63,447
—
(263,075 )
(271,159 )
380
—
38,935
(190,140 )
230,945
10,049
—
(11,970 )
(15,012 )
40,132
(430,915 )
187,883
—
61,120
12,012
(9,262 )
4,592
(1,258 )
255,087
43,207
156,857
200,064
$
313,770
—
181,846
—
(50,927 )
1,345
(126 )
445,908
78,440
78,417
156,857
$
2,432
6,425
1,165
—
92
3,822
(2,967 )
(290 )
—
(87,900 )
86,604
(7,970 )
(1,395 )
6,786
(1,147 )
1,350
(8,853 )
23,669
(1,972 )
(247,000 )
(43,440 )
(216 )
(9,642 )
33,751
(90,127 )
27,642
1,506
—
(1,887 )
(2,856 )
2,961
(331,280 )
228,279
(1,500 )
47,682
—
—
758
(116 )
275,103
(32,508 )
110,925
78,417
21,777
$
13,564
$
12,081
$
$
Income taxes paid
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
Transfers from loans to other real estate owned
Assets acquired (liabilities assumed) in acquisitions (See Note 25):
Interest-bearing deposits with financial institutions
Investment securities
Loans
Core deposit intangible
Deferred income tax
Bank owned life insurance
Goodwill
Fixed assets
Other assets
Deposits
Other borrowings
Other liabilities
Common Stock and additional paid-in capital
18,846
13,139
12,127
$
121
$
197
$
450
—
442,923
2,427,589
39,703
14,959
—
391,070
42,097
74,379
(2,752,501 )
(180,186 )
(16,395 )
(716,421 )
1,972
190,254
456,158
4,319
6,748
—
51,658
4,190
9,362
(636,591 )
—
(8,843 )
(120,174 )
—
56,121
332,893
2,903
4,794
11,276
27,882
2,134
2,402
(336,018 )
(33,300 )
(1,796 )
(79,777 )
Accompanying notes are an integral part of these consolidated financial statements.
79
INDEX
PACIFIC PREMIER BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Description of Business—The Corporation, a Delaware corporation organized in 1997, is a California-based bank holding company
that owns 100% of the capital stock of the Bank, the Corporation’s principal operating subsidiary. The Bank was incorporated and commenced
operations in 1983.
The principal business of the Company is attracting deposits from the general public and investing those deposits, together with
funds generated from operations and borrowings, primarily in business loans and real estate property loans. At December 31, 2017, the
Company had 33 depository branches located in the counties of Orange, Los Angeles, Riverside, San Bernardino, San Diego, San Luis Obispo
and Santa Barbara, California as well as Clark County, Nevada. The Company is subject to competition from other financial institutions. The
Company is subject to the regulations of certain governmental agencies and undergoes periodic examinations by those regulatory authorities.
Principles of Consolidation—The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the
‘‘Corporation’’) and its wholly-owned subsidiary, Pacific Premier Bank (the ‘‘Bank’’) (collectively, the ‘‘Company’’). The Company accounts
for its investments in its wholly-owned special purpose entities, PPBI Statutory Trust I, Heritage Oaks Capital Trust II, Mission Community
Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust, under the equity method whereby the subsidiary’s net earnings are recognized in
the Company’s Statement of Income and the investment in these entities is included in Other Assets on the Company’s Consolidated
Statements of Financial Condition. The Company is organized and operates as a single reporting segment, principally engaged in the
commercial banking business. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation—The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States ("U.S. GAAP"). Certain amounts in the financial statements and
related footnote disclosures for the prior years have been reclassified to conform to the current presentation with no impact to previously
reported net income or stockholders' equity.
Use of Estimates—The preparation of consolidated 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, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Estimates may change as new information is obtained.
The following discussion provides a summary of the Company's significant accounting policies:
Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, cash balances due from banks and federal funds
sold. Interest bearing deposits with financial institutions represent primarily cash held at the Federal Reserve Bank of San Francisco. At
December 31, 2017, there were no cash reserves required by the Board of Governors of the Federal Reserve System (“Federal Reserve”) for
depository institutions based on the amount of deposits held. The Company maintains amounts due from banks that exceed federally insured
limits. The Company has not experienced any losses in such accounts.
Securities—The Company has established written guidelines and objectives for its investing activities. At the time of purchase,
management designates the security as either held to maturity, available-for-sale or held for trading based on the Company’s investment
objectives, operational needs and intent. The investments are monitored to ensure that those activities are consistent with the established
guidelines and objectives.
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INDEX
Securities Held-to-Maturity—Investments in debt securities that management has the positive intent and ability to hold to maturity
are reported at cost and adjusted for periodic principal payments and the amortization of premiums and accretion of discounts, which are
recognized in interest income using the interest method over the period of time to investment's maturity.
Securities Available-for-Sale—Investments in debt securities that management has no immediate plan to sell, but which may be
sold in the future, are carried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to the
call date for premiums or contractual maturity for discounts and, in the case of mortgage-backed securities the estimated average life, which
can fluctuate based on the anticipated prepayments on the underlying collateral of the securities. Unrealized holding gains and losses, net of
tax, are recorded in a separate component of stockholders’ equity as accumulated other comprehensive income. Realized gains and losses on
the sales of securities are determined on the specific identification method, recorded on a trade date basis based on the amortized cost basis of
the specific security and are included in noninterest income as net gain (loss) on investment securities.
Impairment of Investments—Quarterly, the Company evaluates investment securities in an unrealized loss position for OTTI. In
determining whether a security's decline in fair value is other-than-temporary, the Company considers a number of factors including: (i) the
length of time and the extent to which the fair value of the investment has been less than its amortized cost; (ii) the financial condition and
near-term prospects of the issuer; (iii) the intent and ability of the Company to hold the investment for a period of time sufficient to allow for an
anticipated recovery in fair value; (iv) downgrades in credit ratings; and (v) general market conditions which reflect prospects for the economy
as a whole, including interest rates and sector credit spreads. If it is determined that an OTTI exists, and either the Company intends to sell the
investment or it is likely the Company will be required to sell the investment before its anticipated recovery, the total amount of the OTTI,
which is measured as the amount by which the investment's amortized cost exceeds its fair value, is recognized in current period earnings. If
the Company has the intent and ability to hold the investment and it is more likely than not it will be required to sell the investment prior to an
anticipated recovery of its amortized cost basis, the Company records in current period earnings the portion of OTTI deemed to be credit
related, while the remaining portion of OTTI deemed to be non-credit related is recorded in accumulated other comprehensive income. Credit
related losses are determined through a discounted cash flow analysis, which incorporates assumptions concerning the estimated timing and
amounts of expected cash flows. Non-credit related OTTI losses result from other factors such as change in interest rates and general market
conditions. The presentation of OTTI in the consolidated financial statements is on a gross basis with a reduction in the gross amount for the
portion of the loss deemed non-credit related and is recorded in accumulated other comprehensive income.
Federal Home Loan Bank Stock—The Bank is a member of the FHLB system. Members are required to own a certain amount
of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and
periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are recorded as a component of
interest income.
Federal Reserve Bank Stock—The Bank is a member of the Federal Reserve Bank of San Francisco. FRB stock is carried at
cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock
dividends are recorded as a component of interest income.
Loans Held for Sale—Loans that the Company has the intent to sell prior to maturity have been designated as held for sale at
origination and are recorded at lower of cost or fair value. Gains or losses are recognized upon the sale of the loans on a specific identification
basis.
Loan Servicing Assets—Servicing assets are related to SBA loans sold and are recognized at the time of sale when servicing is
retained with the income statement effect recorded in gains on sales of SBA loans. Servicing assets are initially recorded at fair value based
on the present value of the contractually specified servicing fee, net of estimated servicing costs, over the estimated life of the loan, using a
discount rate. The Company’s servicing
81
INDEX
costs approximates the industry average servicing costs of approximately 40 basis points. The servicing assets are subsequently amortized into
noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The Company
periodically evaluates servicing assets for impairment based upon the fair value of the assets as compared to their carrying amount.
The Company typically sells the guaranteed portion of SBA loans and retains the unguaranteed portion (“retained interest”). A
portion of the premium on sale of SBA loans is recognized as gain on sale of loans at the time of the sale by allocating the carrying amount
between the asset sold and the retained interest, based on their relative fair values. The remaining portion of the premium is recorded as a
discount on the retained interest and is amortized over the remaining life of the loan as an adjustment to yield. The retained interest, net of any
discount, are included in loans held for investment—net of allowance for loan losses in the accompanying consolidated statements of financial
condition.
Loans Held for Investment—Loans held for investment are loans the Company has the ability and intent to hold until their
maturity. The loans are carried at amortized cost, net of discounts and premiums on purchased loans, deferred loan origination fees and costs
and ALLL. Net deferred loan origination fees and costs on loans are amortized or accreted using the interest method over the expected life of
the loans. Amortization of deferred loan fees and costs are discontinued for loans placed on nonaccrual. Any remaining deferred fees or costs
and prepayment fees associated with loans that payoff prior to contractual maturity are included in loan interest income in the period of payoff.
Loan commitment fees received to originate or purchase a loan are deferred and, if the commitment is exercised, recognized over the life of
the loan using the interest method as an adjustment of yield or, if the commitment expires unexercised, recognized as income upon expiration of
the commitment.
Interest on loans is recognized using the interest method and is only accrued if deemed collectible. Loans for which the accrual of
interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is
past due 90 days based on contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collection of
principal and or interest. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against
current period interest income. Interest income generally is not recognized on nonaccrual loans unless the likelihood of further loss is remote.
Interest payments received on nonaccrual loans are applied as a reduction to the loan principal balance. Interest accruals are resumed on such
loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to all principal and interest.
A loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and
interest) according to the contractual terms of the loan agreement. The Company reviews loans for impairment when the loan is classified as
substandard or worse, delinquent 90 days, determined by management to be collateral dependent, or when the borrower files bankruptcy or is
granted concession which qualifies as a troubled debt restructuring. 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. The Company selects the measurement method on a loan-by-loan basis except those
loans deemed collateral dependent. Loans for which impairment has been determined are generally charged-off at such time the loan is
classified as a loss.
Allowance for Loan Losses—The Company maintains an ALLL at a level deemed appropriate by management to provide for
known or probable incurred losses in the portfolio as of the date of the consolidated statements of financial condition. The Company has an
internal asset review system and loss allowance methodology designed to provide for the detection of problem assets and an appropriate level
of allowance to cover loan losses. Management’s determination of the adequacy of the ALLL is based on an evaluation of the composition of
the portfolio, actual loss experience, industry charge-off experience on income property loans, current economic conditions, and other relevant
factors in the area in which the Company’s lending and real estate activities are based. These factors may affect the borrowers’ ability to pay
as well as the value of the underlying collateral securing loans. The allowance is calculated by applying loss factors to loans held for
investment according to loan
82
INDEX
type and loan credit classification. The loss factors are based primarily upon the Bank’s historical loss experience and industry charge-off
experience and are evaluated on a quarterly basis.
At December 31, 2017, the following portfolio segments have been identified. Segments are groupings of similar loans at a level,
which the Company has adopted systematic methods of documentation for determining its allowance for loan losses:
• Commercial and industrial (including Franchise) - Commercial and industrial loans are secured by business assets including
inventory, receivables and machinery and equipment to businesses located generally in our primary market area. Loan types includes
revolving lines or credit, term loans, seasonal loans and loans secured by liquid collateral such as cash deposits or marketable
securities. HOA credit facilities are included in C&I loans. We also issue letters of credit on behalf of our customers. Risk arises
primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the
Company's investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these
loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by
accounts receivable, the recovery of the Company's investment is dependent upon the borrower's ability to collect amounts due from
its customers.
• Commercial real estate (including owner-occupied and nonowner occupied) - Commercial real estate includes various type of
loans which the Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-
occupied or nonowner-occupied. The primary risks of real estate loans include the borrower's inability to pay, material decreases in the
value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate loan
unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.
• SBA - We are approved to originate loans under the SBA's Preferred Lenders Program ("PLP"). The PLP lending status affords us a
higher level of delegated credit autonomy, translating to a significantly shorter turnaround time from application to funding, which is
critical to our marketing efforts. We originate loans nationwide under the SBA's 7(a), SBAExpress, International Trade and 504(a)
loan programs, in conformity with SBA underwriting and documentation standards. SBA loans are similar to commercial business
loans, but have additional credit enhancement provided by the U.S. Small Business Administration, for up to 85 percent of the loan
amount for loans up to $150,000 and 75 percent of the loan amount for loans of more than $150,000. The Company originates SBA
loans with the intent to sell the guaranteed portion into the secondary market on a quarterly basis.
• Agribusiness and farmland - We originate loans to the agricultural community to fund seasonal production and longer term
investments in land, buildings, equipment, crops and livestock. Agribusiness loans are for the purpose of financing agricultural
production to finance crops and livestock. Farmland loans include all land know to be used or usable for agricultural purposes, such as
crop and livestock production and is secured by the land and improvements thereon.
• Multi-family - Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk
than one-to-four family loans. Because payments on loans secured by multi-family and commercial real estate properties are often
dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse
conditions in the real estate market or the economy.
• One-to-four family - Although we do not originate, through our bank acquisitions, we have acquired first lien single family loans, we
occasionally purchase such loans to diversify our portfolio. The primary risks of one-to-four family loans include the borrower's
inability to pay, material decreases in the value of the
83
INDEX
real estate that is being held as collateral and significant increases in interest rates, which may make loan unprofitable.
• Construction and land - We originate loans for the construction of 1-4 family and multi-family residences and CRE properties in our
market area. We concentrate our efforts on single homes and small infill projects in established neighborhoods where there is not
abundant land available for development. Construction loans are considered to have higher risks due to construction completion and
timing risk, and the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the
availability of long-term financing. Additionally, economic conditions may impact the Company's ability to recover its investment in
construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower's
ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions
change. We occasionally originate land loans located predominantly in California for the purpose of facilitating the ultimate
construction of a home or commercial building. The primary risks include the borrower's inability to pay and the inability of the
Company to recover its investment due to a decline in the fair value of the underlying collateral.
• Consumer loans - We originate a limited number of consumer loans, generally for banking customers only, which consist primarily of
home equity lines of credit, savings account secured loans and auto loans. Repayment of these loans is dependent on the borrower's
ability to pay and the fair value of the underlying collateral.
Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such
agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.
In the opinion of management, and in accordance with the credit loss allowance methodology, the present allowance is considered
adequate to absorb probable incurred credit losses. Additions and reductions to the allowance are reflected in current operations. Charge-offs
to the allowance, for all loan segments, are made when specific assets are considered uncollectible or are transferred to other real estate
owned and the fair value of the property is less than the loan’s recorded investment. Recoveries are credited to the allowance.
Although management uses the best information available to make these estimates, future adjustments to the allowance may be
necessary due to economic, operating, regulatory and other conditions that may extend beyond the Company’s control.
Purchased Credit Impaired Loans—As part of business acquisitions, the Bank acquires certain loans that have shown evidence
of credit deterioration since origination, referred to as purchased credit impaired loans. These loans are recorded at the fair value, such that no
ALLL for PCI is established upon their acquisition. The Company has elected to account for such loans individually. The Company estimates
the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the fair value is recorded as
interest income over the remaining life of the loan and is referred to as the accretable yield. The excess of the loan’s contractual principal and
interest over expected cash flows is not recorded and is referred to as the non-accretable difference. Over the life of the loan, expected cash
flows continue to be estimated. Subsequent decreases in expected future cash flows beyond the expected cash flows as of the acquisition date
are accounted for through a charge to the provision for loan losses. If subsequent reforecasts indicate there has been a probable and
significant increase in the level of expected future cash flows, the Company first reduces any previously established ALLL for PCI loans and
then accounts for the remainder of the increase through interest income as a yield adjustment.
Other Real Estate Owned—Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at fair value, less
cost to sell, with any excess loan balance over the fair value of the property charged against the ALLL. The Company obtains an appraisal
and/or market valuation on all other real estate owned at the time of possession. After foreclosure, valuations are periodically performed by
management. Any subsequent fair
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value losses are recorded as a charge to current period earnings with a corresponding write-down to the asset. All legal fees and direct costs,
including foreclosure and other related costs are expensed as incurred.
Premises and Equipment—Premises and equipment are carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which range from forty
years for buildings, seven years for furniture, fixtures and equipment, and three years for computer and telecommunication equipment. The
cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term
of the related leases.
The Company periodically evaluates the recoverability of long-lived assets, such as premises and equipment, to ensure the carrying
value has not been impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Securities Sold Under Agreements to Repurchase—The Company enters into sales of securities under agreement to repurchase.
These agreements are treated as financing arrangements and, accordingly, the obligations to repurchase the securities sold are reflected as
liabilities in the Company’s consolidated financial statements. The securities collateralizing these agreements are delivered to several major
national brokerage firms who arranged the transactions. The securities are reflected as assets in the Company’s consolidated financial
statements. The brokerage firms may loan such securities to other parties in the normal course of their operations and agree to return the
identical security to the Company at the maturity of the agreements.
Bank Owned Life Insurance—Bank owned life insurance is accounted for using the cash surrender value method and is recorded
at its realizable value. The change in the net asset value is included in other assets and other noninterest 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
indefinite useful lives 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 typically performs its annual impairment testing in the fourth
quarter. 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 asset is consumed or otherwise used up, or on a straight-line amortization method over
their estimated useful lives, which ranges from 6 to 10 years.
Loan Commitments and Related Financial Instruments—Financial instruments include off-balance sheet credit instruments, such
as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they
are funded.
Subordinated Debentures—Long-term borrowings are carried at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized in interest expense using the interest method. Debt issuance costs are recognized in interest expense using the
interest method over the life of the instrument.
Stock-Based Compensation—The Company issues stock-based awards to certain officers and directors of the Company. The
related compensation costs are recognized in the income statement based on the grant-date fair value over the grantee's requisite service
period (generally the vesting period). A Black-Scholes model is utilized to estimate the fair value of stock options and the market price of the
Company's common stock at the date of the grant is used for restricted stock awards.
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Income Taxes—Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been
recognized in the Company’s financial statements or tax returns using the asset liability method. In estimating future tax consequences, all
expected future events other than enactments of changes in the tax law or rates are considered. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are to be recognized for temporary
differences that will result in deductible amounts in future years and for tax carryforwards if, in the opinion of management, it is more likely
than not that the deferred tax assets will be realized. At December 31, 2016, there was no valuation allowance deemed necessary against the
Company’s deferred tax asset. At December 31, 2017, a valuation allowance of $380,000 was recorded against the capital loss carryover
deferred tax asset, as the Company does not believe it will generate sufficient capital gain before the capital loss carryover expires.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The
Company recognizes interest and / or penalties related to income tax matters in income tax expense.
Earnings per Share—Earnings per share of common stock is calculated on both a basic and diluted basis based on the weighted
average number of common and common equivalent shares outstanding, excluding common shares in treasury. Basic earnings per share
excludes dilution and is computed by dividing income available to stockholders by the weighted average number of common shares outstanding
for the period. The Company has no outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends that
would be considered participating securities for the basic calculation. 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 then would share in earnings.
Comprehensive Income—Comprehensive income is reported in addition to net income for all periods presented. Comprehensive
income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has
not been recognized in the calculation of net income. Unrealized gains and losses on the Company's available-for-sale investment securities are
required to be included in other comprehensive income or loss. Total comprehensive income (loss) and the components of accumulated other
comprehensive income or loss are presented in the Consolidated Statement of Stockholders’ Equity and Consolidated Statements of
Comprehensive Income.
Loss Contingencies—Loss contingencies, including claims and legal action arising in the ordinary course of business, are recorded
as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe
there now are such matters that will have a material effect on the financial statements.
Fair Value of Financial Instruments—Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect these estimates.
Accounting Standards Adopted in 2017
In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Compensation-Stock Compensation (Topic
718): Improvements to Employee Share-Based Accounting. The amendments simplify several aspects of the accounting for share-based
payment award transactions, including accounting for excess tax benefits and tax deficiencies, classifying excess tax benefits on the statement
of cash flows, accounting for forfeitures, classifying awards that permit share repurchases to satisfy statutory tax-withholding requirements
and classifying
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INDEX
tax payments on behalf of employees on the statement of cash flows. For public business entities, the amendment is effective for annual
periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted for any organization in
any interim or annual period. As a result of the adoption of ASU 2016-09, the Company began recognizing the tax effects of exercised or
vested awards as discrete items in the reporting period in which they occur, resulting in a $2.0 million tax benefit to the Company for the year
ended December 31, 2017.
In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the
Transition to the Equity Method of Accounting. The amendments eliminate the requirement to retrospectively apply the equity method to an
investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence.
As result, when an investment qualifies for the equity method, the equity method investor will add the cost of acquiring the additional interest in
the investee to the current basis of the investor’s previously held interest and adopt the equity method of account as of the date the investment
becomes qualified for equity method accounting. The amendments further require unrealized holding gains or losses in accumulated other
comprehensive income related to an available-for-sale security that becomes eligible for the equity method to be recognized in earnings as of
the date on which the investment qualifies for the equity method. The amendments are effective for all entities for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2016. The adoption of this standard did not have a material effect on the
Company's operating results or financial condition.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in
Debt Instruments. The amendments clarify the required steps to be taken when assessing whether the economic characteristics and risks of
call/put options are clearly and closely related to those of their debt hosts - which is one of the criteria for bifurcating an embedded derivative.
The Update is effective for public business entities for fiscal years beginning after December 31, 2016, including interim periods within those
years. The adoption of this standard did not have a material effect on the Company's operating results or financial condition.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract
Novations on Existing Hedge Accounting Relationships. The amendments clarify that a change in the counterparty to a derivative
instrument designated as a hedging instrument does not, in and of itself, require designation of that hedging relationship provided that all other
hedge accounting criteria remain the same. The Update is effective for public business entities for fiscal years beginning after December 31,
2016, including interim periods within those years. The adoption of this standard did not have a material effect on the Company's operating
results or financial condition.
Recent Accounting Guidance Not Yet Effective
In February 2018, the FASB issued ASU 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 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 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) do not reflect the appropriate tax rate. This
Update allows for an election to reclass 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 has analyzed
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the effects of this Update and has elected to early adopt in the first quarter of 2018. Accordingly, the Company will record a reclass of
approximately $81,000 from retained earnings to AOCI 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 Board
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 will 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. The 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 will 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. The Update provides guidance on eight specific cash flow classification issues, which include: 1) debt prepayment or debt
extinguishment costs; 2) settlement of zero-coupon debt instruments 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 will not 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. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology
that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit
loss estimates. For public business entities, the amendment is effective for annual periods beginning after December 15, 2019 and interim
period within those annual periods. The Company is currently evaluating the effects of ASU 2016-13 on its financial
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statements and disclosures. The Company is in the process of compiling key data elements and is in the process of purchasing a software
model in an effort to meet the requirements of the new guidance.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard is being issued to increase the
transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more
prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative
disclosures in the notes to the financial statements. The Update is generally effective for public business entities in fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. The Company is in the early stages of its implementation assessment,
which includes identifying the population of the Company's leases that are within the scope of the new guidance and gathering all key lease
data that will facilitate application of the new accounting requirements.
In January 2016, the FASB issued ASU 2016-01, 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
accounting for equity securities with readily determinable fair values, where changes in fair value will impact 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. The 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 generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The adoption of this standard will not have a material effect on the Company's operating results or financial
condition. However, the Company will be required to expand its disclosures concerning its valuation techniques.
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 has completed its review of its various revenue streams and has determined that approximately 98% of the
Company’s revenue is out of the scope of ASU 2014-09, 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, the Company has 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. 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 customers. The Company also evaluated the need for changes to internal controls as a result of the implementation of ASU
2014-09 and, as a result, has made some enhancements. The Company plans to adopt the provisions of ASU 2014-09 using the modified
retrospective transition method, and believes the impact of the adoption of ASU 2014-09 will be insignificant to the financial statements.
However, the Company will be required to expand its disclosures concerning revenue recognition.
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2. Regulatory Capital Requirements and Other Regulatory Matters
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 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, and fully phased in by January 1, 2019. The most significant of
the provisions of the Final Capital Rules, which applied to the Company and the Bank were 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. Under the Basel III rules, the Company must hold a capital conservation buffer above the
adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.00% for 2015 to 2.50% by 2019. The
capital conservation buffer for 2017 is 1.25% and for 2016 is 0.625%. The net unrealized gain or loss on available-for-sale securities is not
included in computing regulatory capital.
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As defined in applicable regulations and set forth in the table below, which excludes the capital conservation buffer, at
December 31, 2017 and 2016, the Company and the Bank continue to exceed the “well capitalized” standards:
Actual
Amount
Ratio
Minimum Required for
Capital Adequacy Purposes
Required to be Well
Capitalized Under Prompt
Corrective Action
Regulations
Amount
Ratio
(dollars in thousands)
Amount
Ratio
At December 31, 2017
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 Leverage Ratio
Common Equity Tier 1 to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
Pacific Premier Bank
Tier 1 Leverage Ratio
Common Equity Tier 1 to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
At December 31, 2016
Pacific Premier Bancorp, Inc. Consolidated
Tier 1 Leverage Ratio
Common Equity Tier 1 to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
Pacific Premier Bank
Tier 1 Leverage Ratio
Common Equity Tier 1 to Risk-Weighted Assets
Tier 1 Capital to Risk-Weighted Assets
Total Capital to Risk-Weighted Assets
$
$
$
$
744,233
724,205
744,233
859,442
812,170
812,170
812,170
843,005
10.70 % $
10.59 %
10.88 %
12.57 %
278,183
307,778
410,371
547,161
4.00 %
4.50 %
6.00 %
8.00 %
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
11.68 % $
11.88 %
11.88 %
12.33 %
278,152
307,702
410,269
547,025
4.00 % $
4.50 %
6.00 %
8.00 %
347,690
444,458
547,025
683,781
5.00 %
6.50 %
8.00 %
10.00 %
366,658
356,658
366,658
448,150
9.78 % $
10.12 %
10.41 %
12.72 %
150,027
158,574
211,432
281,909
4.00 %
4.50 %
6.00 %
8.00 %
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
10.94 % $
11.65 %
11.65 %
12.29 %
150,107
158,536
211,382
281,842
4.00 % $
4.50 %
6.00 %
8.00 %
187,634
228,997
281,842
352,303
5.00 %
6.50 %
8.00 %
10.00 %
410,524
410,524
410,524
432,943
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INDEX
3. Investment Securities
The amortized cost and estimated fair value of securities were as follows:
Investment securities available-for-sale
Agency
Corporate
Municipal bonds
Collateralized mortgage obligation: residential
Mortgage-backed securities: residential
Total investment securities available-for-sale
Investment securities held-to-maturity
Mortgage-backed securities: residential
Other
Total investment securities held-to-maturity
Total investment securities
Investment securities available-for-sale
Corporate
Municipal bonds
Collateralized mortgage obligation: residential
Mortgage-backed securities: residential
Total investment securities available-for-sale
Investment securities held-to-maturity
Mortgage-backed securities: residential
Other
Total investment securities held-to-maturity
Total investment securities
December 31, 2017
Amortized
Cost
Unrealized
Gain
Unrealized
Loss
Estimated
Fair Value
(dollars in thousands)
$
$
$
$
47,051
78,155
228,929
33,984
398,664
786,783
17,153
1,138
18,291
805,074
Amortized
Cost
37,475
120,155
31,536
196,496
385,662
7,375
1,190
8,565
394,227
$
$
$
$
236
1,585
3,942
132
266
6,161
—
—
—
6,161
$
(78) $
(194)
(743)
(335)
(4,165)
(5,515)
(209)
—
(209)
$
(5,724) $
47,209
79,546
232,128
33,781
394,765
787,429
16,944
1,138
18,082
805,511
December 31, 2016
Unrealized
Gain
Unrealized
Loss
(dollars in thousands)
Estimated
Fair Value
372
338
25
69
804
—
—
—
804
$
$
(205) $
(1,690)
(173)
(3,435)
(5,503)
(104)
—
(104)
(5,607) $
37,642
118,803
31,388
193,130
380,963
7,271
1,190
8,461
389,424
Unrealized gains and losses on investment securities available-for-sale are recognized in stockholders’ equity as accumulated other
comprehensive income or loss. At December 31, 2017, the Company had accumulated other comprehensive income of $646,000, or $415,000
net of tax, compared to accumulated other comprehensive loss of $4.7 million or $2.7 million net of tax, at December 31, 2016.
At December 31, 2017, mortgage-backed securities 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 inverse putable reverse repurchase agreements which totaled $28.5 million and HOA reverse
repurchase agreements which totaled $17.6 million.
At December 31, 2017 and 2016, there were not holdings of securities of any one issuer, other than the U.S. Government and its
agencies, in an amount greater than 10% of shareholders' equity.
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INDEX
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 (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 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 realized OTTI recovery of $2,000 as of December 31, 2017, which relates to investment income from previously
charged-off investments. As of December 31, 2016, the Company realized OTTI losses net of recoveries of $205,000. A $207,000 OTTI was
taken in the first quarter of 2016, related to a CRA investment purchased in June of 2014 with a par value of $50, and a book value of
$500,000. In March of 2016, the shareholders of the investment voted to approve a sale of the institution at a per share acquisition price less
than the Bank's book value, and the sale closed in July 2016. The Company is currently waiting to receive the proceeds for its outstanding
shares. As a result, the Bank's current holdings were written down and the loss recognized. The Company did not realize any OTTI losses in
2015.
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.
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INDEX
Investment securities
available-for-sale
Agency
Corporate
Municipal bonds
Collateralized mortgage
obligation: residential
Mortgage-backed securities:
residential
Total investment securities
available-for-sale
Investment securities held-to-
maturity
Mortgage-backed securities:
residential
Total investment securities
held-to-maturity
Total investment
securities
Investment securities
available-for-sale
Corporate
Municipal bonds
Collateralized mortgage
obligation: residential
Mortgage-backed securities:
residential
Total available-for-sale
Investment securities held-to-
maturity
Mortgage-backed securities:
residential
Total held-to-maturity
Total securities
Less than 12 months
December 31, 2017
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)
$
6
4
103
5
66
$
13,754
10,079
61,313
13,971
(78)
(64)
(268)
(149)
220,951
(1,600)
184
320,068
(2,159)
2
2
10,745
10,745
(133)
(133)
—
2
30
3
41
76
1
1
$
$
—
6,076
15,658
8,943
—
(130)
(475)
(186)
$
6
6
133
$
13,754
16,155
76,971
8
22,914
(78)
(194)
(743)
(335)
110,062
(2,565)
140,739
(3,356)
6,198
6,198
(76)
(76)
107
260
3
3
331,013
(4,165)
460,807
(5,515)
16,943
16,943
(209)
(209)
186
$ 330,813
$
(2,292)
77
$ 146,937
$
(3,432)
263
$ 477,750
$
(5,724)
Less than 12 months
December 31, 2016
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)
$
3
152
$
7,609
85,750
(205)
(1,690)
5
19,092
(173)
55
215
149,740
262,191
(2,916)
(4,984)
1
1
216
7,271
7,271
$ 269,462
$
(104)
(104)
(5,088)
—
—
—
4
4
—
—
4
94
$
$
—
—
—
—
—
—
$
3
152
$
7,609
85,750
(205)
(1,690)
5
19,092
(173)
16,039
16,039
(519)
(519)
59
219
165,779
278,230
(3,435)
(5,503)
—
—
16,039
$
$
—
—
(519)
1
1
220
7,271
7,271
$ 285,501
(104)
(104)
$
(5,607)
INDEX
The amortized cost and estimated fair value of investment securities available for sale at December 31, 2017, by contractual
maturity are shown in the table below.
One Year
or Less
More than One
Year to Five Years
More than Five Years
to Ten Years
More than
Ten Years
Total
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(dollars in thousands)
$
$
—
—
4,124
$
$
—
—
4,121
—
—
32,390
—
—
32,424
$ 15,156
78,155
72,845
$ 15,164
79,546
73,312
$ 31,895
—
119,570
$ 32,045
—
122,271
$ 47,051
78,155
228,929
$ 47,209
79,546
232,128
—
—
—
—
1,069
1,071
32,915
32,710
33,984
33,781
2,591
2,583
2,647
2,611
65,541
65,014
327,885
324,557
398,664
394,765
6,715
6,704
35,037
35,035
232,766
234,107
512,265
511,583
786,783
787,429
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,153
1,138
16,944
1,138
17,153
1,138
16,944
1,138
18,291
18,082
18,291
18,082
$
6,715
$
6,704
$ 35,037
$ 35,035
$ 232,766
$ 234,107
$ 530,556
$ 529,665
$ 805,074
$ 805,511
Investment securities
available-for-sale
Agency
Corporate
Municipal bonds
Collateralized mortgage
obligation: residential
Mortgage-backed securities:
residential
Total investment securities
available-for-sale
Investment securities held-to-
maturity
Mortgage-backed securities:
residential
Other
Total investment securities
held-to-maturity
Total investment
securities
During the years ended December 31, 2017, 2016 and 2015, the Company recognized gross gains on sales of available-for-sale
securities in the amount of $3.1 million, $1.8 million and $317,000, respectively. During the years ended December 31, 2017, 2016 and 2015, the
Company recognized gross losses on sales of available-for-sale securities in the amount of $386,000, $9,000 and $27,000, respectively. The
Company had net proceeds from the sale or maturity/call of available-for-sale securities of $269 million, $231 million and $28 million during the
years ended December 31, 2017, 2016 and 2015, respectively.
FHLB, FRB and other stock
At December 31, 2017, the Company had $17.3 million in FHLB stock, $25.3 million in FRB stock, and $23.3 million in other stock,
all carried at cost. During the years ended December 31, 2017 and 2015, FHLB had repurchased $10.3 million and $16.4 million, respectively,
of the Company’s excess FHLB stock through their stock repurchase program. During the year ended December 31, 2016, FHLB did not
repurchase any of the Company’s excess FHLB stock through their stock repurchase program. The Company evaluates its investments in
FHLB and other stock for impairment periodically, including their capital adequacy and overall financial condition. No impairment losses have
been recorded through December 31, 2017.
95
INDEX
4. Loans
The following table presents the composition of the loan portfolio as of the dates indicated:
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Agribusiness
Total business loans
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Construction
Farmland
Land
Total real estate loans
Consumer Loans
Consumer loans
Gross loans held for investment
Plus: Deferred loan origination costs/(fees) and premiums/(discounts), net
Loans held for investment
Allowance for loan losses
Loans held for investment, net
Loans held for sale, at lower of cost or fair value
For the Years Ended December 31,
2017
2016
(dollars in thousands)
$
1,086,659
660,414
1,289,213
185,514
116,066
3,337,866
1,243,115
794,384
270,894
282,811
145,393
31,233
2,767,830
92,931
6,198,627
(2,159 )
6,196,468
(28,936 )
6,167,532
$
563,169
459,421
454,918
88,994
—
1,566,502
586,975
690,955
100,451
269,159
—
19,829
1,667,369
4,112
3,237,983
3,630
3,241,613
(21,296 )
3,220,317
23,426
$
7,711
$
$
$
The Company originates SBA loans with the intent to sell the guaranteed portion of the loan prior to maturity and therefore
designates them as held for sale. From time to time, the Company may purchase or sell other types of loans in order to manage concentrations,
maximize interest income, change risk profiles, improve returns and generate liquidity.
Concentration of Credit Risk
The Company’s loan portfolio was collateralized by various forms of real estate and business assets located principally in California.
The Company’s loan portfolio contains concentrations of credit in commercial non-owner occupied real estate, multi-family real estate and
commercial owner occupied business loans. The Company maintains policies approved by the Board of Directors that address these
concentrations and continues to diversify its loan portfolio through loan originations and purchases and sales of loans to meet approved
concentration levels. While management believes that the collateral presently securing these loans is adequate, there can be no assurances that
further significant deterioration in the California real estate market and economy would not expose the Company to significantly greater credit
risk.
96
INDEX
Loans Serviced for Others
The Company generally retains the servicing rights of the guaranteed portion of SBA loans sold, for which the Company records a
servicing asset at fair value within other assets. At December 31, 2017 and 2016, the servicing asset total $8.8 million and $5.3 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 December 31, 2017, and 2016, the Company determined that no valuation allowance was necessary.
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 $635 million at December 31, 2017 and $303 million at December 31, 2016.
Purchased Credit Impaired Loans
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination
and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans at
December 31, 2017, and 2016 was as follows:
Business Loans
Commercial and industrial
Commercial owner occupied
SBA
Total business loans
Real Estate Loans
Commercial non-owner occupied
One-to-four family
Construction
Land
Total real estate loans
Consumer Loans
Consumer loans
Total purchase credit impaired
For the Years Ended December 31,
2017
2016
(dollars in thousands)
$
$
$
3,310
1,262
1,802
6,374
1,650
255
517
83
2,505
10
8,889
$
2,586
491
—
3,077
1,088
1
—
—
1,089
393
4,559
The following table summarizes the accretable yield on the purchased credit impaired for the years ended December 31, 2017, 2016
and 2015:
For the Years Ended December 31,
Balance at the beginning of period
Additions
Accretion
Payoffs
Reclassification from nonaccretable difference
Balance at the end of period
2017
$
$
97
$
2016
(dollars in thousands)
2,726
788
(1,354)
165
1,422
3,747
$
$
3,747
3,102
(2,037)
(2,125)
332
3,019
$
2015
1,403
602
(385)
(249)
1,355
2,726
INDEX
Impaired Loans
The following tables provide a summary of the Company’s investment in impaired loans as of and for the periods indicated:
Impaired Loans
Recorded
Investment
Unpaid
Principal
Balance
With Specific
Allowance
Without
Specific
Allowance
Specific
Allowance for
Impaired Loans
Average
Recorded
Investment
Interest Income
Recognized
(dollars in thousands)
$
1,160
$
1,585
$
—
$
1,160
$
—
$
441
$
December 31, 2017
Business Loans
Commercial and
industrial
Commercial owner
occupied
SBA
Real Estate Loans
Commercial non-owner
occupied
One-to-four family
Construction
Land
Totals
December 31, 2016
Business Loans
Commercial and
industrial
Franchise
Commercial owner
occupied
SBA
Real Estate Loans
Commercial non-owner
occupied
One-to-four family
Land
Totals
December 31, 2015
Business Loans
Commercial and
industrial
Franchise
Commercial owner
occupied
Real Estate Loans
Commercial non-owner
occupied
One-to-four family
Land
Totals
$
$
$
$
$
97
1,201
—
817
—
9
3,284
250
—
436
316
$
$
—
124
15
1,141
$
98
4,329
—
849
—
35
6,896
$
97
—
—
—
—
—
97
$
—
1,201
—
817
—
9
3,187
$
55
—
—
—
—
—
55
$
153
434
86
166
1,017
12
2,309
$
$
1,990
—
$
250
—
$
—
—
$
250
—
$
864
1,016
847
3,865
—
291
36
7,029
$
—
—
—
—
—
250
$
$
313
1,630
$
578
2,394
$
—
1,461
536
883
—
214
70
21
2,784
$
329
98
37
4,319
$
—
—
—
1,461
$
98
436
316
—
124
15
891
313
169
536
$
$
214
70
21
1,323
$
—
—
—
—
—
250
—
731
—
—
—
—
731
$
$
$
505
331
1,072
226
18
4,032
$
$
90
1,386
415
430
204
13
2,538
$
—
—
—
—
—
—
—
—
76
68
37
23
93
18
2
317
29
3
67
19
5
—
123
INDEX
The Company considers a loan to be impaired when, based on current information and events, it is probable 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, determined by
management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt restructure. 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 the time that 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.
We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the
borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in
limited cases, concessions to the outstanding loan balances. These loans are classified as troubled debt restructurings (“TDRs”) and
considered impaired loans. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition
or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term.
A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual
restructured terms for a time frame of at least six months and the ultimate collectability of the total contractual restructured principal and
interest in no longer in doubt. At December 31, 2017, the Company had a recorded investment in a TDR of $97,000. The modification of the
terms of this relationship included the restructuring of two loans related to one borrower into one loan and an extension of the maturity to three
years. There were no TDRs at December 31, 2016.
When loans are placed on nonaccrual status, all accrued interest is reversed from current period 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 six 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 collection of interest. The Company had impaired loans on nonaccrual status of $3.3 million, $1.1 million and $4.0
million at December 31, 2017, 2016 and 2015, respectively. If such loans had been performing in accordance with their original terms, the
Company would have recorded additional loan interest income of $155,000 in 2017, $360,000 in 2016, and $279,000 in 2015. The Company did
not record income from the receipt of cash payments related to nonaccruing loans during the years ended December 31, 2017, 2016 and 2015.
The Company had $1.8 million loans 90 days or more past due and still accruing at December 31, 2017, majority of which were PCI loans.
Income recognition for PCI loans is accounted for in accordance with ASC Subtopic 310-30 Receivables-Loans and Debt Securities
Acquired with Deteriorated Credit Quality. There were no loans 90 days or more past due and still accruing at December 31, 2016.
Credit Quality and Credit Risk
The Company’s credit quality is maintained and credit risk managed 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
99
INDEX
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 seasoned underwriters and portfolio managers ensure all key risk factors are analyzed with most loan underwriting
including a comprehensive global cash flow analysis.
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 federal banking 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 probable incurred 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.
The following provides brief definitions for risk grades assigned to loans in the portfolio:
• Pass classifications represent assets with a level of credit quality, which contain no well-defined deficiency or weakness.
• 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 are 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 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 are commenced 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 or 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 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.
100
INDEX
The following tables stratify the loan portfolio by the Company’s internal risk grading system as well as certain other information
concerning the credit quality of the loan portfolio as of the periods indicated:
December 31, 2017
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Agribusiness
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Construction
Farmland
Land
Consumer Loans
Consumer loans
Totals
December 31, 2016
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Construction
Land
Consumer Loans
Consumer loans
Totals
Pass
Special
Mention
Credit Risk Grades
Substandard
Doubtful
(dollars in thousands)
Total Gross
Loans
$
$
1,063,452
660,415
1,273,380
199,468
108,143
1,242,045
794,156
268,776
282,294
144,234
30,979
$
8,163
—
654
1
4,079
—
—
154
517
44
—
$
15,044
—
21,180
3,469
3,844
1,070
228
1,964
—
1,115
254
92,794
6,160,136
$
$
—
13,612
$
137
48,305
$
Pass
Special
Mention
Credit Risk Grades
Substandard
Doubtful
(dollars in thousands)
$
$
550,919
459,421
450,416
96,190
585,093
681,942
100,010
269,159
19,814
$
8,216
—
281
53
810
6,610
—
—
—
$
3,784
—
4,221
462
1,072
2,403
441
—
15
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
250
—
—
—
—
—
—
—
—
1,086,659
660,415
1,295,214
202,938
116,066
1,243,115
794,384
270,894
282,811
145,393
31,233
92,931
6,222,053
Total Gross
Loans
563,169
459,421
454,918
96,705
586,975
690,955
100,451
269,159
19,829
3,719
3,216,683
$
$
—
15,970
$
393
12,791
$
—
250
$
4,112
3,245,694
101
INDEX
December 31, 2017
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Agribusiness
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Construction
Farmland
Land
Consumer Loans
Consumer loans
Totals
December 31, 2016
Business Loans
Commercial and industrial
Franchise
Commercial owner occupied
SBA
Real Estate Loans
Commercial non-owner occupied
Multi-family
One-to-four family
Construction
Land
Consumer Loans
Consumer loans
Totals
5. Allowance for Loan Losses
Days Past Due
Current
30-59
60-89
90+
(dollars in thousands)
Total Gross
Loans
Non-accruing
$
$
1,085,770
660,415
1,291,254
200,821
116,066
1,243,115
792,603
269,725
282,811
145,393
31,141
$
84
—
3,474
177
—
—
1,781
354
—
—
83
$
570
—
486
—
—
—
—
—
—
—
—
$
235
—
—
1,940
—
—
—
815
—
—
9
$
1,086,659
660,415
1,295,214
202,938
116,066
1,243,115
794,384
270,894
282,811
145,393
31,233
1,160
—
97
1,201
—
—
—
817
—
—
9
92,880
6,211,994
$
11
5,964
$
—
1,056
$
40
3,039
$
92,931
6,222,053
$
$
—
3,284
Days Past Due
Current
30-59
60-89
90+
(dollars in thousands)
Total Gross
Loans
Non-accruing
$
$
562,805
459,421
454,918
96,389
586,975
690,955
100,314
269,159
19,814
$
104
—
—
—
—
—
18
—
—
4,112
3,244,862
$
$
—
122
$
—
—
—
—
—
—
71
—
—
—
71
$
$
260
—
—
316
—
—
48
—
15
$
563,169
459,421
454,918
96,705
586,975
690,955
100,451
269,159
19,829
250
—
436
316
—
—
124
—
15
$
—
639
$
4,112
3,245,694
$
—
1,141
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
102
INDEX
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 on average from 1 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 migration analysis of risk
grading and net charge-offs.
103
INDEX
The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various
segments in the loan portfolio as of and for the periods indicated:
Commercial
and Industrial Franchise
Commercial
Owner
Occupied
SBA
Agribusiness
Warehouse
Facilities
Commercial
Non-owner
Occupied
Multi-family
One-to-four
Family
Construction Farmland
Land
Consumer
Loans
Total
(dollars in thousands)
6,362
(1,344 )
$ 3,845
—
—
$
1,193
—
105
$ 1,039
$
(8 )
127
$
—
—
—
94
4,609
1,952
(531 )
1,732
1,291
—
—
—
—
$
$
1,715
—
—
$ 2,927
—
—
$
365
(10 )
35
3,632
—
—
$
$
$
—
—
—
198
—
—
20
—
1
$
21,296
(1,362 )
362
(449 )
(2,320 )
413
937
137
795
74
8,640
$
9,721
$ 5,797
$
767
$ 2,890
$ 1,291
$
—
$
1,266
$
607
$
803
$
4,569
$
137
$
993
$
95
$
28,936
$
—
$
—
$
55
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$ —
$ —
$
55
9,721
5,797
712
2,890
1,291
1,160
—
97
1,201
—
—
—
1,266
607
803
4,569
137
993
95
28,881
—
—
817
—
—
9
—
3,284
— %
— %
56.70 %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
1.67 %
$ 660,414
$ 1,289,116
$ 184,313
$ 116,066
$
—
$ 1,243,115
$ 794,384
$ 270,077
$ 282,811
$ 145,393
$ 31,224
$ 92,931
$ 6,195,343
Balance,
December
31, 2016
$
Charge-offs
Recoveries
Provisions
for
(reduction
in) loan
losses
Balance,
December
31, 2017
Amount of
allowance
attributed
to:
Specifically
evaluated
impaired
loans
General
portfolio
allocation
Loans
individually
evaluated for
impairment
Specific
reserves to
total loans
individually
evaluated for
impairment
Loans
collectively
evaluated for
impairment $ 1,085,499
General
reserves to
total loans
collectively
evaluated for
impairment
0.90 %
0.88 %
0.06 %
1.57 %
1.11 %
— %
0.10 %
0.08 %
0.30 %
1.62 %
0.09 %
3.18 %
0.10 %
0.47 %
Total gross
loans
Total
allowance to
gross loans
$ 1,086,659
$ 660,414
$ 1,289,213
$ 185,514
$ 116,066
$
—
$ 1,243,115
$ 794,384
$ 270,894
$ 282,811
$ 145,393
$ 31,233
$ 92,931
$ 6,198,627
0.89 %
0.88 %
0.06 %
1.56 %
1.11 %
— %
0.10 %
0.08 %
0.30 %
1.62 %
0.09 %
3.18 %
0.10 %
0.47 %
104
INDEX
Commercial
and
Industrial
Franchise
Commercial
Owner
Occupied
SBA
Agribusiness
Warehouse
Facilities
Commercial
Non-owner
Occupied
Multi-family
One-to-four
Family
Construction Farmland
Land
Consumer
Loans
Total
(dollars in thousands)
Balance,
December
31, 2015
Charge-offs
Recoveries
Provisions
for
(reduction
in) loan
losses
Balance,
December
31, 2016
Amount of
allowance
attributed
to:
Specifically
evaluated
impaired
loans
General
portfolio
allocation
Loans
individually
evaluated for
impairment
Specific
reserves to
total loans
individually
evaluated for
impairment
$ 3,449
$
(2,802)
3,124
(980)
$ 1,870
$
(329)
$
1,500
(980)
177
—
25
193
$
—
—
—
759
—
—
$ 2,048
—
21
$ 1,583
—
—
$
$
698
(151)
25
2,030
—
—
$
$
$
—
—
—
233
—
—
$
23
—
4
17,317
(5,242)
445
5,538
1,701
(373)
326
—
(759)
(354)
1,344
(207)
1,602
—
(35)
(7)
8,776
$ 6,362
$
3,845
$ 1,193
$
1,039
$
—
$
—
$ 1,715
$ 2,927
$
365
$
3,632
$
—
$
198
$
20
$
21,296
$
250
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$ —
$
250
6,112
3,845
1,193
1,039
250
—
436
316
—
—
—
1,715
2,927
365
3,632
—
198
20
21,046
—
—
—
124
—
—
15
—
1,141
100.00%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
21.91%
$ 459,421
$ 454,482
$ 88,678
$
—
$
—
$ 586,975
$ 690,955
$ 100,327
$ 269,159
$
—
$19,814
$ 4,112
$ 3,236,842
Loans
collectively
evaluated for
impairment $ 562,919
General
reserves to
total loans
collectively
evaluated for
impairment
1.09%
0.84%
0.26%
1.17%
—%
—%
0.29%
0.42%
0.36%
1.35%
—%
1.00%
0.49%
0.65%
Total gross
loans
Total
allowance to
gross loans
$ 563,169
$ 459,421
$ 454,918
$ 88,994
$
—
$
—
$ 586,975
$ 690,955
$ 100,451
$ 269,159
$
—
$19,829
$ 4,112
$ 3,237,983
1.13%
0.84%
0.26%
1.17%
—%
—%
0.29%
0.42%
0.36%
1.35%
—%
1.00%
0.49%
0.66%
105
INDEX
Commercial
and
Industrial
Franchise
Commercial
Owner
Occupied
SBA
Agribusiness
Warehouse
Facilities
Commercial
Non-owner
Occupied
Multi-family
One-to-four
Family
Construction Farmland
Land
Consumer
Loans
Total
(dollars in thousands)
Balance,
December
31, 2014
Charge-offs
Recoveries
Provisions
for
(reduction
in) loan
losses
Balance,
December
31, 2015
Amount of
allowance
attributed
to:
Specifically
evaluated
impaired
loans
General
portfolio
allocation
Loans
individually
evaluated for
impairment
Specific
reserves to
total loans
individually
evaluated for
impairment
$ 2,646
$ 1,554
$ 1,757
—
—
$
$
568
—
8
$
—
—
—
546
—
—
(764 )
—
$ 2,007
$ 1,060
—
—
$
$
$
842
(16 )
13
1,088
—
—
$
$
—
—
—
108
—
—
24
—
1
$
12,200
(1,380 )
72
(116 )
3
(484 )
47
1,240
2,334
113
924
—
213
154
523
(141 )
942
—
125
(2 )
6,425
$ 3,449
$ 3,124
$ 1,870
$ 1,500
$
—
$
759
$ 2,048
$ 1,583
$
698
$
2,030
$
—
$
233
$
23
$
17,317
$
—
$
731
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$ —
$ —
$
731
3,449
2,393
1,870
1,500
313
1,630
536
—
—
—
759
2,048
1,583
698
2,030
—
233
23
16,586
—
214
—
70
—
—
21
—
2,784
— %
44.85 %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
— %
26.26 %
$ 327,295
$ 294,190
$ 62,256
$
—
$ 143,200
$ 421,369
$ 429,003
$ 79,980
$ 169,748
$
—
$ 18,319
$ 5,111
$ 2,259,899
Loans
collectively
evaluated for
impairment $ 309,428
General
reserves to
total loans
collectively
evaluated for
impairment
1.11 %
0.73 %
0.64 %
2.41 %
— %
0.53 %
0.49 %
0.37 %
0.87 %
1.20 %
— %
1.27 %
0.45 %
0.73 %
Total gross
loans
Total
allowance to
gross loans
$ 309,741
$ 328,925
$ 294,726
$ 53,691
$
—
$ 143,200
$ 421,583
$ 429,003
$ 80,050
$ 169,748
$
—
$ 18,340
$ 5,111
$ 2,254,118
1.11 %
0.95 %
0.63 %
2.79 %
— %
0.53 %
0.49 %
0.37 %
0.87 %
1.20 %
— %
1.27 %
0.45 %
0.77 %
106
INDEX
6. Other Real Estate Owned
Other real estate owned was $326,000 at December 31, 2017, $460,000 at December 31, 2016 and $1.2 million at December 31,
2015. The following summarizes the activity in the other real estate owned for the years ended December 31:
2017
2016
2015
Balance, beginning of year
Additions / foreclosures
Sales
Gain (loss) on sale
Write downs
Balance, end of year
$
$
$
(dollars in thousands)
1,161
197
(577)
18
(339)
460
$
460
326
(507)
47
—
326
$
$
1,037
450
(233)
(52)
(41)
1,161
The Company had $73,000 in consumer mortgage loans collateralized by residential real estate property for which formal
foreclosure proceedings were in process as of December 31, 2017, compared to $41,000 as of December 31, 2016.
107
INDEX
7. Premises and Equipment
The Company's premises and equipment consisted of the following at December 31:
2017
2016
Land
Premises
Leasehold improvements
Furniture, fixtures and equipment
Automobiles
Subtotal
Less: accumulated depreciation
Total
$
$
(dollars in thousands)
$
16,920
19,868
14,025
20,480
187
71,480
18,325
53,155
$
200
1,707
8,982
14,565
187
25,641
13,627
12,014
Depreciation expense for premises and equipment was $4.9 million for 2017, $2.9 million for 2016 and $2.4 million for 2015.
108
INDEX
8. Goodwill and Core Deposit Intangibles
At December 31, 2017, the Company had goodwill of $493 million. Additions to goodwill of $391 million included $122 million from
the PLZZ acquisition and $269 million from the HEOP acquisition. The following table presents changes in the carrying value of goodwill for
the periods indicated:
Balance, beginning of year
Goodwill acquired during the year
Impairment losses
Balance, end of year
Accumulated impairment losses at end of year
$
$
2017
2016
(dollars in thousands)
102,490
$
390,839
—
493,329
—
$
50,832
51,658
—
102,490
—
The Company’s goodwill was evaluated for impairment during the fourth quarter of 2017, with no impairment loss recognition
considered necessary.
At December 31, 2017, the Company had $43.0 million of CDI. Additions to CDI of $39.7 million included $11.6 million from the
PLZZ acquisition and $28.1 million from the HEOP acquisition. The Company's change in the gross amount of core deposit intangibles and the
related accumulated amortization consisted of the following at December 31:
Gross amount of CDI:
Balance, beginning of year
Additions due to acquisitions
Balance, end of year
Accumulated amortization:
Balance, beginning of year
Amortization
Balance, end of year
Net CDI, end of year
2017
2016
(dollars in thousands)
2015
$
$
$
15,102
39,707
54,809
(5,651)
(6,144)
(11,795)
$
43,014
$
10,782
4,320
15,102
(3,612)
(2,039)
(5,651)
9,451
$
7,876
2,906
10,782
(2,262)
(1,350)
(3,612)
7,170
The estimated aggregate amortization expense related to our core deposit intangible assets for each of the next five years is $8.4
million, $7.3 million, $6.5 million, $5.4 million, and $4.5 million. The Company’s core deposit intangibles is evaluated for impairment if events
and circumstances indicate possible impairment. Factors that may attribute to impairment include customer attrition and run-off. Management
is unaware of any events and/or circumstances that would indicate a possible impairment to the core deposit intangibles.
9. Bank Owned Life Insurance
At December 31, 2017 and 2016, the Company had $76.0 million and $40.4 million, respectively of BOLI. The Company recorded
noninterest income associated with the BOLI policies of $2.3 million, $1.4 million and $1.3 million for the years ending December 31, 2017,
2016 and 2015, respectively.
BOLI involves the purchasing of life insurance by the Company on a selected group of employees where the Company is the owner
and beneficiary of the policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash surrender value of these
policies, as well as a portion of the insurance proceeds received, are
109
INDEX
recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties.
10. Qualified Affordable Housing Project Investments
The Company's investment in Qualified Affordable Housing Funds that generate Low Income Housing Tax Credits at
December 31, 2017 and 2016 was $11.6 million and $7.0 million, respectively, recorded in other assets. Total unfunded commitments related to
the investments in qualified affordable housing funds totaled $1.3 million and $749 thousand at December 31, 2017 and 2016, respectively. The
Company has invested in three separate LIHTC funds, which provide the Company with CRA credit. Additionally, the investment in LIHTC
funds provide the Company with tax credits and with operating loss tax benefits over an approximately 10 year period. None of the original
investment will be repaid. The investments in the WNC Institutional Tax Credit funds are being accounted for using the cost method, under
which the Company amortizes as non-interest expense the initial cost of the investment equally over the expected time period in which tax
credits and other tax benefits will be received. The investment in the Sycamore Court fund qualifies for and is being accounted for using the
proportional amortization method, which allows for the amortization of the investment to be in proportion to the total of the tax credits and other
tax benefits that are allocated to the investor. The tax credits and operating loss tax benefits are recognized in the income statement as a
component of income tax expense (benefit) for all LIHTC funds.
The following table presents the Company's original investment in the LIHTC funds, the current recorded investment balance, and
the unfunded liability balance of each investment at December 31, 2017 and 2016. In addition, the table reflects the tax credits and tax benefits
recorded by the Company during 2017 and 2016, the amortization of the investment and the net impact to the Company's income tax provision
for 2017 and 2016.
Qualified Affordable Housing Funds
at
December 31, 2017
Original
Investment
Value
Current
Recorded
Investment
Unfunded
Liability
Obligation
Tax Credits and Tax
Deductions (1)
Amortization of
Investments (2)
Net Income Tax
Benefit
WNC Institutional Tax Credit
Fund X, CA Series 11 L.P.
WNC Institutional Tax Credit
Fund X, CA Series 12, L.P.
Sycamore Court
Total - Investments in
Qualified Affordable
Housing Projects
$
5,000
$
2,750
$
85
$
455
$
500
$
5,000
6,181
3,250
5,582
288
927
482
1,577
500
599
(663)
(690)
(782)
$
16,181
$
11,582
$
1,300
$
2,514
$
1,599
$
(2,135)
Qualified Affordable Housing Funds
at
December 31, 2016
Original
Investment
Value
Current
Recorded
Investment
Unfunded
Liability
Obligation
Tax Credits and Tax
Deductions (1)
Amortization of
Investments (2)
Net Income Tax
Benefit
$
$
5,000
WNC Institutional Tax Credit
Fund X, CA Series 11 L.P.
WNC Institutional Tax Credit
Fund X, CA Series 12, L.P.
Total - Investments in
Qualified Affordable
Housing Projects
(1) The amounts reflected in this column represent both the tax credits, as well as the tax benefits generated by the Qualified Affordable Housing Projects
operating loss for the year, which are included in the calculation of income tax expense.
(2) This amount represents the amortization of the investment cost of the LIHTC.
10,000
5,000
3,750
3,250
1,324
7,000
473
526
542
223
488
782
749
961
$
$
$
$
$
$
$
$
$
$
(596)
(637)
(1,233)
110
INDEX
11. Deposit Accounts
Deposit accounts and weighted average interest rates consisted of the following at December 31:
2017
Weighted
Average
Interest Rate
2016
(dollars in thousands)
Weighted
Average
Interest Rate
Transaction accounts
Noninterest-bearing checking
Interest-bearing checking
Money market
Savings
Total transaction accounts
Certificates of deposit accounts
Less than 100,000
$100,000 through $250,000
Greater than $250,000
Total certificates of deposit accounts
Total deposits
$
$
2,226,848
365,193
2,181,571
227,436
5,001,048
192,409
369,748
522,663
1,084,820
6,085,868
—% $
0.13%
0.48%
0.13%
0.21%
0.85%
1.01%
1.26%
1.10%
0.33% $
1,185,768
182,893
1,100,787
101,574
2,571,022
121,148
153,103
300,308
574,559
3,145,581
—%
0.11%
0.34%
0.14%
0.16%
0.74%
0.82%
0.74%
0.76%
0.27%
The aggregate annual maturities of certificates of deposit accounts at December 31, 2017 are as follows:
2017
Balance
Weighted Average
Interest Rate
Within 3 months
4 to 6 months
7 to 12 months
13 to 24 months
25 to 36 months
37 to 60 months
Over 60 months
Total
$
$
(dollars in thousands)
318,794
250,026
279,192
175,005
29,270
22,936
9,597
1,084,820
Interest expense on deposit accounts for the years ended December 31 is summarized as follows:
Checking accounts
Money market accounts
Savings
Certificates of deposit accounts
Total
2017
365
6,720
251
6,035
13,371
$
$
2016
(dollars in thousands)
200
3,641
151
4,399
8,391
2015
$
$
$
$
0.93%
1.07%
1.18%
1.24%
1.33%
1.44%
1.13%
1.10%
165
2,426
141
3,898
6,630
Accrued interest on deposits, which is included in accrued expenses and other liabilities, was $526,000 at December 31, 2017 and
$178,000 at December 31, 2016.
111
INDEX
12. Federal Home Loan Bank Advances and Other Borrowings
As of December 31, 2017, the Company has a line of credit with the FHLB that provides for advances totaling up to 45% of the
Company’s assets, equating to a credit line of $2.9 billion, of which $677 million was available for borrowing. The available for borrowing was
based on collateral pledged by real estate loans with an aggregate balance of $1.4 billion and FHLB stock of $17.3 million.
At December 31, 2017, the Company had $310 million in overnight FHLB advances and $180 million term advances, compared to
$278 million in overnight FHLB advances and no term advances at December 31, 2016. The term advance have maturity dates ranging from
January 2018 to June of 2022 and rates ranging from 0.90% to 2.73%.
The following table summarizes activities in advances from the FHLB for the periods indicated:
Average balance outstanding
Maximum amount outstanding at any month-end during the year
Balance outstanding at end of year
Weighted average interest rate during the year
$
Year Ended December 31,
2017
2016
(dollars in thousands)
$
290,839
490,148
490,148
1.19%
58,814
278,000
278,000
0.59%
Bank related credit facilities have been established with Citigroup, Barclays Bank and Union Bank. The outstanding credit facilities
are secured by pledged investment securities. At December 31, 2017 and 2016, the Company had borrowings of $18.5 million with Citigroup
that mature in September of 2018, $10.0 million with Barclays Bank that mature in February of 2018, which the Company does not intend on
renewing, and an unused reverse repurchase facility with Union Bank of $50 million. The outstanding borrowings are secured by MBS with an
estimated fair value of $27.3 million.
The Company sells certain securities under agreements to repurchase. The agreements are treated as overnight borrowings with
the obligations to repurchase securities sold reflected as a liability. The dollar amount of investment securities underlying the agreements
remain in the asset accounts. The Company enters into these debt agreements as a service to certain HOA depositors to add protection for
deposit amounts above FDIC insurance levels. At December 31, 2017, the Company sold securities under agreement to repurchase of $17.6
million with weighted average rate of 0.01% and collateralized by investment securities with fair value of approximately $29.7 million.
At December 31, 2017, the Bank had unsecured lines of credit with eight correspondent banks for a total amount of $168 million
and access through the Federal Reserve discount window to borrow $3.3 million. At December 31, 2017 and December 31, 2016, the
Company had no outstanding balances against these lines.
In addition, the Corporation acquired a line of credit with Wells Fargo Bank in June of 2017, with availability of $15 million. The line
was added to provide an additional source of liquidity at the Corporation level and has no outstanding balance at December 31, 2017 and
matures in June 2018.
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The following table summarizes activities in other borrowings for the periods indicated:
Average balance outstanding
Maximum amount outstanding at any month-end during the year
Balance outstanding at end of year
Weighted average interest rate during the year
13. Subordinated Debentures
$
Year Ended December 31,
2017
2016
(dollars in thousands)
$
50,866
52,996
46,139
1.86 %
48,732
53,586
49,971
1.94 %
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%, with the first interest payment on the Notes occurring on March 3, 2015, and interest will be paid semiannually each
March 3 and September 3 through September 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). As of
December 31, 2017, the Notes qualify as Tier 2 Capital. Principal and 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 secured debt and subordinated debt, respectively, and a
senior deposit rating of A- for the Bank. The Company's and Bank's ratings were re-affirmed in October of 2017 by KBRA.
In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the
“Debt Securities”) to PPBI Trust I, a statutory trust created under the laws of the State of Delaware. The Debt Securities are subordinated to
effectively all borrowings of the Corporation and are due and payable on April 6, 2034. Interest is payable quarterly on the Debt Securities at
3-month LIBOR plus 2.75% for a rate of 4.11% at December 31, 2017 and 3.63% at December 31, 2016. The Debt Securities may be
redeemed, in part or whole, on or after April 7, 2009 at the option of the Corporation, at par. The Debt Securities 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 the equity of PPBI Trust I is comprised of mandatorily redeemable preferred
securities (“Trust Preferred Securities”) and is included in other assets. 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 Heritage Oaks 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 3.06% per annum as of December 31, 2017. At December 31, 2017, the carrying value of these debentures was $3.9
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 December 31, 2017, 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 $327,000 and $1.4 million,
respectively. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 4.31% per annum as of
December 31, 2017 for Mission Community Capital Trust I. Interest is payable quarterly at three-month LIBOR plus 1.48% per annum, for an
effective rate of 2.84% per annum as of December 31, 2017 for Santa Lucia Bancorp (CA) Capital Trust. These three debentures are callable
by the Corporation at par.
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On November 1, 2017, as part of the PLZZ acquisition, the Company 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 from time to time beginning in 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.
The Corporation is not allowed to consolidate and 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 as a component of the
Company’s liabilities.
The following table summarizes activities for our subordinated debentures for the periods indicated:
Average balance outstanding
Maximum amount outstanding at any month-end during the year
Balance outstanding at end of year
Weighted average interest rate during the year
14. Income Taxes
Income taxes for the years ended December 31 consisted of the following:
$
Year Ended December 31,
2017
2016
(dollars in thousands)
$
81,466
105,123
105,123
5.80%
69,347
69,383
69,383
5.54%
Current income tax provision:
Federal
State
Total current income tax provision
Deferred income tax provision (benefit):
Federal
Effect of Tax Act
State
Total deferred income tax provision (benefit)
Total income tax provision
2017
2016
2015
(dollars in thousands)
18,644
7,062
25,706
8,294
5,633
2,493
16,420
42,126
$
$
16,928
4,655
21,583
2,379
—
1,253
3,632
25,215
$
$
12,460
4,144
16,604
(887)
—
(508)
(1,395)
15,209
$
$
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INDEX
A reconciliation from statutory federal income taxes, that are based on a statutory rate of 35%, to the Company's effective income
taxes for the years ended December 31 is as follows:
2017
2016
2015
Statutory federal income tax provision
State taxes, net of federal income tax effect
Cash surrender life insurance
Tax exempt interest
Merger costs
LIHTC investments
Effect of the Tax Act
Excess tax benefit of stock-based compensation
Prior year true-up
Other
Total income tax provision
$
$
$
(dollars in thousands)
22,863
4,135
(407)
(764)
533
(909)
—
—
—
(236)
25,215
$
$
35,778
6,720
(645)
(1,660)
824
(1,031)
5,633
(1,995)
(1,108)
(390)
$
42,126
14,253
2,886
(483)
(742)
447
(871)
—
—
—
(281)
15,209
Deferred tax assets (liabilities) were comprised of the following temporary differences between the financial statement carrying
amounts and the tax basis of assets at December 31:
2017
2016
2015
(dollars in thousands)
Deferred tax assets:
Accrued expenses
Net operating loss
Allowance for loan losses, net of bad debt charge-offs
Deferred compensation
State taxes
Depreciation
Loan discount
Stock-based compensation
Unrealized loss on available for sale securities
Capital loss carryover
AMT credit
Total deferred tax assets
Deferred tax liabilities:
Deferred FDIC gain
Core deposit intangibles
Loan origination costs
Depreciation
Unrealized loss on available for sale securities
Other
Total deferred tax liabilities
Valuation allowance
Net deferred tax asset
$
$
$
2,463
4,834
8,400
3,074
1,500
—
8,642
1,914
—
380
107
31,314
(524)
(11,691)
(3,368)
(699)
(188)
(1,199)
(17,669)
(380)
$
13,265
$
2,839
3,977
8,061
2,348
1,879
1,090
3,477
1,108
1,939
—
—
26,718
(1,675)
(3,331)
(4,208)
—
—
(697)
(9,911)
—
16,807
$
1,717
5,192
6,252
2,547
1,451
651
—
639
—
—
—
18,449
(1,656)
(2,266)
—
—
(231)
(2,785)
(6,938)
—
11,511
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and
Jobs Act (“Tax Act”). Among other changes, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. The Company has
recorded an income tax expense of $5.6 million related to the
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remeasurement of federal net deferred tax assets resulting from the permanent reduction in the U.S. statutory corporate tax rate
to 21% from 35%. 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 in SAB 118.
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 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 determined that a valuation allowance for deferred tax assets was not required as of December 31, 2016 and
December 31, 2015. As of December 31, 2017, the Company recorded a valuation allowance of $380,000 against the capital loss carryover
deferred tax asset, as the Company does not believe it will generate sufficient capital gain before the capital loss carryover expires.
Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to use any net unrealized built in losses and
other tax attributes, such as net operating loss and tax credit carryforwards, when it undergoes a 50% ownership change over a designated
testing period. The Company has a Section 382 limited net operating loss carry forward of approximately $17.4 million for federal income tax
purposes, which is scheduled to expire in 2026. In addition, the Company has a Section 382 limited net operating loss carry forward of
approximately $14.7 million for California franchise tax purposes, which is scheduled to expire in 2020. The Company is expected to fully
utilize the federal and California net operating loss carryforward before it expires with the application of the Section 382 annual limitation.
The Company and its subsidiaries are subject to U.S. Federal income tax as well as income and franchise tax in multiple state
jurisdictions. The statute of limitations related to the consolidated Federal income tax returns is closed for all tax years up to and including
2013. The expiration of the statute of limitations related to the various state income and franchise tax returns varies by state. The Company is
currently not under examination in any taxing jurisdiction.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017 and 2016
is as follows:
Balance at January 1,
Additions based on tax positions related to prior
years
Balance at December 31,
$
$
2017
2016
(dollars in thousands)
— $
2,906
2,906 $
—
—
—
The total amount of unrecognized tax benefits was $2.9 million and $0 at December 31, 2017 and 2016 and is primarily comprised
of unrecognized tax benefits from an acquisition during 2017. The total amount of tax benefits that, if recognized, would favorably impact the
effective tax rate was $0 at December 31, 2017. The Company does not believe that the unrecognized tax benefits will change within the next
twelve months.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company
had accrued for $104,000 and $0 of the interest and penalties at December 31, 2017 and 2016, respectively.
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INDEX
15. Commitments, Contingencies and Concentrations of Risk
Lease Commitments – The Company leases a portion of its facilities from non-affiliates under operating leases expiring at various
dates through 2027. The following schedule shows the minimum annual lease payments, excluding any renewals and extensions, property
taxes, and other operating expenses, due under these agreements:
Year ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
Amount
(dollars in thousands)
7,170
5,476
2,675
1,887
1,421
2,312
20,941
$
$
Rental expense under all operating leases totaled $4.8 million for 2017, $4.4 million for 2016, and $3.8 million for 2015.
Legal Proceedings –The Company is not involved in any material pending legal proceedings other than legal proceedings occurring
in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a
material adverse impact on the results of operations or financial condition of the Company.
Employment Agreements—The Company has entered into a three-year employment agreement with its Chief Executive Officer
(“CEO”). This agreement provides for the payment of a base salary, a bonus based upon the CEO’s individual performance and the
Company’s overall performance, provides a vehicle for the CEO’s use, and provides for the payment of severance benefits upon termination
under specified circumstances.
Additionally, the Bank has entered into a three years employment agreements with the following executive officers: Chief Banking
Officer, the Chief Financial Officer, the Chief Credit Officer and the Chief Operating Officer. The agreements provide for the payment of a
base salary, a bonus based upon the individual’s performance and the overall performance of the Bank and the payment of severance benefits
upon termination under specified circumstances.
Availability of Funding Sources—The Company funds substantially all of the loans, which it originates or purchases, through
deposits, internally generated funds, and/or borrowings. The Company competes for deposits primarily on the basis of rates, and, as a
consequence, the Company could experience difficulties in attracting deposits to fund its operations if the Company does not continue to offer
deposit rates at levels that are competitive with other financial institutions. To the extent that the Company is not able to maintain its currently
available funding sources or to access new funding sources, it would have to curtail its loan production activities or sell loans and investment
securities earlier than is optimal. Any such event could have a material adverse effect on the Company’s results of operations, financial
condition and cash flows.
16. Benefit Plans
401(k) Plan—The Bank maintains an Employee Savings Plan (the “401(k) Plan”) which qualifies under Section 401(k) of the
Internal Revenue Code. Under the 401(k) Plan, employees may contribute between 1% to 100% of their compensation. In 2017, 2016 and
2015, the Bank matched 100% of contributions for the first three percent contributed and 50% on the next two percent contributed.
Contributions made to the 401(k) Plan by the Bank amounted to $1.4 million for 2017, $959,000 for 2016 and $769,000 for 2015.
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INDEX
Pacific Premier Bancorp, Inc. 2004 Long-Term Incentive Plan (the “2004 Plan”)—The 2004 Plan was approved by the
Corporation’s stockholders in May 2004. The 2004 Plan authorized the granting of incentive stock options, nonstatutory stock options, stock
appreciation rights and restricted stock (collectively "Awards") equal to 525,500 shares of the common stock of the Corporation for issuances
to executive, key employees, officers and directors. The 2004 Plan was in effect for a period of ten years starting in February 25, 2004, the
date the 2004 Plan was adopted. Awards granted under the 2004 Plan were made at an exercise price equal to the fair market value of the
stock on the date of grant. The Awards granted pursuant to the 2004 Plan vest at a rate of 33.3% per year. The 2004 Plan terminated in
February 2014.
Heritage Oaks Bancorp, Inc. 2005 Equity Based Compensation Plan (the "2005 Plan")—The 2005 Plan was acquired from
Heritage Oaks Bancorp, Inc. on April 1, 2017. The 2005 Plan authorized the granting of Incentive Stock Options, Non-Qualified Stock Options,
Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units and Performance Share Cash Only Awards. As of December 31,
2016, no further grants can be made from this plan, however Pacific Premier assumed all unvested and unexercised awards.
Pacific Premier Bancorp, Inc. 2012 Long-Term Incentive Plan (the “2012 Plan”)—The 2012 Plan was approved by the
Corporation’s stockholders in May 2012. The 2012 Plan authorizes the granting of Awards equal to 620,000 shares of the common stock of the
Corporation for issuances to executives, key employees, officers, and directors. The 2012 Plan will be in effect for a period of ten years from
May 30, 2012, the date the 2012 Plan was adopted. Awards granted under the 2012 Plan will be made at an exercise price equal to the fair
market value of the stock on the date of grant. Awards granted to officers and employees may include incentive stock options, non-qualified
stock options, restricted stock, restricted stock units, and stock appreciation rights. The awards have vesting periods ranging from 1 to 3 years;
vesting in either three equal annual installments or one lump sum at the end of the third year. In May 2014, the Corporation’s stockholders
approved an amendment to the 2012 Plan to increase the shares available under the plan by 800,000 shares to total 1,420,000 shares. In May
2015, the Corporation's stockholders approved an amendment to the 2012 Plan to permit the grant of performance-based awards, including
equity compensation awards that may not be subject to the deduction limitation of Section 162(m) of the Internal Revenue Code. The
performance-based awards include (i) both performance-based equity compensation awards and performance-based cash bonus payments
and (ii) restricted stock units. In May 2017, the Corporation’s stockholders approved an amendment to the 2012 Plan to increase the shares
available under the plan by 3,580,000 shares to total 5,000,000 shares.
Heritage Oaks Bancorp, Inc. 2015 Equity Based Compensation Plan (the "2015 Plan")—The 2015 Plan was acquired from
Heritage Oaks Bancorp, Inc. on April 1, 2017. The 2015 plan was approved by the Corporation's stockholders in May 2015. The 2015 Plan
authorized the Company to grant various types of share-based compensation awards to the Company's employees and Board of Directors
such as stock options, restricted stock awards, and restricted stock units. Under the 2015 Equity Incentive Plan a maximum of 2,500,000
shares of the Company's common stock were made to be issued. Shares issued under this plan, other than stock options and stock appreciation
rights, were counted against the plan on a two shares for every one share actually issued basis. Awards that were canceled, expired, forfeited,
fail to vest, or otherwise resulted in issued shares not being delivered to the grantee, were made available for the issuance of future share-
based compensation awards. Additionally, under this plan, no one individual was to be granted shares in aggregate that exceed more than
250,000 shares during any calendar year. The 2015 Plan is still active and Pacific Premier assumed all unvested and unexercised awards.
The Pacific Premier Bancorp, Inc. 2004 Long-Term Incentive Plan, Heritages Oaks Bancorp, Inc. 2005 Equity Based
Compensation Plan, Pacific Premier Bancorp, Inc. 2012 Long-Term Incentive Plan and the Heritage Oaks Bancorp, Inc. 2015 Equity
Based Compensation Plan are collectively the “Plans.”
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INDEX
Stock Options
As of December 31, 2017, there are 114,454 options outstanding on the 2004 Plan with zero available for grant. As of
December 31, 2017, there are 48,532 options outstanding on the 2005 Plan with zero available for grant. As of December 31, 2017, there are
755,362 options outstanding on the 2012 Plan with 3,594,149 available for grant. As of December 31, 2017, there are 36,175 options
outstanding on the 2015 Plan with zero available for grant. Below is a summary of the stock option activity in the Plans for the year ended
December 31, 2017:
Number of Stock
Options
Outstanding
Weighted Average
Exercise Price Per
Share
Weighted Average
Remaining
Contractual Term
2017
(in years)
Aggregate Intrinsic
value
(dollars in
thousands)
Outstanding at January 1, 2017
Granted
Exercised
Forfeited and Expired
Outstanding at December 31, 2017
Vested and Exercisable at December 31, 2017
$
1,083,667
210,977
(333,959)
(6,162)
954,523
749,281
$
$
12.61
20.40
13.49
34.68
13.89
12.47
5.8
5.3
$
$
24,926
20,627
The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $7.7 million, $2.0
million and $60,000, respectively.
The amount charged against compensation expense in relation to the stock options was $927,000 for 2017, $883,000 for 2016 and
$514,000 for 2015. At December 31, 2017, unrecognized compensation expense related to the options is approximately $814,000.
Options granted under the Option Plans during 2017, 2016 and 2015 were valued using the Black-Scholes model with the following
average assumptions:
Expected volatility
Expected term
Expected dividends
Risk free rate
Weighted-average grant date fair value
2017
22.43% - 28.77%
.33 - 6 Years
None
1.03% - 2.02%
$19.66
Year Ended December 31,
2016
21.98% - 26.88%
6.00 Years
None
1.32% - 1.83%
$5.55
2015
29.47%
6.00 Years
None
1.39%
$4.73
The following is the listing of the input variables and the assumptions utilized by the Company for each parameter used in the Black-
Scholes option pricing model in prior years:
Risk-free Rate – The risk-free rate for periods within the contractual life of the option have been based on the U.S. Treasury rate
that matures on the expected assigned life of the option at the date of the grant.
Expected Life of Options – The expected life of options is based on the period of time that options granted are expected to be
outstanding.
Expected Volatility –The expected volatility has been based on the historical volatility for the Company’s shares.
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Dividend Yield – The dividend yield has been based on historical experience and expected future changes on dividend payouts. The
Company does not expect to declare or pay dividends on its common stock within the foreseeable future.
Restricted Stock
Below is a summary of the restricted stock activity in the Plans for the years ended December 31, 2017:
Unvested at the beginning of the year
Granted
Vested
Forfeited
Unvested at the end of the year
2017
Weighted Average
Grant-Date Fair
Value per share
Shares
$
370,334
201,544
(125,035)
—
446,843
$
23.53
38.70
26.26
—
29.61
Compensation expense for the year ended December 31, 2017, 2016 and 2015 related to the above restricted stock grants
amounted to $5.0 million, $1.8 million and $260,000, respectively. Restricted stock awards are valued at the closing stock price on the date of
grant and are expensed to stock based compensation expense over the period for which the related service is performed. The total grant date
fair value of awards was $7.8 million for 2017 awards. At December 31, 2017, unrecognized compensation expense related to restricted stock
is approximately $8.2 million.
Other Plans
Salary Continuation Plan—The Bank implemented a non-qualified supplemental retirement plan in 2006 (the “Salary Continuation
Plan”) for certain executive officers of the Bank. The Salary Continuation Plan is unfunded.
Deferred Compensation Plans—Deferred Compensation Plan-The Bank implemented a non-qualified supplemental retirement
plan in 2006 (the “Supplemental Executive Retirement Plan” or “SERP”) for certain executive officers of the Bank. The Bank has acquired
additional SERPs through the acquisitions of SDTB, IDPK and HEOP. The SERP is unfunded. The expense incurred for the SERP for each
of the last three years was $721,000, $573,000 and $307,000 resulting in a deferred compensation liability of $8.3 million and $5.1 million as of
the years ended 2017 and 2016. In addition, with the acquisition of PLZZ, the Company acquired a deferred compensation plan that is
unfunded and results in a deferred compensation asset and liability both in the amount of $2.0 million.
The amounts expensed in 2017, 2016, and 2015 for all of these plans amounted to $721,000, $573,000, and $555,000 respectively.
As of December 31, 2017, 2016 and 2015, $8.4 million, $5.7 million, and $5.4 million, respectively, were recorded in other liabilities on the
consolidated statements of condition for each of these plans.
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17. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit in the form of originating loans or providing funds
under existing lines or letters of credit. These commitments are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. Since many
commitments are expected to expire, the total commitment amounts do not necessarily represent future cash requirements. Commitments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the accompanying consolidated
statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual or notional amount of those instruments. The Company controls credit risk of
its commitments to fund loans through credit approvals, limits and monitoring procedures. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet instruments. The Company evaluates each customer for
creditworthiness.
The Company receives collateral to support commitments when deemed necessary. The most significant categories of collateral
include real estate properties underlying mortgage loans, liens on personal property and cash on deposit with the Bank.
The Company maintains an allowance for credit losses to provide for commitments related to loans associated with undisbursed
loan funds and unused lines of credit. The allowance for these commitments was $1.9 million at December 31, 2017 and $1.1 million at
December 31, 2016.
The Company’s commitments to extend credit at December 31, 2017 were $1.2 billion and $581 million at December 31, 2016. The
2017 balance is primarily composed of $707 million of undisbursed commitments for C&I loans.
18. Fair Value of Financial Instruments
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability 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,
and for estimating the fair value of financial assets and financial liabilities not recorded 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,
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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 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. Therefore, for substantially all financial
instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales
transaction at December 31, 2017 and December 31, 2016.
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. 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.
Cash and due from banks—The carrying amounts of cash and short-term instruments approximate fair value due to the liquidity
of these instruments.
Investment securities—Investment securities are generally valued based upon quotes obtained from an independent third-party
pricing service, 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.
FHLB, FRB, Other Stock—Due to restrictions placed on its transferability, it is not practical to determine the fair value of the
stock.
Loans Held for Sale—The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party
investors resulting in a Level 2 classification.
Loans Held for Investment—The fair value of loans, other than loans on nonaccrual status, was estimated by discounting the
remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk
characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance
for loan losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change
in borrowers’ credit risks since the origination of such loans. Rather, the allocable portion of the allowance for loan losses is considered to
provide for such changes in estimating fair value. As a result, this fair value is not necessarily
122
INDEX
the value, which would be derived using an exit price. These loans are included within Level 3 of the fair value hierarchy.
Impaired loans and OREO—Impaired loans and OREO assets are recorded at the fair value less estimated costs to sell at the
time of foreclosure. The fair value of impaired loans and OREO assets are generally based on recent real estate appraisals adjusted for
estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales
and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the
comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for
determining fair value.
Deposit Accounts and Short-term Borrowings—The amounts payable to depositors for demand, savings, and money market
accounts, and short-term borrowings are considered to approximate fair value. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining maturities using a discounted cash flow calculation. Interest-
bearing deposits and borrowings are included within Level 2 of the fair value hierarchy.
Term FHLB Advances and Other Long-term Borrowings—The fair value of long term borrowings is determined using rates
currently available for similar borrowings with similar credit risk and for the remaining maturities and are classified as Level 2.
Subordinated Debentures—The fair value of subordinated debentures is estimated by discounting the balance by the current
three-month LIBOR rate plus the current market spread. The fair value is determined based on the maturity date as the Company does not
currently have intentions to call the debenture and is classified as Level 2.
Accrued Interest Receivable/Payable—The carrying amounts of accrued interest receivable and accrued interest payable are
deemed to approximate fair value.
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.
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INDEX
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2017 and
2016.
Assets:
$
Cash and cash equivalents
Interest-bearing time deposits with financial institutions
Investments held to maturity
Investment securities available-for-sale
FHLB, FRB and other stock
Loans held for sale
Loans held for investment, net
Accrued interest receivable
Liabilities:
Deposit accounts
FHLB advances
Other borrowings
Subordinated debentures
Accrued interest payable
Assets:
$
Cash and cash equivalents
Interest-bearing time deposits with financial institutions
Investments held to maturity
Investment securities available for sale
FHLB, FRB and other stock
Loans held for sale
Loans held for investment, net
Accrued interest receivable
Liabilities:
Deposit accounts
FHLB advances
Other borrowings
Subordinated debentures
Accrued interest payable
Carrying
Amount
At December 31, 2017
Level 1
Level 2
Level 3
(dollars in thousands)
Estimated
Fair Value
$
$
200,064
3,693
18,291
787,429
65,881
23,426
6,167,532
27,053
6,085,868
490,148
46,139
105,123
2,131
Carrying
Amount
156,857
3,944
8,565
380,963
37,304
7,711
3,220,317
13,145
3,145,581
278,000
49,971
69,383
1,481
$
200,064
3,693
—
—
N/A
—
—
27,053
5,001,053
—
—
—
2,131
$
—
—
18,082
787,429
N/A
23,524
—
—
1,074,564
489,823
46,373
115,159
—
$
—
—
—
—
N/A
—
6,269,366
—
—
—
—
—
—
200,064
3,693
18,082
787,429
N/A
23,524
6,269,366
27,053
6,075,617
489,823
46,373
115,159
2,131
At December 31, 2016
Level 1
Level 2
(dollars in thousands)
Level 3
Estimated
Fair Value
$
156,857
3,944
—
—
N/A
—
—
13,145
2,330,579
—
—
—
1,481
$
—
—
8,461
380,963
N/A
8,405
—
—
573,467
277,935
50,905
69,982
—
$
—
—
—
—
N/A
—
3,211,154
—
—
—
—
—
—
156,857
3,944
8,461
380,963
N/A
8,405
3,211,154
13,145
2,904,046
277,935
50,905
69,982
1,481
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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INDEX
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 non-recurring Level 3 when
the fair value of the underlying collateral is based on an observable market price or current appraised value. When current market prices are
not available or the Company determines that the fair value of the underlying collateral is further impaired below appraised values, the
Company records impaired loans as Level 3. At 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.
The measures of fair value on a non-recurring basis are immaterial at December 31, 2017 and 2016. The following fair value
hierarchy tables present information about the Company’s assets measured at fair value on a recurring basis at the dates indicated:
At December 31, 2017
Fair Value Measurement Using
Level 1
Level 2
Level 3
(dollars in thousands)
Securities at
Fair Value
$
$
$
$
—
—
—
—
—
—
$
$
47,209
79,546
232,128
33,781
394,765
787,429
$
$
At December 31, 2016
Fair Value Measurement Using
Level 1
Level 2
Level 3
(dollars in thousands)
—
—
—
—
—
$
$
37,642
118,803
31,388
193,130
380,963
$
$
—
—
—
—
—
—
$
$
—
—
—
—
—
$
$
47,209
79,546
232,128
33,781
394,765
787,429
Securities at
Fair Value
37,642
118,803
31,388
193,130
380,963
Investment securities available for sale:
Agency
Corporate
Municipal bonds
Collateralized mortgage obligation: residential
Mortgage-backed securities: residential
Total securities available for sale:
Investment securities available for sale:
Corporate
Municipal bonds
Collateralized mortgage obligation: residential
Mortgage-backed securities: residential
Total securities available for sale:
19. Earnings Per Share
Earnings per share of common stock is calculated on both a basic and diluted basis based on the weighted average number of
common and common equivalent shares outstanding, excluding common shares in treasury. Basic earnings per share excludes dilution and is
computed by dividing income available to stockholders by the weighted average number of common shares outstanding for the period. The
Company has no outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends that would be considered
participating securities for the basic calculation. 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 then
would share in earnings and excludes common shares in
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INDEX
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 impact of stock options, which are anti-dilutive are excluded from the computations of diluted earnings per share. 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 weighted average number of stock options excluded was 17,524 for December 31, 2017, 82,760 for December 31, 2016 and
222,858 for December 31, 2015.
A reconciliation of the numerators and denominators used in basic and diluted earnings per share computations is presented in the
table below.
For the year ended December 31, 2017:
Net income applicable to earnings per share
Basic earnings per share: Income available to common stockholders
Effect of dilutive securities: Warrants and stock option plans
Diluted earnings per share: Income available to common stockholders
For the year ended December 31, 2016:
Net income applicable to earnings per share
Basic earnings per share: Income available to common stockholders
Effect of dilutive securities: Warrants and stock option plans
Diluted earnings per share: Income available to common stockholders
For the year ended December 31, 2015:
Net income applicable to earnings per share
Basic earnings per share: Income available to common stockholders
Effect of dilutive securities: Warrants and stock option plans
Diluted earnings per share: Income available to common stockholders
20. Derivative Instruments
Income/(Loss)
(numerator)
Shares
(denominator)
Per Share
Amount
(dollars in thousands, except share data)
$
$
$
$
$
$
60,100
60,100
—
60,100
40,103
40,103
—
40,103
25,515
25,515
—
25,515
37,705,556
805,705
38,511,261
$
$
26,931,634
507,525
27,439,159
$
$
21,156,668
332,030
21,488,698
$
$
1.59
1.56
1.49
1.46
1.21
1.19
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. At December 31, 2017, the Company had swaps with matched terms with an aggregate notional
amount of $58.6 million and a fair value of $1.1 million. 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
126
INDEX
collateral arrangements for the underlying loans these borrowers have with the Company. During the twelve months 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 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. The Company's derivative instruments were acquired as part of the HEOP acquisition, and the
Company did not have any at December 31, 2016:
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
Total derivative instruments
$
$
58,599
58,599
$
$
1,135
1,135
$
$
58,599
58,599
$
$
1,135
1,135
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INDEX
21. 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 December 31, 2017 are
presented in the table below:
December 31, 2017
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)
Financial assets:
Derivatives not
designated as
hedging instruments
Total
Financial liabilities:
Derivatives not
designated as
hedging instruments
Total
$
$
$
$
1,833
1,833
$
$
(698) $
(698) $
1,135
1,135
$
$
—
—
$
$
—
—
$
$
1,135
1,135
1,135
1,135
$
$
—
—
$
$
1,135
1,135
$
$
—
—
$
$
—
—
$
$
1,135
1,135
(1) Represents cash collateral held with counterparty bank.
22. Related Parties
Loans to the Company’s executive officers and directors are made in the ordinary course of business, in accordance with applicable
regulations and the Company's policies and procedures. At December 31, 2017, the Company had related party loans outstanding totaling $6.12
million and at December 31, 2016, the Company had related party loans outstanding totaling $2.38 million. On January 8, 2018, the Company
entered into a new related party loan with a commitment amount of $4.0 million.
At the end of 2017, the Company had related party deposits of $746 million compared to $354 million at the end of 2016. John J.
Carona was appointed to the Board of Directors on March 15, 2013, in connection with the Company's acquisition of FAB. Mr. Carona is the
President and Chief Executive Officer of Associa, a Texas corporation that specializes in providing management and related services for
homeowners associations located across the United States. At December 31, 2017 and 2016, $736 million and $352 million, respectively, of the
related party deposits were attributable to Associa.
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INDEX
23. Quarterly Results of Operations (Unaudited)
The following is a summary of selected financial data presented below by quarter for the periods indicated:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(dollars in thousands, except per share data)
For the year ended December 31, 2017:
Interest income
Interest expense
Provision for loan losses
Noninterest income
Noninterest expense
Income tax provision
Net income
Earnings per share:
Basic
Diluted
For the year ended December 31, 2016:
Interest income
Interest expense
Provision for loan losses
Noninterest income
Noninterest expense
Income tax provision
Net income
Earnings per share:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
$
45,427
3,724
2,502
4,683
29,747
4,616
9,521
0.35
0.34
37,505
3,304
1,120
4,848
23,633
5,742
8,554
0.33
0.33
129
$
$
$
$
$
$
68,733
5,395
1,904
8,759
48,496
7,521
14,176
0.36
0.35
40,874
3,313
1,589
4,468
23,713
6,358
10,369
0.38
0.37
$
$
$
$
$
$
70,161
5,870
2,049
8,221
39,612
10,619
20,232
0.51
0.50
42,429
3,420
4,013
5,968
25,860
5,877
9,227
0.34
0.33
85,684
7,514
2,185
9,451
49,895
19,370
16,171
0.37
0.36
45,797
3,493
2,054
4,318
25,377
7,238
11,953
0.44
0.43
INDEX
24. Parent Company Financial Information
The Corporation is a California-based bank holding company organized in 1997 as a Delaware corporation and owns 100% of the
capital stock of the Bank, its principal operating subsidiary. The Bank was incorporated and commenced operations in 1983. Condensed
financial statements of the Corporation are as follows:
PACIFIC PREMIER BANCORP, INC.
STATEMENTS OF FINANCIAL CONDITION
(Parent company only)
Assets
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total Assets
Liabilities
Subordinated debentures
Accrued expenses and other liabilities
Total Liabilities
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
Income
Interest income
Noninterest income
Total income
Expense
Interest expense
Noninterest expense
Total expense
Loss before income tax provision
Income tax benefit
Net loss (parent only)
Equity in net earnings of subsidiaries
Net income
At December 31,
2017
2016
(dollars in thousands)
$
$
$
$
17,097
1,329,961
2,599
1,349,657
105,123
2,538
107,661
1,241,996
1,349,657
$
$
$
$
15,124
513,606
2,400
531,130
69,383
2,007
71,390
459,740
531,130
PACIFIC PREMIER BANCORP, INC.
STATEMENTS OF OPERATIONS
(Parent company only)
For the Years Ended December 31,
2017
2016
(dollars in thousands)
2015
$
36
—
36
4,720
8,956
13,676
(13,640 )
(5,417 )
(8,223 )
68,323
60,100
$
$
31
—
31
3,844
3,769
7,613
(7,582 )
(2,785 )
(4,797 )
44,900
40,103
$
27
—
27
3,937
2,831
6,768
(6,741 )
(2,783 )
(3,958 )
29,473
25,515
$
$
130
INDEX
PACIFIC PREMIER BANCORP, INC.
SUMMARY STATEMENTS OF CASH FLOWS
(Parent company only)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to cash used in operating activities:
$
Share-based compensation expense
Equity in undistributed earnings of subsidiaries and dividends from the bank
Increase (decrease) in accrued expenses and other liabilities
(Decrease) increase in current and deferred taxes
Decrease (increase) in other assets
Net cash (used in) provided by operating activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance cost
Repurchase of common stock
Proceeds from exercise of options and warrants
Capital contribution to Bank
Proceeds from issuance of subordinated debentures
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
25. Acquisitions
Plaza Bancorp Acquisition
$
For the Years Ended December 31,
2016
2015
2017
(dollars in thousands)
40,103
$
$
60,100
5,809
(68,323)
(365)
(896)
1,714
(1,961)
—
(1,258)
4,592
600
—
3,934
1,973
15,124
17,097
$
2,729
(44,901)
240
—
4,794
2,965
—
(125)
1,107
7,765
—
8,747
11,712
3,412
15,124
$
25,515
1,165
(29,473)
166
3,566
(6,893)
(5,954)
—
(116)
758
(10,000)
—
(9,358)
(15,312)
18,724
3,412
Effective as of November 1, 2017, the Company completed the acquisition of Plaza Bancorp (OTC Market Group Pink Sheets: PLZZ)
(“Plaza”), the holding company of Plaza Bank, a California chartered banking corporation headquartered in Irvine, California with $1.3 billion in
total assets, $1.1 billion in gross loans and $1.1 billion in total deposits.
Pursuant to the terms of the merger agreement, each outstanding share of PLZZ common stock was converted into the right to
receive 0.2000 shares of Company common stock. The value of the total deal consideration was approximately $251 million, which included
approximately $6.5 million of aggregate cash consideration payable to holders of unexercised options and warrants exercisable for shares of
PLZZ common stock, and the issuance of 6,049,373 shares of the Company's common stock, which had a value of $40.40 per share, which
was the closing price of the Company's common stock on October 31, 2017, the last trading day prior to the consummation of the acquisition.
Goodwill in the amount of $122 million was recognized in the PLZZ 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.
131
INDEX
The following table represents the assets acquired and liabilities assumed of PLZZ as of November 1, 2017 and the fair value
adjustments and amounts recorded by the Company in 2017 under the acquisition method of accounting, which are subject to adjustment for up
to one year after the merger date:
ASSETS ACQUIRED
Cash and cash equivalents
Loans, gross
Allowance for loan losses
Fixed assets
Core deposit intangible
Deferred tax assets
Other assets
Total assets acquired
LIABILITIES ASSUMED
Deposits
Borrowings
Other Liabilities
Total liabilities assumed
Excess of assets acquired over liabilities
assumed
Consideration paid
Paid by PLZZ prior to close
Capitalized merger-related expense
Goodwill recognized
PLZZ
Book Value
Fair Value
Adjustment
(dollars in thousands)
Fair
Value
$
150,459 $
1,069,359
(13,009)
7,389
198
11,849
19,495
1,245,740 $
1,081,727 $
40,755
8,956
1,131,438
$
$
— $
(6,418)
13,009
(194)
11,382
(6,876)
(330)
10,573 $
150,459
1,062,941
—
7,195
11,580
4,973
19,165
1,256,313
1,224 $
397
(622)
999
1,082,951
41,152
8,334
1,132,437
$
114,302 $
9,574
$
123,876
250,939
6,544
1,366
121,885
Heritage Oaks Bancorp Acquisition
Effective as of April 1, 2017, the Company completed the acquisition of HEOP, the holding company of Heritage Oaks Bank, a Paso
Robles, California based state-chartered bank (“Heritage Oaks Bank”) with $2.0 billion in total assets, $1.4 billion in gross loans and $1.7 billion
in total deposits at March 31, 2017. Heritage Oaks Bank operates branches within San Luis Obispo and Santa Barbara Counties and a loan
production office in Ventura County.
Pursuant to the terms of the merger agreement, each outstanding share of HEOP common stock was converted into the right to
receive 0.3471 shares of corporate common stock. The value of the total deal consideration was approximately $465 million, which included
approximately $3.9 million of aggregate cash consideration payable to holders of Heritage Oaks share-based compensation awards, and the
issuance of 11,959,022 shares of the Corporation's common stock, which had a value of $38.55 per share, which was the closing price of the
Corporation's common stock on March 31, 2017, the last trading day prior to the consummation of the acquisition.
Goodwill in the amount of $269 million was recognized in the HEOP acquisition. Goodwill represents the future economic benefits
arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be
derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.
132
INDEX
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
78,728
447,520
1,387,949
$
Fair Value
Adjustments
(dollars in thousands)
—
(4,597 )
(23,300 )
17,200
$
ASSETS ACQUIRED
Cash and cash equivalents
Investment securities
Loans, gross
Allowance for loan losses
Fixed assets
Core deposit intangible
Deferred tax assets
Other assets
Total assets acquired
LIABILITIES ASSUMED
Deposits
Borrowings
Other Liabilities
Total liabilities assumed
Excess of assets acquired over liabilities assumed
Consideration paid
Capitalized merger-related expense
Goodwill recognized
$
$
$
$
(17,200 )
35,567
—
17,850
55,223
2,005,637
$
1,668,079
141,996
7,290
1,817,365
188,272
$
$
Fair
Value
78,728
442,923
1,364,649
—
34,902
28,123
11,283
55,214
2,015,822
1,669,550
139,034
8,061
1,816,645
199,177
465,482
2,649
268,954
(665 )
28,123
(6,567 )
(9 )
10,185
$
$
1,471
(2,962 )
771
(720 )
10,905
$
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.
Security Bank Acquisition
On January 31, 2016, the Company completed its acquisition of SCAF whereby we acquired $714 million in total assets, $456
million in loans and $637 million in total deposits. Under the terms of the merger agreement, each share of SCAF common stock was
converted into the right to receive 0.9629 shares of the Corporation’s common stock. The value of the total deal consideration was $120
million, which includes $788,000 of aggregate cash consideration to the holders of SCAF stock options and the issuance of 5,815,051 shares of
the Corporation’s common stock, valued at $119.4 million based on a closing stock price of $20.53 per share on January 29, 2016.
SCAF was the holding company of Security Bank of California, a Riverside, California, based state-chartered bank with six
branches located in Riverside County, San Bernardino County and Orange County.
Goodwill in the amount of $51.7 million was recognized in the SCAF acquisition. Goodwill represents the future economic benefits
arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be
derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed of SCAF as of January 31, 2016 and the fair value
adjustments and amounts recorded by the Company in 2016 under the acquisition method of accounting:
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INDEX
ASSETS ACQUIRED
Cash and cash equivalents
Interest-bearing deposits with financial institutions
Investment securities
Loans, gross
Allowance for loan losses
Fixed assets
Core deposit intangible
Deferred tax assets
Other assets
Total assets acquired
LIABILITIES ASSUMED
Deposits
Borrowings
Deferred tax liability
Other Liabilities
Total liabilities assumed
$
$
$
Excess of assets acquired over liabilities assumed $
Consideration paid
Goodwill recognized
SCAF
Book Value
Fair Value
Adjustments
Fair
Value
(dollars in thousands)
40,947 $
1,972
191,881
467,197
(7,399)
5,335
493
5,618
10,589
716,633 $
636,450 $
—
—
9,063
645,513
71,120 $
— $
—
(1,627)
(11,039)
7,399
(1,145)
3,826
1,130
(1,227)
(2,683) $
141 $
—
—
(220)
(79)
(2,604)
$
40,947
1,972
190,254
456,158
—
4,190
4,319
6,748
9,362
713,950
636,591
—
—
8,843
645,434
68,516
120,174
51,658
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 SCAF, HEOP and PLZZ were recorded at fair value at the date of each acquisition. A valuation of SCAF,
HEOP and PLZZ's loan portfolio was performed 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 period and prepayment rates based on industry standards.
The Company also determined the fair value of the core deposit intangible, securities and deposits with the assistance of third-party
valuations as well as the fair value of OREO was based on recent appraisals of the properties.
The core deposit intangible on non-maturing deposit 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 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.
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INDEX
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 SCAF, HEOP and PLZZ, the contractual amounts due, expected cash flows to be collected, interest
component and fair value as of the respective acquisition dates were as follows:
Contractual amounts due
Cash flows not expected to be collected
Expected cash flows
Interest component of expected cash flows
Fair value of acquired loans
Acquired Loans
SCAF
HEOP
PLZZ
(dollars in thousands)
1,717,230 $
4,442
1,712,788
348,100
1,364,688 $
539,806 $
2,765
537,041
80,883
456,158 $
1,703,246
20,152
1,683,094
625,592
1,057,502
$
$
In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan losses that had been
previously recorded by SCAF, HEOP and PLZZ.
The operating results of the Company for the twelve months ending December 31, 2017 include the operating results of SCAF,
HEOP and PLZZ since their respective acquisition dates. The following table presents the net interest and other income, net income and
earnings per share as if the merger with SCAF, HEOP and PLZZ were effective as of January 1, 2017, 2016 and 2015 for the respective year
in which each acquisition was closed. The unaudited pro forma information in the following table is intended for informational purposes only
and is not necessarily indicative of our future operating results or operating results that would have occurred had the mergers been completed
at the beginning of each respective year. No assumptions have been applied to the pro forma results of operations regarding possible revenue
enhancements, expense efficiencies or asset dispositions.
Unaudited pro forma net interest and other income, net income and earnings per share presented below:
Net interest and other income
Net income
Basic earnings per share
Diluted earnings per share
26. Subsequent Events
Year Ended December 31,
2017
2016
2015
$
$
342,159
72,316
1.58
1.55
$
258,970
71,722
1.58
1.56
246,622
58,257
1.30
1.29
Pacific Premier Bancorp, Inc. and Grandpoint Capital, Inc.
On February 9, 2018, we entered into a definitive agreement with Grandpoint Capital, Inc. to acquire Grandpoint and its wholly-
owned, California-chartered state bank subsidiary, Grandpoint Bank. Grandpoint is headquartered in Los Angeles, California with $3.2 billion in
total assets, $2.4 billion in gross loans and $2.4 billion in total deposits at December 31, 2017. Grandpoint operates 14 regional offices in
Southern California, Arizona and Vancouver, Washington. Under the terms of the definitive agreement, holders of Grandpoint common stock
will have the right to receive 0.4750 shares of Company common stock.
The proposed transaction is expected to close in the third quarter of 2018, subject to satisfaction of customary closing conditions,
including regulatory approvals and approval of Grandpoint’s and the Corporation’s shareholders. Certain Grandpoint shareholders, as well as
Grandpoint's directors and executive officers have entered
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INDEX
into agreements with the Corporation pursuant to which they have committed to provide written consents with respect to shares of Grandpoint
common stock in favor of the acquisition.
Related Party Loan
On January 8, 2018, the Company entered into a new related party loan having a commitment amount of $4.0 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rule 13a-15(c) and 15d-15(c)) under the Exchange Act as of the end of the period
covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and
that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls
and procedures are effective as of the end of the period covered by this Annual Report on Form 10-K in providing reasonable assurance that
information we are required to disclose in periodic reports that we file or submit to the SEC pursuant to the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
United States generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with United States generally accepted accounting principles, and that our receipts and expenditures are being made
only in accordance with the authorization of its management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2017. In making this
assessment, management used the framework set forth in the report entitled
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INDEX
“Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. As permitted, the Company
has excluded the operations of Plaza Bancorp acquired November 1, 2017, which is described in Note 23 to the consolidated financial
statements. The assets acquired in this acquisition and excluded from management’s assessment on internal control over financial reporting
comprised approximately 15.9% of total consolidated assets at acquisition, before purchase accounting adjustments. Based on this assessment,
our management believes that, as of December 31, 2017, our internal control over financial reporting was effective.
Crowe Horwath LLP, the independent registered public accounting firm that audited the Company’s financial statements included in
the Annual Report, issued an audit report on the Company’s internal control over financial reporting as of, and for the year ended
December 31, 2017. Crowe Horwath, LLP’s audit report appears in Item 8 of this Annual Report.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to
improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such
activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
As of the end of the fourth quarter ended December 31, 2017, there were no changes in our internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
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INDEX
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item with respect to our directors and certain corporate governance practices is contained in our
Proxy Statement for our 2018 Annual Meeting of Stockholders (the “Proxy Statement”), expected to be filed with the SEC within 120 days
after the end of the Company’s fiscal year ended December 31, 2017. Such information is incorporated herein by reference.
We maintain a Code of Business Conduct and Ethics applicable to our Board of Directors, principal executive officer, and principal
financial officer, as well as all of our other employees. Our Code of Business Conduct and Ethics can be found on our internet website located
at www.ppbi.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our
2018 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table provides information as of December 31, 2017, with respect to options and RSUs outstanding and shares
available for future awards under the Company’s active equity incentive plans.
Plan Category
Equity compensation plans approved by security holders:
2004 Long-term Incentive Plan
Amended and Restated 2012 Stock Long-term Incentive Plan
2005 Equity Incentive Plan
2015 Equity Incentive Plan
Equity compensation plans not approved by security holders
Total Equity Compensation plans
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(excluding securities
reflected in column (a))
(a)
(b)
(c)
114,454
755,362
48,532
36,175
—
954,523
$
$
8.25
14.03
19.15
21.78
—
13.89
—
3,594,149
—
—
—
3,594,149
Additional information required by this item information required by this Item will appear in the Proxy Statement we will deliver to our
stockholders in connection with our 2018 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
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INDEX
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our
2018 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will appear in the Proxy Statement we will deliver to our stockholders in connection with our
2018 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
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INDEX
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report.
PART IV
(1) The following financial statements are incorporated by reference from Item 8 hereof:
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Financial Condition as of December 31, 2017 and 2016.
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015.
Consolidated Statement of Other Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015.
Consolidated Statement of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not
applicable or the required information is included in the consolidated financial statements or related notes thereto.
(3) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
Exhibit No.
Description
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Purchase and Assumption Agreement-Whole Bank All Deposits, Among Federal Deposit Insurance Corporation, Receiver of Palm
Desert National Bank, Palm Desert, California, Federal Deposit Insurance Corporation and Pacific Premier Bank, Costa Mesa, California
dated as of April 27, 2012. (1)
Agreement and Plan of Reorganization, dated as of October 15, 2012, among Pacific Premier Bancorp, Inc., Pacific Premier Bank and First
Associations Bank. (2)
Agreement and Plan of Reorganization, dated as of March 5, 2013, among Pacific Premier Bancorp, Inc., Pacific Premier Bank and San
Diego Trust Bank. (3)
Agreement and Plan of Reorganization, dated as of October 21, 2014, among Pacific Premier Bancorp, Inc., Pacific Premier Bank and
Independence Bank. (4)
Agreement and Plan of Merger and Reorganization, dated as of September 30, 2015, among Pacific Premier Bancorp, Inc. and Security
California Bancorp. (5)
Agreement and Plan of Reorganization, dated as of December 12, 2016, between Pacific Premier Bancorp, Inc. and Heritage Oaks
Bancorp (6)
Agreement and Plan of Reorganization, dated as of August 8, 2017 between Pacific Premier Bancorp, Inc. and Plaza Bancorp (19)
Agreement and Plan of Reorganization, dated as of February 9, 2018 between Pacific Premier Bancorp, Inc. and Grandpoint Capital, Inc.
(21)
Amended and Restated Certificate of Incorporation of Pacific Premier Bancorp, Inc., as amended (22)
Amended and Restated Bylaws of Pacific Premier Bancorp, Inc. (7)
Specimen Stock Certificate of Pacific Premier Bancorp, Inc. (8)
Investor Right Agreement, dated as of August 8, 2017 between Pacific Premier Bancorp, Inc. and Carpenter Fund Manager GP, LLC (19)
Amended and Restated Declaration of Trust from PPBI Trust I (9)
Guarantee Agreement from PPBI Trust I (9)
2004 Long-Term Incentive Plan (12)*
Form of 2004 Long-Term Incentive Plan Incentive Stock Option Agreement (13)*
Form of 2004 Long-Term Incentive Plan Nonqualified Stock Option Agreement (13)*
Form of 2004 Long-Term Incentive Plan Restricted Stock Agreement (13)*
Salary Continuation Agreements between Pacific Premier Bank and Steven R. Gardner. (14)*
Form of 2012 Long-Term Incentive Plan Incentive Stock Option Award Agreement (15)
Form of 2012 Long-Term Incentive Plan Non-Qualified Stock Option Award Agreement (15)
Form of 2012 Long-Term Incentive Plan Restricted Stock Award Agreement (16)
Issuing and Paying Agency Agreement between Pacific Premier Bancorp, Inc. and U.S. Bank National Associated dated as of August
29, 2014 (10)
Pacific Premier Bancorp, Inc. Amended and Restated 2012 Long-Term Incentive Plan, as amended (16)*
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
21
23.1
23.2
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
*
**
†
#
Form of Amended and Restated 2012 Long-Term Incentive Plan Restricted Stock Unit Agreement (17)
Second Amended and Restated Employment Agreement between Pacific Premier Bancorp, Inc. and Pacific Premier Bank and Steven R.
Gardner dated as of May 31, 2016 (18)*
Employment Agreement between Pacific Premier Bancorp, Inc., Pacific Premier Bank and Ronald J. Nicolas, Jr. dated May 31, 2016 (18)*
Third Amended and Restated Employment Agreement between Pacific Premier Bank and Edward Wilcox dated May 31, 2016 (18)*
Third Amended and Restated Employment Agreement between Pacific Premier Bank and Michael S. Karr dated May 31, 2016 (18)*
Second Amended and Restated Employment Agreement between Pacific Premier Bank and Thomas Rice dated May 31, 2016 (18)*
Second Amendment to the Pacific Premier Bancorp, Inc. Amended and Restated 2012 Long-Term Incentive Plan (20)*
Amended Form of 2012 Long-Term Incentive Plan Restricted Stock Award Agreement (non-NEOs) (20)*
Amended Form of 2012 Long-Term Incentive Plan Restricted Stock Award Agreement (NEOs) (20)*
Amended Form of 2012 Long-Term Incentive Plan Restricted Stock Unit Agreement (20)*
Amended Form of 2012 Long-Term Incentive Plan Incentive Stock Option Agreement (20)*
Amended Form of 2012 Long-Term Incentive Plan Non-Qualified Stock Option Agreement (20)*
Subsidiaries of Pacific Premier Bancorp, Inc. (Reference is made to “Item 1. Business” for the required information.)
Consent of Crowe Horwath, LLP.
Consent of Vavrinek, Trine, Day and Co., LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
XBRL Instance Document #
XBRL Taxonomy Extension Schema Document #
XBRL Taxonomy Extension Calculation Linkbase Document #
XBRL Taxonomy Extension Label Linkbase Document #
XBRL Taxonomy Extension Presentation Linkbase Document #
XBRL Taxonomy Extension Definition Linkbase Document #
Incorporated by reference from the Registrant’s Form 8-K/A filed with the SEC on May 3, 2012.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on October 15, 2012.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on March 6, 2013.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on October 22, 2014.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on October 1, 2015.
Incorporated by reference from the Registrant's Form 8-K filed with the SEC on December 31, 2016.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 29, 2016.
Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (Registration No. 333-20497) filed with the SEC on
January 27, 1997.
Incorporated by reference from the Registrant’s Form 10-Q filed with the SEC on May 3, 2004.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on September 2, 2014.
Incorporated by reference from the Registrant’s Proxy Statement filed with the SEC on May 1, 2000.
Incorporated by reference from the Registrant’s Proxy Statement filed with the SEC on April 23, 2004.
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 1 to Form S-8 (Registration No. 333-117857) filed with
the SEC on September 3, 2004.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on May 19, 2006.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on June 4, 2012.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on June 2, 2017.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 1, 2016.
Incorporated by reference from the Registrant's Form 8-K filed with the SEC on June 2, 2016.
Incorporated by reference from the Registrant's Form 8-K filed with the SEC on August 9, 2017.
Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on November 16, 2017.
Incorporated by reference from the Registrant's Form 8-K filed with the SEC on February 12, 2018.
Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed with the SEC on March 16, 2017.
Management contract or compensatory plan or arrangement.
Filed herewith.
Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish
copies of such instruments to the Commission upon request.
Attached as Exhibit 101 to this Annual Report on Form 10-K for the period ended December 31, 2016 of Pacific Premier Bancorp., Inc. are
the following documents in XBRL (eXtensive Business Reporting Language): (i) Consolidated Statements of Financial Condition as of
December 31, 2016 and 2015; (ii) Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014; (iii)
Consolidated Statement of Stockholders’ Equity and Other Comprehensive Income for the Years Ended December 31, 2016, 2015 and
2014; (iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014, and (v) Notes to Consolidated
Financial Statements.
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INDEX
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:
/s/ Steven R. Gardner
Steven R. Gardner
Chairman, President and Chief Executive Officer
DATED: February 28, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
141
INDEX
Signature
Title
Chairman, President and Chief Executive Officer
(principal executive officer)
Date
February 28, 2018
Senior Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
February 28, 2018
/s/ Steven R. Gardner
Steven R. Gardner
/s/ Ronald J. Nicolas, Jr.
Ronald J. Nicolas, Jr.
/s/ John Carona
John Carona
/s/ Ayad A. Fargo
Ayad A Fargo
/s/ Joseph L. Garrett
Joseph L. Garrett
/s/ Jeff C. Jones
Jeff C. Jones
/s/ Simone F. Lagomarsino
Simone F. Lagomarsino
/s/ Michael J. Morris
Michael J. Morris
/s/ Michael E. Pfau
Michael E. Pfau
/s/ Zareh H. Sarrafian
Zareh H. Sarrafian
/s/ Cora M. Tellez
Cora M. Tellez
(Back To Top)
Director
Director
Director
Director
Director
Director
Director
Director
Director
142
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
February 28, 2018
Exhibit 23.1
Section 2: EX-23.1 (EXHIBIT 23.1)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-185142, 333-117857, 333-58642, and 333-217253 on Form S-8 of Pacific
Premier Bancorp, Inc. and Subsidiaries of our report dated February 28, 2018 relating to the consolidated financial statements of Pacific Premier Bancorp, Inc.
and Subsidiaries and our report dated the same date relative to the effectiveness of internal control over financial reporting, appearing in this Annual Report
on Form 10-K.
/s/ Crowe Horwath LLP
Los Angeles, California
February 28, 2018
(Back To Top)
Section 3: EX-23.2 (EXHIBIT 23.2)
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement No. 333-185142, No. 333-117857, No. 333-58642, and No. 333-217253 on
Form S-8 of Pacific Premier Bancorp, Inc., and Subsidiaries, of our report dated March 4, 2016 with respect to the consolidated statement of income,
comprehensive income, stockholders’ equity and cash flows of Pacific Premier Bancorp, Inc. and Subsidiaries for the year ended December 31, 2015, which
report appears in the Annual Report on Form 10-K.
/s/ Vavrinek, Trine, Day & Co., LLP
Laguna Hills, California
February 28, 2018
(Back To Top)
Section 4: EX-31.1 (EXHIBIT 31.1)
Exhibit 31.1
Pacific Premier Bancorp, Inc.,
Annual Report on Form 10-K
for the Year ended December 31, 2017
CHIEF EXECUTIVE OFFICER CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven R. Gardner, certify that:
1.
I have reviewed this annual report on Form 10-K of Pacific Premier Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
a)
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
b)
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
c)
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
a)
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
b)
over financial reporting.
Dated:
February 28, 2018
/s/ Steven R. Gardner
Steven R. Gardner
Chairman, President and Chief Executive Officer
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Section 5: EX-31.2 (EXHIBIT 31.2)
Exhibit 31.2
Pacific Premier Bancorp, Inc.,
Annual Report on Form 10-K
for the Year ended December 31, 2017
CHIEF FINANCIAL OFFICER CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Ronald J. Nicolas, Jr., certify that:
1.
I have reviewed this annual report on Form 10-K of Pacific Premier Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
c)
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
a)
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
b)
over financial reporting.
Dated:
February 28, 2018
/s/ Ronald J. Nicolas, Jr.
Ronald J. Nicolas, Jr.
Senior Executive Vice President and Chief Financial Officer
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Section 6: EX-32 (EXHIBIT 32)
Pacific Premier Bancorp, Inc.,
Annual Report on Form 10-K
for the Year ended December 31, 2017
Exhibit 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Pacific Premier Bancorp, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2017, as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigned’s best knowledge and belief:
a)
b)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated this 28th day of February 2018.
PACIFIC PREMIER BANCORP, INC.
/s/ Steven R. Gardner
Steven R. Gardner
Chairman, President and
Chief Executive Officer
/s/ Ronald J. Nicolas, Jr.
Ronald J. Nicolas, Jr.
Senior Executive Vice President and
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
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Chief Financial Officer