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PACIFIC PREMIER BANCORP INC - Quarter Report: 2015 June (Form 10-Q)




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
FORM 10-Q 
(Mark One)
(X)    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR 
( )    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from _______ to _______ 
Commission File Number 0-22193
 
(Exact name of registrant as specified in its charter) 
DELAWARE
33-0743196
(State or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification No.)
 

17901 VON KARMAN AVENUE, SUITE 1200, IRVINE, CALIFORNIA 92614
(Address of principal executive offices and zip code)

(949) 864-8000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X ] No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer
[ ]
Accelerated filer
[X]
Non-accelerated filer
(Do not check if a smaller
 reporting company)
[ ]
Smaller reporting company
[  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock as of August 10, 2015 was 21,510,558.




PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED JUNE 30, 2015

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share data)

ASSETS
 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
 
 
(Unaudited)
 
(Audited)
 
(Unaudited)
Cash and due from banks
 
$
82,552

 
$
110,650

 
$
120,016

Federal funds sold
 
525

 
275

 
276

Cash and cash equivalents
 
83,077

 
110,925

 
120,292

Investment securities available for sale
 
280,434

 
201,638

 
235,116

FHLB and other stock, at cost
 
22,843

 
17,067

 
18,494

Loans held for investment
 
2,118,560

 
1,628,622

 
1,466,768

Allowance for loan losses
 
(15,100
)
 
(12,200
)
 
(9,733
)
Loans held for investment, net
 
2,103,460

 
1,616,422

 
1,457,035

Accrued interest receivable
 
9,072

 
7,131

 
6,645

Other real estate owned
 
711

 
1,037

 
752

Premises and equipment
 
9,394

 
9,165

 
9,344

Deferred income taxes
 
12,305

 
9,383

 
10,796

Bank owned life insurance
 
38,665

 
26,822

 
26,445

Intangible assets
 
7,858

 
5,614

 
6,121

Goodwill
 
50,832

 
22,950

 
22,950

Other assets
 
18,105

 
10,743

 
7,535

TOTAL ASSETS
 
$
2,636,756

 
$
2,038,897

 
$
1,921,525

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

 
 

LIABILITIES:
 
 

 
 

 
 

Deposit accounts:
 
 

 
 

 
 

Noninterest bearing checking
 
$
635,695

 
$
456,754

 
$
410,843

Interest-bearing:
 
 

 
 

 
 

Checking
 
135,228

 
131,635

 
128,911

Money market/savings
 
795,725

 
600,764

 
533,672

Retail certificates of deposit
 
402,262

 
365,168

 
367,299

Wholesale/brokered certificates of deposit
 
127,073

 
76,505

 
4,856

Total interest-bearing
 
1,460,288

 
1,174,072

 
1,034,738

Total deposits
 
2,095,983

 
1,630,826

 
1,445,581

FHLB advances and other borrowings
 
167,389

 
116,643

 
255,287

Subordinated debentures
 
70,310

 
70,310

 
10,310

Accrued expenses and other liabilities
 
21,481

 
21,526

 
18,166

TOTAL LIABILITIES
 
2,355,163

 
1,839,305

 
1,729,344

STOCKHOLDERS’ EQUITY:
 
 

 
 

 
 

Common stock, $.01 par value; 50,000,000 shares authorized; 21,510,558 shares at June 30, 2015, 16,903,884 shares at December 31, 2014, and 17,068,641 shares at June 30, 2014 issued and outstanding
 
215

 
169

 
171

Additional paid-in capital
 
220,759

 
147,474

 
149,942

Retained earnings
 
61,044

 
51,431

 
42,090

Accumulated other comprehensive income (loss), net of tax (benefit) of $(297) at June 30, 2015, $362 at December 31, 2014 and ($16) at June 30, 2014
 
(425
)
 
518

 
(22
)
TOTAL STOCKHOLDERS’ EQUITY
 
281,593

 
199,592

 
192,181

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
2,636,756

 
$
2,038,897

 
$
1,921,525

 
 
 
 
 
 
 

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




PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2015
 
March 31, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
Loans
 
$
27,581

 
$
24,513

 
$
17,922

 
$
52,094

 
$
34,507

Investment securities and other interest-earning assets
 
2,158

 
1,557

 
1,309

 
3,715

 
2,746

Total interest income
 
29,739

 
26,070

 
19,231

 
55,809

 
37,253

INTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Deposits
 
1,589

 
1,606

 
1,203

 
3,195

 
2,272

FHLB advances and other borrowings
 
407

 
375

 
255

 
782

 
498

Subordinated debentures
 
982

 
971

 
75

 
1,953

 
150

Total interest expense
 
2,978

 
2,952

 
1,533

 
5,930

 
2,920

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
 
26,761

 
23,118

 
17,698

 
49,879

 
34,333

PROVISION FOR LOAN LOSSES
 
1,833

 
1,830

 
1,030

 
3,663

 
1,979

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
24,928

 
21,288

 
16,668

 
46,216

 
32,354

NONINTEREST INCOME
 
 
 
 
 
 
 
 

 
 

Loan servicing fees
 
724

 
901

 
282

 
1,625

 
1,138

Deposit fees
 
634

 
582

 
463

 
1,216

 
917

Net gain from sales of loans
 
2,721

 

 
1,298

 
2,721

 
1,846

Net gain from sales of investment securities
 
139

 
116

 
98

 
255

 
160

Other income
 
494

 
427

 
330

 
921

 
462

Total noninterest income
 
4,712

 
2,026

 
2,471

 
6,738

 
4,523

NONINTEREST EXPENSE
 
 
 
 
 
 
 
 

 
 

Compensation and benefits
 
9,486

 
9,522

 
6,485

 
19,008

 
13,376

Premises and occupancy
 
2,082

 
1,829

 
1,566

 
3,911

 
3,154

Data processing and communications
 
716

 
702

 
485

 
1,418

 
1,616

Other real estate owned operations, net
 
56

 
48

 
41

 
104

 
54

FDIC insurance premiums
 
363

 
314

 
266

 
677

 
503

Legal, audit and professional expense
 
661

 
521

 
385

 
1,182

 
978

Marketing expense
 
615

 
603

 
242

 
1,218

 
418

Office and postage expense
 
505

 
499

 
345

 
1,004

 
714

Loan expense
 
263

 
193

 
191

 
456

 
375

Deposit expense
 
982

 
805

 
747

 
1,787

 
1,508

Merger related expense
 

 
3,992

 

 
3,992

 
626

CDI amortization
 
344

 
314

 
254

 
658

 
507

Other expense
 
1,141

 
1,127

 
634

 
2,268

 
1,353

Total noninterest expense
 
17,214

 
20,469

 
11,641

 
37,683

 
25,182

NET INCOME BEFORE INCOME TAX
 
12,426

 
2,845

 
7,498

 
15,271

 
11,695

INCOME TAX
 
4,601

 
1,056

 
2,855

 
5,658

 
4,420

NET INCOME
 
$
7,825

 
$
1,789

 
$
4,643

 
$
9,613

 
$
7,275

EARNINGS PER SHARE
 
 
 
 
 
 
 
 

 
 

Basic
 
$
0.36

 
$
0.09

 
$
0.28

 
$
0.46

 
$
0.43

Diluted
 
$
0.36

 
$
0.09

 
$
0.27

 
$
0.46

 
$
0.42

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
 

 
 

Basic
 
21,493,641

 
20,091,924

 
17,124,337

 
20,796,655

 
17,083,194

Diluted
 
21,828,876

 
20,382,832

 
17,476,390

 
21,126,542

 
17,422,928

 
 
 
 
 
 
 
 
 
 
 

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





PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2015
 
2015
 
2014
 
2015
 
2014
Net income
$
7,825

 
$
1,789

 
$
4,643

 
$
9,613

 
$
7,275

Other comprehensive income (loss), net of tax (benefit):
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period, net of income taxes (benefits) (1)
(1,628
)
 
835

 
1,120

 
(793
)
 
3,149

Reclassification adjustment for net gain on sale of securities included in net income, net of income taxes (2)
(82
)
 
(68
)
 
(58
)
 
(150
)
 
(94
)
Net unrealized gain (loss) on securities, net of income taxes
(1,710
)
 
767

 
1,062

 
(943
)
 
3,055

Comprehensive income
$
6,115

 
$
2,556

 
$
5,705

 
$
8,670

 
$
10,330

______________________________
(1) Income tax (benefit) on the unrealized gains (losses) on securities was $(1.1) million for the three months ended June 30, 2015, $584,000 for the three months ended March 31, 2015, $741,000 for the three months ended June 30, 2014, $(556,000) for the six months ended June 30, 2015 and $2.1 million for the six months ended June 30, 2014.
(2) Income taxes on the reclassification adjustment for net gain on sale of securities included in net income was $57,000 for the three months ended June 30, 2015, $48,000 for the three months ended March 31, 2015, $40,000 for the three months ended June 30, 2014, $105,000 for the six months ended June 30, 2015 and $66,000 for the six months ended June 30, 2014.

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






PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(dollars in thousands)
(unaudited)

 
Common Stock
Shares
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Retained
Earnings
 
Accumulated Other Comprehensive Income
 
Total Stockholders’ Equity
Balance at December 31, 2014
16,903,884

 
$
169

 
$
147,474

 
$
51,431

 
$
518

 
$
199,592

Net income

 

 

 
9,613

 

 
9,613

Other comprehensive income

 

 

 

 
(943
)
 
(943
)
Share-based compensation expense

 

 
435

 

 

 
435

Common stock issued
4,480,645

 
45

 
72,207

 

 

 
72,252

Warrants exercised
125,196

 
1

 
688

 

 

 
689

Repurchase of common stock
(5,833
)
 

 
(93
)
 

 

 
(93
)
Exercise of stock options
6,666

 

 
48

 

 

 
48

Balance at June 30, 2015
21,510,558

 
$
215

 
$
220,759

 
$
61,044

 
$
(425
)
 
$
281,593

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
16,656,279

 
$
166

 
$
143,322

 
$
34,815

 
$
(3,077
)
 
$
175,226

Net income

 

 

 
7,275

 

 
7,275

Other comprehensive income

 

 

 

 
3,055

 
3,055

Share-based compensation expense

 

 
257

 

 

 
257

Common stock repurchased and retired
(262,897
)
 
(2
)
 
(2,755
)
 

 

 
(2,757
)
Common stock issued
562,469

 
6

 
9,006

 

 

 
9,012

Stock options exercised
112,790

 
1

 
112

 

 

 
113

Balance at June 30, 2014
17,068,641

 
$
171

 
$
149,942

 
$
42,090

 
$
(22
)
 
$
192,181


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





PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
 
Six Months Ended
 
 
June 30,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
9,613

 
$
7,275

Adjustments to net income:
 
 

 
 

Depreciation and amortization expense
 
1,244

 
1,088

Amortization of Loan Fees and Discounts
 
(60
)
 

Provision for loan losses
 
3,663

 
1,979

Share-based compensation expense
 
435

 
257

Loss on sale and disposal of premises and equipment
 

 
23

Loss on sale of other real estate owned
 
51

 
17

Write down of other real estate owned
 
41

 

Amortization of premium/discounts on securities held for sale, net
 
1,763

 
1,220

Accretion of loan mark-to-market discount from acquisitions
 
(907
)
 
(1,167
)
Gain on sale of investment securities available for sale
 
(255
)
 
(160
)
Other-than-temporary impairment recovery on investment securities, net
 

 
(23
)
Gain on sale of loans held for investment
 
(2,721
)
 
(1,846
)
Recoveries on loans
 
25

 
55

Principal payments from loans held for sale
 

 
31

Loss on loans held for sale
 

 
180

Deferred income tax benefit (provision)
 
1,706

 
(2,319
)
Change in accrued expenses and other liabilities, net
 
(1,840
)
 
(595
)
Income from bank owned life insurance, net
 
(643
)
 
(394
)
Change in accrued interest receivable and other assets, net
 
(5,159
)
 
(2,754
)
Net cash provided by operating activities
 
6,956

 
2,867

CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from sale and principal payments on loans held for investment
 
309,960

 
147,372

Decrease in undisbursed loan funds
 
56,124

 
24,913

Purchase and origination of loans held for investment
 
(520,230
)
 
(314,429
)
Proceeds from sale of other real estate owned
 
234

 
777

Principal payments on securities available for sale
 
15,907

 
13,430

Purchase of securities available for sale
 
(60,132
)
 
(66,274
)
Proceeds from sale or maturity of securities available for sale
 
16,070

 
77,947

Investment in bank owned life insurance
 

 
(2,000
)
Purchases of premises and equipment
 
(842
)
 
(517
)
Purchase of Federal Reserve Bank stock
 
(2,257
)
 
(506
)
Purchase of FHLB stock
 
(1,150
)
 
(2,538
)
Cash acquired (disbursed) in acquisitions, net
 
2,961

 
(7,793
)
Net cash used in investing activities
 
(183,355
)
 
(129,618
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Net increase in deposit accounts
 
129,139

 
139,295

Repayment of FHLB advances and other borrowings, net
 

 
(16,421
)
Proceeds from FHLB advances
 
17,446

 

Proceeds from issuance of common stock, net of issuance costs
 
1,323

 

Proceeds from exercise of stock options
 
48

 
113

Warrants exercised
 
688

 

Repurchase of common stock
 
(93
)
 
(2,757
)
Net cash provided by financing activities
 
148,551

 
120,230

 
 
 
 
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
 
(27,848
)
 
(6,521
)
CASH AND CASH EQUIVALENTS, beginning of period
 
110,925

 
126,813

CASH AND CASH EQUIVALENTS, end of period
 
$
83,077

 
$
120,292

 
 
 
 
 
SUPPLEMENTAL CASH FLOW DISCLOSURES
 
 

 
 

Interest paid
 
$
5,979

 
$
2,924

Income taxes paid
 
7,450

 
7,300

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

 
 

Investment securities
 
53,752

 

FHLB and Other Stock
 
2,369

 

Loans
 
332,893

 
78,833

Core deposit intangible
 
2,903

 

Deferred income tax
 
4,794

 

Bank owned life insurance
 
11,276

 

Goodwill
 
27,882

 
5,522

Fixed assets
 
2,134

 
74

Other assets
 
2,402

 
702

Deposits
 
(336,018
)
 

Other borrowings
 
(33,300
)
 
(67,617
)
Other liabilities
 
(1,796
)
 
(709
)
Common stock and additional paid-in capital
 
(70,929
)
 
(9,012
)
 
 
 
 
 
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
 
 

 
 

Transfers from loans to other real estate owned
 
$

 
$
360

Loans held for sale transfer to loans held for investment
 
$

 
$
2,936


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




PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(UNAUDITED)
Note 1 - Basis of Presentation
 
The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiaries, including Pacific Premier Bank (the “Bank”) (collectively, the “Company,” “we,” “our” or “us”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2015, December 31, 2014 and June 30, 2014, the results of its operations and comprehensive income for the three months ended June 30, 2015, March 31, 2015 and June 30, 2014 and the six months ended June 30, 2015 and 2014 and the changes in stockholders’ equity and cash flows for the six months ended June 30, 2015 and 2014.  Operating results or comprehensive income for the six months ended June 30, 2015 are not necessarily indicative of the results or comprehensive income that may be expected for any other interim period or the full year ending December 31, 2015.
 
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Annual Report”).
 
The Company accounts for its investments in its wholly owned special purpose entity, PPBI Trust I, under the equity method whereby the subsidiary’s net earnings are recognized in the Company’s statement of operations.
 
Note 2 – Recently Issued Accounting Pronouncements
 
Accounting Standards Adopted in 2015

In June 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-10, Technical Corrections and Improvements, to clarify the Accounting Standards Codification ("ASC"), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2014, the FASB issued ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): "Accounting for Investments in Qualified Affordable Housing Projects."  This Update permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense.  This new guidance also requires new disclosures for all investors in these projects.  ASU No. 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014 for public business entities and after December 15, 2015 for non public business entities.  Upon adoption, the guidance must be applied retrospectively to all periods presented.  However, entities that used the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments.  The Company currently accounts for such investments using the effective yield method and plans to do so for these pre-existing investments after adopting ASU No. 2014-01 on January 1, 2015.  The Company expects investments made after January 1, 2015 to meet the criteria required for the proportional amortization method and plans to make such an accounting election.  The Company adopted the provisions of ASU No. 2014-01 effective January 1, 2015.  The adoption had no impact on the Company’s Consolidated Financial Statements.
 
In January 2014, the FASB issued ASU No. 2014-04, Receivables-Troubled Debt Restructuring By Creditors (Subtopic 310-40): “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure."  The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014.  The Company adopted the provisions of ASU No. 2014-04 effective January 1, 2015.  The adoption had no impact on the Company’s Consolidated Financial Statements.
 
In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860):"Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures."  This Update aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements.  Going forward, these transactions would all be accounted for as secured borrowings.  The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting.  The Update requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction.  The Update also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.  The Update is effective for interim or annual period beginning after December 15, 2014.  All of the Company's repurchase agreements are typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings.  The Company adopted the provisions of ASU No. 2014-11 effective January 1, 2015.  The adoption had no impact on the Company’s Consolidated Financial Statements.
 
In August 2014, the FASB issued ASU No. 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): “Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”.  This Update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered by the Federal Housing Administration (“FHA”), the U.S. Department of Housing and Urban Development (“HUD”), and the U.S. Department of Veterans Affairs (“VA”).  Although current accounting guidance stipulates proper measurement and classification in situations where a creditor obtains from a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidance does not specify how to measure and classify foreclosed mortgage loans that are government-guaranteed.  Under the provisions of this Update, a creditor would derecognize a mortgage loan that has been foreclosed upon, and recognize a separate receivable if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.  This Update is effective for interim and annual periods beginning after December 15, 2014 for public business entities and after December 15, 2015 for non public business entities.  The Company adopted the provisions of ASU No. 2014-14 effective January 1, 2015.  The adoption had no impact on the Company’s Consolidated Financial Statements.
 
Accounting Standards Pending Adoption
 
In August 2014, the FASB issued guidance within ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This Update provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern.  The amendments require management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards.  This Update is effective for interim and annual periods ending after December 15, 2016.  The adoption of this guidance is not expected to have a material impact on the Company's Consolidated Financial Statements.
 
Note 3 – Significant Accounting Policies
 
Certain Acquired Loans:  As part of business acquisitions, the Bank acquires certain loans that have shown evidence of credit deterioration since origination.  These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses.  Such acquired loans are accounted for individually.  The Bank estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield).  The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference).  Over the life of the loan, expected cash flows continue to be estimated.  If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses.  If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
 
Goodwill and Core Deposit Intangible: Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed.  The Company has selected December 31 as the date to perform the annual impairment test.  Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.  Goodwill is the only intangible asset with an indefinite life on our balance sheet.
 
Core deposit intangible assets arising from whole bank acquisitions are amortized on an accelerated method over their estimated useful lives, which range from 6 to 10 years
 
Use of Estimates:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  Actual results could differ from those estimates.  The allowance for loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly subject to change.
 



Note 4 –  Acquisitions
 
The Company accounted for the following transactions under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.  The Company determined the fair value of the core deposit intangible, securities and deposits with the assistance of third party valuations.  The fair value of other real estate owned (“OREO”) was based on recent appraisals of the properties.
 
The estimated fair values in these acquisitions are subject to refinement as additional information relative to the closing date fair values become available through the measurement period, which can extend for up to one year after the closing date of the transaction.  While additional significant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date.  During the measurement period, any such changes will be recorded as part of the closing date fair value.
 
Independence Bank Acquisition
 
On January 26, 2015, the Company completed its acquisition of Independence Bank (“IDPK”) in exchange for consideration valued at $79.8 million, which consisted of $6.1 million of cash consideration for IDPK common stockholders, $1.5 million of aggregate cash consideration to the holders of IDPK stock options and warrants, $1.3 million fair market value of warrants assumed and the issuance of 4,480,645 shares of the Corporation’s common stock, which was valued at $70.9 million based on the closing stock price of the Company’s common stock on January 26, 2015 of $15.83 per share.
 
IDPK was a Newport Beach, California based state-chartered bank.  The acquisition was an opportunity for the Company to strengthen its competitive position as one of the premier community banks headquartered in Southern California.  Additionally, the IDPK acquisition enhanced and connected the Company’s footprint in Southern California. 
 
Goodwill in the amount of $27.9 million was recognized in the IDPK acquisition.  Goodwill recognized in this transaction is not deductible for income tax purposes.
 
The following table represents the assets acquired and liabilities assumed of IDPK as of January 26, 2015 and the provisional fair value adjustments and amounts recorded by the Company in 2015 under the acquisition method of accounting: 

 
IDPK
Book Value
 
Fair Value
Adjustments
 
Fair
Value
 
(dollars in thousands)
ASSETS ACQUIRED
 
 
 
 
 
Cash and cash equivalents
$
10,486

 
$

 
$
10,486

Investment securities
56,503

 
(382
)
 
56,121

Loans, gross
339,502

 
(6,609
)
 
332,893

Allowance for loan losses
(3,301
)
 
3,301

 

Deferred income taxes
3,252

 
1,542

 
4,794

Bank owned life insurance
11,276

 

 
11,276

Core deposit intangible
904

 
1,999

 
2,903

Other assets
3,756

 
780

 
4,536

Total assets acquired
$
422,378

 
$
631

 
$
423,009

 
 
 
 
 
 
LIABILITIES ASSUMED
 

 
 

 
 

Deposits
$
335,685

 
$
333

 
$
336,018

FHLB advances
33,300

 

 
33,300

Other liabilities
1,916

 
(120
)
 
1,796

Total liabilities assumed
370,901

 
213

 
371,114

Excess of assets acquired over liabilities assumed
$
51,477

 
$
418

 
51,895

Consideration paid
 

 
 

 
79,777

Goodwill recognized
 

 
 

 
$
27,882


Infinity Franchise Holdings Acquisition
 
On January 30, 2014, the Company completed its acquisition of Infinity Franchise Holdings, LLC (“Infinity Holdings”) and its wholly owned operating subsidiary Infinity Franchise Capital, LLC (“IFC” and together with Infinity Holdings, “IFH”), a national lender to franchisees in the quick service restaurant (“QSR”) industry, and other direct and indirect subsidiaries utilized in its business.  The value of the total consideration paid for the IFH acquisition was $17.4 million, which consisted of $8.3 million paid in cash and the issuance of 562,469 shares of the Corporation’s stock, which was valued at $16.02 per share as measured by the 10-day average closing price immediately prior to closing of the transaction.
 
The acquisition of IFH further diversified our loan portfolio with commercial and industrial and owner-occupied commercial real estate loans, deployed excess liquidity into higher yielding assets, to positively impact our net interest margin and further leveraged our strong capital base.  The QSR franchisee lending business is a niche market that we believe provides attractive growth opportunities for the Company in the future.  IFH had no delinquent loans or adversely classified assets as of the acquisition date; and the acquisition was accretive to our 2014 earnings per share.
 
Goodwill in the amount of $5.5 million was recognized in the IFH 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 IFH as of January 30, 2014 and the provisional fair value adjustments and amounts recorded by the Company in 2014 under the acquisition method of accounting: 

 
IFH
Book Value
 
Fair Value
Adjustments
 
Fair
Value
 
(dollars in thousands)
ASSETS ACQUIRED
 
 
 
 
 
Cash and cash equivalents
$
555

 
$

 
$
555

Loans, gross
78,833

 

 
78,833

Deferred loan costs
1,082

 
(1,082
)
 

Allowance for loan losses
(268
)
 
268

 

Other assets
776

 

 
776

Total assets acquired
$
80,978

 
$
(814
)
 
$
80,164

 
 
 
 
 
 
LIABILITIES ASSUMED
 

 
 

 
 

Bank loan
$
67,617

 
$

 
$
67,617

Accrued compensation
495

 

 
495

Other liabilities
214

 

 
214

Total liabilities assumed
68,326

 

 
68,326

Excess of assets acquired over liabilities assumed
$
12,652

 
$
(814
)
 
11,838

Consideration paid
 

 
 

 
17,360

Goodwill recognized
 

 
 

 
$
5,522


There were no purchased credit impaired loans acquired from IFH.  For loans acquired from IFH and IDPK, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows:

 
Acquired Loans
 
IFH
 
IDPK
 
(dollars in thousands)
Contractual amounts due
$
98,320

 
$
453,987

Cash flows not expected to be collected

 
3,795

Expected cash flows
98,320

 
450,192

Interest component of expected cash flows
19,487

 
117,299

Fair value of acquired loans
$
78,833

 
$
332,893


In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan losses that had been previously recorded by IFH or IDPK.
 
The operating results of the Company for the six months ending June 30, 2015 include the operating results of IDPK and IFH since the acquisition date.  The operating results of the Company for the six months ending June 30, 2014 include the operating results of IFH since the acquisition date.  The following table presents the net interest and other income, net income and earnings per share as if the acquisitions of IFH and IDPK were effective as of January 1, 2014.  There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

 
Six Months Ended June 30,
 
2015
 
2014
Net interest and other income
$
31,013

 
$
30,354

Net income
$
6,838

 
$
6,446

Basic earnings per share
$
0.30

 
$
0.30

Diluted earnings per share
$
0.30

 
$
0.29


Note 5 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
 
 
 
June 30, 2015
 
 
Amortized
 Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 

 
 
 
 
 
 
Municipal bonds
 
$
120,392

 
$
784

 
$
(745
)
 
$
120,431

Mortgage-backed securities
 
160,764

 
312

 
(1,073
)
 
160,003

Total securities available for sale
 
$
281,156

 
$
1,096

 
$
(1,818
)
 
$
280,434


 
 
December 31, 2014
 
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 

 
 

 
 

 
 

Municipal bonds
 
$
88,599

 
$
1,235

 
$
(173
)
 
$
89,661

Mortgage-backed securities
 
112,159

 
432

 
(614
)
 
111,977

Total securities available for sale
 
$
200,758

 
$
1,667

 
$
(787
)
 
$
201,638


 
 
June 30, 2014
 
 
Amortized
 Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 

 
 

 
 

 
 

Municipal bonds
 
$
84,576

 
$
1,211

 
$
(354
)
 
85,433

Mortgage-backed securities
 
150,578

 
230

 
(1,125
)
 
149,683

Total securities available for sale
 
$
235,154

 
$
1,441

 
$
(1,479
)
 
$
235,116


At June 30, 2015, the Company had $11.3 million in Federal Home Loan Bank (“FHLB”) stock, $7.5 million in Federal Reserve Bank (“FRB”) stock, and $4 million in other stock, all carried at cost.  During the six months ended June 30, 2015, the Company had net sales of $10.5 million of FHLB stock through the FHLB stock purchase program.
 
At June 30, 2015, mortgage-backed securities (“MBS”) with an estimated par value of $65.2 million and a fair value of $66.8 million were pledged as collateral for the Bank’s three reverse repurchase agreements which totaled $28.5 million and HOA reverse repurchase agreements which totaled $19.7 million.
 
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.
 
 
June 30, 2015
 
Less than 12 months
 
12 months or Longer
 
Total
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
(dollars in thousands)
Municipal bonds
109

 
$
56,215

 
$
(636
)
 
7

 
$
3,728

 
$
(109
)
 
116

 
$
59,943

 
$
(745
)
Mortgage-backed securities
32

 
87,506

 
(548
)
 
3

 
14,222

 
(525
)
 
35

 
101,728

 
(1,073
)
Total
141

 
$
143,721

 
$
(1,184
)
 
10

 
$
17,950

 
$
(634
)
 
151

 
$
161,671

 
$
(1,818
)

 
December 31, 2014
 
Less than 12 months
 
12 months or Longer
 
Total
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
(dollars in thousands)
Municipal bonds
35

 
$
18,129

 
$
(117
)
 
16

 
$
6,510

 
$
(56
)
 
51

 
$
24,639

 
$
(173
)
Mortgage-backed securities
7

 
24,353

 
(105
)
 
4

 
18,842

 
(509
)
 
11

 
43,195

 
(614
)
Total
42

 
$
42,482

 
$
(222
)
 
20

 
$
25,352

 
$
(565
)
 
62

 
$
67,834

 
$
(787
)
 
June 30, 2014
 
Less than 12 months
 
12 months or Longer
 
Total
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
Number
 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 
(dollars in thousands)
Municipal bonds
27

 
$
14,011

 
$
(143
)
 
44

 
$
18,316

 
$
(211
)
 
71

 
$
32,327

 
$
(354
)
Mortgage-backed securities
11

 
37,316

 
(109
)
 
12

 
52,235

 
(1,016
)
 
23

 
89,551

 
(1,125
)
Total
38

 
$
51,327

 
$
(252
)
 
56

 
$
70,551

 
$
(1,227
)
 
94

 
$
121,878

 
$
(1,479
)

The amortized cost and estimated fair value of investment securities available for sale at June 30, 2015, by contractual maturity are shown in the table below.

 
 
One Year
or Less
 
More than One
Year to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 
Total
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(dollars in thousands)
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
 
$
462

 
$
465

 
$
21,627

 
$
21,554

 
$
45,981

 
$
46,111

 
$
52,322

 
$
52,301

 
$
120,392

 
$
120,431

Mortgage-backed securities
 

 

 

 

 
24,341

 
24,328

 
136,423

 
135,675

 
160,764

 
160,003

Total investment securities available for sale
 
$
462

 
$
465

 
$
21,627

 
$
21,554

 
$
70,322

 
$
70,439

 
$
188,745

 
$
187,976

 
$
281,156

 
$
280,434


Any temporary impairment is a result of the change in market interest rates and not the underlying issuers’ ability to repay.  The Company has the intent and ability to hold these securities until the temporary impairment is eliminated.  Accordingly, the Company has not recognized the temporary impairment in earnings.
 
Unrealized gains and losses on investment securities available for sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss.  At June 30, 2015, the Company had accumulated other comprehensive loss of $722,000, or $425,000 net of benefit, compared to accumulated other comprehensive income of $880,000 or $518,000 net of tax, at December 31, 2014.
 
Note 6 – Loans Held for Investment
 
The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:

 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
(in thousands)
Business loans:
 
 
 
 
 
Commercial and industrial
$
454,463

 
$
428,207

 
$
319,541

Commercial owner occupied (1)
382,537

 
210,995

 
216,784

SBA
50,306

 
28,404

 
15,115

Warehouse facilities
198,113

 
113,798

 
114,032

Real estate loans:
 

 
 

 
 

Commercial non-owner occupied
402,786

 
359,213

 
360,288

Multi-family
400,237

 
262,965

 
251,512

One-to-four family (2)
84,283

 
122,795

 
132,020

Construction
124,448

 
89,682

 
47,034

Land
16,339

 
9,088

 
6,271

Other loans
4,811

 
3,298

 
3,753

Total gross loans held for investment (3)
2,118,323

 
1,628,445

 
1,466,350

Deferred loan origination costs and premiums, net
237

 
177

 
418

Allowance for loan losses
(15,100
)
 
(12,200
)
 
(9,733
)
Loans held for investment, net
$
2,103,460

 
$
1,616,422

 
$
1,457,035

______________________________
(1) Majority secured by real estate.
(2) Includes second trust deeds.
(3) Total gross loans for June 30, 2015 are net of (i) the unaccreted mark-to-market discounts on Canyon National Bank ("Canyon National") loans of $1.1 million, on Palm Desert National Bank ("Palm Desert National") loans of $1.1 million, on San Diego Trust Bank ("SDTB") loans of $144,000, and on IDPK loans of $6.3 million and (ii) the mark-to-market premium on First Associations Bank ("FAB") loans of $24,000.

From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.
 
The Company makes residential and commercial loans held for investment to customers located primarily in California.  Consequently, the underlying collateral for our loans and a borrower’s ability to repay may be impacted unfavorably by adverse changes in the economy and real estate market in the region.
 
Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of the Bank’s unimpaired capital plus surplus and likewise in excess of 15% for unsecured loans.  These loans-to-one borrower limitations result in a dollar limitation of $88.8 million for secured loans and $53.3 million for unsecured loans at June 30, 2015.  At June 30, 2015, the Bank’s largest aggregate outstanding balance of loans to one borrower was $46.7 million of secured credit.
 
Purchased Credit Impaired
 
The following table provides a summary of the Company’s investment in purchased credit impaired loans, acquired from Canyon National, Palm Desert National and IDPK, as of the period indicated: 

 
June 30, 2015
 
Canyon National
 
Palm Desert National
 
IDPK
 
Total
 
(in thousands)
Business loans:
 
 
 
 
 
 
 
Commercial and industrial
$
94

 
$

 
$
540

 
$
634

Commercial owner occupied
535

 

 
2,335

 
2,870

Real estate loans:
 

 
 

 
 

 


Commercial non-owner occupied
943

 

 
1,237

 
2,180

One-to-four family

 

 
92

 
92

Total purchase credit impaired
$
1,572

 
$

 
$
4,204

 
$
5,776


On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield.”  The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan.  At June 30, 2015, the Company had $5.8 million of purchased credit impaired loans, of which $1.6 million were placed on nonaccrual status.
 










The following table summarizes the accretable yield on the purchased credit impaired loans for the six months ended June 30, 2015:

 
Six Months Ended
 
June 30, 2015
 
Canyon National
 
Palm Desert National
 
IDPK
 
Total
 
(in thousands)
Balance at the beginning of period
$
1,351

 
$
52

 
$

 
$
1,403

Accretable yield at acquisition

 

 
602

 
602

Accretion
(106
)
 

 
(75
)
 
(181
)
Disposals and other

 
(52
)
 
(4
)
 
(56
)
Change in accretable yield

 

 
149

 
149

Balance at the end of period
$
1,245

 
$

 
$
672

 
$
1,917

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

 
 
 
 
 
 
Impaired Loans
 
 
 
 
 
 
 
 
Contractual
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
Average Recorded Investment
 
Interest Income Recognized
 
 
(in thousands)
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,494

 
$
1,684

 
$
223

 
$
1,461

 
$
223

 
$
1,797

 
$

Commercial owner occupied
 
437

 
370

 

 
370

 

 
373

 
15

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
 
693

 
443

 

 
443

 

 
446

 
21

One-to-four family
 
215

 
206

 

 
206

 

 
222

 
10

Land
 
37

 
23

 

 
23

 

 
8

 

Totals
 
$
3,876

 
$
2,726

 
$
223

 
$
2,503

 
$
223

 
$
2,846

 
$
46

  

 
 
 

 
 

 
Impaired Loans
 
 

 
 

 
 

 
 
Contractual
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
Average Recorded Investment
 
Interest Income Recognized
 
 
(in thousands)
December 31, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Business loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$

 
$

 
$

 
$

 
$

 
$
11

 
$

Commercial owner occupied
 
440

 
388

 

 
388

 

 
514

 
46

SBA
 

 

 

 

 

 
5

 

Real estate loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
1,217

 
848

 

 
848

 

 
908

 
85

One-to-four family
 
256

 
236

 

 
236

 

 
440

 
17

Totals
 
$
1,913

 
$
1,472

 
$

 
$
1,472

 
$

 
$
1,878

 
$
148

  

 
 
 

 
 

 
Impaired Loans
 
 

 
 

 
 

 
 
Contractual
Unpaid Principal Balance
 
Recorded Investment
 
With Specific Allowance
 
Without Specific Allowance
 
Specific Allowance for Impaired Loans
 
Average Recorded Investment
 
Interest Income Recognized
 
 
(in thousands)
June 30, 2014
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Business loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
59

 
$
24

 
$

 
$
24

 
$

 
$
18

 
$

Commercial owner occupied
 
444

 
417

 

 
417

 

 
627

 
25

SBA
 

 

 

 

 

 
9

 

Real estate loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
708

 
514

 

 
514

 

 
938

 
21

One-to-four family
 
625

 
575

 
270

 
305

 
104

 
591

 
15

Totals
 
$
1,836

 
$
1,530

 
$
270

 
$
1,260

 
$
104

 
$
2,183

 
$
61

  

The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or it is determined that the likelihood of the Company receiving all scheduled payments, including interest, when due is remote.  The Company has no commitments to lend additional funds to debtors whose loans have been impaired.
 
The Company reviews loans for impairment when the loan is classified as substandard or worse, delinquent 90 days, or determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt restructuring (“TDR”).  Measurement of impairment is based on the loan’s expected future cash flows discounted at the loan’s effective interest rate, measured by reference to an observable market value, if one exists, or the fair value of the collateral if the loan is deemed collateral dependent.  All loans are generally charged-off at such time the loan is classified as a loss.  Valuation allowances are determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics.
 
The following table provides additional detail on the components of impaired loans at the period end indicated:
 
 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
(in thousands)
Nonaccruing loans
$
2,471

 
$
1,290

 
$
1,345

Accruing loans
255

 
182

 
185

Total impaired loans
$
2,726

 
$
1,472

 
$
1,530


When loans are placed on nonaccrual status all accrued interest is reversed from earnings.  Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance.  If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only.  Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.
 
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest.  The Company had impaired loans on nonaccrual status of $2.5 million at June 30, 2015, $1.3 million at December 31, 2014, and $1.3 million at June 30, 2014.  The Company had no loans 90 days or more past due and still accruing at June 30, 2015, December 31, 2014 or June 30, 2014.
 
The Company had no new TDRs during the quarter ended June 30, 2015 and June 30, 2014 and had one immaterial TDR outstanding related to a U.S. Small Business Administration (“SBA”) loan.
 
Concentration of Credit Risk
 
As of June 30, 2015, 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 multi-family real estate, commercial non-owner occupied real estate and commercial owner occupied business loans.  The Bank maintains policies approved by the Bank’s Board of Directors (the “Bank Board”) that address these concentrations and continues to diversify its loan portfolio through loan originations, purchases and sales to meet approved concentration levels.  While management believes that the collateral presently securing these loans is adequate, there can be no assurances that a significant deterioration in the California real estate market or economy would not expose the Company to significantly greater credit risk.
 
Credit Quality and Credit Risk Management
 
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 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 ensure all key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis of the prospective borrowers.  The credit approval process mandates multiple-signature approval by the management credit committee for every loan that requires any subjective credit analysis.
 
Credit risk is managed within the loan portfolio by the Company’s Portfolio Management department based on a comprehensive credit and investment 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 Management department also monitors 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 biennially, and in most cases more often, including the assignment of a risk grade.
 
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications as such classifications are defined by the regulatory agencies.  The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio.  Risk grades are reviewed regularly by the Company’s Credit and Portfolio Review committee, and are reviewed annually by an independent third-party, as well as by regulatory agencies during scheduled examinations.
 
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 is also classified as substandard.
Doubtful credits have all the weaknesses inherent in substandard credits, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted.  Amounts classified as loss are promptly charged off.

The Portfolio Management department also manages 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 (“ALLL”) if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable.  The Company typically continues to obtain or confirm updated valuations of underlying collateral for special mention and classified loans on an annual basis in order to have the most current indication of fair value.  Once a loan is identified as impaired, an analysis of the underlying collateral is performed at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.
 
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:

 
 
Credit Risk Grades
 
 
Pass
 
Special
Mention
 
Substandard
 
Total Gross
Loans
June 30, 2015
 
(in thousands)
Business loans:
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
449,461

 
$
267

 
$
4,735

 
$
454,463

Commercial owner occupied
 
370,185

 
678

 
11,674

 
382,537

SBA
 
50,306

 

 

 
50,306

Warehouse facilities
 
198,113

 

 

 
198,113

Real estate loans:
 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
399,245

 
265

 
3,276

 
402,786

Multi-family
 
395,565

 
704

 
3,968

 
400,237

One-to-four family
 
83,671

 

 
612

 
84,283

Construction
 
124,448

 

 

 
124,448

Land
 
15,143

 

 
1,196

 
16,339

Other loans
 
4,401

 

 
410

 
4,811

Totals
 
$
2,090,538

 
$
1,914

 
$
25,871

 
$
2,118,323


 
 
Credit Risk Grades
 
 
Pass
 
Special
Mention
 
Substandard
 
Total Gross
Loans
December 31, 2014
 
(in thousands)
Business loans:
 
 

 
 

 
 

 
 

Commercial and industrial
 
$
426,379

 
$

 
$
1,828

 
$
428,207

Commercial owner occupied
 
202,390

 

 
8,605

 
210,995

SBA
 
28,132

 
272

 

 
28,404

Warehouse facilities
 
113,798

 

 

 
113,798

Real estate loans:
 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
355,274

 

 
3,939

 
359,213

Multi-family
 
261,956

 
501

 
508

 
262,965

One-to-four family
 
122,146

 

 
649

 
122,795

Construction
 
89,682

 

 

 
89,682

Land
 
9,088

 

 

 
9,088

Other loans
 
3,298

 

 

 
3,298

Totals
 
$
1,612,143

 
$
773

 
$
15,529

 
$
1,628,445


 
 
Credit Risk Grades
 
 
Pass
 
Special
Mention
 
Substandard
 
Total Gross
Loans
June 30, 2014
 
(in thousands)
Business loans:
 
 

 
 

 
 

 
 

Commercial and industrial
 
$
317,713

 
$

 
$
1,828

 
$
319,541

Commercial owner occupied
 
206,890

 
393

 
9,501

 
216,784

SBA
 
15,115

 

 

 
15,115

Warehouse facilities
 
114,032

 

 

 
114,032

Real estate loans:
 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
355,878

 

 
4,410

 
360,288

Multi-family
 
250,494

 
506

 
512

 
251,512

One-to-four family
 
131,330

 

 
690

 
132,020

Construction
 
47,034

 

 

 
47,034

Land
 
6,271

 

 

 
6,271

Other loans
 
3,753

 

 

 
3,753

Totals
 
$
1,448,510

 
$
899

 
$
16,941

 
$
1,466,350


The following tables set forth delinquencies in the Company’s loan portfolio at the dates indicated:
 
 
 
 
 
Days Past Due
 
 
 
Non-
 
 
Current
 
30-59
 
60-89
 
90+
 
Total
 
Accruing
June 30, 2015
 
(in thousands)
Business loans:
 
 
 
 

 
 

 
 

 
 
 
 
Commercial and industrial
 
$
452,383

 
$
452

 
$

 
$
1,628

 
$
454,463

 
$
2,147

Commercial owner occupied
 
382,537

 

 

 

 
382,537

 
578

SBA
 
50,306

 

 

 

 
50,306

 

Warehouse facilities
 
198,113

 

 

 

 
198,113

 

Real estate loans:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
402,297

 
489

 

 

 
402,786

 
1,454

Multi-family
 
400,237

 

 

 

 
400,237

 

One-to-four family
 
84,218

 
2

 

 
63

 
84,283

 
88

Construction
 
124,448

 

 

 

 
124,448

 

Land
 
16,316

 

 

 
23

 
16,339

 
23

Other loans
 
4,783

 

 
28

 

 
4,811

 
92

Totals
 
$
2,115,638

 
$
943

 
$
28

 
$
1,714

 
$
2,118,323

 
$
4,382


 
 
 

 
Days Past Due
 
 

 
Non-
 
 
Current
 
30-59
 
60-89
 
90+
 
Total
 
Accruing
December 31, 2014
 
(in thousands)
Business loans:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
428,183

 
$

 
$
24

 
$

 
$
428,207

 
$

Commercial owner occupied
 
210,995

 

 

 

 
210,995

 
514

SBA
 
28,404

 

 

 

 
28,404

 

Warehouse facilities
 
113,798

 

 

 

 
113,798

 

Real estate loans:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
359,213

 

 

 

 
359,213

 
848

Multi-family
 
262,965

 

 

 

 
262,965

 

One-to-four family
 
122,722

 
19

 

 
54

 
122,795

 
82

Construction
 
89,682

 

 

 

 
89,682

 

Land
 
9,088

 

 

 

 
9,088

 

Other loans
 
3,297

 
1

 

 

 
3,298

 

Totals
 
$
1,628,347

 
$
20

 
$
24

 
$
54

 
$
1,628,445

 
$
1,444


 
 
 

 
Days Past Due
 
 

 
Non-
 
 
Current
 
30-59
 
60-89
 
90+
 
Total
 
Accruing
June 30, 2014
 
(in thousands)
Business loans:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
$
319,418

 
$

 
$
99

 
$
24

 
$
319,541

 
$
24

Commercial owner occupied
 
216,367

 

 
417

 

 
216,784

 
549

SBA
 
15,115

 

 

 

 
15,115

 

Warehouse facilities
 
114,032

 

 

 

 
114,032

 

Real estate loans:
 
 

 
 

 
 

 
 

 
 

 
 

Commercial non-owner occupied
 
360,288

 

 

 

 
360,288

 
910

Multi-family
 
251,512

 

 

 

 
251,512

 

One-to-four family
 
131,258

 
236

 
478

 
48

 
132,020

 
458

Construction
 
47,034

 

 

 

 
47,034

 

Land
 
6,271

 

 

 

 
6,271

 

Other loans
 
3,753

 

 

 

 
3,753

 

Totals
 
$
1,465,048

 
$
236

 
$
994

 
$
72

 
$
1,466,350

 
$
1,941


Note 7 – Allowance for Loan Losses
 
The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio.  The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.
 
The loan portfolio is segmented into groups of loans with similar risk characteristics.  Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions.  An estimated loss rate calculated using the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.
 
The following provides a summary of the ALLL calculation for the major segments within the Company’s loan portfolio.
 
Owner Occupied Commercial Real Estate Loans, Commercial and Industrial Loans and SBA Loans
 
The Company's base ALLL factor for owner occupied commercial real estate loans, commercial business loans and SBA loans is determined by management using the Bank's annualized actual trailing charge-off data over intervals of 84, 72, 36, 24, 12 and 6 months.  Adjustments to those base factors are made for relevant internal and external factors.  For owner occupied commercial real estate loans, commercial business loans and SBA loans, those factors 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.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all Federal Deposit Insurance Corporation (“FDIC”) insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 
Multi-Family and Non-Owner Occupied Commercial Real Estate and Construction Loans
 
The Company's base ALLL factor for multi-family and non-owner occupied commercial real estate and construction loans is determined by management using the Bank's annualized actual trailing charge-off data over intervals of 84, 72, 36, 24, 12 and 6 months.  Adjustments to those base factors are made for relevant internal and external factors.  For multi-family and non-owner occupied commercial real estate loans, those factors include:
 
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
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.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC-insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 
One-to-Four Family and Consumer Loans
 
The Company's base ALLL factor for one-to-four family and consumer loans is determined by management using the Bank's annualized actual trailing charge-off data over intervals of 84, 72, 36, 24, 12 and 6 months.  Adjustments to those base factors are made for relevant internal and external factors.  For one-to-four family and consumer loans, those factors include:
 
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment, and
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.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC-insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 
Warehouse Facilities
 
The Company's warehouse facilities are structured as repurchase facilities, whereby we purchase funded one-to-four family loans on an interim basis.  Therefore, the base ALLL factor for warehouse facilities is equal to that for one-to-four family and consumer loans as discussed above.  Adjustments to the base factor are made for relevant internal and external factors.  Those factors 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, and
The existence and effect of concentrations of credit, and changes in the level of such concentrations.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for one-to-four family loans for all FDIC-insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 



















The following tables summarize the allocation of the ALLL as well as the activity in the ALLL attributed to various segments in the loan portfolio as of and for the six months ended for the periods indicated:
 
 
Commercial and industrial
 
Commercial owner occupied
 
SBA
 
Warehouse Facilities
 
Commercial non-owner occupied
 
Multi-family
 
One-to-four family
 
Construction
 
Land
 
Other loans
 
Total
 
(dollars in thousands)
Balance, December 31, 2014
$
4,200

 
$
1,757

 
$
568

 
$
546

 
$
2,007

 
$
1,060

 
$
842

 
$
1,088

 
$
108

 
$
24

 
$
12,200

Charge-offs
(789
)
 

 

 

 

 

 

 

 

 

 
(789
)
Recoveries
24

 

 
1

 

 

 

 

 

 

 
1

 
26

Provisions for (reduction in) loan losses
1,867

 
339

 
317

 
329

 
(44
)
 
472

 
(189
)
 
314

 
254

 
4

 
3,663

Balance, June 30, 2015
$
5,302

 
$
2,096

 
$
886

 
$
875

 
$
1,963

 
$
1,532

 
$
653

 
$
1,402

 
$
362

 
$
29

 
$
15,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of allowance attributed to:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Specifically evaluated impaired loans
$
223

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
223

General portfolio allocation
5,079

 
2,096

 
886

 
875

 
1,963

 
1,532

 
653

 
1,402

 
362

 
29

 
14,877

Loans individually evaluated for impairment
1,684

 
370

 

 

 
443

 

 
206

 

 
23

 

 
2,726

Specific reserves to total loans individually evaluated for impairment
13.24
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
%
 
8.18
%
Loans collectively evaluated for impairment
$
452,779

 
$
382,167

 
$
50,306

 
$
198,113

 
$
402,343

 
$
400,237

 
$
84,077

 
$
124,448

 
$
16,316

 
$
4,811

 
$
2,115,597

General reserves to total loans collectively evaluated for impairment
1.12
%
 
0.55
%
 
1.76
%
 
0.44
%
 
0.49
%
 
0.38
%
 
0.78
%
 
1.13
%
 
2.22
%
 
0.60
%
 
0.70
%
Total gross loans
$
454,463

 
$
382,537

 
$
50,306

 
$
198,113

 
$
402,786

 
$
400,237

 
$
84,283

 
$
124,448

 
$
16,339

 
$
4,811

 
$
2,118,323

Total allowance to gross loans
1.17
%
 
0.55
%
 
1.76
%
 
0.44
%
 
0.49
%
 
0.38
%
 
0.77
%
 
1.13
%
 
2.22
%
 
0.60
%
 
0.71
%

 
Commercial and industrial
 
Commercial owner occupied
 
SBA
 
Warehouse Facilities
 
Commercial non-owner occupied
 
Multi-family
 
One-to-four family
 
Construction
 
Land
 
Other loans
 
Total
 
(dollars in thousands)
Balance, December 31, 2013
$
1,968

 
$
1,818

 
$
151

 
$
392

 
$
1,658

 
$
817

 
$
1,099

 
$
136

 
$
127

 
$
34

 
$
8,200

Charge-offs
(124
)
 

 

 

 
(365
)
 

 
(12
)
 

 

 

 
(501
)
Recoveries
21

 

 
3

 

 

 

 
30

 

 

 
1

 
55

Provisions for (reduction in) loan losses
1,036

 
(72
)
 
110

 
64

 
698

 
120

 
(299
)
 
391

 
(60
)
 
(9
)
 
1,979

Balance, June 30, 2014
$
2,901

 
$
1,746

 
$
264

 
$
456

 
$
1,991

 
$
937

 
$
818

 
$
527

 
$
67

 
$
26

 
$
9,733

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of allowance attributed to:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Specifically evaluated impaired loans
$

 
$

 
$

 
$

 
$

 
$

 
$
104

 
$

 
$

 
$

 
$
104

General portfolio allocation
2,901

 
1,746

 
264

 
456

 
1,991

 
937

 
714

 
527

 
67

 
26

 
9,629

Loans individually evaluated for impairment
24

 
417

 

 

 
514

 

 
575

 

 

 

 
1,530

Specific reserves to total loans individually evaluated for impairment
%
 
%
 
%
 
%
 
%
 
%
 
18.09
%
 
%
 
%
 
%
 
6.80
%
Loans collectively evaluated for impairment
$
319,517

 
$
216,367

 
$
15,115

 
$
114,032

 
$
359,774

 
$
251,512

 
$
131,445

 
$
47,034

 
$
6,271

 
$
3,753

 
$
1,464,820

General reserves to total loans collectively evaluated for impairment
0.91
%
 
0.81
%
 
1.75
%
 
0.40
%
 
0.55
%
 
0.37
%
 
0.54
%
 
1.12
%
 
1.07
%
 
0.69
%
 
0.66
%
Total gross loans
$
319,541

 
$
216,784

 
$
15,115

 
$
114,032

 
$
360,288

 
$
251,512

 
$
132,020

 
$
47,034

 
$
6,271

 
$
3,753

 
$
1,466,350

Total allowance to gross loans
0.91
%
 
0.81
%
 
1.75
%
 
0.40
%
 
0.55
%
 
0.37
%
 
0.62
%
 
1.12
%
 
1.07
%
 
0.69
%
 
0.66
%

Note 8 – Subordinated Debentures
 
In August 2014, the Corporation issued $60 million in aggregate principal amount of 5.75% Subordinated Notes Due 2024 (the “Notes”) in a private placement transaction to institutional accredited investors (the “Private Placement”).  The Corporation contributed $50 million of net proceeds from the Private Placement to the Bank to support general corporate purposes.  The Notes will 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 until September 3, 2024.
 
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.
 
In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) to PPBI Trust I, which funded the payment of $10 million of Floating Rate Trust Preferred Securities (“Trust Preferred Securities”) issued by PPBI Trust I in March 2004.  The net proceeds from the offering of Trust Preferred Securities were contributed as capital to the Bank to support further growth.  Interest is payable quarterly on the Subordinated Debentures at three-month LIBOR plus 2.75% per annum, for an effective rate of 2.98% per annum as of June 30, 2015.
 
The Corporation is not allowed to consolidate PPBI Trust I 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.
 




Note 9 – Earnings Per Share
 
Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common shares in treasury.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings and excludes common shares in treasury.  Stock options exercisable for shares of common stock are excluded from the computation of diluted earnings per share if they are anti-dilutive due to their exercise price exceeding the average market price during the period.
 
The 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 following table sets forth the number of stock options excluded for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
March 31,
 
June 30,
 
June 30,
 
2015
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
Stock options excluded
780,659

 
814,369

 
503,676

 
800,806

 
593,387


The following tables set forth the Company’s unaudited earnings per share calculations for the periods indicated:
 
 
Three Months Ended
 
June 30, 2015
 
March 31, 2015
 
June 30, 2014
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
 
(dollars in thousands, except per share data)
Net income
$
7,825

 
 
 
 
 
$
1,789

 
 
 
 
 
$
4,643

 
 
 
 
Basic income available to common stockholders
7,825

 
21,493,641

 
$
0.36

 
1,789

 
20,091,924

 
$
0.09

 
4,643

 
17,124,337

 
$
0.28

Effect of dilutive stock option grants and warrants

 
335,235

 
 
 

 
290,908

 
 
 

 
352,053

 
 
Diluted income available to common stockholders plus assumed conversions
$
7,825

 
21,828,876

 
$
0.36

 
1,789

 
20,382,832

 
$
0.09

 
$
4,643

 
17,476,390

 
$
0.27



 
Six Months Ended June 30,
 
2015
 
2014
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
 
(dollars in thousands, except per share data)
Net income
$
9,613

 
 
 
 
 
$
7,275

 
 
 
 
Basic income available to common stockholders
9,613

 
20,796,655

 
$
0.46

 
7,275

 
17,083,194

 
$
0.43

Effect of dilutive stock option grants and warrants

 
329,887

 
 
 

 
339,734

 
 
Diluted income available to common stockholders plus assumed conversions
$
9,613

 
21,126,542

 
$
0.46

 
7,275

 
17,422,928

 
$
0.42



Note 10 – Fair Value of Financial Instruments
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities.  Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
 
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.  The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at June 30, 2015, December 31, 2014 and June 30, 2014:
 
Cash and due from banks – The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Securities Available for Sale – Where possible, the Company utilizes quoted market prices to measure debt and equity securities; such items are classified as Level 1 in the hierarchy and include equity securities, US government bonds and securities issued by federally sponsored agencies.  When quoted market prices for identical assets are unavailable or the market for the asset is not sufficiently active, varying valuation techniques are used.  Common inputs in valuing these assets include, among others, benchmark yields, issuer spreads, forward mortgage-backed securities trade prices and recently reported trades.  Such assets are classified as Level 2 in the hierarchy and typically include private label mortgage-backed securities and corporate bonds.  Pricing on these securities are provided to the Company by a pricing service vendor.  In the Level 3 category, the Company classifies securities that reflect other-than-temporary impairments (“OTTI”) based on a discounted cash flow of the security or a determination of fair value that requires significant management judgment or consideration.
 
FHLB, FRB, Other Stock – The carrying value approximates the fair value based upon the redemption provisions of the stock and are classified as Level 1.
 
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 the value which would be derived using an exit price.  These loans are included within Level 3 of the fair value hierarchy.  The carrying amount of accrued interest receivable approximates its fair value as a Level 1 classification.
 
OREO OREO assets are recorded at the fair value less estimated costs to sell at the time of foreclosure.  The fair value of OREO assets is 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.
 
Accrued Interest Receivable/Payable The carrying amount approximates fair value and is classified as Level 1.
 
Deposit Accounts— The fair values estimated for demand deposits (interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) resulting in a Level 1 classification.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits in a Level 2 classification.  The carrying amount of accrued interest payable approximates its fair value as a Level 1 classification.
 
FHLB Advances and Other Borrowings— For these instruments, the fair value of short term borrowings is estimated to be the carrying amount and is classified as Level 1.  The fair value of long term borrowings and debentures is determined using rates currently available for similar borrowings or debentures with similar credit risk and for the remaining maturities and are classified as Level 2.  The carrying amount of accrued interest payable approximates its fair value as a Level 1 classification.
 
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.
 
Off-Balance Sheet Commitments and Standby Letters of Credit – The majority of the Bank’s commitments to extend credit carry current market interest rates if converted to loans.  Because these commitments are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower.  The notional amount disclosed for off-balance sheet commitments and standby letters of credit is the amount available to be drawn down on all lines and letters of credit.  The cost to assume is calculated at 10% of the notional amount and is classified as Level 2.
 
Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value.  These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.  In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
 
The fair value estimates presented herein are based on pertinent information available to management as of the periods indicated.
 
 
 
At June 30, 2015
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
83,077

 
$
83,077

 
$

 
$

 
$
83,077

Securities available for sale
 
280,434

 

 
280,434

 

 
280,434

FHLB, Federal Reserve Bank, and other stock, at cost
 
22,843

 
22,843

 

 

 
22,843

Loans held for investment, net
 
2,103,460

 

 

 
2,150,673

 
2,150,673

Accrued interest receivable
 
9,072

 
9,072

 

 

 
9,072

Other real estate owned
 
711

 

 

 
711

 
711

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
2,095,983

 
1,575,404

 
522,157

 

 
2,097,561

FHLB advances
 
118,000

 
118,208

 

 

 
118,208

Other borrowings
 
49,389

 

 
48,936

 

 
48,936

Subordinated debentures
 
70,310

 

 
68,675

 

 
68,675

Accrued interest payable
 
212

 
212

 

 

 
212

 
 
 
 
 
 
 
 
 
 
 
 
 
Notional Amount
 
Level 1
 
Level 2
 
Level 3
 
Cost to Cede
or Assume
Off-balance sheet commitments and standby letters of credit
 
$
380,783

 
$

 
$
38,078

 
$

 
$
38,078



 
 
At December 31, 2014
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(in thousands)
Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
110,925

 
$
110,925

 
$

 
$

 
$
110,925

Securities available for sale
 
201,638

 

 
201,638

 

 
201,638

FHLB, Federal Reserve Bank, and other stock, at cost
 
17,067

 
17,067

 

 

 
17,067

Loans held for investment, net
 
1,616,422

 

 

 
1,686,046

 
1,686,046

Accrued interest receivable
 
7,131

 
7,131

 

 

 
7,131

Other real estate owned
 
1,037

 

 

 
1,037

 
1,037

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
1,630,826

 
1,216,847

 
519,898

 

 
1,736,745

FHLB advances
 
70,000

 
70,025

 

 

 
70,025

Other borrowings
 
46,643

 

 
48,312

 

 
48,312

Subordinated debentures
 
70,310

 

 
33,456

 

 
33,456

Accrued interest payable
 
209

 
209

 

 

 
209

 
 
 
 
 
 
 
 
 
 
 
 
 
Notional Amount
 
Level 1
 
Level 2
 
Level 3
 
Cost to Cede
or Assume
Off-balance sheet commitments and standby letters of credit
 
$
355,024

 
$

 
$
35,502

 
$

 
$
35,502

 

 
 
At June 30, 2014
 
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Estimated
Fair Value
 
 
(in thousands)
Assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
120,292

 
$
120,292

 
$

 
$

 
$
120,292

Securities available for sale
 
235,116

 

 
235,116

 

 
235,116

FHLB, Federal Reserve Bank, and other stock, at cost
 
18,494

 
18,494

 

 

 
18,494

Loans held for investment, net
 
1,457,035

 

 

 
1,461,796

 
1,461,796

Accrued interest receivable
 
6,645

 
6,645

 

 

 
6,645

Other real estate owned
 
752

 

 

 
752

 
752

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

 
 

Deposit accounts
 
1,445,581

 
1,102,419

 
371,132

 

 
1,473,551

FHLB advances
 
210,000

 
210,000

 

 

 
210,000

Other borrowings
 
45,287

 

 
47,538

 

 
47,538

Subordinated debentures
 
10,310

 

 
4,592

 

 
4,592

Accrued interest payable
 
177

 
177

 

 

 
177

 
 
 
 
 
 
 
 
 
 
 
 
 
Notional Amount
 
Level 1
 
Level 2
 
Level 3
 
Cost to Cede
or Assume
Off-balance sheet commitments and standby letters of credit
 
$
293,228

 
$

 
$
29,323

 
$

 
$
29,323


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 2 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 June 30, 2015, 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 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.
 
The following fair value hierarchy table presents information about the Company’s financial instruments measured at fair value on a recurring basis at the dates indicated:
 
 
 
June 30, 2015
 
 
Fair Value Measurement Using
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Securities at
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 
 
 
 
 
 
 
Municipal bonds
 
$

 
$
120,431

 
$

 
$
120,431

Mortgage-backed securities
 

 
160,003

 

 
160,003

Total securities available for sale
 
$

 
$
280,434

 
$

 
$
280,434


 
 
June 30, 2014
 
 
Fair Value Measurement Using
 
 

 
 
Level 1
 
Level 2
 
Level 3
 
Securities at
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 

 
 

 
 

 
 

Municipal bonds
 
$

 
$
85,433

 
$

 
85,433

Mortgage-backed securities
 

 
149,683

 

 
149,683

Total securities available for sale
 
$

 
$
235,116

 
$

 
$
235,116


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

 
June 30, 2015
 
Fair Value Measurement Using
 
 
 
Level 1
 
Level 2
 
Level 3
 
Assets at
Fair Value
 
(in thousands)
Assets
 
 
 
 
 
 
 
Collateral dependent impaired loans
$

 
$

 
$
2,548

 
$
2,548

Other real estate owned

 

 
711

 
711

Total assets
$

 
$

 
$
3,259

 
$
3,259


 
June 30, 2014
 
Fair Value Measurement Using
 
 

 
Level 1
 
Level 2
 
Level 3
 
Assets at
Fair Value
 
(in thousands)
Assets
 

 
 

 
 

 
 

Collateral dependent impaired loans
$

 
$

 
$
1,003

 
$
1,003

Other real estate owned

 

 
752

 
752

Total assets
$

 
$

 
$
1,755

 
$
1,755


The following table presents quantitative information about level 3 of fair value measurements for financial instruments measured at fair value on a non-recurring basis for the periods indicated:

 
June 30, 2015
 
 
 
 
 
Range
 
Fair Value
 
Valuation Techniques
 
Rate
 
 Maturity (years)
 
Unobservable Inputs
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,684

 
Collateral valuation
 
6.70%
 
8
 
0 - 10% 
Commercial owner occupied
370

 
Collateral valuation
 
6.75%
 
7
 
0 - 10%
Real estate loans:
 

 
 
 
 
 
 
 
 
Commercial non-owner occupied
443

 
Collateral valuation
 
7.00%
 
12
 
0 - 15%
One-to-four family
28

 
Collateral valuation
 
8.00 - 15.00%
 
5 - 16 
 
0 - 10%
Land
23

 
Collateral valuation
 
13.00%
 
15
 
0 - 10%
Total collateral dependent impaired loans
$
2,548

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 

 
 
 
 
 
 
 
 
Land
$
711

 
Collateral valuation
 
 
 
0 - 10% 
One-to-four family

 
Collateral valuation
 
 
 
0 - 10% 
Total other real estate owned
$
711

 
 
 
 
 
 
 
 

 
 
June 30, 2014
 
 

 
 
 
Range
 
Fair Value
 
Valuation Techniques
 
Rate
 
  Maturity (years)
 
Unobservable Inputs
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
 
Business loans:
 

 
 
 
 
 
 
 
 
Commercial and industrial
$
24

 
Collateral valuation
 
6.00%
 
3
 
0 - 10% 
Commercial owner occupied
417

 
Collateral valuation
 
11.75%
 
8
 
0 - 10%
Real estate loans:
 

 
 
 
 
 
 
 
 
Commercial non-owner occupied
514

 
Collateral valuation
 
7.00%
 
13
 
0 - 15%
One-to-four family
48

 
Collateral valuation
 
2.26% - 15.00%
 
2-22
 
0 - 10%
Total collateral dependent impaired loans
$
1,003

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other real estate owned
 

 
 
 
 
 
 
 
 
Land
$
752

 
Collateral valuation
 
 
 
0-10%
Total other real estate owned
$
752

 
 
 
 
 
 
 
 



Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 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 phrases of similar meaning.  We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control.  Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
 
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 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;
The effect of acquisitions we have made or may make, if any, including, without limitation, the failure to achieve the expected revenue growth or expense savings from such acquisitions, or the failure to effectively integrate an acquisition target into our operations;
Changes in the level of our nonperforming assets and charge-offs;
The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB or other accounting standards setters;
Possible OTTI of securities held by us;
Changes in consumer spending, borrowing and savings habits;
The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
Ability to attract deposits and other sources of liquidity;
Changes in the financial performance and/or condition of our borrowers;
Changes in the competitive environment among financial and bank holding companies and other financial service providers;
Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
Unanticipated regulatory or judicial proceedings; and
Our ability to manage the risks involved in the foregoing.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC.  Therefore, we caution you not to place undue reliance on our forward-looking information and statements.  We will not update the forward-looking information and statements to reflect actual results or changes in the factors affecting the forward-looking information and statements.  For information on the factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our 2014 Annual Report.
 
Forward-looking information and statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us.  Any investor in our common stock should consider all risks and uncertainties disclosed in our filings with the SEC, all of which are accessible on the SEC’s website at http://www.sec.gov.
 
GENERAL
 
This discussion should be read in conjunction with our Management Discussion and Analysis of Financial Condition and Results of Operations included in our 2014 Annual Report, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.  The results for the three and six months ended June 30, 2015 are not necessarily indicative of the results expected for the year ending December 31, 2015.
 
The Corporation is a California-based bank holding company incorporated in the state of Delaware and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”). Our wholly owned subsidiary, Pacific Premier Bank, is a California state-chartered commercial bank.  As a bank holding company, the Corporation is subject to regulation and supervision by the Federal Reserve. We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA.  The Federal Reserve may conduct examinations of bank holding companies, such as the Corporation, and its subsidiaries.  The Corporation is also a bank holding company within the meaning of the California Financial Code.  As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Business Oversight-Division of Financial Institutions (“DBO”).
 
A bank holding company, such as the Corporation, is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such a policy.  The Federal Reserve, under the BHCA, has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
 
As a California state-chartered commercial bank which is a member of the Federal Reserve, the Bank is subject to supervision, periodic examination and regulation by the DBO and the Federal Reserve.  The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund.  In general terms, insurance coverage is up to $250,000 per depositor for all deposit accounts.  As a result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank.  If, as a result of an examination of the Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators.  Such remedies include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict growth, to assess civil monetary penalties, to remove officers and directors and ultimately to request the FDIC to terminate the Bank’s deposit insurance.  As a California-chartered commercial bank, the Bank is also subject to certain provisions of California law.
 
We provide banking services within our targeted markets in California to businesses, including the owners and employees of those businesses, professionals, real estate investors and non-profit organizations, as well as consumers in the communities we serve.  Additionally, through our HOA Banking and Lending and Franchise Capital units we can provide customized cash management, electronic banking services and credit facilities to HOAs, HOA management companies and QSR franchise owners nationwide.  At June 30, 2015, the Bank operated 16 full-service depository branches in California located in the cities of Encinitas, Huntington Beach, Irvine, Los Alamitos, Newport Beach, Palm Desert (2), Palm Springs (2), San Bernardino, San Diego (2), Seal Beach, Tustin, Riverside and Corona.  Our corporate headquarters are located in Irvine, California.  Through our branches and our web site at www.ppbi.com, we offer a broad array of deposit products and services for both business and consumer customers, including checking, money market and savings accounts, cash management services, electronic banking, and on-line bill payment.  We also offer a variety of loan products, including commercial business loans, lines of credit, commercial real estate loans, SBA loans, residential home loans, and home equity loans.  The Bank funds its lending and investment activities with retail deposits obtained through its branches, advances from the FHLB, lines of credit, and wholesale and brokered certificates of deposits.
 
Our principal source of income is the net spread between interest earned on loans and investments and the interest costs associated with deposits and borrowings used to finance the loan and investment portfolios.  Additionally, the Bank generates fee income from loan and investment sales and various products and services offered to both depository and loan customers.
 
CRITICAL ACCOUNTING POLICIES
 
Management has established various accounting policies that govern the application of U.S. GAAP in the preparation of our financial statements.  Our significant accounting policies are described in the Notes to the Consolidated Financial Statements in our 2014 Annual Report.  There have been no significant changes to our Critical Accounting Policies as described in our 2014 Annual Report.
 
Certain accounting policies require management to make estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities; management considers these to be critical accounting policies.  The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances.  Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at balance sheet dates and our results of operations for future reporting periods.
 
We consider the ALLL to be a critical accounting policy that requires judicious estimates and assumptions in the preparation of our financial statements that is particularly susceptible to significant change.  For further information, see “Allowances for Loan Losses” discussed in Note 7 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q and Note 5 to the Consolidated Financial Statements in our 2014 Annual Report.
 
IDPK ACQUISITION
 
Effective January 26, 2015, the Company acquired IDPK, a Newport Beach, California, based state-chartered bank, pursuant to the terms of a definitive agreement entered into by the Corporation, the Bank and IDPK on October 22, 2014.  As a result of the IDPK acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $450 million, including:
 
$333 million of gross loans;
$56.1 million in investment securities;
$27.9 million in goodwill;
$11.3 million in bank owned life insurance;
$10.5 million of cash and cash equivalents;
$9.3 million of other types of assets; and
$2.9 million of a core deposit intangible.

Also as a result of the IDPK acquisition, the Bank recorded equity of $72.2 million in connection with the Corporation’s stock issued to IDPK shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $371.1 million, including:
 
$270 million in deposit transaction accounts;
$66 million in retail certificates of deposit;
$33.3 million in FHLB advances; and
$1.8 million other liabilities.

The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures.
 
The acquisition was an opportunity for the Company to strengthen its competitive position as one of the premier community banks headquartered in Southern California.  Additionally, the IDPK acquisition enhanced and connected the Company’s footprint in Southern California. The integration and system conversion of IDPK was completed in April of 2015.
 
IFH ACQUISITION
 
On January 30, 2014, the Company acquired IFH, a national lender to franchisees in the QSR industry, and other direct and indirect subsidiaries utilized in its business, pursuant to the terms of a definitive agreement entered into by the Corporation, the Bank and Infinity on November 15, 2013.  As a result of the IFH acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $80.2 million, including $78.8 million in loans.  Also as a result of the IFH acquisition, the Bank recorded equity of $9 million in connection with the Corporation’s stock issued to IFH shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $68.3 million, including a $67.6 million credit facility that was paid off in conjunction with the closing of the acquisition.
 
The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures.
 
The acquisition of IFH has diversified our loan portfolio with commercial and industrial and owner-occupied commercial real estate loans, permitting us to deploy excess liquidity into higher yielding assets.  The QSR franchisee lending business is a niche market that provides attractive growth opportunities for the Company in the future.  IFH had no delinquent loans or adversely classified assets as of the acquisition date.



NON-GAAP MEASUREMENTS

For periods presented below, adjusted net income, adjusted diluted earnings per share and adjusted return on average assets are non-GAAP financial measures derived from GAAP-based amounts. We calculate these figures by excluding merger related expenses in the period results. Management believes that the exclusion of such items from these financial measures provides useful information to an understanding of the operating results of our core business. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2015

March 31, 2015

June 30, 2014

June 30, 2015

June 30, 2014
 
 




 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
7,825

 
$
1,789

 
$
4,643

 
$
9,613

 
$
7,275

Plus merger related expenses, net of tax
 

 
2,510

 

 
2,510

 
393

Adjusted net income
 
$
7,825

 
$
4,299

 
$
4,643

 
$
12,123

 
$
7,668

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.36

 
$
0.09

 
$
0.27

 
$
0.46

 
$
0.42

Plus merger related expenses, net of tax
 

 
0.12

 

 
0.12

 
0.02

Adjusted diluted earnings per share
 
$
0.36

 
$
0.21

 
$
0.27

 
$
0.58

 
$
0.44

 
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
1.18
%
 
0.29
%
 
1.06
%
 
0.75
%
 
0.85
%
Plus merger related expenses, net of tax
 

 
0.41

 

 
0.41

 
0.07

Adjusted return on average assets
 
1.18
%
 
0.70
%
 
1.06
%
 
1.16
%
 
0.92
%

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

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2015
 
March 31, 2015
 
June 30, 2014
 
June 30, 2015
 
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
7,825

 
$
1,789

 
$
4,643

 
$
9,613

 
$
7,275

Plus tax effected CDI amortization
 
216

 
160

 
157

 
376

 
316

Net income for average tangible common equity
 
8,041

 
1,949

 
4,800

 
9,989

 
7,591

Plus merger related expenses, net of tax
 

 
2,510

 

 
2,510

 
393

Adjusted net income for average tangible common equity
 
8,041

 
4,459

 
4,800

 
12,499

 
7,984

 
 
 
 
 
 
 
 
 
 
 
Average stockholders' equity
 
$
275,860

 
$
241,644

 
$
189,673

 
$
258,846

 
$
186,023

Less average CDI
 
8,080


6,909


6,248


8,258


6,375

Less average goodwill
 
50,965

 
41,657

 
22,950

 
45,444

 
22,030

Average tangible common equity
 
$
216,815

 
$
193,078

 
$
160,475

 
$
205,144

 
$
157,618

 
 
 
 
 
 
 
 
 
 
 
Return on average tangible common equity
 
14.84
%
 
4.04
%
 
11.96
%
 
9.74
%
 
9.63
%
Adjusted return on average tangible common equity
 
14.84
%
 
9.24
%
 
11.96
%
 
10.44
%
 
8.68
%





RESULTS OF OPERATIONS
     
In the second quarter of 2015, we reported net income of $7.8 million, or $0.36 per diluted share, compared with net income for the first quarter of 2015 of $1.8 million, or $0.09 per diluted share. The quarter-over-quarter increase was mostly due to: (a) the $3.7 million increase in net interest revenue from growth in earning assets and net interest margin expansion; (b) the $2.7 million increase in gain on sale of loans; and (c) the $3.3 million decrease in non-interest expense that was mostly the result of $4.0 million in merger related expenses realized in the prior quarter for the IDPK acquisition. For the three months ended June 30, 2015, the Company’s return on average assets was 1.18% and return on average tangible common equity was 14.84%, compared with a return on average assets of .29% and a return on average tangible common equity of 4.04% for the prior quarter. On an adjusted basis for the merger expenses incurred during the first quarter of 2015, the Company's return on average assets was .70% and a return on average tangible common equity of 9.24%.

Net income of $7.8 million, or $0.36 per diluted share, for the second quarter of 2015 compares to net income for the second quarter of 2014 of $4.6 million or $0.27 per diluted share. The increase in net earnings of $3.2 million was mostly due to the $9.1 million increase in net interest income resulting from earning asset growth and a $1.4 million increase in gain on sale of loans. These items were offset by an increase in the provision for loan losses of $0.8 million and a $5.6 million increase in non-interest expense. All of these changes from the prior year were impacted by the acquisition of IDPK.  For the three months ended June 30, 2015, the Company’s return on average assets was 1.18% and return on average tangible common equity was 14.84%, compared with a return on average assets of 1.06% and a return on average tangible common equity of 11.96% for the three months ended June 30, 2014.

For the first six months of 2015, the Company recorded net income of $9.6 million, or $0.46 per diluted share. This compares with net income of $7.3 million or $0.42 per diluted share for the first six months of 2014. The increase in net income of $2.3 million was mostly due to the $15.5 million increase in net interest income resulting from earning asset growth, offset by an increase in loan loss provision of $1.7 million and growth in non-interest expense of $12.5 million. Prior period comparisons for the year-to-date results are impacted by one-time merger-related expenses totaling $4 million associated with acquisition of IDPK in the first quarter of 2015 and $626,000 associated with the acquisition of IFH in the first quarter of 2014. Excluding non-recurring merger-related expenses, the Company reported adjusted net income of $12.1 million, or $0.58 per share on a diluted basis, for the first six months of 2015, compared with $7.7 million, or $0.44 per share on a diluted basis, for the first six months of 2014.

For the six months ended June 30, 2015, the Company’s return on average assets was .75% and return on average tangible common equity was 9.74%, compared with a return on average assets of .85% and a return on average tangible common equity of 9.63% for the six months ended June 30, 2014. Excluding the non-recurring merger-related expenses, the Company’s adjusted return on average assets was 1.16% and adjusted return on average tangible common equity was 10.44% for the six months ended June 30, 2015, compared with an adjusted return on average assets of .92% and an adjusted return on average tangible common equity of 8.68% for the six months ended June 30, 2014.
 
Net Interest Income
 
Our earnings are derived predominately from net interest income, which is the difference between the interest income earned on interest-earning assets, primarily loans and securities, and the interest expense incurred on interest-bearing liabilities, primarily deposits and borrowings.  Net interest income is affected by changes in both interest rates and the volume of average interest-earning assets and interest-bearing liabilities
 
Net interest income for the second quarter of 2015 increased by $3.6 million or 16% over the first quarter of 2015. Of this increase, approximately $2 million was the result of $174 million growth in average interest-earning assets. The growth in average interest-earning assets was partially impacted by the IDPK acquisition at the beginning of the prior quarter. The remaining $1.6 million increase was the result of the expansion in the Company's net interest margin of .27% from 3.99% in the first quarter of 2015 to 4.26% in the second quarter of 2015. The net interest margin expansion was partly due to a special dividend from the Federal Home Loan Bank of San Fransisco received in the second quarter of approximately $.5 million, which increased the net interest margin by .08%. The remaining .19% increase in the net interest margin was mostly the result of an improved mix of interest-earning assets, as loans, which are the highest yielding assets, grew as a percentage of interest-earning assets from 79% during the first quarter to 84% in the second quarter of 2015.

Net interest income for the second quarter of 2015 increased $9 million or 51% compared to the second quarter of 2014.  The increase was primarily related to an increase in interest-earning assets of $855 million, related to our organic loan growth since the end of the second quarter of 2014 and our acquisition of IDPK during the first quarter of 2015, with our net interest margin remaining unchanged at 4.26%. Although the net interest margin remain unchanged, the yield on interest earning assets increased .10%, primarily driven by a favorable asset mix as average loans grew to 84% of interest-earning assets during the second quarter of 2015, compared to 82% in the second quarter of 2014. In addition, the Company received a special dividend from the San Francisco Federal Home Loan Bank during the second quarter of approximately $.5 million. Conversely the cost of interest-bearing liabilities increased .15%. The increase in cost of interest-bearing liabilities was primarily associated with the issuance of $60 million of subordinated debt at a fixed rate of 5.75% and $50 million of fixed-term FHLB borrowings in the third quarter of 2014.

For the first six months of 2015, net interest income totaled $49.9 million, up $15.5 million or 45%, compared to the net interest income for the first six months of 2014. The increase reflected an increase in interest-earning assets of $817 million while the net interest margin decreased .15% to 4.13%. The increase in interest-earning assets was primarily related to the acquisitions of IDPK along with our organic loan growth. The decrease in net interest margin was largely the result of an increase in the cost of interest-bearing liabilities of .18% primarily associated with the issuance of $60 million of subordinated debt at a fixed rate of 5.75% and $50 million of fixed-term FHLB borrowing in the third quarter of 2014.

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

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

 
Average Balance Sheet
 
Three Months Ended
June 30, 2015
 
Three Months Ended
March 31, 2015
 
Three Months Ended
June 30, 2014
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
Assets
(dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
103,385

 
$
62

 
0.24
%
 
$
224,913

 
$
129

 
0.23
%
 
$
79,600

 
$
37

 
0.19
%
Federal funds sold
446

 

 

 
275

 

 

 
276

 

 

Investment securities
306,774

 
2,096

 
2.73

 
273,162

 
1,428

 
2.09

 
225,294

 
1,272

 
2.26

Loans receivable, net (1)
2,111,253

 
27,581

 
5.24

 
1,849,553

 
24,513

 
5.38

 
1,362,030

 
17,922

 
5.28

Total interest-earning assets
2,521,858

 
29,739

 
4.73
%
 
2,347,903

 
26,070

 
4.50
%
 
1,667,200

 
19,231

 
4.63
%
Noninterest-earning assets
140,446

 
 
 
 
 
114,132

 
 
 
 
 
84,845

 
 
 
 
Total assets
$
2,662,304

 
 
 
 
 
$
2,462,035

 
 
 
 
 
$
1,752,045

 
 
 
 
Liabilities and Equity
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

 
 

Interest-bearing deposits:
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

 
 

Interest checking
$
147,620

 
$
43

 
0.12
%
 
$
145,813

 
$
45

 
0.13
%
 
$
134,051

 
$
39

 
0.12
%
Money market
695,935

 
604

 
0.35

 
695,369

 
562

 
0.33

 
456,466

 
343

 
0.30

Savings
87,706

 
35

 
0.16

 
87,439

 
36

 
0.17

 
74,406

 
27

 
0.15

Time
472,135

 
907

 
0.77

 
472,534

 
963

 
0.83

 
359,446

 
794

 
0.89

Total interest-bearing deposits
1,403,396

 
1,589

 
0.45

 
1,401,155

 
1,606

 
0.46

 
1,024,369

 
1,203

 
0.47

FHLB advances and other borrowings
263,633

 
407

 
0.62

 
201,700

 
375

 
0.75

 
103,813

 
255

 
0.99

Subordinated debentures
70,310

 
982

 
5.60

 
70,310

 
971

 
5.60

 
10,310

 
75

 
2.92

Total borrowings
333,943

 
1,389

 
1.67

 
272,010

 
1,346

 
2.01

 
114,123

 
330

 
1.16

Total interest-bearing liabilities
1,737,339

 
2,978

 
0.69
%
 
1,673,165

 
2,952

 
0.72
%
 
1,138,492

 
1,533

 
0.54
%
Noninterest-bearing deposits
627,674

 
 
 
 
 
523,859

 
 
 
 
 
408,318

 
 
 
 
Other liabilities
21,431

 
 
 
 
 
23,367

 
 
 
 
 
15,562

 
 
 
 
Total liabilities
2,386,444

 
 
 
 
 
2,220,391

 
 
 
 
 
1,562,372

 
 
 
 
Stockholders' equity
275,860

 
 
 
 
 
241,644

 
 
 
 
 
189,673

 
 
 
 
Total liabilities and equity
$
2,662,304

 
 
 
 
 
$
2,462,035

 
 
 
 
 
$
1,752,045

 
 
 
 
Net interest income
 
 
$
26,761

 
 
 
 
 
$
23,118

 
 
 
 
 
$
17,698

 
 
Net interest rate spread (2)
 
 
 
 
4.04
%
 
 
 
 
 
3.78
%
 
 
 
 
 
4.09
%
Net interest margin (3)
 
 
 
 
4.26
%
 
 
 
 
 
3.99
%
 
 
 
 
 
4.26
%
Ratio of interest-earning assets to interest-bearing liabilities
 
 
 
 
145.16
%
 
 
 
 
 
140.33
%
 
 
 
 
 
146.44
%
______________________________
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums, and allowance for loan losses.
(2) Represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(3) Represents net interest income divided by average interest-earning assets.
 


 
Average Balance Sheet
 
Six Months Ended
June 30, 2015
 
Six Months Ended
June 30, 2014
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
Assets
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
163,813

 
$
191

 
0.24
%
 
$
74,996

 
$
64

 
0.17
%
Federal funds sold
361

 

 

 
234

 

 

Investment securities
290,061

 
3,524

 
2.43

 
234,519

 
2,682

 
2.29

Loans receivable, net (1)
1,981,126

 
52,094

 
5.30

 
1,308,514

 
34,507

 
5.32

Total interest-earning assets
2,435,361

 
55,809

 
4.62
%
 
1,618,263

 
37,253

 
4.64
%
Noninterest-earning assets
127,361

 
 
 
 
 
85,967

 
 
 
 
Total assets
$
2,562,722

 
 
 
 
 
$
1,704,230

 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest checking
$
146,721

 
$
88

 
0.12
%
 
$
135,845

 
$
77

 
0.11
%
Money market
670,988

 
1,166

 
0.35

 
445,886

 
657

 
0.30

Savings
87,573

 
70

 
0.16

 
75,151

 
55

 
0.15

Time
472,333

 
1,871

 
0.80

 
344,320

 
1,483

 
0.87

Total interest-bearing deposits
1,377,615

 
3,195

 
0.47

 
1,001,202

 
2,272

 
0.46

FHLB advances and other borrowings
232,838

 
782

 
0.68

 
94,468

 
498

 
1.06

Subordinated debentures
70,310

 
1,953

 
5.60

 
10,310

 
150

 
2.93

Total borrowings
303,148

 
2,735

 
1.82

 
104,778

 
648

 
1.25

Total interest-bearing liabilities
1,680,763

 
5,930

 
0.71
%
 
1,105,980

 
2,920

 
0.53
%
Noninterest-bearing deposits
600,720

 
 
 
 
 
398,967

 
 
 
 
Other liabilities
22,393

 
 
 
 
 
13,260

 
 
 
 
Total liabilities
2,303,876

 
 
 
 
 
1,518,207

 
 
 
 
Stockholders' equity
258,846

 
 
 
 
 
186,023

 
 
 
 
Total liabilities and equity
$
2,562,722

 
 
 
 
 
$
1,704,230

 
 
 
 
Net interest income
 
 
$
49,879

 
 
 
 
 
$
34,333

 
 
Net interest rate spread (2)
 
 
 
 
3.91
%
 
 
 
 
 
4.11
%
Net interest margin (3)
 
 
 
 
4.13
%
 
 
 
 
 
4.28
%
Ratio of interest-earning assets to interest-bearing liabilities
 
 
 
 
144.90
%
 
 
 
 
 
146.32
%
______________________________
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums, and allowance for loan losses.
(2) Represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(3) Represents net interest income divided by average interest-earning assets.



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 periods indicated.  For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes to our net interest income with respect to:
 
Changes in interest rates (changes in interest rates multiplied by prior volume);
Changes in volume (changes in volume multiplied by prior rate); and
The net change or the combined impact of volume and rate changes allocated proportionately to changes in volume and changes in interest rates.

 
Three Months Ended June 30, 2015
Compared to
Three Months Ended March 31, 2015
Increase (decrease) due to
 
Rate
 
Volume
 
Net
 
(in thousands)
Interest-earning assets
 
 
 
 
 
Cash and cash equivalents
$
6

 
$
(72
)
 
$
(66
)
Federal funds sold
(1
)
 

 
(1
)
Investment securities
476

 
192

 
668

Loans receivable, net
(617
)
 
3,685

 
3,068

Total interest-earning assets
$
1,562

 
$
2,107

 
$
3,669

Interest-bearing liabilities
 

 
 

 
 

Interest checking
$
(4
)
 
$
2

 
$
(2
)
Money market
41

 

 
41

Savings
(1
)
 

 
(1
)
Time
(54
)
 
(1
)
 
(55
)
FHLB advances and other borrowings
(73
)
 
105

 
32

Subordinated debentures
11

 

 
11

Total interest-bearing liabilities
$
(80
)
 
$
106

 
$
26

Change in net interest income
$
1,642

 
$
2,001

 
$
3,643


 
 
Three Months Ended June 30, 2015
Compared to
Three Months Ended June 30, 2014
Increase (decrease) due to
 
Rate
 
Volume
 
Net
 
(in thousands)
Interest-earning assets
 
 
 
 
 
Cash and cash equivalents
$
11

 
$
14

 
$
25

Investment securities
301

 
523

 
824

Loans receivable, net
(406
)
 
10,065

 
9,659

Total interest-earning assets
$
425

 
$
10,083

 
$
10,508

Interest-bearing liabilities
 

 
 

 
 

Interest checking
$
(6
)
 
$
10

 
$
4

Money market
63

 
198

 
261

Savings
2

 
6

 
8

Time
(268
)
 
381

 
113

FHLB advances and other borrowings
(280
)
 
432

 
152

Subordinated debentures
123

 
784

 
907

Total interest-bearing liabilities
$
54

 
$
1,391

 
$
1,445

Change in net interest income
$
371

 
$
8,692

 
$
9,063



 
Six Months Ended June 30, 2015
Compared to
Six Months Ended June 30, 2014
Increase (decrease) due to
 
Rate
 
Volume
 
Net
 
 
Interest-earning assets
 
 
 
 
 
Cash and cash equivalents
$
30

 
$
97

 
$
127

Investment securities
177

 
666

 
843

Loans receivable, net
(65
)
 
17,652

 
17,587

Total interest-earning assets
$
(136
)
 
$
18,693

 
$
18,557

Interest-bearing liabilities
 

 
 

 
 

Interest checking
$
5

 
$
6

 
$
11

Money market
135

 
375

 
510

Savings
5

 
10

 
15

Time
(107
)
 
495

 
388

FHLB advances and other borrowings
(94
)
 
378

 
284

Subordinated debentures
930

 
873

 
1,803

Total interest-bearing liabilities
$
890

 
$
2,121

 
$
3,011

Change in net interest income
$
(1,026
)
 
$
16,572

 
$
15,546







Provision for Loan Losses
  We recorded a $1.8 million provision for loan losses during the second quarter of 2015, which was consistent with the first quarter of 2015. Net loan charge-offs amounted to $379,000 in the second quarter of 2015, compared to net charge-offs of $384,000 from the first quarter of 2015.

The $1.8 million provision for loan losses during the second quarter of 2015, increased by $803,000 from the second quarter of 2014.  The increase in the provision for loan losses was mainly attributable to the growth in certain segments of the loan portfolio.  Net loan charge-offs amounted to $379,000 in the second quarter of 2015, compared to net recoveries of $18,000 from the second quarter of 2014.

For the first six months of 2015, we recorded a $3.7 million provision for loan losses, up from $1.7 million recorded for the first six months of 2014. The increase in the provision for loan losses was primarily attributable to the organic growth in our loan portfolio. Net loan charge-offs amounted to $763,000 for the first six months of 2015, up from $446,000 for the first six months of 2014.

For purchased credit impaired loans, charge-offs are recorded when there is a decrease in the estimated cash flows of the credit from original cash flow estimates.  Purchased credit impaired loans were recorded at their estimated fair value, which incorporated our estimated expected cash flows until the ultimate resolution of these credits.  To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses or charge-offs will be recognized into earnings or against the allowance, if applicable.  To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in loan interest income.  Due to the accounting rules associated with our purchased credit impaired loans, each quarter we are required to re-estimate cash flows which could cause volatility in our reported net interest margin and provision for loans losses.  During the second quarter of 2015, there were no charge-offs associated with purchased credit impaired loans. See “Allowance for Loan Losses” discussed below in this Quarterly Report on Form 10-Q.
 
Noninterest Income
      Noninterest income totaled $4.7 million for the second quarter of 2015, up $2.7 million from the first quarter of 2015.  The increase was primarily related to net gain on sale of loans sold in the second quarter totaling $2.7 million. There were no loans sold in the first quarter of 2015.

Noninterest income for the second quarter of 2015 increased by $2.2 million or 91% from the second quarter of 2014.  The increase was primarily related to an increase of $1.4 million in net gain on sale of loans and an increase in loans servicing fees of $442,000. During the second quarter of 2015, we sold $21 million in SBA loans at an overall premium of 10% and $68 million of other loans. That activity compares with sales of $12.8 million in SBA loans at an overall premium of 10% and $276,000 in commercial non-owner occupied loans in the second quarter of 2014.

For the first six months of 2015, noninterest income totaled $6.7 million, up from $4.5 million for the first six months of 2014. The increase was primarily related to higher net gain from sale of loans of $875,000, loan servicing fees of $487,000, and other income of $459,000.
  
Noninterest Expense
  Noninterest expense totaled $17.2 million for the second quarter of 2015, a decrease of $3.3 million from the first quarter of 2015. The decline in noninterest expense was essentially due to the $4 million of merger related expenses recorded during the first quarter of 2015.

Noninterest expense for the second quarter of 2015 increased by $5.6 million or 48%, compared with the second quarter of 2014.  The increase was primarily related to higher compensation and benefits costs of $3 million, a $516,000 increase in premises and occupancy expense, a $373,000 increase in marketing expenses, a $276,000 increase in legal, audit and professional fees, a $235,000 increases in deposit expenses and a $231,000 increase in data processing and communication, all of which primarily related to our organic growth and acquisition of IDPK.

For the first six months of 2015, noninterest expense totaled $37.7 million, up $12.5 million or 50% from the first six months of 2014. The increase in expense was primarily related to higher compensation and benefits costs of $5.6 million, higher non-recurring merger-related expense of $3.4 million, increased marketing expense of $800,000 and growth in premises and occupancy expense of $757,000.
 
The Company’s efficiency ratio was 53.7% for the second quarter of 2015, compared to 64.6% for the first quarter of 2015 and 56.6% for the second quarter of 2014. The Company's efficiency ratio was 58.4% for the first six months of 2015, compared to 61.4% for the first six months of 2014.
 
Income Taxes
 
For both the second and first quarter of 2015, our effective tax rate was 37.1%. Our effective tax rate was 38.1% for the second quarter of 2014. For the first six months of 2015, our effective tax rate was 37.1%, compared to 37.8% for the first six months of 2014. The decrease was primarily related to low income tax credits and increased interest income from municipal securities.
 
FINANCIAL CONDITION
 
At June 30, 2015, assets totaled $2.6 billion, an increase of $598 million or 29% from December 31, 2014 and $715 million or 37% from June 30, 2014.
 
The increase in assets since December 31, 2014 was principally impacted by the acquisition of IDPK, which at closing added $450 million in assets including $333 million in loans, $56 million in investment securities, $28 million in goodwill and $11 million in bank owned life insurance.  Additionally, organic loan growth, an increase in investment securities contributed to the increase in assets during the during the second quarter of 2015.

The increase in assets at June 30, 2015 as compared to June 30, 2014 was related to both organic and acquisitive loan growth of $652 million, as well as growth in investment securities.
  
Loans
 
Net loans held for investment totaled $2.1 billion at June 30, 2015, an increase of $487 million or 30% from December 31, 2014, and an increase of $646 million or 44% from June 30, 2014.

The increase since December 31, 2014 was primarily related to loans acquired from IDPK of $333 million at acquisition date, as well as our organic loan originations. This included increases in multifamily of $137 million, commercial owner occupied loans of $172 million, warehouse facilities of $84 million, commercial non-owner occupied of $44 million, construction of $35 million and SBA of $22 million.
 
The increase in loans from June 30, 2014, including loans acquired from IDPK, was comprised of increases in real estate loans of $231 million, commercial and industrial loans of $135 million, warehouse facilities loans of $84 million, commercial owner occupied loans of $166 million and SBA loans of $35 million.

The total end of period weighted average contractual interest rate on loans at June 30, 2015 was 4.89%, compared to 4.91% at December 31, 2014 and 4.94% at June 30, 2014.
 
The following table sets forth the composition of our loan portfolio in dollar amounts, as a percentage of the portfolio and gives the weighted average interest rate by loan category at the dates indicated: 

 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
Amount
 
Percent
of Total
 
Weighted
Average
Interest Rate
 
Amount
 
Percent
of Total
 
Weighted
Average
Interest Rate
 
Amount
 
Percent
of Total
 
Weighted
Average
Interest Rate
 
(dollars in thousands)
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
454,463

 
21.5
%
 
5.18
%
 
$
428,207

 
26.3
%
 
5.25
%
 
$
319,541

 
21.8
%
 
5.37
%
Commercial owner occupied (1)
382,537

 
18.1
%
 
5.12
%
 
210,995

 
13.0
%
 
5.09
%
 
216,784

 
14.8
%
 
5.23
%
SBA
50,306

 
2.4
%
 
5.55
%
 
28,404

 
1.7
%
 
5.63
%
 
15,115

 
1.0
%
 
5.78
%
Warehouse facilities
198,113

 
9.4
%
 
3.91
%
 
113,798

 
7.0
%
 
4.21
%
 
114,032

 
7.8
%
 
4.07
%
Real estate loans:
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Commercial non-owner occupied
402,786

 
19.0
%
 
4.99
%
 
359,213

 
22.1
%
 
4.97
%
 
360,288

 
24.6
%
 
5.23
%
Multi-family
400,237

 
18.9
%
 
4.61
%
 
262,965

 
16.1
%
 
4.55
%
 
251,512

 
17.2
%
 
4.58
%
One-to-four family (2)
84,283

 
4.0
%
 
4.50
%
 
122,795

 
7.5
%
 
4.35
%
 
132,020

 
9.0
%
 
4.39
%
Construction
124,448

 
5.8
%
 
5.17
%
 
89,682

 
5.5
%
 
5.15
%
 
47,034

 
3.1
%
 
5.21
%
Land
16,339

 
0.7
%
 
4.81
%
 
9,088

 
0.6
%
 
4.78
%
 
6,271

 
0.4
%
 
4.55
%
Other loans
4,811

 
0.2
%
 
5.79
%
 
3,298

 
0.2
%
 
6.06
%
 
3,753

 
0.3
%
 
5.77
%
Total gross loans (3)
2,118,323

 
100.0
%
 
4.89
%
 
1,628,445

 
100.0
%
 
4.91
%
 
1,466,350

 
100.0
%
 
4.94
%
Less loans held for sale

 
 

 
 

 

 
 

 
 

 

 
 

 
 

Total gross loans held for investment
2,118,323

 
 

 
 

 
1,628,445

 
 

 
 

 
1,466,350

 
 

 
 

Deferred loan origination costs/(fees) and premiums/(discounts), net
237

 
 

 
 

 
177

 
 

 
 

 
418

 
 

 
 

Allowance for loan losses
(15,100
)
 
 

 
 

 
(12,200
)
 
 

 
 

 
(9,733
)
 
 

 
 

Loans held for investment, net
$
2,103,460

 
 

 
 

 
$
1,616,422

 
 

 
 

 
$
1,457,035

 
 

 
 

______________________________
(1) Majority secured by real estate.
(2) Includes second trust deeds.
(3) Total gross loans for June 30, 2015 are net of (i) the unaccreted mark-to-market discounts on Canyon National loans of $1.1 million, on Palm Desert National loans of $1.1 million, on SDTB loans of $144,000, and on IDPK loans of $6.3 million and (ii) the mark-to-market premium on FAB loans of $24,000.




The following table sets forth loan originations, purchases, sales and principal repayments relating to our gross loans for the periods indicated:
 
 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
(in thousands)
Beginning balance gross loans
$
1,628,445

 
$
1,243,252

Loans originated:
 
 
 
Business loans:
 
 
 
Commercial and industrial
120,439

 
117,717

Commercial owner occupied (1)
54,934

 
7,483

SBA
42,249

 
21,952

Warehouse facilities
93,380

 
1,150

Real estate loans:
 
 
 
Commercial non-owner occupied
15,175

 
49,325

Multi-family
44,710

 
11,834

One-to-four family (2)
2,097

 
1,030

Construction loans
116,735

 
47,854

Other loans
223

 
61

Total loans originated
489,942

 
258,406

Loans purchased/acquired:
 

 
 

Business loans:
 

 
 

Commercial and industrial
53,840

 
69,543

Commercial owner occupied
51,608

 
18,651

SBA
5,431

 

Real estate loans:
 
 
 
Commercial non-owner occupied
126,410

 
11,399

Multi-family
118,802

 
35,263

One-to-four family
2,158

 

Construction
2,024

 

Land
880

 

Other loans
2,028

 

Total loans purchased
363,181

 
134,856

Total loan production
853,123

 
393,262

Principal repayments
(218,823
)
 
(123,004
)
Sales of loans
(88,416
)
 
(22,553
)
Change in undisbursed loan funds, net
(56,124
)
 
(24,913
)
Charge-offs
(789
)
 
(501
)
Change in mark-to-market discounts from acquisitions
907

 
1,167

Transfer to other real estate owned

 
(360
)
Net increase in gross loans
489,878

 
223,098

Ending balance gross loans
$
2,118,323

 
$
1,466,350

______________________________
(1) Majority secured by real estate.
(2) Includes second trust deeds.
 
The following table sets forth the weighted average interest rates, weighted average number of months to reprice and the periods to repricing for our gross loan portfolio at the date indicated:
 
 
 
June 30, 2015
Periods to Repricing
 
Number of Loans
 
Amount
 
Weighted
Average Interest Rate
 
Weighted
Average Months to Reprice
 
 
(dollars in thousands)
1 Year and less
 
1,405

 
$
789,488

 
4.91
%
 
9.20

Over 1 Year to 3 Years
 
292

 
303,934

 
4.57
%
 
26.04

Over 3 Years to 5 Years
 
436

 
591,958

 
4.72
%
 
48.71

Over 5 Years to 7 Years
 
54

 
93,325

 
4.82
%
 
69.60

Over 7 Years to 10 Years
 
20

 
23,061

 
4.89
%
 
106.12

Total adjustable
 
2,207

 
1,801,766

 
4.78
%
 
26.08

Fixed
 
1,128

 
316,557

 
5.54
%
 
 
Total
 
3,335

 
$
2,118,323

 
4.89
%
 
 
 
Delinquent Loans.  When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally record a notice of default and, after providing the required notices to the borrower, commence foreclosure proceedings.  If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale.  At these foreclosure sales, we generally acquire title to the property.  At June 30, 2015, loans delinquent 30 or more days as a percentage of total gross loans was .13%, up from .01% at December 31, 2014 and .09% at June 30, 2014.
 
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 June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
4

 
$
452

 

 
$

 
3

 
$
1,628

 
7

 
$
2,080

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial non-owner occupied
1

 
$
489

 

 
$

 

 
$

 
1

 
$
489

One-to-four family
1

 
$
2

 

 
$

 
3

 
$
63

 
4

 
$
65

Land

 
$

 

 
$

 
1

 
$
23

 
1

 
$
23

Other

 
$

 
1

 
$
28

 

 
$

 
1

 
$
28

Total
6

 
$
943

 
1

 
$
28

 
7

 
$
1,714

 
14

 
$
2,685

Delinquent loans to total gross loans
 

 
0.04
%
 
 

 
%
 
 

 
0.08
%
 
 
 
0.13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial

 
$

 
1

 
$
24

 

 
$

 
1

 
$
24

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
1

 
$
19

 

 
$

 
3

 
$
54

 
4

 
$
73

Other
1

 
$
1

 

 
$

 

 
$

 
1

 
$
1

Total
2

 
$
20

 
1

 
$
24

 
3

 
$
54

 
6

 
$
98

Delinquent loans to total gross loans
 
 
%
 
 
 
%
 
 
 
%
 
 
 
0.01
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial

 
$

 
2

 
$
99

 
1

 
$
24

 
3

 
$
123

Commercial owner occupied

 
$

 
1

 
$
417

 

 
$

 
1

 
$
417

Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
One-to-four family
3

 
$
236

 
4

 
$
478

 
3

 
$
48

 
10

 
$
762

Total
3

 
$
236

 
7

 
$
994

 
4

 
$
72

 
14

 
$
1,302

Delinquent loans to total gross loans
 
 
0.02
%
 
 
 
0.07
%
 
 
 
%
 
 
 
0.09
%
______________________________
(1) All loans that are delinquent 90 days or more are on nonaccrual status and reported as part of nonperforming loans.
 
Allowance for Loan Losses.  The ALLL represents an estimate of probable losses inherent in our loan portfolio and is determined by applying a systematically derived loss factor to individual segments of the loan portfolio.  The adequacy and appropriateness of the ALLL and the individual loss factors are reviewed each quarter by management.
 
The loss factor for each segment of our loan portfolio is generally based on our actual historical loss rate experience supplemented by management judgment for certain segments where we lack loss history experience.  We also consider historical charge-off rates for the last 10 and 15 years for commercial banks and savings institutions headquartered in California as collected and reported by the FDIC.  The loss factor is adjusted by qualitative adjustment factors to arrive at a final loss factor for each loan portfolio segment.  For additional information regarding the qualitative adjustments, please see “Allowances for Loan Losses” as discussed in our 2014 Annual Report.  The qualitative factors allow management to assess current trends within our loan portfolio and the economic environment to incorporate their effect when calculating the ALLL.  The final loss factors are applied to pass graded loans within our loan portfolio.  Higher factors are applied to loans graded below pass, including classified and criticized assets.
 
No assurance can be given that we will not, in any particular period, sustain loan losses that exceed the amount reserved, or that subsequent evaluation of our loan portfolio, in light of the prevailing factors, including economic conditions which may adversely affect our market area or other circumstances, will not require significant increases in the loan loss allowance.  In addition, regulatory agencies, as an integral part of their examination process, periodically review our ALLL and may require us to recognize additional provisions to increase the allowance or take charge-offs in anticipation of future losses.
 
At June 30, 2015, our ALLL was $15.1 million, up $2.9 million from December 31, 2014 and $5.4 million from June 30, 2014.  The increase in the allowance for loan losses at June 30, 2015 was mainly attributable to the growth in certain segments of the loan portfolio. At June 30, 2015, given the composition of our loan portfolio, the ALLL was considered adequate to cover estimated losses inherent in the loan portfolio.  Should any of the factors considered by management in evaluating the appropriate level of the ALLL change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for loan losses.
 
The following table sets forth the Company’s ALLL and its corresponding percentage of the loan category balance and the percent of loan balance to total gross loans in each of the loan categories listed for the periods indicated:
 

 
 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
Balance at End of Period Applicable to
 
Amount
 
Allowance as a % of Category Total
 
% of Loans in Category to
Total Loans
 
Amount
 
Allowance as a % of Category Total
 
% of Loans in Category to
Total Loans
 
Amount
 
Allowance as a % of Category Total
 
% of Loans in Category to
Total Loans
 
 
(dollars in thousands)
Business loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
5,302

 
1.17
%
 
21.5
%
 
$
4,200

 
0.98
%
 
26.3
%
 
$
2,901

 
0.91
%
 
21.8
%
Commercial owner occupied
 
2,096

 
0.55
%
 
18.1
%
 
1,757

 
0.83
%
 
13.0
%
 
1,746

 
0.81
%
 
14.8
%
SBA
 
886

 
1.76
%
 
2.4
%
 
568

 
2.00
%
 
1.7
%
 
264

 
1.75
%
 
1.0
%
Warehouse facilities
 
875

 
0.44
%
 
9.4
%
 
546

 
0.48
%
 
7.0
%
 
456

 
0.40
%
 
7.8
%
Real estate loans:
 
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Commercial non-owner occupied
 
1,963

 
0.49
%
 
19.0
%
 
2,007

 
0.56
%
 
22.1
%
 
1,991

 
0.55
%
 
24.6
%
Multi-family
 
1,532

 
0.38
%
 
18.9
%
 
1,060

 
0.40
%
 
16.1
%
 
937

 
0.37
%
 
17.2
%
One-to-four family
 
653

 
0.77
%
 
4.0
%
 
842

 
0.69
%
 
7.5
%
 
818

 
0.62
%
 
9.0
%
Construction
 
1,402

 
1.13
%
 
5.8
%
 
1,088

 
1.21
%
 
5.5
%
 
527

 
1.12
%
 
3.1
%
Land
 
362

 
2.22
%
 
0.7
%
 
108

 
1.19
%
 
0.6
%
 
67

 
1.07
%
 
0.4
%
Other Loans
 
29

 
0.60
%
 
0.2
%
 
24

 
0.73
%
 
0.2
%
 
26

 
0.69
%
 
0.3
%
Total
 
$
15,100

 
0.71
%
 
100.0
%
 
$
12,200

 
0.75
%
 
100.0
%
 
$
9,733

 
0.66
%
 
100.0
%

The ALLL as a percent of nonaccrual loans was 344.6% at June 30, 2015, down from 844.9% at December 31, 2014, and 501.4% at June 30, 2014.  At June 30, 2015, the ratio of ALLL to total gross loans was .71%, down from .75% at December 31, 2014 and up from .66% at June 30, 2014.  The decrease in this ratio at June 30, 2015 from December 31, 2014 is attributable to the loans acquired from IDPK, recorded at fair value, which did not necessitate an allowance against them.  Our ratio of ALLL plus the remaining unamortized credit discount on the loans acquired to total gross loans was .94% at June 30, 2015, up from .87% at December 31, 2014 and .85% at June 30, 2014.
 












The following table sets forth the activity within the Company’s ALLL in each of the loan categories listed for the periods indicated:
 

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(dollars in thousands)
Balance, beginning of period
$
13,646

 
$
8,685

 
$
12,200

 
$
8,200

Provision for loan losses
1,833

 
1,030

 
3,663

 
1,979

Charge-offs:
 

 
 

 
 

 
 

Business loans:
 

 
 

 
 

 
 

Commercial and industrial
(392
)
 

 
(789
)
 
(124
)
Real estate:
 

 
 

 
 

 
 

Commercial non-owner occupied

 

 

 
(365
)
One-to-four family

 

 

 
(12
)
Total charge-offs
(392
)
 

 
(789
)
 
(501
)
Recoveries :
 

 
 

 
 

 
 

Business loans:
 

 
 

 
 

 
 

Commercial and industrial
12

 
16

 
24

 
21

SBA

 
1

 
1

 
3

Real estate:
 

 
 

 
 

 
 

One-to-four family

 

 

 
30

Other loans
1

 
1

 
1

 
1

Total recoveries
13

 
18

 
26

 
55

Net loan (charge-offs) recoveries
(379
)
 
18

 
(763
)
 
(446
)
Balance at end of period
$
15,100

 
$
9,733

 
$
15,100

 
$
9,733

 
 
 
 
 
 
 
 
Ratios:
 

 
 

 
 

 
 

Net charge-offs (recoveries) to average total loans, net
0.07
%
 
(0.01
)%
 
0.08
%
 
0.07
%
Allowance for loan losses to gross loans at end of period
0.71
%
 
0.66
 %
 
0.71
%
 
0.66
%

Investment Securities
 
We primarily use our investment portfolio for liquidity purposes and to support our interest rate risk management strategies.  Investment securities available for sale totaled $280 million at June 30, 2015, up $78.8 million or 39% from December 31, 2014, and $45.3 million or 19% from June 30, 2014.  The increase in investment securities from December 31, 2014 was primarily due to the acquisition of IDPK, which added $56.1 million in investment securities at the acquisition date, along with our purchases of $60.1 million, partially offset by sales of $15.8 million and principal paydowns of $15.9 million.  In general, the purchase of investment securities primarily related to investing excess liquidity from our banking operations and to maintain a certain level of securities to our overall asset size, while the sales were made to help fund loan production and improve our interest-earning asset mix.
 
The following tables set forth the amortized cost, unrealized gains and losses, and estimated fair value of our investment securities portfolio at the dates indicated:
 

 
 
June 30, 2015
 
 
Amortized Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 

 
 
 
 
 
 
Municipal bonds
 
$
120,392

 
$
784

 
$
(745
)
 
$
120,431

Mortgage-backed securities
 
160,764

 
312

 
(1,073
)
 
160,003

Total securities available for sale
 
$
281,156

 
$
1,096

 
$
(1,818
)
 
$
280,434


 
 
December 31, 2014
 
 
Amortized Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 

 
 

 
 

 
 

Municipal bonds
 
$
88,599

 
$
1,235

 
$
(173
)
 
$
89,661

Mortgage-backed securities
 
112,159

 
432

 
(614
)
 
111,977

Total securities available for sale
 
$
200,758

 
$
1,667

 
$
(787
)
 
$
201,638


 
 
June 30, 2014
 
 
Amortized Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
 
(in thousands)
Investment securities available for sale:
 
 

 
 

 
 

 
 

Municipal bonds
 
$
84,576

 
$
1,211

 
$
(354
)
 
85,433

Mortgage-backed securities
 
150,578

 
230

 
(1,125
)
 
149,683

Total securities available for sale
 
$
235,154

 
$
1,441

 
$
(1,479
)
 
$
235,116


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

 
June 30, 2015
 
One Year
or Less
 
More than One
to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 
Total
 
Fair
Value
 
Weighted
Average
 Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
(dollars in thousands)
Investment securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
465

 
1.14
%
 
$
21,554

 
1.42
%
 
$
46,111

 
1.84
%
 
$
52,301

 
2.04
%
 
$
120,431

 
1.85
%
Mortgage-backed securities

 
%
 

 
%
 
24,328

 
1.59
%
 
135,675

 
1.77
%
 
160,003

 
1.75
%
Total investment securities available for sale
465

 
1.14
%
 
21,554

 
1.42
%
 
70,439

 
1.76
%
 
187,976

 
1.85
%
 
280,434

 
1.79
%
Stock:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

FHLB
11,350

 
6.00
%
 

 
%
 

 
%
 

 
%
 
11,350

 
6.00
%
Federal Reserve Bank and other
11,493

 
4.69
%
 

 
%
 

 
%
 

 
%
 
11,493

 
4.69
%
Total stock
22,843

 
5.34
%
 

 
%
 

 
%
 

 
%
 
22,843

 
5.34
%
Total securities
$
23,308

 
5.26
%
 
$
21,554

 
1.42
%
 
$
70,439

 
1.76
%
 
$
187,976

 
1.85
%
 
$
303,277

 
2.06
%

Each quarter, we review individual securities classified as available for sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.  If it is probable that we will be unable to collect all amounts due according to the contractual terms of the debt security, an OTTI write down is recorded against the security and a loss recognized.
 
In determining if a security has an OTTI loss, we review downgrades in credit ratings and the length of time and extent that the fair value has been less than the cost of the security.  We estimate OTTI losses on a security primarily through:
 
An evaluation of the present value of estimated cash flows from the security using the current yield to accrete beneficial interest and including assumptions in the prepayment rate, default rate, delinquencies, loss severity and percentage of nonperforming assets;
An evaluation of the estimated payback period to recover principal;
An analysis of the credit support available in the underlying security to absorb losses; and
A review of the financial condition and near term prospects of the issuer.

During the quarter ended June 30, 2015, there were no OTTI recoveries, compared to $10,000 in OTTI recoveries during the quarter ended June 30, 2014.
 
Nonperforming Assets
 
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), restructured loans and OREO.  It is our general policy to account for a loan as nonaccrual when the loan becomes 90 days delinquent or when collection of interest appears doubtful.
 
Nonperforming assets totaled $5.1 million or .19% of total assets at June 30, 2015, up from $2.5 million or .12% of total assets at December 31, 2014 and $2.7 million or .14% of total assets at June 30, 2014. At June 30, 2015, nonperforming loans increased $2.9 million and OREO decreased $326,000 from December 31, 2014 and nonperforming loans increased $2.4 million and OREO decreased $41,000 from June 30, 2014.
 
      The following table sets forth our composition of nonperforming assets at the dates indicated:

 
 
June 30,
2015
 
December 31,
2014
 
June 30,
2014
 
 
(dollars in thousands)
Nonperforming assets
 
 
 
 
 
 
Business loans:
 
 
 
 
 
 
Commercial and industrial
 
$
2,147

 
$

 
$
24

Commercial owner occupied
 
578

 
514

 
549

Real estate:
 
 

 
 

 
 

Commercial non-owner occupied
 
1,454

 
848

 
910

One-to-four family
 
88

 
82

 
458

Land
 
23

 

 

Other loans
 
92

 

 

Total nonaccrual loans
 
4,382

 
1,444

 
1,941

Other real estate owned:
 
 

 
 

 
 

One-to-four family
 

 
285

 

Land
 
711

 
752

 
752

Total other real estate owned
 
711

 
1,037

 
752

Total nonperforming assets, net
 
$
5,093

 
$
2,481

 
$
2,693

 
 
 
 
 
 
 
Allowance for loan losses
 
$
15,100

 
$
12,200

 
$
9,733

Allowance for loan losses as a percent of
total nonperforming loans
 
344.59
%
 
844.88
%
 
501.44
%
Nonperforming loans as a percent of gross loans
 
0.21
%
 
0.09
%
 
0.13
%
Nonperforming assets as a percent of total assets
 
0.19
%
 
0.12
%
 
0.14
%

Liabilities and Stockholders’ Equity
 
Total liabilities were $2.4 billion at June 30, 2015, compared to $1.8 billion at December 31, 2014 and $1.7 billion at June 30, 2014.  The increase of $516 million or 28% from the year ended December 31, 2014 and the increase of $626 million or 36% from June 30, 2014 was related to the acquisition of IDPK, which added $371 million in assumed liabilities at the acquisition date, organic growth in deposits and an increase in borrowings to fund loan growth and increase liquidity.
 
Deposits.  At June 30, 2014, deposits totaled $2.1 billion, up $465 million or 29% from December 31, 2014 and $650 million or 45% from June 30, 2014.
 
The increase in deposits since December 31, 2014 included increases in money market accounts of $182 million, noninterest bearing checking of $179 million, certificates of deposit of $88 million and savings of $13 million. The increase in deposits during the first six months of 2015 was due to organic growth and the acquisition of IDPK, which added $336 million in deposits. 

The increase in deposits since June 30, 2014 included increases in money market accounts of $249 million, noninterest bearing checking of $225 million, certificates of deposit of $157 million and savings of $13 million.
The total end of period weighted average rate of deposits at June 30, 2015 was .32%, down from .36% at December 31, 2014 and .36% at June 30, 2014.
 
At June 30, 2015, our gross loan to deposit ratio was 101.1%, up from 99.9% at December 31, 2014 and down from 101.4% at June 30, 2014.
 
The following table sets forth the distribution of the Company’s deposit accounts at the dates indicated and the weighted average interest rates on each category of deposits presented:
 
 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
Balance
 
% of Total Deposits
 
Weighted Average Rate
 
Balance
 
% of Total Deposits
 
Weighted Average Rate
 
Balance
 
% of Total Deposits
 
Weighted Average Rate
 
(dollars in thousands)
Noninterest bearing checking
$
635,695

 
30.3
%
 
0.00
%
 
$
456,754

 
28.0
%
 
0.00
%
 
$
410,843

 
28.4
%
 
0.00
%
Interest-bearing deposits:
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Checking
135,228

 
6.5
%
 
0.12
%
 
131,635

 
8.1
%
 
0.11
%
 
128,911

 
8.8
%
 
0.11
%
Money market
708,214

 
33.8
%
 
0.34
%
 
526,256

 
32.3
%
 
0.32
%
 
459,118

 
31.8
%
 
0.30
%
Savings
87,511

 
4.2
%
 
0.16
%
 
74,508

 
4.5
%
 
0.14
%
 
74,554

 
5.2
%
 
0.14
%
Time deposit accounts:
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Less than 1.00%
353,072

 
16.8
%
 
0.57
%
 
232,043

 
14.2
%
 
0.62
%
 
142,950

 
9.9
%
 
0.58
%
1.00 - 1.99
172,427

 
8.2
%
 
1.14
%
 
197,410

 
12.1
%
 
1.08
%
 
216,365

 
15.0
%
 
1.06
%
2.00 - 2.99
3,012

 
0.1
%
 
2.43
%
 
10,771

 
0.7
%
 
2.86
%
 
11,398

 
0.8
%
 
2.85
%
3.00 - 3.99
121

 
0.0
%
 
3.90
%
 
714

 
0.0
%
 
3.20
%
 
700

 
0.0
%
 
3.20
%
4.00 - 4.99
3

 
0.0
%
 
4.93
%
 
2

 
0.0
%
 
4.93
%
 
3

 
0.0
%
 
4.93
%
5.00 and greater
700

 
0.1
%
 
5.21
%
 
733

 
0.1
%
 
5.24
%
 
739

 
0.1
%
 
5.24
%
Total time deposit accounts
529,335

 
25.2
%
 
0.77
%
 
441,673

 
27.1
%
 
0.89
%
 
372,155

 
25.7
%
 
0.94
%
Total interest-bearing deposits
1,460,288

 
69.7
%
 
0.47
%
 
1,174,072

 
72.0
%
 
0.50
%
 
1,034,738

 
71.6
%
 
0.50
%
Total deposits
$
2,095,983

 
100.0
%
 
0.32
%
 
$
1,630,826

 
100.0
%
 
0.36
%
 
$
1,445,581

 
100.0
%
 
0.36
%
 
Borrowings.  At June 30, 2015, total borrowings amounted to $238 million, up $51 million or 27% from December 31, 2014 and down $28 million or 11% from June 30, 2014

On August 29, 2014, the Corporation completed the issuance of $60 million in aggregate principal amount of 5.75% subordinated notes due September 3, 2024 in a private placement transaction.  The net proceeds of the offering were approximately $59 million and are to be used for general corporate purposes, including, but not limited to, contribution of capital to the Bank to support both organic growth as well as opportunistic acquisitions, should appropriate opportunities arise.  At the beginning of the third quarter of 2014, we locked in borrowings from the FHLB of $25 million at 60 basis points for 18 months and $25 million at 84 basis points for 2 years.  These borrowings replaced our FHLB overnight borrowings and also extended the overall maturity of our liabilities and support our interest rate risk management strategies as well as leverage our balance sheet for future growth.  Additionally, during the second quarter of 2015, repurchase agreement debt related to our HOA business increased $4.8 million to $19.7 million.  This repurchase agreement debt was offered as a service to certain HOA depositors as added protection for deposit amounts above FDIC insurance levels.  At June 30, 2015, total borrowings represented 9% of total assets and had an end of period weighted average cost of 2.2%, compared with 9.2% of total assets at a weighted average cost of 2.74% at December 31, 2014 and 13.8% of total assets at a weighted average cost of .61% at June 30, 2014.
 
At June 30, 2015, total borrowings were comprised of the following:
 
Overnight FHLB advances of $68 million at .24%;
Subordinated notes of $60 million at 5.75% due September 3, 2024.  For additional information about the Subordinated notes, see Note 8 to the Consolidated Financial Statements in this report;
One 18 month fixed FHLB advance of $25 million at .60% due March 16, 2016, and one 24 month fixed FHLB advance of $25 million at .84% due September 15, 2016;
Three reverse repurchase agreements totaling $28.5 million at a weighted average rate of 3.26% with $10 million due in February 2018 and $18.5 million due in September 2018.  These agreements are secured by government sponsored entity MBS securities with a par value of $33.9 million and a fair value of $34.7 million;
HOA reverse repurchase agreements totaling $19.7 million at a weighted average rate of .02% and secured by of government sponsored entity MBS securities with a par value of $31.3 million and a fair value of $32.1 million; and
Subordinated debentures used to fund the issuance of Trust Preferred Securities in 2004 of $10.3 million at 3.00% due April 7, 2034.  For additional information about the Subordinated Debentures and Trust Preferred Securities, see Note 8 to the Consolidated Financial Statements in this report.

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

 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
Balance
 
Weighted
Average Rate
 
Balance
 
Weighted
Average Rate
 
Balance
 
Weighted
 Average Rate
 
(dollars in thousands)
FHLB advances
$
118,000

 
0.44
%
 
$
70,000

 
0.59
%
 
$
210,000

 
0.18
%
Reverse repurchase agreements
49,389

 
1.91
%
 
46,643

 
2.03
%
 
45,287

 
2.06
%
Subordinated debentures
70,310

 
5.34
%
 
70,310

 
5.34
%
 
10,310

 
2.98
%
Total borrowings
$
237,699

 
2.20
%
 
$
186,953

 
2.74
%
 
$
265,597

 
0.61
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average cost of
borrowings during the quarter
1.67
%
 
 

 
2.01
%
 
 

 
1.16
%
 
 

Borrowings as a percent of total assets
9.0
%
 
 

 
9.2
%
 
 

 
13.8
%
 
 

 
Stockholders’ Equity.  Total stockholders’ equity was $282 million as of June 30, 2015, up from $200 million at December 31, 2014 and $192 million at June 30, 2014.  The current year increase of $82 million in stockholders’ equity was primarily related to equity consideration of $70.9 million associated with the acquisition of IDPK, and net income for the first six months of 2015 of $9.6 million. The increase of $89.4 million from June 30, 2014 was primarily related to equity consideration of $70.9 million associated with the acquisition of IDPK, and net income over the period of $19 million.
 
Our book value per share increased to $13.09 at June 30, 2015, up from $11.81 at December 31, 2014 and $11.26 at June 30, 2014.  At June 30, 2015, the Company’s tangible common equity to tangible assets ratio was 8.65%, up from 8.51% at December 31, 2014, and 8.62% at June 30, 2014.
 
Tangible common equity to tangible assets (the "tangible common equity ratio") is a non-GAAP financial measure derived from GAAP-based amounts.  We calculate the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets.  We believe that this information is important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk-based ratios.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
GAAP Reconciliation
(dollars in thousands)

 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
 
 
Total stockholders' equity
$
281,593

 
$
199,592

 
$
192,181

Less: Intangible assets
(58,690
)
 
(28,564
)
 
(29,071
)
Tangible common equity
$
222,903

 
$
171,028

 
$
163,110

 
 
 
 
 
 
Total assets
$
2,636,756

 
$
2,038,897

 
$
1,921,525

Less: Intangible assets
(58,690
)
 
(28,564
)
 
(29,071
)
Tangible assets
$
2,578,066

 
$
2,010,333

 
$
1,892,454

 
 
 
 
 
 
Tangible common equity ratio
8.65
%
 
8.51
%
 
8.62
%

CAPITAL RESOURCES AND LIQUIDITY
 
Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments.  While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.
 
Our primary sources of funds generated during the first six months of 2015 were from:
 
Proceeds of $310 million from the sale and principal payments on loans held for investment;
Net increase of $129 million in deposit accounts; and
Net change of $56.1 million of undisbursed loan funds.

We used these funds to:
 
Purchase and originate loans held for investment of $520 million; and
Purchase securities available for sale of $60.1 million.

Our most liquid assets are unrestricted cash and short-term investments.  The levels of these assets are dependent on our operating, lending and investing activities during any given period.  Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate.  At June 30, 2015, cash and cash equivalents totaled $83.1 million and the market value of our investment securities available for sale totaled $280 million.  If additional funds are needed, we have additional sources of liquidity that can be accessed, including FHLB advances, federal fund lines, the Federal Reserve’s lending programs and loan sales.  As of June 30, 2015, the maximum amount we could borrow through the FHLB was $1.2 billion, of which $608 million was available for borrowing based on collateral pledged of $684 million in real estate loans.  At June 30, 2015, we had $118 million in FHLB borrowings against that available balance.  At June 30, 2015, we also had unsecured lines of credit aggregating $173 million, which consisted of $120 million with other financial institutions from which to draw funds and $3.3 million with the Federal Reserve Bank and one reverse repo line with a correspondent bank of $50 million.  At June 30, 2015, there was one advance drawn against these unsecured lines of credit for $1.2 million which matured on July 1, 2015.  For the quarter ended June 30, 2015, our average liquidity ratio was 13.63%.  The Company regularly models liquidity stress scenarios to ensure that adequate liquidity is available and has contingency funding plans in place which are reviewed and tested on a regular basis.
 
To the extent that 2015 deposit growth is not sufficient to satisfy our ongoing commitments to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, or make investments, we may access funds through our FHLB borrowing arrangement, unsecured lines of credit or other sources.
 
The Bank has a policy in place that permits the purchase of brokered funds, in an amount not to exceed 20% of total deposits, as a secondary source for funding.  At June 30, 2015, we had $120 million in brokered time deposits, which constituted 5.7% of total deposits at that date.
 
The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity.  The Corporation’s primary sources of liquidity are dividends from the Bank.  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 Corporation has never declared or paid dividends on its common stock and does not anticipate declaring or paying any cash dividends in the foreseeable future.  The Corporation’s board of directors authorized in June 2012 a stock repurchase plan, which allows the Corporation to proactively manage its capital position and return excess capital to its stockholders.  The repurchase plan authorizes the repurchase of up to 1,000,000 shares of the Company’s common stock.  Shares purchased under such plans also provide the Corporation with shares of common stock necessary to satisfy obligations related to stock compensation awards.  For the three months ending June 30, 2015, the Company made no repurchases of its common stock under the repurchase plan.  Also, please see Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for additional information.
 
Contractual Obligations and Off-Balance Sheet Commitments
 
Contractual Obligations.  The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs.
 
The following schedule summarizes maturities and payments due on our obligations and commitments, excluding accrued interest, as of the date indicated:

 
June 30, 2015
 
Less than 1 year
 
1 - 3 years
 
3 - 5 years
 
More than 5 years
 
Total
 
(in thousands)
Contractual obligations
 
 
 

 
 

 
 
 
 
FHLB advances
$
68,000

 
$
50,000

 
$

 
$

 
$
118,000

Other borrowings
20,889

 
10,000

 
18,500

 

 
49,389

Subordinated debentures

 

 

 
70,310

 
70,310

Certificates of deposit
378,762

 
144,909

 
4,244

 
1,420

 
529,335

Operating leases
3,622

 
5,201

 
3,135

 
451

 
12,409

Total contractual cash obligations
$
471,273

 
$
210,110

 
$
25,879

 
$
72,181

 
$
779,443

 
Off-Balance Sheet Commitments.  We utilize off-balance sheet commitments in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates.  These financial instruments include commitments to originate real estate, business and other loans held for investment, undisbursed loan funds, lines and letters of credit, and commitments to purchase loans and investment securities for portfolio.  The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
 
Commitments to originate loans held for investment are agreements to lend to a customer as long as there is no violation of any condition established in the commitment.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Undisbursed loan funds and unused lines of credit on home equity and commercial loans include committed funds not disbursed.  Letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party.  As of June 30, 2015, we had commitments to extend credit on existing lines and letters of credit of $381 million, compared to $355 million at December 31, 2014 and $293 million at June 30, 2014.
 
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:
 
 
June 30, 2015
 
Less than 1 year
 
1 - 5 years
 
3 - 5 years
 
More than 5 years
 
Total
 
(in thousands)
Other commitments
 
 
 

 
 

 
 
 
 
Commercial and industrial
$
108,286

 
$
30,178

 
$
1,964

 
$
14,164

 
$
154,592

Construction
52,192

 
61,849

 

 
4,424

 
118,465

Home equity lines of credit
64

 
1,385

 
14

 
13,979

 
15,442

Standby letters of credit
13,176

 
1

 

 

 
13,177

All other
77,153

 
515

 
210

 
1,229

 
79,107

Total other commitments
$
250,871

 
$
93,928

 
$
2,188

 
$
33,796

 
$
380,783


Regulatory Capital Compliance  (BASEL III)
 
On July 2, 2013, federal banking regulators issued a final rule (the “Basel III Rule”) implementing a revised regulatory capital framework for U.S. banks in accordance with the Basel III international accord and satisfying related mandates under the Dodd-Frank Act.  The Basel III Rule includes a new common equity tier 1 minimum capital requirement of 4.5% of risk-weighted assets and increases the minimum tier 1 capital requirement from 4.0% to 6.0% of risk-weighted assets.  The minimum total risk-based capital requirement remains unchanged at 8.0% of total risk-weighted assets.  In addition to these minimum capital requirements, the Basel III Rule requires banking organizations to hold a buffer of common equity tier 1 capital in an amount above 2.5% of total risk-weighted assets to avoid restrictions on capital distributions and discretionary bonus payments to executive officers.
 
The minimum regulatory capital requirements and compliance with a standardized approach for determining risk-weighted assets of the final rule became effective for us on January 1, 2015.  The capital conservation buffer framework transition period begins January 1, 2016, with full implementation effective January 1, 2019.
 
The Basel III Rule also establishes a standardized approach for determining risk-weighted assets.  Under the Basel III Rule, risk weights for residential mortgage loans that apply under current capital rules will continue to apply and banking organizations with less than $15 billion in total assets may continue to include existing trust preferred securities as capital.  The Basel III Rule allows banking organizations that are not subject to the advanced approaches rule, like us, to make a one-time election not to include most elements of accumulated other comprehensive income (“AOCI”) in regulatory capital and instead use the existing treatment under current capital rules.  The Corporation and Bank, as permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital.
 
The final rule also enhances the risk-sensitivity of the advanced approaches risk-based capital rule, including among others, revisions to better address counterparty credit risk and interconnectedness among financial institutions and incorporation of the Federal Reserve’s market risk rule into the integrated capital framework.  These provisions of the final rule generally apply only to large, internationally active banking organizations or banking organizations with significant trading activity and are not expected to directly impact us.
 
For regulatory capital purposes, subject to applicable limitations, the issuance of $60 million of subordinated notes during the third quarter of 2014 qualifies as Tier 2 capital for the Company.  The Company contributed $40 million of the proceeds from the offering to the Bank, in August 2014 and an additional $10 million in May 2015, which enhanced the Bank’s regulatory capital ratios.
 
Beginning in the first quarter of 2015, we calculated our regulatory capital ratios under the Basel III Rule.  Basel III had no significant effect on our capital ratios.  Our capital ratios as of December 31, 2014 and June 30, 2014 are under the Basel I rules.  The Bank’s and the Company’s capital amounts and ratios are presented in the following table along with the well capitalized requirement at the dates indicated:
 
 
 
Actual
 
Minimum Required for Capital Adequacy Purposes
 
Required to be Well Capitalized Under Prompt Corrective Action Regulations
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
(dollars in thousands)
At June 30, 2015 (1)
 
 
 
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
$
285,209

 
10.95
%
 
$
104,157

 
4.00
%
 
$
130,196

 
5.00
%
Consolidated
 
233,780

 
8.97
%
 
104,289

 
4.00
%
 
130,361

 
5.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 to Risk-Weighted Assets (2)
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
285,209

 
12.39
%
 
103,588

 
4.50
%
 
149,627

 
6.50
%
Consolidated
 
226,508

 
9.81
%
 
103,935

 
4.50
%
 
150,129

 
6.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
285,209

 
12.39
%
 
138,117

 
6.00
%
 
184,156

 
8.00
%
Consolidated
 
233,780

 
10.12
%
 
138,581

 
6.00
%
 
184,774

 
8.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
300,820

 
13.07
%
 
184,156

 
8.00
%
 
230,196

 
10.00
%
Consolidated
 
309,390

 
13.40
%
 
184,774

 
8.00
%
 
230,968

 
10.00
%
At December 31, 2014 (1)
 
 

 
 

 
 

 
 

 
 

 
 

Leverage Ratio
 
 

 
 

 
 

 
 

 
 

 
 

Bank
 
$
221,523

 
11.29
%
 
$
78,466

 
4.00
%
 
$
98,083

 
5.00
%
Consolidated
 
179,881

 
9.18
%
 
78,401

 
4.00
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital to Risk-Weighted Assets
 
 

 
 

 
 

 
 

 
 

 
 

Bank
 
221,523

 
12.72
%
 
69,650

 
4.00
%
 
104,475

 
6.00
%
Consolidated
 
179,881

 
10.30
%
 
69,855

 
4.00
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk-Weighted Assets
 
 

 
 

 
 

 
 

 
 

 
 

Bank
 
234,120

 
13.45
%
 
139,300

 
8.00
%
 
174,126

 
10.00
%
Consolidated
 
252,477

 
14.46
%
 
139,709

 
8.00
%
 
N/A

 
N/A

At  June 30, 2014 (1)
 
 

 
 

 
 

 
 

 
 

 
 

Leverage Ratio
 
 

 
 

 
 

 
 

 
 

 
 

Bank
 
$
169,977

 
9.85
%
 
$
69,008

 
4.00
%
 
$
86,260

 
5.00
%
Consolidated
 
172,883

 
10.04
%
 
68,910

 
4.00
%
 
 N/A

 
 N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
169,977

 
10.83
%
 
62,797

 
4.00
%
 
94,195

 
6.00
%
Consolidated
 
172,883

 
10.99
%
 
62,939

 
4.00
%
 
 N/A

 
 N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
179,982

 
11.46
%
 
125,593

 
8.00
%
 
156,992

 
10.00
%
Consolidated
 
182,888

 
11.62
%
 
125,878

 
8.00
%
 
 N/A

 
 N/A

______________________________
(1) The Company adopted the Basel III Rule effective January 1, 2015. All ratios subsequent to the effective date reflect its adoption, while ratios for the prior periods reflect the previous capital rules under Basel I.
(2) The common equity tier 1 ratio is a new ratio required under the Basel III Rule and represents common equity, less goodwill and intangible assets net of any deferred tax liabilities, divided by risk-weighted assets.






Item 3.  Quantitative and Qualitative Disclosure About Market Risk
 
Management believes that there have been no material changes in our quantitative and qualitative information about market risk since December 31, 2014.  For a complete discussion of our quantitative and qualitative market risk, see “Item 7A.  Quantitative and Qualitative Disclosure About Market Risk” in our 2014 Annual Report.
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Controls
 
There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
In February 2004, the Bank was named as a defendant in a class action lawsuit entitled “James Baker v. Century Financial, et al,” which alleged violations of the Missouri Second Mortgage Loan Act (the “MSMLA”) by the Bank’s predecessor, Life Bank.  The lawsuit alleged that Missouri homeowners were charged closing costs and related fees exceeding the amount permitted by the MSMLA.  While Life Bank did not originate these mortgages, it did ultimately own and service them for a period of time, which plaintiffs allege creates potential liability under the MSMLA.  The class action lawsuit was filed in the Circuit Court of Clay County, Missouri in 2000.
 
After a lengthy period of inactivity, the Bank was contacted by plaintiffs’ counsel to schedule depositions and discovery, and prepare the case to go to trial in 2015.  The Board of Directors of the Company established a $1.7 million reserve related to the lawsuit during the fourth quarter of 2014, which the Board of Directors believed to be a reasonable estimate of the Company’s exposure as of December 31, 2014.  In March and April 2015, the Company entered into a proposed settlement agreement with plaintiffs to resolve the litigation as to the Company.  In June, the court granted approval for the settlement and the Bank remitted the final settlement amount of $1,764,693.87.  The Bank has been dismissed from the lawsuit with prejudice.

The Company is not involved in any other 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.
 
Item 1A. Risk Factors
 
There were no material changes to the risk factors as previously disclosed under Item 1A of our 2014 Annual Report.
 
Item 2.  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 second quarter of 2015.

Month of Purchase
 
Total Number of shares purchased/ returned
 
Average price paid per share
 
Total number of shares repurchased as part of the publicly announced program
 
Maximum number of shares that may yet be purchased under the program at end of month
March-2015
 

 

 

 
763,877

April-2015
 

 

 

 
763,877

May-2015
 

 

 

 
763,877

June-2015
 

 

 

 
763,877

Total/Average
 

 
$

 

 
763,877


Item 3.  Defaults Upon Senior Securities
 
None
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
Item 5.  Other Information
 
None
 
Item 6.  Exhibits
 
Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 31.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 32
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS
 
XBRL Instance Document
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document





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

 
PACIFIC PREMIER BANCORP, INC.,
 
 
 
 
August 10, 2015
 
By:
/s/ Steve Gardner
Date
 
 
Steve Gardner
 
 
 
President and Chief Executive Officer
 
 
 
(principal executive officer)
 
 
 
 
August 10, 2015
 
By:
/s/ E. Allen Nicholson
Date
 
 
E. Allen Nicholson
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(principal financial and accounting officer)




 
 
Index to Exhibits
Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 31.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 32
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS
 
XBRL Instance Document
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document