ppbi10q-2015q1.htm
 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 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
[ ]
Smaller reporting company
[  ]
       
(Do not check if a 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 May 8, 2015 was 21,511,426.
 
 

 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED MARCH 31, 2015
 
 
PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements
 
Consolidated Statements of Financial Condition: At March 31, 2015 (unaudited), December 31, 2014 (audited) and March 31, 2014 (unaudited)
 
Consolidated Statements of Operations: For the three months ended March 31, 2015 and 2014 (unaudited)
 
Consolidated Statements of Comprehensive Income: For the three months ended March 31, 2015 and 2014 (unaudited)
 
Consolidated Statements of Stockholders’ Equity: For the three months ended March 31, 2015 and 2014 (unaudited)
 
Consolidated Statements of Cash Flows: For the three months ended March 31, 2015 and 2014 (unaudited)
 
Notes to Consolidated Financial Statements (unaudited)
 
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
Item 4 - Controls and Procedures
 
PART II - OTHER INFORMATION
 
Item 1 - Legal Proceedings
 
Item 1A - Risk Factors
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3 - Defaults Upon Senior Securities
 
Item 4 - Mine Safety Disclosures
 
Item 5 - Other Information
 
Item 6 - Exhibits
 
 

 
PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
 

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except share data)
 
                   
   
March 31,
   
December 31,
   
March 31,
 
ASSETS
 
2015
   
2014
   
2014
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Cash and due from banks
  $ 178,096     $ 110,650     $ 124,143  
Federal funds sold
    275       275       276  
Cash and cash equivalents
    178,371       110,925       124,419  
Investment securities available for sale
    280,461       201,638       202,142  
FHLB and other stock, at cost
    30,586       17,067       14,104  
Loans held for investment
    2,131,387       1,628,622       1,325,372  
Allowance for loan losses
    (13,646 )     (12,200 )     (8,685 )
Loans held for investment, net
    2,117,741       1,616,422       1,316,687  
Accrued interest receivable
    8,769       7,131       5,865  
Other real estate owned
    997       1,037       752  
Premises and equipment
    9,591       9,165       9,643  
Deferred income taxes
    12,815       9,383       9,180  
Bank owned life insurance
    38,377       26,822       26,240  
Intangible assets
    8,203       5,614       6,374  
Goodwill
    51,010       22,950       22,950  
Other assets
    16,079       10,743       6,926  
TOTAL ASSETS
  $ 2,753,000     $ 2,038,897     $ 1,745,282  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
LIABILITIES:
                       
Deposit accounts:
                       
Noninterest bearing checking
  $ 619,763     $ 456,754     $ 412,871  
Interest-bearing:
                       
Checking
    130,869       131,635       137,285  
Money market/savings
    809,408       600,764       529,348  
Retail certificates of deposit
    406,649       365,168       350,690  
Wholesale/brokered certificates of deposit
    76,477       76,505       5,009  
Total interest-bearing
    1,423,403       1,174,072       1,022,332  
Total deposits
    2,043,166       1,630,826       1,435,203  
FHLB advances and other borrowings
    343,434       116,643       95,506  
Subordinated debentures
    70,310       70,310       10,310  
Accrued expenses and other liabilities
    22,843       21,526       15,403  
TOTAL LIABILITIES
    2,479,753       1,839,305       1,556,422  
STOCKHOLDERS’ EQUITY:
                       
Common stock, $.01 par value; 25,000,000 shares authorized;21,387,818 shares at March 31, 2015, 16,903,884 shares at December 31, 2014,  and 17,224,977 shares at March 31, 2014 issued and outstanding
    214       169       172  
Additional paid-in capital
    218,528       147,474       152,325  
Retained earnings
    53,220       51,431       37,447  
Accumulated other comprehensive income (loss), net of tax (benefit) of $898 at March 31, 2015, $362 at December 31, 2014 and ($757) at March 31, 2014
    1,285       518       (1,084 )
TOTAL STOCKHOLDERS’ EQUITY
    273,247       199,592       188,860  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 2,753,000     $ 2,038,897     $ 1,745,282  

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

 

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except per share data)
 
(unaudited)
 
             
   
Three Months Ended
 
   
March 31, 2015
   
March 31, 2014
 
INTEREST INCOME
           
Loans
  $ 24,513     $ 16,585  
Investment securities and other interest-earning assets
    1,557       1,437  
Total interest income
    26,070       18,022  
INTEREST EXPENSE
               
Deposits
    1,606       1,069  
FHLB advances and other borrowings
    375       243  
Subordinated debentures
    971       75  
Total interest expense
    2,952       1,387  
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    23,118       16,635  
PROVISION FOR LOAN LOSSES
    1,830       949  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    21,288       15,686  
NONINTEREST INCOME
               
Loan servicing fees
    901       856  
Deposit fees
    582       454  
Net gain from sales of loans
    -       548  
Net gain from sales of investment securities
    116       62  
Other-than-temporary impairment recovery (loss) on investment securities, net
    -       13  
Other income
    427       119  
Total noninterest income
    2,026       2,052  
NONINTEREST EXPENSE
               
Compensation and benefits
    9,522       6,891  
Premises and occupancy
    1,829       1,588  
Data processing and communications
    702       1,131  
Other real estate owned operations, net
    48       13  
FDIC insurance premiums
    314       237  
Legal, audit and professional expense
    521       593  
Marketing expense
    603       176  
Office and postage expense
    499       369  
Loan expense
    193       184  
Deposit expense
    805       761  
Merger related expense
    3,992       626  
Other expense
    1,441       972  
Total noninterest expense
    20,469       13,541  
NET INCOME BEFORE INCOME TAX
    2,845       4,197  
INCOME TAX
    1,056       1,565  
NET INCOME
  $ 1,789     $ 2,632  
                 
EARNINGS PER SHARE
               
Basic
  $ 0.09     $ 0.15  
Diluted
  $ 0.09     $ 0.15  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
Basic
    20,091,924       17,041,594  
Diluted
    20,382,832       17,376,001  

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



 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands)
 
(unaudited)
 
             
   
Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
             
Net income
  $ 1,789     $ 2,632  
Other comprehensive income (loss), net of tax (benefit):
         
Unrealized holding gains (losses) on securities arising during the period, net of income taxes (benefits) (1)
    835       2,029  
Reclassification adjustment for net gain on sale of securities included in net income, net of income taxes (2)
    (68 )     (36 )
Net unrealized gain (loss) on securities, net of income taxes
    767       1,993  
Comprehensive income
  $ 2,556     $ 4,625  
                 
(1) Income taxes on the unrealized gains (losses) on securities was $584,000 for the three months ended March 31, 2015 and $1.4 million for the three months ended March 31, 2014.
 
(2) Income taxes on the reclassification adjustment for net gain on sale of securities included in net income was $48,000 for the three months ended March 31, 2015 and $26,000 for the three months ended March 31, 2014.
 



 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
FOR THE THREE MONTHS ENDED MARCH 31, 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
                            1,789               1,789  
Other comprehensive income
                                    767       767  
Share-based compensation expense
                    200                       200  
Common stock issued
    4,480,645       45       70,884                       70,929  
Warrants exercised
    2,456       -       15                       15  
Repurchase of common stock
    (5,833 )     -       (93 )                     (93 )
Exercise of stock options
    6,666       -       48                       48  
Balance at March 31, 2015
    21,387,818     $ 214     $ 218,528     $ 53,220     $ 1,285     $ 273,247  
                                                 
Balance at December 31, 2013
    16,656,279     $ 166     $ 143,322     $ 34,815     $ (3,077 )   $ 175,226  
Net income
                            2,632               2,632  
Other comprehensive income
                                    1,993       1,993  
Share-based compensation expense
                    181                       181  
Common stock repurchased and retired
    (3,936 )     -       (284 )                     (284 )
Common stock issued
    562,469       6       9,006                       9,012  
Stock options exercised
    10,165       -       100                       100  
Balance at March 31, 2014
    17,224,977     $ 172     $ 152,325     $ 37,447     $ (1,084 )   $ 188,860  

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




 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(in thousands)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2015
   
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 1,789     $ 2,632  
Adjustments to net income:
               
Depreciation and amortization expense
    610       549  
Amortization of Loan Fees and Discounts
    (357 )     -  
Provision for loan losses
    1,830       949  
Share-based compensation expense
    200       181  
Loss on sale and disposal of premises and equipment
    -       23  
Loss on sale of other real estate owned
    -       11  
Write down of other real estate owned
    40       -  
Amortization of premium/discounts on securities held for sale, net
    804       637  
Accretion of loan mark-to-market discount from acquisitions
    (371 )     (579 )
Gain on sale of investment securities available for sale
    (116 )     (62 )
Other-than-temporary impairment recovery on investment securities, net
    -       (13 )
Gain on sale of loans held for investment
    -       (548 )
Recoveries on loans
    12       37  
Principal payments from loans held for sale
    -       31  
Loss on loans held for sale
    -       180  
Deferred income tax benefit (provision)
    -       (703 )
Change in accrued expenses and other liabilities, net
    1,144       (3,916 )
Income from bank owned life insurance, net
    (279 )     (189 )
Change in accrued interest receivable and other assets, net
    (4,934 )     (372 )
Net cash provided by (used in) operating activities
    372       (1,152 )
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale and principal payments on loans held for investment
    106,409       87,580  
Decrease (increase) in undisbursed loan funds
    (39,395 )     17,651  
Purchase and origination of loans held for investment
    (236,554 )     (108,020 )
Proceeds from sale of other real estate owned
    -       423  
Principal payments on securities available for sale
    6,851       6,212  
Purchase of securities available for sale
    (40,077 )     (4,976 )
Proceeds from sale or maturity of securities available for sale
    8,771       56,081  
Investment in bank owned life insurance
    -       (2,000 )
Purchases of premises and equipment
    (525 )     (277 )
Redemption (purchase) of Federal Reserve Bank stock
    506       (6 )
Redemption (purchase) of FHLB stock
    (11,656 )     1,352  
Cash acquired (disbursed) in acquisitions, net
    2,961       (7,793 )
Net cash provided by (used in) investing activities
    (202,709 )     46,227  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease) in deposit accounts
    76,322       128,917  
Repayment of FHLB advances and other borrowings, net
    -       (176,202 )
Proceeds from FHLB advances
    193,491       -  
Proceeds from exercise of stock options
    48       100  
Warrants exercised
    15       -  
Repurchase of common stock
    (93 )     (284 )
Net cash provided by (used in) financing activities
    269,783       (47,469 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    67,446       (2,394 )
CASH AND CASH EQUIVALENTS, beginning of period
    110,925       126,813  
CASH AND CASH EQUIVALENTS, end of period
  $ 178,371     $ 124,419  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURES
               
Interest paid
  $ 3,853     $ 1,104  
Income taxes paid
    3,700       3,500  
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
    3,969       -  
Bank owned life insurance
    11,276       -  
Goodwill
    28,060       5,522  
Fixed assets
    2,134       74  
Other assets
    1,726       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
               
Investment securities available for sale purchased and not settled
  $ -     $ 557  
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
March 31, 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 March 31, 2015, December 31, 2014, and March 31, 2014, the results of its operations and comprehensive income for the three months ended March 31, 2015 and 2014 and the changes in stockholders’ equity and cash flows for the three months ended March 31, 2015 and 2014.  Operating results or comprehensive income for the three months ended March 31, 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 January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. 2014-4 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 $78.5, 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, 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 $28.1 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: 

 
   
IDBK
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       717       3,969  
Bank owned life insurance
    11,276               11,276  
Core deposit intangible
    904       1,999       2,903  
Other assets
    3,756       105       3,860  
Total assets acquired
  $ 422,378     $ (869 )   $ 421,508  
                         
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     $ (1,082 )     50,394  
Consideration paid
                    78,454  
Goodwill recognized
                  $ 28,060  


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 three months ending March 31, 2015 include the operating results of IDPK since the acquisition date.  The operating results of the Company for the three months ending March 31, 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:
 

   
Three months Ended March 31,
 
   
2015
   
2014
 
             
Net interest and other income
  $ 24,687     $ 19,715  
Net income
  $ 802     $ 3,028  
Basic earnings per share
  $ 0.04     $ 0.14  
Diluted earnings per share
  $ 0.04     $ 0.14  


Note 5 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
 

   
March 31, 2015
 
   
Amortized
 Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
Municipal bonds
  $ 103,997     $ 1,718     $ (192 )   $ 105,523  
Mortgage-backed securities
    174,281       1,097       (440 )     174,938  
Total securities available for sale
  $ 278,278     $ 2,815     $ (632 )   $ 280,461  
                                 
   
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  
                                 
   
March 31, 2014
 
   
Amortized
 Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
Municipal bonds
  $ 77,062     $ 848     $ (586 )     77,324  
Mortgage-backed securities
    126,921       65       (2,168 )     124,818  
Total securities available for sale
  $ 203,983     $ 913     $ (2,754 )   $ 202,142  


At March 31, 2015, the Company had $21.9 million in Federal Home Loan Bank (“FHLB”) stock, $5.4 million in Federal Reserve Bank (“FRB”) stock, and $3.3 million in other stock, all carried at cost.  During the three months ended March 31, 2015, the Company had net purchases of $13.5 million of FHLB stock through the FHLB stock purchase program.
 
At March 31, 2015, mortgage-backed securities (“MBS”) with an estimated par value of $59.6 million and a fair value of $61.7 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 $14.9 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.
 

   
March 31, 2015
 
   
Less than 12 months
   
12 months or Longer
   
Total
 
               
Gross
               
Gross
               
Gross
 
               
Unrealized
               
Unrealized
               
Unrealized
 
         
Fair
   
Holding
         
Fair
   
Holding
         
Fair
   
Holding
 
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
 
   
(dollars in thousands)
 
                                                       
Municipal bonds
    48     $ 20,818     $ (179 )     3     $ 1,073     $ (13 )     51     $ 21,891     $ (192 )
Mortgage-backed securities
    10       21,857       (66 )     3       15,111       (374 )     13       36,968       (440 )
Total
    58     $ 42,675     $ (245 )     6     $ 16,184     $ (387 )     64     $ 58,859     $ (632 )
                                                                         
   
December 31, 2014
   
   
Less than 12 months
   
12 months or Longer
   
Total
 
                   
Gross
                   
Gross
                   
Gross
 
                   
Unrealized
                   
Unrealized
                   
Unrealized
 
           
Fair
   
Holding
           
Fair
   
Holding
           
Fair
   
Holding
 
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
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 )
                                                                         
   
March 31, 2014
 
   
Less than 12 months
   
12 months or Longer
   
Total
 
                   
Gross
                   
Gross
                   
Gross
 
                   
Unrealized
                   
Unrealized
                   
Unrealized
 
           
Fair
   
Holding
           
Fair
   
Holding
           
Fair
   
Holding
 
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
 
   
(dollars in thousands)
 
                                                                         
Municipal bonds
    74     $ 36,765     $ (476 )     12     $ 5,046     $ (110 )     86     $ 41,811     $ (586 )
Mortgage-backed securities
    32       93,299       (1,422 )     1       12,312       (746 )     33       105,611       (2,168 )
Total
    106     $ 130,064     $ (1,898 )     13     $ 17,358     $ (856 )     119     $ 147,422     $ (2,754 )

The amortized cost and estimated fair value of investment securities available for sale at March 31, 2015, by contractual maturity are shown in the table below.

 
   
One Year
   
More than One
   
More than Five Years
   
More than
   
 
 
   
or Less
   
Year to Five Years
   
to Ten Years
   
Ten Years
   
Total
 
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
 
   
(dollars in thousands)
 
Investment securities available for sale:
                                                           
Municipal bonds
  $ 466     $ 470     $ 21,044     $ 21,076     $ 35,914     $ 36,539     $ 46,573     $ 47,438     $ 103,997     $ 105,523  
Mortgage-backed securities
    -       -       251       255       27,988       28,208       146,042       146,475       174,281       174,938  
Total investment securities available for sale
  $ 466     $ 470     $ 21,295     $ 21,331     $ 63,902     $ 64,747     $ 192,615     $ 193,913     $ 278,278     $ 280,461  


    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 March 31, 2015, the Company had accumulated other comprehensive income of $2.2 million, or $1.3 million net of tax, compared to accumulated other comprehensive loss 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:
 

   
March 31, 2015
   
December 31, 2014
   
March 31, 2014
 
   
(in thousands)
 
Business loans:
                 
Commercial and industrial
  $ 420,218     $ 428,207     $ 271,877  
Commercial owner occupied (1)
    352,351       210,995       223,848  
SBA
    49,855       28,404       11,045  
Warehouse facilities
    216,554       113,798       81,033  
Real estate loans:
                       
Commercial non-owner occupied
    452,422       359,213       333,490  
Multi-family
    397,130       262,965       223,200  
One-to-four family (2)
    116,735       122,795       141,469  
Construction
    111,704       89,682       29,857  
Land
    7,243       9,088       6,170  
Other loans
    6,641       3,298       3,480  
Total gross loans (3)
    2,130,853       1,628,445       1,325,469  
Less loans held for sale, net
    -       -       -  
Total gross loans held for investment
    2,130,853       1,628,445       1,325,469  
Deferred loan origination costs/(fees) and premiums/(discounts), net
    534       177       (97 )
Allowance for loan losses
    (13,646 )     (12,200 )     (8,685 )
Loans held for investment, net
  $ 2,117,741     $ 1,616,422     $ 1,316,687  
                         
(1) Majority secured by real estate.
                       
(2)  Includes second trust deeds.
                       
(3) Total gross loans for March 31, 2015 are net of (i) the unaccreted mark-to-market discounts on Canyon National Bank ("Canyon National") loans of $1.2 million, on Palm Desert National Bank ("Palm Desert National") loans of $1.3 million, on SDTB loans of $151,000, and on IDPK loans of $6.9 million and (ii) the mark-to-market premium on FAB loans of $28,000.
 


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 $83.9 million for secured loans and $50.4 million for unsecured loans at March 31, 2015.  At March 31, 2015, the Bank’s largest aggregate outstanding balance of loans to one borrower was $44.9 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:
 

   
March 31, 2015
 
   
Canyon National
   
Palm Desert National
   
IDPK
   
Total
 
   
(in thousands)
 
Business loans:
                       
Commercial and industrial
  $ 95     $ -     $ 601     $ 696  
Commercial owner occupied
    549       -       2,388       2,937  
Real estate loans:
                               
Commercial non-owner occupied
    965       -       1,379       2,344  
One-to-four family
    -       1       -       1  
Total purchase credit impaired
  $ 1,609     $ 1     $ 4,368     $ 5,978  


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 March 31, 2015, the Company had $6.0 million of purchased credit impaired loans, of which $1.7 million were placed on nonaccrual status.
 
The following table summarizes the accretable yield on the purchased credit impaired for the three months ended March 31, 2015:

 
   
Three Months Ended
 
   
March 31, 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
    (47 )     -       (30 )     (77 )
Disposals and other
    -       -       (4 )     (4 )
Change in accretable yield
    -       -       -       -  
Balance at the end of period
  $ 1,304     $ 52     $ 568     $ 1,924  


 
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)
 
March 31, 2015
                                         
Business loans:
                                         
Commercial and industrial
  $ 2,225     $ 1,853     $ -     $ 1,853     $ -     $ 618     $ -  
Commercial owner occupied
    438       379       -       379       -       382       7  
Real estate loans:
                                                       
Commercial non-owner occupied
    698       458       -       458       -       465       12  
One-to-four family
    254       232       -       232       -       234       5  
Totals
  $ 3,615     $ 2,922     $ -     $ 2,922     $ -     $ 1,699     $ 24  
                                                         
                   
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)
 
March 31, 2014
                                                       
Business loans:
                                                       
Commercial and industrial
  $ 67     $ 31     $ -     $ 31     $ -     $ 10     $ -  
Commercial owner occupied
    870       718       -       718       -       738       -  
SBA
    246       14       -       14       -       14       9  
Real estate loans:
                                                       
Commercial non-owner occupied
    1,894       1,327       -       1,327       -       1,093       17  
One-to-four family
    639       593       274       319       104       602       17  
Totals
  $ 3,716     $ 2,683     $ 274     $ 2,409     $ 104     $ 2,457     $ 43  

 
  
    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:
 

   
March 31, 2015
   
December 31, 2014
   
March 31, 2014
 
   
(in thousands)
 
                   
Nonaccruing loans
  $ 2,742     $ 1,290     $ 2,497  
Accruing loans
    180       182       186  
Total impaired loans
  $ 2,922     $ 1,472     $ 2,683  


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 $2.7 million at March 31, 2015, $1.3 million at December 31, 2014, and $2.5 million at March 31, 2014.  The Company had no loans 90 days or more past due and still accruing at March 31, 2015, December 31, 2014 or March 31, 2014.
 
The Company had no new TDRs during the quarter ended March 31, 2015 and March 31, 2014 and had one immaterial TDR outstanding related to a U.S. Small Business Administration (“SBA”) loan.
 
Concentration of Credit Risk
 
As of March 31, 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
 
         
Special
         
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
March 31, 2015
 
(in thousands)
 
Business loans:
                       
Commercial and industrial
  $ 410,328     $ 1,250     $ 8,640     $ 420,218  
Commercial owner occupied
    340,685       -       11,666       352,351  
SBA
    49,855       -       -       49,855  
Warehouse facilities
    216,554       -       -       216,554  
Real estate loans:
                               
Commercial non-owner occupied
    446,900       -       5,522       452,422  
Multi-family
    391,690       1,954       3,486       397,130  
One-to-four family
    115,780       -       955       116,735  
Construction
    111,469       -       235       111,704  
Land
    7,243       -       -       7,243  
Other loans
    6,641       -       -       6,641  
Totals
  $ 2,097,145     $ 3,204     $ 30,504     $ 2,130,853  
                                 
   
Credit Risk Grades
 
           
Special
           
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
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
 
           
Special
           
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
March 31, 2014
 
(in thousands)
 
Business loans:
                               
Commercial and industrial
  $ 270,024     $ -     $ 1,853     $ 271,877  
Commercial owner occupied
    212,663       272       10,913       223,848  
SBA
    11,031       -       14       11,045  
Warehouse facilities
    81,033       -       -       81,033  
Real estate loans:
                               
Commercial non-owner occupied
    328,645       -       4,845       333,490  
Multi-family
    222,178       508       514       223,200  
One-to-four family
    140,453       -       1,016       141,469  
Construction
    29,857       -       -       29,857  
Land
    6,170       -       -       6,170  
Other loans
    3,478       -       2       3,480  
Totals
  $ 1,305,532     $ 780     $ 19,157     $ 1,325,469  

 
 
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
 
March 31, 2015
 
(in thousands)
 
Business loans:
                                       
Commercial and industrial
  $ 417,894     $ 146     $ -     $ 2,178   $ 420,218     $ 2,455  
Commercial owner occupied
    351,600       349       375       27     352,351       527  
SBA
    49,855       -       -       -     49,855       -  
Warehouse facilities
    216,554       -       -       -     216,554       -  
Real estate loans:
                                             
Commercial non-owner occupied
    452,422       -       -       -     452,422       1,602  
Multi-family
    397,130       -       -       -     397,130       -  
One-to-four family
    116,533       149       -       53     116,735       79  
Construction
    111,704       -       -       -     111,704       -  
Land
    7,243       -       -       -     7,243       -  
Other loans
    6,640       1       -       -     6,641       -  
Totals
  $ 2,127,575     $ 645     $ 375     $ 2,258   $ 2,130,853     $ 4,663  
                                               
           
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
 
March 31, 2014
 
(in thousands)
 
Business loans:
                                             
Commercial and industrial
  $ 271,845     $ -     $ 32     $ -   $ 271,877     $ 31  
Commercial owner occupied
    223,402       -       -       446     223,848       864  
SBA
    10,985       46       -       14     11,045       14  
Warehouse facilities
    81,033       -       -       -     81,033       -  
Real estate loans:
                                             
Commercial non-owner occupied
    332,572       -       -       918     333,490       1,327  
Multi-family
    223,200       -       -       -     223,200       -  
One-to-four family
    141,348       72       -       49     141,469       438  
Construction
    29,857       -       -       -     29,857       -  
Land
    6,170       -       -       -     6,170       -  
Other loans
    3,480       -       -       -     3,480       -  
Totals
  $ 1,323,892     $ 118     $ 32     $ 1,427   $ 1,325,469     $ 2,674  


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 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-1 through 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 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-1 through 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 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-1 through 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-1 through 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 three 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
    (396 )     -       -       -       -       -       -       -       -       -       (396 )
Recoveries
    12       -       -       -       -       -       -       -       -       -       12  
Provisions for (reduction in) loan losses
    1,116       96       (21 )     343       124       243       (168 )     122       (30 )     5       1,830  
Balance, March 31, 2015
  $ 4,932     $ 1,853     $ 547     $ 889     $ 2,131     $ 1,303     $ 674     $ 1,210     $ 78     $ 29     $ 13,646  
                                                                                         
Amount of allowance attributed to:
                                                                                       
Specifically evaluated impaired loans
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
General portfolio allocation
    4,932       1,853       547       889       2,131       1,303       674       1,210       78       29       13,646  
                                                                                         
Loans individually evaluated for impairment
    1,853       379       -       -       458       -       232       -       -       -       2,922  
Specific reserves to total loans individually evaluated for impairment
    0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %
Loans collectively evaluated for impairment
  $ 418,365     $ 351,972     $ 49,855     $ 216,554     $ 451,964     $ 397,130     $ 116,503     $ 111,704     $ 7,243     $ 6,641     $ 2,127,931  
General reserves to total loans collectively evaluated for impairment
    1.18 %     0.53 %     1.10 %     0.41 %     0.47 %     0.33 %     0.58 %     1.08 %     1.08 %     0.44 %     0.64 %
                                                                                         
Total gross loans
  $ 420,218     $ 352,351     $ 49,855     $ 216,554     $ 452,422     $ 397,130     $ 116,735     $ 111,704     $ 7,243     $ 6,641     $ 2,130,853  
Total allowance to gross loans
    1.17 %     0.53 %     1.10 %     0.41 %     0.47 %     0.33 %     0.58 %     1.08 %     1.08 %     0.44 %     0.64 %
                                                                                         
                                                                                         
   
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
    5       -       2       -       -       -       30       -       -       -       37  
Provisions for (reduction in) loan losses
    516       (64 )     26       (16 )     564       (12 )     (198 )     187       (46 )     (8 )     949  
Balance, March 31, 2014
  $ 2,365     $ 1,754     $ 179     $ 376     $ 1,857     $ 805     $ 919     $ 323     $ 81     $ 26     $ 8,685  
                                                                                         
Amount of allowance attributed to:
                                                                                       
Specifically evaluated impaired loans
  $ -     $ -     $ -     $ -     $ -     $ -     $ 104     $ -     $ -     $ -     $ 104  
General portfolio allocation
    2,365       1,754       179       376       1,857       805       815       323       81       26       8,581  
                                                                                         
Loans individually evaluated for impairment
    31       718       14       -       1,327       -       593       -       -       -       2,683  
Specific reserves to total loans individually evaluated for impairment
    0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     17.54 %     0.00 %     0.00 %     0.00 %     3.88 %
Loans collectively evaluated for impairment
  $ 271,846     $ 223,130     $ 11,031     $ 81,033     $ 332,163     $ 223,200     $ 140,876     $ 29,857     $ 6,170     $ 3,480     $ 1,322,786  
General reserves to total loans collectively evaluated for impairment
    0.87 %     0.79 %     1.62 %     0.46 %     0.56 %     0.36 %     0.58 %     1.08 %     1.31 %     0.75 %     0.65 %
                                                                                         
Total gross loans
  $ 271,877     $ 223,848     $ 11,045     $ 81,033     $ 333,490     $ 223,200     $ 141,469     $ 29,857     $ 6,170     $ 3,480     $ 1,325,469  
Total allowance to gross loans
    0.87 %     0.78 %     1.62 %     0.46 %     0.56 %     0.36 %     0.65 %     1.08 %     1.31 %     0.75 %     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 $40 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 $10.0 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 3.00% per annum as of March 31, 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
 
March 31,
 
2015
2014
     
Stock options excluded
        967,050
        700,598

The following tables set forth the Company’s unaudited earnings per share calculations for the periods indicated:

 
   
Three Months Ended March 31,
 
   
2015
   
2014
 
   
Net
         
Per Share
   
Net
         
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
   
(dollars in thousands, except per share data)
 
Net income
  $ 1,789                 $ 2,632              
Basic income available to common stockholders
    1,789       20,091,924     $ 0.09       2,632       17,041,594     $ 0.15  
Effect of dilutive stock options and warrants
    -       290,908               -       334,407          
Diluted income available to common stockholders plus assumed conversions
  $ 1,789       20,382,832     $ 0.09     $ 2,632       17,376,001     $ 0.15  

 
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 March 31, 2015, December 31, 2014 and March 31, 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 March 31, 2015
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                             
Cash and cash equivalents
  $ 178,371     $ 178,371     $ -     $ -     $ 178,371  
Securities available for sale
    280,461       -       280,461       -       280,461  
FHLB, Federal Reserve Bank, and other stock, at cost
    30,586       30,586       -       -       30,586  
Loans held for investment, net
    2,117,741       -       -       2,205,161       2,205,161  
Accrued interest receivable
    8,769       8,769       -       -       8,769  
Other real estate owned
    997       -       -       997       997  
                                         
Liabilities:
                                       
Deposit accounts
    2,043,166       1,576,056       479,204       -       2,055,260  
FHLB advances
    300,000       300,031       -       -       300,031  
Other borrowings
    43,434       -       45,084       -       45,084  
Subordinated debentures
    70,310       -       69,501       -       69,501  
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
  $ 403,084     $ -     $ 40,308     $ -     $ 40,308  
                                         
   
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       -       -       1037       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 March 31, 2014
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                                       
Cash and cash equivalents
  $ 124,419     $ 124,419     $ -     $ -     $ 124,419  
Securities available for sale
    202,142       -       202,142       -       202,142  
FHLB, Federal Reserve Bank, and other stock, at cost
    14,104       14,104       -       -       14,104  
Loans held for investment, net
    1,316,687       -       -       1,392,661       1,392,661  
Accrued interest receivable
    5,865       5,865       -       -       5,865  
Other real estate owned
    752       -       -       752       752  
                                         
Liabilities:
                                       
Deposit accounts
    1,435,203       1,110,877       354,437       -       1,465,314  
FHLB advances
    50,000       50,000       -       -       50,000  
Other borrowings
    45,506       -       47,708       -       47,708  
Subordinated debentures
    10,310       -       4,649       -       4,649  
Accrued interest payable
    168       168       -       -       168  
                                         
   
Notional Amount
   
Level 1
   
Level 2
   
Level 3
   
Cost to Cede
or Assume
 
Off-balance sheet commitments and standby letters of credit
  $ 246,014     $ -     $ 24,601     $ -     $ 24,601  


 
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 March 31, 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:
 

   
March 31, 2015
 
   
Fair Value Measurement Using
       
   
Level 1
   
Level 2
   
Level 3
   
Securities at
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
Municipal bonds
  $ -     $ 105,523     $ -     $ 105,523  
Mortgage-backed securities
    -       174,938       -       174,938  
Total securities available for sale
  $ -     $ 280,461     $ -     $ 280,461  
                                 
   
March 31, 2014
 
   
Fair Value Measurement Using
         
   
Level 1
   
Level 2
   
Level 3
   
Securities at
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
Municipal bonds
  $ -     $ 77,324     $ -       77,324  
Mortgage-backed securities
    -       124,818       -       124,818  
Total securities available for sale
  $ -     $ 202,142     $ -     $ 202,142  

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:
 

   
March 31, 2015
 
   
Fair Value Measurement Using
       
   
Level 1
   
Level 2
   
Level 3
   
Assets at
Fair Value
 
   
(in thousands)
 
Assets
                       
Collateral dependent impaired loans
  $ -     $ -     $ 2,742     $ 2,742  
Other real estate owned
    -       -       997       997  
Total assets
  $ -     $ -     $ 3,739     $ 3,739  
                                 
   
March 31, 2014
 
   
Fair Value Measurement Using
         
   
Level 1
   
Level 2
   
Level 3
   
Assets at
Fair Value
 
   
(in thousands)
 
Assets
                               
Collateral dependent impaired loans
  $ -     $ -     $ 1,730     $ 1,730  
Other real estate owned
    -       -       752       752  
Total assets
  $ -     $ -     $ 2,482     $ 2,482  


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:
 
 

   
March 31, 2015
           
Range
   
Fair Value
Valuation Techniques
 
Rate
   Maturity (years)
Unobservable Inputs
Collateral dependent impaired loans:
               
Business loans:
                   
Commercial and industrial
  $ 1,853  
Collateral valuation
  6.70%   8   0 - 10% 
Commercial owner occupied
    379  
Collateral valuation
  6.75%   7   0 - 10%
Real estate loans:
                     
Commercial non-owner occupied
    458  
Collateral valuation
  7.00%   12   0 - 15%
One-to-four family
    52  
Collateral valuation
  8.00 - 15.00%   5 - 16    0 - 10%
Total collateral dependent impaired loans
  $ 2,742                
                       
Other real estate owned
                     
Land
  $ 711  
Collateral valuation
  --   --   0 - 10% 
One-to-four family
    286  
Collateral valuation
  --   --   0 - 10% 
Total other real estate owned
  $ 997                
                       
                       
   
March 31, 2014
             
Range
   
Fair Value
Valuation Techniques
 
Rate
    Maturity (years)
Unobservable Inputs
Collateral dependent impaired loans:
               
Business loans:
                     
Commercial and industrial
  $ 31  
Collateral valuation
  6.00%   3   0 - 10% 
Commercial owner occupied
    718  
Collateral valuation
  7.00 - 11.75%   3 - 8    0 - 10%
SBA
    14  
Collateral valuation
  6.00%   7   0 - 20%
Real estate loans:
                     
Commercial non-owner occupied
    918  
Collateral valuation
  6.13 - 7.00%   12-13   0 - 15%
One-to-four family
    49  
Collateral valuation
  11.10 - 15.00%   6 - 15    0 - 10%
Total collateral dependent impaired loans
  $ 1,730                
                       
Other real estate owned
                     
Land
  $ 752  
Collateral valuation
  --   --    
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 months ended March 31, 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 March 31, 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 $449.6 million, including:
 
·  
$332.9 million of gross loans;
 
·  
$56.1 million in investment securities;
 
·  
$28.1 million in goodwill;
 
·  
$11.3 million in bank owned life insurance;
 
·  
$10.5 million of cash and cash equivalents;
 
·  
$7.8 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 $70.9 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:
 
·  
$270.0 million in deposit transaction accounts;
 
·  
$66.0 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.
 
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 $9.0 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.
 
 
RESULTS OF OPERATIONS
 
In the first quarter of 2015, we reported net income of $1.8 million, or $0.09 per diluted share, compared with net income for the first quarter of 2014 of $2.6 million or $0.15 per diluted share.  For the three months ended March 31, 2015, the Company’s return on average assets was 0.29% and return on average tangible common equity was 4.04%, compared with a return on average assets of 0.64% and a return on average tangible common equity of 7.22% for the three months ended March 31, 2014.
 
The Company’s first quarter 2015 financial results included merger-related expenses of $4.0 million associated with the IDPK acquisition. The Company’s first quarter 2014 financial results included merger-related expenses of $626,000 associated with the acquisition of IFH. Excluding non-recurring merger-related expenses, the Company reported adjusted net income of $4.3 million, or $0.21 per share on a diluted basis, for the first quarter of 2015, compared with $3.0 million, or $0.17 per share on a diluted basis, for the first quarter of 2014.
 
Excluding the non-recurring merger-related expenses, the Company’s adjusted return on average assets was 0.70% and adjusted return on average tangible common equity was 9.24% for the three months ended March 31, 2015, compared with an adjusted return on average assets of 0.73% and an adjusted return on average tangible common equity of 8.23% for the three months ended March 31, 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.  The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities principally affect net interest income.
 
Net interest income for the first quarter of 2015 increased $6.5 million or 39.0% compared to the first quarter of 2014.  The increase was primarily related to an increase in interest-earning assets of $779.1 million, primarily related to our organic loan growth since the end of the first quarter of 2014 and our acquisition of IDPK during the first quarter of 2015.  The increase was partially offset by a lower net interest margin, which decreased 31 basis points from the first quarter of 2014 to the first quarter of 2015.  The decrease in the net interest margin was primarily related to a 15 basis point decrease in the yield of interest-earning assets and 20 basis point increase in the cost of interest-bearing liabilities.  The decrease in yield on interest-earning assets was primarily related to a higher mix of lower yielding cash and cash equivalents, partially offset by an increase in yield of loans by 2 basis points.  The increase in cost of interest-bearing liabilities was primarily associated with the issuance of $60.0 million of subordinated debt and $50 million of fixed-term FHLB borrowings in the third quarter of 2014 and an increase in our cost of deposits of 2 basis points.
 
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
   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2015
   
December 31, 2014
   
March 31, 2014
 
   
Average
         
Average
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
 
Assets
 
(dollars in thousands)
 
Interest-earning assets:
                                                     
Cash and cash equivalents
  $ 224,913     $ 129       0.23 %   $ 103,926     $ 50       0.19 %   $ 70,341     $ 27       0.16 %
Federal funds sold
    275       -       -       275       -       -       192       -       -  
Investment securities
    273,162       1,428       2.09       237,347       1,308       2.20       243,847       1,410       2.31  
Loans receivable, net (1)
    1,849,553       24,513       5.38       1,558,826       20,679       5.26       1,254,407       16,585       5.36  
Total interest-earning assets
    2,347,903       26,070       4.50 %     1,900,374       22,037       4.60 %     1,568,787       18,022       4.65 %
Noninterest-earning assets
    114,132                       89,322                       87,095                  
Total assets
  $ 2,462,035                     $ 1,989,696                     $ 1,655,882                  
Liabilities and Equity
                                                                       
Interest-bearing deposits:
                                                                       
Interest checking
  $ 145,813     $ 45       0.13 %   $ 129,773     $ 43       0.13 %   $ 137,658     $ 38       0.11 %
Money market
    695,369       562       0.33       506,850       406       0.32       435,188       314       0.29  
Savings
    87,439       36       0.17       75,182       28       0.15       75,904       28       0.15  
Time
    472,534       963       0.83       438,711       971       0.88       329,026       689       0.85  
Total interest-bearing deposits
    1,401,155       1,606       0.46       1,150,516       1,448       0.50       977,776       1,069       0.44  
FHLB advances and other borrowings
    201,700       375       0.75       103,394       332       1.27       85,019       243       1.16  
Subordinated debentures
    70,310       971       5.60       70,310       990       5.59       10,310       75       2.95  
Total borrowings
    272,010       1,346       2.01       173,704       1,322       3.02       95,329       318       1.35  
Total interest-bearing liabilities
    1,673,165       2,952       0.72 %     1,324,220       2,770       0.83 %     1,073,105       1,387       0.52 %
Noninterest-bearing deposits
    523,859                       447,315                       389,513                  
Other liabilities
    23,367                       20,541                       10,951                  
Total liabilities
    2,220,391                       1,792,076                       1,473,569                  
Stockholders' equity
    241,644                       197,620                       182,313                  
Total liabilities and equity
  $ 2,462,035                     $ 1,989,696                     $ 1,655,882                  
Net interest income
          $ 23,118                     $ 19,267                     $ 16,635          
Net interest rate spread (2)
              3.78 %                     3.77 %                     4.13 %
Net interest margin (3)
                    3.99 %                     4.02 %                     4.30 %
Ratio of interest-earning assets to interest-bearing liabilities
      140.33 %                     143.51 %                     146.19 %
                                                                         
(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 March 31, 2015
 
   
Compared to
 
   
Three Months Ended March 31, 2014
 
   
Increase (decrease) due to
 
                   
   
Rate
   
Volume
   
Net
 
   
(in thousands)
 
Interest-earning assets
                 
Cash and cash equivalents
  $ 20     $ 82     $ 102  
Investment securities
    (142 )     160       18  
Loans receivable, net
    31       7,897       7,928  
Total interest-earning assets
  $ (91 )   $ 8,139     $ 8,048  
Interest-bearing liabilities
                       
Interest checking
  $ 4     $ 3     $ 7  
Money market
    37       211       248  
Savings
    4       4       8  
Time
    (17 )     291       274  
FHLB advances and other borrowings
    (109 )     241       132  
Subordinated debentures
    119       777       896  
Total interest-bearing liabilities
  $ 38     $ 1,527     $ 1,565  
Change in net interest income
  $ (129 )   $ 6,612     $ 6,483  


Provision for Loan Losses
 
We recorded a $1.8 million provision for loan losses during the first quarter of 2015, up from $949,000 from the first quarter of 2014.  The increase in the provision for loan losses was mainly attributable to the organic growth in our loan portfolio.  Net loan charge-offs amounted to $384,000 in the first quarter of 2015, compared to net loan charge-offs of $464,000 from the first quarter 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 first quarter of 2015, there were no charge-offs associated with purchased credit impaired loans.
 
Our Loss Mitigation Department continues collection efforts on loans previously written down and/or charged-off to maximize potential recoveries.  See “Allowance for Loan Losses” discussed below in this Quarterly Report on Form 10-Q.
 
Noninterest Income
 
Noninterest income totaled $2.0 million for the first quarter of 2015, down $26,000 or 1.3% from the first quarter of 2014.  The decrease was primarily related to a decrease in gain on sale of loans of $548,000 because there were no loan sales in the current quarter, partially offset by higher other income of $308,000 and deposit fees of $128,000, primarily related to our growth.  The absence of loan gains during the first quarter of 2015 resulted from a decision to hold SBA loans for a slightly longer period of time to optimize their overall return.
 
Noninterest Expense
 
Noninterest expense totaled $20.5 million for the first quarter of 2015, up $6.9 million or 51.2%, compared with the first quarter of 2014.  The increase in expense was primarily related to higher non-recurring merger-related expense of $3.4 million, compensation and benefits costs of $2.6 million, other expense of $469,000 and marketing expense of $427,000, primarily related to our organic growth and acquisition of IDPK. Partially offsetting these increases was lower data processing and communications expense of $429,000 primarily related to lower negotiated core system provider costs.
 
The Company’s efficiency ratio was 64.63% for the first quarter of 2015, compared to 67.96% for the first quarter of 2014.
 
Income Taxes
 
For the first quarter of 2015, our effective tax rate was 37.1%, compared with 37.3% for the first quarter of 2014.
 
FINANCIAL CONDITION
 
At March 31, 2015, assets totaled $2.8 billion, up $714.1 million or 35.0% from December 31, 2014 and $1.0 billion or 57.7% from March 31, 2014.
 
The increases were principally impacted by the acquisition of IDPK, which at closing added $449.6 million in assets including $332.9 million in loans, $56.1 million in investment securities, $28.1 million in goodwill and $11.3 million in bank owned life insurance.  Additionally, organic loan growth, an increase in cash and cash equivalents and investment security and FHLB stock purchases contributed to the increase in assets during the first quarter of 2015.  Cash and cash equivalents increased $67.4 million during the first quarter of 2015 as management opted to increase liquidity temporarily by increasing FHLB advances and investing the proceeds in short-term holdings.  This was done in consideration of the largest loan pipeline in the Bank’s history, increased activity on the Bank’s warehouse lines of credit, the announcement of the closure and consolidation of three IDPK branches, and the intentional run-off of a large amount of higher-cost certificates of deposit that matured during the quarter.  Management does not expect to operate the Bank at the high levels of cash balances going forward.
 
The increase in assets since the end of the first quarter of 2014 was primarily related to organic and acquisitive loan growth of $806.0 million, investment securities and FHLB stock growth of $94.8 million and an increase in cash and cash equivalents of $54.0 million, goodwill of $28.1 million and bank owned life insurance of $12.1 million.
 
Loans
 
Net loans held for investment totaled $2.1 billion at March 31, 2015, an increase of $502.8 million or 30.9% from December 31, 2014, and an increase of $806.0 million or 60.8% from March 31, 2014.
 
The increase during the first quarter of 2015 was primarily related to loans acquired from IDPK of $332.9 million at acquisition date, as well as our organic loan originations.  The increase included increases in multifamily of $134.2 million, commercial owner occupied loans of $141.4 million, warehouse facilities of $102.8 million, commercial non-owner occupied of $93.2 million, construction of $22.0 million and SBA of $21.5 million.
 
The increase in loans from March 31, 2014 included loans acquired from IDPK as well as organic loan growth in real estate loans of $354.2 million, C&I loans of $148.3 million, warehouse facilities loans of $135.5 million, commercial owner occupied loans of $128.5 million and SBA loans of $38.8 million.
 
The total end of period weighted average interest rate on loans at March 31, 2015 was 4.90%, compared to 4.91% at December 31, 2014 and 5.00% at March 31, 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:
 

   
March 31, 2015
   
December 31, 2014
   
March 31, 2014
 
               
Weighted
               
Weighted
               
Weighted
 
         
Percent
   
Average
         
Percent
   
Average
         
Percent
   
Average
 
   
Amount
   
of Total
   
Interest Rate
   
Amount
   
of Total
   
Interest Rate
   
Amount
   
of Total
   
Interest Rate
 
   
(dollars in thousands)
 
Business loans:
                                                     
Commercial and industrial
  $ 420,218       19.7 %     5.24 %   $ 428,207       26.3 %     5.25 %   $ 271,877       20.5 %     5.33 %
Commercial owner occupied (1)
    352,351       16.5 %     5.28 %     210,995       13.0 %     5.09 %     223,848       16.9 %     5.39 %
SBA
    49,855       2.3 %     5.71 %     28,404       1.7 %     5.63 %     11,045       0.8 %     5.85 %
Warehouse facilities
    216,554       10.2 %     3.97 %     113,798       7.0 %     4.21 %     81,033       6.1 %     3.91 %
Real estate loans:
                                                                       
Commercial non-owner occupied
    452,422       21.2 %     4.96 %     359,213       22.1 %     4.97 %     333,490       25.2 %     5.33 %
Multi-family
    397,130       18.6 %     4.60 %     262,965       16.1 %     4.55 %     223,200       16.8 %     4.73 %
One-to-four family (2)
    116,735       5.5 %     4.35 %     122,795       7.5 %     4.35 %     141,469       10.7 %     4.41 %
Construction
    111,704       5.2 %     5.16 %     89,682       5.5 %     5.15 %     29,857       2.2 %     5.19 %
Land
    7,243       0.3 %     5.07 %     9,088       0.6 %     4.78 %     6,170       0.5 %     4.59 %
Other loans
    6,641       0.5 %     5.81 %     3,298       0.2 %     6.06 %     3,480       0.3 %     5.78 %
Total gross loans (3)
    2,130,853       100.0 %     4.90 %     1,628,445       100.0 %     4.91 %     1,325,469       100.0 %     5.00 %
Less loans held for sale
    -                       -                       -                  
Total gross loans held for investment
    2,130,853                       1,628,445                       1,325,469                  
Deferred loan origination costs/(fees) and premiums/(discounts), net
    534                       177                       (97 )                
Allowance for loan losses
    (13,646 )                     (12,200 )                     (8,685 )                
Loans held for investment, net
  $ 2,117,741                     $ 1,616,422                     $ 1,316,687                  
                                                                         
(1) Majority secured by real estate.
   
(2) Includes second trust deeds.
   
(3) Total gross loans for March 31, 2015 are net of (i) the unaccreted mark-to-market discounts on Canyon National loans of $1.2 million, on Palm Desert National loans of $1.3 million, on SDTB loans of $151,000, and on IB loans of $6.9 million and (ii) the mark-to-market premium on FAB loans of $28,000.
 

 
Loan activity during the first quarter of 2015 included loans acquired from IDPK, organic loan originations of $206.3 million and loan purchases of $30.3 million and a decrease in undisbursed loan funds of $39.4 million, partially offset by loan repayments of $106.4 million. During the first quarter of 2015, our organic loan originations were well diversified across loan type and included $46.4 million in warehouse facilities loans, $43.5 million in construction loans, $38.9 million in C&I loans, including $16.4 million in franchise loans, $24.4 million in multifamily loans, $23.4 million in commercial owner occupied loans, $20.4 million in SBA loans and $8.6 million in commercial non-owner occupied loans.
 
The following table sets forth loan originations, purchases, sales and principal repayments relating to our gross loans for the periods indicated:

 
   
Three Months Ended
 
   
March 31, 2015
   
March 31, 2014
 
   
(in thousands)
 
Beginning balance gross loans
  $ 1,628,445     $ 1,243,252  
Loans originated:
               
Business loans:
               
Commercial and industrial
    38,906       46,786  
Commercial owner occupied (1)
    23,380       1,800  
SBA
    20,405       5,199  
Warehouse facilities
    46,380       1,150  
Real estate loans:
               
Commercial non-owner occupied
    8,589       22,806  
Multi-family
    24,366       7,574  
One-to-four family (2)
    762       450  
Construction loans
    43,466       20,428  
Other loans
    12       12  
Total loans originated
    206,266       106,205  
Loans purchased/acquired:
               
Business loans:
               
Commercial and industrial
    53,840       69,543  
Commercial owner occupied
    51,608       11,105  
SBA
    5,431       -  
Real estate loans:
               
Commercial non-owner occupied
    126,410       -  
Multi-family
    118,802       -  
One-to-four family
    2,158       -  
Construction
    2,024       -  
Land
    880       -  
Other loans
    2,028       -  
Total loans purchased
    363,181       80,648  
Total loan production
    569,447       186,853  
Principal repayments
    (106,409 )     (77,555 )
Sales of loans
    -       (9,508 )
Change in undisbursed loan funds, net
    39,395       (17,651 )
Charge-offs
    (396 )     (501 )
Change in mark-to-market discounts from acquisitions
    371       579  
Net increase in gross loans
    502,408       82,217  
Ending balance gross loans
  $ 2,130,853     $ 1,325,469  
                 
(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:
 

 
   
March 31, 2015
 
               
Weighted
   
Weighted
 
   
Number
         
Average
   
Average Months
 
Periods to Repricing
 
of Loans
   
Amount
   
Interest Rate
   
to Reprice
 
   
(dollars in thousands)
 
1 Year and less
    1,838     $ 1,015,478       4.95 %     10.05  
Over 1 Year to 3 Years
    212       237,457       4.55 %     27.23  
Over 3 Years to 5 Years
    348       443,794       4.76 %     49.21  
Over 5 Years to 7 Years
    57       125,913       4.56 %     66.63  
Over 7 Years to 10 Years
    20       21,533       4.82 %     106.84  
Total adjustable
    2,475       1,844,175       4.83 %     23.06  
Fixed
    895       286,678       5.45 %        
Total
    3,370     $ 2,130,853       4.90 %        

 
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 March 31, 2015, loans delinquent 30 or more days as a percentage of total gross loans was 0.15%, up from 0.01% at December 31, 2014 and 0.12% at March 31, 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 March 31, 2015
                                               
Business loans:
                                               
Commercial and industrial
    1     $ 146       -     $ -       3     $ 2,178       4     $ 2,324  
Commercial owner occupied
    1       349       1       375       1       27       3       751  
Real estate loans:
                                                               
One-to-four family
    3       149       -       -       3       53       6       202  
Other
    1       1       -       -       -       -       1       1  
Total
    6     $ 645       1     $ 375       7     $ 2,258       14     $ 3,278  
Delinquent loans to total gross loans
            0.03 %             0.02 %             0.11 %             0.15 %
                                                                 
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
            0.00 %             0.00 %             0.00 %             0.01 %
                                                                 
At  March 31, 2014
                                                               
Business loans:
                                                               
Commercial and industrial
    -     $ -       1     $ 32       -     $ -       1     $ 32  
Commercial owner occupied
    -       -       -       -       2       446       2       446  
SBA
    1       46       -       -       1       14       2       60  
Real estate loans:
                                                               
Commercial non-owner occupied
    -       -       -       -       2       918       2       918  
One-to-four family
    3       72       -       -       3       49       6       121  
Total
    4     $ 118       1     $ 32       8     $ 1,427       13     $ 1,577  
Delinquent loans to total gross loans
            0.01 %             0.00 %             0.11 %             0.12 %
                                                                 
(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 March 31, 2015, our ALLL was $13.6 million, up $1.4 million from December 31, 2014 and $5.0 million from March 31, 2014.  The increase in the allowance for loan losses at March 31, 2015 was mainly attributable to the growth in our loan portfolio. At March 31, 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:
 

   
March 31, 2015
   
December 31, 2014
   
March 31, 2014
 
         
Allowance
   
% of Loans
         
Allowance
   
% of Loans
         
Allowance
   
% of Loans
 
Balance at End of
       
as a % of
   
in Category to
         
as a % of
   
in Category to
         
as a % of
   
in Category to
 
Period Applicable to
 
Amount
   
Category Total
   
Total Loans
   
Amount
   
Category Total
   
Total Loans
   
Amount
   
Category Total
   
Total Loans
 
   
(dollars in thousands)
 
Business loans:
                                                     
Commercial and industrial
  $ 4,932       1.17 %     19.7 %   $ 4,200       0.98 %     26.3 %   $ 2,365       0.87 %     20.5 %
Commercial owner occupied
    1,853       0.53 %     16.5 %     1,757       0.83 %     13.0 %     1,754       0.78 %     16.9 %
SBA
    547       1.10 %     2.3 %     568       2.00 %     1.7 %     179       1.62 %     0.8 %
Warehouse facilities
    889       0.41 %     10.2 %     546       0.48 %     7.0 %     376       0.46 %     6.1 %
Real estate loans:
                                                                       
Commercial non-owner occupied
    2,131       0.47 %     21.2 %     2,007       0.56 %     22.1 %     1,857       0.56 %     25.2 %
Multi-family
    1,303       0.33 %     18.6 %     1,060       0.40 %     16.1 %     805       0.36 %     16.8 %
One-to-four family
    674       0.58 %     5.5 %     842       0.69 %     7.5 %     919       0.65 %     10.7 %
Construction
    1,210       1.08 %     5.2 %     1,088       1.21 %     5.5 %     323       1.08 %     2.2 %
Land
    78       1.08 %     0.3 %     108       1.19 %     0.6 %     81       1.31 %     0.5 %
Other Loans
    29       0.44 %     0.5 %     24       0.73 %     0.2 %     26       0.75 %     0.3 %
Total
  $ 13,646       0.64 %     100.0 %   $ 12,200       0.75 %     100.0 %   $ 8,685       0.66 %     100.0 %


The ALLL as a percent of nonaccrual loans was 291.3% at March 31, 2015, down from 844.9% at December 31, 2014, and 324.8% at March 31, 2014.  At March 31, 2015, the ratio of ALLL to total gross loans was 0.64%, down from 0.75% at December 31, 2014 and 0.66% at March 31, 2014.  The decrease in this ratio at March 31, 2015 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 0.90% at March 31, 2015, up from 0.87% at December 31, 2014 and 0.88% at March 31, 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
 
   
March 31,
 
   
2015
   
2014
 
   
(dollars in thousands)
 
Balance, beginning of period
  $ 12,200     $ 8,200  
Provision for loan losses
    1,830       949  
Charge-offs:
               
Business loans:
               
Commercial and industrial
    (396 )     (124 )
Real estate:
               
Commercial non-owner occupied
    -       (365 )
One-to-four family
    -       (12 )
Total charge-offs
    (396 )     (501 )
Recoveries :
               
Business loans:
               
Commercial and industrial
    12       5  
SBA
    -       2  
Real estate:
               
One-to-four family
    -       30  
Total recoveries
    12       37  
Net loan charge-offs
    (384 )     (464 )
Balance at end of period
  $ 13,646     $ 8,685  
                 
Ratios:
               
Net charge-offs (recoveries) to average total loans, net
    0.08 %     0.15 %
Allowance for loan losses to gross loans at end of period
    0.64 %     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 $280.5 million at March 31, 2015, up $78.8 million or 39.1% from December 31, 2014, and $78.3 million or 38.7% from March 31, 2014.  The increase in investment securities during the first quarter of 2015 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 $40.1 million, partially offset by sales of $8.7 million and principal paydowns of $6.9 million.  The increase in investment securities since March 31, 2014 was primarily due to purchase and acquired securities of $223.8 million, partially offset by sales of $117.4 million and principal pay downs of $29.3 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:
 

   
March 31, 2015
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
Municipal bonds
  $ 103,997     $ 1,718     $ (192 )   $ 105,523  
Mortgage-backed securities
    174,281       1,097       (440 )     174,938  
Total securities available for sale
  $ 278,278     $ 2,815     $ (632 )   $ 280,461  
                                 
   
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  
                                 
   
March 31, 2014
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
Municipal bonds
  $ 77,062     $ 848     $ (586 )     77,324  
Mortgage-backed securities
    126,921       65       (2,168 )     124,818  
Total securities available for sale
  $ 203,983     $ 913     $ (2,754 )   $ 202,142  

 
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:
 

   
March 31, 2015
 
   
One Year
   
More than One
   
More than Five Years
   
More than
   
 
 
   
or Less
   
to Five Years
   
to Ten Years
   
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
  $ 470       1.14 %   $ 21,076       1.41 %   $ 36,539       1.96 %   $ 47,438       2.20 %   $ 105,523       1.95 %
Mortgage-backed securities
    -       0.00 %     255       2.05 %     28,208       1.72 %     146,475       1.91 %     174,938       1.88 %
Total investment securities available for sale
    470       1.14 %     21,331       1.42 %     64,747       1.86 %     193,913       1.98 %     280,461       1.91 %
Stock:
                                                                               
FHLB
    21,855       6.00 %     -       0.00 %     -       0.00 %     -       0.00 %     21,855       6.00 %
Federal Reserve Bank and other
    8,731       4.88 %     -       0.00 %     -       0.00 %     -       0.00 %     8,731       4.88 %
Total stock
    30,586       5.68 %     -       0.00 %     -       0.00 %     -       0.00 %     30,586       5.68 %
Total securities
  $ 31,056       5.61 %   $ 21,331       1.42 %   $ 64,747       1.86 %   $ 193,913       1.98 %   $ 311,047       2.28 %

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 March 31, 2015, there were no OTTI recoveries, compared to $13,000 in OTTI recoveries during the quarter ended March 31, 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 $5.7 million or 0.21% of total assets at March 31, 2015, up from $2.5 million or 0.12% of total assets at December 31, 2014 and $3.4 million or 0.20% of total assets at March 31, 2014.  During the first quarter of 2015, nonperforming loans increased $3.2 million to total $4.7 million while other real estate owned decreased $40,000 to $997,000.  The increase in nonperforming loans primarily was attributable to acquired loans.
 
      The following table sets forth our composition of nonperforming assets at the dates indicated:

 
   
March 31,
   
December 31,
   
March 31,
 
   
2015
   
2014
   
2014
 
   
(dollars in thousands)
 
Nonperforming assets
                 
Business loans:
                 
Commercial and industrial
  $ 2,455     $ -     $ 31  
Commercial owner occupied
    527       514       864  
SBA
    -       -       14  
Real estate:
                       
Commercial non-owner occupied
    1,602       848       1,327  
One-to-four family
    79       82       438  
Total nonaccrual loans
    4,663       1,444       2,674  
Other real estate owned:
                       
One-to-four family
    286       285       -  
Land
    711       752       752  
Total other real estate owned
    997       1,037       752  
Total nonperforming assets, net
  $ 5,660     $ 2,481     $ 3,426  
                         
Allowance for loan losses
  $ 13,646     $ 12,200     $ 8,685  
Allowance for loan losses as a percent of
total nonperforming loans
    292.64 %     844.88 %     324.79 %
Nonperforming loans as a percent of gross loans
    0.22 %     0.09 %     0.20 %
Nonperforming assets as a percent of total assets
    0.21 %     0.12 %     0.20 %


Liabilities and Stockholders’ Equity
 
Total liabilities were $2.5 billion at March 31, 2015, compared to $1.8 billion at December 31, 2014 and $1.6 billion at March 31, 2014.  The increase of $640.4 million or 34.8% from the year ended December 31, 2014 and the increase of $923.3 million or 59.3% from March 31, 2014 was related to the acquisition of IDPK, which added $371.1 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 March 31, 2015, deposits totaled $2.0 billion, up $412.3 million or 25.3% from December 31, 2014 and $608.0 million or 42.4% from March 31, 2014.
 
During the first quarter of 2015, deposit increases included money market accounts of $194.3 million, noninterest bearing checking of $163.0 million, certificates of deposit of $41.5 million and savings of $14.4 million.  The increase in deposits during the first quarter of 2015 was primarily due to the acquisition of IDPK, which added $336.0 million in deposits with a cost of 0.41% at the acquisition date, along with organic transaction account increases of $71.9 million related to seasonal increases in existing HOA management accounts attributed to annual billings and the receipt of homeowner’s dues.
 
The increase in deposits since the end of the first quarter of 2014 was likewise attributable to organic growth and the IDPK acquisition and included increases in money market of $267.2 million, noninterest bearing checking of $206.9 million, wholesale/brokered certificates of deposit of $71.5 million, retail certificates of deposit of $56.0 million and savings of $12.8 million.  Additionally, brokered deposits of $70.0 million were raised in the third quarter of 2014 to extend the overall maturity of our liabilities and support our interest rate risk management strategies.
 
The total end of period weighted average cost of deposits at March 31, 2015 was 0.33%, down from 0.36% at December 31, 2014 and 0.34% at March 31, 2014.
 
At March 31, 2015, our gross loan to deposit ratio was 104.3%, up from 99.9% at December 31, 2014 and 92.4% at March 31, 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:
 

   
March 31, 2015
   
December 31, 2014
   
March 31, 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
  $ 619,763       30.3 %     0.00 %   $ 456,754       28.0 %     0.00 %   $ 412,871       28.8 %     0.00 %
Interest-bearing deposits:
                                                                 
Checking
    130,869       6.4 %     0.11 %     131,635       8.1 %     0.11 %     137,285       9.5 %     0.11 %
Money market
    720,510       35.3 %     0.36 %     526,256       32.3 %     0.32 %     453,261       31.6 %     0.30 %
Savings
    88,898       4.4 %     0.17 %     74,508       4.5 %     0.14 %     76,087       5.3 %     0.14 %
Time deposit accounts:
                                                                       
Less than 1.00%
    301,611       14.8 %     0.61 %     232,043       14.2 %     0.62 %     131,274       9.1 %     0.51 %
    1.00 - 1.99     173,860       8.5 %     1.11 %     197,410       12.1 %     1.08 %     211,725       14.8 %     1.06 %
    2.00 - 2.99     6,314       0.3 %     2.80 %     10,771       0.7 %     2.86 %     11,266       0.8 %     2.85 %
    3.00 - 3.99     613       0.0 %     3.23 %     714       0.0 %     3.20 %     694       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
    725       0.0 %     5.22 %     733       0.1 %     5.24 %     737       0.1 %     5.25 %
Total time deposit accounts
    483,126       23.6 %     0.83 %     441,673       27.1 %     0.89 %     355,699       24.8 %     0.92 %
Total interest-bearing deposits
    1,423,403       69.7 %     0.48 %     1,174,072       72.0 %     0.50 %     1,022,332       71.2 %     0.48 %
Total deposits
  $ 2,043,166       100.0 %     0.33 %   $ 1,630,826       100.0 %     0.36 %   $ 1,435,203       100.0 %     0.34 %

 
Borrowings.  At March 31, 2015, total borrowings amounted to $413.7 million, up $226.8 million or 121.3% from December 31, 2014 and $307.9 million or 291.0% from March 31, 2014.  The increase in borrowings was primarily to fund loan growth and to provide cash for liquidity purposes.
 
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 $25.0 million at 60 basis points for 18 months and $25.0 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 first quarter of 2015, repurchase agreement debt related to our HOA business decreased $1.7 million to $14.9 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 March 31, 2015, total borrowings represented 15.0% of total assets and had an end of period weighted average cost of 1.37%, compared with 9.2% of total assets at a weighted average cost of 2.74% at December 31, 2014 and 6.1% of total assets at a weighted average cost of 1.22% at March 31, 2014.
 
At March 31, 2015, total borrowings were comprised of the following:
 
·  
Overnight FHLB advances of $250.0 million at 0.24%;
 
·  
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 $25.0 million at 0.60% due March 16, 2016, and one 24 month fixed FHLB advance of $25.0 million at 0.84% due September 15, 2016;
 
·  
Three reverse repurchase agreements totaling $28.5 million at a weighted average rate of 3.26% with $10.0 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 $32.7 million and a fair value of $33.9 million;
 
·  
HOA reverse repurchase agreements totaling $14.9 million at a weighted average rate of 0.02% and secured by of government sponsored entity MBS securities with a par value of $26.9 million and a fair value of $27.8 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:
 

   
March 31, 2015
   
December 31, 2014
   
March 31, 2014
 
   
Balance
   
Weighted
Average Rate
   
Balance
   
Weighted
Average Rate
   
Balance
   
Weighted
 Average Rate
 
   
(dollars in thousands)
 
FHLB advances
  $ 300,000       0.32 %   $ 70,000       0.59 %   $ 50,000       0.11 %
Reverse repurchase agreements
    43,434       2.15 %     46,643       2.03 %     45,506       2.05 %
Subordinated debentures
    70,310       5.34 %     70,310       5.34 %     10,310       2.99 %
Total borrowings
  $ 413,744       1.37 %   $ 186,953       2.74 %   $ 105,816       1.22 %
                                                 
Weighted average cost of
borrowings during the quarter
    2.01 %             3.02 %             1.35 %        
Borrowings as a percent of total assets
    15.0 %             9.2 %             6.1 %        

 
Stockholders’ Equity.  Total stockholders’ equity was $273.2 million as of March 31, 2015, up from $199.6 million at December 31, 2014 and $188.9 million at March 31, 2014.  The current year increase of $73.7 million in stockholders’ equity was primarily related to equity consideration of $70.9 million associated with the acquisition of IDPK, net income for the first three months of 2015 of $1.8 million and favorable change in accumulated other comprehensive income of $767,000.  The increase of $84.4 million from March 31, 2014 was primarily related to equity consideration of $70.9 million associated with the acquisition of IDPK, net income over the period of $15.8 million and a favorable change in accumulated other comprehensive income of $2.4 million, partially offset by the repurchase of the Company’s common stock of $4.8 million.
 
Our book value per share increased to $12.78 at March 31, 2015, up from $11.81 at December 31, 2014 and $10.96 at March 31, 2014.  At March 31, 2015, the Company’s tangible common equity to tangible assets ratio was 7.95%, down from 8.51% at December 31, 2014, and 9.30% at March 31, 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)
 
                   
   
March 31,
   
December 31,
   
March 31,
 
   
2015
   
2014
   
2014
 
                   
Total stockholders' equity
  $ 273,247     $ 199,592     $ 188,860  
Less: Intangible assets
    (59,213 )     (28,564 )     (29,324 )
Tangible common equity
  $ 214,034     $ 171,028     $ 159,536  
                         
Total assets
  $ 2,753,000     $ 2,038,897     $ 1,745,282  
Less: Intangible assets
    (59,213 )     (28,564 )     (29,324 )
Tangible assets
  $ 2,693,787     $ 2,010,333     $ 1,715,958  
                         
Tangible common equity ratio
    7.95 %     8.51 %     9.30 %


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 three months of 2015 were from:
 
·  
Proceeds of $193.5 from FHLB advances
·  
Proceeds of $106.4 million from the sale and principal payments on loans held for investment; and
·  
Net increase of $76.3 million in deposit accounts.
 
We used these funds to:
 
·  
Purchase and originate loans held for investment of $236.6 million;
·  
Purchase securities available for sale of $40.1 million;
·  
Net change of $39.4 million of undisbursed loan funds; and
·  
Purchase FHLB stock of $11.7 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 March 31, 2015, cash and cash equivalents totaled $178.4 million and the market value of our investment securities available for sale totaled $280.5 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 March 31, 2015, the maximum amount we could borrow through the FHLB was $915.2 million, of which $507.8 million was available for borrowing based on collateral pledged of $571.8 million in real estate loans.  At March 31, 2015, we had $300.0 million in FHLB borrowings against that available balance.  At March 31, 2015, we also had unsecured lines of credit aggregating $123.3 million, which consisted of $120.0 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 $50.0 million.  At March 31, 2015, there were no advances drawn against these unsecured lines of credit.  For the quarter ended March 31, 2015, our average liquidity ratio was 19.10%.  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 5% of total deposits, as a secondary source for funding.  At March 31, 2015, we had $72.4 million in brokered time deposits, which constituted 3.5% 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 March 31, 2015, the Company has repurchased 5,833 shares of its common stock for $93,000 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:
 

   
March 31, 2015
 
   
Less than 1 year
   
1 - 3 years
   
3 - 5 years
   
More than 5 years
   
Total
 
   
(in thousands)
 
Contractual obligations
                                 
FHLB advances
  $ 250,000     $ 50,000     $ -     $ -     $ 300,000  
Other borrowings
    14,934       10,000       18,500       -       43,434  
Subordinated debentures
    -       -       -       70,310       70,310  
Certificates of deposit
    324,324       153,697       4,493       612       483,126  
Operating leases
    3,440       5,215       3,434       462       12,551  
Total contractual cash obligations
  $ 592,698     $ 218,912     $ 26,427     $ 71,384     $ 909,421  

 
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 March 31, 2015, we had commitments to extend credit on existing lines and letters of credit of $403.1 million, compared to $355.0 million at December 31, 2014 and $246.0 million at March 31, 2014.
 
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:
 

   
March 31, 2015
 
   
Less than 1 year
   
1 - 5 years
   
3 - 5 years
   
More than 5 years
   
Total
 
   
(in thousands)
 
Other commitments
                                 
Commercial and industrial
  $ 103,047     $ 32,738     $ 10,034     $ 11,666     $ 157,485  
Warehouse facilities
    -       -       -       69,796       69,796  
Construction
    42,116       51,258       -       -       93,374  
Home equity lines of credit
    196       1,480       -       7,470       9,146  
Standby letters of credit
    11,897       -       -       20       11,917  
All other
    60,054       320       7       985       61,366  
Total other commitments
  $ 217,310     $ 85,796     $ 10,041     $ 89,937     $ 403,084  

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.  During August 2014, the Company contributed $40 million of the proceeds from the offering to the Bank, 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 March 31, 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 March 31, 2015 (1)
                                   
                                     
Leverage Ratio
                                   
Bank
  $ 226,917       11.03 %   $ 96,407       4.00 %   $ 120,509       5.00 %
Consolidated
    226,917       9.43 %     96,280       4.00 %     120,350       5.00 %
                                                 
Common Equity Tier 1 to Risk-Weighted Assets (2)
                                               
Bank
    265,765       11.46 %     104,370       4.50 %     150,757       6.50 %
Consolidated
    216,917       9.32 %     104,780       4.50 %     151,349       6.50 %
                                                 
Tier 1 Capital to Risk-Weighted Assets
                                               
Bank
    265,765       11.46 %     139,161       6.00 %     185,547       8.00 %
Consolidated
    226,917       9.75 %     139,706       6.00 %     186,275       8.00 %
                                                 
Total Capital to Risk-Weighted Assets
                                               
Bank
    279,834       12.07 %     185,547       8.00 %     231,934       10.00 %
Consolidated
    300,987       12.93 %     186,275       8.00 %     232,844       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  March 31, 2014 (1)
                                               
                                                 
Leverage Ratio
                                               
Bank
  $ 167,294       10.26 %   $ 65,229       4.00 %   $ 81,536       5.00 %
Consolidated
    170,096       10.45 %     65,085       4.00 %     N/A       N/A  
                                                 
Tier 1 Capital to Risk-Weighted Assets
                                               
Bank
    167,294       12.06 %     55,476       4.00 %     83,214       6.00 %
Consolidated
    170,096       12.23 %     55,624       4.00 %     N/A       N/A  
                                                 
Total Capital to Risk-Weighted Assets
                                               
Bank
    176,301       12.71 %     110,953       8.00 %     138,691       10.00 %
Consolidated
    179,104       12.88 %     111,249       8.00 %     N/A       N/A  
                                                 
 (1) The capital ratios as of March 31, 2015 reflect the adoption of the Basel III Rule in effect beginning January 1, 2015, while ratios for the prior periods represent 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 determined to establish a $1.7 million reserve related to the lawsuit during the fourth quarter of 2014, which the Board of Directors believes 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.  The court granted preliminary approval for the settlement, and plaintiffs are currently in the process of notifying class members about the proposed settlement.  A hearing is scheduled for June 2015 to seek final approval of the settlement from the court.
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 first 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
 
                         
December-2014
    --       --       --       769,710  
January-2015
    -     $ -       -       769,710  
February-2015
    -       -       -       769,710  
March-2015
    5,833       16.02       5,833       763,877  
Total/Average
    5,833     $ 16.02       5,833       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.,
 
May 08, 2015
By:
/s/ Steve Gardner
Date
 
Steve Gardner
   
President and Chief Executive Officer
   
(principal executive officer)
     
May 08, 2015
By:
/s/ Kent J. Smith
Date
 
Kent J. Smith
   
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