UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to.2017
 
Commission File No.: 0-22193
(Exact name of registrant as specified in its charter)
 
Delaware                                                                33-0743196
(State of Incorporation)                        (I.R.S. Employer Identification No)
 
17901 Von Karman Avenue, Suite 1200, Irvine, California 92614
(Address of Principal Executive Offices and Zip Code)

Registrant’s telephone number, including area code: (949) 864-8000
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Securities registered pursuant to Section 12(b) of the Act:
Title of className of each exchange on which registered
Common Stock, par value $0.01 per shareNASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [__] No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [__] No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [_]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [   ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
Large accelerated filer[ X ] Accelerated filer[ X    ]
Non-accelerated filer[   ](Do not check if a smaller reporting company)Smaller reporting company[    ]
Emerging growth company[    ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [__] No [X]
 
The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant, was approximately $357,772,133$1.5 billion and was based upon the last sales price as quoted on the NASDAQ Stock Market as of June 30, 2015,2017, the last business day of the most recently completed second fiscal quarter.

As of March 4, 2016,February 27, 2018, the Registrant had 27,416,79746,241,238 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its 2018 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated herein by this reference.


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PART I
 
ITEM 1.  BUSINESS
 
Forward-Looking Statements
 
All references to “we,” “us,” “our,” “Pacific Premier” or the “Company” mean Pacific Premier Bancorp, Inc. and our consolidated subsidiaries, including Pacific Premier Bank, our primary operating subsidiary. All references to ‘‘Bank’’ refer to Pacific Premier Bank. All references to the “Corporation” refer to Pacific Premier Bancorp, Inc.
 
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended or the Securities Act,(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors, which are in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
 
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

The strength of the United States economy in general and the strength of the local economies in which we conduct operations;
The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
Inflation/deflation, interest rate, market and monetary fluctuations;
The effect of acquisitions we may make, such as our currently pending acquisition of Grandpoint Capital Inc., including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;
The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
The impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
Technological and social media changes;
The effect of acquisitions we may make, if any, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations;
Changes in the level of our nonperforming assets and charge-offs;
The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the U.S. Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters;
Possible other-than-temporary impairments (“OTTI”) of securities held by us;
The impact of current governmental efforts to restructure the U.S. financial regulatory system, including enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”);
Changes in consumer spending, borrowing and savings habits;
The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
Ability to attract deposits and other sources of liquidity;
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Changes in the financial performance and/or condition of our borrowers;

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Changes in the competitive environment among financial and bank holding companies and other financial service providers;
Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
Unanticipated regulatory or judicial proceedings; and
Our ability to manage the risks involved in the foregoing.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Annual Report on Form 10-K. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements.
 
Overview
 
We are a California-based bank holding company incorporated in 1997 in the State of Delaware and a registered bankingbank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”). Our wholly ownedwholly-owned subsidiary, Pacific Premier Bank, is a California state-chartered commercial bank. The Bank was founded in 1983 as a state-chartered thrift and subsequently converted to a federally chartered thrift in 1991. The Bank converted to a California-chartered commercial bank and became a Federal Reserve member in March of 2007. The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”), which is a member bank of the FHLB System. The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount currently allowable under federal law. The Bank is currently subject to examination and regulation by the Federal Reserve Bank (“FRB”), the California Department of Business Oversight (“DBO”) and the FDIC.
 
We are a growth company keenly focused on building shareholder value through consistent earnings and creating franchise value. Our growth is derived both organically and through acquisitions of financial institutions and lines of business that complement our business banking strategy. The Bank’s primary target market is small and middle market businesses.
 
We primarily conduct business throughout California from our 1633 full-service depository branches in the counties of Orange, Los Angeles, Orange, Riverside, San Bernardino and San Diego. These depository branches are located in the cities of Corona, Encinitas, Huntington Beach, Irvine, Los Alamitos, Newport Beach, Palm Desert, Palm Springs, Riverside, San Bernardino, San Diego, Seal BeachSan Luis Obispo and Tustin, California. Our corporate headquarters are located in Irvine, California.Santa Barbara, California as well as Clark County, Nevada.
 
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. Additionally, we provide certain banking services nationwide. We provide customized cash management, electronic banking services and credit facilities to Home Owners’ Associations (“HOA”) and HOA management companies nationwide. We provide U.S. Small Business Administration (“SBA”) loans nationwide, which provide entrepreneurs and small business owners access to loans needed for working capital and continued growth. In addition, we expanded our commercial banking platform as a result of our acquisition of Infinity Franchise Holdings, LLC (“Infinity Holdings”)offer loans and its primary operating subsidiary, Infinity Franchise Capital (“IFC” and together with Infinity Holdings, “Infinity”), in January 2014.  Infinity was a specialty,other services nationwide lender to experienced owner-operator franchisees in the quick service restaurant (“QSR”("QSR") industry.  Following the acquisition of Infinity Holdings, we began offering loans and other services to franchisees in the QSR industry.
 
Through our branches and our Internet website at www.ppbi.com, we offer a broad array of deposit products and services, including checking, money market and savings accounts, cash management services,

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electronic banking services, and on-line bill payment. We also offer a wide array of loan products, such as commercial business loans, lines of credit, SBA loans, warehouse credit facilities, commercial real estate loans, residentialagribusiness loans, home loans,equity lines of credit, construction loans, farmland and consumer loans. At December 31, 2015,2017, we had consolidated total assets of $2.8$8.0 billion, net loans of $2.2$6.2 billion, total deposits of $2.2$6.1 billion, and consolidated
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total stockholders’ equity of $299 million.  $1.2 billion. At December 31, 2015,2017, the Bank was considered a “well-capitalized” financial institution for regulatory capital purposes.
 
The Corporation's common stock is traded on the NASDAQ Global Select Market under the ticker symbol “PPBI.” There are 50.0100 million authorized shares of the Corporation’s common stock, with approximately 21.646.2 million shares outstanding as of December 31, 2015, which increased to approximately 27.4 million upon the closing of the acquisition of Security California Bancorp ("SCAF") in January of 2016, as described below under “Recent Developments.”2017. The Corporation has an additional 1.0 million authorized shares of preferred stock, none of which havehas been issued to date.
 
Our executive offices are located at 17901 Von Karman Avenue, Suite 1200, Irvine, California 92614, and our telephone number is (949) 864-8000. Our Internet website address is www.ppbi.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments thereto, from 19982012 to present that have been filed with the SEC are available free of charge on our Internet website. Also on our website are our Code of Business Conduct, Insider Trading and Beneficial Ownership forms, and Corporate Governance Policy. The information contained in our website or in any websites linked by our website is not a part of this Annual Report on Form 10-K.
 
Recent Developments -

Pending Acquisition of Security California Bancorp

Grandpoint Capital, Inc.On October 2, 2015, the Company announced that it hadFebruary 9, 2018, we entered into ana definitive agreement with Grandpoint Capital, Inc. ("Grandpoint") to acquire SCAF, the holding company of Security Bank ofGrandpoint and its wholly-owned, California-chartered state bank subsidiary, Grandpoint Bank. Grandpoint is headquartered in Los Angeles, California ("Security"), a Riverside, California, based state-chartered bank with six branches located in Riverside County, San Bernardino County and Orange County. The acquisition was completed on January 31, 2016, whereby we acquired $715 million$3.2 billion in total assets, $467 million$2.4 billion in gross loans and $635 million$2.4 billion in total deposits.deposits at December 31, 2017. Grandpoint operates 14 regional offices in Southern California, Arizona and Vancouver, Washington. Under the terms of the mergerdefinitive agreement, each shareholders of SCAFGrandpoint common stock was converted intowill have the right to receive 0.96290.4750 shares of Company common stock.

The valueproposed transaction is expected to close in the third quarter of 2018, subject to satisfaction of customary closing conditions, including regulatory approvals and approval of Grandpoint’s and the Corporation’s shareholders. Certain Grandpoint shareholders, as well as Grandpoint's directors and executive officers have entered into agreements with the Corporation pursuant to which they have committed to provide written consents with respect to shares of Grandpoint common stock in favor of the total deal consideration was approximately $120 million,acquisition. For additional information about the proposed acquisition of Grandpoint, see the Corporation’s Current Report on Form 8-K filed with the SEC on February 12, 2018 and the definitive agreement which includes $788.1 thousand of aggregate cash considerationis filed as an exhibit to the holders of SCAF stock options (basedCurrent Report on the excess of $18.75 per share over the average exercise price of $15.58 per share for 248,459 options).Form 8-K.

Our Strategic Plan
 
Our strategic plan is focused on generating organic growth through our high performing sales culture. Additionally, we seek to grow through mergers and acquisitions of California basedCalifornia-based banks and the acquisition of lines of business that complement our business banking strategy.
 
Our two key operating strategies are summarized as follows:
 
Expansion through Organic Growth.  Over the past several years, we have developed a high performing sales culture that places a premium on business bankers that have the ability to consistently generate business with new business.and existing clients. Business unit managers that possess in-depth product knowledge and expertise in their respective lines of business systematically manage the business development efforts through the use of sales and relationship management technology tools.

Expansion through Acquisitions.  Our acquisition strategy is twofold; first we seek to acquire whole banks within and contiguous to the State of California to expand geographically and/or to consolidate in our existing markets and, second, we seek to acquire lines of business that will complement our existing business banking strategy. We have completed sevennine acquisitions since 2010:
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2010, of which the first two were FDIC-assisted transactions and all other bank transactions were open bank, arm's length negotiated transactions: Canyon National Bank (“CNB”) (FDIC-assisted, geographic(geographic expansion, closed February 2011), Palm Desert National Bank (“PDNB”) (FDIC-assisted, in(in market consolidation, closed April 2012), First Associations Bank

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(“FAB”) (open bank, nationwide(nationwide HOA line of business, closed March 2013), San Diego Trust Bank (“SDTB”) (open bank, geographic(geographic expansion, closed June 2013), Infinity Franchise Holdings, LLC and Infinity Franchise Capital (collectively, "Infinity") (nationwide lender to franchisees in the QSR industry, closed January 2014), Independence Bank ("IDPK") (open bank, geographic(geographic expansion, closed January 2015), and SCAF (open bank, geographicSecurity Bank of California ("SCAF") (geographic expansion, closed January 2016), Heritage Oaks Bancorp ("HEOP") (geographic expansion, closed April 2017), and Plaza Bancorp ("PLZZ") (geographic expansion, closed November 2017). In addition, on February 9, 2018, we entered into a definitive agreement with Grandpoint to acquire Grandpoint and its wholly-owned, California-chartered state bank subsidiary, Grandpoint Bank. That transaction is expected to close in the third quarter of 2018, subject to the receipt of all regulatory and shareholder approvals and the satisfaction or waiver, if applicable, of all closing conditions. We will continue to pursue acquisitions of open banks and other non-depository businesses that meet our criteria, though there can be no assurances that we will identify or consummate any such acquisitions, and if we do, that any or all of those acquisitions will produce the intended results.

Lending Activities
 
General.  In 2015,2017, we maintained our commitment to a high level of credit quality in our lending activities. Our core lending business continues to focus on meeting the financial needs of local businesses and their owners. To that end, the Company offers a full complement of flexible and structured loan products tailored to meet the diverse needs of our customers.
 
During 2015,2017, we made or purchased loans to borrowers secured by real property and business assets located principally in California, our primary market area. We made select loans, primarily QSR franchise loans, SBA guaranteed loans and loans to HOAs, throughout the United States. We emphasize relationship lending and focus on generating loans with customers who also maintain full depository relationships with us. These efforts assist us in establishing and expanding depository relationships consistent with the Company’s strategic direction. We maintain an internal lending limit below our $94.1$340.9 million legal lending limit for secured loans and $56.5$204.5 million for unsecured loans as of December 31, 2015.2017. At December 31, 2017, the Bank's largest aggregate outstanding balance of loans to one borrower was $44.9 million of secured credit. Historically, we have managed loan concentrations by selling certain loans, primarily commercial non-owner occupied CRE and multi-family residential loan production. In recent periods, we have also focused on selling the guaranteed portion of SBA loans due to the attractive premiums in the market, which gains on sale increase our noninterest income. Other types of loan sales remain a strategic option for us.
 
During 2015,2017, we originated $124$2.2 billion of loans and loan commitments, including $490 million of commercial and industrial (“C&I”) loans, $171 million of QSR franchise loans, $250$344 million of construction loans, $62.0$313 million of franchise loans, $267 million of non-owner occupied CRE loans, $113$246 million of owner occupied CRE loans, $189 million of SBA loans, $94.4$186 million of multi-family real estate loans, $48.6$37.8 million of owner occupied CREagribusiness loans, $93.4$35.9 million of warehouse facilities, and $20.8 million of singleone-to-four family real estate loans, and other loans; and we purchased $376$32.8 million of consumer loans including $333and $10.3 million acquired from Independence Bank.of farmland loans. During the same period, the acquisition of PLZZ added $1.1 billion of loans in the fourth quarter of 2017, and the acquisition of HEOP added $1.4 billion of loans in the second quarter of 2017, both before fair value adjustments. At December 31, 2015,2017, we had $2.26$6.2 billion in total gross loans held for investment outstanding.
 
Commercial and Industrial Lending.  We originate C&I loans secured by business assets including inventory, receivables, and machinery and equipment to businesses located in our primary market area. Loan types include revolving lines of credit, term loans, seasonal loans and loans secured by liquid collateral such as cash deposits or marketable securities. HOA credit facilities are included in C&I loans. We also issue letters of credit on behalf of our customers, backed by loans or deposits with the Company. At December 31, 2015,2017, C&I loans totaled $310 million,
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$1.1 billion, constituting 13.7%17.5% of our gross loans.loans held for investment. At December 31, 2015,2017, we had commitments to extend additional credit on C&I loans of $200$707 million.

Franchise Lending. We originate C&I loans to franchises in the QSR industry nationwide, including financing for equipment, real estate, new store development, remodeling, refinancing, acquisition and partnership restructuring. At December 31, 2015,2017, Franchise loans totaled $329$660 million, constituting 14.5%10.7% of our gross loans.loans held for investment.  
 
Commercial Owner-Occupied Business Lending.  We originate and purchase loans secured by owner-occupied CRE, such as small office and light industrial buildings, and mixed-use commercial properties located predominantly in California. We also make loans secured by special purpose properties, such as gas stations and churches. Pursuant to our underwriting policies, owner-occupied CREcommercial real estate ("CRE") loans may be made in amounts of up to 80% of the lesser of the appraised value or the purchase price of the collateral property. Loans are generally made for

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terms up to 25 years with amortization periods up to 25 years. At December 31, 2015,2017, we had $295 million$1.3 billion of owner-occupied CRE secured loans, constituting 13.0%20.8% of our gross loans. loans held for investment. 
 
SBA Lending.  We are approved to originate loans under the SBA’s Preferred Lenders Program (“PLP”). The PLP lending status affords us a higher level of delegated credit autonomy, translating to a significantly shorter turnaround time from application to funding, which is critical to our marketing efforts. We originate loans nationwide under the SBA’s 7(a), SBAExpress Patriot Express,, International Trade and 504 loan programs, in conformity with SBA underwriting and documentation standards. The guaranteed portion of the 7(a) loans is typically sold on the secondary market. At December 31, 2015,2017, we had $62.3$186 million of SBA loans, constituting 2.8%3.0% of our gross loans.loans held for investment.

Warehouse Repurchase Facilities.Agribusiness and Farmland. We provide warehouse repurchase facilitiesoriginate loans to the agricultural community to fund seasonal production and longer term investments in land, buildings, equipment, crops and livestock. Agribusiness loans are for qualified mortgage bankers operating principally in California.  These facilities provide short-term funding for one-to-four family mortgagethe purpose of financing agricultural production to finance crops and livestock. Farmland loans via a mechanism whereby the mortgage banker sells us closed loans on an interim basis,include all land known to be repurchased in conjunction withused or usable for agricultural purposes, such as crop and livestock production, and is secured by the sale of each loan on the secondary market.  We carefully underwriteland and monitor the financial strength and performance of all counterparties to the transactions, including the mortgage bankers, secondary market participants and closing agents.  We generally purchase only conforming/conventional (Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”)) and government guaranteed (Federal Housing Administration (“FHA”), Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”)) credits, and only after thorough due diligence including sophisticated fraud checks.improvements thereon. At December 31, 2015, warehouse2017, agribusiness loans totaled $143$116 million, constituting 6.3%1.9% of our gross loans. We have notifiedloans held for investment. At December 31, 2017, we had $145 million of farmland loans, constituting 2.3% of our borrowers that we will no longer provide funding under the repurchase facilities after March 15, 2016 and will be winding down and exiting the warehouse lending area.gross loans held for investment.
 
Commercial Non-Owner Occupied Real Estate Lending.  We originate and purchase loans that are secured by CRE, such as retail centers, small office and light industrial buildings, and mixed-use commercial properties located predominantly in California that are not occupied by the borrower and are located predominantly in California.borrower. We also make loans secured by special purpose properties, such as hotels and self-storage facilities. Pursuant to our underwriting practices, non-owner occupied CRE loans may be made in amounts up to 75% of the lesser of the appraised value or the purchase price of the collateral property. We consider the net operating income of the property and typically require a stabilized debt service coverage ratio of at least 1.20:1, based on the qualifying loan interest rate. Loans are generally made for terms from 10 years up to 25 years, with amortization periods up to 25 years. At December 31, 2015,2017, we had $422 million$1.2 billion of non-owner occupied CRE secured loans, constituting 18.7%20.0% of our gross loans.loans held for investment. 
 
Multi-family Residential Lending.  We originate and purchase loans secured by multi-family residential properties (five units and greater) located predominantly in California. Pursuant to our underwriting practices, multi-family residential loans may be made in an amount up to 75% of the lesser of the appraised value or the purchase price of the collateral property. In addition, we generally require a stabilized minimum debt service coverage ratio of at least 1.15:1, based on the qualifying loan interest rate. Loans are made for terms of up to 30 years with amortization periods up to 30 years. At December 31, 2015,2017, we had $429$794 million of multi-family real estate secured loans, constituting 19.0%12.8% of our gross loans.loans held for investment. 
 
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One-to-Four Family Real Estate Lending.  Although we do not originate, through our bank acquisitions, we have acquired first lien single family mortgages, we occasionally purchase such loans to diversify our portfolio.mortgages. Our portfolio of one-to-four family loans at December 31, 20152017 totaled $80.1$271 million, constituting 3.5%4.4% of our gross loans held for investment, of which $71.7$223 million consists of loans secured by first liens on real estate and $8.4$48.0 million consists of loans secured by second or junior liens on real estate.
 
Construction Lending.  We originate loans for the construction of 1-4 family, and multi-family residences and CRE properties in our market area. We concentrate our efforts on single homes and very small infill projects in established neighborhoods where there is not abundant land available for development. Pursuant to our underwriting practices, construction loans may be made in an amount up to the lesser of 80% of the completed

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value of or 85% of the cost to build the collateral property. Loans are made solely for the term of construction, generally less than 24 months. We require that the owner’s equity is injected prior to the funding of the loan. At December 31, 2015,2017, construction loans totaled $170$283 million, constituting 7.5%4.6% of our gross loans, and we had commitments to extend additional construction credit of $155$306 million.
 
Land Loans.  We occasionally originate land loans located predominantly in California for the purpose of facilitating the ultimate construction of a home or commercial building. We do not originate loans to facilitate the holding of land for speculative purposes. At December 31, 2015,2017, land loans totaled $18.3$31.2 million, constituting 0.8%0.5% of our gross loans.
 
OtherConsumer Loans.  We originate a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit and savings account secured loans and auto loans. Before we make a consumer loan, we assess the applicant’s ability to repay the loan and, if applicable, the value of the collateral securing the loan. At December 31, 2015,2017, we had $5.1$92.9 million in otherconsumer loans that represented 0.2%1.5% of our gross loans.

Warehouse Repurchase Facilities.  In 2015, we provided warehouse repurchase facilities for qualified mortgage bankers operating principally in California. These facilities provided short-term funding for one-to-four family mortgage loans via a mechanism whereby the mortgage banker sold us closed loans on an interim basis, to be repurchased in conjunction with the sale of each loan on the secondary market. We generally purchased only conforming/conventional (Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”)) and government guaranteed (Federal Housing Administration (“FHA”), Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”)) credits, and only after due diligence that we believed was thorough and sophisticated. We notified our borrowers that we will no longer provide funding under the repurchase facilities after March 15, 2016, and at December 31, 2017 and 2016, we had no warehouse loans. 
      
Sources of Funds
 
General.  Deposits, loan repayments and prepayments, and cash flows generated from operations and borrowings are the primary sources of the Company’s funds for use in lending, investing and other general purposes.
 
Deposits.  Deposits represent our primary source of funds for our lending and investing activities. The Company offers a variety of deposit accounts with a range of interest rates and terms. The deposit accounts are offered through our 1633 full depository branch network in California and Nevada, and nationwide through our HOA Banking unit.unit located in Irvine, California. The Company’s deposits consist of checking accounts, money market accounts, passbook savings, and certificates of deposit. TotalThe flow of deposits at December 31, 2015 were $2.2 billion, compared to $1.6 billion at December 31, 2014.  At December 31, 2015, certificates of deposit constituted 23.7% of total deposits, compared to 27.1% at the year-end 2014.is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The terms of the fixed-rate certificates of deposit offered by the Company vary from three months to five years. Specific terms of an individual account vary according to the type of account, the minimum balance required, the time period funds must remain on deposit and the interest rate, among other factors. The flow ofTotal deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition.at December 31, 2017 were $6.1 billion, compared to $3.1 billion at December 31, 2016. At December 31, 2015,2017, certificates of deposit constituted 17.8% of
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total deposits, compared to 18.3% at the year-end 2016. At December 31, 2017, we had $400$848 million of certificate of deposit accounts maturing in one year or less.
 
We primarily rely on customer service, sales and marketing efforts, business development, cross-sellingcross selling of deposit products to loan customers, and long-standing relationships with customers to attract and retain local deposits. However, market interest rates and rates offered by competing financial institutions significantly affect the Company’s ability to attract and retain deposits. Additionally, from time to time, we will utilize both wholesale and brokered deposits to supplement our generation of deposits from businesses and consumers. At December 31, 2015,2017, we had $155$386 million in brokered deposits that were raised to help lengthen the overall maturity ofsupplement and diversify our liabilitiesdeposit funding and support our interest rate risk management strategies. The brokered deposits had a weighted average maturity of 157 months and an all inall-in cost of 66143 basis points.

    Subsidiaries
 
At December 31, 2014,2017, we had twofive operating subsidiaries, the Bank, a wholly-owned consolidated subsidiary with no subsidiaries of its own, and PPBI Statutory Trust I, Heritage Oaks Capital Trust II, Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust which is aare wholly-owned special purpose entity accountedentities. The Company accounts for usingits investments in its wholly-owned special purpose entities under the equity method, under whichwhereby the subsidiaries’subsidiary’s net earnings are recognized in our operationsthe Company’s Statement of Income and the investment in the Trustthese entities is included in other assetsOther Assets on our consolidated statementsthe Company’s Consolidated Statements of financial condition.
Financial Condition.


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    Personnel
 
As of December 31, 2015,2017, we had 332842 full-time employees and three4 part-time employees. The employees are not represented by a collective bargaining unit and we consider our relationship with our employees to be satisfactory.
 
    Competition
 
We consider our Bank to be a community bank focused on the commercial banking business, with our primary market encompassing California. To a lesser extent, we also compete in several broader regional and national markets through our HOA Banking, SBA, Warehouse Lending, Franchise Lending and Income Property business units.lines of business.
 
The banking business is highly competitive with respect to virtually all products and services. The industry continues to consolidate, and unregulated competitors in the banking markets have focused products targeted at highly profitable customer segments. Many largely unregulated competitors are able to compete across geographic boundaries, and provide customers increasing access to meaningful alternatives to nearly all significant banking services and products.
 
The banking business is dominated by a relatively small number of major banks with many offices operating over a wide geographical area. These banks have, among other advantages, the ability to finance wide-ranging and effective advertising campaigns, and to allocate their resources to regions of highest yield and demand. Many of the majornational or super-regional banks operating in our primary market area offer certain services that we do not offer directly but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, the majornational or super-regional banks also have substantially higher lending limits than those we do.us.
 
In addition to other local community banks, our competitors include commercial banks, savings banks, credit unions, and numerous non-banking institutions, such as finance companies, leasing companies, insurance companies, brokerage firms and investment banking firms. Increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card, and other consumer finance services, including on-line banking services and personal financial software. Strong competition for deposit and loan products affects the rates of those products, as well as the terms on which they are offered to customers.
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Mergers between financial institutions have placed additional pressure on banks within the industry to streamline their operations, reduce expenses, and increase revenues to remain competitive.
 
Technological innovations have also resulted in increased competition in the financial services market. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously were considered traditional banking products. In addition, many customers now expect a choice of delivery systems and channels, including telephone, mobile phones, mail, home computer, ATMs, self-service branches, and/or in-store branches. The sources of competition in such products include commercial banks, as well as credit unions, brokerage firms, money market and other mutual funds, asset management groups, finance and insurance companies, internet-only financial intermediaries and mortgage banking firms.
 
We work to anticipate and adapt to competitive conditions, whether it is by developing and marketing innovative products and services, adopting or developing new technologies that differentiate our products and services, or providing highly personalized banking services. We strive to distinguish ourselves from other community banks and financial services providers in our marketplace by providing a high level of service to enhance customer loyalty and to attract and retain business. However, no assurances can be given that our efforts to compete in our market areas will continue to be successful.
 



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Supervision and Regulation
 
General.  Bank holding companies, such as the Corporation, and banks, such as the Bank, are subject to extensive regulation and supervision by federal and state regulators. Various requirements and restrictions under state and federal law affect our operations, including reserves against deposits, ownership of deposit accounts, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital requirements. The following is a summary of certain statutes and rules applicable to us. This summary is qualified in its entirety by reference to the particular statute and regulatory provision referred to below and is not intended to be an exhaustive description of all applicable statutes and regulations.
 
As a bank holding company, the Corporation is subject to regulation and supervision by the Federal Reserve. We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve may conduct examinations of bank holding companies and their subsidiaries. The Corporation is also a bank holding company within the meaning of the California Financial Code (the “Financial Code”). As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the DBO.
 
Under changes made by the Dodd-Frank Act, a bank holding company must act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. In order to fulfill its obligations as a source of strength, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank. In addition, the Federal Reserve may charge the bank holding company with engaging in unsafe and unsound practices if the bank holding company fails to commit resources to a subsidiary bank or if it undertakes actions that the Federal Reserve believes might jeopardize the bank holding company’s ability to commit resources to such subsidiary bank. The Federal Reserve also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
 
As a California state-chartered commercial bank, which is a member of the Federal Reserve, the Bank is subject to supervision, periodic examination and regulation by the DBO and the Federal Reserve. The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund (“DIF”). Pursuant to the Dodd-Frank Act, federal deposit insurance coverage was permanently increased to $250,000 per depositor for all insured depository institutions. As a result of this deposit insurance function, the FDIC also has certain supervisory authority and
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powers over the Bank as well as all other FDIC insured institutions. If, as a result of an examination of the Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators. Such remedies include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict growth, to assess civil monetary penalties, to remove officers and directors and ultimately to request the FDIC to terminate the Bank’s deposit insurance. As a California-chartered commercial bank, the Bank is also subject to certain provisions of California law.
 
Legislative and regulatory initiatives have been, and are likely to continue to be,from time-to-time introduced, and implemented, which could substantially intensifynecessarily impacts the regulation of the financial services industry. We cannot predict whether or when potential legislation or new regulations will be enacted, and if enacted, the effect that new legislation or any implemented regulations and supervisory policies would have on our financial condition and results of operations. Moreover, bank regulatory agencies can be more aggressive in responding to concerns and trends identified in examinations, which could result in an increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management and capital adequacy, as well as other safety and soundness concerns.
 

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Dodd-Frank Act
 
The Dodd-Frank Act, which was signed into law onin July 21, 2010, implementsimplemented far-reaching changes across the financial regulatory landscape, including provisions that, among other things, repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts, and increased the authority of the Federal Reserve to examine bank holding companies, such as the Corporation, and their non-bank subsidiaries.

Many aspects of the Dodd-Frank Act arecontinue to be subject to rulemaking and willhave yet to take full effect, over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

In 2017, both the House of Representatives and the Senate introduced legislation that would repeal or modify provisions of the Dodd-Frank Act and significantly impact financial services regulation. Although the bills vary in content, certain key aspects include revisions to rules related to mortgage loans, delayed implementation of rules related to the Home Mortgage Disclosure Act, reform and simplification of certain Volcker Rule requirements, and raising the threshold for applying enhanced prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to those with total consolidated assets equal to or greater than $250 billion.

Activities of Bank Holding Companies.  The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank holding companies that qualify and register as “financial holding companies” are also able to engage in certain additional financial activities, such as merchant banking and securities and insurance underwriting, subject to limitations set forth in federal law. We are not at this date a “financial holding company.”
 
The BHCA requires a bank holding company to obtain prior approval of the Federal Reserve before: (i) taking any action that causes a bank to become a controlled subsidiary of the bank holding company; (ii) acquiring direct or indirect ownership or control of voting shares of any bank or bank holding company, if the acquisition results in the acquiring bank holding company having control of more than 5% of the outstanding shares of any class of voting securities of such bank or bank holding company, unless such bank or bank holding company is
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majority-owned by the acquiring bank holding company before the acquisition; (iii) acquiring all or substantially all the assets of a bank; or (iv) merging or consolidating with another bank holding company.
 
Permissible Activities of the Bank.  Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank can form subsidiaries to engage in activates “closely related to banking” or “nonbanking” activities and expanded financial activities. However, to form a financial subsidiary, the Bank must be well capitalized and would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank to conduct directly within the bank. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, engage as principal in underwriting insurance (other than credit life insurance), issue annuities or engage in real estate development, or investment or merchant banking.
 
Incentive Compensation. Federal banking agencies have issued guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. In accordance with the Dodd-Frank Act, the federal banking agencies prohibit incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions (generally institutions that have over $1 billion in assets) and are deemed to be excessive, or that may lead to material losses.
 

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The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
 
The scope and content of the U.S. banking regulators’ policies on executive compensation may continue to evolve in the near future. It cannot be determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain and motivate its key employees.
 
Capital Requirements. Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal agencies. These agencies may establish higher minimum requirements if, for example, a banking organization previously has received special attention or has a high susceptibility to interest rate risk. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items. Under the Dodd-Frank Act, the Federal Reserve must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness.

Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements. Prior to the effectiveness of Basel III, on January 1, 2015, the risk-based capital requirements were as follows: a minimum ratio of 8% of total capital to risk-weighted assets, and a minimum ratio of 4% of Tier 1 capital to risk-weighted assets. Under federal regulations in effect prior to the effectiveness of Basel III, “Tier 1 capital” is defined to include: common stockholders’ equity (including retained earnings), qualifying noncumulative perpetual preferred stock and related surplus, qualifying cumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of consolidated subsidiaries (limited to a maximum of 25% of Tier 1 capital), and certain trust preferred securities.

Prior to January 1, 2015, federal banking regulators required banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 4%. To be deemed “well capitalized” under applicable federal regulations, banks must have a minimum leverage ratio of 5%.

Effective as of January 1, 2015, the Basel III final capital framework, among other things, (i)
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introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations. Beginning January 1, 2016, financial institutions are required to maintain a minimum capital conservation buffer to avoid restrictions on capital distributions and other payments. The minimum capital conservation buffer is phased in over a four year transition period with minimum buffers of 0.625%, 1.25%, 1.875%, and 2.50% during 2016, 2017, 2018, and 2019, respectively.

When fully phased-in by January 1, 2019, Basel III requires banks will be subject to the following risk-based capital requirements:

a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer”;
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%;
a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, or 10.5%; and

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a minimum leverage ratio of 3%4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.

The Basel III final framework provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Basel III also includes, as part of the definition of CET1 capital, a requirement that banking institutions include the amount of Additional Other Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available for sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital. Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first regulatory report following January 1, 2015. As permitted by Basel III, the Company and the Bank have elected to exclude AOCI from CET1.

Basel III also includes the following significant provisions:

An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion, with advance notice, that would be a CET1 add-on to the capital conservation buffer in the range of 0% and 2.5% when fully implemented;
Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone;
Deduction from common equity of deferred tax assets that depend on future profitability to be realized; and
For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement that the instrument must be written off or converted to common equity if a triggering event occurs, either pursuant to applicable law or at the direction of the banking regulator. A triggering event is an event that would cause the banking organization to become nonviable without the write off or conversion, or without an injection of capital from the public sector.

Banking institutions with a ratio of CET1 to risk-weighted assets abovethat do not satisfy the minimum but below thecapital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on its ability to pay dividends, effect equity repurchases and pay discretionary bonuses to executive officers, which constraints vary based on the amount of the shortfall. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019.

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The Dodd-Frank Act excludes trust preferred securities issued after May 19, 2010, from being included in Tier 1 capital, unless the issuing company is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1 capital for bank holding companies with less than $15 billion in total assets, such as the Corporation. The trust preferred securities issued by our unconsolidated subsidiary capital trusttrusts qualify as Tier 1 capital up to a maximum limit of 25% of total Tier 1 capital. Any additional portion of our trust preferred securities would qualify as “Tier 2 capital.” As of December 31, 2015, the2017, our subsidiary trust, PPBI Trust I, had $10.3 million in trust preferred securities outstanding, of which $10.0 million qualifies as Tier 1 capitalcapital. As a result of the Heritage Oaks acquisition, the Company assumed three unconsolidated subsidiaries with floating rate junior subordinated debt securities of $5.2 million associated with Heritage Oaks Capital Trust II, $3.1 million, associated with Mission Community Capital Trust I and $60$5.2 million associated with the Santa Lucia Bancorp (CA) Capital Trust of which $10.0 million qualifies as Tier 1 capital. The Company also holds $85 million in subordinated notes that qualifies as Tier 2 capital. Also, goodwill and most intangible assets are deducted from Tier 1 capital. For purposes of applicable the total risk-based capital regulatory guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is defined to include, subject to limitations: perpetual preferred stock not included in Tier 1 capital, intermediate-term preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible debt securities, allowances for loan and lease losses, and intermediate-term subordinated debt instruments. The maximum amount of qualifying Tier 2 capital is 100% of qualifying Tier 1 capital. For purposes of determining total capital under federal guidelines, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets and other deductions.

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Basel III changeschanged the manner of calculating risk weightedrisk-weighted assets. New methodologies for determining risk weightedrisk-weighted assets in the general capital rules are included, including revisions to recognition of credit risk mitigation, including a greater recognition of financial collateral and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past due loans; and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity components. In particular, loans categorized as “high-volatility commercial real estate” loans (“HVCRE loans”) are required to be assigned a 150% risk weighting, and require additional capital support. HVCRE loans are defined to include any credit facility that finances or has financed the acquisition, development or construction of real property, unless it finances: 1-4 family residential properties; certain community development investments; agricultural land used or usable for, and whose value is based on, agricultural use; or commercial real estate projects in which: (i) the loan to value is less than the applicable maximum supervisory loan to value ratio established by the bank regulatory agencies; (ii) the borrower has contributed cash or unencumbered readily marketable assets, or has paid development expenses out of pocket, equal to at least 15% of the appraised “as completed” value; (iii) the borrower contributes its 15% before the bank advances any funds; and (iv) the capital contributed by the borrower, and any funds internally generated by the project, is contractually required to remain in the project until the facility is converted to permanent financing, sold or paid in full.

In addition to the uniform risk-based capital guidelines and regulatory capital ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect our ability to grow and could restrict the amount of profits, if any, available for the payment of dividends.

In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address the risks that the activities of an institution poses to the institution and the public and private stakeholders, including risks arising from certain enumerated activities. The federal banking agencies will likely change existing capital guidelines or adopt new capital guidelines in the future pursuant to the Dodd-Frank Act or other regulatory or supervisory changes. We will be assessing the impact on us of these new regulations, as they are proposed and implemented.

Basel III became applicable to the Corporation and the Bank on January 1, 2015. Overall, the Corporation believes that implementation of the Basel III Rule has not had and will not have a material adverse effect on the Corporation’s or the Bank’s capital ratios, earnings, shareholder’s equity, or its ability to pay dividends, effect stock repurchases or pay discretionary bonuses to executive officers.
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In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking organizations, such as the Corporation and the Bank, that are not subject to the advanced approaches requirements. In November 2017, the federal banking regulators revised the Basel III Rules to extend the current transitional treatment of these items for non-advanced approaches banking organizations until the September 2017 proposal is finalized. The September 2017 proposal would also change the capital treatment of certain commercial real estate loans under the standardized approach, which we use to calculate our capital ratios.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Corporation or the Bank. The impact of Basel IV on us will depend on the manner in which it is implemented by the federal bank regulators. We will be assessing the impact on us of these new regulations, as they are proposed and implemented.
Prompt Corrective Action Regulations. The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions. Federal banking regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under regulations effective through December 31, 2014,2017, the Bank was “well capitalized”, which means it had a total risk-basedcommon equity Tier 1 capital ratio of 10.0%6.5% or higher; a Tier I risk-based capital ratio of 6.0%8.0% or higher; a total risk-based capital ratio of 10.0% or higher; a leverage ratio of 5.0% or higher; and was not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure.
 
As noted above, Basel III integrates the new capital requirements into the prompt corrective action category definitions. As of January 1, 2015, theThe following capital requirements applyhave applied to the Corporation for purposes of Section 38 of the FDIA.since January 1, 2015.

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Capital Category
Total Risk-Based
Capital Ratio
 
Tier 1 Risk-Based
Capital Ratio
 
Common Equity
Tier 1 (CET1) Capital Ratio
 Leverage Ratio 
Tangible Equity
to Assets
 
Supplemental
Leverage Ratio
Well Capitalized10% or greater 8% or greater 6.5% or greater 5% or greater n/a n/a
Adequately Capitalized8% or greater 6% or greater 4.5% or greater 4% or greater n/a 3% or greater
UndercapitalizedLess than 8% Less than 6% Less than 4.5% Less than 4% n/a Less than 3%
Significantly UndercapitalizedLess than 6% Less than 4% Less than 3% Less than 3% n/a n/a
Critically Undercapitalizedn/a n/a n/a n/a Less than 2% n/a
As of December 31, 2015,2017, the Bank was “well capitalized” according to the guidelines as generally discussed below.above. As of December 31, 2015,2017, the Corporation had a consolidated ratio of 14.46%12.57% of total capital to risk-weighted assets, a consolidated ratio of 10.88% of Tier 1 capital to risk-weighted assets, and a consolidated ratio of 10.30%10.59% of common equity Tier 1 capital, to risk-weighted assets and the Bank had a ratio of 13.45%12.33% of total capital to risk-weightedrisk-
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weighted assets, a ratio of 11.88% of common equity Tier 1 capital and a ratio of 12.72%11.88% of Tier 1 capital to risk-weighted assets.

An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. An institution’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the institution’s overall financial condition or prospects for other purposes.

In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. In addition to requiring undercapitalized institutions to submit a capital restoration plan, bank regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

As an institution’s capital decreases, the regulators’ enforcement powers become more severe. A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions. A regulator has limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator.

Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

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In addition to the federal regulatory capital requirements described above, the DBO has authority to take possession of the business and properties of a bank in the event that the tangible stockholders’ equity of a bank is less than the greater of (i) 4% of the bank’s total assets or (ii) $1.0 million.
 
Dividends.  It is the Federal Reserve’s policy that bank holding companies, such as the Corporation, should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. It is our policy to retain earnings, if any, to provide funds for use in our business. We have never declared or paid dividends on our common stock.
 
The Bank’s ability to pay dividends to the Corporation is subject to restrictions set forth in the Financial Code. The Financial Code provides that a bank may not make a cash distribution to its stockholders in excess of the lesser of a bank’s (1) retained earnings; or (2) net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the stockholders of the bank during such period. However, a bank may, with the approval of the DBO, make a distribution to its stockholders in an amount not exceeding the greatest of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its

net income for its current fiscal year. In the event that bank regulators determine that the stockholders' equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the regulators may order the bank to refrain from making a proposed distribution. The payment of dividends could, depending on the financial condition of the Bank,a bank, be deemed to constitute an unsafe or unsound practice. Under these provisions,the foregoing provision of the Financial Code, the amount available for distribution from the Bank to the Corporation was approximately $58.8$142.7 million at December 31, 2015.2017.
 
Approval of the Federal Reserve is required for payment of any dividend by a state chartered bank that is a member of the Federal Reserve, such as the Bank, if the total of all dividends declared by the bank in any calendar year would exceed the total of its retained net income for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its undivided profits without regulatory and stockholder approval. The Bank is also prohibited under federal law from paying any dividend that would cause it to become undercapitalized.
It is our policy to retain earnings, if any, to provide funds for use in our business.  We have never declared or paid dividends on our common stock.
 
FDIC Insurance of Certain Accounts and Regulation by the FDIC.  The Bank is an FDIC insured financial institution whereby the FDIC provides deposit insurance for a certain maximum dollar amount per customer. The Bank, as is the case with all FDIC insured banks, is subject to deposit insurance assessments as determined by the FDIC. The amount of the deposit insurance assessment for institutions with less than $10.0 billion in assets, which includes the Bank, is based on its risk category, with certain adjustments for any unsecured debt or brokered deposits held by the insured bank. Institutions assigned to higher risk categories (that is, institutions that pose a higher risk of loss to the DIF) pay assessments at higher rates than institutions that pose a lower risk. An institution’s risk classification is assigned based on a combination of its financial ratios and supervisory ratings, reflecting, among other things, its capital levels and the level of supervisory concern that the institution poses to the regulators. In addition, the FDIC can impose special assessments in certain instances. Deposit insurance assessments fund the DIF.
 
The Dodd-Frank Act changeschanged the way that deposit insurance premiums are calculated. The assessment base is no longer the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. The Dodd-Frank Act also increasesincreased the minimum designated reserve ratio of the DIF from 1.15% to 1.35% of the estimated amount of total insured deposits by 2020, eliminates the upper limit for the reserve ratio designated by the FDIC each year, and eliminates the requirement that the FDIC pay dividends to depository

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institutions when the reserve ratio exceeds certain thresholds. Continued action by the FDIC to replenish the DIF, as well as the changes contained in the Dodd Frank Act, may result in higher assessment rates, which could reduce our profitability or otherwise negatively impact our operations. Based on the current FDIC insurance assessment methodology, and including our participation in the Transaction Account Guarantee Program, our FDIC insurance premium expense was $2.2 million for 2017, $1.5 million for 2016 and $1.4 million for 2015, $1.0 million for 2014 and $749,000 in 2013.2015.
 
Transactions with Related Parties.  Depository institutions are subject to the restrictions contained in the Federal Reserve Act (the “FRA”) with respect to loans to directors, executive officers and principal stockholders. Under the FRA, loans to directors, executive officers and stockholders who own more than 10% of a depository institution and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit as discussed in the above section. Federal regulations also prohibitsprohibit loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and stockholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The prescribedproscribed loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is required, is the greater of $25,000 or 5% of capital and surplus up to $500,000. The Federal Reserve also requires that loans to directors, executive officers, and principal stockholders be made on terms substantially the same as offered in comparable transactions to non-executive employees of the bank and must not involve more than the normal risk of repayment. There are additional limits on the amount a bank can loan to an executive officer.
 

Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under Sections 23A and 23B of the FRA. Section 23A restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the financial institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates are generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. The Federal Reserve has promulgated Regulation W, which codifies prior interpretations under Sections 23A and 23B of the FRA and provides interpretive guidance with respect to affiliate transactions. Affiliates of a bank include, among other entities, a bank’s holding company and companies that are under common control with the bank. We are considered to be an affiliate of the Bank.
 
The Dodd-Frank Act generally enhancesenhanced the restrictions on transactions with affiliates under Section 23A and 23B of the FRA, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution's board of directors.
 
Safety and Soundness Standards.  The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating toto: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits.
 
In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. These guidelines provide six standards for establishing and maintaining a system

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to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution shouldshould: (i) conduct periodic asset quality reviews to identify problem assets; (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses; (iii) compare problem asset totals to capital; (iv) take appropriate corrective action to resolve problem assets; (v) consider the size and potential risks of material asset concentrations; and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk.
 
Loans-to-OneLoans to One Borrower.  Under California law, our ability to make aggregate secured and unsecured loans-to-one-borrower is limited to 25% and 15%, respectively, of unimpaired capital and surplus. At December 31, 2015,2017, the Bank’s limit on aggregate secured loans-to-one-borrower was $94.1$341 million and unsecured loans-to-one borrower was $56.5$204.5 million. The Bank has established internal loan limits, which are lower than the legal lending limits for a California bank.
 
Community Reinvestment Act and the Fair Lending Laws.  The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and CRACommunity Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking regulators to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. A bank’s compliance with its CRA obligations is based on a performance-based evaluation system, which bases CRA ratings on an institution’s lending, service and

investment performance, resulting in a rating by the appropriate bank regulator of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.”  Based on its last CRA examination, the Bank received a “satisfactory” rating.
 
Bank Secrecy Act and Money Laundering Control Act.  In 1970, Congress passed the Currency and Foreign Transactions Reporting Act, otherwise known as the Bank Secrecy Act (the “BSA”), which established requirements for recordkeeping and reporting by banks and other financial institutions. The BSA was designed to help identify the source, volume and movement of currency and other monetary instruments into and out of the U.S. in order to help detect and prevent money laundering connected with drug trafficking, terrorism and other criminal activities. The primary tool used to implement BSA requirements is the filing of Suspicious Activity Reports. Today, the BSA requires that all banking institutions develop and provide for the continued administration of a program reasonably designed to assure and monitor compliance with certain recordkeeping and reporting requirements regarding both domestic and international currency transactions. These programs must, at a minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of such systems and compliance, designate individuals responsible for such compliance and provide appropriate personnel training.
 
USA Patriot Act.  Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the "USAUSA Patriot Act"Act or the "PatriotPatriot Act," financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including employee training and independent audit requirements, meet minimum standards specified by the act, follow minimum standards for customer identification and maintenance of customer identification records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The costs or other effects of the compliance burdens imposed by the Patriot Act or future anti-terrorist, homeland security or anti-money laundering legislation or regulation cannot be predicted with certainty.
 
Consumer Laws and Regulations.  The Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws include, among others,others: Truth in Lending Act; Truth in Savings Act; Electronic Funds Transfer Act; Expedited Funds Availability Act; Equal Credit Opportunity Act; Fair and Accurate Credit Transactions Act; Fair Housing Act; Fair Credit Reporting Act; Fair Debt

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Collection Act; Home Mortgage Disclosure Act; Real Estate Settlement Procedures Act; laws regarding unfair and deceptive acts and practices; and usury laws. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations. Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general, and civil or criminal liability.
 
Pursuant to the Dodd-Frank Act, the CFPBConsumer Financial Protection Bureau (the "CFPB") has broad authority to regulate and supervise the retail consumer financial products and services activities of banks and various non-bank providers. The CFPB has authority to promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer financial products and services. In general, however,Notwithstanding the foregoing, banks with assets of $10.0 billion or less such as the Bank, will continue to be examined for consumer compliance by their primary federal banking regulator. Following the closing of the acquisition of Grandpoint, the Bank’s assets will exceed $10.0 billion, and the Bank will be examined for consumer compliance by the CFPB. The creation of the CFPB by the Dodd-Frank Act has leadled to, and is likely to continue to lead to, enhanced and strengthened enforcement of consumer financial protection laws.
 

In addition, federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, a financial institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure.
 
    Federal and State Taxation
 
The Corporation and the Bank report their income on a consolidated basis using the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions. The Company has not been audited by the IRS.Internal Revenue Service ("IRS"). For its 2015, 20142017, 2016 and 20132015 tax years, the Company was subject to a maximum federal income tax rate of 35.00% and California state income tax rate of 10.84%.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act includes a number of provisions that impact us, including the following:
Tax Rate. The Tax Act replaces the graduated corporate income tax rates applicable under prior law, which imposed a maximum corporate income tax rate of 35%, with a reduced 21% flat corporate income tax rate. Although the reduced corporate income tax rate generally should be favorable to us, resulting in increased earnings and capital, it decreased the value of our existing deferred tax assets. Generally accepted accounting principles (“GAAP”) requires that the impact of the provisions of the Tax Act be accounted for in the period of enactment. Accordingly, the incremental income tax expense recorded by the Corporation in the fourth quarter of 2017 related to the Tax Act was $5.6 million, resulting primarily from a re-measurement of deferred tax assets.

FDIC Insurance Premiums. The Tax Act prohibits taxpayers with consolidated assets over $50 billion from deducting any FDIC insurance premiums and prohibits taxpayers with consolidated assets between $10 and $50 billion from deducting the portion of their FDIC premiums equal to the ratio, expressed as a percentage, that (i) the taxpayer’s total consolidated assets over $10 billion, as of the close of the taxable year, bears to (ii) $40 billion. If we consummate our proposed acquisition of Grandpoint Capital, Inc. during 2018, our ability to fully deduct our FDIC premiums will be limited, as our total consolidated assets will exceed $10 billion.

Employee Compensation. A “publicly held corporation” is not permitted to deduct compensation in excess of $1 million per year paid to certain employees. The Tax Act eliminates certain exceptions to the $1 million limit applicable under prior law related to performance-based compensation (for example, equity grants and cash bonuses paid only on the attainment of performance goals). As a result, our ability to deduct certain compensation paid to our most highly compensated employees will now be limited.

Business Asset Expensing. The Tax Act allows taxpayers to immediately expense the entire cost (instead of only 50%, as under prior law) of certain depreciable tangible property and real property improvements acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain property). This 100% “bonus” depreciation is phased out proportionately for property placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for certain property).
 
Interest Expense. The Tax Act limits a taxpayer’s annual deduction of business interest expense to the sum of (i) business interest income, and (ii) 30% of “adjusted taxable income,” defined as a business’s taxable income without taking into account business interest income or expense, net operating losses, and, for 2018

through 2021, depreciation, amortization and depletion. Because we generate significant amounts of net interest income, we do not expect to be impacted by this limitation.

ITEM 1A.  RISK FACTORS
 
Ownership of our common stock involves certain risks. The risks and uncertainties described below are not the only ones we face. You should carefully consider the risks described below, as well as all other information contained in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occurs, our business, financial condition or results of operations could be materially, adversely affected.
 
Risks Related to Our Business
 
The economic environment could pose significant challenges for the Company and could adversely affect our financial condition and results of operations.
 
From December 2007 through June 2009,Although the U.S. economy wascontinues a gradual expansion following the severe recession that ended in recession and economic recovery has been slower than expected.  Although the economy continues to slowly improve, declines in real estate values and2009, financial stress on borrowers as a result of an uncertain future economic environment could have an adverse effect on the Company’s borrowers and their ability to repay their loans to us, which could adversely affect the Company’s business, financial condition and results of operations. A weakening of these conditions in the markets in which we operate would likely have an adverse effect on us and others in the financial institutions industry. For example, deterioration in economic conditions in our markets could drive losses beyond that which is provided for in our ALLL.allowance for loan losses ("ALLL"). We may also face the following risks in connection with these events:

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Economic conditions that negatively affect real estate values and the job market may result, in the deterioration of the credit quality of our loan portfolio, and such deterioration in credit quality could have a negative impact on our business.
A decrease in the demand for loans and other products and services offered by us.
A decrease in deposit balances due to overall reductions in the accounts of customers.
A decrease in the value of our loans or other assets secured by commercial or residential real estate.
A decrease in net interest income derived from our lending and deposit gathering activities.
Sustained weakness or continuing weakness in our markets may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities.
The processes we use to estimate ALLL and reserves may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation.
Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite its customers become less predictive of future charge-offs.
We expect to face increased regulation of its industry, and compliance with such regulation may increase our costs, limit our ability to pursue business opportunities and increase compliance challenges.

As these conditions or similar ones exist or worsen, we could experience adverse effects on our business, financial condition and results of operations.
 

Our business is subject to various lending and other economic risks that could adversely impact our results of operations and financial condition.
 
There was significant disruption and volatility in the financial and capital markets in 2008 and 2009. The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or require government intervention to avoid failure. These conditions were largely the result of the erosion of the U.S. and global credit markets, including a significant and rapid deterioration in the mortgage lending and related real estate markets. While economic conditions have improved, the sustainability of the economic recovery is uncertain, and there can be no assurance that the economic conditions that adversely affected the financial services industry, and the capital, credit and real estate markets generally, will continue to improvenot deteriorate in the near or long term, in which case, we could experience losses and write-downs of assets, and could face capital and liquidity constraints or other business challenges. If economic conditions were to deteriorate, particularly within our geographic region, it could result in the following additional consequences, any of which could have a material adverse effect on our business, results of operations and financial condition:
 
Loan delinquencies may increase causing increases in our provision and allowance for loan losses.
Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future charge-offs.
Collateral for loans, especially real estate, may continue to decline in value, in turn reducing a client’s borrowing power, and reducing the value of assets and collateral associated with our loans held for investment.
Consumer confidence levels may decline and cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities and decreased demand for our products and services.
Performance of the underlying loans in mortgage backed securities may deteriorate to potentially cause OTTI markdowns to our investment portfolio.

We may suffer losses in our loan portfolio in excess of our allowance for loan losses.
 
Our total nonperforming assets amounted to $5.1$3.6 million, or 0.18%0.04% of our total assets, at December 31, 2015, up2017, an increase from $2.5$1.6 million or 0.12%0.04% at December 31, 2014.2016. We had $1.3$1.0 million of net loan charge-offs for 2015,

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up2017, a decrease from $684,000$4.8 million in 2014.2016. Our provision for loan losses was $6.4$8.6 million in 2015, up2017, a decrease from $4.7$8.8 million in 2014.2016. If increases in our nonperforming assets occur in the future, our net loan charge-offs and/or provision for loan losses may also increase which may have an adverse effect upon our future results of operations.
 
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. These practices generally include analysis of a borrower’s prior credit history, financial statements, tax returns and cash flow projections, valuation of collateral based on reports of independent appraisers and liquid asset verifications. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our ALLL. We create anOur allowance for estimated loanprobable incurred losses in our accounting records,is based on analysis of the following:
 
Historical experience with our loans;
Industry historical losses as reported by the FDIC;
Evaluation of economic conditions;
Regular reviews of the quality, mix and size of the overall loan portfolio;
Regular reviews of delinquencies;
The quality of the collateral underlying our loans; and
The effect of external factors, such as competition, legal developments and regulatory requirements.


Although we maintain an ALLL at a level that we believe is adequate to absorb probable incurred losses inherent in our loan portfolio, changes in economic, operating and other conditions, including thea sharp decline in real estate values and changes in interest rates, which are beyond our control, may cause our actual loan losses to exceed our current allowance estimates. If the actual loan losses exceed the amount reserved, it will adversely affect our financial condition and results of operations.
 
In addition, the Federal Reserve and the DBO, as part of their supervisory function, periodically review our ALLL. Either agency may require us to increase our provision for loan losses or to recognize further loan losses, based on their judgments, which may be different from those of our management. Any increase in the allowance required by them could also adversely affect our financial condition and results of operations.

Risks related to specific segments of our loan portfolio may result in losses that could affect our results of operations and financial condition.

  General economic conditions and local economic conditions affect our entire loan portfolio. Lending risks vary by the type of loan extended.

In our C&I and SBA lending activities, collectability of loans may be adversely affected by risks generally related to small and middle market businesses, such as:
 
Changes or weaknesses in specific industry segments, including weakness affecting the business’ customer base;
Changes in consumer behavior;
Changes in a business’ personnel;
Increases in supplier costs that cannot be passed along to customers;
Increases in operating expenses (including energy costs);
Changes in governmental rules, regulations and fiscal policies;
Increases in interest rates, tax rates; and

In our investor real estate loans, payment performance and the liquidation values of collateral properties may be adversely affected by risks generally incidental to interests in real property, such as:
 
Declines in real estate values;
Declines in rental rates;

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Declines in occupancy rates;
Increases in other operating expenses (including energy costs);
The availability of property financing;
Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and taxation;
Increases in interest rates, real estate and personal property tax rates; and

In our HOA and consumer loans, collectability of the loans may be adversely affected by risks generally related to consumers, such as:
 
Changes or weakness in employment and wage income;
Changes in consumer behavior;
Declines in real estate values;
Declines in rental rates;
Increases in association operating expenses (including energy costs);
The availability of property financing;
Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and taxation;
Increases in interest rates, real estate and personal property tax rates; and


In our construction loans, collectability and the liquidation values of collateral properties may be adversely affected by risks generally related to consumers (for SFRsingle family residence construction loans) or incidental to interests in real property (for CRE construction loans), such as:
 
Declines in real estate values;
Declines in rental rates;
Declines in occupancy rates;
Increases in other operating expenses (including energy costs);
The availability of property financing;
Changes in governmental rules, regulations and fiscal policies, including rent control ordinances, environmental legislation and taxation;
Increases in interest rates, real estate and personal property tax rates; and

In our agribusiness and farmland loans, collectability of the loans may be adversely affected by risks generally related to agriculture production and farmlands, such as:

The cyclical nature of the agriculture industry;
Fluctuating commodity prices and changing climatic conditions;
Drought conditions, which adversely impact agricultural customers’ operating costs, crop yields and crop quality and could impact such customers’ ability to repay loans;
Increases in operating expenses; and
Changes in real estate values.

Adverse economic conditions in California may cause us to suffer higher default rates on our loans and reduce the value of the assets we hold as collateral.
 
Our business activities and credit exposure are concentrated in California. Difficult economic conditions, including state and local government deficits, in California may cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. In addition, demand for our products and services may decline. Declines in the California real estate market could hurt our business, because the vast majority of our loans are secured by real estate located within California. As of December 31, 2015,2017, approximately54%61% of our loans secured by real estate were located in California. If real estate values were to decline, especially in California, the collateral for our loans provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate would be diminished, and we would be more likely to suffer losses on defaulted loans.
 
Our level of credit risk could increase due to our focus on commercial lending and the concentration on small and middle market business customers with heightened vulnerability to economic conditions.
 
As of December 31, 2015,2017, our commercial real estate loans amounted to $869 million,$2.2 billion, or 38.4%35.7% of our total loan portfolio, and our commercial business loans amounted to $1.14$3.3 billion, or 50.3%53.8% of our total loan portfolio. At such date, our largest outstanding commercial business loan was $32.1$40.3 million, our largest multiple

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borrower relationship was $30.7$82.8 million and our largest outstanding commercial real estate loan was $26.5$31.5 million. Commercial real estate and commercial business loans generally are considered riskier than single-family residential loans because they have larger balances to a single borrower or group of related borrowers. Commercial real estate and commercial business loans involve risks because the borrowers’ ability to repay the loans typically depends primarily on the successful operation of the businesses or the properties securing the loans. Most of the Company’s commercial business loans are made to small business or middle market customers who may have a heightened vulnerability to economic conditions. Moreover, a portion of these loans have been made or acquired by us in recent years and the borrowers may not have experienced a complete business or economic cycle. Furthermore, the deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could adversely affect our results of operations.

 
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.
 
Nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on nonperforming loans or OREO,other real estate owned ("OREO"), which adversely affects our income. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile. While we reduce problem assets through loan sales, workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. There can be no assurance that we will not experience future increases in nonperforming assets.
 
We may be unable to successfully compete in our industry.
 
We face direct competition from a significant number of financial institutions, many with a state-wide or regional presence, and in some cases, a national presence, in both originating loans and attracting deposits. Competition in originating loans comes primarily from other banks and finance companies that make loans in our primary market areas. We also face substantial competition in attracting deposits from other banking institutions, money market and mutual funds, credit unions and other investment vehicles. In addition banks with larger capitalizations and non-bank financial institutions that are not governed by bank regulatory restrictions have larger lending limits and are better able to serve the needs of larger customers. Many of these financial institutions are also significantly larger andthan us, have greater financial resources than we have, and have established customer bases and name recognition. We compete for loans principally on the basis of interest rates and loan fees, the types of loans we offer and the quality of service that we provide to our borrowers. Our ability to attract and retain deposits requires that we provide customers with competitive investment opportunities with respect to rate of return, liquidity, risk and other factors. To effectively compete, we may have to pay higher rates of interest to attract deposits, resulting in reduced profitability. In addition, we rely upon local promotional activities, personal relationships established by our officers, directors and employees and specialized services tailored to meet the individual needs of our customers in order to compete. If we are not able to effectively compete in our market area, our profitability may be negatively affected.
 
Interest rate fluctuations,changes, increases or decreases, which are out of our control, could harm profitability.
 
Our profitability depends to a large extent upon net interest income, which is the difference between interest income and dividends on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Any change in general market interest rates, whether as a result of changes in the monetary policy of the Federal Reserve or otherwise, may have a significant effect on net interest income.  The

Our assets and liabilities may react differently to changes in overall interest rates or conditions. In general, higher interest rates are associated with a lower volume of loan originations while lower

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interest rates are usually associated with higher loan originations. Further, if interest rates decline, our loans may be refinanced at lower rates or paid off and our investments may be prepaid earlier than expected. If that occurs, we may have to redeploy the loan or investment proceeds into lower yielding assets, which might also decrease our income. Also, as many of our loans currently have interest rate floors, a rise in rates may increase the cost of our deposits while the rates on the loans remain at their floors, which could decrease our net interest margin.




Accordingly, changes in levels of market interest rates could materially and adversely affect our financial condition, loan origination volumes, net interest margin, results of operations and profitability.

Since December 2015, the Federal Reserve has started to gradually increase interest rates after maintaining rates at historically low levels during the financial crisis and its aftermath. Since that date and through December 31, 2017, the Federal Reserve increased its federal funds benchmark rate five times, from near zero to a range of 1.25% to 1.5%. Moreover, since December 2015, the Federal Reserve has removed reserves from the banking system, which also puts upward pressure on market rates of interest.

The prohibition restricting depository institutions from paying interest on demand deposits, such as checking accounts, was repealed as part of the Dodd-Frank Act. At December 31, 2017, we had $365 million in interest-bearing demand deposits. In addition, at December 31, 2017, we had $2.4 billion in money market and savings deposits. Currently, interest rates for these types of deposit accounts are very low because of existing market conditions. If we need to offer additional interest-bearing demand deposit products or higher interest rates on our current interest-bearing demand, money market or savings deposit accounts in order to maintain current clients or attract new clients, our interest expense will increase, perhaps materially. Furthermore, if we fail to offer competitive rates sufficient to retain these accounts, our core deposits may be reduced, which would require us to seek alternative funding sources or risk slowing our future asset quality and loan origination volume.growth.
 
Changes in the fair value of our investment securities may reduce our stockholders’ equity and net income.
 
At December 31, 2015, $280.32017, $787 million of our securities were classified as available-for-sale. At such date, the aggregate net unrealized gain on our available-for-sale securities was $562,000.$646,000. We increase or decrease stockholders’ equity by the amount of change from the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of our available-for-sale securities portfolio, net of the related tax, under the category of accumulated other comprehensive income/loss. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’ equity, as well as book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold and there are no credit impairments, the decrease will be recovered over the life of the securities. In the case of equity securities, which have no stated maturity, the declines in fair value may or may not be recovered over time. As of December 31, 2017, the Company realized OTTI recoveries of $2,000.
 
For the year ended December 31, 2015 there were OTTI charges or recoveries to report on our securities portfolio.  We continue to monitor the fair value of our entire securities portfolio as part of our ongoing OTTI evaluation process.  No assurance can be given that we will not need to recognize OTTI charges related to securities in the future.  At December 31, 2015,2017, we had stock holdings in the FHLB of San Francisco totaling $11.4$17.3 million, $25.3 million in FRB stock, and $23.3 million in other stock, holdings of $10.9 million which included stock from FRB, a CRA investment, and TIB.all carried at cost. The stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. For the year ended December 31, 2015,2017, we did not recognize an impairment charge related to our stock holdings. There can be no assurance that future negative changes to the financial condition of the issuers may require us to recognize an impairment charge with respect to such stock holdings.


Changes in the value of goodwill and intangible assets could reduce our earnings.

When the Company acquires a business, a substantial portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price, which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the fair value of the net identifiable assets acquired. As of December 31, 2017, the Company had approximately $536 million of goodwill and intangible assets, which includes goodwill of approximately $493 million resulting from the acquisitions the Company has consummated since 2011. The Company accounts for goodwill and intangible assets in accordance with GAAP, which, in general, requires that goodwill not be amortized, but rather that it is tested for impairment at least annually at the reporting unit level. Testing for impairment of goodwill and intangible assets is performed annually and involves the identification of reporting units and the estimation of fair values. The estimation of fair values involves a high degree of judgment and subjectivity in the assumptions used. Changes in the local and national economy, the federal and state legislative and regulatory environments for financial institutions, the stock market, interest rates and other external factors (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability, and may materially impact the fair value of publicly traded financial institutions and could result in an impairment charge at a future date. If we were to conclude that a future write-down of our goodwill or intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, results of operations or financial condition.
 
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
 
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, repurchase agreements, federal funds purchased, FHLB advances, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include a reduction in our credit ratings, if any, an increase in costs of capital in financial capital markets, negative operating results, a decrease in the level of our business activity due to a market downturn, a decrease in depositor or investor confidence or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole.
 
The soundnessfinancial condition of other financial institutions could negatively affect us.
 
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative

24


exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.
 
We are subject to extensive regulation, which could adversely affect our business.
 
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact our operations. These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted in the future, which could (1) make compliance much more

difficult or expensive, (2) restrict our ability to originate, broker or sell loans or accept certain deposits, (3) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (4) otherwise adversely affect our business or prospects for business.
 
Moreover, banking regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations.
 
Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.
 
The Dodd-Frank Act continues to materially affect our operations.
 
On July 21, 2010, President Obama signed into law theThe Dodd-Frank Act, which imposeswas enacted in 2010, imposed significant regulatory and compliance changes. The key provisions of the Dodd-Frank Act that have affected or are anticipated to affect our operations include:
 
Changes to regulatory capital requirements and how we plan capital and liquidity levels;
Creation of new government regulatory agencies, including the CFPB, which possesses broad rule-making and enforcement authorities;
Restrictions that will impact the nature of our incentive compensation programs for executive officers;
Changes in insured depository institution regulations and assessments;
Mortgage loan origination and risk retention; and
Potential new and different litigation and regulatory enforcement risks.

While several provisions of the Dodd-Frank Act became effective immediately upon its enactment and others have come into effect over the last few years, many provisions still require regulations to be promulgated by various federal agencies in order to be implemented. Some of these regulations have been proposed by the applicable federal agencies but not yet finalized.

In addition, on February 3, 2017, the President of the United States issued an executive order identifying “core principles” for the administration’s financial services regulatory policy and directing the Secretary of the Treasury, in consultation with the heads of other financial regulatory agencies, to evaluate how the current regulatory framework promotes or inhibits the principles and what actions have been, and are being, taken to promote the principles. In response to the executive order, on June 12, 2017, October 6, 2017 and October 26, 2017, respectively, the U.S. Department of the Treasury issued the first three of four reports recommending a number of comprehensive changes in the current regulatory system for U.S. depository institutions, the U.S. capital markets and the U.S. asset management and insurance industries.

It is not clear whether the referenced executive order issued by President Trump will result in material changes to the current laws and rules, or those that are in process, applicable to financial institutions and financial services or products like ours.

Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new

requirements or with any future changes in laws or regulations may negatively impact our results of operations and financial condition.
 


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Changes in laws, government regulation and monetary policy may have a material effect on our results of operations.
 
Financial institutions have been the subject of substantial legislative and regulatory changes and may be the subject of further legislation or regulation in the future, none of which is within our control. Significant new laws or regulations or changes in, or repeals of, existing laws or regulations may cause our results of operations to differ materially. In addition, the cost and burden of compliance with applicable laws and regulations have significantly increased and could adversely affect our ability to operate profitably. Further, federal monetary policy significantly affects credit conditions for us, as well as for our borrowers, particularly as implemented by the Federal Reserve, primarily through open market operations in U.S. government securities, the discount rate for bank borrowings and reserve requirements. A material change in any of these conditions could have a material impact on us or our borrowers, and therefore on our results of operations.
We expect to face continued increased regulation and supervision of our industry as a result of the past financial crisis.  The effects on us of recently enacted and proposed legislation and regulatory programs cannot reliably be determined at this time.
The repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.
All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act.  As a result, financial institutions can offer interest on demand deposits to compete for clients.  Our interest expense will increase and our net interest margin will decrease if the Bank begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on our business, financial condition and results of operations.
 
Federal and state banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations may adversely affect us.
 
Federal and state banking agencies, including the Federal Reserve, the DBO and the FDIC, periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that the Company or its management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin "unsafe or unsound" practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.  
 
We may in the future engage in additional FDIC-assisted transactions, which could present additional risk to our business.
We completed acquisitions of assets and assumption of deposits and liabilities of CNB on February 11, 2011 and of PDNB on April 27, 2012 from the FDIC.  We acquired the assets and assumed the liabilities of CNB and PDNB without entering into a loss sharing agreement with the FDIC.  In the current economic environment, and subject to any requisite regulatory consent, we may potentially be presented with additional opportunities to acquire the assets and liabilities of other failed banks in FDIC-assisted transactions.  The CNB acquisition, the PDNB acquisition and any future acquisitions involve risks similar to acquiring existing banks even though the FDIC might provide assistance to mitigate certain risks such as sharing in exposure to loan losses and providing

26


indemnification against certain liabilities of the failed institution.  However, because FDIC-assisted transactions are structured in a manner that would not allow us the time normally associated with preparing for and evaluating an acquisition, including preparing for integration of an acquired institution, we may face additional risks if we engage in FDIC-assisted transactions.  The risks related to the CNB acquisition, the PDNB acquisition and other future FDIC-assisted transactions include, among other things, the loss of customers, strain on management resources related to collection and management of problem loans and problems related to integration of personnel and operating systems.  We may not be successful in overcoming these risks or any other problems encountered in connection with the CNB acquisition, the PDNB acquisition or other future FDIC-assisted transactions.  Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value and profitability.
Moreover, even if we were inclined to participate in additional FDIC-assisted transactions, there are no assurances that the FDIC would allow us to participate or what the terms of such transaction might be or whether we would be successful in acquiring the bank or assets that we are seeking.  We may be required to raise additional capital as a condition to, or as a result of, participation in FDIC-assisted transactions.  Any such transactions and related issuances of stock may have a dilutive effect on earnings per share and share ownership.
Furthermore, to the extent we are allowed to, and choose to, participate in additional FDIC-assisted transactions, we may face competition from other financial institutions with respect to the proposed FDIC-assisted transactions.  To the extent that our competitors are selected to participate in FDIC-assisted transactions, our ability to identify and attract acquisition candidates and/or make acquisitions on favorable terms may be adversely affected.
Our HOA business is substantially dependent upon its relationship with Associa, which is the entity that owns and controls the HOA management companies that manage the HOAs from which we receive a majority of our HOA deposits.
 
OnIn March 15, 2013, we acquired FAB, which is exclusively focused on providing deposit and other services to HOAs and HOA management companies nationwide. A majoritySome of our HOA customers are also customers of the HOA management companies controlled by Associations, Inc. (“Associa”). At December 31, 2015,2017, approximately 60%41% of the HOA transaction deposits we held were derived from our relationship with Associa. We will continue to rely on the relationship with Associa to solicit HOA deposits as deemed necessary. If Associa or its HOA management companies lose some or all of their HOA customers, fall into financial or legal difficulty or elect to reduce the amount of HOA customers that it directs to us, it could have a material and adverse effect upon our business, including the decline or total loss of all of the deposits from the HOA management companies and the HOAs. We cannot assure you that we would be able to replace the relationship with Associa and its HOA management companies if any of these events occurred, which could have a material and adverse impact on our business, financial condition and results of operations. In connection with the closing of the FAB acquisition, we appointed John Carona to the boards of directors of the Company and the Bank. Mr. Carona is the founder, chief executive officerPresident and a directorChief Executive Officer of Associa.
Potential
Existing and potential acquisitions may disrupt our businessbusiness.
On April 1, 2017, we completed the acquisition of HEOP, the holding company of Heritage Oaks Bank, a California state-chartered bank with $2.0 billion in total assets. On November 1, 2017, we completed the acquisition of PLZZ, the holding company of Plaza Bank, a California-chartered banking corporation with $1.3 billion in total assets.

On February 9, 2018, we entered into a definitive agreement to acquire Grandpoint, the holding company of Grandpoint Bank, a California state-chartered bank with $3.2 billion in total assets. That transaction is expected to close in the third quarter of 2018, subject to the receipt all required regulatory and stockholder approvals and the satisfaction or waiver, applicable, of all closing conditions.
The success of these mergers will depend on, among other things, our ability to realize the anticipated revenue enhancements and efficiencies and to combine the businesses of Pacific Premier with those of HEOP, PLZZ and Grandpoint, if the acquisition is completed, in a manner that does not materially disrupt the existing customer relationships of HEOP, PLZZ or Grandpoint, if applicable, or result in decreased revenues resulting from any loss of customers, and that permits growth opportunities to occur. If we are not able to successfully achieve these objectives, the anticipated benefits of the mergers may not be realized fully or at all or may take longer to realize than expected.

It is possible that the ongoing HEOP integration process, the PLZZ integration process or the Grandpoint integration process when and if applicable, could result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the mergers. Integration efforts could also divert management attention and resources. These integration matters could have an adverse effect on the combined company.

Existing and potential acquisitions may dilute stockholder value.
 
In addition, we issued 11,959,022 shares of our common stock in connection with the HEOP acquisition and 6,049,373 shares of our common stock in connection with the acquisition of PLZZ. All of the shares of our common stock issued to former HEOP and PLZZ shareholders in the mergers are freely tradable without restrictions under the Securities Act. If former HEOP and PLZZ holders sell substantial amounts of our common stock, it may cause the market price of our common stock to decrease. We are expected to issue approximately 15,758,089 shares of our common stock in the Grandpoint acquisition.
We continue to evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions on an ongoing basis. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our stock’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from recent or future acquisitions could have a material adverse effect on our financial condition and results of operations.
 

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We may seek merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services.  We do not currently have any specific plans, arrangements or understandings regarding such expansion.  We cannot say with any certainty that we will be able to consummate, or if consummated, successfully integrate future acquisitions or that we will not incur disruptions or unexpected expenses in integrating such acquisitions. In attempting to make such future acquisitions, we anticipate competing with other financial institutions, many of which have greater financial and operational resources. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including, among other things:


Potential exposure to unknown or contingent liabilities of the target company;
Exposure to potential asset quality issues of the target company;
Difficulty and expense of integrating the operations and personnel of the target company;
Potential disruption to our business;
Potential diversion of management’s time and attention;
The possible loss of key employees and customers of the target company;
Difficulty in estimating the value of the target company; and
Potential changes in banking or tax laws or regulations that may affect the target company.

Our controls and procedures may fail or be circumvented.
 
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
 
Environmental liabilities with respect to properties on which we take title may have a material effect on our results of operations.
 
We could be subject to environmental liabilities on real estate properties we foreclose and take title in the normal course of our business. In connection with environmental contamination, we may be held liable to governmental entities or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties, or we may be required to investigate or clean-up hazardous or toxic substances at a property. The investigation or remediation costs associated with such activities could be substantial. Furthermore, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination even if we were the former owner of a contaminated site. The incurrence of a significant environmental liability could adversely affect our business, financial condition and results of operations.
 
Confidential customer information transmitted throughA breach in the Bank’s online banking service is vulnerable to security breaches and computer viruses, whichof our systems, or those of contracted partners, could exposedisrupt our business, result in the Bank to litigation and adversely affect its reputation and ability to generate deposits.
The Bank provides its customers the ability to bank online.  The secure transmissiondisclosure of confidential information, overdamage our reputation, and create significant financial and legal exposure.

Although we devote significant resources to maintain and regularly update our systems and processes that are designed to protect the Internetsecurity of our computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to us and our customers, there is a critical elementno assurance that all of online banking.  The Bank’s network couldour security measures will provide absolute security.
Like many financial institutions, we can be vulnerablesubject to attempts to infiltrate the security of our websites or other systems which can involve sophisticated and targeted attacks intended to obtain unauthorized access computer viruses, phishing schemes andto confidential information, destroy data, disrupt service, sabotage systems or cause other security problems.  The Bank may be required to spend significant capital and other resources to protect againstdamage, including through the threatintroduction of security breaches and computer viruses or malware, cyberattacks and other means. We can be targeted by individuals and groups using malicious code and viruses, and can be exposed to alleviate problems caused bydistributed denial-of-service attacks with the objective of disrupting on-line banking services.
Despite efforts to ensure the security and integrity of our systems, it is possible that we may not be able to anticipate, detect or recognize threats to our systems or to implement effective preventive measures against all security breaches of these types inside or viruses.  Tooutside our business, especially because the extent thattechniques used frequently are not recognized until launched, and because cyberattacks can originate from a wide variety of sources, including individuals or groups who are or may be involved in organized crime, hostile foreign governments or linked to terrorist organizations. These risks may increase in the Bank’s activitiesfuture as our web-based product offerings grow or we expand internal usage of web-based applications.

A successful penetration or circumvention of the security of our systems or the activitiessystems of its customers involve the storage and transmissionanother market participant could cause serious negative consequences, including significant disruption of our operations, misappropriation of confidential information, security breachesor damage to computers or systems, and viruses could expose the Bank to claims, litigationmay result in violations of applicable privacy and other possible liabilities.  Any inabilitylaws, financial loss, loss of confidence, customer dissatisfaction, significant litigation exposure and harm to prevent security breaches or computer virusesour reputation, all of which could also cause existing customers to lose confidence in the Bank’s systemshave a material adverse effect on our business, financial condition, results of operations, and could adversely affect its reputation and ability to generate deposits.future prospects.

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We are dependent on our key personnel.
 
Our future operating results depend in large part on the continued services of our key personnel, including Steven R. Gardner, our Chairman, President and Chief Executive Officer, who developed and implemented our business strategy. The loss of Mr. Gardner could have a negative impact on the success of our business strategy. In addition, we rely upon the services of EddieEdward Wilcox, our Senior Executive Vice President, and Chief Banking Officer, and our ability to attract and retain highly skilled personnel. We do not maintain key-man life insurance on any employee other than Mr. Gardner. We cannot assure you that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business. The unexpected loss of services of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In addition, recent regulatory proposals and guidance relating to compensation may negatively impact our ability to retain and attract skilled personnel.
 
A natural disaster or recurring energy shortage, especially in California, could harm our business.
 
We are based in Irvine, California, and approximately 54%61% of our loans secured by real estate were located in California at December 31, 2015.2017. In addition, the computer systems that operate our Internet websites and some of their back-up systems are located in Irvine and San Diego, California. Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes, wildfires, floods and mudslides. Natural disasters could harm our operations directly through interference with communications, including the interruption or loss of our websites, which would prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. A natural disaster or recurring power outages may also impair the value of our largest class of assets, our loan portfolio, which is comprised substantially of real estate loans. Uninsured or underinsured disasters may reduce borrowers’ ability to repay mortgage loans. Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on defaulted loans through foreclosure and making it more likely that we would suffer losses on defaulted loans. California has also experienced energy shortages, which, if they recur, could impair the value of the real estate in those areas affected. Although we have implemented several back-up systems and protections (and maintain business interruption insurance), these measures may not protect us fully from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business prospects, financial condition and results of operations.
 
Risks Related to Ownership of Our Common Stock
 
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell your shares of common stock at times or at prices you find attractive.
 
Stock price volatility may make it difficult for holders of our common stock to resell their common stock when desired and at desirable prices. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:
 
Actual or anticipated variations in quarterly results of operations;
Recommendations by securities analysts;
Operating and stock price performance of other companies that investors deem comparable to us;

News reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions in the current economic downturn;
Perceptions in the marketplace regarding us and/or our competitors;
Cyber security breaches;
New technology used, or services offered, by competitors;

29


Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
Failure to integrate acquisitions or realize anticipated benefits from acquisitions;
Changes in government regulations; and
Geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results as evidenced by the current volatility and disruption of capital and credit markets.
A limited trading market has historically existed for our common stock, which could lead to significant price volatility.
Our common stock is traded on the NASDAQ Global Select Market under the trading symbol “PPBI,” but there has historically been a relatively low trading volume in our common stock.  Although we recently issued additional shares of our common stock in our acquisition of Security California Bancorp that closed in January 2016, we may continue to experience a limited trading market for our common stock, which may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock.  Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the common stock.  In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue.
 
We have retained earnings, if any, to provide funds for use in our business.
 
It is our policy to retain earnings, if any, to provide funds for use in our business. We have never declared or paid dividends on our common stock. In addition, in order to pay cash dividends over time to our stockholders, we would most likely need to obtain funds from the Bank. The Bank’s ability, in turn, to pay dividends to us is subject to restrictions set forth in the Financial Code. The Financial Code provides that a bank may not make a cash distribution to its stockholders in excess of the lesser of (1) a bank’s retained earnings; or (2) a bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the stockholders of the bank during such period. However, a bank may, with the approval of the DBO, make a distribution to its stockholders in an amount not exceeding the greatest of (a) its retained earnings; (b) its net income for its last fiscal year; or (c) its net income for its current fiscal year. In the event that banking regulators determine that the stockholders’ equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the regulators may order the bank to refrain from making a proposed distribution.
 
Approval of the Federal Reserve is required for payment of any dividend by a state chartered bank that is a member of the Federal Reserve Board System, such as the Bank, if the total of all dividends declared by the bank in any calendar year would exceed the total of its retained net income for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its undivided profits without regulatory and stockholder approval. The Bank is also prohibited under federal law from paying any dividend that would cause it to become undercapitalized.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None.
 

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ITEM 2.  PROPERTIES
Location Leased or Owned Original Year Leased or Acquired Date of Lease Expiration
Corporate Headquarters: 17901 Von Karman, Suites 200 & 1200 Irvine, CA 92614 Leased 2012 2020
           
Branch Office: 19011 Magnolia Street Huntington Beach, CA 92646 Owned (a) (b) 2005 2023
           
Branch Office: 4957 Katella Avenue, Suite B Los Alamitos, CA 90720 Leased 2005 2020
           
Branch Office: 4667 MacArthur Blvd. Newport Beach, CA 92660 Leased 2005 2016
           
Branch Office: 74-150 Country Club Drive Palm Desert, CA 92260 Owned 2011 N.A.
           
Branch Office: 73-745 El Paseo Palm Desert, CA 92260 Leased 2012 2017
           
Branch Office: 1711 East Palm Canyon Drive Palm Springs, CA 92264 Leased 2011 2016
           
Branch Office: 901 East Tahquitz Canyon Way Palm Springs, CA 92262 Leased 2011 2018
           
Branch Office: 1598 E Highland Avenue San Bernardino, CA 92404 Leased 1986 2015
           
Branch Office: 13928 Seal Beach Blvd. Seal Beach, CA 90740 Leased 1999 2017
           
Branch Office: 2550 Fifth St., Ste 1010 San Diego, CA 92103 Leased 2013 2018
           
Branch Office: 781 Garden View Court St., Ste 100 Encinitas, CA 92024 Leased 2013 2017
           
Branch Office: 1110 Rosecrans St., Ste 101 Point Loma, CA 92106 Leased 2013 2015
           
Branch Office: 17782 E. 17th St. Tustin, CA 92780 Leased 2012 2016
           
Branch Office: 3637 Arlington Ave., Ste A Riverside, CA 92506 Leased 2001 2016
           
Branch Office: 102 E. 6th St., Ste 100 Corona, CA 92879 Leased 2003 2018
           
HOA Office: 12001 N. Central Expressway, Ste 1165 Dallas, TX 75243 Leased 2013 2017
           
HOA Office: 300 Winding Brook Dr., 2nd Flr. Glastonbury, CT 06033 Leased 2013 2018
           
Franchise Office: 123 Tice Blvd., #102 Woodcliff Lake, NJ 07675 Leased 2014 2019
           
(a) The building is owned, but the land is leased on a long-term basis.    
(b) During 2015 we leased to one tenant approximately 1,000 square feet of the 9,937 square feet of our Huntington Beach branch for $2,750 per month, and to another tenant approximately 1,724 square feet for $2,672 per month.

The headquarters of the Company and the Bank are located in Irvine, California at 17901 Von Karman Avenue. As of December 31,



2017, our properties include 11 administrative offices and 33 branches. We owned 13 properties and leased the remaining properties throughout Orange, Los Angeles, Riverside, San Bernardino, San Diego, San Luis Obispo and Santa Barbara, California as well as Clark County, Nevada. The lease terms are not individually material and range from month to month to ten years from inception date.     
All of our existing facilities are considered to be adequate for our present and anticipated future use. In the opinion of management, all properties are adequately covered by insurance.

For additional information regarding properties of the Company and the Bank, see Note 7. Premises and Equipment of the Notes to the Consolidate Financial Statements contained in "Item 8. Financial Statements and Supplementary."
ITEM 3.  LEGAL PROCEEDINGS

The Corporation was named as a defendant in a lawsuit brought in California state court (San Luis Obispo County) entitled, Garfield v. Heritage Oaks Bancorp, et al. This lawsuit was brought by Robert Garfield, a shareholder of HEOP, parent corporation of Heritage Oaks Bank. Mr. Garfield challenged the share price and other financial benefits to shareholders in the Corporation’s proposed acquisition of HEOP. Mr. Garfield purported to bring this claim on behalf of a class of similarly-situated HEOP shareholders, although no class was certified by the court. Mr. Garfield was unsuccessful in obtaining a preliminary injunction in advance of the acquisition. He later filed an amended complaint, which did not name the Corporation. As a result, the Corporation was dismissed from the action in October 2017.
The Corporation also was named as a defendant in a lawsuit brought in the U.S. District Court for the Central District of California entitled Parshall v. Heritage Oaks Bancorp, et al. In relevant part, Mr. Parshall alleged that the Corporation, as a “control person” of HEOP, should be liable for what Mr. Parshall claimed to be inadequate disclosures in the joint proxy statement/prospectus HEOP sent to its shareholders in connection with soliciting approval of the Corporation’s acquisition of HEOP. Mr. Parshall purported to bring this claim on behalf of a class of similarly-situated HEOP shareholders, although no class was certified by the court. Mr. Parshall voluntarily dismissed the action in June 2017.
In addition to the lawsuits described above, the Company is not involved in any material pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that noneneither the lawsuits described above nor any legal proceedings occurring in the ordinary course of these legal proceedings,business, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.
  
ITEM 4.  MINE SAFETY DISCLOSURES
 
None.
 
PART II
  
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Price Range by Quarters
 
The common stock of the Corporation has been publicly traded since 1997 and is currently traded on the NASDAQ Global Market under the symbol PPBI.  
 

As of March 4, 2016,February 27, 2018, there were approximately 490964 holders of record of our common stock. The following table summarizes the range of the high and low closing sale prices per share of our common stock as quoted by the NASDAQ Global Select Market for the periods indicated.

   Sale Price of Common Stock Sale Price of Common Stock
   High Low High Low
2014      
2016    
First Quarter ……………………………………………………. 17.36
 15.41
 $21.66
 $18.63
Second Quarter ……………………………………………………. 16.61
 13.65
 25.07
 20.32
Third Quarter ……………………………………………………. 15.33
 13.88
 27.39
 23.68
Fourth Quarter ……………………………………………………. 17.33
 14.05
 35.85
 24.75
2015    
  
2017  
  
First Quarter ……………………………………………………. 16.90
 14.86
 41.90
 34.35
Second Quarter ……………………………………………………. 17.35
 15.54
 38.75
 33.15
Third Quarter ……………………………………………………. 20.89
 16.76
 38.70
 32.05
Fourth Quarter ……………………………………………………. 23.80
 20.21
 42.55
 36.25
 
Stock Performance Graph.  The graph below compares the performance of our common stock with that of the NASDAQ Composite Index (U.S. companies) and the NASDAQ Bank Stocks Index from December 31, 20102012 through December 31, 2015.2017. The graph is based on an investment of $100 in our common stock at its closing price on December 31, 2010.2012. The Corporation has not paid any dividends on its common stock.

32

INDEX


Total Return to Stockholders
(Assumes $100 investment on 12/31/2010)2012)
Total Return Analysis 12/31/2010 12/30/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/30/2016 12/29/2017
Pacific Premier Bancorp, Inc. $100.00
 $97.84
 $158.02
 $242.90
 $267.44
 $327.93
 $100.00
 $153.71
 $169.24
 $207.52
 $345.21
 $390.63
NASDAQ Composite Index 100.00
 98.20
 113.82
 157.44
 178.53
 188.75
 100.00
 138.32
 156.85
 165.84
 178.28
 228.63
NASDAQ Bank Stocks Index 100.00
 87.58
 101.40
 140.85
 144.85
 154.45
 100.00
 138.90
 142.85
 152.31
 205.66
 212.88
 
Dividends
 
It is our policy to retain earnings, if any, to provide funds for use in our business. WeAlthough we have never declared or paid dividends on our common stock.stock, our board of directors periodically reviews whether to declare or pay cash dividends taking into account, among other things, general business conditions, our financial results, future prospects, capital requirements, legal and regulatory restrictions, and such other factors as our board may deem relevant.
 
Our ability to pay dividends on our common stock is dependent on the Bank’s ability to pay dividends to the Corporation. Various statutory provisions restrict the amount of dividends that the Bank can pay without regulatory approval. For information on the statutory and regulatory limitations on the ability of the Corporation to pay dividends to its stockholders and on the Bank to pay dividends to the Corporation, see “Item 1. Business-Supervision and Regulation—Dividends” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity.”

INDEX

Unregistered Sales of Equity Securities and Use of Proceeds

On June 25, 2012, the board of directors authorized its second stock repurchase program. Under the repurchase program, management is authorized to repurchase up to 1,000,000 shares of the Company’s common stock. The program may be limited or terminated at any time without prior notice. The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the fourth quarter of 2017.

33

Month of PurchaseTotal Number of shares purchased/ returnedAverage price paid per shareTotal number of shares repurchased as part of the publicly announced programMaximum number of shares that may yet be purchased under the program at end of month
October 1, 2017 to October 31, 2017


762,545
November 1, 2017 to November 30, 2017


762,545
December 1, 2017 to December 31, 2017


762,545
Total/Average


762,545

INDEX

ITEM 6.  SELECTED FINANCIAL DATA
 
The following table sets forth certain of our financial and statistical information at or for each of the years presented. This data should be read in conjunction with our audited consolidated financial statements as of December 31, 20152017 and 2014,2016, and for each of the years in the three-year period ended December 31, 20152017 and related Notes to Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.”
 
For the Years Ended December 31,For the Years Ended December 31,
2015 2014 2013 2012 20112017 2016 2015 2014 2013
Operating Data(in thousands)(dollars in thousands, except per share data)
Interest income$118,356
 $81,339
 $63,800
 $53,298
 $50,941
$270,005
 $166,605
 $118,356
 $81,339
 $63,800
Interest expense12,057
 7,704
 5,356
 7,149
 9,596
22,503
 13,530
 12,057
 7,704
 5,356
Net interest income106,299
 73,635
 58,444
 46,149
 41,345
247,502
 153,075
 106,299
 73,635
 58,444
Provision for loan losses6,425
 4,684
 1,860
 751
 3,255
8,640
 8,776
 6,425
 4,684
 1,860
Net interest income after provision for loans losses99,874
 68,951
 56,584
 45,398
 38,090
238,862
 144,299
 99,874
 68,951
 56,584
Net gains (losses) from loan sales7,970
 6,300
 3,228
 628
 (3,605)
Net gains from loan sales12,468
 9,539
 7,970
 6,300
 3,228
Other noninterest income6,471
 7,077
 5,583
 11,593
 9,402
18,646
 10,063
 6,418
 7,077
 5,583
Noninterest expense73,591
 54,993
 50,815
 31,854
 26,904
167,750
 98,583
 73,538
 54,993
 50,815
Income before income tax40,724
 27,335
 14,580
 25,765
 16,983
102,226
 65,318
 40,724
 27,335
 14,580
Income tax15,209
 10,719
 5,587
 9,989
 6,411
42,126
 25,215
 15,209
 10,719
 5,587
Net income$25,515
 $16,616
 $8,993
 $15,776
 $10,572
$60,100
 $40,103
 $25,515
 $16,616
 $8,993
         
         
Share Data(dollars in thousands, except per share data) 
Net income (loss) per share: 
  
  
  
  
Net income per share: 
  
  
  
  
Basic$1.21
 $0.97
 $0.57
 $1.49
 $1.05
$1.59
 $1.49
 $1.21
 $0.97
 $0.57
Diluted$1.19
 $0.96
 $0.54
 $1.44
 $0.99
1.56
 1.46
 1.19
 0.96
 0.54
Weighted average common shares outstanding: 
  
  
  
  
 
  
  
  
  
Basic21,156,668
 17,046,660
 15,798,885
 10,571,073
 10,092,181
37,705,556
 26,931,634
 21,156,668
 17,046,660
 15,798,885
Diluted21,488,698
 17,343,977
 16,609,954
 10,984,034
 10,630,720
38,511,261
 27,439,159
 21,488,698
 17,343,977
 16,609,954
Book value per share (basic)$13.90
 $11.81
 $10.52
 $9.85
 $8.39
$26.86
 $16.54
 $13.86
 $11.81
 $10.52
Book value per share (diluted)$13.78
 $11.73
 $10.44
 $9.75
 $8.34
26.73
 16.78
 13.78
 11.73
 10.44
Selected Balance Sheet Data 
  
  
  
  
 
  
  
  
  
Total assets$2,790,646
 $2,038,897
 $1,714,187
 $1,173,792
 $961,128
$8,024,501
 $4,036,311
 $2,789,599
 $2,037,731
 $1,714,187
Securities and FHLB stock312,207
 218,705
 271,539
 95,313
 128,120
871,601
 426,832
 312,207
 218,705
 271,539
Loans held for sale, net8,565
 
 3,147
 3,681
 
23,426
 7,711
 8,565
 
 3,147
Loans held for investment, net2,236,998
 1,616,422
 1,231,923
 974,213
 730,067
6,167,532
 3,220,317
 2,236,998
 1,616,422
 1,231,923
Allowance for loan losses17,317
 12,200
 8,200
 7,994
 8,522
28,936
 21,296
 17,317
 12,200
 8,200
Total deposits2,195,123
 1,630,826
 1,306,286
 904,768
 828,877
6,085,868
 3,145,581
 2,195,123
 1,630,826
 1,306,286
Total borrowings266,435
 186,953
 214,401
 125,810
 38,810
641,410
 397,354
 265,388
 185,787
 214,401
Total stockholders' equity298,980
 199,592
 175,226
 134,517
 86,777
1,241,996
 459,740
 298,980
 199,592
 175,226
Performance Ratios 
  
  
  
  
 
  
  
  
  
Return on average assets0.97% 0.91% 0.62% 1.52% 1.12%0.99% 1.11% 0.97% 0.91% 0.62%
Return on average equity9.31
 8.76
 5.61
 16.34
 12.91
6.75
 9.30
 9.31
 8.76
 5.61
Average equity to average assets10.45
 10.38
 11.13
 9.32
 8.69
14.62
 11.97
 10.45
 10.38
 11.13
Equity to total assets at end of period10.71
 9.79
 10.22
 11.46
 9.03
15.48
 11.39
 10.72
 9.79
 10.22
Average interest rate spread4.04
 4.03
 4.02
 4.44
 4.49
4.18
 4.22
 4.01
 4.01
 3.99
Net interest margin4.27
 4.23
 4.20
 4.65
 4.55
4.43
 4.48
 4.25
 4.21
 4.18
Efficiency ratio (1)55.89
 61.33
 64.69
 58.94
 56.50
50.9
 53.6
 55.9
 61.3
 64.7
Average interest-earnings assets to average interest-bearing deposits and borrowings148.19
 144.60
 146.75
 129.01
 104.74
164.66
 166.42
 149.17
 145.45
 147.58
Pacific Premier Bank Capital Ratios 
  
  
  
  
 
  
  
  
  
Tier 1 leverage ratio11.41% 11.29% 10.03% 12.07% 9.44%11.68% 10.94% 11.41% 11.29% 10.03%
Common equity tier 1 risk-based capital ratio12.35
 N/A
 N/A
 N/A
 N/A
Common equity tier 1 risk-weighted capital ratio11.88
 11.65
 12.35
 N/A
 N/A
Tier 1 capital to total risk-weighted assets12.35
 12.72
 12.34
 12.99
 11.68
11.88
 11.65
 12.35
 12.72
 12.34
Total capital to total risk-weighted assets13.07
 13.45
 12.97
 13.79
 12.81
12.33
 12.29
 13.07
 13.45
 12.97
Pacific Premier Bancorp, Inc. Capital Ratios 
  
  
  
  
 
  
  
  
  
Tier 1 leverage ratio9.52% 9.18% 10.29% 12.71% 9.50%10.70% 9.78% 9.52% 9.18% 10.29%
Common equity tier 1 risk-based capital ratio9.91
 N/A
 N/A
 N/A
 N/A
Common equity tier 1 risk-weighted capital ratio10.59
 10.12
 9.91
 N/A
 N/A
Tier 1 capital to total risk-weighted assets10.28
 10.30
 12.54
 13.61
 11.69
10.88
 10.41
 10.28
 10.30
 12.54
Total capital to total risk-weighted assets13.43
 14.46
 13.17
 14.43
 12.80
12.57
 12.72
 13.43
 14.46
 13.17
Asset Quality Ratios 
  
  
  
  
 
  
  
  
  
Nonperforming loans, net, to gross loans0.18% 0.09% 0.18% 0.22% 0.82%
Nonperforming assets, net as a percent of total assets0.18
 0.12
 0.20
 0.38
 0.76
Nonperforming loans to loans held for investment0.05% 0.04% 0.18% 0.09% 0.18%
Nonperforming assets as a percent of total assets0.04
 0.04
 0.18
 0.12
 0.20
Net charge-offs to average total loans, net0.06
 0.05
 0.16
 0.16
 0.53
0.02
 0.17
 0.06
 0.05
 0.16
Allowance for loan losses to gross loans at period end0.77
 0.75
 0.66
 0.81
 1.15
0.47
 0.66
 0.77
 0.75
 0.66
Allowance for loan losses as a percent of nonperforming loans, gross at period end436.20
 844.88
 364.28
 362.38
 139.87
881
 1,868
 436
 845
 364
(1) Represents the ratio of noninterest expense less other real estate owned operations, core deposit intangible amortization and non-recurring merger related and litigation expenses to the sum of net interest income before provision for loan losses and total noninterest income less gains/(loss) on sale of securities, other-than-temporary impairment recovery (loss) on investment securities, and gain on acquisitions.
         
(1) Represents the ratio of noninterest expense less OREO operations, core deposit intangible amortization and merger-related and litigation expenses to the sum of net interest income before provision for loan losses and total noninterest income less gains/(loss) on sale of securities, gain/(loss) on sale of OREO. OTTI recovery (loss) on investment securities, and gain on acquisitions. (1) Represents the ratio of noninterest expense less OREO operations, core deposit intangible amortization and merger-related and litigation expenses to the sum of net interest income before provision for loan losses and total noninterest income less gains/(loss) on sale of securities, gain/(loss) on sale of OREO. OTTI recovery (loss) on investment securities, and gain on acquisitions.

INDEX

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management's discussion and analysis of financial condition and results of operations is intended to provide a better understanding of the significant changes in trends relating to the Company's financial condition, results of operation, liquidity and capital resources. This section should be read in conjunction with the disclosures regarding "Forward-Looking Statements" set forth in "Item I. Business-Forward Looking Statements", as well as the discussion set forth in "Item 8. Financial Statements and Supplementary Data," including the notes to consolidated financial statements.

Merger Agreement

On February 12, 2018, the Corporation announced that, on February 9, 2018, it had entered into a definitive agreement to acquire Grandpoint and its wholly-owned bank subsidiary, Grandpoint Bank, a California-chartered state bank subsidiary. At December 31, 2017, Grandpoint had $3.2 billion in total assets, $2.4 billion in gross loans and $2.4 billion in total deposits. Grandpoint operates 14 regional offices in Southern California, Arizona and Vancouver, Washington.
Upon consummation of the acquisition, holders of Grandpoint common stock will have the right to receive 0.4750 shares of the Corporation's common stock for each share of Grandpoint common stock they own. Based on a $39.10 closing price of the Corporation's common stock on February 9, 2018, the aggregate merger consideration payable to Grandpoint's shareholders is approximately $641 million.

Summary
 
Our principal business is attracting deposits from small and middle market businesses and consumers and investing those deposits, together with funds generated from operations and borrowings, primarily in commercial business loans and various types of commercial real estate loans. The Company expects to fund substantially all of the loans that it originates or purchases through deposits, FHLB advances and other borrowings and internally generated funds. Deposit flows and cost of funds are influenced by prevailing market rates of interest primarily on competing investments, account maturities and the levels of savings in the Company’s market area. The Company generates the majority of its revenues from interest income on loans that it originates and purchases, income from investment in securities and service charges on customer accounts. The Company’s revenues are partially offset by interest expense paid on deposits and borrowings, the provision for loan losses and noninterest expenses, such as operating expenses. The Company’s operating expenses primarily consist of employee compensation and benefit expenses, premises and occupancy expenses, data processing and communication expenses and other general expenses. The Company's results of operations are also affected by prevailing economic conditions, competition, government policies and other actions of regulatory agencies.
 
Critical Accounting Policies and Estimates
 
We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company’s financial statements in Item 8 hereof. The Company’s significant accounting policies are described in the Note 1 to the Consolidated Financial Statements. Certain accounting policies require management to make estimates and assumptions that have a material impact on the carrying value of certain assets and liabilities; management considers these to be critical accounting policies. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at consolidated statements of financial condition dates and the Company’s results of operations for future reporting periods.
 

34

INDEX

Allowance for Loan Losses
 
We consider the determination of ALLL to be among our critical accounting policies that require judicious estimates and assumptions in the preparation of the Company’s financial statements that is particularly susceptible to significant change. The Company maintains an ALLL at a level deemed appropriate by management to provide for known or inherent risksprobable incurred losses in the portfolio at the consolidated statements of financial condition date. The Company has implemented and adheres to an internal asset review system and loss allowance methodology designed to provide for the detection of problem assets and an adequate allowance to cover loan losses. Management’s determination of the adequacy of ALLL is based on an evaluation of the composition of the portfolio, actual loss experience, industry charge-off experience on income property loans, current economic conditions, and other relevant factors in the areaareas in which the Company’s lending and real estate activities are based. These factors may affect the borrowers’ ability to pay and the value of the underlying collateral. The allowance is calculated by applying loss factors to loans held for investment according to loan program type and loan credit classification. The loss factors are evaluated on a quarterly basis and established based primarily upon the Bank’s historical loss experience and, to a lesser extent, the industry charge-off experience and are evaluated on a quarterly basis.experience. Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Bank to recognize additions to the allowance based on judgments different from those of management. In the opinion of management, and in accordance with the credit loss allowance methodology, the present allowance is considered adequate to absorb estimable and probable credit losses. Additions and reductions to the allowance are reflected in current operations. Charge-offs to the allowance are made when specific assets are considered uncollectible or are transferred to OREO and the fair value of the property is less than the loan’s recorded investment. Recoveries are credited to the allowance.

Although management uses the best information available to make these estimates, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may be beyond the Company’s control. For further information on the ALLL, see Notes 1 and 5 to the Consolidated Financial Statements in Item 8 hereof.

 Business Combinations 

We account for acquisitions under the acquisition method. All identifiable assets acquired and liabilities assumed are recorded at fair value. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill. Identifiable intangible assets include core deposit intangibles, which have a definite life. Core deposit intangibles ("CDI") are subsequently amortized over the estimated life up to 10 years and are tested for impairment quarterly.annually. Goodwill generated from business combinations is deemed to have an indefinite life and is not subject to amortization, and instead is tested for impairment at least annually.

As part of the estimation of fair value, we review each loan or loan pool acquired to determine whether there is evidence of deterioration in credit quality since inception and if it is probable that the Company will be unable to collect all amounts due under the contractual loan agreements. We consider expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition. If a loan is determined to be a purchased credit impaired ("PCI") loan, the amount in excess of the estimated future cash flows is not accreted into earnings. The amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan (accretable yield). The Company records these loans on the acquisition date at their net realizable value. Thus, an allowance for estimated future losses is not established on the acquisition date. Losses or a reduction in cash flow, which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses. An increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan.


35

INDEX

Income Taxes

Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the asset liability method. In estimating future tax consequences, all expected future events other than enactments of changes in the tax laws or rates are considered. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are to be recognized for temporary differences that will result in deductible amounts in future years and for tax carryforwards if, in the opinion of management, it is more likely than not that the deferred tax assets will be realized. See also Note 14 of the Consolidated Financial Statements in Item 8 hereof this Form 10-K.

Fair Value of Financial Instruments

We use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Investment securities available-for-sale are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a non-recurring basis, such as impaired loans and OREO. These non-recurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Further, we include in Note 18 to the Consolidated Financial Statements information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value we disclose the estimate of their fair value.

Operating Results
 
Overview.  The comparability of financial information is affected by our acquisitions. On January 26, 2015,April 1, 2017 and November 1, 2017, the Company completed anthe acquisition of Independence Bank (“IDPK”)HEOP and Infinity Franchise Capital, LLC (“IFC”) was acquired on January 30, 2014.PLZZ, respectively.

Non-GAAP Measurements
 
The Company uses certain non‑-GAAPnon-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The non-GAAP measures used in this Form 10-K include the following:
Adjusted net income: Earnings are adjusted to exclude the tax effected impact of merger and litigation expenses.
Adjusted net income for return on adjusted tangible common equity: Earnings are adjusted to exclude the tax effected impact of core deposit amortization and merger and litigation expenses.
Tangible common equity: Total stockholders' equity is reduced by the amount of intangible assets.assets, including goodwill.
Adjusted return on average assets, adjusted return on average tangible equity, tangibleTangible common equity amounts and ratios, tangible assets, and tangible book value per share: Given that the use of these measures is prevalent among banking regulators, investors and analysts, we disclose them in addition to return on average assets, return on average equity, equity-to-assets ratio, total assets, and book value per share, respectively.
  For the Years ended December 31,
  2015 2014 2013
Net income $25,515
 $16,616
 $8,993
Plus merger related and litigation expenses, net of tax 3,399
 1,909
 4,272
    Adjusted net income $28,914
 $18,525
 $13,265
       
Diluted earnings per share $1.19
 $0.96
 $0.54
Plus merger related and litigation expenses, net of tax 0.16
 0.11
 0.26
    Adjusted diluted earnings per share $1.35
 $1.07
 $0.80
       
Return on average assets 0.97% 0.91% 0.62%
Plus merger related and litigation expenses, net of tax 0.13
 0.10
 0.30
    Adjusted return on average assets 1.10% 1.01% 0.92%




36

INDEX

  For the Years ended December 31,
  2015 2014 2013
Net income $25,515
 $16,616
 $8,993
Plus: Tax effected CDI amortization 807
 616
 471
    Adjusted net income for return on average tangible common equity $26,322
 $17,232
 $9,464
Plus: Merger related and litigation expenses, net of tax $3,399
 $1,909
 $4,272
    Adjusted net income for adjusted return on average tangible common equity $29,721
 $19,141
 $13,736
       
Average stockholders' equity $274,002
 $189,659
 $160,391
Less: Average core deposit intangible 7,984
 6,121
 5,321
Less: Average goodwill 48,058
 22,490
 12,393
    Average tangible common equity $217,960
 $161,048
 $142,677
       
Return on average common equity 9.31% 8.76% 5.61%
Plus: Intangible return on average tangible common equity 2.77
 1.94
 1.02
Return on average tangible common equity 12.08
 10.70
 6.63
    Adjusted return on average tangible common equity 13.64% 11.89% 9.63%

  For the Years ended December 31,
  2015 2014 2013
Total stockholders' equity $298,980
 $199,592
 $175,226
Less: Intangible assets (58,002) (28,564) (24,056)
    Tangible common equity $240,978
 $171,028
 $151,170
       
Total assets $2,790,646
 $2,038,897
 $1,714,187
Less: Intangible assets (58,002) (28,564) (24,056)
    Tangible assets $2,732,644
 $2,010,333
 $1,690,131
       
Common Equity ratio 10.71 % 9.79 % 10.22 %
Less: Intangibility equity ratio (1.89) (1.28) (1.28)
    Tangible common equity ratio 8.82 % 8.51 % 8.94 %
       
Basic shares outstanding 21,570,746
 16,903,884
 16,656,279
       
Book value per share $13.86
 $11.81
 $10.52
Less: Intangible book value per share (2.69) (1.69) (1.44)
    Tangible book value per share $11.17
 $10.12
 $9.08

For 2015, including non-recurring merger-related expenses of $4.8 million associated with the acquisitions of Security and IDPK, the Company recorded net income of $25.5 million, or $1.19 per diluted share.  For 2014, including non-recurring merger-related expenses of $864,000 associated with the acquisition of IDPK and $626,000 associated with the acquisition of Infinity, and a non-recurring $1.7 million litigation expense, the Company recorded net income of $16.6 million or $0.96 per diluted share. For 2013, including non-recurring merger-related expenses of $5.0 million associated with the acquisition of SDTB, $1.7 million associated with the acquisition of FAB and $203,000 associated with the acquisition of Infinity, the Company recorded net income of $9.0 million or $0.54 per share on a diluted basis.

Excluding the non-recurring merger-related expenses and litigation expense detailed above, the Company reported adjusted net income for 2015 of $28.9 million or $1.35 per share on a diluted basis, compared

37

INDEX

with adjusted net income for 2014 of $18.5 million or $1.07 per share on a diluted basis and adjusted net income for 2013 of $13.3 million or $0.80 per share on a diluted basis.
The Company’s pre-tax income totaled $40.7 million in 2015, compared with pre-tax income of $27.3 million in 2014.  The $13.4 million increase in the Company’s pre-tax income for 2015 compared to 2014 was principally due to higher net interest income of $32.7 million which was primarily related to an increase in interest earning assets from both organic growth and acquisitions. Non-interest income increased by $1.1 million, primarily from $1.7 million increase in net gains from the sales of loans. The aggregate increase in net interest income and non-interest income exceeded the $18.6 million increase in non-interest expense and the $1.7 million increase in provision for loan losses. The Company had higher operating expenses in 2015 primarily from compensation and benefits of $9.8 million, predominately due to an increase in staff from our acquisition activity and to a lesser extent to support organic growth, and an increase in merger related expenses of $3.3 million.  In addition, our provision expense increased by $1.7 million, primarily related to our growth in the loan portfolio.
The Company’s pre-tax income totaled $27.3 million in 2014, compared with a pre-tax income of $14.6 million in 2013.  The $12.8 million increase in the Company’s pre-tax income for 2014, compared to 2013 was primarily due to higher net interest income of $15.2 million which was primarily related to an increase in interest earning assets from organic growth as well as acquisitive growth. Non-interest income was higher in 2014 primarily from an increase in net gains from the sales of loans of $3.1 million, an increase in loan servicing fees of $565,000 and settlement proceeds of $1.1 million related to properties received from our FDIC-assisted acquisitions. Additionally, lower non-recurring merger-related expenses of $5.4 million associated with our acquisition activities contributed to the growth in pre-tax income. These increases to the Company's pre-tax income for 2014 were partially offset by higher operating expenses primarily from compensation and benefits of $5.7 million, primarily related to an increase in staff from our acquisition activity and internal growth, an established litigation expense of $1.7 million within our other expense category and higher deposit expenses of $1.1 million related to an increase in deposit balances. In addition, our provision expense increased by $2.8 million in 2014, primarily related to our growth in the loan portfolio.

For 2015, our return on average assets was 0.97% and our return on average equity was 9.31%.  These returns were higher than our 2014 returns of 0.91% on average assets and 8.76% on average equity and higher than our 2013 returns of 0.62% on average assets and 5.61% on average equity.
Excluding non-recurring merger-related expenses and litigation expense detailed above, the Company’s 2015 adjusted return on average assets was 1.10% and adjusted return on average tangible common equity was 13.64%. These returns compare with an adjusted return on average assets of 1.01% and an adjusted return on average tangible common equity of 11.89% for 2014 and an adjusted return on average assets of 0.92% and an adjusted return on average tangible common equity of 9.63% for 2013.
  For the Years ended December 31,
  2017 2016 2015
  (dollars in thousands)
Total stockholders' equity $1,241,996
 $459,740
 $298,980
Less: Intangible assets 536,343
 111,941
 58,002
    Tangible common equity $705,653
 $347,799
 $240,978
       
Total assets $8,024,501
 $4,036,311
 $2,789,599
Less: Intangible assets 536,343
 111,941
 58,002
    Tangible assets $7,488,158
 $3,924,370
 $2,731,597
       
Common Equity ratio 15.48% 11.39% 10.72%
Less: Intangible equity ratio 6.06
 2.53
 1.90
    Tangible common equity ratio 9.42% 8.86% 8.82%
       
Basic shares outstanding 46,245,050
 27,798,283
 21,570,746
       
Book value per share $26.86
 $16.54
 $13.86
Less: Intangible book value per share 11.60
 4.03
 2.69
    Tangible book value per share $15.26
 $12.51
 $11.17
 
Net Interest Income.  Our primary source of revenue is net interest income, which is the difference between the interest earned on loans, investment securities, and interest earning balances with financial institutions (“interest-earning assets”) and the interest paid on deposits and borrowings (“interest-bearing liabilities”). Net interest margin is net interest income expressed as a percentage of average interest earning assets. Net interest income is affected by changes in both interest rates and the volume of interest earninginterest-earning assets and interest-bearing liabilities.
 
For 2015,2017, net interest income totaled $106$248 million, an increase of $32.7$94.4 million or 44.4%62% over 2014.2016. The increase reflected an increase in average interest-earning assets of $747$2.2 billion, primarily due to the acquisitions of HEOP and PLZZ in the second and fourth quarter of 2017, respectively. Net interest margin decreased 5 basis points to 4.43%, primarily due to the yield on interest-earning assets decreasing 4 basis points and a slight increase in cost of funds.
For 2016, net interest income totaled $153 million, an increase of $46.8 million or 44% over 2015. The increase reflected an increase in average interest-earning assets of $912 million and an increase in the average yield of 9 bps, partially offset by15 basis points, resulting in an increase in interest-bearing liabilities of $475 million and 8 bps increase in the average cost of interest-bearing liabilities. The net interest margin expanded by 4 bps asof 23 basis points to 4.48%. The 23 basis point expansion in net interest margin was a result of the increase in the yield on earning assets increasing by more than the increasecoupled with a 6 basis point decrease in the cost of interest bearing liabilities, as well as the $231$440 million increase in non-interest bearing deposits. The increase in interest-earning assets was primarily related to our organic loan growth, and ourthe acquisition of Independence BankSCAF in early 2015.  The increase in interest-bearing liabilities was also due primarily to our acquisition2016, and the purchase of Independence Bank, as well as the impact of

38

INDEX

having the $60$265 million of subordinated debt issuedmulti-family loans in August of 2014 at a fixed rate of 5.75% outstanding for full year.
For 2014, net interest income totaled $73.6 million, an increase of $15.2 million or 26.0% over 2013.  The increase reflected an increase in average interest-earning assets of $349.2 million and net interest margin of 3 bps to 4.23%.  The increase in average interest-earning assets was primarily related to our organic loan growth and a full year’s impact from our acquisitions of SDTB and FAB in 2013, as well as our acquisition of Infinity in early 2014.  The increase in net interest margin is mainly attributable to an increase in yield on average interest-earning assets of 9 bps, primarily from deploying liquidity received in our acquisitions during 2013 to create a higher mix of loans, partially offset by a lower yield on loans of 28 bps. The lower loan yield primarily related to interest rates on loan originations during 2013 and 2014 that produced yields lower than the average yield on our existing loan portfolio. Also contributing to the increase in the net interest margin was a $97 million increase in average non interest bearing deposits in 2014, compared to 2013. An increase in borrowing costs of 22 bps resulted in increased interest-bearing liability costs of 8 bps in 2014. The increase in borrowing costs was the result of issuance of $60 million in subordinated debt, with an interest rate of 5.75%, in August of 2014  2016.
 
The following table presents for the periods indicated the average dollar amounts from selected balance sheet categories calculated from daily average balances and the total dollar amount, including adjustments to yields and costs, of:
 
Interest income earned from average interest-earning assets and the resultant yields; and
Interest expense incurred from average interest-bearing liabilities and resultant costs, expressed as rates.

The table also sets forth our net interest income, net interest rate spread and net interest rate margin for the periods indicated. The net interest rate spread represents the difference between the yield on interest-earning
INDEX

assets and the cost of interest-bearing liabilities. The net interest rate margin reflects the ratio of net interest income as a percentage of interest-earning assets for the year.
 

39

INDEX

For the Years Ended December 31,For the Years Ended December 31,
2015 2014 20132017 2016 2015
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
(dollars in thousands)(dollars in thousands)
Assets                                  
Interest-earning assets:                                  
Cash and cash equivalents$141,454
 $310
 0.22% $81,290
 $141
 0.17% $93,298
 $184
 0.20%$140,402
 $842
 0.60% $180,185
 $762
 0.42% $141,454
 $310
 0.22%
Investment securities299,767
 6,949
 2.32
 244,854
 5,447
 2.22
 266,854
 5,527
 2.07
718,564
 18,136
 2.52
 334,283
 7,908
 2.37
 299,767
 6,949
 2.32
Loans receivable, net (1)2,046,981
 111,097
 5.43
 1,414,973
 75,751
 5.35
 1,031,740
 58,089
 5.63
4,724,970
 251,027
 5.31
 2,900,379
 157,935
 5.45
 2,061,788
 111,097
 5.39
Total interest-earning assets2,488,202
 118,356
 4.76% 1,741,117
 81,339
 4.67% 1,391,892
 63,800
 4.58%5,583,936
 270,005
 4.84% 3,414,847
 166,605
 4.88% 2,503,009
 118,356
 4.73%
Noninterest-earning assets134,476
  
  
 86,818
  
  
 49,663
  
  
510,947
  
  
 186,564
  
  
 118,536
  
  
Total assets$2,622,678
  
  
 $1,827,935
  
  
 $1,441,555
  
  
$6,094,883
  
  
 $3,601,411
  
  
 $2,621,545
  
  
Liabilities and Equity 
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
Interest-bearing deposits: 
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
Interest checking$141,962
 $165
 0.12% $134,056
 $161
 0.12% $94,718
 $110
 0.12%$293,450
 $365
 0.12% $176,508
 $203
 0.11% $141,962
 $165
 0.12%
Money market696,747
 2,426
 0.35
 469,123
 1,443
 0.31
 367,769
 1,043
 0.28
1,701,209
 6,720
 0.40
 1,003,861
 3,638
 0.36
 696,747
 2,426
 0.35
Savings88,247
 141
 0.16
 75,068
 110
 0.15
 78,815
 103
 0.13
189,408
 251
 0.13
 98,224
 151
 0.15
 88,247
 141
 0.16
Time493,747
 3,898
 0.79
 377,333
 3,323
 0.88
 325,439
 2,809
 0.86
Retail certificates of deposit556,121
 3,390
 0.61
 416,232
 3,084
 0.74
 390,797
 3,209
 0.82
Wholesale/brokered certificates of deposit227,822
 2,645
 1.16
 180,209
 1,315
 0.73
 102,950
 689
 0.67
Total interest-bearing deposits1,420,703
 6,630
 0.47% 1,055,580
 5,037
 0.48% 866,741
 4,065
 0.47%2,968,010
 13,371
 0.45% 1,875,034
 8,391
 0.45% 1,420,703
 6,630
 0.47%
FHLB advances and other borrowings188,032
 1,490
 0.79
 117,694
 1,124
 0.96
 71,447
 984
 1.38
341,782
 4,411
 1.29
 107,519
 1,295
 1.20
 188,032
 1,490
 0.79
Subordinated debentures70,310
 3,937
 5.60
 30,858
 1,543
 5.00
 10,310
 307
 2.98
81,466
 4,721
 5.80
 69,346
 3,844
 5.54
 69,199
 3,937
 5.69
Total borrowings258,342
 5,427
 2.10% 148,552
 2,667
 1.80% 81,757
 1,291
 1.58%423,248
 9,132
 2.16% 176,865
 5,139
 2.91% 257,231
 5,427
 2.11%
Total interest-bearing liabilities1,679,045
 12,057
 0.72% 1,204,132
 7,704
 0.64% 948,498
 5,356
 0.56%3,391,258
 22,503
 0.66% 2,051,899
 13,530
 0.66% 1,677,934
 12,057
 0.72%
Noninterest-bearing deposits646,931
  
  
 415,983
  
  
 318,985
  
  
1,758,730
  
  
 1,086,814
  
  
 646,931
  
  
Other liabilities22,700
  
  
 18,161
  
  
 13,681
  
  
54,039
  
  
 31,682
  
  
 22,678
  
  
Total liabilities2,348,676
  
  
 1,638,276
  
  
 1,281,164
  
  
5,204,027
  
  
 3,170,395
  
  
 2,347,543
  
  
Stockholders' equity274,002
  
  
 189,659
  
  
 160,391
  
  
890,856
  
  
 431,016
  
  
 274,002
  
  
Total liabilities and equity$2,622,678
  
  
 $1,827,935
  
  
 $1,441,555
  
  
$6,094,883
  
  
 $3,601,411
  
  
 $2,621,545
  
  
Net interest income 
 $106,299
  
  
 $73,635
  
  
 $58,444
  
 
 $247,502
  
  
 $153,075
  
  
 $106,299
  
Net interest rate spread 
  
 4.04%  
  
 4.03%  
  
 4.02% 
  
 4.18%  
  
 4.22%  
  
 4.01%
Net interest margin 
  
 4.27%  
  
 4.23%  
  
 4.20% 
  
 4.43%  
  
 4.48%  
  
 4.25%
Ratio of interest-earning assets to interest-bearing liabilitiesRatio of interest-earning assets to interest-bearing liabilities  
 148.19%  
  
 144.60%  
  
 146.75%Ratio of interest-earning assets to interest-bearing liabilities  
 164.66%  
  
 166.42%  
  
 149.17%
                                  
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums, and ALLL.
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums.(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums.

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


40

INDEX


Year Ended December 31, 2015
Compared to
Year Ended December 31, 2014
Increase (decrease) due to
 Year Ended December 31, 2014
Compared to
Year Ended December 31, 2013
Increase (decrease) due to
Year Ended December 31, 2017
compared to
Year Ended December 31, 2016
Increase (decrease) due to
 Year Ended December 31, 2016
compared to
Year Ended December 31, 2015
Increase (decrease) due to
Average
Rate
 
Average
Volume
 Net 
Average
Rate
 
Average
Volume
 NetVolume Days Rate Net Volume Days Rate Net
(in thousands)(dollars in thousands)
Interest-earning assets           
Interest-Earning Assets               
Cash and cash equivalents$49
 $120
 $169
 $(25) $(18) $(43)$(193) $(2) $275
 $80
 $105
 $2
 $345
 $452
Investment securities296
 1,206
 1,502
 18
 (98) (80)9,696
 
 532
 10,228
 808
 
 151
 959
Loans receivable, net1,133
 34,213
 35,346
 (2,888) 20,550
 17,662
97,907
 (688) (4,127) 93,092
 45,168
 432
 1,238
 46,838
Total interest-earning assets1,567
 35,450
 37,017
 1,253
 16,286
 17,539
107,410
 (690) (3,320) 103,400
 46,081
 434
 1,734
 48,249
Interest-bearing liabilities 
  
  
  
  
  
Interest-Bearing Liabilities 
    
  
  
    
  
Transaction accounts215
 803
 1,018
 108
 350
 458
2,935
 (20) 429
 3,344
 1,196
 11
 53
 1,260
Retail certificates of deposit(368) 943
 575
 66
 448
 514
Time deposits1,330
 (17) 323
 1,636
 753
 12
 (264) 501
FHLB advances and other borrowings(200) 566
 366
 (300) 440
 140
3,020
 (12) 108
 3,116
 (787) 4
 588
 (195)
Subordinated debentures303
 2,091
 2,394
 416
 820
 1,236
602
 
 275
 877
 4
 
 (97) (93)
Total interest-bearing liabilities963
 3,390
 4,353
 759
 1,589
 2,348
7,887
 (49) 1,135
 8,973
 1,166
 27
 280
 1,473
Changes in net interest income$879
 $31,785
 $32,664
 $471
 $14,720
 $15,191
$99,523
 $(641) $(4,455) $94,427
 $44,915
 $407
 $1,454
 $46,776

Provision for Loan Losses.  For 2015,2017, we recorded a $6.4an $8.6 million provision for loan losses compared to the $4.7$8.8 million recorded in 2014.2016. The $1.7$136,000 decrease in the provision for loan losses was primarily attributable to a lower level of net charge-offs for the year, partially offset by the growth in our loan portfolio. Net loan charge-offs for 2017 amounted to $1.0 million, a decrease from $4.8 million in 2016.
For 2016, we recorded an $8.8 million provision for loan losses compared to $6.4 million recorded in 2015. The $2.4 million increase in the provision for loan losses was primarily attributable to the growth in our loan portfolio during the year and, to a lesser extent, the change in our loan composition.composition and net charge-offs. Net loan charge-offs for 20152016 amounted to $4.8 million, which increased from $1.3 million an increase from $684,000 in 2014.
For 2014, we recorded a $4.7 million provision for loan losses compared to the $1.9 million recorded in 2013.  The $2.8 million increase in the provision for loan losses was primarily attributable to the growth in our loan portfolio during the year, and to a lesser extent, the change in our loan composition. Net loan charge-offs for 2014 amounted to $684,000, which declined from $1.7 million in 2013.2015.
 
Noninterest Income.  For 2015,2017, non-interest income totaled $14.4$31.1 million, an increase of $1.1$11.5 million or 8.0%59% from 2014.2016. The increase was primarily due to an increase in other income of $5.8 million, which is primarily attributable to higher recoveries of $2.0 million from pre-acquisition charge-offs, higher ATM and debit card fees of $1.7 million,and higher bank-owned life insurance ("BOLI") income of $926,000. Also, the Bank had a $2.9 million increase on the gain on sale of loans, from $9.5 million in 2016 to $12.5 million in 2017. During 2017, we sold $127 million of SBA loans at an overall premium of 11.4% and $96.6 million in various other loans at an overall premium of 1%, compared to 2016 in which we sold $110 million of SBA loans at an overall premium of 8.3% and $2.6 million in commercial and industrial loans at an overall premium of 17.4%. Deposit related fees grew $2.1 million in 2017, as growth in core transaction deposit accounts from both organic growth and the acquisition of HEOP and PLZZ contributed to the increase in deposit fees from $1.7 million in 2016 to $3.8 million in 2017. Lastly, gain on sale of investments increased $940,000 as the Bank sold $261 million of securities during 2017 compared to $222 million in 2016.

For 2016, non-interest income totaled $19.6 million, an increase of $5.2 million or 36% from 2015. The increase was primarily related to an increase of $1.7$1.6 million on gain on sale of loans from $6.3$8.0 million in 20142015 to $8.0$9.5 million. During 2016, we sold $110 million of SBA loans at an overall premium of 8.3% and $2.6 million in commercial and industrial loans at an overall premium of 17.4%, compared to 2015 in which we sold $79.3 million of SBA loans at an overall premium of 9% and $69.1 million in commercial real estate and multifamilymulti-family loans at an
INDEX

overall premium of 1%, compared to 2014 in which we sold $54.1 million in SBA loans at a 10% overall premium and $37.5 million in commercial real estate and multifamily loans at an overall premium of 2.5%. The increase from gain-on-sale of loans was offset by a $1.3 million decline in gainGain on sale of investments increased $1.5 million as the Bank sold a limited number of securities during 2015. Finally, depositDeposit related fees and loan servicing fees grew by $723,000 or 40.0%a combined $1.5 million in 2015, as growth in core transaction deposit accounts from both organic growth and the acquisition of IDPK and organic growthSCAF contributed to the increase in deposit fees from $1.8 million in 2014 to $2.5 million in 2015.

For 2014, non-interest income totaled $13.42015 to $3.4 million an increase of $4.6 million or 51.8% from 2013. The increase was primarily related to gain on sale of loans of $6.3 million, which grew by $3.1 million from 2013,in 2016 and loan servicing fees increasing by $565,000from $371,000 in 2015 to $1.5$1.0 million andin 2016. Finally, other income increasingincreased $735,000 as the Bank saw higher recoveries of $1.7 million from pre-acquisition charge-offs, partially offset by $990,000 to $2.2 million.a $641,000 decrease in other loans fees and asset write-offs of $366,000.
 

41

INDEX

 For the Years ended December 31, For the Years ended December 31,
 2015 2014 2013 2017 2016 2015
NONINTEREST INCOME  
  
  
Noninterest Income (dollars in thousands)
Loan servicing fees $1,459
 $1,475
 $910
 $787
 $1,032
 $371
Deposit fees 2,532
 1,809
 1,873
 3,809
 1,697
 1,274
Net gain from sales of loans 7,970
 6,300
 3,228
 12,468
 9,539
 7,970
Net gain from sales of investment securities 290
 1,547
 1,544
 2,737
 1,797
 290
Other income 2,190
 2,246
 1,256
 11,313
 5,537
 4,483
Total noninterest income $14,441
 $13,377
 $8,811
 $31,114
 $19,602
 $14,388

Noninterest Expense.  For 2015,2017, noninterest expense totaled $73.6$168 million, an increase of $18.6$69.2 million or 33.8%70.2% from 2014.2016. The increase in noninterest expense was primarily due to higher compensation and benefits of $9.8$31.3 million, primarily related to an increase in staff from our acquisitions of HEOP in April 2017, PLZZ in November 2017, and internal growth in staff to support our growth. Merger-related expense increased $16.6 million in 2017 reflecting costs from both the HEOP and PLZZ acquisitions. Occupancy expense grew by $4.9 million in 2017, mostly due to the acquisitions and the additional branches retained from the mergers. The remaining expense categories grew by $16.3 million or 52% in 2017, due to both a combination of expense growth related to the acquisitions of HEOP and PLZZ and increased expenses to support the Company's organic growth in loans and deposits. The most significant increase in expense from these remaining categories is a $4.1 million increase in CDI expenses, $3.9 million increase in data processing, $3.1 million increase in legal, audit, and professional expenses, and a $1.3 million increase in deposit related expenses, which include expenses such as lock box services, to support our continued growth in core transaction deposits.

For 2016, noninterest expense totaled $98.6 million, an increase of $25.0 million or 34% from 2015. The increase in noninterest expense was primarily due to higher compensation and benefits of $15.7 million, primarily related to an increase in staff from our acquisition of IDKPSCAF and internal growth in staff to support our organic growth. In 2015, the Company experienced an increase in merger related expenses of $3.3 million, due to both the acquisition of IDPK and the pending merger with Security. Occupancy expense grew by $1.6$2.0 million in 2015,2016, mostly due to the acquisition of IDKPSCAF and the additional branches retained from the merger. Marketing expense grew by approximately $1.1$1.7 million in 2016, as the Company increased its investment in sponsorships and other marketing areas to support its continued efforts to organically grow its customer base. The remaining expense categories grew by $2.8$5.5 million or 16.7%21% in 2015,2016, due to both a combination of expense growth related to the acquisition of IDKPSCAF and increased expenses to support the Company's organic growth in loans and deposits. The most significant increase in expense from these remaining categories is a $679,000$1.4 million increase in data processing and $1.3 increase in deposit related expenses, which include expenses such as lock box services, to support our continued growth in core transaction deposits.

For 2014, noninterest merger-related expense totaled $55.0 million, up $4.2 million or 8.2%in 2016 reflects costs from 2013. The increase was primarily due toboth the full year’s impact of expenses addedSCAF merger in January 2016 as a result of the acquisitions of SDTB and FAB andwell as the acquisition of Infinity in the first quarter of 2014, along with costs associated with organic growth that included the expansion of our lending platform to increase loan production throughout 2013 and 2014.  The increase in noninterest expense in 2014 was primarily comprised of higher compensation and benefits costs of $5.7 million; higher other expense of $2.2 million, which includes a $1.7 million litigation expense; higher deposit expenses of $1.1 million; higher premises and occupancy expense of $811,000; and higher professional expense of $377,000.    Partially offsetting these increases was a decrease in non-recurring merger-related expense of $5.4 million, lower data processing and communications costs of $510,000, primarily associated with lower negotiated core system provider costs, and lower other real estate owned operations of $543,000.HEOP. 
 
Our efficiency ratio was 55.89%50.9% for 2015,2017, compared to 61.33%53.6% for 20142016 and 64.69%55.9% for 2013.2015. The improvement in the efficiency ratio in 20152017 compared to 20142016 was related to revenues growing faster than expenses, as the Company's growing asset size creates greater scale of efficiencies.
 

42

INDEX

 For the Years ended December 31, For the Years ended December 31,
 2015 2014 2013 2017 2016 2015
NONINTEREST EXPENSE  
  
  
Noninterest Expense (dollars in thousands)
Compensation and benefits $38,456
 $28,705
 $23,018
 $84,138
 $52,836
 $37,108
Premises and occupancy 8,205
 6,608
 5,797
 14,742
 9,838
 7,810
Data processing and communications 2,816
 2,570
 3,080
Data processing 8,206
 4,261
 2,816
Other real estate owned operations, net 121
 75
 618
 72
 385
 68
FDIC insurance premiums 1,376
 1,021
 749
 2,151
 1,545
 1,376
Legal, audit and professional expense 2,514
 2,240
 1,863
 6,101
 3,041
 2,514
Marketing expense 2,305
 1,208
 1,088
 4,436
 3,981
 2,305
Office and postage expense 2,005
 1,576
 1,313
Office, telecommunications and postage expense 3,117
 2,107
 2,005
Loan expense 1,268
 848
 1,009
 3,299
 2,191
 1,268
Deposit expense 3,643
 2,964
 1,818
 6,240
 4,904
 3,643
Merger-related expense 4,799
 1,490
 6,926
 21,002
 4,388
 4,799
CDI amortization 1,350
 1,014
 764
 6,144
 2,039
 1,350
Other expense 4,733
 4,674
 2,772
 8,102
 7,067
 6,476
Total noninterest expense $73,591
 $54,993
 $50,815
 $167,750
 $98,583
 $73,538

Income Taxes. The Company recorded income taxes of $42.1 million in 2017, compared with $25.2 million in 2016 and $15.2 million in 2015, compared with $10.7 million in 2014 and $5.6 million in 2013.2015. Our effective tax rate was 41.2% for 2017, 38.6% for 2016, and 37.3% for 2015, 39.2% for 2014, and 38.3% for 2013.2015. The effective tax rate in each year is affected by various items, including changes in tax law, tax exempt income from municipal securities, and BOLI. In addition, bothBOLI, tax credits and tax deductions from investments in LIHTC reduce the Company's effective tax rate. In general, growth in tax exemptlow income and increased LIHTChousing tax credits reduced("LIHTC") and merger-related expense.

On December 22, 2017, the Company'sU.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The effective tax rate for 2017 increased from 2016 primarily due to the inclusion of $5.6 million of income tax expense related to the revaluation of the deferred tax assets and liabilities due to the reduction of the U.S. corporate tax rate from 35% to 21% under the Tax Act. Additional information on the Tax Act is presented in 2015.   Item 1. Business - Federal and State Taxation.

See Note 14 to the Consolidated Financial Statements included in Item 8 hereof for further discussion of income taxes and an explanation of the factors, which impact our effective tax rate.
 
Financial Condition
 
At December 31, 2015,2017, total assets of the Company were $2.79$8.0 billion, up $752 million$4.0 billion or 36.9%99% from total assets of $2.04$4.0 billion at December 31, 2014.2016. The increase in assets since year-end 20142016 was primarily related to the increase in loans held for investment of $626 million$3.0 billion associated with organic loan growth and the acquisitions of PLZZ and HEOP. The acquisition of Independence Bank, which at closingPLZZ added $450 million$1.1 billion of loans in assets including $333 millionthe fourth quarter of 2017, and the acquisition of HEOP added $1.4 billion of loans in loans, $56 million in investment securities, $28 million in goodwill and $11 million in bank owned life insurance.the second quarter of 2017, both before fair value adjustments.

Investment Activities
 
Our investment policy, as established by our board of directors, attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk and complement our lending activities. Specifically, our investment policy generally limits our investments to U.S. government securities, federal agency-backed securities, government-sponsored guaranteed mortgage-backed securities (“MBS”) and collateralized mortgage obligations ("CMO"), municipal bonds, and corporate bonds. The Bank has designated all investment securities as Available-for-saleavailable-for-sale outside of investments made for Community Development (CRA)CRA purposes.


43

INDEX

Below is a breakdown of the portfolio for the past three years by investment type and designation.

 At December 31,
 2015 2014 2013
 
Amortized
Cost
 
Fair
Value
 % Portfolio 
Amortized
Cost
 
Fair
Value
 % Portfolio 
Amortized
Cost
 
Fair
Value
 % Portfolio
 (in thousands)
Available-for-sale                 
U.S. Treasury$
 $
 % $
 $
 % $73
 $81
 %
Municipal bonds128,546
 130,245
 44.9
 88,599
 89,661
 44.5
 95,388
 94,127
 36.8
Collateralized mortgage obligation24,722
 24,543
 8.5
 6,831
 6,862
 3.4
 16,743
 16,573
 6.5
Mortgage-backed securities126,443
 125,485
 43.3
 105,328
 105,115
 52.1
 149,114
 145,308
 56.7
Total available-for-sale279,711
 280,273
 96.7% 200,758
 201,638
 100% 261,318
 256,089
 100%
Held-to-maturity 
  
    
  
    
  
  
Mortgage-backed securities$8,400
 $8,330
 2.9% $
 $
 % $
 $
 %
Other1,242
 1,242
 0.4
 
 
 
 
 
 
Total held-to-maturity$9,642
 $9,572
 3.3% $
 $
 % $
 $
 %
Total securities$289,353
 $289,845
 100% $200,758
 $201,638
 100% $261,318
 $256,089
 100%
 At December 31,
 2017 2016 2015
 
Amortized
Cost
 
Fair
Value
 % Portfolio 
Amortized
Cost
 
Fair
Value
 % Portfolio 
Amortized
Cost
 
Fair
Value
 % Portfolio
 (dollars in thousands)
Investment Securities Available-for-Sale                 
Agency$47,051
 $47,209
 5.9% $
 $
 % $
 $
 %
Corporate78,155
 79,546
 9.9
 37,475
 37,642
 9.7
 
 
 
Municipal bonds228,929
 232,128
 28.8
 120,155
 118,803
 30.5
 128,546
 130,245
 44.9
Collateralized mortgage obligation: residential33,984
 33,781
 4.2
 31,536
 31,388
 8.1
 24,722
 24,543
 8.5
Mortgage-backed securities: residential398,664
 394,765
 49.0
 196,496
 193,130
 49.5
 126,443
 125,485
 43.3
Total investment securities available-for-sale786,783
 787,429
 97.8
 385,662
 380,963
 97.8
 279,711
 280,273
 96.7
Investment Securities Held-to-Maturity 
  
    
  
    
  
  
Mortgage-backed securities: residential17,153
 16,944
 2.1
 7,375
 7,271
 1.9
 8,400
 8,330
 2.9
Other1,138
 1,138
 0.1
 1,190
 1,190
 0.3
 1,242
 1,242
 0.4
Total investment securities held-to-maturity18,291
 18,082
 2.2
 8,565
 8,461
 2.2
 9,642
 9,572
 3.3
Total investment securities$805,074
 $805,511
 100% $394,227
 $389,424
 100% $289,353
 $289,845
 100%


Our investment securities portfolio amounted to $290$806 million at December 31, 2015,2017, as compared to $202$389 million at December 31, 2014,2016, representing a 43.8%107% increase. The increase in securities since year-end 20142016 was primarily due to purchases of $100 million and securities acquired through the acquisition of IDPKHEOP, which increased securities by $443 million and purchases of $53.8$317 million, partially offset by sales/calls of $27.6$222 million, and principal pay downs of $33.8$76.1 million. In general, the purchase of investment securities primarily related to investing excess liquidity from our banking operations, while the sales were made to help fund loan production, which improved our interest-earning asset mix by deploying investment securities dollars into higher yielding loans.  


44

INDEX

The following table sets forth the fair values and weighted average yields on our investment security portfolio by contractual maturity as of the date indicated:
  
  At December 31, 2015
  
One Year
or Less
 
More than One Year
to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 Total
  
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
  (dollars in thousands)
Available-for-sale                  
Municipal bonds $1,068
 0.99% $27,134
 1.44% $44,695
 1.91% $57,348
 1.94% $130,245
Collateralized mortgage obligation 
 
 
 
 
 
 24,543
 1.98
 24,543
Mortgage-backed securities 
 
 
 
 27,612
 1.78
 97,873
 1.75
 125,485
Total available-for-sale $1,068
 0.99% $27,134
 1.44% $72,307
 1.86% $179,764
 1.84% $280,273
Held-to-maturity                  
Mortgage-backed securities $
 % $
 % $
 % $8,330
 3.22% $8,330
Other 
 
 
 
 
 
 1,242
 0.93
 $1,242
Total held-to-maturity $
 % $
 % $
 % $9,572
 2.92% $9,572
Total securities $1,068
 0.99% $27,134
 1.44% $72,307
 1.86% $189,336
 1.89% $289,845
                   
 At December 31, 2017
 
One Year
or Less
 
More than One Year
to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 Total
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 (dollars in thousands)
Investment Securities Available-for-Sale                 
Agency$
 % $
 % $15,164
 2.11% $32,045
 2.01% $47,209
Corporate
 
 
 
 79,546
 5.01
 
 
 79,546
Municipal bonds4,121
 1.44
 32,424
 1.83
 73,312
 2.04
 122,271
 2.51
 232,128
Collateralized mortgage obligation: residential
 
 
 
 1,071
 1.83
 32,710
 2.48
 33,781
Mortgage-backed securities: residential2,583
 2.30
 2,611
 1.13
 65,014
 2.13
 324,557
 2.22
 394,765
Total investment securities available-for-sale6,704
 1.77
 35,035
 1.78
 234,107
 3.08
 511,583
 2.29
 787,429
Investment Securities Held-to-Maturity                 
Mortgage-backed securities: residential
 
 
 
 
 
 16,944
 3.04
 16,944
Other
 
 
 
 
 
 1,138
 0.93
 1,138
Total investment securities held-to-maturity
 
 
 
 
 
 18,082
 2.90
 18,082
Total investment securities$6,704
 1.77% $35,035
 1.78% $234,107
 3.08% $529,665
 2.31% $805,511
                  

 As of December 31, 2015,2017, our investment securities portfolio consisted of $134$412 million in GSE MBS, $25 million in GSE CMO, $130government-sponsored enterprise ("GSE") mortgage-backed securities ("MBS"), $232 million in municipal bonds, $79.5 million in corporate bonds, $47.2 million of agency bonds, $33.8 million in GSE collateralized mortgage obligations ("CMO") and $1$1.1 million in other securities. At December 31, 2015,2017, we had an estimated par value of $61$55.6 million of the GSE securities that were pledged as collateral for the Company’s $28.5 million of reverse repurchase agreements (“Repurchase Agreements”). The total end of period weighted average interest rate on investments at December 31, 20152017 was 2.10%2.69%, compared to 1.95%2.45% at December 31, 2014.2016, reflecting the increased investment in higher yielding corporate bonds.
 
The following table lists the percentage of our portfolio exposure to any one issuer as a percentage of capital. The only issuers with greater than ten percent exposure are GNMA, FNMA,the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and FHLMC.the Federal Home Loan Mortgage Corporation ("FHLMC"). No single municipal issuer exceeds two percent of capital.

INDEX
 At December 31,
 2015 2014
 
Amortized
Cost
 
Fair
Value
 % Capital 
Amortized
Cost
 
Fair
Value
 % Capital
 (in thousands)
Issuer           
GNMA$32,160
 $31,960
 10.7% $34,537
 $34,431
 17.3%
FNMA71,936
 71,317
 23.9
 55,061
 54,920
 27.5
FHLMC47,070
 46,751
 15.6
 22,562
 22,627
 11.3

 At December 31,
 2017 2016
 
Amortized
Cost
 
Fair
Value
 % Capital 
Amortized
Cost
 
Fair
Value
 % Capital
 (dollars in thousands)
Issuer           
GNMA$30,497
 $30,008
 2.4% $33,062
 $32,672
 7.1%
FNMA216,530
 214,685
 17.3
 117,716
 115,968
 25.2
FHLMC185,621
 183,853
 14.8
 77,254
 75,878
 16.5



45

INDEX

All of ourthe municipal bond securities in our portfolio have an underlying rating of investment grade, with the majority insured by the largest bond insurance companies to bring each of these securities to a Moody’s A+ rating or better. The Company has only purchased general obligation bonds that are risk-weighted at 20% for regulatory capital purposes. The Company reduces its exposure to any single adverse event by holding securities from geographically diversified municipalities. We are continually monitoring the quality of our municipal bond portfolio in accordance with current financial conditions. To our knowledge, none of the municipalities in which we hold bonds are exhibiting financial problems that would require us to record an OTTI charge. 

The following is a listing of the breakdown by state for our municipal holdings, with all states with greater than tennine percent of the portfolio listed. Eighty-fourEighty-one percent of the Texas issues are insured by The Texas Permanent School Fund.

At December 31, 2015At December 31, 2017
Amortized
Cost
 
Fair
Value
 % Municipal
Amortized
Cost
 
Fair
Value
 % Municipal
(in thousands)(dollars in thousands)
Issuer          
Texas$44,156
 $44,905
 34.5%$97,109
 $98,127
 42.3%
Minnesota15,149
 15,335
 11.8
California13,274
 13,500
 10.4
38,737
 39,750
 17.1
Other55,967
 56,505
 43.3
93,083
 94,251
 40.6
Total municipal securities$128,546
 $130,245
 100%$228,929
 $232,128
 100%

Loans

Loans held for investment, net totaled $2.2$6.2 billion at December 31, 2015,2017, an increase of $621 million$2.9 billion or 38.4%92% from December 31, 2014.2016. The increase in loans from December 31, 20142016 includes loans acquired from IDPKPLZZ, which added $1.1 billion of $333 million,loans in the fourth quarter of 2017, and HEOP, which added $1.4 billion of loans in the second quarter of 2017, both before fair value adjustments, as well as our organic loan originations. The increase in loans included increases in multi-familycommercial owner occupied of $166$834 million, commercial non-owner occupied of $656 million, C&I loans of $523 million, franchise loans of $130$201 million, commercial owner occupied of $84 million, C&Ione-to-four family loans of $81$170 million, farmland loans of $145 million, agriculture loans of $116 million, multi-family of $103 million, SBA loans of $97 million and constructionconsumer loans of $80$88.8 million. The total end of period weighted average interest rate on loans as of December 31, 20152017 was 4.95% and 4.81% as of December 31, 2014 was 4.91%.2016.

Loans held for sale totaled $8.6$23.4 million at December 31, 2015.2017. Loans held for sale primarily represent the guaranteed portion of SBA loans, which the Bank originates for sale. As of December 31, 2014 there were no2016, loans held for sale.sale totaled $7.7 million.




46

INDEX


The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated:
 
At December 31,At December 31,
2015 2014 20132017 2016 2015
Amount % of Total Weighted Average Interest Rate Amount % of Total Weighted Average Interest Rate Amount % of Total Weighted Average Interest RateAmount % of Total Weighted Average Interest Rate Amount % of Total Weighted Average Interest Rate Amount % of Total Weighted Average Interest Rate
(dollars in thousands)(dollars in thousands)
Business loans:                 
Business Loans                 
Commercial and industrial$309,741
 13.7% 5.0% $228,979
 14.1% 4.8% $187,035
 15.0% 5.0%$1,086,659
 17.5% 5.18% $563,169
 17.4% 4.82% $309,741
 13.7% 4.95%
Franchise328,925
 14.5
 5.5
 199,228
 12.2
 5.7
      660,414
 10.7
 5.23
 459,421
 14.2
 5.24
 328,925
 14.6% 5.45
Commercial owner occupied (1)294,726
 13.0
 5.0
 210,995
 13.0
 5.1
 221,089
 17.8
 5.3
1,289,213
 20.8
 5.01
 454,918
 14.1
 4.76
 294,726
 13.1
 4.98
SBA62,256
 2.8
 5.5
 28,404
 1.7
 5.6
 10,659
 0.9
 5.9
185,514
 3.0
 6.30
 88,994
 2.8
 5.63
 53,691
 2.4
 5.49
Warehouse facilities143,200
 6.3
 3.9
 113,798
 7.0
 4.2
 87,517
 7.0
 4.1

 
 
 
 
 
 143,200
 6.4
 3.88
Real estate loans: 
  
  
  
  
  
  
  
  
Agribusiness116,066
 1.9
 4.62
 
 
 
 
 
 
Total business loans3,337,866
 53.9
 5.16
 1,566,502
 48.5
 4.97
 1,130,283
 50.2
 4.99
Real Estate Loans 
  
  
  
  
  
  
  
  
Commercial non-owner occupied421,583
 18.7
 4.9
 359,213
 22.1
 5.0
 333,544
 26.9
 5.3
1,243,115
 20.0
 4.60
 586,975
 18.1
 4.63
 421,583
 18.7
 4.91
Multi-family429,003
 19.0
 4.6
 262,965
 16.1
 4.6
 233,689
 18.8
 4.8
794,384
 12.8
 4.29
 690,955
 21.3
 4.28
 429,003
 19.0
 4.56
One-to-four family (2)80,050
 3.5
 4.5
 122,795
 7.5
 4.4
 145,235
 11.7
 4.4
270,894
 4.4
 4.63
 100,451
 3.1
 4.62
 80,050
 3.6
 4.51
Construction169,748
 7.5
 5.4
 89,682
 5.5
 5.2
 13,040
 1.0
 5.2
282,811
 4.6
 6.13
 269,159
 8.3
 5.57
 169,748
 7.5
 5.42
Farmland145,393
 2.3
 4.52
 
 
 
 
 
 
Land18,340
 0.8
 5.2
 9,088
 0.6
 4.8
 7,605
 0.6
 4.7
31,233
 0.5
 5.72
 19,829
 0.6
 5.36
 18,340
 0.8
 5.16
Other loans5,111
 0.2
 5.2
 3,298
 0.2
 6.1
 3,839
 0.3
 5.8
Total gross loans$2,262,683
 100.0% 4.9% $1,628,445
 100.0% 4.9% $1,243,252
 100.0% 5.0%
Less loans held for sale8,565
  
  
 
  
  
 3,147
  
  
Total gross loans held for investment$2,254,118
  
  
 $1,628,445
  
  
 $1,240,105
  
  
Plus (less): 
  
  
  
  
  
  
  
  
Deferred loan origination costs and premiums, net

$197
  
  
 $177
  
  
 $18
  
  
Total real estate loans2,767,830
 44.6
 4.68
 1,667,369
 51.4
 4.65
 1,118,724
 49.6
 4.83
Consumer Loans                 
Consumer loans92,931
 1.5
 5.63
 4,112
 0.1
 5.60
 5,111
 0.2
 5.21
Gross loans held for investment6,198,627
 100% 4.95% 3,237,983
 100% 4.81% 2,254,118
 100% 4.91%
Plus: Deferred loan origination costs/(fees) and premiums/(discounts), net(2,159)  
  
 3,630
  
  
 197
  
  
Loans held for investment6,196,468
     3,241,613
     2,254,315
  
  
Allowance for loan losses(17,317)  
  
 (12,200)  
  
 (8,200)  
  
(28,936)  
  
 (21,296)  
  
 (17,317)  
  
Loans held for investment, net$2,236,998
  
  
 $1,616,422
  
  
 $1,231,923
  
  
$6,167,532
  
  
 $3,220,317
  
  
 $2,236,998
  
  
                 
Loans held for sale, at lower of cost or fair value$23,426
  
  
 $7,711
  
  
 $8,565
  
  


47

INDEX

2012 20112014 2013
Amount % of Total Weighted Average Interest Rate Amount % of Total Weighted Average Interest RateAmount % of Total Weighted Average Interest Rate Amount % of Total Weighted Average Interest Rate
(dollars in thousands)(dollars in thousands)
Business loans:           
Business Loans           
Commercial and industrial$115,354
 11.7% 5.3% $86,684
 11.7% 5.8%$228,979
 14.1% 4.80% $187,035
 15.1% 5.00%
Franchise199,228
 12.2
 5.70
 
 
 
Commercial owner occupied (1)150,934
 15.3
 6.1
 152,299
 20.6
 6.6
210,995
 13.0
 5.10
 221,089
 17.8
 5.30
SBA6,882
 0.7
 6.0
 4,727
 0.7
 6.0
28,404
 1.7
 5.60
 7,512
 0.6
 5.90
Warehouse facilities195,761
 19.9
 4.8
 67,518
 9.1
 5.4
113,798
 7.0
 4.20
 87,517
 7.1
 4.10
Real estate loans: 
  
  
  
  
  
Total business loans781,404
 48.0
 5.05
 503,153
 40.6
 4.99
Real Estate Loans 
  
  
  
  
  
Commercial non-owner occupied253,409
 25.6
 5.7
 164,341
 22.2
 6.6
359,213
 22.1
 5.00
 333,544
 26.9
 5.30
Multi-family156,424
 15.9
 5.8
 193,830
 26.2
 6.0
262,965
 16.1
 4.60
 233,689
 18.8
 4.80
One-to-four family (2)97,463
 9.9
 4.7
 60,027
 8.1
 5.1
122,795
 7.5
 4.40
 145,235
 11.7
 4.40
Construction89,682
 5.5
 5.20
 13,040
 1.1
 5.20
Land8,774
 0.9
 4.9
 6,438
 0.9
 5.8
9,088
 0.6
 4.80
 7,605
 0.6
 4.70
Other loans1,193
 0.1
 6.2
 3,390
 0.5
 7.6
Total gross loans$986,194
 100.0% 5.4% $739,254
 100.0% 6.1%
Less loans held for sale3,681
  
  
 
  
  
Total gross loans held for investment$982,513
  
  
 $739,254
  
  
Plus (less): 
  
  
  
  
  
Deferred loan origination costs and premiums, net

$(306)  
  
 $(665)  
  
Total real estate loans843,743
 51.8
 4.81
 733,113
 59.1
 4.95
Consumer Loans           
Consumer loans3,298
 0.2
 6.10
 3,839
 0.3
 5.80
Gross loans held for investment1,628,445
 100% 4.90% 1,240,105
 100% 5.00%
Plus: Deferred loan origination costs/(fees) and premiums/(discounts), net177
  
  
 18
  
  
Loans held for investment1,628,622
     1,240,123
    
Allowance for loan losses(7,994)  
  
 (8,522)  
  
(12,200)  
  
 (8,200)  
  
Loans held for investment, net$974,213
  
  
 $730,067
  
  
$1,616,422
  
  
 $1,231,923
  
  
           
Loans held for sale, at lower of cost or fair value
  
  
 3,147
    
           
(1) Secured by real estate. 
  
  
  
  
  
 
  
  
  
  
  
(2) Includes second trust deeds. 
  
  
  
  
  
(2) Includes second trust deeds.  
  
  
  
  

INDEX

The following table shows the contractual maturity of the Company's loans without consideration to prepayment assumptions at the date indicated:
At December 31, 2015At December 31, 2017
Commercial
and
 Industrial
 Franchise 
Commercial
Owner
 Occupied
 SBA Warehouse Facilities 
Commercial
Non-owner
 Occupied
 
Multi-
Family
 
One-to-Four
Family
 Construction Land 
Other
Loans
 Total
Commercial
and
 Industrial
 Franchise 
Commercial
Owner
 Occupied
 SBA Agribusiness 
Commercial
Non-owner
 Occupied
 
Multi-
family
 
One-to-four
Family
 Construction Farmland Land 
Consumer
Loans
 Total
(in thousands)(dollars in thousands)
Amounts due                       
Amounts Due                         
One year or less$114,115
 $6,639
 $16,805
 $
 $
 $17,848
 $11,725
 $8,696
 $127,466
 $8,929
 $2,459
 $314,682
$463,630
 $21,646
 $27,921
 $145
 $67,508
 $53,372
 $27,058
 $22,682
 $229,625
 $7,517
 $17,458
 $18,620
 $957,182
More than one year to three years42,593
 6,253
 15,249
 109
 
 24,883
 7,016
 3,313
 37,953
 3,132
 80
 140,581
213,645
 18,612
 33,536
 630
 6,951
 88,833
 8,475
 10,304
 49,454
 10,435
 4,057
 1,424
 446,356
More than three years to five years28,445
 40,196
 14,738
 126
 
 27,746
 12,192
 1,154
 
 836
 295
 125,728
191,918
 49,184
 64,959
 1,989
 33,350
 109,185
 17,097
 8,264
 950
 8,914
 1,741
 4,886
 492,437
More than five years to 10 years76,077
 235,222
 76,593
 6,013
 143,200
 160,539
 26,576
 1,537
 18
 1,652
 217
 727,644
156,755
 444,034
 458,781
 17,874
 7,788
 713,157
 87,736
 35,960
 2,782
 105,279
 5,615
 34,756
 2,070,517
More than 10 years to 20 years37,864
 32,365
 25,570
 912
 
 36,849
 27,684
 15,565
 4,311
 3,135
 979
 185,234
49,437
 100,298
 179,526
 23,434
 469
 152,441
 45,953
 26,412
 
 9,287
 2,362
 30,516
 620,135
More than 20 years10,647
 8,250
 145,771
 55,096
 
 153,718
 343,810
 49,785
 
 656
 1,081
 768,814
11,274
 26,641
 530,491
 158,866
 
 126,127
 608,065
 167,272
 
 3,961
 
 2,729
 1,635,426
Total gross loans$309,741
 $328,925
 $294,726
 $62,256
 $143,200
 $421,583
 $429,003
 $80,050
 $169,748
 $18,340
 $5,111
 $2,262,683
$1,086,659
 $660,415
 $1,295,214
 $202,938
 $116,066
 $1,243,115
 $794,384
 $270,894
 $282,811
 $145,393
 $31,233
 $92,931
 $6,222,053

48


The following table sets forth at December 31, 20152017 the dollar amount of gross loans receivable contractually due after December 31, 20162018 and whether such loans have fixed interest rates or adjustable interest rates.
At December 31, 2015
Loans Due After December 31, 2016
At December 31, 2017
Loans Due After December 31, 2018
Fixed Adjustable TotalFixed Adjustable Total
(in thousands)(dollars in thousands)
Business loans:     
Business Loans     
Commercial and industrial$82,440
 $113,186
 $195,626
$253,761
 $369,268
 $623,029
Franchise77,557
 244,729
 322,286
87,424
 551,345
 638,769
Commercial owner occupied59,437
 218,484
 277,921
216,670
 1,050,623
 1,267,293
SBA
 62,256
 62,256
5,507
 197,286
 202,793
Warehouse facilities
 143,200
 143,200
Real estate loans:     
Agribusiness40,631
 7,927
 48,558
Total business loans603,993
 2,176,449
 2,780,442
Real Estate Loans     
Commercial non-owner occupied31,763
 371,972
 403,735
242,495
 947,248
 1,189,743
Multi-family3,281
 413,997
 417,278
24,067
 743,259
 767,326
One-to-four family34,607
 36,747
 71,354
41,779
 206,433
 248,212
Construction
 42,282
 42,282
2,122
 51,064
 53,186
Farmland93,773
 44,103
 137,876
Land1,079
 8,332
 9,411
2,925
 10,850
 13,775
Other loans2,271
 381
 2,652
Total real estate loans407,161
 2,002,957
 2,410,118
Consumer Loans     
Consumer loans72,699
 1,612
 74,311
Total gross loans$292,435
 $1,655,566
 $1,948,001
$1,083,853
 $4,181,018
 $5,264,871

Delinquent Loans.  When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally initiate formal collection activities including, for loans secured by real estate, recording a notice of default and, after providing the required notices to the borrower, commencing foreclosure proceedings. If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale. At these foreclosure sales, we generally acquire title to the property. At December 31, 2015,2017, loans delinquent 60 or more days as a percentage of total gross loans held for investment was 117 basis point,points, up from less than 12 basis pointpoints at year-end 2014.2016.

The following table sets forth delinquencies in the Company's loan portfolio at the dates indicated:
  
 30 - 59 Days 60 - 89 Days 90 Days or More (1) Total
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 (dollars in thousands)    
At December 31, 2015              
Business loans:               
Commercial and industrial2
 $20
 
 $
 1
 $257
 3
 $277
Franchise
 
 
 
 3
 1,630
 3
 1,630
Commercial owner occupied
 
 1
 355
 
 
 1
 355
Real estate loans: 
  
  
  
  
  
  
  
Commercial non-owner occupied1
 214
 
 
 
 
 1
 214
One-to-four family1
 89
 
 
 2
 46
 3
 135
 30 - 59 Days 60 - 89 Days 90 Days or More (1) Total
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 
# of
Loans
 
Principal
Balance
of Loans
 (dollars in thousands)    
At December 31, 2017              
Business Loans               
Commercial and industrial3
 $84
 4
 $570
 4
 $235
 11
 $889
Commercial owner occupied1
 3,474
 1
 486
 
 
 2
 3,960
SBA2
 177
 
 
 5
 1,940
 7
 2,117
Real Estate Loans 
  
  
  
  
  
  
  
Multi-family3
 1,781
 
 
 
 
 3
 1,781

49


One-to-four family1
 354
 
 
 4
 815
 5
 1,169
Land1
 83
 
 
 1
 9
 2
 92
Consumer Loans               
Consumer loans2
 11
 
 
 2
 40
 4
 51
Total13
 $5,964
 5
 $1,056
 16
 $3,039
 34
 $10,059
Delinquent loans to total loans held for investment  0.10%  
 0.02%  
 0.05%  
 0.16%
              
              
At December 31, 2016At December 31, 2016  
  
  
  
  
  
  
Business Loans               
Commercial and industrial2
 $104
 
 $
 2
 $260
 4
 $364
SBA
 
 
 
 3
 316
 3
 316
Real Estate Loans 
  
  
  
  
  
  
  
One-to-four family1
 18
 1
 71
 3
 48
 5
 137
Land
 
 
 
 1
 21
 1
 21

 
 
 
 1
 15
 1
 15
Total4
 $323
 1
 $355
 7
 $1,954
 12
 $2,632
3
 $122
 1
 $71
 9
 $639
 13
 $832
Delinquent loans to total gross loans 0.01%  
 0.02%  
 0.09%  
 0.12%
Delinquent loans to total loans held for investment  %  
 %  
 0.02%  
 0.03%
               
At December 31, 2015At December 31, 2015  
  
  
  
  
  
  
Business Loans               
Commercial and industrial2
 $20
 
 $
 1
 $257
 3
 $277
Franchise
 
 
 
 3
 1,630
 3
 1,630
Commercial owner occupied
 
 1
 355
 
 
 1
 355
Real Estate Loans 
  
  
  
  
  
  
  
Commercial non-owner occupied1
 214
 
 
 
 
 1
 214
One-to-four family1
 89
 
 
 2
 46
 3
 135
Land
 
 
 
 1
 21
 1
 21
Total4
 $323
 1
 $355
 7
 $1,954
 12
 $2,632
Delinquent loans to total loans held for investment  0.01%  
 0.02%  
 0.09%  
 0.12%
                             
At December 31, 2014At December 31, 2014  
  
  
  
  
  
  
At December 31, 2014  
  
  
  
  
  
  
Business loans:               
Business Loans 
  
  
  
  
  
  
  
Commercial and industrial
 $
 1
 $24
 
 $
 1
 24

 $
 1
 $24
 
 $
 1
 $24
Real estate loans: 
  
  
  
  
  
  
  
Real Estate Loans 
  
  
  
  
  
  
  
One-to-four family1
 19
 
 
 3
 54
 4
 73
1
 19
 
 
 3
 54
 4
 73
Other loans1
 1
 
 
 
 
 1
 1
Consumer Loans               
Consumer loans1
 1
 
 
 
 
 1
 1
Total2
 $20
 1
 $24
 3
 $54
 6
 $98
2
 $20
 1
 $24
 3
 $54
 6
 $98
Delinquent loans to total gross loans %  
 %  
 %  
 0.01%
Delinquent loans to total loans held for investment  %  
 %  
 %  
 0.01%
                              
At December 31, 2013  
  
  
  
  
  
  
Business loans: 
  
  
  
  
  
  
  
Commercial owner occupied2
 $768
 
 $
 1
 $446
 3
 1,214
SBA
 
 
 
 1
 14
 1
 14
Real estate loans: 
  
  
  
  
  
  
  
Commercial non-owner occupied
 
 
 
 2
 560
 2
 560
One-to-four family3
 71
 
 
 4
 123
 7
 194
Other loans3
 130
 
 
 
 
 3
 130
Total8
 $969
 
 $
 8
 $1,143
 16
 $2,112
Delinquent loans to total gross loans 0.08%  
 %  
 0.09%  
 0.17%
                             
At December 31, 2012  
  
  
  
  
  
  
Business loans: 
  
  
  
  
  
  
  
Commercial and industrial
 $
 1
 $58
 1
 $218
 2
 276
Commercial owner occupied
 
 1
 245
 
 
 1
 245
SBA
 
 
 
 4
 185
 4
 185
Real estate loans: 
  
  
  
  
  
  
  
One-to-four family2
 101
 
 
 2
 79
 4
 180
Other loans1
 5
 
 
 
 
 1
 5
Total3
 $106
 2
 $303
 7
 $482
 12
 $891
Delinquent loans to total gross loans 0.01%  
 0.03%  
 0.05%  
 0.09%
               
At December 31, 2011  
  
  
  
  
  
  
Business loans: 
  
  
  
  
  
  
  
Commercial and industrial1
 $12
 
 $
 4
 $1,057
 5
 1,069
Commercial owner occupied
 
 
 
 3
 919
 3
 919

50

INDEX

At December 31, 2013At December 31, 2013  
  
  
  
  
  
  
Business Loans 
  
  
  
  
  
  
  
Commercial owner occupied2
 $768
 
 $
 1
 $446
 3
 $1,214
SBA1
 49
 1
 113
 8
 665
 10
 827

 
 
 
 1
 14
 1
 14
Real estate loans: 
  
  
  
  
  
  
  
Real Estate Loans 
  
  
  
  
  
  
  
Commercial non-owner occupied1
 434
 
 
 3
 1,244
 4
 1,678

 
 
 
 2
 560
 2
 560
One-to-four family4
 201
 
 
 2
 323
 6
 524
3
 71
 
 
 4
 123
 7
 194
Land
 
 1
 617
 1
 52
 2
 669
Other loans2
 3
 1
 1
 
 
 3
 4
Consumer Loans               
Consumer loans3
 130
 
 
 
 
 3
 130
Total9
 $699
 3
 $731
 21
 $4,260
 33
 $5,690
8
 $969
 
 $
 8
 $1,143
 16
 $2,112
Delinquent loans to total gross loans 0.09%  
 0.10%  
 0.58%  
 0.77%
Delinquent loans to total loans held for investment  0.08%  
 %  
 0.09%  
 0.17%
                              
(1) All 90 day or greater delinquencies are on nonaccrual status and are reported as part of nonperforming loans.
     
Nonperforming Assets
 
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), troubled debt restructured loans and OREO. Nonaccrual loans consisted of all loans 90 days or more past due and on loans where, in the opinion of management, there is reasonable doubt as to the collection of principal and interest. A “restructured loan” is one where the terms of the loan were renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. We did not have anyhad one troubled debt restructured loan with a recorded balance of $97,000 at December 31, 2017 and no troubled debt restructured loans during the periods presented.at December 31, 2016. At December 31, 2015,2017, we had $5.13$3.6 million of nonperforming assets, which consisted of $3.97$3.3 million of net nonperforming loans and $1.16 million$326,000 of OREO. At December 31, 2014,2016, we had $2.48$1.6 million of nonperforming assets, which consisted of $1.44$1.1 million of nonperforming loans and $1.0 million$460,000 of OREO. It is our policy to take appropriate, timely and aggressive action when necessary to resolve nonperforming assets. When resolving problem loans, it is our policy to determine collectability under various circumstances, which are intended to result in our maximum financial benefit. We accomplish this by working with the borrower to bring the loan current, selling the loan to a third party or by foreclosing and selling the asset.

At December 31, 2015,2017, OREO consisted of one commercial owner occupied property and one land property, compared to one commercial non-owner occupied property and one land property compared to one land property and three single family properties at December 31, 2014.2016. Properties acquired through or in lieu of foreclosure are recorded at fair value less cost to sell. The Company generally obtains an appraisal and/or a market evaluation on all OREO prior to obtaining possession. After foreclosure, valuations are periodically performed by management as needed due to changing market conditions or factors specifically attributable to the property’s condition. If the carrying value of the property exceeds its fair value, less estimated cost to sell, the asset is written down and a charge to operations is recorded.

We recognized loan interest income on nonperforming loans of $640,000 in 2017, $740,000 in 2016 and $467,000 in 2015, $192,000 in 2014 and $225,000 in 2013.2015. If these loans had paid in accordance with their original loan terms, we would have recorded additional loan interest income of $155,000 in 2017, $360,000 in 2016 and $279,000 in 2015, $151,000 in 2014 and $311,000 in 2013.2015.
 

51

INDEX

The following table sets forth composition of nonperforming assets at the date indicated:
 
At December 31,At December 31,
2015 2014 2013 2012 20112017 2016 2015 2014 2013
(dollars in thousands)(dollars in thousands)
Nonperforming assets         
Business loans:         
Nonperforming Assets         
Business Loans         
Commercial and industrial$463
 $
 $
 $347
 $1,177
$1,160
 $250
 $463
 $
 $
Franchise1,630
 
 
 
 

 
 1,630
 
 
Commercial owner occupied536
 514
 747
 14
 2,053
97
 436
 536
 514
 747
SBA
 
 14
 260
 700
1,201
 316
 
 
 14
Real estate loans: 
  
  
  
  
Total business loans2,458
 1,002
 2,629
 514
 761
Real Estate Loans 
  
  
  
  
Commercial non-owner occupied1,164
 848
 983
 670
 1,495

 
 1,164
 848
 983
Multi-family
 
 
 266
 293

 
 
 
 
One-to-four family155
 82
 507
 522
 323
817
 124
 155
 82
 507
Land21
 
 
 127
 52
9
 15
 21
 
 
Other loans1
 
 
 
 
Total nonperforming loans, net$3,970
 $1,444
 $2,251
 $2,206
 $6,093
Total real estate loans826
 139
 1,340
 930
 1,490
Consumer Loans         
Consumer loans
 
 1
 
 
Total nonperforming loans3,284
 1,141
 3,970
 1,444
 2,251
Other real estate owned1,161
 1,037
 1,186
 2,258
 1,231
326
 460
 1,161
 1,037
 1,186
Total nonperforming assets, net$5,131
 $2,481
 $3,437
 $4,464
 $7,324
Total nonperforming assets$3,610
 $1,601
 $5,131
 $2,481
 $3,437
Allowance for loan losses$17,317
 $12,200
 $8,200
 $7,994
 $8,522
$28,936
 $21,296
 $17,317
 $12,200
 $8,200
Allowance for loan losses as a percent of total nonperforming loans, gross436.20% 844.88% 364.28% 362.38% 139.87%881% 1,866% 436% 845% 364%
Nonperforming loans, net of specific allowances, as a percent of gross loans receivable (1)0.18
 0.09
 0.18
 0.22
 0.82
Nonperforming assets, net of specific allowances, as a percent of total assets0.18
 0.12
 0.20
 0.38
 0.76
         
(1) Gross loans include loans receivable held for investment and held for sale. 
  
  
  
  
Nonperforming loans as a percent of loans held for investment0.05
 0.04
 0.18
 0.09
 0.18
Nonperforming assets as a percent of total assets0.04
 0.04
 0.18
 0.12
 0.20

Allowance for Loan Losses.  The allowance for loan losslosses is established as management's estimate of probable incurred losses inherent in the loan receivable portfolio. Management evaluates the adequacy of the allowance quarterly to maintain the allowance at levels sufficient to provide for these inherent losses. The ALLL is based upon the total loans evaluated individually and collectively, and is reported as a reduction of loans held for investment. The allowance is increased by a provision for loan losses which is charged to expense and reduced by charge-offs, net of recoveries.  Loans held for sale are carried at the lower of amortized cost or fair value.  Net unrealized losses, if any, are recorded in current earnings.
 
We separate our assets, largely loans, by type, and we use various asset classifications to segregate the assets into various risk grade categories. We use the various asset classifications as a means of measuring risk for determining the valuation allowance for groups and individual assets at a point in time. Currently, we designate our assets into a category of “Pass,” “Special Mention,” “Substandard,” “Doubtful” or “Loss.” A brief description of these classifications follows:
 
Pass classifications represent assets with a level of credit quality, which contain no well-defined deficiency or weakness.
Special Mention assets do not currently expose the Bank to a sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiency or potential weaknesses deserving management’s close attention.

52

INDEX

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.  
INDEX

Doubtful credits have all the weaknesses inherent in substandard credits, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted. Amounts classified as loss are promptly charged off.

Our determination as to the classification of assets and the amount of valuation allowances necessary are subject to review by bank regulatory agencies, which can order a change in a classification or an increase to the allowance. While we believe that an adequate allowance for estimated loan losses has been established, there can be no assurance that our regulators, in reviewing assets including the loan portfolio, will not request us to materially increase our allowance for estimated loan losses, thereby negatively affecting our financial condition and earnings at that time. In addition, actual losses are dependent upon future events and, as such, further increases to the level of allowances for estimated loan losses may become necessary.
 
At December 31, 2015,2017, we had $19.4$48.6 million of assets classified as substandard, compared to $16.6$13.3 million at December 31, 2014.  During 2015, one loan amounting2016, with the increase primarily attributable to $1.5 million was classified as Doubtful. In 2014, thereacquired loans. There were no loans classified as Doubtful.doubtful as of year-end 2017, compared to $250,000 as of year-end 2016.
 

53

INDEX

The following tables set forth information concerning substandard and doubtful assets at the dates indicated:
 
At December 31, 2015At December 31, 2017
Loans OREO Total Substandard Assets DoubtfulLoans OREO Total Substandard Assets Doubtful
Gross Balance # of Loans Balance # of Properties Balance # of Assets Balance # of LoansGross Balance # of Loans Balance # of Properties Balance # of Assets Balance # of Loans
(dollars in thousands)(dollars in thousands)
Business loans:         
  
    
Business Loans         
  
    
Commercial and industrial$3,155
 17
 $
 
 $3,155
 17
 $
 
$15,044
 91
 $
 
 $15,044
 91
 $
 
Franchise169
 2
 
 
 169
 2
 1,461
 1
Commercial owner occupied7,829
 16
 
 
 7,829
 16
 
 
21,180
 32
 121
 1
 21,301
 33
 
 
Real estate loans: 
  
  
  
        
SBA3,469
 34
 
 
 3,469
 34
 
 
Agribusiness3,844
 6
 
 
 3,844
 6
 
 
Total business loans43,537
 163
 121
 1
 43,658
 164
 
 
Real Estate Loans 
  
  
  
        
Commercial non-owner occupied2,666
 9
 450
 1
 3,116
 10
 
 
1,070
 7
 
 
 1,070
 7
 
 
Multi-family3,387
 8
 
 
 3,387
 8
 
 
228
 1
 
 
 228
 1
 
 
One-to-four family1,053
 14
 
 
 1,053
 14
 
 
1,964
 16
 
 
 1,964
 16
 
 
Farmland1,115
 3
 
 
 1,115
 3
 
 
Land21
 1
 711
 1
 732
 2
 
 
254
 4
 205
 1
 459
 5
 
 
Total real estate loans4,631
 31
 205
 1
 4,836
 32
 
 
Consumer Loans               
Consumer loans137
 14
 
 
 137
 14
 
 
Total substandard assets$18,280
 67
 $1,161
 2
 $19,441
 69
 $1,461
 1
$48,305
 208
 $326
 2
 $48,631
 210
 $
 
                              
At December 31, 2014               
Loans OREO Total Substandard Assets DoubtfulAt December 31, 2016
Gross Balance # of Loans Balance # of Properties Balance # of Assets Balance # of LoansLoans OREO Total Substandard Assets Doubtful
(dollars in thousands)Gross Balance # of Loans Balance # of Properties Balance # of Assets Balance # of Loans
Business loans:               
(dollars in thousands)
Business Loans               
Commercial and industrial$1,828
 9
 $
 
 $1,828
 9
 $
 
$3,784
 21
 $88
 1
 $3,872
 22
 $250
 1
Commercial owner occupied8,605
 19
 
 
 8,605
 19
 
 
4,221
 14
 
 
 4,221
 14
 
 
Real estate loans: 
  
  
  
  
  
    
SBA462
 5
 
 
 462
 5
 
 
Total business loans8,467
 40
 88
 1
 8,555
 41
 250
 1
Real Estate Loans 
  
  
  
  
  
    
Commercial non-owner occupied3,939
 6
 
 
 3,939
 6
 
 
1,072
 3
 
 
 1,072
 3
 
 
Multi-family508
 1
 
 
 508
 1
 
 
2,403
 6
 
 
 2,403
 6
 
 
One-to-four family649
 11
 285
 3
 934
 14
 
 
441
 9
 
 
 441
 9
 
 
Land
 
 752
 1
 752
 1
 
 
15
 1
 372
 1
 387
 2
 
 
Total real estate loans3,931
 19
 372
 1
 4,303
 20
 
 
Consumer Loans               
Consumer loans393
 2
 
 
 393
 2
 
 
Total substandard assets$15,529
 46
 $1,037
 4
 $16,566
 50
 $
 
$12,791
 61
 $460
 2
 $13,251
 63
 $250
 1
     
In determining the ALLL, we evaluate loan credit losses on an individual basis in accordance with FASB ASCthe Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 310, Accounting by
INDEX

Creditors for Impairment of a Loan, and on a collective basis based on FASB ASC 450, Accounting for Contingencies. For loans evaluated on an individual basis, we analyze the borrower’s creditworthiness, cash flows and financial status, and the condition and estimated value of the collateral. Loans evaluated individually that are deemed to be impaired are separated from our collective credit loss analysis.

54

INDEX

 
Unless an individual borrower relationship warrants a separate analysis, the majority of our loans are evaluated for credit losses on a collective basis through a quantitative analysis to arrive at base loss factors that are adjusted through a qualitative analysis for internal and external identified risks. The adjusted factor is applied against the loan risk category to determine the appropriate allowance. Our base loss factors are calculated using actual trailing twelve-month and annualized actual trailing six-month, twenty-four month, thirty-six month and eighty-four month charge-off data for all loan types except (1) Zero Factor loans, which includes loans fully secured by cash deposits, the guaranteed portion of SBA loans and FHA/VA guaranteed 1st TD loans, and (2) Overdraft Deposit Accounts, to which a base factor of 5% is applied.  Then adjustments for the following internal and external risk factors are added to the base factors:
 
Internal Factors
 
Changes in lending policies and procedures, including underwriting standards and collection, charge-offs, and recovery practices;
Changes in the nature and volume of the loan portfolio and the terms of loans, as well as new types of lending;
Changes in the experience, ability, and depth of lending management and other relevant staff that may have an impact on our loan portfolio;
Changes in the volume and severity of past due and classified loans, and in the volume of non-accruals, troubled debt restructurings, and other  loan modifications;
Changes in the quality of our loan review system and the degree of oversight by our board of directors; and
The existence and effect of any concentrations of credit and changes in the level of such concentrations.

External Factors
 
Changes in national, state and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments (includes trends in real estate values and the interest rate environment);
Changes in the value of the underlying collateral for collateral-dependent loans; and
The effect of external factors, such as competition, legal developments and regulatory requirements on the level of estimated credit losses in our current loan portfolio.

The factor adjustments for each of the nine above-described risk factors are determined by the Chief Credit Officer and approved by the Credit and Portfolio Review Committee ("CPR") on a quarterly basis.
The ALLL factors are reviewed for reasonableness against the 10-year average, 15-year average, and trailing twelve month total charge-off data for all FDIC insured commercial banks and savings institutions based in California.  Given the above evaluations, the amount of the ALLL is based upon the total loans evaluated individually and collectively.

Loans acquired through bank acquisition are recorded at fair value at acquisition date without a carryover of the related ALLL. Loans acquired with deteriorated credit quality are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect principal and interest payments according to contractual terms. These loans are accounted for under ASC Subtopic 310-30 Receivables — Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality.Quality.

As of December 31, 2015,2017, the ALLL totaled $17.3$28.9 million, an increase of $5.1$7.6 million from December 31, 20142016 and $9.1$11.6 million from December 31, 2013.2015. At December 31, 2015,2017, the ALLL as a percent of nonperforming loans was 436.20%881%, compared with 844.88%1,866% at December 31, 20142016 and 364.3%436% at December 31, 2013.  2015.

At December 31, 2015,2017, the ALLL as a percent of gross loans held for investment was 0.77%0.47%, an increase from 0.75% at December 31, 2014, and an increasea decrease from 0.66% at December 31, 2013.2016, and 0.77% at December 31, 2015. The increasedecrease in the 20152017 ratio was

55

INDEX

primarily relatedattributable to growth in our loan portfolio, as well as changes in the composition of the portfolio, including the growth in construction loans.loans acquired from HEOP and PLZZ, recorded at fair value with no ALLL carried over. At December 31, 2015,2017, management deems the ALLL to be sufficient to provide for inherentprobable incurred losses within the loan portfolio.

INDEX

The following table sets forth the activity in the Company’s ALLL for the periods indicated:
For the Year Ended December 31,For the Year Ended December 31,
2015 2014 2013 2012 20112017 2016 2015 2014 2013
(dollars in thousands)(dollars in thousands)
Allowance for Loan Losses                  
Balance at beginning of period$12,200
 $8,200
 $7,994
 $8,522
 $8,879
$21,296
 $17,317
 $12,200
 $8,200
 $7,994
Provision for loan losses6,425
 4,684
 1,860
 751
 3,255
8,640
 8,776
 6,425
 4,684
 1,860
Charge-offs: 
  
  
  
  
 
  
  
  
  
Business loans: 
  
  
  
  
Business loans 
  
  
  
  
Commercial and industrial484
 223
 509
 512
 1,285
1,344
 2,802
 484
 223
 509
Franchise764
 
 
 
 

 980
 764
 
 
Commercial owner occupied
 
 232
 265
 307

 329
 
 
 232
SBA
 
 143
 132
 90
8
 980
 
 
 143
Real estate: 
  
  
  
  
Real Estate loans 
  
  
  
  
Commercial non-owner occupied116
 365
 756
 88
 43

 
 116
 365
 756
Multi-family
 
 101
 
 489

 
 
 
 101
One-to-four family16
 195
 272
 371
 1,408
10
 151
 16
 195
 272
Land
 
 
 145
 164
Other loans
 
 18
 2
 228
Consumer loans         
Consumer loans
 
 
 
 18
Total charge-offs$1,380
 $783
 $2,031
 $1,515
 $4,014
$1,362
 $5,242
 $1,380
 $783
 $2,031
Recoveries: 
  
  
  
  
 
  
  
  
  
Business loans: 
  
  
  
  
Business loans 
  
  
  
  
Commercial and industrial$47
 $42
 $138
 $2
 $9
$94
 $177
 $47
 $42
 $138
Commercial owner occupied105
 25
 
 
 
SBA8
 4
 50
 163
 211
127
 193
 8
 4
 50
Real estate: 
  
  
  
  
Real Estate loans 
  
  
  
  
Commercial non-owner occupied3
 
 
 21
 

 21
 3
 
 
One-to-four family13
 34
 47
 8
 142
35
 25
 13
 34
 47
Land
 
 
 
 23
Other loans1
 19
 142
 42
 17
Consumer loans         
Consumer loans1
 4
 1
 19
 142
Total recoveries$72
 $99
 $377
 $236
 $402
362
 445
 72
 99
 377
Net loan charge-offs$1,308
 $684
 $1,654
 $1,279
 $3,612
1,000
 4,797
 1,308
 684
 1,654
Balance at end of period$17,317
 $12,200
 $8,200
 $7,994
 $8,522
$28,936
 $21,296
 $17,317
 $12,200
 $8,200
Ratios 
  
  
  
  
 
  
  
  
  
Net charge-offs to average net loans0.06% 0.05% 0.16% 0.16% 0.53%
Allowance for loan losses to gross loans at end of period0.77
 0.75
 0.66
 0.81
 1.15
Net charge-offs to average total loans, net0.02% 0.17% 0.06% 0.05% 0.16%
Allowance for loan losses to loans held for investment0.47% 0.66% 0.77% 0.75% 0.66%
 

56

INDEX

The following table sets forth the Company’s ALLL and the percent of gross loans to total gross loans in each of the categories listed and the allowance as a percentage of the loan category balance at the dates indicated:
 At December 31, At December 31,
 2015 2014 2013 2017 2016 2015
Balance at End of Period Applicable to Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance
 (dollars in thousands) (dollars in thousands)
Business loans:                  
Business Loans                  
Commercial and industrial $3,449
 13.7% 1.11% $2,646
 14.1% 1.16% $1,968
 15.0% 1.05% $9,721
 17.5% 0.89% $6,362
 17.4% 1.13% $3,449
 13.7% 1.11%
Franchise 3,124
 14.5
 0.95
 1,554
 12.2
 0.78
 
 
 
 5,797
 10.7
 0.88
 3,845
 14.1
 0.84
 3,124
 14.5
 0.95
Commercial owner occupied 1,870
 13.0
 0.63
 1,757
 13.0
 0.83
 1,818
 17.8
 0.82
 767
 20.8
 0.06
 1,193
 14.0
 0.26
 1,870
 13.0
 0.63
SBA 1,500
 2.8
 2.41
 568
 1.7
 2.00
 151
 0.9
 1.42
 2,890
 3.0
 1.56
 1,039
 3.0
 1.17
 1,500
 2.8
 2.79
Agribusiness 1,291
 1.9
 1.11
 
 
 
 
 
 
Warehouse facilities 759
 6.3
 0.53
 546
 7.0
 0.48
 392
 7.0
 0.45
 
 
 
 
 
 
 759
 6.3
 0.53
Real estate loans:  
  
  
  
  
  
  
  
  
Real Estate Loans  
  
  
  
  
  
  
  
  
Commercial non-owner occupied 2,048
 18.7
 0.49
 2,007
 22.1
 0.56
 1,658
 26.9
 0.50
 1,266
 20.0
 0.10
 1,715
 18.1
 0.29
 2,048
 18.7
 0.49
Multi-family 1,583
 19.0
 0.37
 1,060
 16.1
 0.40
 817
 18.8
 0.35
 607
 12.8
 0.08
 2,927
 21.3
 0.42
 1,583
 19.0
 0.37
One-to-four family 698
 3.5
 0.87
 842
 7.5
 0.69
 1,099
 11.7
 0.76
 803
 4.4
 0.30
 365
 3.1
 0.36
 698
 3.5
 0.87
Construction 2,030
 7.5
 1.20
 1,088
 5.5
 1.21
 136
 1.0
 1.04
 4,569
 4.6
 1.62
 3,632
 8.3
 1.35
 2,030
 7.5
 1.20
Farmland 137
 2.3
 0.09
 
 
 
 
 
 
Land 233
 0.8
 1.27
 108
 0.6
 1.19
 127
 0.6
 1.67
 993
 0.5
 3.18
 198
 0.6
 1.00
 233
 0.8
 1.27
Other loans 23
 0.2
 0.45
 24
 0.2
 0.73
 34
 0.3
 0.89
Consumer Loans                  
Consumer loans 95
 1.5
 0.10
 20
 0.1
 0.49
 23
 0.2
 0.45
Total $17,317
 100.0% 0.77% $12,200
 100.0% 0.75% $8,200
 100.0% 0.66% $28,936
 100.0% 0.47% $21,296
 100.0% 0.66% $17,317
 100.0% 0.77%


57

INDEX

 2012 2011 2014 2013
Balance at End of Period Applicable to Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance Amount % of Loans in Category to Total Loans Allowance as a % of Loan Category Balance
 (dollars in thousands) (dollars in thousands)
Business loans:            
Business Loans            
Commercial and industrial $1,310
 11.7% 1.14% $1,361
 11.7% 1.57% $2,646
 14.1% 1.16% $1,968
 15.0% 1.05%
Franchise 1,554
 12.2
 0.78
 
 
 
Commercial owner occupied 1,512
 15.3
 1.00
 1,119
 20.6
 0.73
 1,757
 13.0
 0.83
 1,818
 17.8
 0.82
SBA 79
 0.7
 1.15
 80
 0.7
 1.69
 568
 1.7
 2.00
 151
 0.9
 2.01
Warehouse facilities 1,544
 19.9
 0.79
 1,347
 9.1
 2.00
 546
 7.0
 0.48
 392
 7.0
 0.45
Real estate loans:  
  
  
  
  
  
Real estate Loans  
  
  
  
  
  
Commercial non-owner occupied 1,459
 25.6
 0.58
 1,287
 22.2
 0.78
 2,007
 22.1
 0.56
 1,658
 26.9
 0.50
Multi-family 1,145
 15.9
 0.73
 2,281
 26.2
 1.18
 1,060
 16.1
 0.40
 817
 18.8
 0.35
One-to-four family 862
 9.9
 0.88
 931
 8.1
 1.55
 842
 7.5
 0.69
 1,099
 11.7
 0.76
Construction 1,088
 5.5
 1.21
 136
 1.0
 1.04
Land 31
 0.9
 0.35
 39
 0.9
 0.61
 108
 0.6
 1.19
 127
 0.6
 1.67
Other loans 52
 0.1
 4.36
 77
 0.5
 2.27
Consumer Loans            
Consumer loans 24
 0.2
 0.73
 34
 0.3
 0.89
Total $7,994
 100.0% 0.81% $8,522
 100.0% 1.15% $12,200
 100.0% 0.75% $8,200
 100.0% 0.66%
 
The following table sets forth the ALLL amounts calculated by the categories listed at the dates indicated:
At December 31, At December 31,
2015 2014 2013 2012 2011 2017 2016 2015 2014 2013
Balance at End of Period Applicable toAmount 
% of
Allowance
 to Total
 Amount % of
Allowance
to Total
 Amount % of
Allowance
to Total
 Amount % of
Allowance
to Total
 Amount % of
Allowance
to Total
 Amount 
% of
Allowance
 to Total
 Amount % of
Allowance
to Total
 Amount % of
Allowance
to Total
 Amount % of
Allowance
to Total
 Amount % of
Allowance
to Total
(dollars in thousands) (dollars in thousands)
Allocated allowance$16,586
 95.9% $12,200
 100.0% $8,095
 98.7% $7,994
 100.0% $8,522
 100.0% $28,881
 99.8% $21,046
 98.8% $16,586
 95.9% $12,200
 100.0% $8,095
 98.7%
Specific allowance731
 4.1
 
 
 105
 1.3
 
 
 
 
 55
 0.2
 250
 1.2
 731
 4.1
 
 
 105.0
 1.3
Total$17,317
 100.0% $12,200
 100.0% $8,200
 100.0% $7,994
 100.0% $8,522
 100.0% $28,936
 100.0% $21,296
 100.0% $17,317
 100.0% $12,200
 100.0% $8,200
 100.0%

INDEX

Deposits

At December 31, 2015,2017, total deposits were $2.20$6.1 billion, an increase of $564 million$2.9 billion or 34.6%93% from December 31, 2014.2016. The increase in deposits since year-end 20142016 included increases in money market and savings of $1.2 billion, noninterest bearing checking of $255 million, money market$1.0 billion, time deposits of $227$510 million and brokered certificatesinterest-bearing checking of deposit of $78.6$182 million. The increase in deposits during the 20152017 was primarily due to organic growththe acquisition of PLZZ in the fourth quarter of 2017, which contributed $1.1 billion of deposits at the time of acquisition, before purchasing accounting adjustments and the acquisition of IDPK,HEOP in the second quarter of 2017, which added $336 million incontributed $1.4 billion of deposits at acquisition.the time of acquisition, before purchase accounting adjustments, as well as organic deposit growth. The total end of period weighted average interest rate on deposits was 0.32%0.33% at December 31, 20152017 and 0.36%0.27% at December 31, 2014.2016.
    

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The following table sets forth the distribution of the Company’s deposit accounts on average for the periods indicated and the weighted average interest rates on each category of deposits presented:
 For the years ended December 31,
 2015 2014 2013
 
Average
Balance
 
Average
Yield/Cost
 
Average
Balance
 
Average
Yield/Cost
 
Average
Balance
 
Average
Yield/Cost
 (dollars in thousands)
Deposits 
  
  
  
  
  
Noninterest bearing checking$646,931
 % $415,983
 % $318,985
 %
Interest bearing checking141,962
 0.12
 134,056
 0.12
 94,718
 0.12
Money market696,747
 0.35
 469,123
 0.31
 367,769
 0.28
Savings88,247
 0.16
 75,068
 0.15
 78,815
 0.13
Time493,747
 0.79
 377,333
 0.88
 325,439
 0.86
Total deposits$2,067,634
 0.32% $1,471,563
 0.34% $1,185,726
 0.34%
The following table presents, by various rate categories, the amount of certificates of deposit accounts outstanding and the periods to maturity of the certificate of deposit accounts outstanding at the period indicated:
 December 31, 2015
 Less than 1.00 % 1.00% - 1.99% 2.00 - 2.99% 3.00 and greater Total % of Total Weighted
Average Rate
 (dollars in thousands)
Certificates of deposit accounts 
  
  
  
      
Within 3 months$67,803
 $11,878
 $32
 $85
 $79,798
 15.3% 0.55%
4 to 6 months73,449
 57,784
 290
 176
 131,699
 25.3
 0.81
7 to 12 months142,169
 45,554
 313
 10
 188,046
 36.1
 0.78
13 to 24 months55,668
 52,259
 44
 223
 108,194
 20.8
 0.98
25 to 36 months4,824
 3,391
 2
 148
 8,365
 1.6
 1.09
37 to 60 months2,344
 1,241
 639
 13
 4,237
 0.8
 1.10
Over 60 months436
 111
 81
 8
 636
 0.1
 0.97
Total$346,693
 $172,218
 $1,401
 $663
 $520,975
 100.0% 0.80%
 For the years ended December 31,
 2017 2016 2015
 
Average
Balance
 
Average
Yield/Cost
 
Average
Balance
 
Average
Yield/Cost
 
Average
Balance
 
Average
Yield/Cost
 (dollars in thousands)
Deposits 
  
  
  
  
  
Noninterest bearing checking$1,758,730
 % $1,086,814
 % $646,931
 %
Interest bearing checking293,450
 0.12
 176,508
 0.11
 141,962
 0.12
Money market1,701,209
 0.40
 1,003,861
 0.36
 696,747
 0.35
Savings189,408
 0.13
 98,224
 0.15
 88,247
 0.16
Retail certificates of deposit556,121
 0.61
 416,232
 0.74
 390,797
 0.82
Wholesale/brokered certificates of deposit227,822
 1.16
 180,209
 0.73
 102,950
 0.67
Total deposits$4,726,740
 0.28% $2,961,848
 0.28% $2,067,634
 0.32%
 
At December 31, 2015,2017, we had $394$892 million in certificate accounts with balances of greater than $100,000, and of that amount, we had $228$523 million in certificate of deposit accounts with balances of greater than $250,000 maturing as follows:
 

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  December 31, 2017
  $100,000 through $250,000   Greater than $250,000 Total
Maturity Period Amount Weighted
Average Rate
 % of Total
Deposits
 Amount Weighted
Average Rate
 % of Total
Deposits
 Amount Weighted
Average Rate
 % of Total
Deposits
  (dollars in thousands)
Three months or less $164,359
 1.00% 2.70% $165,731
 1.14% 2.72% $330,090
 1.07% 5.42%
Over three months through 6 months 57,816
 0.77
 0.95
 153,775
 1.29
 2.53
 211,591
 1.14
 3.48
Over 6 months through 12 months 76,376
 1.00
 1.25
 151,038
 1.36
 2.48
 227,414
 1.24
 3.74
Over 12 months 71,197
 1.24
 1.17
 52,118
 1.31
 0.86
 123,315
 1.27
 2.03
Total $369,748
 1.01% 6.07% $522,662
 1.26% 8.59% $892,410
 1.16% 14.66%

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 December 31, 2015
 $100,000 through $250,000   Greater than $250,000 Total
Maturity PeriodAmount Weighted
Average Rate
 % of Total
Deposits
 Amount Weighted
Average Rate
 % of Total
Deposits
 Amount Weighted
Average Rate
 % of Total
Deposits
 (dollars in thousands)
Three months or less$22,832
 0.63% 1.04% $37,373
 0.51% 1.70% $60,205
 0.56% 2.74%
Over three months through 6 months41,571
 0.93
 1.89
 60,549
 0.74
 2.76
 102,120
 0.82
 4.65
Over 6 months through 12 months54,785
 0.88
 2.50
 90,167
 0.74
 4.11
 144,952
 0.79
 6.60
Over 12 months47,209
 1.07
 2.15
 39,785
 0.86
 1.81
 86,994
 0.97
 3.96
Total$166,397
 0.91% 7.58% $227,874
 0.72% 10.38% $394,271
 0.80% 17.96%

Borrowings.  Borrowings represent a secondary source of funds for our lending and investing activities. The Company has a variety of borrowing relationships that it can draw upon to fund its activities. At December 31, 2015,2017, total borrowings amounted to $266$641 million, an increase of $79.5$244 million or 42.5%61% from December 31, 2014.2016. The increase in borrowings at December 31, 20152017 from December 31, 20142016 was primarily related to an increase in FHLB overnight advances. On August 29, 2014, the Company 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 being used for general corporate purposes, including, but not limited to, contribution of capital to the Bank of $40 million in 2014 to support both organic growth as well as acquisition activities.  Additionally, toward the end 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 lengthen the overall maturity of our liabilities and support our interest rate risk management strategies as well as leverage our balance sheet for future growth.  At December 31, 2015,2017, total borrowings represented 9.5%8.0% of total assets and had an end of period weighted average rate of 1.99%2.21%, compared with 9.2%9.8% of total assets at a weighted average rate of 2.74%1.95% at December 31, 2014.2016.

FHLB Advances.  The FHLB system functions as a source of credit to financial institutions that are members. Advances are secured by certain real estate loans, investment securities, and the capital stock of the FHLB owned by the Company. Subject to the FHLB’s advance policies and requirements, these advances can be requested for any business purpose in which the Company is authorized to engage. In granting advances, the FHLB considers a member’s creditworthiness and other relevant factors. The Company has a line of credit with the FHLB, which provides for advances totaling up to 45% of its assets, equating to a credit line of $1.2$2.9 billion as of December 31, 2015.2017. At December 31, 2015,2017, we had borrowing capacity of $533 million$1.2 billion with the FHLB. At December 31, 2015,2017, the Company had $50$180 million in term FHLB advances which mature within one year, and $98$310 million in overnight FHLB advances, compared to $20no term FHLB advances, which matured within one year, and $278 million in overnight FHLB advances at December 31, 2014.2016. The FHLB advances at December 31, 20152017 were collateralized by real estate loans and securities with an aggregate balance of $620 million$1.4 billion and FHLB stock of $11.4$17.3 million. With this pledged collateral, the Company has additional available advances of $385$677 million as of December 31, 2015.2017.
 
Other Borrowings. The Company maintains lines of credit to purchase federal funds and a reverse repurchase facility together totaling $170$218 million with seveneight correspondent banks and has access through the Federal Reserve Bank discount window to borrow $3.3 million to be utilized as business needs dictate. Federal funds purchased and reverse repurchase facilities are short-term in nature and utilized to meet short-term funding needs.
 
As of December 31, 2015,2017, the Company has three Repurchase Agreements totaling $28.5 million with a weighted average interest rate of 3.26% as of December 31, 20152017 secured by GSE MBS totaling an estimated par value of $33.2$26.5 million. The Repurchase Agreements were entered into in 2008 at a term of 10 years each with the buyers of the Repurchase Agreements having the option to terminate the Repurchase Agreements after the fixed interest rate period has expired. The interest rates reset quarterly with the maximum reset rate being 2.89% on one

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$10.0 $10.0 million Repurchase Agreement, 3.47% on the other $10.0 million Repurchase Agreement, and 3.45% on the $8.5 million Repurchase Agreement.
 
The Company sells certain securities under agreements to repurchase. The agreements are treated as overnight borrowings with the obligations to repurchase securities sold reflected as a liability. The dollar amount of investment securities underlying the agreements remain in the asset accounts. The Company enters into these debt agreements as a service to certain HOA depositors to add protection for deposit amounts above FDIC insurance levels. At December 31, 2015,2017, the Company sold securities under agreement to repurchase of $19.6$17.6 million with weighted average rate of 0.03%0.01% and collateralized by investment securities with fair value of approximately $28.5$29.7 million.
 
Debentures.  On March 25, 2004, the Corporation issued $10,310,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debt Securities”) to PPBI Trust I, a statutory trust created under the laws of the State of Delaware. The Debt Securities are subordinated to effectively all borrowings of the Corporation and are due and payable on April 7, 2034. Interest is payable quarterly on the Debt Securities at three-month LIBORLondon Interbank Offered Rate ("LIBOR") plus 2.75% for an effective rate of 3.07%4.11% as of December 31, 2015.2017.
 
In the third quarter of 2014, the Company completed a private placement of $60 million in aggregate principal amount of subordinated notes to certain accredited investors. The subordinated notes bear a fixed interest rate of 5.75% per annum, payable semi-annually, and mature on September 3, 2024. The net proceeds from the sale
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of the notes were $59 million, and the notes qualify as Tier 2 capital for regulatory purposes. The net proceeds from this offering are intended 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.  The Bank received $50.0 million of contributed capital in 2014.

On April 1, 2017, as part of the HEOP acquisition, the Corporation assumed $5.2 million of floating rate junior subordinated debt securities associated with Heritage Oaks Capital Trust II. Interest is payable quarterly at three-month LIBOR plus 1.72% per annum, for an effective rate of 3.06% per annum as of December 31, 2017. At December 31, 2017, the carrying value of these debentures was $3.9 million, which reflects purchase accounting fair value adjustments of $1.3 million. The Corporation also assumed $3.1 million and $5.2 million of floating rate junior subordinated debt associated with Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust, respectively. At December 31, 2017, the carrying value of Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust were $2.8 million and $3.8 million, respectively, which reflects purchase accounting fair value adjustments of $332,000 and $1.4 million, respectively. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 4.31% per annum as of December 31, 2017 for Mission Community Capital Trust I. Interest is payable quarterly at three-month LIBOR plus 1.48% per annum, for an effective rate of 2.84% per annum as of December 31, 2017 for Santa Lucia Bancorp (CA) Capital Trust. These three debentures are callable by the Corporation at par.

On November 1, 2017, as part of the PLZZ acquisition, the Company assumed three subordinated notes totaling $25 million at a fixed interest rate of 7.125% payable in arrears on a quarterly basis. The notes have a maturity date of June 26, 2025 and are also redeemable in whole or in part from time to time beginning in June 26, 2020 at an amount equal to 103.0% of principal plus accrued unpaid interest. The redemption price decreases 50 basis points each subsequent year.
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The following table sets forth certain information regarding the Company's borrowed funds at or for the years ended on the dates indicated:
 
At or For Year Ended December 31,At or For Year Ended December 31,
2015 2014 20132017 2016 2015
(dollars in thousands)(dollars in thousands)
FHLB advances     
FHLB Advances     
Balance outstanding at end of year$148,000
 $70,000
 $156,000
$490,148
 $278,000
 $148,000
Weighted average interest rate at end of year0.42% 0.59% 0.06%1.49% 0.55% 0.42%
Average balance outstanding$139,542
 $70,296
 $26,137
$290,839
 $58,814
 $139,542
Weighted average interest rate during the year0.39% 0.26% 0.15%1.19% 0.59% 0.39%
Maximum amount outstanding at any month-end during the year$340,000
 $210,000
 $156,000
$490,148
 $278,000
 $340,000
Other borrowings   
  
Other Borrowings   
  
Balance outstanding at end of year$48,125
 $46,643
 $48,091
$46,139
 $49,971
 $48,125
Weighted average interest rate at end of year1.94% 2.03% 1.98%2.02% 1.94% 1.94%
Average balance outstanding$48,490
 $47,398
 $45,310
$50,866
 $48,732
 $48,490
Weighted average interest rate during the year1.95% 2.00% 2.09%1.86% 1.95% 1.95%
Maximum amount outstanding at any month-end during the year$49,925
 $49,712
 $52,077
$52,996
 $53,586
 $49,925
Debentures   
  
   
  
Balance outstanding at end of year$70,310
 $70,310
 $10,310
$105,123
 $69,383
 $69,263
Weighted average interest rate at end of year5.34% 5.34% 2.99%5.60% 5.35% 5.34%
Average balance outstanding$70,310
 $30,858
 $10,310
$81,466
 $69,347
 $69,199
Weighted average interest rate during the year5.60% 5.00% 2.98%5.80% 5.54% 5.69%
Maximum amount outstanding at any month-end during the year$70,310
 $70,310
 $10,310
$105,123
 $69,383
 $69,263
Total borrowings   
  
Total Borrowings   
  
Balance outstanding at end of year$266,435
 $186,953
 $214,401
$641,410
 $397,354
 $265,388
Weighted average interest rate at end of year1.99% 2.74% 0.63%2.21% 1.56% 1.98%
Average balance outstanding$258,342
 $148,552
 $81,757
$423,248
 $176,893
 $257,231
Weighted average interest rate during the year2.10% 1.80% 1.58%2.16% 2.91% 2.11%
Maximum amount outstanding at any month-end during the year$455,154
 $255,297
 $218,387
$648,267
 $397,354
 $454,008

Stockholders' Equity
 
At December 31, 2015,2017, our stockholders’ equity amounted to $299 million,$1.2 billion, compared with $200$460 million at December 31, 2014.2016. The increase of $99.4$782 million or 49.8%170% is primarily due to net income in 20152017 of $25.5$60.1 million and an increase of $74.0$719 million, primarily as a result of the issuance of common stock in the IDPK acquisition.PLZZ and HEOP acquisitions.
 
Liquidity
 
Our primary sources of funds are deposits, principal and interest payments on loans, deposits, FHLB advances and other borrowings. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. We seek to maintain a level of liquid assets to ensure a safe and sound operation. Our liquid assets are comprised of cash and unpledged investments. As part of our daily monitoring, we calculate a liquidity ratio by dividing the sum of cash balances plus unpledged securities by the sum of deposits that mature in one year or less plus transaction accounts and FHLB advances. At December 31, 2015,2017, our liquidity ratio was 13.36%11.59%, compared with 14.93%13.15% at December 31, 2014.2016.
 

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We believe our level of liquid assets is sufficient to meet current anticipated funding needs. At December 31, 2015,2017, liquid assets of the Company represented approximately 11.8%9.2% of total assets, compared to 10.9%11.1% at December 31, 2014.2016. At December 31, 2015,2017, the Company had seveneight unsecured lines of credit with other correspondent banks to purchase federal funds totaling $120$168 million, one reverse repo line with a correspondent bank of $50.0$50 million and access through the Federal Reserve Bank discount window to borrow $3.3 million, as business needs dictate. We also have a line of credit with the FHLB allowing us to borrow up to 45% of the Bank’s total assets. At December 31, 2015,2017, we had a borrowing capacity of $533 million,$1.25 billion, based on collateral pledged at the FHLB, with $148$490 million outstanding in FHLB borrowing. The FHLB advance line is collateralized by eligible loans and FHLB stock. At December 31, 2015,2017, we had approximately $620 million$1.45 billion of collateral pledged to secure FHLB borrowings.
 
At December 31, 2015,2017, the Company’s loan to deposit and borrowing ratio was 91.9%92.5%, compared with 89.6%91.7% at December 31, 2014.2016. The increase in the ratio from year-end 2014 to 2015 was primarily associated with our loans increasing at a faster rate relative to our deposits and borrowings during the period. Certificates of deposit, which are scheduled to mature in one year or less from December 31, 2015,2017, totaled $400$911 million. We expect to retain a substantial portion of the maturing certificates of deposit at maturity.
 
The CompanyBank has a policy in place that permits the purchase of brokered funds, in an amount not to exceed 20%15% of total deposits, or 12% of total assets, as a secondary source for funding. At December 31, 2015,2017, the Company had $155$317 million, or 5.6%4.0% of total assets, in brokered time deposits. At December 31, 2014,2016, the Company had $77$199 million, or 3.8%4.9% of total assets, in brokered time deposits.
 
The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity. The Corporation’s primary sources of liquidity are dividends from the Bank. There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation. Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations.
 
The Financial Code provides that a bank may not make a cash distribution to its stockholders in excess of the lesser of a (i) bank’s retained earnings; or (ii) bank’s net income for its last three fiscal years, less the amount of any distributions made by the bank or by any majority-owned subsidiary of the bank to the stockholders of the bank during such period. However, a bank may, with the approval of the DBO, make a distribution to its stockholders in an amount not exceeding the greatest of (x) its retained earnings; (y) its net income for its last fiscal year; or (z) its net income for its current fiscal year. In the event that the DBO determines that the stockholders’ equity of a bank is inadequate or that the making of a distribution by the bank would be unsafe or unsound, the DBO may order the bank to refrain from making a proposed distribution. Under these provisions, the amount available for distribution from the Bank to the Corporation was approximately $58.8$142.7 million at December 31, 2015.2017.
 
Capital Resources
 
The Corporation and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
At December 31, 2015,2017, the Bank’s leverage capital amounted to $304$812 million and risk-basedrisk-weighted capital amounted to $322$843 million. At December 31, 2014,2016, the Bank’s leverage capital was $222$411 million and risk-basedrisk-weighted capital was $234$433 million. Pursuant to regulatory guidelines under prompt corrective action rules, a bank must have
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total risk-basedrisk-weighted capital of 10.00% or greater, Tier 1 risk-basedrisk-weighted capital of 8.00% or greater, common equity tier 1

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INDEX

capital ratio of 6.5% and Tier I capital to adjusted tangible assets of 5.00% or greater to be considered ‘‘well"well capitalized.’’" At December 31, 2015,2017, the Bank’s total risk-basedrisk-weighted capital ratio was 13.07%12.33%, Tier 1 risk-basedrisk-weighted capital ratio was 12.35%11.88%, common equity Tier 1 risk-basedrisk-weighted capital ratio was 12.35%11.88%, and Tier I capital to adjusted tangible assets capital ratio was 11.41%11.68%. See Note 2 to the Consolidated Financial Statements included in Item 8 hereof for a discussion of the Bank’s and Company’s capital ratios.
 
Contractual Obligations and Commitments
 
The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and to meet required capital needs. The following schedule summarizes maturities and payments due on our obligations and commitments, excluding accrued interest, at the date indicated:
 
At December 31, 2015At December 31, 2017
Less than 1 year 1 - 3 years 3 - 5 years More than 5 years TotalLess than 1 year 1 - 3 years 3 - 5 years More than 5 years Total
(in thousands)(dollars in thousands)
Contractual Obligations   
  
       
  
    
FHLB advances$148,000
 $
 $
 $
 $148,000
$428,500
 $23,500
 $38,148
 $
 $490,148
Other borrowings19,625
 28,500
 
 
 48,125
46,139
 
 
 
 46,139
Subordinated debentures
 
 
 70,310
 70,310

 
 
 105,123
 105,123
Certificates of deposit399,543
 116,559
 4,237
 636
 520,975
911,033
 146,893
 17,297
 9,597
 1,084,820
Operating leases3,658
 5,652
 3,062
 400
 12,772
7,170
 8,151
 3,308
 2,312
 20,941
Total contractual cash obligations$570,826
 $150,711
 $7,299
 $71,346
 $800,182
$1,392,842
 $178,544
 $58,753
 $117,032
 $1,747,171
 
Off-Balance Sheet Arrangements
 
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:

At December 31, 2015At December 31, 2017
Less than 1 year 1 - 3 years 3 - 5 years More than 5 years TotalLess than 1 year 1 - 3 years 3 - 5 years More than 5 years Total
(in thousands)(dollars in thousands)
Other unused commitments   
  
    
Other Unused Commitments   
  
    
Commercial and industrial$144,865
 $33,643
 $8,282
 $12,863
 $199,653
$488,734
 $158,715
 $28,261
 $31,308
 $707,018
Construction62,633
 88,291
 
 4,513
 155,437
119,276
 178,774
 7,550
 
 305,600
Agriculture and farmland37,958
 2,683
 10,335
 2,973
 53,949
Home equity lines of credit921
 127
 10
 8,652
 9,710
2,006
 8,044
 4,916
 64,057
 79,023
Standby letters of credit15,079
 
 
 
 15,079
30,876
 50
 
 
 30,926
All other32,201
 1,949
 70
 723
 34,943
18,968
 3,181
 5,724
 21,338
 49,211
Total commitments$255,699
 $124,010
 $8,362
 $26,751
 $414,822
$697,818
 $351,447
 $56,786
 $119,676
 $1,225,727

See Note 17 to the Consolidated Financial Statements in Item 8 hereof for narrative disclosure regarding off-balance sheet arrangements.
  

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Impact of Inflation and Changing Prices
 
Our consolidated financial statements and related data presented in this annual report on Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States which require the measurement of financial position and operating results in terms of historical dollar amounts (except with respect to securities classified as available for sale which are carried at market value) without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same magnitude as the price of goods and services.
 
Impact of New Accounting Standards
 
See Note 1 to the Consolidated Financial Statements included in Item 8 hereof for a listing of recently issued accounting pronouncements and the impact of them on the Company.
  
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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Asset/Liability Management and Market Risk

Market risk is the risk of loss in value or reduced earnings from adverse changes in market prices and interest rates. OurThe Bank’s market risk arises primarily from interest rate risk in our lending and deposit taking activities. Interest rate risk primarily occurs to the degree that ourthe Bank’s interest-bearing liabilities reprice or mature on a different basis and frequency than ourits interest-earning assets. Since ourThe Bank’s earnings depend primarily on our net interest income, which is the difference between the interest and dividends earned on interest-earning assets and the interest paid on interest-bearing liabilities, our principal objectives areliabilities. Therefore, the Bank actively monitors and manages its portfolios to actively monitorlimit the adverse effects on net interest income and manage the effects of adverseeconomic value due to changes in interest rates on net interest income.rates.

OurThe Asset/Liability Committee is responsible for implementing the Bank’s interest rate risk management policy which sets forth limits established by the board of directors that sets forth limits of acceptable changes in net interest income (“NII”) and economic value of equity (“EVE”) fromdue to specified changes in interest rates. OurThe Asset/Liability Committee reviews, among other items, economic conditions, the interest rate outlook, the demand for loans, the availability of deposits and borrowings, and ourthe Bank’s current operating results, liquidity, capital and interest rate exposure. Based on these reviews, ourthe Asset/Liability Committee formulates a strategy that is intendedstrategies to implement the objectives set forth in ourthe business plan without exceedingwhile complying with the net interest income and EVEeconomic value limits set forth in our guidelines approved by ourthe Bank’s board of directors.

Interest Rate Risk Management.  The principal objective of the Company’s interest rate risk management function is to evaluatemaintain an interest rate risk profile close to the desired risk profile in light of the interest rate outlook. The Bank measures the interest rate risk included in certainthe major balance sheet accounts, determineportfolios and compares the level of appropriatecurrent risk profile to the desired risk profile and manageto policy limits set by the risk consistent with prudent asset and liability concentration guidelines approved by our board of directors. We monitor asset and liability maturities and repricing characteristics on a regular basis and review various simulations and analysis to determineManagement then implements strategies consistent with the potential impact of various business strategies in controllingdesired risk profile. Currently the Company’s interest rate risk and the potential impact of those strategies upon future earnings under various interest rate scenarios.  OurBank’s primary strategy in managing interest rate risk is to emphasize the originationfocus originations for investment ofon adjustable rate loans or loans with relatively short maturities. Interest rates on adjustable rate loans are primarilymainly tied to 3-month or 6-monthPrime and 1-month LIBOR index, 12-month moving average of yields on actively traded U.S. Treasury securities adjustedindexes. Likewise, the Bank seeks to a constant maturity of one year ("MTA") index and the Wall Street Journal Prime Rate (“Prime”) index.  Also as part of this strategy, we seek to lengthen our deposit maturities when deposit rates are considered in the lower end of the interest rate cycle and shorten our deposit maturities when deposit rates are considered in the higher end of the interest rate cycle.raise non-maturity deposits. Management often implements these strategies through pricing actions. Finally, we structure ourmanagement structures its security portfolio and borrowings to mitigateoffset some of the interest rate sensitivity created by the re-pricing characteristics of customer loans and deposits.


65

INDEX

Management monitors asset and liability maturities and repricing characteristics on a regular basis and evaluates its interest rate risk as such riskit relates to its operational strategies. TheManagement analyzes potential strategies for their impact on the interest rate risk profile. Each quarter the Company’s board of directors reviews on a quarterly basis the Company’sBank’s asset/liability position, including simulations ofshowing the effectimpact on the Bank’s capitaleconomic value of equity in various interest rate scenarios. The extent ofInterest rate moves, up or down, may subject the movement of interest rates, higher or lower, is an uncertainty that could have a negative impact on the earnings of the Company.  If interest rates rise we may be subjectBank to interest rate spread compression, which would adversely impact ourimpacts its net interest income. This is primarily due to the lag in repricing of the indices, to which our adjustable rate loans and mortgage-backed securities are tied, as well as their repricing frequencies. Furthermore, large rate moves show the repricing frequencies andimpact of interest rate caps and floors on these adjustable rate loans and mortgage-backed securities.transactions. This is partly offset by lags in repricing for deposit products. The extent of the interest rate spread compression depends among other things, uponon the frequencydirection and severity of such interest rate fluctuations.moves and features in the Bank’s product portfolios.

The Company’s interest rate sensitivity is monitored by management through the use of both a simulation model that quantifies the estimated impact to earnings (Earnings at Risk) for a twelve and twenty-four month period, and a model that estimates the change in the Company’s EVE under alternative interest rate scenarios, primarily non-parallelinstantaneous parallel interest rate shifts over a twelve month period in 100 basis point increments. The simulation model estimates the impact on earningsnet interest income (NII) from changing interest rates on interest earningsearning assets and interest expense paid on interest bearing liabilities. The EVE model computes the net present value of capitalequity by discounting all expected cash flows fromon assets and liabilities under each rate scenario. AnFor each scenario, the EVE is the present value of all assets less the present value of all liabilities. The EVE ratio is defined as the EVE divided by the market value of assets within the same scenario.  The sensitivity measure is the largest decline in the EVE ratio, measured in basis points, caused by an increase or decrease in rates, and the higher an institution’s sensitivity measure, the greater exposure it has to interest rate risk.

INDEX

The following table shows the projected net interest income and net interest margin of the Company at December 31, 2015,2017, assuming non-parallelinstantaneous parallel interest rate shifts over a twelve month period of 100, 200, and 300 basis points:

in the first period:
As of December 31, 2015
As of December 31, 2017As of December 31, 2017
(dollars in thousands)
Earnings at RiskEarnings at Risk Projected Net Interest MarginEarnings at Risk Projected Net Interest Margin
Change in Rates $ Amount $ Change % Change $ Amount % Change $ Amount $ Change % Change $ Amount % Change
+300 BP $120,041
 $6,699
 5.9 % 4.54% 5.8 %
+200 BP 117,621
 4,279
 3.8
 4.45
 3.7
 342,622
 7,363
 2.2
 4.70 2.2
+100 BP 115,302
 1,960
 1.7
 4.37
 1.9
 339,239
 3,980
 1.2
 4.65 1.2
Static 113,342
 
 
 4.29
 
 335,259
 
 
 4.60 
-100 BP 111,927
 (1,415) (1.2) 4.24
 (1.2) 331,508
 (3,751) (1.1) 4.54 (1.1)
-200 BP 109,629
 (3,713) (3.3) 4.15
 (3.3) 333,498
 (1,761) (0.5) 4.57 (0.5)
-300 BP 108,525
 (4,817) (4.2) 4.11
 (4.2)


66

INDEX

The following table shows the EVE and projected change in the EVE of the Company at December 31, 2015,2017, assuming various non-parallel interest rate shifts over a twelve month period of 100, 200, and 300 basis points ("BP"):period:
 
As of December 31, 2015
As of December 31, 2017As of December 31, 2017
(dollars in thousands)
         EVE as % of Portfolio         EVE as % of Portfolio
Economic Value of EquityEconomic Value of Equity   Value of AssetsEconomic Value of Equity   Value of Assets
Change in Rates $ Amount $ Change % Change EVE Ratio % Change (BP) $ Amount $ Change % Change EVE Ratio % Change (BP)
+300 BP $394,170
 $5,946
 1.5 % 14.94% 104 BP
+200 BP 391,690
 3,466
 0.9 % 14.58% 68 BP 1,953,748
 38,564
 2.0
 25.06 140 BP
+100 BP 388,943
 719
 0.2 % 14.21% 31 BP 1,940,220
 25,036
 1.3
 24.41 76 BP
Static 388,224
 
 
 13.90% 0 1,915,184
 
 
 23.66 0
-100 BP 382,226
 (5,998) (1.5)% 13.40% -50 BP 1,886,490
 (28,694) (1.5) 22.83 -83 BP
-200 BP 347,736
 (40,488) (10.4)% 12.12% -178 BP 1,864,246
 (50,938) (2.7) 22.02 -164 BP
-300 BP 348,359
 (39,865) (10.3)% 12.10% -180 BP

Based on the modeling of the impact on earnings and EVE from changes in interest rates, the Company's sensitivity to changes in interest rates is moderate.low for rising rates. Both the earnings at risk and the EVE increase as rates rise. It is important to note that the above tables are a summary offorecasts based on several forecastsassumptions and that actual results may vary. The forecasts are based on estimates of historical behavior and assumptions of Managementby management that may change over time and may turn out to be different and may change over time.different. Factors affecting these estimates and assumptions include, but are not limited to (1) competitor behavior, (2) economic conditions both locally and nationally, (3) actions taken by the Federal Reserve, (4) customer behavior and (5) Management’s responses. Changes that vary significantly from the assumptions and estimates may have significant effects on the Company’s earnings and EVE.
Selected Assets and Liabilities which are Interest Rate Sensitive. The following table provides information regarding the Company’s primary categories of assets and liabilities that are sensitive to changes in interest rates for the year ended December 31, 2015.  The information presented reflects the expected cash flows of the primary categories by year, including the related weighted average interest rate.  The cash flows for loans are based on maturity and re-pricing date.  The loans and MBSs that have adjustable rate features are presented in accordance with their next interest-repricing date.  Cash flow information on interest-bearing liabilities, such as NOW accounts and money market accounts is also adjusted for expected decay rates, which are based on historical information.  All certificates of deposit and borrowings are presented by maturity date.  The weighted average interest rates for the various assets and liabilities presented are based on the actual rates that existed at December 31, 2015.  The degree of market risk inherent in loans with prepayment features may not be completely reflected in the disclosures.  Although we have taken into consideration historical prepayment trends adjusted for current market conditions to determine expected maturity categories, changes in prepayment behavior can be triggered by changes in many variables, including market rates of interest.  Unexpected changes in these variables may increase or decrease the rate of prepayments from those anticipated.  As such, the potential loss from such market rate changes may be significantly larger.


67

INDEX

 At December 31, 2015
 Maturities and Repricing
 2016 2016 2016 2017 2018 2019 - 20   Total
 3M or Less 4-6M 7-12M Year 2 Year3 Year 4 & 5 Thereafter Balance
 (dollars in thousands)
Selected Assets               
Int Bearing cash with financial institutions$63,482
 $
 $
 $
 $
 $
 $
 $63,482
Weighted average interest rate0.4% % % % % % % 0.4%
                
Investments$14,631
 $8,799
 $22,926
 $32,909
 $35,687
 $106,866
 $92,361
 $314,179
Weighted average interest rate1.73% 1.76% 1.62% 1.75% 1.83% 1.82% 2.09% 1.87%
                
Gross Loans$852,403
 $142,899
 $181,475
 $354,941
 $319,274
 $358,139
 $53,749
 $2,262,880
Weighted average interest rate4.99% 5.11% 4.93% 4.83% 4.77% 4.81% 7.72% 4.97%
                
Total interest-sensitive assets$930,516
 $151,698
 $204,401
 $387,850
 $354,961
 $465,005
 $146,110
 $2,640,541
Weighted average interest rate4.63% 4.92% 4.56% 4.57% 4.47% 4.12% 4.16% 4.49%
                
Selected Liabilities               
Non-Interest Bearing Deposits$32,710
 $32,710
 $65,420
 $130,840
 $130,840
 $261,681
 $57,570
 $711,771
Weighted average interest rate% % % % % % % %
                
Interest-bearing Transaction and Savings$14,007
 $14,007
 $28,013
 $56,027
 $56,027
 $50,424
 $
 $218,505
Weighted average interest rate0.14% 0.14% 0.14% 0.14% 0.14% 0.14% % 0.14%
                
Money market Deposits$86,497
 $86,497
 $172,993
 $345,987
 $51,898
 $
 $
 $743,872
Weighted average interest rate0.24% 0.24% 0.24% 0.24% 0.24% % % 0.24%
                
Certificates of deposit$82,938
 $132,864
 $187,850
 $105,288
 $7,783
 $3,716
 $536
 $520,975
Weighted average interest rate0.57% 0.81% 0.78% 0.98% 1.10% 0.96% 0.78% 0.80%
                
FHLB advances$123,000
 $
 $25,000
 $
 $
 $
 $
 $148,000
Weighted average interest rate0.34% % 0.84% % % % % 0.42%
                
Other borrowings and FFP$19,625
 $
 $
 $28,500
 $
 $
 $
 $48,125
Weighted average interest rate0.01% % % 3.26% % % % 1.93%
                
Subordinated Debentures% % % % % % $70,300
 $70,300
Weighted average interest rate% % % % % % 5.36% 5.36%
Total interest-sensitive liabilities$358,777
 $266,078
 $479,276
 $666,642
 $246,548
 $315,821
 $128,406
 $2,461,548
Weighted average interest rate0.31% 0.49% 0.44% 0.43% 0.12% 0.03% 2.94% 0.47%
                
GAP$571,739
 $(114,380) $(274,875) $(278,792) $108,413
 $149,184
 $17,704
 $178,993
Cumulative GAP$571,739
 $457,359
 $182,484
 $(96,308) $12,105
 $161,289
 $178,993
  

The Company does not have any direct market risk from foreign exchange or commodity exposures.


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INDEX

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Shareholders and the Board of Directors and Stockholders
of Pacific Premier Bancorp, Inc. and Subsidiaries
Irvine, California


Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of Pacific Premier Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 20152017 and 2014, and2016, the related consolidated statements of income, comprehensive income, stockholders'stockholders’ equity, and cash flows for eachthe years ending December 31, 2017 and 2016, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years ending December 31, 2017 and 2016, in conformity with accounting principles generally accepted in the threeUnited States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 28, 2018expressed an unqualified opinion.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Crowe Horwath LLP

We have served as the Company's auditor since 2016.

Los Angeles, California
February 28, 2018
INDEX

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
Pacific Premier Bancorp, Inc. and Subsidiaries
Irvine, California

We have audited the accompanying consolidated statement of income, comprehensive income, stockholders’ equity, and cash flows of Pacific Premier Bancorp, Inc. and Subsidiaries (the "Company") for the year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.audit.

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as, evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of its operations changes in its stockholders' equity, and its cash flows for each of the years in the three year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.


/s/ Vavrinek, Trine, Day & Co., LLP


Laguna Hills, California
March 4, 2016





INDEX

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Shareholders and the Board of Directors of Pacific Premier Bancorp, Inc.
Irvine, California


Opinion on Internal Control over Financial Reporting

We have audited Pacific Premier Bancorp, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Pacific Premier Bancorp, Inc. and Subsidiaries internal control overthe consolidated statements of financial reportingcondition of the Company as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by2017 and 2016, the Committeerelated consolidated statements of Sponsoring Organizations ofincome, comprehensive income, stockholders’ equity, and cash flows for the Treadway Commission (COSO),years ending December 31, 2017 and 2016, and the related notes (collectively referred to as the "financial statements") and our report dated March 4, 2016,February 28, 2018, expressed an unqualified opinion.

/s/ Vavrinek, Trine, Day & Co., LLP
Laguna Hills, California
March 4, 2016
Basis for Opinion


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INDEX

Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Pacific Premier Bancorp and Subsidiaries
Irvine, California
We have audited Pacific Premier Bancorp and Subsidiaries (the "Company") internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. As permitted, the Company has excluded the operations of Plaza Bancorp, acquired during 2017, which is described in Note 23 of the consolidated financial statements, from the scope of management’s report on internal control over financial reporting. As such, it has also been excluded from the scope of our audit of internal control over financial reporting. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because management's assessment and our audit were conducted to also meet the reporting requirement of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment and our audit of the Company's internal control over financial reporting included controls over the preparation of financial statements in accordance with instructions to the Consolidated Reports of Condition and Income (Form FFIEC 041). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thethat receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of the Company as of December 31, 2015 and 2014 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2015, and our report dated March 4, 2016 expressed an unqualified opinion on those financial statements.

/s/ Vavrinek, Trine, Day & Co.,Crowe Horwath LLP
Laguna Hills,
Los Angeles, California
March 4, 2016February 28, 2018


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INDEX

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(dollars in thousands, except share data)
 At December 31, At December 31,
ASSETS 2015 2014 2017 2016
Cash and due from banks $14,935
 $12,562
 $79,284
 $14,706
Interest bearing deposits with financial institutions 63,482
 98,363
Interest-bearing deposits with financial institutions 120,780
 142,151
Cash and cash equivalents 78,417
 110,925
 200,064
 156,857
Interest bearing time deposits with financial institutions 1,972
 
Investment securities held-to-maturity, at amortized cost 9,642
 
Interest-bearing time deposits with financial institutions 3,693
 3,944
Investments held-to-maturity, at amortized cost (fair value of $18,082 and $8,461 as of December 31, 2017 and December 31, 2016, respectively) 18,291
 8,565
Investment securities available-for-sale, at fair value 280,273
 201,638
 787,429
 380,963
FHLB, FRB and other stock, at cost 22,292
 17,067
 65,881
 37,304
Loans held for sale at lower of cost or market 8,565
 
Loans held for sale, at lower of cost or fair value 23,426
 7,711
Loans held for investment 2,254,315
 1,628,622
 6,196,468
 3,241,613
Allowance for loan losses (17,317) (12,200) (28,936) (21,296)
Loans held for investment, net 2,236,998
 1,616,422
 6,167,532
 3,220,317
Accrued interest receivable 9,315
 7,131
 27,053
 13,145
Other real estate owned 1,161
 1,037
 326
 460
Premises and equipment 9,248
 9,165
 53,155
 12,014
Deferred income taxes, net 11,511
 9,383
 13,265
 16,807
Bank owned life insurance 39,245
 26,822
 75,976
 40,409
Intangible assets 7,170
 5,614
 43,014
 9,451
Goodwill 50,832
 22,950
 493,329
 102,490
Other assets 24,005
 10,743
 52,067
 25,874
TOTAL ASSETS $2,790,646
 $2,038,897
Total assets $8,024,501
 $4,036,311
LIABILITIES AND STOCKHOLDERS’ EQUITY  
  
  
  
LIABILITIES:  
  
LIABILITIES  
  
Deposit accounts:        
Noninterest bearing checking $711,771
 $456,754
Noninterest-bearing checking $2,226,848
 $1,185,768
Interest-bearing:        
Checking 134,999
 131,635
 365,193
 182,893
Money market/savings 827,378
 600,764
 2,409,007
 1,202,361
Retail certificates of deposit 365,911
 365,168
 767,651
 375,203
Wholesale/brokered certificates of deposit 155,064
 76,505
 317,169
 199,356
Total interest-bearing 1,483,352
 1,174,072
 3,859,020
 1,959,813
Total deposits 2,195,123
 1,630,826
 6,085,868
 3,145,581
FHLB advances and other borrowings 196,125
 116,643
 536,287
 327,971
Subordinated debentures 70,310
 70,310
 105,123
 69,383
Accrued expenses and other liabilities 30,108
 21,526
 55,227
 33,636
Total liabilities 2,491,666
 1,839,305
 6,782,505
 3,576,571
COMMITMENTS AND CONTINGENCIES (Note 14) 
 
STOCKHOLDERS’ EQUITY:  
  
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares outstanding 
 
Common stock, $.01 par value; 50,000,000 shares authorized; 21,570,746 shares at December 31, 2015, and 16,903,884 shares at December 31, 2014 issued and outstanding 215
 169
STOCKHOLDERS’ EQUITY  
  
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued and outstanding 
 
Common stock, $.01 par value; 100,000,000 shares authorized; 46,245,050 shares at December 31, 2017 and 100,000,000 shares authorized; 27,798,283 shares at December 31, 2016 issued and outstanding 458
 274
Additional paid-in capital 221,487
 147,474
 1,063,974
 345,138
Retained earnings 76,946
 51,431
 177,149
 117,049
Accumulated other comprehensive income, net of tax of $230 at December 31, 2015 and $362 at December 31, 2014 332
 518
TOTAL STOCKHOLDERS’ EQUITY 298,980
 199,592
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $2,790,646
 $2,038,897
Accumulated other comprehensive income (loss), net of tax (benefit) of $231 at December 31, 2017 and $(1,978) at December 31, 2016 415
 (2,721)
Total stockholders' equity 1,241,996
 459,740
Total liabilities and stockholders' equity $8,024,501
 $4,036,311
        
See Notes to Consolidated Financial Statements.
Accompanying notes are an integral part of these consolidated financial statements.Accompanying notes are an integral part of these consolidated financial statements.

70

INDEX

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(dollars in thousands, except per share data)
 For the Years ended December 31, For the Years ended December 31,
 2015 2014 2013 2017 2016 2015
INTEREST INCOME            
Loans $111,097
 $75,751
 $58,089
 $251,027
 $157,935
 $111,097
Investment securities and other interest-earning assets 7,259
 5,588
 5,711
 18,978
 8,670
 7,259
Total interest income 118,356
 81,339
 63,800
 270,005
 166,605
 118,356
INTEREST EXPENSE  
  
  
  
  
  
Deposits 6,630
 5,037
 4,065
 13,371
 8,391
 6,630
FHLB advances and other borrowings 1,490
 1,124
 984
 4,411
 1,295
 1,490
Subordinated debentures 3,937
 1,543
 307
 4,721
 3,844
 3,937
Total interest expense 12,057
 7,704
 5,356
 22,503
 13,530
 12,057
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 106,299
 73,635
 58,444
PROVISION FOR LOAN LOSSES 6,425
 4,684
 1,860
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 99,874
 68,951
 56,584
Net interest income before provision for loan losses 247,502
 153,075
 106,299
Provision for loan losses 8,640
 8,776
 6,425
Net interest income after provision for loan losses 238,862
 144,299
 99,874
NONINTEREST INCOME  
  
  
  
  
  
Loan servicing fees 1,459
 1,475
 910
 787
 1,032
 371
Deposit fees 2,532
 1,809
 1,873
 3,809
 1,697
 1,274
Net gain from sales of loans 7,970
 6,300
 3,228
 12,468
 9,539
 7,970
Net gain from sales of investment securities 290
 1,547
 1,544
 2,737
 1,797
 290
Other income 2,190
 2,246
 1,256
 11,313
 5,537
 4,483
Total noninterest income 14,441
 13,377
 8,811
 31,114
 19,602
 14,388
NONINTEREST EXPENSE  
  
  
  
  
  
Compensation and benefits 38,456
 28,705
 23,018
 84,138
 52,836
 37,108
Premises and occupancy 8,205
 6,608
 5,797
 14,742
 9,838
 7,810
Data processing and communications 2,816
 2,570
 3,080
Data processing 8,206
 4,261
 2,816
Other real estate owned operations, net 121
 75
 618
 72
 385
 68
FDIC insurance premiums 1,376
 1,021
 749
 2,151
 1,545
 1,376
Legal, audit and professional expense 2,514
 2,240
 1,863
 6,101
 3,041
 2,514
Marketing expense 2,305
 1,208
 1,088
 4,436
 3,981
 2,305
Office and postage expense 2,005
 1,576
 1,313
Office, telecommunications and postage expense 3,117
 2,107
 2,005
Loan expense 1,268
 848
 1,009
 3,299
 2,191
 1,268
Deposit expense 3,643
 2,964
 1,818
 6,240
 4,904
 3,643
Merger-related expense 4,799
 1,490
 6,926
 21,002
 4,388
 4,799
CDI amortization 1,350
 1,014
 764
 6,144
 2,039
 1,350
Other expense 4,733
 4,674
 2,772
 8,102
 7,067
 6,476
Total noninterest expense 73,591
 54,993
 50,815
 167,750
 98,583
 73,538
INCOME BEFORE INCOME TAX 40,724
 27,335
 14,580
INCOME TAX 15,209
 10,719
 5,587
NET INCOME $25,515
 $16,616
 $8,993
Net income before income taxes 102,226
 65,318
 40,724
Income tax 42,126
 25,215
 15,209
Net income $60,100
 $40,103
 $25,515
EARNINGS PER SHARE  
  
  
  
  
  
Basic $1.21
 $0.97
 $0.57
 $1.59
 $1.49
 $1.21
Diluted $1.19
 $0.96
 $0.54
 $1.56
 $1.46
 $1.19
WEIGHTED AVERAGE SHARES OUTSTANDING  
  
  
  
  
  
Basic 21,156,668
 17,046,660
 15,798,885
 37,705,556
 26,931,634
 21,156,668
Diluted 21,488,698
 17,343,977
 16,609,954
 38,511,261
 27,439,159
 21,488,698
            
See Notes to Consolidated Financial Statements.
Accompanying notes are an integral part of these consolidated financial statements.Accompanying notes are an integral part of these consolidated financial statements.

71

INDEX

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
  For the Years ended December 31,
  2015 2014 2013
Net Income $25,515
 $16,616
 $8,993
Other comprehensive income (loss), net of tax (benefit):  
  
  
Unrealized holding gains (losses) on securities arising during the period, net of income taxes (benefits) (1) (15) 4,506
 (3,273)
Reclassification adjustment for net loss (gain) on sale of securities included in net income, net of income taxes (2) (171) (911) (909)
Net unrealized gain (loss) on securities, net of income taxes (186) 3,595
 (4,182)
Comprehensive Income $25,329
 $20,211
 $4,811
       
(1) Income tax (benefit) on unrealized holding gains (losses) on securities was $(13,000) for 2015, $3.2 million for 2014, and ($2.3) million for 2013.
(2) Income tax on reclassification adjustment for net gain on sale of securities included in net income was $119,000 for 2015, $636,000 for 2014, and $635,000 for 2013.
 
See Notes to Consolidated Financial Statements.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
  For the Years ended December 31,
  2017 2016 2015
Net Income $60,100
 $40,103
 $25,515
Other comprehensive income (loss), net of tax:  
  
  
Unrealized holding gains/(losses) on securities arising during the period, net of income tax (benefit) (1) 4,937
 (2,013) (15)
Reclassification adjustment for net gain on sale of securities included in net income, net of income tax (2) (1,801) (1,040) (171)
  Other comprehensive income (loss), net of tax 3,136
 (3,053) (186)
Comprehensive income, net of tax $63,236
 $37,050
 $25,329
       
(1) Income tax (benefit) on unrealized holding gains (losses) on securities was $3.1 million for 2017, $(1.5 million) for 2016, and $(13,000) for 2015.
(2) Income tax on reclassification adjustment for net gain on sale of securities included in net income was $936,000 for 2017, $757,000 for 2016, and $119,000 for 2015.
 
Accompanying notes are an integral part of these consolidated financial statements.



72

INDEX

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(dollars in thousands)
 
Common
 Stock
Shares
 Common Stock 
Additional
 Paid-in Capital
 
Accumulated Retained
Earnings (Deficit)
 Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity 
Common
 Stock
Shares
 Common Stock 
Additional
 Paid-in Capital
 
Accumulated Retained
Earnings
 Accumulated Other Comprehensive Income (Loss) Total Stockholders’ Equity
Balance at December 31, 2012 13,661,648
 $137
 $107,453
 $25,822
 $1,105
 $134,517
Net Income 
 
 
 8,993
 
 8,993
Other comprehensive income 
 
 
 
 (4,182) (4,182)
Share-based compensation expense 
 
 943
 
 
 943
Issuance of common stock 2,972,472
 29
 34,895
 
 
 34,924
Repurchase of common stock (35,005) 
 (59) 
 
 (59)
Exercise of stock options 57,164
 
 90
 
 
 90
Balance at December 31, 2013 16,656,279
 $166
 $143,322
 $34,815
 $(3,077) $175,226
Net Income 
 
 
 16,616
 
 16,616
Other comprehensive loss 
 
 
 
 3,595
 3,595
Share-based compensation expense 
 
 514
 
 
 514
Issuance of common stock 562,469
 6
 9,006
 
 
 9,012
Repurchase of common stock (447,450) (4) (5,634) 
 
 (5,638)
Exercise of stock options 132,586
 1
 266
 
 
 267
Balance at December 31, 2014 16,903,884
 $169
 $147,474
 $51,431
 $518
 $199,592
 16,903,884
 $169
 $147,474
 $51,431
 $518
 $199,592
Net Income 
 
 
 25,515
 
 25,515
 
 
 
 25,515
 
 25,515
Other comprehensive income 
 
 
 
 (186) (186) 
 
 
 
 (186) (186)
Share-based compensation expense 
 
 1,165
 
 
 1,165
 
 
 1,165
 
 
 1,165
Issuance of restricted stock, net 60,000
 
 
 
 
 
 60,000
 
 
 
 
 
Issuance of common stock 4,480,645
 45
 72,207
 
 
 72,252
 4,480,645
 45
 72,207
 
 
 72,252
Warrants exercised 125,316
 1
 688
 
 
 689
 125,316
 1
 688
 
 
 689
Repurchase of common stock (7,165) 
 (116) 
 
 (116) (7,165) 
 (116) 
 
 (116)
Exercise of stock options 8,066
 
 69
 
 
 69
 8,066
 
 69
 
 
 69
Balance at December 31, 2015 21,570,746
 $215
 $221,487
 $76,946
 $332
 $298,980
 21,570,746
 $215
 $221,487
 $76,946
 $332
 $298,980
Net Income 
 
 
 40,103
 
 40,103
Other comprehensive loss 
 
 
 
 (3,053) (3,053)
Share-based compensation expense 
 
 2,729
 
 
 2,729
Issuance of restricted stock, net 296,236
 
 
 
 
 
Issuance of common stock 5,815,051
 58
 119,325
 
 
 119,383
Goodwill adjustment 
 
 379
 
 
 379
Repurchase of common stock 
 
 (126) 
 
 (126)
Exercise of stock options 116,250
 1
 1,344
 
 
 1,345
Balance at December 31, 2016 27,798,283
 $274
 $345,138
 $117,049
 $(2,721) $459,740
Net Income 
 
 
 60,100
 
 60,100
Other comprehensive income 
 
 
 
 3,136
 3,136
Share-based compensation expense 
 
 5,809
 
 
 5,809
Issuance of restricted stock, net 166,397
 
 
 
 
 
Issuance of common stock 17,954,274
 181
 709,196
 
 
 709,377
Goodwill adjustment 
 
 500
 
 
 500
Repurchase of common stock (21,537) 
 (1,258) 
 
 (1,258)
Exercise of stock options 347,633
 3
 4,589
 
 
 4,592
Balance at December 31, 2017 46,245,050
 $458
 $1,063,974
 $177,149
 $415
 $1,241,996
                        
See Notes to Consolidated Financial Statements.
Accompanying notes are an integral part of these consolidated financial statements.Accompanying notes are an integral part of these consolidated financial statements.


73

INDEX

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(dollars in thousands)(dollars in thousands)
 For the Years ended December 31, For the Years ended December 31,
 2015 2014 2013 2017 2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES      
Cash flows from operating activities:      
Net income $25,515
 $16,616
 $8,993
 $60,100
 $40,103
 $25,515
Adjustments to net income:  
  
  
  
  
  
Depreciation and amortization expense 2,432
 2,198
 1,948
 4,888
 2,854
 2,432
Provision for loan losses 6,425
 4,684
 1,860
 8,640
 8,776
 6,425
Share-based compensation expense 1,165
 514
 943
 5,809
 2,729
 1,165
Loss on sale of or write down of other real estate owned 92
 17
 580
Amortization of premium/discounts on securities held for sale, net 3,822
 2,641
 3,052
Accretion of discounts/premiums for loans acquired and deferred loan fees/costs (2,967) (2,179) (3,555)
Gain on sale of investment securities available for sale (290) (1,547) (1,544)
Other-than-temporary impairment loss (recovery) on investment securities, net 
 (29) 4
Loss on sale and disposal of premises and equipment 234
 656
 
(Gain) loss on sale of or write down of other real estate owned (46) 321
 92
Net amortization on securities available-for-sale 7,601
 9,157
 3,822
Net accretion of discounts/premiums for loans acquired and deferred loan fees/costs 1,627
 1,832
 (2,967)
Gain on sale of investment securities available-for-sale (2,737) (1,797) (290)
Other-than-temporary impairment recovery on investment securities, net 
 (205) 
Originations of loans held for sale (87,900) 
 
 (142,104) (103,883) (87,900)
Recoveries on loans 73
 99
 377
Proceeds from the sales of and principal payments from loans held for sale 86,604
 31
 534
 140,012
 115,877
 86,604
Gain on sale of loans (7,970) (6,120) (3,228) (12,468) (9,539) (7,970)
Deferred income tax provision (benefit) (1,395) (2,375) (3,750)
Deferred income tax expense (benefit) 16,866
 3,887
 (1,395)
Change in accrued expenses and other liabilities, net 6,786
 2,764
 9,683
 5,003
 (4,428) 6,786
Income from bank owned life insurance, net (1,147) (771) (659) (1,842) (1,164) (1,147)
Amortization of core deposit intangible 1,350
 1,014
 764
 6,144
 2,039
 1,350
Change in accrued interest receivable and other assets, net (7,347) (4,270) (498) (13,728) (3,768) (8,853)
Net cash provided by operating activities 25,248
 13,287
 15,504
 83,999
 63,447
 23,669
CASH FLOWS FROM INVESTING ACTIVITIES  
  
  
Cash flows from investing activities:  
  
  
Net increase in interest-bearing time deposits with financial institutions (1,972) 
 
 251
 
 (1,972)
Proceeds from sale of loans 70,489
 97,848
 39,411
Increase in loans, net (361,002) (397,347) (223,792) (519,407) (263,075) (247,000)
Change in other real estate owned from sales and writedowns (216) 777
 1,488
Purchase of held to maturity securities (9,642) 
 
Principal payments on securities available for sale 33,751
 26,815
 33,688
Purchase of securities available for sale (90,127) (133,689) (101,268)
Proceeds from sale or maturity of securities available for sale 27,642
 166,341
 234,067
Purchase of loans held for investment (13,582) (271,159) (43,440)
Change in other real estate owned from sales 507
 380
 (216)
Purchase of held-to-maturity securities 
 
 (9,642)
Principal payments on securities available-for-sale 76,057
 38,935
 33,751
Purchase of securities available-for-sale (317,441) (190,140) (90,127)
Proceeds from sale of securities available-for-sale 268,596
 230,945
 27,642
Proceeds from the sale of premises and equipment 
 10,049
 1,506
Investment in bank owned life insurance 
 (2,000) 
 198
 
 
Purchases of premises and equipment (1,887) (1,448) (3,581) (4,165) (11,970) (1,887)
Purchase of Federal Reserve Bank stock (1,706) (536) (5,948)
Redemption (purchase) of FHLB stock (1,150) (1,081) 2,398
Cash acquired (disbursed) in acquisitions 2,961
 (7,793) 138,424
Net cash (used in) provided by investing activities (332,859) (252,113) 114,887
CASH FLOWS FROM FINANCING ACTIVITIES  
  
  
Net (decrease) increase in deposit accounts 228,279
 324,540
 (139,207)
Proceeds from issuance of subordinated debt 
 58,834
 
Change in FHLB advances and other borrowings, net 46,182
 (155,065) 71,686
Proceeds from issuance of common stock, net of issuance cost 
 
 4,560
Change in FHLB, FRB, and other stock, at cost (12,838) (15,012) (2,856)
Cash acquired in acquisitions 225,945
 40,132
 2,961
Net cash used in investing activities (295,879) (430,915) (331,280)
Cash flows from financing activities:  
  
  
Net increase in deposit accounts 187,883
 313,770
 228,279
Net change in federal funds purchased 
 
 (1,500)
Net change in short-term borrowings 61,120
 181,846
 47,682
Proceeds from long-term borrowings 12,012
 
 
Repayment of long-term borrowings (9,262) (50,927) 
Proceeds from exercise of stock options and warrants 758
 267
 90
 4,592
 1,345
 758
Repurchase of common stock (116) (5,638) (59) (1,258) (126) (116)
Net cash provided (used in) financing activities 275,103
 222,938
 (62,930)
Net cash provided by financing activities 255,087
 445,908
 275,103
Net increase (decrease) in cash and cash equivalents (32,508) (15,888) 67,461
 43,207
 78,440
 (32,508)
Cash and cash equivalents, beginning of year 110,925
 126,813
 59,352
 156,857
 78,417
 110,925
Cash and cash equivalents, end of year $78,417
 $110,925
 $126,813
 $200,064
 $156,857
 $78,417
SUPPLEMENTAL CASH FLOW DISCLOSURES  
  
  
Supplemental cash flow disclosures:  
  
  
Interest paid 12,081
 $6,500
 $5,352
 $21,777
 $13,564
 $12,081
Income taxes paid 12,127
 14,700
 9,425
 18,846
 13,139
 12,127
Assets acquired (liabilities assumed) in acquisitions (See Note 23):  
  
NONCASH INVESTING ACTIVITIES DURING THE PERIOD  
  
  
Transfers from loans to other real estate owned $121
 $197
 $450
Assets acquired (liabilities assumed) in acquisitions (See Note 25):Assets acquired (liabilities assumed) in acquisitions (See Note 25):  
  
Interest-bearing deposits with financial institutions 
 1,972
 
Investment securities 53,752
 
 347,196
 442,923
 190,254
 56,121
FRB / FHLB / TIB Stock 2,369
 
 1,765
Loans 332,893
 78,833
 69,144
 2,427,589
 456,158
 332,893
Core deposit intangible 2,903
 
 4,766
 39,703
 4,319
 2,903
Deferred income tax 4,794
 
 
 14,959
 6,748
 4,794
Bank owned life insurance 11,276
 
 
 
 
 11,276
Other real estate owned 
 
 752
Goodwill 27,882
 5,522
 17,428
 391,070
 51,658
 27,882
Fixed assets 2,134
 74
 1,446
 42,097
 4,190
 2,134
Other assets 2,402
 702
 12,468
 74,379
 9,362
 2,402
Deposits (336,018) 
 (540,725) (2,752,501) (636,591) (336,018)
Other borrowings (33,300) (67,617) (16,905) (180,186) 
 (33,300)
Other liabilities (1,796) (709) (6,722) (16,395) (8,843) (1,796)
NONCASH INVESTING ACTIVITIES DURING THE PERIOD  
  
  
Transfers from loans to other real estate owned $450
 $645
 $996
Loans held for sale transfer to loans held for investment $
 $2,936
 $
Common Stock and additional paid-in capital (716,421) (120,174) (79,777)
            
See Notes to Consolidated Financial Statements.
Accompanying notes are an integral part of these consolidated financial statements.Accompanying notes are an integral part of these consolidated financial statements.


74

INDEX

PACIFIC PREMIER BANCORP, INC., AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
1. Description of Business and Summary of Significant Accounting Policies
Principles of Consolidation—The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the ‘‘Corporation’’) and its wholly owned subsidiary, Pacific Premier Bank (the ‘‘Bank’’) (collectively, the ‘‘Company’’).  The Company accounts for its investments in its wholly-owned special purpose entity, PPBI Statutory Trust I ( the “Trust”), using the equity method under which the subsidiary’s net earnings are recognized in the Company’s Statement of Income and the investment in the Trust is included in Other Assets on the Company’s Consolidated Statements of Financial Condition.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Description of Business—The Corporation, a Delaware corporation organized in 1997, is a California-based bank holding company that owns 100% of the capital stock of the Bank, the Corporation’s principal operating subsidiary. The Bank was incorporated and commenced operations in 1983.
 
The principal business of the Company is attracting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, primarily in business loans and real estate property loans. At December 31, 2015,2017, the Company had 1633 depository branches located in the citiescounties of Encinitas, Huntington Beach, Irvine,Orange, Los Alamitos, Newport Beach, Palm Desert (2), Palm Springs (2),Angeles, Riverside, San Bernardino, San Diego, (2), Seal Beach, Tustin, RiversideSan Luis Obispo and Corona.Santa Barbara, California as well as Clark County, Nevada. The Company is subject to competition from other financial institutions. The Company is subject to the regulations of certain governmental agencies and undergoes periodic examinations by those regulatory authorities.
 
Principles of Consolidation—The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the ‘‘Corporation’’) and its wholly-owned subsidiary, Pacific Premier Bank (the ‘‘Bank’’) (collectively, the ‘‘Company’’). The Company accounts for its investments in its wholly-owned special purpose entities, PPBI Statutory Trust I, Heritage Oaks Capital Trust II, Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust, under the equity method whereby the subsidiary’s net earnings are recognized in the Company’s Statement of Income and the investment in these entities is included in Other Assets on the Company’s Consolidated Statements of Financial Condition. The Company is organized and operates as a single reporting segment, principally engaged in the commercial banking business. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation—The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“("U.S. GAAP”GAAP"). Certain amounts in the prior periods' financial statements and related footnote disclosures for the prior years have been reclassified to conform to the current presentation with no impact to previously reported net income or stockholders' equity.

Use of Estimates in the Preparation—The preparation of Financial Statements - In preparing the consolidated financial statements in conformity with U.S. GAAP requires management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities asand disclosure of contingent assets and liabilities at the date of the datesfinancial statements, as well as the reported amounts of the consolidated statements of financial conditionrevenues and the results of operations forexpenses during the reporting periods.period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significantEstimates may change relate to the determinationas new information is obtained.

The following discussion provides a summary of the allowance for loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies.Company's significant accounting policies:
 
Cash and Cash Equivalents—Cash and cash equivalents include cash on hand, cash balances due from banks and fedfederal funds sold. Interest bearing deposits with financial institutions represent mostlyprimarily cash held at the Federal Reserve Bank of San Francisco. At December 31, 2015, $71.9 million was allocated to2017, there were no cash reserves required by the Board of Governors of the Federal Reserve System (“Federal Reserve”) for depository institutions based on the amount of deposits held. The Company maintains amounts due from banks that exceed federally insured limits. The Company has not experienced any losses in such accounts.

Securities—The Company has established written guidelines and objectives for its investing activities. At the time of purchase, management designates the security as either held to maturity, available for saleavailable-for-sale or held for trading based on the Company’s investment objectives, operational needs and intent. The investments are monitored to ensure that those activities are consistent with the established guidelines and objectives.
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Securities Held to MaturityHeld-to-Maturity—Investments in debt securities that management has the positive intent and ability to hold to maturity are reported at cost and adjusted for unamortizedperiodic principal payments and the amortization of premiums and unearnedaccretion of discounts, that

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which are recognized in interest income using the interest method over the period of time to investment's maturity.  If the cost basis of these securities is determined to be other than temporarily impaired, the amount of the impairment is charged to operations.
 
Securities Available for SaleAvailable-for-Sale—Investments in debt securities that management has no immediate plan to sell, but which may be sold in the future, are valuedcarried at fair value. Premiums and discounts are amortized using the interest method over the remaining period to the call date for premiums or contractual maturity for discounts and, in the case of mortgage-backed securities the estimated average life, which can fluctuate based on the anticipated prepayments on the underlying collateral of the securities. Unrealized holding gains and losses, net of tax, are excluded from earnings and reported asrecorded in a separate component of stockholders’ equity as accumulated other comprehensive income.  If the cost basis of the security is deemed other than temporarily impaired the amount of the impairment is charged to operations. Realized gains and losses on the sales of securities are determined on the specific identification method, recorded on a trade date basis based on the amortized cost basis of the specific security and are included in noninterest income as net gain (loss) on investment securities.
 
Securities Held for Trading—Securities held for trading are carried at fair value.  Realized and unrealized gains and losses are reflected in earnings.  The Company had no investment securities classified as held for trading at December 31, 2015 or 2014.
Impairment of InvestmentsDeclinesQuarterly, the Company evaluates investment securities in thean unrealized loss position for OTTI. In determining whether a security's decline in fair value is other-than-temporary, the Company considers a number of individual held to maturity and available for sale securities below their cost that are other-than-temporary impairments ("OTTI") result in write-downs of the individual securities to their fair value.   In estimating OTTI losses, management considers:factors including: (i) the length of time and the extent to which the marketfair value of the investment has been less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) the intent and ability of the Company to retain itshold the investment in a security for a period of time sufficient to allow for anyan anticipated recovery in marketfair value; (iv) downgrades in credit ratings; and (iv)(v) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads. If it is determined that an OTTI exists, and either the Company intends to sell the securityinvestment or it is likely the securityCompany will be required to sell the investment before its anticipated recovery, the total amount of the OTTI, will bewhich is measured as the amount by which the investment's amortized cost exceeds its fair value, is recognized in current period earnings. If the Company has the intent and ability to retainhold the security,investment and it is more likely than not it will be required to sell the investment prior to an anticipated recovery of its amortized cost basis, the Company will determine the amount of the impairment related to credit loss and the amount related to other factors. The portion related to the credit loss will be recognizedrecords in current period earnings and the portion of OTTI deemed to be credit related, while the remaining portion of OTTI deemed to other factors will be includednon-credit related is recorded in accumulated other comprehensive income. Credit related losses are determined through a discounted cash flow analysis, which incorporates assumptions concerning the estimated timing and amounts of expected cash flows. Non-credit related OTTI losses result from other factors such as change in interest rates and general market conditions. The related write-downs are included in operations as realized lossespresentation of OTTI in the categoryconsolidated financial statements is on a gross basis with a reduction in the gross amount for the portion of other-than-temporary impairmentthe loss on investment securities, net. deemed non-credit related and is recorded in accumulated other comprehensive income.
 
Federal Home Loan Bank ("FHLB") Stock—The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reportedrecorded as a component of interest income.

Federal Reserve Bank Stock—The Bank is a member of the Federal Reserve Bank of San Francisco. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are recorded as a component of interest income.

Loans Held for Sale Small Business Administration ("SBA") loansLoans that the Company has the intent to sell prior to maturity have been designated as held for sale at origination and are recorded at lower of cost or fair market value. Gains or losses are recognized upon the sale of the loans on a specific identification basis.

Loan Servicing AssetAssetsServicing assets are related to SBA loans sold and are recognized at the time of sale when servicing is retained with the income statement effect recorded in gains on sales of SBA loans. Servicing assets are initially recorded at fair value based on the present value of the contractually specified servicing fee, net of estimated servicing costs, over the estimated life of the loan, using a discount rate. The Company’s servicing
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costs approximates the industry average servicing costs of approximately 40 basis points. The servicing assets are subsequently amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The Company periodically evaluates servicing assets for impairment based upon the fair value of the assets as compared to their carrying amount.

The Company typically sells the guaranteed portion of SBA loans and retains the unguaranteed portion (“retained interest”). A portion of the premium on sale of SBA loans is recognized as gain on sale of loans at the time of the sale by allocating the carrying amount between the asset sold and the retained interest, based on their relative fair values. The remaining portion of the premium is recorded as a discount on the retained interest and is amortized over the remaining life of the loan as an adjustment to yield. The retained interest, net of any discount, are included in loans held for investment—net of allowance for loan losses in the accompanying consolidated statements of financial condition.
Servicing assets are recognized when SBA loans are sold with servicing retained with the income statement effect recorded in gains on sales of SBA loans. Servicing assets are initially recorded at fair value based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the

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loan, using a discount rate. The Company’s servicing costs approximates the industry average servicing costs of 40 basis points. The servicing assets are subsequently amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. The Company periodically evaluates servicing assets for impairment based upon the fair value of the rights as compared to carrying amount.
Loans Held for Investment—Loans held for investment are loans the Company has the ability and intent to hold until their maturity. The loans are carried at amortized cost, net of discounts and premiums on purchased loans, deferred loan origination fees and costs and ALLL. Net deferred loan origination fees and costs on loans are amortized or accreted using the interest method over the expected life of the loans. Amortization of deferred loan fees and costs are discontinued for loans placed on nonaccrual. Any remaining deferred fees or costs and prepayment fees associated with loans that payoff prior to contractual maturity are included in loan interest income in the period of payoff. Loan commitment fees received to originate or purchase a loan are deferred and, if the commitment is exercised, recognized over the life of the loan using the interest method as an adjustment of yield or, if the commitment expires unexercised, recognized as income upon expiration of the commitment.  Loans held for investment are not adjusted to the lower of cost or estimated market value because it is management's intention, and the Company has the ability, to hold these loans to maturity.
 
Interest on loans is credited to income as earned.  Interest receivablerecognized using the interest method and is only accrued only if deemed collectible. Loans onfor which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days based on contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collection of principal and or interest. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest income generally is not recognized on impairednonaccrual loans unless the likelihood of further loss is remote. Interest payments received on suchnonaccrual loans are applied as a reduction to the loan principal balance. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.
 
A loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. The Company reviews loans for impairment when the loan is classified as substandard or worse, delinquent 90 days, determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted concession which qualifies as a troubled debt restructure.restructuring. Measurement of impairment is based on the loan’s expected future cash flows discounted at the loan’s effective interest rate, measured by reference to an observable market value, if one exists, or the fair value of the collateral if the loan is deemed collateral dependent. The Company selects the measurement method on a loan-by-loan basis except those loans deemed collateral dependent. All loansLoans for which impairment has been determined are generally charged-off at such time the loan is classified as a loss.
 
Allowance for Loan Losses—The Company maintains an ALLL at a level deemed appropriate by management to provide for known or inherent risksprobable incurred losses in the portfolio atas of the date of the consolidated statements of financial condition date.condition. The Company has implemented and adheres to an internal asset review system and loss allowance methodology designed to provide for the detection of problem assets and an adequateappropriate level of allowance to cover loan losses. Management’s determination of the adequacy of the loan loss allowanceALLL is based on an evaluation of the composition of the portfolio, actual loss experience, industry charge-off experience on income property loans, current economic conditions, and other relevant factors in the area in which the Company’s lending and real estate activities are based. These factors may affect the borrowers’ ability to pay andas well as the value of the underlying collateral.collateral securing loans. The allowance is calculated by applying loss factors to loans held for investment according to loan program
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type and loan credit classification. The loss factors are established based primarily upon the Bank’s historical loss experience and the industry charge-off experience and are evaluated on a quarterly basis.

At December 31, 2017, the following portfolio segments have been identified. Segments are groupings of similar loans at a level, which the Company has adopted systematic methods of documentation for determining its allowance for loan losses:

Commercial and industrial (including Franchise) - Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment to businesses located generally in our primary market area. Loan types includes revolving lines or credit, term loans, seasonal loans and loans secured by liquid collateral such as cash deposits or marketable securities. HOA credit facilities are included in C&I loans. We also issue letters of credit on behalf of our customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company's investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company's investment is dependent upon the borrower's ability to collect amounts due from its customers.

Commercial real estate (including owner-occupied and nonowner occupied) - Commercial real estate includes various type of loans which the Company holds real property as collateral. Commercial real estate lending activity is typically restricted to owner-occupied or nonowner-occupied. The primary risks of real estate loans include the borrower's inability to pay, material decreases in the value of the real estate that is being held as collateral and significant increases in interest rates, which may make the real estate loan unprofitable. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

SBA - We are approved to originate loans under the SBA's Preferred Lenders Program ("PLP"). The PLP lending status affords us a higher level of delegated credit autonomy, translating to a significantly shorter turnaround time from application to funding, which is critical to our marketing efforts. We originate loans nationwide under the SBA's 7(a), SBAExpress, International Trade and 504(a) loan programs, in conformity with SBA underwriting and documentation standards. SBA loans are similar to commercial business loans, but have additional credit enhancement provided by the U.S. Small Business Administration, for up to 85 percent of the loan amount for loans up to $150,000 and 75 percent of the loan amount for loans of more than $150,000. The Company originates SBA loans with the intent to sell the guaranteed portion into the secondary market on a quarterly basis.

Agribusiness and farmland - We originate loans to the agricultural community to fund seasonal production and longer term investments in land, buildings, equipment, crops and livestock. Agribusiness loans are for the purpose of financing agricultural production to finance crops and livestock. Farmland loans include all land know to be used or usable for agricultural purposes, such as crop and livestock production and is secured by the land and improvements thereon.

Multi-family - Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk than one-to-four family loans. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

One-to-four family - Although we do not originate, through our bank acquisitions, we have acquired first lien single family loans, we occasionally purchase such loans to diversify our portfolio. The primary risks of one-to-four family loans include the borrower's inability to pay, material decreases in the value of the
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real estate that is being held as collateral and significant increases in interest rates, which may make loan unprofitable.

Construction and land - We originate loans for the construction of 1-4 family and multi-family residences and CRE properties in our market area. We concentrate our efforts on single homes and small infill projects in established neighborhoods where there is not abundant land available for development. Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company's ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower's ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. We occasionally originate land loans located predominantly in California for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower's inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

Consumer loans - We originate a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, savings account secured loans and auto loans. Repayment of these loans is dependent on the borrower's ability to pay and the fair value of the underlying collateral.

Various regulatory agencies, as an integral part of their examination process, periodically review the Company’s ALLL. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.  

In the opinion of management, and in accordance with the credit loss allowance methodology, the present allowance is considered adequate to absorb estimable and probable incurred credit losses. Additions and reductions to the allowance are reflected in current operations. Charge-offs to the allowance, for all loan segments, are made

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when specific assets are considered uncollectible or are transferred to other real estate owned and the fair value of the property is less than the loan’s recorded investment. Recoveries are credited to the allowance.
 
Although management uses the best information available to make these estimates, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions that may beextend beyond the Company’s control.

Certain AcquiredPurchased Credit Impaired Loans—As part of business acquisitions, the Bank acquires certain loans that have shown evidence of credit deterioration since origination.origination, referred to as purchased credit impaired loans. These acquired loans are recorded at the allocated fair value, such that thereno ALLL for PCI is no carryover of the seller’s allowanceestablished upon their acquisition. The Company has elected to account for loan losses. Such acquiredsuch loans are accounted for individually. The BankCompany 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).and is referred to as the accretable yield. The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference).and is referred to as the non-accretable difference. Over the life of the loan, expected cash flows continue to be estimated. IfSubsequent decreases in expected future cash flows beyond the present value of expected cash flows is less thanas of the carrying amount,acquisition date are accounted for through a loss is recorded throughcharge to the allowanceprovision for loan losses. If subsequent reforecasts indicate there has been a probable and significant increase in the present valuelevel of expected future cash flows, is greater than the carrying amount, it is recognizedCompany first reduces any previously established ALLL for PCI loans and then accounts for the remainder of the increase through interest income as part of future interest income.a yield adjustment.
 
Other Real Estate Owned—The Company obtains an appraisal and/or market valuation on all other real estate owned at the time of possession.  Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at fair value, less cost to sell, with any excess loan balance over the fair value of the property charged against the allowance for estimated loan losses.ALLL. The Company obtains an appraisal and/or market valuation on all other real estate owned at the time of possession. After foreclosure, valuations are periodically performed by management. Any subsequent fair
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value losses are recorded as a charge to other real estate owned operationscurrent period earnings with a corresponding write-down to the asset. All legal fees and direct costs, including foreclosure and other related costs are expensed as incurred.  Revenue and expenses from continued operations are included in other real estate owned operations in the consolidated statement of income.
 
Premises and Equipment—Premises and equipment are statedcarried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which range from forty years for buildings, seven years for furniture, fixtures and equipment, and three years for computer and telecommunication equipment. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related leases.
 
The Company periodically evaluates the recoverability of long-lived assets, such as premises and equipment, to ensure the carrying value has not been impaired. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
 
Securities Sold Under Agreements to Repurchase—The Company enters into sales of securities under agreement to repurchase. These agreements are treated as financing arrangements and, accordingly, the obligations to repurchase the securities sold are reflected as liabilities in the Company’s consolidated financial statements. The securities collateralizing these agreements are delivered to several major national brokerage firms who arranged the transactions. The securities are reflected as assets in the Company’s consolidated financial statements. The brokerage firms may loan such securities to other parties in the normal course of their operations and agree to return the identical security to the Company at the maturity of the agreements.

Bank Owned Life Insurance—Bank owned life insurance is accounted for using the cash surrender value method and is recorded at its realizable value. The change in the net asset value is included in other assets and other noninterest income.

Goodwill and Core Deposit Intangible—Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful lifelives are not amortized, but

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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 thetypically performs its annual impairment test.testing in the fourth quarter. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
 
Core deposit intangible assets arising from whole bank acquisitions are amortized on either an accelerated basis, reflecting the pattern in which the economic benefits of the intangible asset is consumed or otherwise used up, or on a straight-line amortization method over their estimated useful lives, which rangeranges from 6 to 10 years.

Loan Commitments and Related Financial Instruments—Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
 
Subordinated Debentures—Long-term borrowings are carried at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized in interest expense using the interest method. Debt issuance costs are recognized in interest expense using the interest method over the life of the instrument.

Stock-Based Compensation—The Company issues stock-based awards to certain officers and directors of the Company. The related compensation costs are recognized in the income statement based on the grant-date fair value over the grantee's requisite service period (generally the vesting period). A Black-Scholes model is utilized to estimate the fair value of stock options and the market price of the Company's common stock at the date of the grant is used for restricted stock awards.
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Income Taxes—Deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the asset liability method. In estimating future tax consequences, all expected future events other than enactments of changes in the tax law or rates are considered. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are to be recognized for temporary differences that will result in deductible amounts in future years and for tax carryforwards if, in the opinion of management, it is more likely than not that the deferred tax assets will be realized. At December 31, 2015 and 2014,2016, there was no valuation allowance deemed necessary against the Company’s deferred tax asset. At December 31, 2017, a valuation allowance of $380,000 was recorded against the capital loss carryover deferred tax asset, as the Company does not believe it will generate sufficient capital gain before the capital loss carryover expires.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and / or penalties related to income tax matters in income tax expense.

Earnings per Share—Earnings per share of common stock is calculated on both a basic and diluted basis based on the weighted average number of common and common equivalent shares outstanding, excluding common shares in treasury. Basic earnings per share excludes dilution and is computed by dividing income available to stockholders by the weighted average number of common shares outstanding for the period. The Company has no outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends that would be considered participating securities for the basic calculation. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then would share in earnings.

Comprehensive Income—Comprehensive income is reported in addition to net income for all periods presented. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of other comprehensive income (loss) that historically has not been recognized in the calculation of net income. Unrealized gains and losses on the Company's available-for-sale investment securities are required to be included in other comprehensive income or loss. Total comprehensive income (loss) and the components of accumulated other comprehensive income or loss are presented in the Consolidated Statement of Stockholders’ Equity and Consolidated Statements of Comprehensive Income.

Stock-Based CompensationLoss Contingencies——The Company recognizes compensation costLoss contingencies, including claims and legal action arising in the income statement forordinary course of business, are recorded as liabilities when the grant-date fair valuelikelihood of stock optionsloss is probable and other equity-based formsan amount or range of compensation issued to employees overloss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the employees’ requisite service period (generally the vesting period). A Black-Scholes model is utilized to estimate the fair value of stock options and the market price of the Company's common stock at the date of the grant is used for restricted stock awards.financial statements.

UseFair Value of EstimatesFinancial Instruments——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 fairFair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the statusabsence of contingencies are particularly subject to change.broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Accounting Standards Adopted in 20152017

In June 2015,March 2016, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU") No. 2015-10, 2016-09Technical Corrections, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting. The amendments simplify several aspects of the accounting for share-based payment award transactions, including accounting for excess tax benefits and Improvements, tax deficiencies, classifying excess tax benefits on the statement of cash flows, accounting for forfeitures, classifying awards that permit share repurchases to clarifysatisfy statutory tax-withholding requirements and classifying
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tax payments on behalf of employees on the Accounting Standards Codification ("ASC"), correct unintended applicationstatement of guidance,cash flows. For public business entities, the amendment is effective for annual periods beginning after December 15, 2016 and make minor improvementsinterim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. As a result of the adoption of ASU 2016-09, the Company began recognizing the tax effects of exercised or vested awards as discrete items in the reporting period in which they occur, resulting in a $2.0 million tax benefit to the ASC that are not expectedCompany for the year ended December 31, 2017.

In March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to have a significant effect on current accounting practice or create significant administrative cost to most entities.the Equity Method of Accounting. The amendments wereeliminate the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. As result, when an investment qualifies for the equity method, the equity method investor will add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of account as of the date the investment becomes qualified for equity method accounting. The amendments further require unrealized holding gains or losses in accumulated other comprehensive income related to an available-for-sale security that becomes eligible for the equity method to be recognized in earnings as of the date on which the investment qualifies for the equity method. The amendments are effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effectiveall entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early2016. The adoption is permitted, including adoption in an

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interim period. The Company doesof this standard did not expect these amendments to have a material effect on itsthe Company's operating results or financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables-Troubled Debt Restructuring By Creditors (Subtopic 310-40): “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The Company adopted the provisions of ASU No. 2014-04 effective January 1, 2015. The adoption had no impact on the Company’s Consolidated Financial Statements.condition.

In January 2014,March 2016, the FASB issued ASU No. 2014-01,2016-06, Investments-Equity MethodDerivatives and Joint VenturesHedging (Topic 323)815):"Accounting for Investments Contingent Put and Call Options in Qualified Affordable Housing Projects." Debt InstrumentsThis Update permits reporting entities. The amendments clarify the required steps to make an accounting policy electionbe taken when assessing whether the economic characteristics and risks of call/put options are clearly and closely related to account forthose of 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 costdebt hosts - which is one 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. As the Company accountscriteria for such investments using the cost method, the update 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.bifurcating an embedded derivative. The Update is effective for interim or annual periodpublic business entities for fiscal years beginning after December 15, 2014. All31, 2016, including interim periods within those years. The adoption of this standard did not have a material effect on the Company's repurchase agreements are typical in nature (i.e., not repurchase-to-maturity transactionsoperating results 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.financial condition.

In August 2014,March 2016, the FASB issued ASU No. 2014-14,2016-05, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)Derivatives and Hedging (Topic 815): “ClassificationEffect of Certain Government-Guaranteed Mortgage Loans upon Foreclosure”Derivative Contract Novations on Existing Hedge Accounting Relationships. This Update addresses classification of government-guaranteed mortgage loans, including those where guarantees are offered byThe amendments clarify that a change in 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 wherecounterparty to a creditor obtains fromderivative instrument designated as a debtor, assets in satisfaction of a receivable (such as through foreclosure), current guidancehedging instrument does not, specify how to measurein and classify foreclosed mortgage loansof itself, require designation of that are government-guaranteed. Underhedging relationship provided that all other hedge accounting criteria remain the provisions of this

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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 fore0closure, 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. Thissame. The Update is effective for interim and annual periodspublic business entities for fiscal years 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, 2015.31, 2016, including interim periods within those years. The adoption had no impactof this standard did not have a material effect on the Company’s Consolidated Financial Statements.Company's operating results or financial condition.
 
Recent Accounting Guidance Not Yet Effective

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. On February 25,December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, which among other things reduced the maximum federal corporate tax rate from 35% to 21%. This Update addresses concerns about the guidance in current GAAP that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in income from continuing operations). As a result of the adjustment of deferred taxes being required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of this Update) do not reflect the appropriate tax rate. This Update allows for an election to reclass between retained earnings and AOCI the impact of the federal income tax rate change. The amendments in this Update are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption of the amendments of this Update is permitted. The Company has analyzed
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the effects of this Update and has elected to early adopt in the first quarter of 2018. Accordingly, the Company will record a reclass of approximately $81,000 from retained earnings to AOCI in the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the Board has developed more stringent criteria for sets without outputs. Lastly, the amendments in this Update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this standard will not have a material effect on the Company's operating results or financial condition.

In November 2016, the FASB issued Accounting StandardsASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The Update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this standard will not have a material effect on the Company's operating results or financial condition.
In August 2016, the FASB issued ASU 2016-15, Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The Update provides guidance on eight specific cash flow classification issues, which include: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or debt with coupon interest rates that are insignificant in relation to the effective interest rate; 3) contingent consideration payments made soon after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investments; 7) beneficial interest in securitization transactions; and 8) separately identifiable cash flows and the application of the predominance principle. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period; however, an entity is required to adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The adoption of this standard will not have a material effect on the Company's operating results or financial condition.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public business entities, the amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. The Company is currently evaluating the effects of ASU 2016-13 on its financial
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statements and disclosures. The Company is in the process of compiling key data elements and is in the process of purchasing a software model in an effort to meet the requirements of the new guidance.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. ThisThe Update is generally effective for public business entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluatingin the effectsearly stages of ASU 2016-02 on its financial statementsimplementation assessment, which includes identifying the population of the Company's leases that are within the scope of the new guidance and disclosures.gathering all key lease data that will facilitate application of the new accounting requirements.

OnIn January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall:Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard will not have a material effect on the Company's operating results or financial condition. However, the Company is currently evaluating the effects of ASU 2016-01 onwill be required to expand its financial statements and disclosures.disclosures concerning its valuation techniques.

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue From Contracts With Customers (Topic 606), ASU 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, ASU 2016-11 Revenue Recognition (Topic 605) and Derivatives ad Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20 Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements to Topic 606. AsThe FASB amended existing guidance related to revenue from contracts with customers, superseding and replacing nearly all existing revenue recognition guidance, including industry-specific guidance, establishing a result ofnew control-based revenue recognition model, changing the deferral,basis for deciding when revenue is recognized over time or at a point in time, providing new and more detailed guidance on specific topics and expanding and improving disclosures about revenue. In addition, this guidance specifies the guidance in ASU 2014-09 will beaccounting for some costs to obtain or fulfill a contract with a customer. The amendments are effective for the Companypublic entities for annual reporting periods beginning after December 15, 2017.

The Update modifiesCompany has completed its review of its various revenue streams and has determined that approximately 98% of the guidance companies use to recognizeCompany’s revenue from contracts with customers for transfersis out of goods or servicesthe scope of ASU 2014-09, including all of the Company’s net interest income and transfersa significant portion of nonfinancial assets, unlessnon-interest income. For those contractsrevenue streams that are within the scope of ASU 2014-09, the Company has reviewed the associated customer contracts and agreements to determine the appropriate accounting for revenues under those contracts. The Company’s review did not identify any significant changes in the timing of revenue recognition under those contracts within the scope of ASU 2014-09. Revenue streams that are within scope primarily relate to service charges and fees associated customer deposit accounts, as well as fees for various other standards. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations.services the Company provides customers. The Company does not expect these amendmentsalso evaluated the need for changes to have a material effect on its financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The Update changes the balance sheet presentation for debt issuance costs. Under the new guidance, debt issuance costs should be reportedinternal controls as a deduction from debt liabilities rather thanresult of the implementation of ASU 2014-09 and, as a deferred charge classified as an asset.result, has made some enhancements. The Update is effective for us in first quarter 2016 withCompany plans to adopt the provisions of ASU 2014-09 using the modified retrospective application. Early adoption is permitted. Thetransition method, and believes the impact of the adoption of this guidance is not expectedASU 2014-09 will be insignificant to have a material impact on the Company's Consolidated Financial Statements.

In August 2014,financial statements. However, the FASB issued guidance within ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40):Disclosure of Uncertainties about an Entity’s AbilityCompany will be required 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 Decemberexpand its disclosures concerning revenue recognition.

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15, 2016.  The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

2. Regulatory Capital Requirements and Other Regulatory Matters
 
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
 
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain capital in order to meet certain capital ratios to be considered adequately capitalized or well capitalized under the regulatory framework for prompt corrective action. As of the most recent formal notification from the Federal Reserve, the Bank was categorized as “well capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s categorization.

NewFinal comprehensive regulatory capital rules for U.S. banking organizations pursuant to the capital framework of the Basel Committee on Banking Supervision, generally referred to as “Basel III”, became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.provisions, and fully phased in by January 1, 2019. The most significant of the provisions of the NewFinal Capital Rules, which applied to the Company and the Bank were as follows: the phase-out of trust preferred securities from Tier 1 capital, the higher risk-weighting of high volatility and past due real estate loans and the capital treatment of deferred tax assets and liabilities above certain thresholds. Under the Basel III rules, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.00% for 2015 to 2.50% by 2019. The capital conservation buffer for 2017 is 1.25% and for 2016 is 0.625%. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital.


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As defined in applicable regulations and set forth in the table below, which excludes the capital conservation buffer, at December 31, 2015,2017 and 2016, the Company and the Bank continue to exceed the “well capitalized” standards:

  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 December 31, 2015            
Tier 1 leverage ratio (1)            
Bank $304,442
 11.41% $106,684
 4.00% $133,354
 5.00%
Consolidated 254,280
 9.52% 106,886
 4.00%  N/A
 N/A
Common equity tier 1 risk-based capital ratio (1)            
Bank 304,442
 12.35% 110,954
 4.50% 160,267
 6.50%
Consolidated 245,224
 9.91% 111,336
 4.50%  N/A
 N/A
Tier 1 risk-based capital ratio (1)  
  
  
  
  
Bank 304,442
 12.35% 147,938
 6.00% 197,251
 8.00%
Consolidated 254,280
 10.28% 148,448
 6.00%  N/A
 N/A
Total risk-based capital ratio (1)  
  
  
  
  
  
Bank 322,361
 13.07% 197,251
 8.00% 246,564
 10.00%
Consolidated 332,200
 13.43% 197,931
 8.00%  N/A
 N/A
At December 31, 2014  
  
  
  
  
  
Tier 1 leverage ratio (1)  
  
  
  
  
  
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 risk-based capital ratio (1)  
  
  
  
  
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 risk-based capital ratio (1)  
  
  
  
  
  
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
             
(1) Beginning with March 31, 2015, the ratio is calculated under Basel III. For prior periods, the ratio was calculated under Basel I or not applicable.
  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 December 31, 2017            
Pacific Premier Bancorp, Inc. Consolidated            
Tier 1 Leverage Ratio $744,233
 10.70% $278,183
 4.00% N/A
 N/A
Common Equity Tier 1 to Risk-Weighted Assets 724,205
 10.59% 307,778
 4.50% N/A
 N/A
Tier 1 Capital to Risk-Weighted Assets 744,233
 10.88% 410,371
 6.00% N/A
 N/A
Total Capital to Risk-Weighted Assets 859,442
 12.57% 547,161
 8.00% N/A
 N/A
             
Pacific Premier Bank    
  
  
  
  
Tier 1 Leverage Ratio $812,170
 11.68% $278,152
 4.00% $347,690
 5.00%
Common Equity Tier 1 to Risk-Weighted Assets 812,170
 11.88% 307,702
 4.50% 444,458
 6.50%
Tier 1 Capital to Risk-Weighted Assets 812,170
 11.88% 410,269
 6.00% 547,025
 8.00%
Total Capital to Risk-Weighted Assets 843,005
 12.33% 547,025
 8.00% 683,781
 10.00%
             
At December 31, 2016  
  
  
  
  
  
Pacific Premier Bancorp, Inc. Consolidated            
Tier 1 Leverage Ratio $366,658
 9.78% $150,027
 4.00% N/A
 N/A
Common Equity Tier 1 to Risk-Weighted Assets 356,658
 10.12% 158,574
 4.50% N/A
 N/A
Tier 1 Capital to Risk-Weighted Assets 366,658
 10.41% 211,432
 6.00% N/A
 N/A
Total Capital to Risk-Weighted Assets 448,150
 12.72% 281,909
 8.00% N/A
 N/A
             
Pacific Premier Bank    
  
  
  
  
Tier 1 Leverage Ratio $410,524
 10.94% $150,107
 4.00% $187,634
 5.00%
Common Equity Tier 1 to Risk-Weighted Assets 410,524
 11.65% 158,536
 4.50% 228,997
 6.50%
Tier 1 Capital to Risk-Weighted Assets 410,524
 11.65% 211,382
 6.00% 281,842
 8.00%
Total Capital to Risk-Weighted Assets 432,943
 12.29% 281,842
 8.00% 352,303
 10.00%


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3. Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
  December 31, 2015
  
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
  (in thousands)
Available-for-sale:  
      
Municipal bonds $128,546
 $1,796
 $(97) $130,245
Collateralized mortgage obligation 24,722
 4
 (183) 24,543
Mortgage-backed securities 126,443
 153
 (1,111) 125,485
Total available-for-sale 279,711
 1,953
 (1,391) 280,273
Held-to-maturity:        
Mortgage-backed securities 8,400
 
 (70) 8,330
Other 1,242
 
 
 1,242
Total held-to-maturity 9,642
 
 (70) 9,572
Total securities $289,353
 $1,953
 $(1,461) $289,845
         
  December 31, 2014
  Amortized Unrealized Unrealized Estimated
  Cost Gain Loss Fair Value
  (in thousands)
Available-for-sale:  
  
  
  
Municipal bonds $88,599
 $1,235
 $(173) $89,661
Collateralized mortgage obligation $6,831
 $31
 $
 $6,862
Mortgage-backed securities 105,328
 401
 (614) 105,115
Total available-for-sale 200,758
 1,667
 (787) 201,638
  December 31, 2017
  
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
  (dollars in thousands)
Investment securities available-for-sale  
      
Agency $47,051
 $236
 $(78) $47,209
Corporate 78,155
 1,585
 (194) 79,546
Municipal bonds 228,929
 3,942
 (743) 232,128
Collateralized mortgage obligation: residential 33,984
 132
 (335) 33,781
Mortgage-backed securities: residential 398,664
 266
 (4,165) 394,765
Total investment securities available-for-sale 786,783
 6,161
 (5,515) 787,429
Investment securities held-to-maturity        
Mortgage-backed securities: residential 17,153
 
 (209) 16,944
Other 1,138
 
 
 1,138
Total investment securities held-to-maturity 18,291
 
 (209) 18,082
Total investment securities $805,074
 $6,161
 $(5,724) $805,511
         
  December 31, 2016
  Amortized Unrealized Unrealized Estimated
  Cost Gain Loss Fair Value
  (dollars in thousands)
Investment securities available-for-sale  
  
  
  
Corporate $37,475
 $372
 $(205) $37,642
Municipal bonds 120,155
 338
 (1,690) 118,803
Collateralized mortgage obligation: residential 31,536
 25
 (173) 31,388
Mortgage-backed securities: residential 196,496
 69
 (3,435) 193,130
Total investment securities available-for-sale 385,662
 804
 (5,503) 380,963
Investment securities held-to-maturity        
Mortgage-backed securities: residential 7,375
 
 (104) 7,271
Other 1,190
 
 
 1,190
Total investment securities held-to-maturity 8,565
 
 (104) 8,461
Total investment securities $394,227
 $804
 $(5,607) $389,424
 
 
Unrealized gains and losses on investment securities available-for-sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At December 31, 2015,2017, the Company had accumulated other comprehensive income of $646,000, or $415,000 net of tax, compared to accumulated other comprehensive loss of $4.7 million or $2.7 million net of tax, at December 31, 2016. 

At December 31, 2017, mortgage-backed securities (“MBS”) with an estimated par value of $61.0$55.6 million and a fair value of $62.5$57.0 million were pledged as collateral for the Bank’s three inverse putable reverse repurchase agreements which totaled $28.5 million and Homeowner's Association ("HOA")HOA reverse repurchase agreements which totaled $19.6$17.6 million.

At December 31, 2017 and 2016, there were not holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.
 
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The Company reviews individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.  temporary (i) those declines were due to interest rate changes and not to a deterioration in the creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values or until their maturity.

If it is probable that the Company will be unable to collect all amounts due according to contractual terms of the debt security not impaired at acquisition, an OTTIother-than-temporary impairment shall be considered to have occurred. If an OTTI occurs, the cost basis of the security will be written down to its fair value as the new cost basis and the write down accounted for as a realized loss. We reviewed all securities in a loss position

The Company realized OTTI recovery of $2,000 as of December 31, 2015 and 2014, and concluded their losses were a result of the level of market interest rates and not a result of credit deterioration or the underlying issuers ability2017, which relates to repay. Therefore there were no securities with OTTI asinvestment income from previously charged-off investments. As of December 31, 2015 or 2014.2016, the Company realized OTTI losses net of recoveries of $205,000. A $207,000 OTTI was taken in the first quarter of 2016, related to a CRA investment purchased in June of 2014 with a par value of $50, and a book value of $500,000. In March of 2016, the shareholders of the investment voted to approve a sale of the institution at a per share acquisition price less than the Bank's book value, and the sale closed in July 2016. The Company is currently waiting to receive the proceeds for its outstanding shares. As a result, the Bank's current holdings were written down and the loss recognized. The Company did not realize any OTTI recoveries or losses in 2015. The Company realized OTTI losses of $29,000 in 2014 and $4,000 in 2013.

During the years ended December 31, 2015, 2014 and 2013 the Company recognized gross gains on sales of available-for-sale securities and held-to-maturity securities in the amount of $317,000, $2.1 million and $2 million, respectively. During the years ended December 31, 2015, 2014 and 2013 the Company recognized gross losses on sales of available-for-sale securities and held-to-maturity securities in the amount of $27,000, $578,000 and $468,000, respectively. The Company had net proceeds from the sale or maturity of available-for-sale

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securities and held-to-maturity securities of $27.6 million, $166 million and $234 million during the years ended December 31, 2015, 2014 and 2013, respectively.

The table below shows the number, fair value and gross unrealized holding losses of the Company’s investment securities by investment category and length of time that the securities have been in a continuous loss position.
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 December 31, 2015
 Less than 12 months 12 months or Longer Total
 Number 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 Number 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 Number 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 (dollars in thousands)
Available-for-sale:                 
Municipal bonds32
 $15,516
 $(61) 6
 $3,349
 $(36) 38
 $18,865
 $(97)
Collateralized mortgage obligation5
 22,771
 (183) 
 
 
 5
 22,771
 (183)
Mortgage-backed securities34
 83,488
 (679) 3
 12,935
 (432) 37
 96,423
 (1,111)
Total available-for-sale71
 $121,775
 $(923) 9
 $16,284
 $(468) 80
 $138,059
 $(1,391)
Held-to-maturity:                 
Mortgage-backed securities1
 $8,330
 $(70) 
 $
 $
 1
 $8,330
 $(70)
Total held-to-maturity1
 $8,330
 $(70) 
 $
 $
 1
 $8,330
 $(70)
Total securities72
 $130,105
 $(993) 9
 $16,284
 $(468) 81
 $146,389
 $(1,461)
                  
 December 31, 2014
 Less than 12 months 12 months or Longer Total
 Number Fair
Value
 Gross
Unrealized
Holding
Losses
 Number Fair
Value
 Gross
Unrealized
Holding
Losses
 Number Fair
Value
 Gross
Unrealized
Holding
Losses
 (dollars in thousands)
Available-for-sale:                 
Municipal bonds35
 $18,129
 $(117) 16
 $6,510
 $(56) 51
 $24,639
 $(173)
Mortgage-backed securities7
 24,353
 (105) 4
 18,842
 (509) 11
 43,195
 (614)
Total available-for-sale42
 $42,482
 $(222) 20
 $25,352
 $(565) 62
 $67,834
 $(787)
 December 31, 2017
 Less than 12 months 12 months or Longer Total
 Number 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 Number 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 Number 
Fair
Value
 
Gross
Unrealized
Holding
Losses
 (dollars in thousands)
Investment securities available-for-sale                 
Agency6
 $13,754
 $(78) 
 $
 $
 6
 $13,754
 $(78)
Corporate4
 10,079
 (64) 2
 6,076
 (130) 6
 16,155
 (194)
Municipal bonds103
 61,313
 (268) 30
 15,658
 (475) 133
 76,971
 (743)
Collateralized mortgage obligation: residential5
 13,971
 (149) 3
 8,943
 (186) 8
 22,914
 (335)
Mortgage-backed securities: residential66
 220,951
 (1,600) 41
 110,062
 (2,565) 107
 331,013
 (4,165)
Total investment securities available-for-sale184
 320,068
 (2,159) 76
 140,739
 (3,356) 260
 460,807
 (5,515)
Investment securities held-to-maturity                 
Mortgage-backed securities: residential2
 10,745
 (133) 1
 6,198
 (76) 3
 16,943
 (209)
Total investment securities held-to-maturity2
 10,745
 (133) 1
 6,198
 (76) 3
 16,943
 (209)
Total investment securities186
 $330,813
 $(2,292) 77
 $146,937
 $(3,432) 263
 $477,750
 $(5,724)
                  
 December 31, 2016
 Less than 12 months 12 months or Longer Total
 Number Fair
Value
 Gross
Unrealized
Holding
Losses
 Number Fair
Value
 Gross
Unrealized
Holding
Losses
 Number Fair
Value
 Gross
Unrealized
Holding
Losses
 (dollars in thousands)
Investment securities available-for-sale                 
Corporate3
 $7,609
 $(205) 
 $
 $
 3
 $7,609
 $(205)
Municipal bonds152
 85,750
 (1,690) 
 
 
 152
 85,750
 (1,690)
Collateralized mortgage obligation: residential5
 19,092
 (173) 
 
 
 5
 19,092
 (173)
Mortgage-backed securities: residential55
 149,740
 (2,916) 4
 16,039
 (519) 59
 165,779
 (3,435)
Total available-for-sale215
 262,191
 (4,984) 4
 16,039
 (519) 219
 278,230
 (5,503)
Investment securities held-to-maturity                 
Mortgage-backed securities: residential1
 7,271
 (104) 
 
 
 1
 7,271
 (104)
Total held-to-maturity1
 7,271
 (104) 
 
 
 1
 7,271
 (104)
Total securities216
 $269,462
 $(5,088) 4
 $16,039
 $(519) 220
 $285,501
 $(5,607)


85

INDEX

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2015,2017, by contractual maturity are shown in the table below.
 
  
One Year
or Less
 
More than One
Year to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 Total
  
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
  (dollars in thousands)
Available-for-sale:                    
Municipal bonds $1,067
 $1,068
 $26,998
 $27,134
 $43,968
 $44,695
 $56,513
 $57,348
 $128,546
 $130,245
Collateralized mortgage obligation 
 
 
 
 
 
 24,722
 24,543
 24,722
 24,543
Mortgage-backed securities 
 
 
 
 27,662
 27,612
 98,781
 97,873
 126,443
 125,485
Total available-for-sale 1,067
 1,068
 26,998
 27,134
 71,630
 72,307
 180,016
 179,764
 279,711
 280,273
Held-to-maturity:  
  
  
  
  
  
  
  
  
  
Mortgage-backed securities 
 
 
 
 
 
 8,400
 8,330
 8,400
 8,330
Other 
 
 
 
 
 
 1,242
 1,242
 1,242
 1,242
Total held-to-maturity 
 
 
 
 
 
 9,642
 9,572
 9,642
 9,572
Total securities $1,067
 $1,068
 $26,998
 $27,134
 $71,630
 $72,307
 $189,658
 $189,336
 $289,353
 $289,845
  
One Year
or Less
 
More than One
Year to Five Years
 
More than Five Years
to Ten Years
 
More than
Ten Years
 Total
  
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
  (dollars in thousands)
Investment securities available-for-sale                    
Agency $
 $
 $
 $
 $15,156
 $15,164
 $31,895
 $32,045
 $47,051
 $47,209
Corporate 
 
 
 
 78,155
 79,546
 
 
 78,155
 79,546
Municipal bonds 4,124
 4,121
 32,390
 32,424
 72,845
 73,312
 119,570
 122,271
 228,929
 232,128
Collateralized mortgage obligation: residential 
 
 
 
 1,069
 1,071
 32,915
 32,710
 33,984
 33,781
Mortgage-backed securities: residential 2,591
 2,583
 2,647
 2,611
 65,541
 65,014
 327,885
 324,557
 398,664
 394,765
Total investment securities available-for-sale 6,715
 6,704
 35,037
 35,035
 232,766
 234,107
 512,265
 511,583
 786,783
 787,429
Investment securities held-to-maturity  
  
  
  
  
  
  
  
  
  
Mortgage-backed securities: residential 
 
 
 
 
 
 17,153
 16,944
 17,153
 16,944
Other 
 
 
 
 
 
 1,138
 1,138
 1,138
 1,138
Total investment securities held-to-maturity 
 
 
 
 
 
 18,291
 18,082
 18,291
 18,082
Total investment securities $6,715
 $6,704
 $35,037
 $35,035
 $232,766
 $234,107
 $530,556
 $529,665
 $805,074
 $805,511

Unrealized gains and losses on investment securities available for sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss.  AtDuring the years ended December 31, 2017, 2016 and 2015, the Company had accumulated other comprehensive incomerecognized gross gains on sales of $562,000, or $332,000 netavailable-for-sale securities in the amount of tax, compared to accumulated other comprehensive loss of $880,000 or $518,000 net of tax, at$3.1 million, $1.8 million and $317,000, respectively. During the years ended December 31, 2014. 2017, 2016 and 2015, the Company recognized gross losses on sales of available-for-sale securities in the amount of $386,000, $9,000 and $27,000, respectively. The Company had net proceeds from the sale or maturity/call of available-for-sale securities of $269 million, $231 million and $28 million during the years ended December 31, 2017, 2016 and 2015, respectively.

FHLB, FRB and other stock

At December 31, 2015,2017, the Company had $11.4$17.3 million in Federal Home Loan Bank ("FHLB")FHLB stock, $7.9$25.3 million in Federal Reserve Bank ("FRB")FRB stock, and $3.0$23.3 million in other stock, all carried at cost. During the yearyears ended December 31, 2017 and 2015, the FHLB had repurchased $10.3 million and $16.4 million, respectively, of the Company’s excess FHLB stock through their stock repurchase program. During the yearsyear ended December 31, 2014 and 2013, the2016, FHLB had repurchased $3.4 million and $4.3 million respectively,did not repurchase any of the Company’s excess FHLB stock through their stock repurchase program. The Company evaluates its investments in FHLB and other stock for impairment periodically, including their capital adequacy and overall financial condition. No impairment losses have been recorded through December 31, 2015.2017.


86

INDEX

4. Loans
 
The following table presents the composition of the loan portfolio as of the dates indicated:
For the Years Ended December 31,For the Years Ended December 31,
2015 20142017 2016
(in thousands)(dollars in thousands)
Business loans:   
Business Loans   
Commercial and industrial$309,741
 $228,979
$1,086,659
 $563,169
Franchise328,925
 199,228
660,414
 459,421
Commercial owner occupied294,726
 210,995
1,289,213
 454,918
SBA62,256
 28,404
185,514
 88,994
Warehouse facilities143,200
 113,798
Real estate loans: 
  
Agribusiness116,066
 
Total business loans3,337,866
 1,566,502
Real Estate Loans 
  
Commercial non-owner occupied421,583
 359,213
1,243,115
 586,975
Multi-family429,003
 262,965
794,384
 690,955
One-to-four family80,050
 122,795
270,894
 100,451
Construction169,748
 89,682
282,811
 269,159
Farmland145,393
 
Land18,340
 9,088
31,233
 19,829
Other loans5,111
 3,298
Total gross loans2,262,683
 1,628,445
Less loans held for sale, net8,565
 
Total gross loans held for investment2,254,118
 1,628,445
Plus (less):   
Deferred loan origination costs and premiums, net197
 177
Total real estate loans2,767,830
 1,667,369
Consumer Loans   
Consumer loans92,931
 4,112
Gross loans held for investment6,198,627
 3,237,983
Plus: Deferred loan origination costs/(fees) and premiums/(discounts), net(2,159) 3,630
Loans held for investment6,196,468
 3,241,613
Allowance for loan losses(17,317) (12,200)(28,936) (21,296)
Loans held for investment, net$2,236,998
 $1,616,422
$6,167,532
 $3,220,317
   
Loans held for sale, at lower of cost or fair value$23,426
 $7,711

The Company originates SBA loans with the intent to sell the guaranteed portion of the loan prior to maturity and therefore designates them as held for sale. From time to time, the Company may purchase or sell other types of loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.

Loans serviced for others are not included in the accompanying consolidated statements of financial condition.  The unpaid principal balance of loans and participations serviced for others were $188 million at December 31, 2015 and $95.2 million at December 31, 2014.
Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of 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 $94.1 million for secured loans and $56.5 million for unsecured loans at December 31, 2015.  At December 31, 2015, the Bank’s largest aggregate outstanding balance of loans-to-one borrower was $30.3 million of secured credit.
Concentration of Credit Risk
 
The Company’s loan portfolio was collateralized by various forms of real estate and business assets located principally in California. The Company’s loan portfolio contains concentrations of credit in commercial non-owner occupied real estate, multi-family real estate and commercial owner occupied business loans. The Company maintains policies approved by the Board of Directors that address these concentrations and continues to diversify its loan portfolio through loan originations and purchases and sales of loans to meet approved

87

INDEX

concentration levels. While management believes that the collateral presently securing these loans is adequate, there can be no assurances that further significant deterioration in the California real estate market and economy would not expose the Company to significantly greater credit risk.
 
INDEX

Loans Serviced for Others

The Company generally retains the servicing rights of the guaranteed portion of SBA loans sold, for which the Company records a servicing asset at fair value within other assets. At December 31, 2017 and 2016, the servicing asset total $8.8 million and $5.3 million, respectively and was included in other assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is recognized through a valuation allowance, to the extent the fair value is less than the carrying amount. At December 31, 2017, and 2016, the Company determined that no valuation allowance was necessary.

Loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balance of loans and participations serviced for others were $635 million at December 31, 2017 and $303 million at December 31, 2016.
Purchased Credit Impaired Loans
 
The Company acquiredhas purchased loans, as part of its acquisitions of Canyon National Bank in 2011, Palm Desert National Bank in 2012 and Independence Bank in 2015 for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at the time of acquisition, that all contractually required payments would not be collected. The carrying amount of those loans at December 31, 2015,2017, and 20142016 was as follows:
 
For the Years Ended December 31,For the Years Ended December 31,
2015 20142017 2016
(in thousands)(dollars in thousands)
Business loans:   
Business Loans   
Commercial and industrial$289
 $94
$3,310
 $2,586
Commercial owner occupied884
 546
1,262
 491
Real estate loans: 
  
SBA1,802
 
Total business loans6,374
 3,077
Real Estate Loans 
  
Commercial non-owner occupied2,088
 956
1,650
 1,088
One-to-four family85
 5
255
 1
Construction517
 
Land83
 
Total real estate loans2,505
 1,089
Consumer Loans   
Consumer loans10
 393
Total purchase credit impaired$3,346
 $1,601
$8,889
 $4,559

The following table summarizes the accretable yield on the purchased credit impaired for the years ended December 31, 2015, 20142017, 2016 and 2013:2015:
 
For the Years Ended December 31,For the Years Ended December 31,
2015 2014 20132017 2016 2015
(in thousands)(dollars in thousands)
Balance at the beginning of period$1,403
 $1,676
 $2,276
$3,747
 $2,726
 $1,403
Accretable yield at acquisition602
 
 
Additions3,102
 788
 602
Accretion(385) (255) (557)(2,037) (1,354) (385)
Disposals and other(249) (18) (648)
Change in accretable yield1,355
 
 605
Payoffs(2,125) 165
 (249)
Reclassification from nonaccretable difference332
 1,422
 1,355
Balance at the end of period$2,726
 $1,403
 $1,676
$3,019
 $3,747
 $2,726

88

INDEX


Impaired Loans
 
The following tables provide a summary of the Company’s investment in impaired loans as of and for the periods indicated:
     Impaired Loans           Impaired Loans      
 Recorded Investment Unpaid Principal Balance With Specific Allowance Without Specific Allowance Specific Allowance for Impaired Loans Average Recorded Investment Interest Income Recognized Recorded Investment Unpaid Principal Balance With Specific Allowance Without Specific Allowance Specific Allowance for Impaired Loans Average Recorded Investment Interest Income Recognized
 (in thousands) (dollars in thousands)
December 31, 2015              
Business loans:              
December 31, 2017              
Business Loans              
Commercial and industrial $1,160
 $1,585
 $
 $1,160
 $
 $441
 $
Commercial owner occupied 97
 98
 97
 
 55
 153
 
SBA 1,201
 4,329
 
 1,201
 
 434
 
Real Estate Loans  
  
  
  
  
  
  
Commercial non-owner occupied 
 
 
 
 
 86
 
One-to-four family 817
 849
 
 817
 
 166
 
Construction 
 
 
 
 
 1,017
 
Land 9
 35
 
 9
 
 12
 
Totals $3,284
 $6,896
 $97
 $3,187
 $55
 $2,309
 $
December 31, 2016  
  
  
  
  
  
  
Business Loans  
  
  
  
  
  
  
Commercial and industrial $313
 $578
 $
 $313
 $
 $90
 $29
 $250
 $1,990
 $250
 $
 $250
 $864
 $76
Franchise 1,630
 2,394
 1,461
 169
 731
 1,386
 3
 
 
 
 
 
 1,016
 68
Commercial owner occupied 536
 883
 
 536
 
 415
 67
 436
 847
 
 436
 
 505
 37
Real estate loans:  
  
  
  
  
  
  
SBA 316
 3,865
 
 316
 
 331
 23
Real Estate Loans  
  
  
  
  
  
  
Commercial non-owner occupied 214
 329
 
 214
 
 430
 19
 
 
 
 
 
 1,072
 93
One-to-four family 70
 98
 
 70
 
 204
 5
 124
 291
 
 124
 
 226
 18
Land 21
 37
 
 21
 
 13
 
 15
 36
 
 15
 
 18
 2
Totals $2,784
 $4,319
 $1,461
 $1,323
 $731
 $2,538
 $123
 $1,141
 $7,029
 $250
 $891
 $250
 $4,032
 $317
December 31, 2014  
  
  
  
  
  
  
Business loans:  
  
  
  
  
  
  
December 31, 2015  
  
  
  
  
  
  
Business Loans  
  
  
  
  
  
  
Commercial and industrial $
 $
 $
 $
 $
 $11
 $
 $313
 $578
 $
 $313
 $
 $90
 $29
Franchise 1,630
 2,394
 1,461
 169
 731
 1,386
 3
Commercial owner occupied 388
 440
 
 388
 
 514
 46
 536
 883
 
 536
 
 415
 67
SBA 
 
 
 
 
 5
 
Real estate loans:  
  
  
  
  
  
  
Real Estate Loans  
  
  
  
  
  
  
Commercial non-owner occupied 848
 1,217
 
 848
 
 908
 85
 214
 329
 
 214
 
 430
 19
Multi-family 
 
 
 
 
 
 
One-to-four family 236
 256
 
 236
 
 440
 17
 70
 98
 
 70
 
 204
 5
Land 21
 37
 
 21
 
 13
 
Totals $1,472
 $1,913
 $
 $1,472
 $
 $1,878
 $148
 $2,784
 $4,319
 $1,461
 $1,323
 $731
 $2,538
 $123
December 31, 2013  
  
  
  
  
  
  
Business loans:  
  
  
  
  
  
  
Commercial and industrial $
 $
 $
 $
 $
 $255
 $17
Commercial owner occupied 747
 872
 
 747
 
 177
 66
SBA 14
 246
 
 14
 
 70
 28
Real estate loans:  
  
  
  
  
  
  
Commercial non-owner occupied 983
 1,202
 28
 955
 1
 984
 68
Multi-family 
 
 
 
 
 108
 2
One-to-four family 683
 746
 278
 405
 104
 743
 44
Totals $2,427
 $3,066
 $306
 $2,121
 $105
 $2,337
 $225


89



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

We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances. These loans are classified as troubled debt restructurings (“TDRs”) and considered impaired loans. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a time frame of at least six months and the ultimate collectability of the total contractual restructured principal and interest in no longer in doubt. These loans, while no longer consideredAt December 31, 2017, the Company had a recorded investment in a TDR are still considered impaired loans.of $97,000. The Company hadmodification of the terms of this relationship included the restructuring of two loans related to one borrower into one loan and an extension of the maturity to three years. There were no troubled debt restructuresTDRs at December 31, 2015.2016.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual.
 
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest. The Company had impaired loans on nonaccrual status of $4.0$3.3 million, $1.4$1.1 million and $2.3$4.0 million at December 31, 2015, 20142017, 2016 and 2013,2015, respectively. If such loans had been performing in accordance with their original terms, the Company would have recorded additional loan interest income of $155,000 in 2017, $360,000 in 2016, and $279,000 in 2015, $151,000 in 2014, and $311,000 in 2013.2015. The Company did not record income from the receipt of cash payments related to nonaccruing loans during the years ended December 31, 2015, 20142017, 2016 and 2013.2015. The Company had no$1.8 million loans 90 daydays or more past due and still accruing at December 31, 20152017, majority of which were PCI loans. Income recognition for PCI loans is accounted for in accordance with ASC Subtopic 310-30 Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. There were no loans 90 days or 2014.more past due and still accruing at December 31, 2016.
 
Credit Quality and Credit Risk
 
The Company’s credit quality is maintained and credit risk managed in two distinct areas. The first is the loan origination process, wherein the Bank underwrites credit quality and chooses which risks it is willing to accept. The second is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and comprehensive fashion.
 
The Company maintains a comprehensive credit policy, which sets forth minimum and maximum tolerances for key elements of loan risk. The policy identifies and sets forth specific guidelines for analyzing each

of the loan products the Company offers from both an individual and portfolio wide basis. The credit policy is reviewed no less than annually by the Board of Directors.  SeasonedBank Board. The Bank's seasoned underwriters and portfolio managers ensure all key risk factors are analyzed with most loan underwriting including a comprehensive global cash flow analysis. The credit approval

90


process mandates multiple-signature approval by either the management or Board credit committee for every loan which requires any subjective credit analysis.
 
Credit risk is managed within the loan portfolio by the Company’s Portfolio Management departmentportfolio managers based on a comprehensive credit and investmentportfolio 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 departmentportfolio managers also monitorsmonitor asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help ensure that the protections built into the loan approvals serve as the early warning and risk mitigation mechanisms.identify potential credit risk. Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, orevery two years and in most cases, more frequently, if deemed necessary, and includesoften, including the assignment of a risk grade.

Risk grades are based on a six-grade Pass scale,scale; along with Special Mention, Substandard, Doubtful and Loss classifications, as such classifications are defined by the federal banking regulatory agencies. The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating creditprobable incurred losses inherent in the portfolio. Risk grades are reviewed regularly by the Company’s Credit and InvestmentPortfolio Review committee, and are scrutinizedreviewed annually by annualan independent loan reviews performed by a third-party, as well as by regulatory agencies during scheduled examinations.
 
The following provides brief definitions for risk grades assigned to loans in the portfolio:
Pass classifications represent assets with a level of credit quality, which contain no well-defined deficiency or weakness.
Special Mention assets do not currently expose the Bank to a sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiencies or potential weaknesses deserving management’s close attention.
Substandard assets are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. These assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. OREO acquired from foreclosure are also classified as substandard.
Doubtful credits have all the weaknesses inherent in substandard credits, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted. Amounts classified as loss are promptly charged off.

The Portfolio Management departmentportfolio managers also managesmanage loan performance risks, handling collections, workouts, bankruptcies and foreclosures. TheseLoan performance risks are controlledmitigated by moving quicklyour portfolio managers acting promptly and assertively to address problem credits when problemsthey are identified. Collection efforts are immediatecommenced immediately upon non-payment, and the portfolio managers seek to promptly determine right away 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 prosecutetake appropriate action to initiate the foreclosure process, including any associated judicial legal actions.  When appropriate, the Company’s in-house counsel or outside legal advisors are consulted to ensure that legal risks are appropriately addressed in handling loan performance issues.process.

When a loan is graded as watchspecial mention or worse,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 ALLLallowance for loan losses if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable. The Company typically continues to obtain or confirm updated valuations of underlying collateral for watch, special mention and classified loans on an annual or biennial 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.

91



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 Credit Risk Grades
 Pass 
Special
Mention
 Substandard Doubtful 
Total Gross
Loans
 Pass 
Special
Mention
 Substandard Doubtful 
Total Gross
Loans
December 31, 2015 (in thousands)
Business loans:          
December 31, 2017 (dollars in thousands)
Business Loans          
Commercial and industrial $306,513
 $73
 $3,155
 $
 $309,741
 $1,063,452
 $8,163
 $15,044
 $
 $1,086,659
Franchise 327,295
 
 169
 1,461
 328,925
 660,415
 
 
 
 660,415
Commercial owner occupied 286,270
 627
 7,829
 
 294,726
 1,273,380
 654
 21,180
 
 1,295,214
SBA 62,256
 
 
 
 62,256
 199,468
 1
 3,469
 
 202,938
Warehouse facilities 143,200
 
 
 
 143,200
Real estate loans:  
  
  
  
  
Agribusiness 108,143
 4,079
 3,844
 
 116,066
Real Estate Loans  
  
  
  
  
Commercial non-owner occupied 1,242,045
 
 1,070
 
 1,243,115
Multi-family 794,156
 
 228
 
 794,384
One-to-four family 268,776
 154
 1,964
 
 270,894
Construction 282,294
 517
 
 
 282,811
Farmland 144,234
 44
 1,115
 
 145,393
Land 30,979
 
 254
 
 31,233
Consumer Loans          
Consumer loans 92,794
 
 137
 
 92,931
Totals $6,160,136
 $13,612
 $48,305
 $
 $6,222,053
          
 Credit Risk Grades
 Pass 
Special
Mention
 Substandard Doubtful 
Total Gross
Loans
December 31, 2016 (dollars in thousands)
Business Loans  
  
  
  
  
Commercial and industrial $550,919
 $8,216
 $3,784
 $250
 $563,169
Franchise 459,421
 
 
 
 459,421
Commercial owner occupied 450,416
 281
 4,221
 
 454,918
SBA 96,190
 53
 462
 
 96,705
Real Estate Loans  
  
  
    
Commercial non-owner occupied 418,917
 
 2,666
 
 421,583
 585,093
 810
 1,072
 
 586,975
Multi-family 425,616
 
 3,387
 
 429,003
 681,942
 6,610
 2,403
 
 690,955
One-to-four family 78,997
 
 1,053
 
 80,050
 100,010
 
 441
 
 100,451
Construction 169,748
 
 
 
 169,748
 269,159
 
 
 
 269,159
Land 18,319
 
 21
 
 18,340
 19,814
 
 15
 
 19,829
Other loans 5,111
 
 
 
 5,111
Consumer Loans          
Consumer loans 3,719
 
 393
 
 4,112
Totals $2,242,242
 $700
 $18,280
 $1,461
 $2,262,683
 $3,216,683
 $15,970
 $12,791
 $250
 $3,245,694
          
 Pass 
Special
Mention
 Substandard Doubtful 
Total Gross
Loans
December 31, 2014 (in thousands)
Business loans:  
  
  
  
  
Commercial and industrial $227,151
 $
 $1,828
 $
 $228,979
Franchise 199,228
 
 
 
 199,228
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


 

92

INDEX

   Days Past Due       Days Past Due    
 Current 30-59 60-89 90+ Total Gross Loans Non-accruing Current 30-59 60-89 90+ Total Gross Loans Non-accruing
December 31, 2015 (in thousands)
Business loans:    
  
  
    
December 31, 2017 (dollars in thousands)
Business Loans    
  
  
    
Commercial and industrial $309,464
 $20
 $
 $257
 $309,741
 $463
 $1,085,770
 $84
 $570
 $235
 $1,086,659
 $1,160
Franchise 327,295
 
 
 1,630
 328,925
 1,630
 660,415
 
 
 
 660,415
 
Commercial owner occupied 294,371
 
 355
 
 294,726
 536
 1,291,254
 3,474
 486
 
 1,295,214
 97
SBA 62,256
 
 
 
 62,256
 
 200,821
 177
 
 1,940
 202,938
 1,201
Warehouse facilities 143,200
 
 
 
 143,200
 
Real estate loans:  
  
  
  
  
  
Agribusiness 116,066
 
 
 
 116,066
 
Real Estate Loans  
  
  
  
  
  
Commercial non-owner occupied 1,243,115
 
 
 
 1,243,115
 
Multi-family 792,603
 1,781
 
 
 794,384
 
One-to-four family 269,725
 354
 
 815
 270,894
 817
Construction 282,811
 
 
 
 282,811
 
Farmland 145,393
 
 
 
 145,393
 
Land 31,141
 83
 
 9
 31,233
 9
Consumer Loans            
Consumer loans 92,880
 11
 
 40
 92,931
 
Totals $6,211,994
 $5,964
 $1,056
 $3,039
 $6,222,053
 $3,284
            
  
 Days Past Due  
  
 Current 30-59 60-89 90+ Total Gross Loans Non-accruing
December 31, 2016 (dollars in thousands)
Business Loans  
  
  
    
  
Commercial and industrial $562,805
 $104
 $
 $260
 $563,169
 $250
Franchise 459,421
 
 
 
 459,421
 
Commercial owner occupied 454,918
 
 
 
 454,918
 436
SBA 96,389
 
 
 316
 96,705
 316
Real Estate Loans  
  
  
  
  
  
Commercial non-owner occupied 421,369
 214
 
 
 421,583
 1,164
 586,975
 
 
 
 586,975
 
Multi-family 429,003
 
 
 
 429,003
 
 690,955
 
 
 
 690,955
 
One-to-four family 79,915
 89
 
 46
 80,050
 155
 100,314
 18
 71
 48
 100,451
 124
Construction 169,748
 
 
 
 169,748
 
 269,159
 
 
 
 269,159
 
Land 18,319
 
 
 21
 18,340
 21
 19,814
 
 
 15
 19,829
 15
Other loans 5,111
 
 
 
 5,111
 1
Consumer Loans            
Consumer loans 4,112
 
 
 
 4,112
 
Totals $2,260,051
 $323
 $355
 $1,954
 $2,262,683
 $3,970
 $3,244,862
 $122
 $71
 $639
 $3,245,694
 $1,141
  
 Days Past Due  
  
 Current 30-59 60-89 90+ Total Gross Loans Non-accruing
December 31, 2014  
  
  
  
  
  
Business loans:  
  
  
  
  
  
Commercial and industrial $228,955
 $
 $24
 $
 $228,979
 $
Franchise 199,228
 
 
 
 199,228
 
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

5.  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 creditprobable incurred losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit and investment review process alongtogether 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
INDEX

rate calculated using the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

93

INDEX

The Company's base ALLL factors are determined by management using the Bank's annualized actual trailing charge-off data over intervals ranginga full credit cycle with the loss emergence period extending on average from 84 72, 36, 24, 12 and 6 months.1 to 1.4 years. Adjustments to those base factors are made for relevant internal and external factors. Those factors may include:

Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
Changes in the nature and volume of the loan portfolio, including new types of lending,
Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and
The existence and effect of concentrations of credit, and changes in the level of such concentrations.

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. These factors are applied to balances graded pass-1through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio andmigration analysis of results from a select group of the Company’s peers.risk grading and net charge-offs.


94

INDEX


The following tables summarize the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the periods indicated:
 
Commercial
 and Industrial
 Franchise 
Commercial
 Owner Occupied
 SBA Warehouse Facilities 
Commercial
 Non-owner Occupied
 Multi-family 
One-to-four
Family
 Construction Land Other Loans Total
Commercial
 and Industrial
 Franchise 
Commercial
 Owner Occupied
 SBA Agribusiness Warehouse Facilities 
Commercial
 Non-owner Occupied
 Multi-family 
One-to-four
Family
 Construction Farmland Land Consumer Loans Total
(dollars in thousands)(dollars in thousands)
Balance, December 31, 2014$2,646
 $1,554
 $1,757
 $568
 $546
 $2,007
 $1,060
 $842
 $1,088
 $108
 $24
 $12,200
Balance, December 31, 2016$6,362
 $3,845
 $1,193
 $1,039
 $
 $
 $1,715
 $2,927
 $365
 $3,632
 $
 $198
 $20
 $21,296
Charge-offs(484) (764) 
 
 
 (116) 
 (16) 
 
 
 (1,380)(1,344) 
 
 (8) 
 
 
 
 (10) 
 
 
 
 (1,362)
Recoveries47
 
 
 8
 
 3
 
 13
 
 
 1
 72
94
 
 105
 127
 
 
 
 
 35
 
 
 
 1
 362
Provisions for (reduction in) loan losses1,240
 2,334
 113
 924
 213
 154
 523
 (141) 942
 125
 (2) 6,425
4,609
 1,952
 (531) 1,732
 1,291
 
 (449) (2,320) 413
 937
 137
 795
 74
 8,640
Balance, December 31, 2015$3,449
 $3,124
 $1,870
 $1,500
 $759
 $2,048
 $1,583
 $698
 $2,030
 $233
 $23
 $17,317
Balance, December 31, 2017$9,721
 $5,797
 $767
 $2,890
 $1,291
 $
 $1,266
 $607
 $803
 $4,569
 $137
 $993
 $95
 $28,936
Amount of allowance attributed to: 
    
  
  
  
  
  
  
  
  
  
 
    
  
    
  
  
  
  
    
  
  
Specifically evaluated impaired loans$
 $731
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $731
$
 $
 $55
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $55
General portfolio allocation3,449
 2,393
 1,870
 1,500
 759
 2,048
 1,583
 698
 2,030
 233
 23
 16,586
9,721
 5,797
 712
 2,890
 1,291
 
 1,266
 607
 803
 4,569
 137
 993
 95
 28,881
Loans individually evaluated for impairment313
 1,630
 536
 
 
 214
 
 70
 
 21
 
 2,784
1,160
 
 97
 1,201
 
 
 
 
 817
 
 
 9
 
 3,284
Specific reserves to total loans individually evaluated for impairment% 30.53% % % % % % % % % % 16.93%% % 56.70% % % % % % % % % % % 1.67%
Loans collectively evaluated for impairment$309,428
 $327,295
 $294,190
 $62,256
 $143,200
 $421,369
 $429,003
 $79,980
 $169,748
 $18,319
 $5,111
 $2,259,899
$1,085,499
 $660,414
 $1,289,116
 $184,313
 $116,066
 $
 $1,243,115
 $794,384
 $270,077
 $282,811
 $145,393
 $31,224
 $92,931
 $6,195,343
General reserves to total loans collectively evaluated for impairment1.11% 0.73% 0.64% 2.41% 0.53% 0.49% 0.37% 0.87% 1.20% 1.27% 0.45% 0.73%0.90% 0.88% 0.06% 1.57% 1.11% % 0.10% 0.08% 0.30% 1.62% 0.09% 3.18% 0.10% 0.47%
Total gross loans$309,741
 $328,925
 $294,726
 $62,256
 $143,200
 $421,583
 $429,003
 $80,050
 $169,748
 $18,340
 $5,111
 $2,262,683
$1,086,659
 $660,414
 $1,289,213
 $185,514
 $116,066
 $
 $1,243,115
 $794,384
 $270,894
 $282,811
 $145,393
 $31,233
 $92,931
 $6,198,627
Total allowance to gross loans1.11% 0.95% 0.63% 2.41% 0.53% 0.49% 0.37% 0.87% 1.20% 1.27% 0.45% 0.77%0.89% 0.88% 0.06% 1.56% 1.11% % 0.10% 0.08% 0.30% 1.62% 0.09% 3.18% 0.10% 0.47%

95INDEX


 
Commercial
 and Industrial
 Franchise 
Commercial
 Owner Occupied
 SBA Agribusiness Warehouse Facilities 
Commercial
 Non-owner Occupied
 Multi-family 
One-to-four
Family
 Construction Farmland Land Consumer Loans Total
 (dollars in thousands)
Balance, December 31, 2015$3,449
 $3,124
 $1,870
 $1,500
 $
 $759
 $2,048
 $1,583
 $698
 $2,030
 $
 $233
 $23
 $17,317
Charge-offs(2,802) (980) (329) (980) 
 
 
 
 (151) 
 
 
 
 (5,242)
Recoveries177
 
 25
 193
 
 
 21
 
 25
 
 
 
 4
 445
Provisions for (reduction in) loan losses5,538
 1,701
 (373) 326
 
 (759) (354) 1,344
 (207) 1,602
 
 (35) (7) 8,776
Balance, December 31, 2016$6,362
 $3,845
 $1,193
 $1,039
 $
 $
 $1,715
 $2,927
 $365
 $3,632
 $
 $198
 $20
 $21,296
Amount of allowance attributed to: 
    
  
    
  
  
  
  
    
  
  
Specifically evaluated impaired loans$250
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $250
General portfolio allocation6,112
 3,845
 1,193
 1,039
 
 
 1,715
 2,927
 365
 3,632
 
 198
 20
 21,046
Loans individually evaluated for impairment250
 
 436
 316
 
 
 
 
 124
 
 
 15
 
 1,141
Specific reserves to total loans individually evaluated for impairment100.00% % % % % % % % % % % % % 21.91%
Loans collectively evaluated for impairment$562,919
 $459,421
 $454,482
 $88,678
 $
 $
 $586,975
 $690,955
 $100,327
 $269,159
 $
 $19,814
 $4,112
 $3,236,842
General reserves to total loans collectively evaluated for impairment1.09% 0.84% 0.26% 1.17% % % 0.29% 0.42% 0.36% 1.35% % 1.00% 0.49% 0.65%
Total gross loans$563,169
 $459,421
 $454,918
 $88,994
 $
 $
 $586,975
 $690,955
 $100,451
 $269,159
 $
 $19,829
 $4,112
 $3,237,983
Total allowance to gross loans1.13% 0.84% 0.26% 1.17% % % 0.29% 0.42% 0.36% 1.35% % 1.00% 0.49% 0.66%
                            
                            
                            
  
INDEX

 
Commercial
 and Industrial
 Franchise 
Commercial
 Owner Occupied
 SBA Agribusiness Warehouse Facilities 
Commercial
 Non-owner Occupied
 Multi-family 
One-to-four
Family
 Construction Farmland Land Consumer Loans Total
 (dollars in thousands)
Balance, December 31, 2014$2,646
 $1,554
 $1,757
 $568
 $
 $546
 $2,007
 $1,060
 $842
 $1,088
 $
 $108
 $24
 $12,200
Charge-offs(484) (764) 
 
 
 
 (116) 
 (16) 
 
 
 
 (1,380)
Recoveries47
 
 
 8
 
 
 3
 
 13
 
 
 
 1
 72
Provisions for (reduction in) loan losses1,240
 2,334
 113
 924
 
 213
 154
 523
 (141) 942
 
 125
 (2) 6,425
Balance, December 31, 2015$3,449
 $3,124
 $1,870
 $1,500
 $
 $759
 $2,048
 $1,583
 $698
 $2,030
 $
 $233
 $23
 $17,317
Amount of allowance attributed to:                           
Specifically evaluated impaired loans$
 $731
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $731
General portfolio allocation3,449
 2,393
 1,870
 1,500
 
 759
 2,048
 1,583
 698
 2,030
 
 233
 23
 16,586
Loans individually evaluated for impairment313
 1,630
 536
 
 
 
 214
 
 70
 
 
 21
 
 2,784
Specific reserves to total loans individually evaluated for impairment% 44.85% % % % % % % % % % % % 26.26%
Loans collectively evaluated for impairment$309,428
 $327,295
 $294,190
 $62,256
 $
 $143,200
 $421,369
 $429,003
 $79,980
 $169,748
 $
 $18,319
 $5,111
 $2,259,899
General reserves to total loans collectively evaluated for impairment1.11% 0.73% 0.64% 2.41% % 0.53% 0.49% 0.37% 0.87% 1.20% % 1.27% 0.45% 0.73%
Total gross loans$309,741
 $328,925
 $294,726
 $53,691
 $
 $143,200
 $421,583
 $429,003
 $80,050
 $169,748
 $
 $18,340
 $5,111
 $2,254,118
Total allowance to gross loans1.11% 0.95% 0.63% 2.79% % 0.53% 0.49% 0.37% 0.87% 1.20% % 1.27% 0.45% 0.77%

INDEX

 
Commercial
 and Industrial
 Franchise 
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(223) 
 
 
 
 (365) 
 (195) 
 
 
 (783)
Recoveries42
 
 
 4
 
 
 
 34
 
 
 19
 99
Provisions for (reduction in) loan losses859
 1,554
 (61) 413
 154
 714
 243
 (96) 952
 (19) (29) 4,684
Balance, December 31, 2014$2,646
 $1,554
 $1,757
 $568
 $546
 $2,007
 $1,060
 $842
 $1,088
 $108
 $24
 $12,200
Amount of allowance attributed to: 
    
  
  
  
  
  
  
  
  
  
Specifically evaluated impaired loans$
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
General portfolio allocation$2,646
 $1,554
 $1,757
 $568
 $546
 $2,007
 $1,060
 $842
 $1,088
 $108
 $24
 $12,200
Loans individually evaluated for impairment$
 $
 $388
 $
 $
 $848
 $
 $236
 $
 $
 $
 $1,472
Specific reserves to total loans individually evaluated for impairment% % % % % % % % % % % %
Loans collectively evaluated for impairment$228,979
 $199,228
 $210,607
 $28,404
 $113,798
 $358,365
 $262,965
 $122,559
 $89,682
 $9,088
 $3,298
 $1,626,973
General reserves to total loans collectively evaluated for impairment1.16% 0.78% 0.83% 2.00% 0.48% 0.56% 0.40% 0.69% 1.21% 1.19% 0.73% 0.75%
Total gross loans$228,979
 $199,228
 $210,995
 $28,404
 $113,798
 $359,213
 $262,965
 $122,795
 $89,682
 $9,088
 $3,298
 $1,628,445
Total allowance to gross loans1.16% 0.78% 0.83% 2.00% 0.48% 0.56% 0.40% 0.69% 1.21% 1.19% 0.73% 0.75%
Balance, December 31, 2012$1,310
 $
 $1,512
 $79
 $1,544
 $1,459
 $1,145
 $862
 $
 $31
 $52
 $7,994
Charge-offs(509) 
 (232) (143) 
 (756) (101) (272) 
 
 (18) (2,031)
Recoveries138
 
 
 50
 
 
 
 47
 
 
 142
 377
Provisions for (reduction in) loan losses1,029
 
 538
 165
 (1,152) 955
 (227) 462
 136
 96
 (142) 1,860

96

INDEX

 
Commercial
 and Industrial
 Franchise 
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
 $8,200
Amount of allowance attributed to:                       
Specifically evaluated impaired loans$
 $
 $
 $
 $
 $1
 $
 $104
 $
 $
 $
 $105
General portfolio allocation$1,968
 $
 $1,818
 $151
 $392
 $1,657
 $817
 $995
 $136
 $127
 $34
 $8,095
Loans individually evaluated for impairment$
 $
 $747
 $14
 $
 $983
 $
 $683
 $
 $
 $
 $2,427
Specific reserves to total loans individually evaluated for impairment% % % % % 0.10% % 15.23% % % % 4.33%
Loans collectively evaluated for impairment$187,035
 $
 $220,342
 $10,645
 $87,517
 $332,561
 $233,689
 $144,552
 $13,040
 $7,605
 $3,839
 $1,240,825
General reserves to total loans collectively evaluated for impairment1.05% % 0.83% 1.42% 0.45% 0.50% 0.35% 0.69% 1.04% 1.67% 0.89% 0.65%
Total gross loans$187,035
 $
 $221,089
 $10,659
 $87,517
 $333,544
 $233,689
 $145,235
 $13,040
 $7,605
 $3,839
 $1,243,252
Total allowance to gross loans1.05% % 0.82% 1.42% 0.45% 0.50% 0.35% 0.76% 1.04% 1.67% 0.89% 0.66%


97

INDEX

6. Other Real Estate Owned
 
Other real estate owned was $1.2 million$326,000 at December 31, 2015, $1.0 million2017, $460,000 at December 31, 20142016 and $1.2 million at December 31, 2013.2015. The following summarizes the activity in the other real estate owned for the years ended December 31:
 
2015 2014 20132017 2016 2015
(in thousands)(dollars in thousands)
Balance, beginning of year$1,037
 $1,186
 $2,258
$460
 $1,161
 $1,037
Additions / foreclosures450
 645
 996
326
 197
 450
Sales(285) (794) (1,488)(507) (577) (233)
Loss on sale
 
 (226)
Gain (loss) on sale47
 18
 (52)
Write downs(41) 
 (354)
 (339) (41)
Balance, end of year$1,161
 $1,037
 $1,186
$326
 $460
 $1,161

The Company had no foreclosed residential real estate property or a recorded investment$73,000 in consumer mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in process as of December 31, 2015 and 2014.2017, compared to $41,000 as of December 31, 2016.


98

INDEX

7. Premises and Equipment
 
PremisesThe Company's premises and equipment consisted of the following at December 31:
2015 20142017 2016
(in thousands)(dollars in thousands)
Land$200
 $200
$16,920
 $200
Premises3,528
 3,340
19,868
 1,707
Leasehold improvements5,901
 5,491
14,025
 8,982
Furniture, fixtures and equipment11,263
 9,372
20,480
 14,565
Automobiles187
 188
187
 187
Subtotal21,079
 18,591
71,480
 25,641
Less: accumulated depreciation11,831
 9,426
18,325
 13,627
Total$9,248
 $9,165
$53,155
 $12,014

Depreciation expense for premises and equipment was $4.9 million for 2017, $2.9 million for 2016 and $2.4 million for 2015, $2.2 million for 2014 and $1.9 million for 2013.2015.
 
INDEX

8. Goodwill and Core Deposit Intangibles

At December 31, 2015,2017, the Company had goodwill of $50.8$493 million. Additions to goodwill of $391 million of which $27.9included $122 million was related tofrom the Independence BankPLZZ acquisition and $269 million from the HEOP acquisition. The following table presents changes in the carrying value of goodwill for the periods indicated:
2015 20142017 2016
(in thousands)(dollars in thousands)
Balance, beginning of year$22,950
 $17,428
$102,490
 $50,832
Goodwill acquired during the year27,882
 5,522
390,839
 51,658
Impairment losses
 

 
Balance, end of year$50,832
 $22,950
$493,329
 $102,490
Accumulated impairment losses at end of year
 

 

The Company’s goodwill was evaluated for impairment during the fourth quarter of 2015,2017, with no impairment loss recognition considered necessary.

At December 31, 2017, the Company had $43.0 million of CDI. Additions to CDI of $39.7 million included $11.6 million from the PLZZ acquisition and $28.1 million from the HEOP acquisition. The Company's change in the gross amount of core deposit intangibles and the related accumulated amortization consisted of the following at December 31:

 2017 2016 2015
 (dollars in thousands)
Gross amount of CDI:     
Balance, beginning of year$15,102
 $10,782
 $7,876
Additions due to acquisitions39,707
 4,320
 2,906
Balance, end of year54,809
 15,102
 10,782
Accumulated amortization:     
Balance, beginning of year(5,651) (3,612) (2,262)
Amortization(6,144) (2,039) (1,350)
Balance, end of year(11,795) (5,651) (3,612)
Net CDI, end of year$43,014
 $9,451
 $7,170

The estimated aggregate amortization expense related to our core deposit intangible assets for each of the next five years is $1.4$8.4 million, $1.4$7.3 million, $1.3$6.5 million, $1.0$5.4 million, and $1.0$4.5 million. The Company’s core deposit intangibles wereis evaluated for impairment during the fourth quarterif events and circumstances indicate possible impairment. Factors that may attribute to impairment include customer attrition and run-off. Management is unaware of 2015, taking into consideration the actual deposit runoff of acquired depositsany events and/or circumstances that would indicate a possible impairment to the level of deposit runoff expected at the date of merger. Based on the Company’s evaluation, no impairment has taken place on the core deposit intangibles. The following table presents the changes in the gross amounts of core deposit intangibles and the related accumulated amortization for the dates and periods indicated:


99

INDEX

 2015 2014 2013
 (in thousands)
Gross amount of CDI:     
Balance, beginning of year$7,876
 $7,876
 $3,110
Additions due to acquisitions2,906
 
 4,766
Balance, end of year10,782
 7,876
 7,876
Accumulated Amortization     
Balance, beginning of year(2,262) (1,248) (484)
Amortization(1,350) (1,014) (764)
Balance, end of year(3,612) (2,262) (1,248)
Net CDI, end of year$7,170
 $5,614
 $6,628


9. Bank Owned Life Insurance

At December 31, 20152017 and 20142016, the Company had $39.2$76.0 million and $26.8$40.4 million, respectively of Bank-Owned Life Insurance (“BOLI”).BOLI. The Company recorded non-interestnoninterest income associated with the BOLI policies of $2.3 million, $1.4 million and $1.3 million $914,000 and $758,000 for the years ending December 31, 2017, 2016 and 2015, 2014 and 2013, respectively. The increase in the Company’s balance in 2015 by $12.4 million was primarily from the $11.3 million BOLI policies acquired from Independance Bank.
 
BOLI involves the purchasing of life insurance by the Company on a selected group of employees where the Company is the owner and beneficiary of the policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash surrender value of these policies, as well as a portion of the insurance proceeds received, are
INDEX

recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties.

10. Qualified Affordable Housing Project Investments
 
The Company's investment in Qualified Affordable Housing ProjectsFunds that generate Low Income Housing Tax Credits at December 31, 20152017 and 2016 was $8.0$11.6 million with aand $7.0 million, respectively, recorded liability of $2.4in other assets. Total unfunded commitments related to the investments in qualified affordable housing funds totaled $1.3 million in funding obligations.and $749 thousand at December 31, 2017 and 2016, respectively. The Company has invested in twothree separate LIHTC projectsfunds, which provide the Company with CRA credit. Additionally, the investment in LIHTC projects providesfunds provide the Company with tax credits and with operating loss tax benefits over an approximately 1510 year period. NonNone of the original investment will be repaid. The investmentinvestments in LIHTC projects isthe WNC Institutional Tax Credit funds are being accounted for using the cost method, under which the Company amortizes as non-interest expense the initial cost of the investment equally over the expected time period in which tax credits and other tax benefits will be receivedreceived. The investment in the Sycamore Court fund qualifies for and recognizesis being accounted for using the proportional amortization method, which allows for the amortization of the investment to be in proportion to the total of the tax credits and other tax benefits that are allocated to the investor. The tax credits and operating loss tax benefits are recognized in the income statement as a component of income tax expense (benefit). for all LIHTC funds.

The following table presents the Company's original investment in the LIHTC projects,funds, the current recorded investment balance, and the unfunded liability balance of each investment at December 31, 20152017 and 2014.2016. In addition, the table reflects the tax credits and tax benefits recorded by the Company during 20152017 and 2014;2016, the amortization of the investment and the net impact to the Company's income tax provision for 20152017 and 2014.2016.


100

INDEX

Qualified Affordable Housing Projects at
December 31, 2015
 Original Investment Value Current Recorded Investment Unfunded Liability Obligation Tax Credits and Tax Deductions (1) Amortization of Investments (2) Net Income Tax Benefit
Qualified Affordable Housing Funds at
December 31, 2017
 Original Investment Value Current Recorded Investment Unfunded Liability Obligation Tax Credits and Tax Deductions (1) Amortization of Investments (2) Net Income Tax Benefit
            
WNC Institutional Tax Credit
Fund X, CA Series 11 L.P.
 $5,000
 $2,750
 $85
 $455
 $500
 $(663)
WNC Institutional Tax Credit
Fund X, CA Series 12, L.P.
 5,000
 3,250
 288
 482
 500
 (690)
Sycamore Court 6,181
 5,582
 927
 1,577
 599
 (782)
Total - Investments in
Qualified Affordable
Housing Projects
 $16,181
 $11,582
 $1,300
 $2,514
 $1,599
 $(2,135)
            
Qualified Affordable Housing Funds at
December 31, 2016
 Original Investment Value Current Recorded Investment Unfunded Liability Obligation Tax Credits and Tax Deductions (1) Amortization of Investments (2) Net Income Tax Benefit
                        
WNC Institutional Tax Credit
Fund X, CA Series 11 L.P.
 $5,000
 $3,750
 $316
 $917
 $500
 $(643) $5,000
 $3,250
 $223
 $488
 $542
 $(596)
WNC Institutional Tax Credit
Fund X, CA Series 12, L.P.
 5,000
 4,250
 2,111
 819
 500
 (531) 5,000
 3,750
 526
 473
 782
 (637)
Total - Investments in
Qualified Affordable
Housing Projects
 $10,000
 $8,000
 $2,427
 $1,736
 $1,000
 $(1,174) $10,000
 $7,000
 $749
 $961
 $1,324
 $(1,233)
            
Qualified Affordable Housing Projects at
December 31, 2014
 Original Investment Value Current Recorded Investment Unfunded Liability Obligation Tax Credits and Tax Deductions (1) Amortization of Investments (2) Net Income Tax Benefit
WNC Institutional Tax Credit
Fund X, CA Series 11 L.P.
 $5,000
 $4,250
 $774
 $887
 $500
 $(626)
WNC Institutional Tax Credit
Fund X, CA Series 12, L.P.
 5,000
 4,750
 3,266
 388
 250
 (268)
Total - Investments in
Qualified Affordable
Housing Projects
 $10,000
 $9,000
 $4,040
 $1,275
 $750
 $(894)
(1) The amounts reflected in this column represent both the tax credits, as well as the tax benefits generated by the Qualified Affordable Housing Projects operating loss for the year, which are included in the calculation of income tax expense.
(2) This amount represents the amortization of the investment cost of the LIHTC, included in non-interest expense.
(1) The amounts reflected in this column represent both the tax credits, as well as the tax benefits generated by the Qualified Affordable Housing Projects operating loss for the year, which are included in the calculation of income tax expense.
(2) This amount represents the amortization of the investment cost of the LIHTC.
(1) The amounts reflected in this column represent both the tax credits, as well as the tax benefits generated by the Qualified Affordable Housing Projects operating loss for the year, which are included in the calculation of income tax expense.
(2) This amount represents the amortization of the investment cost of the LIHTC.


101

INDEX

11. Deposit Accounts
 
Deposit accounts and weighted average interest rates consisted of the following at December 31:
 2015 Weighted
Average
Interest Rate
 2014 Weighted
Average
Interest Rate
 2017 Weighted
Average
Interest Rate
 2016 Weighted
Average
Interest Rate
  (dollars in thousands)  (dollars in thousands)
Transaction accounts                
Noninterest-bearing checking $711,771
 % $456,754
 % $2,226,848
 % $1,185,768
 %
Interest-bearing checking 134,999
 0.11% 131,635
 0.11% 365,193
 0.13% 182,893
 0.11%
Money market 743,871
 0.35% 526,256
 0.32% 2,181,571
 0.48% 1,100,787
 0.34%
Savings 83,507
 0.15% 74,508
 0.14% 227,436
 0.13% 101,574
 0.14%
Total transaction accounts 1,674,148
 0.17% 1,189,153
 0.16% 5,001,048
 0.21% 2,571,022
 0.16%
Certificates of deposit accounts  
  
  
  
  
  
  
  
Less than 100,000 126,704
 0.79% 123,862
 0.91% 192,409
 0.85% 121,148
 0.74%
$100,000 through $250,000 166,397
 0.91% 163,819
 1.00% 369,748
 1.01% 153,103
 0.82%
Greater than $250,000 227,874
 0.72% 153,992
 0.76% 522,663
 1.26% 300,308
 0.74%
Total certificates of deposit accounts 520,975
 0.80% 441,673
 0.89% 1,084,820
 1.10% 574,559
 0.76%
Total deposits $2,195,123
 0.32% $1,630,826
 0.36% $6,085,868
 0.33% $3,145,581
 0.27%
 
The aggregate annual maturities of certificates of deposit accounts at December 31, 20152017 are as follows:

20152017
Balance Weighted Average Interest RateBalance Weighted Average Interest Rate
(dollars in thousands)(dollars in thousands)
Within 3 months$79,798
 0.55%$318,794
 0.93%
4 to 6 months131,699
 0.81%250,026
 1.07%
7 to 12 months188,046
 0.78%279,192
 1.18%
13 to 24 months108,194
 0.98%175,005
 1.24%
25 to 36 months8,365
 1.09%29,270
 1.33%
37 to 60 months4,237
 1.10%22,936
 1.44%
Over 60 months636
 0.97%9,597
 1.13%
Total$520,975
 0.80%$1,084,820
 1.10%

Interest expense on deposit accounts for the years ended December 31 is summarized as follows:
2015 2014 20132017 2016 2015
(dollars in thousands)(dollars in thousands)
Checking accounts$165
 $161
 $110
$365
 $200
 $165
Money market accounts6,720
 3,641
 2,426
Savings141
 110
 103
251
 151
 141
Money market accounts2,426
 1,443
 1,043
Certificates of deposit accounts3,898
 3,323
 2,809
6,035
 4,399
 3,898
Total$6,630
 $5,037
 $4,065
$13,371
 $8,391
 $6,630


102

INDEX

Accrued interest on deposits, which is included in accrued expenses and other liabilities, was $124,195$526,000 at December 31, 20152017 and $136,000$178,000 at December 31, 2014.2016.
 
INDEX

12. Federal Home Loan Bank Advances and Other Borrowings
 
As of December 31, 2015,2017, the Company has a line of credit with the FHLB that provides for advances totaling up to 45% of the Company’s assets, equating to a credit line of $1.2$2.9 billion, of which $385$677 million was available for borrowing. The available for borrowing was based on collateral pledged by real estate loans and securities with an aggregate balance of $620 million$1.4 billion and FHLB stock of $11.4$17.3 million.  

At December 31, 2015,2017, the Company had $98$310 million in overnight FHLB advances and $50$180 million in term advances, compared to $20$278 million in overnight FHLB advances and $50 million inno term advances at December 31, 2014.2016. The term advances mature during 2016.advance have maturity dates ranging from January 2018 to June of 2022 and rates ranging from 0.90% to 2.73%.

The following table summarizes activities in advances from the FHLB for the periods indicated:
Year Ended December 31,Year Ended December 31,
2015 20142017 2016
(dollars in thousands)(dollars in thousands)
Average balance outstanding$139,542
 $70,296
$290,839
 $58,814
Maximum amount outstanding at any month-end during the year340,000
 210,000
490,148
 278,000
Balance outstanding at end of year148,000
 70,000
490,148
 278,000
Weighted average interest rate during the year0.39% 0.26%1.19% 0.59%
 
CreditBank related credit facilities have been established with Citigroup, Barclays Bank and Union Bank. The outstanding credit facilities are secured by pledged investment securities. At December 31, 20152017 and 2014,2016, the Company had borrowings of $18.5 million with Citigroup that mature in September of 2018, $10.0 million with Barclays Bank that mature in February of 2018, which the Company does not intend on renewing, and an unused reverse repurchase facility with Union Bank of $50 million. The outstanding borrowings are secured by MBS with an estimated fair value of $34.0$27.3 million.
 
The Company sells certain securities under agreements to repurchase. The agreements are treated as overnight borrowings with the obligations to repurchase securities sold reflected as a liability. The dollar amount of investment securities underlying the agreements remain in the asset accounts. The Company enters into these debt agreements as a service to certain HOA depositors to add protection for deposit amounts above FDIC insurance levels. At December 31, 2015,2017, the Company sold securities under agreement to repurchase of $19.6$17.6 million with weighted average rate of 0.03%0.01% and collateralized by investment securities with fair value of approximately $28.5$29.7 million.
 
At December 31, 2015,2017, the Bank had unsecured lines of credit with seveneight correspondent banks for a total amount of $120$168 million and access through the Federal Reserve discount window to borrow $3.3 million. At December 31, 2015,2017 and December 31, 2016, the Company had no outstanding balances against these lines comparedlines.

In addition, the Corporation acquired a line of credit with Wells Fargo Bank in June of 2017, with availability of $15 million. The line was added to $1.5 million inprovide an additional source of liquidity at the Corporation level and has no outstanding balance at December 31, 2014.  2017 and matures in June 2018.  

INDEX

The following table summarizes activities in other borrowings:
borrowings for the periods indicated:
Year Ended December 31,Year Ended December 31,
2015 20142017 2016
(dollars in thousands)(dollars in thousands)
Average balance outstanding$48,490
 $47,398
$50,866
 $48,732
Maximum amount outstanding at any month-end during the year49,925
 49,712
52,996
 53,586
Balance outstanding at end of year48,125
 46,643
46,139
 49,971
Weighted average interest rate during the year1.95% 2.00%1.86% 1.94%

103

INDEX


13. Subordinated Debentures
 
In August 2014, the Corporation issued $60 million in aggregate principal amount of 5.75% Subordinated Notes Due 2024 (the “Notes”) in a private placement transaction to institutional accredited investors (the “Private Placement”). The Corporation contributed $50 million of net proceeds from the Private Placement to the Bank to support general corporate purposes. The Notes will bear interest at an annual fixed rate of 5.75%, with the first interest payment on the Notes occurring on March 3, 2015, and interest will be paid semiannually each March 3 and September 3 untilthrough September 3, 2024. The Notes can only be redeemed, partially or in whole, prior to the maturity date if the notes do not constitute Tier 2 Capital (for purposes of capital adequacy guidelines of the Board of Governors of the Federal Reserve). As of December 31, 2017, the Notes qualify as Tier 2 Capital. Principal and interest are due upon early redemption.

In connection with the Private Placement, the Corporation obtained ratings from Kroll Bond Rating Agency (“KBRA”). KBRA assigned investment grade ratings of BBB+ and BBB for the Corporation's senior secured debt and subordinated debt, respectively, and a senior deposit rating of A- for the Bank. The Company's and Bank's ratings were re-affirmed in October of 2017 by KBRA.

In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Debt Securities”) to PPBI Trust I, a statutory trust created under the laws of the State of Delaware. The Debt Securities are subordinated to effectively all borrowings of the Corporation and are due and payable on April 7,6, 2034. Interest is payable quarterly on the Debt Securities at 3-month LIBOR plus 2.75% for a rate of 3.07%4.11% at December 31, 20152017 and 2.98%3.63% at December 31, 2014.2016. The Debt Securities may be redeemed, in part or whole, on or after April 7, 2009 at the option of the Corporation, at par. The Debt Securities can also be redeemed at par if certain events occur that impact the tax treatment or the capital treatment of the issuance. The Corporation also purchased a 3% minority interest totaling $310,000 in PPBI Trust I. The balance of the equity of PPBI Trust I is comprised of mandatorily redeemable preferred securities (“Trust Preferred Securities”) and is included in other assets. PPBI Trust I sold $10,000,000 of Trust Preferred Securities to investors in a private offering.

On April 1, 2017, as part of the Heritage Oaks acquisition, the Corporation assumed $5.2 million of floating rate junior subordinated debt securities associated with Heritage Oaks Capital Trust II. Interest is payable quarterly at three-month LIBOR plus 1.72% per annum, for an effective rate of 3.06% per annum as of December 31, 2017. At December 31, 2017, the carrying value of these debentures was $3.9 million, which reflects purchase accounting fair value adjustments of $1.3 million. The Corporation also assumed $3.1 million and $5.2 million of floating rate junior subordinated debt associated with Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust, respectively. At December 31, 2017, the carrying value of Mission Community Capital Trust I and Santa Lucia Bancorp (CA) Capital Trust were $2.8 million and $3.8 million, respectively, which reflects purchase accounting fair value adjustments of $327,000 and $1.4 million, respectively. Interest is payable quarterly at three-month LIBOR plus 2.95% per annum, for an effective rate of 4.31% per annum as of December 31, 2017 for Mission Community Capital Trust I. Interest is payable quarterly at three-month LIBOR plus 1.48% per annum, for an effective rate of 2.84% per annum as of December 31, 2017 for Santa Lucia Bancorp (CA) Capital Trust. These three debentures are callable by the Corporation at par.

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

The Corporation is not allowed to consolidate PPBI Trust Iand trust preferred securities into the Company’sCompany's consolidated financial statements. The resulting effect on the Company’s consolidated financial statements is to report only the Subordinated Debentures as a component of the Company’s liabilities.
 
The following table summarizes activities for our subordinated debentures for the periods indicated:
Year Ended December 31,Year Ended December 31,
2015 20142017 2016
(dollars in thousands)(dollars in thousands)
Average balance outstanding$70,310
 $30,858
$81,466
 $69,347
Maximum amount outstanding at any month-end during the year70,310
 70,310
105,123
 69,383
Balance outstanding at end of year70,310
 70,310
105,123
 69,383
Weighted average interest rate during the year5.36% 5.00%5.80% 5.54%


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14. Income Taxes
 
Income taxes for the years ended December 31 consisted of the following:

 2015 2014 2013 2017 2016 2015
 (in thousands) (dollars in thousands)
Current income tax provision:            
Federal $12,460
 $9,628
 $7,008
 $18,644
 $16,928
 $12,460
State 4,144
 3,466
 2,329
 7,062
 4,655
 4,144
Total current income tax provision 16,604
 13,094
 9,337
 25,706
 21,583
 16,604
Deferred income tax provision (benefit):  
  
  
  
  
  
Federal (887) (1,789) (3,129) 8,294
 2,379
 (887)
Effect of Tax Act 5,633
 
 
State (508) (586) (621) 2,493
 1,253
 (508)
Total deferred income tax provision (benefit) (1,395) (2,375) (3,750) 16,420
 3,632
 (1,395)
Total income tax provision $15,209
 $10,719
 $5,587
 $42,126
 $25,215
 $15,209
 
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A reconciliation from statutory federal income taxes, that are based on a statutory rate of 35%, to the Company's effective income taxes for the years ended December 31 is as follows:
 2015 2014 2013 2017 2016 2015
 (in thousands) (dollars in thousands)
Statutory federal income tax provision $14,253
 $9,459
 $5,103
 $35,778
 $22,863
 $14,253
California franchise tax, net of federal income tax effect 2,886
 1,926
 1,027
State taxes, net of federal income tax effect 6,720
 4,135
 2,886
Cash surrender life insurance (483) (324) (277) (645) (407) (483)
Tax exempt interest (742) (614) (718) (1,660) (764) (742)
Merger costs 447
 410
 164
 824
 533
 447
LIHTC investments (871) (728) (237) (1,031) (909) (871)
Effect of the Tax Act 5,633
 
 
Excess tax benefit of stock-based compensation (1,995) 
 
Prior year true-up (1,108) 
 
Other (281) 590
 525
 (390) (236) (281)
Total income tax provision $15,209
 $10,719
 $5,587
 $42,126
 $25,215
 $15,209
  

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Deferred tax assets (liabilities) were comprised of the following temporary differences between the financial statement carrying amounts and the tax basis of assets at December 31:
 2015 2014 2013 2017 2016 2015
 (in thousands) (dollars in thousands)
Deferred tax assets:            
Accrued expenses $1,717
 $1,802
 $891
 $2,463
 $2,839
 $1,717
Net operating loss 5,192
 2,703
 3,353
 4,834
 3,977
 5,192
Allowance for loan losses, net of bad debt charge-offs 6,252
 5,158
 3,336
 8,400
 8,061
 6,252
Deferred compensation 2,547
 1,750
 1,896
 3,074
 2,348
 2,547
State taxes 1,451
 1,238
 858
 1,500
 1,879
 1,451
Depreciation 651
 321
 (216) 
 1,090
 651
Other-than-temporary impairment 
 
 684
Stock based compensation 639
 313
 273
Loan discount 8,642
 3,477
 
Stock-based compensation 1,914
 1,108
 639
Unrealized loss on available for sale securities 
 1,939
 
Capital loss carryover 380
 
 
AMT credit 107
 
 
Total deferred tax assets 18,449
 13,285
 11,075
 31,314
 26,718
 18,449
Deferred tax liabilities:  
  
  
  
  
  
Deferred FDIC gain (1,656) (1,731) (1,944) (524) (1,675) (1,656)
Core deposit intangibles (2,266) (1,518) (1,813) (11,691) (3,331) (2,266)
Unrealized (gain) loss on available for sale securities (231) (362) 2,160
Loan origination costs (3,368) (4,208) 
Depreciation (699) 
 
Unrealized loss on available for sale securities (188) 
 (231)
Other (2,785) (291) (1,001) (1,199) (697) (2,785)
Total deferred tax liabilities (6,938) (3,902) (2,598) (17,669) (9,911) (6,938)
Valuation allowance (380) 
 
Net deferred tax asset $11,511
 $9,383
 $8,477
 $13,265
 $16,807
 $11,511
 
AtOn December 31, 2015, there was no valuation allowance against22, 2017, the Company’s deferredU.S. government enacted comprehensive tax asset.legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). Among other changes, the Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%. The Company has recorded an income tax expense of $5.6 million related to the
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remeasurement of federal net deferred tax assets resulting from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. The Company is still completing its analysis of the impact of the Tax Act and will record any adjustments to the provisional amount as a component of income tax expense during the measurement period provided for in SAB 118.

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of December 31, 2016 and December 31, 2015. As of December 31, 2017, the Company recorded a valuation allowance of $380,000 against the capital loss carryover deferred tax asset, as the Company does not believe it will generate sufficient capital gain before the capital loss carryover expires.

Section 382 of the Internal Revenue Code imposes limitations on a corporation’s ability to use any net unrealized built in losses and other tax attributes, such as net operating loss and tax credit carryforwards, when it undergoes a 50% ownership change over a designated testing period. The Company has a Section 382 limited net operating loss carry forward of approximately $13.0$17.4 million for federal income tax purposes, which expiresis scheduled to expire in 2034.2026. In addition, the Company has a Section 382 limited net operating loss carry forward of approximately $10.1$14.7 million for California franchise tax purposes.  The net operating loss deduction for the statepurposes, which is scheduled to expire in 2034.  Under Internal Revenue Code2020. The Company is expected to fully utilize the federal and California net operating loss carryforward before it expires with the application of the Section 382 which has also been adopted under California law, if during any three years period there is more than a 50 percentage point change in the ownership of theannual limitation.

The Company then the future use of any pre-change net operating losses or built-in losses of the Companyand its subsidiaries are subject to an annual percentage limitation based onU.S. Federal income tax as well as income and franchise tax in multiple state jurisdictions. The statute of limitations related to the valueconsolidated Federal income tax returns is closed for all tax years up to and including 2013. The expiration of the company atstatute of limitations related to the ownership change date.various state income and franchise tax returns varies by state. The annual usable net operating loss carry forwardCompany is currently not under examination in any taxing jurisdiction.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the following year is approximately $3.6 million.
As ofyears ended December 31, 2015,2017 and 2016 is as follows:

  2017 2016
  (dollars in thousands)
Balance at January 1, $
 $
   Additions based on tax positions related to prior years 2,906
 
Balance at December 31, $2,906
 $

The total amount of unrecognized tax yearsbenefits was $2.9 million and $0 at December 31, 2017 and 2016 and is primarily comprised of unrecognized tax benefits from an acquisition during 2017. The total amount of tax benefits that, if recognized, would favorably impact the effective tax rate was $0 at December 31, 2017. The Company does not believe that the unrecognized tax benefits will change within the next twelve months.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. The Company had accrued for 2012 through 2014 remain open to audit by$104,000 and $0 of the Internal Revenue Serviceinterest and 2011 through 2014 by various state taxing agencies.penalties at December 31, 2017 and 2016, respectively.


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15. Commitments, Contingencies and Concentrations of Risk

Lease Commitments – The Company leases a portion of its facilities from non-affiliates under operating leases expiring at various dates through 2023.2027. The following schedule shows the minimum annual lease payments, excluding any renewals and extensions, property taxes, and other operating expenses, due under these agreements:
 
Year ending December 31, Amount Amount
 (in thousands) (dollars in thousands)
2016 $3,658
2017 3,095
2018 2,557
 $7,170
2019 2,351
 5,476
2020 711
 2,675
2021 1,887
2022 1,421
Thereafter 400
 2,312
Total $12,772
 $20,941

Rental expense under all operating leases totaled $4.8 million for 2017, $4.4 million for 2016, and $3.8 million for 2015, $2.8 million for 2014, and $2.4 million for 2013.2015.

Legal Proceedings –The Company is not involved in any material pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.
 
Employment Agreements—The Company has entered into a three-year employment agreement with its Chief Executive Officer (“CEO”). This agreement provides for the payment of a base salary, and a bonus based upon the CEO’s individual performance and the Company’s overall performance, provides a vehicle for the CEO’s use, and provides for the payment of severance benefits upon termination under specified circumstances.  

Additionally, the Bank has entered into a three years employment agreements with the following executive officers: Chief Banking Officer, the Chief Financial Officer, the Chief Credit Officer and the Chief CreditOperating Officer. The agreements provide for the payment of a base salary, a bonus based upon the individual’s performance and the overall performance of the Bank and the payment of severance benefits upon termination under specified circumstances.
 
Availability of Funding Sources—The Company funds substantially all of the loans, which it originates or purchases, through deposits, internally generated funds, and/or borrowings. The Company competes for deposits primarily on the basis of rates, and, as a consequence, the Company could experience difficulties in attracting deposits to fund its operations if the Company does not continue to offer deposit rates at levels that are competitive with other financial institutions. To the extent that the Company is not able to maintain its currently available funding sources or to access new funding sources, it would have to curtail its loan production activities or sell loans and investment securities earlier than is optimal. Any such event could have a material adverse effect on the Company’s results of operations, financial condition and cash flows.
 
16. Benefit Plans
 
401(k) Plan—The Bank maintains an Employee Savings Plan (the “401(k) Plan”) which qualifies under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, employees may contribute between 1% to 50%100% of their compensation. In 2015, 20142017, 2016 and 2013,2015, the Bank matched 100% of contributions for the first three percent contributed and 50% on the next two percent contributed. Contributions made to the 401(k) Plan by the Bank amounted to $1.4 million for 2017, $959,000 for 2016 and $769,000 for 2015, $540,000 for 2014 and $401,000 for 2013.2015.

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Pacific Premier Bancorp, Inc. 2004 Long-Term Incentive Plan (the “2004 Plan”)The 2004 Plan was approved by the Corporation’s stockholders in May 2004. The 2004 Plan authorizesauthorized the granting of incentive stock options, nonstatutory stock options, stock appreciation rights and restricted stock (collectively "Awards") equal to 525,500 shares of the common stock of the Corporation for issuances to executives,executive, key employees, officers and directors. The 2004 Plan will bewas in effect for a period of ten years years fromstarting in February 25, 2004, the date the 2004 Plan was adopted. OptionsAwards granted under the 2004 Plan will bewere made at an exercise price equal to the fair market value of the stock on the date of grant. Awards granted to officers and employees may include incentive stock options, nonstatutory stock options and limited rights, which are exercisable only upon a change in control of the Corporation.  The optionsAwards granted pursuant to the 2004 Plan vest at a rate of 33.3% per year. As of December 31, 2015, there are 318,355 options outstanding on the 2004 Plan with zero available for grant.  The 2004 Plan terminated in February 2014.
 
Heritage Oaks Bancorp, Inc. 2005 Equity Based Compensation Plan (the "2005 Plan")The 2005 Plan was acquired from Heritage Oaks Bancorp, Inc. on April 1, 2017. The 2005 Plan authorized the granting of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units and Performance Share Cash Only Awards. As of December 31, 2016, no further grants can be made from this plan, however Pacific Premier assumed all unvested and unexercised awards.

Pacific Premier Bancorp, Inc. 2012 Long-Term Incentive Plan (the “2012 Plan”)The 2012 Plan was approved by the Corporation’s stockholders in May 2012. The 2012 Plan authorizes the granting of optionsAwards equal to 620,000 shares of the common stock of the Corporation for issuances to executives, key employees, officers, and directors. The 2012 Plan will be in effect for a period of ten years years from May 30, 2012, the date the 2012 Plan was adopted. OptionsAwards granted under the 2012 Plan will be made at an exercise price equal to the fair market value of the stock on the date of grant. Awards granted to officers and employees may include incentive stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights. The options granted pursuantawards have vesting periods ranging from 1 to 3 years; vesting in either three equal annual installments or one lump sum at the 2012 Plan vest at a rateend of 33.3% perthe third year. In May 2014, the Corporation’s stockholders approved an amendment to the 2012 Plan to increase the shares available under the plan by 800,000 shares to total 1,420,000 shares.  As of December 31, 2015, there are 740,731 options outstanding on the 2012 Plan with 816,105 available for grant. In May 2015, the Corporation's stockholders approved an amendment to the 2012 Plan to permit the grant of performance-based awards, including equity compensation awards that may not be subject to the deduction limitation of Section 162(m) of the Internal Revenue Code. The performance-based awards include (i) both performance-based equity compensation awards and performance-based cash bonus payments and (ii) restricted stock units. In May 2017, the Corporation’s stockholders approved an amendment to the 2012 Plan to increase the shares available under the plan by 3,580,000 shares to total 5,000,000 shares.

Heritage Oaks Bancorp, Inc. 2015 Equity Based Compensation Plan (the "2015 Plan")The 2015 Plan was acquired from Heritage Oaks Bancorp, Inc. on April 1, 2017. The 2015 plan was approved by the Corporation's stockholders in May 2015. The 2015 Plan authorized the Company to grant various types of share-based compensation awards to the Company's employees and Board of Directors such as stock options, restricted stock awards, and restricted stock units. Under the 2015 Equity Incentive Plan a maximum of 2,500,000 shares of the Company's common stock were made to be issued. Shares issued under this plan, other than stock options and stock appreciation rights, were counted against the plan on a two shares for every one share actually issued basis. Awards that were canceled, expired, forfeited, fail to vest, or otherwise resulted in issued shares not being delivered to the grantee, were made available for the issuance of future share-based compensation awards. Additionally, under this plan, no one individual was to be granted shares in aggregate that exceed more than 250,000 shares during any calendar year. The 2015 Plan is still active and Pacific Premier assumed all unvested and unexercised awards.
 
The Pacific Premier Bancorp, Inc. 2004 Long-Term Incentive Plan, and the Heritages Oaks Bancorp, Inc. 2005 Equity Based Compensation Plan, Pacific Premier Bancorp, Inc. 2012 Long-Term Incentive Plan and the Heritage Oaks Bancorp, Inc. 2015 Equity Based Compensation Plan are collectively the “Option Plans.“Plans.
 
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Stock Options

 As of December 31, 2017, there are 114,454 options outstanding on the 2004 Plan with zero available for grant. As of December 31, 2017, there are 48,532 options outstanding on the 2005 Plan with zero available for grant. As of December 31, 2017, there are 755,362 options outstanding on the 2012 Plan with 3,594,149 available for grant. As of December 31, 2017, there are 36,175 options outstanding on the 2015 Plan with zero available for grant. Below is a summary of the stock option activity in the Plans for the year ended December 31, 2015:

2017:
20152017
Number of Stock Options Outstanding Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic valueNumber of Stock Options Outstanding Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic value
    (in years) (in thousands)    (in years) (dollars in thousands)
Outstanding at January 1, 2015925,084
 $10.41
  
Outstanding at January 1, 20171,083,667
 $12.61
  
Granted249,000
 15.16
  210,977
 20.40
  
Exercised(8,066) 8.70
  (333,959) 13.49
  
Forfeited and Expired(106,932) 12.31
  (6,162) 34.68
  
Outstanding at December 31, 20151,059,086
 $11.35
 6.3 $10,489
Vested and exercisable at December 31, 2015635,069
 $9.09
 4.9 $7,719
Outstanding at December 31, 2017954,523
 $13.89
 5.8 $24,926
Vested and Exercisable at December 31, 2017749,281
 $12.47
 5.3 $20,627
 
The total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 2014was $7.7 million, $2.0 million and 2013 was $60,000, $536,000 and $277,000, respectively.
  

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The amount charged against compensation expense in relation to the stock options was $905,000$927,000 for 20152017, $514,000883,000 for 20142016 and $943,000$514,000 for 2013.2015. At December 31, 2015,2017, unrecognized compensation expense related to the options is approximately $1.0 million.$814,000.
 
Options granted under the Option Plans during 2015, 20142017, 2016 and 20132015 were valued using the Black-Scholes model with the following average assumptions:
Year Ended December 31,Year Ended December 31,
2015 2014 20132017 2016 2015
Expected volatility29.47% 16.2% - 18.5% 22.2% - 25.82%22.43% - 28.77% 21.98% - 26.88% 29.47%
Expected term6.00 Years 6.00 Years 10.00 Years.33 - 6 Years 6.00 Years 6.00 Years
Expected dividendsNone None NoneNone None None
Risk free rate1.39% 1.81% - 2.10% 1.78% - 2.67%1.03% - 2.02% 1.32% - 1.83% 1.39%
Weighted-average grant date fair value$4.73 $3.28 - $3.67 $3.93 - $5.87$19.66 $5.55 $4.73

The following is the listing of the input variables and the assumptions utilized by the Company for each parameter used in the Black-Scholes option pricing model in prior years:
Risk-free Rate – The risk-free rate for periods within the contractual life of the option have been based on the U.S. Treasury rate that matures on the expected assigned life of the option at the date of the grant.
Expected Life of Options – The expected life of options is based on the period of time that options granted are expected to be outstanding.
Expected Volatility –The expected volatility has been based on the historical volatility for the Company’s shares.
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Dividend Yield – The dividend yield has been based on historical experience and expected future changes on dividend payouts. The Company does not expect to declare or pay dividends on its common stock within the foreseeable future.
Restricted Stock

Below is a summary of the restricted stock activity in the Plans for the years ended December 31, 2015:

2017:
20152017
Shares Weighted Average Grant-Date Fair Value per shareShares Weighted Average Grant-Date Fair Value per share
Unvested at the beginning of the year
 $
370,334
 $23.53
Granted60,000
 15.46
201,544
 38.70
Vested
 
(125,035) 26.26
Forfeited
 
Unvested at the end of the year60,000
 $15.46
446,843
 $29.61

Compensation expense of $260,000 was recordedfor the year ended December 31, 2017, 2016 and 2015 related to the above restricted stock grants for the year ended December 31, 2015.amounted to $5.0 million, $1.8 million and $260,000, respectively. Restricted stock awards are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed. The total grant date fair value of awards was $927,500$7.8 million for 20152017 awards. At December 31, 2015,2017, unrecognized compensation expense related to restricted stock is approximately $689,000.$8.2 million.


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Other Plans

Salary Continuation Plan—The Bank implemented a non-qualified supplemental retirement plan in 2006 (the “Salary Continuation Plan”) for certain executive officers of the Bank. The Salary Continuation Plan is unfunded.

Directors’ Deferred Compensation PlansDeferred Compensation Plan-The Bank implemented a non-qualified supplemental retirement plan in 2006 (the “Supplemental Executive Retirement Plan” or “SERP”) for certain executive officers of the Bank. The Bank createdhas acquired additional SERPs through the acquisitions of SDTB, IDPK and HEOP. The SERP is unfunded. The expense incurred for the SERP for each of the last three years was $721,000, $573,000 and $307,000 resulting in a Directors’ Deferred Compensation Plan in September 2006 which allows directors to defer boarddeferred compensation liability of directors’ fees.$8.3 million and $5.1 million as of the years ended 2017 and 2016. In addition, with the acquisition of PLZZ, the Company contributes to the plan $4,000 per year for non-executive directors that do not receive Company provided long-term care insurance. Theacquired a deferred compensation plan that is credited with interest byunfunded and results in a deferred compensation asset and liability both in the Bank at prime minus one percent and the accrued liability is payable upon retirement or resignation.  The Directors’ Deferred Compensation Plan is unfunded.amount of $2.0 million.

The amounts expensed in 2015, 2014,2017, 2016, and 20132015 for all of these plans amounted to $555,000$721,000, $573,000, and $461,000, and 255,724$555,000 respectively. As of December 31, 2017, 2016 and 2015, 2014, and 2013, $5.4$8.4 million, $4.0$5.7 million, and $4.4$5.4 million, respectively, were recorded in other liabilities on the consolidated statements of condition for each of these plans.
  

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17. Financial Instruments with Off-Balance Sheet Risk
 
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines or letters of credit. These commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require payment of a fee. Since many commitments are expected to expire, the total commitment amounts do not necessarily represent future cash requirements. Commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the accompanying consolidated statements of financial condition.
 
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual or notional amount of those instruments. The Company controls credit risk of its commitments to fund loans through credit approvals, limits and monitoring procedures. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company evaluates each customer for creditworthiness.
 
The Company receives collateral to support commitments when deemed necessary. The most significant categories of collateral include real estate properties underlying mortgage loans, liens on personal property and cash on deposit with the Bank.
 
The Company maintains an allowance for credit losses to provide for commitments related to loans associated with undisbursed loan funds and unused lines of credit. The allowance for these commitments was $603,000$1.9 million at December 31, 20152017 and $397,000$1.1 million at December 31, 2014.2016.
 
The Company’s commitments to extend credit at December 31, 20152017 were $415 million$1.2 billion and $355.0$581 million at December 31, 2014.2016. The 20152017 balance is primarily composed of $200$707 million of undisbursed commitments for C&I loans.
 
18. Fair Value of Financial Instruments
 
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value, and for estimating the fair value of financial assets and financial liabilities not recorded at fair value, are discussed below.

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

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


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Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets,
INDEX

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

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.
 
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at December 31, 20152017 and December 31, 2014.2016.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

Cash and due from banksThe carrying amounts of cash and short-term instruments approximate fair value due to the liquidity of these instruments.

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

FHLB, FRB, Other Stock – The carrying value approximates—Due to restrictions placed on its transferability, it is not practical to determine the fair value based upon the redemption provisions of the stock.

Loans Held for Sale—The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
 
Loans Held for InvestmentThe 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
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the value, which would be derived using an exit price. These loans are included within Level 3 of the fair value hierarchy.

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Loans Held for Sale The fair values of LHFS are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans adjusted to reflect the inherent credit risk. The borrower-specific credit risk is embedded within the quoted market prices or is implied by considering loan performance when selecting comparables.
Impaired loans and OREOImpaired loans and OREO assets are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of impaired loans and OREO assets are generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 
Deposit Accounts and Short-term Borrowings —Borrowings—The amounts payable to depositors for demand, savings, and money market accounts, and short-term borrowings are considered to approximate fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities using a discounted cash flow calculation. Interest-bearing deposits and borrowings are included within Level 2 of the fair value hierarchy.
 
Term FHLB Advances and Other Long-term Borrowings—The fair value of long term borrowings is determined using rates currently available for similar borrowings with similar credit risk and for the remaining maturities and are classified as Level 2.
 
Subordinated DebenturesThe fair value of subordinated debentures is estimated by discounting the balance by the current three-month LIBOR rate plus the current market spread. The fair value is determined based on the maturity date as the Company does not currently have intentions to call the debenture and is classified as Level 2.

Accrued Interest Receivable/Payable—The carrying amounts of accrued interest receivable and accrued interest payable are deemed to approximate fair value.

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


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The fair value estimates presented herein are based on pertinent information available to management as of December 31, 20152017 and 2014.2016.
 At December 31, 2015 At December 31, 2017
 
Carrying
Amount
 Level 1 Level 2 Level 3 
Estimated
Fair Value
 
Carrying
Amount
 Level 1 Level 2 Level 3 
Estimated
Fair Value
 (in thousands)       (dollars in thousands)
Assets:                    
Cash and cash equivalents $78,417
 $78,417
 $
 $
 $78,417
 $200,064
 $200,064
 $
 $
 $200,064
Securities available for sale 280,273
 
 280,273
 
 280,273
Federal Reserve Bank and FHLB stock, at cost 22,292
 
 22,292
 
 22,292
Loans held for sale, net 8,565
 
 9,507
 
 9,507
Interest-bearing time deposits with financial institutions 3,693
 3,693
 
 
 3,693
Investments held to maturity 18,291
 
 18,082
 
 18,082
Investment securities available-for-sale 787,429
 
 787,429
 
 787,429
FHLB, FRB and other stock 65,881
  N/A
  N/A
  N/A
 N/A
Loans held for sale 23,426
 
 23,524
 
 23,524
Loans held for investment, net 2,236,998
 
 
 2,244,936
 2,244,936
 6,167,532
 
 
 6,269,366
 6,269,366
Accrued interest receivable 9,315
 9,315
 
 
 9,315
 27,053
 27,053
 
 
 27,053
Liabilities:  
  
  
  
  
  
  
  
  
  
Deposit accounts 2,195,123
 1,674,148
 521,291
 
 2,195,439
 6,085,868
 5,001,053
 1,074,564
 
 6,075,617
FHLB advances 148,000
 
 148,036
 
 148,036
 490,148
 
 489,823
 
 489,823
Other borrowings 48,125
 
 49,156
 
 49,156
 46,139
 
 46,373
 
 46,373
Subordinated debentures 70,310
 
 68,675
 
 68,675
 105,123
 
 115,159
 
 115,159
Accrued interest payable 206
 206
 
 
 206
 2,131
 2,131
 
 
 2,131
                    
 At December 31, 2014 At December 31, 2016
 
Carrying
Amount
 Level 1 Level 2 Level 3 
Estimated
Fair Value
 
Carrying
Amount
 Level 1 Level 2 Level 3 
Estimated
Fair Value
 (in thousands)  
  
  
 (dollars in thousands)
Assets:  
  
  
  
  
  
  
  
  
  
Cash and cash equivalents $110,925
 $110,925
 $
 $
 $110,925
 $156,857
 $156,857
 $
 $
 $156,857
Securities available for sale 201,638
 
 201,638
 
 201,638
Federal Reserve Bank and FHLB stock, at cost 17,067
 
 17,067
 
 17,067
Interest-bearing time deposits with financial institutions 3,944
 3,944
 
 
 3,944
Investments held to maturity 8,565
 
 8,461
 
 8,461
Investment securities available for sale 380,963
 
 380,963
 
 380,963
FHLB, FRB and other stock 37,304
 N/A
 N/A
 N/A
 N/A
Loans held for sale 7,711
 
 8,405
 
 8,405
Loans held for investment, net 1,616,422
 
 
 2,116,719
 2,116,719
 3,220,317
 
 
 3,211,154
 3,211,154
Accrued interest receivable 7,131
 7,131
 
 
 7,131
 13,145
 13,145
 
 
 13,145
Liabilities:  
  
  
  
  
  
  
  
  
  
Deposit accounts 1,630,826
 1,216,847
 519,898
 
 1,736,745
 3,145,581
 2,330,579
 573,467
 
 2,904,046
FHLB advances 70,000
 
 70,025
 
 70,025
 278,000
 
 277,935
 
 277,935
Other borrowings 46,643
 
 48,312
 
 48,312
 49,971
 
 50,905
 
 50,905
Subordinated debentures 70,310
 
 33,456
 
 33,456
 69,383
 
 69,982
 
 69,982
Accrued interest payable 209
 209
 
 
 209
 1,481
 1,481
 
 
 1,481

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
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A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows. The Company measures impairment on all non-accrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost. As such, the Company records impaired loans as non-recurring Level 3 when the fair value of the underlying collateral is based on an observable market price or current appraised value. When current market prices are not available or the Company determines that the fair value of the underlying collateral is further impaired below appraised values, the Company records impaired loans as Level 3. At December 31, 2015,2017, substantially all the Company’s impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to management.
 

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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 estimatemeasures of fair value on a non-recurring basis are immaterial at the reporting date.
December 31, 2017 and 2016. The following fair value hierarchy tables present information about the Company’s assets measured at fair value on a recurring basis at the dates indicated:
 
 At December 31, 2015 At December 31, 2017
 Fair Value Measurement Using   Fair Value Measurement Using  
 Level 1 Level 2 Level 3 
Securities at
Fair Value
 Level 1 Level 2 Level 3 
Securities at
Fair Value
 (in thousands) (dollars in thousands)
Investment securities available for sale:                
Agency $
 $47,209
 $
 $47,209
Corporate 
 79,546
 
 79,546
Municipal bonds $
 $130,245
 $
 $130,245
 
 232,128
 
 232,128
Collateralized mortgage obligation $
 $24,543
 $
 $24,543
Mortgage-backed securities $
 $125,485
 $
 $125,485
Collateralized mortgage obligation: residential 
 33,781
 
 33,781
Mortgage-backed securities: residential 
 394,765
 
 394,765
Total securities available for sale: $
 $280,273
 $
 $280,273
 $
 $787,429
 $
 $787,429
                
 At December 31, 2014 At December 31, 2016
 Fair Value Measurement Using  
 Fair Value Measurement Using  
 Level 1 Level 2 Level 3 
Securities at
Fair Value
 Level 1 Level 2 Level 3 
Securities at
Fair Value
 (in thousands) (dollars in thousands)
Investment securities available for sale:  
  
  
  
  
  
  
  
Corporate $
 $37,642
 $
 $37,642
Municipal bonds $
 $89,661
 $
 $89,661
 
 118,803
 
 118,803
Collateralized mortgage obligation $
 $6,862
 $
 $6,862
Mortgage-backed securities $
 $105,115
 $
 $105,115
Collateralized mortgage obligation: residential 
 31,388
 
 31,388
Mortgage-backed securities: residential 
 193,130
 
 193,130
Total securities available for sale: $
 $201,638
 $
 $201,638
 $
 $380,963
 $
 $380,963
  
The following table provides a summary of the financial instruments the Company measures at fair value on a non-recurring basis at the dates indicated:
  At December 31, 2015
  Fair Value Measurement Using  
  Level 1 Level 2 Level 3 Assets at Fair Value
  (in thousands)
Assets        
Collateral dependent impaired loans $
 $
 $1,322
 $1,322
Other real estate owned 
 
 1,161
 1,161
Total assets $
 $
 $2,483
 $2,483


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  At December 31, 2014
  Fair Value Measurement Using
  Level 1 Level 2 Level 3 Assets at Fair Value
  (in thousands)
Assets        
Collateral dependent impaired loans $
 $
 $921
 $921
Other real estate owned 
 
 1,037
 1,037
Total assets $
 $
 $1,958
 $1,958

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 at the dates indicated: 
  December 31, 2015
        Range
  Fair Value Valuation Technique Unobservable Inputs Rate Maturity (years) Unobservable Inputs
Collateral dependent impaired loans:            
Business loans:            
Commercial and industrial $313
 Collateral valuation Management adjustment to reflect current conditions and selling costs 7.50% 6
 0-10
Franchise 168
 Collateral valuation Management adjustment to reflect current conditions and selling costs 5.70% - 6.70%
 7 - 8
 0-10
Commercial owner occupied 536
 Collateral valuation Management adjustment to reflect current conditions and selling costs 7.75% 7
 0-10
Real estate loans:  
      
  
  
Commercial non-owner occupied 214
 Collateral valuation Management adjustment to reflect current conditions and selling costs 6.75% 2 - 12
 0-15
One-to-four family 70
 Collateral valuation Management adjustment to reflect current conditions and selling costs 9.00% - 15.00%
 5 - 16
 0-10
Land 21
 Collateral valuation Management adjustment to reflect current conditions and selling costs 13.00% 15
 0-10
Total collateral dependent impaired loans $1,322
      
  
  
Other real estate owned  
      
  
  
One-to-four family $
 Collateral valuation Management adjustment to reflect current conditions and selling costs 
 
 0-10
Land 1,161
 Collateral valuation Management adjustment to reflect current conditions and selling costs 
 
 0-10
Total other real estate owned $1,161
      
  
  


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  At December 31, 2014
        Range
  Fair Value Valuation Technique Unobservable Inputs Rate Maturity (years) Unobservable Inputs
Collateral dependent impaired loans:            
Business loans:            
Commercial owner occupied $388
 Collateral valuation Management adjustment to reflect current conditions and selling costs 6.75% 7
 0-10
Real estate loans:  
      
  
  
Commercial non-owner occupied 479
 Collateral valuation Management adjustment to reflect current conditions and selling costs 7.00% - 7.50%
 2 - 12
 0-15
One-to-four family 54
 Collateral valuation Management adjustment to reflect current conditions and selling costs 8.00% - 15.00%
 5 - 16
 0-10
Total collateral dependent impaired loans $921
      
  
  
Other real estate owned  
      
  
  
One-to-four family $285
 Collateral valuation Management adjustment to reflect current conditions and selling costs 
 
 0-10
Land 752
 Collateral valuation Management adjustment to reflect current conditions and selling costs 
 
 0-10
Total other real estate owned $1,037
      
  
  
19. Earnings Per Share
 
Earnings per share of common stock is calculated on both a basic and diluted basis based on the weighted average number of common and common equivalent shares outstanding, excluding common shares in treasury. Basic earnings per share excludes dilution and is computed by dividing income available to stockholders by the weighted average number of common shares outstanding for the period. The Company has no outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends that would be considered participating securities for the basic calculation. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that then would share in earnings.earnings and excludes common shares in

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treasury. Stock options exercisable for shares of common stock are excluded from the computation of diluted earnings per share if they are anti-dilutive due to their exercise price exceeding the average market price during the period.
The impact of stock options, which are anti-dilutive are excluded from the computations of diluted earnings per share. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases. The weighted average number of stock options excluded was 17,524 for December 31, 2017, 82,760 for December 31, 2016 and 222,858 for December 31, 2015.
A reconciliation of the numerators and denominators used in basic and diluted earnings per share computations is presented in the table below.
 
Income/(Loss)
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
 
Income/(Loss)
(numerator)
 
Shares
(denominator)
 
Per Share
Amount
 (dollars in thousands, except share data) (dollars in thousands, except share data)
For the year ended December 31, 2017:      
Net income applicable to earnings per share $60,100
    
Basic earnings per share: Income available to common stockholders 60,100
 37,705,556
 $1.59
Effect of dilutive securities: Warrants and stock option plans 
 805,705
  
Diluted earnings per share: Income available to common stockholders $60,100
 38,511,261
 $1.56
For the year ended December 31, 2016:  
  
  
Net income applicable to earnings per share $40,103
  
  
Basic earnings per share: Income available to common stockholders 40,103
 26,931,634
 $1.49
Effect of dilutive securities: Warrants and stock option plans 
 507,525
  
Diluted earnings per share: Income available to common stockholders $40,103
 27,439,159
 $1.46
For the year ended December 31, 2015:        
  
  
Net income applicable to earnings per share $25,515
     $25,515
  
  
Basic earnings per share: Income available to common stockholders 25,515
 21,156,668
 $1.21
 25,515
 21,156,668
 $1.21
Effect of dilutive securities: Warrants and stock option plans 
 332,030
  
 
 332,030
  
Diluted earnings per share: Income available to common stockholders $25,515
 21,488,698
 $1.19
 $25,515
 21,488,698
 $1.19
For the year ended December 31, 2014:  
  
  
Net income applicable to earnings per share $16,616
  
  
Basic earnings per share: Income available to common stockholders 16,616
 17,046,660
 $0.97
Effect of dilutive securities: Warrants and stock option plans 
 297,317
  
Diluted earnings per share: Income available to common stockholders $16,616
 17,343,977
 $0.96
For the year ended December 31, 2013:  
  
  
Net income applicable to earnings per share $8,993
  
  
Basic earnings per share: Income available to common stockholders 8,993
 15,798,885
 $0.57
Effect of dilutive securities: Warrants and stock option plans 
 811,069
  
Diluted earnings per share: Income available to common stockholders $8,993
 16,609,954
 $0.54
 
20. Derivative Instruments

From time to time, the Company enters into interest rate swap agreements with certain borrowers to assist them in mitigating their interest rate risk exposure associated with the loans they have with the Company. At the same time, the Company enters into identical interest rate swap agreements with another financial institution to mitigate the Company’s interest rate risk exposure associated with the swap agreements it enters into with its borrowers. At December 31, 2017, the Company had swaps with matched terms with an aggregate notional amount of $58.6 million and a fair value of $1.1 million. The fair values of these swaps are recorded as components of other assets and other liabilities in the Company’s condensed consolidated balance sheet. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Company’s income statement as a component of noninterest income. Since the terms of the swap agreements between the Company and its borrowers have been matched with the terms of swap agreements with another financial institution, the adjustments for the change in their fair value offset each other in non-interest income.
Although changes in the fair value of swap agreements between the Company and borrowers and the Company and other financial institutions offset each other, changes in the credit risk of these counterparties may result in a difference in the fair value of these swap agreements. Offsetting swap agreements the Company has with other financial institutions are collateralized with cash, and swap agreements with borrowers are secured by the
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collateral arrangements for the underlying loans these borrowers have with the Company. During the twelve months ended December 31, 2017, there were no losses recorded on swap agreements, attributable to the change in credit risk associated with a counterparty. All interest rate swap agreements entered into by the Company as of December 31, 2017 are not designated as hedging instruments.
The following tables summarize the Company's derivative instruments, included in "other assets" and "other liabilities" in the consolidated statements of financial condition. The Company's derivative instruments were acquired as part of the HEOP acquisition, and the Company did not have any at December 31, 2016:
 December 31, 2017
 Derivative Assets Derivative Liabilities
 Notional Fair Value Notional Fair Value
 (dollars in thousands)
Derivative instruments not designated as hedging instruments:       
Interest rate swap contracts$58,599
 $1,135
 $58,599
 $1,135
Total derivative instruments$58,599
 $1,135
 $58,599
 $1,135

20.
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21. Balance Sheet Offsetting

Derivative financial instruments may be eligible for offset in the consolidated balance sheets, such as those subject to enforceable master netting arrangements or a similar agreement. Under these agreements, the Company has the right to net settle multiple contracts with the same counterparty. The Company offers an interest rate swap product to qualified customers, which are then paired with derivative contracts the Company enters into with a counterparty bank. While derivative contracts entered into with counterparty banks may be subject to enforceable master netting agreements, derivative contracts with customers may not be subject to enforceable master netting arrangements.
Financial instruments that are eligible for offset in the consolidated statements of financial condition as of December 31, 2017 are presented in the table below:
 December 31, 2017
       Gross Amounts Not Offset in the Consolidated
Balance Sheets
  
 Gross Amounts Recognized in the Consolidated Balance Sheets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Financial Instruments Cash Collateral (1) Net Amount
 (dollars in thousands)
Financial assets:           
Derivatives not designated as
hedging instruments
$1,833
 $(698) $1,135
 $
 $
 $1,135
Total$1,833
 $(698) $1,135
 $
 $
 $1,135
            
Financial liabilities:           
Derivatives not designated as
hedging instruments
$1,135
 $
 $1,135
 $
 $
 $1,135
Total$1,135
 $
 $1,135
 $
 $
 $1,135
            
(1) Represents cash collateral held with counterparty bank.

22. Related Parties
 
Loans to the Company’s executive officers and directors are made in the ordinary course of business, in accordance with applicable regulations and are made on substantially the same terms as comparable transactions.Company's policies and procedures. At December 31, 20152017, the Company had onerelated party loans outstanding totaling $6.12 million and at December 31, 2016, the Company had related party loans outstanding totaling $2.38 million. On January 8, 2018, the Company entered into a new related party loan outstandingwith a commitment amount of $2.4 million, which was new for 2015. At December 31, 2014 there were no outstanding loans to executive officers and directors.$4.0 million.
 
At the end of 20152017, the Company had related party deposits of $312$746 million compared to $282$354 million at the end of 2014.2016. John J. Carona was appointed to the Board of Directors on March 15, 2013, in connection with the Company's acquisition of First Associations Bank ("FAB").FAB. Mr. Carona is the President and Chief Executive Officer of Associations, Inc. ("Associa"),Associa, a Texas corporation that specializes in providing management and related services for homeowners associations located accrossacross the United States. At December 31, 20152017 and 2014, $3102016, $736 million and $280$352 million, respectively, of the related party deposits were attributable to Associa.

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21.
23. Quarterly Results of Operations (Unaudited)
 
The following is a summary of selected financial data presented below by quarter for the periods indicated:
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 (dollars in thousands, except per share data) (dollars in thousands, except per share data)
For the year ended December 31, 2015:        
For the year ended December 31, 2017:        
Interest income $26,626
 $30,071
 $29,747
 $31,911
 $45,427
 $68,733
 $70,161
 $85,684
Interest expense 2,952
 2,978
 3,051
 3,074
 3,724
 5,395
 5,870
 7,514
Provision for estimated loan losses 1,830
 1,833
 1,062
 1,700
Provision for loan losses 2,502
 1,904
 2,049
 2,185
Noninterest income 1,470
 4,380
 4,378
 4,217
 4,683
 8,759
 8,221
 9,451
Noninterest expense 20,469
 17,214
 17,374
 18,539
 29,747
 48,496
 39,612
 49,895
Income tax provision 1,056
 4,601
 4,801
 4,750
 4,616
 7,521
 10,619
 19,370
Net income $1,789
 $7,825
 $7,837
 $8,065
 $9,521
 $14,176
 $20,232
 $16,171
Earnings per share:  
  
  
  
  
  
    
Basic $0.09
 $0.36
 $0.36
 $0.38
 $0.35
 $0.36
 $0.51
 $0.37
Diluted $0.09
 $0.36
 $0.36
 $0.37
 0.34
 0.35
 0.50
 0.36
For the year ended December 31, 2014:  
  
  
  
For the year ended December 31, 2016:  
  
  
  
Interest income $18,156
 $19,314
 $21,333
 $22,536
 $37,505
 $40,874
 $42,429
 $45,797
Interest expense 1,387
 1,533
 2,014
 2,770
 3,304
 3,313
 3,420
 3,493
Provision for estimated loan losses 949
 1,030
 1,284
 1,421
Provision for loan losses 1,120
 1,589
 4,013
 2,054
Noninterest income 1,918
 2,388
 4,168
 4,903
 4,848
 4,468
 5,968
 4,318
Noninterest expense 13,541
 11,641
 13,343
 16,468
 23,633
 23,713
 25,860
 25,377
Income tax provision 1,565
 2,855
 3,410
 2,889
 5,742
 6,358
 5,877
 7,238
Net income (loss) $2,632
 $4,643
 $5,450
 $3,891
Net income $8,554
 $10,369
 $9,227
 $11,953
Earnings per share:  
  
  
  
  
  
  
  
Basic $0.15
 $0.28
 $0.32
 $0.23
 $0.33
 $0.38
 $0.34
 $0.44
Diluted $0.15
 $0.27
 $0.31
 $0.23
 0.33
 0.37
 0.33
 0.43


119

INDEX

22.24. Parent Company Financial Information
 
The Corporation is a California-based bank holding company organized in 1997 as a Delaware corporation and owns 100% of the capital stock of the Bank, its principal operating subsidiary. The Bank was incorporated and commenced operations in 1983. Condensed financial statements of the Corporation are as follows:
PACIFIC PREMIER BANCORP, INC.STATEMENTS OF FINANCIAL CONDITION(Parent company only)
 At December 31, At December 31,
 2015 2014 2017 2016
 (in thousands) (dollars in thousands)
Assets:    
Assets    
Cash and cash equivalents $3,412
 $18,724
 $17,097
 $15,124
Deferred income taxes 
 3,566
Investment in subsidiaries 359,143
 247,669
 1,329,961
 513,606
Other assets 8,502
 1,544
 2,599
 2,400
Total Assets $371,057
 $271,503
 $1,349,657
 $531,130
Liabilities:  
  
Liabilities  
  
Subordinated debentures $70,310
 $70,310
 $105,123
 $69,383
Accrued expenses and other liabilities 1,767
 1,601
 2,538
 2,007
Total Liabilities 72,077
 71,911
 107,661
 71,390
Total Stockholders’ Equity 298,980
 199,592
 1,241,996
 459,740
Total Liabilities and Stockholders’ Equity $371,057
 $271,503
 $1,349,657
 $531,130


PACIFIC PREMIER BANCORP, INC.STATEMENTS OF OPERATIONS(Parent company only)
 For the Years Ended December 31, For the Years Ended December 31,
 2015 2014 2013 2017 2016 2015
 (in thousands) (dollars in thousands)
Income:      
Income      
Interest income $27
 $36
 $20
 $36
 $31
 $27
Noninterest income 
 2
 3
 
 
 
Total income 27
 38
 23
 36
 31
 27
Expense:  
  
  
Expense  
  
  
Interest expense 3,937
 1,543
 307
 4,720
 3,844
 3,937
Noninterest expense 2,831
 1,874
 2,141
 8,956
 3,769
 2,831
Total expense 6,768
 3,417
 2,448
 13,676
 7,613
 6,768
Loss before income tax provision (6,741) (3,379) (2,425) (13,640) (7,582) (6,741)
Income tax benefit (2,783) (1,275) (827) (5,417) (2,785) (2,783)
Net loss (parent only) (3,958) (2,104) (1,598) (8,223) (4,797) (3,958)
Equity in net earnings of subsidiaries 29,473
 18,720
 10,591
 68,323
 44,900
 29,473
Net income $25,515
 $16,616
 $8,993
 $60,100
 $40,103
 $25,515


120

INDEX


 
INDEX
PACIFIC PREMIER BANCORP, INC.
SUMMARY STATEMENTS OF CASH FLOWS
(Parent company only)
  For the Years Ended December 31,
  2015 2014 2013
CASH FLOWS FROM OPERATING ACTIVITIES (in thousands)
Net income $25,515
 $16,616
 $8,993
Adjustments to reconcile net income to cash used in operating activities:  
  
  
Share-based compensation expense 1,165
 514
 943
Equity in undistributed earnings of subsidiaries and dividends from the bank (29,473) (16,248) (10,591)
Increase (decrease) in accrued expenses and other liabilities 166
 1,560
 (39)
Increase (decrease) in current and deferred taxes 3,566
 (286) 1,153
Decrease (increase) in other assets (6,893) 232
 (504)
Net cash used in operating activities (5,954) 2,388
 (45)
CASH FLOWS FROM FINANCING ACTIVITIES:  
  
  
Proceeds from issuance of common stock, net of issuance cost 
 
 4,560
Repurchase of common stock (116) (5,638) (59)
Proceeds from exercise of options and warrants 758
 267
 90
Capital contribution to Bank (10,000) (40,000) (8,700)
Proceeds from issuance of subordinated debentures 
 58,834
 
Net cash provided by (used in) financing activities (9,358) 13,463
 (4,109)
Net increase (decrease) in cash and cash equivalents (15,312) 15,851
 (4,154)
Cash and cash equivalents, beginning of year 18,724
 2,873
 7,027
Cash and cash equivalents, end of year $3,412
 $18,724
 $2,873

PACIFIC PREMIER BANCORP, INC.
SUMMARY STATEMENTS OF CASH FLOWS
(Parent company only)
  For the Years Ended December 31,
  2017 2016 2015
CASH FLOWS FROM OPERATING ACTIVITIES (dollars in thousands)
Net income $60,100
 $40,103
 $25,515
Adjustments to reconcile net income to cash used in operating activities:  
  
  
Share-based compensation expense 5,809
 2,729
 1,165
Equity in undistributed earnings of subsidiaries and dividends from the bank (68,323) (44,901) (29,473)
Increase (decrease) in accrued expenses and other liabilities (365) 240
 166
(Decrease) increase in current and deferred taxes (896) 
 3,566
Decrease (increase) in other assets 1,714
 4,794
 (6,893)
Net cash (used in) provided by operating activities (1,961) 2,965
 (5,954)
CASH FLOWS FROM FINANCING ACTIVITIES:  
  
  
Proceeds from issuance of common stock, net of issuance cost 
 
 
Repurchase of common stock (1,258) (125) (116)
Proceeds from exercise of options and warrants 4,592
 1,107
 758
Capital contribution to Bank 600
 7,765
 (10,000)
Proceeds from issuance of subordinated debentures 
 
 
Net cash provided by (used in) financing activities 3,934
 8,747
 (9,358)
Net increase (decrease) in cash and cash equivalents 1,973
 11,712
 (15,312)
Cash and cash equivalents, beginning of year 15,124
 3,412
 18,724
Cash and cash equivalents, end of year $17,097
 $15,124
 $3,412
  
23.25. Acquisitions

Independence BankPlaza Bancorp Acquisition

On January 26, 2015,Effective as of November 1, 2017, the Company completed itsthe acquisition of IndependencePlaza Bancorp (OTC Market Group Pink Sheets: PLZZ) (“Plaza”), the holding company of Plaza Bank, (“IDPK”)a California chartered banking corporation headquartered in exchange forIrvine, California with $1.3 billion in total assets, $1.1 billion in gross loans and $1.1 billion in total deposits.

Pursuant to the terms of the merger agreement, each outstanding share of PLZZ common stock was converted into the right to receive 0.2000 shares of Company common stock. The value of the total deal consideration valued at $79.8was approximately $251 million, which consisted of $6.1 million of cash consideration for IDPK common stockholders, $1.5included approximately $6.5 million of aggregate cash consideration payable to the holders of IDPK stockunexercised options and warrants $1.3 million fair market valueexercisable for shares of warrants assumedPLZZ common stock, and the issuance of 4,480,6456,049,373 shares of the Corporation’sCompany's common stock, which had a value of $40.40 per share, which was valued at $70.9 million based on the closing stock price of the Company’sCompany'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 forOctober 31, 2017, the Companylast trading day prior to strengthen its competitive position as onethe consummation of the premier community banks headquartered in Southern California. Additionally, the IDPK acquisition enhanced and connected the Company’s footprint in Southern California.acquisition.

Goodwill in the amount of $27.9$122 million was recognized in the IDPKPLZZ 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.


121

INDEX

The following table represents the assets acquired and liabilities assumed of IDPKPLZZ as of January 26, 2015November 1, 2017 and the provisional fair value adjustments and amounts recorded by the Company in 20152017 under the acquisition method of accounting:accounting, which are subject to adjustment for up to one year after the merger date: 

PLZZ Fair Value Fair
IDPK
Book Value
 
Fair Value
Adjustments
 
Fair
Value
Book Value Adjustment Value
(dollars in thousands)(dollars in thousands)
ASSETS ACQUIRED      
Cash and cash equivalents$10,486
 $
 $10,486
$150,459
 $
 $150,459
Investment securities56,503
 (382) 56,121
Loans, gross339,502
 (6,609) 332,893
1,069,359
 (6,418) 1,062,941
Allowance for loan losses(3,301) 3,301
 
(13,009) 13,009
 
Deferred income taxes5,266
 (472) 4,794
Bank owned life insurance11,276
 
 11,276
Fixed assets7,389
 (194) 7,195
Core deposit intangible904
 1,999
 2,903
198
 11,382
 11,580
Deferred tax assets11,849
 (6,876) 4,973
Other assets3,756
 780
 4,536
19,495
 (330) 19,165
Total assets acquired$424,392
 $(1,383) $423,009
$1,245,740
 $10,573
 $1,256,313
     
LIABILITIES ASSUMED             
Deposits335,685
 333
 336,018
$1,081,727
 $1,224
 $1,082,951
FHLB advances33,300
 
 33,300
Other liabilities1,916
 (120) 1,796
Borrowings40,755
 397
 41,152
Other Liabilities8,956
 (622) 8,334
Total liabilities assumed370,901
 213
 371,114
1,131,438
 999
 1,132,437
Excess of assets acquired over liabilities assumed$53,491
 $(1,596) 51,895
$114,302
 $9,574
 123,876
Consideration paid    79,777
      250,939
Paid by PLZZ prior to close    6,544
Capitalized merger-related expense    1,366
Goodwill recognized    $27,882
      $121,885

Heritage Oaks Bancorp Acquisition

Infinity Franchise Holdings Acquisition
On November 18, 2013,Effective as of April 1, 2017, the Company announced that it had entered intocompleted the acquisition of HEOP, the holding company of Heritage Oaks Bank, a definitive agreementPaso Robles, California based state-chartered bank (“Heritage Oaks Bank”) with $2.0 billion in total assets, $1.4 billion in gross loans and $1.7 billion in total deposits at March 31, 2017. Heritage Oaks Bank operates branches within San Luis Obispo and Santa Barbara Counties and a loan production office in Ventura County.

Pursuant to acquire privately held Infinity Franchise Holdings, LLC (“Infinity Holdings”) and its wholly owned operating subsidiary Infinity Franchise Capital, LLC (“IFC” and together with Infinity Holdings, “Infinity”), a national lender to franchisees in the quick service restaurant (“QSR”) industry, and other direct and indirect subsidiaries utilized in its business.  The acquisition was completed on January 30, 2014, whereby we acquired $81.0 million in assets, $709,000 in liabilities and paid off their credit facility of $67.6 million.  Infinity had no delinquent loans or adversely classified assets asterms of the acquisition date.  The acquisitionmerger agreement, each outstanding share of Infinity further diversified our loan portfolio with commercial and industrial and owner-occupied commercial real estate loans and positively impacted our net interest margin.  The QSR franchisee lending business is a niche market that provides attractive growth opportunities forHEOP common stock was converted into the Company in the future.right to receive 0.3471 shares of corporate common stock. The value of the total deal consideration paid for the Infinity acquisition was $17.4approximately $465 million, which consistedincluded approximately $3.9 million of $9.0 million paid inaggregate cash consideration payable to holders of Heritage Oaks share-based compensation awards, and the issuance of 562,46911,959,022 shares of the Corporation’sCorporation's common stock, which was valued at $16.02had a value of $38.55 per share, as measured bywhich was the 10-day average closing price immediatelyof the Corporation's common stock on March 31, 2017, the last trading day prior to closingthe consummation of the transaction.acquisition.

Goodwill in the amount of $5.5$269 million was recognized in this 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 deductible for income tax purposes.


122

INDEX

The following table represents the assets acquired and liabilities assumed of IFC 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:
 
IFC
Book Value
 
Fair Value
Adjustments
 
Fair
Value
 (dollars in thousands)
ASSETS ACQUIRED     
Cash and cash equivalents$555
 $
 $555
Loans78,833
 
 78,833
Deferred loan costs1,082
 (1,082) 
Allowance for loan losses(268) 268
 
Other assets776
 
 776
Total assets acquired$80,978
 $(814) $80,164
LIABILITIES ASSUMED 
  
  
Bank loan$67,617
 $
 $67,617
Accrued compensation495
 
 495
Other liabilities214
 
 214
Total liabilities assumed68,326
 
 68,326
Excess of assets acquired over liabilities assumed$12,652
 $(814) 11,838
Consideration paid 
  
 17,360
Goodwill recognized 
  
 $5,522
San Diego Trust Bank Acquisition
On June 25, 2013, the Company completed its acquisition of San Diego Trust Bank (“SDTB”) in exchange for consideration valued at $30.6 million which consisted of $16.2 million of cash and 1,198,255 shares of the Corporation’s common stock.
SDTB was a San Diego, California based state-chartered bank.  The acquisition was an opportunity for the Company to acquire a banking network that complemented our existing banking franchise and expanded into a new market area.  Additionally, the SDTB acquisition improved the Company’s deposit base by lowering our cost of deposits and providing an opportunity to accelerate future core deposit growth in the San Diego, California, market area.
Goodwill in the amount of $5.6 million was recognized in thisHEOP 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.


123

INDEX

The following table represents the assets acquired and liabilities assumed of SDTBHEOP as of June 25, 2013April 1, 2017 and the provisional fair value adjustments and amounts recorded by the Company in 20132017 under the acquisition method of accounting: 
SDTB
Book Value
 
Fair Value
Adjustments
 
Fair
Value
(dollars in thousands)
HEOP
Book Value
 
Fair Value
Adjustments
 
Fair
Value
ASSETS ACQUIRED     (dollars in thousands)
Cash and cash equivalents$30,252
 $
 $30,252
$78,728
 $
 $78,728
Investment securities124,960
 (155) 124,805
447,520
 (4,597) 442,923
Loans, gross42,945
 (223) 42,722
1,387,949
 (23,300) 1,364,649
Allowance for loan losses(1,013) 1,013
 
(17,200) 17,200
 
Other real estate owned752
 
 752
Fixed assets35,567
 (665) 34,902
Core deposit intangible
 2,836
 2,836

 28,123
 28,123
Deferred tax assets17,850
 (6,567) 11,283
Other assets9,856
 
 9,856
55,223
 (9) 55,214
Total assets acquired$207,752
 $3,471
 $211,223
$2,005,637
 $10,185
 $2,015,822
LIABILITIES ASSUMED 
  
  
 
  
  
Deposits$183,901
 $6
 $183,907
$1,668,079
 $1,471
 $1,669,550
Deferred tax liability (asset)(333) 1,507
 1,174
Other liabilities1,823
 (729) 1,094
Borrowings141,996
 (2,962) 139,034
Other Liabilities7,290
 771
 8,061
Total liabilities assumed185,391
 784
 186,175
1,817,365
 (720) 1,816,645
Excess of assets acquired over liabilities assumed$22,361
 $2,687
 25,048
$188,272
 $10,905
 199,177
Consideration paid 
  
 30,622
 
  
 465,482
Capitalized merger-related expense    2,649
Goodwill recognized 
  
 $5,574
 
  
 $268,954

First AssociationThe fair values are estimates and are subject to adjustment for up to one year after the merger date. In the third quarter of 2017, the Company made a $1.1 million adjustment to deferred tax assets and the deal consideration.

Security Bank Acquisition

On March 15, 2013,January 31, 2016, the Company completed its acquisition of First Association Bank (“FAB”)SCAF whereby we acquired $714 million in exchange for consideration valued astotal assets, $456 million in loans and $637 million in total deposits. Under the terms of the closing at $57.9 million which consistedmerger agreement, each share of $43.0 million of cash and 1,279,217SCAF common stock was converted into the right to receive 0.9629 shares of the Corporation’s common stock. The value of the total deal consideration was $120 million, which includes $788,000 of aggregate cash consideration to the holders of SCAF stock options and the issuance of 5,815,051 shares of the Corporation’s common stock, valued at $119.4 million based on a closing stock price of $20.53 per share on January 29, 2016.

FABSCAF was the holding company of Security Bank of California, a Dallas, Texas,Riverside, California, based state-chartered bank which specializedwith six branches located in providing commercial banking services to home owner association (“HOA”) management companies throughout the United States.  The FAB acquisition was an opportunity for the Company to acquire a highly efficient, consistently profitableRiverside County, San Bernardino County and niche-focused business that complimented our banking franchise.  Additionally, this acquisition improved the Company’s deposit base by lowering our cost of deposits and providing a platform to accelerate future core deposit growth from HOAs.Orange County.

Goodwill in the amount of $11.9$51.7 million was recognized in thisthe SCAF acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.


124

INDEX

The following table represents the assets acquired and liabilities assumed of FABSCAF as of March 15, 2013,January 31, 2016 and the provisional fair value adjustments and amounts recorded by the Company in 20132016 under the acquisition method of accounting:
INDEX
 
FAB
Book Value
 
Fair Value
Adjustments
 
Fair
Value
ASSETS ACQUIRED(dollars in thousands)
Cash and cash equivalents$167,663
 $
 $167,663
Investment securities219,913
 2,478
 222,391
Loans, gross26,264
 158
 26,422
Allowance for loan losses(224) 224
 
Core deposit intangible
 1,930
 1,930
Other assets5,823
 
 5,823
Total assets acquired$419,439
 $4,790
 $424,229
LIABILITIES ASSUMED 
  
  
Deposits$356,737
 $81
 $356,818
Borrowings16,905
 
 16,905
Deferred tax liability
 3,918
 3,918
Other Liabilities536
 
 536
Total liabilities assumed374,178
 3,999
 378,177
Excess of assets acquired over liabilities assumed$45,261
 $791
 46,052
Consideration paid 
  
 57,906
Goodwill recognized 
  
 $11,854

 
SCAF
Book Value
 
Fair Value
Adjustments
 
Fair
Value
 (dollars in thousands)
ASSETS ACQUIRED     
Cash and cash equivalents$40,947
 $
 $40,947
Interest-bearing deposits with financial institutions1,972
 
 1,972
Investment securities191,881
 (1,627) 190,254
Loans, gross467,197
 (11,039) 456,158
Allowance for loan losses(7,399) 7,399
 
Fixed assets5,335
 (1,145) 4,190
Core deposit intangible493
 3,826
 4,319
Deferred tax assets5,618
 1,130
 6,748
Other assets10,589
 (1,227) 9,362
Total assets acquired$716,633
 $(2,683) $713,950
LIABILITIES ASSUMED 
  
  
Deposits$636,450
 $141
 $636,591
Borrowings
 
 
Deferred tax liability
 
 
Other Liabilities9,063
 (220) 8,843
Total liabilities assumed645,513
 (79) 645,434
Excess of assets acquired over liabilities assumed$71,120
 $(2,604) 68,516
Consideration paid 
  
 120,174
Goodwill recognized 
  
 $51,658

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

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

The Company also determined the fair value of the core deposit intangible, securities and deposits with the assistance of third-party valuations.  Thevaluations as well as the fair value of other real estate owned (“OREO”)OREO was based on recent appraisals of the properties.

ThereThe core deposit intangible on non-maturing deposit was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets are calculated as if they were no purchased credit impaired loans acquiredstand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to take advantage of potential tax benefits resulting from FAB, SDTB or IFC.  the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount rate applicable to the asset.

INDEX

In determining the fair value of certificates of deposit, a discounted cash flow analysis was used, which involved present valuing the contractual payments over the remaining life of the certificates of deposit at market-based interest rates.

For loans acquired from FAB, SDTB, IFCSCAF, HEOP and IDPK,PLZZ, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows:
 
Acquired Loans Acquired Loans
FAB SDTB IFC IDPK SCAF HEOP PLZZ
(dollars in thousands) (dollars in thousands)
Contractual amounts due$32,107
 $47,251
 $98,320
 $453,987
 $539,806
 $1,717,230
 $1,703,246
Cash flows not expected to be collected
 
 
 3,795
 2,765
 4,442
 20,152
Expected cash flows32,107
 47,251
 98,320
 450,192
 537,041
 1,712,788
 1,683,094
Interest component of expected cash flows5,685
 4,529
 19,487
 117,299
 80,883
 348,100
 625,592
Fair value of acquired loans$26,422
 $42,722
 $78,833
 $332,893
 $456,158
 $1,364,688
 $1,057,502

In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan losses that had been previously recorded by FAB, SDTB, IFCSCAF, HEOP and IDPKPLZZ.
 
The operating results of the Company for the twelve months ending December 31, 20152017 include the operating results of FAB, SDTB, IFC,SCAF, HEOP and IDPKPLZZ since their respective acquisition dates. The following table presents the net interest and other income, net income and earnings per share as if the merger with FAB, SDTB, IFC

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SCAF, HEOP and IDPKPLZZ were effective as of January 1, 2015, 20142017, 2016 and 20132015 for the respective year in which each acquisition was closed. The unaudited pro forma information in the following table is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the mergers been completed at the beginning of each respective year. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

Unaudited pro forma net interest and other income, net income and earnings per share presented below:
Twelve months Ended December 31,Year Ended December 31,
2015 2014 20132017 2016 2015
Net interest and other income$122,426
 $110,727
 $84,988
$342,159
 $258,970
 $246,622
Net income25,862
 20,428
 11,123
72,316
 71,722
 58,257
Basic earnings per share$1.22
 $0.95
 $0.54
1.58
 1.58
 1.30
Diluted earnings per share$1.20
 $0.94
 $0.52
1.55
 1.56
 1.29

24.26. Subsequent Events
 
Pacific Premier Bancorp, Inc. and Security California BancorpGrandpoint Capital, Inc.

On October 2, 2015, the Company announced that it hadFebruary 9, 2018, we entered into ana definitive agreement with Grandpoint Capital, Inc. to acquire SecurityGrandpoint and its wholly-owned, California-chartered state bank subsidiary, Grandpoint Bank. Grandpoint is headquartered in Los Angeles, California Bancorp (OTCQB: SCAF) ("Security"), the holding company of Security Bank of California, a Riverside, California, based state-chartered bank with six branches located in Riverside County, San Bernardino County and Orange County. The acquisition was completed on January 31, 2016, whereby we acquired $715 million$3.2 billion in total assets, $467 million$2.4 billion in gross loans and $635 million$2.4 billion in total deposits.deposits at December 31, 2017. Grandpoint operates 14 regional offices in Southern California, Arizona and Vancouver, Washington. Under the terms of the mergerdefinitive agreement, each shareholders of SecurityGrandpoint common stock was converted intowill have the right to receive 0.96290.4750 shares of Company common stock.

The valueproposed transaction is expected to close in the third quarter of 2018, subject to satisfaction of customary closing conditions, including regulatory approvals and approval of Grandpoint’s and the Corporation’s shareholders. Certain Grandpoint shareholders, as well as Grandpoint's directors and executive officers have entered

into agreements with the Corporation pursuant to which they have committed to provide written consents with respect to shares of Grandpoint common stock in favor of the total deal consideration was $120 million, which includes $788,100 of aggregate cash consideration to the holders of Security stock options (based on the excess of $18.75 per share over the average exercise price of $15.58 per share for 248,459 options).acquisition.

Related Party Loan

On January 8, 2018, the Company entered into a new related party loan having a commitment amount of $4.0 million.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
  
ITEM 9A.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(c) and 15d-15(c)) under the Exchange Act as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
 
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this Annual Report on Form 10-K in providing reasonable assurance that information we are required to disclose in periodic reports that we file or submit to the SEC pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated

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and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
 
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with United States generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with the authorization of its management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Our management assessed the effectiveness of its internal control over financial reporting as of December 31, 2015.2017. In making this assessment, management used the framework set forth in the report entitled

Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. As permitted, the Company has excluded the operations of Plaza Bancorp acquired November 1, 2017, which is described in Note 23 to the consolidated financial statements. The assets acquired in this acquisition and excluded from management’s assessment on internal control over financial reporting comprised approximately 15.9% of total consolidated assets at acquisition, before purchase accounting adjustments.Based on this assessment, our management believes that, as of December 31, 2015,2017, our internal control over financial reporting was effective.
 
Vavrinek, Trine, Day & Co.,Crowe Horwath LLP, the independent registered public accounting firm that audited the Company’s financial statements included in the Annual Report, issued an audit report on the Company’s internal control over financial reporting as of, and for the year ended December 31, 2015.  Vavrinek, Trine, Day & Co.,2017. Crowe Horwath, LLP’s audit report appears in Item 8 of this Annual Report on Form 10-K.Report.
 
Changes in Internal Control over Financial Reporting
 
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
 
As of the end of the fourth quarter ended December 31, 2015,2017, there were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
  
ITEM 9B.  OTHER INFORMATION
 
None
 

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PART III
  

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by this item with respect to our directors and certain corporate governance practices is contained in our Proxy Statement for our 20162018 Annual Meeting of Stockholders (the “Proxy Statement”), expected to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2015, under the headings “Corporate Governance;” “Item 1—Election of Directors;” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which2017. Such information is incorporated herein by reference. The information required by this item with respect to our executive officers is contained in the Proxy Statement under the headings “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference.
We maintain a Code of Business Conduct and Ethics applicable to our Board of Directors, principal executive officer, and principal financial officer, as well as all of our other employees. Our Code of Business Conduct and Ethics can be found on our internet website located at www.ppbi.com.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by this item is containedItem will appear in the Proxy Statement under the headings “Executive Compensation;” “Compensation Committee Interlocks and Insider Participation;” and “Compensation Committee Report,” whichwe will deliver to our stockholders in connection with our 2018 Annual Meeting of Stockholders. Such information is incorporated herein by reference.
  
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
Equity Compensation Plan Information
 
The following table provides information as of December 31, 2015,2017, with respect to options and RSUs outstanding and shares available for future awards under the Company’s active stockequity incentive plans.

Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options/Warrants Weighted-Average Exercise Price of Outstanding Options/Warrants Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a))
 (a) (b) (c) (a) (b) (c)
Equity compensation plans approved by security holders:Equity compensation plans approved by security holders:    Equity compensation plans approved by security holders:    
2004 Long-term Incentive Plan 318,355
 $8.33
 
 114,454
 $8.25
 
Amended and Restated 2012 Stock Long-term Incentive Plan 740,731
 $12.64
 704,105
 755,362
 14.03
 3,594,149
2005 Equity Incentive Plan 48,532
 19.15
 
2015 Equity Incentive Plan 36,175
 21.78
 
Equity compensation plans not approved by security holders 
 
 
 
 
 
Total Equity Compensation plans 1,059,086
 $11.35
 704,105
 954,523
 $13.89
 3,594,149

Additional information required by this item is containedinformation required by this Item will appear in the Proxy Statement under the headings “Principal Holderswe will deliver to our stockholders in connection with our 2018 Annual Meeting of Common Stock” and “Security Ownership of Directors and Executives Officers,” whichStockholders. Such information is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item is containedItem will appear in the Proxy Statement under the headings “Transactionswe will deliver to our stockholders in connection with Certain Related Persons” and “Item 1—Electionour 2018 Annual Meeting of Directors,” whichStockholders. Such information is incorporated herein by reference.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this item is containedItem will appear in the Proxy Statement under the heading “Item 11.  Ratificationwe will deliver to our stockholders in connection with our 2018 Annual Meeting of the Appointment of Vavrinek, Trine, Day & Co., LLP as the Company’s Independent Auditor for the Fiscal Year Ended December 31, 2015,” whichStockholders. Such information is incorporated herein by reference.

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PART IV
  
ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a)           Documents filed as part of this report.
 
(1)The following financial statements are incorporated by reference from Item 8 hereof:

Report of Independent Auditors’ Report.Registered Public Accounting Firm.
 
Consolidated Statements of Financial Condition as of December 31, 20152017 and 2014.2016.
 
Consolidated Statements of Income for the Years Ended December 31, 2015, 20142017, 2016 and 2013.2015.
 
Consolidated Statement of Stockholders’ Equity and Other Comprehensive Income for the Years Ended December 31, 2015, 20142017, 2016 and 2013.2015.

Consolidated Statement of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015.
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 20142017, 2016 and 2013.2015.
 
Notes to Consolidated Financial Statements.
 
(2)All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not applicable or the required information is included in the consolidated financial statements or related notes thereto.
(3)The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.


Exhibit No.Description
3.1
Indenture from PPBI Trust I (8)
4.3Form
2000 Stock Incentive Plan. (10)*
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9Employment Agreement between Pacific Premier Bancorp, Inc. and Pacific Premier Bank and Steven Gardner dated January 1, 2011. (14)*
10.10
10.11
10.12
10.13Amended and Restated Employment Agreement between Pacific Premier Bank and Eddie Wilcox dated April 7, 2014 (16)*
10.14Amended and Restated Employment Agreement between Pacific Premier Bank and Mike Karr dated April 7, 2014 (16)*
10.15Employment Agreement between Pacific Premier Bank and Thomas Rice dated April 7, 2014 (16)*
10.16
10.17
10.18Employment Agreement between Pacific Premier Bancorp, Inc., Pacific Premier Bank and E. Allen Nicholson dated May 22, 2015 (17)*
10.19
21
23
101.INSXBRL Instance Document #
101.SCHXBRL Taxonomy Extension Schema Document #
101.CALXBRL Taxonomy Extension Calculation Linkbase Document #
101.LABXBRL Taxonomy Extension Label Linkbase Document #
101.PREXBRL Taxonomy Extension Presentation Linkbase Document #
101.DEFXBRL Taxonomy Extension Definition Linkbase Document #
  
(1)Incorporated by reference from the Registrant’s Form 8-K/A filed with the SEC on May 3, 2012.
(2)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on October 15, 2012.
(3)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on March 6, 2013.
(4)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on October 22, 2014.
(5)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on October 1, 2015.
(6)Incorporated by reference from the Registrant's Form 8-K filed with the SEC on December 31, 2016.
(7)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 29, 2016.
(7)(8)Incorporated by reference from the Registrant’s Registration Statement on Form S-1 (Registration No. 333-20497) filed with the SEC on January 27, 1997.
(8)(9)Incorporated by reference from the Registrant’s Form 10-Q filed with the SEC on May 3, 2004.
(9)(10)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on September 2, 2014.
(10)(11)Incorporated by reference from the Registrant’s Proxy Statement filed with the SEC on May 1, 2000.
(11)(12)Incorporated by reference from the Registrant’s Proxy Statement filed with the SEC on April 23, 2004.
(12)(13)Incorporated by reference from the Registrant’s Post-Effective Amendment No. 1 to Form S-8 (Registration No. 333-117857) filed with the SEC on September 3, 2004.
(13)(14)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on May 19, 2006.
(14)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on January 6, 2011.
(15)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on June 4, 2012.
(16)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on April 10, 2014.June 2, 2017.
(17)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on May 28, 2015.
(18)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on February 1, 2016.
(18)Incorporated by reference from the Registrant's Form 8-K filed with the SEC on June 2, 2016.
(19)Incorporated by reference from the Registrant's Form 8-K filed with the SEC on August 9, 2017.
(20)Incorporated by reference from the Registrant’s Form 8-K filed with the SEC on November 16, 2017.
(21)Incorporated by reference from the Registrant's Form 8-K filed with the SEC on February 12, 2018.
(22)Incorporated by reference from the Registrant’s Annual Report on Form 10-K filed with the SEC on March 16, 2017.
*Management contract or compensatory plan or arrangement.
**Filed herewith.
Long-term borrowing instruments are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The Company undertakes to furnish copies of such instruments to the Commission upon request.
#Attached as Exhibit 101 to this Annual Report on Form 10-K for the period ended December 31, 20152016 of Pacific Premier Bancorp., Inc. are the following documents in XBRL (eXtensive Business Reporting Language): (i) Consolidated Statements of Financial Condition as of December 31, 20152016 and 2014;2015; (ii) Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 2014 and 2013;2014; (iii) Consolidated Statement of Stockholders’ Equity and Other Comprehensive Income for the Years Ended December 31, 2016, 2015 2014 and 2014; (iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 2014 and 2013,2014, and (v) Notes to Consolidated Financial Statements.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 PACIFIC PREMIER BANCORP, INC.
 By: /s/ SteveSteven R. Gardner
   SteveSteven R. Gardner
   Chairman, President and Chief Executive Officer
 
DATED: March 4, 2016February 28, 2018
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 

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  SignatureTitleDate
   
 
/s/ Steven R. Gardner
Chairman, President and Chief Executive Officer
(principal executive officer)
March 4, 2016February 28, 2018
Steven R. Gardner  
   
 
/s/ E. Allen NicholsonRonald J. Nicolas, Jr.
Senior Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
March 4, 2016February 28, 2018
E. Allen NicholsonRonald J. Nicolas, Jr.
/s/ John CaronaDirectorFebruary 28, 2018
John Carona
/s/ Ayad A. FargoDirectorFebruary 28, 2018
Ayad A Fargo
/s/ Joseph L. GarrettDirectorFebruary 28, 2018
Joseph L. Garrett  
   
/s/ Jeff C. JonesChairman of the Board of DirectorsDirectorMarch 4, 2016February 28, 2018
Jeff C. Jones  
   
/s/ John D. GoddardSimone F. LagomarsinoDirectorMarch 4, 2016February 28, 2018
John D. GoddardSimone F. Lagomarsino  
   
/s/ Michael L. McKennonJ. MorrisDirectorMarch 4, 2016February 28, 2018
Michael L. McKennonJ. Morris  
   
/s/ Kenneth BoudreauMichael E. PfauDirectorMarch 4, 2016February 28, 2018
Kenneth BoudreauMichael E. Pfau  
   
/s/ Joe GarrettZareh H. SarrafianDirectorMarch 4, 2016February 28, 2018
Joe Garrett
/s/ John CaronaDirectorMarch 4, 2016
John CaronaZareh H. Sarrafian  
   
/s/ Cora M. TellezDirectorMarch 4, 2016February 28, 2018
Cora M. Tellez  
/s/ Ayad A. FargoDirectorMarch 4, 2016
Ayad A. Fargo
/s/ Zareh H. SarrafianDirectorMarch 4, 2016
Zareh H. Sarrafian

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