XNAS:PPBI Pacific Premier Bancorp Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
 
( )        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File Number 0-22193
 
(Exact name of registrant as specified in its charter)
 
DELAWARE
33-0743196
(State or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification No.)
 
 
 
1600 SUNFLOWER AVENUE, 2ND FLOOR, COSTA MESA, CALIFORNIA 92626
 
(Address of principal executive offices and zip code)
 
(714) 431-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X ] No [_]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] No [_]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
 
Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
Smaller reporting company
[ X ]
       
(Do not check if a smaller
 reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
 
The number of shares outstanding of the registrant's common stock as of May 15, 2012 was 10,329,934.
 
 
 

 

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED MARCH 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except share data)
 
   
March 31,
   
December 31,
   
March 31,
 
ASSETS
 
2012
   
2011
   
2011
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Cash and due from banks
  $ 93,622     $ 60,207     $ 46,302  
Federal funds sold
    27       28       10,578  
Cash and cash equivalents
    93,649       60,235       56,880  
Investment securities available for sale
    150,739       115,645       140,927  
FHLB stock/Federal Reserve Bank stock, at cost
    11,975       12,475       14,161  
Loans held for sale, net
    62       -       -  
Loans held for investment
    695,195       738,589       699,953  
Allowance for loan losses
    (8,116 )     (8,522 )     (8,879 )
Loans held for investment, net
    687,079       730,067       691,074  
Accrued interest receivable
    3,632       3,885       4,014  
Other real estate owned
    1,768       1,231       10,509  
Premises and equipment
    9,550       9,819       8,166  
Deferred income taxes
    8,654       8,998       8,977  
Bank owned life insurance
    13,096       12,977       12,583  
Intangible assets
    2,013       2,069       2,243  
Other assets
    2,954       3,727       6,948  
TOTAL ASSETS
  $ 985,171     $ 961,128     $ 956,482  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
LIABILITIES:
                       
Deposit accounts:
                       
Noninterest bearing
  $ 125,448     $ 112,313     $ 118,241  
Interest bearing:
                       
Transaction accounts
    311,152       287,876       287,694  
Retail certificates of deposit
    410,117       428,688       413,126  
Wholesale certificates of deposit
    -       -       13,725  
Total deposits
    846,717       828,877       832,786  
Other borrowings
    28,500       28,500       28,500  
Subordinated debentures
    10,310       10,310       10,310  
Accrued expenses and other liabilities
    10,165       6,664       5,217  
TOTAL LIABILITIES
    895,692       874,351       876,813  
STOCKHOLDERS’ EQUITY:
                       
Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares outstanding
    -       -       -  
Common stock, $.01 par value; 15,000,000 shares authorized; 10,329,934 shares at March 31, 2012, 10,337,626 shares at December 31, 2011, and 10,084,626 shares at March 31, 2011 issued and outstanding
    103       103       101  
Additional paid-in capital
    76,239       76,310       76,326  
Retained earnings
    12,738       10,046       4,246  
Accumulated other comprehensive income (loss), net of tax (benefit) of $278 at March 31, 2012, $221 at December 31, 2011, and ($702) at March 31, 2011
    399       318       (1,004 )
TOTAL STOCKHOLDERS’ EQUITY
    89,479       86,777       79,669  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 985,171     $ 961,128     $ 956,482  

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


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except per share data)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31, 2012
   
March 31, 2011
 
INTEREST INCOME
           
Loans
  $ 11,237     $ 10,533  
Investment securities and other interest-earning assets
    879       1,201  
Total interest income
    12,116       11,734  
INTEREST EXPENSE
               
Interest-bearing deposits:
               
Interest on transaction accounts
    329       445  
Interest on certificates of deposit
    1,427       1,823  
Total interest-bearing deposits
    1,756       2,268  
Other borrowings
    235       288  
Subordinated debentures
    84       76  
Total interest expense
    2,075       2,632  
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    10,041       9,102  
PROVISION FOR LOAN LOSSES
    -       106  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    10,041       8,996  
NONINTEREST INCOME
               
Loan servicing fees
    177       217  
Deposit fees
    501       448  
Net gain from sales of loans
    -       86  
Net gain from sales of investment securities
    -       164  
Other-than-temporary impairment loss on investment securities, net
    (37 )     (214 )
Gain on FDIC transaction
    -       4,189  
Other income
    298       349  
Total noninterest income
    939       5,239  
NONINTEREST EXPENSE
               
Compensation and benefits
    3,520       3,181  
Premises and occupancy
    878       800  
Data processing and communications
    367       301  
Other real estate owned operations, net
    147       263  
FDIC insurance premiums
    133       264  
Legal and audit
    486       392  
Marketing expense
    215       229  
Office and postage expense
    163       167  
Other expense
    732       762  
Total noninterest expense
    6,641       6,359  
NET INCOME BEFORE INCOME TAXES
    4,339       7,876  
INCOME TAX
    1,647       3,104  
NET INCOME
  $ 2,692     $ 4,772  
                 
EARNINGS PER SHARE
               
Basic
  $ 0.26     $ 0.47  
Diluted
  $ 0.25     $ 0.44  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
Basic
    10,335,935       10,049,311  
Diluted
    10,626,174       10,857,123  

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


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
 
(dollars in thousands)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
             
Net Income
  $ 2,692     $ 4,772  
Other comprehensive income (loss), net of tax:
               
Unrealized holding gains on securities arising during the period, net of tax
    81       132  
Reclassification adjustment for net gain on sale of securities included in net income, net of tax
    -       (222 )
Net unrealized gain (loss) on securities, net of tax
    81       (90 )
Comprehensive Income
  $ 2,773     $ 4,682  

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



PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
 
(dollars in thousands)
 
(unaudited)
 
   
Common Stock Shares
   
Amount
   
Additional Paid-in Capital
   
Accumulated Retained
Earnings (Deficit)
   
Accumulated Other Comprehensive Income (Loss)
   
Total Stockholders’ Equity
 
                                     
Balance at December 31, 2011
    10,337,626     $ 103     $ 76,310     $ 10,046     $ 318     $ 86,777  
Total comprehensive income
                            2,692       81       2,773  
Share-based compensation expense
                    8                       8  
Common stock repurchased and retired
    (13,022 )     -       (102 )                     (102 )
Stock options exercised
    5,330       -       23                       23  
Balance at March 31, 2012
    10,329,934     $ 103     $ 76,239     $ 12,738     $ 399     $ 89,479  
                                                 
Balance at December 31, 2010
    10,033,836     $ 100     $ 79,942     $ (526 )   $ (914 )   $ 78,602  
Total comprehensive income
                            4,772       (90 )     4,682  
Share-based compensation expense
                    13                       13  
Common stock repurchased and retired
    (10,610 )     (1 )     (69 )                     (70 )
Warrants purchased and retired
                    (3,660 )                     (3,660 )
Warrants exercised
    41,400       1       31                       32  
Stock options exercised
    20,000       1       69                       70  
Balance at March 31, 2011
    10,084,626     $ 101     $ 76,326     $ 4,246     $ (1,004 )   $ 79,669  

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


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(in thousands)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 2,692     $ 4,772  
Adjustments to net income:
               
Depreciation and amortization expense
    312       265  
Provision for loan losses
    -       106  
Share-based compensation expense
    8       13  
Loss on sale and disposal of premises and equipment
    -       6  
Loss (gain) on sale of other real estate owned
    (35 )     16  
Write down of other real estate owned
    184       -  
Amortization of premium/discounts on securities held for sale, net
    140       235  
Amortization of loan mark-to-market discount from FDIC transaction
    (344 )     (65 )
Gain on sale of investment securities available for sale
    -       (164 )
Other-than-temporary impairment loss on investment securities, net
    37       214  
Gain on sale of loans held for investment
    -       (86 )
Purchase and origination of loans held for sale
    (62 )     -  
Recoveries on loans
    17       -  
Gain on FDIC transaction
    -       (4,189 )
Deferred income tax provision
    344       248  
Change in accrued expenses and other liabilities, net
    (2,016 )     (4,905 )
Income from bank owned life insurance, net
    (119 )     (129 )
Change in accrued interest receivable and other assets, net
    459       2,450  
Net cash provided by (used in) operating activities
    1,617       (1,213 )
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale and principal payments on loans held for investment
    35,219       20,307  
Net change in undisbursed loan funds
    40,077       15,263  
Purchase and origination of loans held for investment
    (33,243 )     (21,451 )
Proceeds from sale of other real estate owned
    1,158       1,892  
Principal payments on securities available for sale
    2,719       5,749  
Purchase of securities available for sale
    (32,351 )     -  
Proceeds from sale or maturity of securities available for sale
    -       20,556  
Purchases of premises and equipment
    (43 )     (174 )
Purchase of Federal Reserve Bank stock
    -       495  
Redemption of Federal Home Loan Bank of San Francisco stock
    500       -  
Cash acquired in FDIC transaction
    -       26,389  
Net cash provided by investing activities
    14,036       69,026  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease) in deposit accounts
    17,840       (30,767 )
Repayment of FHLB advances and other borrowings
    -       (40,000 )
Proceeds from exercise of stock options
    23       32  
Warrants purchased and retired
    -       (3,660 )
Repurchase of common stock
    (102 )     -  
Net cash (used in) provided by financing activities
    17,761       (74,395 )
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    33,414       (6,582 )
CASH AND CASH EQUIVALENTS, beginning of period
    60,235       63,462  
CASH AND CASH EQUIVALENTS, end of period
  $ 93,649     $ 56,880  

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

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
(in thousands)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
SUPPLEMENTAL CASH FLOW DISCLOSURES
           
Interest paid
  $ 2,041     $ 2,624  
Income taxes paid
    1,475       115  
Assets acquired (liabilities assumed) in Canyon National acquisition (See Note 3):
    -          
Investment securities
    -       14,076  
FDIC receivable
    -       2,838  
Loans
    -       149,739  
Core deposit intangible
    -       2,270  
Other real estate owned
    -       11,953  
Fixed assets
    -       42  
Other assets
    -       1,599  
Deposits
    -       (204,678 )
Other liabilities
    -       (39 )
                 
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
               
Transfers from loans to other real estate owned
  $ 1,843     $ -  
Investment securities available for sale purchased and not settled
  $ 5,517     $ -  

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

 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
March 31, 2012
(UNAUDITED)
Note 1 - Basis of Presentation
 
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,” “we,” “our” or “us”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2012, December 31, 2011, and March 31, 2011, the results of its operations for the three months ended March 31, 2012 and 2011 and the changes in stockholders’ equity, other comprehensive income and cash flows for the three months ended March 31, 2012 and 2011.  Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2012.
 
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
The Company accounts for its investments in its wholly owned special purpose entity, PPBI Trust I, under the equity method whereby the subsidiary’s net earnings are recognized in the Company’s statement of income.
 
Note 2 – Recently Issued Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  The provisions of ASU No. 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets.  ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks, which exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs.  In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed.  The Company adopted the provisions of ASU No. 2011-04 effective January 1, 2012.  The fair value measurement provisions of ASU No. 2011-04 had no impact on the Company’s Consolidated Financial Statements.  See Note 9 to the Consolidated Financial Statements for the enhanced disclosures required by ASU No. 2011-04.
 
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.”  The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  Under either method, entities are required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  ASU No. 2011-05 also eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  ASU No. 2011-05 was effective for the Company’s interim reporting period beginning on or after January 1, 2012, with retrospective application required.  In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  The provisions of ASU No. 2011-12 defer indefinitely the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented.  ASU No. 2011-12, which shares the same effective date as ASU No. 2011-05, does not defer the requirement for entities to present components of comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  The Company adopted the provisions of ASU No. 2011-05 and ASU No. 2011-12 which resulted in a new statement of comprehensive income for the interim period ended March 31, 2012.  The adoption of ASU No. 2011-05 and ASU No. 2011-12 had no impact on the Company’s statements of income and condition.
 
In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.”  ASU No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale.  Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale.  The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee.  The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights.  ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control.  The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012.  The Company accounts for all of its repurchase agreements as collateralized financing arrangements. The Company adopted the provisions of ASU No. 2011-04 effective January 1, 2012.  The provisions of ASU No. 2011-03 had no impact on the Company’s Consolidated Financial Statements. 
 
 
Future Application of Accounting Pronouncements
 
In December 2011, the FASB issued ASU No. 2011-11, “Disclosures About Offsetting Assets and Liabilities.”  This project began as an attempt to converge the offsetting requirements under U.S. GAAP and IFRS.  However, as the Boards were not able to reach a converged solution with regards to offsetting requirements, the Boards developed convergent disclosure requirements to assist in reconciling differences in the offsetting requirements under U.S. GAAP and IFRS.  The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting arrangement.  ASU No. 2011-11 also requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements.  ASU No. 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013.  As the provisions of ASU No. 2011-11 only impact the disclosure requirements related to the offsetting of assets and liabilities, the adoption will have no impact on the Company’s Consolidated Financial Statements.
 
Note 3 – Canyon National Bank Acquisition
 
Effective February 11, 2011, the Bank acquired certain assets and assumed certain liabilities of Canyon National Bank (“Canyon National”) from the Federal Deposit Insurance Corporation (the “FDIC”) as receiver for Canyon National (the “Canyon National Acquisition”), pursuant to the terms of a purchase and assumption agreement entered into by the Bank and the FDIC on February 11, 2011. The Canyon National Acquisition included the three branches of Canyon National, all of which became branches of the Bank upon consummation of the Canyon National Acquisition.  As a result of the Canyon National Acquisition, the Bank acquired and received certain assets with a fair value of approximately $208.9 million, including $149.7 million of loans, $16.1 million of a FDIC receivable, $13.2 million of cash and cash equivalents, $12.8 million of investment securities, $12.0 million of other real estate owned, $2.3 million of a core deposit intangibles, $1.5 million of other assets and $1.3 million of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank stock.  Liabilities with a fair value of approximately $206.6 million were also assumed, including $204.7 million of deposits, $1.9 million in deferred tax liability and $39,000 of other liabilities.  The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB Accounting Standards Codification (“ASC”) Topic 820: Fair Value Measurements and Disclosures.
 
Note 4 – Loans Held for Investment
 
 
The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:

 
   
March 31, 2012
   
December 31, 2011
   
March 31, 2011
 
   
(in thousands)
 
Real estate loans:
                 
Multi-family
  $ 185,367     $ 193,830     $ 235,443  
Commercial non-owner occupied
    168,672       164,341       156,616  
One-to-four family (1)
    52,280       60,027       48,291  
Construction
    -       -       5,631  
Land
    7,246       6,438       10,002  
Business loans:
                       
Commercial owner occupied (2)
    146,904       152,299       156,379  
Commercial and industrial
    83,947       86,684       76,854  
Warehouse facilities
    44,246       67,518       9,352  
SBA
    3,948       4,727       3,268  
Other loans
    3,139       3,390       1,264  
Total gross loans (3)
    695,749       739,254       703,100  
Less loans held for sale, net
    62       -       -  
Total gross loans held for investment
    695,687       739,254       703,100  
Less:
                       
Deferred loan origination costs/(fees) and premiums/(discounts), net
    (492 )     (665 )     (3,147 )
Allowance for loan losses
    (8,116 )     (8,522 )     (8,879 )
Loans held for investment, net
  $ 687,079     $ 730,067     $ 691,074  
                         
(1)  Includes second trust deeds.
                       
(2) Majority secured by real estate.
                       
(3) Total gross loans for March 31, 2012 is net of the mark-to-market discount on Canyon National loans of $4.1 million.
 

From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.
 
The Company grants residential and commercial loans held for investment to customers located primarily in Southern California. Consequently, the underlying collateral for our loans and a borrower’s ability to repay may be impacted unfavorably by adverse changes in the economy and real estate market in the region.
 
Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of 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 $25.0 million for secured loans and $15.0 million for unsecured loans at March 31, 2012.  At March 31, 2012, the Bank’s largest aggregate outstanding balance of loans to one borrower was $20.0 million of secured credit.
 
Purchase Credit Impaired
 
The following table provides a summary of the Company’s investment in purchase credit impaired loans, acquired from Canyon National, as of the period indicated:
 
   
March 31, 2012
 
   
(in thousands)
 
Real estate loans:
     
Commercial non-owner occupied
  $ 1,061  
Land
    2,253  
Business loans:
       
Commercial owner occupied
    1,970  
Commercial and industrial
    101  
Total purchase credit impaired
  $ 5,385  

    On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield”. The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan.
 
The following table summarizes the accretable yield on the purchased credit impaired for the three months ended March 31, 2012:

 
   
Three Months Ended
 
   
March 31, 2012
 
   
(in thousands)
 
       
Balance at the beginning of period
  $ 3,248  
Accretion
    (161 )
Disposals and other
    (54 )
Balance at the end of period
  $ 3,033  

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

 
               
Impaired Loans
                   
   
Contractual
Unpaid Principal Balance
   
Recorded Investment
   
With Specific Allowance
   
Without Specific Allowance
   
Specific Allowance for Impaired Loans
   
Average Recorded Investment
   
Interest Income Recognized
 
         
(in thousands)
 
March 31, 2012
                                         
Real estate loans:
                                         
Multi-family
  $ 1,446     $ 1,414     $ -     $ 1,414     $ -     $ 1,417     $ 23  
Commercial non-owner occupied
    709       648       -       648       -       1,069       11  
One-to-four family
    1,170       973       -       973       -       671       11  
Business loans:
                                                       
Commercial owner occupied
    1,043       913       -       913       -       1,154       -  
Commercial and industrial
    81       76       -       76       -       351       1  
SBA
    2,171       604       -       604       -       547       8  
Totals
  $ 6,620     $ 4,628     $ -     $ 4,628     $ -     $ 5,209     $ 54  
                                                         
                   
Impaired Loans
                         
   
Contractual
Unpaid Principal Balance
   
Recorded Investment
   
With Specific Allowance
   
Without Specific Allowance
   
Specific Allowance for Impaired Loans
   
Average Recorded Investment
   
Interest Income Recognized
 
           
(in thousands)
 
December 31, 2011
                                                       
Real estate loans:
                                                       
Multi-family
  $ 1,450     $ 1,423     $ -     $ 1,423     $ -     $ 2,309     $ 88  
Commercial non-owner occupied
    1,592       1,495       -       1,495       -       2,283       198  
One-to-four family
    705       521       -       521       -       311       47  
Land
    -       -       -       -       -       11       1  
Business loans:
                                                       
Commercial owner occupied
    1,771       1,641       -       1,641       -       1,635       64  
Commercial and industrial
    1,321       1,138       -       1,138       -       373       62  
SBA
    2,427       773       -       773       -       887       68  
Other loans
    -       -       -       -       -       2       -  
Totals
  $ 9,266     $ 6,991     $ -     $ 6,991     $ -     $ 7,811     $ 528  
                                                         
                   
Impaired Loans
                         
   
Contractual
Unpaid Principal Balance
   
Recorded Investment
   
With Specific Allowance
   
Without Specific Allowance
   
Specific Allowance for Impaired Loans
   
Average Recorded Investment
   
Interest Income Recognized
 
           
(in thousands)
 
March 31, 2011
                                                       
Real estate loans:
                                                       
Multi-family
  $ 3,300     $ 3,300     $ -     $ 3,300     $ -     $ 2,036     $ 17  
Commercial non-owner occupied
    2,476       2,476       463       2,012       47       2,371       34  
One-to-four family
    3,743       3,742       -       3,742       -       2,898       44  
Construction
    537       537       -       537       -       433       1  
Land
    2,982       2,982       -       2,982       -       2,280       27  
Business loans:
                                                       
Commercial owner occupied
    6,563       6,430       -       6,430       -       5,979       67  
Commercial and industrial
    5,020       4,905       -       4,905       -       4,290       51  
SBA
    2,570       1,000       -       1,000       -       1,030       19  
Other loans
    2       1       -       2       -       1       -  
Totals
  $ 27,193     $ 25,373     $ 463     $ 24,910     $ 47     $ 21,318     $ 260  

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, or determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt restructurings (“TDRs”). Measurement of impairment is based on the loan’s expected future cash flows discounted at the loan’s effective interest rate, measured by reference to an observable market value, if one exists, or the fair value of the collateral if the loan is deemed collateral dependent. All loans are generally charged-off at such time the loan is classified as a loss. Valuation allowances are determined on a loan-by-loan basis or by aggregating loans with similar risk characteristics.
 
The following table provides additional detail on the components of impaired loans at the period end as indicated below.
 
   
March 31, 2012
   
December 31, 2011
   
March 31, 2011
 
   
(in thousands)
 
                   
Nonaccruing loans
  $ 3,696     $ 5,590     $ 19,900  
Accruing loans
    932       1,401       5,473  
Total impaired loans
  $ 4,628     $ 6,991     $ 25,373  

When loans are placed on nonaccrual status all accrued interest is reversed from earnings.  Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance.  If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only.  Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.
 
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest.  The Company had impaired loans on nonaccrual status at March 31, 2012 of $3.7 million, December 31, 2011 of $5.6 million, and March 31, 2011 of $19.9 million.  At March 31, 2012, the Company had $5.4 million of purchased credit impaired loans acquired from Canyon National, of which $412,000 were placed on nonaccrual status.  The Company had no loans 90 days or more past due and still accruing at March 31, 2012, December 31, 2011 or March 31, 2011.
 
The Company had an immaterial amount of TDRs related to three SBA loans which were all completed prior to 2011.
 
Concentration of Credit Risk
 
The Company’s loan portfolio was collateralized by various forms of real estate and business assets located principally in Southern California.  The Company’s loan portfolio contains concentrations of credit in multi-family real estate, commercial non-owner occupied real estate and commercial owner occupied business loans.  The Company maintains policies approved by the Company’s Board of Directors (the “Board”) that address these concentrations and continues to diversify its loan portfolio through loan originations, purchases and sales to meet approved concentration levels.  While management believes that the collateral presently securing these loans is adequate, there can be no assurances that further significant deterioration in the California real estate market and economy would not expose the Company to significantly greater credit risk.
 
Credit Quality and Credit Risk Management
 
The Company’s credit quality is maintained and credit risk managed in two distinct areas.  The first is the loan origination process, wherein the Bank underwrites credit quality and chooses which risks it is willing to accept.  The second is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and comprehensive fashion.
 
The Company maintains a comprehensive credit policy which sets forth minimum and maximum tolerances for key elements of loan risk.  The policy identifies and sets forth specific guidelines for analyzing each of the loan products the Company offers from both an individual and portfolio wide basis.  The credit policy is reviewed annually by the Board.  The Bank’s seasoned underwriters ensure all key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis of the prospective borrowers.  The credit approval process mandates multiple-signature approval by either the management or Board credit committee for every loan that requires any subjective credit analysis.
 
Credit risk is managed within the loan portfolio by the Company’s Portfolio Management department based on a comprehensive credit and investment review policy.  This policy requires a program of financial data collection and analysis, comprehensive loan reviews, property and/or business inspections and monitoring of portfolio concentrations and trends.  The Portfolio Management department also monitors asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help identify potential credit risk.  Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, or more frequently, if deemed necessary, and includes the assignment of a risk grade.
 
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications as such classifications are defined by the regulatory agencies.  The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio.  Risk grades are reviewed regularly by the Company’s Credit and Investment Review committee, and are reviewed annually by an independent third-party, as well as by regulatory agencies during scheduled examinations.
 
The following provides brief definitions for risk grades assigned to loans in the portfolio:
 
    • Pass – Pass credits are well protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Such credits exhibit few weaknesses, if any, but may include credits with exposure to certain factors that may adversely impact the credit if they materialize.  The Company has established six subcategories within the pass grade to stratify risk associated with pass loans.  The Company maintains a subset of pass credits designated as “watch” loans which, for any of a variety of reasons, requires close monitoring.
 
    • Special Mention – Loans graded special mention exhibit potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the institution’s credit position.  Special mention credits are not considered as part of the classified extensions of credit category and do not expose the Company to sufficient risk to warrant classification.
 
    • Substandard – Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Extensions of credit classified as substandard have a well-defined weakness or weaknesses that jeopardizes the orderly payment of the debt.    Substandard credits are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.
 
    • Doubtful – 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.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined.
 
The Portfolio Management department also manages loan performance risks, collections, workouts, bankruptcies and foreclosures.  Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credit when they are identified.  Collection efforts are commenced immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss.  When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.
 
When a loan is graded as special mention or substandard or doubtful, the Company obtains an updated valuation of the underlying collateral.  If the credit in question is also identified as impaired, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable.  The Company typically continues to obtain updated valuations of underlying collateral for special mention and classified loans on an annual basis in order to have the most current indication of fair value.  Once a loan is identified as impaired, an analysis of the underlying collateral is performed at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.
 
The following tables stratifies the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio as of the periods indicated:

 
   
Credit Risk Grades
 
         
Special
         
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
March 31, 2012
 
(in thousands)
 
Real estate loans:
                       
Multi-family
  $ 170,714     $ 9,932     $ 4,721     $ 185,367  
Commercial non-owner occupied
    165,237       672       2,763       168,672  
One-to-four family
    50,580       -       1,700       52,280  
Land
    7,246       -       -       7,246  
Business loans:
                               
Commercial owner occupied
    134,326       3,778       8,800       146,904  
Commercial and industrial
    82,070       864       1,013       83,947  
Warehouse facilities
    44,246       -       -       44,246  
SBA
    3,747       -       201       3,948  
Other loans
    3,119       -       20       3,139  
Totals
  $ 661,285     $ 15,246     $ 19,218     $ 695,749  
                                 
   
Credit Risk Grades
 
           
Special
           
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
December 31, 2011
 
(in thousands)
 
Real estate loans:
                               
Multi-family
  $ 176,477     $ 13,286     $ 4,067     $ 193,830  
Commercial non-owner occupied
    160,051       676       3,614       164,341  
One-to-four family
    57,685       -       2,342       60,027  
Land
    6,386       -       52       6,438  
Business loans:
                               
Commercial owner occupied
    138,975       5,689       7,635       152,299  
Commercial and industrial
    83,441       1,046       2,197       86,684  
Warehouse facilities
    67,518       -       -       67,518  
SBA
    4,548       -       179       4,727  
Other loans
    3,352       -       38       3,390  
Totals
  $ 698,433     $ 20,697     $ 20,124     $ 739,254  
                                 
   
Credit Risk Grades
 
           
Special
           
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
March 31, 2011
 
(in thousands)
 
Real estate loans:
                               
Multi-family
  $ 215,521     $ 13,115     $ 6,807     $ 235,443  
Commercial non-owner occupied
    149,790       610       6,216       156,616  
One-to-four family
    39,131       1,917       7,243       48,291  
Construction
    4,816       -       815       5,631  
Land
    4,809       494       4,699       10,002  
Business loans:
                            -  
Commercial owner occupied
    138,203       6,823       11,353       156,379  
Commercial and industrial
    65,422       1,923       9,509       76,854  
Warehouse facilities
    9,352       -       -       9,352  
SBA
    2,233       -       1,035       3,268  
Other loans
    1,145       14       105       1,264  
Totals
  $ 630,422     $ 24,896     $ 47,782     $ 703,100  

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

 
         
Days Past Due
         
Non-
 
   
Current
      30-59       60-89       90 +  
Total
   
Accruing
 
March 31, 2012
 
(in thousands)
 
Real estate loans:
                                         
Multi-family
  $ 185,367     $ -     $ -     $ -     $ 185,367     $ 287  
Commercial non-owner occupied
    168,487       -       -       185       168,672       648  
One-to-four family
    51,741       -       219       320       52,280       792  
Land
    7,246       -       -       -       7,246       -  
Business loans:
                                               
Commercial owner occupied
    145,580       -       478       846       146,904       1,325  
Commercial and industrial
    83,937       10       -       -       83,947       100  
Warehouse facilities
    44,246                               44,246          
SBA
    3,435       -       -       513       3,948       544  
Other loans
    3,138       1       -       -       3,139       -  
Totals
  $ 693,177     $ 11     $ 697     $ 1,864     $ 695,749     $ 3,696  
                                                 
           
Days Past Due
           
Non-
 
   
Current
      30-59       60-89       90 +  
Total
   
Accruing
 
December 31, 2011
 
(in thousands)
 
Real estate loans:
                                               
Multi-family
  $ 193,830     $ -     $ -     $ -     $ 193,830     $ 293  
Commercial non-owner occupied
    162,663       434       -       1,244       164,341       1,495  
One-to-four family
    59,503       201       -       323       60,027       323  
Land
    5,769       -       617       52       6,438       52  
Business loans:
                                               
Commercial owner occupied
    151,380       -       -       919       152,299       2,053  
Commercial and industrial
    85,615       12       -       1,057       86,684       1,177  
Warehouse facilities
    67,518       -       -       -       67,518       -  
SBA
    3,900       49       113       665       4,727       700  
Other loans
    3,386       3       1       -       3,390       -  
Totals
  $ 733,564     $ 699     $ 731     $ 4,260     $ 739,254     $ 6,093  
                                                 
           
Days Past Due
           
Non-
 
   
Current
      30-59       60-89       90 +  
Total
   
Accruing
 
March 31, 2011
 
(in thousands)
 
Real estate loans:
                                               
Multi-family
  $ 232,086     $ 1,907     $ 1,147     $ 303     $ 235,443     $ 2,030  
Commercial non-owner occupied
    154,411       1,289       615       301       156,616       753  
One-to-four family
    46,096       592       143       1,460       48,291       2,848  
Construction
    4,330       -       278       1,023       5,631       161  
Land
    9,431       -       -       571       10,002       3,175  
Business loans:
                                               
Commercial owner occupied
    145,436       6,474       -       4,469       156,379       7,359  
Commercial and industrial
    71,574       1,379       637       3,264       76,854       3,415  
Warehouse facilities
    9,352       -       -       -       9,352       -