XNAS:PPBI Pacific Premier Bancorp Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 [X] No [_]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
 
Large accelerated filer
[ ]
Accelerated filer
[ ]
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 August 10, 2012 was 10,329,934.



PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED JUNE 30, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands)
 
                   
ASSETS
 
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Cash and due from banks
  $ 64,945     $ 60,207     $ 36,034  
Federal funds sold
    27       28       10,998  
Cash and cash equivalents
    64,972       60,235       47,032  
Investment securities available for sale
    146,134       115,645       141,304  
FHLB stock/Federal Reserve Bank stock, at cost
    12,744       12,475       13,492  
Loans held for sale, net
    2,401       -       -  
Loans held for investment
    795,319       738,589       708,096  
Allowance for loan losses
    (7,658 )     (8,522 )     (8,517 )
Loans held for investment, net
    787,661       730,067       699,579  
Accrued interest receivable
    3,968       3,885       3,984  
Other real estate owned
    9,339       1,231       4,447  
Premises and equipment
    9,429       9,819       10,108  
Deferred income taxes
    5,585       8,998       8,960  
Bank owned life insurance
    13,240       12,977       12,714  
Intangible assets
    2,781       2,069       2,183  
Other assets
    6,781       3,727       4,308  
TOTAL ASSETS
  $ 1,065,035     $ 961,128     $ 948,111  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
LIABILITIES:
                       
Deposit accounts:
                       
Noninterest bearing
  $ 150,538     $ 112,313     $ 122,539  
Interest bearing:
                       
Transaction accounts
    327,556       287,876       283,565  
Retail certificates of deposit
    435,097       428,688       398,985  
Wholesale certificates of deposit
    -       -       10,896  
Total deposits
    913,191       828,877       815,985  
Other borrowings
    28,500       28,500       28,500  
Subordinated debentures
    10,310       10,310       10,310  
Accrued expenses and other liabilities
    16,965       6,664       11,499  
TOTAL LIABILITIES
    968,966       874,351       866,294  
STOCKHOLDERS’ EQUITY:
                       
Preferred stock, $.01 par value; 1,000,000 shares authorized;no shares outstanding
    -       -       -  
Common stock, $.01 par value; 25,000,000 shares authorized; 10,329,934 shares at June 30, 2012, 10,337,626 shares at December 31, 2011, and 10,084,626 shares at June 30, 2011 issued and outstanding
    103       103       101  
Additional paid-in capital
    76,258       76,310       76,509  
Retained earnings
    18,549       10,046       5,031  
Accumulated other comprehensive income, net of tax of $810 at June 30, 2012, $221 at December 31, 2011, and $123 at June 30, 2011
    1,159       318       176  
TOTAL STOCKHOLDERS’ EQUITY
    96,069       86,777       81,817  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,065,035     $ 961,128     $ 948,111  

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
   
Six Months Ended
 
   
June 30, 2012
   
June 30, 2011
   
June 30, 2012
   
June 30, 2011
 
INTEREST INCOME
                       
Loans
  $ 12,098     $ 11,750     $ 23,335     $ 22,283  
Investment securities and other interest-earning assets
    948       1,059       1,827       2,260  
Total interest income
    13,046       12,809       25,162       24,543  
INTEREST EXPENSE
                               
Interest-bearing deposits:
                               
Interest on transaction accounts
    223       369       552       814  
Interest on certificates of deposit
    1,224       1,792       2,651       3,615  
Total interest-bearing deposits
    1,447       2,161       3,203       4,429  
Other borrowings
    235       235       470       523  
Subordinated debentures
    82       77       166       153  
Total interest expense
    1,764       2,473       3,839       5,105  
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    11,282       10,336       21,323       19,438  
PROVISION FOR LOAN LOSSES
    -       1,300       -       1,406  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    11,282       9,036       21,323       18,032  
NONINTEREST INCOME
                               
Loan servicing fees
    214       160       391       377  
Deposit fees
    472       635       973       1,083  
Net gain (loss) from sales of loans
    10       (2,547 )     10       (2,461 )
Net gain from sales of investment securities
    174       316       174       480  
Other-than-temporary impairment loss on investment securities, net
    (45 )     (154 )     (82 )     (368 )
Gain on FDIC transaction
    5,340       -       5,340       4,189  
Other income
    364       497       662       846  
Total noninterest income (loss)
    6,529       (1,093 )     7,468       4,146  
NONINTEREST EXPENSE
                               
Compensation and benefits
    3,947       3,489       7,467       6,670  
Premises and occupancy
    981       878       1,859       1,678  
Data processing and communications
    817       347       1,184       648  
Other real estate owned operations, net
    590       167       737       430  
FDIC insurance premiums
    168       303       301       567  
Legal and audit
    552       501       1,038       893  
Marketing expense
    264       328       479       557  
Office and postage expense
    217       194       380       361  
Other expense
    669       648       1,401       1,410  
Total noninterest expense
    8,205       6,855       14,846       13,214  
NET INCOME BEFORE INCOME TAXES
    9,606       1,088       13,945       8,964  
INCOME TAX
    3,795       303       5,442       3,407  
NET INCOME
  $ 5,811     $ 785     $ 8,503     $ 5,557  
                                 
EARNINGS PER SHARE
                               
Basic
  $ 0.56     $ 0.08     $ 0.82     $ 0.55  
Diluted
  $ 0.55     $ 0.08     $ 0.80     $ 0.52  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING                                
Basic
    10,329,934       10,084,626       10,332,935       10,067,066  
Diluted
    10,669,005       10,578,928       10,647,590       10,717,257  

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


 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands)
 
(unaudited)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net Income
  $ 5,811     $ 785     $ 8,503     $ 5,557  
Other comprehensive income (loss), net of tax:
                               
Unrealized holding gains on securities  arising during the period, net of tax
    760       1,648       944       1,426  
Reclassification adjustment for net gain on sale of securities included in net income, net of tax
    (103 )     (468 )     (103 )     (336 )
Net unrealized gain (loss) on securities, net of tax
    657       1,180       841       1,090  
Comprehensive Income
  $ 6,468     $ 1,965     $ 9,344     $ 6,647  

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


 

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
(dollars in thousands)
 
(unaudited)
 
                                     
   
Common Stock
Shares
   
Common Stock
   
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
                            8,503       841       9,344  
Share-based compensation expense
                    27                       27  
Common stock repurchased and retired
    (13,022 )     -       (102 )                     (102 )
Stock options exercised
    5,330       -       23                       23  
Balance at June 30, 2012
    10,329,934     $ 103     $ 76,258     $ 18,549     $ 1,159     $ 96,069  
                                                 
Balance at December 31, 2010
    10,033,836     $ 100     $ 79,942     $ (526 )   $ (914 )   $ 78,602  
Total comprehensive income
                            5,557       1,090       6,647  
Share-based compensation expense
                    196                       196  
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 June 30, 2011
    10,084,626     $ 101     $ 76,509     $ 5,031     $ 176     $ 81,817  

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



PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(in thousands)
 
(unaudited)
 
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 8,503     $ 5,557  
Adjustments to net income:
               
Depreciation and amortization expense
    642       561  
Provision for loan losses
    -       1,406  
Share-based compensation expense
    27       196  
Loss on sale and disposal of premises and equipment
    -       63  
Loss on sale of other real estate owned
    305       21  
Write down of other real estate owned
    302       -  
Amortization of premium/discounts on securities held for sale, net
    378       389  
Amortization of loan mark-to-market discount
    (1,048 )     (807 )
Gain on sale of loans held for sale
    (10 )     -  
Gain on sale of investment securities available for sale
    (174 )     (480 )
Other-than-temporary impairment loss on investment securities, net
    82       368  
Loss on sale of loans held for investment
    -       2,461  
Purchase and origination of loans held for sale
    (2,995 )     -  
Recoveries on loans
    95       -  
Proceeds from the sales of and principal payments from loans held for sale
    595       -  
Gain on FDIC transaction
    (5,340 )     (4,189 )
Deferred income tax provision
    3,413       265  
Change in accrued expenses and other liabilities, net
    (159 )     (3,695 )
Income from bank owned life insurance, net
    (263 )     (260 )
Change in accrued interest receivable and other assets, net
    (1,364 )     4,152  
Net cash provided by operating activities
    2,989       6,008  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale and principal payments on loans held for investment
    92,770       49,386  
Net change in undisbursed loan funds
    57,361       11,096  
Purchase and origination of loans held for investment
    (143,900 )     (58,938 )
Proceeds from sale of other real estate owned
    5,315       9,626  
Principal payments on securities available for sale
    7,505       8,977  
Purchase of securities available for sale
    (70,467 )     (19,612 )
Proceeds from sale or maturity of securities available for sale
    44,151       43,141  
Purchases of premises and equipment
    (252 )     (2,471 )
Redemption of Federal Reserve Bank stock
    63       155  
Redemption of Federal Home Loan Bank of San Francisco stock
    1,058       1,009  
Cash acquired in FDIC transaction
    39,491       26,389  
Net cash provided by investing activities
    33,095       68,758  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net decrease in deposit accounts
    (31,268 )     (47,568 )
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 financing activities
    (31,347 )     (91,196 )
                 
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    4,737       (16,430 )
CASH AND CASH EQUIVALENTS, beginning of period
    60,235       63,462  
CASH AND CASH EQUIVALENTS, end of period
  $ 64,972     $ 47,032  

 


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
(in thousands)
 
(unaudited)
 
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
SUPPLEMENTAL CASH FLOW DISCLOSURES
           
Interest paid
  $ 3,827     $ 5,030  
Income taxes paid
    3,775       2,445  
Assets acquired (liabilities assumed) in FDIC transaction (See Note 3):
               
Investment securities
    101       12,753  
FRB and FHLB Stock
    1,390       1,323  
FDIC receivable
    167       2,838  
Loans
    63,773       149,739  
Core deposit intangible
    840       2,270  
Other real estate owned
    11,533       11,953  
Fixed assets
    -       42  
Other assets
    3,656       1,599  
Deposits
    (115,582 )     (204,678 )
Other liabilities
    (29 )     (39 )
                 
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
               
Transfers from loans to other real estate owned
  $ 2,497     $ 2,107  
Investment securities available for sale purchased and not settled
  $ 10,460     $ 5,083  

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

 

 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
June 30, 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 subsidiaries, including Pacific Premier Bank (the “Bank”) (collectively, the “Company,” “we,” “our” or “us”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2012, December 31, 2011, and June 30, 2011, the results of its operations and comprehensive income for the three and six months ended June 30, 2012 and 2011 and the changes in stockholders’ equity and cash flows for the six months ended June 30, 2012 and 2011.  Operating results or comprehensive income for the three and six months ended June 30, 2012 are not necessarily indicative of the results or comprehensive income that may be expected for any other interim period or the full year ending December 31, 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 (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 operations.
 
Note 2 – Recently Issued Accounting Pronouncements
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. 2011-03 effective January 1, 2012.  The provisions of ASU No. 2011-03 had no impact on the Company’s Consolidated Financial Statements. 
 
In May 2011, the FASB issued 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, which prohibition extends 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 beginning with 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 September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other Intangible Assets: Testing Goodwill for Impairment”.  The provisions of ASU No. 2011-08 allows an entity the option to first assess the qualitative factors to determine whether the existence of events or circumstances leads to a determination that is it more likely than not that the fair value of a reporting unit is less than its carrying amount.  Under ASU 2011-08, if, after that assessment is made, an entity determines that it is more likely than not that the carrying value of goodwill is not impaired, then the two-step impairment test is not required.  However, if the entity concludes otherwise, the two-step impairment test would be required.  The provisions of ASU 2011-08 are effective for interim and annual periods beginning after December 15, 2011, although early adoption was allowed.  Adoption of ASU 2011-08 had no material impact on the Company’s financial condition, results of operations or liquidity.
 
 
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 financial accounting 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 –  Federal Deposit Insurance Corporation (“FDIC”) Acquisitions
 
Palm Desert National Bank Acquisition
 
Effective April 27, 2012, the Bank acquired certain assets and assumed certain liabilities of Palm Desert National Bank (“Palm Desert National”) from the FDIC as receiver for Palm Desert National (the “Palm Desert National Acquisition”), pursuant to the terms of a purchase and assumption agreement entered into by the Bank and the FDIC on April 27, 2012.  The Palm Desert National Acquisition included one branch of Palm Desert National that became a branch of the Bank upon consummation of the Palm Desert National Acquisition.  The Bank did not enter into any loss sharing agreements with the FDIC in connection the Palm Desert national Acquisition.  As a result of the Palm Desert National Acquisition, the Bank acquired and recorded at the acquisition date certain assets with a fair value of approximately $120.9 million, including:
 
$63.8 million of loans;
 
$39.5 million of cash and cash equivalents;
 
● 
$11.5 million of other real estate owned (“OREO”);
 
● 
$1.5 million in investment securities, including Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank stock;
 
● 
$840,000 of a core deposit intangible; and
 
● 
$3.8 million of other types of assets.
 
Also as a result of the Palm Desert National Acquisition, the Bank assumed and recorded at acquisition date certain liabilities with a fair value of approximately $118.0 million, including:
 
● 
$50.1 million in deposit transaction accounts;
 
● 
$30.8 million in retail certificates of deposit;
 
● 
$34.1 million in whole sale certificates of deposits, which were purposefully run off during the second quarter of 2012;
 
● 
$2.4 million in deferred tax liability; and
 
● 
$578,000 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.
 
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 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.  The Bank did not enter into any loss sharing agreements with the FDIC in connection with 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 OREO, $2.3 million of a core deposit intangibles, $1.5 million of other assets and $1.3 million of 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 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:
 

   
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
   
(in thousands)
 
Real estate loans:
                 
Multi-family
  $ 183,742     $ 193,830     $ 231,604  
Commercial non-owner occupied
    242,700       164,341       155,419  
One-to-four family (1)
    56,694       60,027       64,550  
Construction
    281       -       -  
Land
    11,191       6,438       8,752  
Business loans:
                       
Commercial owner occupied (2)
    150,428       152,299       147,186  
Commercial and industrial
    84,191       86,684       70,744  
Warehouse facilities
    61,111       67,518       21,758  
SBA
    3,995       4,727       4,682  
Other loans
    4,019       3,390       6,497  
Total gross loans (3)
    798,352       739,254       711,192  
Less loans held for sale, net
    2,401       -       -  
Total gross loans held for investment
    795,951       739,254       711,192  
Less:
                       
Deferred loan origination costs/(fees) and premiums/(discounts), net
    (632 )     (665 )     (3,096 )
Allowance for loan losses
    (7,658 )     (8,522 )     (8,517 )
Loans held for investment, net
  $ 787,661     $ 730,067     $ 699,579  
                         
(1)  Includes second trust deeds.
                       
(2) Majority secured by real estate.
                       
(3) Total gross loans for June 30, 2012 is net of the mark-to-market discounts on Canyon National loans of $3.7 million and on Palm Desert National loans of $11.0 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 $25.6 million for secured loans and $15.4 million for unsecured loans at June 30, 2012.  At June 30, 2012, the Bank’s largest aggregate outstanding balance of loans to one borrower was $11.9 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 and Palm Desert National, as of the period indicated:
 
   
   
June 30, 2012
 
   
Canyon National
   
Palm Desert National
   
Total
 
   
(in thousands)
 
Real estate loans:
                 
Multi-family
  $ -     $ 2,835     $ 2,835  
Commercial non-owner occupied
    1,061       4,950       6,011  
One-to-four family
    -       36       36  
Land
    2,272       691       2,963  
Business loans:
                       
Commercial owner occupied
    1,760       1,135       2,895  
Commercial and industrial
    75       -       75  
Total purchase credit impaired
  $ 5,168     $ 9,647     $ 14,815  


     On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield.”  The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan.   At June 30, 2012, the Company had $14.8 million of purchased credit impaired loans, of which $4.6 million were placed on nonaccrual status.
 
The following table summarizes the accretable yield on the purchased credit impaired for the six months ended June 30, 2012:
 

   
Six Months Ended
 
   
June 30, 2012
 
   
Canyon National
   
Palm Desert National
   
Total
 
   
(in thousands)
 
                   
Balance at the beginning of period
  $ 3,248     $ -     $ 3,248  
Accretable yield at acquisition
    -       3,908       3,908  
Accretion
    (303 )     (74 )     (377 )
Disposals and other
    (53 )     (8 )     (61 )
Change in accretable yield
    (813 )     -       (813 )
Balance at the end of period
  $ 2,079     $ 3,826     $ 5,905  

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

               
Impaired Loans
                   
   
Contractual
Unpaid Principal Balance
   
Recorded Investment
   
With Specific Allowance
   
Without Specific Allowance
   
Specific Allowance for
Impaired Loans
   
Average Recorded Investment
   
Interest Income Recognized
 
         
(in thousands)
 
June 30, 2012
                                         
Real estate loans:
                                         
Multi-family
  $ 1,442     $ 1,404     $ -     $ 1,404     $ -     $ 1,412     $ 45  
Commercial non-owner occupied
    2,304       2,095       -       2,095       -       1,279       32  
One-to-four family
    670       667       -       667       -       708       22  
Construction
    -       -       -       -       -       -       -  
Land
    -       -       -       -       -       -       -  
Business loans:
                                                       
Commercial owner occupied
    507       478       -       478       -       889       -  
Commercial and industrial
    -       -       -       -       -       200       -  
Warehouse facilities
    -       -       -       -       -       -       -  
SBA
    1,723       549       -       549       -       564       16  
Other loans
    -       -       -       -       -       -       -  
Totals
  $ 6,646     $ 5,193     $ -     $ 5,193     $ -     $ 5,052     $ 115  
                                                         
                   
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)
 
June 30, 2011
                                                       
Real estate loans:
                                                       
Multi-family
  $ 4,149     $ 4,149     $ -     $ 4,149     $ -     $ 2,786     $ 52  
Commercial non-owner occupied
    3,427       3,427       462       2,965       44       2,736       82  
One-to-four family
    1,569       1,567       -       1,567       -       2,893       42  
Construction
    -       -       -       -       -       309       -  
Land
    2,523       2,523       -       2,523       -       2,627       54  
Business loans:
                                                       
Commercial owner occupied
    5,267       5,124       -       5,124       -       5,945       124  
Commercial and industrial
    2,143       2,143       -       2,143       -       4,200       61  
SBA
    1,659       930       -       930       -       1,001       28  
Other loans
    22       22       -       22       -       9       2  
Totals
  $ 20,759     $ 19,885     $ 462     $ 19,423     $ 44     $ 22,506     $ 445  

 
    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 indicated:

 
   
June 30, 2012
   
December 31, 2011
   
June 30, 2011
 
   
(in thousands)
 
Nonaccruing loans
  $ 3,826     $ 5,590     $ 10,808  
Accruing loans
    1,367       1,401       9,077  
Total impaired loans
  $ 5,193     $ 6,991     $ 19,885  

 
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 June 30, 2012 of $3.8 million, December 31, 2011 of $5.6 million, and June 30, 2011 of $10.8 million.  The Company had no loans 90 days or more past due and still accruing at June 30, 2012, December 31, 2011 or June 30, 2011.
 
The Company had an immaterial amount of TDRs related to three U.S. Small Business Administration (“SBA”) loans which were all completed prior to 2011.
 
Concentration of Credit Risk
 
As of June 30, 2012, 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 the management credit committee for every loan that requires any subjective credit analysis.
 
Credit risk is managed within the loan portfolio by the Company’s Portfolio Management department based on a comprehensive credit and investment review policy.  This policy requires a program of financial data collection and analysis, comprehensive loan reviews, property and/or business inspections and monitoring of portfolio concentrations and trends.  The Portfolio Management department also monitors asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help identify potential credit risk.  Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, and in most cases more often, including the assignment of a risk grade.
 
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications as such classifications are defined by the regulatory agencies.  The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio.  Risk grades are reviewed regularly by the Company’s Credit and 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, require 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 credits when they are identified.  Collection efforts are commenced immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss.  When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.
 
When a loan is graded as special mention or substandard or doubtful, the Company obtains an updated valuation of the underlying collateral.  If the credit in question is also identified as impaired, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses (“ALLL”) if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable.  The Company typically continues to obtain 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
 
June 30, 2012
 
(in thousands)
 
Real estate loans:
                       
Multi-family
  $ 166,309     $ 9,898     $ 7,535     $ 183,742  
Commercial non-owner occupied
    236,685       668       5,347       242,700  
One-to-four family
    55,303       -       1,391       56,694  
Construction
    281       -       -       281  
Land
    8,591       -       2,600       11,191  
Business loans:
                               
Commercial owner occupied
    134,749       4,036       11,643       150,428  
Commercial and industrial
    81,359       1,753       1,079       84,191  
Warehouse facilities
    61,111       -       -       61,111  
SBA
    3,858       -       137       3,995  
Other loans
    3,892       -       127       4,019  
Totals
  $ 752,138     $ 16,355     $ 29,859     $ 798,352  
                                 
   
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
 
June 30, 2011
 
(in thousands)
 
Real estate loans:
                               
Multi-family
  $ 211,734     $ 13,058     $ 6,812     $ 231,604  
Commercial non-owner occupied
    149,974       604       4,841       155,419  
One-to-four family
    59,991       1,951       2,608       64,550  
Land
    8,367       -       385       8,752  
Business loans:
                            -  
Commercial owner occupied
    131,777       6,376       9,033       147,186  
Commercial and industrial
    64,145       1,665       4,934       70,744  
Warehouse facilities
    21,758       -       -       21,758  
SBA
    4,474       -       208       4,682  
Other loans
    6,396       -       101       6,497  
Totals
  $ 658,616     $ 23,654     $ 28,922     $ 711,192  

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

 
         
Days Past Due
         
Non-
 
   
Current
      30-59       60-89       90+    
Total
   
Accruing
 
June 30, 2012
 
(in thousands)
 
Real estate loans:
                                         
Multi-family
  $ 180,907     $ -     $ 2,835     $ -     $ 183,742     $ 3,115  
Commercial non-owner occupied
    241,290       259       -       1,151       242,700       2,094  
One-to-four family
    56,588       93       -       13       56,694       486  
Construction
    281       -       -       -       281       -