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PACIFIC PREMIER BANCORP INC - Quarter Report: 2013 September (Form 10-Q)

ppbi_10q-2013q3.htm
 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
OR
 
( )        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File Number 0-22193
 
 
(Exact name of registrant as specified in its charter)
 
DELAWARE
33-0743196
(State or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification No.)
 
 
 
17901 VON KARMAN AVENUE, SUITE 1200, IRVINE, CALIFORNIA 92614
 
(Address of principal executive offices and zip code)
 
(949) 864-8000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X ] No [_]
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [_]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
 
Large accelerated filer
[ ]
Accelerated filer
[X]
Non-accelerated filer
[ ]
Smaller reporting company
[  ]
       
(Do not check if a smaller
 reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
 
The number of shares outstanding of the registrant's common stock as of November 12, 2013 was 16,647,991.
 
 


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED SEPTEMBER 30, 2013
 
 
PART I - FINANCIAL INFORMATION
 
Item 1 - Financial Statements
 
Consolidated Statements of Financial ConditionAt September 30, 2013 (unaudited), December 31, 2012 (audited) and September 30, 2012 (unaudited)
 
Consolidated Statements of OperationsFor the three and nine months ended September 30, 2013 and 2012 (unaudited)
 
Consolidated Statements of Comprehensive Income:  For the three and nine months ended September 30, 2013 and 2012 (unaudited)
 
Consolidated Statements of Stockholders’ Equity:  For the three and nine months ended September 30, 2013 and 2012 (unaudited)
 
Consolidated Statements of Cash FlowsFor the nine months ended September 30, 2013 and 2012 (unaudited)
 
Notes to Consolidated Financial Statements (unaudited)
 
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation
 
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
Item 4 - Controls and Procedures
 
PART II - OTHER INFORMATION
 
Item 1 - Legal Proceedings
 
Item 1A - Risk Factors
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3 - Defaults Upon Senior Securities
 
Item 4 - Mine Safety Disclosures
 
Item 5 - Other Information
 
Item 6 - Exhibits
 
 

 
PART I - FINANCIAL INFORMATION
 
 

Item 1.  Financial Statements
 

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except share data)
 
                   
ASSETS
 
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Cash and due from banks
  $ 61,393     $ 59,325     $ 58,216  
Federal funds sold
    26       27       27  
Cash and cash equivalents
    61,419       59,352       58,243  
Investment securities available for sale
    282,846       84,066       114,250  
FHLB/Federal Reserve Bank/TIB stock, at cost
    10,827       11,247       12,191  
Loans held for sale, net
    3,176       3,681       4,728  
Loans held for investment
    1,138,969       982,207       859,373  
Allowance for loan losses
    (7,994 )     (7,994 )     (7,658 )
Loans held for investment, net
    1,130,975       974,213       851,715  
Accrued interest receivable
    5,629       4,126       3,933  
Other real estate owned
    1,186       2,258       5,521  
Premises and equipment
    9,829       8,575       10,067  
Deferred income taxes
    9,029       6,887       5,515  
Bank owned life insurance
    23,862       13,485       13,362  
Intangible assets
    6,881       2,626       2,703  
Goodwill
    17,428       -       -  
Other assets
    5,933       3,276       7,108  
TOTAL ASSETS
  $ 1,569,020     $ 1,173,792     $ 1,089,336  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
LIABILITIES:
                       
Deposit accounts:
                       
Noninterest bearing
  $ 363,606     $ 213,636     $ 211,410  
Interest bearing
    920,528       691,132       684,460  
Total deposits
    1,284,134       904,768       895,870  
FHLB advances and other borrowings
    86,474       115,500       75,500  
Subordinated debentures
    10,310       10,310       10,310  
Accrued expenses and other liabilities
    16,948       8,697       7,770  
TOTAL LIABILITIES
    1,397,866       1,039,275       989,450  
STOCKHOLDERS’ EQUITY:
                       
Common stock, $.01 par value; 25,000,000 shares authorized; 16,641,991 shares at September 30, 2013, 13,661,648 shares at December 31, 2012 and 10,343,434 shares at September 30, 2012 issued and outstanding
    166       137       103  
Additional paid-in capital
    143,014       107,453       76,414  
Retained earnings
    30,611       25,822       22,011  
Accumulated other comprehensive income (loss), net of tax (benefit) of ($1,843) at September 30, 2013, $772 at December 31, 2012 and $949 at September 30, 2012
    (2,637 )     1,105       1,358  
TOTAL STOCKHOLDERS’ EQUITY
    171,154       134,517       99,886  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,569,020     $ 1,173,792     $ 1,089,336  


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
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
INTEREST INCOME
                       
Loans
  $ 14,420     $ 12,847     $ 41,504     $ 36,182  
Investment securities and other interest-earning assets
    1,954       779       4,041       2,606  
Total interest income
    16,374       13,626       45,545       38,788  
INTEREST EXPENSE
                               
Deposits
    1,045       1,444       3,097       4,647  
FHLB advances and other borrowings
    244       247       722       717  
Subordinated debentures
    77       81       230       247  
Total interest expense
    1,366       1,772       4,049       5,611  
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    15,008       11,854       41,496       33,177  
PROVISION FOR LOAN LOSSES
    646       145       1,264       145  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    14,362       11,709       40,232       33,032  
NONINTEREST INCOME
                               
Loan servicing fees
    237       224       881       615  
Deposit fees
    485       486       1,382       1,459  
Net gain (loss) from sales of loans
    982       (41 )     1,927       (31 )
Net gain from sales of investment securities
    305       857       1,373       1,031  
Other-than-temporary impairment recovery (loss) on investment securities, net
    16       (36 )     (19 )     (118 )
Gain on FDIC transaction
    -       -       -       5,340  
Other income
    296       420       932       1,082  
Total noninterest income
    2,321       1,910       6,476       9,378  
NONINTEREST EXPENSE
                               
Compensation and benefits
    5,948       4,367       16,732       11,834  
Premises and occupancy
    1,600       1,063       4,222       2,922  
Data processing and communications
    824       582       2,214       1,766  
Other real estate owned operations, net
    (1 )     244       610       981  
FDIC insurance premiums
    201       165       537       466  
Legal, audit and professional expense
    679       473       1,523       1,511  
Marketing expense
    307       225       777       704  
Office and postage expense
    375       232       960       612  
Loan expense
    282       219       714       632  
Deposit expense
    497       38       1,172       136  
Merger related expense
    -       -       6,723       -  
Other expense
    1,059       423       2,622       1,313  
Total noninterest expense
    11,771       8,031       38,806       22,877  
NET INCOME BEFORE INCOME TAX
    4,912       5,588       7,902       19,533  
INCOME TAX
    1,846       2,126       3,113       7,568  
NET INCOME
  $ 3,066     $ 3,462     $ 4,789     $ 11,965  
                                 
EARNINGS PER SHARE
                               
Basic
  $ 0.19     $ 0.34     $ 0.31     $ 1.16  
Diluted
  $ 0.18     $ 0.32     $ 0.29     $ 1.12  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
                               
Basic
    16,640,471       10,330,814       15,512,508       10,332,223  
Diluted
    17,482,230       10,832,934       16,314,701       10,709,822  

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

 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands)
 
(unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net income
  $ 3,066     $ 3,462     $ 4,789     $ 11,965  
Other comprehensive income (loss), net of tax (benefit):
                               
Unrealized holding gains on securities arising during the period
    (1,966 )     (519 )     (7,730 )     737  
Reclassification adjustment for net gain on sale of securities included in net income (1)
    305       857       1,373       1,031  
Income tax (benefit)
    (683 )     139       (2,615 )     728  
Net unrealized gain (loss) on securities, net of tax
    (978 )     199       (3,742 )     1,040  
Comprehensive income
  $ 2,088     $ 3,661     $ 1,047     $ 13,005  
                                 
(1) Income tax expense associated with the reclassification adjustment for the three months ended September 30, 2013 and 2012 was $126 and $353, respectively, and the nine months ended September 30, 2013 and 2012 was $564 and $424, respectively.
 

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



 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
 
(dollars in thousands)
 
(unaudited)
 
                                     
   
Common
Stock Shares
   
Common Stock
   
Additional Paid-in Capital
   
Accumulated
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Total Stockholders’ Equity
 
                                     
Balance at December 31, 2012
    13,661,648     $ 137     $ 107,453     $ 25,822     $ 1,105     $ 134,517  
Net income
                            4,789               4,789  
Other comprehensive loss
                                    (3,742 )     (3,742 )
Share-based compensation expense
                    680                       680  
Common stock repurchased and retired
    (10,960 )     -       (41 )                     (41 )
Common stock issued
    2,972,472       29       34,895                       34,924  
Stock options exercised
    18,831       -       27                       27  
Balance at September 30, 2013
    16,641,991     $ 166     $ 143,014     $ 30,611     $ (2,637 )   $ 171,154  
                                                 
Balance at December 31, 2011
    10,337,626     $ 103     $ 76,310     $ 10,046     $ 318     $ 86,777  
Net income
                            11,965               11,965  
Other comprehensive income
                                    1,040       1,040  
Share-based compensation expense
                    96                       96  
Common stock repurchased and retired
    (13,022 )     -       (102 )                     (102 )
Stock options exercised
    18,830       -       110                       110  
Balance at September 30, 2012
    10,343,434     $ 103     $ 76,414     $ 22,011     $ 1,358     $ 99,886  

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




PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(in thousands)
 
(unaudited)
 
   
Nine Months Ended September 30,
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 4,789     $ 11,965  
Adjustments to net income:
               
Depreciation and amortization expense
    1,423       985  
Provision for loan losses
    1,264       145  
Share-based compensation expense
    680       96  
Loss on sale and disposal of premises and equipment
    2       -  
Loss (gain) on sale of other real estate owned
    226       341  
Write down of other real estate owned
    354       390  
Amortization of premium/discounts on securities held for sale, net
    2,319       627  
Amortization of loan mark-to-market discount from FDIC transaction
    (2,032 )     (1,570 )
Gain on sale of loans held for sale
    -       (80 )
Gain on sale of investment securities available for sale
    (1,373 )     (1,031 )
Other-than-temporary impairment loss on investment securities, net
    19       118  
Gain on sale of loans held for investment
    (1,927 )     111  
Purchase and origination of loans held for sale
    -       (11,005 )
Recoveries on loans
    344       198  
Principal payments from loans held for sale
    505       6,225  
Gain on FDIC transaction
    -       (5,340 )
Deferred income tax provision
    (2,142 )     2,755  
Change in accrued expenses and other liabilities, net
    5,562       1,106  
Income from bank owned life insurance, net
    (470 )     (385 )
Change in accrued interest receivable and other assets, net
    1,196       (5,577 )
Net cash provided by operating activities
    10,739       74  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale and principal payments on loans held for investment
    131,619       142,907  
Net change in undisbursed loan funds
    246,814       71,304  
Purchase and origination of loans held for investment
    (463,706 )     (267,805 )
Proceeds from sale of other real estate owned
    1,488       9,663  
Principal payments on securities available for sale
    27,528       13,033  
Purchase of securities available for sale
    (98,799 )     (96,438 )
Proceeds from sale or maturity of securities available for sale
    212,314       86,919  
Purchases of premises and equipment
    (3,010 )     (1,233 )
Purchase of Federal Reserve Bank stock
    (1,276 )     63  
Redemption of FHLB stock
    2,349       1,611  
Cash acquired in Palm Desert National acquisition
    -       39,491  
Cash acquired in acquisitions, net
    138,751       -  
Net cash provided by investing activities
    194,072       (485 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net (decrease) increase in deposit accounts
    (161,359 )     (48,589 )
Repayment of FHLB advances and other borrowings
    (45,931 )     -  
Proceeds from FHLB advances
    -       47,000  
Proceeds from issuance of common stock, net of issuance cost
    4,560       -  
Proceeds from exercise of stock options
    27       110  
Repurchase of common stock
    (41 )     (102 )
Net cash (used in) provided by financing activities
    (202,744 )     (1,581 )
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    2,067       (1,992 )
CASH AND CASH EQUIVALENTS, beginning of period
    59,352       60,235  
CASH AND CASH EQUIVALENTS, end of period
  $ 61,419     $ 58,243  


 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
(in thousands)
 
(unaudited)
 
             
   
Nine Months Ended  September 30,
 
   
2013
   
2012
 
             
SUPPLEMENTAL CASH FLOW DISCLOSURES
           
Interest paid
  $ 4,012     $ 5,549  
Income taxes paid
    6,825       6,075  
Assets acquired (liabilities assumed and capital created) in acquisitions (See Note 4):
               
Investment securities
    347,196       101  
Federal Reserve Bank/FHLB/TIB Stock
    1,765       1,390  
FDIC receivable
    -       167  
Loans
    68,815       63,773  
Core deposit intangible
    4,766       840  
Other real estate owned
    752       11,533  
Goodwill
    18,234       -  
Fixed assets
    1,446       -  
Other assets
    12,468       3,656  
Deposits
    (540,725 )     (115,582 )
Other borrowings
    (16,905 )     -  
Other liabilities
    (7,199 )     (29 )
Additional paid-in capital
    (29,364 )     -  
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
               
Transfers from loans to other real estate owned
  $ 244     $ 3,151  
Investment securities available for sale purchased and not settled
  $ -     $ -  

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



PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(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 September 30, 2013, December 31, 2012, and September 30, 2012, the results of its operations and comprehensive income for the three and nine months ended September 30, 2013 and 2012 and the changes in stockholders’ equity and cash flows for the three and nine months ended September 30, 2013 and 2012.  Operating results or comprehensive income for the three and nine months ended September 30, 2013 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, 2013.
 
    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, 2012, as amended (the “2012 Annual Report”).
 
    The Company accounts for its investments in its wholly owned special purpose entity, PPBI Trust I, under the equity method whereby the subsidiary’s net earnings are recognized in the Company’s statement of operations.
 
Note 2 – Recently Issued Accounting Pronouncements
 
    In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”.  ASU 2011-11 affects all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement.  The requirements amend the disclosure requirements on offsetting in Section 210-20-50.  This information is intended to enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this ASU.  The amended guidance is effective for interim and annual periods beginning after January 1, 2013 and should be applied retrospectively to all periods presented. The adoption of the disclosure requirements had no impact on the Company’s consolidated financial statements.
 
    In October 2012, the FASB issued ASU 2012-06, "Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution."  The amendments in this update clarify the applicable guidance for subsequently measuring an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. The update provides that changes in cash flows expected to be collected on the indemnification asset arising subsequent to initial recognition as a result of changes in cash flows expected to be collected on the related indemnified assets should be accounted for on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The Company is required to adopt this update prospectively for the quarter ending September 30, 2013. The requirements of the update are consistent with the Company's existing accounting policy; therefore, adoption has no impact on the Company's consolidated financial position, results of operations or cash flows.
 
    In February 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income."  This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.  The adoption of the disclosure requirements had no impact on the Company’s consolidated financial statements.
 
Note 3 – Significant Accounting Policies
 
Certain Acquired Loans:  As part of business acquisitions, the Bank acquires certain loans that have shown evidence of credit deterioration since origination. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. Such acquired loans are accounted for individually. The Bank estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
 
Goodwill and Core Deposit Intangible: Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
 
Core deposit intangible assets arising from whole bank acquisitions are amortized on an accelerated method over their estimated useful lives, which range from 8 to 10 years.
 
 
Note 4 –  Acquisitions
 
San Diego Trust Bank Acquisition
 
    On June 25, 2013, the Company completed its acquisition of San Diego Trust Bank (“SDTB”) in exchange for consideration valued at $30.6 million which consisted of $16.2 million of cash and 1,198,255 shares of the Corporation’s common stock.
 
    SDTB was a San Diego, California based state-chartered bank.  The acquisition was an opportunity for the Company to acquire a banking network that complemented our existing banking franchise and expanded into a new market area.  Additionally, the SDTB acquisition improved the Company’s deposit base by lowering our cost of deposits and providing an opportunity to accelerate future core deposit growth in the San Diego, California, market area.
 
    Goodwill in the amount of $6.4 million was recognized in this acquisition.  Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities.  Goodwill recognized in this transaction is not deductible for income tax purposes.
 
    The following table represents the assets acquired and liabilities assumed of SDTB as of June 25, 2013 and the provisional fair value adjustments and amounts recorded by the Company in 2013 under the acquisition method of accounting:
 
   
SDTB
Book Value
   
Fair Value
Adjustments
   
Fair
Value
 
   
(dollars in thousands)
 
ASSETS ACQUIRED
                 
Cash and cash equivalents
  $ 30,252     $ -     $ 30,252  
Investment securities
    124,960       (155 )     124,805  
Loans, gross
    42,945       (552 )     42,393  
Allowance for loan losses
    (1,013 )     1,013       -  
Other real estate owned
    752       -       752  
Core deposit intangible
    -       2,836       2,836  
Other assets
    9,856       -       9,856  
Total assets acquired
  $ 207,752     $ 3,142     $ 210,894  
                         
LIABILITIES ASSUMED
                       
Deposits
  $ 183,901     $ 6     $ 183,907  
Deferred tax liability (asset)
    (333 )     1,255       922  
Other liabilities
    1,823       -       1,823  
Total liabilities assumed
    185,391       1,261       186,652  
Excess of assets acquired over liabilities assumed
  $ 22,361     $ 1,881       24,242  
Consideration paid
                    30,622  
Goodwill recognized
                  $ 6,380  

The Company accounted for these transactions under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.  The Company determined the fair value of the core deposit intangible, securities and deposits with the assistance of third-party valuations. The fair value of other real estate owned (“OREO”) was based on recent appraisals of the properties.
 
The estimated fair values are subject to refinement as additional information relative to the closing date fair values become available through the measurement period, which can extend for up to one year after the closing date of the transaction.  While additional significant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date.  During the measurement period, any such changes will be recorded as part of the closing date fair value.
 
First Association Bank Acquisition
 
     On March 15, 2013, the Company completed its acquisition of First Association Bank (“FAB”) in exchange for consideration valued as of the closing at $57.9 million which consisted of $43.0 million of cash and 1,279,217 shares of the Corporation’s common stock.
 
    FAB was a Dallas, Texas, based bank which specialized in providing commercial banking services to home owner association (“HOA”) management companies throughout the United States.  The FAB acquisition was an opportunity for the Company to acquire a highly efficient, consistently profitable and niche-focused business that complimented our banking franchise.  Additionally, this acquisition improved the Company’s deposit base by lowering our cost of deposits and providing a platform to accelerate future core deposit growth from HOAs.
 
    Goodwill in the amount of $11.9 million was recognized in this acquisition.  Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities.  Goodwill recognized in this transaction is not deductible for income tax purposes.
 
    The following table represents the assets acquired and liabilities assumed of FAB as of March 15, 2013, the provisional fair value adjustments and amounts recorded by the Company in 2013 under the acquisition method of accounting:
 
   
FAB
Book Value
   
Fair Value
Adjustments
   
Fair
Value
 
ASSETS ACQUIRED
 
(dollars in thousands)
 
Cash and cash equivalents
  $ 167,663     $ -     $ 167,663  
Investment securities
    219,913       2,478       222,391  
Loans, gross
    26,264       158       26,422  
Allowance for loan losses
    (224 )     224       -  
Core deposit intangible
    -       1,930       1,930  
Other assets
    5,823       -       5,823  
  Total assets acquired
  $ 419,439     $ 4,790     $ 424,229  
                         
LIABILITIES ASSUMED
                       
Deposits
  $ 356,737     $ 81     $ 356,818  
Borrowings
    16,905       -       16,905  
Deferred tax liability
    -       3,918       3,918  
Other Liabilities
    536       -       536  
  Total liabilities assumed
    374,178       3,999       378,177  
Excess of assets acquired over liabilities assumed
  $ 45,261     $ 791       46,052  
Consideration paid
                    57,906  
Goodwill recognized
                  $ 11,854  


There were no purchased credit impaired loans acquired from FAB or SDTB.  For loans acquired from FAB and SDTB, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows:
 
   
Acquired Loans
 
   
(dollars in thousands)
 
Contractual amounts due
  $ 79,358  
Cash flows not expected to be collected
    -  
Expected cash flows
    79,358  
Interest component of expected cash flows
    10,543  
Fair value of acquired loans
  $ 68,815  

In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been previously recorded by FAB or SDTB.
 
The operating results of the Company for the nine months ending September 30, 2013 include the operating results of FAB and SDTB since their respective acquisition dates.  The following table presents the net interest and other income, net income and earnings per share as if the merger with FAB and SDTB were effective as of January 1, 2013 and 2012.  There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:
 
   
Nine months Ended September 30,
 
   
2013
   
2012
 
             
Net interest and other income
  $ 52,738     $ 55,791  
Net income
    5,648       14,902  
Basic earnings per share
  $ 0.36     $ 1.16  
Diluted earnings per share
  $ 0.35     $ 1.13  
                 

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 Federal Deposit Insurance Corporation (“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”) stock and Federal Reserve Bank stock, $840,000 of a core deposit intangible and $3.8 million of other types of assets. 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 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 5 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:

 
   
September 30, 2013
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
U.S. Treasury
  $ 73     $ 9     $ -     $ 82  
Municipal bonds
    95,971       709       (1,795 )     94,885  
Mortgage-backed securities
    191,282       182       (3,585 )     187,879  
Total securities available for sale
  $ 287,326     $ 900     $ (5,380 )   $ 282,846  
                                 
   
December 31, 2012
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
U.S. Treasury
  $ 147     $ 12     $ -     $ 159  
Municipal bonds
    25,401       1,186       (1 )     26,586  
Mortgage-backed securities
    56,641       1,162       (482 )     57,321  
Total securities available for sale
  $ 82,189     $ 2,360     $ (483 )   $ 84,066  
                                 
   
September 30, 2012
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
U.S. Treasury
  $ 147     $ 13     $ -     $ 160  
Municipal bonds
    55,445       1,667       (15 )     57,097  
Mortgage-backed securities
    56,351       1,121       (479 )     56,993  
Total securities available for sale
  $ 111,943     $ 2,801     $ (494 )   $ 114,250  


At September 30, 2013, the Company had a $7.5 million investment in FHLB stock carried at cost.  During the nine months of 2013, the FHLB has repurchased $3.0 million of the Company’s excess FHLB stock through its stock repurchase program.
 
At September 30, 2013, mortgage-backed securities (“MBS”) with an estimated par value of $34.9 million and a fair value of $36.0 million were pledged as collateral for the Bank’s three reverse repurchase agreements which totaled $28.5 million.
 
The table below shows the number, fair value and gross unrealized holding losses of the Company’s investment securities by investment category and length of time that the securities have been in a continuous loss position.
 
   
September 30, 2013
 
   
Less than 12 months
   
12 months or Longer
   
Total
 
               
Gross
               
Gross
               
Gross
 
               
Unrealized
               
Unrealized
               
Unrealized
 
         
Fair
   
Holding
         
Fair
   
Holding
         
Fair
   
Holding
 
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
 
   
(dollars in thousands)
 
                                                       
Municipal bonds
    131     $ 60,183     $ (1,795 )     -     $ -     $ -       131     $ 60,183     $ (1,795 )
Mortgage-backed securities
    39       136,513       (2,725 )     1       13,117       (860 )     40       149,630       (3,585 )
Total
    170     $ 196,696     $ (4,520 )     1     $ 13,117     $ (860 )     171     $ 209,813     $ (5,380 )
                                                                         
   
December 31, 2012
 
   
Less than 12 months
   
12 months or Longer
   
Total
 
                   
Gross
                   
Gross
                   
Gross
 
                   
Unrealized
                   
Unrealized
                   
Unrealized
 
           
Fair
   
Holding
           
Fair
   
Holding
           
Fair
   
Holding
 
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
 
   
(dollars in thousands)
 
                                                                         
Municipal bonds
    1     $ 292     $ (1 )     -     $ -     $ -       1     $ 292     $ (1 )
Mortgage-backed securities
    2       15,128       (152 )     31       1,012       (330 )     33       16,140       (482 )
Total
    3     $ 15,420     $ (153 )     31     $ 1,012     $ (330 )     34     $ 16,432     $ (483 )
                                                                         
   
September 30, 2012
 
   
Less than 12 months
   
12 months or Longer
   
Total
 
                   
Gross
                   
Gross
                   
Gross
 
                   
Unrealized
                   
Unrealized
                   
Unrealized
 
           
Fair
   
Holding
           
Fair
   
Holding
           
Fair
   
Holding
 
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
   
Number
   
Value
   
Losses
 
   
(dollars in thousands)
 
                                                                         
Municipal bonds
    9     $ 2,775     $ (15 )     -     $ -     $ -       9     $ 2,775     $ (15 )
Mortgage-backed securities
    4       9,025       (33 )     34       1,004       (446 )     38       10,029       (479 )
Total
    13     $ 11,800     $ (48 )     34     $ 1,004     $ (446 )     47     $ 12,804     $ (494 )

The amortized cost and estimated fair value of investment securities available for sale at September 30, 2013, by contractual maturity are shown in the table below.
 
   
One Year
   
More than One
   
More than Five Years
   
More than
   
 
 
   
or Less
   
Year to Five Years
   
to Ten Years
   
Ten Years
   
Total
 
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
   
Cost
   
Value
 
   
(dollars in thousands)
 
Investment securities available for sale:
                                                           
U.S. Treasury
  $ -     $ -     $ 73     $ 82     $ -     $ -     $ -     $ -     $ 73     $ 82  
Municipal bonds
    -       -       9,995       9,905       42,734       42,392       43,242       42,588       95,971       94,885  
Mortgage-backed securities
    -       -       -       -       14,153       14,038       177,129       173,841       191,282       187,879  
Total investment securities available for sale
    -       -       10,068       9,987       56,887       56,430       220,371       216,429       287,326       282,846  
 
 

    Any temporary impairment is a result of the change in market interest rates and not the underlying issuers’ ability to repay.  The Company has the intent and ability to hold these securities until the temporary impairment is eliminated.  Accordingly, the Company has not recognized the temporary impairment in earnings.
 
Unrealized gains and losses on investment securities available for sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss.  At September 30, 2013, the Company had accumulated other comprehensive loss of $4.5 million, or $2.6 million net of tax, compared to accumulated other comprehensive income of $1.9 million, or $1.1 million net of tax, at December 31, 2012.
 
Note 6 – Loans Held for Investment
 
The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:
 
   
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
   
(in thousands)
 
Business loans:
                 
Commercial and industrial
  $ 173,720     $ 115,354     $ 88,105  
Commercial owner occupied (1)
    222,162       150,934       148,139  
SBA
    6,455       6,882       4,736  
Warehouse facilities
    49,104       195,761       112,053  
Real estate loans:
                       
Commercial non-owner occupied
    304,979       253,409       262,046  
Multi-family
    218,929       156,424       173,484  
One-to-four family (2)
    152,667       97,463       62,771  
Construction
    2,835       -       308  
Land
    7,371       8,774       11,005  
Other loans
    3,793       1,193       2,191  
Total gross loans (3)
    1,142,015       986,194       864,838  
Less loans held for sale, net
    3,176       3,681       4,728  
Total gross loans held for investment
    1,138,839       982,513       860,110  
Less:
                       
Deferred loan origination costs (fees) and premiums (discounts), net
    130       (306 )     (737 )
Allowance for loan losses
    (7,994 )     (7,994 )     (7,658 )
Loans held for investment, net
  $ 1,130,975     $ 974,213     $ 851,715  
                         
(1) Majority secured by real estate.
                       
(2)  Includes second trust deeds.
                       
(3) Total gross loans for September 30, 2013 are net of the unaccreted mark-to-market discounts on Canyon National loans of $2.3 million, on Palm Desert National loans of $3.7 million, and on SDTB loans of $230,000 and of the mark-to-market premium on FAB loans of $103,000.
 


From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.
 
The Company makes residential and commercial loans held for investment to customers located primarily in 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 $45.8 million for secured loans and $27.5 million for unsecured loans at September 30, 2013.  At September 30, 2013, the Bank’s largest aggregate outstanding balance of loans to one borrower was $34.9 million of secured credit.
 
Purchased Credit Impaired
 
The following table provides a summary of the Company’s investment in purchased credit impaired loans, acquired from Canyon National and Palm Desert National, as of the period indicated:
   
September 30, 2013
 
   
Canyon National
   
Palm Desert National
   
Total
 
   
(in thousands)
 
Business loans:
                 
Commercial and industrial
  $ 79     $ 174     $ 253  
Commercial owner occupied
    942       -       942  
Real estate loans:
                       
Commercial non-owner occupied
    1,009       -       1,009  
One-to-four family
    -       21       21  
Total purchase credit impaired
  $ 2,030     $ 195     $ 2,225  


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 September 30, 2013, the Company had $2.2 million of purchased credit impaired loans, of which $10,000 were placed on nonaccrual status.
 
The following table summarizes the accretable yield on the purchased credit impaired for the nine months ended September 30, 2013:
   
Nine Months Ended
 
   
September 30, 2013
 
   
Canyon National
   
Palm Desert National
   
Total
 
   
(in thousands)
 
                   
Balance at the beginning of period
  $ 2,029     $ 247     $ 2,276  
Accretable yield at acquisition
    -       -       -  
Accretion
    (348 )     (49 )     (397 )
Disposals and other
    (31 )     (514 )     (545 )
Change in accretable yield
    157       448       605  
Balance at the end of period
  $ 1,807     $ 132     $ 1,939  
                         
 
 
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)
 
September 30, 2013
                                         
Business loans:
                                         
Commercial and industrial
  $ 186     $ 68     $ -     $ 68     $ -     $ 326     $ 71  
Commercial owner occupied
    -       -       -       -       -       153       18  
SBA
    246       14       -       14       -       60       16  
Real estate loans:
                                                       
Commercial non-owner occupied
    527       437       -       437       -       983       157  
Multi-family
    -       -       -       -       -       144       2  
One-to-four family
    701       642       282       360       104       772       154  
Totals
  $ 1,660     $ 1,161     $ 282     $ 879     $ 104     $ 2,438     $ 418  
                                                         
                   
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, 2012
                                                       
Business loans:
                                                       
Commercial and industrial
  $ 707     $ 593     $ 287     $ 306     $ 270     $ 203     $ 29  
Commercial owner occupied
    -       -       -       -       -       444       -  
SBA
    810       259       -       259       -       468       21  
Real estate loans:
                                                       
Commercial non-owner occupied
    746       670       -       670       -       1,031       59  
Multi-family
    315       266       -       266       -       1,123       22  
One-to-four family
    960       948       541       407       395       720       59  
Totals
  $ 3,538     $ 2,736     $ 828     $ 1,908     $ 665     $ 3,989     $ 190  
                                                         
                   
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)
 
September 30, 2012
                                                       
Business loans:
                                                       
Commercial and industrial
  $ 59     $ 60     $ 60     $ -     $ 36     $ 140     $ 3  
Commercial owner occupied
    -       -       -       -       -       592       -  
SBA
    1,368       309       -       309       -       518       37  
Real estate loans:
                                                       
Commercial non-owner occupied
    507       460       -       460       -       1,257       15  
Multi-family
    1,437       1,394       -       1,394       -       1,408       67  
One-to-four family
    657       643       299       344       153       656       31  
Totals
  $ 4,028     $ 2,866     $ 359     $ 2,507     $ 189     $ 4,571     $ 153  
  
     The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or it is determined that the likelihood of the Company receiving all scheduled payments, including interest, when due is remote.  The Company has no commitments to lend additional funds to debtors whose loans have been impaired.
 
The Company reviews loans for impairment when the loan is classified as substandard or worse, delinquent 90 days, or determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a troubled debt 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:
 
   
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
   
(in thousands)
 
                   
Nonaccruing loans
  $ 972     $ 1,988     $ 1,439  
Accruing loans
    189       748       1,427  
Total impaired loans
  $ 1,161     $ 2,736     $ 2,866  

When loans are placed on nonaccrual status all accrued interest is reversed from earnings.  Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance.  If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only.  Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.
 
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest.  The Company had impaired loans on nonaccrual status of $972,000 at September 30, 2013, $2.0 million at December 31, 2012, and $1.4 million at September 30, 2012.  The Company had no loans 90 days or more past due and still accruing at September 30, 2013, December 31, 2012 or September 30, 2012.
 
The Company had an immaterial amount of TDRs related to two U.S. Small Business Administration (“SBA”) loans which were all completed prior to 2011.
 
Concentration of Credit Risk
 
As of September 30, 2013, 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 Bank maintains policies approved by the Bank’s Board of Directors (the “Bank Board”) that address these concentrations and continues to diversify its loan portfolio through loan originations, purchases and sales to meet approved concentration levels.  While management believes that the collateral presently securing these loans is adequate, there can be no assurances that 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 Bank Board.  The Bank’s seasoned underwriters ensure all key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis of the prospective borrowers.  The credit approval process mandates multiple-signature approval by the management credit committee for every loan that requires any subjective credit analysis.
 
Credit risk is managed within the loan portfolio by the Company’s Portfolio Management department based on a comprehensive credit and investment review policy.  This policy requires a program of financial data collection and analysis, comprehensive loan reviews, property and/or business inspections and monitoring of portfolio concentrations and trends.  The Portfolio Management department also monitors asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help identify potential credit risk.  Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, and in most cases more often, including the assignment of a risk grade.
 
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications as such classifications are defined by the regulatory agencies.  The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio.  Risk grades are reviewed regularly by the Company’s Credit and 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 classifications represent assets with a level of credit quality which contain no well-defined deficiency or weakness.
·  
Special Mention assets do not currently expose the Bank to a sufficient risk to warrant classification in one of the adverse categories, but possess correctable deficiency or potential weaknesses deserving management’s close attention.
·  
Substandard assets are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  These assets are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  OREO acquired from foreclosure is also classified as substandard.
·  
Doubtful credits have all the weaknesses inherent in substandard credits, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
·  
Loss assets are those that are considered uncollectible and of such little value that their continuance as assets is not warranted.  Amounts classified as loss are promptly charged off.
 
The Portfolio Management department also manages loan performance risks, collections, workouts, bankruptcies and foreclosures.  Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credits when they are identified.  Collection efforts are commenced immediately upon non-payment, and the portfolio managers seek to promptly determine the appropriate steps to minimize the Company’s risk of loss.  When foreclosure will maximize the Company’s recovery for a non-performing loan, the portfolio managers will take appropriate action to initiate the foreclosure process.
 
When a loan is graded as special mention or substandard or doubtful, the Company obtains an updated valuation of the underlying collateral.  If the credit in question is also identified as impaired, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses (“ALLL”) if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable.  The Company typically continues to obtain updated valuations of underlying collateral for special mention and classified loans on an annual basis in order to have the most current indication of fair value.  Once a loan is identified as impaired, an analysis of the underlying collateral is performed at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.
 
The following tables stratify the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio as of the periods indicated:
   
Credit Risk Grades
 
         
Special
         
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
September 30, 2013
 
(in thousands)
 
Business loans:
                       
Commercial and industrial
  $ 170,840     $ 68     $ 2,812     $ 173,720  
Commercial owner occupied
    207,519       2,632       12,011       222,162  
SBA
    6,455       -       -       6,455  
Warehouse facilities
    49,104       -       -       49,104  
Real estate loans:
                               
Commercial non-owner occupied
    299,940       355       4,684       304,979  
Multi-family
    217,897       513       519       218,929  
One-to-four family
    151,564       -       1,103       152,667  
Construction
    2,835       -       -       2,835  
Land
    7,371       -       -       7,371  
Other loans
    3,787       -       6       3,793  
Totals
  $ 1,117,312     $ 3,568     $ 21,135     $ 1,142,015  
                                 
   
Credit Risk Grades
 
           
Special
           
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
December 31, 2012
 
(in thousands)
 
Business loans:
                               
Commercial and industrial
  $ 111,895     $ 92     $ 3,367     $ 115,354  
Commercial owner occupied
    136,330       2,674       11,930       150,934  
SBA
    6,819       -       63       6,882  
Warehouse facilities
    195,761       -       -       195,761  
Real estate loans:
                               
Commercial non-owner occupied
    240,585       687       12,137       253,409  
Multi-family
    143,003       11,583       1,838       156,424  
One-to-four family
    96,061       -       1,402       97,463  
Land
    8,762       -       12       8,774  
Other loans
    1,177       -       16       1,193  
Totals
  $ 940,393     $ 15,036     $ 30,765     $ 986,194  
                                 
   
Credit Risk Grades
 
           
Special
           
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
September 30, 2012
 
(in thousands)
 
Business loans:
                               
Commercial and industrial
  $ 86,000     $ 847     $ 1,258     $ 88,105  
Commercial owner occupied
    137,289       3,334       7,516       148,139  
SBA
    4,455       -       281       4,736  
Warehouse facilities
    112,053       -       -       112,053  
Real estate loans:
                               
Commercial non-owner occupied
    252,216       663       9,167       262,046  
Multi-family
    170,365       -       3,119       173,484  
One-to-four family
    61,378       -       1,393       62,771  
Construction
    308       -       -       308  
Land
    9,009       -       1,996       11,005  
Other loans
    2,174       -       17       2,191  
Totals
  $ 835,247     $ 4,844     $ 24,747     $ 864,838  


 
 
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
 
September 30, 2013
 
(in thousands)
 
Business loans:
                               
Commercial and industrial
  $ 173,478   $ 163   $ 79   $ -   $ 173,720   $ 78  
Commercial owner occupied
    222,162     -     -     -     222,162     -  
SBA
    6,312     -     129     14     6,455     142  
Warehouse facilities
    49,104     -     -     -     49,104     -  
Real estate loans:
                                     
Commercial non-owner occupied
    304,420     559     -     -     304,979     437  
Multi-family
    218,929     -     -     -     218,929     -  
One-to-four family
    152,570     -     -     97     152,667     496  
Construction
    2,835     -     -     -     2,835     -  
Land
    7,371     -     -     -     7,371     -  
Other loans
    3,785     2     6     -     3,793     -  
Totals
  $ 1,140,966   $ 724   $ 214   $ 111   $ 1,142,015   $ 1,153  
                                       
         
Days Past Due
       
Non-
 
   
Current
    30-59     60-89     90+  
Total
 
Accruing
 
December 31, 2012
 
(in thousands)
 
Business loans:
                                     
Commercial and industrial
  $ 115,078   $ -   $ 58   $ 218   $ 115,354   $ 347  
Commercial owner occupied
    150,689     -     245     -     150,934     14  
SBA
    6,697     -     -     185     6,882     260  
Warehouse facilities
    195,761     -     -     -     195,761     -  
Real estate loans:
                                     
Commercial non-owner occupied
    253,409     -     -     -     253,409     670  
Multi-family
    156,424     -     -     -     156,424     266  
One-to-four family
    97,283     101     -     79     97,463     522  
Land
    8,774     -     -     -     8,774     127  
Other loans
    1,188     5     -     -     1,193     -  
Totals
  $ 985,303   $ 106   $ 303   $ 482   $ 986,194   $ 2,206  
                                       
         
Days Past Due
       
Non-
 
   
Current
    30-59     60-89     90+  
Total
 
Accruing
 
September 30, 2012
 
(in thousands)
 
Business loans:
                                     
Commercial and industrial
  $ 87,984   $ -   $ 121   $ -   $ 88,105   $ -  
Commercial owner occupied
    147,812     327     -     -     148,139     218  
SBA
    4,551     -     -     185     4,736     266  
Warehouse facilities
    112,053     -     -     -     112,053     -  
Real estate loans:
                                     
Commercial non-owner occupied
    256,489     1,708     -     3,849     262,046     4,528  
Multi-family
    173,484     -     -     -     173,484     273  
One-to-four family
    62,307     301     43     120     62,771     578  
Construction
    308     -     -     -     308     -  
Land
    10,776     229     -     -     11,005     417  
Other loans
    2,191     -     -     -     2,191     -  
Totals
  $ 857,955   $ 2,565   $ 164   $ 4,154   $ 864,838   $ 6,280  

Note 7 – Allowance for Loan Losses
 
The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio.  The ALLL is prepared using the information provided by the Company’s credit and investment review process together with data from peer institutions and economic information gathered from published sources.
 
The loan portfolio is segmented into groups of loans with similar risk characteristics.  Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions.  An estimated loss rate calculated using the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.
 
The following provides a summary of the ALLL calculation for the major segments within the Company’s loan portfolio.
 
Owner Occupied Commercial Real Estate Loans, Commercial and Industrial Loans and SBA Loans
 
The Company's base ALLL factor for owner occupied commercial real estate loans, commercial business loans and SBA loans is determined by management using the Bank's actual trailing 36 month, 24 month, trailing 12 month and annualized trailing six month charge-off data.  Adjustments to those base factors are made for relevant internal and external factors.  For owner occupied commercial real estate loans, commercial business loans and SBA loans, those factors include:
 
·  
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
 
·  
Changes in the nature and volume of the loan portfolio, including new types of lending,
 
·  
Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and
 
·  
The existence and effect of concentrations of credit, and changes in the level of such concentrations.
 
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1 through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 
Multi-Family and Non-Owner Occupied Commercial Real Estate Loans
 
The Company's base ALLL factor for multi-family and non-owner occupied commercial real estate loans is determined by management using the Bank's actual trailing 36 month, 24 month, trailing 12 month and annualized trailing six month charge-off data.  Adjustments to those base factors are made for relevant internal and external factors.  For multi-family and non-owner occupied commercial real estate loans, those factors include:
 
·  
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
 
·  
Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and
 
·  
The existence and effect of concentrations of credit, and changes in the level of such concentrations.
 
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1 through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 
One-to-Four Family and Consumer Loans
 
The Company's base ALLL factor for one-to-four family and consumer loans is determined by management using the Bank's actual trailing 36 month, trailing 24 month, trailing 12 month and annualized trailing six month charge-off data.  Adjustments to those base factors are made for relevant internal and external factors.  For one-to-four family and consumer loans, those factors include:
 
·  
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment, and
·  
Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
 
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1 through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 
Warehouse Facilities
 
The Company's warehouse facilities are structured as repurchase facilities, whereby we purchase funded one-to-four family loans on an interim basis.  Therefore, the base ALLL factor for warehouse facilities is equal to that for one-to-four family and consumer loans as discussed above.  Adjustments to the base factor are made for relevant internal and external factors.  Those factors include:
 
·  
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
 
·  
Changes in the nature and volume of the loan portfolio, including new types of lending, and
 
·  
The existence and effect of concentrations of credit, and changes in the level of such concentrations.
 
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for one-to-four family loans for all FDIC insured commercial banks and savings institutions based in California.  This factor is applied to balances graded pass-1 through pass-5.  For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
 
The following tables summarize the allocation of the ALLL as well as the activity in the ALLL attributed to various segments in the loan portfolio as of and For the nine months ended for the periods indicated:
   
Commercial and industrial
   
Commercial owner occupied
   
SBA
   
Warehouse
   
Commercial non-owner occupied
   
Multi-family
   
One-to-four family
   
Construction
   
Land
   
Other loans
   
Total
 
   
(dollars in thousands)
 
                                                                   
Balance, December 31, 2012
  $ 1,310     $ 1,512     $ 79     $ 1,544     $ 1,459     $ 1,145     $ 862     $ -     $ 31     $ 52     $ 7,994  
Charge-offs
    (291 )     (163 )     (16 )     -       (757 )     (101 )     (273 )     -       -       (7 )     (1,608 )
Recoveries
    107       -       51       -       -       -       45       -       -       141       344  
Provisions for (reduction in) loan losses
    1,675       170       (64 )     (1,319 )     701       (538 )     540       121       116       (138 )     1,264  
Balance, September 30, 2013
  $ 2,801     $ 1,519     $ 50     $ 225     $ 1,403     $ 506     $ 1,174     $ 121     $ 147     $ 48     $ 7,994  
Amount of allowance attributed to:
                                                                                       
Specifically evaluated impaired loans
  $ -     $ -     $ -     $ -     $ -     $ -     $ 104     $ -     $ -     $ -     $ 104  
General portfolio allocation
    2,801       1,519       50       225       1,403       506       1,070       121       147       48       7,890  
Loans individually evaluated for impairment
    68       -       14       -       437       -       642       -       -       -       1,161  
Specific reserves to total loans individually evaluated for impairment
    0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     16.20 %     0.00 %     0.00 %     0.00 %     8.96 %
Loans collectively evaluated for impairment
  $ 173,652     $ 222,162     $ 6,441     $ 49,104     $ 304,542     $ 218,929     $ 152,025     $ 2,835     $ 7,371     $ 3,793     $ 1,140,854  
General reserves to total loans collectively evaluated for impairment
    1.61 %     0.68 %     0.78 %     0.46 %     0.46 %     0.23 %     0.70 %     4.27 %     1.99 %     1.27 %     0.69 %
Total gross loans
  $ 173,720     $ 222,162     $ 6,455     $ 49,104     $ 304,979     $ 218,929     $ 152,667     $ 2,835     $ 7,371     $ 3,793     $ 1,142,015  
Total allowance to gross loans
    1.61 %     0.68 %     0.77 %     0.46 %     0.46 %     0.23 %     0.77 %     4.27 %     1.99 %     1.27 %     0.70 %
                                                                                         
   
Commercial and industrial
   
Commercial owner occupied
   
SBA
   
Warehouse
   
Commercial non-owner occupied
   
Multi-family
   
One-to-four family
   
Construction
   
Land
   
Other loans
   
Total
 
   
(dollars in thousands)
 
                                                                                         
Balance, December 31, 2011
  $ 1,361     $ 1,119     $ 80     $ 1,347     $ 1,287     $ 2,281     $ 931     $ -     $ 39     $ 77     $ 8,522  
Charge-offs
    (270 )     (405 )     (132 )     -       (88 )     -       (305 )     -       (5 )     (2 )     (1,207 )
Recoveries
    2       -       162       -       2       -       7       -       -       25       198  
Provisions for (reduction in) loan losses
    (269 )     437       (44 )     (301 )     835       (184 )     (215 )     -       (34 )     (80 )     145  
Balance, September 30, 2012
  $ 824     $ 1,151     $ 66     $ 1,046     $ 2,036     $ 2,097     $ 418     $ -     $ -     $ 20     $ 7,658  
Amount of allowance attributed to:
                                                                                       
Specifically evaluated impaired loans
  $ 36     $ -     $ -     $ -     $ -     $ -     $ 153     $ -     $ -     $ -     $ 189  
General portfolio allocation
    788       1,151       66       1,046       2,036       2,097       265       -       -       20       7,469  
Loans individually evaluated for impairment
    60       -       309       -       460       1,394       643       -       -       -       2,866  
Specific reserves to total loans individually evaluated for impairment
    60.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     23.79 %     0.00 %     0.00 %     0.00 %     6.59 %
Loans collectively evaluated for impairment
  $ 88,045     $ 148,139     $ 4,427     $ 112,053     $ 261,586     $ 172,090     $ 62,128     $ 308     $ 11,005     $ 2,191     $ 861,972  
General reserves to total loans collectively evaluated for impairment
    0.89 %     0.78 %     1.49 %     0.93 %     0.78 %     1.22 %     0.43 %     0.00 %     0.00 %     0.91 %     0.87 %
Total gross loans
  $ 88,105     $ 148,139     $ 4,736     $ 112,053     $ 262,046     $ 173,484     $ 62,771     $ 308     $ 11,005     $ 2,191     $ 864,838  
Total allowance to gross loans
    0.94 %     0.78 %     1.39 %     0.93 %     0.78 %     1.21 %     0.67 %     0.00 %     0.00 %     0.91 %     0.89 %

Note 8 – Subordinated Debentures
 
In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) to PPBI Trust I, which funded the payment of $10.0 million of Floating Rate Trust Preferred Securities (“Trust Preferred Securities”) issued by PPBI Trust I in March 2004.  The net proceeds from the offering of Trust Preferred Securities were contributed as capital to the Bank to support further growth.  Interest is payable quarterly on the Subordinated Debentures at three-month LIBOR plus 2.75% per annum, for an effective rate of 3.02% per annum as of September 30, 2013.
 
The Corporation is not allowed to consolidate PPBI Trust I into the Company’s consolidated financial statements.  The resulting effect on the Company’s consolidated financial statements is to report only the Subordinated Debentures as a component of the Company’s liabilities.
 
Note 9 – Earnings Per Share
 
Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common shares in treasury.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings and excludes common shares in treasury.  Stock options exercisable for shares of common stock are excluded from the computation of diluted earnings per share if they are anti-dilutive due to their exercise price exceeding the average market price during the period.
 
The impact of stock options which are anti-dilutive are excluded from the computations of diluted earnings per share.  The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases.  The following table sets forth the number of stock options excluded for the periods indicated:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2013
2012
2013
2012
         
Stock options excluded
          13,744
        233,630
          53,310
        358,151


The following tables set forth the Company’s unaudited earnings per share calculations for the periods indicated:
   
Three Months Ended September 30,
 
   
2013
   
2012
 
   
Net
         
Per Share
   
Net
         
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
   
(dollars in thousands, except per share data)
 
                                     
Net income
  $ 3,066                 $ 3,462              
Basic income available to common stockholders
    3,066       16,640,471     $ 0.19       3,462       10,330,814     $ 0.34  
Effect of warrants and dilutive stock options
    -       841,759               -       502,120          
Diluted income available to common stockholders plus assumed conversions
  $ 3,066       17,482,230     $ 0.18     $ 3,462       10,832,934     $ 0.32  
                                                 
   
Nine Months Ended September 30,
 
      2013      2012  
   
Net
           
Per Share
   
Net
           
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
   
(dollars in thousands, except per share data)
 
                                                 
Net income
  $ 4,789                     $ 11,965                  
Basic income available to common stockholders
    4,789       15,512,508     $ 0.31       11,965       10,332,223     $ 1.16  
Effect of warrants and dilutive stock options
    -       802,193               -       377,599          
Diluted income available to common stockholders plus assumed conversions
  $ 4,789       16,314,701     $ 0.29     $ 11,965       10,709,822     $ 1.12  
 
 
Note 10 – Fair Value of Financial Instruments
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
 
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.  The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at September 30, 2013, December 31, 2012 and September 30, 2012:
 
Cash and due from banks – The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Securities Available for Sale – Where possible, the Company utilizes quoted market prices to measure debt and equity securities; such items are classified as Level 1 in the hierarchy and include equity securities, US government bonds and securities issued by federally sponsored agencies.  When quoted market prices for identical assets are unavailable or the market for the asset is not sufficiently active, varying valuation techniques are used.  Common inputs in valuing these assets include, among others, benchmark yields, issuer spreads, forward mortgage-backed securities trade prices and recently reported trades.  Such assets are classified as Level 2 in the hierarchy and typically include private label mortgage-backed securities and corporate bonds.  Pricing on these securities are provided to the Company by a pricing service vendor.  In the Level 3 category, the Company is classifying the securities that reflected an other-than-temporary impairments (“OTTI”) charge based on the discounted cash flow of the security or a determination of fair value that requires significant management judgment or consideration.
 
FHLB, Federal Reserve Bank Stock and The Independent BankersBank (“TIB”) Stock – The carrying value approximates the fair value based upon the redemption provisions of the stock and are classified as Level 1.
 
Loans Held for Sale - The fair value of loans held for sale is determined, when possible, using quoted secondary-market prices.  If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan.  Loans held for sale are classified as Level 2.
 
Loans Held for Investment— For variable-rate loans that re-price frequently and have no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.  The carrying amount of accrued interest receivable approximates its fair value as a Level 1 classification.
 
OREO OREO assets are recorded at the fair value less estimated costs to sell at the time of foreclosure.  The fair value of OREO assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 
Accrued Interest Receivable/Payable The carrying amount approximates fair value and are classified as Level 1.
 
Deposit Accounts— The fair values estimated for demand deposits (interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) resulting in a Level 1 classification.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits in a Level 2 classification.  The carrying amount of accrued interest payable approximates its fair value as a Level 1 classification.
 
FHLB Advances and Other Borrowings— For these instruments, the fair value of short term borrowings is estimated to be the carrying amount and is classified as Level 1.  The fair value of long term borrowings and debentures is determined using rates currently available for similar borrowings or debentures with similar credit risk and for the remaining maturities and are classified as Level 2.  The carrying amount of accrued interest payable approximates its fair value as a Level 1 classification.
 
Subordinated Debentures – The fair value of subordinated debentures is estimated by discounting the balance by the current three-month LIBOR rate plus the current market spread.  The fair value is determined based on the maturity date as the Company does not currently have intentions to call the debenture and is classified as Level 2.
 
Off-Balance Sheet Commitments and Standby Letters of Credit – The majority of the Bank’s commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower.  The notional amount disclosed for off-balance sheet commitments and standby letters of credit is the amount available to be drawn down on all lines and letters of credit.  The cost to assume is calculated at 10% of the notional amount and is classified as Level 2.
 
Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
 
The fair value estimates presented herein are based on pertinent information available to management as of the periods indicated.
 
 
At September 30, 2013
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                             
Cash and cash equivalents
  $ 61,419     $ 61,419     $ -     $ -     $ 61,419  
Securities available for sale
    282,846       187,961       94,885       -       282,846  
Federal Reserve Bank, TIB and FHLB stock, at cost
    10,827       10,827       -       -       10,827  
Loans held for sale, net
    3,176       -       3,176       -       3,176  
Loans held for investment, net
    1,130,975       -       -       1,225,352       1,225,352  
Accrued interest receivable
    5,629       5,629       -       -       5,629  
                                         
Liabilities:
                                       
Deposit accounts
    1,284,134       998,217       284,403       -       1,282,620  
FHLB advances
    35,000       35,000       -       -       35,000  
Other borrowings
    51,474       -       53,435       -       53,435  
Subordinated debentures
    10,310       -       4,766       -       4,766  
Accrued interest payable
    195       195       -       -       195  
                                         
   
Notional Amount
   
Level 1
   
Level 2
   
Level 3
   
Cost to Cede
or Assume
 
Off-balance sheet commitments and standby letters of credit
  $ 333,592     $ -     $ 33,359     $ -     $ 33,359  
                                         
   
At December 31, 2012
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                                       
Cash and cash equivalents
  $ 59,352     $ 59,352     $ -     $ -     $ 59,352  
Securities available for sale
    84,066       81,042       2,072       952       84,066  
Federal Reserve Bank and FHLB stock, at cost
    11,247       11,247       -       -       11,247  
Loans held for sale, net
    3,681       -       3,681       -       3,681  
Loans held for investment, net
    974,213       -       -       1,049,589       1,049,589  
Accrued interest receivable
    4,126       4,126       -       -       4,126  
                                         
Liabilities:
                                       
Deposit accounts
    904,768       548,101       363,382       -       911,483  
FHLB advances
    87,000       87,000       -       -       87,000  
Other borrowings
    28,500       -       31,267       -       31,267  
Subordinated debentures
    10,310       -       4,973       -       4,973  
Accrued interest payable
    142       142       -       -       142  
                                         
   
Notional Amount
   
Level 1
   
Level 2
   
Level 3
   
Cost to Cede
or Assume
 
Off-balance sheet commitments and standby letters of credit
  $ 131,450     $ -     $ 13,145     $ -     $ 13,145  
                                         
   
At September 30, 2012
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                                       
Cash and cash equivalents
  $ 58,243     $ 58,243     $ -     $ -     $ 58,243  
Securities available for sale
    114,250       54,099       59,190       961       114,250  
Federal Reserve Bank and FHLB stock, at cost
    12,191       12,191       -       -       12,191  
Loans held for sale, net
    4,728       -       4,728       -       4,728  
Loans held for investment, net
    851,715       -       -       931,640       931,640  
Accrued interest receivable
    3,933       3,933       -       -       3,933  
                                         
Liabilities:
                                       
Deposit accounts
    895,870       476,852       422,036       -       898,888  
FHLB advances
    47,000       47,000       -       -       47,000  
Other borrowings
    28,500       -       32,360       -       32,360  
Subordinated debentures
    10,310       -       8,222       -       8,222  
Accrued interest payable
    213       213       -       -       213  
                                         
   
Notional Amount
   
Level 1
   
Level 2
   
Level 3
   
Cost to Cede
or Assume
 
Off-balance sheet commitments and standby letters of credit
  $ 152,057     $ -     $ 15,206     $ -     $ 15,206  


A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows.  The Company measures impairment on all non-accrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost.  As such, the Company records impaired loans as non-recurring Level 2 when the fair value of the underlying collateral is based on an observable market price or current appraised value.  When current market prices are not available or the Company determines that the fair value of the underlying collateral is further impaired below appraised values, the Company records impaired loans as Level 3.  At September 30, 2013, substantially all the Company’s impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to management.
 
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.  While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
The following fair value hierarchy table presents information about the Company’s financial instruments measured at fair value on a recurring basis at the dates indicated:
   
September 30, 2013
 
   
Fair Value Measurement Using
       
   
Level 1
   
Level 2
   
Level 3
   
Securities at
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
U.S. Treasury
  $ 82     $ -     $ -     $ 82  
Municipal bonds
    -       94,885       -       94,885  
Mortgage-backed securities
    187,879       -       -       187,879  
Total securities available for sale
  $ 187,961     $ 94,885     $ -     $ 282,846  
Stock:
                               
FHLB stock
  $ 7,532     $ -     $ -     $ 7,532  
Federal Reserve Bank stock
    3,295       -       -       3,295  
Total stock
    10,827       -       -       10,827  
Total securities
  $ 198,788     $ 94,885     $ -     $ 293,673  
                                 
   
September 30, 2012
 
   
Fair Value Measurement Using
         
   
Level 1
   
Level 2
   
Level 3
   
Securities at
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
U.S. Treasury
  $ 160     $ -     $ -     $ 160  
Municipal bonds
    -       57,097       -       57,097  
Mortgage-backed securities
    53,939       2,093       961       56,993  
Total securities available for sale
  $ 54,099     $ 59,190     $ 961     $ 114,250  
Stock:
                               
FHLB stock
  $ 10,172     $ -     $ -     $ 10,172  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
    12,191       -       -       12,191  
Total securities
  $ 66,290     $ 59,190     $ 961     $ 126,441  

The following table provides a summary of the changes in balance sheet carrying values associated with Level 3 financial instruments during the nine months ended for the periods indicated:

 
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
   
(in thousands)
 
Balance, beginning of period
  $ 952     $ 991  
Total gains or (losses) realized/unrealized:
               
Included in earnings (or changes in net assets)
    194       (118 )
Included in other comprehensive income
    (140 )     290  
Purchases, issuances, and settlements
    (1,077 )     (202 )
Transfer in and/or out of Level 3
    71       -  
Balance, end of period
  $ -     $ 961  


    The following table provides a summary of the financial instruments the Company measures at fair value on a non-recurring basis as of the periods indicated:
 
   
September 30, 2013
   
Fair Value Measurement Using
       
   
Level 1
   
Level 2
   
Level 3
   
Assets at
Fair Value
 
   
(in thousands)
 
Assets
                       
Impaired loans
  $ -     $ -     $ 1,161     $ 1,161  
Other real estate owned
    -       -       1,186       1,186  
Total assets
  $ -     $ -     $ 2,347     $ 2,347  
                                 
   
September 30, 2012
 
   
Fair Value Measurement Using
         
   
Level 1
   
Level 2
   
Level 3
   
Assets at
Fair Value
 
   
(in thousands)
 
Assets
                               
Impaired loans
  $ -     $ -     $ 2,866     $ 2,866  
Other real estate owned
    -       -       5,521       5,521  
Total assets
  $ -     $ -     $ 8,387     $ 8,387  


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based.  Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phrases of similar meaning.  We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control.  Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
 
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
 
·  
The strength of the United States economy in general and the strength of the local economies in which we conduct operations;
 
·  
The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
 
·  
Inflation/deflation, interest rate, market and monetary fluctuations;
 
·  
The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
 
·  
The willingness of users to substitute competitors’ products and services for our products and services;
 
·  
The impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
 
·  
Technological changes;
 
·  
The effect of the SDTB Acquisition, the FAB Acquisition, the Palm Desert National Acquisition, the Canyon National Acquisition and other acquisitions we may make, if any, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
 
·  
Changes in the level of our nonperforming assets and charge-offs;
 
 
·  
The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB or other accounting standards setters;
 
·  
Possible OTTI of securities held by us;
 
·  
The impact of current governmental efforts to restructure the United States financial regulatory system, including enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
 
·  
Changes in consumer spending, borrowing and savings habits;
 
·  
The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
 
·  
Ability to attract deposits and other sources of liquidity;
 
·  
Changes in the financial performance and/or condition of our borrowers;
 
·  
Changes in the competitive environment among financial and bank holding companies and other financial service providers;
 
·  
Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
 
·  
Unanticipated regulatory or judicial proceedings; and
 
·  
Our ability to manage the risks involved in the foregoing.
 
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC.  Therefore, we caution you not to place undue reliance on our forward-looking information and statements.  We will not update the forward-looking information and statements to reflect actual results or changes in the factors affecting the forward-looking information and statements.  For information on the factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our 2012 Annual Report.
 
Forward-looking information and statements should not be viewed as predictions, and should not be the primary basis upon which investors evaluate us.  Any investor in our common stock should consider all risks and uncertainties disclosed in our filings with the SEC, all of which are accessible on the SEC’s website at http://www.sec.gov.
 
GENERAL
 
This discussion should be read in conjunction with our Management Discussion and Analysis of Financial Condition and Results of Operations included in our 2012 Annual Report, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.  The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results expected for the year ending December 31, 2013.
 
The Corporation is a California-based bank holding company incorporated in the state of Delaware and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”).  Our wholly owned subsidiary, Pacific Premier Bank, is a California state chartered commercial bank.  As a bank holding company, the Corporation is subject to regulation and supervision by the Federal Reserve.  We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA.  The Federal Reserve may conduct examinations of bank holding companies, such as the Corporation, and its subsidiaries.  The Corporation is also a bank holding company within the meaning of the California Financial Code.  As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Business Oversight-Division of Financial Institutions (“DBO”).
 
A bank holding company, such as the Corporation, is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such a policy.  The Federal Reserve, under the BHCA, has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
 
As a California state-chartered commercial bank which is a member of the Federal Reserve, the Bank is subject to supervision, periodic examination and regulation by the DBO and the Federal Reserve.  The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund.  In general terms, insurance coverage is unlimited for non-interest bearing transaction accounts and up to $250,000 per depositor for all other accounts in accordance with the Dodd-Frank Act.  As a result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank.  If, as a result of an examination of the Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators.  Such remedies include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict growth, to assess civil monetary penalties, to remove officers and directors and ultimately to request the FDIC to terminate the Bank’s deposit insurance.  As a California-chartered commercial bank, the Bank is also subject to certain provisions of California law.
 
We provide banking services within our targeted markets in Southern California to businesses, including the owners and employees of those businesses, professionals, real estate investors and non-profit organizations, as well as consumers in the communities we serve.  Additionally, through our HOA Banking and Lending unit we provide customized cash management, electronic banking services and credit facilities to HOAs and HOA management companies nationwide.   At September 30, 2013, the Bank operated 13 full-service depository branches in Southern California located in the cities of Encinitas, Huntington Beach, Irvine, Los Alamitos, Newport Beach, Palm Springs, Palm Desert, Point Loma, San Bernardino, San Diego and Seal Beach and one office located Dallas, Texas.  Our corporate headquarters are located in Irvine, California.  Through our branches and our web site at www.ppbi.com, we offer a broad array of deposit products and services for both business and consumer customers, including checking, money market and savings accounts, cash management services, electronic banking, and on-line bill payment.  We also offer a variety of loan products, including commercial business loans, lines of credit, commercial real estate loans, SBA loans, residential home loans, and home equity loans.  The Bank funds its lending and investment activities with retail deposits obtained through its branches, advances from the FHLB, lines of credit, and wholesale and brokered certificates of deposits.
 
Our principal source of income is the net spread between interest earned on loans and investments and the interest costs associated with deposits and borrowings used to finance the loan and investment portfolios.  Additionally, the Bank generates fee income from loan and investment sales and various products and services offered to both depository and loan customers.
 
CRITICAL ACCOUNTING POLICIES
 
Management has established various accounting policies that govern the application of U.S. GAAP in the preparation of our financial statements.  Our significant accounting policies are described in the Notes to the Consolidated Financial Statements in our 2012 Annual Report.  There have been no significant changes to our Critical Accounting Policies as described in our 2012 Annual Report.
 
Certain accounting policies require management to make estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities; management considers these to be critical accounting policies.  The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances.  Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at balance sheet dates and our results of operations for future reporting periods.
 
We consider the ALLL to be a critical accounting policy that requires judicious estimates and assumptions in the preparation of our financial statements that is particularly susceptible to significant change.  For further information, see “Allowances for Loan Losses” discussed in Note 6 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in our 2012 Annual Report.
 
SDTB ACQUISITION
 
Effective June 25, 2013, the Bank acquired SDTB, a San Diego, California, based state-chartered bank, pursuant to the terms of a definitive agreement entered into by the Corporation, the Bank and SDTB on March 6, 2013.  As a result of the SDTB Acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $210.9 million, including:
 
·  
$124.8 million in investment securities;
 
·  
$42.4 million of loans;
 
·  
$30.3 million of cash and cash equivalents;
 
·  
$6.4 million in goodwill;
 
·  
$5.8 million in bank owned life insurance;
 
·  
$4.1 million of other types of assets; and
 
·  
$2.8 million of a core deposit intangible.
 
Also as a result of the SDTB Acquisition, the Bank recorded equity of $14.4 million in connection with the Corporation’s stock issued to SDTB shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $186.7 million, including:
 
·  
$178.8 million in deposit transaction accounts;
 
·  
$5.1 million in retail certificates of deposit;
 
·  
$1.9 million other liabilities; and
 
·  
$922,000 in deferred tax liability.
 
The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures.
 
The acquisition was an opportunity for the Company to acquire a banking network that complemented our existing banking franchise and expanded into a new market area.  Additionally, the SDTB acquisition improved the Company’s deposit base by lowering our cost of deposits and providing an opportunity to accelerate future core deposit growth in the San Diego, California, market area.
 
FAB ACQUISITION
 
Effective March 15, 2013, the Bank acquired FAB, a Dallas, Texas, based Texas-chartered bank, pursuant to the terms of a definitive agreement entered into by the Bank and the FAB on October 15, 2012.  As a result of the FAB Acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $424.2 million, including:
 
·  
$222.4 million in investment securities;
 
·  
$167.7 million of cash and cash equivalents;
 
·  
$26.4 million of loans;
 
·  
$11.9 million in goodwill;
 
·  
$5.8 million of other types of assets; and
 
·  
$1.9 million of a core deposit intangible.
 
Also as a result of the FAB Acquisition, the Bank recorded equity of $14.9 million in connection with the Corporation’s stock issued to FAB shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $378.2 million, including:
 
·  
$329.5 million in deposit transaction accounts;
 
·  
$17.4 million in retail certificates of deposit;
 
·  
$9.9 million in wholesale deposits;
 
·  
$16.9 million in other borrowings;
 
·  
$3.9 million in deferred tax liability; and
 
·  
$536,000 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.
 
The FAB acquisition was an opportunity for the Company to acquire a highly efficient, consistently profitable and niche-focused business that complimented our banking franchise.  Additionally, this acquisition improved the Company’s deposit base by lowering our cost of deposits and providing a platform to accelerate future core deposit growth from HOAs.
 
 
Palm Desert National Acquisition
 
Effective April 27, 2012, the Bank acquired certain assets and assumed certain liabilities of Palm Desert National from the FDIC as receiver for Palm Desert National, 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 OREO, $1.5 million in investment securities, including FHLB stock and Federal Reserve Bank stock, $840,000 of a core deposit intangible and $3.8 million of other types of assets. 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 ASC Topic 820: Fair Value Measurements and Disclosures.
 
 
RESULTS OF OPERATIONS
 
In the third quarter of 2013, we reported earnings of $3.1 million, or $0.18 per share on a diluted basis, compared with earnings for the third quarter of 2012 of $3.5 million, or $0.32 per share on a diluted basis.  For the three months ended September 30, 2013, the Company’s return on average assets was 0.78% and return on average equity was 7.29%, compared with a return on average assets of 1.30% and an adjusted return on average equity of 14.19% for the three months ended September 30, 2012.
 
For the first nine months of 2013, the Company’s net income totaled $4.8 million or $0.29 per diluted share, down from $12.0 million or $1.12 per diluted share for the first nine months of 2012.  The decrease in net income was primarily due to a $5.3 million gain on FDIC transaction recorded on the Palm Desert National Acquisition in the first nine months of 2012 and merger related expenses of $6.7 million recorded on the acquisitions of FAB and SDTB in the first nine months of 2013.  For the first nine months of 2013, our net interest income increased $7.2 million compared to the first nine months of 2012, partially offset by higher compensation and benefits expense of $4.9 million for the comparable periods.  For the nine months ended September 30, 2013, our return on average assets was 0.46% and return on average equity was 4.09%, down from a return on average assets of 1.56% and a return on average equity of 17.23% for the same comparable period of 2012.
 
Net Interest Income
 
Our earnings are derived predominately from net interest income, which is the difference between the interest income earned on interest-earning assets, primarily loans and securities, and the interest expense incurred on interest-bearing liabilities, primarily deposits and borrowings.  The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities principally affect net interest income.
 
Net interest income totaled $15.0 million in the third quarter of 2013, up $3.2 million or 26.6%, compared to the third quarter of 2012.  The increase in net interest income reflected higher average interest-earning assets of $487.4 million, partially offset by a decrease in net interest margin to 3.93%.  The increase in average interest-earning assets was primarily from a $204.83 million increase in loans, $196.5 million increase in securities and $86.0 million increase in cash and cash equivalents, primarily from the Company’s acquisition activities and organic loan growth.  The decrease in the net interest margin of 68 basis points is primarily attributable to a decrease in yield on average interest-earning assets of 101 basis points, primarily from a higher mix of lower yielding investment securities and cash and cash equivalents together with a decrease in the loan portfolio yield.  Partially offsetting this decrease was lower deposit costs of 36 basis points from an improved mix of lower costing deposits associated with our acquisitions and lower cost of our certificates of deposit accounts.  The loan yield decline of 65 basis points primarily reflected a lower portfolio weighted average rate that decreased 67 basis points to 5.05% at September 30, 2013, and a reduction in deferred fee recognition on loan payoffs.
 
Compared to the first nine months of 2012, net interest income for the first nine months of 2013 increased $8.3 million or 25.1%.  The increase in net interest income reflected an increase in average interest-earning assets of $367.6 million or 37.6% in the first three quarters of 2013 to $1.3 billion.  Partially offsetting the average interest-earning asset increase was a lower net interest margin of 4.12%, compared with 4.52% in the first three quarters of 2012.  The increase in average interest-earning assets for the period was primarily due to an increase in average loans of $223.3 million, securities of $111.5 million and cash and cash equivalents of $32.8 million primarily associated with organic loan growth, loan purchases and our acquisitions.  The decrease in the current period net interest margin of 40 basis points primarily reflected a decrease in our average interest-earning asset yield of 76 basis points, partially offset by a decrease in the cost of deposits of 37 basis points associated with our acquisitions and lower cost of our certificates of deposit accounts.
 
The following tables present for the periods indicated the average dollar amounts from selected balance sheet categories calculated from daily average balances and the total dollar amount, including adjustments to yields and costs, of:
 
·  
Interest income earned from average interest-earning assets and the resultant yields; and
 
·  
Interest expense incurred from average interest-bearing liabilities and resultant costs, expressed as rates.
 
The tables below set forth our net interest income, net interest rate spread and net interest rate margin for the periods indicated.  The net interest rate margin reflects the relative level of interest-earning assets to interest-bearing liabilities and equals our net interest rate spread divided by average interest-earning assets for the periods indicated.

 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
STATISTICAL INFORMATION
 
                                     
   
Average Balance Sheet
 
   
Three Months Ended
   
Three Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
 
Assets
 
(dollars in thousands)
 
Interest-earning assets:
                                   
Cash and cash equivalents
  $ 126,503     $ 64       0.20 %   $ 40,459     $ 17       0.17 %
Federal funds sold
    26       -       0.00 %     27       -       0.00 %
Investment securities
    346,737       1,890       2.18 %     150,198       762       2.03 %
Loans receivable, net (1)
    1,041,871       14,420       5.49 %     837,070       12,847       6.14 %
Total interest-earning assets
    1,515,137       16,374       4.29 %     1,027,754       13,626       5.30 %
Noninterest-earning assets
    61,873                       34,379                  
Total assets
  $ 1,577,010                     $ 1,062,133                  
Liabilities and Equity
                                               
Interest-bearing deposits:
                                               
Interest checking
  $ 109,775     $ 38       0.14 %   $ 65,998     $ 22       0.13 %
Money market
    445,717       313       0.28 %     162,856       202       0.49 %
Savings
    80,298       31       0.15 %     84,819       56       0.26 %
Time
    316,931       663       0.83 %     425,879       1,164       1.09 %
Total interest-bearing deposits
    952,721       1,045       0.44 %     739,552       1,444       0.78 %
FHLB advances and other borrowings
    66,284       244       1.46 %     42,690       247       2.30 %
Subordinated debentures
    10,310       77       2.96 %     10,310       81       3.13 %
Total borrowings
    76,594       321       1.66 %     53,000       328       2.46 %
Total interest-bearing liabilities
    1,029,315       1,366       0.53 %     792,552       1,772       0.89 %
Noninterest-bearing deposits
    362,442                       164,777                  
Other liabilities
    16,974                       7,235                  
Total liabilities
    1,408,731                       964,564                  
Stockholders' equity
    168,279                       97,569                  
Total liabilities and equity
  $ 1,577,010                     $ 1,062,133                  
Net interest income
          $ 15,008                     $ 11,854          
Net interest rate spread (2)
                    3.76 %                     4.41 %
Net interest margin (3)
                    3.93 %                     4.61 %
Ratio of interest-earning assets to interest-bearing liabilities
      147.20 %                     129.68 %
                                                 
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums, and ALLL.
 
(2) Represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
 
(3) Represents net interest income divided by average interest-earning assets.
                         


 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
STATISTICAL INFORMATION
 
                                     
   
Average Balance Sheet
 
   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
 
Assets
 
(dollars in thousands)
 
Interest-earning assets:
                                   
Cash and cash equivalents
  $ 103,592     $ 161       0.21 %   $ 70,743     $ 96       0.18 %
Federal funds sold
    26       -       0.00 %     27       -       0.00 %
Investment securities
    261,300       3,880       1.98 %     149,836       2,510       2.23 %
Loans receivable, net (1)
    980,695       41,504       5.66 %     757,373       36,182       6.37 %
Total interest-earning assets
    1,345,613       45,545       4.53 %     977,979       38,788       5.29 %
Noninterest-earning assets
    41,957                       44,136                  
Total assets
  $ 1,387,570                     $ 1,022,115                  
Liabilities and Equity
                                               
Interest-bearing deposits:
                                               
Interest checking
  $ 86,505     $ 75       0.12 %   $ 70,160     $ 78       0.15 %
Money market
    347,349       711       0.27 %     151,237       531       0.47 %
Savings
    79,433       95       0.16 %     89,447       223       0.33 %
Time
    335,935       2,216       0.88 %     422,648       3,815       1.21 %
Total interest-bearing deposits
    849,222       3,097       0.49 %     733,492       4,647       0.85 %
FHLB advances and other borrowings
    54,146       722       1.78 %     33,316       717       2.87 %
Subordinated debentures
    10,310       230       2.98 %     10,310       247       3.20 %
Total borrowings
    64,456       952       1.97 %     43,626       964       2.95 %
Total interest-bearing liabilities
    913,678       4,049       0.59 %     777,118       5,611       0.96 %
Noninterest-bearing deposits
    307,714                       141,494                  
Other liabilities
    10,189                       10,901                  
Total liabilities
    1,231,581                       929,513                  
Stockholders' equity
    155,989                       92,602                  
Total liabilities and equity
  $ 1,387,570                     $ 1,022,115                  
Net interest income
          $ 41,496                     $ 33,177          
Net interest rate spread (2)
                    3.94 %                     4.33 %
Net interest margin (3)
                    4.12 %                     4.52 %
Ratio of interest-earning assets to interest-bearing liabilities
      147.27 %                     125.85 %
                                                 
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums, and ALLL.
 
(2) Represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
 
(3) Represents net interest income divided by average interest-earning assets.
                         

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

   
Three Months Ended September 30, 2013
   
Nine Months Ended September 30, 2013
 
   
Compared to
   
Compared to
 
   
Three Months Ended September 30, 2012
   
Nine Months Ended September 30, 2012
 
   
Increase (decrease) due to
   
Increase (decrease) due to
 
                                     
   
Rate
   
Volume
   
Net
   
Rate
   
Volume
   
Net
 
   
(in thousands)
 
Interest-earning assets
                                   
Cash and cash equivalents
  $ 4     $ 43     $ 47     $ 17     $ 48     $ 65  
Investment securities
    60       1,068       1,128       (309 )     1,679       1,370  
Loans receivable, net
    (1,346 )     2,919       1,573       (4,483 )     9,805       5,322  
Total interest-earning assets
  $ (1,282 )   $ 4,030     $ 2,748     $ (4,775 )   $ 11,532     $ 6,757  
                                                 
Interest-bearing liabilities
                                               
Interest checking
  $ 2     $ 14     $ 16     $ (18 )   $ 15     $ (3 )
Money market
    (121 )     232       111       (297 )     477       180  
Savings
    (22 )     (3 )     (25 )     (105 )     (23 )     (128 )
Time
    (241 )     (260 )     (501 )     (902 )     (697 )     (1,599 )
FHLB advances and other borrowings
    (110 )     107       (3 )     (337 )     342       5  
Subordinated debentures
    (4 )     -       (4 )     (17 )     -       (17 )
Total interest-bearing liabilities
  $ (496 )   $ 90     $ (406 )   $ (1,676 )   $ 114     $ (1,562 )
Change in net interest income
  $ (786 )   $ 3,940     $ 3,154     $ (3,099 )   $ 11,418     $ 8,319  


Provision for Loan Losses
 
We recorded a $646,000 provision for loan loss in the third quarter of 2013, compared to $145,000 recorded in the third quarter of 2012.  We believe that the credit quality of our loan portfolio continues to remain strong, and as a result, we left our allowance for loan losses unchanged during the quarter.  Compared to the third quarter of 2012, net loan charge-offs increased $501,000 to $646,000 during the third quarter of 2013.  The increase in charge-offs was primarily attributable to three loans acquired in our FDIC assisted transactions.
 
For the first nine months of 2013, a provision for loan losses of $1.3 million was recorded, compared with a provision for loan losses of $145,000 for the first nine months of 2012.  For the first nine months of 2013, our net loan charge-offs were $1.3 million, all related to our FDIC assisted transactions.
 
For purchased credit impaired loans, charge-offs are recorded when there is a decrease in the estimated cash flows of the credit from original cash flow estimates.  Purchased credit impaired loans were recorded at their estimated fair value, which incorporated our estimated expected cash flows until the ultimate resolution of these credits.  To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses or charge-offs will be recognized into earnings or against the allowance, if applicable.  To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in loan interest income.  Due to the accounting rules associated with our purchased credit impaired loans, each quarter we are required to re-estimate cash flows which could cause volatility in our reported net interest margin and provision for loans losses.  During the third quarter of 2013, there were no charge-offs associated with purchased credit impaired loans, compared to $145,000 for the same period in 2012.
 
Our Loss Mitigation Department continues collection efforts on loans previously written down and/or charged-off to maximize potential recoveries.  See “Allowance for Loan Losses” discussed below in this Quarterly Report on Form 10-Q.
 
Noninterest Income
 
Noninterest income for the third quarter of 2013 amounted to $2.3 million, up $411,000 or 21.5%, compared to the third quarter of 2012.  The increase was primarily attributable to a $1.0 million increase in net gains received in the third quarter of 2013 from the sale of loans compared to the prior period, which increase in net gains was due to more loans being sold in the third quarter of 2013.  Partially offsetting the increase in net gains from the sale of loans was a lower gain on sale of securities of $552,000 and reduced other income of $124,000.  The decrease in gain on sale of securities was primarily related to lower inherent gains on securities sold during the third quarter of 2013, compared with those sold in the third quarter of 2012.
 
Noninterest income for the first nine months of 2013 amounted to $6.5 million, down $2.9 million or 30.9% compared to the first nine months of 2012.  The decrease was primarily related to a gain of $5.3 million in the year-ago period for the Palm Desert National Acquisition, compared to no bargain purchase gain recorded in the first nine months of 2013.  Partially offsetting  the absence of a bargain purchase in the first nine months of 2013, was higher net gains from the sale of loans of $2.0 million and from the sales of investment securities of $342,000, as well as higher loan servicing fees of $266,000.  The higher gains on loan and investment securities were primarily related to a higher volume of loans and investment securities sold.
 
Noninterest Expense
 
Noninterest expense totaled $11.8 million for the third quarter of 2013, up $3.7 million or 46.6%, compared to the third quarter of 2012. The increase primarily related to higher costs in the third quarter of 2013 when compared to the third quarter of 2012 associated with the following expense categories:
 
·  
Compensation and benefits costs increased by $1.6 million, primarily due to the increase in employees from our acquisition activities and new hires in the lending and credit areas to increase our production of commercial and industrial (“C&I”) loans, commercial real estate (“CRE”) loans, SBA loans, HOA loans, and construction loans;
 
·  
Other expense of $636,000, primarily related to core deposit intangible amortization, tax credit expense and higher miscellaneous expenses related to our acquisition activities;
 
·  
Premises and occupancy by $537,000, primarily due to our acquisition activities and a new leased corporate headquarters needed to support our growth;
 
·  
Deposit expenses of $459,000, primarily due to our acquisition activities;
 
·  
Data processing and communications of $242,000, primarily due to our acquisition activities; and
 
·  
Legal, audit and professional expense of $206,000, primarily due to our acquisition activities.
 
These higher costs were partially offset by a decline of $245,000 in OREO operations activity.
 
Compared to the first nine months of 2012, noninterest expense increased $15.9 million or 69.6% for the first nine months of 2013. The increase primarily related to one-time costs associated with the acquisitions of SDTB and FAB of $6.7 million, as well as higher compensation and benefits costs of $4.9 million, other expense of $1.3 million, premises and occupancy costs of $1.3 million, deposit expenses of $1.0 million, data processing and communications costs of $448,000, and office and postage expense of $348,000.  Partially offsetting these increases was a decrease in OREO operations activity of $371,000.  The increases in the above categories were primarily related to the acquisitions of FAB and SDTB, and business expansion initiatives over the first nine months of 2013.
 
Income Taxes
 
For the third quarter of 2013, our effective tax rate was 37.6%, compared with 38.1% for the third quarter of 2012.  For the first nine months of 2013, the effective tax rate was 39.4%, compared to 38.7% for the first nine months of 2012.  At September 30, 2013, we had no valuation allowance against our deferred tax asset of $9.0 million based on management’s analysis that the asset was more-likely-than-not to be realized.
 
FINANCIAL CONDITION
 
At September 30, 2013, assets totaled $1.6 billion, up $479.7 million or 44.0% from September 30, 2012 and up $395.2 million or 33.7% from December 31, 2012.  The increase in assets since year-end 2012 was primarily related to the FAB Acquisition, which added assets at the acquisition date of $424.2 million, partially offset by $49.0 million of FAB deposits held by the Bank at December 31, 2012, and the SDTB Acquisition, which added assets at the acquisition date of $210.9 million.  Partially offsetting these acquisition increases was a decrease of $112.3 million in deposits, primarily due to our higher-cost certificates of deposit not being renewed and a decrease of $29.0 million in FHLB borrowings.
 
The increase in assets from September 30, 2012 was primarily related to FAB assets in the amount of $424.2 million and SDTB assets in the amount of $210.9 million.  Partially offsetting these increases were the assets used to fund the decrease in certificates of deposit of $131.9 million.
 
Loans
 
Net loans held for investment totaled $1.1 billion at September 30, 2013, an increase of $279.3 million or 32.8% from September 30, 2012 and an increase of $156.8 million or 16.1% from December 31, 2012.  The increase in loans from December 31, 2012 included loans at acquisition date from the SDTB Acquisition of $42.4 million and from FAB Acquisition of $26.4 million, and was primarily associated with increases in real estate loan balances of $170.7 million, commercial owner occupied loans of $71.2 million and C&I loans of $58.4 million.  Partially offsetting these increases was a decrease in warehouse facility loans of $146.7 million.  During the first nine months of 2013, commitments on our warehouse repurchase facility credits increased $32.3 million to a total of $303.5 million with our end of period utilization rates for these loans decreasing from 73.4% at December 31, 2012 to 16.18% at September 30, 2013.  The decrease in utilization rates is primarily due to the increase in mortgage rates which lead to a decrease in loan applications.
 
The increase in loans from September 30, 2012 was due to both organic growth and the FAB Acquisition and SDTB Acquisition.  The loan increase since September 30, 2012 was primarily related to our real estate loans of $177.2 million and our business loans of $98.4 million.
 
The following table sets forth the composition of our loan portfolio in dollar amounts, as a percentage of the portfolio and gives the weighted average interest rate by loan category at the dates indicated:
 
   
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
   
Amount
   
Percent
of Total
   
Weighted
Average
Interest Rate
   
Amount
   
Percent
of Total
   
Weighte
Average
Interest Rate
   
Amount
   
Percent
of Total
   
Weighted
Average
Interest Rate
 
   
(dollars in thousands)
 
Business loans:
                                                     
Commercial and industrial
  $ 173,720       15.2 %     5.07 %   $ 115,354       11.7 %     5.25 %   $ 88,105       10.2 %     5.37 %
Commercial owner occupied (1)
    222,162       19.5 %     5.41 %     150,934       15.3 %     6.11 %     148,139       17.1 %     6.26 %
SBA
    6,455       0.6 %     6.02 %     6,882       0.7 %     6.04 %     4,736       0.5 %     6.08 %
Warehouse facilities
    49,104       4.3 %     4.10 %     195,761       19.9 %     4.80 %     112,053       13.0 %     5.03 %
Real estate loans:
                                                                       
Commercial non-owner occupied
    304,979       26.7 %     5.41 %     253,409       25.6 %     5.68 %     262,046       30.3 %     5.84 %
Multi-family
    218,929       19.2 %     4.91 %     156,424       15.9 %     5.78 %     173,484       20.1 %     5.90 %
One-to-four family (2)
    152,667       13.4 %     4.46 %     97,463       9.9 %     4.67 %     62,771       7.3 %     5.08 %
Construction
    2,835       0.2 %     5.84 %     -       0.0 %     0.00 %     308       0.0 %     5.25 %
Land
    7,371       0.6 %     4.72 %     8,774       0.9 %     4.89 %     11,005       1.3 %     5.27 %
Other loans
    3,793       0.3 %     5.96 %     1,193       0.1 %     6.20 %     2,191       0.2 %     6.86 %
Total gross loans (3)
    1,142,015       100.0 %     5.05 %     986,194       100.0 %     5.44 %     864,838       100.0 %     5.72 %
Less loans held for sale
    3,176                       3,681                       4,728                  
Total gross loans held for investment
    1,138,839                       982,513                       860,110                  
Less:
                                                                       
Deferred loan origination costs/(fees) and premiums/(discounts)
    130                       (306 )                     (737 )                
Allowance for loan losses
    (7,994 )                     (7,994 )                     (7,658 )                
Loans held for investment, net
  $ 1,130,975                     $ 974,213                     $ 851,715                  
                                                                         
(1) Majority secured by real estate.
                                                                       
(2) Includes second trust deeds.
                                                                       
(3) Total gross loans for September 30, 2013 are net of the unaccreted mark-to-market discounts on Canyon National loans of $2.3 million, on Palm Desert National loans of $3.7 million, and on SDTB loans of $230,000 and of the mark-to-market premium on FAB loans of $103,000.
 

Gross loans totaled $1.1 billion at September 30, 2013, compared to $864.8 million at September 30, 2012 and $986.2 million at December 31, 2012.  The increase in gross loans held for investment of $278.7 million or 32.4% from the year-ago third quarter was primarily related to increases from organic growth, the acquisitions of FAB and SDTB, and loan purchases.  The increase of $155.8 million or 15.8% since December 31, 2012 included loan originations of $316.4 million, loans purchased of $147.3 million and loans acquired of $69.2 million, partially offset by an increase in undisbursed loan funds of $246.8 million, loan repayments of $111.5 million, and loan sales of $18.7 million.  The increase in the undisbursed loan funds was primarily related to the reduction in the utilization rate for warehouse facility loans.
 
The following table sets forth loan originations, purchases, sales and principal repayments relating to our gross loans for the periods indicated:
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
   
(in thousands)
 
Beginning balance gross loans
  $ 986,194     $ 739,254  
Loans originated:
               
Business loans:
               
Commercial and industrial
    60,792       27,324  
Commercial owner occupied (1)
    40,931       22,509  
SBA
    6,548       3,764  
Warehouse facilities
    74,860       119,750  
Real estate loans:
               
Commercial non-owner occupied
    76,555       41,479  
Multi-family
    46,659       18,402  
One-to-four family (2)
    1,580       17,138  
Construction loans
    5,650       -  
Other loans
    2,803       882  
Total loans originated
    316,378       251,248  
Loans purchased:
               
Business loans:
               
Commercial and industrial
    30,084       5,033  
Commercial owner occupied
    42,835       11,786  
Real estate loans:
               
Commercial non-owner occupied
    16,763       58,541  
Multi-family
    43,231       3,690  
One-to-four family
    78,673       4,437  
Construction
    1,399       198  
Land
    2,770       5,395  
Other loans
    716       2,255  
Total loans purchased
    216,471       91,335  
Total loan production
    532,849       342,583  
Principal repayments
    (111,475 )     (134,783 )
Sales of loans
    (18,722 )     (14,390 )
Change in undisbursed loan funds, net
    (246,814 )     (71,304 )
Charge-offs
    (1,608 )     (1,207 )
Change in mark-to-market discounts from acquisitions
    2,587       7,836  
Transfer to other real estate owned
    (996 )     (3,151 )
Net increase in gross loans
    155,821       125,584  
Ending balance gross loans
  $ 1,142,015     $ 864,838  
                 
(1) Majority secured by real estate.
               
(2) Includes second trust deeds.
               

 
 
The following table sets forth the weighted average interest rates, weighted average number of months to reprice and the periods to repricing for our gross loan portfolio at the date indicated:
   
September 30, 2013
 
               
Weighted
   
Weighted
 
   
Number
         
Average
   
Average Months
 
Periods to Repricing
 
of Loans
   
Amount
   
Interest Rate
   
to Reprice
 
   
(dollars in thousands)
 
1 Year and less
    865     $ 405,020       5.53 %     6.05  
Over 1 Year to 3 Years
    43       33,570       4.44 %     25.56  
Over 3 Years to 5 Years
    289       320,912       4.56 %     50.57  
Over 5 Years to 7 Years
    40       93,056       4.26 %     78.14  
Over 7 Years to 10 Years
    16       21,238       4.54 %     100.11  
Total adjustable
    1,253       873,796       4.97 %     33.11  
Fixed
    862       268,219       5.34 %        
Total
    2,115     $ 1,142,015       5.05 %        


    Delinquent Loans.  When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally record a notice of default and, after providing the required notices to the borrower, commence foreclosure proceedings.  If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale.  At these foreclosure sales, we generally acquire title to the property.  At September 30, 2013, loans delinquent 30 or more days as a percentage of total gross loans was 0.09%, unchanged from December 31, 2012, but down from 0.80% at September 30, 2012.
 
The following table sets forth delinquencies in the Company's loan portfolio at the dates indicated:
   
30 - 59 Days
   
60 - 89 Days
   
90 Days or More (1)
   
Total
 
   
# of
Loans
   
Principal
Balance
of Loans
   
# of
Loans
   
Principal
Balance
of Loans
   
# of
Loans
   
Principal
Balance
of Loans
   
# of
Loans
   
Principal
Balance
of Loans
 
   
(dollars in thousands)
 
                                                 
At September 30, 2013
                                               
Business loans:
                                               
Commercial and industrial
    1     $ 163       2     $ 79       -     $ -       3     $ 242  
SBA
    -       -       1       129       1       14       2       143  
Real estate loans:
                                                               
Commercial non-owner occupied
    2       559       -       -       -       -       2       559  
One-to-four family
    -       -       -       -       3       97       3       97  
Other
    1       2       1       6       -       -       2       8  
Total
    4     $ 724       4     $ 214       4     $ 111       12     $ 1,049  
Delinquent loans to total gross loans
            0.06 %             0.02 %             0.01 %             0.09 %
                                                                 
At December 31, 2012
                                                               
Business loans:
                                                               
Commercial and industrial
    -     $ -       1     $ 58       1     $ 218       2     $ 276  
Commercial owner occupied
    -       -       1       245       -       -       1       245  
SBA
    -       -       -       -       4       185       4       185  
Real estate loans:
                                                               
One-to-four family
    2       101       -       -       2       79       4       180  
Other
    1       5       -       -       -       -       1       5  
Total
    3     $ 106       2     $ 303       7     $ 482       12     $ 891  
Delinquent loans to total gross loans
            0.01 %             0.03 %             0.05 %             0.09 %
                                                                 
At  September 30, 2012
                                                               
Business loans:
                                                               
Commercial and industrial
    -     $ -       2     $ 121       -     $ -       2     $ 121  
Commercial owner occupied
    1       327       -       -       -       -       1       327  
SBA
    -       -       -       -       4       185       4       185  
Real estate loans:
                                                               
Commercial non-owner occupied
    1       1,708       -       -       2       3,849       3       5,557  
One-to-four family
    2       301       2       43       3       120       7       464  
Land
    1       229       -       -       -       -       1       229  
Total
    5     $ 2,565       4     $ 164       9     $ 4,154       18     $ 6,883  
Delinquent loans to total gross loans
            0.30 %             0.02 %             0.48 %             0.80 %
                                                                 
(1) All loans that are delinquent 90 days or more are on nonaccrual status and reported as part of nonperforming loans.
                 

Allowance for Loan Losses.  The ALLL represents an estimate of probable losses inherent in our loan portfolio and is determined by applying a systematically derived loss factor to individual segments of the loan portfolio.  The adequacy and appropriateness of the ALLL and the individual loss factors are reviewed each quarter by management.
 
The loss factor for each segment of our loan portfolio is generally based on our actual historical loss rate experience with emphasis on recent past periods to account for current economic conditions and supplemented by management judgment for certain segments where we lack loss history experience.  We also consider historical charge-off rates for the last 10 and 15 years for commercial banks and savings institutions headquartered in California as collected and reported by the FDIC.  The loss factor is adjusted by qualitative adjustment factors to arrive at a final loss factor for each loan portfolio segment.  For additional information regarding the qualitative adjustments, please see “Allowances for Loan Losses” discussed in our 2012 Annual Report.  The qualitative factors allow management to assess current trends within our loan portfolio and the economic environment to incorporate their effect when calculating the ALLL.  The final loss factors are applied to pass graded loans within our loan portfolio.  Higher factors are applied to loans graded below pass, including classified and criticized assets.
 
No assurance can be given that we will not, in any particular period, sustain loan losses that exceed the amount reserved, or that subsequent evaluation of our loan portfolio, in light of the prevailing factors, including economic conditions which may adversely affect our market area or other circumstances, will not require significant increases in the loan loss allowance.  In addition, regulatory agencies, as an integral part of their examination process, periodically review our ALLL and may require us to recognize additional provisions to increase the allowance or take charge-offs in anticipation of future losses.
 
Our ALLL at September 30, 2013 was $8.0 million, up from $7.7 million at September 30, 2012 and unchanged from the ALLL at December 31, 2012.  At September 30, 2013, given the composition of our loan portfolio, the ALLL was considered adequate to cover estimated losses inherent in the loan portfolio.  Should any of the factors considered by management in evaluating the appropriate level of the ALLL change, the Company’s estimate of probable loan losses could also change, which could affect the level of future provisions for loan losses.
 
The following table sets forth the Company’s ALLL and its corresponding percentage of the loan category balance and the percent of loan balance to total gross loans in each of the loan categories listed for the periods indicated:

 
   
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
         
Allowance
   
% of Loans
         
Allowance
   
% of Loans
         
Allowance
   
% of Loans
 
Balance at End of
       
as a % of
   
in Category to
         
as a % of
   
in Category to
         
as a % of
   
in Category to
 
Period Applicable to
 
Amount
   
Category Total
   
Total Loans
   
Amount
   
Category Total
   
Total Loans
   
Amount
   
Category Total
   
Total Loans
 
   
(dollars in thousands)
 
Business loans:
                                                     
Commercial and industrial
  $ 2,801       1.61 %     15.2 %   $ 1,310       1.14 %     11.7 %   $ 824       0.94 %     10.2 %
Commercial owner occupied
    1,519       0.68 %     19.5 %     1,512       1.00 %     15.3 %     1,151       0.78 %     17.1 %
SBA
    50       0.77 %     0.6 %     79       1.15 %     0.7 %     66       1.39 %     0.5 %
Warehouse facilities
    225       0.46 %     4.3 %     1,544       0.79 %     19.9 %     1,046       0.93 %     13.0 %
Real estate loans:
                                                                       
Commercial non-owner occupied
    1,403       0.46 %     26.7 %     1,459       0.58 %     25.6 %     2,036       0.78 %     30.3 %
Multi-family
    506       0.23 %     19.2 %     1,145       0.73 %     15.9 %     2,097       1.21 %     20.1 %
One-to-four family
    1,174       0.77 %     13.4 %     862       0.88 %     9.9 %     418       0.67 %     7.3 %
Construction
    121       4.27 %     0.2 %     -       0.00 %     0.0 %     -       0.00 %     0.0 %
Land
    147       1.99 %     0.6 %     31       0.35 %     0.9 %     -       0.00 %     1.3 %
Other Loans
    48       1.27 %     0.3 %     52       4.36 %     0.1 %     20       0.91 %     0.2 %
Total
  $ 7,994       0.70 %     100.0 %   $ 7,994       0.81 %     100.0 %   $ 7,658       0.89 %     100.0 %
 
   
    The ALLL as a percent of nonaccrual loans was 693.3% at September 30, 2013, up from 121.9% at September 30, 2012, and from 362.4% at December 31, 2012. The increase in ALLL as a percent of nonaccrual loans at September 30, 2013, compared to year-end 2012 was due to a decrease in nonaccrual loans during the first nine months of 2013.  At September 30, 2013, the ratio of ALLL to total gross loans was 0.70%, down from 0.89% at September 30, 2012, and from 0.81% at December 31, 2012.  Our ratio of ALLL plus the remaining unamortized credit discount on the loans acquired to total gross loans was 1.06% at September 30, 2013, down from 1.53% at September 30, 2012, and 1.34% at December 31, 2012.
 
The following table sets forth the activity within the Company’s ALLL in each of the loan categories listed for the periods indicated:

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(dollars in thousands)
 
Balance, beginning of period
  $ 7,994     $ 7,658     $ 7,994     $ 8,522  
Provision for loan losses
    646       145       1,264       145  
Charge-offs:
                               
Business loans:
                               
Commercial and industrial
    (233 )     (79 )     (291 )     (270 )
Commercial owner occupied
    (163 )     (140 )     (163 )     (405 )
SBA
    (11 )     (23 )     (16 )     (132 )
Real estate:
                               
Commercial non-owner occupied
    -       -       (757 )     (88 )
Multi-family
    (90 )     -       (101 )     -  
One-to-four family
    (263 )     -       (273 )     (305 )
Land
    -       (5 )     -       (5 )
Other loans
    (1 )     (1 )     (7 )     (2 )
Total charge-offs
    (761 )     (248 )     (1,608 )     (1,207 )
Recoveries :
                               
Business loans:
                               
Commercial and industrial
    86       -       107       2  
SBA
    7       85       51       162  
Real estate:
                               
Commercial non-owner occupied
    -       2       -       2  
One-to-four family
    1       2       45       7  
Other loans
    21       14       141       25  
Total recoveries
    115       103       344       198  
Net loan charge-offs
    (646 )     (145 )     (1,264 )     (1,009 )
Balance at end of period
  $ 7,994     $ 7,658     $ 7,994     $ 7,658  
                                 
Ratios:
                               
Net charge-offs to average total loans, net
    0.25 %     0.07 %     0.17 %     0.18 %
Allowance for loan losses to gross loans at end of period
    0.70 %     0.89 %     0.70 %     0.89 %


Investment Securities
 
Investment securities available for sale totaled $282.8 million at September 30, 2013, up $168.6 million or 147.6% from September 30, 2012 and up $198.8 million or 236.5% from December 31, 2012. The increase over both period ends was primarily due to the acquisitions of FAB and SDTB.  At acquisition date, we added investment securities available for sale from the FAB Acquisition of $222.4 million and from the SDTB Acquisition of $124.8 million.  The increase in investment securities available for sale since year-end 2012 also included $98.8 million in purchases, partially offset by $210.9 million in sales and $27.5 million in principal paydowns.  We sold securities to help fund the expansion of our loan growth and to restructure the portfolio.  The increase in investment securities since September 30, 2012, included an additional $26.5 million in sales. At September 30, 2013, the end of period yield on investment securities was 2.12%, down from 2.25% at September 30, 2012, but up from 2.06% at December 31, 2012.  At September 30, 2013, we no longer held any of the private label MBS that were acquired when we redeemed our shares in certain mutual funds in 2008.
 
The following tables set forth the amortized cost, unrealized gains and losses, and estimated fair value of our investment securities portfolio at the dates indicated:
 
   
September 30, 2013
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
U.S. Treasury
  $ 73     $ 9     $ -     $ 82  
Municipal bonds
    95,971       709       (1,795 )     94,885  
Mortgage-backed securities
    191,282       182       (3,585 )     187,879  
Total securities available for sale
  $ 287,326     $ 900     $ (5,380 )   $ 282,846  
                                 
   
December 31, 2012
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
U.S. Treasury
  $ 147     $ 12     $ -     $ 159  
Municipal bonds
    25,401       1,186       (1 )     26,586  
Mortgage-backed securities
    56,641       1,162       (482 )     57,321  
Total securities available for sale
  $ 82,189     $ 2,360     $ (483 )   $ 84,066  
                                 
   
September 30, 2012
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
U.S. Treasury
  $ 147     $ 13     $ -     $ 160  
Municipal bonds
    55,445       1,667       (15 )     57,097  
Mortgage-backed securities
    56,351       1,121       (479 )     56,993  
Total securities available for sale
  $ 111,943     $ 2,801     $ (494 )   $ 114,250  

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

 
   
September 30, 2013
 
   
One Year
   
More than One
   
More than Five Years
   
More than
   
 
 
   
or Less
   
to Five Years
   
to Ten Years
   
Ten Years
   
Total
 
   
Fair Value
   
Weighted
Average Yield
   
Fair Value
   
Weighted
Average Yield
   
Fair Value
   
Weighted
Average Yield
   
Fair Value
   
Weighted
Average Yield
   
Fair Value
   
Weighted
Average Yield
 
   
(dollars in thousands)
 
Investment securities available for sale:
                                                           
U.S. Treasury
  $ -       0.00 %   $ 82       4.15 %   $ -       0.00 %   $ -       0.00 %   $ 82       4.15 %
Municipal bonds
    -       0.00 %     9,905       0.95 %     42,392       1.76 %     42,588       3.12 %     94,885       2.29 %
Mortgage-backed securities
    -       0.00 %     -       0.00 %     14,038       1.16 %     173,841       2.14 %     187,879       2.07 %
Total investment securities available for sale
    -       0.00 %     9,987       0.97 %     56,430       1.61 %     216,429       2.34 %     282,846       2.14 %
Stock:
                                                                               
FHLB
    7,532       0.00 %     -       0.00 %     -       0.00 %     -       0.00 %     7,532       0.00 %
Federal Reserve Bank/TIB
    3,295       5.04 %     -       0.00 %     -       0.00 %     -       0.00 %     3,295       5.04 %
Total stock
    10,827       1.53 %     -       0.00 %     -       0.00 %     -       0.00 %     10,827       1.53 %
Total securities
  $ 10,827       1.53 %   $ 9,987       0.97 %   $ 56,430       1.61 %   $ 216,429       2.34 %   $ 293,673       2.12 %

Each quarter, we review individual securities classified as available for sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.  If it is probable that we will be unable to collect all amounts due according to the contractual terms of the debt security, an OTTI write down is recorded against the security and a loss recognized.
 
In determining if a security has an OTTI loss, we review downgrades in credit ratings and the length of time and extent that the fair value has been less than the cost of the security.  We estimate OTTI losses on a security primarily through:
 
·  
An evaluation of the present value of estimated cash flows from the security using the current yield to accrete beneficial interest and including assumptions in the prepayment rate, default rate, delinquencies, loss severity and percentage of nonperforming assets;
·  
An evaluation of the estimated payback period to recover principal;
·  
An analysis of the credit support available in the underlying security to absorb losses; and
·  
A review of the financial condition and near term prospects of the issuer.
 
During the quarter ended September 30, 2013, we sold all of our private label securities including those classified substandard that had incurred OTTI, which led to the recording of a $16,000 recovery, compared to $36,000 of OTTI charges during the same period last year.
 
Securities with OTTI credit losses recognized in noninterest income and associated OTTI non-credit losses recognized in accumulated other comprehensive loss during the periods indicated were as follows:

 
   
Three Months Ended
   
Three Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
                                     
Rating
 
Number
 
Fair Value
 
OTTI Credit Gain (Loss)
 
Non Credit Gain in Accumulated Other Comprehensive Income (AOCI)
 
Number
 
Fair Value
 
OTTI Credit Loss
 
Non Credit Gain in Accumulated Other Comprehensive Income (AOCI)
 
(dollars in thousands)
 
C     7   $ -   $ 11   $ -       -   $ -   $ -   $ -  
D     5     -     5     -       4     633     36     81  
Total
    12   $ -   $ 16   $ -       4   $ 633   $ 36   $ 81  
                                                     
   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
                                                     
Rating
 
Number
 
Fair Value
 
OTTI Credit Gain (Loss)
 
Non Credit Gain in Accumulated Other Comprehensive Income (AOCI)
 
Number
 
Fair Value
 
OTTI credit loss
 
Non Credit Gain in Accumulated Other Comprehensive Income (AOCI)
 
(dollars in thousands)
 
Caa2
    1   $ -   $ (11 ) $ -       -   $ -   $ -   $ -  
C     7     -     11     -       -     -     -     -  
D     7     -     (19 )   -       8     633     118     179  
Total
    15   $ -   $ (19 ) $ -       8   $ 633   $ 118   $ 179  

 
The largest OTTI credit loss for any single debt security was $32,000 for the three and nine months ended September 30, 2013 and $25,000 for the same periods in the prior year.
 
Nonperforming Assets
 
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), restructured loans and OREO.  It is our general policy to account for a loan as nonaccrual when the loan becomes 90 days delinquent or when collection of interest appears doubtful.
 
At September 30, 2013, nonperforming assets totaled $2.3 million or 0.15% of total assets, down from $11.8 million or 1.08% at September 30, 2012 and down from $4.5 million or 0.38% at December 31, 2012.  During the third quarter of 2013, nonperforming loans decreased $879,000 to total $1.2 million and OREO remained unchanged at $1.2 million.
 
The following table sets forth our composition of nonperforming assets at the dates indicated:

 
   
September 30,
   
December 31,
   
September 30,
 
   
2013
   
2012
   
2012
 
   
(dollars in thousands)
 
Nonperforming assets
                 
Business loans:
                 
Commercial and industrial
  $ 78     $ 347     $ -  
Commercial owner occupied
    -       14       218  
SBA (1)
    142       260       266  
Real estate:
                       
Commercial non-owner occupied
    437       670       4,528  
Multi-family
    -       266       273  
One-to-four family
    496       522       578  
Land
    -       127       417  
Total nonaccrual loans
    1,153       2,206       6,280  
Other real estate owned:
                       
Commercial owner occupied
    -       -       375  
Commercial non-owner occupied
    245       -       309  
One-to-four family
    -       -       179  
Land
    941       2,258       4,658  
Total other real estate owned
    1,186       2,258       5,521  
Total nonperforming assets, net
  $ 2,339     $ 4,464     $ 11,801  
                         
Allowance for loan losses
  $ 7,994     $ 7,994     $ 7,658  
Allowance for loan losses as a percent of
total nonperforming loans
    693.32 %     362.38 %     121.94 %
Nonperforming loans as a percent of gross loans
    0.10 %     0.22 %     0.73 %
Nonperforming assets as a percent of total assets
    0.15 %     0.38 %     1.08 %
                         
 (1) The SBA totals include the guaranteed amount of $185,000 as of December 31, 2012 and $127,000 as of September 30, 2012    
 
Liabilities and Stockholders’ Equity
 
Total liabilities were $1.4 billion at September 30, 2013, compared to $989.5 million at September 30, 2012 and $1.0 billion at December 31, 2012.  The increase of $358.6 million from the year ended December 31, 2012 was predominately related to increases in deposits associated with net deposits added from the acquisitions of FAB and SDTB of $462.2 million at the acquisition dates, partially offset by a decrease in FHLB advances and other borrowings of $29.0 million.
 
Deposits.  Deposits totaled $1.3 billion at September 30, 2013, up $388.3 million or 43.3% from September 30, 2012 and $379.4 million or 41.9% from December 31, 2012.  The increase over both prior periods was predominately related to the FAB Acquisition, which added deposits of $356.8 million at the closing of the acquisition, partially offset by FAB’s deposits held by the Bank at acquisition of $78.5 million and the SDTB Acquisition, which added deposits of $183.9 million at the closing of the acquisition.  Excluding the deposit acquisition increases, we had an adjusted net decrease in deposits of $112.3 million in the first nine months of 2013 and a net decrease of $152.5 million since September 30, 2012.  The decrease in deposits for the nine months of 2013 was primarily associated with the lowering of pricing on certificates of deposits, which resulted in a desired runoff upon maturity.  The increase in deposits during the first nine months of 2013 included interest-bearing transaction accounts of $304.6 million and noninterest-bearing accounts of $150.0 million, partially offset by a decrease in retail certificates of deposit of $75.2 million.  At September 30, 2013, we had no brokered deposits.  The total weighted average cost of deposits at September 30, 2013 decreased to 0.30%, from 0.64% at September 30, 2012 and from 0.51% at December 31, 2012.
 
At September 30, 2013, our gross loan to deposit ratio was 88.9%, down from 96.5% at September 30, 2012 and from 109.0% at December 31, 2012.
 
The following table sets forth the distribution of the Company’s deposit accounts at the dates indicated and the weighted average interest rates on each category of deposits presented:

 
   
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
   
Balance
   
% of Total Deposits
   
Weighted Average Rate
   
Balance
   
% of Total Deposits
   
Weighted Average Rate
   
Balance
   
% of Total Deposits
   
Weighted Average Rate
 
   
(dollars in thousands)
 
Noninterest bearing checking
  $ 363,606       28.3 %     0.00 %   $ 213,636       23.6 %     0.00 %   $ 211,410       23.6 %     0.00 %
Interest-bearing deposits:
                                                                       
Checking
    106,740       8.3 %     0.11 %     14,299       1.6 %     0.10 %     11,684       1.3 %     0.09 %
Money market
    446,885       34.8 %     0.29 %     236,206       26.1 %     0.32 %     174,375       19.5 %     0.57 %
Savings
    80,867       6.3 %     0.15 %     79,420       8.8 %     0.22 %     80,419       9.0 %     0.25 %
Time deposit accounts:
                                                                       
Less than 1.00%
    152,820       11.9 %     0.42 %     147,813       16.3 %     0.58 %     127,497       14.2 %     0.68 %
        1.00 - 1.99     119,450       9.3 %     1.09 %     197,554       21.8 %     1.16 %     271,717       30.3 %     1.14 %
        2.00 - 2.99     12,037       0.9 %     2.82 %     13,439       1.5 %     2.78 %     15,840       1.8 %     2.73 %
        3.00 - 3.99     874       0.1 %     3.29 %     1,130       0.1 %     3.44 %     1,283       0.1 %     3.43 %
        4.00 - 4.99     142       0.0 %     4.30 %     395       0.0 %     4.29 %     672       0.1 %     4.26 %
        5.00 and greater
    713       0.1 %     5.26 %     876       0.1 %     5.27 %     973       0.1 %     5.25 %
Total time deposit accounts
    286,036       22.3 %     0.82 %     361,207       39.9 %     1.00 %     417,982       46.6 %     1.08 %
Total interest-bearing deposits
    920,528       71.7 %     0.42 %     691,132       76.4 %     0.66 %     684,460       76.4 %     0.84 %
Total deposits
  $ 1,284,134       100.0 %     0.30 %   $ 904,768       100.0 %     0.51 %   $ 895,870       100.0 %     0.64 %


Borrowings.  At September 30, 2013, total borrowings amounted to $96.8 million, up $11.0 million or 12.8% from September 30, 2012 but down $29.0 million or 23.1% from December 31, 2012. The decrease from December 31, 2012 was due to the repayment of $52.0 million in FHLB borrowings, partially offset by $23.0 million in new repurchase agreements related to HOA deposits.  This repurchase agreement debt was offered as a service to certain HOA depositors that adds protection for deposit amounts above FDIC insurance levels.  Total borrowings at September 30, 2013 represented 6.2% of total assets and had an end of period weighted average cost of 1.32%, compared with 7.9% of total assets and at a weighted average cost of 1.64% at September 30, 2012 and 10.7% of total assets at a weighted average cost of 1.19% at December 31, 2012.  At September 30, 2013, total borrowings were comprised of the following:
 
·  
Three reverse repurchase agreements totaling $28.5 million at a weighted average rate of 3.26% and secured by approximately $36.0 million of government sponsored entity MBS;
 
·  
HOA reverse repurchase agreements totaling $23.0 million at a weighted average rate of 0.01%; and
 
·  
Subordinated Debentures used to fund the issuance of Trust Preferred Securities in 2004 of $10.3 million with a rate of 3.02%.  For additional information about the Subordinated Debentures and Trust Preferred Securities, see Note 8 to the Consolidated Financial Statements in this report.
 
The following table sets forth certain information regarding the Company's borrowed funds at the dates indicated:
 

   
September 30, 2013
   
December 31, 2012
   
September 30, 2012
 
   
Balance
   
Weighted Average Rate
   
Balance
   
Weighted Average Rate
   
Balance
   
Weighted Average Rate
 
   
(dollars in thousands)
 
FHLB advances
  $ 35,000       0.11 %   $ 87,000       0.28 %   $ 47,000       0.32 %
Reverse repurchase agreements
    51,474       1.81 %     28,500       3.26 %     28,500       3.26 %
Subordinated debentures
    10,310       3.02 %     10,310       3.09 %     10,310       3.21 %
Total borrowings
  $ 96,784       1.32 %   $ 125,810       1.19 %   $ 85,810       1.64 %
                                                 
Weighted average cost of
borrowings during the quarter
    1.66 %             3.24 %             2.46 %        
Borrowings as a percent of total assets
    6.2 %             10.7 %             7.9 %        


Stockholders’ Equity.  Total stockholders’ equity was $171.2 million as of September 30, 2013, up from $99.9 million at September 30, 2012 and $134.5 million at December 31, 2012.  On January 9, 2013, the Corporation issued 495,000 new shares of its common stock at a public offering price of $10.00 per share in connection with the exercise of the over-allotment option granted to the underwriters as part of an underwritten public offering that was completed on December 11, 2012. The net proceeds from the exercise of the over-allotment option, after deducting underwriting discounts and commissions, was $4.7 million.  On March 15, 2013, as a result of the FAB Acquisition, the Bank recorded equity of $14.9 million in connection with the Corporation’s stock issued to FAB shareholders as part of the acquisition consideration.  On June 25, 2013, as a result of the SDTB Acquisition, the Bank recorded equity of $14.4 million in connection with the Corporation’s stock issued to SDTB shareholders as part of the acquisition consideration.  The current year increase of $36.6 million in stockholders’ equity was related to the exercise of the over-allotment option, equity consideration for the FAB Acquisition, equity consideration for the SDTB Acquisition, net income for the first nine months of 2013 of $4.8 million, partially offset by an unfavorable change in accumulated other comprehensive income to a loss of $3.7 million.
 
Our book value per share increased to $10.28 at September 30, 2013, up from $9.66 at September 30, 2012 and $ 9.85 at December 31, 2012.  At September 30, 2013, the Company’s tangible common equity to tangible assets ratio was 9.51%, up from 8.94% at September 30, 2012, but down from 11.26% at December 31, 2012.
 
Tangible common equity to tangible assets (the "tangible common equity ratio") is a non-GAAP financial measure derived from GAAP-based amounts.  We calculate the tangible common equity ratio by excluding the balance of intangible assets from common shareholders' equity and dividing by tangible assets.  We believe that this information is important to shareholders as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk-based ratios.

 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
GAAP Reconciliation
 
(dollars in thousands)
 
                   
   
September 30, 2013
   
December 31, 2013
   
September 30, 2013
 
                   
Total stockholders' equity
  $ 171,154     $ 134,517     $ 99,886  
Less: Intangible assets
    (24,309 )     (2,626 )     (2,703 )
Tangible common equity
  $ 146,845     $ 131,891     $ 97,183  
                         
Total assets
  $ 1,569,020     $ 1,173,792     $ 1,089,336  
Less: Intangible assets
    (24,309 )     (2,626 )     (2,703 )
Tangible assets
  $ 1,544,711     $ 1,171,166     $ 1,086,633  
                         
Tangible common equity ratio
    9.51 %     11.26 %     8.94 %

CAPITAL RESOURCES AND LIQUIDITY
 
Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments.  While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.
 
Our primary sources of funds generated during the first nine months of 2013 were from:
 
·  
Net change of $246.8 million of undisbursed loan funds;
·  
Net cash of $138.4  million acquired from the FAB and SDTB acquisitions;
·  
Proceeds of $212.3 million from the sale of securities available for sale;
·  
Proceeds of $131.6 million from the sale and principal payments on loans held for investment;
·  
Principal payments of $27.5 million from securities available for sale; and
·  
Net proceeds from the issuance of stock related to the underwriter’s exercise of the over-allotment option of $4.7 million.
 
We used these funds to:
 
·  
Purchase and originate loans held for investment of $463.7 million;
·  
Absorb deposit outflows of $161.4 million; and
·  
Repay FHLB advances and other borrowings of $45.9 million.
 
Our most liquid assets are unrestricted cash and short-term investments.  The levels of these assets are dependent on our operating, lending and investing activities during any given period.  Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate.  At September 30, 2013, cash and cash equivalents totaled $61.4 million and the market value of our investment securities available for sale totaled $282.8 million.  If additional funds are needed, we have additional sources of liquidity that can be accessed, including FHLB advances, Federal Funds lines, the Federal Reserve’s lending programs and loan sales.  As of September 30, 2013, the maximum amount we could borrow through the FHLB was $699.4 million, of which $256.5 million was available for borrowing based on collateral pledged of $405.5 million in real estate loans.  At September 30, 2013, we had unsecured lines of credit aggregating $62.3 million, which consisted of $59.0 million with other financial institutions from which to draw funds and $3.3 million with the Federal Reserve Bank.  At September 30, 2013, no funds were drawn against these unsecured lines of credit.  For the quarter ended September 30, 2013, our average liquidity ratio was 23.77%.  The Company regularly models liquidity stress scenarios to ensure that adequate liquidity is available and has contingency funding plans in place which are reviewed and tested on a regular basis.
 
To the extent that 2013 deposit growth is not sufficient to satisfy our ongoing commitments to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, or make investments, we may access funds through our FHLB borrowing arrangement, unsecured lines of credit or other sources.
 
The Bank has a policy in place that permits the purchase of brokered funds, in an amount not to exceed 5% of total deposits, as a secondary source for funding.  At September 30, 2013, we had no brokered time deposits.
 
The Corporation is a corporate entity separate and apart from the Bank that must provide for its own liquidity.  The Corporation’s primary sources of liquidity are dividends from the Bank.  There are statutory and regulatory provisions that limit the ability of the Bank to pay dividends to the Corporation.  Management believes that such restrictions will not have a material impact on the ability of the Corporation to meet its ongoing cash obligations.
 
The Corporation has never declared or paid dividends on its common stock and does not anticipate declaring or paying any cash dividends in the foreseeable future.  The Corporation’s board of directors has authorized stock repurchase plans, which allow the Corporation to proactively manage its capital position and return excess capital to it stockholders.  Shares purchased under such plans also provide the Corporation with shares of common stock necessary to satisfy obligations related to stock compensation awards.  No shares were repurchased under our stock repurchase plans during the three or nine months ended September 30, 2013.  See Part II, Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds for additional information.
 
Contractual Obligations and Off-Balance Sheet Commitments
 
Contractual Obligations.  The Company enters into contractual obligations in the normal course of business primarily as a source of funds for its asset growth and to meet required capital needs.
 
The following schedule summarizes maturities and payments due on our obligations and commitments, excluding accrued interest, as of the date indicated:

 
   
September 30, 2013
 
   
Less than
1 year
   
1 - 3
years
   
3 -5
years
   
More than
5 years
   
Total
 
   
(in thousands)
 
Contractual obligations
                                 
FHLB advances
  $ 35,000     $ -     $ -     $ -     $ 35,000  
Other borrowings
    22,974       -       10,000       18,500       51,474  
Subordinated debentures
    -       -       -       10,310       10,310  
Certificates of deposit
    240,473       36,573       2,378       6,612       286,036  
Operating leases
    2,646       5,335       3,983       2,703       14,667  
Total contractual cash obligations
  $ 301,093     $ 41,908     $ 16,361     $ 38,125     $ 397,487  

Off-Balance Sheet Commitments.  We utilize off-balance sheet commitments in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate real estate, business and other loans held for investment, undisbursed loan funds, lines and letters of credit, and commitments to purchase loans and investment securities for portfolio. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
 
Commitments to originate loans held for investment are agreements to lend to a customer as long as there is no violation of any condition established in the commitment.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Undisbursed loan funds and unused lines of credit on home equity and commercial loans include committed funds not disbursed.  Letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party.  As of September 30, 2013, we had commitments to extend credit on existing lines and letters of credit of $333.6 million, compared to $152.1 million at September 30, 2012 and $131.5 million at December 31, 2012.
 
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:

 
   
September 30, 2013
 
   
Less than
1 year
   
1 - 3
years
   
3 - 5
years
   
More than
5 years
   
Total
 
   
(in thousands)
 
Other unused commitments
                                 
Home equity lines of credit
  $ 100     $ 709     $ 851     $ 3,488     $ 5,148  
Commercial and industrial
    42,446       5,606       1,736       16,656       66,444  
Warehouse facilities
    -       -       -       254,426       254,426  
Standby letters of credit
    3,550       44       -       -       3,594  
All other
    2,718       875       5       382       3,980  
Total commitments
  $ 48,814     $ 7,234     $ 2,592     $ 274,952     $ 333,592  


Regulatory Capital Compliance
 
The Corporation and the Bank are subject to risk-based capital regulations which quantitatively measure capital against risk-weighted assets, including certain off-balance sheet items.  These regulations define the elements of the Tier 1 and Tier 2 components of total capital and establish minimum ratios of 4% for Tier 1 capital and 8% for total capital for capital adequacy purposes.  Supplementing these regulations is a leverage requirement.  This requirement establishes a minimum leverage ratio (at least 3% or 4%, depending upon an institution’s regulatory status) which is calculated by dividing Tier 1 capital by adjusted quarterly average assets (after deducting goodwill).  In addition, the Bank is subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) which imposes a number of mandatory supervisory measures.  Among other matters, FDICIA established five capital categories, ranging from “well capitalized” to “critically under capitalized.”  Such classifications are used by regulatory agencies to determine a bank’s deposit insurance premium and approval of applications authorizing institutions to increase their asset size or otherwise expand business activities or acquire other institutions.  Under FDICIA, a “well capitalized” bank must maintain minimum leverage, Tier 1 and total capital ratios of 5%, 6% and 10%, respectively.  The Federal Reserve applies comparable tests for bank holding companies.  At September 30, 2013, the Bank and the Corporation, respectively, exceeded the requirements for “well capitalized” institutions under the tests pursuant to FDICIA and of the Federal Reserve.
 
On December 11, 2012, we completed an underwritten public offering of 3.3 million shares of common stock for net proceeds, after deducting underwriting discounts and commissions, of $31.2 million.  On January 9, 2013, the Corporation issued 495,000 new shares of its common stock at a public offering price of $10.00 per share in connection with the exercise of the over-allotment option granted to the underwriters as part of the offering.  The net proceeds from the exercise of the over-allotment option, after deducting underwriting discounts and commissions, was $4.7 million.  During March of 2013, the Corporation injected $8.7 million of the proceeds from the offering into the Bank, which enhanced the Bank’s regulatory capital ratios.
 
The Bank’s and the Company’s capital amounts and ratios are presented in the following table along with the well capitalized requirement at the dates indicated:

 
   
Actual
   
Minimum Required for
Capital Adequacy Purposes
   
Required to be Well Capitalized Under
Prompt Corrective Action Regulations
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(dollars in thousands)
 
At September 30, 2013
                                   
                                     
Tier 1 Capital (to adjusted tangible assets)
                                   
Bank
  $ 155,832       10.02 %   $ 62,201       4.00 %   $ 77,751       5.00 %
Consolidated
    158,309       10.19 %     62,167       4.00 %     N/A       N/A  
                                                 
Tier 1 Risk-Based Capital (to risk-weighted assets)
                                               
Bank
    155,832       13.28 %     46,936       4.00 %     70,404       6.00 %
Consolidated
    158,309       13.48 %     46,966       4.00 %     N/A       N/A  
                                                 
Total Capital (to risk-weighted assets)
                                               
Bank
    163,827       13.96 %     93,873       8.00 %     117,341       10.00 %
Consolidated
    166,303       14.16 %     93,933       8.00 %     N/A       N/A  
                                                 
At December 31, 2012
                                               
                                                 
Tier 1 Capital (to adjusted tangible assets)
                                               
Bank
  $ 129,055       12.07 %   $ 42,773       4.00 %   $ 53,466       5.00 %
Consolidated
    135,883       12.71 %     42,771       4.00 %     N/A       N/A  
                                                 
Tier 1 Risk-Based Capital (to risk-weighted assets)
                                               
Bank
    129,055       12.99 %     39,750       4.00 %     59,625       6.00 %
Consolidated
    135,883       13.61 %     39,924       4.00 %     N/A       N/A  
                                                 
Total Capital (to risk-weighted assets)
                                               
Bank
    137,049       13.79 %     79,500       8.00 %     99,375       10.00 %
Consolidated
    144,004       14.43 %     79,848       8.00 %     N/A       N/A  
                                                 
At  September 30, 2012
                                               
                                                 
Tier 1 Capital (to adjusted tangible assets)
                                               
Bank
  $ 99,876       9.48 %   $ 42,153       4.00 %   $ 52,692       5.00 %
Consolidated
    100,881       9.58 %     42,125       4.00 %     N/A       N/A  
                                                 
Tier 1 Risk-Based Capital (to risk-weighted assets)
                                               
Bank
    99,876       11.04 %     36,195       4.00 %     54,292       6.00 %
Consolidated
    100,881       11.09 %     36,386       4.00 %     N/A       N/A  
                                                 
Total Capital (to risk-weighted assets)
                                               
Bank
    107,534       11.88 %     72,390       8.00 %     90,487       10.00 %
Consolidated
    108,539       11.93 %     72,771       8.00 %     N/A       N/A  
 
 

On July 2, 2013, the Federal Reserve issued a final rule implementing a revised regulatory capital framework for U.S. banks in accordance with the Basel III international accord and satisfying related mandates under the Dodd-Frank Act.  Under the final rule, minimum capital requirements will increase for both quantity and quality of capital held by banking organizations. The final rule includes a new common equity tier 1 minimum capital requirement of 4.5% of risk-weighted assets and increases the minimum tier 1 capital requirement from 4.0% to 6.0% of risk-weighted assets. The minimum total risk-based capital requirement remains unchanged at 8.0% of total risk-weighted assets. In addition to these minimum capital requirements, the final rule requires banking organizations to hold a buffer of common equity tier 1 capital in an amount above 2.5% of total risk-weighted assets to avoid restrictions on capital distributions and discretionary bonus payments to executive officers.
 
The final rule also establishes a standardized approach for determining risk-weighted assets. Under the final rule, risk weights for residential mortgage loans that apply under current capital rules will continue to apply and banking organizations with less than $15 billion in total assets may continue to include existing trust preferred securities as capital. The final rule allows banking organizations that are not subject to the advanced approaches rule, like us, to make a one-time election not to include most elements of accumulated other comprehensive income in regulatory capital and instead use the existing treatment under current capital rules.
 
The minimum regulatory capital requirements and compliance with a standardized approach for determining risk-weighted assets of the final rule are effective for us on January 1, 2015. The capital conservation buffer framework transition period begins January 1, 2016, with full implementation effective January 1, 2019. The Company is evaluating the impact of the final Basel III capital rules, and based on management’s initial review, we expect to exceed all capital requirements under the new rules. We will continue to evaluate and monitor our capital ratios under the new rules prior to the initial implementation date of January 1, 2015.
 
The final rule also enhances the risk-sensitivity of the advanced approaches risk-based capital rule, including among others, revisions to better address counterparty credit risk and interconnectedness among financial institutions and incorporation of the Federal Reserve’s market risk rule into the integrated capital framework. These provisions of the final rule generally apply only to large, internationally active banking organizations or banking organizations with significant trading activity and are not expected to directly impact us.
 
Item 3.  Quantitative and Qualitative Disclosure About Market Risk
 
Management believes that there have been no material changes in our quantitative and qualitative information about market risk since December 31, 2012.  For a complete discussion of our quantitative and qualitative market risk, see “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our 2012 Annual Report.
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
 
Changes in Internal Controls
 
There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 

 
PART II - OTHER INFORMATION
 
 
Item 1.  Legal Proceedings
 
We were not involved in any legal proceedings other than those occurring in the ordinary course of business; except for the class action case captioned “James Baker v. Century Financial, et al,” which was discussed in “Item 3.  Legal Proceedings” in our 2012 Annual Report, and the class action case captioned “Mike Hall v. San Diego Trust Bank, et al.,” which was dismissed in August 2013. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on our results of operations or financial condition.
 
Mike Hall v. San Diego Trust Bank, et al.  In June 2013, a complaint was filed in the Superior Court of the State of California, County of San Diego, Central (the “Superior Court”) against SDTB, its former executive officers and directors, the Bank and the Corporation.  The lawsuit alleged SDTB’s former executive officers and directors breached their fiduciary duties by entering into the definitive acquisition agreement with the Corporation and the Bank that resulted in payouts to SDTB’s former executive officers and directors at the expense of SDTB’s shareholders.  The complaint alleged that SDTB issued a materially false and misleading proxy statement in connection with SDTB’s solicitation of its shareholders to approve the merger with the Bank.  The complaint further accused the Corporation and the Bank of aiding and abetting the alleged breaches of fiduciary duties by SDTB’s executive officers and directors.  The lead plaintiff failed to make any application to enjoin the merger in advance, and failed to make any application since the merger was concluded on June 25, 2013 to attempt to rescind it.  The Company believed the complaint to be without merit and filed a demurrer to have the case dismissed. Instead of filing opposition to the demurrer, plaintiff filed a motion for voluntary dismissal.  On August 23, 2013, the Superior Court granted the motion and dismissed the case.
 
Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on our results of operations or financial condition.
 
Item 1A.  Risk Factors
 
There were no material changes to the risk factors as previously disclosed under Item 1A. of our 2012 Annual Report.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
Item 3.  Defaults Upon Senior Securities
 
None
 
Item 4.  Mine Safety Disclosures
 
Not applicable.
 
Item 5.  Other Information
 
None
 
Item 6.  Exhibits
 
 
Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 31.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 32
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS
 
XBRL Instance Document (1)
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document (1)
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (1)
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document (1)
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document (1)
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (1)
 
(1)  Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 

 


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
PACIFIC PREMIER BANCORP, INC.,
 
November 12, 2013
By:
/s/ Steve Gardner
Date
 
Steve Gardner
   
President and Chief Executive Officer
   
(principal executive officer)
     
November 12, 2013
By:
/s/ Kent J. Smith
Date
 
Kent J. Smith
   
Executive Vice President and Chief Financial Officer
   
(principal financial and accounting officer)
 
 

 
 
 
Index to Exhibits
 
Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 31.2
 
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
Exhibit 32
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS
 
XBRL Instance Document (1)
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document (1)
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (1)
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document (1)
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document (1)
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (1)
 
 
 
(1)  Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.