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

ppbi_10q-2013q1.htm
 



 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 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 May 9, 2013 was 15,437,531.



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

 
PART 1 - FINANCIAL INFORMATION
 

Item 1.  Financial Statements
 


PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except share data)
 
                   
ASSETS
 
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Cash and due from banks
  $ 99,431     $ 59,325     $ 93,622  
Federal funds sold
    27       27       27  
Cash and cash equivalents
    99,458       59,352       93,649  
Investment securities available for sale
    301,160       84,066       150,739  
FHLB stock/Federal Reserve Bank stock, at cost
    10,974       11,247       11,975  
Loans held for sale, net
    3,643       3,681       62  
Loans held for investment
    941,828       982,207       695,195  
Allowance for loan losses
    (7,994 )     (7,994 )     (8,116 )
Loans held for investment, net
    933,834       974,213       687,079  
Accrued interest receivable
    4,898       4,126       3,632  
Other real estate owned
    1,561       2,258       1,768  
Premises and equipment
    8,862       8,575       9,550  
Deferred income taxes
    2,646       6,887       8,654  
Bank owned life insurance
    17,701       13,485       13,096  
Intangible assets
    4,463       2,626       2,013  
Goodwill
    11,854       -       -  
Other assets
    5,601       3,276       2,954  
TOTAL ASSETS
  $ 1,406,655     $ 1,173,792     $ 985,171  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
LIABILITIES:
                       
Deposit accounts:
                       
Noninterest bearing
  $ 316,536     $ 213,636     $ 125,448  
Interest bearing:
                       
Transaction accounts
    519,828       329,925       311,152  
Retail certificates of deposit
    344,968       361,207       410,117  
Wholesale certificates of deposit
    4,387       -       -  
Total deposits
    1,185,719       904,768       846,717  
FHLB advances and other borrowings
    44,191       115,500       28,500  
Subordinated debentures
    10,310       10,310       10,310  
Accrued expenses and other liabilities
    8,846       8,697       10,165  
TOTAL LIABILITIES
    1,249,066       1,039,275       895,692  
STOCKHOLDERS’ EQUITY:
                       
Common stock, $.01 par value; 25,000,000 shares authorized; 15,437,531 shares at March 31, 2013, 13,661,648 shares at December 31, 2012, and 10,329,934 shares at March 31, 2012 issued and outstanding
    154       137       103  
Additional paid-in capital
    128,075       107,453       76,239  
Retained earnings
    27,794       25,822       12,738  
Accumulated other comprehensive income, net of tax of $1,095 at March 31, 2013, $772 at December 31, 2012, and $278 at March 31, 2012
    1,566       1,105       399  
TOTAL STOCKHOLDERS’ EQUITY
    157,589       134,517       89,479  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,406,655     $ 1,173,792     $ 985,171  

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


 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except per share data)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31, 2013
   
March 31, 2012
 
INTEREST INCOME
           
Loans
  $ 13,396     $ 11,237  
Investment securities and other interest-earning assets
    839       879  
Total interest income
    14,235       12,116  
INTEREST EXPENSE
               
Interest-bearing deposits:
               
Interest on transaction accounts
    218       329  
Interest on certificates of deposit
    801       1,427  
Total interest-bearing deposits
    1,019       1,756  
FHLB advances and other borrowings
    240       235  
Subordinated debentures
    77       84  
Total interest expense
    1,336       2,075  
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    12,899       10,041  
PROVISION FOR LOAN LOSSES
    296       -  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    12,603       10,041  
NONINTEREST INCOME
               
Loan servicing fees
    326       177  
Deposit fees
    440       501  
Net gain from sales of loans
    723       -  
Other-than-temporary impairment loss on investment securities, net
    (30 )     (37 )
Other income
    265       298  
Total noninterest income
    1,724       939  
NONINTEREST EXPENSE
               
Compensation and benefits
    5,097       3,520  
Premises and occupancy
    1,293       878  
Data processing and communications
    635       367  
Other real estate owned operations, net
    37       147  
FDIC insurance premiums
    140       133  
Legal, audit and professional expense
    595       486  
Marketing expense
    206       215  
Office and postage expense
    263       163  
Loan expense
    248       236  
Deposit expense
    95       64  
Merger related expense
    1,745       -  
Other expense
    825       432  
Total noninterest expense
    11,179       6,641  
NET INCOME BEFORE INCOME TAXES
    3,148       4,339  
INCOME TAX
    1,176       1,647  
NET INCOME
  $ 1,972     $ 2,692  
                 
EARNINGS PER SHARE
               
Basic
  $ 0.14     $ 0.26  
Diluted
  $ 0.13     $ 0.25  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
Basic
    14,355,407       10,335,935  
Diluted
    15,117,216       10,626,174  

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



PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands)
 
(unaudited)
 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
             
Net Income
  $ 1,972     $ 2,692  
Other comprehensive income, net of tax:
               
Unrealized holding gains on securities arising during the period, net of tax
    461       81  
Reclassification adjustment for net gain on sale of securities included in net income, net of tax
    -       -  
Net unrealized gain on securities, net of tax
    461       81  
Comprehensive Income
  $ 2,433     $ 2,773  

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


 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
FOR THE THREE MONTHS ENDED MARCH 31, 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
                            1,972               1,972  
Other comprehensive income
                                    461       461  
Share-based compensation expense
                    152                       152  
Common stock repurchased and retired
    (3,666 )     -       (22 )                     (22 )
Common stock issued
    1,774,217       17       20,482                       20,499  
Stock options exercised
    5,332       -       10                       10  
Balance at March 31, 2013
    15,437,531     $ 154     $ 128,075     $ 27,794     $ 1,566     $ 157,589  
                                                 
Balance at December 31, 2011
    10,337,626     $ 103     $ 76,310     $ 10,046     $ 318     $ 86,777  
Net Income
                            2,692               2,692  
Other comprehensive income
                                    81       81  
Share-based compensation expense
                    8                       8  
Common stock repurchased and retired
    (13,022 )     -       (102 )                     (102 )
Stock options exercised
    5,330       -       23                       23  
Balance at March 31, 2012
    10,329,934     $ 103     $ 76,239     $ 12,738     $ 399     $ 89,479  

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



PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(in thousands)
 
(unaudited)
 
             
   
Three Months Ended March 31,
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 1,972     $ 2,692  
Adjustments to net income:
               
Depreciation and amortization expense
    440       312  
Provision for loan losses
    296       -  
Share-based compensation expense
    152       8  
Loss (gain) on sale of other real estate owned
    3       (35 )
Write down of other real estate owned
    -       184  
Amortization of premium/discounts on securities held for sale, net
    237       140  
Amortization of loan mark-to-market discount from FDIC transaction
    (729 )     (344 )
Other-than-temporary impairment loss on investment securities, net
    30       37  
Gain on sale of loans held for investment
    (723 )     -  
Purchase and origination of loans held for sale
    -       (62 )
Recoveries on loans
    184       17  
Principal payments from loans held for sale
    38       -  
Deferred income tax provision
    -       344  
Change in accrued expenses and other liabilities, net
    (387 )     (2,016 )
Income from bank owned life insurance, net
    (128 )     (119 )
Change in accrued interest receivable and other assets, net
    (1,347 )     459  
Net cash provided by operating activities
    38       1,617  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale and principal payments on loans held for investment
    50,977       35,219  
Net change in undisbursed loan funds
    107,003       40,077  
Purchase and origination of loans held for investment
    (89,836 )     (33,243 )
Proceeds from sale of other real estate owned
    694       1,158  
Principal payments on securities available for sale
    5,797       2,719  
Purchase of securities available for sale
    -       (32,351 )
Purchases of premises and equipment
    (657 )     (43 )
Redemption of Federal Home Loan Bank of San Francisco stock
    926       500  
Cash disbursed for purchase of FAB
    (42,966 )     -  
Cash acquired in FAB transaction
    167,663       -  
Net cash provided by investing activities
    199,601       14,036  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net (decrease) increase in deposit accounts
    (75,867 )     17,840  
Repayment of FHLB advances and other borrowings
    (88,214 )     -  
Proceeds from issuance of common stock, net of issuance cost
    4,560       -  
Proceeds from exercise of stock options
    10       23  
Repurchase of common stock
    (22 )     (102 )
Net cash (used in) provided by financing activities
    (159,533 )     17,761  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    40,106       33,414  
CASH AND CASH EQUIVALENTS, beginning of period
    59,352       60,235  
CASH AND CASH EQUIVALENTS, end of period
  $ 99,458     $ 93,649  




PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
(in thousands)
 
(unaudited)
 
             
   
Three Months Ended March 31,
 
   
2013
   
2012
 
SUPPLEMENTAL CASH FLOW DISCLOSURES
           
Interest paid
  $ 1,277     $ 2,041  
Income taxes paid
    2,700       1,475  
Assets acquired (liabilities assumed and capital created) in FAB transaction (See Note 3):
               
Investment securities
    222,391       -  
FHLB Stock and TIB Stock
    653       -  
Loans
    26,422       -  
Core deposit intangible
    1,930       -  
Goodwill
    11,854       -  
Fixed assets
    70       -  
Other assets
    6,098       -  
Deposits
    (356,818 )     -  
Other borrowings
    (16,905 )     -  
Other liabilities
    (4,454 )     -  
Additional paid-in capital
    (15,938 )     -  
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
               
Transfers from loans to other real estate owned
  $ -     $ 1,843  
Investment securities available for sale purchased and not settled
  $ -     $ 5,517  

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



 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 2013, December 31, 2012, and March 31, 2012, the results of its operations and comprehensive income for the three months ended March 31, 2013 and 2012 and the changes in stockholders’ equity and cash flows for the three months ended March 31, 2013 and 2012.  Operating results or comprehensive income for the three months ended March 31, 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 March 31, 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 Company is required to adopt this update prospectively for the quarter ending March 31, 2013.  The update may result in revised disclosures in the Company's financial statements but otherwise has no impact on the Company's consolidated financial position, results of operations or cash flows. 
 
 
Note 3 –  Acquisitions
 
First Associations Bank (“FAB”)
 
Effective March 15, 2013, the Bank acquired FAB (“FAB Acquisition”), a Dallas, Texas, based Texas-chartered bank pursuant to the terms of a definitive agreement entered into by the Corporation, the Bank and 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 $394.1 million, including:
 
  
$223.0 million in investment securities, including Federal Home Loan Bank (“FHLB”) and TIB-The Independent BankersBank (“TIB”) stock;
 
●  
$124.7 million of cash and cash equivalents;
 
●  
$26.4 million of loans;
 
●  
$11.9 million in goodwill;
 
●  
$6.2 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 $15.9 million in connection with the Company’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 Accounting Standards Codification (“ASC”) Topic 820: Fair Value Measurements and Disclosures.
 
The acquisition is a unique opportunity for the Company to acquire a highly efficient, consistently profitable and niche focused business that will complement our existing banking franchise.  Additionally, this partnership will improve the Company’s deposit base, lower its cost of deposits and provide the platform to accelerate future core deposit growth.  Additionally, the acquisition of FAB allowed the Company to deploy a portion of its current capital base into a compelling investment.
 
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 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 4 – Investment Securities
 
The amortized cost and estimated fair value of securities were as follows:
 

   
March 31, 2013
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
U.S. Treasury
  $ 74     $ 11     $ -     $ 85  
Municipal bonds
    154,543       1,783       (387 )     155,939  
Mortgage-backed securities
    143,882       1,821       (567 )     145,136  
Total securities available for sale
    298,499       3,615       (954 )     301,160  
Stock:
                               
FHLB stock
  $ 8,955       -       -       8,955  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
    10,974       -       -       10,974  
Total securities
  $ 309,473     $ 3,615     $ (954 )   $ 312,134  
                                 
   
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  
Stock:
                               
FHLB stock
    9,228       -       -       9,228  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
    11,247       -       -       11,247  
Total securities
  $ 93,436     $ 2,360     $ (483 )   $ 95,313  
                                 
   
March 31, 2012
   
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
U.S. Treasury
  $ 147     $ 13     $ -     $ 160  
Corporate
    5,000       -       (183 )     4,817  
Municipal bonds
    26,940       851       (96 )     27,695  
Mortgage-backed securities
    117,975       893       (801 )     118,067  
Total securities available for sale
    150,062       1,757       (1,080 )     150,739  
Stock:
                               
FHLB stock
    9,956       -       -       9,956  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
    11,975       -       -       11,975  
Total securities
  $ 162,037     $ 1,757     $ (1,080 )   $ 162,714  


At March 31, 2013, the Company had a $9.0 million investment in FHLB stock carried at cost.  During the first quarter of 2013, the FHLB has repurchased $273,000 of the Company’s excess FHLB stock through their stock repurchase program.
 
At March 31, 2013, mortgage-backed securities (“MBS”) with an estimated par value of $41.1 million and a fair value of $42.5 million were pledged as collateral for the Bank’s three reverse repurchases 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.

   
March 31, 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
    122     $ 53,773     $ (387 )     -     $ -     $ -       122     $ 53,773     $ (387 )
Mortgage-backed securities
    3       20,258       (350 )     27       1,031       (217 )     30       21,289       (567 )
    Total
    125     $ 74,031     $ (737 )     27     $ 1,031     $ (217 )     152     $ 75,062     $ (954 )
                                                                         
   
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 )
                                                                         
   
March 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)
 
                                                                         
Corporate bonds
    1     $ 4,817     $ (183 )     -     $ -     $ -       1     $ 4,817     $ (183 )
Municipal bonds
    8       2,832       (96 )     -       -       -       8       2,832       (96 )
Mortgage-backed securities
    13       25,523       (87 )     39       1,368       (714 )     52       26,891       (801 )
    Total
    22     $ 33,172     $ (366 )     39     $ 1,368     $ (714 )     61     $ 34,540     $ (1,080 )

The amortized cost and estimated fair value of investment securities available for sale at March 31, 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
  $ -     $ -     $ -     $ -     $ 74     $ 85     $ -     $ -     $ 74     $ 85  
Municipal bonds
    -       -       4,716       4,720       61,012       61,297       88,815       89,922       154,543       155,939  
Mortgage-backed securities
    -       -       23       24       12,989       13,102       130,870       132,010       143,882       145,136  
Total investment securities available for sale
    -       -       4,739       4,744       74,075       74,484       219,685       221,932       298,499       301,160  
Stock:
                                                                               
FHLB
    8,955       8,955       -       -       -       -       -       -       8,955       8,955  
Federal Reserve Bank
    2,019       2,019       -       -       -       -       -       -       2,019       2,019  
 Total stock
    10,974       10,974       -       -       -       -       -       -       10,974       10,974  
Total securities
  $ 10,974     $ 10,974     $ 4,739     $ 4,744     $ 74,075     $ 74,484     $ 219,685     $ 221,932     $ 309,473     $ 312,134  


    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 (loss).  At March 31, 2013, the Company had accumulated other comprehensive income of $2.7 million, or $1.6 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 5 – Loans Held for Investment
 
The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:
 

   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
(in thousands)
 
Business loans:
                 
Commercial and industrial
  $ 140,592     $ 115,354     $ 83,947  
Commercial owner occupied (1)
    166,571       150,934       146,904  
SBA
    5,116       6,882       3,948  
Warehouse facilities
    138,935       195,761       44,246  
Real estate loans:
                       
Commercial non-owner occupied
    256,015       253,409       168,672  
Multi-family
    139,100       156,424       185,367  
One-to-four family (2)
    87,109       97,463       52,280  
Land
    7,863       8,774       7,246  
Other loans
    4,690       1,193       3,139  
Total gross loans (3)
    945,991       986,194       695,749  
Less loans held for sale, net
    3,643       3,681       62  
Total gross loans held for investment
    942,348       982,513       695,687  
Less:
                       
Deferred loan origination costs (fees) and premiums (discounts), net
    (520 )     (306 )     (492 )
Allowance for loan losses
    (7,994 )     (7,994 )     (8,116 )
Loans held for investment, net
  $ 933,834     $ 974,213     $ 687,079  
                         
(1) Majority secured by real estate.
                       
(2)  Includes second trust deeds.
                       
(3) Total gross loans for March 31, 2013 is net of the mark-to-market discounts on Canyon National loans of $2.7 million, on Palm Desert National loans of $4.7 million, and on FAB loans of $157,000.
 

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 $37.6 million for secured loans and $22.6 million for unsecured loans at March 31, 2013.  At March 31, 2013, the Bank’s largest aggregate outstanding balance of loans to one borrower was $22.8 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:
   
March 31, 2013
 
   
Canyon National
   
Palm Desert National
   
Total
 
   
(in thousands)
 
Business loans:
                 
Commercial and industrial
  $ 77     $ 214     $ 291  
Commercial owner occupied (1)
    941       260       1,201  
Real estate loans:
                       
Commercial non-owner occupied
    1,029       -       1,029  
One-to-four family (2)
    -       27       27  
Land
    1,034       -       1,034  
Total purchase credit impaired
  $ 3,081     $ 501     $ 3,582  
  
On the acquisition date, the amount by which the undiscounted expected cash flows of the purchased credit impaired loans exceed the estimated fair value of the loan is the “accretable yield.”  The accretable yield is measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the purchased credit impaired loan.  At March 31, 2013, the Company had $3.6 million of purchased credit impaired loans, of which $34,000 were placed on nonaccrual status.
 
The following table summarizes the accretable yield on the purchased credit impaired for the three months ended March 31, 2013:
   
Three Months Ended March 31, 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
    (122 )     (28 )     (150 )
Disposals and other
    -       (75 )     (75 )
Change in accretable yield
    157       448       605  
Balance at the end of period
  $ 2,064     $ 592     $ 2,656  

 
 
Impaired Loans
 
The following tables provide a summary of the Company’s investment in impaired loans as of the period indicated:
               
Impaired Loans
                   
   
Contractual
Unpaid Principal Balance
   
Recorded Investment
   
With Specific Allowance
   
Without Specific Allowance
   
Specific Allowance for Impaired Loans
   
Average Recorded Investment
   
Interest Income Recognized
 
         
(in thousands)
 
March 31, 2013
                                         
Business loans:
                                         
Commercial and industrial
  $ 697     $ 580     $ 281     $ 299     $ 256     $ 584     $ 18  
Commercial owner occupied
    245       245       -       245       -       245       -  
SBA
    422       129       -       129       -       143       6  
Real estate loans:
                                                       
Commercial non-owner occupied
    2,478       1,974       -       1,974       -       1,550       22  
Multi-family
    -       -       -       -       -       88       2  
One-to-four family
    849       824       501       322       360       858       26  
Totals
  $ 4,691     $ 3,752     $ 782     $ 2,969     $ 616     $ 3,468     $ 74  
                                                         
                   
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)
 
March 31, 2012
                                                       
Business loans:
                                                       
Commercial and industrial
  $ 81     $ 76     $ -     $ 76     $ -     $ 351     $ 1  
Commercial owner occupied
    1,043       913       -       913       -       1,154       -  
SBA
    2,171       604       -       604       -       547       8  
Real estate loans:
                                                       
Commercial non-owner occupied
    709       648       -       648       -       1,069       11  
Multi-family
    1,446       1,414       -       1,414       -       1,417       23  
One-to-four family
    1,170       973       -       973       -       671       11  
Totals
  $ 6,620     $ 4,628     $ -     $ 4,628     $ -     $ 5,209     $ 54  

 
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:
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
(in thousands)
 
                   
Nonaccruing loans
  $ 3,055     $ 1,988     $ 3,696  
Accruing loans
    697       748       932  
Total impaired loans
  $ 3,752     $ 2,736     $ 4,628  

When loans are placed on nonaccrual status all accrued interest is reversed from earnings.  Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance.  If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only.  Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.
 
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest.  The Company had impaired loans on nonaccrual status at March 31, 2013 of $3.1 million, December 31, 2012 of $2.0 million, and March 31, 2012 of $3.7 million.  The Company had no loans 90 days or more past due and still accruing at March 31, 2013, December 31, 2012 or March 31, 2012.
 
The Company had an immaterial amount of TDRs related to three U.S. Small Business Administration (“SBA”) loans which were all completed prior to 2011.
 
Concentration of Credit Risk
 
As of March 31, 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
 
March 31, 2013
 
(in thousands)
 
Business loans:
                       
Commercial and industrial
  $ 136,947     $ 96     $ 3,549     $ 140,592  
Commercial owner occupied
    149,787       2,792       13,992       166,571  
SBA
    5,063       -       53       5,116  
Warehouse facilities
    138,935       -       -       138,935  
Real estate loans:
                               
Commercial non-owner occupied
    247,140       360       8,515       256,015  
Multi-family
    137,014       517       1,569       139,100  
One-to-four family
    85,849       -       1,260       87,109  
Land
    7,853       -       10       7,863  
Other loans
    4,678       -       12       4,690  
Totals
  $ 913,266     $ 3,765     $ 28,960     $ 945,991  
                                 
                                 
   
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
 
March 31, 2012
 
(in thousands)
 
Business loans:
                            -  
Commercial and industrial
  $ 82,070     $ 864     $ 1,013     $ 83,947  
Commercial owner occupied
    134,326       3,778       8,800       146,904  
SBA
    3,747       -       201       3,948  
Warehouse facilities
    44,246       -       -       44,246  
Real estate loans:
                               
Commercial non-owner occupied
    165,237       672       2,763       168,672  
Multi-family
    170,714       9,932       4,721       185,367  
One-to-four family
    50,580       -       1,700       52,280  
Land
    7,246       -       -       7,246  
Other loans
    3,119       -       20       3,139  
Totals
  $ 661,285     $ 15,246     $ 19,218     $ 695,749  

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

         
Days Past Due
       
Non-
 
   
Current
      30-59       60-89       90+  
Total
   
Accruing
 
March 31, 2013
 
(in thousands)
 
Business loans:
                                       
Commercial and industrial
  $ 140,365     $ 9     $ -     $ 218   $ 140,592     $ 333  
Commercial owner occupied
    166,326       -       -       245     166,571       245  
SBA
    5,044       -       -       72     5,116       121  
Warehouse facilities
    138,935       -       -       -     138,935       -  
Real estate loans:
                                             
Commercial non-owner occupied
    254,678       -       -       1,337     256,015       1,974  
Multi-family
    138,053       -       1,047       -     139,100       -  
One-to-four family
    87,021       49       30       9     87,109       429  
Land
    7,863       -       -       -     7,863       -  
Other loans
    4,690       -       -       -     4,690       -  
Totals
  $ 942,975     $ 58     $ 1,077     $ 1,881   $ 945,991     $ 3,102  
                                               
                                               
           
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
 
March 31, 2012
 
(in thousands)
 
Business loans:
                                             
Commercial and industrial
  $ 83,937     $ 10     $ -     $ -   $ 83,947     $ 100  
Commercial owner occupied
    145,580       -       478       846     146,904       1,325  
SBA
    3,435       -       -       513     3,948       544  
Warehouse facilities
    44,246       -       -       -     44,246       -  
Real estate loans:
                                             
Commercial non-owner occupied
    168,487       -       -       185     168,672       648  
Multi-family
    185,367       -       -       -     185,367       287  
One-to-four family
    51,741       -       219       320     52,280       792  
Land
    7,246       -       -       -     7,246       -  
Other loans
    3,138       1       -       -     3,139       -  
Totals
  $ 693,177     $ 11     $ 697     $ 1,864   $ 695,749     $ 3,696  

 
 
Note 6 – 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, 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 three months ended for the periods indicated:
 

   
Commercial and industrial
   
Commercial owner occupied
   
SBA
   
Warehouse
   
Commercial non-owner occupied
   
Multi-family
   
One-to-four family
   
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
    (58 )     -       (5 )     -       (401 )     -       (10 )     -       (6 )     (480 )
Recoveries
    7       -       19       -       -       -       43       -       115       184  
Provisions for (reduction in) loan losses
    1,037       153       (43 )     (814 )     345       (639 )     279       90       (112 )     296  
Balance, March 31, 2013
  $ 2,296     $ 1,665     $ 50     $ 730     $ 1,403     $ 506     $ 1,174     $ 121     $ 49     $ 7,994  
                                                                                 
Amount of allowance attributed to:
                                                                               
Specifically evaluated impaired loans
  $ 256     $ -     $ -     $ -     $ -     $ -     $ 360     $ -     $ -     $ 616  
General portfolio allocation
    2,040       1,665       50       730       1,403       506       814       121       49       7,378  
                                                                                 
Loans individually evaluated for impairment
    580       245       129       -       1,974       -       824       -       -       3,752  
Specific reserves to total loans individually evaluated for impairment
    44.14 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     43.69 %     0.00 %     0.00 %     16.42 %
Loans collectively evaluated for impairment
  $ 140,012     $ 166,326     $ 4,987     $ 138,935     $ 254,041     $ 139,100     $ 86,285     $ 7,863     $ 4,690     $ 942,239  
General reserves to total loans collectively evaluated for impairment
    1.46 %     1.00 %     1.00 %     0.53 %     0.55 %     0.36 %     0.94 %     1.54 %     1.04 %     0.78 %
                                                                                 
Total gross loans
  $ 140,592     $ 166,571     $ 5,116     $ 138,935     $ 256,015     $ 139,100     $ 87,109     $ 7,863     $ 4,690     $ 945,991  
Total allowance to gross loans
    1.63 %     1.00 %     0.98 %     0.53 %     0.55 %     0.36 %     1.35 %     1.54 %     1.04 %     0.85 %
                                                                                 
                                                                                 
   
Commercial and industrial
   
Commercial owner occupied
   
SBA
   
Warehouse
   
Commercial non-owner occupied
   
Multi-family
   
One-to-four family
   
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
    (191 )     -       (108 )     -       (1 )     -       (122 )     -       (1 )     (423 )
Recoveries
    1       -       11       -       -       -       1       -       4       17  
Provisions for (reduction in) loan losses
    291       31       188       (576 )     215       196       (247 )     (39 )     (59 )     -  
Balance, March 31, 2012
  $ 1,462     $ 1,150     $ 171     $ 771     $ 1,501     $ 2,477     $ 563     $ -     $ 21     $ 8,116  
                                                                                 
Amount of allowance attributed to:
                                                                               
Specifically evaluated impaired loans
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
General portfolio allocation
    1,462       1,150       171       771       1,501       2,477       563       -       21       8,116  
                                                                                 
Loans individually evaluated for impairment
    76       913       604       -       648       1,414       973       -       -       4,628  
Specific reserves to total loans individually evaluated for impairment
    0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %
Loans collectively evaluated for impairment
  $ 83,871     $ 145,991     $ 3,344     $ 44,246     $ 168,024     $ 183,953     $ 51,307     $ 7,246     $ 3,139     $ 691,121  
General reserves to total loans collectively evaluated for impairment
    1.74 %     0.79 %     5.11 %     1.74 %     0.89 %     1.35 %     1.10 %     0.00 %     0.67 %     1.17 %
                                                                                 
Total gross loans
  $ 83,947     $ 146,904     $ 3,948     $ 44,246     $ 168,672     $ 185,367     $ 52,280     $ 7,246     $ 3,139     $ 695,749  
Total allowance to gross loans
    1.74 %     0.78 %     4.33 %     1.74 %     0.89 %     1.34 %     1.08 %     0.00 %     0.67 %     1.17 %

 
Note 7 – 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 3.05% per annum as of March 31, 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 8 – Earnings Per Share
 
Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common shares in treasury.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings and excludes common shares in treasury.  Stock options exercisable for shares of common stock are excluded from the computation of diluted earnings per share if they are anti-dilutive due to their exercise price exceeding the average market price during the period.
 
The impact of stock options which are anti-dilutive are excluded from the computations of diluted earnings per share.  The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases.  The following table sets forth the number of stock options excluded for the periods indicated:

 
   
Three Months Ended March 31,
 
   
2013
   
2012
 
             
Stock options excluded
    102,193       271,511  


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

   
Three Months Ended March 31,
 
   
2013
   
2012
 
   
Net
         
Per Share
   
Net
         
Per Share
 
   
Income
   
Shares
   
Amount
   
Income
   
Shares
   
Amount
 
   
(dollars in thousands, except per share data)
 
                                     
Net income
  $ 1,972                 $ 2,692              
Basic income available to common stockholders
    1,972       14,355,407     $ 0.14       2,692       10,335,935     $ 0.26  
Effect of warrants and dilutive stock options
    -       761,809               -       290,239          
                                                 
Diluted income available to common stockholders plus assumed conversions
  $ 1,972       15,117,216     $ 0.13     $ 2,692       10,626,174     $ 0.25  


Note 9 – Fair Value of Financial Instruments
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
 
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the fair values presented.  The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at March 31, 2013, December 31, 2012 and March 31, 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 all the securities that the Company pricing service vendor cannot price due to lack of trade activity in these securities.
 
FHLB and Federal Reserve Bank 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.
 
Other real estate owned Other real estate owned (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 2 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 2 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 are 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 all lines and letters of credit.  The cost to assume is calculated at 10% of the notional amount and are classified as Level 2.
 
Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.  These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
 
The fair value estimates presented herein are based on pertinent information available to management as of the periods indicated.
 

 
 
At March 31, 2013
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                             
Cash and cash equivalents
  $ 99,458     $ 99,458     $ -     $ -     $ 99,458  
Securities available for sale
    301,160       142,219       157,957       984       301,160  
Federal Reserve Bank and FHLB stock, at cost
    10,974       10,974       -       -       10,974  
Loans held for sale, net
    3,643       -       3,643       -       3,643  
Loans held for investment, net
    933,834       -       -       1,004,001       1,004,001  
Accrued interest receivable
    4,898       4,898       -       -       4,898  
                                         
Liabilities:
                                       
Deposit accounts
    1,185,719       835,196       351,462       -       1,186,658  
Other borrowings
    44,191       -       47,463       -       47,463  
Subordinated debentures
    10,310       -       4,865       -       4,865  
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
  $ 236,720     $ -     $ 23,672     $ -     $ 23,672  
                                         
                                         
   
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 March 31, 2012
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Estimated
Fair Value
 
   
(in thousands)
 
Assets:
                                       
Cash and cash equivalents
  $ 93,649     $ 93,649     $ -     $ -     $ 93,649  
Securities available for sale
    150,739       146,875       2,898       966       150,739  
Federal Reserve Bank and FHLB stock, at cost
    11,975       11,975       -       -       11,975  
Loans held for sale, net
    62       -       62       -       62  
Loans held for investment, net
    687,079       -       -       758,893       758,893  
Accrued interest receivable
    3,632       3,632       -       -       3,632  
                                         
Liabilities:
                                       
Deposit accounts
    846,717       436,064       413,314       -       849,378  
FHLB advances
    -       -       -       -       -  
Other borrowings
    28,500       -       31,964       -       31,964  
Subordinated debentures
    10,310       -       7,617       -       7,617  
Accrued interest payable
    181       181       -       -       181  
                                         
   
Notional Amount
      Level 1        Level 2        Level 3    
Cost to Cede
or Assume
 
Off-balance sheet commitments and standby letters of credit
  $ 105,011     $ -     $ 10,501     $ -     $ 10,501  

A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement.  Impairment is measured based on the fair value of the underlying collateral or the discounted expected future cash flows.  The Company measures impairment on all non-accrual loans for which it has reduced the principal balance to the value of the underlying collateral less the anticipated selling cost.  As such, the Company records impaired loans as non-recurring Level 2 when the fair value of the underlying collateral is based on an observable market price or current appraised value.  When current market prices are not available or the Company determines that the fair value of the underlying collateral is further impaired below appraised values, the Company records impaired loans as Level 3.  At March 31, 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 assets measured at fair value on a recurring basis at the dates indicated:
   
March 31, 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
  $ 85     $ -     $ -     $ 85  
Municipal bonds
    -       155,939       -       155,939  
Mortgage-backed securities
    142,134       2,018       984       145,136  
Total securities available for sale
  $ 142,219     $ 157,957     $ 984     $ 301,160  
Stock:
                               
FHLB stock
  $ 8,955     $ -     $ -     $ 8,955  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
  $ 10,974     $ -     $ -     $ 10,974  
Total securities
  $ 153,193     $ 157,957     $ 984     $ 312,134  
                                 
   
March 31, 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  
Corporate
    4,817       -       -       4,817  
Municipal bonds
    27,695       -       -       27,695  
Mortgage-backed securities
    114,203       2,898       966       118,067  
Total securities available for sale
  $ 146,875     $ 2,898     $ 966     $ 150,739  
Stock:
                               
FHLB stock
  $ 9,956     $ -     $ -     $ 9,956  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
  $ 11,975     $ -     $ -     $ 11,975  
Total securities
  $ 158,850     $ 2,898     $ 966     $ 162,714  

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

 
   
Three Months Ended
 
   
March 31, 2013
   
March 31, 2012
 
   
(in thousands)
 
Balance, beginning of period
  $ 952     $ 991  
Total gains or (losses) realized/unrealized:
               
Included in earnings (or changes in net assets)
    (30 )     (47 )
Included in other comprehensive income
    117       113  
Purchases, issuances, and settlements
    (55 )     (71 )
Transfer in and/or out of Level 3
    -       (20 )
Balance, end of period
  $ 984     $ 966  


The following table provides a summary of the financial instruments the Company measures at fair value on a non-recurring basis as of the periods indicated:
 

   
March 31, 2013
 
   
Fair Value Measurement Using
       
   
Level 1
   
Level 2
   
Level 3
   
Assets at
Fair Value
 
   
(in thousands)
 
Assets
                       
Impaired loans
  $ -     $ -     $ 3,752     $ 3,752  
Loans held for sale
    -       3,643       -       3,643  
Other real estate owned
    -       1,561       -       1,561  
Total assets
  $ -     $ 5,204     $ 3,752     $ 8,956  
                                 
                                 
   
March 31, 2012
 
   
Fair Value Measurement Using
         
   
Level 1
   
Level 2
   
Level 3
   
Assets at
Fair Value
 
   
(in thousands)
 
Assets
                               
Impaired loans
  $ -     $ -     $ 4,628     $ 4,628  
Loans held for sale
    -       62       -       62  
Other real estate owned
    -       1,768       -       1,768  
Total assets
  $ -     $ 1,830     $ 4,628     $ 6,458  

 
Note 10 – Pending Acquisition of San Diego Trust Bank
 
On March 5, 2013, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with San Diego Trust Bank, a San Diego, California, based state-chartered bank (“SDTB”), pursuant to which the Bank will acquire SDTB.  At March 31, 2013, SDTB had total assets of $210.9 million, total stockholders’ equity of $25.5 million and total deposits of $182.3 million.  If the acquisition of SDTB is consummated, it will expand the Company’s banking footprint into San Diego County and is expect to further improve the Company’s deposit mix.
 
On the date of the Merger Agreement, the transaction was valued at approximately $30.6 million.  SDTB shareholders will have a choice between electing to receive $13.41 per share in cash or 1.114 shares of the Corporation’s common stock for each share of SDTB common stock, subject to the overall requirement that 50% of the consideration will be in the form of cash and 50% will be in the form of the Corporation’s common stock.  Both the cash portion and the stock portion of the merger consideration payable to SDTB shareholders will be subject to possible adjustment prior to the closing of the transaction. The cash portion of the consideration payable to SDTB shareholders may be reduced if SDTB’s transaction-related expenses exceed $3.0 million on an after-tax basis.  The number of shares of the Corporation’s common stock to be issued in exchange for each share of SDTB common stock is based on a fixed exchange ratio of 1.114 shares of Corporation common stock, subject to possible upward or downward adjustment in the event that the average closing price of the Corporation’s common stock price as measured during the 10 trading day period ending on the fifth business day prior to the effective time of the acquisition is below $10.83 per share or above $13.24 per share. In no event will an upward adjustment to the exchange ratio increase beyond a number of shares of Corporation common stock that would result in the Corporation issuing to SDTB shareholders in the aggregate more than 19.9% of its outstanding shares of Corporation common stock at the closing of the transaction.
 
The transaction is expected to close late in the second quarter of 2013 or in the third quarter of 2013, subject to satisfaction of customary closing conditions and approval of the SDTB shareholders.  Directors and executive officers of SDTB have entered into agreements with the Company and SDTB whereby they committed to vote their shares of SDTB common stock in favor of the acquisition.  The Company has received bank regulatory approval for the acquisition of SDTB.  For additional information about the proposed acquisition of SDTB, see the Company’s Current Report on Form 8-K filed with the SEC on March 6, 2013 and the Merger Agreement which is filed as an exhibit to the Current Report on Form 8-K.
 
 
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.  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 Palm Desert National Acquisition, the Canyon National Acquisition, the FAB Acquisition, the proposed acquisition of SDTB 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;
 
●  
Oversupply of inventory and continued deterioration in values of California real estate, both residential and commercial;
 
●  
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 other-than-temporary impairments (“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 months ended March 31, 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 (the “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 Financial Institutions (“DFI”).
 
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 DFI 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.  At March 31, 2013, the Bank operated ten full-service depository branches in Southern California located in the cities of Huntington Beach, Irvine, Los Alamitos, Newport Beach, Palm Springs, Palm Desert, San Bernardino, and Seal Beach.  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.
 
FIRST ASSOCIATIONS BANK 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 $394.1 million, including:
 
●  
$223.0 million in investment securities, including FHLB and TIB Bank stock;
 
●  
$124.7 million of cash and cash equivalents;
 
●  
$26.4 million of loans;
 
●  
$11.9 million in goodwill;
 
●  
$6.2 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 $15.9 million in connection with the Company’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 acquisition is a unique opportunity for the Company to acquire a highly efficient, consistently profitable and niche focused business that will complement our existing banking franchise.  Additionally, this partnership will improve the Company’s deposit base, lower its cost of deposits and provide the platform to accelerate future core deposit growth.  Additionally, the acquisition of FAB allowed the Company to deploy a portion of its current capital base into a compelling investment.
 
 
RESULTS OF OPERATIONS
 
In the first quarter of 2013, we recorded net income of $2.0 million, or $0.13 per diluted share, down from net income of $2.7 million, or $0.25 per diluted share, for the first quarter of 2012.
 
The Company’s pre-tax income totaled $3.1 million for the quarter ended March 31, 2013, down from $4.3 million for the quarter ended March 31, 2012.  The decrease of $1.2 million between the two quarters was primarily related to an increase in noninterest expense of $4.5 million, partially offset by an increase of $2.9 million in net interest income and an increase in noninterest income of $785,000.
 
For the three months ended March 31, 2013, our return on average assets was 0.67% and return on average equity was 5.65%, down from a return on average assets of 1.11% and a return on average equity of 12.24% 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.
 
Compared to the first quarter of 2012, net interest income for the first quarter of 2013 increased $2.9 million or 28.5% to $12.9 million.  The increase in net interest income reflected an increase in average interest-earning assets of $201.3 million or 21.6% in the current quarter to $1.1 billion and a higher net interest margin of 4.62% in the current quarter, compared with 4.31% in the first quarter of 2012.  The increase in average interest-earning assets for the period was primarily due to an increase in average loans, which were up $229.7 million primarily associated with organic loan growth, loan purchases and acquisitions.  The increase in the current quarter net interest margin of 31 basis points primarily reflected a decrease in the cost of deposits of 41 basis points, partially offset by the decrease in our interest-earning asset yield of 11 basis points.
 
The following tables present for the periods indicated the average dollar amounts from selected balance sheet categories calculated from daily average balances and the total dollar amount, including adjustments to yields and costs, of:
 
●  
Interest income earned from average interest-earning assets and the resultant yields; and
 
●  
Interest expense incurred from average interest-bearing liabilities and resultant costs, expressed as rates.
 
The tables also set forth our net interest income, net interest rate spread and net interest rate margin for the periods indicated.  The net interest rate margin reflects the relative level of interest-earning assets to interest-bearing liabilities and equals our net interest rate spread divided by average interest-earning assets for the periods indicated.

   
Average Balance Sheet
 
   
Three Months Ended
   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
Average
         
Average
   
Average
         
Average
   
Average
         
Average
 
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
 
Assets
 
(dollars in thousands)
 
Interest-earning assets:
                                                     
Cash and cash equivalents
  $ 69,143     $ 37       0.22 %   $ 41,867     $ 14       0.13 %   $ 96,177     $ 50       0.21 %
Federal funds sold
    27       -       0.00 %     27       -       0.00 %     28       -       0.00 %
Investment securities
    134,895       802       2.38 %     120,787       668       2.21 %     136,216       829       2.43 %
Loans receivable, net (1)
    928,577       13,396       5.85 %     870,782       13,477       6.19 %     698,923       11,237       6.43 %
Total interest-earning assets
    1,132,642       14,235       5.09 %     1,033,463       14,159       5.48 %     931,344       12,116       5.20 %
Noninterest-earning assets
    38,911                       43,352                       40,861                  
Total assets
  $ 1,171,553                     $ 1,076,815                     $ 972,205                  
Liabilities and Equity
                                                                       
Deposit accounts:
                                                                       
Noninterest-bearing
  $ 237,081     $ -       0.00 %   $ 217,436     $ -       0.00 %   $ 118,545     $ -       0.00 %
Interest-bearing:
                                                                       
Transaction accounts
    379,638       218       0.23 %     305,364       243       0.32 %     295,415       329       0.45 %
Retail certificates of deposit
    349,471       800       0.93 %     378,068       963       1.01 %     423,635       1,427       1.35 %
Wholesale certificates of deposit
    833       1       0.49 %     -       -       0.00 %     -       -       0.00 %
Total deposits
    967,023       1,019       0.43 %     900,868       1,206       0.53 %     837,595       1,756       0.84 %
FHLB advances and other borrowings
    44,769       240       2.17 %     50,576       253       1.99 %     28,566       235       3.32 %
Subordinated debentures
    10,310       77       3.03 %     10,310       79       3.05 %     10,310       84       3.29 %
Total borrowings
    55,079       317       2.33 %     60,886       332       2.17 %     38,876       319       3.31 %
Total deposits and borrowings
    1,022,102       1,336       0.53 %     961,754       1,538       0.64 %     876,471       2,075       0.95 %
Other liabilities
    9,766                       6,725                       7,752                  
Total liabilities
    1,031,868                       968,479                       884,223                  
Stockholders' equity
    139,685                       108,336                       87,982                  
Total liabilities and equity
  $ 1,171,553                     $ 1,076,815                     $ 972,205                  
Net interest income
          $ 12,899                     $ 12,621                     $ 10,041          
Net interest rate spread (2)
                    4.56 %                     4.84 %                     4.25 %
Net interest margin (3)
                    4.62 %                     4.88 %                     4.31 %
Ratio of interest-earning assets to deposits and borrowings
      110.81 %                     107.46 %                     106.26 %


(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 March 31, 2013
 
   
Compared to
 
   
Three Months Ended March 31, 2012
 
   
Increase (decrease) due to
 
                   
   
Rate
   
Volume
   
Net
 
   
(in thousands)
 
Interest-earning assets
                 
Cash and cash equivalents
  $ 2     $ (15 )   $ (13 )
Investment securities
    (19 )     (8 )     (27 )
Loans receivable, net
    (1,243 )     3,402       2,159  
Total interest-earning assets
  $ (1,260 )   $ 3,379     $ 2,119  
                         
Interest-bearing liabilities
                       
Transaction accounts
  $ (189 )   $ 78     $ (111 )
Retail certificates of deposit
    (404 )     (223 )     (627 )
Wholesale/brokered certificates of deposit
    -       1       1  
FHLB advances and other borrowings
    (100 )     105       5  
Subordinated debentures
    (7 )     -       (7 )
Total interest-bearing liabilities
  $ (700 )   $ (39 )   $ (739 )
Change in net interest income
  $ (560 )   $ 3,418     $ 2,858  


Provision for Loan Losses
 
There was no provision for loan loss recorded in the first quarter of 2012, compared to $296,000 recorded in the first quarter of 2013. Stable credit quality metrics and the recent charge-off history within our loan portfolio were significant factors in estimating the adequacy of our ALLL.  Compared to the first quarter of 2012, net loan charge-offs decreased $110,000 to $296,000 during the first quarter of 2013.
 
For purchased credit impaired loans, charge-offs are recorded when there is a decrease in the estimated cash flows of the credit from original cash flow estimates.  Purchased credit impaired loans were recorded at their estimated fair value, which incorporated our estimated expected cash flows until the ultimate resolution of these credits.  To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses or charge-offs will be recognized into earnings or against the allowance, if applicable.  To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in loan interest income.  Due to the accounting rules associated with our purchased credit impaired loans, each quarter we are required to re-estimate cash flows which could cause volatility in our reported net interest margin and provision for loans losses.  During the first quarter of 2013, charge-offs associated with purchased credit impaired loans totaled $57,000, compared to zero 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 first quarter of 2013 amounted to $1.7 million, up $785,000 or 83.6% compared to the first quarter of 2012.  The increase was primarily related to net gains from the sale of loans of $723,000 that were generated from the sale of $5.0 million of SBA loans in the first quarter of 2013, compared with no sales in the year-ago quarter, and higher loan servicing fees of $149,000, partially offset by lower deposit fees of $61,000.
 
Noninterest Expense
 
Noninterest expense totaled $11.2 million for the first quarter of 2013, up $4.5 million or 68.3%, compared to the first quarter of 2012.  The increase primarily related to one-time costs associated with the FAB Acquisition of $1.7 million and included higher:
 
●  
Compensation and benefits costs of $1.6 million primarily from increased employee count from acquisitions and business expansion, as we added employees in lending and credit areas to increase our production of commercial and industrial (“C&I”) loans, commercial real estate (“CRE”) loans, SBA loans, homeowner association (“HOA”) loans, warehouse facilities and a construction loan manager to oversee the origination of construction loans; health care expense and employer payroll taxes;
●  
Premises and occupancy costs of $415,000 primarily related to rental expense of our new corporate headquarters needed for business expansion;
●  
Other expense of $393,000 primarily due to acquisition and business expansion and a higher provision for off-balance sheet commitment expenses of $96,000 and HOA management company fees of $65,000; and
●  
Data processing and communications costs of $268,000, primarily related to acquisition and business expansion initiatives over the past year.
 
Partially offsetting these increased expenses was lower OREO operations expense of $110,000.  Additionally, included in legal, audit and professional expense were legal fees of $337,000 related to our pending acquisition of with SDTB.
 
Income Taxes
 
For the three months ended March 31, 2013, we had a tax provision of $1.2 million and an effective tax rate of 37.4%, compared to a tax provision of $1.6 million and an effective tax rate of 38.0% for the same period in 2012.  The decrease in the effective tax rate was primarily attributed to lower pre-tax income in relation to the permanent tax differences of income from bank-owned life insurance, enterprise zone deductions and tax free municipal securities in the first quarter of 2013 as compared to the first quarter in 2012.  At March 31, 2013, we had no valuation allowance against our deferred tax asset of $2.6 million based on management’s analysis that the asset was more-likely-than-not to be realized.
 
FINANCIAL CONDITION
 
At March 31, 2013, assets totaled $1.4 billion, up $421.5 million or 42.8% from March 31, 2012 and up $232.9 million or 19.8% from December 31, 2012. The increase since year-end 2012 was primarily related to the FAB Acquisition, partially offset by the payoff of $87.0 million of FHLB borrowings and a decrease in loans held for investment of $66.8 million, excluding the loans acquired from FAB. The increase from March 31, 2012 was predominately related to two acquisitions: the FAB Acquisition in March of 2012, which included at the acquisition date $222.4 million in securities, $124.7 million in cash, $26.4 million in loans, $11.9 million in goodwill and $8.7 million in other types of assets, and the acquisition of Palm Desert National from the FDIC, as receiver, in April of 2012, which included at the acquisition date $63.8 million in loans, $39.5 million in cash, $11.5 million in OREO and $6.1 million in other types of assets.
 
Loans
 
Net loans held for investment totaled $933.8 million at March 31, 2013, an increase of $246.8 million or 35.9% from March 31, 2012 and a decrease of $40.4 million or 4.1% from December 31, 2012.  The increase in net loans held for investment from the year-ago quarter was primarily related to increases from organic growth including warehouse facility lending of $94.7 million and the Palm Desert National Acquisition.  The decrease in loans from the end of the prior quarter was primarily related to a decline in loan balances of our warehouse facilities of $56.8 million, multi-family loans of $17.3 million, including sub-performing credits totaling $14.9 million, and one-to-four residential loans of $10.4 million, partially offset by increases in C&I loans of $25.2 million and owner occupied CRE loans of $15.6 million. During the first quarter of 2013, commitments on our warehouse repurchase facility credits increased $42.7 million to total $313.9 million with our end of period utilization rates for these loans dropping from 73.4% at December 31, 2012 to 44.3% at March 31, 2013. Although our end of period balances for warehouse facilities decreased, our average daily outstanding balance increased $12.5 million to $145.3 million when comparing the first quarter of 2013 with the fourth quarter of 2012.
 
The following table sets forth the composition of our loan portfolio in dollar amounts, as a percentage of the portfolio and gives the weighted average interest rate by loan category at the dates indicated:
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
             
Weighted
             
Weighted
             
Weighted
 
       
Percent
   
Average
       
Percent
   
Average
       
Percent
   
Average
 
   
Amount
 
of Total
   
Interest Rate
   
Amount
 
of Total
   
Interest Rate
   
Amount
 
of Total
   
Interest Rate
 
   
(dollars in thousands)
 
Business loans:
                                               
Commercial and industrial
  $ 140,592     14.9 %     5.16 %   $ 115,354     11.7 %     5.25 %   $ 83,947     12.1 %     5.73 %
Commercial owner occupied (1)
    166,571     17.6 %     5.90 %     150,934     15.3 %     6.11 %     146,904     21.1 %     6.46 %
SBA
    5,116     0.5 %     6.04 %     6,882     0.7 %     6.04 %     3,948     0.6 %     6.06 %
Warehouse facilities
    138,935     14.7 %     4.79 %     195,761     19.9 %     4.80 %     44,246     6.4 %     5.40 %
Real estate loans:
                                                                 
Commercial non-owner occupied
    256,015     27.1 %     5.59 %     253,409     25.6 %     5.68 %     168,672     24.2 %     6.34 %
Multi-family
    139,100     14.7 %     5.69 %     156,424     15.9 %     5.78 %     185,367     26.6 %     5.99 %
One-to-four family (2)
    87,109     9.2 %     4.67 %     97,463     9.9 %     4.67 %     52,280     7.5 %     5.11 %
Construction
    -     0.0 %     0.00 %     -     0.0 %     0.00 %     -     0.0 %     0.00 %
Land
    7,863     0.8 %     4.83 %     8,774     0.9 %     4.89 %     7,246     1.0 %     5.26 %
Other loans
    4,690     0.5 %     6.09 %     1,193     0.1 %     6.20 %     3,139     0.5 %     7.46 %
Total gross loans (3)
    945,991     100.0 %     5.30 %     986,194     100.0 %     5.44 %     695,749     100.0 %     6.04 %
Less loans held for sale
    3,643                     3,681                     62                
Total gross loans held for investment
    942,348                     982,513                     695,687                
Less:
                                                                 
Deferred loan origination costs/(fees) and premiums/(discounts)
    (520 )                   (306 )                   (492 )              
Allowance for loan losses
    (7,994 )                   (7,994 )                   (8,116 )              
Loans held for investment, net
  $ 933,834                   $ 974,213                   $ 687,079                
                                                                   
(1) Majority secured by real estate.
                                                                 
(2) Includes second trust deeds.
                                                                 
(3) Total gross loans for March 31, 2013 is net of the mark-to-market discounts on Canyon National loans of $2.7 million, on Palm Desert National loans of $4.7 million, and on FAB loans of $157,000.
 

Gross loans held for investment totaled $942.3 million at March 31, 2013, compared to $695.7 million at March 31, 2012 and $982.5 million at December 31, 2012.  The increase in gross loans held for investment of $246.7 million or 35.5% from the year-ago first quarter was primarily related to increases from organic growth and the Palm Desert National Acquisition.  The decrease of $40.2 million or 4.1% since December 31, 2012 included loan originations of $89.8 million, partially offset by an increase in undisbursed loan funds of $107.0 million, loan repayments of $45.2 million, and loan sales of $5.0 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:
   
Three Months Ended
 
   
March 31, 2013
   
March 31, 2012
 
   
(in thousands)
 
Beginning balance gross loans
  $ 986,194     $ 739,254  
Loans originated:
               
Business loans:
               
Commercial and industrial
    12,133       8,266  
Commercial owner occupied (1)
    3,582       4,347  
SBA
    4,373       769  
Warehouse facilities
    42,710       11,200  
Real estate loans:
               
Commercial non-owner occupied
    25,970       3,953  
Multi-family
    783       2,575  
One-to-four family (2)
    180       62  
Other loans
    106       439  
Total loans originated
    89,837       31,611  
Loans purchased:
               
Business loans:
               
  Commercial and industrial
    26,421       -  
Real estate loans:
               
  Commercial non-owner occupied
    -       1,694  
Total loans purchased
    26,421       1,694  
Total loan production
    116,258       33,305  
Principal repayments
    (45,244 )     (35,219 )
Sales of loans
    (5,048 )     -  
Change in undisbursed loan funds, net
    (107,003 )     (40,077 )
Charge-offs
    (480 )     (423 )
Change in mark-to-market discounts from FDIC transactions
    1,314       752  
Transfer to other real estate owned
    -       (1,843 )
Net increase in gross loans
    (40,203 )     (43,505 )
Ending balance gross loans
  $ 945,991     $ 695,749  
                 
(1) Majority secured by real estate.
               
(2) Includes second trust deeds.
               


The following table sets forth the weighted average interest rates, weighted average number of months to reprice and the periods to repricing for our gross loan portfolio at the date indicated:

 
   
March 31, 2013
 
               
Weighted
   
Weighted
 
   
Number
         
Average
   
Average Months
 
Periods to Repricing
 
of Loans
   
Amount
   
Interest Rate
   
to Reprice
 
   
(dollars in thousands)
 
1 Year and less
    877     $ 513,723       5.55 %     1.02  
Over 1 Year to 3 Years
    50       34,237       5.06 %     25.19  
Over 3 Years to 5 Years
    205       204,025       4.68 %     52.55  
Over 5 Years to 7 Years
    49       31,628       4.88 %     68.50  
Over 7 Years to 10 Years
    23       18,694       4.69 %     107.94  
Total adjustable
    1,204       802,307       5.26 %     20.30  
Fixed
    726       143,684       5.50 %        
Total
    1,930     $ 945,991       5.30 %        


    Delinquent Loans.  When a borrower fails to make required payments on a loan and does not cure the delinquency within 30 days, we normally record a notice of default and, after providing the required notices to the borrower, commence foreclosure proceedings.  If the loan is not reinstated within the time permitted by law, we may sell the property at a foreclosure sale.  At these foreclosure sales, we generally acquire title to the property.  At March 31, 2013, loans delinquent 30 or more days as a percentage of total gross loans was 0.32%, up from 0.09% at December 31, 2012 but down from 0.37% at March 31, 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 March 31, 2013
                                               
Business loans:
                                               
Commercial and industrial
    1     $ 9       -     $ -       1     $ 218       2     $ 227  
Commercial owner occupied
    -       -       -       -       1       245       1       245  
SBA
    -       -       -       -       1       72       1       72  
Real estate loans:
                                                               
Commercial non-owner occupied
    -       -       -       -       1       1,337       1       1,337  
Multi-family
    -       -       1       1,047       -       -       1       1,047  
One-to-four family
    2       49       1       30       1       9       4       88  
Total
    3     $ 58       2     $ 1,077       5     $ 1,881       10     $ 3,016  
Delinquent loans to total gross loans
            0.01 %             0.11 %             0.20 %             0.32 %
                                                                 
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  March 31, 2012
                                                               
Business loans:
                                                               
Commercial and industrial
    1     $ 10       -     $ -       -     $ -       1       10  
Commercial owner occupied
    -       -       1       478       2       846       3       1,324  
SBA
    -       -       -       -       7       513       7       513  
Real estate loans:
                                                               
Commercial non-owner occupied
    -       -       -       -       1       185       1       185  
One-to-four family
    -       -       1       219       3       320       4       539  
Other
    1       1       -       -       -       -       1       1  
Total
    2     $ 11       2     $ 697       13     $ 1,864       17     $ 2,572  
Delinquent loans to total gross loans
            0.00 %             0.10 %             0.27 %             0.37 %
                                                                 
(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 March 31, 2013 was $8.0 million, down from $8.1 million at March 31, 2012 and equal to the ALLL at December 31, 2012.  At March 31, 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:
 

   
March 31, 2013
   
December 31, 2012
   
March 31, 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
  $ 2,296       1.63 %     14.9 %   $ 1,310       1.14 %     11.7 %   $ 1,462       1.74 %     12.1 %
Commercial owner occupied
    1,665       1.00 %     17.6 %     1,512       1.00 %     15.3 %     1,150       0.78 %     21.1 %
SBA
    50       0.98 %     0.5 %     79       1.15 %     0.7 %     171       4.33 %     0.6 %
Warehouse facilities
    730       0.53 %     14.7 %     1,544       0.79 %     19.9 %     771       1.74 %     6.4 %
Real estate loans:
                                                                       
Commercial non-owner occupied
    1,403       0.55 %     27.1 %     1,459       0.58 %     25.6 %     1,501       0.89 %     24.2 %
Multi-family
    506       0.36 %     14.7 %     1,145       0.73 %     15.9 %     2,477       1.34 %     26.6 %
One-to-four family
    1,174       1.35 %     9.2 %     862       0.88 %     9.9 %     563       1.08 %     7.5 %
Land
    121       1.54 %     0.8 %     31       0.35 %     0.9 %     -       0.00 %     1.0 %
Other Loans
    49       1.04 %     0.5 %     52       4.36 %     0.1 %     21       0.67 %     0.5 %
Total
  $ 7,994       0.85 %     100.0 %   $ 7,994       0.81 %     100.0 %   $ 8,116       1.17 %     100.0 %

    Our ALLL at March 31, 2013 was $8.0 million, down from $8.1 million at March 31, 2012 and equal to the ALLL at December 31, 2012. The ALLL as a percent of nonaccrual loans was 257.7% at March 31, 2013, up from 219.6% at March 31, 2012, but down from 362.4% at December 31, 2012. The decrease in ALLL as a percent of nonaccrual loans at March 31, 2013, compared to year-end 2012 was due to an increase in nonaccrual loans during the first quarter of 2013.  At March 31, 2013, the ratio of ALLL to total gross loans was 0.85%, down from 1.17% at March 31, 2012, but up 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 1.33% at March 31, 2013, down from 1.47% at March 31, 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 March 31,
 
   
2013
   
2012
 
   
(dollars in thousands)
 
Balance, beginning of period
  $ 7,994     $ 8,522  
Provision for loan losses
    296       -  
Charge-offs:
               
Business loans:
               
Commercial and industrial
    (58 )     (191 )
SBA
    (5 )     (108 )
Real estate:
               
Commercial non-owner occupied
    (401 )     (1 )
One-to-four family
    (10 )     (122 )
Other loans
    (6 )     (1 )
Total charge-offs
    (480 )     (423 )
Recoveries :
               
Business loans:
               
Commercial and industrial
    7       1  
SBA
    19       11  
Real estate:
               
One-to-four family
    43       1  
Other loans
    115       4  
Total recoveries
    184       17  
Net loan charge-offs
    (296 )     (406 )
Balance at end of period
  $ 7,994     $ 8,116  
                 
Ratios:
               
Net charge-offs to average total loans, net
    0.13 %     0.23 %
Allowance for loan losses to gross loans at end of period
    0.85 %     1.17 %


Investment Securities
 
Investment securities available for sale totaled $301.2 million at March 31, 2013, up $150.4 million or 99.8% from March 31, 2012 and up $217.1 million or 258.2% from December 31, 2012. The increase over both period ends was primarily due to the FAB Acquisition, which added $222.4 million in investment securities available for sale at the acquisition date, which was March 15, 2013.  During the first quarter of 2013, principal payments of $5.8 million partially offset the securities acquired from FAB.  At March 31, 2013, the end of period yield on investment securities was 1.73%, down from 2.45% at March 31, 2012 and 2.06% at December 31, 2012.  At March 31, 2013, 43 of our 52 private label mortgage-backed securities (“MBS”) were classified as substandard or impaired and had a book value and a market value of $2.2 million.  Interest received from these securities is applied against their respective principal balances.  Our entire private label MBS 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:
 

   
March 31, 2013
 
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
 
 
                   
U.S. Treasury
  $ 74     $ 11     $ -     $ 85  
Municipal bonds
    154,543       1,783       (387 )     155,939  
Mortgage-backed securities
    143,882       1,821       (567 )     145,136  
Total securities available for sale
    298,499       3,615       (954 )     301,160  
Stock:
                               
FHLB stock
  $ 8,955       -       -       8,955  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
    10,974       -       -       10,974  
Total securities
  $ 309,473     $ 3,615     $ (954 )   $ 312,134  
                                 
   
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  
Stock:
                               
FHLB stock
    9,228       -       -       9,228  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
    11,247       -       -       11,247  
Total securities
  $ 93,436     $ 2,360     $ (483 )   $ 95,313  
                                 
   
March 31, 2012
   
   
Amortized Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
   
(in thousands)
 
Investment securities available for sale:
                               
U.S. Treasury
  $ 147     $ 13     $ -     $ 160  
Corporate
    5,000       -       (183 )     4,817  
Municipal bonds
    26,940       851       (96 )     27,695  
Mortgage-backed securities
    117,975       893       (801 )     118,067  
Total securities available for sale
    150,062       1,757       (1,080 )     150,739  
Stock:
                               
FHLB stock
    9,956       -       -       9,956  
Federal Reserve Bank stock
    2,019       -       -       2,019  
Total stock
    11,975       -       -       11,975  
Total securities
  $ 162,037     $ 1,757     $ (1,080 )   $ 162,714  


The following table sets forth the fair values and weighted average yields on our investment securities available for sale portfolio by contractual maturity at the date indicated:
   
March 31, 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 %   $ -       0.00 %   $ 85       4.15 %   $ -       0.00 %   $ 85       4.15 %
Municipal bonds
    -       0.00 %     4,720       0.76 %     61,297       1.39 %     89,922       2.24 %     155,939       1.86 %
Mortgage-backed securities
    -       0.00 %     24       5.58 %     13,102       1.07 %     132,010       1.68 %     145,136       1.62 %
Total investment securities available for sale
    -       0.00 %     4,744       0.79 %     74,484       1.34 %     221,932       1.91 %     301,160       1.75 %
Stock:
                                                                               
FHLB
    8,955       0.00 %     -       0.00 %     -       0.00 %     -       0.00 %     8,955       0.00 %
Federal Reserve Bank
    2,019       6.00 %     -       0.00 %     -       0.00 %     -       0.00 %     2,019       6.00 %
Total stock
    10,974       1.10 %     -       0.00 %     -       0.00 %     -       0.00 %     10,974       1.10 %
Total securities
  $ 10,974       1.10 %   $ 4,744       0.79 %   $ 74,484       1.34 %   $ 221,932       1.91 %   $ 312,134       1.73 %

Each quarter, we review individual securities classified as available for sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.  If it is probable that we will be unable to collect all amounts due according to the contractual terms of the debt security, an OTTI write down is recorded against the security and a loss recognized.
 
In determining if a security has an OTTI loss, we review downgrades in credit ratings and the length of time and extent that the fair value has been less than the cost of the security.  We estimate OTTI losses on a security primarily through:
 
●  
An evaluation of the present value of estimated cash flows from the security using the current yield to accrete beneficial interest and including assumptions in the prepayment rate, default rate, delinquencies, loss severity and percentage of nonperforming assets;
●  
An evaluation of the estimated payback period to recover principal;
●  
An analysis of the credit support available in the underlying security to absorb losses; and
●  
A review of the financial condition and near term prospects of the issuer.
 
During the quarter ended March 31, 2013, we incurred a net $30,000 OTTI charge against our private label MBS deemed to be impaired, compared to $37,000 of OTTI charges during the same period last year.  These impaired private label MBS are classified as substandard assets with all the interest received since the date of impairment being applied against their principal balances.
 
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
 
     
March 31, 2013
 
March 31, 2012
 
                                                 
Rating
   
Number
   
Fair Value
   
OTTI Credit Loss
   
Non Credit Gain (Loss) in Accumulated Other Compreheniseve Income (AOCI)
 
Number
   
Fair Value
   
OTTI Credit Loss
   
Non Credit Gain (Loss) in Accumulated Other Compreheniseve Income (AOCI)
 
(dollars in thousands)
 
 D       4     $ 446     $ 30     $ 95     5     $ 184     $ (37 )   $ 50  
Total
      4     $ 446     $ 30     $ 95     5     $ 184     $ (37 )   $ 50  


The largest OTTI credit loss for any single debt security was $32,000 for the three months ended March 31, 2013 and $25,000 for the same period in the prior year.
 
 
Nonperforming Assets
 
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), restructured loans and real estate acquired in settlement of loans (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 March 31, 2013, nonperforming assets totaled $4.7 million or 0.33% of total assets, down from $5.5 million or 0.55% at March 31, 2012 and up from $4.5 million or 0.38% at December 31, 2012.  During the first quarter of 2013, nonperforming loans increased $896,000 to total $3.1 million and OREO decreased $697,000 to total $1.6 million.
 
The following table sets forth our composition of nonperforming assets at the dates indicated:
 

 
   
March 31,
   
December 31,
   
March 31,
 
   
2013
   
2012
   
2012
 
   
(dollars in thousands)
 
Nonperforming assets
                 
Business loans:
                 
Commercial and industrial
  $ 333     $ 347     $ 100  
Commercial owner occupied
    245       14       1,325  
SBA (1)
    121       260       544  
Real estate:
                       
Commercial non-owner occupied
    1,974       670       648  
Multi-family
    -       266       287  
One-to-four family
    429       522       792  
Land
    -       127       -  
Total nonaccrual loans
    3,102       2,206       3,696  
Other real estate owned:
                       
Commercial non-owner occupied
    -       -       720  
One-to-four family
    -       -       113  
Land
    1,561       2,258       935  
Total other real estate owned
    1,561       2,258       1,768  
Total nonperforming assets, net
  $ 4,663     $ 4,464     $ 5,464  
                         
Allowance for loan losses
  $ 7,994     $ 7,994     $ 8,116  
Allowance for loan losses as a percent of
total nonperforming loans
    257.70 %     362.38 %     219.59 %
Nonperforming loans as a percent of gross loans
    0.33 %     0.22 %     0.53 %
Nonperforming assets as a percent of total assets
    0.33 %     0.38 %     0.55 %
                         
 (1)The SBA totals include the guaranteed amount, which was $72,000 as of March 31, 2013, $185,000 as of December 31, 2012, and $237,000 as of March 31, 2012.  

 
Liabilities and Stockholders’ Equity
 
Total liabilities were $1.3 billion at March 31, 2013, compared to $895.7 million at March 31, 2012 and $1.0 billion at December 31, 2012.  The increase from the year ended December 31, 2012 was predominately related to increases in deposits of $281.0 million primarily associated with deposits acquired from FAB, partially offset by a decrease in FHLB advances and other borrowings of $71.3 million.
 
Deposits.  Deposits totaled $1.2 billion at March 31, 2013, up $339.0 million or 40.0% from March 31, 2012 and $281.0 million or 31.1% 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 a cost of 21 basis points at the closing of the acquisition, partially offset by FAB deposits held by the Bank prior to acquisition of $78.5 million.  The increase in deposits during the first quarter of 2013 included interest-bearing transaction accounts of $189.9 million and noninterest-bearing accounts of $102.9 million, partially offset by a decrease in retail certificates of deposit of $16.2 million. At March 31, 2013, we had $4.4 million in CDARS deposits assumed in the FAB Acquisition.  Additionally, the increase between March 31, 2013 and March 31, 2012 included deposits of $80.9 million at the closing of the Palm Desert National acquisition, excluding the runoff of $34.1 million in wholesale certificates shortly after closing.  At March 31, 2013, we had no brokered deposits.  The total weighted average cost of deposits at March 31, 2013 decreased to 0.37%, from 0.75% at March 31, 2012 and from 0.51% at December 31, 2012.
 
At March 31, 2013, our gross loan to deposit ratio was 79.8%, down from 82.2% at March 31, 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:

 
   
March 31, 2013
   
December 31, 2012
   
March 31, 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)
 
Transaction accounts:
                                                     
Noninterest bearing checking
  $ 316,536       26.7 %     0.00 %   $ 213,636       23.6 %     0.00 %   $ 125,448       14.8 %     0.00 %
Interest bearing checking
    115,541       9.7 %     0.10 %     14,299       1.6 %     0.10 %     70,446       8.3 %     0.14 %
Money market
    323,709       27.3 %     0.28 %     236,206       26.1 %     0.32 %     148,515       17.5 %     0.36 %
Regular passbook
    80,578       6.8 %     0.15 %     79,420       8.8 %     0.22 %     92,191       10.9 %     0.32 %
Total transaction accounts
    836,364       70.5 %     0.13 %     543,561       60.1 %     0.19 %     436,600       51.5 %     0.21 %
Certificates of deposit accounts:
                                                                       
Less than 1.00%
    164,843       13.9 %     0.55 %     147,813       16.3 %     0.58 %     110,963       13.1 %     0.71 %
    1.00 - 1.99     169,616       14.3 %     1.15 %     197,554       21.8 %     1.16 %     230,470       27.2 %     1.31 %
    2.00 - 2.99     12,560       1.1 %     2.80 %     13,439       1.5 %     2.78 %     64,453       7.6 %     2.23 %
    3.00 - 3.99     1,144       0.1 %     3.44 %     1,130       0.1 %     3.44 %     1,322       0.2 %     3.45 %
    4.00 - 4.99     288       0.0 %     4.24 %     395       0.1 %     4.29 %     1,384       0.2 %     4.47 %
    5.00 and greater
    904       0.1 %     5.26 %     876       0.1 %     5.27 %     1,525       0.2 %     5.25 %
Total certificates of deposit accounts
    349,355       29.5 %     0.94 %     361,207       39.9 %     1.00 %     410,117       48.5 %     1.32 %
Total deposits
  $ 1,185,719       100.0 %     0.37 %   $ 904,768       100.0 %     0.51 %   $ 846,717       100.0 %     0.75 %


Borrowings.  At March 31, 2013, total borrowings amounted to $54.5 million, up $15.7 million or 40.4% from March 31, 2012. During the first quarter of 2013, total borrowings decreased $71.3 million or 56.7%, primarily related to the reduction of FHLB overnight advances taken out primarily to fund loans, partially offset by $15.7 million in repurchase agreement debt assumed in the FAB Acquisition. This repurchase agreement debt was offered as a service to certain former FAB depositors that adds protection for deposit amounts above FDIC insurance levels. Total borrowings at March 31, 2013 represented 3.9% of total assets and had an end of period weighted average cost of 2.29%, compared with 3.9% of total assets and at a weighted average cost of 3.28% at March 31, 2012 and 10.7% of total assets at a weighted average cost of 1.19% at December 31, 2012.  At March 31, 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 $42.5 million of GSE MBS;
 
●  
HOA reverse repurchase agreements totaling $15.7 million at a weighted average rate of 0.02%; and
 
●  
Subordinated Debentures used to fund the issuance of Trust Preferred Securities in 2004 of $10.3 million with a rate of 3.05%.  For additional information about the Subordinated Debentures and Trust Preferred Securities, see Note 7 to the Consolidated Financial Statements in this report.
 
The following table sets forth certain information regarding the Company's borrowed funds at the dates indicated:

 
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
   
Balance
   
Weighted Average Rate
   
Balance
   
Weighted Average Rate
   
Balance
   
Weighted Average Rate
 
   
(dollars in thousands)
 
FHLB advances
  $ -       0.00 %   $ 87,000       0.28 %   $ -       0.00 %
Reverse repurchase agreements
    44,191       2.11 %     28,500       3.26 %     28,500       3.26 %
Subordinated debentures
    10,310       3.05 %     10,310       3.09 %     10,310       3.32 %
Total borrowings
  $ 54,501       2.29 %   $ 125,810       1.19 %   $ 38,810       3.28 %
                                                 
Weighted average cost of
borrowings during the quarter
    2.33 %             3.24 %             3.31 %        
Borrowings as a percent of total assets
    3.9 %             10.7 %             3.9 %        

Stockholders’ Equity.  Total stockholders’ equity was $157.6 million as of March 31, 2013, up from $89.5 million at March 31, 2012 and $134.5 million at December 31, 2012.  On January 9, 2013, the Company 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 $15.9 million in connection with the Company’s stock issued to FAB shareholders as part of the acquisition consideration.  The current year increase of $23.0 million in stockholders’ equity was related to the over-allotment exercise, equity consideration for the FAB Acquisition, net income for the first quarter of 2013 of $2.0 million and an increase in accumulated other comprehensive income of gain of $461,000.
 
Our basic book value per share increased to $10.21 at March 31, 2013 from $8.66 at March 31, 2012 and $ 9.85 at December 31, 2012, while our diluted book value per share increased to $10.13 at March 31, 2013 from $8.59 at March 31, 2012 and $9.75 at December 31, 2012.  At March 31, 2013, the Company’s tangible common equity to tangible assets ratio was 10.16%, up from 8.90% at March 31, 2012 and 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)
 
                   
   
March 31, 2013
   
December 31, 2012
   
March 31, 2012
 
                   
Total stockholders' equity
  $ 157,589     $ 134,517     $ 89,479  
Less: Intangible assets
    (16,317 )     (2,626 )     (2,013 )
Tangible common equity
  $ 141,272     $ 131,891     $ 87,466  
                         
Total assets
  $ 1,406,655     $ 1,173,792     $ 985,171  
Less: Intangible assets
    (16,317 )     (2,626 )     (2,013 )
Tangible assets
  $ 1,390,338     $ 1,171,166     $ 983,158  
                         
Tangible common equity ratio
    10.16 %     11.26 %     8.90 %

CAPITAL RESOURCES AND LIQUIDITY
 
Our primary sources of funds are deposits, advances from the FHLB and other borrowings, principal and interest payments on loans, and income from investments. While maturities and scheduled amortization of loans are a predictable source of funds, deposit inflows and outflows as well as loan prepayments are greatly influenced by general interest rates, economic conditions, and competition.
 
Our primary sources of funds generated during the first three months of 2013 were from:
 
●  
Cash of $167.7 million acquired from the FAB;
●  
Net change of $107.0 million of undisbursed loan funds;
●  
Proceeds of $51.0 million from the sale and principal payments on loans held for investment;
●  
Principal payments of $5.8 million from securities available for sale; and
●  
Net proceeds from the issuance of stock related to the underwriter’s over-allotment option of $4.7 million.
 
We used these funds to:
 
●  
Purchase and originate loans held for investment of $89.8 million;
●  
Repay FHLB advances and other borrowings of $88.2 million;
●  
Absorb deposit outflows of $75.9 million; and
●  
Cash disbursed in connection with the FAB Acquisition of $43.0 million.
 
Our most liquid assets are unrestricted cash and short-term investments.  The levels of these assets are dependent on our operating, lending and investing activities during any given period.  Our liquidity position is continuously monitored and adjustments are made to the balance between sources and uses of funds as deemed appropriate.  At March 31, 2013, cash and cash equivalents totaled $99.5 million and the market value of our investment securities available for sale totaled $301.2 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 March 31, 2013, the maximum amount we could borrow through the FHLB was $526.2 million, of which $226.4 million was available for borrowing based on collateral pledged of $341.3 million in real estate loans.  At March 31, 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 March 31, 2013, no funds were drawn against these unsecured lines of credit.  For the quarter ended March 31, 2013, our average liquidity ratio was 10.41%.  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 March 31, 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 months ended March 31, 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
   
March 31, 2013
 
   
Less than 1 year
   
1 - 3 years
   
3 - 5 years
   
More than 5 years
   
Total
 
   
(in thousands)
 
Contractual obligations
                                 
FHLB advances
  $ -     $ -     $ -     $ -     $ -  
Other borrowings
    15,691       -       -       28,500       44,191  
Subordinated debentures
    -       -       -       10,310       10,310  
Certificates of deposit
    268,322       73,288       2,016       5,729       349,355  
Operating leases
    1,823       7,001       7,709       6,787       23,320  
Total contractual cash obligations
  $ 285,836     $ 80,289     $ 9,725     $ 51,326     $ 427,176  

Off-Balance Sheet Commitments.  We utilize off-balance sheet commitments in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate real estate, business and other loans held for investment, undisbursed loan funds, lines and letters of credit, and commitments to purchase loans and investment securities for portfolio. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
 
Commitments to originate loans held for investment are agreements to lend to a customer as long as there is no violation of any condition established in the commitment.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Undisbursed loan funds and unused lines of credit on home equity and commercial loans include committed funds not disbursed.  Letters of credit are conditional commitments we issue to guarantee the performance of a customer to a third party.  As of March 31, 2013, we had commitments to extend credit on existing lines and letters of credit of $236.7 million, compared to $105.0 million at March 31, 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:
   
March 31, 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
  $ -     $ 316     $ 1,188     $ 3,404     $ 4,908  
Commercial and industrial
    25,594       12,054       560       15,683       53,891  
Warehouse facilities
    -       -       -       174,945       174,945  
Standby letters of credit
    441       44       -       -       485  
All other
    45       50       -       2,396       2,491  
Total commitments
  $ 26,080     $ 12,464     $ 1,748     $ 196,428     $ 236,720  

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 March 31, 2013, the Corporation and the Bank 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 Company 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 Company 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 March 31, 2013
                                   
Tier 1 Capital (to adjusted tangible assets)
                                   
Bank
  $ 145,642       12.55 %   $ 46,423       4.00 %   $ 58,029       5.00 %
Consolidated
    147,953       12.84 %     46,100       4.00 %     N/A       N/A  
Tier 1 Risk-Based Capital (to risk-weighted assets)
                                         
Bank
    145,642       14.43 %     40,362       4.00 %     60,543       6.00 %
Consolidated
    147,953       14.61 %     40,500       4.00 %     N/A       N/A  
Total Capital (to risk-weighted assets)
                                               
Bank
    153,636       15.23 %     80,724       8.00 %     100,905       10.00 %
Consolidated
    155,947       15.40 %     81,000       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  March 31, 2012
                                               
Tier 1 Capital (to adjusted tangible assets)
                                               
Bank
  $ 91,643       9.49 %   $ 38,613       4.00 %   $ 48,267       5.00 %
Consolidated
    92,086       9.54 %     38,592       4.00 %     N/A       N/A  
Tier 1 Risk-Based Capital (to risk-weighted assets)
                                         
Bank
    91,643       12.54 %     29,238       4.00 %     43,857       6.00 %
Consolidated
    92,086       12.53 %     29,403       4.00 %     N/A       N/A  
Total Capital (to risk-weighted assets)
                                               
Bank
    99,759       13.65 %     58,477       8.00 %     73,096       10.00 %
Consolidated
    100,306       13.65 %     58,805       8.00 %     N/A       N/A  

In June 2012, the Federal Reserve and the other federal banking regulatory agencies published several notices of proposed rulemaking (together, the “2012 Proposed Rules”) that would substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Corporation and the Bank, compared to the current U.S. risk-based capital rules, which are based on the international capital accords of the Basel Committee on Banking Supervision (the “Basel Committee”) generally referred to as “Basel I.” One of the 2012 Proposed Rules (the “Basel III Proposal”) deals with the components of capital and other issues affecting the numerator in banking institutions’ regulatory capital ratios and would implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards.  The other 2012 Proposed Rules (the “Standardized Approach Proposal”) addresses risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and would replace the existing risk-weighting approach with a more conservative risk-sensitive approach.  The U.S. federal banking agencies have not proposed rules implementing the final liquidity framework of Basel III and have not determined to what extent they will apply to U.S. banks that are not large, internationally active banks.
 
The 2012 Proposed Rules were to become effective in stages beginning January 1, 2013 through 2019.  In the fourth quarter of 2012, however, the implementation of Basel III and the 2012 Proposed Rules was postponed indefinitely in response to the large number of comment letters received by the federal banking agencies with regard to the proposed rulemaking. Given that the 2012 Proposed Rules are subject to change, and the scope and content of capital regulations that the U.S. federal banking agencies may adopt under the Dodd-Frank Act is uncertain, we cannot be certain of the impact new capital regulations will have on our capital ratios or our results of operations.
 
 
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.
 
In October 2012, a lawsuit was filed against the Bank by a former employee, alleging wrongful termination on the basis of race, gender and disability (pregnancy).  The plaintiff alleges that the Bank did not reasonably accommodate her pregnancy or take reasonable steps necessary to prevent the alleged discrimination, harassment and retaliation.  The lawsuit was filed in Orange County Superior Court and was dismissed on February 20, 2013.  The parties have agreed to arbitrate this matter, however the plaintiff has not brought the matter before the American Arbitration Association.  The Bank believes these claims to be without merit and will vigorously defend it if brought to arbitration.
 
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 2
 
Agreement and Plan of Reorganization, dated March 5, 2013, among Pacific Premier Bancorp, Inc., Pacific Premier Bank and San Diego Trust Bank (1)
Exhibit 10.1
 
Form of Shareholder Agreement among Pacific Premier Bancorp, Inc., San Diego Trust Bank, and certain shareholders of San Diego Trust Bank (1)
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 (2)
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document (2)
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (2)
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document (2)
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document (2)
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (2)
 
(1)  Incorporated by reference from the Company’s Form 8-K filed with the SEC on March 6, 2013.
 
(2)  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.,
 
May 10, 2013
By:
/s/ Steven R. Gardner
Date
 
Steven R. Gardner
   
President and Chief Executive Officer
   
(principal executive officer)
     
May 10, 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 2
 
Agreement and Plan of Reorganization, dated March 5, 2013, among Pacific Premier Bancorp, Inc., Pacific Premier Bank and San Diego Trust Bank (1)
Exhibit 10.1
 
Form of Shareholder Agreement among Pacific Premier Bancorp, Inc., San Diego Trust Bank, and certain shareholders of San Diego Trust Bank (1)
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 (2)
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document (2)
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (2)
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase Document (2)
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document (2)
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (2)
 
 
 
(1)  Incorporated by reference from the Company’s Form 8-K filed with the SEC on March 6, 2013.
 
(2)  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.