PACIFIC PREMIER BANCORP INC - Quarter Report: 2014 March (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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Washington, DC 20549
FORM 10-Q
(Mark One)
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(X)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2014
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
![](https://www.sec.gov/Archives/edgar/data/0001028918/000102891814000024/ppbilogo11.jpg)
(Exact name of registrant as specified in its charter)
DELAWARE
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33-0743196
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(State or other jurisdiction of incorporation or organization)
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(I.R.S Employer Identification No.)
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17901 VON KARMAN AVENUE, SUITE 1200, IRVINE, CALIFORNIA 92614
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(Address of principal executive offices and zip code)
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(949) 864-8000
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(Registrant’s telephone number, including area code)
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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 [_]
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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 [_]
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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
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[ ]
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Accelerated filer
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[X]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[ ]
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(Do not check if a smaller
reporting company)
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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, 2014 was 17,224,977.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED MARCH 31, 2014
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
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(dollars in thousands, except share data)
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ASSETS
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March 31, 2014
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December 31, 2013
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March 31, 2013
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(Unaudited)
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(Audited)
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(Unaudited)
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||||||||||
Cash and due from banks
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$ | 124,143 | $ | 126,787 | $ | 99,431 | ||||||
Federal funds sold
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276 | 26 | 27 | |||||||||
Cash and cash equivalents
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124,419 | 126,813 | 99,458 | |||||||||
Investment securities available for sale
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202,142 | 256,089 | 301,160 | |||||||||
FHLB/FRB/Other stock, at cost
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14,104 | 15,450 | 10,974 | |||||||||
Loans held for sale, net
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- | 3,147 | 3,643 | |||||||||
Loans held for investment
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1,325,372 | 1,240,123 | 941,828 | |||||||||
Allowance for loan losses
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(8,685 | ) | (8,200 | ) | (7,994 | ) | ||||||
Loans held for investment, net
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1,316,687 | 1,231,923 | 933,834 | |||||||||
Accrued interest receivable
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5,865 | 6,254 | 4,898 | |||||||||
Other real estate owned
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752 | 1,186 | 1,561 | |||||||||
Premises and equipment
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9,643 | 9,864 | 8,862 | |||||||||
Deferred income taxes
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9,180 | 8,477 | 2,646 | |||||||||
Bank owned life insurance
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26,240 | 24,051 | 17,701 | |||||||||
Intangible assets
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6,374 | 6,628 | 4,463 | |||||||||
Goodwill
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22,950 | 17,428 | 11,854 | |||||||||
Other assets
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6,926 | 6,877 | 5,601 | |||||||||
TOTAL ASSETS
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$ | 1,745,282 | $ | 1,714,187 | $ | 1,406,655 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
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LIABILITIES:
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Deposit accounts:
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Noninterest bearing
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$ | 412,871 | $ | 366,755 | $ | 316,536 | ||||||
Interest bearing
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1,022,332 | 939,531 | 869,183 | |||||||||
Total deposits
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1,435,203 | 1,306,286 | 1,185,719 | |||||||||
FHLB advances and other borrowings
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95,506 | 204,091 | 44,191 | |||||||||
Subordinated debentures
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10,310 | 10,310 | 10,310 | |||||||||
Accrued expenses and other liabilities
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15,403 | 18,274 | 8,846 | |||||||||
TOTAL LIABILITIES
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1,556,422 | 1,538,961 | 1,249,066 | |||||||||
STOCKHOLDERS’ EQUITY:
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Common stock, $.01 par value; 25,000,000 shares authorized; 17,224,977 shares at March 31, 2014, 16,656,279 shares at December 31, 2013, and 15,437,531 shares at March 31, 2013 issued and outstanding
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172 | 166 | 154 | |||||||||
Additional paid-in capital
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152,325 | 143,322 | 128,075 | |||||||||
Retained earnings
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37,447 | 34,815 | 27,794 | |||||||||
Accumulated other comprehensive income (loss), net of tax (benefit) of ($757) at March 31, 2014, ($2,152) at December 31, 2013, and $1,095 at March 31, 2013
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(1,084 | ) | (3,077 | ) | 1,566 | |||||||
TOTAL STOCKHOLDERS’ EQUITY
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188,860 | 175,226 | 157,589 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$ | 1,745,282 | $ | 1,714,187 | $ | 1,406,655 |
Accompanying notes are an integral part of these consolidated financial statements.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
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(dollars in thousands, except per share data)
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(unaudited)
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Three Months Ended
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March 31, 2014
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March 31, 2013
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INTEREST INCOME
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Loans
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$ | 16,585 | $ | 13,396 | ||||
Investment securities and other interest-earning assets
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1,437 | 839 | ||||||
Total interest income
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18,022 | 14,235 | ||||||
INTEREST EXPENSE
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Deposits
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1,069 | 1,019 | ||||||
FHLB advances and other borrowings
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243 | 240 | ||||||
Subordinated debentures
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75 | 77 | ||||||
Total interest expense
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1,387 | 1,336 | ||||||
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
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16,635 | 12,899 | ||||||
PROVISION FOR LOAN LOSSES
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949 | 296 | ||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
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15,686 | 12,603 | ||||||
NONINTEREST INCOME
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Loan servicing fees
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856 | 326 | ||||||
Deposit fees
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454 | 440 | ||||||
Net gain from sales of loans
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548 | 723 | ||||||
Net gain from sales of investment securities
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62 | - | ||||||
Other-than-temporary impairment recovery (loss) on investment securities, net
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13 | (30 | ) | |||||
Other income
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119 | 265 | ||||||
Total noninterest income
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2,052 | 1,724 | ||||||
NONINTEREST EXPENSE
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Compensation and benefits
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6,891 | 5,097 | ||||||
Premises and occupancy
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1,588 | 1,293 | ||||||
Data processing and communications
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1,131 | 635 | ||||||
Other real estate owned operations, net
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13 | 37 | ||||||
FDIC insurance premiums
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237 | 140 | ||||||
Legal, audit and professional expense
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593 | 595 | ||||||
Marketing expense
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176 | 206 | ||||||
Office and postage expense
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369 | 263 | ||||||
Loan expense
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184 | 248 | ||||||
Deposit expense
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761 | 160 | ||||||
Merger related expense
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626 | 1,745 | ||||||
Other expense
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972 | 760 | ||||||
Total noninterest expense
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13,541 | 11,179 | ||||||
NET INCOME BEFORE INCOME TAX
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4,197 | 3,148 | ||||||
INCOME TAX
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1,565 | 1,176 | ||||||
NET INCOME
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$ | 2,632 | $ | 1,972 | ||||
EARNINGS PER SHARE
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Basic
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$ | 0.15 | $ | 0.14 | ||||
Diluted
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$ | 0.15 | $ | 0.13 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING
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Basic
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17,041,594 | 14,355,407 | ||||||
Diluted
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17,376,001 | 15,117,216 |
Accompanying notes are an integral part of these consolidated financial statements.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
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(dollars in thousands)
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(unaudited)
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Three Months Ended
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March 31,
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2014
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2013
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Net income
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$ | 2,632 | $ | 1,972 | ||||
Other comprehensive income (loss), net of tax (benefit):
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Unrealized holding gains on securities arising during the period, net of income taxes (1)
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2,029 | 461 | ||||||
Reclassification adjustment for net gain on sale of securities included in net income, net of income taxes (2)
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(36 | ) | - | |||||
Net unrealized gain on securities, net of income taxes
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1,993 | 461 | ||||||
Comprehensive income
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$ | 4,625 | $ | 2,433 | ||||
(1) Income taxes on the unrealized gains on securities was $1.4 million for the first quarter of 2014 and $323,000 for the first quarter of 2013.
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(2) Income taxes on the reclassification adjustment for net gain on sale of securities included in net income was $26,000 for the first quarter of 2014.
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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
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FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
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(dollars in thousands)
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(unaudited)
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Common
Stock Shares
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Common
Stock
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Additional
Paid-in Capital
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Accumulated
Retained Earnings
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Accumulated Other Comprehensive Income
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Total
Stockholders’ Equity
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Balance at December 31, 2013
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16,656,279 | $ | 166 | $ | 143,322 | $ | 34,815 | $ | (3,077 | ) | $ | 175,226 | ||||||||||||
Net income
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2,632 | 2,632 | ||||||||||||||||||||||
Other comprehensive income
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1,993 | 1,993 | ||||||||||||||||||||||
Share-based compensation expense
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181 | 181 | ||||||||||||||||||||||
Common stock repurchased and retired
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(3,936 | ) | - | (284 | ) | (284 | ) | |||||||||||||||||
Common stock issued
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562,469 | 6 | 9,006 | 9,012 | ||||||||||||||||||||
Stock options exercised
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10,165 | - | 100 | 100 | ||||||||||||||||||||
Balance at March 31, 2014
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17,224,977 | $ | 172 | $ | 152,325 | $ | 37,447 | $ | (1,084 | ) | $ | 188,860 | ||||||||||||
Balance at December 31, 2012
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13,661,648 | $ | 137 | $ | 107,453 | $ | 25,822 | $ | 1,105 | $ | 134,517 | |||||||||||||
Net income
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1,972 | 1,972 | ||||||||||||||||||||||
Other comprehensive income
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461 | 461 | ||||||||||||||||||||||
Share-based compensation expense
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152 | 152 | ||||||||||||||||||||||
Common stock repurchased and retired
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(3,666 | ) | - | (22 | ) | (22 | ) | |||||||||||||||||
Common stock issued
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1,774,217 | 17 | 20,482 | 20,499 | ||||||||||||||||||||
Stock options exercised
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5,332 | - | 10 | 10 | ||||||||||||||||||||
Balance at March 31, 2013
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15,437,531 | $ | 154 | $ | 128,075 | $ | 27,794 | $ | 1,566 | $ | 157,589 |
Accompanying notes are an integral part of these consolidated financial statements.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
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(in thousands)
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(unaudited)
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Three Months Ended March 31,
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2014
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2013
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net income
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$ | 2,632 | $ | 1,972 | ||||
Adjustments to net income:
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Depreciation and amortization expense
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549 | 440 | ||||||
Provision for loan losses
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949 | 296 | ||||||
Share-based compensation expense
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181 | 152 | ||||||
Loss on sale and disposal of premises and equipment
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23 | - | ||||||
Loss on sale of other real estate owned
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11 | 3 | ||||||
Amortization of premium/discounts on securities held for sale, net
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637 | 237 | ||||||
Amortization of loan mark-to-market discount from FDIC transaction
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(579 | ) | (729 | ) | ||||
Gain on sale of investment securities available for sale
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(62 | ) | - | |||||
(Recoveries) other-than-temporary impairment loss on investment securities, net
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(13 | ) | 30 | |||||
Gain on sale of loans held for investment
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(548 | ) | (723 | ) | ||||
Recoveries on loans
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37 | 184 | ||||||
Principal payments from loans held for sale
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31 | 38 | ||||||
Loss on loans held for sale | 180 | - | ||||||
Deferred income tax provision
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(703 | ) | - | |||||
Change in accrued expenses and other liabilities, net
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(3,916 | ) | (387 | ) | ||||
Income from bank owned life insurance, net
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(189 | ) | (128 | ) | ||||
Change in accrued interest receivable and other assets, net
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(372 | ) | (1,347 | ) | ||||
Net cash provided by operating activities
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(1,152 | ) | 38 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES
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Proceeds from sale and principal payments on loans held for investment
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87,580 | 50,977 | ||||||
Net change in undisbursed loan funds
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17,651 | 107,003 | ||||||
Purchase and origination of loans held for investment
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(108,020 | ) | (89,836 | ) | ||||
Proceeds from sale of other real estate owned
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423 | 694 | ||||||
Principal payments on securities available for sale
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6,212 | 5,797 | ||||||
Purchase of securities available for sale
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(4,976 | ) | - | |||||
Proceeds from sale or maturity of securities available for sale
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56,081 | - | ||||||
Investment in Bank Own Life Insurance
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(2,000 | ) | - | |||||
Purchases of premises and equipment
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(277 | ) | (657 | ) | ||||
Purchase of Federal Reserve Bank stock
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(6 | ) | - | |||||
Redemption of FHLB stock
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1,352 | 926 | ||||||
Cash (disbursed) acquired in acquisitions, net
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(7,793 | ) | 124,697 | |||||
Net cash provided by investing activities
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46,227 | 199,601 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES
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Net increase (decrease) in deposit accounts
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128,917 | (75,867 | ) | |||||
Repayment of FHLB advances and other borrowings
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(176,202 | ) | (88,214 | ) | ||||
Proceeds from issuance of common stock, net of issuance cost
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- | 4,560 | ||||||
Proceeds from exercise of stock options
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100 | 10 | ||||||
Repurchase of common stock
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(284 | ) | (22 | ) | ||||
Net cash (used in) provided by financing activities
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(47,469 | ) | (159,533 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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(2,394 | ) | 40,106 | |||||
CASH AND CASH EQUIVALENTS, beginning of period
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126,813 | 59,352 | ||||||
CASH AND CASH EQUIVALENTS, end of period
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$ | 124,419 | $ | 99,458 |
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
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(in thousands)
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(unaudited)
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Three Months Ended March 31,
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2014
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2013
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SUPPLEMENTAL CASH FLOW DISCLOSURES
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Interest paid
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$ | 1,104 | $ | 1,277 | ||||
Income taxes paid
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3,500 | 2,700 | ||||||
Assets acquired (liabilities assumed and capital created) in acquisitions (See Note 4):
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Investment securities
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- | 222,391 | ||||||
Federal Reserve Bank/FHLB/TIB Stock
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- | 653 | ||||||
Loans
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78,833 | 26,422 | ||||||
Core deposit intangible
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- | 1,930 | ||||||
Goodwill
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5,522 | 11,854 | ||||||
Fixed assets
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74 | 70 | ||||||
Other assets
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702 | 5,100 | ||||||
Deposits
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- | (356,818 | ) | |||||
Other borrowings
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(67,617 | ) | (16,905 | ) | ||||
Other liabilities
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(709 | ) | (4,454 | ) | ||||
Additional paid-in capital
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(9,012 | ) | (15,938 | ) | ||||
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
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Transfers from loans to other real estate owned
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$ | - | $ | - | ||||
Investment securities available for sale purchased and not settled
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$ | 557 | $ | - | ||||
Loans held for sale transfer to loans held for investment
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$ | 2,936 | $ | - |
Accompanying notes are an integral part of these consolidated financial statements.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
March 31, 2014
(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, 2014, December 31, 2013, and March 31, 2013, the results of its operations and comprehensive income for the three months ended March 31, 2014 and 2013 and the changes in stockholders’ equity and cash flows for the three months ended March 31, 2014 and 2013. Operating results or comprehensive income for the three months ended March 31, 2014 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, 2014.
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, 2013 (the “2013 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
Accounting Standards Adopted in 2014
In July 2013, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2013-11,"Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. The Company adopted the provisions of ASU No. 2013-11 effective January 1, 2014. The adoption of ASU No. 2013-11 had no impact on the Company's Consolidated Financial Statements.
Accounting Standards Pending Adoption
In January 2014, the FASB issued ASU No. 2014-01,"Accounting for Investments in Qualified Affordable Housing Projects." ASU No. 2014-01 permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU No. 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that use the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The Company currently accounts for such investments using the effective yield method and plans to continue to do so for these pre-existing investments after adopting ASU No. 2014-01 on January 1, 2015. The Company expects investments made after January 1, 2015 to meet the criteria required for the proportional amortization method and plans to make such an accounting policy election. The adoption of ASU No. 2014-01 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In January 2014, the FASB issued ASU No. 2014-04,"Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure." The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's Consolidated Financial Statements.
Note 3 – Significant Accounting Policies
Certain Acquired Loans: As part of business acquisitions, the Bank acquires certain loans that have shown evidence of credit deterioration since origination. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. Such acquired loans are accounted for individually. The Bank estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Goodwill and Core Deposit Intangible: Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
Core deposit intangible assets arising from whole bank acquisitions are amortized on an accelerated method over their estimated useful lives, which range from 8 to 10 years.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The allowance for loan losses, the fair value of stock-based compensation awards, the fair values of financial instruments and the status of contingencies are particularly subject to change.
Note 4 – Acquisitions
The Company accounted for the following transactions under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of the core deposit intangible, securities and deposits with the assistance of third party valuations. The fair value of other real estate owned (“OREO”) was based on recent appraisals of the properties.
The estimated fair values in these acquisitions are subject to refinement as additional information relative to the closing date fair values become available through the measurement period, which can extend for up to one year after the closing date of the transaction. While additional significant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date. During the measurement period, any such changes will be recorded as part of the closing date fair value.
Infinity Franchise Holdings Acquisition
On January 30, 2014, the Company completed its acquisition of Infinity Franchise Holdings, LLC (“Infinity Holdings”) and its wholly owned operating subsidiary Infinity Franchise Capital, LLC (“IFC” and together with Infinity Holdings, “IFH”), a national lender to franchisees in the quick service restaurant (“QSR”) industry, and other direct and indirect subsidiaries utilized in its business. The value of the total consideration paid for the Infinity acquisition was $17.4 million, which consisted of $8.3 million paid in cash and the issuance of 562,469 shares of the Corporation’s stock, which was valued at $16.02 per share as measured by the 10-day average closing price immediately prior to closing of the transaction.
The acquisition of IFH is expected to further diversify our loan portfolio with commercial and industrial and owner-occupied commercial real estate loans, to deploy excess liquidity into higher yielding assets, to positively impact our net interest margin and to further leverage our strong capital base. The QSR franchisee lending business is a niche market that we believe provides attractive growth opportunities for the Company in the future. Infinity had no delinquent loans or adversely classified assets as of the acquisition date; and the acquisition is expected to be accretive to our 2014 earnings per share.
Goodwill in the amount of $5.5 million was recognized in the IFH acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed of Infinity as of January 30, 2014 and the provisional fair value adjustments and amounts recorded by the Company in 2014 under the acquisition method of accounting:
IFH
Book Value
|
Fair Value
Adjustments
|
Fair
Value
|
||||||||||
(dollars in thousands)
|
||||||||||||
ASSETS ACQUIRED
|
||||||||||||
Cash and cash equivalents
|
$ | 555 | $ | - | $ | 555 | ||||||
Loans, gross
|
78,833 | - | 78,833 | |||||||||
Deferred loan costs
|
1,082 | (1,082 | ) | - | ||||||||
Allowance for loan losses
|
(268 | ) | 268 | - | ||||||||
Other assets
|
776 | - | 776 | |||||||||
Total assets acquired
|
$ | 80,978 | $ | (814 | ) | $ | 80,164 | |||||
LIABILITIES ASSUMED
|
||||||||||||
Bank loan
|
$ | 67,617 | $ | - | $ | 67,617 | ||||||
Accrued compensation
|
495 | - | 495 | |||||||||
Other liabilities
|
214 | - | 214 | |||||||||
Total liabilities assumed
|
68,326 | - | 68,326 | |||||||||
Excess of assets acquired over liabilities assumed
|
$ | 12,652 | $ | (814 | ) | 11,838 | ||||||
Consideration paid
|
17,360 | |||||||||||
Goodwill recognized
|
$ | 5,522 |
San Diego Trust Bank Acquisition
On June 25, 2013, the Company completed its acquisition of San Diego Trust Bank (“SDTB”) in exchange for consideration valued at $30.6 million which consisted of $16.2 million of cash and 1,198,255 shares of the Corporation’s common stock.
SDTB was a San Diego, California based state-chartered bank. The acquisition was an opportunity for the Company to acquire a banking network that complemented our existing banking franchise and expanded into a new market area. Additionally, the SDTB acquisition improved the Company’s deposit base by lowering our cost of deposits and providing an opportunity to accelerate future core deposit growth in the San Diego, California, market area.
Goodwill in the amount of $5.6 million was recognized in the SDTB acquisition. Goodwill recognized in this transaction is not deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed of SDTB as of June 25, 2013 and the provisional fair value adjustments and amounts recorded by the Company in 2013 under the acquisition method of accounting:
SDTB
Book Value
|
Fair Value
Adjustments
|
Fair
Value
|
||||||||||
(dollars in thousands)
|
||||||||||||
ASSETS ACQUIRED
|
||||||||||||
Cash and cash equivalents
|
$ | 30,252 | $ | - | $ | 30,252 | ||||||
Investment securities
|
124,960 | (155 | ) | 124,805 | ||||||||
Loans, gross
|
42,945 | (223 | ) | 42,722 | ||||||||
Allowance for loan losses
|
(1,013 | ) | 1,013 | - | ||||||||
Other real estate owned
|
752 | - | 752 | |||||||||
Core deposit intangible
|
- | 2,836 | 2,836 | |||||||||
Other assets
|
9,856 | - | 9,856 | |||||||||
Total assets acquired
|
$ | 207,752 | $ | 3,471 | $ | 211,223 | ||||||
LIABILITIES ASSUMED
|
||||||||||||
Deposits
|
$ | 183,901 | $ | 6 | $ | 183,907 | ||||||
Deferred tax liability (asset)
|
(333 | ) | 1,507 | 1,174 | ||||||||
Other liabilities
|
1,823 | (729 | ) | 1,094 | ||||||||
Total liabilities assumed
|
185,391 | 784 | 186,175 | |||||||||
Excess of assets acquired over liabilities assumed
|
$ | 22,361 | $ | 2,687 | 25,048 | |||||||
Consideration paid
|
30,622 | |||||||||||
Goodwill recognized
|
$ | 5,574 |
First Association Bank Acquisition
On March 15, 2013, the Company completed its acquisition of First Association Bank (“FAB”) in exchange for consideration valued as of the closing at $57.9 million which consisted of $43.0 million of cash and 1,279,217 shares of the Corporation’s common stock.
FAB was a Dallas, Texas, based bank which specialized in providing commercial banking services to home owner association (“HOA”) management companies throughout the United States. The FAB acquisition was an opportunity for the Company to acquire a highly efficient, consistently profitable and niche-focused business that complimented our banking franchise. Additionally, this acquisition improved the Company’s deposit base by lowering our cost of deposits and providing a platform to accelerate future core deposit growth from HOAs.
Goodwill in the amount of $11.9 million was recognized in the FAB acquisition. Goodwill recognized in this transaction is not deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed of FAB as of March 15, 2013, the provisional fair value adjustments and amounts recorded by the Company in 2013 under the acquisition method of accounting:
FAB
Book Value
|
Fair Value
Adjustments
|
Fair
Value
|
||||||||||
ASSETS ACQUIRED
|
(dollars in thousands)
|
|||||||||||
Cash and cash equivalents
|
$ | 167,663 | $ | - | $ | 167,663 | ||||||
Investment securities
|
219,913 | 2,478 | 222,391 | |||||||||
Loans, gross
|
26,264 | 158 | 26,422 | |||||||||
Allowance for loan losses
|
(224 | ) | 224 | - | ||||||||
Core deposit intangible
|
- | 1,930 | 1,930 | |||||||||
Other assets
|
5,823 | - | 5,823 | |||||||||
Total assets acquired
|
$ | 419,439 | $ | 4,790 | $ | 424,229 | ||||||
LIABILITIES ASSUMED
|
||||||||||||
Deposits
|
$ | 356,737 | $ | 81 | $ | 356,818 | ||||||
Borrowings
|
16,905 | - | 16,905 | |||||||||
Deferred tax liability
|
- | 3,918 | 3,918 | |||||||||
Other Liabilities
|
536 | - | 536 | |||||||||
Total liabilities assumed
|
374,178 | 3,999 | 378,177 | |||||||||
Excess of assets acquired over liabilities assumed
|
$ | 45,261 | $ | 791 | 46,052 | |||||||
Consideration paid
|
57,906 | |||||||||||
Goodwill recognized
|
$ | 11,854 |
There were no purchased credit impaired loans acquired from FAB, SDTB or Infinity. For loans acquired from FAB, SDTB and Infinity, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows:
Acquired Loans
|
||||||||||||
FAB
|
SDTB
|
IFH
|
||||||||||
(dollars in thousands)
|
||||||||||||
Contractual amounts due
|
$ | 32,107 | $ | 47,251 | $ | 98,320 | ||||||
Cash flows not expected to be collected
|
- | - | - | |||||||||
Expected cash flows
|
32,107 | 47,251 | 98,320 | |||||||||
Interest component of expected cash flows
|
5,685 | 4,529 | 19,487 | |||||||||
Fair value of acquired loans
|
$ | 26,422 | $ | 42,722 | $ | 78,833 |
In accordance with generally accepted accounting principles, there was no carryover of the allowance for loan losses that had been previously recorded by FAB, SDTB or Infinity.
The operating results of the Company for the three months ending March 31, 2014 include the operating results of FAB, SDTB and Infinity since their respective acquisition dates. The following table presents the net interest and other income, net income and earnings per share as if the acquisitions of FAB, SDTB and Infinity were effective as of January 1, 2014 and 2013. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:
Three months Ended March 31,
|
||||||||
2014
|
2013
|
|||||||
Net interest and other income
|
$ | 18,722 | $ | 16,543 | ||||
Net income
|
$ | 2,251 | $ | 1,909 | ||||
Basic earnings per share
|
$ | 0.13 | $ | 0.12 | ||||
Diluted earnings per share
|
$ | 0.13 | $ | 0.12 |
Note 5 – Investment Securities
The amortized cost and estimated fair value of securities were as follows:
March 31, 2014
|
||||||||||||||||
Amortized
Cost
|
Unrealized
Gain
|
Unrealized
Loss
|
Estimated
Fair Value
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Investment securities available for sale:
|
|
|||||||||||||||
Municipal bonds
|
$ | 77,062 | $ | 848 | $ | (586 | ) | $ | 77,324 | |||||||
Mortgage-backed securities
|
126,921 | 65 | (2,168 | ) | 124,818 | |||||||||||
Total securities available for sale
|
$ | 203,983 | $ | 913 | $ | (2,754 | ) | $ | 202,142 | |||||||
December 31, 2013
|
||||||||||||||||
Amortized
Cost
|
Unrealized
Gain
|
Unrealized
Loss
|
Estimated
Fair Value
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Investment securities available for sale:
|
||||||||||||||||
U.S. Treasury
|
$ | 73 | $ | 8 | $ | - | $ | 81 | ||||||||
Municipal bonds
|
95,388 | 589 | (1,850 | ) | 94,127 | |||||||||||
Mortgage-backed securities
|
165,857 | 12 | (3,988 | ) | 161,881 | |||||||||||
Total securities available for sale
|
$ | 261,318 | $ | 609 | $ | (5,838 | ) | $ | 256,089 | |||||||
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 |
At March 31, 2014, the Company had $6.1 million in Federal Home Loan Bank (“FHLB”) stock, $3.9 million in Federal Reserve Bank (“FRB”) stock, and $4.0 million in other stock, all carried at cost. During the three months of 2014, the FHLB has repurchased $1.4 million of the Company’s excess FHLB stock through its stock repurchase program.
At March 31, 2014, mortgage-backed securities (“MBS”) with an estimated par value of $65.5 million and a fair value of $67.5 million were pledged as collateral for the Bank’s three reverse repurchase agreements which totaled $28.5 million and HOA reverse repurchase agreements which totaled $17.0 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, 2014
|
||||||||||||||||||||||||||||||||||||
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
|
74 | $ | 36,765 | $ | (476 | ) | 12 | $ | 5,046 | $ | (110 | ) | 86 | $ | 41,811 | $ | (586 | ) | ||||||||||||||||||
Mortgage-backed securities
|
32 | 93,299 | (1,422 | ) | 1 | 12,312 | (746 | ) | 33 | 105,611 | (2,168 | ) | ||||||||||||||||||||||||
Total
|
106 | $ | 130,064 | $ | (1,898 | ) | 13 | $ | 17,358 | $ | (856 | ) | 119 | $ | 147,422 | $ | (2,754 | ) | ||||||||||||||||||
December 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
|
133 | $ | 61,524 | $ | (1,850 | ) | - | $ | - | $ | - | 133 | $ | 61,524 | $ | (1,850 | ) | |||||||||||||||||||
Mortgage-backed securities
|
45 | 140,704 | (3,075 | ) | 1 | 12,607 | (913 | ) | 46 | 153,311 | (3,988 | ) | ||||||||||||||||||||||||
Total
|
178 | $ | 202,228 | $ | (4,925 | ) | 1 | $ | 12,607 | $ | (913 | ) | 179 | $ | 214,835 | $ | (5,838 | ) | ||||||||||||||||||
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 | ) |
The amortized cost and estimated fair value of investment securities available for sale at March 31, 2014, 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:
|
||||||||||||||||||||||||||||||||||||||||
Municipal bonds
|
$ | - | $ | - | $ | 11,749 | $ | 11,729 | $ | 37,712 | $ | 37,570 | $ | 27,601 | $ | 28,025 | $ | 77,062 | $ | 77,324 | ||||||||||||||||||||
Mortgage-backed securities
|
- | - | - | - | 12,675 | 12,576 | 114,246 | 112,242 | 126,921 | 124,818 | ||||||||||||||||||||||||||||||
Total investment securities available for sale
|
- | - | 11,749 | 11,729 | 50,387 | 50,146 | 141,847 | 140,267 | 203,983 | 202,142 |
Any temporary impairment is a result of the change in market interest rates and not the underlying issuers’ ability to repay. The Company has the intent and ability to hold these securities until the temporary impairment is eliminated. Accordingly, the Company has not recognized the temporary impairment in earnings.
Unrealized gains and losses on investment securities available for sale are recognized in stockholders’ equity as accumulated other comprehensive income or loss. At March 31, 2014, the Company had accumulated other comprehensive loss of $1.8 million, or $1.1 million net of tax, compared to accumulated other comprehensive loss of $5.2 million, or $3.1 million net of tax, at December 31, 2013.
Note 6 – Loans Held for Investment
The following table sets forth the composition of our loan portfolio in dollar amounts at the dates indicated:
March 31, 2014
|
December 31, 2013
|
March 31, 2013
|
||||||||||
(in thousands)
|
||||||||||||
Business loans:
|
||||||||||||
Commercial and industrial
|
$ | 271,877 | $ | 187,035 | $ | 140,592 | ||||||
Commercial owner occupied (1)
|
223,848 | 221,089 | 166,571 | |||||||||
SBA
|
11,045 | 10,659 | 5,116 | |||||||||
Warehouse facilities
|
81,033 | 87,517 | 138,935 | |||||||||
Real estate loans:
|
||||||||||||
Commercial non-owner occupied
|
333,490 | 333,544 | 256,015 | |||||||||
Multi-family
|
223,200 | 233,689 | 139,100 | |||||||||
One-to-four family (2)
|
141,469 | 145,235 | 87,109 | |||||||||
Construction
|
29,857 | 13,040 | - | |||||||||
Land
|
6,170 | 7,605 | 7,863 | |||||||||
Other loans
|
3,480 | 3,839 | 4,690 | |||||||||
Total gross loans (3)
|
1,325,469 | 1,243,252 | 945,991 | |||||||||
Less loans held for sale, net
|
- | (3,147 | ) | (3,643 | ) | |||||||
Total gross loans held for investment
|
1,325,469 | 1,240,105 | 942,348 | |||||||||
Less:
|
||||||||||||
Deferred loan origination costs (fees) and premiums (discounts), net
|
(97 | ) | 18 | (520 | ) | |||||||
Allowance for loan losses
|
(8,685 | ) | (8,200 | ) | (7,994 | ) | ||||||
Loans held for investment, net
|
$ | 1,316,687 | $ | 1,231,923 | $ | 933,834 | ||||||
(1) Majority secured by real estate.
|
||||||||||||
(2) Includes second trust deeds.
|
||||||||||||
(3) Total gross loans for March 31, 2014 are net of (i) the unaccreted mark-to-market discounts on Canyon National Bank ("Canyon National") loans of $1.8 million, on Palm Desert National Bank ("Palm Desert National") loans of $2.2 million, and on SDTB loans of $115,000 and (ii) the mark-to-market premium on FAB loans of $53,000.
|
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 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 the Bank’s 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 $50.3 million for secured loans and $30.2 million for unsecured loans at March 31, 2014. At March 31, 2014, the Bank’s largest aggregate outstanding balance of loans to one borrower was $34.5 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, 2014
|
||||||||||||
Canyon National
|
Palm Desert National
|
Total
|
||||||||||
(in thousands)
|
||||||||||||
Business loans:
|
||||||||||||
Commercial and industrial
|
$ | 84 | $ | - | $ | 84 | ||||||
Commercial owner occupied
|
866 | - | 866 | |||||||||
Real estate loans:
|
||||||||||||
Commercial non-owner occupied
|
993 | - | 993 | |||||||||
One-to-four family
|
- | 14 | 14 | |||||||||
Total purchase credit impaired
|
$ | 1,943 | $ | 14 | $ | 1,957 |
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, 2014, the Company had $2.0 million of purchased credit impaired loans, of which $302,000 were placed on nonaccrual status.
The following table summarizes the accretable yield on the purchased credit impaired for the three months ended March 31, 2014:
Three Months Ended
|
||||||||||||
March 31, 2014
|
||||||||||||
Canyon National
|
Palm Desert National
|
Total
|
||||||||||
(in thousands)
|
||||||||||||
Balance at the beginning of period
|
$ | 1,623 | $ | 53 | $ | 1,676 | ||||||
Accretion
|
(68 | ) | - | (68 | ) | |||||||
Disposals and other
|
- | - | - | |||||||||
Change in accretable yield
|
- | - | - | |||||||||
Balance at the end of period
|
$ | 1,555 | $ | 53 | $ | 1,608 |
Impaired Loans
The following tables provide a summary of the Company’s investment in impaired loans as of the period indicated:
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, 2014
|
||||||||||||||||||||||||||||
Business loans:
|
||||||||||||||||||||||||||||
Commercial and industrial
|
$ | 67 | $ | 31 | $ | - | $ | 31 | $ | - | $ | 10 | $ | - | ||||||||||||||
Commercial owner occupied
|
870 | 718 | - | 718 | - | 738 | - | |||||||||||||||||||||
SBA
|
246 | 14 | - | 14 | - | 14 | 9 | |||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||
Commercial non-owner occupied
|
1,894 | 1,327 | - | 1,327 | - | 1,093 | 17 | |||||||||||||||||||||
One-to-four family
|
639 | 593 | 274 | 319 | 104 | 602 | 17 | |||||||||||||||||||||
Totals
|
$ | 3,716 | $ | 2,683 | $ | 274 | $ | 2,409 | $ | 104 | $ | 2,457 | $ | 43 | ||||||||||||||
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, 2013
|
||||||||||||||||||||||||||||
Business loans:
|
||||||||||||||||||||||||||||
Commercial and industrial
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | 255 | $ | 17 | ||||||||||||||
Commercial owner occupied
|
872 | 747 | - | 747 | - | 177 | 66 | |||||||||||||||||||||
SBA
|
246 | 14 | - | 14 | - | 70 | 28 | |||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||
Commercial non-owner occupied
|
1,202 | 983 | 28 | 955 | 1 | 984 | 68 | |||||||||||||||||||||
Multi-family
|
- | - | - | - | - | 108 | 2 | |||||||||||||||||||||
One-to-four family
|
746 | 683 | 278 | 405 | 104 | 743 | 44 | |||||||||||||||||||||
Totals
|
$ | 3,066 | $ | 2,427 | $ | 306 | $ | 2,121 | $ | 105 | $ | 2,337 | $ | 225 | ||||||||||||||
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 | 502 | 322 | 360 | 858 | 26 | |||||||||||||||||||||
Totals
|
$ | 4,691 | $ | 3,752 | $ | 783 | $ | 2,969 | $ | 616 | $ | 3,468 | $ | 74 |
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 restructuring (“TDR”). 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, 2014
|
December 31, 2013
|
March 31, 2013
|
||||||||||
(in thousands)
|
||||||||||||
Nonaccruing loans
|
$ | 2,497 | $ | 2,239 | $ | 3,055 | ||||||
Accruing loans
|
186 | 188 | 697 | |||||||||
Total impaired loans
|
$ | 2,683 | $ | 2,427 | $ | 3,752 |
When loans are placed on nonaccrual status all accrued interest is reversed from earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is remote, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least three months of sustained repayment performance since the loan was placed on nonaccrual.
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest. The Company had impaired loans on nonaccrual status of $2.5 million at March 31, 2014, $2.2 million at December 31, 2013, and $3.1 million at March 31, 2013. The Company had no loans 90 days or more past due and still accruing at March 31, 2014, December 31, 2013 or March 31, 2013.
The Company had no TDRs during the quarter ended March 31, 2014 and has an immaterial amount of TDRs related to one U.S. Small Business Administration (“SBA”) loan which was completed prior to 2011.
Concentration of Credit Risk
As of March 31, 2014, the Company’s loan portfolio was collateralized by various forms of real estate and business assets located principally in California. The Company’s loan portfolio contains concentrations of credit in 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 a significant deterioration in the California real estate market or 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, 2014
|
(in thousands)
|
|||||||||||||||
Business loans:
|
||||||||||||||||
Commercial and industrial
|
$ | 270,024 | $ | - | $ | 1,853 | $ | 271,877 | ||||||||
Commercial owner occupied
|
212,663 | 272 | 10,913 | 223,848 | ||||||||||||
SBA
|
11,031 | - | 14 | 11,045 | ||||||||||||
Warehouse facilities
|
81,033 | - | - | 81,033 | ||||||||||||
Real estate loans:
|
||||||||||||||||
Commercial non-owner occupied
|
328,645 | - | 4,845 | 333,490 | ||||||||||||
Multi-family
|
222,178 | 508 | 514 | 223,200 | ||||||||||||
One-to-four family
|
140,453 | - | 1,016 | 141,469 | ||||||||||||
Construction
|
29,857 | - | - | 29,857 | ||||||||||||
Land
|
6,170 | - | - | 6,170 | ||||||||||||
Other loans
|
3,478 | - | 2 | 3,480 | ||||||||||||
Totals
|
$ | 1,305,532 | $ | 780 | $ | 19,157 | $ | 1,325,469 | ||||||||
Credit Risk Grades
|
||||||||||||||||
Special
|
Total Gross
|
|||||||||||||||
Pass
|
Mention
|
Substandard
|
Loans
|
|||||||||||||
December 31, 2013
|
(in thousands)
|
|||||||||||||||
Business loans:
|
||||||||||||||||
Commercial and industrial
|
$ | 184,247 | $ | 12 | $ | 2,776 | $ | 187,035 | ||||||||
Commercial owner occupied
|
207,872 | 1,217 | 12,000 | 221,089 | ||||||||||||
SBA
|
10,659 | - | - | 10,659 | ||||||||||||
Warehouse facilities
|
87,517 | - | - | 87,517 | ||||||||||||
Real estate loans:
|
||||||||||||||||
Commercial non-owner occupied
|
329,538 | 352 | 3,654 | 333,544 | ||||||||||||
Multi-family
|
232,661 | 511 | 517 | 233,689 | ||||||||||||
One-to-four family
|
144,152 | - | 1,083 | 145,235 | ||||||||||||
Construction
|
13,040 | - | - | 13,040 | ||||||||||||
Land
|
7,605 | - | - | 7,605 | ||||||||||||
Other loans
|
3,834 | - | 5 | 3,839 | ||||||||||||
Totals
|
$ | 1,221,125 | $ | 2,092 | $ | 20,035 | $ | 1,243,252 | ||||||||
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 |
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, 2014
|
(in thousands)
|
|||||||||||||||||||||||
Business loans:
|
||||||||||||||||||||||||
Commercial and industrial
|
$ | 271,845 | $ | - | $ | 32 | $ | - | $ | 271,877 | $ | 31 | ||||||||||||
Commercial owner occupied
|
223,402 | - | - | 446 | 223,848 | 864 | ||||||||||||||||||
SBA
|
10,985 | 46 | - | 14 | 11,045 | 14 | ||||||||||||||||||
Warehouse facilities
|
81,033 | - | - | - | 81,033 | - | ||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||
Commercial non-owner occupied
|
332,572 | - | - | 918 | 333,490 | 1,327 | ||||||||||||||||||
Multi-family
|
223,200 | - | - | - | 223,200 | - | ||||||||||||||||||
One-to-four family
|
141,348 | 72 | - | 49 | 141,469 | 438 | ||||||||||||||||||
Construction
|
29,857 | - | - | - | 29,857 | - | ||||||||||||||||||
Land
|
6,170 | - | - | - | 6,170 | - | ||||||||||||||||||
Other loans
|
3,480 | - | - | - | 3,480 | - | ||||||||||||||||||
Totals
|
$ | 1,323,892 | $ | 118 | $ | 32 | $ | 1,427 | $ | 1,325,469 | $ | 2,674 | ||||||||||||
Days Past Due
|
Non-
|
|||||||||||||||||||||||
Current
|
30-59 | 60-89 | 90+ |
Total
|
Accruing
|
|||||||||||||||||||
December 31, 2013
|
(in thousands)
|
|||||||||||||||||||||||
Business loans:
|
||||||||||||||||||||||||
Commercial and industrial
|
$ | 187,035 | $ | - | $ | - | $ | - | $ | 187,035 | $ | - | ||||||||||||
Commercial owner occupied
|
219,875 | 768 | - | 446 | 221,089 | 747 | ||||||||||||||||||
SBA
|
10,645 | - | - | 14 | 10,659 | 14 | ||||||||||||||||||
Warehouse facilities
|
87,517 | - | - | - | 87,517 | - | ||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||
Commercial non-owner occupied
|
332,984 | - | - | 560 | 333,544 | 983 | ||||||||||||||||||
Multi-family
|
233,689 | - | - | - | 233,689 | - | ||||||||||||||||||
One-to-four family
|
145,041 | 71 | - | 123 | 145,235 | 507 | ||||||||||||||||||
Construction
|
13,040 | - | - | - | 13,040 | - | ||||||||||||||||||
Land
|
7,605 | - | - | - | 7,605 | - | ||||||||||||||||||
Other loans
|
3,709 | 130 | - | - | 3,839 | - | ||||||||||||||||||
Totals
|
$ | 1,241,140 | $ | 969 | $ | - | $ | 1,143 | $ | 1,243,252 | $ | 2,251 | ||||||||||||
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 |
Note 7 – Allowance for Loan Losses
The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit and investment review process together with data from peer institutions and economic information gathered from published sources.
The loan portfolio is segmented into groups of loans with similar risk characteristics. Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated using the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.
The following provides a summary of the ALLL calculation for the major segments within the Company’s loan portfolio.
Owner Occupied Commercial Real Estate Loans, Commercial and Industrial Loans and SBA Loans
The Company's base ALLL factor for owner occupied commercial real estate loans, commercial business loans and SBA loans is determined by management using the Bank's actual trailing 36 month, 24 month, trailing 12 month and annualized trailing six month charge-off data. Adjustments to those base factors are made for relevant internal and external factors. For owner occupied commercial real estate loans, commercial business loans and SBA loans, those factors include:
·
|
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
|
·
|
Changes in the nature and volume of the loan portfolio, including new types of lending,
|
·
|
Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and
|
·
|
The existence and effect of concentrations of credit, and changes in the level of such concentrations.
|
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all Federal Deposit Insurance (“FDIC”) insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
Multi-Family and Non-Owner Occupied Commercial Real Estate Loans
The Company's base ALLL factor for multi-family and non-owner occupied commercial real estate loans is determined by management using the Bank's actual trailing 36 month, 24 month, trailing 12 month and annualized trailing six month charge-off data. Adjustments to those base factors are made for relevant internal and external factors. For multi-family and non-owner occupied commercial real estate loans, those factors include:
·
|
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
|
·
|
Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and
|
·
|
The existence and effect of concentrations of credit, and changes in the level of such concentrations.
|
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC-insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
One-to-Four Family and Consumer Loans
The Company's base ALLL factor for one-to-four family and consumer loans is determined by management using the Bank's actual trailing 36 month, trailing 24 month, trailing 12 month and annualized trailing six month charge-off data. Adjustments to those base factors are made for relevant internal and external factors. For one-to-four family and consumer loans, those factors include:
·
|
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment, and
|
·
|
Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
|
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC-insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
Warehouse Facilities
The Company's warehouse facilities are structured as repurchase facilities, whereby we purchase funded one-to-four family loans on an interim basis. Therefore, the base ALLL factor for warehouse facilities is equal to that for one-to-four family and consumer loans as discussed above. Adjustments to the base factor are made for relevant internal and external factors. Those factors include:
·
|
Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,
|
·
|
Changes in the nature and volume of the loan portfolio, including new types of lending, and
|
·
|
The existence and effect of concentrations of credit, and changes in the level of such concentrations.
|
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for one-to-four family loans for all FDIC-insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.
The following tables summarize the allocation of the ALLL as well as the activity in the ALLL attributed to various segments in the loan portfolio as of and for the 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
|
Construction
|
Land
|
Other loans
|
Total
|
||||||||||||||||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2013
|
$ | 1,968 | $ | 1,818 | $ | 151 | $ | 392 | $ | 1,658 | $ | 817 | $ | 1,099 | $ | 136 | $ | 127 | $ | 34 | $ | 8,200 | ||||||||||||||||||||||
Charge-offs
|
(124 | ) | - | - | - | (365 | ) | - | (12 | ) | - | - | - | (501 | ) | |||||||||||||||||||||||||||||
Recoveries
|
5 | - | 2 | - | - | - | 30 | - | - | - | 37 | |||||||||||||||||||||||||||||||||
Provisions for (reduction in) loan losses
|
516 | (64 | ) | 26 | (16 | ) | 564 | (12 | ) | (198 | ) | 187 | (46 | ) | (8 | ) | 949 | |||||||||||||||||||||||||||
Balance, March 31, 2014
|
$ | 2,365 | $ | 1,754 | $ | 179 | $ | 376 | $ | 1,857 | $ | 805 | $ | 919 | $ | 323 | $ | 81 | $ | 26 | $ | 8,685 | ||||||||||||||||||||||
Amount of allowance attributed to:
|
||||||||||||||||||||||||||||||||||||||||||||
Specifically evaluated impaired loans
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 104 | $ | - | $ | - | $ | - | $ | 104 | ||||||||||||||||||||||
General portfolio allocation
|
2,365 | 1,754 | 179 | 376 | 1,857 | 805 | 815 | 323 | 81 | 26 | 8,581 | |||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment
|
31 | 718 | 14 | - | 1,327 | - | 593 | - | - | - | 2,683 | |||||||||||||||||||||||||||||||||
Specific reserves to total loans individually evaluated for impairment
|
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 17.54 | % | 0.00 | % | 0.00 | % | 0.00 | % | 3.88 | % | ||||||||||||||||||||||
Loans collectively evaluated for impairment
|
$ | 271,846 | $ | 223,130 | $ | 11,031 | $ | 81,033 | $ | 332,163 | $ | 223,200 | $ | 140,876 | $ | 29,857 | $ | 6,170 | $ | 3,480 | $ | 1,322,786 | ||||||||||||||||||||||
General reserves to total loans collectively evaluated for impairment
|
0.87 | % | 0.79 | % | 1.62 | % | 0.46 | % | 0.56 | % | 0.36 | % | 0.58 | % | 1.08 | % | 1.31 | % | 0.75 | % | 0.65 | % | ||||||||||||||||||||||
Total gross loans
|
$ | 271,877 | $ | 223,848 | $ | 11,045 | $ | 81,033 | $ | 333,490 | $ | 223,200 | $ | 141,469 | $ | 29,857 | $ | 6,170 | $ | 3,480 | $ | 1,325,469 | ||||||||||||||||||||||
Total allowance to gross loans
|
0.87 | % | 0.78 | % | 1.62 | % | 0.46 | % | 0.56 | % | 0.36 | % | 0.65 | % | 1.08 | % | 1.31 | % | 0.75 | % | 0.66 | % | ||||||||||||||||||||||
Commercial and industrial
|
Commercial owner occupied
|
SBA
|
Warehouse
|
Commercial non-owner occupied
|
Multi-family
|
One-to-four family
|
Construction
|
Land
|
Other loans
|
Total
|
||||||||||||||||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2012
|
$ | 1,310 | $ | 1,512 | $ | 79 | $ | 1,544 | $ | 1,459 | $ | 1,145 | $ | 862 | $ | - | $ | 31 | $ | 52 | $ | 7,994 | ||||||||||||||||||||||
Charge-offs
|
(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 | % | 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 | % | 0.00 | % | 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 | % | 0.00 | % | 1.54 | % | 1.04 | % | 0.85 | % |
Note 8 – Subordinated Debentures
In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) to PPBI Trust I, which funded the payment of $10.0 million of Floating Rate Trust Preferred Securities (“Trust Preferred Securities”) issued by PPBI Trust I in March 2004. The net proceeds from the offering of Trust Preferred Securities were contributed as capital to the Bank to support further growth. Interest is payable quarterly on the Subordinated Debentures at three-month LIBOR plus 2.75% per annum, for an effective rate of 2.99% per annum as of March 31, 2014.
The Corporation is not allowed to consolidate PPBI Trust I into the Company’s consolidated financial statements. The resulting effect on the Company’s consolidated financial statements is to report only the Subordinated Debentures as a component of the Company’s liabilities.
Note 9 – Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, excluding common shares in treasury. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from the issuance of common stock that would then share in earnings and excludes common shares in treasury. Stock options exercisable for shares of common stock are excluded from the computation of diluted earnings per share if they are anti-dilutive due to their exercise price exceeding the average market price during the period.
The impact of stock options which are anti-dilutive are excluded from the computations of diluted earnings per share. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the common stock increases. The following table sets forth the number of stock options excluded for the periods indicated:
Three Months Ended
|
||
March 31,
|
||
2014
|
2013
|
|
Stock options excluded
|
700,598
|
102,193
|
The following tables set forth the Company’s unaudited earnings per share calculations for the periods indicated:
Three Months Ended March 31,
|
||||||||||||||||||||||||
2014
|
2013
|
|||||||||||||||||||||||
Net
|
Per Share
|
Net
|
Per Share
|
|||||||||||||||||||||
Income
|
Shares
|
Amount
|
Income
|
Shares
|
Amount
|
|||||||||||||||||||
(dollars in thousands, except per share data)
|
||||||||||||||||||||||||
Net income
|
$ | 2,632 | $ | 1,972 | ||||||||||||||||||||
Basic income available to common stockholders
|
2,632 | 17,041,594 | $ | 0.15 | 1,972 | 14,355,407 | $ | 0.14 | ||||||||||||||||
Effect of dilutive stock options
|
- | 334,407 | - | 761,809 | ||||||||||||||||||||
Diluted income available to common stockholders plus assumed conversions
|
$ | 2,632 | 17,376,001 | $ | 0.15 | $ | 1,972 | 15,117,216 | $ | 0.13 |
Note 10 – Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at March 31, 2014, December 31, 2013 and March 31, 2013:
Cash and due from banks – The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Securities Available for Sale – Where possible, the Company utilizes quoted market prices to measure debt and equity securities; such items are classified as Level 1 in the hierarchy and include equity securities, US government bonds and securities issued by federally sponsored agencies. When quoted market prices for identical assets are unavailable or the market for the asset is not sufficiently active, varying valuation techniques are used. Common inputs in valuing these assets include, among others, benchmark yields, issuer spreads, forward mortgage-backed securities trade prices and recently reported trades. Such assets are classified as Level 2 in the hierarchy and typically include private label mortgage-backed securities and corporate bonds. Pricing on these securities are provided to the Company by a pricing service vendor. In the Level 3 category, the Company is classifying the securities that reflected an other-than-temporary impairments (“OTTI”) charge based on the discounted cash flow of the security or a determination of fair value that requires significant management judgment or consideration.
FHLB, FRB, Other 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— The fair value of loans, other than loans on nonaccrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for loan losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers’ credit risks since the origination of such loans. Rather, the allocable portion of the allowance for loan losses is considered to provide for such changes in estimating fair value. As a result, this fair value is not necessarily the value which would be derived using an exit price. These loans are included within Level 3 of the fair value hierarchy. The carrying amount of accrued interest receivable approximates its fair value as a Level 1 classification.
OREO – OREO assets are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of OREO assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Accrued Interest Receivable/Payable – The carrying amount approximates fair value and are classified as Level 1.
Deposit Accounts— The fair values estimated for demand deposits (interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts) resulting in a Level 1 classification. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits in a Level 2 classification. The carrying amount of accrued interest payable approximates its fair value as a Level 1 classification.
FHLB Advances and Other Borrowings— For these instruments, the fair value of short term borrowings is estimated to be the carrying amount and is classified as Level 1. The fair value of long term borrowings and debentures is determined using rates currently available for similar borrowings or debentures with similar credit risk and for the remaining maturities and are classified as Level 2. The carrying amount of accrued interest payable approximates its fair value as a Level 1 classification.
Subordinated Debentures – The fair value of subordinated debentures is estimated by discounting the balance by the current three-month LIBOR rate plus the current market spread. The fair value is determined based on the maturity date as the Company does not currently have intentions to call the debenture and is classified as Level 2.
Off-Balance Sheet Commitments and Standby Letters of Credit – The majority of the Bank’s commitments to extend credit carry current market interest rates if converted to loans. Because these commitments are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The notional amount disclosed for off-balance sheet commitments and standby letters of credit is the amount available to be drawn down on all lines and letters of credit. The cost to assume is calculated at 10% of the notional amount and is classified as Level 2.
Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
The fair value estimates presented herein are based on pertinent information available to management as of the periods indicated.
|
At March 31, 2014
|
|||||||||||||||||||
Carrying
Amount
|
Level 1
|
Level 2
|
Level 3
|
Estimated
Fair Value
|
||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Assets:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 124,419 | $ | 124,419 | $ | - | $ | - | $ | 124,419 | ||||||||||
Securities available for sale
|
202,142 | - | 202,142 | - | 202,142 | |||||||||||||||
Federal Reserve Bank, TIB and FHLB stock, at cost
|
14,104 | 14,104 | - | - | 14,104 | |||||||||||||||
Loans held for sale, net
|
- | - | - | - | - | |||||||||||||||
Loans held for investment, net
|
1,316,687 | - | - | 1,392,661 | 1,392,661 | |||||||||||||||
Accrued interest receivable
|
5,865 | 5,865 | - | - | 5,865 | |||||||||||||||
Other real estate owned
|
752 | - | - | 752 | 752 | |||||||||||||||
Liabilities:
|
||||||||||||||||||||
Deposit accounts
|
1,435,203 | 1,110,877 | 354,437 | - | 1,465,314 | |||||||||||||||
FHLB advances
|
50,000 | 50,000 | - | - | 50,000 | |||||||||||||||
Other borrowings
|
45,506 | - | 47,708 | - | 47,708 | |||||||||||||||
Subordinated debentures
|
10,310 | - | 4,649 | - | 4,649 | |||||||||||||||
Accrued interest payable
|
168 | 168 | - | - | 168 | |||||||||||||||
Notional Amount
|
Level 1
|
Level 2
|
Level 3
|
Cost to Cede
or Assume
|
||||||||||||||||
Off-balance sheet commitments and standby letters of credit
|
$ | 246,014 | $ | - | $ | 24,601 | $ | - | $ | 24,601 | ||||||||||
At December 31, 2013
|
||||||||||||||||||||
Carrying
Amount
|
Level 1
|
Level 2
|
Level 3
|
Estimated
Fair Value
|
||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Assets:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 126,813 | $ | 126,813 | $ | - | $ | - | $ | 126,813 | ||||||||||
Securities available for sale
|
256,089 | - | 256,089 | - | 256,089 | |||||||||||||||
Federal Reserve Bank and FHLB stock, at cost
|
15,450 | 15,450 | - | - | 15,450 | |||||||||||||||
Loans held for sale, net
|
3,147 | - | 3,147 | - | 3,147 | |||||||||||||||
Loans held for investment, net
|
1,231,923 | - | - | 1,230,316 | 1,230,316 | |||||||||||||||
Accrued interest receivable
|
6,254 | 6,254 | - | - | 6,254 | |||||||||||||||
Other real estate owned
|
1,186 | - | 1,186 | - | 1,186 | |||||||||||||||
Liabilities:
|
||||||||||||||||||||
Deposit accounts
|
1,306,286 | 991,630 | 301,007 | - | 1,292,637 | |||||||||||||||
FHLB advances
|
156,000 | 156,000 | - | - | 156,000 | |||||||||||||||
Other borrowings
|
48,091 | - | 49,058 | - | 49,058 | |||||||||||||||
Subordinated debentures
|
10,310 | - | 4,696 | - | 4,696 | |||||||||||||||
Accrued interest payable
|
166 | 166 | - | - | 166 | |||||||||||||||
Notional Amount
|
Level 1
|
Level 2
|
Level 3
|
Cost to Cede
or Assume
|
||||||||||||||||
Off-balance sheet commitments and standby letters of credit
|
$ | 337,181 | $ | - | $ | 33,718 | $ | - | $ | 33,718 | ||||||||||
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 | 85 | 300,091 | 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 | |||||||||||||||
Other real estate owned
|
1,561 | - | - | 1,561 | 1,561 | |||||||||||||||
Liabilities:
|
||||||||||||||||||||
Deposit accounts
|
1,185,719 | 835,196 | 351,462 | - | 1,186,658 | |||||||||||||||
FHLB advances
|
15,691 | 15,691 | - | - | 15,691 | |||||||||||||||
Other borrowings
|
28,500 | - | 31,772 | - | 31,772 | |||||||||||||||
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 |
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, 2014, substantially all the Company’s impaired loans were evaluated based on the fair value of their underlying collateral based upon the most recent appraisal available to management.
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The following fair value hierarchy table presents information about the Company’s financial instruments measured at fair value on a recurring basis at the dates indicated:
March 31, 2014
|
||||||||||||||||
Fair Value Measurement Using
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Securities at
Fair Value
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Investment securities available for sale:
|
|
|||||||||||||||
Municipal bonds
|
$ | - | $ | 77,324 | $ | - | $ | 77,324 | ||||||||
Mortgage-backed securities
|
- | 124,818 | - | 124,818 | ||||||||||||
Total securities available for sale
|
$ | - | $ | 202,142 | $ | - | $ | 202,142 | ||||||||
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
|
- | 144,152 | 984 | 145,136 | ||||||||||||
Total securities available for sale
|
$ | 85 | $ | 300,091 | $ | 984 | $ | 301,160 |
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
|
||||
Balance, beginning of period
|
$ | 952 | ||
Total gains or (losses) realized/unrealized:
|
||||
Included in earnings (or changes in net assets)
|
(30 | ) | ||
Included in other comprehensive income
|
117 | |||
Purchases, issuances, and settlements
|
(55 | ) | ||
Transfer in and/or out of Level 3
|
- | |||
Balance, end of period
|
$ | 984 |
The fair value of impaired loans was determined using Level 3 assumptions, and represents impaired loan balances for which a specific reserve has been established or on which a write down has been taken. Generally, the Company obtains third party appraisals (or property evaluations) and/or collateral audits in conjunction with internal analyses based on historical experience on its impaired loans and other real estate owned to determine fair value. In determining the net realizable value of the underlying collateral for impaired loans, the Company will then discount the valuation to cover both market price fluctuations and selling costs the Company expected would be incurred in the event of foreclosure. In addition to the discounts taken, the Company’s calculation of net realizable value considered any other senior liens in place on the underlying collateral.
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, 2014
|
||||||||||||||||
Fair Value Measurement Using
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Assets at
Fair Value
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Collateral dependent impaired loans
|
$ | - | $ | - | $ | 1,730 | $ | 1,730 | ||||||||
Other real estate owned
|
- | - | 752 | 752 | ||||||||||||
Total assets
|
$ | - | $ | - | $ | 2,482 | $ | 2,482 | ||||||||
March 31, 2013
|
||||||||||||||||
Fair Value Measurement Using
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Assets at
Fair Value
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Collateral dependent impaired loans
|
$ | - | $ | - | $ | 2,690 | $ | 2,690 | ||||||||
Loans held for sale
|
- | 3,643 | - | 3,643 | ||||||||||||
Other real estate owned
|
- | - | 1,561 | 1,561 | ||||||||||||
Total assets
|
$ | - | $ | 3,643 | $ | 4,251 | $ | 7,894 |
The following table presents quantitative information about level 3 of fair value measurements for financial instruments measured at fair value on a non-recurring basis for the periods indicated:
March 31, 2014
|
||||||||||||||||||
Range
|
||||||||||||||||||
Fair Value
|
Valuation Techniques
|
Unobservable Inputs
|
Rate
|
Maturity (years)
|
Unobservable Inputs
|
|||||||||||||
Collateral dependent impaired loans:
|
||||||||||||||||||
Business loans:
|
||||||||||||||||||
Commercial and industrial
|
$ | 31 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
6.00 | % | 3 | 0-10 | % | |||||||||
Commercial owner occupied
|
718 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
7.00-11.75 | % | 3-8 | 0-10 | % | ||||||||||
SBA
|
14 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
6.00 | % | 7 | 0-20 | % | ||||||||||
Real estate loans:
|
||||||||||||||||||
Commercial non-owner occupied
|
918 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
6.13-7.00 | % | 12-13 | 0-15 | % | ||||||||||
One-to-four family
|
49 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
11.10-15.00 | % | 6-15 | 0-10 | % | ||||||||||
Total collateral dependent impaired loans
|
$ | 1,730 | ||||||||||||||||
Other real estate owned
|
||||||||||||||||||
Land
|
$ | 752 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
-- | -- | 0-10 | % | ||||||||||
Total other real estate owned
|
$ | 752 | ||||||||||||||||
March 31, 2013
|
||||||||||||||||||
Range
|
||||||||||||||||||
Fair Value
|
Valuation Techniques
|
Unobservable Inputs
|
Rate
|
Maturity (years)
|
Unobservable Inputs
|
|||||||||||||
Collateral dependent impaired loans:
|
||||||||||||||||||
Business loans:
|
||||||||||||||||||
Commercial and industrial
|
$ | 580 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
5.25-7.25 | % | 3-8 | 0-10 | % | |||||||||
Commercial owner occupied
|
245 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
8.00 | % | 5 | 0-10 | % | ||||||||||
SBA
|
129 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
5.25-6.00 | % | 1-6 | 0-20 | % | ||||||||||
Real estate loans:
|
||||||||||||||||||
Commercial non-owner occupied
|
1,511 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
4.75-6.25 | % | 10-11 | 0-15 | % | ||||||||||
One-to-four family
|
225 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
7.25-11.50 | % | 1-12 | 0-10 | % | ||||||||||
Total collateral dependent impaired loans
|
$ | 2,690 | ||||||||||||||||
Other real estate owned
|
||||||||||||||||||
Land
|
$ | 1,561 |
Collateral valuation
|
Management adjustment to reflect current conditions and selling costs
|
-- | -- | 0-10 | % | ||||||||||
Total other real estate owned
|
$ | 1,561 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains information and statements that are considered “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, expected operating results and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phrases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
·
|
The strength of the United States economy in general and the strength of the local economies in which we conduct operations;
|
·
|
The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
|
·
|
Inflation/deflation, interest rate, market and monetary fluctuations;
|
·
|
The timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
|
·
|
The willingness of users to substitute competitors’ products and services for our products and services;
|
·
|
The impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
|
·
|
Technological changes;
|
·
|
The effect of the SDTB, FAB and Infinity acquisitions and other acquisitions we have made or may make, if any, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions;
|
·
|
Changes in the level of our nonperforming assets and charge-offs;
|
·
|
The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the SEC, the Public Company Accounting Oversight Board, the FASB or other accounting standards setters;
|
·
|
Possible OTTI of securities held by us;
|
·
|
The impact of current governmental efforts to restructure the United States financial regulatory system, including enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);
|
·
|
Changes in consumer spending, borrowing and savings habits;
|
·
|
The effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
|
·
|
Ability to attract deposits and other sources of liquidity;
|
·
|
Changes in the financial performance and/or condition of our borrowers;
|
·
|
Changes in the competitive environment among financial and bank holding companies and other financial service providers;
|
·
|
Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
|
·
|
Unanticipated regulatory or judicial proceedings; and
|
·
|
Our ability to manage the risks involved in the foregoing.
|
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports and registration statements filed by us with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We will not update the forward-looking information and statements to reflect actual results or changes in the factors affecting the forward-looking information and statements. For information on the factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our 2013 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 2013 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, 2014 are not necessarily indicative of the results expected for the year ending December 31, 2014.
The Corporation is a California-based bank holding company incorporated in the state of Delaware and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHCA”). Our wholly owned subsidiary, Pacific Premier Bank, is a California state-chartered commercial bank. As a bank holding company, the Corporation is subject to regulation and supervision by the Federal Reserve. We are required to file with the Federal Reserve quarterly and annual reports and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve may conduct examinations of bank holding companies, such as the Corporation, and its subsidiaries. The Corporation is also a bank holding company within the meaning of the California Financial Code. As such, the Corporation and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Business Oversight-Division of Financial Institutions (“DBO”).
A bank holding company, such as the Corporation, is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such a policy. The Federal Reserve, under the BHCA, has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
As a California state-chartered commercial bank which is a member of the Federal Reserve, the Bank is subject to supervision, periodic examination and regulation by the DBO and the Federal Reserve. The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund. In general terms, insurance coverage is unlimited for non-interest bearing transaction accounts and up to $250,000 per depositor for all other accounts in accordance with the Dodd-Frank Act. As a result of this deposit insurance function, the FDIC also has certain supervisory authority and powers over the Bank. If, as a result of an examination of the Bank, the regulators should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the Bank’s operations are unsatisfactory or that the Bank or our management is violating or has violated any law or regulation, various remedies are available to the regulators. Such remedies include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict growth, to assess civil monetary penalties, to remove officers and directors and ultimately to request the FDIC to terminate the Bank’s deposit insurance. As a California-chartered commercial bank, the Bank is also subject to certain provisions of California law.
We provide banking services within our targeted markets in California to businesses, including the owners and employees of those businesses, professionals, real estate investors and non-profit organizations, as well as consumers in the communities we serve. Additionally, through our HOA Banking and Lending and Franchise Capital units we can provide customized cash management, electronic banking services and credit facilities to HOAs, HOA management companies and Franchise owners nationwide. At March 31, 2014, the Bank operated 13 full-service depository branches in California located in the cities of Encinitas, Huntington Beach, Irvine, Los Alamitos, Newport Beach, Palm Springs, Palm Desert, Point Loma, San Bernardino, San Diego and Seal Beach. 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 2013 Annual Report. There have been no significant changes to our Critical Accounting Policies as described in our 2013 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 2013 Annual Report.
IFH ACQUISITION
On January 30, 2014, the Company completed its acquisition of IFH, a national lender to franchisees in the QSR industry, and other direct and indirect subsidiaries utilized in its business
Effective January 30, 2014, the Bank acquired Infinity, a national lender to franchisees in the QSR industry, pursuant to the terms of a definitive agreement entered into by the Corporation, the Bank and Infinity on November 15, 2013. As a result of the Infinity Acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $80.2 million, including $78.8 million in loans. Also as a result of the Infinity Acquisition, the Bank recorded equity of $9.0 million in connection with the Corporation’s stock issued to Infinity shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $68.3 million, including a $67.6 million credit facility that was paid off in conjunction with the closing of the acquisition.
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 of Infinity is expected to further diversify our loan portfolio with commercial and industrial and owner-occupied commercial real estate loans, to deploy excess liquidity into higher yielding assets, to positively impact our net interest margin and to further leverage our strong capital base. The QSR franchisee lending business is a niche market that provides attractive growth opportunities for the Company in the future. Infinity had no delinquent loans or adversely classified assets as of the acquisition date; and the acquisition is expected to be accretive to our 2014 earnings per share.
SDTB ACQUISITION
Effective June 25, 2013, the Bank acquired SDTB, a San Diego, California, based state-chartered bank, pursuant to the terms of a definitive agreement entered into by the Corporation, the Bank and SDTB on March 6, 2013. As a result of the SDTB Acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $211.2 million, including:
·
|
$124.8 million in investment securities;
|
·
|
$42.7 million of gross loans;
|
·
|
$30.3 million of cash and cash equivalents;
|
·
|
$5.6 million in goodwill;
|
·
|
$5.8 million in bank owned life insurance;
|
·
|
$4.1 million of other types of assets; and
|
·
|
$2.8 million of a core deposit intangible.
|
Also as a result of the SDTB Acquisition, the Bank recorded equity of $14.4 million in connection with the Corporation’s stock issued to SDTB shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $186.2 million, including:
·
|
$178.8 million in deposit transaction accounts;
|
·
|
$5.1 million in retail certificates of deposit;
|
·
|
$1.1 million other liabilities; and
|
·
|
$1.2 million in deferred tax liability.
|
The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures.
The acquisition was an opportunity for the Company to acquire a banking network that complemented our existing banking franchise and expanded into a new market area. Additionally, the SDTB acquisition improved the Company’s deposit base by lowering our cost of deposits and providing an opportunity to accelerate future core deposit growth in the San Diego, California, market area.
FAB ACQUISITION
Effective March 15, 2013, the Bank acquired FAB, a Dallas, Texas, based Texas-chartered bank, pursuant to the terms of a definitive agreement entered into by the Bank and the FAB on October 15, 2012. As a result of the FAB Acquisition, the Bank acquired and recorded at the acquisition date assets with a fair value of approximately $424.2 million, including:
·
|
$222.4 million in investment securities;
|
·
|
$167.7 million of cash and cash equivalents;
|
·
|
$26.4 million of gross loans;
|
·
|
$11.9 million in goodwill;
|
·
|
$5.8 million of other types of assets; and
|
·
|
$1.9 million of a core deposit intangible.
|
Also as a result of the FAB Acquisition, the Bank recorded equity of $14.9 million in connection with the Corporation’s stock issued to FAB shareholders as part of the acquisition consideration and assumed at acquisition date liabilities with a fair value of approximately $378.2 million, including:
·
|
$329.5 million in deposit transaction accounts;
|
·
|
$17.4 million in retail certificates of deposit;
|
·
|
$9.9 million in wholesale deposits;
|
·
|
$16.9 million in other borrowings;
|
·
|
$3.9 million in deferred tax liability; and
|
·
|
$536,000 of other liabilities.
|
The fair values of the assets acquired and liabilities assumed were determined based on the requirements of FASB ASC Topic 820: Fair Value Measurements and Disclosures.
The FAB acquisition was an opportunity for the Company to acquire a highly efficient, consistently profitable and niche-focused business that complimented our banking franchise. Additionally, this acquisition improved the Company’s deposit base by lowering our cost of deposits and providing a platform to accelerate future core deposit growth from HOAs.
RESULTS OF OPERATIONS
In the first quarter of 2014, we reported net income of $2.6 million, or $0.15 per share on a diluted basis, compared with net income for the first quarter of 2013 of $2.0 million, or $0.13 per share on a diluted basis. For the three months ended March 31, 2014, the Company’s return on average assets was 0.64% and return on average equity was 5.77%, compared with a return on average assets of 0.67% and a return on average equity of 5.65% for the three months ended March 31, 2013.
Net Interest Income
Our earnings are derived predominately from net interest income, which is the difference between the interest income earned on interest-earning assets, primarily loans and securities, and the interest expense incurred on interest-bearing liabilities, primarily deposits and borrowings. The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities principally affect net interest income.
Net interest income totaled $16.6 million in the first quarter of 2014 up $3.7 million or 29.0%, compared to the first quarter of 2013. The increase in net interest income was primarily related to an increase in interest-earning assets of $436.1 million, primarily related to the acquisition of FAB and SDTB in the first and second quarters of 2013, respectively, and organic loan growth. The increase was partially offset by a lower net interest margin, which decreased 32 basis points from the first quarter of 2013 to the first quarter of 2014. The decrease in the net interest margin was related to the rate on interest-earning assets decreasing more rapidly than the cost of interest-bearing liabilities. The decrease in interest-earning assets of 44 basis points is mainly attributable to a higher mix of lower yielding investment securities, which were acquired from FAB and SDTB, and a decrease in our weighted average loan portfolio rate. The weighted average loan portfolio rate at the end of the first quarter of 2014 was 5.0%, 30 basis points lower than the weighted average loan portfolio rate at the end of the first quarter of 2013 and primarily reflected lower rates on loan originations during the period. Partially offsetting the lower yield on average interest-earning assets was a decrease in deposit costs of 13 basis points primarily resulting from an improved mix of lower cost deposits acquired from FAB and SDTB and lower pricing on certificates of deposit.
The following tables present for the periods indicated the average dollar amounts from selected balance sheet categories calculated from daily average balances and the total dollar amount, including adjustments to yields and costs, of:
·
|
Interest income earned from average interest-earning assets and the resultant yields; and
|
·
|
Interest expense incurred from average interest-bearing liabilities and resultant costs, expressed as rates.
|
The tables below set forth our net interest income, net interest rate spread and net interest rate margin for the periods indicated. The net interest rate margin reflects the relative level of interest-earning assets to interest-bearing liabilities and equals our net interest rate spread divided by average interest-earning assets for the periods indicated.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||||||||||
STATISTICAL INFORMATION
|
||||||||||||||||||||||||||||||||||||
Average Balance Sheet
|
||||||||||||||||||||||||||||||||||||
Three Months Ended
|
Three Months Ended
|
Three Months Ended
|
||||||||||||||||||||||||||||||||||
March 31, 2014
|
December 31, 2013
|
March 31, 2013
|
||||||||||||||||||||||||||||||||||
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
|
$ | 70,341 | $ | 27 | 0.16 | % | $ | 62,647 | $ | 24 | 0.15 | % | $ | 69,143 | $ | 37 | 0.22 | % | ||||||||||||||||||
Federal funds sold
|
192 | - | - | 26 | - | - | 27 | - | - | |||||||||||||||||||||||||||
Investment securities
|
243,847 | 1,410 | 2.31 | 283,334 | 1,646 | 2.32 | 134,895 | 802 | 2.38 | |||||||||||||||||||||||||||
Loans receivable, net (1)
|
1,254,407 | 16,585 | 5.36 | 1,183,209 | 16,303 | 5.47 | 928,577 | 13,396 | 5.85 | |||||||||||||||||||||||||||
Total interest-earning assets
|
1,568,787 | 18,022 | 4.65 | % | 1,529,216 | 17,973 | 4.67 | % | 1,132,642 | 14,235 | 5.09 | % | ||||||||||||||||||||||||
Noninterest-earning assets
|
87,095 | 78,684 | 38,911 | |||||||||||||||||||||||||||||||||
Total assets
|
$ | 1,655,882 | $ | 1,607,900 | $ | 1,171,553 | ||||||||||||||||||||||||||||||
Liabilities and Equity
|
||||||||||||||||||||||||||||||||||||
Interest-bearing deposits:
|
||||||||||||||||||||||||||||||||||||
Interest checking
|
$ | 137,658 | $ | 38 | 0.11 | % | $ | 119,092 | $ | 41 | 0.14 | % | $ | 34,761 | $ | 8 | 0.09 | % | ||||||||||||||||||
Money market
|
435,188 | 314 | 0.29 | 428,363 | 307 | 0.28 | 263,923 | 175 | 0.27 | |||||||||||||||||||||||||||
Savings
|
75,904 | 28 | 0.15 | 76,980 | 28 | 0.14 | 80,954 | 35 | 0.18 | |||||||||||||||||||||||||||
Time
|
329,026 | 689 | 0.85 | 294,292 | 592 | 0.80 | 350,304 | 801 | 0.93 | |||||||||||||||||||||||||||
Total interest-bearing deposits
|
977,776 | 1,069 | 0.44 | 918,727 | 968 | 0.42 | 729,942 | 1,019 | 0.57 | |||||||||||||||||||||||||||
FHLB advances and other borrowings
|
85,019 | 243 | 1.16 | 122,786 | 262 | 0.85 | 44,769 | 240 | 2.17 | |||||||||||||||||||||||||||
Subordinated debentures
|
10,310 | 75 | 2.95 | 10,310 | 77 | 2.96 | 10,310 | 77 | 3.03 | |||||||||||||||||||||||||||
Total borrowings
|
95,329 | 318 | 1.35 | 133,096 | 339 | 1.01 | 55,079 | 317 | 2.33 | |||||||||||||||||||||||||||
Total interest-bearing liabilities
|
1,073,105 | 1,387 | 0.52 | % | 1,051,823 | 1,307 | 0.49 | % | 785,021 | 1,336 | 0.69 | % | ||||||||||||||||||||||||
Noninterest-bearing deposits
|
389,513 | 364,735 | 237,081 | |||||||||||||||||||||||||||||||||
Other liabilities
|
10,951 | 17,887 | 9,766 | |||||||||||||||||||||||||||||||||
Total liabilities
|
1,473,569 | 1,434,445 | 1,031,868 | |||||||||||||||||||||||||||||||||
Stockholders' equity
|
182,313 | 173,455 | 139,685 | |||||||||||||||||||||||||||||||||
Total liabilities and equity
|
$ | 1,655,882 | $ | 1,607,900 | $ | 1,171,553 | ||||||||||||||||||||||||||||||
Net interest income
|
$ | 16,635 | $ | 16,666 | $ | 12,899 | ||||||||||||||||||||||||||||||
Net interest rate spread (2)
|
4.13 | % | 4.18 | % | 4.40 | % | ||||||||||||||||||||||||||||||
Net interest margin (3)
|
4.30 | % | 4.32 | % | 4.62 | % | ||||||||||||||||||||||||||||||
Ratio of interest-earning assets to interest-bearing liabilities
|
146.19 | % | 145.39 | % | 144.28 | % | ||||||||||||||||||||||||||||||
(1) Average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees, unamortized discounts and premiums, and allowance for loan losses.
|
||||||||||||||||||||||||||||||||||||
(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, 2014
|
||||||||||||
Compared to
|
||||||||||||
Three Months Ended March 31, 2013
|
||||||||||||
Increase (decrease) due to
|
||||||||||||
Rate
|
Volume
|
Net
|
||||||||||
(in thousands)
|
||||||||||||
Interest-earning assets
|
||||||||||||
Cash and cash equivalents
|
$ | (11 | ) | $ | 1 | $ | (10 | ) | ||||
Investment securities
|
(25 | ) | 633 | 608 | ||||||||
Loans receivable, net
|
(1,190 | ) | 4,379 | 3,189 | ||||||||
Total interest-earning assets
|
$ | (1,226 | ) | $ | 5,013 | $ | 3,787 | |||||
Interest-bearing liabilities
|
||||||||||||
Interest checking
|
$ | 2 | $ | 28 | $ | 30 | ||||||
Money market
|
14 | 125 | 139 | |||||||||
Savings
|
(5 | ) | (2 | ) | (7 | ) | ||||||
Time
|
(66 | ) | (46 | ) | (112 | ) | ||||||
FHLB advances and other borrowings
|
(146 | ) | 149 | 3 | ||||||||
Subordinated debentures
|
(2 | ) | - | (2 | ) | |||||||
Total interest-bearing liabilities
|
$ | (203 | ) | $ | 254 | $ | 51 | |||||
Change in net interest income
|
$ | (1,023 | ) | $ | 4,759 | $ | 3,736 |
Provision for Loan Losses
We recorded a $949,000 provision for loan losses during the first quarter of 2014, up from $296,000 for the first quarter of 2013. The increase in the provision for loan losses in the first quarter of 2014 was attributable to both the changing profile of our loan portfolio and the net charge-off of $464,000 of loans primarily acquired from our FDIC-assisted acquisitions. Net loan charge-offs in the first quarter of 2014 were up $168,000 from the first quarter of 2013. Substantially all of the charge-offs in the first quarter of 2014 were attributable to loans that we acquired from our FDIC-assisted transactions.
For purchased credit impaired loans, charge-offs are recorded when there is a decrease in the estimated cash flows of the credit from original cash flow estimates. Purchased credit impaired loans were recorded at their estimated fair value, which incorporated our estimated expected cash flows until the ultimate resolution of these credits. To the extent actual or projected cash flows are less than originally estimated, additional provisions for loan losses or charge-offs will be recognized into earnings or against the allowance, if applicable. To the extent actual or projected cash flows are more than originally estimated, the increase in cash flows is prospectively recognized in loan interest income. Due to the accounting rules associated with our purchased credit impaired loans, each quarter we are required to re-estimate cash flows which could cause volatility in our reported net interest margin and provision for loans losses. During the first quarter of 2014, there were no charge-offs associated with purchased credit impaired loans, compared to $57,000 for the same period in 2013.
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 2014 was $2.1 million, $328,000 or 19.0% from the first quarter of 2013. The increase was primarily related to higher loan servicing fees of $530,000, primarily associated with the $500,000 fee related to the assumption of an existing loan in the first quarter of 2014, partially offset by lower net gains on sales of loans of $175,000 and other income of $146,000, primarily related to the $180,000 market value loss on loans held for sale that were moved to loans held for investment during the first quarter of 2014.
Noninterest Expense
Noninterest expense totaled $13.5 million for the first quarter of 2014, up $2.4 million or 21.1%, compared to the first quarter of 2013. The increase in expense primarily related to increased costs associated with the acquisitions of FAB during the first quarter of 2013, SDTB in the second quarter of 2013 and IFH in the first quarter of 2014, together with our organic growth. On a year-over-year basis, the increase primarily related to the following:
·
|
A $1.8 million increase in compensation and benefits expense, primarily due to the addition of employees from the acquisitions, as well as employees added in lending and credit areas to increase our loan production of commercial and industrial (“C&I”) loans, commercial real estate (“CRE”) loans, SBA loans, HOA loans, warehouse facilities and construction loans;
|
·
|
A $601,000 increase in deposit expenses, primarily related to increases in deposit transaction accounts related to acquisitions and organic growth;
|
·
|
A $496,000 increase in data processing and communications expense, primarily related to a $357,000 fee paid to terminate services from our payment processing system provider for a new, more cost effective provider; and
|
·
|
A $295,000 increase in premises and occupancy, primarily related to acquisitions.
|
Partially offsetting these increases was a decrease in merger-related expense of $1.1 million.
Income Taxes
For the first quarter of 2014, our effective tax rate was 37.3%, compared with 37.4% for the first quarter of 2013. At March 31, 2014, we had no valuation allowance against our deferred tax asset of $9.2 million based on management’s analysis that the asset was more-likely-than-not to be realized.
FINANCIAL CONDITION
At March 31, 2014, assets totaled $1.7 billion, up $31.1 million or 1.8% from December 31, 2013, and up $338.6 million or 24.1% from March 31, 2013. The increase in assets during the first quarter of 2014 was primarily related to the acquisition of IFH, which added assets at the acquisition date of $80.2 million and $5.5 million in goodwill, partially offset by a decrease in investment securities available for sale of $53.9 million.
The increase in assets from March 31, 2013 was primarily related to the acquisition of SDTB, which added assets at the acquisition date of $211.2 million, and IFH, as well as organic loan growth. In addition, during the period, loans increased $379.9 million inclusive of loans acquired, cash and cash equivalents increased $25.0 million, and goodwill from acquisitions increased $11.1 million. These increases were partially offset by a decrease in investment securities available for sale of $99.0 million.
Loans
Net loans held for investment totaled $1.3 billion at March 31, 2014, an increase of $84.8 million or 6.9% from December 31, 2013, and an increase of $382.9 million or 41.0% from March 31, 2013. The increase in loan balances for the first quarter of 2014 was primarily related to increases in C&I loans of $84.8 million, primarily from the acquisition of IFH, which included $78.8 million in loans at acquisition date, construction loans of $16.8 million and commercial owner occupied loans of $2.8 million, partially offset by decreases in multi-family loans of $10.5 million, warehouse facilities loans of $6.5 million and one-to-four family loans of $3.8 million.
The increase in loans from March 31, 2013 was impacted by $78.8 million of loans acquired from IFH and $42.7 million of loans acquired from SDTB at their respective acquisition dates. The remainder of the increase was primarily associated with organic growth and purchases of loans. The increase in loans from March 31, 2013 included increases in real estate loans of $244.1 million, C&I loans of $131.3 million and commercial owner occupied loans of $57.3 million, partially offset by a decrease in warehouse facility loans of $57.9 million.
The following table sets forth the composition of our loan portfolio in dollar amounts, as a percentage of the portfolio and gives the weighted average interest rate by loan category at the dates indicated:
March 31, 2014
|
December 31, 2013
|
March 31, 2013
|
||||||||||||||||||||||||||||||||||
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
|
$ | 271,877 | 20.5 | % | 5.33 | % | $ | 187,035 | 15.0 | % | 5.01 | % | $ | 140,592 | 14.9 | % | 5.16 | % | ||||||||||||||||||
Commercial owner occupied (1)
|
223,848 | 16.9 | % | 5.39 | % | 221,089 | 17.8 | % | 5.33 | % | 166,571 | 17.6 | % | 5.90 | % | |||||||||||||||||||||
SBA
|
11,045 | 0.8 | % | 5.85 | % | 10,659 | 0.9 | % | 5.92 | % | 5,116 | 0.5 | % | 6.04 | % | |||||||||||||||||||||
Warehouse facilities
|
81,033 | 6.1 | % | 3.91 | % | 87,517 | 7.0 | % | 4.07 | % | 138,935 | 14.7 | % | 4.79 | % | |||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||||||||||
Commercial non-owner occupied
|
333,490 | 25.2 | % | 5.33 | % | 333,544 | 26.9 | % | 5.33 | % | 256,015 | 27.1 | % | 5.59 | % | |||||||||||||||||||||
Multi-family
|
223,200 | 16.8 | % | 4.73 | % | 233,689 | 18.8 | % | 4.82 | % | 139,100 | 14.7 | % | 5.69 | % | |||||||||||||||||||||
One-to-four family (2)
|
141,469 | 10.7 | % | 4.41 | % | 145,235 | 11.7 | % | 4.43 | % | 87,109 | 9.2 | % | 4.67 | % | |||||||||||||||||||||
Construction
|
29,857 | 2.2 | % | 5.19 | % | 13,040 | 1.0 | % | 5.18 | % | - | 0.0 | % | 0.00 | % | |||||||||||||||||||||
Land
|
6,170 | 0.5 | % | 4.59 | % | 7,605 | 0.6 | % | 4.73 | % | 7,863 | 0.8 | % | 4.83 | % | |||||||||||||||||||||
Other loans
|
3,480 | 0.3 | % | 5.78 | % | 3,839 | 0.3 | % | 5.82 | % | 4,690 | 0.5 | % | 6.09 | % | |||||||||||||||||||||
Total gross loans (3)
|
1,325,469 | 100.0 | % | 5.00 | % | 1,243,252 | 100.0 | % | 4.95 | % | 945,991 | 100.0 | % | 5.30 | % | |||||||||||||||||||||
Less loans held for sale
|
- | 3,147 | 3,643 | |||||||||||||||||||||||||||||||||
Total gross loans held for investment
|
1,325,469 | 1,240,105 | 942,348 | |||||||||||||||||||||||||||||||||
Less:
|
||||||||||||||||||||||||||||||||||||
Deferred loan origination costs/(fees) and premiums/(discounts)
|
(97 | ) | 18 | (520 | ) | |||||||||||||||||||||||||||||||
Allowance for loan losses
|
(8,685 | ) | (8,200 | ) | (7,994 | ) | ||||||||||||||||||||||||||||||
Loans held for investment, net
|
$ | 1,316,687 | $ | 1,231,923 | $ | 933,834 | ||||||||||||||||||||||||||||||
(1) Majority secured by real estate.
|
||||||||||||||||||||||||||||||||||||
(2) Includes second trust deeds.
|
||||||||||||||||||||||||||||||||||||
(3) Total gross loans for March 31, 2014 are net of (i) the unaccreted mark-to-market discounts on Canyon National loans of $1.8 million, on Palm Desert National loans of $2.2 million, and on SDTB loans of $115,000 and (ii) the mark-to-market premium on FAB loans of $53,000.
|
Gross loans increased $82.2 million during the first quarter of 2014, compared to a decrease of $40.2 million during the first quarter of 2013. The increase in gross loans during the first quarter of 2014 was primarily from loan originations of $106.2 million, of which $69.5 million were funded at origination, loans acquired from IFH of $78.8 million and loan purchases of $1.8 million, partially offset by loan repayments of $77.6 million, an increase in undisbursed loan funds of $17.7 million and loan sales of $9.5 million. During the first quarter of 2014, our loan originations were diversified across loan type and included $46.8 million in C&I loans which contained $8.1 million in HOA loans and $6.8 million in franchise business loans, $22.8 million in commercial non-owner occupied loans, $20.4 million in construction loans, $7.6 million in multifamily loans and $5.2 million in SBA loans.
The decrease in gross loans in the first quarter of 2013 was primarily from a change in undisbursed loan funds, net of $107.0 million and principal repayments of $45.2 million, partially offset by loan originations of $89.8 million and loans acquired from First Associations of $26.4 million.
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, 2014
|
March 31, 2013
|
|||||||
(in thousands)
|
||||||||
Beginning balance gross loans
|
$ | 1,243,252 | $ | 986,194 | ||||
Loans originated:
|
||||||||
Business loans:
|
||||||||
Commercial and industrial
|
46,786 | 12,133 | ||||||
Commercial owner occupied (1)
|
1,800 | 3,582 | ||||||
SBA
|
5,199 | 4,373 | ||||||
Warehouse facilities
|
1,150 | 42,710 | ||||||
Real estate loans:
|
||||||||
Commercial non-owner occupied
|
22,806 | 25,970 | ||||||
Multi-family
|
7,574 | 783 | ||||||
One-to-four family (2)
|
450 | 180 | ||||||
Construction loans
|
20,428 | - | ||||||
Other loans
|
12 | 106 | ||||||
Total loans originated
|
106,205 | 89,837 | ||||||
Loans purchased:
|
||||||||
Business loans:
|
||||||||
Commercial and industrial
|
69,543 | 26,421 | ||||||
Commercial owner occupied
|
11,105 | - | ||||||
Total loans purchased
|
80,648 | 26,421 | ||||||
Total loan production
|
186,853 | 116,258 | ||||||
Principal repayments
|
(77,555 | ) | (45,244 | ) | ||||
Sales of loans
|
(9,508 | ) | (5,048 | ) | ||||
Change in undisbursed loan funds, net
|
(17,651 | ) | (107,003 | ) | ||||
Charge-offs
|
(501 | ) | (480 | ) | ||||
Change in mark-to-market discounts from acquisitions
|
579 | 1,314 | ||||||
Net increase (decrease) in gross loans
|
82,217 | (40,203 | ) | |||||
Ending balance gross loans
|
$ | 1,325,469 | $ | 945,991 | ||||
(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, 2014
|
||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||
Number
|
Average
|
Average Months
|
||||||||||||||
Periods to Repricing
|
of Loans
|
Amount
|
Interest Rate
|
to Reprice
|
||||||||||||
(dollars in thousands)
|
||||||||||||||||
1 Year and less
|
893 | $ | 423,071 | 5.15 | % | 1.23 | ||||||||||
Over 1 Year to 3 Years
|
73 | 77,373 | 4.50 | % | 28.59 | |||||||||||
Over 3 Years to 5 Years
|
310 | 383,699 | 4.70 | % | 48.64 | |||||||||||
Over 5 Years to 7 Years
|
56 | 121,809 | 4.54 | % | 75.38 | |||||||||||
Over 7 Years to 10 Years
|
15 | 15,799 | 4.92 | % | 103.44 | |||||||||||
Total adjustable
|
1,347 | 1,021,751 | 4.86 | % | 31.59 | |||||||||||
Fixed
|
919 | 303,718 | 5.49 | % | ||||||||||||
Total
|
2,266 | $ | 1,325,469 | 5.00 | % |
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, 2014, loans delinquent 30 or more days as a percentage of total gross loans was 0.12%, down from 0.17% at December 31, 2013, and from 0.32% at March 31, 2013.
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, 2014
|
||||||||||||||||||||||||||||||||
Business loans:
|
||||||||||||||||||||||||||||||||
Commercial and industrial
|
- | $ | - | 1 | $ | 32 | - | $ | - | 1 | $ | 32 | ||||||||||||||||||||
Commercial owner occupied
|
- | - | - | - | 2 | 446 | 2 | 446 | ||||||||||||||||||||||||
SBA
|
1 | 46 | - | - | 1 | 14 | 2 | 60 | ||||||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||||||
Commercial non-owner occupied
|
- | - | - | - | 2 | 918 | 2 | 918 | ||||||||||||||||||||||||
One-to-four family
|
3 | 72 | - | - | 3 | 49 | 6 | 121 | ||||||||||||||||||||||||
Total
|
4 | $ | 118 | 1 | $ | 32 | 8 | $ | 1,427 | 13 | $ | 1,577 | ||||||||||||||||||||
Delinquent loans to total gross loans
|
0.01 | % | 0.00 | % | 0.11 | % | 0.12 | % | ||||||||||||||||||||||||
At December 31, 2013
|
||||||||||||||||||||||||||||||||
Business loans:
|
||||||||||||||||||||||||||||||||
Commercial owner occupied
|
2 | $ | 768 | - | $ | - | 1 | $ | 446 | 3 | $ | 1,214 | ||||||||||||||||||||
SBA
|
- | - | - | - | 1 | 14 | 1 | 14 | ||||||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||||||
Commercial non-owner occupied
|
- | - | - | - | 2 | 560 | 2 | 560 | ||||||||||||||||||||||||
One-to-four family
|
3 | 71 | - | - | 4 | 123 | 7 | 194 | ||||||||||||||||||||||||
Other
|
3 | 130 | - | - | - | - | 3 | 130 | ||||||||||||||||||||||||
Total
|
8 | $ | 969 | - | $ | - | 8 | $ | 1,143 | 16 | $ | 2,112 | ||||||||||||||||||||
Delinquent loans to total gross loans
|
0.08 | % | 0.00 | % | 0.09 | % | 0.17 | % | ||||||||||||||||||||||||
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 | % | ||||||||||||||||||||||||
(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 2013 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, 2014 was $8.7 million, up from $8.2 million at December 31, 2013 and $8.0 million at March 31, 2013. At March 31, 2014, 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, 2014
|
December 31, 2013
|
March 31, 2013
|
||||||||||||||||||||||||||||||||||
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
|
$ | 2,365 | 0.87 | % | 20.5 | % | $ | 1,968 | 1.05 | % | 15.0 | % | $ | 2,296 | 1.63 | % | 14.9 | % | ||||||||||||||||||
Commercial owner occupied
|
1,754 | 0.78 | % | 16.9 | % | 1,818 | 0.82 | % | 17.8 | % | 1,665 | 1.00 | % | 17.6 | % | |||||||||||||||||||||
SBA
|
179 | 1.62 | % | 0.8 | % | 151 | 1.42 | % | 0.9 | % | 50 | 0.98 | % | 0.5 | % | |||||||||||||||||||||
Warehouse facilities
|
376 | 0.46 | % | 6.1 | % | 392 | 0.45 | % | 7.0 | % | 730 | 0.53 | % | 14.7 | % | |||||||||||||||||||||
Real estate loans:
|
||||||||||||||||||||||||||||||||||||
Commercial non-owner occupied
|
1,857 | 0.56 | % | 25.2 | % | 1,658 | 0.50 | % | 26.9 | % | 1,403 | 0.55 | % | 27.1 | % | |||||||||||||||||||||
Multi-family
|
805 | 0.36 | % | 16.8 | % | 817 | 0.35 | % | 18.8 | % | 506 | 0.36 | % | 14.7 | % | |||||||||||||||||||||
One-to-four family
|
919 | 0.65 | % | 10.7 | % | 1,099 | 0.76 | % | 11.7 | % | 1,174 | 1.35 | % | 9.2 | % | |||||||||||||||||||||
Construction
|
323 | 1.08 | % | 2.2 | % | 136 | 1.04 | % | 1.0 | % | - | 0.00 | % | 0.0 | % | |||||||||||||||||||||
Land
|
81 | 1.31 | % | 0.5 | % | 127 | 1.67 | % | 0.6 | % | 121 | 1.54 | % | 0.8 | % | |||||||||||||||||||||
Other Loans
|
26 | 0.75 | % | 0.3 | % | 34 | 0.89 | % | 0.3 | % | 49 | 1.04 | % | 0.5 | % | |||||||||||||||||||||
Total
|
$ | 8,685 | 0.66 | % | 100.0 | % | $ | 8,200 | 0.66 | % | 100.0 | % | $ | 7,994 | 0.85 | % | 100.0 | % |
The ALLL as a percent of nonaccrual loans was 324.8% at March 31, 2014, down from 364.3% at December 31, 2013, but up from 257.7% at March 31, 2013. At March 31, 2014, the ratio of ALLL to total gross loans was 0.66%, equal to that at December 31, 2013, but down from 0.85% at March 31, 2013. Our ratio of ALLL plus the remaining unamortized credit discount on the loans acquired to total gross loans was 0.88% at March 31, 2014, down from 0.93% at December 31, 2013 and 1.47% at March 31, 2013.
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,
|
||||||||
2014
|
2013
|
|||||||
(dollars in thousands)
|
||||||||
Balance, beginning of period
|
$ | 8,200 | $ | 7,994 | ||||
Provision for loan losses
|
949 | 296 | ||||||
Charge-offs:
|
||||||||
Business loans:
|
||||||||
Commercial and industrial
|
(124 | ) | (58 | ) | ||||
SBA
|
- | (5 | ) | |||||
Real estate:
|
||||||||
Commercial non-owner occupied
|
(365 | ) | (401 | ) | ||||
One-to-four family
|
(12 | ) | (10 | ) | ||||
Other loans
|
- | (6 | ) | |||||
Total charge-offs
|
(501 | ) | (480 | ) | ||||
Recoveries :
|
||||||||
Business loans:
|
||||||||
Commercial and industrial
|
5 | 7 | ||||||
SBA
|
2 | 19 | ||||||
Real estate:
|
||||||||
One-to-four family
|
30 | 43 | ||||||
Other loans
|
- | 115 | ||||||
Total recoveries
|
37 | 184 | ||||||
Net loan charge-offs
|
(464 | ) | (296 | ) | ||||
Balance at end of period
|
$ | 8,685 | $ | 7,994 | ||||
Ratios:
|
||||||||
Net charge-offs to average total loans, net
|
0.15 | % | 0.13 | % | ||||
Allowance for loan losses to gross loans at end of period
|
0.66 | % | 0.85 | % |
Investment Securities
Investment securities available for sale totaled $202.1 million at March 31, 2014, down $53.9 million or 21.1% from December 31, 2013 and down $99.0 million or 32.9% from March 31, 2013. The decrease in securities available for sale during the first quarter of 2014 was primarily due to sales totaling $56.0 million and principal pay downs of $6.2 million, partially offset by purchases of $5.5 million and increase in market value of $3.4 million. The decrease in securities from March 31, 2013 was primarily related to sales of $288.5 million and principal pay downs of $34.1 million, partially offset by $124.8 million added from the acquisition of SDTB and $106.8 million of investment security purchases. The purchase of investment securities primarily related to investing excess liquidity from our bank acquisitions, while the sales were made to help fund loan production and to improve our interest-earning asset mix by redeploying investment funds into loans. At March 31, 2014, the end of period yield on investment securities was 2.32%, up from 2.21% at December 31, 2013, and 1.73% at March 31, 2013.
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, 2014
|
||||||||||||||||
Amortized
Cost
|
Unrealized
Gain
|
Unrealized
Loss
|
Estimated
Fair Value
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Investment securities available for sale:
|
|
|||||||||||||||
Municipal bonds
|
$ | 77,062 | $ | 848 | $ | (586 | ) | $ | 77,324 | |||||||
Mortgage-backed securities
|
126,921 | 65 | (2,168 | ) | 124,818 | |||||||||||
Total securities available for sale
|
$ | 203,983 | $ | 913 | $ | (2,754 | ) | $ | 202,142 | |||||||
December 31, 2013
|
||||||||||||||||
Amortized
Cost
|
Unrealized
Gain
|
Unrealized
Loss
|
Estimated
Fair Value
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Investment securities available for sale:
|
||||||||||||||||
U.S. Treasury
|
$ | 73 | $ | 8 | $ | - | $ | 81 | ||||||||
Municipal bonds
|
95,388 | 589 | (1,850 | ) | 94,127 | |||||||||||
Mortgage-backed securities
|
165,857 | 12 | (3,988 | ) | 161,881 | |||||||||||
Total securities available for sale
|
$ | 261,318 | $ | 609 | $ | (5,838 | ) | $ | 256,089 | |||||||
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 |
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, 2014
|
||||||||||||||||||||||||||||||||||||||||
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:
|
||||||||||||||||||||||||||||||||||||||||
Municipal bonds
|
$ | - | 0.00 | % | $ | 11,729 | 1.07 | % | $ | 37,570 | 1.87 | % | $ | 28,025 | 2.94 | % | $ | 77,324 | 2.15 | % | ||||||||||||||||||||
Mortgage-backed securities
|
- | 0.00 | % | - | 0.00 | % | 12,576 | 1.42 | % | 112,242 | 2.06 | % | 124,818 | 2.02 | % | |||||||||||||||||||||||||
Total investment securities available for sale
|
- | 0.00 | % | 11,729 | 1.07 | % | 50,146 | 1.75 | % | 140,267 | 2.24 | % | 202,142 | 2.07 | % | |||||||||||||||||||||||||
Stock:
|
||||||||||||||||||||||||||||||||||||||||
FHLB
|
6,131 | 6.66 | % | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 6,131 | 6.66 | % | |||||||||||||||||||||||||
Federal Reserve Bank/TIB
|
7,973 | 5.53 | % | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 7,973 | 5.53 | % | |||||||||||||||||||||||||
Total stock
|
14,104 | 6.02 | % | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 14,104 | 6.02 | % | |||||||||||||||||||||||||
Total securities
|
$ | 14,104 | 6.02 | % | $ | 11,729 | 1.07 | % | $ | 50,146 | 1.75 | % | $ | 140,267 | 2.24 | % | $ | 216,246 | 2.32 | % |
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, 2014, there were no OTTI charges and $13,000 in recoveries, compared to $30,000 of net OTTI charges during the same period last year.
Securities with OTTI credit losses recognized in noninterest income and associated OTTI non-credit losses recognized in accumulated other comprehensive loss during the periods indicated were as follows:
Three Months Ended
|
Three Months Ended
|
||||||||||||||||||||||||||||||||
March 31, 2014
|
March 31, 2013
|
||||||||||||||||||||||||||||||||
Rating
|
Number
|
Fair Value
|
OTTI Credit Loss (Recovery)
|
Non Credit Gain in Accumulated Other Comprehensive Income (AOCI)
|
Number
|
Fair Value
|
OTTI Credit Loss
|
Non Credit Gain in Accumulated Other Comprehensive Income (AOCI)
|
|||||||||||||||||||||||||
(dollars in thousands)
|
|||||||||||||||||||||||||||||||||
D | - | $ | - | $ | - | $ | - | 4 | $ | 446 | $ | 30 | $ | 95 | |||||||||||||||||||
Various
|
- | - | (13 | ) | - | - | - | - | - | ||||||||||||||||||||||||
Total
|
- | $ | - | $ | (13 | ) | $ | - | 4 | $ | 446 | $ | 30 | $ | 95 |
There was no OTTI credit loss for any single debt security for the three months ended March 31, 2014, compared to $32,000 for the three months ended March 31, 2013.
Nonperforming Assets
Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), restructured loans and OREO. It is our general policy to account for a loan as nonaccrual when the loan becomes 90 days delinquent or when collection of interest appears doubtful.
At March 31, 2014, nonperforming assets totaled $3.4 million or 0.20% of total assets, essentially equal to $3.4 million or 0.20% at December 31, 2013, but down from $4.7 million or 0.33% at March 31, 2013. Compared to March 31, 2014, nonperforming loans increased $423,000 and OREO decreased $434,000 from December 31, 2013 and nonperforming loans decreased $428,000 and OREO decreased $809,000 from March 31, 2013.
The following table sets forth our composition of nonperforming assets at the dates indicated:
March 31,
|
December 31,
|
March 31,
|
||||||||||
2014
|
2013
|
2013
|
||||||||||
(dollars in thousands)
|
||||||||||||
Nonperforming assets
|
||||||||||||
Business loans:
|
||||||||||||
Commercial and industrial
|
$ | 31 | $ | - | $ | 333 | ||||||
Commercial owner occupied
|
864 | 747 | 245 | |||||||||
SBA (1)
|
14 | 14 | 121 | |||||||||
Real estate:
|
||||||||||||
Commercial non-owner occupied
|
1,327 | 983 | 1,974 | |||||||||
One-to-four family
|
438 | 507 | 429 | |||||||||
Total nonaccrual loans
|
2,674 | 2,251 | 3,102 | |||||||||
Other real estate owned:
|
||||||||||||
Land
|
752 | 1,186 | 1,561 | |||||||||
Total other real estate owned
|
752 | 1,186 | 1,561 | |||||||||
Total nonperforming assets, net
|
$ | 3,426 | $ | 3,437 | $ | 4,663 | ||||||
Allowance for loan losses
|
$ | 8,685 | $ | 8,200 | $ | 7,994 | ||||||
Allowance for loan losses as a percent of
total nonperforming loans
|
324.79 | % | 364.28 | % | 257.70 | % | ||||||
Nonperforming loans as a percent of gross loans
|
0.20 | % | 0.18 | % | 0.33 | % | ||||||
Nonperforming assets as a percent of total assets
|
0.20 | % | 0.20 | % | 0.33 | % | ||||||
(1) The SBA totals include the guaranteed amount of $72,000 as of March 31, 2013. |
Liabilities and Stockholders’ Equity
Total liabilities were $1.6 billion at March 31, 2014, compared to $1.5 billion at December 31, 2013 and $1.2 billion at March 31, 2013. The increase of $17.5 million from the year ended December 31, 2013 was predominately related to increases in deposits of $128.9 million, partially offset by a decrease in FHLB advances and other borrowings of $108.6 million. The increase of $307.4 million from March 31, 2013 was primarily due to an increase in deposits of $249.5 million, FHLB advances and other borrowings of $51.3 million and accrued expenses and other liabilities of $6.6 million.
Deposits. Deposits totaled $1.4 billion at March 31, 2014, up $128.9 million or 9.9% from December 31, 2013 and $249.5 million or 21.0% from March 31, 2013. During the first quarter of 2014, we had deposit increases in noninterest bearing checking of $46.1 million, certificates of deposit of $41.0 million, money market of $25.7 million and checking of $16.4 million. Within the first quarter of 2014, transaction account increases of approximately $27 million to $30 million were related to seasonal increases in existing HOA management accounts attributed to annual billings and the receipt of homeowners’ dues.
The increase in deposits since March 31, 2013 was primarily related to the SDTB acquisition, which added deposits of $183.9 million at a cost of 23 basis points at the acquisition date, partially offset by declines in deposit levels in the second through fourth quarters in 2013 of $63.3 million, mainly related to purposeful runoff of certificates of deposit, and the deposit activity in first quarter of 2014. At March 31, 2014, we had no brokered deposits.
The total weighted average cost of deposits at March 31, 2014 was 0.34%, up from 0.33% at December 31, 2013, but down from 0.37% at March 31, 2013.
At March 31, 2014, our gross loan to deposit ratio was 92.4%, down from 95.2% at December 31, 2013, but up from 79.8% at March 31, 2013.
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, 2014
|
December 31, 2013
|
March 31, 2013
|
|||||||||||||||||||||||||||||||||||
Balance
|
% of Total Deposits
|
Weighted Average Rate
|
Balance
|
% of Total Deposits
|
Weighted Average Rate
|
Balance
|
% of Total Deposits
|
Weighted Average Rate
|
|||||||||||||||||||||||||||||
(dollars in thousands)
|
|||||||||||||||||||||||||||||||||||||
Noninterest bearing checking
|
$ | 412,871 | 28.8 | % | 0.00 | % | $ | 366,755 | 28.1 | % | 0.00 | % | $ | 316,536 | 26.7 | % | 0.00 | % | |||||||||||||||||||
Interest-bearing deposits:
|
|||||||||||||||||||||||||||||||||||||
Checking
|
137,285 | 9.5 | % | 0.11 | % | 120,886 | 9.3 | % | 0.11 | % | 115,541 | 9.7 | % | 0.10 | % | ||||||||||||||||||||||
Money market
|
453,261 | 31.6 | % | 0.30 | % | 427,577 | 32.7 | % | 0.29 | % | 323,709 | 27.3 | % | 0.28 | % | ||||||||||||||||||||||
Savings
|
76,087 | 5.3 | % | 0.14 | % | 76,412 | 5.8 | % | 0.14 | % | 80,578 | 6.8 | % | 0.15 | % | ||||||||||||||||||||||
Time deposit accounts:
|
|||||||||||||||||||||||||||||||||||||
Less than 1.00%
|
131,274 | 9.1 | % | 0.51 | % | 120,583 | 9.2 | % | 0.39 | % | 164,843 | 13.9 | % | 0.55 | % | ||||||||||||||||||||||
1.00-1.99 | 211,725 | 14.8 | % | 1.06 | % | 181,046 | 13.9 | % | 1.06 | % | 169,616 | 14.3 | % | 1.15 | % | ||||||||||||||||||||||
2.00-2.99 | 11,266 | 0.8 | % | 2.85 | % | 11,503 | 0.8 | % | 2.83 | % | 12,560 | 1.1 | % | 2.80 | % | ||||||||||||||||||||||
3.00-3.99 | 694 | 0.0 | % | 3.20 | % | 795 | 0.1 | % | 3.28 | % | 1,144 | 0.1 | % | 3.44 | % | ||||||||||||||||||||||
4.00-4.99 | 3 | 0.0 | % | 4.93 | % | 2 | 0.0 | % | 4.93 | % | 288 | 0.0 | % | 4.24 | % | ||||||||||||||||||||||
5.00 and greater
|
737 | 0.1 | % | 5.25 | % | 727 | 0.1 | % | 5.25 | % | 904 | 0.1 | % | 5.26 | % | ||||||||||||||||||||||
Total time deposit accounts
|
355,699 | 24.8 | % | 0.92 | % | 314,656 | 24.1 | % | 0.88 | % | 349,355 | 29.5 | % | 0.94 | % | ||||||||||||||||||||||
Total interest-bearing deposits
|
1,022,332 | 71.2 | % | 0.48 | % | 939,531 | 71.9 | % | 0.45 | % | 869,183 | 73.3 | % | 0.51 | % | ||||||||||||||||||||||
Total deposits
|
$ | 1,435,203 | 100.0 | % | 0.34 | % | $ | 1,306,286 | 100.0 | % | 0.33 | % | $ | 1,185,719 | 100.0 | % | 0.37 | % |
Borrowings. At March 31, 2014, total borrowings amounted to $105.8 million, down $108.6 million or 50.6% from December 31, 2013, but up $51.3 million or 94.2% from March 31, 2013. The change in borrowings primarily related to overnight FHLB advances used to supplement the funding of loans as deposit levels fluctuate. Additionally, during the first quarter of 2014, repurchase agreement debt related to our HOA business decreased $1.6 million to $17.0 million. This repurchase agreement debt was offered as a service to certain HOA depositors that adds protection for deposit amounts above FDIC insurance levels. Total borrowings at March 31, 2014 represented 6.1% of total assets and had an end of period weighted average cost of 1.22%, compared with 12.5% of total assets at a weighted average cost of 0.63% at December 31, 2013 and 3.9% of total assets at a weighted average cost of 2.29% at March 31, 2013. At March 31, 2014, total borrowings were comprised of the following:
·
|
Three reverse repurchase agreements totaling $28.5 million at a weighted average rate of 3.26% and secured by approximately $36.3 million of government sponsored entity MBS;
|
·
|
HOA reverse repurchase agreements totaling $17.0 million at a weighted average rate of 0.02% and secured by approximately $29.2 million of government sponsored entity MBS; and
|
·
|
Subordinated Debentures used to fund the issuance of Trust Preferred Securities in 2004 of $10.3 million with a rate of 2.99%. For additional information about the Subordinated Debentures and Trust Preferred Securities, see Note 8 to the Consolidated Financial Statements in this report.
|
The following table sets forth certain information regarding the Company's borrowed funds at the dates indicated:
March 31, 2014
|
December 31, 2013
|
March 31, 2013
|
||||||||||||||||||||||
Balance
|
Weighted Average Rate
|
Balance
|
Weighted Average Rate
|
Balance
|
Weighted Average Rate
|
|||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||
FHLB advances
|
$ | 50,000 | 0.11 | % | $ | 156,000 | 0.06 | % | $ | - | 0.00 | % | ||||||||||||
Reverse repurchase agreements
|
45,506 | 2.05 | % | 48,091 | 1.98 | % | 44,191 | 2.11 | % | |||||||||||||||
Subordinated debentures
|
10,310 | 2.99 | % | 10,310 | 2.99 | % | 10,310 | 3.05 | % | |||||||||||||||
Total borrowings
|
$ | 105,816 | 1.22 | % | $ | 214,401 | 0.63 | % | $ | 54,501 | 2.29 | % | ||||||||||||
Weighted average cost of borrowings during the quarter
|
1.35 | % | 1.01 | % | 2.33 | % | ||||||||||||||||||
Borrowings as a percent of total assets
|
6.1 | % | 12.5 | % | 3.9 | % |
Stockholders’ Equity. Total stockholders’ equity was $188.9 million as of March 31, 2014, up from $175.2 million at December 31, 2013 and $157.6 million at March 31, 2013. The current year increase of $13.6 million in stockholders’ equity was primarily related to equity consideration for the acquisition of IFH of $9.0 million, net income for the first three months of 2014 of $2.6 million and favorable change in accumulated other comprehensive income of $2.0 million. The increase of $31.3 million from March 31, 2013 was primarily related to the Corporation’s stock issued to SDTB and Infinity shareholders as part of the acquisition consideration of $14.4 million for SDTB and $9.0 million for Infinity and net income over the period of $9.7 million, partially offset by the unfavorable change in accumulated other comprehensive income of $2.7 million.
Our book value per share increased to $10.96 at March 31, 2014, up from $10.52 at December 31, 2013 and $10.21 at March 31, 2013. At March 31, 2014, the Company’s tangible common equity to tangible assets ratio was 9.30%, up from 8.94% at December 31, 2013, but down from 10.16% at March 31, 2013.
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,
|
December 31,
|
March 31,
|
||||||||||
2014
|
2013
|
2013
|
||||||||||
Total stockholders' equity
|
188,860 | 175,226 | 157,589 | |||||||||
Less: Intangible assets
|
(29,324 | ) | (24,056 | ) | (16,317 | ) | ||||||
Tangible common equity
|
$ | 159,536 | $ | 151,170 | $ | 141,272 | ||||||
Total assets
|
1,745,282 | 1,714,187 | 1,406,655 | |||||||||
Less: Intangible assets
|
(29,324 | ) | (24,056 | ) | (16,317 | ) | ||||||
Tangible assets
|
$ | 1,715,958 | $ | 1,690,131 | $ | 1,390,338 | ||||||
Tangible common equity ratio
|
9.30 | % | 8.94 | % | 10.16 | % |
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 2014 were from:
·
|
Net increase of $128.9 million in deposit accounts;
|
·
|
Proceeds of $87.6 million from the sale and principal payments on loans held for investment;
|
·
|
Proceeds of $56.1 million from the sale of securities available for sale;
|
·
|
Net change of $17.7 million of undisbursed loan funds; and
|
·
|
Principal payments of $6.2 million from securities available for sale.
|
We used these funds to:
·
|
Repay FHLB advances and other borrowings of $176.2 million;
|
·
|
Purchase and originate loans held for investment of $108.0 million;
|
·
|
Acquire Infinity of $7.8 million; and
|
·
|
Purchase securities available for sale of $5.0 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, 2014, cash and cash equivalents totaled $124.4 million and the market value of our investment securities available for sale totaled $202.1 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, 2014, the maximum amount we could borrow through the FHLB was $769.6 million, of which $488.1 million was available for borrowing based on collateral pledged of $607.6 million in real estate loans. At March 31, 2014, we had $50.0 million in FHLB borrowings against that available balance. At March 31, 2014, we also 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, 2014, no funds were drawn against these unsecured lines of credit. For the quarter ended March 31, 2014, our average liquidity ratio was 12.52%. 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 2014 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, 2014, 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, 2014. 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, 2014
|
||||||||||||||||||||
Less than 1 year
|
1 - 3 years
|
3 - 5 years
|
More than 5 years
|
Total
|
||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Contractual obligations
|
||||||||||||||||||||
FHLB advances
|
$ | 50,000 | $ | - | $ | - | $ | - | $ | 50,000 | ||||||||||
Other borrowings
|
17,006 | - | 28,500 | - | 45,506 | |||||||||||||||
Subordinated debentures
|
- | - | - | 10,310 | 10,310 | |||||||||||||||
Certificates of deposit
|
250,244 | 101,726 | 3,051 | 678 | 355,699 | |||||||||||||||
Operating leases
|
2,161 | 5,137 | 3,708 | 1,595 | 12,601 | |||||||||||||||
Total contractual cash obligations
|
$ | 319,411 | $ | 106,863 | $ | 35,259 | $ | 12,583 | $ | 474,116 |
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, 2014, we had commitments to extend credit on existing lines and letters of credit of $246.0 million, compared to $337.2 million at December 31, 2013 and $236.7 million at March 31, 2013.
The following table summarizes our contractual commitments with off-balance sheet risk by expiration period at the date indicated:
March 31, 2014
|
||||||||||||||||||||
Less than 1 year
|
1 - 3 years
|
3 - 5 years
|
More than 5 years
|
Total
|
||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Other unused commitments
|
||||||||||||||||||||
Home equity lines of credit
|
$ | 100 | $ | 2,051 | $ | 100 | $ | 4,863 | $ | 7,114 | ||||||||||
Commercial and industrial
|
40,599 | 21,738 | 5,093 | 34,944 | 102,374 | |||||||||||||||
Warehouse facilities
|
- | - | - | 101,817 | 101,817 | |||||||||||||||
Standby letters of credit
|
4,305 | - | - | - | 4,305 | |||||||||||||||
All other
|
3,137 | 26,810 | 5 | 452 | 30,404 | |||||||||||||||
Total commitments
|
$ | 48,141 | $ | 50,599 | $ | 5,198 | $ | 142,076 | $ | 246,014 |
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, 2014, the Bank and the Corporation, respectively, exceeded the requirements for “well capitalized” institutions under the tests pursuant to FDICIA and of the Federal Reserve.
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, 2014
|
||||||||||||||||||||||||
Tier 1 Capital (to adjusted tangible assets)
|
||||||||||||||||||||||||
Bank
|
$ | 167,294 | 10.26 | % | $ | 65,229 | 4.00 | % | $ | 81,536 | 5.00 | % | ||||||||||||
Consolidated
|
170,096 | 10.45 | % | 65,085 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 Risk-Based Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
167,294 | 12.06 | % | 55,476 | 4.00 | % | 83,214 | 6.00 | % | |||||||||||||||
Consolidated
|
170,096 | 12.23 | % | 55,624 | 4.00 | % | N/A | N/A | ||||||||||||||||
Total Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
176,301 | 12.71 | % | 110,953 | 8.00 | % | 138,691 | 10.00 | % | |||||||||||||||
Consolidated
|
179,104 | 12.88 | % | 111,249 | 8.00 | % | N/A | N/A | ||||||||||||||||
At December 31, 2013
|
||||||||||||||||||||||||
Tier 1 Capital (to adjusted tangible assets)
|
||||||||||||||||||||||||
Bank
|
$ | 160,473 | 10.03 | % | $ | 64,025 | 4.00 | % | $ | 80,031 | 5.00 | % | ||||||||||||
Consolidated
|
163,105 | 10.29 | % | 63,431 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier 1 Risk-Based Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
160,473 | 12.34 | % | 52,021 | 4.00 | % | 78,031 | 6.00 | % | |||||||||||||||
Consolidated
|
163,105 | 12.54 | % | 52,046 | 4.00 | % | N/A | N/A | ||||||||||||||||
Total Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
168,673 | 12.97 | % | 104,042 | 8.00 | % | 130,052 | 10.00 | % | |||||||||||||||
Consolidated
|
171,305 | 13.17 | % | 104,092 | 8.00 | % | N/A | N/A | ||||||||||||||||
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 |
On July 2, 2013, the Federal Reserve issued a final rule implementing a revised regulatory capital framework for U.S. banks in accordance with the Basel III international accord and satisfying related mandates under the Dodd-Frank Act. Under the final rule, minimum capital requirements will increase for both quantity and quality of capital held by banking organizations. The final rule includes a new common equity tier 1 minimum capital requirement of 4.5% of risk-weighted assets and increases the minimum tier 1 capital requirement from 4.0% to 6.0% of risk-weighted assets. The minimum total risk-based capital requirement remains unchanged at 8.0% of total risk-weighted assets. In addition to these minimum capital requirements, the final rule requires banking organizations to hold a buffer of common equity tier 1 capital in an amount above 2.5% of total risk-weighted assets to avoid restrictions on capital distributions and discretionary bonus payments to executive officers.
The final rule also establishes a standardized approach for determining risk-weighted assets. Under the final rule, risk weights for residential mortgage loans that apply under current capital rules will continue to apply and banking organizations with less than $15 billion in total assets may continue to include existing trust preferred securities as capital. The final rule allows banking organizations that are not subject to the advanced approaches rule, like us, to make a one-time election not to include most elements of accumulated other comprehensive income in regulatory capital and instead use the existing treatment under current capital rules.
The minimum regulatory capital requirements and compliance with a standardized approach for determining risk-weighted assets of the final rule are effective for us on January 1, 2015. The capital conservation buffer framework transition period begins January 1, 2016, with full implementation effective January 1, 2019. The Company continues to evaluate the impact of the final Basel III capital rules, and based on management’s initial review, we expect to exceed all capital requirements under the new rules. We will continue to evaluate and monitor our capital ratios under the new rules prior to the initial implementation date of January 1, 2015.
The final rule also enhances the risk-sensitivity of the advanced approaches risk-based capital rule, including among others, revisions to better address counterparty credit risk and interconnectedness among financial institutions and incorporation of the Federal Reserve’s market risk rule into the integrated capital framework. These provisions of the final rule generally apply only to large, internationally active banking organizations or banking organizations with significant trading activity and are not expected to directly impact us.
Management believes that there have been no material changes in our quantitative and qualitative information about market risk since December 31, 2013. For a complete discussion of our quantitative and qualitative market risk, see “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in our 2013 Annual Report.
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.
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 2013 Annual Report. Management believes that this legal proceeding will not have a material adverse impact on our results of operations or financial condition.
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.
There were no material changes to the risk factors as previously disclosed under Item 1A. of our 2013 Annual Report.
None
None
Not applicable.
None
10.1
|
Employment Agreement by and between Thomas Rice and Pacific Premier Bank, dated April 7, 2014 (1)
|
|
10.2
|
Amended and Restated Employment Agreement by and between Edward Wilcox and Pacific Premier Bank, dated April 7, 2014 (1)
|
|
10.3
|
Amended and Restated Employment Agreement by and between Michael Karr and Pacific Premier Bank, dated April 7, 2014 (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 Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2014 (File No 000-22193).
|
(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 12, 2014
|
By:
|
/s/ Steve Gardner
|
Date
|
Steve Gardner
|
|
President and Chief Executive Officer
|
||
(principal executive officer)
|
||
May 12, 2014
|
By:
|
/s/ Kent J. Smith
|
Date
|
Kent J. Smith
|
|
Executive Vice President and Chief Financial Officer
|
||
(principal financial and accounting officer)
|
|
Index to Exhibits
|
Exhibit 31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
|
|
Exhibit 31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended
|
|
Exhibit 32
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit 101.INS
|
XBRL Instance Document (1)
|
|
Exhibit 101.SCH
|
XBRL Taxonomy Extension Schema Document (1)
|
|
Exhibit 101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document (1)
|
|
Exhibit 101.DEF
|
XBRL Taxonomy Extension Definitions Linkbase Document (1)
|
|
Exhibit 101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document (1)
|
|
Exhibit 101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document (1)
|
|
(1)
|
Incorporated by reference from the Corporation’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 10, 2014 (File No 000-22193).
|
(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.
|