Attached files

file filename
EX-32 - PPBI 10-Q 2011 Q1 EX 32 - PACIFIC PREMIER BANCORP INCppbi_10q-2011q132.htm
EX-31.1 - PPBI 10-Q 2011 Q1 EX 31.1 - PACIFIC PREMIER BANCORP INCppbi_10q-2011q1311.htm
EX-31.2 - PPBI 10-Q 2011 Q1 EX 31.2 - PACIFIC PREMIER BANCORP INCppbi_10q-2011q1312.htm
 


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
 
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR
 
( )        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File Number 0-22193
 

(Exact name of registrant as specified in its charter)
 
DELAWARE
33-0743196
(State or other jurisdiction of incorporation or organization)
(I.R.S Employer Identification No.)
 
 
 
 
 
 
 
1600 SUNFLOWER AVENUE, 2ND FLOOR, COSTA MESA, CALIFORNIA 92626
 
(Address of principal executive offices and zip code)
 
(714) 431-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X ] No [_]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [_] No [_]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
 
Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer
[ ]
Smaller reporting company
[ X ]
       
(Do not check if a smaller reporting company)
     
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
 
The number of shares outstanding of the registrant's common stock as of May 13, 2011 was 10,084,626.
 

 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except share data)
 
                   
   
March 31,
   
December 31,
   
March 31,
 
ASSETS
 
2011
   
2010
   
2010
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Cash and due from banks
  $ 46,302     $ 63,433     $ 49,541  
Federal funds sold
    10,578       29       29  
Cash and cash equivalents
    56,880       63,462       49,570  
Investment securities available for sale
    140,927       155,094       120,270  
FHLB stock/Federal Reserve Bank stock, at cost
    14,161       13,334       14,330  
Loans held for investment
    699,953       564,417       547,051  
Allowance for loan losses
    (8,879 )     (8,879 )     (9,169 )
Loans held for investment, net
    691,074       555,538       537,882  
Accrued interest receivable
    4,014       3,755       3,592  
Other real estate owned
    10,509       34       6,169  
Premises and equipment
    8,166       8,223       8,697  
Deferred income taxes
    8,977       11,103       11,546  
Bank owned life insurance
    12,583       12,454       12,060  
Intangible assets
    2,243       -       -  
Other assets
    6,948       3,819       3,528  
TOTAL ASSETS
  $ 956,482     $ 826,816     $ 767,644  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
LIABILITIES:
                       
Deposit accounts:
                       
Noninterest bearing
  $ 118,241     $ 47,229     $ 38,084  
Interest bearing:
                       
Transaction accounts
    287,694       203,029       174,644  
Retail certificates of deposit
    413,126       407,108       397,121  
Wholesale/brokered certificates of deposit
    13,725       1,874       3,052  
Total deposits
    832,786       659,240       612,901  
FHLB advances and other borrowings
    28,500       68,500       66,500  
Subordinated debentures
    10,310       10,310       10,310  
Accrued expenses and other liabilities
    5,217       10,164       3,812  
TOTAL LIABILITIES
    876,813       748,214       693,523  
STOCKHOLDERS’ EQUITY:
                       
Preferred Stock, $.01 par value; 1,000,000 shares authorized;
    no shares outstanding
    -       -       -  
Common stock, $.01 par value; 15,000,000 shares authorized; 10,084,626 shares at March 31, 2011, 10,033,836 shares at December 31, 2010 and March 31, 2010 issued and outstanding
    101       100       100  
Additional paid-in capital
    76,326       79,942       79,928  
Retained earnings (accumulated deficit)
    4,246       (526 )     (4,308 )
Accumulated other comprehensive loss, net of tax benefit of $702 at March 31, 2011, $639 at December 31, 2010, and $1,118 at March 31, 2010
    (1,004 )     (914 )     (1,599 )
TOTAL STOCKHOLDERS’ EQUITY
    79,669       78,602       74,121  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 956,482     $ 826,816     $ 767,644  

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

 
 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(dollars in thousands, except per share data)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31, 2011
   
March 31, 2010
 
INTEREST INCOME
           
Loans
  $ 10,533     $ 9,155  
Investment securities and other interest-earning assets
    1,201       1,029  
Total interest income
    11,734       10,184  
INTEREST EXPENSE
               
Interest-bearing deposits:
               
Interest on transaction accounts
    445       413  
Interest on certificates of deposit
    1,823       2,168  
Total interest-bearing deposits
    2,268       2,581  
FHLB advances and other borrowings
    288       868  
Subordinated debentures
    76       75  
Total interest expense
    2,632       3,524  
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    9,102       6,660  
PROVISION FOR LOAN LOSSES
    106       1,056  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    8,996       5,604  
NONINTEREST INCOME
               
Loan servicing fees
    217       70  
Deposit fees
    448       188  
Net gain (loss) from sales of loans
    86       (1,015 )
Net gain from sales of investment securities
    164       87  
Other-than-temporary impairment loss on investment securities, net
    (214 )     (326 )
Gain on FDIC transaction
    4,189       -  
Other income
    349       270  
Total noninterest income (loss)
    5,239       (726 )
NONINTEREST EXPENSE
               
Compensation and benefits
    3,181       2,013  
Premises and occupancy
    800       626  
Data processing and communications
    301       184  
Other real estate owned operations, net
    263       295  
FDIC insurance premiums
    264       348  
Legal and audit
    392       125  
Marketing expense
    229       149  
Office and postage expense
    167       123  
Other expense
    762       459  
Total noninterest expense
    6,359       4,322  
NET INCOME BEFORE INCOME TAXES
    7,876       556  
INCOME TAX
    3,104       100  
NET INCOME
  $ 4,772     $ 456  
                 
EARNINGS PER SHARE
               
Basic
  $ 0.47     $ 0.05  
Diluted
  $ 0.44     $ 0.04  
                 
WEIGHTED AVERAGE SHARES OUTSTANDING
               
Basic
    10,049,311       10,033,836  
Diluted
    10,857,123       11,021,014  

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

 

 
 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
 
(dollars in thousands)
 
(unaudited)
 
                                           
   
Common Stock Shares
   
Amount
   
Additional Paid-in Capital
   
Accumulated Retained
Earnings (Deficit)
   
Accumulated Other Comprehensive Income (Loss)
   
Comprehensive Income
   
Total Stockholders’ Equity
 
                                           
Balance at December 31, 2010
    10,033,836     $ 100     $ 79,942     $ (526 )   $ (914 )         $ 78,602  
Comprehensive Income:
                                                     
Net income
                            4,772             $ 4,772       4,772  
Unrealized holding gains on securities
 arising during the period, net of tax
                              132          
Reclassification adjustment for net loss on sale
of securities included in net income, net of tax
                      (222 )        
Net unrealized gain on securities, net of tax
                                    (90 )     (90 )     (90 )
Total comprehensive income
                                          $ 4,682          
Share-based compensation expense
                    13                               13  
Common stock repurchased and retired
    (10,610 )     (1 )     (69 )                             (70 )
Warrants purchased and retired
                    (3,660 )                             (3,660 )
Warrants exercised
    41,400       1       31                               32  
Stock options exercised
    20,000       1       69                               70  
Balance at March 31, 2011
    10,084,626     $ 101     $ 76,326     $ 4,246     $ (1,004 )           $ 79,669  
                                                         
Balance at December 31, 2009
    10,033,836     $ 100     $ 79,907     $ (4,764 )   $ (1,741 )           $ 73,502  
Comprehensive Income:
                                                       
Net income
                            456             $ 456       456  
Unrealized holding gains on securities
 arising during the period, net of tax
                              94          
Reclassification adjustment for net loss on sale
of securities included in net income, net of tax
                      48          
Net unrealized gain on securities, net of tax
                                    142       142       142  
Total comprehensive income
                                          $ 598          
Share-based compensation expense
                    21                               21  
Balance at March 31, 2010
    10,033,836     $ 100     $ 79,928     $ (4,308 )   $ (1,599 )           $ 74,121  


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


 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
 
(in thousands)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 4,772     $ 456  
Adjustments to net income:
               
Depreciation and amortization expense
    265       247  
Provision for loan losses
    106       1,056  
Share-based compensation expense
    13       21  
Loss on sale and disposal of premises and equipment
    6       12  
Loss on sale of other real estate owned
    16       27  
Write down of other real estate owned
    -       226  
Amortization of premium/discounts on securities held for sale, net
    235       129  
Gain on sale of investment securities available for sale
    (164 )     (87 )
Other-than-temporary impairment loss on investment securities, net
    214       326  
Loss (gain) on sale of loans held for investment
    (86 )     1,015  
Gain on FDIC transaction
    (4,189 )     -  
Deferred income tax provision (benefit)
    248       (81 )
Change in accrued expenses and other liabilities, net
    (4,905 )     (1,227 )
Income from bank owned life insurance, net
    (129 )     (134 )
Change in accrued interest receivable and other assets, net
    4,628       416  
Net cash provided by operating activities
    1,030       2,402  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale and principal payments on loans held for investment
    20,307       28,670  
Net change in undisbursed loan funds
    15,263       (2,471 )
Purchase and origination of loans held for investment
    (21,451 )     (2,922 )
Proceeds from sale of other real estate owned
    1,892       489  
Principal payments on securities available for sale
    5,749       3,216  
Purchase of securities available for sale
    -       (32,795 )
Proceeds from sale or maturity of securities available for sale
    20,556       24,351  
Purchases of premises and equipment
    (174 )     (243 )
Purchase of Federal Reserve Bank stock
    495       -  
Cash acquired in FDIC transaction
    26,389       -  
Net cash provided by investing activities
    69,026       18,295  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net  increase (decrease) in deposit accounts
    (30,767 )     (5,833 )
Repayment of FHLB advances and other borrowings
    (40,000 )     (25,000 )
Proceeds from exercise of stock options
    32       -  
Warrants purchased and retired
    (3,660 )     -  
Net cash used in financing activities
    (74,395 )     (30,833 )
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (4,339 )     (10,136 )
CASH AND CASH EQUIVALENTS, beginning of period
    63,462       59,706  
CASH AND CASH EQUIVALENTS, end of period
  $ 59,123     $ 49,570  


 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 
(in thousands)
 
(unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
SUPPLEMENTAL CASH FLOW DISCLOSURES
           
Interest paid
  $ 2,624     $ 3,403  
Income taxes paid
    115       150  
Assets acquired (liabilities assumed) in acquisition:
               
Investment securities
    14,076       -  
FDIC receivable
    2,838       -  
Loans
    149,739       -  
Core deposit intangible
    2,270       -  
Other real estate owned
    11,953       -  
Fixed assets
    42       -  
Other assets
    1,599       -  
Deposits
    (204,678 )     -  
Other liabilities
    (39 )     -  
                 
NONCASH INVESTING ACTIVITIES DURING THE PERIOD
               
Transfers from loans to other real estate owned
  $ -     $ 3,530  

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



 
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
March 31, 2011
(UNAUDITED)
Note 1 - Basis of Presentation
 
The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiary, Pacific Premier Bank (the “Bank”) (collectively, the “Company,” “we,” “our” or “us”).  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
In the opinion of management, the consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2011, December 31, 2010, and March 31, 2010 and the results of its operations, changes in stockholders’ equity, comprehensive income and cash flows for the three months ended March 31, 2011 and 2010.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2011.
 
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
 
The Company accounts for its investments in its wholly owned special purpose entity, PPBI Trust I, under the equity method whereby the subsidiary’s net earnings are recognized in the Company’s statement of income.
 
Note 2 – Recently Issued Accounting Pronouncements
 
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements.”  ASU 2010-06 revised two disclosure requirements concerning fair value measurements and clarifies two others.  It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers.  It will also require the presentation of purchases, sales, issuances, and settlements within Level 3 on a gross basis rather than a net basis.  The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements.  The Company’s disclosures about fair value measurements are presented in Note 8 – Fair Value Disclosures.  These new disclosure requirements were effective for the period ended March 31, 2011, except for the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010.  There was no significant effect to the Company’s financial statement disclosure upon adoption of this ASU.
 
In January 2011, the FASB deferred the effective date of Disclosures about Troubled Debt Restructurings (“TDRs”). This delay was intended to allow the FASB time to complete deliberations on what constitutes a TDR. The effective date of the new disclosures regarding TDRs for public entities and the guidelines for determining what constitutes a troubled debt restructuring will be effective upon issuance. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.
 
Future Application of Accounting Pronouncements
 
The following accounting pronouncement has been issued by the FASB but is not yet effective: ASU 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU 2011-02 provides guidance clarifying under what circumstances a creditor should classify a restructured receivable as a TDR. A receivable is a TDR if both of the following exist: 1) a creditor has granted a concession to the debtor, and 2) the debtor is experiencing financial difficulties. ASU 2011-02  clarifies that a creditor should consider all aspects of a restructuring when evaluating whether it has granted a concession, which include determining whether a debtor can obtain funds from another source at market rates and assessing the value of additional collateral and guarantees obtained at the time of restructuring. ASU 2011-02 also provides factors a creditor should consider when determining if a debtor is experiencing financial difficulties, such as probability of payment default and bankruptcy declarations. ASU 2011-02 will become effective for us in third quarter 2011 with retrospective application to January 1, 2011. Early adoption is permitted. We are evaluating the impact these accounting changes may have on our consolidated financial statements.
 
 
Note 3 – Loans Held for Investment
 
The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated:

   
March 31, 2011
   
December 31, 2010
   
March 31, 2010
 
   
(dollars in thousands)
 
Real estate loans:
                 
Multi-family
  $ 235,443     $ 243,584     $ 264,996  
Commercial non-owner occupied
    156,616       130,525       139,953  
One-to-four family
    48,291       20,318       8,364  
Construction
    5,631       -       -  
Land
    10,002       -       -  
Business loans:
                       
Commercial owner occupied
    156,379       113,025       96,336  
Commercial and industrial
    86,206       54,687       33,166  
SBA
    3,268       4,088       3,002  
Other loans
    1,264       1,417       1,770  
Total gross loans
    703,100       567,644       547,587  
Less loans held for sale
    -       -       -  
Total gross loans held for investment
    703,100       567,644       547,587  
Less (plus):
                       
Deferred loan origination costs (fees) and premiums (discounts)
    (3,147 )     (3,227 )     (536 )
Allowance for loan losses
    (8,879 )     (8,879 )     (9,169 )
Loans held for investment, net
  $ 691,074     $ 555,538     $ 537,882  
 
From time to time, we may purchase or sell loans in order to manage concentrations, maximize interest income, change risk profiles, improve returns and generate liquidity.
 
The Company grants residential and commercial loans held for investment to customers located primarily in Southern California. Consequently, the underlying collateral for our loans and a borrower’s ability to repay may be impacted unfavorably by adverse changes in the economy and real estate market in the region.
 
Under applicable laws and regulations, the Bank may not make secured loans to one borrower in excess of 25% of unimpaired capital plus surplus and likewise in excess of 15% for unsecured loans. These loans-to-one borrower limitations result in a dollar limitation of $23.0 million for secured loans and $13.6 million for unsecured
loans at March 31, 2011.  At March 31, 2011, the Bank’s largest aggregate outstanding balance of loans to one borrower was $11.3 million of secured credit.
 
Concentration of Credit Risk
 
The Company’s loan portfolio was collateralized by various forms of real estate and business assets located principally in Southern California.  The Company’s loan portfolio contains concentrations of credit in multi-family real estate, commercial non-owner occupied real estate and commercial owner occupied business loans.  The Company maintains Board approved policies that address these concentrations and continues to diversify its loan portfolio through loan originations, purchases and sales to meet approved concentration levels.  While management believes that the collateral presently securing these loans is adequate, there can be no assurances that further significant deterioration in the California real estate market and economy would not expose the Company to significantly greater credit risk.
 
Impaired Loans
 
The following table provides a summary of the Company’s investment in impaired loans as of and for the quarter ended March 31, 2011, and as of and for the year ended December 31, 2010:
 
               
Impaired Loans
                   
   
Recorded Investment
   
Unpaid Principal Balance
   
With Specific Allowance
   
Without Specific Allowance
   
Specific Allowance for Impaired Loans
   
Average Recorded Investment
   
Interest Income Recognized
 
   
(in thousands)
 
March 31, 2011
                                         
Real estate loans:
                                         
Multi-family
  $ 3,300     $ 3,300     $ -     $ 3,300     $ -     $ 2,036     $ 17  
Commercial investor
    2,476       2,476       463       2,012       47       2,371       34  
One-to-four family
    3,743       3,742       -       3,742       -       2,898       44  
Construction
    537       537       -       537       -       433       1  
Land
    2,982       2,982       -       2,982       -       2,280       27  
Business loans:
                                                       
Commercial owner occupied
    6,563       6,430       -       6,430       -       5,979       67  
Commercial and industrial
    5,020       4,905       -       4,905       -       4,290       51  
SBA
    1,672       1,000       -       1,000       -       1,030       19  
Other loans
    2       1       -       2       -       1       -  
Totals
  $ 26,295     $ 25,373     $ 463     $ 24,910     $ 47     $ 21,318     $ 260  

 
               
Impaired Loans
                   
   
Recorded Investment
   
Unpaid Principal Balance
   
With Specific Allowance
   
Without Specific Allowance
   
Specific Allowance for Impaired Loans
   
Average Recorded Investment
   
Interest Income Recognized
 
   
(dollars in thousands)
 
December 31, 2010
                                         
Real estate loans:
                                         
Multi-family
  $ 1,156     $ 1,156     $ -     $ 1,156     $ -     $ 2,114     $ 94  
Commercial investor
    2,068       2,068       465       1,603       47       1,949       127  
One-to-four family
    223       224       -       223       -       249       15  
Business loans:
                                                       
Commercial owner occupied
    2,225       2,342       -       2,225       -       1,332       -  
Commercial and industrial
    54       169       -       54       -       270       14  
SBA
    1,092       1,751       -       1,092       -       970       14  
Totals
  $ 6,818     $ 7,710     $ 465     $ 6,353     $ 47     $ 6,882     $ 264  

The following table summarizes impaired loan balances for prior periods as presented below:
 
   
March 31, 2010
 
   
(in thousands)
 
       
Impaired loans without a valuation allowance
  $ 7,317  
Imparied loans with a valuation allowance
  $ 613  
Valuation allowance related to impaired loans
  $ 127  
Average recorded investment in impaired loans
  $ 8,847  

The Company considers a loan to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or it is determined that the likelihood of the Company receiving all scheduled payments, including interest, when due is remote. The Company has no commitments to lend additional funds to debtors whose loans have been impaired.
 
The Company reviews loans for impairment when the loan is classified as substandard or worse, delinquent 90 days, or determined by management to be collateral dependent, or when the borrower files bankruptcy or is granted a 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 for the periods indicated below.
 
   
March 31, 2011
   
December 31, 2010
   
March 31, 2010
 
   
(in thousands)
 
                   
Nonaccruing loans
  $ 19,900     $ 3,270     $ 4,299  
Accruing loans
    5,473       3,548       3,630  
Total impaired loans
  $ 25,373     $ 6,818     $ 7,929  

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 six months of sustained repayment performance since the loan was placed on nonaccrual.
 
The Company does not accrue interest on loans 90 days or more past due or when, in the opinion of management, there is reasonable doubt as to the collection of interest.  The Company had impaired loans on nonaccrual status at March 31, 2011, of $19.9 million, December 31, 2010 of $3.3 million, and March 31, 2010 of $4.3 million.   The Company had no loans 90 days or more past due and still accruing or troubled debt restructures at March 31, 2011, December 31, 2010 or March 31, 2010.
 
 
Credit Quality and Credit Risk Management
 
The Company’s credit quality is maintained and credit risk managed in two distinct areas.  The first is the loan origination process, wherein the Bank underwrites credit quality and chooses which risks it is willing to accept.  The second is in the ongoing oversight of the loan portfolio, where existing credit risk is measured and monitored, and where performance issues are dealt with in a timely and comprehensive fashion.
 
The Company maintains a comprehensive credit policy which sets forth minimum and maximum tolerances for key elements of loan risk.  The policy identifies and sets forth specific guidelines for analyzing each of the loan products the Company offers from both an individual and portfolio wide basis.  The credit policy is reviewed annually by the Board of Directors.  Seasoned underwriters ensure all key risk factors are analyzed with nearly all underwriting including a comprehensive global cash flow analysis.  The credit approval process mandates multiple-signature approval by either the management or Board credit committee for every loan which requires any subjective credit analysis.
 
Credit risk is managed within the loan portfolio by the Company’s Portfolio Management department based on a comprehensive credit and investment review policy.  This policy requires a program of financial data collection and analysis, comprehensive loan reviews, property and/or business inspections and monitoring of portfolio concentrations and trends.  The Portfolio Management department also monitors asset-based lines of credit, loan covenants and other conditions associated with the Company’s business loans as a means to help identify potential credit risk.  Individual loans, excluding the homogeneous loan portfolio, are reviewed at least biennially, or more frequently, if deemed necessary, and includes the assignment of a risk grade.
 
Risk grades are based on a six-grade Pass scale, along with Special Mention, Substandard, Doubtful and Loss classifications as such classifications are defined by the regulatory agencies.  The assignment of risk grades allows the Company to, among other things, identify the risk associated with each credit in the portfolio, and to provide a basis for estimating credit losses inherent in the portfolio.  Risk grades are reviewed regularly by the Company’s Credit and Investment Review committee, and are reviewed annually by an independent third-party, as well as by regulatory agencies during scheduled examinations.
 
The following provides brief definitions for risk grades assigned to loans in the portfolio:
 
•      Pass – Pass credits are well protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Such credits exhibit few weaknesses, if any, but may include credits with exposure to certain factors that may adversely impact the credit if they materialize.  The Company has established six subcategories within the pass grade to stratify risk associated with pass loans.  The Company maintains a subset of pass credits designated as “watch” loans which, for any of a variety of reasons, requires close monitoring
 
•      Special Mention – Loans graded special mention exhibit potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the institution’s credit position.  Special mention credits are not considered as part of the classified extensions of credit category and do not expose the Company to sufficient risk to warrant classification.
 
•      Substandard – Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Extensions of credit classified as substandard have a well-defined weakness or weaknesses that jeopardizes the orderly payment of the debt.    Substandard credits are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.  Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified substandard.
 
•      Doubtful – Doubtful credits have all the weaknesses inherent in substandard credits, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined.
 
The Portfolio Management department also manages loan performance risks, collections, workouts, bankruptcies and foreclosures.  Loan performance risks are mitigated by our portfolio managers acting promptly and assertively to address problem credit when they are identified.  Collection efforts are commenced immediately upon non-payment, and the portfolio managers seek to determine right away 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 worse, the Company obtains an updated valuation of the underlying collateral.  If the credit in question is also identified as impaired, a valuation allowance, if necessary, is established against such loan or a loss is recognized by a charge to the allowance for loan losses if management believes that the full amount of the Company’s recorded investment in the loan is no longer collectable.  The Company typically continues to obtain updated valuations of underlying collateral for special mention and classified loans on an annual basis in order to have the most current indication of fair value.  Once a loan is identified as impaired, an analysis of the underlying collateral is performed at least quarterly, and corresponding changes in any related valuation allowance are made or balances deemed to be fully uncollectable are charged-off.
 
The following tables stratifies the loan portfolio by the Company’s internal risk grading system as well as certain other information concerning the credit quality of the loan portfolio as of the periods indicated:
 
   
Credit Risk Grades
 
         
Special
         
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
March 31, 2011
 
(in thousands)
 
Real estate loans:
                       
Multi-family
  $ 215,521     $ 13,115     $ 6,807     $ 235,443  
Commercial non-owner occupied
    149,790       610       6,216       156,616  
One-to-four family
    39,131       1,917       7,243       48,291  
Construction
    4,816       -       815       5,631  
Land
    4,809       494       4,699       10,002  
Business loans:
                               
Commercial owner occupied
    138,203       6,823       11,353       156,379  
Commercial and industrial
    74,774       1,923       9,509       86,206  
SBA
    2,233       -       1,035       3,268  
Other loans
    1,145       14       105       1,264  
Totals
  $ 630,422     $ 24,896     $ 47,782     $ 703,100  

 
   
Credit Risk Grades
 
         
Special
         
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
December 31, 2010
 
(dollars in thousands)
       
Real estate loans:
                       
Multi-family
  $ 226,270     $ 13,161     $ 4,153     $ 243,584  
Commercial investor
    124,513       577       5,435       130,525  
One-to-four family
    19,823       -       495       20,318  
Business loans:
                               
Commercial owner occupied
    104,475       4,074       4,476       113,025  
Commercial and industrial
    53,188       360       1,139       54,687  
SBA
    2,956       -       1,132       4,088  
Other loans
    1,417       -       -       1,417  
Totals
  $ 532,642     $ 18,172     $ 16,830     $ 567,644  

   
Credit Risk Grades
 
         
Special
         
Total Gross
 
   
Pass
   
Mention
   
Substandard
   
Loans
 
March 31, 2010
 
(in thousands)
 
Real estate loans:
                       
Multi-family
  $ 231,752     $ 26,459     $ 6,785     $ 264,996  
Commercial non-owner occupied
    128,482       2,979       8,492       139,953  
One-to-four family
    7,798       -       566       8,364  
Construction
    -       -       -       -  
Land
    -       -       -       -  
Business loans:
                            -  
Commercial owner occupied
    88,030       4,764       3,542       96,336  
Commercial and industrial
    33,166       -       -       33,166  
SBA
    1,624       347       1,031       3,002  
Other loans
    1,770       -       -       1,770  
Totals
  $ 492,622     $ 34,549     $ 20,416     $ 547,587  
 
 
   
Days Past Due
       
                   
Total
   
Non-
 
      30-59       60-89       90+  
Past Due
   
Accruing
 
March 31, 2011
 
(in thousands)
 
Real estate loans:
                                 
Multi-family
  $ 1,907     $ 1,147     $ 303   $ 3,357     $ 2,030  
Commercial investor
    1,289       615       301     2,205       753  
One-to-four family
    592       143       1,460     2,195       2,848  
Construction
    -       278       1,023     1,301       161  
Land
    -       -       571     571       3,175  
Business loans:
                          -          
Commercial owner occupied
    6,474       -       4,469     10,943       7,359  
Commercial and industrial
    1,379       637       3,264     5,280       3,415  
SBA
    133       -       583     716       891  
Other loans
    37       -       16     53       18  
Totals
  $ 11,811     $ 2,820     $ 11,990   $ 26,621     $ 20,650  

   
Days Past Due
       
                   
Total
   
Non-
 
      30-59       60-89       90+  
Past Due
   
Accruing
 
December 31, 2010
                                 
Real estate loans:
                                 
Multi-family
  $ -     $ -     $ -   $ -     $ -  
Commercial investor
    617       -       -     617       -  
One-to-four family
    402       17       20     439       26  
Business loans:
                          -          
Commercial owner occupied
    184       -       2,225     2,409       2,225  
Commercial and industrial
    -       -       -     -       54  
SBA
    -       -       846     846       971  
Other loans
    -       -       -     -       -  
Totals
  $ 1,203     $ 17     $ 3,091   $ 4,311     $ 3,277  

   
Days Past Due
       
                   
Total
   
Non-
 
      30-59       60-89       90+  
Past Due
   
Accruing
 
March 31, 2010
 
(in thousands)
 
Real estate loans:
                                 
Multi-family
  $ -     $ -     $ -   $ -     $ 2,032  
Commercial investor
    -       3,384       -     3,384       -  
One-to-four family
    31       25       65     121       74  
Land
    -       -       -     -       -  
Business loans:
                                     
Commercial owner occupied
    -       -       972     972       972  
Commercial and industrial
    38       400       -     438       438  
SBA
    497       96       499     1,092       783  
Other loans
    -       -       -     -       -  
Totals
  $ 566     $ 3,905     $ 1,536   $ 6,007     $ 4,299  

Note 4 – Allowance for Loan Losses
 
The Company’s Allowance for loan losses (“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.
 
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 twenty-four month, trailing twelve 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 twelve month total charge-off data for all Federal Deposit Insurance Corporation (the “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.
 
Owner Occupied Commercial Real Estate Loans, Commercial Business 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 twenty-four month, trailing twelve 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 twelve 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.
 
Single Family and Consumer Loans
 
The Company's base ALLL factor for single family and consumer loans is determined by Management using the Bank's actual trailing twenty-four month, trailing twelve month and annualized trailing six month charge-off data.  Adjustments to those base factors are made for relevant internal and external factors.  For single 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.
 
The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing twelve 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.
 
The following table summarizes the allocation of the allowance as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the quarter ended March 31, 2011:
 
   
Multi-family
   
Commercial investor
   
One-to-four family
   
Construction
   
Land
   
Commercial owner occupied
   
Commercial and industrial
   
SBA
   
Other loans
   
Total
 
   
(dollars in thousands)
 
                                                             
Balance, December 31, 2010
  $ 2,730     $ 1,580     $ 332     $ -     $ -     $ 1,687     $ 2,356     $ 145     $ 49     $ 8,879  
Charge-offs
    (28 )     -       (142 )     -       -       -       -       -       -       (170 )
Recoveries
    -       -       55       -       -       -       -       5       4       64  
Provisions for (reduction in) loan losses
    (82 )     (1 )     83       -       -       825       (661 )     (51 )     (7 )     106  
Balance, March 31, 2011
  $ 2,620     $ 1,579     $ 328     $ -     $ -     $ 2,512     $ 1,695     $ 99     $ 46     $ 8,879  
                                                                                 
Amount of allowance attributed to:
                                                                               
Specifically evaluated impaired loans
  $ -     $ 47     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 47  
General portfolio allocation
  $ 2,620     $ 1,532     $ 328     $ -     $ -     $ 2,512     $ 1,695     $ 99     $ 46     $ 8,832  
                                                                                 
Loans individually evaluated for impairment
  $ 3,300     $ 2,476     $ 3,742     $ 537     $ 2,982     $ 6,430     $ 4,905     $ 1,000     $ 1     $ 25,373  
Specific reserves to total loans individually evaluated for impairment
    0.00 %     1.90 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.00 %     0.19 %
Loans collectively evaluated for impairment
  $ 232,143     $ 154,140     $ 44,549     $ -     $ -     $ 149,949     $ 81,301     $ 2,268     $ 16,896     $ 681,246  
General reserves to total loans collectively evaluated for impairment
    1.13 %     0.99 %     0.74 %     0.00 %     0.00 %     1.68 %     2.08 %     4.37 %     0.27 %     1.30 %
                                                                                 
Total gross loans
  $ 235,443     $ 156,616     $ 48,291     $ 5,631     $ 10,002     $ 156,379     $ 86,206     $ 3,268     $ 1,264     $ 703,100  
Total allowance to gross loans
    1.11 %     1.01 %     0.68 %     0.00 %     0.00 %     1.61 %     1.97 %     3.03