10-Q 1 d505851d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

 

 

CU BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

California   90-0779788

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

15821 Ventura Boulevard, Suite 110

Encino, California

  91436
(Address of principal executive offices)   (Zip Code)

(818) 257-7700

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨      Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 3, 2013, the number of shares outstanding of the registrant’s no par value Common Stock was 10,730,626.

 

 

 


Table of Contents

CU BANCORP

March 31, 2013 FORM 10-Q

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

ITEM 1.

 

Financial Statements

  

 

Consolidated Balance Sheets March 31, 2013 (Unaudited) and December 31, 2012

     1   
 

Consolidated Statements of Income Three Months Ended March 31, 2013 and 2012 (Unaudited)

     2   
 

Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2013 and 2012 (Unaudited)

     3   
 

Consolidated Statements of Changes in Shareholders’ Equity Year Ended December 31, 2012 and Three Months Ended March 31, 2013 (Unaudited)

     4   
 

Consolidated Statements of Cash Flows Three Months Ended March 31, 2013 and 2012 (Unaudited)

     5   
 

Notes to the Consolidated Financial Statements (Unaudited)

     6   

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

 

Overview

     30   
 

Results of Operations

     34   
 

Financial Condition

     39   
 

Liquidity

     42   
 

Dividends

     42   
 

Capital Resources

     43   

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     45   

ITEM 4.

 

Controls and Procedures

     46   

PART II. OTHER INFORMATION

  

ITEM 1.

 

Legal Proceedings

     47   

ITEM 1A.

 

Risk Factors

     47   

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     47   

ITEM 3.

 

Defaults Upon Senior Securities

     47   

ITEM 4.

 

Mine Safety Disclosures

     47   

ITEM 5.

 

Other Information

     47   

ITEM 6.

 

Exhibits

     47   

Signatures 

       48   

 

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CU BANCORP

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     March 31,
2013
    December 31,
2012
 
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 19,286      $ 25,181   

Interest earning deposits in other financial institutions

     172,086        157,715   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     191,372        182,896   

Certificates of deposit in other financial institutions

     25,484        27,006   

Investment securities available-for-sale, at fair value

     109,787        118,153   

Loans

     860,833        854,885   

Allowance for loan loss

     (8,841     (8,803
  

 

 

   

 

 

 

Net loans

     851,992        846,082   

Premises and equipment, net

     3,153        3,422   

Deferred tax assets, net

     12,689        13,818   

Other real estate owned, net

     3,112        3,112   

Goodwill

     12,292        12,292   

Core deposit intangibles

     1,664        1,747   

Bank owned life insurance

     20,736        20,583   

Accrued interest receivable and other assets

     32,695        20,526   
  

 

 

   

 

 

 

Total Assets

   $ 1,264,976      $ 1,249,637   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Non-interest bearing demand deposits

   $ 557,452      $ 543,527   

Interest bearing transaction accounts

     117,280        112,747   

Money market and savings deposits

     345,145        340,466   

Certificates of deposit

     70,377        81,336   
  

 

 

   

 

 

 

Total deposits

     1,090,254        1,078,076   

Securities sold under agreements to repurchase

     25,187        22,857   

Subordinated debentures, net

     9,226        9,169   

Accrued interest payable and other liabilities

     12,498        13,912   
  

 

 

   

 

 

 

Total Liabilities

     1,137,165        1,124,014   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 11)

     0        0   

SHAREHOLDERS’ EQUITY

    

Serial Preferred Stock - authorized, 20,000,000 shares no par value, no shares issued or outstanding

     0        0   

Common stock - authorized, 30,000,000 shares no par value, 10,741,974 and 10,758,674 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

     118,885        118,885   

Additional paid-in capital

     7,159        7,052   

Retained earnings (deficit)

     447        (1,708

Accumulated other comprehensive income

     1,320        1,394   
  

 

 

   

 

 

 

Total Shareholders’ Equity

     127,811        125,623   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 1,264,976      $ 1,249,637   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CU BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2013      2012  

Interest Income

     

Interest and fees on loans

   $ 11,425       $ 6,690   

Interest on investment securities

     484         604   

Interest on interest bearing deposits in other financial institutions

     160         184   
  

 

 

    

 

 

 

Total Interest Income

     12,069         7,478   
  

 

 

    

 

 

 

Interest Expense

     

Interest on interest bearing transaction accounts

     52         40   

Interest on money market and savings deposits

     260         135   

Interest on certificates of deposit

     76         44   

Interest on securities sold under agreements to repurchase

     19         20   

Interest on subordinated debentures

     124         0   
  

 

 

    

 

 

 

Total Interest Expense

     531         239   
  

 

 

    

 

 

 

Net Interest Income

     11,538         7,239   

Provision for loan losses

     134         0   
  

 

 

    

 

 

 

Net Interest Income After Provision For Loan Losses

     11,404         7,239   
  

 

 

    

 

 

 

Non-Interest Income

     

Gain on sale of securities, net

     5         0   

Gain on sale of SBA loans, net

     350         0   

Other-than-temporary impairment losses

     0         (30

Deposit account service charge income

     568         463   

Other non-interest income

     503         189   
  

 

 

    

 

 

 

Total Non-Interest Income

     1,426         622   
  

 

 

    

 

 

 

Non-Interest Expense

     

Salaries and employee benefits (includes stock based compensation expense of $258 and $265 for the three months ended March 31, 2013 and 2012, respectively)

     5,675         3,938   

Occupancy

     1,064         752   

Data processing

     482         459   

Legal and professional

     507         240   

FDIC deposit assessment

     246         141   

Merger related expenses

     43         148   

OREO valuation write-downs and expenses

     26         278   

Office services expenses

     266         227   

Other operating expenses

     1,000         722   
  

 

 

    

 

 

 

Total Non-Interest Expense

     9,309         6,905   
  

 

 

    

 

 

 

Net Income Before Provision for Income Tax

     3,521         956   

Provision for income taxes

     1,366         450   
  

 

 

    

 

 

 

Net Income

   $ 2,155       $ 506   
  

 

 

    

 

 

 

Earnings Per Share

     

Basic earnings per share

   $ 0.21       $ 0.08   

Diluted earnings per share

   $ 0.20       $ 0.07   

The accompanying notes are an integral part of these consolidated financial statements.

 

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CU BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

     Three Months Ended
March 31,
 
     2013     2012  

Net Income

   $ 2,155      $ 506   

Other Comprehensive Income, net of tax:

    

Non-credit portion of other-than-temporary impairments arising during the period

     (22     120   

Net unrealized gains on investment securities arising during the period

     (52     (23
  

 

 

   

 

 

 

Other Comprehensive Income (Loss)

     (74     97   
  

 

 

   

 

 

 

Comprehensive Income

   $ 2,081      $ 603   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CU BANCORP

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Year Ended December 31, 2012 and the Three Months Ended March 31, 2013

(2013 activity unaudited)

(Dollars and shares in thousands)

 

     Common Stock                           
     Outstanding
Shares
    Amount      Additional Paid
in Capital
    Retained
Earnings
(Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

Balance at December 31, 2011

     6,950      $ 77,225       $ 6,164      $ (3,435   $ 890      $ 80,844   

Net Issuance of Restricted Stock

     110        0         0        0        0        0   

Issuance of Stock for Purchase of PC Bancorp, net of $199 in issuance costs

     3,721        41,660         0        0        0        41,660   

Stock based compensation expense related to employee stock options and restricted stock

     0        0         1,120        0        0        1,120   

Restricted Stock Repurchase/Dividend

     (22     0         (228     0        0        (228

Excess tax deficiency - Stock based compensation

     0        0         (4     0        0        (4

Net Income

     0        0         0        1,727        0        1,727   

Other Comprehensive Income

     0        0         0        0        504        504   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     10,759      $ 118,885       $ 7,052      $ (1,708   $ 1,394      $ 125,623   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net Issuance (forfeiture) of Restricted Stock

     (4     0         0        0        0        0   

Stock based compensation expense related to employee stock options and restricted stock

     0        0         258        0        0        258   

Restricted Stock Repurchase/Dividend

     (13     0         (151     0        0        (151

Net income

     0        0         0        2,155        0        2,155   

Other Comprehensive Income (Loss)

     0        0         0        0        (74     (74
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

     10,742      $ 118,885       $ 7,159      $ 447      $ 1,320      $ 127,811   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CU BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Three Months Ended
March  31,
 
     2013     2012  

Cash flows from operating activities:

    

Net income:

   $ 2,155      $ 506   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Provision for loan losses

     134        0   

Provision for unfunded loan commitments

     34        20   

Stock based compensation expense

     258        265   

Depreciation

     288        237   

Net accretion of deferred loan fees/costs

     (1,213     (593

Net amortization from investment securities

     428        328   

OREO valuation write-downs

     0        232   

Net other-than-temporary impairment losses recognized in operations

     0        30   

Gain on sale of securities, net

     (5     0   

Gain on sale of SBA loans

     (350     0   

Amortization of core deposit intangible

     83        34   

Amortization of time deposit premium

     (63     0   

Accretion of subordinated debenture discount

     57        0   

(Increase) decrease in deferred tax assets

     1,181        (275

(Increase) decrease in accrued interest receivable and other assets

     (12,286     1,058   

Decrease in accrued interest payable and other liabilities

     (1,448     (586
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (10,747     1,256   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of available-for-sale investment securities

     (11,718     0   

Proceeds from sales of investment securities

     2,854        0   

Proceeds from repayment and maturities from investment securities

     16,645        6,552   

Loans originated, net of principal payments

     (4,481     36,622   

Purchases of premises and equipment

     (19     (391

Net decrease in certificates of deposit in other financial institutions

     1,522        1,865   

Net redemption of FHLB stock

     0        146   
  

 

 

   

 

 

 

Net cash provided by investing activities

     4,803        44,794   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in Non-interest bearing demand deposits

     13,925        42,436   

Net increase in Interest bearing transaction accounts

     4,533        9,381   

Net increase in Money market and savings deposits

     4,679        16,138   

Net increase (decrease) in Certificates of deposit

     (10,896     2,142   

Net increase (decrease) in Securities sold under agreements to repurchase

     2,330        (2,925

Restricted stock repurchase/dividends

     (151     (124
  

 

 

   

 

 

 

Net cash provided by financing activities

     14,420        67,048   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     8,476        113,098   

Cash and cash equivalents, beginning of year

     182,896        134,230   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 191,372      $ 247,328   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid during the year for interest

   $ 538      $ 239   

Cash paid during the year for taxes

   $ 1,303      $ 170   

Supplemental disclosures of non-cash investing activities:

    

Net increase (decrease) in unrealized gain (loss) on investment securities, net of tax

   $ (74   $ 97   

Loans transferred to other real estate owned

   $ 0      $ 0   

The accompanying notes are an integral part of these consolidated financial statements

 

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CU BANCORP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(Unaudited)

Note 1 - Basis of Financial Statement Presentation

CU Bancorp (the “Company”) is a bank holding company whose operating subsidiary is California United Bank. CU Bancorp was established to facilitate the reorganization and merger of Premier Commercial Bank, N.A. into California United Bank, which took place after the close of business on July 31, 2012. As a bank holding company, CU Bancorp is subject to regulation of the Federal Reserve Board (“FRB”). The term “Company”, as used throughout this document, refers to the consolidated balance sheets and consolidated statements of income of CU Bancorp and California United Bank.

California United Bank (the “Bank”) is a full-service commercial business bank offering a broad range of banking products and services including: deposit services, lending and cash management to small and medium-sized businesses, to non-profit organizations, to business principals and entrepreneurs, to the professional community, including attorneys, certified public accountants, financial advisors, healthcare providers and investors. The Bank opened for business in 2005, with its headquarters office located in Encino, California. As a state chartered non-member bank, the Bank is subject to regulation by the California Department of Financial Institutions, (the “DFI”) and the Federal Deposit Insurance Corporation (“FDIC”). The deposits of the Bank are insured by the FDIC, to the maximum amount allowed by law.

The consolidated financial statements include the accounts of the Company and the Bank. Significant intercompany items have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission.

CU Bancorp is the common shareholder of Premier Commercial Statutory Trust I, Premier Commercial Statutory Trust II, and Premier Commercial Statutory Trust III, entities which were acquired in the merger with Premier Commercial Bancorp (“PC Bancorp”). These trusts were established for the sole purpose of issuing trust preferred securities and do not meet the criteria for consolidation in accordance with ASC 810 Consolidation. For more detail, see Note 7 - Borrowings and Subordinated Debentures.

Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in the interim consolidated financial statements. Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with our 2012 Annual Report on Form 10-K. In the opinion of management, the accompanying financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company and the results of its operations for the interim period presented.

Additional Significant Accounting Policies

Loans Held for Sale and Servicing Assets: Loans held for sale are loans originated and includes the principal amount outstanding net of unearned income and the loans are carried at the lower of cost or fair value on an aggregate basis. A decline in the aggregate fair value of the loans below their aggregate carrying amount is recognized through a charge to earnings in the period of such decline. Unearned income on these loans is taken into earnings when they are sold. At March 31, 2013, the Company had no loans classified as held for sale.

Gains or losses resulting from sales of loans are recognized at the date of settlement and are based on the difference between the cash received and the carrying value of the related loans less transaction costs. A transfer of financial assets in which control is surrendered is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in the exchange. Assets, liabilities, derivative financial instruments, or other retained interests issued or obtained through the sale of financial assets are measured at estimated fair value, if practicable.

The most common retained interest related to loan sales is a servicing asset. Servicing assets are amortized in proportion to and over the period of the estimated future net servicing income. The amortization of the servicing asset and the servicing income are included in noninterest income in the consolidated statement of income. The fair value of the servicing assets is estimated by discounting the future cash flows using market-based discount rates and prepayment speeds. The Company’s servicing asset is evaluated regularly for impairment. The servicing asset is stratified based on the original term to maturity and the year of origination of the underlying loans for purposes of measuring impairment. The risk is that loans prepay faster than anticipated and the fair value of the asset declines. If the fair value of the servicing asset is less than the amortized carrying value, the asset is considered to be impaired and an impairment charge will be taken against earnings. The servicing asset is included in other assets on the consolidated balance sheets.

Income Taxes: The Company’s consolidated effective statutory federal and state income tax rate is approximately 41%. The actual effective rate reflected within these financial statements is dependent on the composition of taxable earnings in the period. A number of expenses such as certain merger related expenses, certain business and entertainment expenses, country club dues, etc. are not allowable as an expense for either federal or state purposes and are classified as permanent tax-to-book taxable income differences. In addition, the Company has several items included in income, that are excluded from taxable income, such as net interest income on loans within the State of California designated enterprise zone areas for state income taxes and the increase in cash surrender value of life insurance policies. Because of these differences, the Company’s effective tax may vary considerably between reporting years. During 2012, due to the inclusion of significant merger related costs, the Company had an effective tax rate in excess of its statutory rate. For 2013, to the extent the Company does not have any significant merger related costs, the consolidated effective tax rate for the period ending March 31, 2013 is expected to be the consolidated effective tax rate, which is below its statutory rate.

 

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Note 2 - Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The amendments in this update provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. This guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. This ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The amendments are effective upon issuance. The adoption of this ASU did not have an impact on the Company’s financial position or results of operations.

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Other Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011). These amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. These amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted the original ASU in the first quarter of 2012. The additional presentation requirements have been implemented and are disclosed in Note 8 herein.

In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This update amends ASU 2011-11, Balance Sheet (Topic 210): Disclosures about offsetting Assets and Liabilities. The amendment clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective for fiscal and interim periods beginning on or after January 1, 2013. The adoption of this ASU did not have an impact on the Company’s financial position or results of operations.

Note 3 - Computation of Tangible Book Value per Common Share

Tangible book value per common share was calculated by dividing total shareholders’ equity by the number of common shares issued. The tables below present the computation of tangible book value per common share as of the dates indicated (in thousands, except share data):

 

     March 31,
2013
     December 31,
2012
 

Total Shareholders’ Equity

   $ 127,811       $ 125,623   

Less: Goodwill & core deposit intangibles

     13,956         14,039   
  

 

 

    

 

 

 

Tangible shareholders’ equity

   $ 113,855       $ 111,584   
  

 

 

    

 

 

 

Common shares issued and outstanding

     10,741,974         10,758,674   
  

 

 

    

 

 

 

Tangible book value per common share

   $ 10.60       $ 10.37   
  

 

 

    

 

 

 

Note 4 - Computation of Earnings per Common Share

Basic and diluted earnings per common share were determined by dividing the net income by the applicable basic and diluted weighted average common shares outstanding. The table below presents the basic and diluted earnings per common share computations for the periods indicated (dollars and shares in thousands, except per share data):

 

     Three Months Ended
March 31,
 
     2013      2012  

Net Income

   $ 2,155       $ 506   
  

 

 

    

 

 

 

Basic weighted average common shares outstanding

     10,486         6,713   

Dilutive effect of potential common share issuances from stock options and restricted stock

     232         121   
  

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     10,718         6,834   
  

 

 

    

 

 

 

Income per common share

     

Basic

   $ 0.21       $ 0.08   

Diluted

   $ 0.20       $ 0.07   
  

 

 

    

 

 

 

Anti-dilutive shares not included in the calculation of diluted earnings per share

     247         247   
  

 

 

    

 

 

 

 

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Table of Contents

Note 5 - Investment Securities

The investment securities portfolio has been classified as available-for-sale, and as such is recorded at estimated fair value.

The following tables present the amortized cost and estimated fair values of investment securities as of the dates indicated (dollars in thousands):

 

            Gross Unrealized         

March 31, 2013 - Available-for-sale:

   Amortized Cost      Gains      Losses      Net
Non-credit
Gains on  Other-
than-
temporarily
Impaired
Securities
     Estimated Fair
Value
 

U.S. Govt Agency and Sponsored Agency - Note Securities

   $ 7,324       $ 13       $ 0       $ 0       $ 7,337   

U.S. Govt Agency - SBA Securities

     43,021         796         32         0         43,785   

U.S. Govt Agency - GNMA Mortgage-Backed Securities

     27,199         635         69         0         27,765   

U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities

     13,936         657         0         0         14,593   

Corporate Securities

     9,274         243         0         0         9,517   

Municipal Securities

     6,790         6         6         0         6,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 107,544       $ 2,350       $ 107       $ 0       $ 109,787   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012 – Available-for-sale:

 

U.S. Govt Agency and Sponsored Agency - Note Securities

   $ 18,888       $ 24       $ 1       $ 0       $ 18,911   

U.S. Govt Agency - SBA Securities

     42,308         703         32         0         42,979   

U.S. Govt Agency - GNMA Mortgage-Backed Securities

     22,237         728         5         0         22,960   

U.S. Govt Sponsored Agency - CMO & Mortgage-Backed Securities

     12,335         696         0         0         13,031   

Corporate Securities

     10,311         235         0         0         10,546   

Municipal Securities

     6,831         3         18         0         6,816   

Private Issue CMO Securities

     2,874         0         0         36         2,910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 115,784       $ 2,389       $ 56       $ 36       $ 118,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s investment securities portfolio at March 31, 2013 consists of U.S. Agency and U.S. Sponsored Agency issued AAA and AA rated investment-grade securities, investment grade corporate bond securities and municipal securities. Securities with a market value of $25.7 million and $23.3 million were pledged to secure securities sold under agreements to repurchase at March 31, 2013 and December 31, 2012, respectively. See Note 7 “Borrowings and Subordinated Debentures.” Securities with a market value of $12 million and $11 million were pledged to secure a certificate of deposit of $10.0 million with the State of California Treasurer’s office at both March 31, 2013 and December 31, 2012. Securities with a market value of $5 million and $12 million were pledged to secure a credit facility with the Federal Reserve Bank of San Francisco at March 31, 2013 and December 31, 2012, respectively. Securities with a market value of $17.3 million and $16.0 million were pledged to secure outstanding standby letters of credit confirmed/issued by a correspondent bank for the benefit of our customers in the amount of $12.7 million and $12.7 million at March 31, 2013 and December 31, 2012, respectively. Securities with a market value of $478,000 and $281,000 were pledged to secure local agency deposits at March 31, 2013 and December 31, 2012, respectively.

 

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Table of Contents

Presented below are investment securities with unrealized losses that are considered to be temporarily-impaired or other-than-temporarily impaired. They are summarized and classified according to the duration of the loss period as of the dates indicated as follows (dollars in thousands):

 

     < 12 Continuous Months      > 12 Continuous Months      Total  
     Fair Value      Net
Unrealized
Loss
     Fair Value      Net
Unrealized
Loss
     Fair Value      Net
Unrealized
Loss
 

March 31, 2013

                 

Temporarily-impaired available-for-sale investment securities:

                 

U.S. Govt. Agency SBA Securities

     4,659         32         0         0         4,659         32   

U.S. Govt. Agency GNMA Mortgage-Backed Securities

     4,516         69         0         0         4,516         69   

Municipal Securities

     3,171         6         0         0         3,171         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily-impaired available-for-sale investment securities

   $ 12,346       $ 107       $ 0       $ 0       $ 12,346       $ 107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

                 

Temporarily-impaired available-for-sale investment securities:

                 

U.S. Govt. - Agency and Sponsored Agency Note Securities

   $ 2,209       $ 1       $ 0       $ 0       $ 2,209       $ 1   

U.S. Govt. Agency SBA Securities

     5,124         32         0         0         5,124         32   

U.S. Govt. Sponsored Agency CMO & Mortgage-Backed Securities

     2,126         5         0         0         2,126         5   

Municipal Securities

     6,293         18         0         0         6,293         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily-impaired available-for-sale investment securities

   $ 15,752       $ 56       $ 0       $ 0       $ 15,752       $ 56   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other-than-temporarily impaired available-for-sale investment securities:

                 

Private Issue CMO Securities

     0         0         1,235         65         1,235         65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily-impaired and other-than-temporarily impaired available-for-sale investment securities

   $ 15,752       $ 56       $ 1,235       $ 65       $ 16,987       $ 121   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost, estimated fair value and average yield of debt securities at March 31, 2013, are shown below. Maturity categories are determined as follows:

 

   

U.S. Govt. Agency and U.S. Govt. Sponsored Agency bonds and notes - maturity date

 

   

U.S. Govt. Sponsored Agency CMO or Mortgage-Backed Securities, U.S. Govt. Agency GNMA Mortgage-Backed Securities and U.S. Gov. Agency SBA Securities - estimated cash flow taking into account estimated pre-payment speeds

 

   

Corporate Bonds and Municipal Securities - maturity date

Although mortgage-backed and U.S. Government Agency securities have contractual maturities through 2050, the expected maturity will differ from the contractual maturities because borrowers or issuers may have the right to prepay such obligations without penalties.

 

(Dollars in thousands)    March 31, 2013  

Maturities Schedule of Securities

   Amortized Cost      Fair Value      Weighted
Average
Yield
 

Due through one year

   $ 19,463       $ 19,856         1.62

Due after one year through five years

     47,666         48,689         1.75

Due after five years through ten years

     19,088         19,451         2.32

Due after ten years

     21,327         21,791         2.99
  

 

 

    

 

 

    

Total

   $ 107,544       $ 109,787         2.07
  

 

 

    

 

 

    

The weighted average yields in the above table are based on effective rates of book balances at the end of the period. Yields are derived by dividing interest income, adjusted for amortization of premiums and accretion of discounts, by total amortized cost.

On each reporting date, the Company evaluates the securities portfolio to determine if there has been an other-than-temporary impairment on each of the individual securities in the investment securities portfolio. In estimating whether an other-than-temporary impairment loss has occurred, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the current liquidity and volatility of the market for each of the individual security categories, (iv) the current slope and shape of the Treasury yield curve, along with where the economy is in the current interest rate cycle, (v) the current spread between Treasuries and the specific security categories, and the spread differential between the current spread and the long-term average spread for that security category, (vi) the projected cash flows from the specific security type, (vii) the financial guarantee and financial rating of the issuer and (viii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

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Table of Contents

If it’s determined that an other-than-temporary impairment exists on a debt security, the Company then determines if (a) it intends to sell the security or (b) it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of the conditions is met, the Company will recognize an other-than-temporary impairment in earnings equal to the difference between the security’s fair value and its adjusted cost basis. If neither of the conditions is met, the Company determines (a) the amount of the impairment related to credit loss and (b) the amount of the impairment due to all other factors. The difference between the present value of the cash flows expected to be collected and the amortized cost basis is the credit loss. The credit loss is the portion of the other-than-temporary impairments that is recognized in earnings and is a reduction to the cost basis of the security. The portion of total impairment related to all other factors is included in other comprehensive income. Significant judgment is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, future default rates, future prepayment speeds, the amount of current delinquencies that will result in defaults and the amount of eventual recoveries expected on these defaulted loans through the foreclosure process.

In January of 2013, the Company sold all of its private issue CMO securities at a net gain of $4,600. As of March 31, 2013, the Company owns no investment securities that have other-than-temporary impairment. The Company had no other sales of investment securities except the private issue CMO securities during the first quarter of 2013, and had no sales of securities during the first quarter of 2012.

Investments in FHLB Common Stock

The Company’s investment in the common stock of the FHLB is carried at cost and was $4.9 million as of March 31, 2013 and December 31, 2012. See Note 7 “Borrowings and Subordinated Debentures” for a detailed discussion regarding the Company’s FHLB borrowings and the requirements to purchase FHLB common stock.

The Company’s investment in FHLB stock is included in other assets on the accompanying balance sheets.

Note 6 - Loans

The following table presents the composition of the Company’s loan portfolio (net of deferred loan fees and costs) by FDIC call reporting category as of the dates indicated (dollars in thousands):

 

     March 31,      December 31,  
     2013      2012  

Commercial and Industrial Loans:

   $ 254,828       $ 262,637   

Loans Secured by Real Estate:

     

Construction, Land Development and Other Land

     53,954         48,528   

Owner-Occupied Nonresidential Properties

     186,563         181,844   

Other Nonresidential Properties

     262,959         246,450   

1-4 Family Residential Properties

     59,828         62,037   

Multifamily Residential Properties

     29,389         31,610   
  

 

 

    

 

 

 

Total Commercial and Other Real Estate

     538,739         521,941   

Other Loans:

     13,312         21,779   
  

 

 

    

 

 

 

Total Loans

   $ 860,833       $ 854,885   
  

 

 

    

 

 

 

The following table is a breakout of the Company’s loan portfolio (net of deferred loan fees and costs) stratified by the industry concentration of the borrower (NAICS code) as of the dates indicated (dollars in thousands):

 

     March 31,      December 31,  
     2013      2012  

Real Estate

   $ 322,258       $ 312,625   

Hotel/Lodging

     82,617         82,483   

Manufacturing

     74,087         77,203   

Construction

     58,872         55,385   

Wholesale

     52,795         54,218   

Finance

     48,163         59,791   

Healthcare

     45,145         41,857   

Professional Services

     41,717         44,714   

Restaurant/Food Service

     34,742         24,105   

Retail

     27,097         30,302   

Other Services

     24,257         23,239   

Administrative Management

     15,437         19,078   

Transportation

     10,487         11,431   

Entertainment

     7,032         8,132   

Other

     16,127         10,322   
  

 

 

    

 

 

 

Total

   $ 860,833       $ 854,885   
  

 

 

    

 

 

 

 

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Table of Contents

SBA Loans

As part of the acquisition of PC Bancorp, the Company acquired loans that were originated under the guidelines of the Small Business Administration (“SBA”) program. Furthermore, the Company continues to originate SBA loans. The total portfolio of the SBA contractual loan balances being serviced by the Company at March 31, 2013 was $110 million of which $75 million has been sold. Of the $35 million remaining on the Company’s books, $9 million is un-guaranteed and $26 million is guaranteed by the SBA.

For SBA guaranteed loans, a secondary market exists to purchase the guaranteed portion of these loans with the Company continuing to “service” the entire loan. The secondary market for guaranteed loans is comprised of investors seeking long term assets with yields that adapt to the prevailing interest rates. These investors are typically financial institutions, insurance companies, pension funds, unions and other types of investors specializing in the acquisition of this product. When a decision to sell the guaranteed portion of an SBA loan is made by the Company, bids are solicited from secondary market investors and the loan is normally sold to the highest bidder.

The Company currently plans to maintain and grow the SBA loan portfolio and is planning on selling some of the guaranteed portion of SBA loans generated during future quarters. While there were no loans classified as held for sale at March 31, 2013, the Company has recently originated approximately $1.4 million in commercial and industrial SBA loans. While the Company does not currently plan on selling these loans, it may choose to do so in the future. The Company sold $3 million of the guaranteed portion of its SBA loans during the first quarter of 2013 and recorded a gain on sale of $350,000.

Allowance for Loan Loss

The following table is a summary of the activity for the allowance for loan loss for the periods indicated (dollars in thousands):

 

     Three Months Ended
March  31,
 
     2013     2012  

Allowance for loan loss at beginning of period

   $ 8,803      $ 7,495   

Provision for loan losses

     134        0   

Net (charge-offs) recoveries:

    

Charge-offs

     (121     (4

Recoveries

     25        21   
  

 

 

   

 

 

 

Net (charge-offs) recoveries

     (96     17   
  

 

 

   

 

 

 

Allowance for loan loss at end of period

   $ 8,841      $ 7,512   
  

 

 

   

 

 

 

Net (charge-offs) recoveries to average loans

     (0.01 )%      0

 

     March 31, 2013     December 31, 2012  

Allowance for loan loss to total loans

     1.03     1.03

Allowance for loan loss to total loans accounted for at historical cost, which excludes loan balances and the related allowance for loans acquired through acquisition

     1.52     1.54

 

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Table of Contents

The following tables present, by portfolio segment, the changes in the allowance for loan loss and the recorded investment in loans as of the dates and for the periods indicated (dollars in thousands):

 

     Commercial
and Industrial
    Construction,
Land
Development
and Other
Land
     Commercial
and Other

Real Estate
    Other     Total  

Three Months Ended March 31, 2013

           

Beginning balance

   $ 4,572      $ 2,035       $ 2,084      $ 112      $ 8,803   

Provision for loan losses

     (362     112         383        1        134   

Net (charge-offs) recoveries:

           

Charge-offs

     (44     0         (69     (8     (121

Recoveries

     21        0         2        2        25   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (23     0         (67     (6     (96
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,187      $ 2,147       $ 2,400      $ 107      $ 8,841   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2012

           

Beginning balance

   $ 3,541      $ 752       $ 2,911      $ 291      $ 7,495   

Provision for loan losses

     278        53         (285     (46     0   

Net (charge-offs) recoveries:

           

Charge-offs

     0        0         0        (4     (4

Recoveries

     18        0         0        3        21   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     18        0         0        (1     17   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,837      $ 805       $ 2,626      $ 244      $ 7,512   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

12


Table of Contents
     Commercial
and Industrial
     Construction,
Land
Development
and Other
Land
     Commercial
and Other
Real Estate
     Other      Total  

March 31, 2013

              

Allowance for Loan Loss - Ending balance:

              

Individually evaluated for impairment

   $ 9       $ 0       $ 0       $ 0       $ 9   

Collectively evaluated for impairment

     4,170         2,147         2,400         107         8,824   

Purchased credit impaired (loans acquired with deteriorated credit quality)

     8         0         0         0         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Allowance for Loan Loss

   $ 4,187       $ 2,147       $ 2,400       $ 107       $ 8,841   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable - Ending balance:

              

Individually evaluated for impairment

   $ 648       $ 1,200       $ 3,434       $ 0       $ 5,282   

Collectively evaluated for impairment

     253,058         52,754         529,284         13,312         848,408   

Purchased credit impaired (loans acquired with deteriorated credit quality)

     1,122         0         6,021         0         7,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans Receivable

   $ 254,828       $ 53,954       $ 538,739       $ 13,312       $ 860,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

              

Allowance for Loan Loss - Ending balance:

              

Individually evaluated for impairment

   $ 11       $ 0       $ 0       $ 0       $ 11   

Collectively evaluated for impairment

     4,552         2,035         2,084         112         8,783   

Purchased credit impaired (loans acquired with deteriorated credit quality)

     9         0         0         0         9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Allowance for Loan Loss

   $ 4,572       $ 2,035       $ 2,084       $ 112       $ 8,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans receivable - Ending balance:

              

Individually evaluated for impairment

   $ 885       $ 1,200       $ 3,499       $ 0       $ 5,584   

Collectively evaluated for impairment

     260,982         47,328         512,312       $ 21,775         842,397   

Purchased credit impaired (loans acquired with deteriorated credit quality)

     770         0         6,130       $ 4         6,904   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans Receivable

   $ 262,637       $ 48,528       $ 521,941       $ 21,779       $ 854,885   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

Credit Quality of Loans

The Company utilizes an internal loan classification system as a means of reporting problem and potential problem loans. Under the Company’s loan risk rating system, loans are classified as “Pass,” with problem and potential problem loans as “Special Mention,” “Substandard” “Doubtful” and “Loss”. Individual loan risk ratings are updated continuously or at any time the situation warrants. In addition, management regularly reviews problem loans to determine whether any loan requires a classification change, in accordance with the Company’s policy and applicable regulations. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The internal loan classification risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

 

   

Pass - loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Loans not meeting the criteria of special mention, substandard, doubtful or loss that have been analyzed individually as part of the above described process are considered to be pass-rated loans.

 

   

Special Mention - loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Special Mention loans do not currently expose the Company to sufficient risk to warrant classification as a Substandard, Doubtful or Loss classification, but possess weaknesses that deserve management’s close attention.

 

   

Substandard - loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful - loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

   

Loss - loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

The following tables present the risk category of loans by class of loans based on the most recent internal loan classification as of the dates indicated (dollars in thousands):

 

     Commercial
and Industrial
     Construction,
Land
Development
and Other
Land
     Commercial
and

Other Real
Estate
     Other      Total  

March 31, 2013

              

Pass

   $ 240,666       $ 52,754       $ 510,879       $ 13,203       $ 817,502   

Special Mention

     1,489         0         5,243         0         6,732   

Substandard

     12,673         1,200         22,617         109         36,599   

Doubtful

     0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 254,828       $ 53,954       $ 538,739       $ 13,312       $ 860,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2012

              

Pass

   $ 250,624       $ 47,328       $ 493,768       $ 21,655       $ 813,375   

Special Mention

     4,602         0         5,300         0         9,902   

Substandard

     7,411         1,200         22,873         119         31,603   

Doubtful

     0         0         0         5         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 262,637       $ 48,528       $ 521,941       $ 21,779       $ 854,885   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Age Analysis of Past Due and Non-Accrual Loans

The following tables present an aging analysis of the recorded investment of past due loans and non-accrual loans as of the dates indicated (dollars in thousands):

 

     31-60
Days
Past Due
     61-90
Days
Past Due
     Greater
than

90 Days
Past Due
and
Accruing
     Total
Past Due
and
Accruing
     Total
Non
Accrual
     Current      Total Loans  

March 31, 2013

                    

Commercial and Industrial

   $ 270       $ 0       $ 0       $ 270       $ 1,701       $ 252,857       $ 254,828   

Construction, Land Development and Other Land

     0         0         0         0         1,200         52,754         53,954   

Commercial and Other Real Estate

     0         652         0         652         7,573         530,513         538,739   

Other

     0         0         0         0         0         13,312         13,312   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 270       $ 652       $ 0       $ 922       $ 10,474       $ 849,437       $ 860,833   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     31-60
Days
Past Due
     61-90
Days
Past Due
     Greater
than

90 Days
Past Due
and
Accruing
     Total
Past Due
and
Accruing
     Total
Non
Accrual
     Current      Total Loans  

December 31, 2012

                    

Commercial and Industrial

   $ 1,025       $ 0       $ 0       $ 1,025       $ 1,583       $ 260,029       $ 262,637   

Construction, Land Development and Other Land

     0         0         0         0         1,200         47,328         48,528   

Commercial and Other Real Estate

     2,884         0         0         2,884         7,742         511,315         521,941   

Other

     0         0         0         0         5         21,774         21,779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,909       $ 0       $ 0       $ 3,909       $ 10,530       $ 840,446       $ 854,885   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructuring

The Company’s loan portfolio contains certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. Loans are restructured in an effort to maximize collections. Economic concessions can include: reductions to the interest rate, payment extensions, forgiveness of principal or other actions.

The modification process includes evaluation of impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the loan collateral. In these cases, management uses the current fair value of the collateral, less selling costs, to evaluate the loan for impairment. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs and unamortized premium or discount) impairment is recognized through a specific allowance or a charge-off.

Impairment analyses are performed on troubled debt restructured loans in conjunction with the normal allowance for loan loss process.

The following tables include the recorded investment and unpaid principal balances for TDR loans for the dates and periods indicated (dollars in thousands): This table includes two TDR loans that were purchased credit impaired. As of March 31, 2013, these loans had a recorded investment of $1.9 million and unpaid principal balances of $2.2 million. Both of these loans are performing in compliance with their restructured agreements, and were returned to accrual status during the fourth quarter of 2012.

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Interest Income
Recognized
 

Period ended March 31, 2013

        

Commercial and Industrial

   $ 618       $ 907       $ 1   

Construction, Land Development and Other Land

     1,200         2,791         0   

Commercial and Other Real Estate

     4,152         4,866         31   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,970       $ 8,564       $ 32   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Recorded
Investment
     Unpaid
Principal
Balance
     Interest Income
Recognized
 

Year ended December 31, 2012

        

Commercial and Industrial

   $ 314       $ 626       $ 5   

Construction, Land Development and Other Land

     1,200         2,791         0   

Commercial and Other Real Estate

     4,193         4,874         32   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,707       $ 8,291       $ 37   
  

 

 

    

 

 

    

 

 

 

The following table shows the pre- and post-modification recorded investment in TDR loans by type of modification and loan segment that have occurred during the periods indicated (dollars in thousands):

 

     Three Months Ended March 31, 2013      Three Months Ended March 31, 2012  
     Number
of Loans
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
     Number
of Loans
     Pre-
Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
 

Reduced Interest Rate:

                 

Construction, Land Development and Other Land

     0       $ 0       $ 0         0       $ 0       $ 0   

Lengthened Amortization:

                 

Commercial and Industrial

     1         310         310         0         0         0   

Commercial and Other Real Estate

     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     0         0         0         0         0         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     0       $ 310       $ 310         0       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There was no financial impact for specific reserves or from charge-offs for the modified loans included in the table above.

The Company restructured one new TDR loan during the three months ended March 31, 2013; Interest only payments were extended on a commercial and industrial SBA 7a loan with a pre and post modification recorded investment of $310,000.

Loans are restructured in an effort to maximize collections. Impairment analyses are performed on the Company’s troubled debt restructured loans in conjunction with the normal allowance for loan loss process. The Company’s troubled debt restructured loans are analyzed to ensure adequate cash flow or collateral supports the outstanding loan balance.

With the exception of one commercial and industrial SBA loan for approximately $285,000 where there were no payments received after the loan was restructured, there have been no other payment defaults in 2013 subsequent to modification on troubled debt restructured loans that have been modified within the last twelve months.

 

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Impaired Loans

Impaired loans are evaluated by comparing the fair value of the collateral, if the loan is collateral dependent, and the present value of the expected future cash flows discounted at the loan’s effective interest rate, if the loan is not collateral dependent. The Company recognizes interest income from impaired loans on an accrual basis, unless the loan is on non-accrual status. There were no loans greater than 90 days past due and still accruing interest at March 31, 2013 or December 31, 2012.

A valuation allowance is established for an impaired loan when the fair value of the loan is less than the recorded investment. In certain cases, portions of impaired loans are charged-off to realizable value instead of establishing a valuation allowance and are included, when applicable in the table above as “Impaired loans without specific valuation allowance.” The valuation allowance disclosed below is included in the allowance for loan loss reported in the consolidated balance sheets as of March 31, 2013 and December 31, 2012.

The following tables present, by loan category, the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of the dates and for the periods indicated (dollars in thousands). This table excludes purchased credit impaired loans (loans acquired with deteriorated credit quality) of $7.1 million and $6.9 million at March 31, 2013 and December 31, 2012, respectively.

 

     March 31, 2013      December 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no specific allowance recorded:

                 

Commercial and Industrial

   $ 498       $ 520       $ 0       $ 677       $ 1,490       $ 0   

Construction, Land Development and Other Land

     1,200         2,791         0         1,201         2,791         0   

Commercial and Other Real Estate

     3,434         4,380         0         3,498         4,331         0   

With a specific allowance recorded:

                 

Commercial and Industrial

     150         405         9         208         463         11   

Construction, Land Development and Other Land

     0         0         0         0         0         0   

Commercial and Other Real Estate

     0         0         0         0         0         0   

Total

                 

Commercial and Industrial

     648         924         9         885         1,953         11   

Construction, Land Development and Other Land

     1,200         2,791         0         1,201         2,791         0   

Commercial and Other Real Estate

     3,434         4,380         0         3,498         4,331         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,282       $ 8,095       $ 9       $ 5,584       $ 9,075       $ 11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Three Months Ended
March 31,
 
     2013      2012  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no specific allowance recorded:

           

Commercial and Industrial

   $ 848         0       $ 588       $ 0   

Construction, Land Development and Other Land

     1,200         0         1,270         0   

Commercial and Other Real Estate

     3,455         0         1,064         0   

With a specific allowance recorded:

           

Commercial and Industrial

     150         0         200         0   

Construction, Land Development and Other Land

     0         0         0         0   

Commercial and Other Real Estate

     0         0         0         0   

Total:

           

Commercial and Industrial

     998         0         788         0   

Construction, Land Development and Other Land

     1,200         0         1,270         0   

Commercial and Other Real Estate

     3,455         0         1,064         0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,653       $ 0       $ 3,122       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of additional information pertaining to impaired loans for the periods indicated (dollars in thousands):

 

     Three Months Ended
March 31,
 
     2013      2012  

Interest foregone on impaired loans

   $ 90       $ 76   

Cash collections applied to reduce principal balance

   $ 42       $ 21   

Interest income recognized on cash collections

   $ 0       $ 0   

Loans Acquired Through Acquisition

The following table reflects the accretable net discount for loans acquired through acquisition accounted for under ASC 310 “Receivables” for the periods indicated (dollars in thousands):

 

     Three Months Ended
March 31,
 
     2013     2012  

Balance, beginning of period

   $ 12,189      $ 2,585   

Accretion, included in interest income

     (944     (392

Transfer - loans placed on non-accrual

     24        0   
  

 

 

   

 

 

 

Balance, end of period

   $ 11,269      $ 2,193   
  

 

 

   

 

 

 

The above table reflects the fair value adjustment on the loans acquired from mergers that will be amortized to loan interest income based on the effective yield method over the remaining life of the loans. These amounts do not include the fair value adjustments on the purchased credit impaired loans acquired from mergers that are on non-accrual.

Purchased Credit Impaired Loans

We evaluated loans acquired through acquisition in accordance with guidance in ASC 310-30 related to loans acquired with deteriorated credit quality. Acquired loans are considered credit-impaired if there is evidence of deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required amounts.

When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows for purchased credit-impaired loans are reasonably estimable, then interest is accreted and the loans are reported as accruing loans.

The non-accretable difference represents the difference between the undiscounted contractual cash flows and the undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans.

 

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Table of Contents

The following table reflects the outstanding balance and related carrying value of PCI loans as of the dates indicated (dollars in thousands):

 

     March 31, 2013      December 31, 2012  
     Unpaid Principal
Balance
     Carrying Value      Unpaid Principal
Balance
     Carrying Value  

Commercial and Industrial

   $ 1,608       $ 1,122       $ 1,221       $ 770   

Commercial and Other Real Estate

     9,382         6,021         9,424         6,130   

Other

     68         0         73         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,058       $ 7,143       $ 10,718       $ 6,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reflects the activities in the accretable yield for PCI loans for the period indicated (dollars in thousands):

 

     Three Months Ended
March 31,
 
     2013      2012  

Balance, beginning of period

   $ 9       $ 0   

Reclassifications from non-accretable yield

     0         0   
  

 

 

    

 

 

 

Balance, end of period

   $ 9       $ 0   
  

 

 

    

 

 

 

Note 7 - Borrowings and Subordinated Debentures

Securities Sold Under Agreements to Repurchase

The Company enters into certain transactions, the legal form of which are sales of securities under agreements to repurchase (“Repos”) at a later date at a set price. Securities sold under agreements to repurchase generally mature within a 1 day to 180 days from the issue date.

As discussed in Note 5 - Investment Securities, the Company has pledged certain investments as collateral for these agreements. Securities with a fair value of $25.7 million and $23.3 million were pledged to secure the Repos at March 31, 2013 and December 31, 2012, respectively. The Company segregates both the principal and accrued interest on these securities with the Company’s third party safekeeping custodians. All principal and interest payments on the investment securities that are pledged as collateral on the Repo program are received directly by the safekeeping custodian.

The tables below describe the terms and maturity of the Company’s Securities Sold Under Agreements to Repurchase as of the dates indicated (dollars in thousands):

 

     March 31, 2013

Date Issued

   Amount      Interest Rate    Original
Term
  

Maturity Date

February 4,2013

   $ 1,020       0.20%    60 days    April 5, 2013

March 29, 2013

     24,167       0.10% - 0.40%    3 days    April 1, 2013
  

 

 

          

Total

   $ 25,187       0.30%      
  

 

 

          
     December 31, 2012

Date Issued

   Amount      Interest Rate    Original
Term
  

Maturity Date

November 5, 2012

   $ 1,020       0.15%    91 days    February 4, 2013

December 31, 2012

     21,837       0.10% - 0.40%    1 day    January 2, 2013
  

 

 

          

Total

   $ 22,857       0.21%      
  

 

 

          

Federal Home Loan Bank Borrowings

As of March 31, 2013 , the Company had no outstanding advances (borrowings) from the Federal Home Loan Bank “FHLB”.

The Company’s credit facility with the FHLB is $312 million, which represents approximately 25% of the Bank’s total assets, as reported by the Bank in its December 31, 2012 FFIEC Call Report.

As of March 31, 2013, the Company had $560 million of loan collateral pledged with the FHLB which provides $237 million in borrowing capacity. The Company is required to purchase FHLB common stock to support its FHLB advances. At March 31, 2013 and December 31, 2012, the Company had $4.9 million of FHLB common stock. The current value of the FHLB common stock of $4.9 million would support FHLB advances up to $104 million. Any advances from the FHLB in excess of $104 million would require additional purchases of FHLB common stock. The FHLB has historically repurchased all of its excess capital stock from each bank where the level of capital stock is in excess of that bank’s current average borrowings. The FHLB repurchased $187,000 of the Company’s FHLB capital stock during 2012. The Company has been notified by the FHLB that a portion of its common stock is to be redeemed (repurchased) by June 30, 2013.

 

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Table of Contents

Subordinated Debentures

The following table summarizes the terms of each issuance of the subordinated debentures outstanding as of March 31, 2013:

 

Series

   Amount
(in  thousands)
    Issuance
Date
   Maturity
Date
  

Rate Index

   Current
Rate
    Next Reset
Date

Trust I

   $ 6,186      12/10/04    03/15/35    3 month LIBOR + 2.05%      2.33   6/17/13

Trust II

     3,093      12/23/05    03/15/36    3 month LIBOR + 1.75%      2.03   6/17/13

Trust III

     3,093      06/30/06    09/15/36    3 month LIBOR + 1.85%      2.13   6/17/13
  

 

 

              

Subtotal

     12,372                

Fair value adjustment

     (3,146             
  

 

 

              

Total

   $ 9,226                
  

 

 

              

The Company had an aggregate outstanding balance of $12.4 million in subordinated debentures at March 31, 2013. These subordinated debentures were acquired as part of the PC Bancorp merger and were issued to trusts originally established by PC Bancorp, which in turn issued trust preferred securities.

These subordinated debentures were issued in three separate series. Each issuance had a maturity of 30 years from their approximate date of issue. All three subordinated debentures are variable rate instruments that reprice quarterly based on the three month LIBOR plus a margin (see tables above). All three subordinated debentures had their interest rates reset in March of 2013 and are set to reprice again in June 2013 at the current three month LIBOR plus their index, and will continue to reprice quarterly through their maturity date. Trust I and Trust II are currently callable at par with no prepayment penalties. Trust III has a prepayment penalty equal to 100.501% of the outstanding principal through September 15, 2013. After this date Trust III would be callable at par with no prepayment penalties.

The Company currently includes in Tier 1 capital, an amount of subordinated debentures equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity less goodwill, core deposit intangibles and a portion of the SBA servicing assets. The Company’s existing subordinated debentures were grandfathered as Tier 1 capital under the Dodd-Frank Wall Street Reform and Consumer Protection Act. However, in June of 2012, the U.S. federal banking agencies issued three notices of proposed rulemaking (“NPR’s”) that would revise and replace current regulatory capital requirements to make them consistent with the Basel III Capital Standards established by the Basel Committee on Banking Supervision and certain provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act. Under the Basel III NPR, the Company’s existing subordinated debentures would be phased out of Tier 1 capital over a period of 10 years, until they are fully-phased out on January 1, 2022. The suggested implementation date for the NPR’s was to be January 1, 2013. However, in November of 2012, the U.S. federal banking agencies announced that the January 1, 2013 implementation date has been delayed due to the volume and number of comments received. These NPRs are subject to final rulemaking by the FRB and their provisions may change before implementation. The Company continues to monitor the development and impact of these proposals.

Interest payments made by the Company on subordinated debentures are considered dividend payments under FRB regulations. Notification to the FRB is required prior to the Company declaring and paying a dividend during any period in which the Company’s quarterly net earnings are insufficient to fund the dividend amount. This notification requirement is included in regulatory guidance regarding safety and soundness surrounding capital and includes other non-financial measures such as asset quality, financial condition, capital adequacy, liquidity, future earnings projections, capital planning and credit concentrations. Should the FRB object to the dividend payments, the Company would be precluded from paying interest on the subordinated debentures after giving notice within 15 days before the payment date. Payments would not commence until approval is received or the Company no longer needs to provide notice under applicable guidance. The Company has the right, assuming no default has occurred, to defer payments of interest on the subordinated debentures at any time for a period not to exceed 20 consecutive quarters. The Company has not deferred any interest payments.

 

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Table of Contents

Note 8 - Other Comprehensive Income (Loss)

The following table presents the changes in accumulated other comprehensive income (loss) by component for the periods indicated (dollars in thousands):

 

     Before Tax     Tax Effect     Net of Tax  

Three Months Ended - March 31, 2013

      

Net unrealized gains (losses) on investment securities:

      

Beginning balance

   $ 2,369      $ 975      $ 1,394   
  

 

 

   

 

 

   

 

 

 

Non-credit portion of other-than-temporary impairments arising during the period

     (32     (13     (19

Net unrealized losses arising during the period

     (89     (37     (52
  

 

 

   

 

 

   

 

 

 

Other comprehensive loss before reclassifications

     (121     (50     (71

Reclassification adjustment for gains realized in net income

     (5     (2     (3
  

 

 

   

 

 

   

 

 

 

Net other comprehensive loss

     (126     (52     (74
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 2,243      $ 923      $ 1,320   
  

 

 

   

 

 

   

 

 

 

Three Months Ended - March 31, 2012

      

Net unrealized gains (losses) on investment securities:

      

Beginning balance

   $ 1,535      $ 645      $ 890   
  

 

 

   

 

 

   

 

 

 

Non-credit portion of other-than-temporary impairments arising during the period

     177        57        120   

Net unrealized losses arising during the period

     (33     (10     (23
  

 

 

   

 

 

   

 

 

 

Other comprehensive income before reclassifications

     144        47        97   

Reclassification adjustment for impairment losses realized in net income

     0        0        0   
  

 

 

   

 

 

   

 

 

 

Net other comprehensive income

     144        47        97   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,679      $ 692      $ 987   
  

 

 

   

 

 

   

 

 

 

The table below presents the components of accumulated other comprehensive income (loss) as of the dates indicated (dollars in thousands):

 

     March 31,
2013
    March 31,
2012
 

Net unrealized gain on non other-than-temporarily impaired investment securities

   $ 2,243      $ 2232   

Net unrealized gain (loss) on other-than-temporarily impaired investment securities

     0        553   
  

 

 

   

 

 

 

Total net unrealized gain on investment securities

     2,243        1,679   

Tax expense

     (923     (692
  

 

 

   

 

 

 

Total accumulated other comprehensive income

   $ 1,320      $ 987   
  

 

 

   

 

 

 

Note 9 - Stock Options and Restricted Stock

Equity Compensation Plans

At March 31, 2013, the Company had one active stock-based employee and director compensation plan, the “2007 Equity and Incentive Plan”, and two terminated stock based compensation plans, the “2005 Plans”, which were terminated effective August 12, 2007, and replaced with the 2007 Equity and Incentive Plan. These plans are described more fully in Note 11, “Stock Options and Restricted Stock” in the Company’s Annual Report on Form 10K for the year ended December 31, 2012. The outstanding vested and unvested stock options and unvested restricted stock under the Equity and Incentive Plans listed above, were transferred and assumed by CU Bancorp in connection with the holding company reorganization, from options and restricted stock originally issued by California United Bank.

The Company’s “2007 Equity and Incentive Plan” allows the Company to issue stock options, restricted stock, restricted stock units and performance units. Certain options and share awards provide for accelerated vesting if there is a change in control as defined in the plans.

At March 31, 2013, future compensation expense related to non-vested stock option and restricted stock grants is reflected in the table below (dollars in thousands):

 

Future Stock Based Compensation Expense

   Stock
Options
     Restricted
Stock
     Total  

Remainder of 2013

   $ 22       $ 681       $ 703   

2014

     11         483         494   

2015

     2         169         171   

2016

     0         53         53   

2017

     0         3         3   

Thereafter

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Total

   $ 35       $ 1,389       $ 1,424   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The estimated fair value of all stock options granted in prior years has been calculated using the Black-Scholes option pricing model. The use of the Black-Scholes model requires the use of input parameters and assumptions used for estimating the fair value of stock options granted in 2010 and prior years. These assumptions are fully described in Note 11 - “Stock Options and Restricted Stock” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

There were no stock options granted during 2011, 2012, or during the first three months of 2013.

Stock Options

The following table summarizes the share option activity under the plans as of the date and for the period indicated:

 

     Shares      Weighted
Average
Exercise Price
     Weighted Average
Remaining
Contractual Term
(in Years)
     Aggregate
Intrinsic Value
 
                          (thousands)  

Outstanding stock options at December 31, 2012

     734,896       $ 12.44         2.8       $ 966   

Granted

     0            

Exercised

     0            

Forfeited

     0            

Expired

     0            
  

 

 

          

Outstanding stock options at March 31, 2013

     734,896       $ 12.44         2.5       $ 1,617   
  

 

 

          

Exercisable options at March 31, 2013

     705,921       $ 12.47         2.5       $ 1,583   

Unvested options at March 31, 2013

     28,975       $ 11.81         3.5       $ 34   

Outstanding, vested and expected to vest at March 31, 2013

     734,896       $ 12.44         2.5       $ 1,617   

Stock option compensation expense of $9,000, and $17,000 was recorded related to the above stock options for the periods ended March 31, 2013 and 2012, respectively. The price range of outstanding stock option grants at March 31, 2013 has not changed from what was reported by the Company at December 31, 2012.

Restricted Stock

The weighted-average grant-date fair value per share in the table below is calculated by taking the number of shares of restricted stock issued divided by the total aggregate cost of the restricted shares issued. The aggregate cost of the restricted stock was calculated by multiplying the number of shares granted at each of the grant dates by the closing stock price of the Company’s common stock on the date of the grant.

The following table summarizes the restricted stock activity under the plans for the period indicated:

 

     Number of Shares      Weighted-Average Grant-
Date Fair Value per Share
 

Restricted Stock:

     

Unvested, at December 31, 2012

     290,550       $ 11.99   

Granted

     2,500         12.74   

Vested

     33,225         11.96   

Cancelled and forfeited

     6,250         10.88   
  

 

 

    

 

 

 

Unvested, at March 31, 2013

     253,575       $ 12.03   
  

 

 

    

 

 

 

Compensation expense of $249,000 and $248,000 was recorded related to the above restricted stock grants for the three months ended March 31, 2013 and 2012, respectively. Restricted stock awards are valued at the closing stock price on the date of grant and are expensed to stock based compensation expense over the period for which the related service is performed. During the first quarter of 2013, the Company issued 2,500 shares of restricted stock to one of its employees.

Note 10 - Common Stock

As part of the merger with PC Bancorp, the Company initially issued 3,721,382 shares of common stock on July 31, 2012 to the shareholders of PC Bancorp.

During 2012, 117,300 shares of restricted stock were issued to the Company’s Directors and employees. During the first quarter of 2013, the Company issued 2,500 of restricted stock to a Company employee. The Company cancelled 6,250 and 7,500 shares of unvested restricted stock during the first quarter of 2013 and for the full year of 2012, respectively, related to employee turnover. Net issuance (forfeiture) of restricted stock for 2013 and 2012 was (3,750) shares and 109,800 shares, respectively. See Note 9 - “Stock Options and Restricted Stock” for a more detailed analysis related to the issuances of these shares.

 

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The Company has a program that allows employees to make an election to have a portion of their restricted stock that became vested during the year, redeemed by the Company to provide funds to pay the employee’s tax obligation related to the vesting of the stock. During the first quarter of 2013 and during the full year of 2012, a number of the Company’s employees elected to participate in this program. A total of 13,550 and 21,921 shares of employee unvested restricted stock were retired under this program for a total value of $151,000 and $228,000 during the first quarter of 2013 and for the full year of 2012, respectively. The retirement of these shares upon vesting is accounted for as a dividend.

Note 11 - Commitments and Contingencies

Litigation

From time to time the Company is a party to claims and legal proceedings arising in the ordinary course of business. The Company accrues for any probable loss contingencies that are estimable and discloses any possible losses in accordance with Accounting Standards Codification (“ASC”) 450, “Contingencies”. As the successor to PC Bancorp, the Company is currently a party to an action pending in the Superior Court of Orange County, California, brought by Stephen Bennett and former PC Bancorp Board member Richard Letwak against PC Bancorp’s former insurance carrier, Progressive Casualty Insurance Company. In a cross-complaint filed against PC Bancorp, Progressive contends (1) Bennett and Letwak are asserting claims PC Bancorp expressly released in late 2008 and (2) PC Bancorp (now the Company) is obligated to indemnify Progressive for its losses (including attorneys’ fees) arising out of Bennett and Letwak’s claims, the amount of which is not presently ascertainable. The Company intends to aggressively defend against the claims, and while management presently believes the Company will prevail in the litigation and that the ultimate outcome of this proceeding will not have a material adverse impact on the Company’s financial position, results of operations or cash flows as a whole, legal proceedings are always subject to inherent uncertainties - and unfavorable rulings or other events could occur.

Note 12 - Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and financial liabilities that are measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed below.

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:

 

   

Level 1 - Observable unadjusted quoted market prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date

 

   

Level 2 - Significant other observable market based inputs, other than Level 1 prices such as quoted prices for similar assets or liabilities or unobservable inputs that are corroborated by market data. This includes quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, either directly or indirectly. This would include those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace.

 

   

Level 3 - Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Assets measured utilizing level 3 are for positions that are not traded in active markets or are subject to transfer restrictions, and or where valuations are adjusted to reflect illiquidity and or non-transferability. These assumptions are not corroborated by market data. This is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. Management uses a combination of reviews of the underlying financial statements, appraisals and management’s judgment regarding credit quality to determine the value of the financial asset or liability.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. The following is a description of both the general and specific valuation methodologies used for certain instruments measured at fair value, as well as the general classification of these instruments pursuant to the valuation hierarchy.

Investment Securities Available-for-Sale: The fair value of securities available for sale may be determined by obtaining quoted prices in active markets, when available, from nationally recognized securities exchanges (Level 1 inputs). If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the securities industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Debt securities’ pricing is generally obtained from one of the matrix pricing models developed from one of the three national pricing agencies. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3 inputs.

Securities classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are excluded from net income and reported as an amount net of taxes as a separate component of accumulated other comprehensive income included in shareholders’ equity.

 

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The Company considers the inputs utilized to fair value the U.S. Agency and U.S. Sponsored Agency issued debt securities (callable and non-callable notes), mortgage backed securities guaranteed by those agencies, collateralized mortgage obligations issued by those agencies, corporate bond securities, and municipal securities within level 2 of the valuation hierarchy. Management bases the fair value for these investments primarily on third party price indications provided by independent pricing sources utilized by the Company’s bond accounting system to obtain market pricing on its individual securities. Vining Sparks who provides the Company with its bond accounting system utilizes pricing from three independent third party pricing sources for pricing of securities. These third party pricing sources utilize, quoted market prices or when quoted market prices are not available, then fair values are estimated using nationally recognized third-party vendor pricing models that would also be classified within the level 2 valuation hierarchy because the inputs are observable. However, the fair value reported may not be indicative of the amounts that could be realized in an actual market exchange.

The fair value of the Company’s U.S. Agency and U.S. Sponsored Agency callable and non-callable agency securities, mortgage backed securities guaranteed by those agencies, and collateralized mortgage obligations issued by those agencies, corporate bond securities, and municipal securities are calculated using an option adjusted spread model from one of the nationally recognized third-party pricing models. Depending on the assumptions used and the treasury yield curve and other interest rate assumptions, the fair value could vary significantly in the near term.

Loans: The fair value for loans is estimated by discounting the expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities, adjusted for the allowance for loan loss. Loans are segregated by type such as commercial and industrial, commercial real estate, construction and other loans with similar credit characteristics and are further segmented into fixed and variable interest rate loan categories. Expected future cash flows are projected based on contractual cash flows, adjusted for estimated prepayments.

Impaired Loans: The fair value of impaired loans is determined based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, if the loan is collateral dependent, or based on the discounted cash flows for non collateral dependent loans, and are classified at a level 3 in the fair value hierarchy. Collateral on collateral dependent loans may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals performed by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. For unsecured loans, the estimated future discounted cash flows of the business or borrower, are used in evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Interest Rate Swap Contracts: The fair value of the interest rate swap contracts are provided by an independent third party vendor that specializes in interest rate risk management and fair value analysis using a system that utilizes current market data to estimate cash flows of the interest rate swaps utilizing the future LIBOR yield curve through the maturity date of the interest rate swap contract. The forward LIBOR yield curve is the primary factor in the valuation of the interest rate swap contracts. Accordingly, the interest rate swap contracts are categorized as a level 2 valuation.

Other Real Estate Owned: The fair value of other real estate owned is generally based on real estate appraisals (unless more current market information is available) less estimated costs of sale. 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.

SBA Servicing Asset: The Company acquired an SBA servicing asset with the PC Bancorp merger. This servicing asset was initially fair valued at the merger date based on an evaluation by a third party who specializes in fair value analysis. The fair value of this asset was based on the estimated discounted future cash flows utilizing market based discount rates and estimated prepayment speeds. The discount rate was based on the current U.S. Treasury yield curve, plus a spread for marketplace risk associated with these assets. Prepayment speeds were selected based on the historical prepayments of similar SBA pools. The prepayment speeds determine the timing of the cash flows. The SBA servicing asset is amortized over the estimated life of the loans based on an effective yield approach. In addition, the Company’s servicing asset is evaluated regularly for impairment by discounting the estimated future cash flows using market-based discount rates and prepayment speeds. If the calculated present value of the servicing asset declines below the Company’s current carrying value, the servicing asset is written down to its present value. Based on the Company’s methodology in its valuation of the SBA servicing asset, the current carrying value is estimated to approximate the fair value. The valuation inputs required in valuing the SBA servicing asset are considered to be level 3 inputs.

Non-Maturing Deposits: The fair values for non-maturing deposits (deposits with no contractual termination date), which include non-interest bearing demand deposits, interest bearing transaction accounts, money market deposits and savings accounts are equal to their carrying amounts, which represent the amounts payable on demand. Because the carrying value and fair value are by definition identical, and accordingly non-maturity deposits are categorized as a level 1 valuation, these balances are not listed in the following tables.

Maturing Deposits: The fair values of fixed maturity certificates of deposit (time deposits) are estimated using a discounted cash flow calculation that applies current market deposit interest rates to the Bank’s current certificate of deposit interest rates for similar term certificates. The rates being paid on certificates of deposit not acquired from PC Bancorp at March 31, 2013 and December 31, 2012, were generally identical to the market interest rates for comparable terms and thus both the carry amount and fair value are generally considered approximately identical as of the reporting dates. The deposits acquired from PC Bancorp were initially adjusted to their fair value at the date of acquisition. The interest rates used to calculate the fair value adjustments on the PCB certificates were considered to be the market rates at the date of acquisition. Maturing deposits are categorized as level 2 valuations.

 

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Table of Contents

Securities Sold under Agreements to Repurchase (“Repos”): The fair value of securities sold under agreements to repurchase is estimated based on the discounted value of future cash flows expected to be paid on the deposits. The carrying amounts of Repos with maturities of 90 days or less approximate their fair values. The fair value of Repos with maturities greater that 90 days is estimated based on the discounted value of the contractual future cash flows. Securities sold under agreements to repurchase are categorized as a level 1 valuation.

Subordinated Debentures: The fair value of the three variable rate subordinated debentures (“debentures”) is estimated using a discounted cash flow calculation that applies the three month LIBOR plus the margin index at March 31, 2013, to the cash flows from the debentures, based on the actual interest rate the debentures were accruing at March 31, 2013. Because all three of the debentures re-priced on March 15, 2013 based on the three month LIBOR plus the index margin at that date, and there has been relatively little to no change in the three month LIBOR from the re-pricing date through March 31, 2013, the current face value of the debentures and their calculated market value were identical.

Fair value of commitments: Loan commitments that are priced on an index plus a margin to a market rate of interest are reported at the carrying value of the loan commitment. Loan commitments on which the committed fixed interest rate is less than the current market rate were insignificant at March 31, 2013 and December 31, 2012.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the financial assets and financial liabilities measured at fair value on a recurring basis as of the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):

 

     Total
Carrying
Value
     Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial Assets - March 31, 2013

           

Investment securities available-for-sale

   $ 109,787       $ 0       $ 109,787       $ 0   

Financial Liabilities - March 31, 2013

           

Interest Rate Swap Contracts

   $ 5,561       $ 0       $ 5,561       $ 0   

Financial Assets - December 31, 2012

           

Investment securities available-for-sale

   $ 118,153       $ 0       $ 115,243       $ 2,910   

Financial Liabilities - December 31, 2012

           

Interest Rate Swap Contracts

   $ 6,040       $ 0       $ 6,040       $ 0   

The investment securities that comprise the balances reflected in the “Significant Unobservable Inputs (Level 3)” as of December 31, 2012 include private issue CMO securities. These securities were sold during the first quarter of 2013 for a net gain of $4,600.

The private issue CMO securities were valued at December 31, 2012 utilizing pricing obtained from the national market pricing services that are utilized in the Company’s bond accounting system. Due to the price volatility associated with these securities, the Company had classified them as level 3. These securities were all sold in the first quarter of 2013. The roll forward of these securities is listed in the table below.

The following table below presents a roll-forward of all assets and liabilities and additional information about the financial assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods presented (dollars in thousands):

 

     Balance at
January 1,
     Included
in
Earnings
    Included in
Other
Comprehensive
Income (Loss)
    Purchases,
Issuances,
(Sales)
Settlements
    Transfers
into (out  of)
Level 3
     Balance at
March 31,
 

Financial Assets - Measured at Fair Value using Level 3 - March 31, 2013

              

Private Issue CMO Securities

   $ 2,910       $ (20   $ 0      $ (2,890   $ 0       $ 0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 2,910       $ (20   $ 0      $ (2,890   $ 0       $ 0   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Financial Assets - Measured at Fair Value using Level 3 - March 31, 2012

              

Private Issue CMO Securities

   $ 2,775       $ (26   $ 177      $ (111   $ 0       $ 2,815   

U.S. Government Sponsored Agency CMO Securities

     2,379         0        0        (180     0         2,199   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 5,154       $ (26   $ 177   $ (291   $ 0       $ 5,014   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Assets Measured at Fair Value on a Non-recurring Basis

The Company may be required periodically, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of or during the period.

The following table presents the balances of assets and liabilities measured at fair value on a non-recurring basis by caption and by level within the fair value hierarchy as of the dates indicated (dollars in thousands):

 

    Carrying Value at
end of period
    Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
    Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable  Inputs

(Level 3)
 

Financial Assets - March 31, 2013

       

Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs

  $ 1,501      $ 0      $ 0      $ 1,501   

Other real estate owned

    3,112        0        0        3,112   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,613      $ 0      $ 0      $ 4,613   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Assets - December 31, 2012

       

Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs

  $ 2,056      $ 0      $ 0      $ 2,269   

Other real estate owned

    3,112        0        0        3,112   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,168      $ 0      $ 0      $ 5,381   
 

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of the dates indicated (dollars in thousands):

 

    Fair Value at
March 31,
2013
   

Valuation

Technique

 

Significant
Unobservable Inputs

  Significant
Unobservable

Input  Values
 

Financial Assets - March 31, 2013

       

Collateral dependent impaired loans with specific valuation allowance and/or partial charge-offs

  $ 1,588      Appraisal value   Estimated Collateral value of property    
 
 
Various depending
on property type and
location
  
  
  

Other real estate owned

  $ 3,112      Purchase and Sale Agreement (1)   Contract   $ 3,190   
      Less estimated selling costs   $ 78   

 

(1) The Company has entered into a non-publicly disclosed purchase and sales agreement to sell this parcel of real estate to a private third party. The purchase price was a negotiated amount based on a number of both public and non-public economic factors.

Fair Value of Financial Asset and Liability Table

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of March 31, 2013 and December 31, 2012. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The description of the valuation methodologies used for assets and liabilities measured at fair value and for estimating fair value for financial instruments not recorded at fair value has been described above.

 

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Table of Contents

The table below presents the carrying amounts and fair values of financial instruments as of the dates indicated (dollars in thousands):

 

                   Fair Value Measurements  
     Carrying
Amount
     Fair Value      Quoted Prices
in Active
Markets for
Identical
Assets  or
Liabilities

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

March 31, 2013

              

Financial Assets

              

Investment securities available-for-sale

   $ 109,787       $ 109,787       $ 0       $ 109,787       $ 0   

Loans, net

     851,992         854,161         0         0         854,161   

Financial Liabilities

              

Certificates of deposit

     70,377         70,568         0         70,568         0   

Securities sold under agreements to repurchase

     25,187         25,187         0         25,187         0   

Subordinated debentures

     9,226         12,372         0         0         12,372   

Interest rate swap contracts

     5,561         5,561         0         5,561         0   

December 31, 2012

              

Financial Assets

              

Investment securities available-for-sale

   $ 118,153       $ 118,153       $ 0       $ 115,243       $ 2,910   

Loans, net

     846,082         848,146         0         0         848,146   

Financial Liabilities

              

Certificates of deposit

     81,336         81,648         0         81,648         0   

Securities sold under agreements to repurchase

     22,857         22,857         0         22,857         0   

Subordinated debentures

     9,169         12,372         0         0         12,372   

Interest rate swap contracts

     6,038         6,038         0         6,038         0   

Note 13 - Derivative Financial Instruments

The Company acquired interest rate swap contracts (“swaps”) on July 31, 2012 as a result of the merger with PC Bancorp. The Company has incorporated these instruments into its asset liability program when monitoring its interest rate risk position. All of the interest rate swap contracts are with the same counterparty bank.

At March 31, 2013, the Company had twenty three pay-fixed, receive-variable interest rate contracts that were designed to convert fixed rate loans into variable rate loans. In addition, the Company had one pay-fixed, receive-variable interest rate swap contract at the holding company that was settled during the first quarter of 2013. Twenty one of the twenty three swap contracts are designated as interest rate hedges at March 31, 2013. The interest rate swaps function as economic hedges of the associated fixed rate loans. The outstanding swaps have maturities of up to 10 years.

The location of the asset and liability derivative instruments as of March 31, 2013 and December 31, 2012, and the amount of income, expense and gain or loss recognized for the three months ended March 31, 2013 and 2012 are presented in the tables below (dollars in thousands):

 

     Liability Derivatives  
     March 31,
2013
     December 31,
2012
 

Fair Value Hedges

     

Interest rate contacts notional amount

   $ 32,720       $ 35,990   

Derivatives not designated as hedging instruments under ASC 815:

     

Interest rate swap contracts fair value

   $ 982       $ 1,114   

Derivatives designated as hedging instruments under ASC 815:

     

Interest rate swap contracts fair value

     4,579         4,924   
  

 

 

    

 

 

 

Total interest rate contracts fair value

   $ 5,561       $ 6,038   
  

 

 

    

 

 

 

Balance sheet location

    
 
Accrued Interest Payable and
Other Liabilities
  
  
    
 
Accrued Interest Payable and
Other Liabilities
  
  

 

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Table of Contents
     The Effect of Derivative Instruments on the
Consolidated Statements of Income
 
     For the Three
Months Ended
March 31,

2013
    For the Three
Months Ended
March 31,

2012
 

Derivatives not designated as hedging instruments:

    

Interest rate swap contracts - loans

    

Decrease in fair value of interest rate swap contracts

   $ 62      $ 0   

Payment received (paid) on interest rate swap contracts on loans

     (87     0   
  

 

 

   

 

 

 

Net increase/(decrease) in other non-interest income

     (25     0   
  

 

 

   

 

 

 

Interest rate swap contracts - subordinated debenture

    

Decrease in fair value of interest rate swap contracts

     70        0   

Payment received (paid) on interest rate swap contracts on subordinated debentures

     (70     0   
  

 

 

   

 

 

 

Net increase/(decrease) in other non-interest income

     0        0   
  

 

 

   

 

 

 

Total increase/(decrease) in other non-interest income

   $ (25   $ 0   
  

 

 

   

 

 

 

Derivatives designated as hedging instruments:

    

Interest rate swap contracts - loans

    

Decrease in fair value of interest rate swap contracts

   $ 345      $ 0   

Decrease in fair value of hedged loans recognized in interest income

     (69     0   

Payment received (paid) on interest rate swap contracts on loans

     (302     0   
  

 

 

   

 

 

 

Net increase/(decrease) in interest income on loans

   $ (26   $ 0   
  

 

 

   

 

 

 

The total amount of interest paid on all interest rate swap contracts by the Company for the three months ended March 31, 2013 was $459,000, the total change (decrease) in the fair value of the interest rate swap contracts was $477,000, and the net change in the fair value of the loans was a decrease of $69,000. The interest rate swap contract originally associated with the subordinated debenture that was scheduled to mature in June 2013 was liquidated prior to maturity during the 1st quarter of 2013. The final payment associated with the liquidation of this swap agreement was completely offset by the liquidation of the fair value liability associated with the interest rate swap contract, resulting in no impact to non-interest income during the 1st quarter of 2013.

The amount of interest recognized in earnings due to the amount of the interest rate swap contracts that are ineffective was considered insignificant during the 1st quarter of 2013.

Under the interest rate swap contracts, the company is required to pledge and maintain collateral for the credit support under these agreements. At March 31, 2013, the Company had $4.3 million in certificates of deposit with the counterparty to the interest rate swap contracts, and had $2.0 million of due from bank balances with the same counterparty pledged to support the interest rate swap contracts. Both the due from bank balances and the certificates of deposit are pledged with the same counterparty bank as the interest rate swap contracts.

 

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Table of Contents

Note 14 - Condensed Financial Information of Parent Company

The Parent Company only condensed balance sheets as of March 31, 2013 and December 31, 2012 and the related statements of net earnings and condensed statements of cash flows for the three month period ended March 31, 2013 are presented below (dollars in thousands):

 

Parent Company Only Condensed Balance Sheets

   March 31,
2013
     December 31,
2012
 
     (unaudited)      (audited)  

ASSETS

     

Cash and due from banks

   $ 1,231       $ 1,477   

Certificates of deposit in other financial institutions

     370         370   

Loans

     2,451         2,472   

Investments in subsidiary

     132,491         130,217   

Accrued interest receivable and other assets

     545         353   
  

 

 

    

 

 

 

Total Assets

   $ 137,088       $ 134,889   
  

 

 

    

 

 

 

LIABILITIES

     

Subordinated debentures

   $ 9,226       $ 9,169   

Accrued interest payable and other liabilities

     51         97   
  

 

 

    

 

 

 

Total Liabilities

     9,277         9,266   
  

 

 

    

 

 

 

SHAREHOLDERS’ EQUITY

     127,811         125,623   
  

 

 

    

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 137,088       $ 134,889   
  

 

 

    

 

 

 

 

     Three Months
Ended
 

Parent Company Only Condensed Statements of Income

   March 31, 2013  

Interest Income

   $ 58   

Interest Expense

     125   

Operating Expenses

     116   
  

 

 

 

Total Expenses

     241   
  

 

 

 

Loss Before Income Tax Benefit and Equity in Undistributed Earnings of Subsidiary

     (183
  

 

 

 

Income tax benefit

     96   
  

 

 

 

Loss Before Equity in Undistributed Earnings of Subsidiary

     (87
  

 

 

 

Equity in undistributed earnings of subsidiary

     2,242   
  

 

 

 

Net Income

   $ 2,155   
  

 

 

 

 

Parent Company Only Condensed Statement of Cash Flows

   Three Months
Ended

March  31, 2013
 

Cash flows from operating activities:

  

Net income:

   $ 2,155   

Adjustments to reconcile net loss to net cash used in operating activities:

  

Equity in undistributed earnings of subsidiaries

     (2,242

Amortization of subordinated debentures fair value

     57   

Accretion of deferred loan fees

     (18

Increase in accrued interest receivable and other assets

     (192

Decrease in accrued interest payable and other liabilities

     (45
  

 

 

 

Net cash used in operating activities

   $ (285
  

 

 

 

Cash flows from investing activities:

  

Net decrease in loans

     39   
  

 

 

 

Net cash provided by financing activities

   $ 39   
  

 

 

 

Net decrease in cash

     (246

Cash, beginning of year

     1,477   
  

 

 

 

Cash, end of period

   $ 1,231   
  

 

 

 

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

See “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” below relating to “forward-looking” statements included in this report.

The following is management’s discussion and analysis of the major factors that influenced the results of the operations and financial condition of CU Bancorp, the (“Company”) for the current period. This analysis should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2012 Annual Report on Form 10K and with the unaudited financial statements and notes as set forth in this report.

OVERVIEW

Forward-Looking Information

Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because the business of the Company involves inherent risks and uncertainties. These risks include, but are not limited to, general economic conditions nationally and in California, unanticipated credit losses in the Company’s loan portfolio, rapid changes in interest rates and other risks discussed in the Bank’s Annual Report on Form 10K.

Recent Developments

Merger

On July 31, 2012 the Company acquired Premier Commercial Bancorp (“PC Bancorp”) and its subsidiary Premier Commercial Bank, N.A. (“PCB”) headquartered in Anaheim, California through a merger transaction. At the date of acquisition, PC Bancorp had assets of approximately $396.6 million, two offices in Orange County, California, an Anaheim branch and an Irvine/Newport Beach branch. Shareholders of PC Bancorp received 3,721,382 shares equal to approximately $41.87 million in the common stock of CU Bancorp, and PC Bancorp stock option holders received $455,000 in cash in payout of their options.

Regulatory Legislation

Dodd-Frank Wall Street Reform and Consumer Protection Act: In July 2010, the Dodd-Frank Financial Reform Bill (“the Wall Street Reform and Consumer Protection Act”) was passed by Congress and signed into law by President Obama. This legislation aims to restore responsibility and accountability to the U.S. financial system and significantly revises and expands the rulemaking, supervisory and enforcement authority of the federal bank regulatory agencies. The numerous rules and regulations that have been promulgated and are yet to be promulgated and finalized under the Dodd-Frank Act are likely to impact our operations and compliance costs.

In general, more stringent capital, liquidity and leverage requirements are expected to impact our business as the Dodd-Frank Act is fully implemented. The federal agencies have issued proposed rules which will apply directly to larger institutions with either more than $50 billion in assets or more than $10 billion in assets, such as Federal Reserve regulations for financial institutions deemed systemically significant, Federal Reserve and FDIC rules requiring stress tests and Federal Reserve rules to implement the Volcker Rule. However, requirements and policies imposed on larger institutions may, in some cases, become “best practice” standards for smaller institutions. Therefore, as a result of the changes required by the Dodd-Frank Act, the profitability of our business activities may be impacted and we may be required to make changes to certain of our business practices. These changes may also require us to devote significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.

The federal regulatory agencies have issued some of the rules implementing the Dodd-Frank Act and are in the process of additional regulations, studies and reports as required by Dodd-Frank. We cannot predict the extent to which the interpretations and implementation of this wide-ranging federal legislation by regulations and in supervisory policies and practices may affect us. Many of the requirements of Dodd-Frank will be implemented over time and most will be subject to regulations to be implemented or which will not become fully effective for several years. There can be no assurance that these or future reforms (such as possible new standards for commercial real estate lending or new stress testing guidance for all banks) arising out of these regulations and studies and reports required by Dodd-Frank will not significantly increase our compliance or other operating costs and earnings or otherwise have a significant impact on our business, financial condition and results of operations. Dodd-Frank will likely result in more stringent capital, liquidity and leverage requirements on us and may otherwise adversely affect our business. For example, the provisions that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits, as well as place limitations on certain revenues those deposits may generate. As a result of the changes required by Dodd-Frank, the profitability of our business activities may be impacted and we may be required to make changes to certain of our business practices. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.

For a more detailed discussion regarding the Dodd-Frank Wall Street Reform and Consumer Protection Act, see the Company’s December 31, 2012 Form 10K, Part I, Item 1 – Business – Supervision and Regulation – Recent Legislation and Regulation – Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

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Regulatory Capital Proposals

Basel III Capital Standards: In June 2012, the federal banking agencies issued a series of proposed rules to conform U.S. regulatory capital requirements and make them consistent with the Basel III Capital Standards established by the Basel Committee on Banking Supervision and certain provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act. The proposed revisions, if adopted, would establish new higher capital ratio requirements, narrow the definitions of capital, impose new operating restrictions on banking organizations with insufficient capital buffers and increase the risk weighting of certain assets. The proposed new capital requirements would apply to all banks, savings associations, bank holding companies with more than $500 million in assets and all savings and loan holding companies regardless of asset size. It is unclear whether, if, or in what form Basel III will be adopted. A summary of the proposed regulatory changes is set forth below.

 

   

New and Increased Capital Requirements. The proposed rules would establish a new capital measure called “Common Equity Tier I Capital” consisting of common stock and related surplus, retained earnings, accumulated other comprehensive income and, subject to certain adjustments, minority common equity interests in subsidiaries. Unlike the current rules which exclude unrealized gains and losses on available-for-sale debt securities from regulatory capital, the proposed rules would generally require accumulated other comprehensive income to flow through to regulatory capital. Depository institutions and their holding companies would be required to maintain Common Equity Tier I Capital equal to 4.5% of risk-weighted assets by 2015. Additionally, the proposed regulations would increase the required ratio of Tier I Capital to risk-weighted assets from the current 4% to 6% by 2015. Tier I Capital would consist of Common Equity Tier I Capital plus Additional Tier I Capital which would include non-cumulative perpetual preferred stock. Neither cumulative preferred stock (other than certain preferred stock issued to the U.S. Treasury) nor trust preferred securities would qualify as Additional Tier I Capital but could be included in Tier II Capital along with qualifying subordinated debt. The proposed regulations would also require a minimum Tier I leverage ratio of 4% for all institutions. The minimum required ratio of total capital to risk-weighted assets would remain at 8%.

 

   

Capital Buffer Requirement. In addition to increased capital requirements, depository institutions and their holding companies may be required to maintain a capital buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer would be subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement would be phased in over a four-year period beginning in 2016. The capital buffer requirement effectively raises the minimum required risk-based capital ratios to 7% Common Equity Tier I Capital, 8.5% Tier I Capital and 10.5% Total Capital on a fully phased-in basis.

 

   

Changes to Prompt Corrective Action Capital Categories. The Prompt Corrective Action rules would be amended to incorporate a Common Equity Tier I Capital requirement and to raise the capital requirements for certain capital categories. In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization would be required to have at least an 8% Total Risk-Based Capital Ratio, a 6% Tier I Risk-Based Capital Ratio, a 4.5% Common Equity Tier I Risk Based Capital Ratio and a 4% Tier I Leverage Ratio. To be well capitalized, a banking organization would be required to have at least a 10% Total Risk-Based Capital Ratio, an 8% Tier I Risk-Based Capital Ratio, a 6.5% Common Equity Tier I Risk-Based Capital Ratio and a 5% Tier I Leverage Ratio.

 

   

Additional Deductions from Capital. Banking organizations would be required to deduct goodwill and certain other intangible assets, net of associated deferred tax liabilities, from Common Equity Tier I Capital. Deferred tax assets arising from temporary timing differences that could not be realized through net operating loss (“NOL”) carrybacks would continue to be deducted but deferred tax assets that could be realized through NOL carrybacks would not be deducted but would be subject to 100% risk weighting. Defined benefit pension fund assets, net of any associated deferred tax liability, would be deducted from Common Equity Tier I Capital unless the banking organization has unrestricted and unfettered access to such assets. Reciprocal cross-holdings of capital instruments in any other financial institutions would now be deducted from capital, not just holdings in other depository institutions. For this purpose, financial institutions are broadly defined to include securities and commodities firms, hedge and private equity funds and non-depository lenders. Banking organizations would also be required to deduct non-significant investments (less than 10% of outstanding stock) in other financial institutions to the extent these exceed 10% of Common Equity Tier I Capital subject to a 15% of Common Equity Tier I Capital cap. Greater than 10% investments must be deducted if they exceed 10% of Common Equity Tier I Capital. If the aggregate amount of certain items excluded from capital deduction due to a 10% threshold exceeds 17.65% of Common Equity Tier I Capital, the excess must be deducted.

 

   

Changes in Risk-Weightings. The proposed rules would apply a 250% risk-weighting to mortgage servicing rights, deferred tax assets that cannot be realized through NOL carrybacks and significant (greater than 10%) investments in other financial institutions. The proposal also would also change the risk-weighting for residential mortgages and would create a new 150% risk-weighting category for “high volatility commercial real estate loans” which are credit facilities for the acquisition, construction or development of real property other than one- to four-family residential properties or commercial real projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate’s “as completed” value before the loan was made.

The proposed rules were to become effective in stages beginning January 1, 2013 through 2019, however in the fourth quarter of 2012, the implementation of Basel III and these regulations was postponed indefinitely in response to the large number of comment letters received by the agencies with regard to the proposed rulemaking. While the proposed new regulatory capital requirements would likely result in generally higher regulatory capital standards for the Company, it is difficult at this time to predict when or how many of the proposed provisions will ultimately be adopted or whether broader exemptions may be provided for community banks or smaller holding companies. In addition, bank regulators may also continue their past policies of expecting banks to maintain additional capital beyond the new minimum requirements. The regulations ultimately applicable to the Company may be substantially different from the Basel III final framework as proposed initially. Requirements to maintain higher

 

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levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity, restrict the ability to pay dividends and require the raising of additional capital. The Company cannot be certain how the regulators will implement requirements of the Dodd-Frank Act that are similar to Basel III.

For a more detailed discussion regarding the Basel III provision see the Company’s December 31, 2012 Form 10K, Part I, Item 1 – Business – Bank Regulation – Basel Capital and Liquidity Initiatives.

Capital

As of March 31, 2013, the Bank’s Tier 1 leverage ratio, Tier 1 risk-based capital ratio, and Total risk-based capital ratio were 9.13%, 10.90% and 11.78%, respectively. CU Bancorp’s consolidated Tier 1 leverage ratio, Tier 1 risk-based capital ratio, and Total risk-based capital ratio at March 31, 2012 were 9.76%, 11.65% and 12.52%, respectively. These ratios placed the Bank and CU Bancorp in the “well-capitalized” category as defined by federal regulations, which require corresponding capital ratios of 5%, 6% and 10%, respectively, to qualify for that designation.

Corporate Governance

The following are some of the key corporate governance practices at both the Company and the Bank, which are oriented to ensure that there are no conflicts of interest and that the Company operates in the best interests of shareholders:

 

   

Nine of the Company’s and Bank’s eleven directors at March 31, 2013 are independent outside directors.

 

   

None of the Company’s senior officers and directors have received loans from the Bank.

 

   

There are no loans by the Bank to outside companies controlled by or affiliated with officers or directors.

 

   

The Bank’s Board of Directors has Audit and Compensation, nomination and governance committees comprised solely of independent outside directors.

Number of Employees

The number of active full-time equivalent employees increased from 167 at December 31, 2012 to 172 at March 31, 2013.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions, and other subjective assessments. We have identified several accounting policies that, due to judgments, estimates, and assumptions inherent in those policies, are essential to an understanding of our consolidated financial statements. These policies relate to the methodologies that that determine our allowance for loan loss, the treatment of non-accrual loans, the classification and valuation of investment securities, the valuation of retained interests and servicing assets related to the sales of SBA loans, accounting for and valuation of derivatives and hedging activities, accounting for business combinations, evaluation of goodwill for impairment, and accounting for income taxes.

Our critical accounting policies are described in greater detail in our 2012 Annual Report on Form 10-K, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates.

We believe that our most critical accounting policies upon which our financial condition depends, and which involve the most complex or subjective decisions or assessment, are as follows:

Allowance for Loan Loss

We maintain an allowance for loan loss to provide for probable losses in the loan portfolio. Additions to the allowance are made by charges to operating expense in the form of a provision for loan losses. All loans or portions thereof that are judged to be uncollectible will be charged against the allowance while any recoveries would be credited to the allowance. We have instituted loan policies designed primarily for internal use, to adequately evaluate and analyze risk factors associated with our loan portfolio and to enable us to assess such risk factors prior to granting new loans and to assess the sufficiency of the allowance. We conduct an evaluation of the loan portfolio on a quarterly basis. This evaluation includes an assessment of the following factors: the results of any current internal and external loan reviews including any regulatory examination, historical loan loss experience, estimated probable loss exposure on substandard credits, concentrations of credit, value of collateral and any known impairment in the borrowers’ ability to repay and present economic conditions.

Investment Securities

The Company currently classifies its investment securities under the available-for-sale classification. Under the available-for-sale classification, securities can be sold in response to certain conditions, such as changes in interest rates, changes in the credit quality of the securities, when the credit quality of a security does not conform with current investment policy guidelines, fluctuations in deposit levels or loan demand or need to restructure the portfolio to better match the maturity or interest rate characteristics of liabilities with assets. Securities classified as available-for-sale are accounted for at their current fair value rather than amortized historical cost. Unrealized gains or losses are excluded from net income and reported as a separate component of accumulated other comprehensive income (net of taxes) included in shareholders’ equity.

 

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At each reporting date, investment securities are assessed to determine whether there is an other-than-temporary impairment. If it is probable, based on current information, that we will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. Once impairment is considered to have occurred, the credit portion of the loss is required to be recognized in current earnings, while the non-credit portion of the loss is recorded as a separate component of shareholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. For mortgage-backed securities, the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The amount of prepayments varies from time to time based on the interest rate environment and the rate of turnover of mortgages. The Bank’s investment in FHLB stock and other bank stock is carried at cost and is included in other assets on the accompanying balance sheets.

Derivative Financial Instruments and Hedging Activities

All derivative instruments are recorded on the consolidated balance sheet at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and hedged item related to the hedged risk are recognized in earnings. ASC Topic 815 establishes the accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the consolidated balance sheet as either an asset or liability measured at its fair value. ASC Topic 815 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

On the date a derivative contract is entered into, the Company will designate the derivative contract as either a fair value hedge (i.e. a hedge of the fair value of a recognized asset or liability), a cash flow hedge (i.e. a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability), or a stand-alone derivative (i.e. an instrument with no hedging designation). For a derivative designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as other non-interest income.

The Company will discontinue hedge accounting prospectively when: it is determined that the derivative is no longer effective in offsetting change in the fair value of the hedged item, the derivative expires or is sold, is terminated, is exercised or management determines that designation of the derivative as a hedging instrument is no longer appropriate. When hedge accounting is discontinued, the Company will continue to carry the derivative on the consolidated balance sheet at its fair value (if applicable), but will no longer adjust the hedged asset or liability for changes in fair value. The adjustments of the carrying amount of the hedged asset or liability will be accounted for in the same manner as other components of the carrying amount of that asset or liability, and the adjustments are amortized to interest income over the remaining life of the hedged item upon the termination of hedge accounting.

Business Combinations

The assets and liabilities of PC Bancorp that were acquired in 2012, were accounted for at fair value at the date of acquisition. The Company obtained either a third party analysis or an internal valuation analysis of the fair value of the assets and liabilities acquired. An analysis was performed as of the date of acquisition on loans, investment securities, interest rate swap contracts, SBA loan servicing assets, contractual lease obligations, deferred compensation, deposits and subordinated debentures as of the acquisition date. Balances that were considered to be at fair value at the date of acquisition were cash and cash equivalents, bank owned life insurance, interest rate swap contracts, other assets (interest receivable) and other liabilities (interest payable).

For a detailed analysis of the business combinations accounting related to either PC Bancorp or COSB, see the Company’s December 31, 2012 Form 10K, Footnote 2, Business Combinations.

Income Taxes

Deferred income tax assets and liabilities are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance may be established to the extent necessary to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax assets or benefits will be realized. Realization of tax benefits depends on having sufficient taxable income, available tax loss carrybacks or credits, the reversing of taxable temporary differences and/or tax planning strategies within the reversal period and that current legislative tax law allows for the realization of those tax benefits.

 

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RESULTS OF OPERATIONS

The following table presents condensed statements of income and related performance data for the periods indicated and the dollar and percentage changes between the periods (dollars in thousands, except per share data):

 

     Three Months Ended March 31,  
     Amounts     Increase
(Decrease)
 
     2013     2012     $     %  

Interest Income

   $ 12,069      $ 7,478      $ 4,591        61.4

Interest Expense

     531        239        292        122.2
  

 

 

   

 

 

   

 

 

   

Net Interest Income

     11,538        7,239        4,299        59.4

Provision for loan losses

     134        —          134     

Gain on sale of securities

     5        —          5     

Gain on sale of SBA loans

     350        —          350     

Other non-interest income

     1,071        622        449        72.2

Non-interest expense

     9,309        6,905        2,404        34.8

Provision for Income Taxes

     1,366        450        916        203.6
  

 

 

   

 

 

   

 

 

   

Net Income

   $ 2,155      $ 506      $ 1,649        325.9
  

 

 

   

 

 

   

 

 

   

Earnings per share

        

Basic

   $ 0.21      $ 0.08      $ 0.13        162.5

Diluted

   $ 0.20      $ 0.07      $ 0.13        185.7

Return on average equity (1)

     6.94     2.52     4.42     175.4

Return on average assets

     0.69     0.24     0.45     187.5

Net interest rate spread

     3.82     3.47     0.35     10.1

Net interest margin

     4.00     3.62     0.38     10.5

Efficiency ratio (2)

     71.83     87.50     (13.68 )%      (15.6 )% 

 

(1) Calculation excludes average accumulated other comprehensive income (loss) from average shareholders’ equity. The net income (loss) for the period has been annualized.
(2) Efficiency ratio is defined as non-interest expense divided by the sum of net interest income, gain on sale of SBA loans, and other non-interest income.

Operations Performance Summary

Three Months Ended March 31, 2013 and 2012

The Company reported net income of $2.2 million (or earnings per share of $0.21 and $0.20 on a basic and diluted basis, respectively) for the three months ended March 31, 2013, compared to net income of $506,000 (or earnings per share of $0.08 and $0.07 on a basic and diluted basis, respectively) for the corresponding period in 2012. This represents a $1.6 million or 325.9% increase between the two periods. The following describes the changes in the major components of the Company’s net income for the three months ended March 31, 2013 compared to the comparable period in 2012:

The increase in interest income of $4.6 million to $12.1 million for the quarter ending March 31, 2013, compared to the comparable period in 2012 is primarily the result of an increase in average interest earning assets of $364 million coupled with an increase in the overall yields on interest-earning assets of 45 basis points to 4.19%. The increase in average interest earning assets increased interest income by $5 million for the first quarter of 2013 compared to 2012. This increase was due to increases in average loan balances as a percentage of interest-earning assets.

Loan interest income for the quarter ending March 31, 2013, increased by $4.7 million, or 70.8%, to $11.4 million compared to the quarter ending March 31, 2012. This increase was attributable to both organic loan growth as well as to loans acquired as part of the PC Bancorp acquisition. The Company acquired $278 million in loans on July 31, 2012 as part of the acquisition. The increase in average loan balances added $5.0 million to loan interest income as average loan balances increased by $373 million, or 79.3% between the two periods. For the quarter ended March 31, 2012, the Company’s average quarterly loan portfolio was $470 million, and for the quarter ended March 31, 2013 the average quarterly loan portfolio had grown to $842 million. First quarter 2013 loan interest income was positively impacted by $854,000 related to the amortization of fair value adjustments related to the PC Bancorp loans acquired, which included $37,000 of discount earned on early loan payoffs during the first quarter of 2013 with a positive impact on net interest margin of 1 basis point, and was negatively impacted by $124,000 related to interest rate swap contracts acquired in the PC Bancorp acquisition. The yield on loans in the first quarter of 2013 was impacted by new loan originations in the low 4% coupon range.

Interest income on investment securities declined by $120,000 to $484,000; a 19.9% decrease for the three months ended March 31, 2013 compared to the same period in 2012. The overall decline in investment securities income was attributable to a decline in the overall yields between the two periods partially offset by a slight increase in the average balances. A decrease of $133,000 in investment securities income was attributable to a decrease of 0.48% in the overall yield. The decline in the overall yield between the first quarter of 2013 and the same period in 2012, resulting in the current yield of 1.72%, was the result of the loss of higher yielding securities due to the runoff of principal balances on the higher yielding mortgage backed securities portfolio due to the increase in prepayments and the sale of the private issue CMO’s. The reinvestments of funds in new securities between these periods were at substantially lower rates than the yield on securities that were running off between these periods. Also impacting the investment securities yield was the acquisition of the $44.4 million of securities on July 31, 2012 from the PC Bancorp acquisition. The overall yield of the PC Bancorp securities was approximately 1.78% at July 31, 2012, after the fair value adjustment, which negatively impacted the overall yields between periods.

 

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Interest income on interest bearing deposits in other financial institutions decreased by $24,000, or 13.0%, to $160,000 for the first quarter of 2013 compared to the same quarter of 2012. The decrease in interest income was primarily attributable the decrease of $ 11 million or a 9.7% in average balances from the first quarter of 2012 to 2013. The average balance during the first quarter of 2013 was $214 million compared to $225 million in 2012. The overall yield declined from 0.32% in the first quarter of 2012 to 0.30% in 2013, a decline of 2 basis points. The decrease in the average balances attributed a decrease of $13,000 in interest income while the decline in the yield decreased interest income by $11,000. The decrease in the balances between these periods was the result of the Company deploying more of its funding sources in loans.

Interest expense on interest bearing deposit accounts increased by $169,000, or 77.2%, to $388,000 for the first quarter of 2013 compared to the same quarter of 2012. The increase in interest expense on deposits was primarily attributable to the increase in the average balances coupled with an increase in the rates paid on deposits acquired from the PC Bancorp acquisition. The overall rate increased from 0.27% in the first quarter of 2012 to 0.29% in the first quarter of 2013, an increase of 2 basis points and resulted in an increase in interest expense of $22,000. Adding to the increase in deposit interest expense was the increase in the average balances of interest earning deposits between the quarters. Total average interest bearing deposits increased by $215 million or 65.3%, to $545 million between these two quarters. The increase in the average balances increased interest expense on deposits by $147,000. The increase in average interest bearing deposits was attributable to the organic growth in deposits as well as the acquisition of $253.8 million from the PC Bancorp acquisition on Jul