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| PPBI > SEC Filings for PPBI > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
FORWARD-LOOKING STATEMENTS
The statements contained herein that are not historical facts are forward-looking statements based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements include, among others, statements with respect to the Company's beliefs, plans, objectives, goals, guidelines, expectations, anticipations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors (many of which are beyond the Company's control). The words "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties. These include, but are not limited to, the following risks: (1) changes in the performance of the financial markets, (2) changes in the demand for and market acceptance of the Company's products and services, (3) changes in general economic conditions including interest rates, presence of competitors with greater financial resources, and the impact of competitive products and pricing, (4) the effect of the Company's policies, (5) the continued availability of adequate funding sources, and (6) various legal, regulatory and litigation risks.
GENERAL
The following presents management's discussion and analysis of the consolidated financial condition and operating results of the Company for the three and nine months ended September 30, 2008 and 2007. The discussion should be read in conjunction with the Company's Management Discussion and Analysis included in the 2007 Annual Report on Form 10-K, as amended, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report. The results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results expected for the year ending December 31, 2008.
We are a California-based bank holding company incorporated in the state of Delaware and registered as a banking holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), for Pacific Premier Bank, a California state chartered commercial bank. The Bank is subject to examination and regulation by the California Department of Financial Institutions ("DFI"), the Board of Governors of the Federal Reserve System (the "Federal Reserve"), and by the Federal Deposit Insurance Corporation ("FDIC"). Additionally, the Corporation is subject to regulation and supervision by the Federal Reserve. The primary business of the Company is community banking.
The Bank was founded in 1983 as a state chartered savings and loan, became a federally chartered stock savings bank in 1991 and in March 2007, converted to a California state chartered commercial bank. The Bank is a member of the FHLB of San Francisco, which is a member bank of the Federal Home Loan Bank System, and the Federal Reserve. As of September 30, 2008, the Bank's deposit accounts were insured up to the $100,000 maximum amount, except for retirement accounts which were insured up to the $250,000 maximum allowable under federal laws by the Deposit Insurance Fund, which is an insurance fund administered by the FDIC. On October 3, 2008, the maximum deposit insurance coverage allowable under federal law increased from $100,000 to $250,000 per account, which expires at the end of 2009.
We provide banking services within our targeted markets in Southern California to businesses, including the owners and employees of those businesses, professionals, real estate investors and non-profit organizations, as well as, consumers in the communities we serve. The Bank operates six depository branches in Southern California located in the cities of Costa Mesa, Huntington Beach, Los Alamitos, Newport Beach, San Bernardino, and Seal Beach. The Company's corporate headquarters are located in Costa Mesa, California. Through our branches and our web site at www.PPBI.net on the Internet, we offer a broad array of deposit products and services for both businesses, and consumer customers including checking, money market and savings accounts, cash management services, electronic banking, and on-line bill payment. We offer a wide array of loan products, such as commercial business loans, lines of credit, commercial real estate loans, U.S. Small Business Administration ("SBA") loans, residential home loans, and home equity loans. The Bank funds its lending and investment activities with retail deposits obtained through its branches, advances from the FHLB of San Francisco, lines of credit, and wholesale and brokered certificates of deposits.
The Company's principal sources of income are the net spread between interest earned on loans and investments and the interest costs associated with deposits and other borrowings used to finance its loan and investment portfolio. Additionally, the Bank generates fee income from loan sales and various products and services offered to both depository and loan customers.
Recent Developments
The global and U.S. economies are experiencing significantly reduced business activity as a result of, among other factors, disruptions in the financial system during the past year. Dramatic declines in the housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.
In response to the financial crises affecting the banking system and financial markets, Congress passed, and President Bush signed, the Emergency Economic Stabilization Act of 2008 (the "EESA") on October 3, 2008. Pursuant to the EESA, the U.S. Department of Treasury ("Treasury") was granted the authority to, among others, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 14, 2008, Treasury announced the Troubled Asset Relief Program Capital Purchase Program (the "Capital Purchase Program"), under which it will purchase equity stakes in a wide variety of banks and thrifts. Pursuant to the Capital Purchase Program, Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. The exercise price on the warrants would be the market price of the participating institution's common stock at the time of issuance, calculated on a 20-day trading day trailing average. Participating financial institutions will be required to adopt Treasury's standards for executive compensation and corporate governance for the period during which Treasury holds equity issued under the Capital Purchase Program. The Company is currently evaluating its participation in the Capital Purchase Program.
Additionally, on October 14, 2008, Treasury triggered the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program ("TLGP"). Coverage under the TLGP is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum surcharge for non-interest bearing transaction deposits in excess of $250,000 per account. The Company is currently evaluating its participation in the TLGP.
It is presently unclear what impact the EESA, the Capital Purchase Program, the TLGP, other previously announced liquidity and funding initiatives of the Federal Reserve and other agencies and any additional programs that may be initiated in the future will have on the financial markets and the other difficulties described above, or on the U.S. banking and financial industries and the broader U.S. and global economies. Further adverse effects could have an adverse impact on the Company and its business.
In October 2008, the FDIC announced its intention to seek an increase in deposit insurance premiums that, beginning in 2009, would effectively double the average insurance premiums paid by depository institutions, such as the Bank, to ensure that the deposit insurance fund can adequately cover projected losses from future bank failures. At this time, the Company cannot provide any assurance as to the amount of any projected increase in its deposit insurance premium rate, should such an increase occur, as such changes are dependent upon a variety of factors, some of which are beyond the Company's control.
CRITICAL ACCOUNTING POLICIES
Management has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's financial statements. The Company's significant accounting policies are described in the Notes to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K, as amended. Certain accounting policies require management to make estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities; management considers these to be critical accounting policies. The estimates and assumptions management uses are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at balance sheet dates and the Company's results of operations for future reporting periods.
Management believes that the allowance for loan losses is the critical accounting policy that requires estimates and assumptions in the preparation of the Company's financial statements that is most susceptible to significant change. For further information, see "Allowances for Loan Losses" discussed later in this report and in our 2007 Annual Report on Form 10-K, as amended.
FINANCIAL CONDITION
Total assets of the Company were $758.6 million as of September 30, 2008, compared to $763.4 million as of December 31, 2007. The $4.8 million, or 0.63%, decrease in total assets is primarily due to a decrease in federal funds sold of $23.4 million, partially offset by increases in net loans and investment securities available for sale of $17.3 million and $3.9 million, respectively.
Investment Securities Available for Sale
Investment securities available for sale totaled $60.1 million at September 30, 2008 compared to $56.2 million at December 31, 2007. The increase is primarily due to the purchase of securities totaling $33.4 million which was partially offset by sale of securities totaling $14.2 million and investment principal received of approximately $9.4 million. The investment securities consist of $152,000 in US Treasuries, $38.8 million in government sponsor entities ("GSE") mortgage backed securities, and $21.3 million of private label mortgage backed securities. Twelve of the private label securities totaling $337,000 are rated below investment grade, which is a rating of "BB" or less. In addition, $32.5 million of the GSE securities have been pledged as collateral for the Bank's $28.5 million of reverse repurchase agreements.
A summary of the Company's investment securities held for sale as of September 30, 2008 and December 31, 2007 is as follows:
September 30, 2008
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Market Value
(in thousands)
Securities Available for
Sale:
US Treasury Notes $ 148 $ 4 $ - $ 152
Mortgage-Backed
Securities (1) 63,626 165 (3,859 ) 59,932
Total securities
available for sale $ 63,774 $ 169 $ (3,859 ) $ 60,084
December 31, 2007
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Market Value
(in thousands)
Securities Available for
Sale:
Mortgage-Backed
Securities $ 29,719 $ 35 $ (1 ) $ 29,753
Mutual Funds 27,719 - (1,234 ) 26,485
Total securities
available for sale $ 57,438 $ 35 $ (1,235 ) $ 56,238
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(1) At September 30, 2008, mortgage-backed securities included collateralized mortgage obligations ("CMO") with an aggregate carrying value of $27.6 million of which $13.8 million are private label issuances and $13.8 million are secured by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
Investment Securities Held for Sale by Contractual Maturity as of September 30, 2008
One Year More than One More than Five More than Ten
or Less to Five Years to Ten Years Years Total
Carrying Carrying Carrying Carrying Carrying
Value Yield Value Yield Value Yield Value Yield Value Yield
(dollars in thousands)
US Treasury Notes $ - 0.00 % $ 76 3.53 % $ 76 4.15 % $ - 0.00 % $ 152 3.84 %
Mortgage-Backed
Securities - 0.00 % $ 4 4.77 % $ 22,808 5.19 % $ 37,120 6.14 % $ 59,932 5.78 %
Total securities
available for sale $ - 0.00 % $ 80 3.59 % $ 22,884 5.18 % $ 37,120 6.14 % $ 60,084 5.77 %
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The Company reviewed individual securities classified as available for sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. If it is probable that the Company will be unable to collect all amounts due according to contractual terms of the debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. If an other-than-temporary impairment occurs, the cost basis of the security would have been written down to its fair value as the new cost basis and the write down accounted for as a realized loss. Management has determined that the unrealized losses on these securities are temporary in nature.
Loans
Gross loans outstanding totaled $645.3 million at September 30, 2008 compared to $626.7 million at December 31, 2007. The increase is primarily due to loan originations and loan purchases of $88.4 million and $67.6 million, respectively, during the period ending September 30, 2008. Partially offsetting the loan originations and loan purchases were loan payoffs and a loan sale, consisting primarily of multi-family loans, of $106.0 million and $6.2 million, respectively. From time to time, management utilizes loan sales or purchases to manage its liquidity, interest rate risk, loan to deposit ratio, diversification of the loan portfolio, and net balance sheet growth.
A summary of the Company's loan originations, loan purchases, loan sales and principal repayments for the nine months ended September 30, 2008 and 2007 are as follows:
For the Nine Months Ended
September September
30, 2008 30, 2007
(in thousands)
Beginning balance, gross $ 626,692 $ 607,618
Loans originated and
purchased:
Real Estate:
Multi-family 32,458 248,011
Commercial real estate 53,807 21,751
One-to-four family (1) - 3,191
Construction-Multi-family - -
Business Loans:
Commercial Owner Occupied
(1) 51,273 13,111
Commercial and Industrial
(1) 16,386 30,430
SBA (1) 907 12,841
Other 1,193 2,780
Total loans originated
and purchased 156,024 332,115
Total 782,716 939,733
Less:
Principal repayments 123,851 133,119
Change in undisbursed
loan funds 5,956 (7,489 )
Charge-offs 582 101
Loan Sales 6,235 184,176
Transfers to Real Estate
Owned 82 46
Total Gross loans 646,010 629,780
Less ending balance loans
held for sale (gross) (682 ) (2,134 )
Ending balance loans held
for investment (gross) $ 645,328 $ 627,646
(1) Includes lines of
credit
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The following table sets forth the composition of the Company's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated:
September 30, 2008 December 31, 2007
Weighted Weighted
Percent Average Percent Average
Amount of Total Interest Rate Amount of Total Interest Rate
(dollars in thousands)
Real Estate
Loans:
Multi-family $ 301,247 46.63 % 6.37 % $ 341,263 54.44 % 6.77 %
Commercial 169,317 26.21 % 7.05 % 142,134 22.67 % 7.42 %
Construction 2,661 0.41 % 8.00 % 2,048 0.33 % 8.00 %
Land 3,125 0.48 % 14.50 % 5,389 0.86 % 11.95 %
One-to-four
family (1) 10,071 1.56 % 8.86 % 13,080 2.09 % 8.60 %
Business Loans:
Commercial Owner
Occupied 112,280 17.38 % 7.13 % 57,614 9.19 % 7.56 %
Commercial and
Industrial 38,169 5.91 % 6.98 % 50,993 8.13 % 8.13 %
SBA 5,135 0.78 % 7.16 % 14,264 2.28 % 8.51 %
Other Loans 4,005 0.62 % 4.59 % 64 0.01 % 2.53 %
Total Gross
loans $ 646,010 100.00 % 6.80 % $ 626,849 100.00 % 7.19 %
(1) Includes
second trust
deeds.
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The following table sets forth the repricing characteristics of the Company's multi-family, commercial real estate and commercial owner occupied loan portfolio in dollar amounts as of September 30, 2008:
Weighted
Number Average Months to
of Loans Amount Interest Rate Reprice
(dollars in thousands)
1 Year and less (1) 204 $ 156,035 6.734 % 3.47
Over 1 Year to 3 Years 111 162,827 6.757 % 25.12
Over 3 Years to 5 Years 133 163,070 6.705 % 48.87
Over 5 Years to 7 Years 11 22,632 6.725 % 74.70
Over 7 Years to 10 Years 23 23,502 7.030 % 103.98
Fixed 54 60,565 6.909 % -
Total 536 $ 588,630 6.762 % 207.96
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(1) Included three and five year hybrid loans that have reached their initial repricing date.
Allowance for Loan Losses
The allowance for loan losses totaled $5.9 million as of September 30, 2008 and $4.6 million as of December 31, 2007. The increase in the allowance for loan losses was primarily due to increases in the Bank's loss factors for loans. Net nonaccrual loans and other real estate owned were $4.5 million and $26,000, respectively, at September 30, 2008, compared to $4.2 million and $711,000, respectively, as of December 31, 2007. The allowance for loan losses as a percent of nonaccrual loans increased to 129% as of September 30, 2008 from 110% at December 31, 2007. The ratio of nonperforming assets to total assets at September 30, 2008 was 0.60%, compared to 0.64% at December 31, 2007.
The Bank's methodology for assessing the appropriateness of the allowance consists of several key elements, including the formula allowance. The formula allowance is calculated by applying loss factors to all loans held for investment. The loss factors for each segment of the loan portfolio, except for loans secured by single family residences originated prior to 2002, are derived by using the average of the last 10 years and 15 years historical charge-off rates by loan types for commercial banks and savings institutions headquartered in the state of California as collected by the FDIC as the base rate. Then the average is adjusted for the following internal and external risk factors:
Internal Factors
- Changes in lending policies and procedures, including underwriting standards
and collection, charge-off, and recovery practices;
- Changes in the nature and volume of the loan portfolio and in the terms of loans, as well as new types of lending;
- Changes in the experience, ability, and depth of lending management and other relevant staff that may have an impact on the Bank's loan portfolio;
- Changes in volume and severity of past due and classified loans, and in volumes of non-accruals, troubled debt restructurings, and other loan modifications;
- Changes in the quality of the Bank's loan review system and the degree of oversight by the Board; and
- The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
External Factors
- Changes in national, state and local economic and business conditions and
developments that affect the collectability of the portfolio, including the
condition of various market segments (includes trends in real estate values
and the interest rate environment);
- Changes in the value of the underlying collateral for collateral-dependent loans; and
- The effect of external factors, such as competition, legal, regulatory requirements on the level of estimated credit losses in the Bank's current loan portfolio.
The factor amount for each of the nine above described risked factors are determined by the Senior Portfolio Manager and Chief Credit Officer and approved by the Credit and Investment Review Committee on a quarterly basis.
For the homogeneous single-family residential loan portfolio, the ALLL loss factors for pre-2002 originations of first and second deeds of trust loans are based upon the Bank's historical loss experience from charge-offs and real estate owned, and the migration history analysis. The Bank has tracked its historical losses for the last 40 quarters. For loans secured with single family residences made after 2001, the factor is calculated using the average of the FDIC charge-off for 10 and 15 years plus the nine credit loss factors mentioned above.
Given the composition of the Company's loan portfolio, the $5.9 million allowance for loan losses was considered adequate to cover losses inherent in the Company's loan portfolio at September 30, 2008. However, no assurance can be given that the Company will not, in any particular period, sustain loan losses that exceed the amount reserved, or that subsequent evaluation of the loan portfolio, in light of the prevailing factors, including economic conditions which may adversely affect the Company's market area or other circumstances, will not require significant increases in the loan loss allowance. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additional provisions to increase the allowance or take charge-offs in anticipation of future losses.
The table below summarizes the activity of the Company's allowance for loan losses for the three and nine months ended September 30, 2008 and 2007:
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(in thousands)
Balance, beginning of period $ 5,267 $ 4,090 $ 4,598 $ 3,543
ALLL Transfer In * - - 8 -
Provision for loan losses 664 403 1,683 917
Charge-offs
Real estate:
Multi-family - - - -
Commercial - - - -
One-to-four family (48 ) (56 ) (77 ) (101 )
Business Loans:
Commercial Owner Occupied - - - -
Commercial and Industrial - - - -
SBA loans (122 ) - (505 ) -
. . .
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