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| PPBI > SEC Filings for PPBI > Form 10-Q on 14-May-2009 | All Recent SEC Filings |
14-May-2009
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 months ended March 31, 2009 and 2008. The discussion should be read in conjunction with the Company's Management Discussion and Analysis included in the 2008 Annual Report on Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report. The results for the three months ended March 31, 2009 are not necessarily indicative of the results expected for the year ending December 31, 2009.
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 March 31, 2009, the Bank's deposit accounts were insured under federal laws by the Deposit Insurance Fund, which is an insurance fund administered by the FDIC. The maximum deposit insurance coverage allowable under federal law increased in October 2008 from $100,000 to $250,000 per account, which expires at the end of 2009, unless extended or made permanent.
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, and the economies of the local communities in which we operate, have continued to experience a rapid decline in the first quarter of 2009. The financial markets, and the financial services industry in particular, suffered significant disruption in 2008, resulting in many institutions failing or requiring, government intervention to avoid failure. These conditions were brought about primarily by dislocations in the U.S. and global credit markets, including a significant and rapid deterioration of the mortgage lending and related real estate markets.
The United States, state and foreign governments have taken or are considering extraordinary actions in an attempt to deal with the global financial crisis and the severe decline in the economy. In the United States, the federal government has adopted Emergency Economic Stabilization Act of 2008 (enacted on October 3, 2008) and the American Recovery and Reinvestment Act of 2009 (enacted on February 17, 2009). Among other matters, these laws:
· provide for the government to invest additional capital into banks and otherwise facilitate bank capital formation (commonly referred to as the Troubled Asset Relief Program or "TARP");
· increase the limits on federal deposit insurance; and
· provide for various forms of economic stimulus, including to assist homeowners in restructuring and lowering mortgage payments on qualifying loans.
Other laws, regulations, and programs at the federal, state and even local levels are under consideration that seek to address the economic climate and/or the financial institutions industry. The effect of these initiatives cannot be predicted at this time.
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 2008 Annual Report on Form 10-K. 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 2008 Annual Report on Form 10-K.
FINANCIAL CONDITION
Total assets of the Company were $737.3 million as of March 31, 2009, compared to $740.0 million as of December 31, 2008. The $2.7 million, or 0.36%, decrease in total assets was primarily due to a $9.5 million and $1.6 million decrease in net loans held for investment and cash and cash equivalents, respectively, which was partially offset by an increase of $9.6 million in securities available for sale.
Investment Securities Available for Sale
Investment securities available for sale totaled $66.2 million at March 31, 2009 compared to $56.6 million at December 31, 2008. The increase was primarily due to the purchase of securities totaling $11.1 million which was partially offset by investment principal received of approximately $2.0 million. The investment securities consist of $163,000 in US Treasuries, $39.3 million in government sponsored entities ("GSE") mortgage backed securities, and $26.7 million of private label mortgage backed securities. Thirty five of the private label mortgage-backed securities totaling $1.6 million are rated below investment grade, which is any rating below "BBB". In addition, $32.2 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 March 31, 2009 and December 31, 2008 is as follows:
March 31, 2009
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
(in thousands)
Securities available for sale:
U.S. Treasury Notes $ 148 $ 15 $ - $ 163
Government Sponsored Entity
Mortgage-backed securities 37,809 1,457 (9 ) 39,257
Private Label Mortgage-backed
securities - investment grade 29,340 511 (4,664 ) 25,187
Private Label Mortgage-backed
securities - non-investment
grade 3,050 - (1,458 ) 1,592
Total securities available for
sale $ 70,347 $ 1,983 $ (6,131 ) $ 66,199
FHLB stock $ 12,731 $ - $ - $ 12,731
Federal Reserve Bank stock 1,599 - - 1,599
Total equities held at cost $ 14,330 $ - $ - $ 14,330
Total securities $ 84,677 $ 1,983 $ (6,131 ) $ 80,529
December 31, 2008
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
(in thousands)
Securities available for sale:
U.S. Treasury Notes $ 148 $ 19 $ - $ 167
Government Sponsored Entity
Mortgage-backed securities 37,887 996 (30 ) 38,853
Private Label Mortgage-backed
securities - investment grade 20,536 1 (4,573 ) 15,964
Private Label Mortgage-backed
securities - non-investment
grade 2,922 - (1,300 ) 1,622
Total securities available for
sale $ 61,493 $ 1,016 $ (5,903 ) $ 56,606
FHLB stock $ 12,731 $ - $ - $ 12,731
Federal Reserve Bank stock 1,599 - - 1,599
Total equities held at cost $ 14,330 $ - $ - $ 14,330
Total securities $ 75,823 $ 1,016 $ (5,903 ) $ 70,936
Investment Securities Held for Sale by Contractual Maturity
As of March 31, 2009
More than One More than Five More than
One Year or Less to Five Years to Ten Years TenYears Total
Carrying Carrying Carrying Carrying Carrying
Value Yield Value Yield Value Yield Value Yield Value Yield
(dollars in thousands)
US Treasury Notes $ - 0.00 % $ 80 3.53 % $ 83 4.15 % $ - 0.00 % $ 163 3.84 %
Government Sponsored
Entity
Mortgage-backed
securities $ 2 6.63 % $ - 0.00 % $ 283 5.27 % $ 38,972 5.77 % 39,257 5.77 %
Private Label
Mortgage-backed
securities -
investment grade $ - 0.00 % $ 340 1.24 % $ 14,281 6.07 % $ 10,566 7.77 % 25,187 6.72 %
Private Label
Mortgage-backed
securities -
non-investment grade $ - 0.00 % $ - 0.00 % $ - 0.00 % $ 1,592 9.11 % 1,592 9.11 %
Total securities
available for sale $ 2 6.63 % $ 420 1.68 % $ 14,647 6.04 % $ 51,130 6.29 % $ 66,199 6.20 %
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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. During 2008, the Company took a $1.3 million other-than-temporary impairment charge after management determined that 19 securities were impaired. No additional securities were deemed other-than-temporary impaired during the quarter-ended March 31, 2009.
Loans
Gross loans outstanding totaled $620.0 million at March 31, 2009 compared to $628.8 million at December 31, 2008. The decrease was primarily due to loan payoffs of $9.7 million, which was partially offset by the purchase of $4.0 million of performing multi-family loans and the origination of commercial and industrial business loans.
From time to time, management utilizes loan purchases or sales 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 three months ended March 31, 2009 and 2008 are as follows:
For the Three Months Ended
March 31, 2009 March 31, 2008
(in thousands)
Beginning balance, gross $ 628,099 $ 626,692
Loans originated and
purchased:
Real Estate:
Multi-family 4,051 7,090
Commercial real estate - 17,315
Business Loans:
Commercial Owner
Occupied (1) - 4,430
Commercial and
Industrial (1) 2,100 7,101
SBA (1) - 582
Other 850 532
Total loans originated
and purchased 7,001 37,050
Total 635,100 663,742
Less:
Principal repayments 16,671 45,506
Change in undisbursed
loan funds (2,259 ) (3,726 )
Charge-offs 645 -
Loan Sales - 5,878
Transfers to Real Estate
Owned 55 -
Total Gross loans 619,988 616,084
Less ending balance
loans held for sale
(gross) (652 ) (870 )
Ending balance loans
held for investment
(gross) $ 619,336 $ 615,214
(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:
March 31, 2009 December 31, 2008
Weighted Weighted
Percent Average Percent Average
Amount of Total Interest Rate Amount of Total Interest Rate
(dollars in thousands)
Real Estate
Loans:
Multi-family $ 289,803 46.74 % 6.30 % $ 287,592 45.74 % 6.30 %
Commercial 161,409 26.03 % 6.99 % 165,978 26.40 % 6.94 %
Construction - 0.00 % 0.00 % - 0.00 % 0.00 %
Land 2,550 0.41 % 0.00 % - 0.00 % 0.00 %
One-to-four
family (1) 8,922 1.44 % 8.67 % 9,925 1.58 % 8.78 %
Business Loans:
Commercial Owner
Occupied 107,714 17.37 % 7.05 % 112,406 17.88 % 7.13 %
Commercial and
Industrial 43,604 7.03 % 7.19 % 43,235 6.88 % 6.75 %
SBA 4,620 0.74 % 5.67 % 4,942 0.79 % 6.35 %
Other Loans 1,366 0.22 % 2.13 % 4,689 0.75 % 5.63 %
Total Gross
loans $ 619,988 100.00 % 6.66 % $ 628,767 100.00 % 6.68 %
(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 March 31, 2009:
Weighted
Number Average Months to
Interest
of Loans Amount Rate Reprice
(dollars in thousands)
1 Year and less
(1) 197 $ 156,595 6.107 % 3.21
Over 1 Year to 3
Years 112 160,510 6.815 % 22.89
Over 3 Years to
5 Years 122 137,699 6.708 % 45.22
Over 5 Years to
7 Years 11 21,042 6.685 % 70.52
Over 7 Years to
10 Years 24 24,544 6.944 % 99.02
Fixed 51 61,085 7.021 % -
Total 517 $ 561,475 6.615 % 216.33
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(1) Includes three and five year hybrid loans that have reached their initial repricing date.
Allowance for Loan Losses
The allowance for loan losses totaled $6.4 million as of March 31, 2009 and $5.9 million as of December 31, 2008. The increase in the allowance for loan losses was primarily due to loans classified as "special mention" and "substandard" of $9.1 million and $6.1 million, respectively. Net nonaccrual loans and other real estate owned were $7.6 million and $55,000, respectively, at March 31, 2009, compared to $5.2 million and $37,000, respectively, as of December 31, 2008. The increase in net nonaccrual loans was primarily due to two commercial real estate loans totaling $2.4 million consisting of a loan for $1.0 million which was current as of quarter-end, but the property securing the loan was in foreclosure earlier in the quarter. The other loan totaling $1.4 million was 90 days past due at March 31, 2009, is in escrow for $2.0 million and is schedule to close sometime in the second quarter. The allowance for loan losses as a percent of nonperforming loans decreased to 84% as of March 31, 2009 from 113% at December 31, 2008. The ratio of nonperforming assets to total assets at March 31, 2009 was 1.04%, compared to 0.71% at December 31, 2008.
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 California as collected by the FDIC as the base rate. Then the following internal and external risk factors are added to the average:
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 risk factors are determined by the 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 allowance for loan and lease loss factors for pre-2002 originations of first and second deeds of trust loans are based upon the Bank's 10 year historical loss experience from charge-offs and real estate owned and the migration history analysis. For loans secured by 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 risk factors mentioned above.
Given the composition of the Company's loan portfolio, the $6.4 million allowance for loan losses was considered adequate to cover losses inherent in the Company's loan portfolio at March 31, 2009. 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 months ended March 31, 2009 and 2008:
Three Months Ended March 31,
2009 2008
(in thousands)
Balance, beginning of period $ 5,881 $ 4,598
Provision for loan losses 1,160 183
Charge-offs
Real estate:
One-to-four family (99 ) -
Business Loans:
Commercial and Industrial (356 ) -
SBA loans (227 ) -
Total charge-offs (682 ) -
Recoveries
Real estate:
One-to-four family 21 4
Business Loans:
SBA loans 12 -
Other loans 4 3
Total recoveries 37 7
Net charge-offs (645 ) 7
Balance, end of period $ 6,396 $ 4,788
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Composition of Nonperforming Assets
The table below summarizes the Company's composition of nonperforming assets as
of the dates indicated. Net nonperforming assets totaled $7.6 million at March
31, 2009 and $5.2 million as of December 31, 2008, or 1.04% and 0.71% of total
assets, respectively. The increase in nonperforming assets was primarily due to
an increase in nonperforming commercial real estate loans during the period
ended March 31, 2009.
At March 31, At December 31,
2009 2008
Nonperforming assets: (dollars in thousands)
Real Estate:
. . .
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