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| PPBI > SEC Filings for PPBI > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-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 known
and unknown 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. Actual results, performance or achievements could
differ materially from those contemplated, expressed, or implied by the
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from that expressed in such
forward-looking statements:
• The strength of the United States economy in general and the strength of the
local economies in which we conduct operations;
• Geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
• The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve");
• Inflation, interest rate, market and monetary fluctuations;
• The timely development of competitive new products and services and the
acceptance of these products and services by new and existing customers;
• The willingness of users to substitute competitors' products and
services for our products and services;
• The impact of changes in financial services policies, laws and regulations,
including laws, regulations and policies concerning taxes, banking, securities
and insurance, and the application thereof by regulatory bodies;
• Technological changes;
• The effect of acquisitions we may make, including, without limitation, the
failure to achieve the expected revenue growth and/or expense savings from
such acquisitions;
• The growth and profitability of non-interest or fee income being less
than expected;
• Changes in the level of our non-performing assets and charge-offs;
• The effect of changes in accounting policies and practices, as may be adopted
from time-to-time by bank regulatory agencies, the SEC, the Public Company
Accounting Oversight Board, the FASB or other accounting standards setters;
• Possible other-than-temporary impairments of securities held by us;
• The impact of current governmental efforts to restructure the U.S.
financial regulatory system;
• Changes in consumer spending and savings habits; and
• Unanticipated regulatory or judicial proceedings.
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If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q and other reports filed by us with the SEC. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.
The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. These factors and other risks and uncertainties are discussed in the Company's 2008 Annual Report on Form 10-K and "Item 1A. Risk Factors" in Part II of this Quarterly Report on Form 10-Q, which adds new risk factors to those previously disclosed in the Company's 2008 Annual Report on Form 10-K.
GENERAL
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 and six months ended June 30, 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, and by the Federal Deposit Insurance Corporation ("FDIC"). Additionally, the Company 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 June 30, 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 depositor and is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and certain retirement accounts, which will remain at $250,000 per depositor.
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.com 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 declines in the second 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 assisting homeowners
in restructuring and lowering mortgage payments on qualifying loans.
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In addition, in June 2009, the Obama Administration recently announced its Financial Regulatory Reform Proposal. The proposal includes sweeping regulations designed to reduce systemic risk to the economy from the financial service sector, as well as new governmental mechanisms for resolving failing large financial firms. The proposal would substantially increase the authority of the Federal Reserve to supervise and regulate financial firms and create a new consumer protection agency, among other matters. There can be no assurance that TARP, the other proposals under consideration or any other legislation or regulatory initiatives will be effective at dealing with the ongoing economic crisis and improving economic conditions globally, nationally or in the Company's markets, or that the measures adopted will not have adverse consequences on our results of operations.
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 $788.4 million as of June 30, 2009, compared to $740.0 million as of December 31, 2008. The $48.5 million, or 6.5%, increase in total assets was primarily due to a $49.6 million and $25.2 million increase in cash and equivalents and securities available for sale, respectively, which was partially offset by a decrease of $27.0 million in net loans held for investment.
Investment Securities Available for Sale
Investment securities available for sale totaled $81.8 million at June 30, 2009 compared to $56.6 million at December 31, 2008. The increase was primarily due to the purchase of securities totaling $43.1 million which was partially offset by investment principal received of approximately $7.1 million and sales of securities totaling $11.5 million. The investment securities consist of $155,000 in US Treasuries, $10.0 million in FHLB bonds, $37.4 million in government sponsored entities ("GSE") mortgage backed securities, and $34.2 million of private label mortgage backed securities. Fifty of the private label mortgage-backed securities totaling $4.1 million are rated below investment grade, which is any rating below "BBB". In addition, $35.2 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 June 30, 2009 and December 31, 2008 is as follows:
June 30, 2009
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
(in thousands)
Securities available for sale:
U.S. Treasury Notes $ 148 $ 7 $ - $ 155
FHLB bonds 10,000 - - 10,000
Government Sponsored Entity
Mortgage-backed securities 36,762 700 (89 ) 37,373
Private Label Mortgage-backed securities
- investment grade 32,587 325 (2,724 ) 30,188
Private Label Mortgage-backed securities
- non-investment grade 5,924 5 (1,866 ) 4,063
Total securities available for sale $ 85,421 $ 1,037 $ (4,679 ) $ 81,779
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 $ 99,751 $ 1,037 $ (4,679 ) $ 96,109
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 June 30, 2009
One Year or Less More than One to Five Years More than Five to Ten Years More than 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 % $ 78 3.63 % $ 77 4.23 % $ - 0.00 % $ 155 3.93 %
FHLB Stock $ 10,000 1.26 % $ - 0.00 % $ - 0.00 % $ - 0.00 % 10,000 1.26 %
Government Sponsored
Entity Mortgage -
backed securities $ 1 4.71 % $ - 0.00 % $ 8,239 4.12 % $ 29,133 5.20 % 37,373 4.96 %
Private Label
Mortgage-backed
securities -
investment grade $ - 0.00 % $ - 0.00 % $ 13,599 6.67 % $ 16,589 10.78 % 30,188 8.93 %
Private Label
Mortgage-backed
securities -
non-investment grade $ - 0.00 % $ 327 0.67 % $ - 0.00 % $ 3,736 5.74 % 4,063 5.33 %
Total securities
available for sale $ 10,001 1.26 % $ 405 1.24 % $ 21,915 5.70 % $ 49,458 7.11 % $ 81,779 5.99 %
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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, 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 by the credit related loss amount and the write down accounted for as a realized loss. During the quarter ended June 30, 2009, the Company took a $1.3 million other-than-temporary impairment charge after management determined that 15 securities were impaired along with the 19 securities that had already been determined to be impaired during the fourth quarter of 2008. All of the impaired securities were acquired by the Bank when it redeemed its shares in a mutual fund. There are 47 more private label securities with a market value of $2.5 million that were received as part of the redemption-in-kind of the mutual fund that are rated investment grade.
Loans
Gross loans outstanding totaled $603.2 million at June 30, 2009 compared to $628.8 million at December 31, 2008. The decrease was primarily due to principal repayments of $35.9 million, which was partially offset by the purchase of $4.1 million of performing multi-family loans and the origination of $4.5 million of commercial and industrial business and consumer 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 and six months ended June 30, 2009 and 2008
are as follows
For the Six Months Ended
June 30, 2009 June 30, 2008
(in thousands)
Beginning balance, gross $ 628,099 $ 626,692
Loans originated and
purchased:
Real Estate:
Multi-family 4,051 25,898
Commercial real estate - 27,195
Business Loans:
Commercial Owner Occupied
(1) - 10,872
Commercial and Industrial
(1) 3,465 11,531
SBA (1) - 907
Other 1,065 1,056
Total loans originated and
purchased 8,581 77,459
Total 636,680 704,151
Less:
Principal repayments 35,936 89,862
Change in undisbursed loan
funds (5,775 ) 11,871
Charge-offs 2,258 412
Loan Sales - 6,235
Transfers to Real Estate
Owned 1,029 -
Total Gross loans 603,232 595,771
Less ending balance loans
held for sale (gross) (635 ) (696 )
Ending balance loans held
for investment (gross) $ 602,597 $ 595,075
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(1) Includes lines of credit
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:
June 30, 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 $ 284,611 47.18 % 6.22 % $ 287,592 45.74 % 6.30 %
Commercial 154,104 25.55 % 6.99 % 163,428 25.99 % 7.04 %
One-to-four family
(1) 8,698 1.44 % 8.34 % 9,925 1.58 % 8.78 %
Land 2,082 0.35 % 0.00 % 2,550 0.41 % 0.00 %
Business Loans:
Commercial Owner
Occupied 107,149 17.76 % 7.08 % 112,406 17.88 % 7.13 %
Commercial and
Industrial 41,628 6.90 % 7.49 % 43,235 6.88 % 6.75 %
SBA 3,842 0.63 % 5.69 % 4,942 0.79 % 6.35 %
Other Loans 1,118 0.19 % 1.62 % 4,689 0.75 % 5.63 %
Total Gross loans $ 603,232 100.00 % 6.65 % $ 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 June 30, 2009:
Weighted
Number Average Months to
Interest
of Loans Amount Rate Reprice
(dollars in thousands)
1 Year and less (1) 197 $ 158,286 6.15 % 3.35
Over 1 Year to 3
Years 108 156,358 6.78 % 21.32
Over 3 Years to 5
Years 117 128,100 6.62 % 43.14
Over 5 Years to 7
Years 14 29,065 6.94 % 72.13
Over 7 Years to 10
Years 21 16,375 6.62 % 101.84
Fixed 50 59,761 6.95 % -
Total 507 $ 547,946 6.58 % 26.94
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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 $7.2 million as of June 30, 2009 and $5.9 million as of December 31, 2008. The increase in the allowance for loan losses was primarily due to the deteriorating economic environment and an overall increase in the reserve factors applied to various segments of the Bank's loan portfolio. Net nonaccrual loans and other real estate owned were $12.3 million and $1.0 million, respectively, at June 30, 2009, compared to $5.2 million and $37,000, respectively, as of December 31, 2008. The increase in net nonaccrual loans is primarily due to 11 loans totaling $9.2 million of which seven loans, totaling $7.8 million, are in foreclosure. The allowance for loan losses as a percent of nonperforming loans decreased to 58% as of June 30, 2009 from 113% 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.
. . .
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