Pacific Premier Bancorp - 10-Q quarterly report FY

United States Securities and Exchange Commission

Washington, DC 20549

FORM 10-Q

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.

ý Yes          o No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,333,572 shares of common stock, par value $0.01 per share, were outstanding as of October 31, 2002.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

FOR THE QUARTER ENDED SEPTEMBER 30, 2002

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Item 1.  Financial Statements.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(UNAUDITED)

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)

(UNAUDITED)

(1) See Footnote 4. “Capital Contributions through the Issuance of Warrants”

Accompanying notes are an integral part of these consolidated financial statements

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(Dollars in thousands)

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

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PACIFIC PREMIER BANCOROP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2002

(UNAUDITED)

Note 1 - Basis of Presentation

The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc., (the “Corporation”) and its wholly owned subsidiaries, Pacific Premier Bank, F.S.B. (formerly LIFE Bank, Federal Savings Bank), (the “Bank”) and Life Financial Insurance Services, Inc. (collectively, the “Company”).  All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of September  30, 2002 and December 31, 2001, and the results of its operations and its cash flows for the three and nine months ended September 30, 2002 and 2001.  Operating results for the three and nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2002.

Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

Certain amounts reflected in the 2001 consolidated financial statements have been reclassified where practicable, to conform to the presentation for 2002.

In addition, in June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141, effective June 30, 2001, requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting; the use of the pooling-of-interests method of accounting is eliminated.  SFAS No. 141 also establishes how the purchase method is to be applied for business combinations completed after June 30, 2001.  This guidance is similar to previous generally accepted accounting principles (GAAP).  However, SFAS No. 141 establishes additional disclosure requirements for transactions occurring after the effective date. The adoption of this standard is not expected to have a material effect on the Company’s financial condition, results of operations and cash flows.

SFAS No. 142 eliminates amortization of goodwill associated with business combinations completed after June 30, 2001.  During a transition period from July 1, 2001 through December 31, 2001, goodwill associated with business combinations completed prior to July 1, 2001 will continue to be amortized through the income statement.  Effective January 1, 2002, all goodwill amortization expense will cease and goodwill be assessed (at least annually) for impairment at the reporting unit level by applying a fair-value based test.  SFAS No. 142 also provides additional guidance on acquired intangibles that should be separately recognized and amortized, which could result in the recognition of additional intangible assets, as compared with previous GAAP.  The adoption of this standard is not expected to have a material effect on the Company’s financial condition, results of operations and cash flows.

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Note 2 – Regulatory Matters

The Bank’s capital amounts and ratios are presented in the following table:

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Note 3 – Issuance of Senior Secured Note

On January 17, 2002, the Corporation closed a transaction with New Life Holdings, LLC to issue a $12.0 million Senior Secured Note and warrants to purchase 1,166,400 shares.  The Senior Secured Note is due in 2007 with an initial principal amount of $12 million and bearing interest at an initial rate of 12% (increasing over time to 16%). The interest is payable on a quarterly basis starting on March 31, 2003.  The stock of the Corporation’s subsidiaries and the Participation Contract were pledged as collateral against the Note. The holders of the Note have the right to nominate three of seven directors of the Corporation and the Bank until the later of (i) such time as the Note has been fully retired or (ii) three years after the Closing. The Corporation utilized the proceeds from the issuance of the notes to infuse $3.7 million of capital into the Bank, to purchase the Participation Contract from the Bank for $4.4 million, to pay the tax receivable of $3.2 million owed to the Bank, and to pay transaction costs incurred.

Note 4 – Capital Contributions through the Issuance of Warrants

In addition to the $12,000,000 Senior Secured Note, the Corporation issued warrants to purchase 1,166,400 shares of stock at an exercise price of $0.75 per share.  The closing price of the Company’s stock on November 19, 2001, the day before execution of the financing agreement, was $1.35 per share.  The intrinsic value of the warrants at the time of the transaction was $700,000, which was accounted for as an original issue discount.  The discount is amortized over the term of the Senior Secured Note, which is due in 2007. The unamortized balance of the discount as of September 30, 2002, is $595,000.  Interest expense of $1,366,000 related to the Senior Secured Note, including $105,000 of discount amortization, was charged to operations for the nine months ended September 30, 2002.

Note 5 – Earnings (Loss) Per Share

The table below sets forth the Company’s earnings (loss) per share calculations for the three and nine months ended September 30, 2002 and 2001.

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share is computed by dividing income available to common stockholders including common stock equivalents, such as outstanding stock options and warrants by the weighted average number of common shares outstanding for the period. The computations for loss per share assuming dilution for the three and nine months ended September 30, 2001 were anti-dilutive.

Earnings (Loss) per share reconciliation is as follows (dollars in thousands, except per share data):

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

FORWARD-LOOKING STATEMENTS

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, 2002 and 2001.  The discussion should be read in conjunction with the Company’s Management’s Discussion and Analysis included in the 2001 Annual Report on Form 10-K, plus the unaudited consolidated financial statements and the notes thereto appearing elsewhere in this report.

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 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 projects and pricing,  (4) the effect of the Company’s policies,  (5) the continued availability of adequate funding sources,  (6)  the actual prepayment rates, credit losses, coupon rate and final disposition price of the underlying loans in the securitizations as compared to the Company’s assumptions of these items in its valuation of its Participation Contract, and (7)  various legal, regulatory and litigation risks.

GENERAL

Pacific Premier Bancorp, Inc., (the “Corporation”), a Delaware corporation organized in 1997, is a unitary savings and loan holding company that owns 100% of the capital stock of Pacific Premier Bank, F.S.B. (the “Bank”), the Corporation’s principal operating subsidiary.  Additionally the Corporation owns 100% of the capital stock of Life Financial Insurance Services (the “Insurance Subsidiary”). The primary business of Pacific Premier Bancorp, Inc., and  its subsidiaries (the “Company”) is branch banking and various lending activities.

The Bank was founded in 1983 as a state chartered savings and loan and became a federally chartered stock savings bank in 1991.  The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”), which is a member bank of the Federal Home Loan Bank System. The Bank’s deposit accounts are insured up to the $100,000

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maximum amount currently allowable under federal laws by the Savings Association Insurance Fund (“SAIF”), which is a separate insurance fund administered by the Federal Deposit Insurance Corporation (“FDIC”).  The Bank is subject to examination and regulation by the Office of Thrift Supervision (“OTS”) its primary federal regulator, and by the FDIC.  The Insurance Subsidiary was organized in 1999 and offers non-deposit and non-FDIC insured investment products such as mutual funds, annuities and insurance.  These products are offered to both Bank and non-Bank customers.  The Insurance Subsidiary has minimal operations.

The Company is a financial services organization committed to serving consumers and small businesses in Southern California. Throughout 2001, the Bank operated five full-service branches located in its market area of San Bernardino, Riverside, and Orange Counties, California. In the second quarter of 2002, the Bank consolidated the accounts at its Riverside and Redlands depository branches into the nearby San Bernardino branch.  The Bank offers a variety of products and services for consumers and small businesses, which include checking, savings, money market accounts and certificates of deposit.  Additionally, the Bank’s lending activities are focused on generating loans secured by apartment buildings and commercial real estate properties as well as the financing of residential construction loans throughout Southern California. The Bank funds its lending and investment activities primarily with retail deposits obtained through its branches and advances from the FHLB of San Francisco.

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 various products and services offered to both depository and loan customers.

FINANCIAL CONDITION

Total assets of the Company were $240.6 million as of September 30, 2002 compared to $243.7 million as of December 31, 2001. The $3.1 million or 1.3% decrease in total assets is the result of decreases of $52.3 million and $2.4 million in net loans and foreclosed real estate, respectively, partially offset by increases in investment securities, premises, and deferred income tax of $45.1 million, $4.3 million, and $2.0 million, respectively.

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Investment Securities

A summary of the Company’s securities as of September 30, 2002 and December 31, 2001 is as follows (dollars in thousands):

(1)           Effective January 17, 2002, the Corporation purchased the Participation Contract from the Bank for $4.4 million.  The Participation Contract represents the right to receive 50% of any cash realized from three residual mortgage-backed securities.  The Corporation does not believe there is an active market for this type of asset and has determined the estimated fair value utilizing a cash flow model which determines the present value of the estimated expected cash flows from this contract using a discount rate the Corporation believes is commensurate with the risks involved.

Emerging Issues Task Force (“EITF”) 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” provides guidance on how transferors that retain an interest in a securitization transaction, and companies that purchase a beneficial interest in such a transaction, should account for interest income and impairment. The EITF concluded that the holder of a beneficial interest should recognize interest income over the life of the investment based on an anticipated yield determined by periodically estimating cash flows. Interest income would be revised prospectively for changes in cash flows.

Effective January of 2001, the Corporation adopted the provisions of EITF 99-20 on a prospective basis based on the actual cash flows of the securitization trusts underlying the Participation Contract.  At that time, due to the uncertainty and inadequate cash flow history from the securitizations to the holders of the asset, the Corporation decided that it was prudent to leave the Participation Contract on a non-accrual basis until there was a sufficient cash flow history. Based on the history of cash flows from the securitization through March 31, 2002, and other events affecting the expected yield of the Participation Contract, the Corporation took the Participation Contract off non-accrual status for the

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quarter ended March 31, 2002.  The change in the reported market value is the result of the reclassification of the Participation Contract to an accrual status.

Loans

Loans totaled $141.5 million at September 30, 2002, including $2.6 million in loans held for sale, compared to $187.2 million at December 31, 2001, or a decrease of $45.8 million.  The Bank originated and purchased $44.2 million of loans for the nine months ending September 30, 2002.  Loan sales totaled $33.8 million, consisting of $26.6 million of performing first liens and $7.2 million of delinquent first liens. Principal repayments totaled $57.7 million during this period.

For the nine months ending September 30, 2001, the Bank originated and purchased $20.9 million of loans.  Loan sales totaled $29.3 million for the nine months ending September 30, 2001.  Principal repayments totaled $93.5 million during this period.

Loan production and purchases were held to modest levels during 2001 and the first quarter of 2002 while the Bank staffed its new Income Property Lending group. The Bank commenced production of income property secured loans during the second quarter of 2002 and is still in the process of adding staff and products to its lending group.

A summary of the Company’s loan originations and sales for the nine months ended September 30, 2002 and 2001 are as follows (dollars in thousands):

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Allowance for Loan Losses

For the nine months ended September 30, 2002, the Company allocated a $979,000 provision for loan losses compared to a $2.2 million provision during the nine months ended September 30, 2001.  During the most recent quarter, the Bank’s examiners adversely classified certain loans to either a Special Mention designation or a Substandard classification. Of the total provision, $500 thousand resulted, in part, from this change in classification.

The allowance for loan losses totaled $3.7 million as of September 30, 2002 and $4.7 million as of December 31, 2001. The allowance for loan losses as a percent of non-accrual loans was 54.1% and 28.6% as of September 30, 2002 and December 31, 2001, respectively.  Non-accrual loans totaled $6.8 million at September 30, 2002 and $15.2 million as of December 31, 2001.

The Company’s determination of the level of the allowance for loan losses and correspondingly, the provision for loan losses, rests upon various judgments and assumptions, including current economic conditions, loan portfolio composition, prior loan loss experience and industry trends.  Given the composition of the Company’s loan portfolio, the $3.7 million allowance for loan losses was considered adequate to cover losses inherent in the Company’s loan portfolio at September 30, 2002. 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 or the Bank’s service 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, 2002 and 2001 (in thousands):

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Composition of Impaired Assets

The table below summarizes the Company’s composition of impaired assets as of the dates indicated:

(1)          Impaired loans consist of all loans 90 days past due, foreclosures in process less than 90 days past, and five loans totaling $1.5 million that were deemed impaired for reasons other than delinquency.

(2)          Gross loans include loans receivable held for investment and held for sale.

(3)          Impaired assets consist of impaired loans and REO.

Participation Contract

The carrying value of the Participation Contract was $5.3 million at September 30, 2002 compared to $4.4 million at December 31, 2001.  The increase of $0.9 million is due to the net of the discount accretion of $3.1 million and cash flows received of $2.2 million. The accretion is based on the Company’s projections of the expected performance of the residual assets underlying the contract.  The Corporation began accreting the discount effective January 1, 2002.  The Corporation does not believe there is an active market for this type of asset and has determined the estimated fair value utilizing a cash flow model which determines the present value of the estimated expected cash flows from this contract using a 40% discount rate which was established by the Bank in December 2000.

The Participation Contract is a contractual right from the purchase of the residual mortgage-backed securities to receive 50% of any cash realized, as defined, in the Participation Contract.  The Company valued the contractual right at its estimated fair value of $9.3 million at December 31, 1999.

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The Participation Contract was recorded on the Bank’s financial statements at December 31, 2001 at $4.4 million after write-downs totaling $4.9 million. Most of the $4.9 million write-down of the Participation Contract resulted from an increase in the discount rate from 15% to 40% and a change in the composite prepayment speeds from 21.6% in 1999 to 24.6% in 2000 in the Bank’s valuation model.  Beginning in June 2001, the residual assets underlying the Participation Contract began to generate cash flow to the lead participants in the contract. In January 2002, the Corporation purchased the Participation Contract from the Bank at the Bank’s carrying value. The Corporation began to receive cash payments from the Participation Contract during the second quarter of 2002.  The Corporation received approximately $643,000 and $1,589,000 in the second and third quarter of 2002, respectively.  Based on the Corporation’s analysis of the expected performance of the underlying loans, the future cash to the Corporation is projected to be approximately $14 to $16 million dollars over three years. In January 2002, the Corporation commenced accreting the discount and the expected yield differential (the difference between the fair market value and the book value) on the Participation Contract over the expected remaining life of the contract using a level yield methodology. The accretion will be adjusted for any changes in the expected performance of the contract.  The Contract has been pledged as collateral for the Senior Secured Note issued in January 2002.

Liabilities and Stockholders’ Equity

Total liabilities of the Company decreased from $236.0 million at December 31, 2001 to $229.1 million at September 30, 2002.  The decrease included an increase of notes payable of $11.3 million and FHLB Advances of $20.0 million, offset by a decrease in deposits of $38.8 million.

There were $20.0 million in FHLB Advances as of September 30, 2002 compared to no borrowings at December 31, 2001.  Advances from the FHLB are collateralized by pledges of certain investment securities with an aggregate principal balance of $22.8 million.  The Bank may borrow up to 15% of its assets under the line, which is $36.1 million as of quarter ended September 30, 2002.

In addition, there were $11.4 million in notes payable as of September 30, 2002 compared to no notes payable at December 31, 2001.  The $11.4 million in notes payable is the Senior Secured Note of $12 million, net of $630,000 discount, issued to New Life Holdings, LLC, on January 17, 2002.  The Senior Secured Note is due in 2007 with an initial principal amount of $12 million and bearing interest at an initial rate of 12% (increasing over time to 16%).  The interest is payable on a quarterly basis beginning on March 31, 2003.

Total deposits were $193.4 million as of September 30, 2002, compared to $232.2 million at December 31, 2001. The $38.8 million decrease in deposits is the result of the continual rate reductions on the Bank’s deposit products and the consolidation of two depository branches into the Bank’s largest branch during the second quarter.

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RESULTS OF OPERATIONS

Results for the quarter and year-to-date ended September 30, 2002 are compared to the quarter and year-to-date ended September 30, 2001 below.

Highlights for the three and nine months ended September 30, 2002 and 2001:

The Company reported net income of $2.4 million for the quarter ended September 30, 2002, or $1.81 per basic and $0.95 per diluted share, compared with net loss of $2.7 million, or ($2.05) loss per basic and diluted share for the quarter ended September 30, 2001.

Net income for the three months ended September 30, 2002 included the discount accretion on the Participation Contract of $0.96 million.  For the nine months ended September 30, 2002 the discount accretion on the Participation Contract was $3.1 million.  Provision for credit losses was $788,000 for the three months ended September 30, 2002 compared with $959,000 for the same period a year ago.  For the nine months ended September 30, 2002, provision for credit losses totaled $979,000 compared with $2.2 million for the same period a year earlier.

The loss of $2.7 million for the quarter ended September 30, 2001 included a $507,000 expense accrual for various potential liabilities and a $970,000 writeoff of the Company’s deferred tax asset.  For the nine months ended September 30, 2001 the loss of $4.0 million included one-time gains of $871,000 from the sale of investment securities, $102,000 from the sale of servicing rights, and $132,000 from the sale of subprime loans.

Net Interest Income:

The Company’s net interest income before provision for loan losses increased 11% to $2.2 million for the three months ended September 30, 2002 compared with $2.0 million for the same period a year earlier. Net interest margin for the three months ended September 30, 2002 was 3.96% compared with 2.86% for the same period a year earlier. The increase is due in part to the accretion of the discount on the Participation Contract partially offset by a decrease in average loan yield of 99 basis points and a decrease in average loans by $95.7 million from the same prior year period.  In addition, the cost of funds decreased 144 basis points and the average interest bearing liabilities decreased $55.6 million from the same prior year period.  The discount accretion included in interest income for the third quarter was $960 thousand and is based on the Company’s projections of the expected performance of the residual assets underlying the contract. However, the actual performance of the residual assets and cash realized by the Company could vary significantly from the Company’s projections. The Company received $1.6 million from the Participation Contract during the third quarter compared to the $643 thousand it received during the second quarter when the Participation Contract first started to cash flow to the Company.  The reduction in the cost of interest bearing liabilities is due to the Bank’s continued focus on increasing lower cost core deposit accounts, namely consumer and small business transaction accounts as well as reducing its reliance on higher cost, short term certificates of deposit, and the overall lower interest rate environment.

For the three months ended September 30, 2002 there was a decrease in average loan yield of 99 basis points and a decrease in average loans by $95.7 million from the same prior year period.  In addition, the cost of funds decreased 143 basis points and the average interest bearing liabilities decreased $55.6 million from the same prior period.  For the nine months ended September 30, 2002 there was a decrease in average loan yield of 95 basis points and a decrease in average loans by $104.3 million from the same prior year period.  The cost of funds decreased 184 basis points and the average interest bearing liabilities decreased $82.7 million from the same prior period.

For the three months ending September 30, 2002, the Company’s net interest margin was 3.96% compared with 2.86% for the same period a year earlier.  For the nine months ending September 30, 2002, the Company’s net interest margin was 4.54% as compared to a net interest margin of 2.64% during the same period in 2001.   As mentioned above, the increase is due to the results of the Participation Contract and lower overall cost of interest bearing liabilities.

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The following table sets forth the Company’s average balance sheets (unaudited), and the related weighted average yields and costs on average interest-earning assets and interest-bearing liabilities, for the three months ended September 30, 2002 and 2001.

The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.  Average balances are measured on a daily basis.  The yields and costs include fees that are considered adjustments to yields.

(1) Included in loans receivable are non-accrual loans of $6.9 million and $15.9 million respectively.

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The following table sets forth the Company’s average balance sheets (unaudited), and the related weighted average yields and costs on average interest-earning assets and interest-bearing liabilities, for the nine months ended September 30, 2002 and 2001.

The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.  Average balances are measured on a daily basis.  The yields and costs include fees that are considered adjustments to yields.