UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-22193
PACIFIC PREMIER BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
33-0743196
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1600 SUNFLOWER AVENUE, 2ND FLOOR, COSTA MESA, CALIFORNIA 92626
(714) 431 - - 4000
(Registrant’s telephone number, including area code)
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes oNo ý
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: 5,258,738 shares of common stock par value $0.01 per share, were outstanding as of May 10, 2005.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES
INDEX
FOR THE QUARTER ENDED MARCH 31, 2005
PART I FINANCIAL INFORMATION
Item 1
Consolidated Statements of Financial Condition:
March 31, 2005 (unaudited) and December 31, 2004
Consolidated Statements of Income:
For the Three months ended March 31, 2005 and 2004 (unaudited)
Consolidated Statement of Stockholders’ Equity and Comprehensive Income:
Consolidated Statements of Cash Flows:
Notes to Consolidated Financial Statements (unaudited)
Item 2
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Item 3
Quantitative and Qualitative Disclosures About Market Risk
Item 4
Controls and Procedures
PART II OTHER INFORMATION
Legal Proceedings
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5
Other Information
Item 6
Exhibits
Item 1. Financial Statements.
PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
December 31,
2005
2004
(Unaudited)
ASSETS
Cash and due from banks
$
4,542
3,003
Federal funds sold
2,100
13,000
Cash and cash equivalents
6,642
16,003
Investment securities available for sale
36,170
36,455
Investment securities held to maturity:
FHLB Stock, at cost
10,697
8,389
Loans:
Loans held for sale, net
510
532
Loans held for investment, net
520,798
469,822
Accrued interest receivable
2,341
1,938
Foreclosed real estate
264
351
Premises and equipment
5,132
5,244
Income taxes receivable
229
188
Deferred income taxes
3,486
3,473
Other assets
950
729
Total Assets
587,219
543,124
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts
Noninterest bearing
11,325
11,732
Interest bearing:
Transaction accounts
66,403
63,438
Certificates of deposit
212,682
213,717
Total Deposits
290,410
288,887
Borrowings
238,100
196,400
Subordinated debentures
10,310
Accrued expenses and other liabilities
2,891
3,499
Total Liabilities
541,711
499,096
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Common stock, $.01 par value; 15,000,000 shares authorized; 5,258,738 shares issued and outstanding at March 31, 2005 and 5,258,738 shares issued and outstanding at December 31, 2004.
53
Additional paid-in capital; common stock and warrants
67,564
Accumulated deficit
(21,646
)
(23,280
Accumulated other comprehensive loss, net of tax of $324 (2005) and $217 (2004)
(463
(309
Total Stockholders’ Equity
45,508
44,028
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Accompanying notes are an integral part of these consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(UNAUDITED)
For the Three Months Ended
March 31, 2005
March 31, 2004
INTEREST INCOME:
Loans
6,767
4,053
Other interest-earning assets
440
1,212
Total interest income
7,207
5,265
INTEREST EXPENSE:
Interest-bearing deposits
1,680
1,218
Other borrowings
1,266
232
135
8
Total interest expense
3,081
1,458
NET INTEREST INCOME
4,126
3,807
PROVISION FOR LOAN LOSSES
145
57
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
3,981
3,750
NONINTEREST INCOME:
Loan servicing fee income
152
144
Bank and other fee income
128
141
Net gain from loan sales
69
—
Net gain from investment securities
1,573
Other income
277
101
Total noninterest income
626
1,959
NONINTEREST EXPENSE:
Compensation and benefits
1,889
1,622
Premises and occupancy
322
363
Data processing
83
79
Net (gain) loss on foreclosed real estate
(9
18
Other expense
689
Total noninterest expense
2,817
2,771
INCOME BEFORE INCOME TAXES
1,790
2,938
PROVISION FOR INCOME TAXES
156
12
NET INCOME
1,634
2,926
INCOME PER SHARE:
Basic income per share
0.31
0.56
Diluted income per share
0.24
0.44
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic
5,258,738
5,255,072
Diluted
6,694,388
6,575,431
2
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
Common
Stock Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Balance at December 31, 2003
67,546
(30,021
(246
37,332
Net income
Unrealized loss on investments, net of tax of ($49)
176
Total comprehensive income
3,102
Balance at March 31, 2004
(27,095
(70
40,434
Income(Loss)
Income
Balance at December 31, 2004
Unrealized loss on investments, net of tax of ($107)
(154
1,480
Balance at March 31, 2005
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to Net Income:
Depreciation expense
93
127
Provision for loan losses
63
Loss on sale, provision, and write-down of foreclosed real estate
32
38
Net unrealized loss and amortization on investment securities
131
Loss on sale of investment securities available for sale
13
Gain on sale of loans held for investment
(69
Net accretion on Participation Contract
(902
Gain on sale and termination of residual assets of Participation Contract
(1,586
Proceeds from the sales of and principal payments from loans held for sale
(2
37
Change in current and deferred income tax receivable
(54
(56
Decrease in accrued expenses and other liabilities
(608
(58
Increase in other assets
(624
(606
Net cash provided by operating activities
678
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale and principal payments on loans held for investment
18,347
16,141
Purchase, origination and advances of loans held for investment
(69,429
(64,024
Principal payments on securities
840
Proceeds from sale of foreclosed real estate
109
328
Proceeds from sale or maturity of securities
2,000
Proceeds from Participation Contract
539
Proceeds from sale and termination of residual assets of Participation Contract
6,300
Decrease (increase) in premises and equipment
19
(25
Purchase of FHLB stock
(2,308
(845
Net cash used in investing activities
(53,262
(38,746
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in deposit accounts
1,523
30,296
Proceeds from FHLB advances
49,600
11,400
(Repayment of) proceeds from other borrowings
(7,900
8,400
Issuance of subordinated debentures
Net cash provided by financing activities
43,223
60,406
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(9,361
21,739
CASH AND CASH EQUIVALENTS, beginning of period
2,440
CASH AND CASH EQUIVALENTS, end of period
24,179
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid
3,141
1,465
Income taxes paid
310
NONCASH INVESTING ACTIVITIES DURING THE PERIOD:
Transfers from loans to foreclosed real estate
54
88
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of Pacific Premier Bancorp, Inc. (the “Corporation”) and its wholly owned subsidiary, Pacific Premier Bank, F.S.B. (the “Bank”) (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 March 31, 2005 and the results of its operations and its cash flows for the three months ended March 31, 2005 and 2004. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for any other interim period or the full year ending December 31, 2005.
Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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, 2004.
The Company accounts for its investments in its wholly owned special purpose entity, PPBI Trust I, using the equity method under which the subsidiary’s net earnings are recognized in the Company’s statement of income.
5
The pro forma effects of applying SFAS No. 123 are disclosed below (dollars in thousands, except per share data):
Net income to common stockholders:
As reported
Stock-based compensation that would have been reported using the fair value method of SFAS 123
Pro forma
2,863
Basic earnings per share:
0.54
Diluted earnings per share:
In January 2003, FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB NO. 51” (“FIN 46”) and in December 2003, FASB issued a revision (“FIN 46R”). FIN 46 and FIN 46R address the requirements for consolidation by business enterprises of variable interest entities. Subsidiary business trusts formed by bank holding companies to issue trust preferred securities and lend the proceeds to the parent holding company have been determined to not meet the definition of a variable interest entity and therefore must be deconsolidated for financial reporting purposes. Bank holding companies have previously consolidated these entities and reported the trust preferred securities as liabilities in the consolidated financial statements. The Company adopted this statement at the time of the issuance of the junior subordinated debentures in March 2004, which did not have a material impact on the Company’s financial statements as subordinated debentures are reported as a component of liabilities. See Note 4 — Subordinated Debentures.
In December 2004, the FASB staff issued a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R focuses primarily on transactions in which the entity exchanges its equity instruments for employee services and generally establishes standards for the accounting for transactions in which an entity obtains goods or services in share-based payment transactions. SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123R establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based method in accounting for share-based transactions with employees. SFAS No. 123R is effective as of the beginning of the first interim reporting period that begins after June 15, 2005. On April 14, 2005, the effective date was amended by the Securities and Exchange Commission. As a result, SFAS No. 123R is now effective for most public companies for annual (rather than interim) periods that begin after June 15, 2005. Therefore, we will begin to expense options in the first quarter of 2006, unless further amended by the Securities and Exchange Commission. Management is currently evaluating the effect of adoption of SFAS No. 123R, but does not expect adoption to have a material effect on the firm’s financial condition, results of operations, or cash flows.
6
The Bank’s capital amounts and ratios are presented in the following table:
Actual
To be adequately
capitalized
To be well capitalized
Ratio
(dollars in thousands)
At March 31, 2005 (Unaudited)
Total Capital (to risk-weighted assets)
52,945
13.02
%
32,528
8.00
40,660
10.00
Tier 1 Capital (to adjusted tangible assets)
50,498
8.65
23,364
4.00
29,205
5.00
Tier 1 Risk-Based Capital (to risk-weighted assets)
12.42
16,264
24,396
6.00
At December 31, 2004
51,316
13.59
30,206
37,758
49,072
9.09
21,600
27,001
13.00
15,103
22,655
At March 31, 2005, the Bank had one advance on its $100 million credit facility with Salomon Brothers due September 2005, at a rate of 3.46%, in the amount of $8.4 million, which is secured by $9.1 million in mortgage-backed securities. At March 31, 2005, the Bank also had one advance against its credit facility, secured by mutual funds pledged to Pershing Bank, in the amount of $2.1 million at a rate of 3.50%. Additionally, the Company had $227.6 million in Federal Home Loan Bank (“FHLB”) advances with a weighted average interest rate of 2.71% and a weighted average maturity of 0.55 years, as of March 31, 2005. Advances from the FHLB are collateralized by pledges of certain real estate loans with an aggregate principal balance of $369.7 million. As of March 31, 2005, the Bank was able to borrow up to 40% of its total assets as of February 28, 2005 under the line, which amounted to $227.7 million, an increase of $37.1 million from the prior quarter. FHLB advances consisted of the following as of March 31, 2005:
Weighted
Average
FHLB Advances Maturing in:
% of Total
Interest Rate
One month or less
68,600
30.14
2.94
Over one month to three months
24,000
10.54
1.85
Over three months to six months
35,000
15.38
2.84
Over six months to one year
2.51
Over one year
65,000
28.56
2.83
Total FHLB Advances
227,600
100.00
2.71
Note 4 — Subordinated Debentures
In March 2004, the Corporation issued $10.3 million of Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) to PPBI Trust I, which fund the payment of $10.0 million of Floating Rate Trust Preferred Securities which were issued by PPBI Trust I in March 2004. The net proceeds from the offering of Trust Preferred Securities were contributed as capital to the Bank to support further growth. Interest is payable quarterly on the Subordinated Debentures at three-month LIBOR plus 2.75% for an effective rate of 5.41% as of March 31, 2005.
Under FIN 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” the Corporation is not allowed to consolidate PPBI Trust I into the Company’s financial statements. The resulting effect on the Company’s consolidated financial statements is to report the Subordinated Debentures as a component of liabilities. Prior to the issuance of FIN 46R, bank holding companies typically consolidated these entities and reported the Trust Preferred Securities as a component of liabilities.
7
The tables below set forth the Company’s unaudited earnings per share calculations for the three months ended March 31, 2005 and 2004.
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 and common stock equivalents outstanding for the period. Stock options totaling 117,597 and 42,372 shares for March 31, 2005 and March 31, 2004, respectively, were excluded from the computation of diluted earnings per share due to their exercise price exceeded the average market price.
The earnings per share reconciliation is as follows (dollars in thousands, except per share data):
For the Three Months Ended March 31,
Net
Per Share
Earnings
Shares
Net Earnings
Basic EPS Earnings Available to common stockholders
Effect of Warrants and Dilutive Stock Options
1,435,650
1,320,359
Diluted EPS Earnings Available to common stockholders plus assumed conversions
Note 6 —Sale of portions of the Participation Contract
In March 2004, the Company sold its share of the residual interest in the 1998-1 component of the Participation Contract for $6.3 million. The gain on sale was $1.6 million. In August 2004, the 1997-2 component of the Participation Contract was terminated early and the performing assets sold. The gain on the sale was $387,000. In November 2004, the final residual interest component of the Participation Contract, the 1997-3 residual, was terminated early and the performing assets sold. The gain on the sale was $437,000.
Note 7 — Valuation Allowance for Deferred Income Taxes
The Company benefited from a reduction in its valuation allowance for deferred taxes in the three months ended March 31, 2005 and 2004 of $500,000 and $1.1 million, respectively. The Company’s valuation allowance for deferred taxes was $3.5 million at March 31, 2005. The decrease in the deferred tax valuation allowance is due to management’s forecast of taxable earnings, based on assumptions regarding the Company’s growth, in the near future. As the Company recognizes continuous taxable income and if the earning projections show that the Company will have the ability to use its net operating loss carry-forwards, then all or part of the remaining valuation allowance for deferred taxes of $3.5 million will be eliminated.
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 months ended March 31, 2005 and 2004. The discussion should be read in conjunction with the Company’s Management Discussion and Analysis included in the 2004 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, 2005 are not necessarily indicative of the results expected for the year ending December 31, 2005.
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, and (6) various legal, regulatory and litigation risks.
The Corporation, a Delaware corporation organized in 1997, is a unitary savings and loan holding company that owns 100% of the capital stock of the Bank, the Corporation’s principal operating subsidiary. The primary business of the Company is community banking.
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 FHLB of San Francisco, which is a member bank of the Federal Home Loan Bank System. The Bank’s deposit accounts are insured up to the $100,000 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 Company is a financial services organization committed to serving consumers and small businesses in Southern California. The Bank currently operates three full-service branches in Southern California located in the cities of San Bernardino, Seal Beach and Huntington Beach. 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 multi-family and commercial real estate properties throughout Southern California. The Bank funds its lending and investment activities primarily 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 various products and services offered to both depository and loan customers.
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 2004 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.
9
Management believes that the allowance for loan losses and the valuation allowance on deferred taxes are the critical accounting policies that require estimates and assumptions in the preparation of the Company’s financial statements that are most susceptible to significant change. For further information, see “Allowances for Loan Losses” and “Provision (Benefit) for Income Taxes” discussed later in this document and in our 2004 Annual Report on Form 10-K.
Total assets of the Company were $587.2 million as of March 31, 2005 compared to $543.1 million as of December 31, 2004. The $44.1 million or 8.1% increase in total assets is primarily the result of a $50.1 million increase in loans held for investment offset by a decrease in cash of $9.3 million.
A summary of the Company’s securities as of March 31, 2005 and December 31, 2004 is as follows (dollars in thousands):
Amortized
Unrealized
Estimated
Cost
Gain
Loss
Market Value
Securities Available for Sale:
Mortgage-Backed Securities (1)
9,238
129
9,109
Mutual Funds (2)
27,719
658
27,061
Total securities available for sale
36,957
787
Securities Held to Maturity:
FHLB Stock
Total securities held to maturity
Total securities and Participation Contract
47,654
46,867
December 31, 2004
Mortgage-Backed Securities
9,262
48
9,214
Mutual Funds
478
27,241
36,981
526
45,370
44,844
(1) Mortgage-backed securities consists of one collateralized mortgage obligation (“CMO”) secured by the Federal Home Loan Mortgage Corporation “(FHLMC”), with a carrying value of $9.1 million. The CMO has been pledged as collateral for the $8.4 million advance on the Company’s secured line of credit.
(2) The Company’s mutual fund investments are with Shay Assets Management Inc, within their AMF Adjustable Rate Mortgage fund and their AMF Intermediate Mortgage fund. Both of these funds qualified for inclusion in the 20% risk-weighting capital category for the quarter ended March 31, 2005. $3.0 million of the mutual funds have been pledged to Pershing Bank on an advance of $2.1 million.
10
Investment Securities by Contractual Maturity
As of March 31, 2005
One Year
More than One
More than Five
More than
or Less
to Five Years
to Ten Years
Ten Years
Carrying
Value
Yield
0.00
4.35
Mutual Fund
3.30
3.56
4.45
Total securities
3.63
3.77
Gross loans outstanding totaled $522.6 million at March 31, 2005 compared to $471.6 million at December 31, 2004, which represents a 43.2% annualized growth rate. The Company’s multi-family loans and commercial real estate secured loans grew during the first quarter of 2005 at an annualized rate of 32.6% and 150.6%, respectively.
The Bank originated $49.7 million, $18.9 million, and $844,000, respectively, of adjustable rate multi-family and commercial real estate secured loans and commercial business loans for the three months ending March 31, 2005. Principal repayments and loan sales totaled $10.3 million and $8.1 million, respectively, for the three months ending March 31, 2005.
11
A summary of the Company’s loan originations and principal repayments for the three months ended March 31, 2005 and 2004 are as follows (dollars in thousands):
For the Three Months ended
Beginning balance, gross
471,609
250,117
Loans originated:
Multi-family
49,661
58,445
Commercial real estate
18,922
5,240
Commercial business loans
844
Total loans originated
69,428
63,690
Loans purchased:
Total loans purchased
Subtotal — Production
541,037
313,807
Less:
Principal repayments
10,341
16,435
Net Charge-offs
(13
Sales of loans
8,055
Transfers to REO
Total Gross loans
522,583
297,297
Ending balance loans held for sale (gross)
555
777
Ending balance loans held for investment (gross)
522,028
296,520
The following table sets forth the composition of our loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated (dollars in thousands):
% of
Real Estate Loans:
426,784
81.66
5.31
394,582
83.66
5.12
Commercial
75,025
14.36
5.68
54,502
11.56
5.54
One-to-four family (1)
19,853
3.80
9.78
22,347
4.74
9.67
Commercial business
0.16
6.85
103
0.02
5.25
Other Loans
77
0.01
4.39
75
4.54
5.38
(1) Includes second trust deeds.
Allowance for Loan Losses
The allowance for loan losses totaled $2.8 million as of March 31, 2005 and $2.6 million as of December 31, 2004. The allowance for loan losses as a percent of nonperforming loans was 142.1% and 110.8% as of March 31, 2005 and December 31, 2004, respectively. Net nonperforming loans totaled $1.7 million at March 31, 2005 and $2.1 million as of December 31, 2004, or 0.33% and 0.45% of total assets, respectively.
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. The allowance for the one-to-four residential loan portfolio is primarily based upon the Bank’s historical loss experience from charge-offs and real estate owned for the last 31 quarters, and a historical delinquency migration analysis. For the multi-family and commercial real estate loan portfolio, the Bank analyzes and uses the 10 year historical loan loss experience for multi-family and commercial real estate secured loans compiled by the OTS to determine its loss factors, since the Bank has not experienced any losses or delinquency on its own loans within the income property portfolio. Given the composition of the Company’s loan portfolio, the $2.8 million allowance for loan losses was considered adequate to cover losses inherent in the Company’s loan portfolio at March 31, 2005. 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, 2005 and 2004 (in thousands):
Balance, beginning of period
2,626
1,984
Charge-offs
Real estate:
One-to-four family
(47
(68
Construction and land
Other loans
(3
Total Charge-offs
(50
(77
Recoveries
30
21
16
Total Recoveries
46
90
Net (charge-offs) recoveries
(4
Balance, end of period
2,767
2,060
Composition of Nonperforming Assets
The table below summarizes the Company’s composition of nonperforming assets as of the dates indicated. The decrease in the total nonperforming assets is primarily due to decreases in nonperforming one-to-four family loans and real estate owned of $423,000 and $88,000, respectively. All nonperforming loans consist of one-to-four family loans.
At March 31,
At December 31,
Nonperforming loans:
Real Estate:
1,948
2,371
Construction
Total nonaccrual loans
Foreclosures in process
Specific Allowance
(214
(244
Total nonperforming loans, net
1,734
2,127
Foreclosed Real Estate Owned
Total nonperforming assets, net (1)
1,998
2,478
Restructured Loans
Allowance for loan losses as a percent of gross loans receivable (2)
0.53
Allowance for loan losses as a percent of total nonperforming loans, gross
142.06
110.77
Nonperforming loans, net of specific allowances, as a percent of gross loans receivable
0.33
0.45
Nonperforming assets, net of specific allowances, as a percent of total assets
0.34
0.46
(1) Nonperforming assets consist of nonperforming loans and REO. Nonperforming loans consisted of all loans 90 days or more past due and foreclosures in process less than 90 days and still accruing interest.
(2) Gross loans include loans receivable that are held for investment and are held for sale.
Liabilities and Stockholders’ Equity
Total liabilities of the Company increased from $499.1 million at December 31, 2004 to $541.7 million at March 31, 2005. The increase is primarily due to an increase in FHLB advances of $59.6 million partially offset by a decrease in the advances from Pershing Bank of $7.9 million.
The Company had $238.1 million in FHLB advances and other borrowings as of March 31, 2005, compared to $196.4 million in such borrowings at December 31, 2004. Advances from the FHLB are collateralized by pledges of certain real estate loans with an aggregate principal balance of $256.0 million. During the quarter, FHLB increased the amount the Bank may borrow from 35% of the Bank’s assets to 40% of its assets. As of March 31, 2005, the maximum the Bank may borrow was $227.7 million, based on the Bank’s assets as of February 28, 2005. The total cost of the Company’s borrowings at March 31, 2005 was 2.85%, an increase of 119 basis points compared to the same period in 2004.
Deposits increased by $1.5 million to $290.4 million at March 31, 2005, compared to $288.9 million of deposits at December 31, 2004. The increase in deposits was primarily comprised of an increase of $2.5 million in transaction accounts which was partially offset by a decrease in certificates of deposits of $1.0 million. During the three months ended March 31, 2005, the cost of deposits increased 44 basis points to 2.50% compared to the same period in 2004.
Total stockholder’s equity increased $1.5 million to $45.5 million at March 31, 2005, compared to $44.0 million at December 31, 2004, largely due to net income during this period.
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Highlights for the three months ended March 31, 2005 and 2004:
The Company reported net income of $1.6 million for the quarter ended March 31, 2005, or $0.24 per diluted share, compared with $2.9 million, or $0.44 per diluted share for the same period a year ago. The year ago results included a one time gain of $1.6 million from the sale of one of three residual interest components which comprised the Company’s Participation Contract and $902,000 in accretion income from the Participation Contract. Excluding the aforementioned gain and accretion income from last year’s results, net income for the first quarter of 2005 increased $1.2 million or 400% over last year’s results. All diluted earnings per share amounts have been adjusted to reflect the dilutive effect of all warrants and stock options outstanding. See Note 5 — Earnings Per Share.
Return on average assets for the quarter ended March 31, 2005 was 1.18%, compared to 3.53% for the same period in 2004. The Company’s return on average equity for the quarter ended March 31, 2005 was 14.58%, compared to 30.80% for the quarter ended March 31, 2004. The Company’s basic and diluted book value per share increased to $8.65 and $7.28, respectively, at March 31, 2005, reflecting an annualized increase of 13.4% and 11.3% from December 31, 2004. Options whose exercise price exceeds the closing market price as of March 31, 2005 are excluded from the diluted book value calculation.
Net Interest Income
For the three months ended March 31, 2005, net interest income before provision for loan losses increased to $4.1 million from $3.8 million for the same period a year earlier. The increase was attributable to an increase of $224.0 million in average loans outstanding, which was partially offset by increases in average borrowings and deposits of $159.8 million and $54.5 million, respectively. Additionally, the quarter ended March 31, 2004 included interest income of $902,000 generated from the Participation Contract, which was eliminated in 2004.
The Company’s average net interest margin for the quarter ended March 31, 2005 was 3.06% compared to 4.81% for the same period a year ago. The elimination of the Participation Contract interest income represents 61.1% of the decrease in the net interest margin. The remaining decrease was primarily attributable to a decrease in the average yield on net loans of 54 basis points and an increase in the average cost of funds of 43 basis points. The decrease in loan yield is primarily due to the origination of short-term adjustable rate loans and the prepayment of the Bank’s discontinued higher yielding subprime loans. The increase in the cost of funds is attributable to the overall rising interest rate environment.
The following tables set 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 March 31, 2005 and 2004.
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.
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Annualized
Balance
Interest
Yield/Cost
(dollars in thousands, unaudited)
Assets
Interest-earning assets:
348
12.64
1,144
1.75
365
2.19
158
2.53
Investment securities
45,643
427
3.74
40,467
304
3.00
Participation Contract
6,094
902
59.21
Loans receivable
492,721
5.49
268,740
6.03
Total interest-earning assets
539,077
5.35
316,603
6.65
Non-interest-earning assets
14,985
14,515
Total assets
554,062
331,118
Liabilities and Equity
Interest-bearing liabilities:
Passbook accounts, money market, and checking
76,197
259
1.36
71,609
205
1.15
Certificate accounts
214,285
1,421
2.65
164,396
1,013
2.46
Total interest-bearing deposits
290,482
2.31
236,005
2.06
204,250
2.48
54,007
1.72
5.24
772
4.15
Total interest-bearing liabilities
505,042
2.44
290,784
2.01
Non-interest-bearing liabilities
4,178
2,333
Total liabilities
509,220
293,117
44,842
38,001
Total liabilities and equity
Net interest income
Net interest rate spread
2.91
4.64
Net interest margin
3.06
4.81
Ratio of interest-earning assets to interest-bearing liabilities
106.74
108.88
The following table sets forth the effects of changing rates and volumes (changes in the average balances) on the Company’s net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (iii) changes in rate/volume (change in rate multiplied by change in volume).
Three Months Ended March 31, 2005
Compared to
Three Months Ended March 31, 2004
Increase (decrease) due to
Rate/
Rate
Volume
Interest earning assets:
125
(14
(105
Federal Funds
(5
298
(331
123
(3,608
2,706
Loans receivable, net (1)
(1,449
13,512
(9,349
2,714
Total interest earning assets
(1,025
10,051
(7,084
1,942
Interest bearing liabilities:
153
(152
308
1,230
(1,130
408
411
2,582
(1,959
1,034
395
(277
Total interest bearing deposits
881
4,260
(3,518
1,623
Change in net interest income
(1,906
5,791
(3,566
319
Provision for Loan Losses
For the three months ended March 31, 2005, provision for loan losses was $145,000 compared to $57,000 for the same period in 2004. The increase is primarily attributable to the significant growth in the Bank’s loan portfolio of $51.1 million since December 31, 2004. Net charge-offs for the quarter were $4,000, while for the same period in 2004 there were net recoveries of $13,000. The Bank’s Loss Mitigation Department continues collection efforts on loans previously written-down and/or charged-off to maximize potential recoveries. See “Provision for Loan Losses.”
Noninterest income decreased to $626,000 compared with $2.0 million for the same period a year ago. The decrease for the quarter was primarily the result of the $1.6 million gain from the sale of one residual interest component of the Participation Contract in 2004, which was partially offset by an increase in other income of $176,000 and net gain from loan sales of $69,000.
Noninterest Expense
Noninterest expense for the quarter ended March 31, 2005 was $2.8 million, a $46,000 increase compared to the same period in the prior year. The increase in noninterest expense was the result of an increase in compensation and benefits of $267,000, which was partially offset by decreases in nearly all other noninterest expense categories.
At March 31, 2005, the Company had 75 full-time equivalent employees compared to 72 at March 31, 2004.
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Provision (Benefit) for Income Taxes
The Company’s income tax provision for the three months ended March 31, 2005 and 2004 was $156,000 and $12,000, respectively. The Company benefited from a reduction in its valuation allowance for deferred taxes in the three months ended March 31, 2005 and 2004 of $500,000 and $1.1 million, respectively. The Company’s valuation allowance for deferred taxes was $3.5 million at March 31, 2005. The decrease in the deferred tax valuation allowance is due to management’s forecast of taxable earnings, based on assumptions regarding the Company’s growth, in the near future. As the Company recognizes continuous taxable income and if the earning projections show that the Company will have the ability to use its net operating loss carry-forwards, then all or part of the remaining valuation allowance for deferred taxes of $3.5 million will be eliminated.
The Bank’s primary sources of funds are principal and interest payments on loans, deposits and borrowings. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. However, the Bank has continued to maintain the required minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the direction of the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The Bank’s average liquidity ratios were 6.17% and 18.64% for the quarters ended March 31, 2005 and 2004, respectively.
The Company’s cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows provided by operating activities was $678,000 for the three months ended March 31, 2005, compared to $79,000 for the three months ended March 31, 2004. Net cash (used in) investing activities was ($53.3) million for the three months ended March 31, 2005, compared to ($38.7) million for the three months ended March 31, 2004. Net cash provided by financing activities was $43.2 million for the three months ended March 31, 2005, compared to $60.4 million for the three months ended March 31, 2004.
The Company’s most liquid assets are unrestricted cash and short-term investments. The levels of these assets are dependent on the Company’s operating, lending and investing activities during any given period. At March 31, 2005, cash and cash equivalents totaled $6.6 million and short-term investments totaled $27.1 million. The Company has other sources of liquidity if a need for additional funds arises, including the utilization of FHLB advances.
As of March 31, 2005 and December 31, 2004, the Bank had outstanding commitments for loan originations of $1.4 million and $8.1 million, respectively. There were no material changes to the Company’s commitments or contingent liabilities as of March 31, 2005 compared to the period ended December 31, 2004 as discussed in the notes to the audited consolidated financial statements of Pacific Premier Bancorp, Inc., for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K.
CAPITAL RESOURCES
The OTS capital regulations require savings institutions to meet three minimum capital requirements: a 1.5% tangible capital ratio, a 3.0% Tier 1 leverage capital ratio and an 8.0% risk-based capital ratio. The Tier 1 leverage capital requirement has been effectively increased to 4.0% because the prompt corrective action legislation provides that institutions with less than 4.0% Tier 1 leverage capital will be deemed “undercapitalized.” In addition, the OTS, under the prompt corrective action regulation, can impose various constraints on institutions depending on their level of capitalization ranging from “well capitalized” to “critically undercapitalized.”
The table in “Item 1. Financial Statements - Note 2 - “Regulatory Matters” reflects the Bank’s capital ratios based on the end of the period covered by this report and the related OTS requirements to be adequately capitalized and well capitalized. As of March 31, 2005, the Bank met the capital ratios required to be considered well capitalized.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Management believes that there have been no material changes in the Company’s quantitative and qualitative information about market risk since December 31, 2004. For a complete discussion of the Company’s quantitative and qualitative market risk, see “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” in the Company’s Form 10-K.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(c) and 15-d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”) have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such controls requiring corrective actions. As a result, no corrective actions were taken.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In December 1999, the Corporation together with certain officers, directors, and third parties were named as defendants in a securities class action lawsuit titled ‘Funke v. Life Financial, et al’. The lawsuit was filed in the United States District Court for the Southern District of New York, and asserts claims under the Exchange Act and the Securities Act of 1933, as amended (“Securities Act”), in connection with purchases and sales of the Corporation’s common stock in its 1997 public offering. The plaintiffs’ Exchange Act cause of action was dismissed and the parties have signed a proposed settlement agreement with regard to the remaining cause of action which was approved at a Fairness Hearing on March 2, 2005. Under the settlement agreement, the defendants collectively agreed to pay and have paid $825,000 (of which the Company paid $120,000).
During February 2004, the Bank was named in a class action lawsuit titled, “James Baker v. Century Financial, et al”, alleging various violations of Missouri’s Second Mortgage Loans Act by charging and receiving fees and costs that were either wholly prohibited by or in excess of that allowed by the Act relating to origination fees, interest rates, and other charges. The class action lawsuit was filed in the Circuit Court of Clay County, Missouri. The complaint seeks restitution of all improperly collected charges and interest plus the right to rescind the mortgage loans or a right to offset any illegal collected charges and interest against the principal amounts due on the loans. On March 29, 2005, the Bank’s motion for dismissal due to limitations was denied by the trial court. We intend to appeal the trial court’s ruling and to vigorously defend.
The Company is not involved in any other pending legal proceedings other than legal proceedings occurring in the ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Exhibit 31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PACIFIC PREMIER BANCORP, INC.,
By:
/s/ Steven R. Gardner
May 10, 2005
Steven R. Gardner
Date
President and Chief Executive Officer
(principal executive officer)
/s/ John Shindler
John Shindler
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
Index to Exhibits
Exhibit No.
Description of Exhibit
31.1
31.2
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