Pacific Premier Bancorp - 10-Q quarterly report FY

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

FOR THE QUARTER ENDED JUNE 30, 2005

Item 1.  Financial Statements.

PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

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 SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(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 SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)

(UNAUDITED)

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(UNAUDITED)

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

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PACIFIC PREMIER BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2005

(UNAUDITED)

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 June 30, 2005, the results of its operations for three and six months ended June 30, 2005 and 2004 and its stockholders’ equity, comprehensive income and cash flows for the six months ended June 30, 2005 and 2004.  Operating results for the three and six months ended June 30, 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.

The pro forma effects of applying SFAS No. 123 are disclosed below (dollars in thousands, except per share data):

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In January 2003, the Financial Accounting Standards Board (“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 SEC.  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 SEC.  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 or cash flows. However, any future issuance of options will reduce earnings.

Note 2 – Regulatory Matters

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

Note 3 – Borrowings

At June 30, 2005, the Bank had one advance in the amount of $8.4 million on its $100 million credit facility with Salomon Brothers due September 2005, at a rate of 3.46% per annum, which is secured by $9.1 million in mortgage-backed securities.  At June 30, 2005, the Bank also had one advance in the amount of $17.1 million at a rate of 3.75% per annum against its $18.9 million credit facility, secured by

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mutual funds pledged to Pershing Bank, and Fed Funds purchased in the amount of $10.0 million at a rate of 3.60% per annum.  Additionally, the Company had $238.9 million in Federal Home Loan Bank (“FHLB”) advances with a weighted average interest rate of 3.05% and a weighted average maturity of 0.55 years, as of June 30, 2005.  Advances from the FHLB are collateralized by pledges of certain real estate loans with an aggregate principal balance of $417.9 million.  As of June 30, 2005, the Bank was able to borrow up to 40% of its total assets as of May 31, 2005 under the line, which amounted to $238.9 million, an increase of $11.2 million from the prior quarter.  FHLB advances consisted of the following as of June 30, 2005:

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% per annum for an effective rate of 5.89% per annum as of June 30, 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.

Note 5 – Earnings Per Share

The tables below set forth the Company’s unaudited earnings per share calculations for the three and six months ended June 30, 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 116,997 and 47,372 shares for June 30, 2005 and June 30, 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):

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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.

Note 7 – Valuation Allowance for Deferred Income Taxes

The Company benefited from a reduction in its valuation allowance for deferred taxes in the three and six months ended June 30, 2005 and the three and six months ended 2004 of $500,000, $1.0 million, $472,000 and $1.1 million, respectively.  The Company’s valuation allowance for deferred taxes was $3.0 million at June 30, 2005. The decrease in the deferred tax valuation allowance is due to management’s updated forecast of taxable earnings for the foreseeable future. As the Company recognizes continuous taxable income and if the earnings 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 $3.0 million will be eliminated.

Note 8 – Subsequent Event

On July 14, 2005 the Bank purchased a building with a ground lease with 18 years remaining plus an option to extend the term for four additional five year periods for $725,000.  The building will be depreciated on a straight-line basis over the term of the lease and the monthly rent on the ground lease is $8,800.  The Bank will be relocating its Huntington Beach branch to the new location when the branch’s current lease terminates in January 2006.

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Investment Securities by Contractual Maturity

As of June 30, 2005

(dollars in thousands)

Loans

Gross loans outstanding totaled $553.8 million at June 30, 2005 compared to $471.6 million at December 31, 2004, which represents a 34.9% annualized growth rate. The Company’s multi-family loans and commercial real estate secured loans grew during the second quarter of 2005 at an annualized rate of 18.8% and 68.3%, respectively.

The Bank originated $34.8 million, $16.2 million, and $554,000, respectively, of adjustable-rate multi-family loans, commercial real estate secured loans, and commercial business loans for the three months ended June 30, 2005 and $84.5 million, $35.1 million, and $1.4 million, respectively, for the six months ended June 30, 2005.  Principal repayments and loan sales for the three and six months ending June 30, 2005 totaled $17.9 million, $2.2 million, $28.3 million, and $10.3 million, respectively,

A summary of the Company’s loan originations and principal repayments for the six months ended June 30, 2005 and 2004 are as follows (dollars in thousands):

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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):

(1) Includes second trust deeds.

Allowance for Loan Losses

The allowance for loan losses totaled $2.8 million as of June 30, 2005 and $2.6 million as of December 31, 2004. The allowance for loan losses as a percent of nonperforming loans was 194.6% and 110.8% as of June 30, 2005 and December 31, 2004, respectively.  Net nonperforming loans totaled $1.3 million at June 30, 2005 and $2.1 million as of December 31, 2004, or 0.23% 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 32 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

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loan portfolio at June 30, 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 and six months ended June 30, 2005 and 2004 (in thousands):