Attached files
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EX-32 - PPBI 2008 10-K EXHIBIT 32 - PACIFIC PREMIER BANCORP INC | ppbi_2009-10kex32.htm |
EX-23 - PPBI 2008 10-K EXHIBIT 23 - PACIFIC PREMIER BANCORP INC | ppbi_2009-10kex23.htm |
EX-31.1 - PPBI 2008 10-K EXHIBIT 31.1 - PACIFIC PREMIER BANCORP INC | ppbi_2009-10kex311.htm |
EX-31.2 - PPBI 2008 10-K EXHIBIT 31.2 - PACIFIC PREMIER BANCORP INC | ppbi_2009-10kex312.htm |
UNITED
STATES SECURITIES AND EXCHANGE
COMMISSION
|
Washington,
DC 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
or
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from to .
Commission
File No.: 0-22193
Pacific
Premier Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
Delaware 33-0743196
(State of
Incorporation) (I.R.S.
Employer Identification No)
1600
Sunflower Ave. 2nd
Floor, Costa Mesa, California 92626
(Address
of Principal Executive Offices and Zip Code)
Registrant’s
telephone number, including area code: (714) 431-4000
----------------
Securities
registered pursuant to Section 12(b) of the Act:
Title of class
|
Name of each exchange on which
registered
|
Common
Stock, par value $0.01 per share
|
NASDAQ Global
Market
|
Securities
registered pursuant to Section 12(g) of the Act:
None
----------------
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [__] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [__] No [X]
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. Yes [X] No [_]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[ ] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check
one).
Large
accelerated filer
|
[ ]
|
Accelerated
filer
|
[ ]
|
|
Non-accelerated
filer
|
[ ]
|
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
|
[X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [__] No
[X]
The
aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant, was approximately $24,362,455 and was based upon the last sales
price as quoted on The NASDAQ Stock Market as of June 30, 2009, the last
business day of the most recently completed second fiscal quarter.
As of
March 29, 2010, the Registrant had 10,033,836 shares outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement filed under Regulation 14A
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, which definitive proxy statement is to be filed within
120 days after the registrant’s fiscal year ended December 31, 2009,
are incorporated by reference in Part III hereof.
INDEX
Forward-Looking
Statements
All
references to “we”, “us”, “our”, or the “Company” mean Pacific Premier Bancorp,
Inc. and our consolidated subsidiaries, including Pacific Premier Bank, our
primary operating subsidiary. All references to ‘‘Bank’’ refer to
Pacific Premier Bank. All references to the “Corporation” refer to
Pacific Premier Bancorp, Inc.
This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). These forward-looking statements
represent plans, estimates, objectives, goals, guidelines, expectations,
intentions, projections and statements of our beliefs concerning future events,
business plans, objectives, expected operating results and the assumptions upon
which those statements are based. Forward-looking statements include
without limitation, any statement that may predict, forecast, indicate or imply
future results, performance or achievements, and are typically identified with
words such as “may,” “could,” “should,” “will,” “would,” “believe,”
“anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phases of
similar meaning. We caution that the forward-looking statements are
based largely on our expectations and are subject to a number of known and
unknown risks and uncertainties that are subject to change based on factors
which are, in many instances, beyond our control. Actual results,
performance or achievements could differ materially from those contemplated,
expressed, or implied by the forward-looking statements.
The
following factors, among others, could cause our financial performance to differ
materially from that expressed in such forward-looking statements:
·
|
The
strength of the United States economy in general and the strength of the
local economies in which we conduct
operations;
|
·
|
The
effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System (the “Federal
Reserve”);
|
·
|
Inflation,
interest rate, market and monetary
fluctuations;
|
·
|
The
timely development of competitive new products and services and the
acceptance of these products and services by new and existing
customers;
|
·
|
The
willingness of users to substitute competitors' products and services for
our products and services;
|
·
|
The
impact of changes in financial services policies, laws and regulations,
including laws, regulations and policies concerning taxes, banking,
securities and insurance, and the application thereof by regulatory
bodies;
|
·
|
Technological
changes;
|
·
|
The
effect of acquisitions we may make, if any, including, without limitation,
the failure to achieve the expected revenue growth and/or expense savings
from such acquisitions;
|
·
|
Changes
in the level of our nonperforming assets and
charge-offs;
|
·
|
Oversupply
of inventory and continued deterioration in values of California real
estate, both residential and
commercial;
|
·
|
The
effect of changes in accounting policies and practices, as may be adopted
from time-to-time by bank regulatory agencies, the Securities and Exchange
Commission (the “SEC”), the Public Company Accounting Oversight Board, the
Financial Accounting Standards Board or other accounting standards
setters;
|
·
|
Possible
other-than-temporary impairments (“OTTI”) of securities held by
us;
|
·
|
The
impact of current governmental efforts to restructure the U.S. financial
regulatory system;
|
·
|
Changes
in consumer spending, borrowing and savings
habits;
|
·
|
The
effects of our lack of a diversified loan portfolio, including the risks
of geographic and industry
concentrations;
|
·
|
Ability
to attract deposits and other sources of
liquidity;
|
·
|
Changes
in the financial performance and/or condition of our
borrowers;
|
·
|
Changes
in the competitive environment among financial and bank holding companies
and other financial service
providers;
|
·
|
Geopolitical
conditions, including acts or threats of terrorism, actions taken by the
United States or other governments in response to acts or threats of
terrorism and/or military conflicts, which could impact business and
economic conditions in the United States and
abroad;
|
·
|
Unanticipated
regulatory or judicial proceedings;
and
|
·
|
Our
ability to manage the risks involved in the
foregoing.
|
If one or
more of the factors affecting our forward-looking information and statements
proves incorrect, then our actual results, performance or achievements could
differ materially from those expressed in, or implied by, forward-looking
information and statements contained in this Annual Report on Form
10-K. Therefore, we caution you not to place undue reliance on our
forward-looking information and statements. We will not update the
forward-looking statements to reflect actual results or changes in the factors
affecting the forward-looking statements.
Overview
We are a
California-based bank holding company incorporated in 1997 in the State of
Delaware and registered as a banking holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA”), for Pacific Premier Bank, a California
state-chartered commercial bank. The Bank is subject to examination
and regulation by the California Department of Financial Institutions (the
“DFI”), the Federal Reserve, and by the Federal Deposit Insurance Corporation
(the “FDIC”).
We
conduct business throughout Southern California from our six locations in the
counties of Orange and San Bernardino. We operate depository branches
in the cities of Huntington Beach, Los Alamitos, Newport Beach, San Bernardino,
Seal Beach, and Costa Mesa, California. Our corporate headquarters
are located in Costa Mesa, California.
We
provide banking services within our targeted markets in Southern California to
businesses, including the owners and employees of those businesses,
professionals entrepreneurs and non-profit organizations, as well as, consumers
in the communities we serve. Through our branches and our Internet
website at www.ppbi.com, we offer a broad array of deposit products and services
for both business and consumer customers, including checking, money market and
savings accounts, cash management services, electronic banking, and on-line bill
payment. We offer a wide array of loan products, such as commercial
business loans, lines of credit, commercial real estate loans, and U.S. Small
Business Administration (“SBA”) loans. At December 31, 2009, we had
consolidated total assets of $807.3 million, net loans of $566.6 million, total
deposits of $618.7 million, and consolidated total stockholders’ equity of $73.5
million. At December 31, 2009, the Bank was considered a
“well-capitalized” financial institution for regulatory capital
purposes.
Operating
Strategy
The Bank
was founded in 1983 as a state chartered savings and loan, became a federally
chartered stock savings bank in 1991 and, in March 2007, converted to a
California-chartered commercial bank. In the fourth quarter of 2000, our
management implemented a new business plan to refocus Pacific Premier’s business
model, emphasizing community banking. To achieve the Bank’s goals, we
implemented a three-phase strategic plan which involved:
• Phase
1: lowering the risk profile of the Bank and re-capitalizing Pacific
Premier;
• Phase
2: growing the balance sheet through the origination of adjustable rate
multi-family residential loans; and
• Phase
3: transforming the institution to a commercial banking business
model.
The first
two phases of our strategic plan were completed in 2002 and 2004, respectively.
Our transition to a commercial banking platform began in 2005 as we recruited
experienced business bankers from other regional and national commercial banks.
These business bankers helped us to introduce new credit and deposit products as
well as on-line banking and cash management services. This in turn allowed us to
begin to capture small business customers in our market. Our transition to a
commercial banking platform is being achieved by retaining and growing the
number of business banking relationships within the Southern California
market.
Our
primary goal is to develop the Bank into one of Southern California’s top
performing commercial banks as an alternative to the large regional and national
banks for businesses, professionals, entrepreneurs and non-profit organizations
for the long term benefit of our stockholders, customers and employees. The
following are our operating strategies which we have adopted in order to achieve
this goal:
• Expansion through Acquisitions.
The consolidation and current turmoil in the banking industry has created
an opportunity in our markets and we expect to expand the Bank’s franchise
through acquisitions. Many banks have been negatively impacted by the economic
environment, which we expect will lead to the continued consolidation and
elimination of certain of our competitors. We intend to take advantage of this
opportunity over the next couple of years by pursuing acquisitions of all or
part of failing banks located in Southern California through FDIC-assisted
transactions.
• Expansion through Relationship
Banking. The industry wide consolidation and turmoil is also creating
opportunities to acquire new business banking customers. Profitable businesses
are not having their needs met either from a service level or credit
availability basis and we intend to convert these businesses to customers of the
Bank. We believe customer relationships are built through a series of
consistently executed experiences in both routine transactions and higher value
interactions. Our business bankers are focused on developing long term
relationships with business owners, professionals, entrepreneurs, and non-profit
organizations through consistent and frequent contact. Additionally, our bankers
are actively involved in community organizations and events, thus building and
capitalizing on the Bank’s reputation within our local communities.
• Reduction in Wholesale Funding and
Brokered Deposits. As we transitioned towards a commercial banking
platform, we began reducing our reliance on wholesale borrowings, such as
advances from the Federal Home Loan Bank (“FHLB”) and brokered
deposits.
• Diversifying our Loan Portfolio.
We believe it is important to diversify our loan portfolio in order to
better manage credit risks. As part of our transition to a commercial banking
platform, we have increased the amount of owner-occupied commercial real estate
(“CRE”) loans, commercial and industrial (“C&I”) loans and Small Business
Administration (“SBA”) loans within the portfolio.
• Maintain Excellent Asset Quality.
Our conservative credit and risk management culture has resulted in
relatively low levels of nonperforming loans and an overall high credit quality
within the loan portfolio as compared to our peer banks. Our portfolio
management strategies involve the early identification of loan weakness,
aggressive collection techniques, loss mitigation through loan sales and/or
working with third parties to refinance the credit. We will continue to monitor
economic trends and conditions that could positively or negatively impact our
business. We seek to take advantage of these trends by entering or exiting
certain lines of business or offering or eliminating various loan product types,
as evidenced by our decision to curtail our multi-family and commercial real
estate lending. We will continue to adjust our risk management practices to the
on-going changes in our local economy that impact our business.
• Premier Customer Service Provider.
We believe it is imperative that the Bank provide a consistent level of
quality service which generates customer retention and referrals. All of our
employees, through training and compensation, understand that each interaction
with our customers is an opportunity to exceed their expectations. We
measure and test our employee’s service levels through third party evaluations
and by listening to customer interactions recorded over the phone. We
use these tools to train and improve our employees on a consistent
basis.
• Expansion through Electronic
Banking. Many businesses feel displaced by large out-of-market
institutions and are attracted to banks that have local decision making
capability, more responsive customer service, and greater familiarity with their
needs. We intend to continue expanding our franchise through electronic banking,
such as remote or merchant capture, on-line banking and cash management services
available through our web site.
Our
executive offices are located at 1600 Sunflower Avenue, 2nd
Floor, Costa Mesa, California 92626 and our telephone number is (714)
431-4000. Our Internet website address is
www.ppbi.com. Our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, and all amendments
thereto, from 1998 to present that have been filed with the SEC, are available
free of charge on our Internet website. Also on our website are our
Code of Ethics, Insider Trading and Beneficial Ownership forms, and Corporate
Governance Guidelines. The information contained in our website, or
in any websites linked by our website, is not a part of this Annual Report on
Form 10-K.
Lending
Activities
General. In 2009,
we maintained our commitment to a high level of credit quality in our lending
activities. We expanded our efforts to diversify our loan portfolio
and focused our efforts on meeting the financial needs of qualified individuals
and local businesses. The Company offers a full complement of
flexible and structured loan products tailored to meet the needs of our
customers.
Loans
were made primarily to borrowers within our market area and secured by real
property and business assets located principally in Southern
California. We emphasize relationship lending and focus on generating
retail production with customers who also maintain full depository relationships
with us. These efforts assist us in establishing and expanding
depository relationships consistent with the Company’s strategic
direction. The Company has generally ceased making loans secured by
investor owner commercial real estate, although such loans continue to make up a
substantial portion of our loan portfolio. We maintain a house
lending limit below our $18.1 million legal lending limit for secured loans and
$10.9 million for unsecured loans as of December 31, 2009. During
2009, we originated or purchased 4.5 million in multi-family loans, $4.2 million
of C&I loans, $1.2 million of SBA loans, $1.2 million of other loan and
$365,000 in owner-occupied commercial real estate loans. At December
31, 2009, we had $576.3 million in total gross loans outstanding.
Owner-Occupied Commercial Real Estate
Lending. We originate and purchase loans secured by
owner-occupied commercial real estate, such as retail buildings, small office
and light industrial buildings, and mixed-use commercial properties located
predominantly in Southern California. We will also, from time to time,
make a loan secured by a special purpose property, such as a gas
station. Pursuant to our underwriting policies, owner-occupied
commercial real estate loans may be made in amounts of up to 75% of the lesser
of the appraised value or the purchase price of the collateral property. Loans
are generally made for terms up to 15 years with amortization periods up to 30
years. Owner-occupied commercial real estate loans originated or
purchased in 2009 had an average balance of $365,000 and an average
loan-to-value ratio of 31.1% at origination. At December 31, 2009, we
had $103.0 million of owner-occupied commercial real estate secured loans,
constituting 17.9% of our loan portfolio.
Commercial and Industrial
Lending. We originate C&I loans secured by business assets
including inventory, receivables, machinery and equipment to businesses located
in our primary market area. In many instances, real estate holdings
of the borrower, its principals or loan guarantors are also taken as
collateral. Loan types include revolving lines of credit, term loans,
seasonal loans and loans secured by liquid collateral such as cash deposits or
marketable securities. We also issue letters of credit on behalf of
our customers, backed by loans or deposits with the Company. At
December 31, 2009, we had total commitments of $42.0 million in commercial
business lines of credit, of which, $31.1 million were disbursed, constituting
5.4% of our loan portfolio.
SBA Lending. The
Company was approved to originate loans under the SBA’s Preferred Lenders
Program (“PLP”) in the third quarter of 2006. The PLP lending status
affords the Company a higher level of delegated credit autonomy, translating to
a significantly shorter turnaround time from application to funding, which is
critical to our marketing efforts. We originate loans under the SBA’s
7(a), 504, and Express loan programs, in conformity with SBA underwriting and
documentation standards. The guaranteed portion of the 7(a) loans is
typically sold on the secondary market. At December 31, 2009, we had
$3.3 million of SBA loans, constituting 0.6% of our loan portfolio.
One-to-Four Family
Lending. The Company is not an active participant in single
family lending on a transactional basis and does not engage in Alt-A or subprime
lending. In keeping with the Company’s strategy of offering a full
complement of loan products to customers, home loans are available to banking
customers only. The Company’s portfolio of one-to-four family loans
at December 31, 2009 totaled $8.5 million, constituting 1.5% of our loan
portfolio, of which $6.7 million consists of loans secured by first liens on
real estate and $1.8 million consists of loans secured by second or junior liens
on real estate.
Multi-family Real Estate
Lending. Although we were not an active multi-family lender in
2009, on occasion, we originate and purchase loans secured by multi-family
residential properties (five units and greater) located predominantly in
Southern California. Pursuant to our underwriting policies,
multi-family residential loans may be made in an amount up to 75% of the lesser
of the appraised value or the purchase price of the collateral
property. In addition, we generally require a stabilized minimum debt
service coverage ratio of 1.15:1, based on the qualifying loan interest
rate. Loans are made for terms of up to 30 years with amortization
periods up to 30 years. As part of our desired strategy to diversify
the loan portfolio, we have substantially reduced the origination of
multi-family real estate loans beginning in late 2007. Historically,
we have managed our concentration in multi-family real estate loans by selling
excess loan production. However, in recent periods, the level of loan sales has
decreased significantly due to dislocations in the credit markets. Multi-family
loan sales remain a strategic option for us as the Bank continues its transition
to a traditional commercial bank. At December 31, 2009, we had $278.7
million of multi-family real estate secured loans, constituting 48.4% of our
loan portfolio.
Commercial Investor Real Estate
Lending. Although we were not an active commercial real estate
lender in 2009, on occasion, we originate and purchase loans secured by
commercial real estate, such as retail centers, small office and light
industrial buildings, and mixed-use commercial properties located predominantly
in Southern California. Pursuant to our underwriting policies,
commercial real estate loans may be made in amounts up to 75% of the lesser of
the appraised value or the purchase price of the collateral
property. We consider the net operating income of the property and
typically require a stabilized debt service coverage ratio of at least 1.20:1,
based on the qualifying interest rate. Loans are generally made for
terms up to 15 years with amortization periods up to 30 years. At
December 31, 2009, we had $149.6 million of commercial real estate secured
loans, constituting 26.0% of our loan portfolio.
Other Loans. We
originate other consumer loan products, generally for banking customers only,
which consist primarily of saving account and auto loans. Before we
make a consumer loan, we assess the applicant’s ability to repay the loan and,
if applicable, the value of the collateral securing the loan. At
December 31, 2009, we had $2.0 million in other loans that represented 0.33% of
our gross loans.
Interest Rates on Our
Loans. We employ a risk-based pricing strategy on all loans
that we fund. The interest rates, fees and loan structure of our
loans generally vary based on a number of factors, including the degree of
credit risk, size, maturity of the loan, a borrower’s business or property
management expertise, and prevailing market rates for similar types of
loans. Adjustable rate C&I and SBA loans are typically priced
based on a margin over the Prime rate. Commercial real estate
loans are typically 3, 5, 7, or 10-year fixed rate hybrid adjustable-rate loans
and are based on one of several interest rate indices. Many of the
C&I loans and substantially all of the investor owned real estate loans
originated by the Company in 2009 had minimum interest rates, or floor rates,
below which the rate charged may not be reduced regardless of further reductions
in the underlying interest rate index. Substantially all commercial
real estate loans also include prepayment penalties.
Lending Risks on Our
Loans. Lending risks vary by the type of loan
extended. In our C&I and SBA lending activities, collectability
of the loans may be adversely affected by risks generally related to small
businesses, such as:
·
|
Changes
or continued weakness in general or local economic
conditions;
|
·
|
Changes
or continued weakness in specific industry segments, including weakness
affecting the business’ customer
base;
|
·
|
Changes
in consumer behavior;
|
·
|
Changes
in a business’ personnel;
|
·
|
Increases
in supplier costs that cannot be passed along to
customers;
|
·
|
Increases
in operating expenses (including energy
costs);
|
·
|
Changes
in governmental rules, regulations and fiscal
policies;
|
·
|
Increases
in interest rates, tax rates; and
|
·
|
Other
factors beyond the control of the borrower or the
lender.
|
In our
investor real estate loans, payment performance and the liquidation values of
collateral properties may be adversely affected by risks generally incidental to
interests in real property, such as:
·
|
Changes
or continued weakness in general or local economic
conditions;
|
·
|
Changes
or continued weakness in specific industry
segments;
|
·
|
Declines
in real estate values;
|
·
|
Declines
in rental rates;
|
·
|
Declines
in occupancy rates;
|
·
|
Increases
in other operating expenses (including energy
costs);
|
·
|
The
availability of property financing;
|
·
|
Changes
in governmental rules, regulations and fiscal policies, including rent
control ordinances, environmental legislation and
taxation;
|
·
|
Increases
in interest rates, real estate and personal property tax rates;
and
|
·
|
Other
factors beyond the control of the borrower or the
lender.
|
We
attempt to mitigate these risks through sound and prudent underwriting
practices, as well as a proactive loan review process and our risk management
practices. See “Lending Activities - Underwriting and Approval
Authority for Our Loans” immediately below. We will not extend credit
to any one borrower that is in excess of regulatory limits.
Underwriting and Approval Authority
for Our Loans. Our board of directors establishes our lending
policies. Each loan must meet minimum underwriting criteria
established in our lending policies and must fit within our overall strategies
for yield, interest rate risk, and portfolio concentrations. The
underwriting and quality control functions are managed through our corporate
office. Each loan application is evaluated from a number of
underwriting perspectives. For C&I and SBA loans, underwriting
considerations include historic business cash flows, debt service coverage,
loan-to-value ratios of underlying collateral, if any, debt to equity ratios,
credit history, business experience, history of business, forecasts of
operations, economic conditions, business viability, net worth, and
liquidity. For loans secured by real estate, underwriting
considerations include property appraised value, loan-to-value ratios, level of
debt service coverage utilizing both the actual net operating income and
forecasted net operating income and use and condition of the property, as well
as the borrower’s liquidity, income, credit history, net worth, and operating
experience. We do not offer loans on a limited- or no-documentation
basis unless fully secured by cash collateral.
Business
loans are generally originated as recourse or with full guarantees from key
borrowers or borrower principals. Loans secured by real estate are
likewise originated on a full recourse basis. On loans made to
entities, such as partnerships, limited liability companies, corporations or
trusts, we typically obtain personal guarantees from the appropriate managing
members, major stockholders, trustees or other appropriate
principals. In 2009, substantially all of our loans to entities were
originated with full recourse and/or personal guarantees from the principals of
the borrowers.
Prior to
processing and underwriting any loan request, we issue a letter of interest
based on a preliminary analysis by our bankers, which letter details the terms
and conditions on which we will consider the loan request. Upon
receipt of the signed letter of interest, a completed loan application and a
deposit, a credit report and other required reports are ordered and, if
necessary, additional information is requested. Upon receipt of all
requested information, we process and underwrite each loan application and
prepare all the loan documentation after the loan has been
approved.
Our
credit memorandums, which are prepared by our underwriters, include a
description of the transaction and prospective borrower and guarantors, the
collateral securing the loan, if any, the proposed uses of loan proceeds and
source(s) of repayment, as well as an analysis of the borrower’s business and
personal financial statements and creditworthiness. The financial
statements and creditworthiness of any guarantors are also
analyzed. For loans secured by real property, the credit memorandum
will include an analysis of the property. Loans for which real estate
is the primary collateral require an independent appraisal conducted by a
licensed appraiser. All appraisal reports are appropriately reviewed
by our appraisal department. Our board of directors reviews and
approves annually the independent list of acceptable appraisers. When
appropriate, environmental reports are obtained and reviewed as
well.
Following
loan approval and prior to funding, our underwriting and processing departments
ensure that all loan approval terms have been satisfied, that those terms
conform with lending policies (or are properly documented as exceptions with
required approvals), and that all the required documentation is present and in
proper form.
Business
loans are subject to the Company’s guidelines regarding appropriate covenants
and periodic monitoring requirements which may include, but are not limited
to:
·
|
Capital
and lease expenditures;
|
·
|
Capital
levels;
|
·
|
Salaries
and other withdrawals;
|
·
|
Working
capital levels;
|
·
|
Debt
to net worth ratios;
|
·
|
Sale
of assets;
|
·
|
Change
of management;
|
·
|
Change
of ownership;
|
·
|
Cash
flow requirements;
|
·
|
Profitability
requirements;
|
·
|
Debt
service ratio;
|
·
|
Collateral
coverage ratio; and
|
·
|
Current
and quick ratios.
|
Subject to the above
standards, our board of directors delegates authority and responsibility to
management for loan approvals of up to $1.5 million for all loans secured by
real estate and up to $250,000 for loans not secured by real
estate. Loan approvals at the management level require the approval
of at least two members of our Management Loan Committee, consisting of our
President and Chief Executive Officer, Chief Credit Officer, and Chief Banking
Officer. All loans in excess of $1.5 million, including total
aggregate borrowings by one borrower in excess of $1.5 million, and any loan in
excess of $250,000 not secured by real estate, require a majority approval of
our board’s Credit Committee, which is comprised of three directors, including
our President and Chief Executive Officer.
Portfolio Management
and Loan Servicing. Portfolio management and loan servicing
activities are centralized at our corporate headquarters. Our loan
servicing operations are designed to provide prompt customer service and
accurate and timely information for account follow-up, financial reporting and
loss mitigation. Following the funding of an approved loan, the data
is entered into our data processing system, which provides monthly billing
statements, tracks payment performance, and effects agreed upon interest rate
adjustments. Loan servicing activities include (i) the collection and
remittance of loan payments, (ii) accounting for principal and interest and
other collections and expenses, and (iii) holding and disbursing escrow or
impounding funds for real estate taxes and insurance premiums.
Our portfolio
management operations are designed to ensure that management and the board of
directors has timely and comprehensive information regarding the performance of
our loan portfolio. This information provides an essential leading
indicator of potential performance issues prior to loan payment
delinquency. For each of the Company’s non-homogeneous loans, our
Portfolio Managers collect financial information from borrowers and guarantors
in order to conduct a detailed loan review in accordance with our policies,
generally annually or more often as appropriate. The Portfolio
Managers also visit properties and businesses on a periodic basis to perform
inspections of our collateral and associated revenue-generating activities of
borrowers. In conjunction with the loan review process, all loans in
the portfolio are assigned a risk grade that, among other purposes, factors into
the Company’s allowance for loan and lease loss calculations.
When payments are not
received by their contractual due date, collection efforts are initiated by our
loss mitigation personnel. Accounts past-due by more than 10 days are
assigned to our collector for comprehensive payment collection
efforts. Our Portfolio Managers conduct an evaluation of all loans 90
days or more past due by obtaining an estimate of value on the underlying
collateral. The evaluation may result in our partial or complete
charge off of the loan, but collection efforts still
continue. Portfolio Managers also conduct discussions with borrowers
in order to identify whether alternatives to foreclosure exist. When
foreclosure will maximize the Company’s recovery for a non-performing loan, the
Portfolio Managers will carry out the foreclosure process, including any
associated judicial legal actions.
Loan Portfolio
Composition. At December 31, 2009, our net loans receivable
held for investment totaled $566.6 million and we had no loans receivable held
for sale. The types of loans that the Company may originate are
subject to federal and state law.
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:
At
December 31,
|
||||||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
Amount
|
%
of Total
|
Amount
|
%
of Total
|
Amount
|
%
of Total
|
Amount
|
%
of Total
|
Amount
|
%
of Total
|
|||||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Real
estate loans:
|
||||||||||||||||||||||||||||||||||||||||
Multi-family
|
$ | 278,744 | 48.4 | % | $ | 287,592 | 45.7 | % | $ | 341,263 | 54.5 | % | $ | 357,275 | 58.8 | % | $ | 459,714 | 76.0 | % | ||||||||||||||||||||
Commercial
investor
|
149,577 | 26.0 | % | 163,428 | 26.0 | % | 142,134 | 22.7 | % | 170,175 | 28.0 | % | 111,566 | 18.4 | % | |||||||||||||||||||||||||
One-to-four
family (1)
|
8,491 | 1.5 | % | 9,925 | 1.6 | % | 13,080 | 2.1 | % | 12,825 | 2.1 | % | 16,500 | 2.7 | % | |||||||||||||||||||||||||
Construction
|
- | 0.0 | % | 2,733 | 0.4 | % | 2,048 | 0.3 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
Land
|
- | 0.0 | % | 2,550 | 0.4 | % | 5,389 | 0.9 | % | 3,277 | 0.5 | % | 2,524 | 0.4 | % | |||||||||||||||||||||||||
Business
loans:
|
||||||||||||||||||||||||||||||||||||||||
Commercial
owner occupied (2)
|
103,019 | 17.9 | % | 112,406 | 17.9 | % | 57,614 | 9.2 | % | 35,929 | 5.9 | % | 11,335 | 1.9 | % | |||||||||||||||||||||||||
Commercial
and industrial
|
31,109 | 5.4 | % | 43,235 | 6.9 | % | 50,992 | 8.1 | % | 22,762 | 3.8 | % | 3,248 | 0.6 | % | |||||||||||||||||||||||||
SBA
|
3,337 | 0.5 | % | 4,942 | 0.8 | % | 13,995 | 2.2 | % | 5,312 | 0.9 | % | - | 0.0 | % | |||||||||||||||||||||||||
Other
loans
|
1,991 | 0.3 | % | 1,956 | 0.3 | % | 177 | 0.0 | % | 63 | 0.0 | % | 89 | 0.0 | % | |||||||||||||||||||||||||
Total
gross loans
|
576,268 | 100.0 | % | 628,767 | 100.0 | % | 626,692 | 100.0 | % | 607,618 | 100.0 | % | 604,976 | 100.0 | % | |||||||||||||||||||||||||
Less
(plus):
|
||||||||||||||||||||||||||||||||||||||||
Deferred
loan origination (fees) costs and (discounts) premiums
|
(779 | ) | 252 | 769 | 1,024 | 1,467 | ||||||||||||||||||||||||||||||||||
Allowance
for loan losses
|
(8,905 | ) | (5,881 | ) | (4,598 | ) | (3,543 | ) | (3,050 | ) | ||||||||||||||||||||||||||||||
Loans
held for investment, net
|
$ | 566,584 | $ | 623,138 | $ | 622,863 | $ | 605,099 | $ | 603,393 | ||||||||||||||||||||||||||||||
(1)
Includes second trust deeds.
|
||||||||||||||||||||||||||||||||||||||||
(2)
Secured by real estate
|
Loan Portfolio
Characteristics. In general, the Company does not require
regular updates of collateral valuations for non-homogeneous loans that are not
classified as potential problem or problem loans. However, updated
valuations are obtained for collateral securing non-homogeneous loans that are
identified as potential problem or problem loans at least every twenty-four
months. Updated collateral valuations may be required more frequently
at the discretion of the Company’s management or for loans identified as
impaired in accordance with the Company’s allowance for loan loss
policy. Market values may be substantiated by obtaining an appraisal
or an appropriate evaluation by the Company’s Chief Appraiser. At December 31,
2009, 29.8% of multi-family, 35.0% of commercial investor and 62.3% of
commercial owned loans had current updated collateral valuations within the last
twenty-four months.
The following table
sets forth by loan category our average loan size, months of seasoning, average
loan-to-value ratio (the proportion of the principal amount of the loan to the
most current market value of the collateral property) and debt coverage ratio
(the proportion of the property's annual net operating income to its annual debt
service, which includes principal and interest payments) for the period
indicated.
At
December 31, 2009
|
||||||||||||||||
Average
Loan
Size
|
Seasoning
(months)
|
Loan-to-
Value
Ratio
|
Debt
Coverage
Ratio
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Real
estate loans:
|
||||||||||||||||
Multi-family
|
$ | 1,053 | 52 | 67 | % | 1.20 | ||||||||||
Commercial
investor
|
1,216 | 45 | 59 | % | 1.42 | |||||||||||
One-to-four
family
|
64 | 135 | 71 | % | N/A | |||||||||||
Business
loans:
|
||||||||||||||||
Commercial
owner occupied
|
972 | 47 | 57 | % | N/A | |||||||||||
Commercial
and industrial
|
399 | 26 | N/A | N/A | ||||||||||||
SBA
|
111 | 30 | N/A | N/A | ||||||||||||
Other
loans
|
80 | 248 | N/A | N/A |
Loan Maturity.
For our commercial real estate and business loans, repayment typically depends
on the successful operation of the businesses or the properties securing the
loans. Several months before a loan matures, our portfolio managers
contact our borrowers to obtain personal and/or business financial and
operations data and property information for review. When deemed
appropriate, business and property visits are made to assess the borrower’s
revenue-generating activities and to perform inspections of our
collateral. This information is reviewed and evaluated for
indications of potential payoff issues prior to maturity. If
potential issues are discovered, our portfolio managers work on a strategy with
the borrower well in advance of the loan maturing in order to maximize the
benefit to the Company. At December 31, 2009, we had $29.9 million or
5.2% of the loans held for investment that were due to mature in one year or
less, primarily in our loan categories of total C&I loans of $20.4 million
and commercial real estate loans of $7.8 million.
The
following table does not reflect prepayment assumptions, but rather shows the
contractual maturity of the Company's gross loans for the period
indicated.
At
December 31, 2009
|
||||||||||||||||||||||||||||||||
Multi-family
|
Commercial
Investor
|
Commercial
Owner
Occupied
|
Commercial
and
Industrial
|
SBA
|
One-to-Four
Family
|
Other
Loans
|
Total
|
|||||||||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||||||||||
Amounts
due:
|
||||||||||||||||||||||||||||||||
One
year or less
|
$ | - | $ | 7,764 | $ | - | $ | 20,372 | $ | - | $ | - | $ | 1,808 | $ | 29,944 | ||||||||||||||||
More
than one year to three years
|
2,202 | 4,330 | 177 | 703 | 152 | 41 | 48 | 7,653 | ||||||||||||||||||||||||
More
than three years to five years
|
178 | 5,115 | - | 4,449 | 1,923 | 627 | 12 | 12,304 | ||||||||||||||||||||||||
More
than five years to 10 years
|
7,688 | 113,156 | 45,236 | 5,585 | 1,262 | 554 | 120 | 173,601 | ||||||||||||||||||||||||
More
than 10 years to 20 years
|
2,051 | 10,828 | 16,242 | - | - | 2,877 | - | 31,998 | ||||||||||||||||||||||||
More
than 20 years
|
266,625 | 8,384 | 41,364 | - | - | 4,392 | 3 | 320,768 | ||||||||||||||||||||||||
Total
gross loans
|
278,744 | 149,577 | 103,019 | 31,109 | 3,337 | 8,491 | 1,991 | 576,268 | ||||||||||||||||||||||||
Less
(plus):
|
||||||||||||||||||||||||||||||||
Deferred
loan origination (fees) costs
|
(718 | ) | (56 | ) | (165 | ) | 95 | 31 | 36 | (2 | ) | (779 | ) | |||||||||||||||||||
Allowance
for loan losses (allocated)
|
(3,350 | ) | (1,585 | ) | (897 | ) | (2,384 | ) | (323 | ) | (269 | ) | (2 | ) | (8,810 | ) | ||||||||||||||||
Allowance
for loan losses (unallocated)
|
- | - | - | - | - | - | - | (95 | ) | |||||||||||||||||||||||
Total
loans, net
|
274,676 | 147,936 | 101,957 | 28,820 | 3,045 | 8,258 | 1,987 | 566,584 | ||||||||||||||||||||||||
Loans
held for sale, net
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loans
held for investment, net
|
$ | 274,676 | $ | 147,936 | $ | 101,957 | $ | 28,820 | $ | 3,045 | $ | 8,258 | $ | 1,987 | $ | 566,584 |
The
following table sets forth at December 31, 2009, the dollar amount of gross
loans receivable contractually due after December 31, 2010, and whether such
loans have fixed interest rates or adjustable interest rates.
At
December 31, 2009
|
||||||||||||
Loans
Due After December 31, 2010
|
||||||||||||
Fixed
|
Adjustable
|
Total
|
||||||||||
(in
thousands)
|
||||||||||||
Real
estate loans:
|
||||||||||||
Multi-family
|
$ | 1,516 | $ | 277,228 | $ | 278,744 | ||||||
Commercial
investor
|
18,049 | 123,764 | 141,813 | |||||||||
One-to-four
family
|
4,063 | 4,428 | 8,491 | |||||||||
Business
loans:
|
||||||||||||
Commercial
owner occupied
|
37,303 | 65,716 | 103,019 | |||||||||
Commercial
and industrial
|
1,462 | 9,275 | 10,737 | |||||||||
SBA
|
- | 3,337 | 3,337 | |||||||||
Other
loans
|
150 | 32 | 182 | |||||||||
Total
gross loans
|
$ | 62,543 | $ | 483,780 | $ | 546,323 |
The
following table sets forth the Company’s loan originations, purchases, sales,
and principal repayments for the periods indicated:
For
the Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Beginning
balance of gross loans
|
$ | 628,767 | $ | 626,692 | $ | 607,618 | ||||||
Loans
originated:
|
||||||||||||
Real
estate loans:
|
||||||||||||
Multi-family
|
494 | 34,166 | 311,236 | |||||||||
Commercial
investor
|
- | 33,058 | 23,040 | |||||||||
One-to-four
family
|
200 | 250 | 341 | |||||||||
Business
loans:
|
||||||||||||
Commercial
owner occupied
|
365 | 5,375 | 17,208 | |||||||||
Commecial
and industrial
|
4,249 | 17,512 | 37,705 | |||||||||
SBA
|
1,150 | 907 | 14,209 | |||||||||
Other
loans
|
958 | 1,215 | 2,992 | |||||||||
Total
loans originated
|
7,416 | 92,483 | 406,731 | |||||||||
Loans
purchased:
|
||||||||||||
Multi-family
|
4,051 | 4,577 | - | |||||||||
Commercial
investor
|
- | 9,305 | - | |||||||||
Commercial
owner occupied
|
- | 53,710 | - | |||||||||
Construction
loans
|
- | - | 2,750 | |||||||||
Total
loans purchased
|
4,051 | 67,592 | 2,750 | |||||||||
Total
loan production
|
11,467 | 160,075 | 409,481 | |||||||||
Total
|
640,234 | 786,767 | 1,017,099 | |||||||||
Less:
|
||||||||||||
Principal
repayments
|
52,107 | 150,498 | 149,550 | |||||||||
Sales
of loans
|
2,515 | 6,235 | 239,396 | |||||||||
Charge-offs
|
4,811 | 1,174 | 701 | |||||||||
Transfer
to other real estate owned
|
4,533 | 93 | 760 | |||||||||
Total
gross loans
|
576,268 | 628,767 | 626,692 | |||||||||
Ending
balance loans held for sale, gross
|
- | 668 | 749 | |||||||||
Ending
balance loans held for investment, gross
|
$ | 576,268 | $ | 628,099 | $ | 625,943 |
Delinquent Loans. When a
borrower fails to make required payments on a loan and does not cure the
delinquency within 30 days, we normally record a notice of default and, after
providing the required notices to the borrower, commence foreclosure
proceedings. If the loan is not reinstated within the time permitted
by law, we may sell the property at a foreclosure sale. At these
foreclosure sales, we generally acquire title to the property. At
December 31, 2009, loans delinquent 60 or more days as a percentage of total
gross loans was 0.95%, up from 0.68% at year-end 2008.
The
following table sets forth delinquencies in the Company's loan portfolio as of
the dates indicated:
60-89
Days
|
90
Days or More
|
|||||||||||||||
Principal
Balance
|
Principal
Balance
|
|||||||||||||||
#
of Loans
|
of
Loans
|
#
of Loans
|
of
Loans
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
At
December 31, 2009
|
||||||||||||||||
Real
estate loans:
|
||||||||||||||||
Multi-family
|
- | $ | - | 3 | $ | 2,073 | ||||||||||
Commercial
investor
|
- | - | 1 | 1,851 | ||||||||||||
One-to-four
family
|
- | - | 4 | 97 | ||||||||||||
Business
loans:
|
||||||||||||||||
Commercial
owner occupied
|
- | - | 2 | 996 | ||||||||||||
SBA
|
1 | 52 | 3 | 463 | ||||||||||||
Total
|
1 | $ | 52 | 13 | $ | 5,480 | ||||||||||
Delinquent
loans to total gross loans
|
0.01 | % | 0.95 | % | ||||||||||||
At
December 31, 2008
|
||||||||||||||||
Real
estate loans:
|
||||||||||||||||
Multi-family
|
- | $ | - | 1 | $ | 350 | ||||||||||
Commercial
investor
|
1 | 317 | 1 | 638 | ||||||||||||
One-to-four
family
|
2 | 32 | 8 | 637 | ||||||||||||
Land
|
- | - | 1 | 2,550 | ||||||||||||
Business
loans:
|
||||||||||||||||
SBA
|
- | - | 2 | 127 | ||||||||||||
Total
|
3 | $ | 349 | 13 | $ | 4,302 | ||||||||||
Delinquent
loans to total gross loans
|
0.06 | % | 0.68 | % |
Nonperforming
Assets. Nonperforming assets consist of loans on which we have
ceased accruing interest (nonaccrual loans), loans restructured at an interest
rate below market and other real estate owned (“OREO”). Nonaccrual
loans consisted of all loans 90 days or more past due and on loans where, in the
opinion of management, there is reasonable doubt as to the collection of
interest. A “restructured loan” is one where the terms of the loan
were renegotiated to provide a reduction or deferral of interest or principal
because of deterioration in the financial position of the
borrower. We did not include in interest income any interest on
restructured loans during the periods presented. At December 31,
2009, we had $13.4 million of nonperforming assets, which consisted of $10.0
million of net nonperforming loans and $3.4 million of OREO. At
December 31, 2008, we had $5.2 million of nonperforming assets, essentially all
of which consisted of $5.2 million of nonperforming loans.
OREO
consisted of three properties at December 31, 2009, compared to two properties
at December 31, 2008. Properties acquired through or in lieu of
foreclosure are recorded at fair value less cost to sell. The Company generally
obtains an appraisal and/or a market evaluation on all OREO prior to obtaining
possession. After foreclosure, valuations are periodically performed by
management as needed due to changing market conditions or factors specifically
attributable to the properties’ condition. If the carrying value of the property
exceeds its fair value less estimated cost to sell, a charge to operations is
recorded.
We
recognized loan interest income on nonperforming loans of $95,000 in 2009,
$212,000 in 2008 and $347,000 in 2007. If these loans had paid in
accordance with their original loan terms, we would have recorded additional
loan interest income of $781,000 in 2009, $491,000 in 2008 and $315,000 in
2007.
The
following table sets forth information concerning nonperforming loans and OREO
at the periods indicated:
At
December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||
Nonperforming
assets
|
||||||||||||||||||||
Real
estate loans:
|
||||||||||||||||||||
Multi-family
|
$ | 5,223 | $ | 350 | $ | - | $ | - | $ | - | ||||||||||
Commercial
investor
|
1,851 | 3,188 | 3,125 | - | - | |||||||||||||||
One-to-four
family
|
107 | 637 | 284 | 634 | 1,687 | |||||||||||||||
Business
loans:
|
||||||||||||||||||||
Commercial
owner occupied
|
996 | - | - | - | - | |||||||||||||||
Commercial
and industrial
|
955 | - | - | - | - | |||||||||||||||
SBA
(1)
|
880 | 1,025 | 784 | - | - | |||||||||||||||
Other
loans
|
- | - | - | - | - | |||||||||||||||
Total
nonaccrual loans
|
10,012 | 5,200 | 4,193 | 634 | 1,687 | |||||||||||||||
Specific
allowance
|
- | - | - | (60 | ) | (185 | ) | |||||||||||||
Total
nonperforming loans, net
|
10,012 | 5,200 | 4,193 | 574 | 1,502 | |||||||||||||||
Other
real estate owned
|
3,380 | 37 | 711 | 138 | 211 | |||||||||||||||
Total
nonperforming assets, net
|
$ | 13,392 | $ | 5,237 | $ | 4,904 | $ | 712 | $ | 1,713 | ||||||||||
Allowance
for loan losses
|
$ | 8,905 | $ | 5,881 | $ | 4,598 | $ | 3,543 | $ | 3,050 | ||||||||||
Allowance
for loan losses as a percent of total nonperforming loans,
gross
|
88.94 | % | 113.10 | % | 109.48 | % | 558.83 | % | 180.79 | % | ||||||||||
Nonperforming
loans, net of specific allowances, as a percent of gross loans receivable
(2)
|
1.74 | % | 0.83 | % | 0.67 | % | 0.09 | % | 0.25 | % | ||||||||||
Nonperforming
assets, net of specific allowances, as a percent of total
assets
|
1.66 | % | 0.71 | % | 0.64 | % | 0.10 | % | 0.24 | % |
(1)
|
The
SBA totals include the guaranteed amount, which was $624,000 as of
December 31, 2009.
|
(2)
|
Gross
loans include loans receivable held for investment and held for
sale.
|
It is our policy
to take appropriate, timely and aggressive action when necessary to resolve
nonperforming assets. When resolving problem loans, it is our policy
to determine collectability under various circumstances which are intended to
result in our maximum financial benefit. We accomplish this by
working with the borrower to bring the loan current, selling the loan to a third
party or by foreclosing and selling the asset.
Allowance for Loan
Losses. We maintain an allowance for loan losses to absorb losses
inherent in the loans held for investment portfolio at the balance sheet
date. Management evaluates the adequacy of the allowance quarterly to
maintain the allowance at levels sufficient to provide for these inherent
losses. The allowance for loan losses is reported as a reduction of
loans held for investment. The allowance is increased by a provision for
loan losses which is charged to expense and reduced by charge-offs, net of
recoveries. Loans held for sale are carried at the lower of cost or
estimated market value. Net unrealized losses, if any, are recognized in a
lower of cost or market valuation allowance by charges to
operations.
The
federal banking agencies adopted an interagency policy statement on the
allowance for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
allowances. Generally, the policy statement recommends that
institutions establish and maintain effective systems and controls to identify,
monitor and address asset quality problems; that management analyzes all
significant factors that affect the collectability of the portfolio in a
reasonable manner; and that management establishes acceptable allowance
evaluation processes that meet the objectives set forth in the policy
statement. Federal regulations require that the Bank utilize an
internal asset classification system to identify and report problem and
potential problem assets. The Bank’s Chief Credit Officer has
responsibility for identifying and reporting problem assets to the Bank’s Credit
and Investment Review Committee (“CIRC”), which operates pursuant to the
board-approved CIRC policy. The policy incorporates the regulatory
requirements of monitoring and classifying all of our assets.
We
separate our assets, largely loans, by type, and we use various asset
classifications to segregate the assets into various risk
categories. We use the various asset classifications as a means of
measuring risk for determining the valuation allowance for groups and individual
assets at a point in time. Currently, we designate our assets into a
category of “Pass,”, “Special Mention”, “Substandard” or “Loss.” A
brief description of these classifications follows:
·
|
Pass
classifications represent assets with a level of credit quality which
contain no well-defined deficiency or
weakness.
|
·
|
Special
Mention assets do not currently expose the Bank to sufficient risk to
warrant classification in one of the adverse categories, but possess
correctable deficiency or potential weaknesses deserving management’s
close attention.
|
·
|
Substandard
assets are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if
any. These assets are characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not
corrected. OREO acquired from foreclosure is classified as
substandard.
|
·
|
Loss
assets are those that are considered uncollectible and of such little
value that their continuance as assets is not
warranted. Amounts classified as loss are promptly charged
off.
|
Our
determination as to the classification of assets and the amount of valuation
allowances necessary are subject to review by bank regulatory agencies, which
can order a change in a classification or an increase to the allowance. While we
believe that an adequate allowance for estimated loan losses has been
established, there can be no assurance that our regulators, in reviewing assets
including the loan portfolio, will not request us to materially increase our
allowance for estimated loan losses, thereby negatively affecting our financial
condition and earnings at that time. In addition, actual losses are dependent
upon future events and, as such, further increases to the level of allowances
for estimated loan losses may become necessary.
The
Company’s CIRC reviews the Chief Credit Officer’s recommendations for
classifying our assets quarterly and reports the results of our review to the
board of directors. At December 31, 2009, we had $36.9 million of assets
classified as substandard. The following tables set forth information
concerning substandard assets and OREO at December 31, 2009 and
2008:
At
December 31, 2009
|
||||||||||||||||||||||||||||||||
Loans
|
OREO
|
Securities
|
Total
Substandard Assets
|
|||||||||||||||||||||||||||||
Gross
Balance
|
#
of Loans
|
Gross
Balance
|
#
of Properties
|
Gross
Balance
|
#
of Securities
|
Gross
Balance
|
#
of Assets
|
|||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||
Real
estate loans:
|
||||||||||||||||||||||||||||||||
Multi-family
|
$ | 12,268 | 10 | $ | - | - | -- | -- | $ | 12,268 | 10 | |||||||||||||||||||||
Commercial
investor
|
10,712 | 12 | 515 | 1 | -- | -- | 11,227 | 13 | ||||||||||||||||||||||||
One-to-four
family
|
724 | 16 | - | - | -- | -- | 724 | 16 | ||||||||||||||||||||||||
Land
|
- | - | 2,138 | 1 | -- | -- | 2,138 | 1 | ||||||||||||||||||||||||
Business
loans:
|
-- | -- | ||||||||||||||||||||||||||||||
Commercial
owner occupied
|
3,576 | 7 | 727 | 1 | -- | -- | 4,303 | 8 | ||||||||||||||||||||||||
Commercial
and industrial
|
2,102 | 6 | - | - | -- | -- | 2,102 | 6 | ||||||||||||||||||||||||
SBA
|
1,146 | 11 | - | - | -- | -- | 1,146 | 11 | ||||||||||||||||||||||||
Securities
|
-- | -- | -- | -- | 2,988 | 27 | 2,988 | 27 | ||||||||||||||||||||||||
Total
substandard assets
|
$ | 30,528 | 62 | $ | 3,380 | 3 | $ | 2,988 | 27 | $ | 36,896 | 92 |
At
December 31, 2008
|
||||||||||||||||||||||||||||||||
Loans
|
OREO
|
Securities
|
Total
Substandard Assets
|
|||||||||||||||||||||||||||||
Gross
Balance
|
#
of Loans
|
Gross
Balance
|
#
of Properties
|
Gross
Balance
|
#
of Securities
|
Gross
Balance
|
#
of Assets
|
|||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||
Real
estate loans:
|
||||||||||||||||||||||||||||||||
Multi-family
|
$ | 350 | 1 | $ | - | - | -- | -- | $ | 350 | 1 | |||||||||||||||||||||
One-to-four
family
|
307 | 7 | 11 | 3 | -- | -- | 318 | 10 | ||||||||||||||||||||||||
Commercial
investor
|
6,362 | 6 | - | - | -- | -- | 6,362 | 6 | ||||||||||||||||||||||||
Business
loans:
|
-- | -- | - | - | ||||||||||||||||||||||||||||
Commercial
owner occupied
|
912 | 2 | - | - | -- | -- | 912 | 2 | ||||||||||||||||||||||||
SBA
|
1,261 | 10 | 26 | 1 | -- | -- | 1,287 | 11 | ||||||||||||||||||||||||
Securities
|
-- | -- | -- | -- | 1,974 | 35 | 1,974 | 35 | ||||||||||||||||||||||||
Total
substandard assets
|
$ | 9,192 | 26 | $ | 37 | 4 | $ | 1,974 | 35 | $ | 11,203 | 65 |
In
determining the allowance for loan losses, we evaluate loan credit losses on an
individual basis in accordance with FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan, and on a collective basis based on FASB
Statement No. 5, Accounting for Contingencies. For loans evaluated on
an individual basis, we analyze the borrower’s creditworthiness, cash flows and
financial status, and the condition and estimated value of the
collateral. Loans evaluated individually that are deemed to be
impaired are separated from our collective credit loss analysis.
Unless an
individual borrower relationship warrants a separate analysis, the majority of
our loans are evaluated for credit losses on a collective basis through a
quantitative analysis to arrive at base loss factors that are adjusted through a
qualitative analysis for internal and external identified risks. The
adjusted factor is applied against the loan risk category to determine the
appropriate allowance. Our base loss factors are calculated using our
trailing twelve-month and annualized trailing six-month actual charge-off data
for all loan types except (1) loans fully secured by cash deposits, the
guaranteed portion of SBA loans and FHA/VA guaranteed 1st TD loans, for which
there is no loss exposure, (2) certain loan segments for which we have no recent
loss experience and for which we rely on charge-off data for all FDIC insured
commercial banks and savings institutions based in California, and (3) negative
deposit accounts. Then adjustments for the following internal and
external risk factors are added to the base factors:
Internal
Factors
· Changes
in lending policies and procedures, including underwriting standards and
collection, charge-offs, and recovery practices;
· Changes
in the nature and volume of the loan portfolio and the terms of loans, as well
as new types of lending;
· Changes
in the experience, ability, and depth of lending management and other relevant
staff that may have an impact on our loan portfolio;
· Changes
in the volume and severity of past due and classified loans, and in the volume
of non-accruals, troubled debt restructurings, and other loan
modifications;
· Changes
in the quality of our loan review system and the degree of oversight by our
board of directors; and
· The
existence and effect of any concentrations of credit and changes in the level of
such concentrations.
External
Factors
· Changes
in national, state and local economic and business conditions and developments
that affect the collectability of the portfolio, including the condition of
various market segments (includes trends in real estate values and the interest
rate environment);
· Changes
in the value of the underlying collateral for collateral-dependent loans;
and
· The
effect of external factors, such as competition, legal developments and
regulatory requirements on the level of estimated credit losses in our current
loan portfolio.
The
factor adjustment for each of the nine above-described risk factors are
determined by the Chief Credit Officer and approved by the CIRC on a quarterly
basis.
The ALLL
factors are reviewed for reasonableness against the 10-year average, 15-year
average, and trailing twelve month total charge-off data for all FDIC insured
commercial banks and savings institutions based in California. Given
the above evaluations, the amount of the allowance for loan losses is based upon
the total loans evaluated individually and collectively.
As of
December 31, 2009, the allowance for loan losses totaled $8.9 million, compared
to $5.9 million at December 31, 2008 and $4.6 million at December 31,
2007. The allowance for loan losses at December 31, 2009, as a
percent of nonperforming loans and gross loans, was 88.9% and 1.55%, compared
with 113.1% and 0.94% at December 31, 2008, and 109.5% and 0.73% at December 31,
2007, respectively.
The
following table sets forth the Company’s allowance for loan losses and the
percent of gross loans to total gross loans in each of the categories listed at
the dates indicated:
The
following table sets forth the Company’s allowance for loan losses and the
percent of gross loans to total gross loans in each of the categories listed at
the dates indicated:
As
of and For the Year Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Balances:
|
(dollars
in thousands)
|
|||||||||||||||||||
Average
net loans outstanding during the period
|
$ | 594,483 | $ | 617,569 | $ | 617,528 | $ | 607,439 | $ | 546,426 | ||||||||||
Total
gross loans outstanding at end of the period
|
576,268 | 628,767 | 626,692 | 607,618 | 604,976 | |||||||||||||||
Allowance
for Loan Losses:
|
||||||||||||||||||||
Balance
at beginning of period
|
5,881 | 4,598 | 3,543 | 3,050 | 2,626 | |||||||||||||||
ALLL
Transfer In *
|
- | 8 | - | - | - | |||||||||||||||
Provision
for loan losses
|
7,735 | 2,241 | 1,651 | 531 | 349 | |||||||||||||||
Charge-offs:
|
||||||||||||||||||||
Real
Estate:
|
||||||||||||||||||||
One-to-four
family
|
125 | 226 | 101 | 266 | 211 | |||||||||||||||
Multi-family
|
1,527 | - | - | - | - | |||||||||||||||
Commercial
investor
|
317 | - | - | - | - | |||||||||||||||
Construction
|
- | - | - | - | - | |||||||||||||||
Business
loans:
|
||||||||||||||||||||
Commercial
owner occupied
|
59 | - | - | - | - | |||||||||||||||
Commercial
and industrial
|
1,409 | - | - | - | - | |||||||||||||||
SBA
|
906 | 948 | 600 | - | - | |||||||||||||||
Other
loans
|
468 | - | - | - | 5 | |||||||||||||||
Total
charge-offs
|
4,811 | 1,174 | 701 | 266 | 216 | |||||||||||||||
Recoveries
:
|
||||||||||||||||||||
Real
Estate:
|
||||||||||||||||||||
One-to-four
family
|
26 | 88 | 103 | 225 | 191 | |||||||||||||||
Multi-family
|
- | - | - | - | - | |||||||||||||||
Commercial
investor
|
- | - | - | - | - | |||||||||||||||
Construction
|
- | - | - | - | 74 | |||||||||||||||
Business
loans:
|
||||||||||||||||||||
Commercial
owner occupied
|
- | - | - | - | - | |||||||||||||||
Commercial
and industrial
|
4 | - | - | - | - | |||||||||||||||
SBA
|
31 | - | - | - | - | |||||||||||||||
Other
loans
|
39 | 120 | 2 | 3 | 26 | |||||||||||||||
Total
recoveries
|
100 | 208 | 105 | 228 | 291 | |||||||||||||||
Net
loan charge-offs
|
4,711 | 966 | 596 | 38 | (75 | ) | ||||||||||||||
Balance
at end of period
|
$ | 8,905 | $ | 5,881 | $ | 4,598 | $ | 3,543 | $ | 3,050 | ||||||||||
Ratios:
|
||||||||||||||||||||
Net
charge-offs to average net loans
|
0.79 | % | 0.16 | % | 0.10 | % | 0.01 | % | (0.01 | )% | ||||||||||
Allowance
for loan losses to gross loans at end of period
|
1.55 | % | 0.94 | % | 0.73 | % | 0.58 | % | 0.50 | % |
The
following table sets forth the allowance for loan losses amounts calculated by
the categories listed for the periods set forth in the table:
As
of December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||
%
of Loans
|
%
of Loans
|
%
of Loans
|
||||||||||||||||||||||
Balance
at End of
|
in
Category to
|
in
Category to
|
in
Category to
|
|||||||||||||||||||||
Period
Applicable to
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Real
estate loans:
|
||||||||||||||||||||||||
Multi-family
|
$ | 3,350 | 48.4 | % | $ | 1,641 | 45.7 | % | $ | 1,438 | 54.5 | % | ||||||||||||
Commercial
investor
|
1,585 | 26.0 | % | 1,151 | 26.0 | % | 1,129 | 22.7 | % | |||||||||||||||
One-to-four
family
|
269 | 1.5 | % | 194 | 1.6 | % | 165 | 2.1 | % | |||||||||||||||
Construction
|
- | 0.0 | % | 65 | 0.4 | % | 20 | 0.3 | % | |||||||||||||||
Land
|
- | 0.0 | % | - | 0.4 | % | - | 0.9 | % | |||||||||||||||
Business
loans:
|
||||||||||||||||||||||||
Commercial
owner occupied
|
897 | 17.9 | % | 784 | 17.9 | % | 248 | 9.2 | % | |||||||||||||||
Commercial
and industrial
|
2,384 | 5.4 | % | 941 | 6.9 | % | 640 | 8.1 | % | |||||||||||||||
SBA
|
323 | 0.5 | % | 148 | 0.8 | % | 207 | 2.2 | % | |||||||||||||||
Other
Loans
|
2 | 0.3 | % | 6 | 0.3 | % | 1 | 0.0 | % | |||||||||||||||
Unallocated
|
95 | -- | 951 | -- | 750 | -- | ||||||||||||||||||
Total
|
$ | 8,905 | 100.0 | % | $ | 5,881 | 100.0 | % | $ | 4,598 | 100.0 | % |
As
of December 31,
|
||||||||||||||||
2006
|
2005
|
|||||||||||||||
%
of Loans
|
%
of Loans
|
|||||||||||||||
Balance
at End of
|
in
Category to
|
in
Category to
|
||||||||||||||
Period
Applicable to
|
Amount
|
Total
Loans
|
Amount
|
Total
Loans
|
||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Real
estate loans:
|
||||||||||||||||
Multi-family
|
$ | 1,405 | 58.8 | % | $ | 1,746 | 76.0 | % | ||||||||
Commercial
investor
|
881 | 28.0 | % | 627 | 18.4 | % | ||||||||||
One-to-four
family
|
331 | 2.1 | % | 554 | 2.7 | % | ||||||||||
Construction
|
- | 0.0 | % | - | 0.0 | % | ||||||||||
Business
loans:
|
||||||||||||||||
Commercial
owner occupied
|
179 | 5.9 | % | 10 | 1.9 | % | ||||||||||
Commercial
and industrial
|
478 | 3.8 | % | 110 | 0.6 | % | ||||||||||
SBA
|
68 | 0.9 | % | - | 0.0 | % | ||||||||||
Other
Loans
|
4 | 0.0 | % | 3 | 0.0 | % | ||||||||||
Unallocated
|
197 | -- | - | -- | ||||||||||||
Total
|
$ | 3,543 | 99.5 | % | $ | 3,050 | 99.6 | % |
Investment Activities
Our
investment policy as established by our board of directors attempts to provide
and maintain liquidity, generate a favorable return on investments without
incurring undue interest rate and credit risk and complement our lending
activities. Specifically, our policies limit investments to U.S.
government securities, federal agency-backed securities, non-government
guaranteed mortgage-backed securities (“MBS”), municipal bonds, and corporate
bonds.
Our
investment securities portfolio amounted to $137.7 million at December 31, 2009,
as compared to $70.9 million at December 31, 2008, representing a 94.2%
increase. As of December 31, 2009, the portfolio consisted of
$154,000 in U.S. Treasuries, $99.6 million in government sponsor entities
(“GSE”) MBS, $18.0 million in municipal bonds, $5.7 million of private label
MBS, $12.7 million of FHLB stock, and $1.6 million of stock of the Federal
Reserve Bank of San Francisco (the “Federal Reserve Bank”). In
addition, $39.5 million of the GSE securities have been pledged as collateral
for the Company’s $28.5 million of inverse putable reverse repurchase
agreements.
Toward the end of 2009, we began
restructuring our investment portfolio to reduce the level of private label MBS
and reinvesting in municipal bonds and federal agency-backed
securities. All of our $18.0 million municipal bond securities have
an underlying rating of investment grade with the majority insured by the
largest bond insurance companies to bring each of these securities to a Moody’s
AAA rating. The Company has only purchased general obligation
unlimited bonds that are risk-weighted at 20% for regulatory capital
purposes. The Company has reduced its exposure to any single adverse
event by holding securities from geographically diversified municipal
issuers. We are continually monitoring the quality of our municipal
bond portfolio in light of the current financial problems. To our
knowledge, none of the municipalities in which we hold bonds are exhibiting
financial problems that would require us to record an OTTII charge.
In June
2008, the Company redeemed its shares in two AMF mutual funds it owned and
received a pro rata distribution in kind of the securities held by the mutual
funds. The managers of the mutual funds had limited redemptions to
payment-in-kind only and did not permit the owners of the funds to redeem their
shares for cash. In aggregate, the Company received cash of $2.9 million and 160
securities with a market value totaling $21.3 million. The Company’s redemption
of its shares in the mutual funds resulted in a charge to earnings of
approximately $3.6 million (pre-tax). The charge is the difference
between the total purchase price of $27.7 million, paid by the Company for the
mutual funds and the market value of the cash and securities of $24.1 million at
the close of business on June 18, 2008. Additionally, in December 2008 the
Company took an OTTI charge of $1.3 million on 19 of the private-label MBSs that
it received in the redemption of its shares in the mutual funds. In
2009, the Company recorded OTTI charges of $2.0 million, all of which are
related to the private label MBSs received from the mutual funds.
Below is
a table of our securities by security type further separated by rating agency
grade as of December 31, 2009:
At
December 31, 2009
|
|||||||||||||||||||||
Security
Type
|
Ratings
|
Number
|
Face
Value
|
Amortized
Cost
|
Fair
Value
|
Unrealized
Gain/(Loss)
|
|||||||||||||||
(dollars
in thousands)
|
|||||||||||||||||||||
U.S.
Treasury
|
AAA
|
2 | $ | 146 | $ | 148 | $ | 154 | $ | 6 | |||||||||||
Government
Sponsored Enterprise
|
AAA
|
69 | 97,768 | 100,104 | 99,610 | (494 | ) | ||||||||||||||
Municipal
bonds
|
AAA
|
22 | 17,870 | 17,918 | 17,965 | 47 | |||||||||||||||
Private
Label:
|
|||||||||||||||||||||
Investment
Grade
|
AAA
|
6 | 200 | 200 | 170 | (30 | ) | ||||||||||||||
Investment
Grade
|
AA/A
|
30 | 2,036 | 1,986 | 1,447 | (539 | ) | ||||||||||||||
Non-investment
Grade *
|
Below
BBB
|
27 | 5,528 | 4,665 | 2,988 | (1,677 | ) | ||||||||||||||
Permanently
Impaired
|
Below
BBB
|
30 | 5,515 | 1,345 | 1,073 | (272 | ) | ||||||||||||||
Total
investment securities available for sale
|
186 | $ | 129,063 | $ | 126,366 | $ | 123,407 | $ | (2,959 | ) | |||||||||||
*
Non-investment grade includes all ratings below BBB.
|
The
following table sets forth certain information regarding the amortized costs and
fair values of the Company's securities at the dates indicated:
At
December 31,
|
||||||||||||||||
|
2009
|
2008
|
||||||||||||||
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||
Cost
|
Value
|
Cost
|
Value
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Investement
securities available for sale:
|
||||||||||||||||
U.S.
Treasury
|
$ | 148 | $ | 154 | $ | 148 | $ | 167 | ||||||||
Municipal
bonds
|
17,918 | 17,965 | $ | - | $ | - | ||||||||||
Mortgage-backed
securities
|
108,300 | 105,288 | 61,345 | 56,439 | ||||||||||||
Total
investment securities available for sale
|
126,366 | 123,407 | 61,493 | 56,606 | ||||||||||||
Stock:
|
||||||||||||||||
FHLB
|
12,731 | 12,731 | 12,731 | 12,731 | ||||||||||||
Federal
Reserve Bank
|
1,599 | 1,599 | 1,599 | 1,599 | ||||||||||||
Total
stock
|
14,330 | 14,330 | 14,330 | 14,330 | ||||||||||||
Total
securities
|
$ | 140,696 | $ | 137,737 | $ | 75,823 | $ | 70,936 |
The table
below sets forth certain information regarding the fair value, weighted average
yields and contractual maturities of the Company's securities as of December 31,
2009.
At
December 31, 2009
|
||||||||||||||||||||||||||||||||||||||||
One
Year
|
More
than One
|
More
than Five Years
|
More
than
|
|
||||||||||||||||||||||||||||||||||||
or
Less
|
to
Five Years
|
to
Ten Years
|
Ten
Years
|
Total
|
||||||||||||||||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||||||||||||||||
Fair
|
Average
|
Fair
|
Average
|
Fair
|
Average
|
Fair
|
Average
|
Fair
|
Average
|
|||||||||||||||||||||||||||||||
Value
|
Yield
|
Value
|
Yield
|
Value
|
Yield
|
Value
|
Yield
|
Value
|
Yield
|
|||||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Investement
securities available for sale:
|
||||||||||||||||||||||||||||||||||||||||
U.S.
Treasury
|
$ | - | 0.00 | % | $ | 78 | 3.53 | % | $ | 76 | 4.15 | % | $ | - | 0.00 | % | $ | 154 | 3.84 | % | ||||||||||||||||||||
Municipal
bonds
|
- | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 17,965 | 4.37 | % | 17,965 | 4.37 | % | |||||||||||||||||||||||||
Mortgage-backed
securities
|
- | 0.00 | % | 10,363 | 2.19 | % | 227 | 5.53 | % | 94,698 | 3.48 | % | 105,288 | 3.36 | % | |||||||||||||||||||||||||
Total
investment securities available for sale
|
- | 0.00 | % | 10,441 | 2.20 | % | 303 | 5.18 | % | 112,663 | 3.62 | % | $ | 123,407 | 3.50 | % | ||||||||||||||||||||||||
Stock:
|
||||||||||||||||||||||||||||||||||||||||
FHLB
|
12,731 | 0.00 | % | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 12,731 | 0.00 | % | |||||||||||||||||||||||||
Federal
Reserve Bank
|
1,599 | 6.00 | % | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 1,599 | 6.00 | % | |||||||||||||||||||||||||
Total
stock
|
14,330 | 0.67 | % | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | $ | 14,330 | 0.67 | % | ||||||||||||||||||||||||
Total
securities
|
$ | 14,330 | 0.67 | % | $ | 10,441 | 2.20 | % | $ | 303 | 5.18 | % | $ | 112,663 | 3.62 | % | $ | 137,737 | 3.21 | % |
Sources
of Funds
General. Deposits, loan
repayments and prepayments, and cash flows generated from operations and
borrowings are the primary sources of the Company’s funds for use in lending,
investing and other general purposes.
Deposits. Deposits
represent our primary source of funds for our lending and investing
activities. The Company offers a variety of deposit accounts with a
range of interest rates and terms. The deposit accounts are offered
through our six branch network in Southern California. The Company’s
deposits consist of passbook savings, checking accounts, money market accounts
and certificates of deposit. Total deposits at December 31, 2009 were
$618.7 million, as compared to $457.1 million at December 31,
2008. At December 31, 2009, certificates of deposit constituted 68.4%
of total deposits, compared to 80.7% at the year-end 2008. The terms
of the fixed-rate certificates of deposit offered by the Company vary from three
months to five years. Specific terms of an individual account vary
according to the type of account, the minimum balance required, the time period
funds must remain on deposit and the interest rate, among other
factors. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and competition. At December 31, 2009, the Company had $297.6 million
of certificate of deposit accounts maturing in one year or less.
The
Company relies primarily on customer service, marketing efforts, business
development, cross-selling of deposit products to loan customers, and
long-standing relationships with customers to attract and retain local
deposits. However, market interest rates and rates offered by
competing financial institutions significantly affect the Company’s ability to
attract and retain deposits. Additionally, from time to time, the
Company will utilize both wholesale and brokered deposits to supplement its
generation of deposits from businesses and consumers. During 2009,
the Company decreased the amount of wholesale and broker deposits by $21.5
million to $5.6 million.
The
following table presents the deposit activity for the years
indicated.
At
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Net
deposits
|
$ | 141,471 | $ | 45,820 | $ | 32,755 | ||||||
Interest
credited on deposit accounts
|
20,135 | 24,573 | 14,531 | |||||||||
Total
increase in deposit accounts
|
$ | 161,606 | $ | 70,393 | $ | 47,286 |
The
following table sets forth the distribution of the Company’s deposit accounts
for the years indicated and the weighted average interest rates on each category
of deposits presented:
At
December 31,
|
|||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||
Balance
|
%
of
Total
Deposits
|
Weighted
Average Rate
|
Balance
|
%
of
Total
Deposits
|
Weighted
Average Rate
|
Balance
|
%
of
Total
Deposits
|
Weighted
Average Rate
|
|||||||||||||||||||||||||||||
(dollars
in thousands)
|
|||||||||||||||||||||||||||||||||||||
Transaction
accounts:
|
|||||||||||||||||||||||||||||||||||||
Non-interest
bearing checking
|
$ | 33,885 | 5.5 | % | 0.00 | % | $ | 29,443 | 6.5 | % | 0.00 | % | $ | 25,322 | 6.5 | % | 0.00 | % | |||||||||||||||||||
Interest
bearing checking
|
22,406 | 3.6 | % | 0.39 | % | 20,989 | 4.6 | % | 0.97 | % | 19,204 | 5.0 | % | 1.33 | % | ||||||||||||||||||||||
Money
market
|
77,687 | 12.6 | % | 1.17 | % | 23,463 | 5.1 | % | 2.00 | % | 35,531 | 9.2 | % | 3.14 | % | ||||||||||||||||||||||
Regular
passbook
|
61,779 | 9.9 | % | 1.33 | % | 14,401 | 3.1 | % | 2.56 | % | 9,254 | 2.4 | % | 4.02 | % | ||||||||||||||||||||||
Total
transaction accounts
|
195,757 | 31.6 | % | 0.93 | % | 88,296 | 19.3 | % | 1.18 | % | 89,311 | 23.1 | % | 1.88 | % | ||||||||||||||||||||||
Certificates
of deposit accounts:
|
|||||||||||||||||||||||||||||||||||||
Less
than 1.00%
|
30,867 | 5.0 | % | 0.82 | % | 32 | 0.0 | % | 0.75 | % | - | 0.0 | % | 0.00 | % | ||||||||||||||||||||||
1.00-1.99 | 91,207 | 14.7 | % | 1.63 | % | 97 | 0.1 | % | 1.77 | % | 17 | 0.0 | % | 1.49 | % | ||||||||||||||||||||||
2.00-2.99 | 292,689 | 47.3 | % | 2.44 | % | 23,080 | 5.0 | % | 2.63 | % | 211 | 0.1 | % | 2.77 | % | ||||||||||||||||||||||
3.00-3.99 | 3,427 | 0.6 | % | 3.29 | % | 233,179 | 51.0 | % | 3.67 | % | 5,875 | 1.5 | % | 3.68 | % | ||||||||||||||||||||||
4.00-4.99 | 3,463 | 0.6 | % | 4.40 | % | 110,625 | 24.2 | % | 4.24 | % | 84,863 | 21.9 | % | 4.61 | % | ||||||||||||||||||||||
5.00-5.99 | 1,324 | 0.2 | % | 5.34 | % | 1,819 | 0.4 | % | 5.53 | % | 206,458 | 53.4 | % | 5.24 | % | ||||||||||||||||||||||
Total
certificates of deposit accounts
|
422,977 | 68.4 | % | 2.18 | % | 368,832 | 80.7 | % | 3.79 | % | 297,424 | 76.9 | % | 5.02 | % | ||||||||||||||||||||||
Total
deposits
|
$ | 618,734 | 100.0 | % | 2.09 | % | $ | 457,128 | 100.0 | % | 3.51 | % | $ | 386,735 | 100.0 | % | 4.32 | % |
The
following table presents, by various rate categories, the amount of certificates
of deposit accounts outstanding and the periods to maturity of the certificate
of deposit accounts outstanding at December 31, 2009:
Less
than
|
1.00% | 2.00% | 3.00% | 4.00% | 5.00% |
%
of
|
||||||||||||||||||||
1.00% | 1.99% | 2.99% | 3.99% | 4.99% |
and
greater
|
Total
|
Total
|
|||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||||
Certificates
of deposit accounts:
|
||||||||||||||||||||||||||
Within
3 months
|
$ | 10,795 | $ | 43,153 | $ | 30,701 | $ | 2,789 | $ | 1,792 | $ | 52 | $ | 89,282 | 21.1 | % | ||||||||||
4
to 6 months
|
11,102 | 14,051 | 111,940 | 214 | 86 | 54 | 137,447 | 32.5 | % | |||||||||||||||||
7
to 12 months
|
8,469 | 24,554 | 37,281 | - | 488 | 126 | 70,918 | 16.8 | % | |||||||||||||||||
13
to 24 months
|
456 | 9,147 | 107,951 | 228 | 665 | 273 | 118,720 | 28.1 | % | |||||||||||||||||
25
to 36 months
|
- | 206 | 4,406 | 152 | 245 | 200 | 5,209 | 1.2 | % | |||||||||||||||||
37
to 60 months
|
- | 20 | 287 | 26 | 185 | 227 | 745 | 0.2 | % | |||||||||||||||||
Over
60 months
|
45 | 76 | 123 | 18 | 2 | 392 | 656 | 0.1 | % | |||||||||||||||||
Total
|
$ | 30,867 | $ | 91,207 | $ | 292,689 | $ | 3,427 | $ | 3,463 | $ | 1,324 | $ | 422,977 | 100.0 | % |
At
December 31, 2009, the Company had $206.0 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
At
December 31,
|
||||||||
Weighted
|
||||||||
Maturity
Period
|
Amount
|
Average
Rate
|
||||||
(dollars
in thousands)
|
||||||||
Three
months or less
|
$ | 42,955 | 1.88 | % | ||||
Over
three months through 6 months
|
60,251 | 2.31 | % | |||||
Over
6 months through 12 months
|
31,138 | 2.11 | % | |||||
Over
12 months
|
71,632 | 2.41 | % | |||||
Total
|
$ | 205,976 | 2.23 | % |
FHLB
Advances. The FHLB system functions as a source of credit to
financial institutions that are members. Advances are secured by
certain real estate loans, investment securities, and the capital stock of the
FHLB owned by the Company. Subject to the FHLB’s advance policies and
requirements, these advances can be requested for any business purpose in which
the Company is authorized to engage. In granting advances, the FHLB
considers a member’s creditworthiness and other relevant factors. The
Company has a line of credit with the FHLB which provides for advances totaling
up to 45% of its assets, equating to a credit line of $363.3 million as of
December 31, 2009. At December 31, 2009, the Company had two FHLB
term advances outstanding totaling $63.0 million with a weighted average
interest rate of 4.90% and a weighted average remaining maturity of 0.6
years. At December 31, 2009, one advance for $25.0 million was due in February
of 2010 and the other for $38.0 million was due in November of
2010.
Borrowings. The Company maintains lines of credit totaling
$35.0 million with five correspondent banks to purchase federal funds as
business needs dictate. Federal funds purchased are short-term in
nature and utilized to meet short-term funding needs. As of December 31, 2009,
we had no outstanding balance with any of our correspondent banks. Additionally,
in 2008 the Company entered into three inverse putable reverse repurchase
agreements (the “repurchase agreements”) totaling $28.5 million with a weighted
average interest rate of 3.04% as of December 31, 2009 secured by GSE MBS
totaling $39.5 million. The terms of each repurchase agreements is for 10 years
with the buyers of the repurchase agreements having the option to terminate the
repurchase agreements after the fixed interest rate period has expired. The
interest rates remain fixed for the first year on $20.0 million of the
repurchase agreements and for two years on the remaining $8.5 million repurchase
agreement. After the fixed interest period expires, the interest rates reset
quarterly with the maximum reset rate being 2.89% on one $10.0 million
repurchase agreement, 3.47% on the other $10.0 million repurchase agreement, and
3.45% on the $8.5 million repurchase agreement.
Debentures. On March 25, 2004, the Corporation issued
$10,310,000 of Floating Rate Junior Subordinated Deferrable Interest Debentures
(the “Debt Securities”) to PPBI Trust I, a statutory trust created under the
laws of the State of Delaware. The Debt Securities are subordinated
to effectively all borrowings of the Corporation and are due and payable on
April 7, 2034. Interest is payable quarterly on the Debt Securities
at three-month LIBOR plus 2.75% for an effective rate of 3.03% as of December
31, 2009.
The
following table sets forth certain information regarding the Company's borrowed
funds at or for the years ended on the dates indicated:
At
or For Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(dollars
in thousands)
|
||||||||||||
FHLB
advances
|
||||||||||||
Average
balance outstanding
|
$ | 127,653 | $ | 236,494 | $ | 285,577 | ||||||
Maximum
amount outstanding at any month-end during the year
|
150,000 | 303,500 | 310,700 | |||||||||
Balance
outstanding at end of year
|
63,000 | 181,400 | 297,300 | |||||||||
Weighted
average interest rate during the year
|
4.77 | % | 4.24 | % | 5.06 | % | ||||||
Debentures
|
||||||||||||
Average
balance outstanding
|
$ | 10,310 | $ | 10,310 | $ | 10,310 | ||||||
Maximum
amount outstanding at any month-end during the year
|
10,310 | 10,310 | 10,310 | |||||||||
Balance
outstanding at end of year
|
10,310 | 10,310 | 10,310 | |||||||||
Weighted
average interest rate during the year
|
3.57 | % | 6.29 | % | 7.97 | % | ||||||
Other
borrowings
|
||||||||||||
Average
balance outstanding
|
$ | 28,500 | $ | 14,787 | $ | 5,172 | ||||||
Maximum
amount outstanding at any month-end during the year
|
28,500 | 28,500 | 31,500 | |||||||||
Balance
outstanding at end of year
|
28,500 | 28,500 | 665 | |||||||||
Weighted
average interest rate during the year
|
2.61 | % | 1.80 | % | 5.48 | % | ||||||
Total
borrowings
|
||||||||||||
Average
balance outstanding
|
$ | 166,463 | $ | 261,591 | $ | 301,059 | ||||||
Maximum
amount outstanding at any month-end during the year
|
188,810 | 342,310 | 352,510 | |||||||||
Balance
outstanding at end of year
|
101,810 | 220,210 | 308,275 | |||||||||
Weighted
average interest rate during the year
|
4.33 | % | 4.19 | % | 5.16 | % |
Subsidiaries
At
December 31, 2009, we had two subsidiaries, the Bank, a wholly-owned
consolidated subsidiary with no subsidiaries of its own, and PPBI Trust I, which
is a wholly-owned special purpose entity accounted for using the equity method
under which the subsidiaries’ net earnings are recognized in our operations and
the investment in the Trust is included in other assets on our balance
sheet.
Personnel
As of
December 31, 2009, we had 89 full-time employees and two part-time
employees. The employees are not represented by a collective
bargaining unit and we consider our relationship with our employees to be
satisfactory.
Competition
The
banking business in California, in general, and specifically in our market
areas, is highly competitive with respect to virtually all products and
services. The industry continues to consolidate, and unregulated
competitors have entered banking markets with focused products targeted at
highly profitable customer segments. Many largely unregulated
competitors are able to compete across geographic boundaries, and provide
customers increasing access to meaningful alternatives to nearly all significant
banking services and products. These competitive trends are likely to
continue.
The
banking business is largely dominated by a relatively small number of major
banks with many offices operating over a wide geographical
area. These banks have, among other advantages, the ability to
finance wide-ranging and effective advertising campaigns and to allocate their
resources to regions of highest yield and demand. Many of the major
banks operating in the area offer certain services that we do not offer directly
but may offer indirectly through correspondent institutions. By
virtue of their greater total capitalization, such banks also have substantially
higher lending limits than those of the Company.
In
addition to other local community banks, our competitors include commercial
banks, savings banks, credit unions, and numerous non-banking institutions, such
as finance companies, leasing companies, insurance companies, brokerage firms
and investment banking firms. In recent years, increased competition
has also developed from specialized finance and non-finance companies that offer
wholesale finance, credit card, and other consumer finance services, including
on-line banking services and personal financial software. Strong
competition for deposit and loan products affects the rates of those products,
as well as the terms on which they are offered to customers. Mergers
between financial institutions have placed additional pressure on banks within
the industry to streamline their operations, reduce expenses, and increase
revenues to remain competitive.
Technological
innovations have also resulted in increased competition in the financial
services market. Such innovation has, for example, made it possible
for non-depository institutions to offer customers automated transfer payment
services that previously were considered traditional banking
products. In addition, many customers now expect a choice of delivery
systems and channels, including telephone, mail, home computer, ATMs,
self-service branches, and/or in-store branches. The sources of
competition in such products include commercial banks, as well as credit unions,
brokerage firms, money market and other mutual funds, asset management groups,
finance and insurance companies, internet-only financial intermediaries and
mortgage banking firms.
In order
to compete with these other institutions, the Company primarily relies on local
promotional activities, personal relationships established by officers,
directors and employees of the Company and specialized services tailored to meet
the individual needs of the Company’s customers.
SUPERVISION
AND REGULATION
General. Bank
holding companies and banks are extensively regulated under state and federal
law. Various requirements and restrictions under state and federal
law affect our operations and regulations regulate many aspects of the Company’s
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices and capital
requirements. Further, we are required to maintain certain levels of
capital. See “Capital Requirements” in this Section below. The
following is a summary of certain statutes and rules applicable to us. This
summary is qualified in its entirety by reference to the particular statute and
regulatory provisions referred to below and are not intended to be an exhaustive
description of all applicable statutes and regulations.
In
response to the recent economic downturn and financial industry instability,
legislative and regulatory initiatives have been, and will likely continue to
be, introduced and implemented, which could substantially intensify the
regulation of the financial services industry (including a possible
comprehensive overhaul of the financial institutions regulatory system, the
creation of a new consumer financial protection agency, and enhanced supervisory
attention and potential new restrictions on executive compensation
arrangements). We cannot predict whether or when potential legislation or new
regulations will be enacted, and if enacted, the effect that new legislation or
any implemented regulations and supervisory policies would have on our financial
condition and results of operations. Moreover, in the current
economic environment, bank regulatory agencies have been more aggressive in
responding to concerns and trends identified in examinations, and this has
resulted in the increased issuance of enforcement actions to financial
institutions requiring action to address credit quality, liquidity and risk
management and capital adequacy, as well as other safety and soundness
concerns.
As a bank
holding company, the Corporation is subject to regulation and supervision by the
Federal Reserve. We are required to file with the Federal Reserve quarterly and
annual reports and such additional information as the Federal Reserve may
require pursuant to the BHCA. The Federal Reserve may conduct examinations of
bank holding companies and their subsidiaries. The Corporation is
also a bank holding company within the meaning of the California Financial Code
(the “Financial Code”). As such, the Corporation and its subsidiaries are
subject to examination by, and may be required to file reports with, the
DFI.
Under a
policy of the Federal Reserve, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such a policy. The Federal Reserve, under the BHCA, has the
authority to require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve’s determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.
As a
California state-chartered commercial bank, which is a member of the Federal
Reserve System, the Bank is subject to supervision, periodic examination and
regulation by the DFI and the Federal Reserve. The Bank’s deposits are insured
by the FDIC through the Deposit Insurance Fund (“DIF”). In general
terms, insurance coverage is currently unlimited for non-interest bearing
transaction accounts and up to $250,000 per owner for all other
accounts. This level of insurance is scheduled to revert to $100,000
on January 1, 2014. As a result of this deposit insurance
function, the FDIC also has certain supervisory authority and powers over our
bank as well as all other FDIC insured institutions. If, as a result of an
examination of the Bank, the regulators should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity or other aspects of the Bank’s operations are unsatisfactory or that
the Bank or our management is violating or has violated any law or regulation,
various remedies are available to the regulators. Such remedies include the
power to enjoin unsafe or unsound practices, to require affirmative action to
correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict growth, to assess civil monetary penalties, to remove
officers and directors and ultimately to request the FDIC to terminate the
Bank’s deposit insurance. As a California-chartered commercial bank, the Bank is
also subject to certain provisions of California law.
Activities of Bank Holding
Companies. The activities of bank holding companies are
generally limited to the business of banking, managing or controlling banks, and
other activities that the Federal Reserve has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Bank holding companies that qualify and register as “financial holding
companies” are also able to engage in certain additional financial activities,
such as merchant banking and securities and insurance underwriting, subject to
limitations set forth in federal law. We are not at this date a “financial
holding company.”
The BHCA
requires a bank holding company to obtain prior approval of the Federal Reserve
before: (1) taking any action that causes a bank to become a controlled
subsidiary of the bank holding company; (2) acquiring direct or indirect
ownership or control of voting shares of any bank or bank holding company, if
the acquisition results in the acquiring bank holding company having control of
more than 5% of the outstanding shares of any class of voting securities of such
bank or bank holding company, unless such bank or bank holding company is
majority-owned by the acquiring bank holding company before the acquisition; (3)
acquiring all or substantially all the assets of a bank; or (4) merging or
consolidating with another bank holding company.
Permissible Activities of the
Bank. Because California permits commercial banks
chartered by the state to engage in any activity permissible for national banks,
the Bank can form subsidiaries to engage in activates “closely related to
banking” or “nonbanking” activities and expanded financial activities. However,
to form a financial subsidiary, the Bank must be well capitalized and would be
subject to the same capital deduction, risk management and affiliate transaction
rules as applicable to national banks. Generally, a financial subsidiary is
permitted to engage in activities that are “financial in nature” or incidental
thereto, even though they are not permissible for the national bank to conduct
directly within the bank. The definition of “financial in nature” includes,
among other items, underwriting, dealing in or making a market in securities,
including, for example, distributing shares of mutual funds. The subsidiary may
not, however, engage as principal in underwriting insurance (other than credit
life insurance), issue annuities or engage in real estate development or
investment or merchant banking. Presently, the Bank does not have any
subsidiaries.
Incentive Compensation. On October 22, 2009,
the Federal Reserve issued a comprehensive proposal on incentive compensation
policies (the “Incentive Compensation Proposal”) intended to ensure that the
incentive compensation policies of banking organizations do not undermine the
safety and soundness of such organizations by encouraging excessive
risk-taking. The Incentive Compensation Proposal, which covers all
employees that have the ability to materially affect the risk profile of an
organization, is based upon the key principles that a banking organization’s
incentive compensation arrangements should (i) provide incentives that do
not encourage risk-taking beyond the organization’s ability to effectively
identify and manage risks, (ii) be compatible with effective internal
controls and risk management, and (iii) be supported by strong corporate
governance, including active and effective oversight by the organization’s board
of directors. The Federal Reserve indicated that all banking
organizations are to evaluate their incentive compensation arrangements and
related risk management, control, and corporate governance processes and
immediately address deficiencies in these arrangements or processes that are
inconsistent with safety and soundness.
The
Federal Reserve will review, as part of the regular, risk-focused examination
process, the incentive compensation arrangements of banking organizations, such
as the Company, that are not “large, complex banking
organizations.” These reviews will be tailored to each organization
based on the scope and complexity of the organization’s activities and the
prevalence of incentive compensation arrangements. The findings of
the supervisory initiatives will be included in reports of
examination. Deficiencies will be incorporated into the
organization’s supervisory ratings, which can affect the organization’s ability
to make acquisitions and take other actions. Enforcement actions may
be taken against a banking organization if its incentive compensation
arrangements, or related risk-management control or governance processes, pose a
risk to the organization’s safety and soundness and the organization is not
taking prompt and effective measures to correct the deficiencies.
In
addition, on January 12, 2010, FDIC issued an Advance Notice of Proposed
Rulemaking seeking public comment on whether certain employee compensation
structures pose risks that should be captured in the deposit insurance
assessment program through higher deposit assessment rates.
The scope
and content of the U.S. banking regulators’ policies on executive compensation
are continuing to develop and are likely to continue evolving in the near
future. It cannot be determined at this time whether compliance with such
policies will adversely affect the Company’s ability to hire, retain and
motivate its key employees.
Capital
Requirements. The federal banking agencies have adopted
regulations establishing minimum capital adequacy requirements for banking
organizations. These agencies may establish higher minimum requirements if, for
example, a banking organization previously has received special attention or has
a high susceptibility to interest rate risk. Under Federal Reserve regulations,
the minimum ratio of total capital to risk-adjusted assets is 8%. At least half
of the total capital is required to be “Tier I capital,” principally consisting
of common stockholders’ equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder (“Tier II capital”) may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the allowance for loan
loss.
In
addition to the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier I capital to total
assets, referred to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier I capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 4%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios. Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect our ability to grow and could restrict the amount of profits, if
any, available for the payment of dividends.
The
regulatory capital requirements, as well as the actual capital ratios for the
Company as of December 31, 2009, are presented in detail in Note 2, Regulatory
Capital Requirements and Other Regulatory Matters in Item 8 hereof. See also
“Capital Resources” within Management’s Discussion and Analysis in Item 7
hereof. As of December 31, 2009, the Bank was considered well capitalized for
regulatory purposes.
Under
applicable regulatory guidelines, the Corporation’s trust preferred securities
issued by our subsidiary capital trust qualify as Tier I capital up to a maximum
limit of 25% of total Tier I capital. Any additional portion of the trust
preferred securities would qualify as Tier II capital. As of December 31, 2009,
the subsidiary trust had $10.3 million in trust preferred securities
outstanding, of which $10.0 million qualifies as Tier I capital.
Prompt Corrective Action
Regulations. The federal banking regulators are required to take “prompt
corrective action” with respect to capital-deficient institutions. Federal
banking regulations define, for each capital category, the levels at which
institutions are “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” and “critically
undercapitalized.” A “well capitalized” institution has a total
risk-based capital ratio of 10.0% or higher; a Tier I risk-based capital ratio
of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not subject to any
written agreement, order or directive requiring it to maintain a specific
capital level for any capital measure. An “adequately capitalized” institution
has a total risk-based capital ratio of 8.0% or higher; a Tier I risk-based
capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or
higher if the bank was rated a composite 1 in its most recent examination report
and is not experiencing significant growth); and does not meet the criteria for
a well capitalized bank. An institution is “undercapitalized” if it fails to
meet any one of the ratios required to be adequately capitalized. An
“undercapitalized” institution has a total risk-based capital ratio that is less
than 8.0%; a Tier 1 risk-based capital ratio of less than 4.0% or a leverage
ratio of less than 4.0%. A “significantly undercapitalized”
institution has a total risk-based capital ratio of less than 6.0%; a Tier 1
risk-based capital ratio of less than 3.0% or a leverage ratio of less than
3.0%. A “critically undercapitalized” institution’s tangible
equity is equal to or less than 2.0% of average quarterly tangible
assets. An institution may be downgraded to, or deemed to be in, a
capital category that is lower than indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. An
institution’s capital category is determined solely for the purpose of applying
prompt corrective action regulations, and the capital category may not
constitute an accurate representation of the institution’s overall financial
condition or prospects for other purposes.
In the
event an institution becomes “undercapitalized,” it must submit a capital
restoration plan. The capital restoration plan will not be accepted
by the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary’s compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution’s holding company is entitled to a priority of payment in
bankruptcy. The aggregate liability of the holding company of an
undercapitalized bank is limited to the lesser of 5% of the institution’s assets
at the time it became undercapitalized or the amount necessary to cause the
institution to be “adequately capitalized.” The bank regulators have greater
power in situations where an institution becomes “significantly” or “critically”
undercapitalized or fails to submit a capital restoration plan. In
addition to requiring undercapitalized institutions to submit a capital
restoration plan, bank regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an
institution’s capital decreases, the regulators’ enforcement powers become more
severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. A regulator has
limited discretion in dealing with a critically undercapitalized institution and
is virtually required to appoint a receiver or conservator.
Banks
with risk-based capital and leverage ratios below the required minimums may also
be subject to certain administrative actions, including the termination of
deposit insurance upon notice and hearing, or a temporary suspension of
insurance without a hearing in the event the institution has no tangible
capital.
In
addition, the DFI has authority to take possession of the business and
properties of a bank in the event that the tangible shareholders’ equity of a
bank is less than the greater of (i) 4% of the bank’s total assets or (ii) $1.0
million.
As of
December 31, 2009, the Bank was “well capitalized” according to the guidelines
as generally discussed above.
Dividends. It is
the Federal Reserve’s policy that bank holding companies, such as us, should
generally pay dividends on common stock only out of income available over the
past year, and only if prospective earnings retention is consistent with the
organization’s expected future needs and financial condition. It is
also the Federal Reserve’s policy that bank holding companies should not
maintain dividend levels that undermine their ability to be a source of strength
to its banking subsidiaries. Additionally, in consideration of the
current financial and economic environment, the Federal Reserve has indicated
that bank holding companies should carefully review their dividend policy and
has discouraged payment ratios that are at maximum allowable levels unless both
asset quality and capital are very strong.
The
Bank's ability to pay dividends to the Corporation is subject to restrictions
set forth in the Financial Code. The Financial Code provides that a
bank may not make a cash distribution to its stockholders in excess of the
lesser of a bank’s (1) retained earnings; or (2) net income for its
last three fiscal years, less the amount of any distributions made by the bank
or by any majority-owned subsidiary of the bank to the stockholders of the bank
during such period. However, a bank may, with the approval of the
DFI, make a distribution to its stockholders in an amount not exceeding the
greatest of (a) its retained earnings; (b) its net income for its last
fiscal year; or (c) its net income for its current fiscal
year. In the event that bank regulators determine that the
stockholders' equity of a bank is inadequate or that the making of a
distribution by the bank would be unsafe or unsound, the regulators may order
the bank to refrain from making a proposed distribution. The payment
of dividends could, depending on the financial condition of the Bank, be deemed
to constitute an unsafe or unsound practice. Under these provisions,
the amount available for distribution from the Bank to the Corporation was
approximately $3.1 million at December 31, 2009.
Approval
of the Federal Reserve is required for payment of any dividend by a state
chartered bank that is a member of the Federal Reserve Board System, such as the
Bank, if the total of all dividends declared by the bank in any calendar year
would exceed the total of its retained net income for that year combined with
its retained net income for the preceding two years. In addition, a
state member bank may not pay a dividend in an amount greater than its undivided
profits without regulatory and stockholder approval. The Bank is also
prohibited under federal law from paying any dividend that would cause it to
become undercapitalized.
In February
2010, the boards of directors of the Corporation and the Bank adopted
certain board resolutions which require, among other things, that we
provide prior written notice to the Federal Reserve Bank before (i) receiving
any dividends or other distributions from the Bank, (ii) declaring any dividends
or making any payments on trust preferred securities or subordinated debt, (iii)
making any capital distributions, (iv) incurring, increasing, refinancing
or guaranteeing any debt; (v) issuing any trust preferred securities or (iv)
repurchasing, redeeming or acquiring any of our stock.
It is our
policy to retain earnings, if any, to provide funds for use in our
business. We have never declared or paid dividends on our common
stock and do not anticipate declaring or paying any cash dividends in the
foreseeable future.
FDIC Insurance of Certain Accounts
and Regulation by the FDIC. The Bank’s deposits are insured by
the FDIC through the DIF. In general terms, insurance coverage is
currently unlimited for non-interest bearing transaction accounts and up to
$250,000 per owner for all other accounts. This level of insurance is
scheduled to revert to $100,000 on January 1, 2014. The FDIC utilizes
a risk-based assessment system to evaluate the risk of each financial
institution based on three primary sources of information: (1) its
supervisory rating, (2) its financial ratios, and (3) its long-term
debt issuer rating, if the institution has one. The FDIC’s base
assessment schedule can be adjusted up or down, and premiums for 2009 ranged
from 12 basis points in the lowest risk category to 45 basis points
for banks in the highest risk category. Premiums for 2010 are
currently set at 2009 rates. During 2009 the FDIC also imposed a
special assessment for all insured depositories that amounted to $360,000 for
the Bank.
On
September 29, 2009, the FDIC adopted an Amended Restoration Plan to allow the
DIF to return to a reserve ratio of 1.15 percent within eight years, as mandated
by statute. At the same time, the FDIC adopted higher annual risk-based
assessment rates uniformly by 3 basis points effective January 1,
2011. The FDIC also considered its need for cash to pay for projected
failures. The pace of resolutions continues to put downward pressure
on cash balances giving an immediate need for more liquid assets to fund
near-term failures. As a result of liquidity needs, on November 12,
2009 the FDIC adopted a final rule to require insured institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009,
and for all of 2010, 2011, and 2012. The prepaid assessment for these
periods was collected on December 30, 2009, along with each institution’s
regular quarterly risk-based deposit insurance assessment for the third quarter
of 2009. On December 30, 2009, the Bank made a payment of
approximately $4.1 million to the FDIC for its estimated quarterly risk-based
assessments for the fourth quarter of 2009, and for all of 2010, 2011, and
2012. For purposes of estimating an institution’s assessments for
these periods, the institution’s assessment rate was its total base assessment
rate in effect on September 30, 2009 increased quarterly at a 5 percent annual
growth rate through the end of 2012. The assessment for 2011 and 2012
will be increased by an annualized 3 basis points beginning in 2011. The FDIC
will begin to draw down an institution’s prepaid assessments on March 30, 2010,
representing payment for the regular quarterly risk-based assessment for the
fourth quarter of 2009. The Bank’s FDIC insurance expense totaled
$1.4 million in 2009 and $264,000 in 2008.
The Company cannot provide any
assurance as to the amount of any proposed increase in its deposit insurance
premium rate, as such changes are dependent upon a variety of factors, some of
which are beyond the Company’s control. Given the enacted and proposed increases
in FDIC assessments for insured financial institutions in 2009, the Company
anticipates that FDIC assessments on deposits will have a significantly greater
impact upon operating expenses in 2010, compared to 2009 and 2008, and could
affect its reported earnings, liquidity and capital for the period.
The FDIC
is authorized to terminate a depository institution’s deposit insurance upon a
finding by the FDIC that the institution’s financial condition is unsafe or
unsound or that the institution has engaged in unsafe or unsound practices or
has violated any applicable rule, regulation, order or condition enacted or
imposed by the institution’s regulators.
In
addition to the assessment for deposit insurance, the Bank, as a former member
of the Savings Association Insurance Fund, also pays assessments towards the
retirement of the Financing Corporation Bonds issued in the 1980s to assist in
the recovery of the savings and loan industry. These assessments will
continue until these bonds mature in 2017. This payment is
established quarterly and during the year ending December 31, 2009, averaged
1.04 basis points of assessable deposits.
Loans-to-One
Borrower. Under California law, our ability to make aggregate
secured and unsecured loans-to-one-borrower is limited to 25% and 15%,
respectively, of unimpaired capital and surplus. At December 31, 2009, the
Bank’s limit on aggregate secured loans-to-one-borrower was $18.1 million and
unsecured loans-to-one borrower was $10.9 million. At December 31, 2009, the
Bank’s largest aggregate outstanding balance of loans-to-one borrower, in
secured loans, was $11.5 million.
Transactions with Related
Parties. Depository institutions are subject to the
restrictions contained in Section 22(h) of the Federal Reserve Act (the “FRA”)
with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a depository institution and certain
affiliated entities of any of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated entities, the
institution’s loans-to-one-borrower limit as discussed in the above section.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
own more than 10% of an institution, and their respective affiliates, unless
such loans are approved in advance by a majority of the board of directors of
the institution. Any “interested” director may not participate in the voting.
The prescribed loan amount, which includes all other outstanding loans to such
person, as to which such prior board of director approval is required, is the
greater of $25,000 or 5% of capital and surplus up to $500,000. Further,
pursuant to Section 22(h), the Federal Reserve requires that loans to directors,
executive officers, and principal stockholders be made on terms
substantially the same as offered in comparable transactions to
non-executive employees of the bank and must not involve more than the normal
risk of repayment. There are additional limits on the amount a bank
can loan to an executive officer.
Transactions
between a bank and its “affiliates” are quantitatively and qualitatively
restricted under Sections 23A and 23B of the FRA. Section 23A restricts the
aggregate amount of covered transactions with any individual affiliate to 10% of
the capital and surplus of the financial institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the institution’s
capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates are generally
prohibited. Section 23B generally provides that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. The Federal
Reserve has promulgated Regulation W, which codifies prior interpretations under
Sections 23A and 23B of the FRA and provides interpretive guidance with respect
to affiliate transactions. Affiliates of a bank include, among other
entities, a bank’s holding company and companies that are under common control
with the bank. We are considered to be an affiliate of the
Bank.
Safety and Soundness
Standards. The federal banking agencies have adopted guidelines designed
to assist the federal banking agencies in identifying and addressing potential
safety and soundness concerns before capital becomes impaired. The guidelines
set forth operational and managerial standards relating to (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) asset growth;
(v) earnings; and (vi) compensation, fees and benefits.
In
addition, the federal banking agencies have also adopted safety and soundness
guidelines with respect to asset quality and for evaluating and monitoring
earnings to ensure that earnings are sufficient for the maintenance of adequate
capital and reserves. These guidelines provide six standards for establishing
and maintaining a system to identify problem assets and prevent those assets
from deteriorating. Under these standards, an insured depository institution
should (i) conduct periodic asset quality reviews to identify problem
assets; (ii) estimate the inherent losses in problem assets and establish
reserves that are sufficient to absorb estimated losses; (iii) compare
problem asset totals to capital; (iv) take appropriate corrective action to
resolve problem assets; (v) consider the size and potential risks of
material asset concentrations; and (vi) provide periodic asset quality
reports with adequate information for management and the board of directors to
assess the level of asset risk.
Community Reinvestment Act and the
Fair Lending Laws. The Bank is subject to certain fair lending
requirements and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act (“CRA”) activities. The CRA generally
requires the federal banking regulators to evaluate the record of a financial
institution in meeting the credit needs of their local communities, including
low and moderate income neighborhoods. In addition to substantial penalties and
corrective measures that may be required for a violation of certain fair lending
laws, the federal banking agencies may take compliance with such laws and CRA
into account when regulating and supervising other activities. A bank’s
compliance with its CRA obligations is based on a performance-based evaluation
system which bases CRA ratings on an institution’s lending service and
investment performance, resulting in a rating by the appropriate bank regulator
of “outstanding,” “satisfactory,” “needs to improve” or “substantial
noncompliance.” Based on its last CRA examination, the Bank received a
“satisfactory” rating.
Bank Secrecy Act and Money Laundering Control
Act. In 1970, Congress passed the Currency and Foreign
Transactions Reporting Act, otherwise known as the Bank Secrecy Act (the “BSA”),
which established requirements for recordkeeping and reporting by banks and
other financial institutions. The BSA was designed to help identify the source,
volume and movement of currency and other monetary instruments into and out of
the U.S. in order to help detect and prevent money laundering connected with
drug trafficking, terrorism and other criminal activities. The primary tool used
to implement BSA requirements is the filing of Suspicious Activity Reports.
Today, the BSA requires that all banking institutions develop and provide for
the continued administration of a program reasonably designed to assure and
monitor compliance with certain recordkeeping and reporting requirements
regarding both domestic and international currency transactions. These programs
must, at a minimum, provide for a system of internal controls to assure ongoing
compliance, provide for independent testing of such systems and compliance,
designate individuals responsible for such compliance and provide appropriate
personnel training.
USA Patriot Act of 2001. On October 26,
2001, President Bush signed the USA Patriot Act of 2001 (the “Patriot
Act”). Enacted in response to the terrorist attacks in New York,
Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is
intended to strengthen U.S. law enforcement’s and the intelligence communities’
ability to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Act on financial institutions of
all kinds is significant and wide ranging. The Patriot Act contains
sweeping anti-money laundering and financial transparency laws and requires
various regulations, including:
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due
diligence requirements for financial institutions that administer,
maintain, or manage private bank accounts or correspondent accounts for
non-U.S. persons;
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standards
for verifying customer identification at account opening;
and
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rules
to promote cooperation among financial institutions, regulators, and law
enforcement entities in identifying parties that may be involved in
terrorism or money laundering.
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Consumer Laws and
Regulations. In addition to the laws and regulations discussed
herein, the Bank is also subject to certain consumer laws and regulations that
are designed to protect consumers in transactions with banks. While
the list set forth herein is not exhaustive, these laws and regulations include
the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, and the Fair Housing Act, and various state counterparts. These
laws and regulations mandate certain disclosure requirements and regulate the
manner in which financial institutions must deal with customers when taking
deposits or making loans to such customers. The Bank must comply with
the applicable provisions of these consumer protection laws and regulations as
part of their ongoing customer relations.
In
addition, federal law currently contains extensive customer privacy protection
provisions. Under these provisions, a financial institution must
provide to its customers, at the inception of the customer relationship and
annually thereafter, the institution’s policies and procedures regarding the
handling of customers’ nonpublic personal financial
information. These provisions also provide that, except for certain
limited exceptions, a financial institution may not provide such personal
information to unaffiliated third parties unless the institution discloses to
the customer that such information may be so provided and the customer is given
the opportunity to opt out of such disclosure.
Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act of 2002 (the “SOX”) was enacted
to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The SOX generally
applies to all companies, both U.S. and non-U.S., that file or are required to
file periodic reports with the SEC under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), including us.
The SOX
includes additional disclosure requirements and new corporate governance rules,
requires the SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules and mandates further
studies of specified issues by the SEC and the Comptroller
General. The SEC has promulgated regulations to implement various
provisions of the SOX, including additional disclosure requirements and
certifications in periodic filings under the Exchange Act. We have
revised our internal policies and Exchange Act disclosures to comply with these
new requirements.
On
December 11, 2009 the U.S. House of Representatives passed the "Wall Street
Reform and Consumer Protection Act of 2009". One component of this
bill would permanently exempt a non-accelerated filer (companies with a market
cap of less than $75 million), such as the Company, from the outside auditor
attestation requirement of Section 404(b) of SOX. Section 404(b) of
SOX requires a registrant’s registered public accounting firm that prepares or
issues the audit report for the registrant to attest to, and report on, the
annual assessment made by management of the registrant’s internal control over
financial reporting in accordance with Section 404(a) of SOX. If the
bill does not become law, and the SEC does not extend the requirements under
Section 404(b) of SOX, all non-accelerated filers will need to begin complying
with Section 404(b) of SOX with respect to a fiscal period ending after June 15,
2010 and the Company would need to begin complying with Section 404(b) of SOX
with respect to our fiscal year ending December 31, 2010.
Emergency Economic Stabilization Act
of 2008. On October 3, 2008, the President signed into
law the Emergency
Economic Stabilization Act of 2008 (“EESA”), which, among other measures,
authorized the Secretary of the Treasury to establish the Troubled Asset Relief
Program (“TARP”). Pursuant to TARP, the Treasury has the authority to,
among other things, purchase up to $700 billion of mortgages, MBS and certain
other financial instruments from financial institutions for the purpose of
stabilizing and providing liquidity to the U.S. financial markets. In
addition, under TARP, the Treasury created the Capital Purchase Plan, pursuant
to which it provides access to capital that will serve as Tier 1 capital to
financial institutions through a standardized program to acquire preferred stock
(accompanied by warrants) from eligible financial
institutions.
American Recovery and Reinvestment
Act of
2009. On February 17, 2009, President Obama signed into law
the American Recovery and Reinvestment Act of 2009 (“ARRA”), which is intended,
among other things, to provide a stimulus to the U.S. economy in the wake of the
economic downturn brought about by the subprime mortgage crisis and the
resulting dislocations in the financial markets. ARRA also includes
numerous non-economic recovery related items, including a limitation on
executive compensation of certain of the most highly-compensated employees and
executive officers of financial institutions that participate in TARP
programs.
Comprehensive Financial Stability
Plan of 2009. On February 10, 2009, the
Secretary of the Treasury announced a new comprehensive financial stability plan
(the “Financial Stability Plan”), which builds upon existing programs and
earmarks the second $350 billion of unused funds originally authorized under the
EESA. Elements of the Financial Stability Plan include: (i) a
capital assistance program that will invest in convertible preferred stock of
certain qualifying institutions, (ii) a consumer and business lending
initiative to fund new consumer loans, small business loans and commercial
mortgage asset-backed securities issuances, (iii) a new public-private
investment fund that will leverage public and private capital with public
financing to purchase legacy “toxic assets” from financial institutions, and
(iv) assistance for homeowners to reduce mortgage payments and interest
rates and establishing loan modification guidelines for government and private
programs. In addition, all banking institutions with assets over $100
billion will be required to undergo a comprehensive “stress test” to determine
if they have sufficient capital to continue lending and to absorb losses that
could result from a more severe decline in the economy than
projected. The Company is not subject to this comprehensive stress
test. Institutions receiving assistance under the Financial Stability
Plan going forward will be subject to higher transparency and accountability
standards, including restrictions on dividends, acquisitions and executive
compensation and additional disclosure requirements.
Federal
and State Taxation
The
Corporation and the Bank report their income on a consolidated basis using the
accrual method of accounting, and are subject to federal income taxation in the
same manner as other corporations with some exceptions. The Company has not been
audited by the IRS. For its 2009 taxable year, the Company is subject to a
maximum federal income tax rate of 34% and state income tax rate of
10.84%.
RISK
FACTORS
Ownership
of our common stock involves certain risks. The risks and uncertainties
described below are not the only ones we face. You should carefully
consider the risks described below, as well as all other information contained
in this Annual Report on Form 10-K. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our
business operations. If any of these risks actually occurs, our business,
financial condition or results of operations could be materially, adversely
affected.
Risks
Related to Our Business
The
current economic environment poses significant challenges for the Company and
could adversely affect our financial condition and results of
operations.
We are
operating in a challenging and uncertain economic environment, including
generally uncertain national and local conditions. Financial
institutions continue to be affected by sharp declines in the real estate market
and constrained financial markets. Dramatic declines in the housing
market over the past year, with falling home prices and increasing foreclosures
and unemployment, have resulted in significant write-downs of asset values by
financial institutions. Continued declines in real estate values,
home sales volumes and financial stress on borrowers as a result of the
uncertain economic environment could have an adverse effect on our borrowers or
their customers, which could adversely affect our financial condition and
results of operations. A worsening of these conditions would likely
exacerbate the adverse effects on us and others in the financial institutions
industry. For example, further deterioration in economic conditions
in our markets could drive losses beyond that which is provided for in our
allowance for loan losses. We may also face the following risks in
connection with these events:
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Economic
conditions that negatively affect real estate values and the job market
have resulted, and may continue to result, in a deterioration in credit
quality of our loan portfolio, and such deterioration in credit quality
has had, and could continue to have, a negative impact on our
business.
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Market
developments may affect consumer confidence levels and may cause adverse
changes in payment patterns, causing increases in delinquencies and
default rates on loans and other credit
facilities.
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The
processes we use to estimate allowance for loan losses and reserves may no
longer be reliable because they rely on complex judgments, including
forecasts of economic conditions, which may no longer be capable of
accurate estimation.
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Our
ability to assess the creditworthiness of our customers may be impaired if
the models and approaches we use to select, manage, and underwrite its
customers become less predictive of future
charge-offs.
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We
expect to face increased regulation of its industry, and compliance with
such regulation may increase our costs, limit our ability to pursue
business opportunities and increase compliance
challenges.
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As these conditions or similar ones continue to exist or worsen, we could
experience continuing or increased adverse effects on its financial condition
and results of operations.
Our
business is subject to various lending and other economic risks that could
adversely impact our results of operations and financial condition.
There was
significant disruption and volatility in the financial and capital markets
during 2008 and 2009. The financial markets and the financial services industry
in particular suffered unprecedented disruption, causing a number of
institutions to fail or require government intervention to avoid failure. These
conditions were largely the result of the erosion of the U.S. and global credit
markets, including a significant and rapid deterioration in the mortgage lending
and related real estate markets. Continued declines in real estate values, high
unemployment and financial stress on borrowers as a result of the uncertain
economic environment could have an adverse effect on our borrowers or their
customers, which could adversely affect our financial condition and results of
operations.
As a
consequence of the difficult economic environment, we experienced losses,
resulting primarily from significant provisions for loan losses and substantial
impairment charges on our investment securities. There can be no assurance that
the economic conditions that have adversely affected the financial services
industry, and the capital, credit and real estate markets generally, will
improve in the near term, in which case we could continue to experience losses
and write-downs of assets, and could face capital and liquidity constraints or
other business challenges. A further deterioration in economic conditions,
particularly within our geographic region, could result in the following
consequences, any of which could have a material adverse effect on our
business:
• Loan
delinquencies may further increase causing additional increases in our provision
and allowance for loan losses.
• Our
ability to assess the creditworthiness of our customers may be impaired if the
models and approaches we use to select, manage, and underwrite our customers
become less predictive of future charge-offs.
•
Collateral for loans, especially real estate, may continue to decline in value,
in turn reducing a client’s borrowing power, and reducing the value of assets
and collateral associated with our loans held for investment.
•
Consumer confidence levels may decline and cause adverse changes in payment
patterns, resulting in increased delinquencies and default rates on loans and
other credit facilities and decreased demand for our products and
services.
•
Performance of the underlying loans in the private label mortgage backed
securities may continue to deteriorate potentially causing further OTTI
markdowns to our investment portfolio.
We
may suffer losses in our loan portfolio in excess of our allowance for loan
losses.
We have
experienced increases in the levels of our nonperforming assets, loan
charge-offs and provision for loan losses in recent periods. Our total
nonperforming assets amounted to $13.4 million, or 1.7% of our total assets, at
December 31, 2009, up from $5.2 million or 0.7% at December 31, 2008. We had
$4.7 million of net loan charge-offs for 2009, up from $1.0 million in 2008. Our
provision for loan losses was $7.7 million in 2009, up from $2.2 million in
2008. Additional increases in our nonperforming assets, loan charge-offs or
provision for loan losses may have an adverse effect upon our future results of
operations.
We seek
to mitigate the risks inherent in our loan portfolio by adhering to specific
underwriting practices. These practices include analysis of a borrower’s prior
credit history, financial statements, tax returns and cash flow projections,
valuation of collateral based on reports of independent appraisers and liquid
asset verifications. Although we believe that our underwriting criteria are
appropriate for the various kinds of loans we make, we may incur losses on loans
that meet our underwriting criteria, and these losses may exceed the amounts set
aside as reserves in our allowance for loan losses. We create an allowance for
estimated loan losses in our accounting records, based on estimates of the
following:
•
Historical experience with our loans;
•
Industry historical losses as reported by the FDIC;
•
Evaluation of economic conditions;
• Regular
reviews of the quality, mix and size of the overall loan portfolio;
• Regular
reviews of delinquencies; and
• The
quality of the collateral underlying our loans.
Although
we maintain an allowance for loan losses at a level that we believe is adequate
to absorb losses inherent in our loan portfolio, changes in economic, operating
and other conditions, including the sharp decline in real estate values and
changes in interest rates, which are beyond our control, may cause our actual
loan losses to exceed our current allowance estimates. If the actual loan losses
exceed the amount reserved, it will adversely affect our financial condition and
results of operations.
In addition, the Federal Reserve and the DFI, as part of their supervisory
function, periodically review our allowance for loan losses. Either agency may
require us to increase our provision for loan losses or to recognize further
loan losses, based on their judgments, which may be different from those of our
management. Any increase in the allowance required by them could also adversely
affect our financial condition and results of operations.
Deteriorating
economic conditions in California may cause us to suffer higher default rates on
our loans and reduce the value of the assets we hold as collateral.
Our
business activities and credit exposure are concentrated in Southern California.
As a result, a deterioration in economic conditions in Southern California may
cause us to incur losses associated with higher default rates and decreased
collateral values in our loan portfolio. In addition, demand for our products
and services may decline. The significant decline in the Southern California
real estate market could hurt our business because the vast majority of our
loans are secured by real estate located within Southern California. As of
December 31, 2009, approximately 93% of our loan portfolio consisted of loans
secured by real estate located in Southern California. As real estate values
decline, especially in Southern California, the collateral for our loans provide
less security. As a result, our ability to recover on defaulted loans by selling
the underlying real estate would be diminished, and we would be more likely to
suffer losses on defaulted loans.
Our
level of credit risk is increasing due to our focus on commercial lending and
the concentration on small businesses customers with heightened vulnerability to
economic conditions.
As of
December 31, 2009, our largest outstanding commercial business loan, which is
fully committed as of such date, was $3.0 million and our largest outstanding
commercial real estate loan amounted was $11.5 million. At such date, our
commercial real estate loans amounted to $428.3 million, or 74.3% of our total
loan portfolio, and our commercial business loans amounted to $134.1 million, or
23.3% of our total loan portfolio. Commercial real estate and commercial
business loans generally are considered riskier than single-family residential
loans because they have larger balances to a single borrower or group of related
borrowers. Commercial real estate and commercial business loans involve risks
because the borrowers’ ability to repay the loans typically depends primarily on
the successful operation of the businesses or the properties securing the loans.
Most of the Company’s commercial business loans are made to small business or
middle market customers who may have a heightened vulnerability to economic
conditions. Moreover, a portion of these loans have been made or acquired by us
in recent years and the borrowers may not have experienced a complete business
or economic cycle. Furthermore, the deterioration of our borrowers’ businesses
may hinder their ability to repay their loans with us, which could adversely
affect our results of operations.
Nonperforming
assets take significant time to resolve and adversely affect our results of
operations and financial condition.
Nonperforming
assets adversely affect our net income in various ways. Until economic and
market conditions improve, we may expect to continue to incur losses relating to
nonperforming assets and higher loan administration costs. We generally do not
record interest income on nonperforming loans or other real estate owned, which
adversely affects our income. When we take collateral in foreclosures
and similar proceedings, we are required to mark the related asset to the then
fair market value of the collateral, which may ultimately result in a loss. An
increase in the level of nonperforming assets increases our risk profile and may
impact the capital levels our regulators believe are appropriate in light of the
ensuing risk profile. While we reduce problem assets through loan sales,
workouts, restructurings and otherwise, decreases in the value of the underlying
collateral, or in these borrowers’ performance or financial condition, whether
or not due to economic and market conditions beyond our control, could adversely
affect our business, results of operations and financial condition. In addition,
the resolution of nonperforming assets requires significant commitments of time
from management and our directors, which can be detrimental to the performance
of their other responsibilities. There can be no assurance that we will not
experience future increases in nonperforming assets.
We
may be unable to successfully compete in our industry.
We face
direct competition from a significant number of financial institutions, many
with a state-wide or regional presence, and in some cases, a national presence,
in both originating loans and attracting deposits. Competition in originating
loans comes primarily from other banks and mortgage companies that make loans in
our primary market areas. We also face substantial competition in attracting
deposits from other banking institutions, money market and mutual funds, credit
unions and other investment vehicles. In addition banks with larger
capitalizations and non-bank financial institutions that are not governed by
bank regulatory restrictions have larger lending limits and are better able to
serve the needs of larger customers. Many of these financial institutions are
also significantly larger and have greater financial resources than we have, and
have established customer bases and name recognition. We compete for loans
principally on the basis of interest rates and loan fees, the types of loans we
offer and the quality of service that we provide to our borrowers. Our ability
to attract and retain deposits requires that we provide customers with
competitive investment opportunities with respect to rate of return, liquidity,
risk and other factors. To effectively compete, we may have to pay higher rates
of interest to attract deposits, resulting in reduced profitability. In
addition, we rely upon local promotional activities, personal relationships
established by our officers, directors and employees and specialized services
tailored to meet the individual needs of our customers in order to compete. If
we are not able to effectively compete in our market area, our profitability may
be negatively affected.
Interest
rate fluctuations, which are out of our control, could harm
profitability.
Our
profitability depends to a large extent upon net interest income, which is the
difference between interest income and dividends on interest-earning assets,
such as loans and investments, and interest expense on interest-bearing
liabilities, such as deposits and borrowings. Any change in general market
interest rates, whether as a result of changes in the monetary policy of the
Federal Reserve or otherwise, may have a significant effect on net interest
income. The assets and liabilities may react differently to changes in overall
interest rates or conditions. In general, higher interest rates are associated
with a lower volume of loan originations while lower interest rates are usually
associated with higher loan originations. Further, if interest rates decline,
our loans may be refinanced at lower rates or paid off and our investments may
be prepaid earlier than expected. If that occurs, we may have to redeploy the
loan or investment proceeds into lower yielding assets, which might also
decrease our income. Also, as many of our loans currently have interest rate
floors, a rise in rates may increase the cost of our deposits while the rates on
the loans remain at their floors, which could decrease our net interest margin.
Accordingly, changes in levels of market interest rates could materially and
adversely affect our net interest margin, asset quality and loan origination
volume.
Adverse
outcomes of litigation against us could harm our business and results of
operations.
We are
currently involved in litigation relating to the origination of certain subprime
mortgages that prior management purchased on the secondary market (and later
sold), as well as other actions arising in the ordinary course of business. A
significant judgment against us in connection with any pending or future
litigation could harm our business and results of operations.
Changes
in the fair value of our securities may reduce our stockholders’ equity and net
income.
At
December 31, 2009, $123.4 million of our securities were classified as
available-for-sale. At such date, the aggregate net unrealized losses on our
available-for-sale securities was $3.0 million. We increase or decrease
stockholders’ equity by the amount of change from the unrealized gain or loss
(the difference between the estimated fair value and the amortized cost) of our
available-for-sale securities portfolio, net of the related tax, under the
category of accumulated other comprehensive income/loss. Therefore, a decline in
the estimated fair value of this portfolio will result in a decline in reported
stockholders’ equity, as well as book value per common share and tangible book
value per common share. This decrease will occur even though the securities are
not sold. In the case of debt securities, if these securities are never sold and
there are no credit impairments, the decrease will be recovered over the life of
the securities. In the case of equity securities which have no stated maturity,
the declines in fair value may or may not be recovered over time.
For the
year ended December 31, 2009, we reported a non-cash OTTI, charge of $2.0
million on our securities portfolio. We continue to monitor the fair value of
our entire securities portfolio as part of our ongoing OTTI evaluation process.
No assurance can be given that we will not need to recognize additional OTTI
charges related to securities in the future. In addition, as a condition to
membership in the FHLB of San Francisco, we are required to purchase and hold a
certain amount of FHLB stock. Our stock purchase requirement is based, in part,
upon the outstanding principal balance of advances from the FHLB. At December
31, 2009, we had stock in the FHLB of San Francisco totaling $12.7 million. The
FHLB stock held by us is carried at cost and is subject to recoverability
testing under applicable accounting standards. For the year ended December 31,
2009, we did not recognize an impairment charge related to our FHLB stock
holdings. There can be no assurance, however, that future negative changes to
the financial condition of the FHLB may not require us to recognize an
impairment charge with respect to such holdings.
Conditions
in the financial markets may limit our access to additional funding to meet our
liquidity needs.
Liquidity
is essential to our business, as we must maintain sufficient funds to respond to
the needs of depositors and borrowers. An inability to raise funds through
deposits, repurchase agreements, federal funds purchased, FHLB advances, the
sale or pledging as collateral of loans and other assets could have a
substantial negative effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities could be impaired by factors that
affect us specifically or the financial services industry in general. Factors
that could negatively affect our access to liquidity sources include negative
operating results, a decrease in the level of our business activity due to a
market downturn or negative regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as severe
disruption of the financial markets or negative news and expectations about the
prospects for the financial services industry as a whole, as evidenced by recent
turmoil in the domestic and worldwide credit markets.
The
soundness of other financial institutions could negatively affect
us.
Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. We have exposure to many different
industries and counterparties, and we routinely execute transactions with
counterparties in the financial services industry, including commercial banks,
brokers and dealers, investment banks and other institutional clients. Many of
these transactions expose us to credit risk in the event of a default by a
counterparty or client. In addition, our credit risk may be exacerbated when the
collateral held by us cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the credit or derivative exposure due
to us. Any such losses could have a material adverse effect on our financial
condition and results of operations.
We
are subject to extensive regulation which could adversely affect our
business.
Our
operations are subject to extensive regulation by federal, state and local
governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of our operations. Given the current disruption in the financial markets and
potential new regulatory initiatives, including the Obama Administration’s
recent financial regulatory reform proposal, new regulations and laws that may
affect us are increasingly likely. Because our business is highly regulated, the
laws, rules and regulations applicable to us are subject to regular modification
and change. There are currently proposed laws, rules and regulations that, if
adopted, would impact our operations. These proposed laws, rules and
regulations, or any other laws, rules or regulations, may be adopted in the
future, which could (1) make compliance much more difficult or expensive, (2)
restrict our ability to originate, broker or sell loans or accept certain
deposits, (3) further limit or restrict the amount of commissions, interest or
other charges earned on loans originated or sold by us, or (4) otherwise
adversely affect our business or prospects for business.
Moreover,
banking regulators have significant discretion and authority to prevent or
remedy unsafe or unsound practices or violations of laws or regulations by
financial institutions and holding companies in the performance of their
supervisory and enforcement duties. The exercise of regulatory authority may
have a negative impact on our financial condition and results of
operations.
Additionally,
in order to conduct certain activities, including acquisitions, we are required
to obtain regulatory approval. There can be no assurance that any required
approvals can be obtained, or obtained without conditions or on a timeframe
acceptable to us.
Changes
in laws, government regulation and monetary policy may have a material effect on
our results of operations.
Financial
institutions have been the subject of substantial legislative and regulatory
changes and may be the subject of further legislation or regulation in the
future, none of which is within our control. Significant new laws or regulations
or changes in, or repeals of, existing laws or regulations may cause our results
of operations to differ materially. In addition, the cost and burden of
compliance with applicable laws and regulations have significantly increased and
could adversely affect our ability to operate profitably. Further, federal
monetary policy significantly affects credit conditions for us, as well as for
our borrowers, particularly as implemented by the Federal Reserve, primarily
through open market operations in U.S. government securities, the discount rate
for bank borrowings and reserve requirements. A material change in any of these
conditions could have a material impact on us or our borrowers, and therefore on
our results of operations.
We expect
to face increased regulation and supervision of our industry as a result of the
existing financial crisis, and there will be additional requirements and
conditions imposed on us to the extent that we participate in any of the
programs established or to be established by the Treasury or by the federal bank
regulatory agencies. Such additional regulation and supervision may increase our
costs and limit our ability to pursue business opportunities. The affects of
such recently enacted, and proposed, legislation and regulatory programs on us
cannot reliably be determined at this time.
Environmental
liabilities with respect to properties on which we take title may have a
material effect on our results of operations.
We could
be subject to environmental liabilities on real estate properties we foreclose
and take title in the normal course of our business. In connection with
environmental contamination, we may be held liable to governmental entities or
to third parties for property damage, personal injury, investigation and
clean-up costs incurred by these parties, or we may be required to investigate
or clean-up hazardous or toxic substances at a property. The investigation or
remediation costs associated with such activities could be substantial.
Furthermore, we may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination even if we were the
former owner of a contaminated site. The incurrence of a significant
environmental liability could adversely affect our business, financial condition
and results of operations.
Confidential
customer information transmitted through Pacific Premier Bank’s online banking
service is vulnerable to security breaches and computer viruses, which could
expose the Bank to litigation and adversely affect its reputation and ability to
generate deposits.
Pacific
Premier Bank provides its customers the ability to bank online. The secure
transmission of confidential information over the Internet is a critical element
of online banking. Pacific Premier Bank’s network could be vulnerable to
unauthorized access, computer viruses, phishing schemes and other security
problems. Pacific Premier Bank may be required to spend significant capital and
other resources to protect against the threat of security breaches and computer
viruses, or to alleviate problems caused by security breaches or viruses. To the
extent that Pacific Premier Bank’s activities or the activities of its customers
involve the storage and transmission of confidential information, security
breaches and viruses could expose Pacific Premier Bank to claims, litigation and
other possible liabilities. Any inability to prevent security breaches or
computer viruses could also cause existing customers to lose confidence in
Pacific Premier Bank’s systems and could adversely affect its reputation and
ability to generate deposits.
We
are dependent on our key personnel.
Our
future operating results depend in large part on the continued services of our
key personnel, including Steven R. Gardner, our President and Chief Executive
Officer, who developed and implemented our new business strategy in late 2000.
The loss of Mr. Gardner could have a negative impact on the success of our
business strategy. In addition, we rely upon the services of Eddie Wilcox, our
Executive Vice President and Chief Banking Officer, and our ability to attract
and retain highly skilled personnel. We do not maintain key-man life insurance
on any employee other than Mr. Gardner. We cannot assure you that we will be
able to continue to attract and retain the qualified personnel necessary for the
development of our business. The unexpected loss of services of our
key personnel could have a material adverse impact on its business because of
their skills, knowledge of our market, years of industry experience and the
difficulty of promptly finding qualified replacement personnel. In
addition, recent regulatory proposals and guidance relating to compensation may
negatively impact our ability to retain and attract skilled
personnel.
Potential
acquisitions may disrupt our business and dilute stockholder value.
We
evaluate merger and acquisition opportunities and conduct due diligence
activities related to possible transactions with other financial institutions on
an ongoing basis. As a result, merger or acquisition discussions and,
in some cases, negotiations may take place and future mergers or acquisitions
involving cash, debt or equity securities may occur at any
time. Acquisitions typically involve the payment of a premium over
book and market values, and, therefore, some dilution of our stock’s tangible
book value and net income per common share may occur in connection with any
future transaction. Furthermore, failure to realize the expected
revenue increases, cost savings, increases in geographic or product presence,
and/or other projected benefits from an acquisition could have a material
adverse effect on our financial condition and results of
operations.
We may
seek merger or acquisition partners that are culturally similar and have
experienced management and possess either significant market presence or have
potential for improved profitability through financial management, economies of
scale or expanded services. We do not currently have any specific
plans, arrangements or understandings regarding such expansion. We
cannot say with any certainty that we will be able to consummate, or if
consummated, successfully integrate future acquisitions or that we will not
incur disruptions or unexpected expenses in integrating such acquisitions. In
attempting to make such acquisitions, we anticipate competing with other
financial institutions, many of which have greater financial and operational
resources. Acquiring other banks, businesses, or branches involves
various risks commonly associated with acquisitions, including, among other
things:
•
Potential exposure to unknown or contingent liabilities of the target
company;
•
Exposure to potential asset quality issues of the target company;
•
Difficulty and expense of integrating the operations and personnel of the target
company;
•
Potential disruption to our business;
•
Potential diversion of management’s time and attention;
• The
possible loss of key employees and customers of the target company;
•
Difficulty in estimating the value of the target company; and
•
Potential changes in banking or tax laws or regulations that may affect the
target company.
We
may in the future engage in FDIC-assisted transactions, which could present
additional risks to our business.
In the
current economic environment, and subject to any requisite regulatory consent,
we may potentially be presented with opportunities to acquire the assets and
liabilities of failed banks in FDIC-assisted transactions. These
acquisitions involve risks similar to acquiring existing banks even though the
FDIC might provide assistance to mitigate certain risks such as sharing in
exposure to loan losses and providing indemnification against certain
liabilities of the failed institution. However, because these
acquisitions are structured in a manner that would not allow us the time
normally associated with preparing for and evaluating an acquisition, including
preparing for integration of an acquired institution, we may face additional
risks if we engage in FDIC-assisted transactions. These risks include, among
other things, the loss of customers, strain on management resources related to
collection and management of problem loans and problems related to integration
of personnel and operating systems. If we engage in FDIC assisted transactions,
we may not be successful in overcoming these risks or any other problems
encountered in connection with these transactions. Our inability to overcome
these risks could have an adverse effect on our ability to achieve our business
strategy and maintain our market value and profitability.
Moreover,
even if we were inclined to participate in an FDIC-assisted transaction, there
are no assurances that the FDIC would allow us to participate or what the terms
of such transaction might be or whether we would be successful in acquiring the
bank or assets that we are seeking. We may be required to raise
additional capital as a condition to, or as a result of, participation in an
FDIC-assisted transaction. Any such transactions and related
issuances of stock may have a dilutive effect on earnings per share and share
ownership.
Furthermore,
to the extent we are allowed to, and choose to, participate in FDIC-assisted
transactions, we may face competition from other financial institutions with
respect to the proposed FDIC-assisted transactions. To the extent that our
competitors are selected to participate in FDIC-assisted transactions, our
ability to identify and attract acquisition candidates and/or make acquisitions
on favorable terms may be adversely affected.
Higher
FDIC deposit insurance premiums and assessments could adversely affect our
financial condition.
FDIC
insurance premiums have increased substantially in 2009, and we expect to pay
significantly higher FDIC premiums in the future. As the large number of recent
bank failures continues to deplete the Deposit Insurance Fund, the FDIC adopted
a revised risk-based deposit insurance assessment schedule in February 2009,
which raised deposit insurance premiums. The FDIC also implemented a five basis
point special assessment of each insured depository institution’s assets minus
Tier 1 capital as of December 31, 2009, which special assessment amount was
capped at 10 basis points times the institution’s assessment base for the second
quarter of 2009. The amount of our special assessment was $360,000. In addition,
the FDIC recently announced a final rule that required financial institutions,
such as the Bank, to prepay in December 2009 their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010
through and including 2012 in order to re-capitalize the Deposit Insurance Fund.
The final rule also provides for increasing the FDIC assessment rates by three
basis points effective January 1, 2011.
A
natural disaster or recurring energy shortage, especially in California, could
harm our business.
We are
based in Costa Mesa, California, and approximately 93% of our total loan
portfolio was secured by real estate located in Southern California at December
31, 2009. In addition, the computer systems that operate our Internet websites
and some of their back-up systems are located in Costa Mesa, California.
Historically, California has been vulnerable to natural disasters. Therefore, we
are susceptible to the risks of natural disasters, such as earthquakes,
wildfires, floods and mudslides. Natural disasters could harm our operations
directly through interference with communications, including the interruption or
loss of our websites, which would prevent us from gathering deposits,
originating loans and processing and controlling our flow of business, as well
as through the destruction of facilities and our operational, financial and
management information systems. A natural disaster or recurring power outages
may also impair the value of our largest class of assets, our loan portfolio,
which is comprised substantially of real estate loans. Uninsured or underinsured
disasters may reduce borrowers’ ability to repay mortgage loans. Disasters may
also reduce the value of the real estate securing our loans, impairing our
ability to recover on defaulted loans through foreclosure and making it more
likely that we would suffer losses on defaulted loans. California has also
experienced energy shortages, which, if they recur, could impair the value of
the real estate in those areas affected. Although we have implemented several
back-up systems and protections (and maintain business interruption insurance),
these measures may not protect us fully from the effects of a natural disaster.
The occurrence of natural disasters or energy shortages in California could have
a material adverse effect on our business prospects, financial condition and
results of operations.
Liquidity risk could impair our
ability to fund our operations and jeopardize its financial
condition.
Liquidity
is essential to our business. An inability to raise funds through
deposits, borrowings, equity/debt offerings and other sources could have a
substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities, or on terms attractive to
us, could be impaired by factors that affect us specifically or the financial
services industry in general. Factors that could detrimentally impact
our access to liquidity sources include a reduction in our credit ratings, if
any, an increase in costs of capital in financial capital markets, a decrease in
the level of our business activity due to a market downturn or adverse
regulatory action against us, or a decrease in depositor or investor
confidence. Our ability to borrow could also be impaired by factors
such as a severe disruption of the financial markets or negative views and
expectations about the prospects for the financial services industry as a
whole.
Risks
Related to Ownership of Our Common Stock
The
price of our common stock may fluctuate significantly, and this may make it
difficult for you to resell your shares of common stock at times or at prices
you find attractive.
Stock
price volatility may make it difficult for you to resell your common stock when
you want and at prices you find attractive. Our stock price can
fluctuate significantly in response to a variety of factors including, among
other things:
·
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Actual
or anticipated variations in quarterly results of
operations;
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Recommendations
by securities analysts;
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Operating
and stock price performance of other companies that investors deem
comparable to us;
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News
reports relating to trends, concerns and other issues in the financial
services industry, including the failures of other financial institutions
in the current economic downturn;
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Perceptions
in the marketplace regarding us and/or our
competitors;
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New
technology used, or services offered, by
competitors;
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Significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our
competitors;
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Failure
to integrate acquisitions or realize anticipated benefits from
acquisitions;
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Changes
in government regulations; and
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·
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Geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
|
General market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause our stock price to decrease
regardless of operating results as evidenced by the current volatility and
disruption of capital and credit markets.
Only
a limited trading market exists for our common stock, which could lead to
significant price volatility.
Our
common stock is traded on the NASDAQ Global Market under the trading symbol
“PPBI,” but there is low trading volumes in our common stock. The
limited trading market for our common stock may cause fluctuations in the market
value of our common stock to be exaggerated, leading to price volatility in
excess of that which would occur in a more active trading market of our common
stock. Future sales of substantial amounts of common stock in the
public market, or the perception that such sales may occur, could adversely
affect the prevailing market price of the common stock. In addition,
even if a more active market in our common stock develops, we cannot assure you
that such a market will continue.
Upon
exercise by certain stockholders of warrants for our common stock, stockholders
will experience significant dilution in their shares of common
stock.
We have
issued warrants to certain stockholders representing the right to purchase
966,400 shares of our common stock at an exercise price of $0.75 per share
outstanding as of December 31, 2009. The aggregate number of shares
of our common stock subject to these warrants represents approximately 9.6% of
our issued and outstanding shares as of December 31, 2009. The
trading price of our common stock has been significantly higher than the
exercise price of the warrants for the last three consecutive fiscal
years. Upon exercise of the warrants, existing stockholders will
experience significant dilution on the shares of our common stock that they
hold.
We
do not expect to pay cash dividends in the foreseeable future.
We do not
intend to pay cash dividends on our common stock in the foreseeable
future. Instead, we intend to reinvest our earnings in our
business. In addition, in order to pay cash dividends to our
stockholders, we would most likely need to obtain funds from the
Bank. The Bank’s ability, in turn, to pay dividends to us is subject
to restrictions set forth in the California Financial Code. The California
Financial Code provides that a bank may not make a cash distribution to its
stockholders in excess of the lesser of (1) a bank’s retained earnings; or (2) a
bank’s net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of the bank
to the stockholders of the bank during such period. However, a bank may, with
the approval of the DFI, make a distribution to its stockholders in an amount
not exceeding the greatest of (a) its retained earnings; (b) its net income for
its last fiscal year; or (c) its net income for its current fiscal year. In the
event that Bank regulators determine that the stockholders’ equity of a bank is
inadequate or that the making of a distribution by the bank would be unsafe or
unsound, the regulators may order the bank to refrain from making a proposed
distribution. The payment of dividends could, depending on the financial
condition of the Bank, be deemed to constitute an unsafe or unsound
practice. Under these provisions, the amount available for
distribution from the Bank to the Corporation was approximately $3.1 million at
December 31, 2009.
Approval
of the Federal Reserve is required for payment of any dividend by a state
chartered bank that is a member of the Federal Reserve Board System, such as
Pacific Premier Bank, if the total of all dividends declared by the bank in any
calendar year would exceed the total of its retained net income for that year
combined with its retained net income for the preceding two ears. In
addition, a state member bank may not pay a dividend in an amount greater than
it undivided profits without regulatory and stockholder approval. The
Bank is also prohibited under federal law from paying any dividend that would
cause it to become undercapitalized.
Anti-takeover
defenses may delay or prevent future transactions
Our
Certificate of Incorporation and Bylaws, among other things:
·
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divide
the board of directors into three classes with directors of each class
serving for a staggered three year
period;
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provide
that our directors must fill vacancies on the board of
directors;
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permit
the issuance, without stockholder approval, of shares of preferred stock
having rights and preferences determined by the board of
directors;
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provide
that stockholders holding 80% of our issued and outstanding shares must
vote to approve certain business combinations and other transactions
involving holders of more than 10% of our common stock or our
affiliates;
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provide
that stockholders holding 80% of our issued and outstanding shares must
vote to remove directors for cause;
and
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provide
that record holders of our common stock who beneficially own in excess of
10% of our common stock are not entitled to vote shares held by them in
excess of 10% of our common stock.
|
These
provisions in our Certificate of Incorporation and Bylaws could make the removal
of incumbent directors more difficult and time-consuming and may have the effect
of discouraging a tender offer or other takeover attempts not previously
approved by our board of directors.
None
Net
Book Value of
|
|||||||
Original
Year
|
Date
of
|
Property
or Leasehold
|
|||||
Leased
or
|
Leased
or
|
Lease
|
Improvements
at
|
||||
Location
|
Owned
|
Acquired
|
Expiration
|
December
31, 2009
|
|||
|
|||||||
Corporate
Headquarters:
|
|||||||
1600
Sunflower Ave
|
|||||||
Costa
Mesa, CA 92626
|
Owned
(a)
|
2002
|
N.A.
|
$ | 2,991,000 | ||
|
|||||||
Branch
Office:
|
|||||||
1598
E Highland Avenue
|
|||||||
San
Bernardino, CA 92404
|
Leased
|
1986
|
2015
|
$ | 361,000 | ||
|
|||||||
Branch
Office:
|
|||||||
19011
Magnolia Avenue
|
|||||||
Huntington
Beach, CA 92646
|
Owned
(b) (c)
|
2005
|
2023
|
$ | 1,348,000 | ||
|
|||||||
Branch
Office:
|
|||||||
13928
Seal Beach Blvd.
|
|||||||
Seal
Beach, CA 90740
|
Leased
|
1999
|
2012
|
$ | 16,000 | ||
Branch
Office:
|
|||||||
4957
Katella Avenue, Suite B
|
|||||||
Los
Alamitos, CA 90720
|
Leased
|
2005
|
2015
|
$ | 254,000 | ||
Branch
Office:
|
|||||||
4667
MacArthur Blvd.
|
|||||||
Newport
Beach, CA 92660
|
Leased
|
2005
|
2016
|
$ | 641,000 | ||
(a)
We lease to three tenants approximately 11,050 square feet of the 36,159
square feet of our corporate headquarters for $16,262 per
month.
|
|||||||
(b)
The building is owned, but the land is leased on a long-term
basis.
|
|||||||
(c)
We lease to two tenants approximately 2,724 square feet of the 9,937
square feet of our Huntington Beach branch for $7,491 per
month.
|
All of
our existing facilities are considered to be adequate for our present and
anticipated future use. In the opinion of management, all properties
are adequately covered by insurance.
In
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, interest
thereon, 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 and punitive damages. In March 2005, the Bank’s motion for
dismissal due to limitations was denied by the trial court without
comment. The Bank’s “preemption” motion was denied in August 2006.
The Bank has answered the plaintiffs’ complaint and the parties have exchanged
and answered initial discovery requests. When the record is more
fully developed, the Bank intends to raise the limitations issue again in the
form of a motion for summary judgment.
The
Company is not involved in any other material 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.
PRICE
RANGE BY QUARTERS
The
common stock of the Corporation has been publicly traded since 1997 and is
currently traded on the NASDAQ Global Market under the symbol
PPBI. However, until recently, trading in the common stock has not
been extensive and such trades cannot be characterized as constituting an active
trading market.
As of
March 10, 2010, there were approximately 1,200 holders of record of the common
stock. The following table summarizes the range of the high and low
closing sale prices per share of our common stock as quoted by the NASDAQ Global
Market for the periods indicated.
Sale
Price of Common Stock
|
|||||||||||
High
|
Low
|
||||||||||
2008
|
|||||||||||
First
Quarter
|
$ | 8.55 | $ | 5.97 | |||||||
Second
Quarter
|
$ | 8.37 | $ | 5.11 | |||||||
Third
Quarter
|
$ | 6.21 | $ | 3.61 | |||||||
Fourth
Quarter
|
$ | 5.25 | $ | 3.40 | |||||||
2009
|
|||||||||||
First
Quarter
|
$ | 4.60 | $ | 2.79 | |||||||
Second
Quarter
|
$ | 5.63 | $ | 3.85 | |||||||
Third
Quarter
|
$ | 5.10 | $ | 3.98 | |||||||
Fourth
Quarter
|
$ | 4.76 | $ | 3.15 |
Stock Performance
Graph. The graph below compares the performance of our common
stock with that of the NASDAQ Composite Index (U.S. companies) and the NASDAQ
Bank Stocks Index from December 31, 2004 through December 31,
2009. The graph is based on an investment of $100 in our common stock
at its closing price on December 31, 2004. The Corporation has not paid any
dividends on its common stock.
Total
Return Analysis
|
12/31/2004
|
12/3/2005
|
12/31/2006
|
12/31/2007
|
12/30/2008
|
12/29/2009
|
||||||||||||||||||
Pacific
Premier Bancorp, Inc.
|
$ | 100.00 | $ | 88.99 | $ | 91.86 | $ | 50.11 | $ | 30.17 | $ | 25.49 | ||||||||||||
NASDAQ
Bank Stocks Index
|
$ | 100.00 | $ | 97.69 | $ | 109.64 | $ | 86.90 | $ | 63.36 | $ | 53.09 | ||||||||||||
NASDAQ
Composite Index
|
$ | 100.00 | $ | 102.13 | $ | 112.19 | $ | 121.68 | $ | 58.64 | $ | 84.28 |
DIVIDENDS
It is our
policy to retain earnings, if any, to provide funds for use in our
business. We have never declared or paid dividends on our common
stock and do not anticipate declaring or paying any cash dividends in the
foreseeable future.
Our
ability to pay dividends on our common stock is dependent on the Bank’s ability
to pay dividends to the Company. Various statutory provisions restrict the
amount of dividends that the Bank can pay without regulatory
approval. For information on the statutory and regulatory limitations
on the ability of the Company to pay dividends to its stockholders and on the
Bank to pay dividends to the Corporation, see “Item 1. Business-Supervision
and Regulation—Dividends” and “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Liquidity.”
ISSUER
PURCHASES OF EQUITY SECURITIES
In
February 2007, our board of directors authorized the management of the Company
to purchase and retain up to 600,000 shares of our issued and outstanding common
stock on a negotiated, non-open market basis by dealing directly with investment
bankers representing stockholders of larger blocks of stock. The plan
has no expiration date and remains open. No determination has been
made to terminate the plan or to cease making purchases. At December
31, 2009, the Corporation had purchased 432,837 shares pursuant to that
authorization.
The
following table provides information with respect to purchases made by or on
behalf of us or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934) of the our common stock during the
fourth quarter of 2009.
Month
of Purchase
|
Total
Number of shares purchased/ returned
|
Average
price paid per share
|
Total
number of shares repurchased as part of the publicly announced
program
|
Maximum
number of shares that may yet be purchased under the program at end of
month
|
||||||||||||
Oct-09
|
- | - | - | 167,163 | ||||||||||||
Nov-09
|
- | - | - | 167,163 | ||||||||||||
Dec-09
|
- | - | - | 167,163 | ||||||||||||
Total/Average
|
- | $ | - | - | 167,163 |
The
selected financial data presented below is derived from the audited consolidated
financial statements of the Company and should be read in conjunction with the
Consolidated Financial Statements presented elsewhere herein.
For
the Years Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Operating
Data:
|
(dollars
in thousands)
|
|||||||||||||||||||
Interest
income
|
$ | 43,439 | $ | 46,522 | $ | 49,432 | $ | 44,128 | $ | 33,707 | ||||||||||
Interest
expense
|
20,254 | 25,404 | 31,166 | 27,003 | 16,571 | |||||||||||||||
Net
interest income
|
23,185 | 21,118 | 18,266 | 17,125 | 17,136 | |||||||||||||||
Provision
for loan losses
|
7,735 | 2,241 | 1,651 | 531 | 349 | |||||||||||||||
Net
interest income after provision for loans losses
|
15,450 | 18,877 | 16,615 | 16,594 | 16,787 | |||||||||||||||
Net
gains (losses) from loan sales
|
(351 | ) | 92 | 3,720 | 3,697 | 590 | ||||||||||||||
Other
noninterest income (loss)
|
1,048 | (2,264 | ) | 2,639 | 2,818 | 3,540 | ||||||||||||||
Noninterest
expense
|
16,694 | 15,964 | 17,248 | 15,231 | 12,260 | |||||||||||||||
Income
(loss) before income tax (benefit)
|
(547 | ) | 741 | 5,726 | 7,878 | 8,657 | ||||||||||||||
Income
tax (benefit) (1)
|
(87 | ) | 33 | 2,107 | 450 | 1,436 | ||||||||||||||
Net
income (loss)
|
$ | (460 | ) | $ | 708 | $ | 3,619 | $ | 7,428 | $ | 7,221 |
As
of and For the Years Ended December 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Share
Data:
|
(dollars
in thousands, except per share data)
|
|||||||||||||||||||
Net
income (loss) per share:
|
||||||||||||||||||||
Basic
|
$ | (0.08 | ) | $ | 0.14 | $ | 0.70 | $ | 1.41 | $ | 1.37 | |||||||||
Diluted
|
$ | (0.08 | ) | $ | 0.11 | $ | 0.55 | $ | 1.11 | $ | 1.08 | |||||||||
Weighted
average common shares outstanding:
|
||||||||||||||||||||
Basic
|
5,642,589 | 4,948,359 | 5,189,104 | 5,261,897 | 5,256,906 | |||||||||||||||
Diluted
|
5,642,589 | 6,210,387 | 6,524,753 | 6,684,915 | 6,658,240 | |||||||||||||||
Book
value per share (basic)
|
$ | 7.33 | $ | 11.74 | $ | 11.77 | $ | 11.03 | $ | 9.67 | ||||||||||
Book
value per share (diluted)
|
$ | 6.75 | $ | 9.60 | $ | 9.69 | $ | 9.16 | $ | 8.09 | ||||||||||
Selected Balance Sheet
Data:
|
||||||||||||||||||||
Total
assets
|
$ | 807,323 | $ | 739,956 | $ | 763,420 | $ | 730,874 | $ | 702,696 | ||||||||||
Securities
and FHLB stock
|
137,737 | 70,936 | 73,042 | 77,144 | 49,795 | |||||||||||||||
Loans
held for sale, net (2)
|
- | 668 | 749 | 795 | 456 | |||||||||||||||
Loans
held for investment, net (2)
|
566,584 | 622,470 | 622,114 | 604,304 | 602,937 | |||||||||||||||
Allowance
for loan losses
|
8,905 | 5,881 | 4,598 | 3,543 | 3,050 | |||||||||||||||
Total
deposits
|
618,734 | 457,128 | 386,735 | 339,449 | 327,936 | |||||||||||||||
Total
borrowings (3)
|
91,500 | 220,210 | 308,275 | 326,801 | 318,145 | |||||||||||||||
Total
stockholders' equity
|
73,502 | 57,548 | 60,750 | 58,038 | 50,542 | |||||||||||||||
Performance
Ratios: (4)
|
||||||||||||||||||||
Return
on average assets (5)
|
(0.06 | )% | 0.09 | % | 0.50 | % | 1.07 | % | 1.18 | % | ||||||||||
Return
on average equity (6)
|
(0.76 | )% | 1.20 | % | 6.03 | % | 13.47 | % | 15.17 | % | ||||||||||
Average
equity to average assets
|
7.74 | % | 7.96 | % | 8.16 | % | 7.94 | % | 7.78 | % | ||||||||||
Equity
to total assets at end of period
|
9.10 | % | 7.78 | % | 7.96 | % | 7.94 | % | 7.19 | % | ||||||||||
Average
interest rate spread (7)
|
3.00 | % | 2.81 | % | 2.44 | % | 2.39 | % | 2.70 | % | ||||||||||
Net
interest margin (8)
|
3.12 | % | 2.99 | % | 2.63 | % | 2.58 | % | 2.88 | % | ||||||||||
Efficiency
ratio (9)
|
63.81 | % | 83.66 | % | 69.87 | % | 64.26 | % | 57.72 | % | ||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
|
104.21 | % | 105.01 | % | 104.20 | % | 104.83 | % | 106.41 | % | ||||||||||
Capital
Ratios: (10)
|
||||||||||||||||||||
Tier
1 capital to adjusted total assets
|
9.72 | % | 8.71 | % | 8.81 | % | 8.38 | % | 7.79 | % | ||||||||||
Tier
1 capital to total risk-weighted assets
|
13.30 | % | 10.71 | % | 10.68 | % | 10.94 | % | 11.21 | % | ||||||||||
Total
capital to total risk-weighted assets
|
14.55 | % | 11.68 | % | 11.44 | % | 11.55 | % | 11.78 | % | ||||||||||
Capital
Ratios: (11)
|
||||||||||||||||||||
Tier
1 capital to adjusted total assets
|
9.89 | % | 8.99 | % | 8.90 | % | N/A | N/A | ||||||||||||
Tier
1 capital to total risk-weighted assets
|
13.41 | % | 11.11 | % | 10.81 | % | N/A | N/A | ||||||||||||
Total
capital to total risk-weighted assets
|
14.67 | % | 12.07 | % | 11.56 | % | N/A | N/A | ||||||||||||
Asset
Quality Ratios:
|
||||||||||||||||||||
Nonperforming
loans, net, to total loans (12)
|
1.74 | % | 0.83 | % | 0.67 | % | 0.09 | % | 0.25 | % | ||||||||||
Nonperforming
assets, net as a percent of total assets (13)
|
1.66 | % | 0.71 | % | 0.64 | % | 0.10 | % | 0.24 | % | ||||||||||
Net
charge-offs to average net loans
|
0.79 | % | 0.16 | % | 0.10 | % | 0.01 | % | (0.01 | )% | ||||||||||
Allowance
for loan losses to total loans at period end
|
1.55 | % | 0.94 | % | 0.73 | % | 0.58 | % | 0.50 | % | ||||||||||
Allowance
for loan losses as a percent of nonperforming loans at period end
(12)
|
88.94 | % | 113.10 | % | 109.48 | % | 558.83 | % | 180.79 | % |
----------
(1)
|
In
the years ended December 31, 2006 and December 31, 2005, we reversed $2.4
million and $1.6 million, respectively, of our deferred tax valuation
allowance due to our improved financial
outlook.
|
(2)
|
Loans
are net of the allowance for loan losses and deferred
fees.
|
(3)
|
Includes
$10.3 million of junior subordinated debentures in all periods
disclosed.
|
(4)
|
All
average balances consist of average daily
balances.
|
(5)
|
Net
income divided by total average
assets.
|
(6)
|
Net
income divided by average stockholders'
equity.
|
(7)
|
Represents
the weighted average yield on interest-earning assets less the weighted
average cost of interest-bearing
liabilities.
|
(8)
|
Represents
net interest income as a percent of average interest-earning
assets.
|
(9)
|
Represents
the ratio of noninterest expense less other real estate owned operations,
gain/(loss) on sale of loans, and gain/(loss) on sale of securities, net
to the sum of net interest income before provision for loan losses and
total noninterest income.
|
(10)
|
Calculated
with respect to the Bank.
|
(11)
|
Calculated
with respect to the Company. Years prior to 2007 are not
applicable due to change in the Bank’s charter to that of a commercial
bank in March 2007.
|
(12)
|
Nonperforming
loans consist of loans past due 90 days or more and of loans where, in the
opinion of management, there is reasonable doubt as to the collection of
interest.
|
(13)
|
Nonperforming
assets consist of nonperforming loans (see footnote 12 above) and other
real estate owned.
|
Summary
Our
principal business is attracting deposits from small businesses and consumers
and investing those deposits together with funds generated from operations and
borrowings, primarily in commercial business loans and various types of
commercial real estate loans. In 2010, the Company expects to fund
substantially all of the loans that it originates or purchases through deposits,
FHLB advances and internally generated funds. Deposit flows and cost
of funds are influenced by prevailing market rates of interest primarily on
competing investments, account maturities and the levels of savings in the
Company’s market area. The Company’s ability to originate and
purchase loans is influenced by the general level of product
available. The Company’s results of operations are also affected by
the Company’s provision for loan losses and the level of operating expenses. The
Company’s operating expenses primarily consist of employee compensation and
benefits, premises and occupancy expenses, and other general expenses. The Company's results
of operations are also affected by prevailing economic conditions, competition,
government policies and other actions of regulatory agencies.
Critical
Accounting Policies
We have
established various accounting policies that govern the application of
accounting principles generally accepted in the United States of America in the
preparation of the Company’s financial statements in Item 8 hereof. The
Company’s significant accounting policies are described in the Note 1 to the
Consolidated Financial Statements. Certain accounting policies require
management to make estimates and assumptions that 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.
We
consider the allowance for loan losses to be a critical accounting policy that
requires judicious estimates and assumptions in the preparation of the Company’s
financial statements that are particularly susceptible to significant change.
For further information, see “Business—Allowances for Loan Losses” and
Note 1 to the Consolidated Financial Statements in Item 8
hereof.
Operating
Results
General. For the year
ended December 31, 2009, the Company reported net loss of $460,000 or $0.08 per
diluted share, compared with net income of $0.7 million or $0.11 per diluted
share for the same period in 2008.
The $1.3 million decrease in the Company’s pre-tax income/(loss) for 2009
compared to 2008 was due primarily to:
·
|
A
$5.5 million increase in provision for loan losses;
and
|
·
|
A
$0.7 million increase in noninterest expense, primarily associated with
higher costs related to Federal Deposit Insurance Corporation (“FDIC”)
insurance premiums, other real estate owned operations, net and
professional fees, partially offset by lower compensation and benefits
expense.
|
Offsetting
the above items were the following:
·
|
A
$2.1 million increase in net interest income due to a higher level of
interest earning assets and a higher net interest margin;
and
|
·
|
A
$2.9 million favorable change in noninterest income (loss) category,
primarily associated with a lower OTTI charge taken on private label
securities in 2009 and higher deposit fee income, partially offset by
lower loan servicing fee income and losses on loan sales, compared to
gains in the prior year.
|
For 2009,
our return on average assets was a negative 0.06% and our return on average
equity was a negative 0.76%. These compare to our 2008 returns of
0.09% on average assets and 1.20% on average equity.
For the
year ended December 31, 2008, the Company reported net income of $0.7 million or
$0.11 per diluted share, compared with net income of $3.6 million or $0.55 per
diluted share for the same period in 2007. The $2.9 million, or
80.6%, decrease in net income in 2008 compared to 2007 was primarily the result
of a charge of $3.6 million (pre-tax), or $0.34 per diluted shares (after-tax),
associated with the termination of the mutual funds investment held by the
Company and of an OTTI charge of $1.3 million, or $0.13 per diluted share
(after-tax), that was recorded on private label MBSs that the Company received
when it redeemed its shares in the mutual funds in the second quarter of
2008.
Net Interest
Income. Our primary source of revenue is net interest income,
which is the difference between the interest and dividends earned on loans,
mortgage-backed securities and investment securities (“interest-earning assets”)
and the interest paid on deposits and borrowings (“interest-bearing
liabilities”). The difference between the yield on interest-earning
assets and the cost of interest-bearing liabilities (“net interest rate spread”)
and the relative dollar amount of these assets and liabilities principally
affects our net interest income.
Net
interest income totaled $23.2 million in 2009, up $2.1 million or 9.8% from
2008. The increase reflected a $36.8 million or 5.2% increase in average
interest-earning assets to $743.6 million and an increase of 13 basis points in
the net interest margin to 3.12% in 2009. The increase in 2009 from a
year ago primarily reflected the average costs on interest-bearing liabilities
decreasing more rapidly than the average yield on interest-earning
assets. The slower decline in interest-earning assets was primarily
due to interest rate floors we have on our adjustable rate loans, which allowed
only a 16 basis point decrease in yield. In contrast, our cost of
funds declined 94 basis points, primarily due to a decrease in market interest
rates that lowered our deposit rates by 113 basis points. The lower
yield on our interest-earning assets was also unfavorably impacted by a lower
yield on our investment securities of 141 basis points. This decline
was primarily due to our decision to reduce the credit risk exposure in the
securities portfolio by selling private label securities with higher credit risk
and replacing them with lower yielding, lower credit risk GSE
securities. These GSE securities also enhanced our regulatory capital
as they have a lower asset risk weighting than the private label
securities.
Net
interest income was $21.1 million in 2008, up $2.8 million from $18.3 million in
2007. Interest income for 2008 was $46.5 million, compared to $49.4
million for 2007. The decrease of $2.9 million or 5.9% was primarily due to
interest income on loans receivable decreasing $3.1 million in 2008. This
decrease was primarily the result of a decrease in the average yield of 51 basis
points primarily due to the repricing of our short-term adjustable-rate income
property loans as general market interest rates declined during 2008. Interest
expense in 2008 was $25.4 million, compared to $31.2 million in 2007. The $5.8
million, or 18.5%, decrease was primarily due to a decrease of 90 basis points
in the average cost of interest-bearing liabilities resulting from the lower
interest rate environment during 2008.
The
following table presents for the years indicated the average dollar amounts from
selected balance sheet categories calculated from daily average balances and the
total dollar amount, including adjustments to yields and costs, of:
·
|
Interest
income earned from average interest-earning assets and the resultant
yields; and
|
·
|
Interest
expense incurred from average interest-bearing liabilities and resultant
costs, expressed as rates.
|
The table also sets forth
our net interest income, net interest rate spread and net interest rate margin
for the years indicated. The net interest rate margin reflects the
relative level of interest-earning assets to interest-bearing liabilities and
equals our net interest rate spread divided by average interest-earning assets
for the year.
For
the Year Ended December 31,
|
||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
Average
Balance
|
Interest
|
Average
Yield/Cost
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
Average
Balance
|
Interest
|
Average
Yield/Cost
|
||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 52,544 | $ | 122 | 0.23 | % | $ | 7,288 | $ | 34 | 0.47 | % | $ | 432 | $ | 78 | 18.06 | % | ||||||||||||||||||
Federal
funds sold
|
3,000 | 8 | 0.27 | % | 1,081 | 22 | 2.04 | % | 1,448 | 72 | 4.97 | % | ||||||||||||||||||||||||
Investment
securities
|
93,606 | 3,739 | 3.99 | % | 80,906 | 4,365 | 5.40 | % | 76,080 | 4,010 | 5.27 | % | ||||||||||||||||||||||||
Loans
receivable, net (1)
|
594,483 | 39,570 | 6.66 | % | 617,569 | 42,101 | 6.82 | % | 617,528 | 45,272 | 7.33 | % | ||||||||||||||||||||||||
Total
interest-earning assets
|
743,633 | 43,439 | 5.84 | % | 706,844 | 46,522 | 6.58 | % | 695,488 | 49,432 | 7.11 | % | ||||||||||||||||||||||||
Noninterest-earning
assets
|
36,146 | 32,612 | 39,326 | |||||||||||||||||||||||||||||||||
Total
assets
|
$ | 779,779 | $ | 739,456 | $ | 734,814 | ||||||||||||||||||||||||||||||
Liabilities
and Equity:
|
||||||||||||||||||||||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
Transaction
accounts
|
$ | 130,594 | 1,429 | 1.09 | % | $ | 96,917 | 1,448 | 1.49 | % | $ | 94,220 | 1,773 | 1.88 | % | |||||||||||||||||||||
Certificates
of deposit
|
416,518 | 11,618 | 2.79 | % | 314,603 | 13,005 | 4.13 | % | 272,176 | 13,848 | 5.09 | % | ||||||||||||||||||||||||
Total
interest-bearing deposits
|
547,112 | 13,047 | 2.38 | % | 411,520 | 14,453 | 3.51 | % | 366,396 | 15,621 | 4.26 | % | ||||||||||||||||||||||||
FHLB
advances and other borrowings
|
156,153 | 6,839 | 4.38 | % | 251,281 | 10,302 | 4.10 | % | 290,749 | 14,723 | 5.06 | % | ||||||||||||||||||||||||
Subordinated
debentures
|
10,310 | 368 | 3.57 | % | 10,310 | 649 | 6.29 | % | 10,310 | 822 | 7.97 | % | ||||||||||||||||||||||||
Total
interest-bearing liabilities
|
713,575 | 20,254 | 2.84 | % | 673,111 | 25,404 | 3.77 | % | 667,455 | 31,166 | 4.67 | % | ||||||||||||||||||||||||
Noninterest-bearing
liabilities
|
5,887 | 7,495 | 7,363 | |||||||||||||||||||||||||||||||||
Total
liabilities
|
719,462 | 680,606 | 674,818 | |||||||||||||||||||||||||||||||||
Stockholders'
equity
|
60,317 | 58,850 | 59,996 | |||||||||||||||||||||||||||||||||
Total
liabilities and equity
|
$ | 779,779 | $ | 739,456 | $ | 734,814 | ||||||||||||||||||||||||||||||
Net
interest income
|
$ | 23,185 | $ | 21,118 | $ | 18,266 | ||||||||||||||||||||||||||||||
Net
interest rate spread (2)
|
3.00 | % | 2.81 | % | 2.44 | % | ||||||||||||||||||||||||||||||
Net
interest margin (3)
|
3.12 | % | 2.99 | % | 2.63 | % | ||||||||||||||||||||||||||||||
Ratio
of interest-earning assets to interest-bearing liabilities
|
104.21 | % | 105.01 | % | 104.20 | % |
----------
(1)
|
Average
balance includes loans held for sale and nonperforming loans and is net of
deferred loan origination fees, unamortized discounts and premiums, and
allowance for loan losses.
|
(2)
|
Represents
the difference between the yield on interest-earning assets and the cost
of interest-bearing liabilities.
|
(3)
|
Represents
net interest income divided by average interest-earning
assets.
|
Changes
in our net interest income are a function of changes in both volumes and rates
of interest-earning assets and interest-bearing liabilities. The
following table presents the impact the volume and rate changes have had on our
net interest income for the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, we have provided
information on changes to our net interest income with respect to:
·
|
Changes
in volume (changes in volume multiplied by prior
rate);
|
·
|
Changes
in interest rates (changes in interest rates multiplied by prior volume);
and
|
·
|
The
net change or the combined impact of volume and rate changes
allocated proportionately to changes in volume and changes in interest
rates.
|
Year
Ended December 31, 2009
|
Year
Ended December 31, 2008
|
|||||||||||||||||||||||
Compared
to
|
Compared
to
|
|||||||||||||||||||||||
Year
Ended December 31, 2008
|
Year
Ended December 31, 2007
|
|||||||||||||||||||||||
Increase
(decrease) due to
|
Increase
(decrease) due to
|
|||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
(in
thousands)
|
||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | (25 | ) | $ | 113 | $ | 88 | $ | 102 | $ | (146 | ) | $ | (44 | ) | |||||||||
Federal
funds sold
|
(30 | ) | 16 | (14 | ) | (14 | ) | (36 | ) | (50 | ) | |||||||||||||
Investment
securities
|
(1,244 | ) | 618 | (626 | ) | 259 | 96 | 355 | ||||||||||||||||
Loans
receivable, net
|
(976 | ) | (1,555 | ) | (2,531 | ) | 3 | (3,174 | ) | (3,171 | ) | |||||||||||||
Total
interest-earning assets
|
(2,275 | ) | (808 | ) | (3,083 | ) | 350 | (3,260 | ) | (2,910 | ) | |||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
Transaction
accounts
|
(446 | ) | 427 | (19 | ) | 49 | (374 | ) | (325 | ) | ||||||||||||||
Certificates
of deposit
|
(4,989 | ) | 3,603 | (1,386 | ) | 1,979 | (2,822 | ) | (843 | ) | ||||||||||||||
FHLB
advances and other borrowings
|
663 | (4,127 | ) | (3,464 | ) | (1,840 | ) | (2,581 | ) | (4,421 | ) | |||||||||||||
Subordinated
debentures
|
(281 | ) | - | (281 | ) | - | (173 | ) | (173 | ) | ||||||||||||||
Total
interest-bearing liabilities
|
(5,053 | ) | (97 | ) | (5,150 | ) | 188 | (5,950 | ) | (5,762 | ) | |||||||||||||
Changes
in net interest income
|
$ | 2,778 | $ | (711 | ) | $ | 2,067 | $ | 162 | $ | 2,690 | $ | 2,852 |
Provision for Loan
Losses. During 2009, the provision for loan losses totaled
$7.7 million, up from $2.2 million in 2008 and $1.7 million in
2007. The increase of $5.5 million in the current year provision was
primarily due to the weakness in the California economy and our recent
charge-off history, which were the dominating factors in determining our
provision and the adequacy of our allowance for loan losses during
2009. Net loan charge-offs amounted to $4.7 million, up from $1.0
million in 2008 and $0.6 million in 2007. The recent loan charge offs
we have experienced are in response to the uncertainty and recessionary
conditions in our primary markets as well as constraints on the financial
markets in which we lend. These conditions continue to adversely
affect our borrowers and their businesses and, consequently, the collateral
securing our loans.
The
increase in the 2008 provision for loan losses from 2007 of $0.6 million or
35.7% was primarily due to increases in the Company’s net charge-offs of
$370,000 and its unallocated allowance of $201,000. The increase in
the unallocated allowance is attributable to management’s expectation of the
continued weakening of the economy and the impact it has on our borrowers’
ability to repay their loans.
Noninterest
Income. Noninterest income was $0.7 million for the year ended
December 31, 2009, compared to a loss of $2.2 million for the year ended
December 31, 2008. The favorable change between years of $2.9 million
or 132.0% was primarily due to a lower loss on the sale of investments of $3.5
million, mostly associated with a loss of $3.6 million from the sale of mutual
fund investment securities in 2008, partially offset by lower loan servicing
fees of $0.5 million and an unfavorable change in losses on the sales of loans
of $443,000 in 2009.
Noninterest
income decreased $8.5 million, or 134.2%, from 2008 to 2007,
primarily due to a $1.3 million OTTI charge in 2008, the loss of $3.6 million
from the sale of the mutual fund investments in 2008 and a decrease in income
generated by loan sales of $3.6 million, compared to the same period in
2007.
Noninterest Expense.
Noninterest expense for 2009 was $16.7 million, compared to $16.0 million for
2008. The $0.7 million or 4.5% increase in noninterest expense was
principally due to increases in FDIC insurance premiums of $1.1 million and
higher expenses for other real estate owned of $259,000, which was partially
offset by decreases in compensation and benefits of $0.9 million and marketing
expenses of $117,000. The decrease in compensation and benefits
during 2009 is attributable primarily to staff reductions related to the
Company’s overall lower loan production levels in 2009. At December
31, 2009, the number of full-time equivalent employees at the Company was 89,
compared to 93 at December 31, 2008 and 105 at December 31, 2007.
Noninterest
expense for 2008 totaled $16.0 million, compared to $17.2 million for
2007. The $1.2 million, or 7.4%, decrease was primarily due to
decreases in compensation and benefits of $1.5 million and legal and audit
expenses of $204,000. The decrease in compensation and benefits for
the year is attributable primarily to staff reductions, which occurred during
the fourth quarter of 2007 and in the first quarter of 2008 related to lower
loan production levels in 2008 as compared to 2007. The decrease in
legal expense was primarily due to higher legal fees in connection with the
settlement of a lawsuit in 2007.
Income Taxes. The
Company recorded a benefit for income taxes of $87,000 in 2009, compared to a
provision for income taxes of $33,000 in 2008 and $2.1 million in
2007. The Company had loss before income taxes of $0.5 million in
2009, compared to income before income taxes of $0.7 million in 2008 and $5.7
million in 2007.
Financial
Condition
At
December 31, 2009, total assets of the Company were $807.3 million, up $67.4
million or 9.1% from total assets of $740.0 million at December 31,
2008. The increase was primarily due to increases in cash and cash
equivalents of $50.0 million and investment securities of $66.8 million
partially offset by a decrease in loans held for investment of $55.9
million.
At
December 31, 2009, total liabilities of the Company were $733.8 million,
compared to $682.4 million at December 31, 2008. The $51.4 million,
or 7.5%, increase during 2009 was primarily due to an increase in deposits of
$161.6 million to $618.7 million, partially offset by a decrease in borrowings
of $118.4 million to $101.8 million.
At
December 31, 2009, our stockholders’ equity amounted to $73.5 million, compared
to $57.5 million at December 31, 2008. The increase of $16.0 million
or 27.7% in stockholders’ equity is primarily due to a successful capital raise
in the fourth quarter of 2009. The Company raised gross proceeds of
$15.5 million from the sale of 5,030,385 shares of common stock at a public
offering price of $3.25 per share. The Company injected $14.0 million
of the proceeds from the offering into the Bank, which enhanced the Bank’s
regulatory capital ratios.
Liquidity
Our
primary sources of funds are principal and interest payments on loans, deposits,
FHLB advances and other borrowings. While maturities and scheduled amortization
of loans are a predictable source of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition. We seek to maintain a level of liquid assets to ensure a
safe and sound operation. Our liquid assets are comprised of cash and
unpledged investments. At December 31, 2009, our average liquidity
ratios was 21.57%, compared to 9.98% at December 31, 2008 and 7.20% at December
31, 2007. The liquidity ratio is calculated by dividing the sum of
cash balances plus unpledged securities by the sum of deposits that mature in
one year or less plus transaction accounts and FHLB advances. Our
liquidity is monitored daily.
We
believe the level of liquid assets is sufficient to meet current and anticipated
funding needs. At December 31, 2009, liquid assets of the Company
represented approximately 16.9% of total assets, compared to 8.5% at December
31, 2008 and 9.0% at December 31, 2007. At December 31, 2009, the
Company had five unsecured lines of credit with other correspondent banks
totaling $35.0 million to purchase federal funds as business needs
dictate. We also have a line of credit with the FHLB allowing
us to borrow up to 45% of the Bank’s total assets. At December 31,
2009, we had a borrowing capacity of $293.1 million, based on collateral pledged
at the FHLB, of which $63.0 million was outstanding. The FHLB advance
line is collateralized by eligible loan collateral and FHLB stock. At
December 31, 2009, we had approximately $483.9 million of loans pledged to
secure FHLB borrowings.
We
had no outstanding commitments to originate or purchase loans at December 31,
2009, December 31, 2008 and December 31, 2007.
At
December 31, 2009, the Company’s loan to deposit and borrowing ratio was 79.9%,
compared to 92.9% at December 31, 2008. The decline in the ratio from
year-end 2008 to 2009 was primarily associated with decreasing loan balance and
higher deposit balances that more than offset a decline in borrowings.
Certificates of deposit, which are scheduled to mature in one year or less from
December 31, 2009, totaled $297.6 million. We expect to retain a
substantial portion of the maturing certificates of deposit at
maturity.
The Company has a policy in place that
permits the purchase of brokered funds, in an amount not to exceed 5% of total
deposits, as a secondary source for funding. At December 31, 2009,
the balance of brokered time deposits was approximately $3.3
million.
The
Corporation is a company separate and apart from the Bank that must provide for
its own liquidity. The Corporation’s primary sources of liquidity are
dividends from the Bank. There are statutory and regulatory provisions that
limit the ability of the Bank to pay dividends to the
Corporation. Management believes that such restrictions will not have
a material impact on the ability of the Corporation to meet its ongoing cash
obligations.
The
Financial Code provides that a bank may not make a cash distribution to its
shareholders in excess of the lesser of a (a) bank’s retained earnings; or (b)
bank’s net income for its last three fiscal years, less the amount of any
distributions made by the bank or by any majority-owned subsidiary of the bank
to the shareholders of the bank during such period. However, a bank may, with
the approval of the DFI, make a distribution to its shareholders in an amount
not exceeding the greatest of (x) its retained earnings; (y) its net income for
its last fiscal year; or (z) its net income for its current fiscal year. In the
event that the DFI determines that the shareholders’ equity of a bank is
inadequate or that the making of a distribution by the bank would be unsafe or
unsound, the DFI may order the bank to refrain from making a proposed
distribution. Under these provisions, the amount available for
distribution from the Bank to the Corporation was approximately $3.1 million at
December 31, 2009.
In February
2010, the boards of directors of the Corporation and the Bank adopted
certain board resolutions which require, among other things, that we
provide prior written notice to the Federal Reserve Bank before (i) receiving
any dividends or other distributions from the Bank, (ii) declaring any dividends
or making any payments on trust preferred securities or subordinated debt, (iii)
making any capital distributions, (iv) incurring, increasing, refinancing
or guaranteeing any debt; (v) issuing any trust preferred securities or (iv)
repurchasing, redeeming or acquiring any of our stock.
Capital
Resources
The
Company and the Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can trigger certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material effect
on our financial condition and results of operations. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
In the
fourth quarter of 2009, the Company raised gross proceeds of $15.5 million in
capital by issuing 5,030,385 shares of its common stock at a public offering
price of $3.25 per share. The Company injected $14.0 million of the
proceeds from the offering into the Bank, which enhanced the Bank’s regulatory
capital ratios. At
December 31, 2009, the Bank’s leverage capital amounted to $78.5 million and
risk-based capital amounted to $85.9 million. At December 31, 2008, the Bank’s
leverage capital was $64.9 million and risk-based capital was $70.8
million. Pursuant to regulatory guidelines under prompt corrective
action rules, a bank must have total risk-based capital of 10.00% or greater,
Tier 1 risk-based capital of 6.00% or greater and Tier I capital to adjusted
tangible assets of 5.00% or greater to be considered ‘‘well
capitalized.’’ At December 31, 2009, the Bank’s total risk-based
capital ratio was 14.55%, Tier 1 risk-based capital ratio was 13.30% and Tier I
capital ratio was 9.72%.
Contractual
Obligations and Commitments
The Company enters into contractual
obligations in the normal course of business as a source of funds for its asset
growth and to meet required capital needs. The following schedule
summarizes maturities and payments due on our obligations and commitments,
excluding accrued interest, as of December 31, 2009:
Less
than
1
year
|
1
- 3
years
|
3
- 5
years
|
More
than
5
years
|
Total
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Contractual
Obligations:
|
||||||||||||||||||||
FHLB
borrowings
|
$ | 63,000 | $ | - | $ | - | $ | - | $ | 63,000 | ||||||||||
Other
borrowings
|
- | - | - | 28,500 | 28,500 | |||||||||||||||
Subordinated
debentures
|
- | - | - | 10,310 | 10,310 | |||||||||||||||
Certificates
of deposit
|
297,647 | 123,929 | 745 | 656 | 422,977 | |||||||||||||||
Operating
leases
|
633 | 1,253 | 1,188 | 3,371 | 6,445 | |||||||||||||||
Total
contractual cash obligations
|
$ | 361,280 | $ | 125,182 | $ | 1,933 | $ | 42,837 | $ | 531,232 |
The
following table summarizes our contractual commitments with off-balance sheet
risk as of December 31, 2009:
Commitment
Expiration by Period
|
||||||||||||||||||||
Less
than
1
year
|
1
- 3
years
|
3
- 5
years
|
More
than
5
years
|
Total
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Other
unused commitments:
|
||||||||||||||||||||
Home
equity lines of credit
|
$ | - | $ | - | $ | - | $ | 483 | $ | 483 | ||||||||||
Commercial
lines of credit
|
10,297 | 20 | - | 551 | 10,868 | |||||||||||||||
Other
lines of credit
|
200 | - | - | 163 | 363 | |||||||||||||||
Standby
letters of credit
|
1,313 | - | - | - | 1,313 | |||||||||||||||
Total
commitments
|
$ | 11,810 | $ | 20 | $ | - | $ | 1,197 | $ | 13,027 |
Impact
of Inflation and Changing Prices
Our
consolidated financial statements and related data presented in this annual
report on Form 10-K have been prepared in accordance with accounting principles
generally accepted in the United States which require the measurement of
financial position and operating results in terms of historical dollar amounts
(except with respect to securities classified as available for sale which are
carried at market value) without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike most industrial
companies, substantially all of our assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same magnitude as the price of
goods and services.
Impact
of New Accounting Standards
See Note
1 to the Consolidated Financial Statements included in Item 8 hereof for a
listing of recently issued accounting pronouncements and the impact of them on
the Company.
Asset/Liability
Management and Market Risk
Market
risk is the risk of loss or reduced earnings from adverse changes in market
prices and interest rates. Our market risk arises primarily from interest rate
risk in our lending and deposit taking activities. Interest rate risk
primarily occurs to the degree that our interest-bearing liabilities reprice or
mature on a different basis and frequency than our interest-earning assets.
Since our earnings depend primarily on our net interest income, which is the
difference between the interest and dividends earned on interest-earning assets
and the interest paid on interest-bearing liabilities, our principal objectives
are to actively monitor and manage the effects of adverse changes in interest
rates on net interest income.
In
addition to the interest rate risk associated with our lending for investment
and deposit-taking activities, we also have market risk associated with our
loans held for sale. Changes in interest rates, primarily fixed rate loans,
impact the fair value of loans held for sale. Rising interest rates
typically result in a decrease in loan market value while declining interest
rates typically result in an increase in loan market value.
Our
Asset/Liability Committee is responsible for implementing the Bank’s interest
rate risk management policy which sets forth limits established by the board of
directors of acceptable changes in net interest income and economic value of
equity (“EVE”) from specified changes in interest rates. Our
Asset/Liability Committee reviews, among other items, economic conditions, the
interest rate outlook, the demand for loans, the availability of deposits and
borrowings, and our current operating results, liquidity, capital and interest
rate exposure. Based on these reviews, our Asset/Liability Committee
formulates a strategy that is intended to implement the objectives set forth in
our business plan without exceeding the net interest income and EVE limits set
forth in our guidelines approved by our board of directors.
Interest Rate Risk
Management. The principal objective of the Company’s interest
rate risk management function is to evaluate the interest rate risk included in
certain balance sheet accounts, determine the level of appropriate risk and
manage the risk consistent with prudent asset and liability concentration
guidelines approved by our board of directors. We monitor asset and
liability maturities and repricing characteristics on a regular basis and review
various simulations and other analyses to determine the potential impact of
various business strategies in controlling the Company’s interest rate risk and
the potential impact of those strategies upon future earnings under various
interest rate scenarios. Our primary strategy in managing interest
rate risk is to emphasize the origination for investment of adjustable rate
loans or loans with relatively short maturities. Interest rates on adjustable
rate loans are primarily tied to 3-month or 6-month London Inter-Bank Offered
Rate ("LIBOR") index, 12-month moving average of yields on actively traded U.S.
Treasury securities adjusted to a constant maturity of one year ("MTA") index
and the Wall Street Journal Prime Rate (“Prime”) index. Also as part
of this strategy, we seek to lengthen our deposit maturities when deposit rates
are considered in the lower end of the interest rate cycle and shorten our
deposit maturities when deposit rates are considered in the higher end of the
interest rate cycle.
Management
monitors its interest rate risk as such risk relates to its operational
strategies. The Company’s board of directors reviews on a quarterly
basis the Company’s asset/liability position, including simulations of the
effect on the Bank’s capital in various interest rate scenarios. The
extent of the movement of interest rates, higher or lower, is an uncertainty
that could have a negative impact on the earnings of the Company. If
interest rates rise we may be subject to interest rate spread compression, which
would adversely impact our net interest income. This is primarily due to the lag
in repricing of the indices, to which our adjustable rate loans and
mortgage-backed securities are tied, as well as the repricing frequencies and
interest rate caps and floors on these adjustable rate loans and mortgage-backed
securities. The extent of the interest rate spread compression depends, among
other things, upon the frequency and severity of such interest rate
fluctuations.
Economic Value of
Equity. The Company’s interest rate sensitivity is monitored
by management through the use of a model that estimates the change in the
Company’s EVE under alternative interest rate scenarios, primarily parallel,
instantaneous and sustained movements in interest rates in 100 basis point
increments. The model computes the net present value of capital by discounting
all expected cash flows from assets, liabilities and off-balance sheet contracts
under each rate scenario. First, we estimate our net interest income for the
next twelve months and the current EVE assuming no change in interest rates from
those at period end. Once this "base-case" has been estimated, we make
calculations for each of the defined changes in interest rates, to include any
anticipated differences in the prepayment speeds of loans. We then compare those
results against the base case to determine the estimated change to net interest
income and EVE due to the changes in interest rates. An
EVE ratio, in any interest rate scenario, is defined as the EVE in that scenario
divided by the market value of assets in the same scenario. The sensitivity
measure is the decline in the EVE ratio, in basis points, caused by an increase
or decrease in rates; whichever produces a larger decline (“Sensitivity
Measure”). The higher an institution’s Sensitivity Measure is, the greater its
exposure to interest rate risk is considered to be.
The
following table shows the EVE and projected change in the EVE of the Company at
December 31, 2009, assuming an instantaneous and sustained change in market
interest rates of 100, 200, and 300 basis points ("BP"):
As
of December 31, 2009
|
||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||
EVE
as % of Portfolio
|
||||||||||||||||||||
Economic
Value of Equity
|
Value
of Assets
|
|||||||||||||||||||
Change
in Rates
|
$
Amount
|
$
Change
|
%
Change
|
EVE
Ratio
|
%
Change (BP)
|
|||||||||||||||
+300
BP
|
$ | 105,375 | $ | 15,363 | 17.1 | % | 13.06 | % |
198
BP
|
|||||||||||
+200
BP
|
102,884 | 12,872 | 14.3 | % | 12.70 | % |
162
BP
|
|||||||||||||
+100
BP
|
97,940 | 7,928 | 8.8 | % | 12.06 | % |
98
BP
|
|||||||||||||
Static
|
90,012 | -- | -- | 11.08 | % | -- | ||||||||||||||
-100
BP
|
87,103 | (2,909 | ) | (3.2 | )% | 10.67 | % |
-41
BP
|
||||||||||||
-200
BP
|
83,672 | (6,340 | ) | (7.0 | )% | 10.20 | % |
-88
BP
|
||||||||||||
-300
BP
|
80,554 | (9,458 | ) | (10.5 | )% | 9.77 | % |
-131
BP
|
Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurements. Modeling changes in EVE requires numerous assumptions that
may tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Company’s interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured. Second,
the models assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Third, the model does not take
into account the impact of the Company’s business or strategic plans on the
structure of interest-earning assets and interest-bearing liabilities. Although
the EVE measurement provides an indication of the Company’s interest rate risk
exposure at a particular point in time, such measurement is not intended
to provide a precise forecast of the effect of changes in market
interest rates on the Company’s net interest income and will differ from actual
results.
Selected Assets and
Liabilities which are Interest Rate Sensitive. The
following table provides information regarding the Company’s primary categories
of assets and liabilities that are sensitive to changes in interest rates for
the year ended December 31, 2009. The information presented reflects the
expected cash flows of the primary categories by year, including the related
weighted average interest rate. The cash flows for loans are based on maturity
and re-pricing date. The loans and MBSs that have adjustable rate features are
presented in accordance with their next interest-repricing date. Cash flow
information on interest-bearing liabilities, such as passbooks, NOW accounts and
money market accounts is also adjusted for expected decay rates, which are based
on historical information. In addition, for purposes of cash flow presentation,
premiums or discounts on purchased assets and mark-to-market adjustments are
excluded from the amounts presented. All certificates of deposit and
borrowings are presented by maturity date. The weighted average
interest rates for the various assets and liabilities presented are based on the
actual rates that existed at December 31, 2009. The degree of market
risk inherent in loans with prepayment features may not be completely reflected
in the disclosures. Although we have taken into consideration historical
prepayment trends adjusted for current market conditions to determine expected
maturity categories, changes in prepayment behavior can be triggered by changes
in variables, including market rates of interest. Unexpected changes in these
variables may increase or decrease the rate of prepayments from those
anticipated. As such, the potential loss from such market rate changes may be
significantly larger.
At
December 31, 2009
|
||||||||||||||||||||||||
Maturities
and Repricing
|
||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
||||||||||||||||||||
Year
1
|
Year
2
|
Year
3
|
Year
4
|
Year
5
|
Thereafter
|
|||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
Selected
Assets:
|
||||||||||||||||||||||||
Investments
and federal funds, other than MBS
|
$ | 14,359 | $ | - | $ | - | $ | 78 | $ | - | $ | 18,041 | ||||||||||||
Weighted
average interest rate
|
0.67 | % | 0.00 | % | 0.00 | % | 3.53 | % | 0.00 | % | 4.37 | % | ||||||||||||
Mortgage
- backed securities
|
||||||||||||||||||||||||
Fixed
rate
|
$ | - | $ | - | $ | 5,118 | $ | 4,915 | $ | - | $ | 54,396 | ||||||||||||
Weighted
average interest rate
|
0.00 | % | 0.00 | % | 1.05 | % | 3.41 | % | 0.00 | % | 3.46 | % | ||||||||||||
Mortgage
- backed securities
|
||||||||||||||||||||||||
Adjustable
rate
|
$ | - | $ | 331 | $ | - | $ | - | $ | - | $ | 40,528 | ||||||||||||
Weighted
average interest rate
|
0.00 | % | 1.70 | % | 0.00 | % | 0.00 | % | 0.00 | % | 3.51 | % | ||||||||||||
Loans
- fixed rate
|
$ | 192 | $ | 152 | $ | 2,402 | $ | 1,253 | $ | 244 | $ | 60,108 | ||||||||||||
Weighted
average interest rate
|
3.83 | % | 8.37 | % | 7.14 | % | 8.36 | % | 9.98 | % | 7.04 | % | ||||||||||||
Loans
- adjustable rate
|
$ | 254,954 | $ | 60,891 | $ | 91,738 | $ | 56,518 | $ | 16,991 | $ | 30,825 | ||||||||||||
Weighted
average interest rate
|
6.34 | % | 6.75 | % | 6.69 | % | 6.59 | % | 6.59 | % | 6.82 | % | ||||||||||||
Selected
Liabilities
|
||||||||||||||||||||||||
Interest-bearing
transaction accounts
|
$ | 195,757 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Weighted
average interest rate
|
0.93 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||
Certificates
of deposit
|
$ | 297,647 | $ | 118,720 | $ | 5,209 | $ | 607 | $ | 138 | $ | 656 | ||||||||||||
Weighted
average interest rate
|
2.09 | % | 2.37 | % | 2.72 | % | 3.94 | % | 3.38 | % | 4.01 | % | ||||||||||||
FHLB
advances
|
$ | 63,000 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Weighted
average interest rate
|
4.90 | % | - | - | - | - | - | |||||||||||||||||
Other
borrowings and subordinated debentures
|
$ | 30,310 | $ | 8,500 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Weighted
average interest rate
|
3.12 | % | 2.70 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |
The
Company does not have any direct market risk from foreign exchange or commodity
exposures.
Report of
Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Pacific
Premier Bancorp, Inc. and Subsidiaries
Costa
Mesa, California
We have
audited the accompanying consolidated statements of financial condition of
Pacific Premier Bancorp, Inc. and Subsidiaries (the “Company”) as of December
31, 2009 and 2008, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2010. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as, evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2009 and 2008, and the
results of its operations, changes in its stockholders' equity, and its cash
flows for each of the three years in the period ended December 31, 2010, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Vavrinek, Trine, Day
& Co.,
LLP
Vavrinek,
Trine, Day & Co., LLP
Certified
Public Accountants
Rancho
Cucamonga, California
March 29,
2010
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
||||||||
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
||||||||
(dollars
in thousands, except share data)
|
||||||||
|
||||||||
At
December 31,
|
||||||||
ASSETS
|
2009
|
2008
|
||||||
Cash
and due from banks
|
$ | 59,677 | $ | 8,181 | ||||
Federal
funds sold
|
29 | 1,526 | ||||||
Cash
and cash equivalents
|
59,706 | 9,707 | ||||||
Investment
securities available for sale
|
123,407 | 56,606 | ||||||
FHLB
stock/Federal Reserve Bank stock, at cost
|
14,330 | 14,330 | ||||||
Loans
held for sale, net
|
- | 668 | ||||||
Loans
held for investment, net of allowance for loan losses of $8,905 (2009) and
$5,881 (2008)
|
566,584 | 622,470 | ||||||
Accrued
interest receivable
|
3,520 | 3,627 | ||||||
Other
real estate owned
|
3,380 | 37 | ||||||
Premises
and equipment
|
8,713 | 9,588 | ||||||
Deferred
income taxes
|
11,465 | 10,504 | ||||||
Bank
owned life insurance
|
11,926 | 11,395 | ||||||
Other
assets
|
4,292 | 1,024 | ||||||
TOTAL
ASSETS
|
$ | 807,323 | $ | 739,956 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
LIABILITIES:
|
||||||||
Deposit
accounts:
|
||||||||
Noninterest
bearing
|
$ | 33,885 | $ | 29,435 | ||||
Interest
bearing:
|
||||||||
Transaction
accounts
|
161,872 | 58,861 | ||||||
Retail
certificates of deposit
|
417,377 | 341,741 | ||||||
Wholesale/brokered
certificates of deposit
|
5,600 | 27,091 | ||||||
Total
Deposits
|
618,734 | 457,128 | ||||||
FHLB
advances and other borrowings
|
91,500 | 209,900 | ||||||
Subordinated
debentures
|
10,310 | 10,310 | ||||||
Accrued
expenses and other liabilities
|
13,277 | 5,070 | ||||||
TOTAL
LIABILITIES
|
733,821 | 682,408 | ||||||
COMMITMENTS
AND CONTINGENCIES (Note 11)
|
||||||||
STOCKHOLDERS’
EQUITY
|
||||||||
Preferred
Stock, $.01 par value; 1,000,000 shares authorized; no shares
outstanding
|
- | - | ||||||
Common
stock, $.01 par value; 15,000,000 shares authorized; 10,033,836 (2009) and
4,903,451 (2008) shares issued and outstanding
|
100 | 49 | ||||||
Additional
paid-in capital
|
79,907 | 64,679 | ||||||
Accumulated
deficit
|
(4,764 | ) | (4,304 | ) | ||||
Accumulated
other comprehensive loss, net of tax of $1,218 (2009) and $2,011
(2008)
|
(1,741 | ) | (2,876 | ) | ||||
TOTAL
STOCKHOLDERS’ EQUITY
|
73,502 | 57,548 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 807,323 | $ | 739,956 |
See Notes to Consolidated Financial Statements
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
(dollars
in thousands, except per share data)
|
||||||||||||
For
the Years ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
INTEREST
INCOME
|
||||||||||||
Loans
|
$ | 39,570 | $ | 42,101 | $ | 45,272 | ||||||
Investment
securities and other interest-earning assets
|
3,869 | 4,421 | 4,160 | |||||||||
Total
interest income
|
43,439 | 46,522 | 49,432 | |||||||||
INTEREST
EXPENSE
|
||||||||||||
Interest-bearing
deposits:
|
||||||||||||
Interest
on transaction accounts
|
1,429 | 1,448 | 1,773 | |||||||||
Interest
on certificates of deposit
|
11,618 | 13,005 | 13,848 | |||||||||
Total
interest-bearing deposits
|
13,047 | 14,453 | 15,621 | |||||||||
FHLB
advances and other borrowings
|
6,839 | 10,302 | 14,723 | |||||||||
Subordinated
debentures
|
368 | 649 | 822 | |||||||||
Total
interest expense
|
20,254 | 25,404 | 31,166 | |||||||||
NET
INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
|
23,185 | 21,118 | 18,266 | |||||||||
PROVISION
FOR LOAN LOSSES
|
7,735 | 2,241 | 1,651 | |||||||||
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
15,450 | 18,877 | 16,615 | |||||||||
NONINTEREST
INCOME
|
||||||||||||
Loan
servicing fee income
|
486 | 989 | 1,056 | |||||||||
Deposit
fees
|
851 | 601 | 619 | |||||||||
Net
gain (loss) from sales of loans
|
(351 | ) | 92 | 3,720 | ||||||||
Net
gain (loss) from sales of investment securities
|
687 | (3,586 | ) | - | ||||||||
Other-than-temporary-impairment
loss on investment securities
|
(2,030 | ) | (1,300 | ) | - | |||||||
Other
income
|
1,054 | 1,032 | 964 | |||||||||
Total
noninterest income (loss)
|
697 | (2,172 | ) | 6,359 | ||||||||
NONINTEREST
EXPENSE
|
||||||||||||
Compensation
and benefits
|
8,047 | 8,986 | 10,479 | |||||||||
Premises
and occupancy
|
2,559 | 2,529 | 2,407 | |||||||||
Data
processing and communications
|
633 | 570 | 512 | |||||||||
Other
real estate owned operations, net
|
373 | 114 | 42 | |||||||||
FDIC
insurance premiums
|
1,382 | 264 | 144 | |||||||||
Legal
and audit
|
797 | 602 | 806 | |||||||||
Marketing
expense
|
664 | 781 | 713 | |||||||||
Office
and postage expense
|
295 | 344 | 384 | |||||||||
Other
expense
|
1,944 | 1,774 | 1,761 | |||||||||
Total
noninterest expense
|
16,694 | 15,964 | 17,248 | |||||||||
INCOME
(LOSS) BEFORE INCOME TAX (BENEFIT)
|
(547 | ) | 741 | 5,726 | ||||||||
INCOME
TAX (BENEFIT)
|
(87 | ) | 33 | 2,107 | ||||||||
NET
INCOME (LOSS)
|
$ | (460 | ) | $ | 708 | $ | 3,619 | |||||
EARNINGS
(LOSS) PER SHARE
|
||||||||||||
Basic
|
$ | (0.08 | ) | $ | 0.14 | $ | 0.70 | |||||
Diluted
|
$ | (0.08 | ) | $ | 0.11 | $ | 0.55 | |||||
WEIGHTED
AVERAGE SHARES OUTSTANDING
|
||||||||||||
Basic
|
5,642,589 | 4,948,359 | 5,189,104 | |||||||||
Diluted
|
5,642,589 | 6,210,387 | 6,524,753 |
See Notes to Consolidated Financial Statements
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
(LOSS)
|
||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||
Common
Stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
Comprehensive
|
Stockholders’
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Income
(loss)
|
Income
(Loss)
|
Equity
|
||||||||||||||||||||||
Balance
at December 31, 2006
|
5,263,488 | $ | 54 | $ | 67,306 | $ | (8,631 | ) | $ | (691 | ) | $ | 58,038 | |||||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||||||
Net
income
|
3,619 | $ | 3,619 | 3,619 | ||||||||||||||||||||||||
Unrealized
holding losses on securities
arising
during the period, net of tax
|
(17 | ) | ||||||||||||||||||||||||||
Reclassification
adjustment for gain on
securities
included in net income, net of tax
|
- | |||||||||||||||||||||||||||
Net
unrealized gain on securities, net of tax
|
(17 | ) | (17 | ) | (17 | ) | ||||||||||||||||||||||
Total
comprehensive income
|
$ | 3,602 | ||||||||||||||||||||||||||
Share-based
compensation expense
|
202 | 202 | ||||||||||||||||||||||||||
Repurchase
of common stock
|
(100,000 | ) | (2 | ) | (1,090 | ) | (1,092 | ) | ||||||||||||||||||||
Balance
at December 31, 2007
|
5,163,488 | $ | 52 | $ | 66,418 | $ | (5,012 | ) | $ | (708 | ) | $ | 60,750 | |||||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||||||
Net
income
|
708 | $ | 708 | 708 | ||||||||||||||||||||||||
Unrealized
holding losses on securities
arising
during the period, net of tax
|
(3,389 | ) | ||||||||||||||||||||||||||
Reclassification
adjustment for net loss on
securities
included in net income, net of tax
|
1,221 | |||||||||||||||||||||||||||
Net
unrealized loss on securities, net of tax
|
(2,168 | ) | (2,168 | ) | (2,168 | ) | ||||||||||||||||||||||
Total
comprehensive loss
|
$ | (1,460 | ) | |||||||||||||||||||||||||
Share-based
compensation expense
|
326 | 326 | ||||||||||||||||||||||||||
Restricted
stock expense adjustment
|
6 | 6 | ||||||||||||||||||||||||||
Repurchase
of common stock
|
(260,037 | ) | (3 | ) | (2,071 | ) | (2,074 | ) | ||||||||||||||||||||
Balance
at December 31, 2008
|
4,903,451 | $ | 49 | $ | 64,679 | $ | (4,304 | ) | $ | (2,876 | ) | $ | 57,548 | |||||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||||||
Net
loss
|
(460 | ) | $ | (460 | ) | (460 | ) | |||||||||||||||||||||
Unrealized
holding gains on securities
arising
during the period, net of tax
|
1,310 | |||||||||||||||||||||||||||
Reclassification
adjustment for gain on
securities
included in net income, net of tax
|
(175 | ) | ||||||||||||||||||||||||||
Net
unrealized gain on securities, net of tax
|
1,135 | 1,135 | 1,135 | |||||||||||||||||||||||||
Total
comprehensive income
|
$ | 675 | ||||||||||||||||||||||||||
Share-based
compensation expense
|
271 | 271 | ||||||||||||||||||||||||||
Issuance
of common stock, net of issuance costs
|
5,030,385 | 50 | 15,191 | 15,241 | ||||||||||||||||||||||||
Warrant
exercise
|
200,000 | 2 | 148 | 150 | ||||||||||||||||||||||||
Repurchase
of common stock
|
(100,000 | ) | (1 | ) | (382 | ) | (383 | ) | ||||||||||||||||||||
Balance
at December 31, 2009
|
10,033,836 | $ | 100 | $ | 79,907 | $ | (4,764 | ) | $ | (1,741 | ) | $ | 73,502 |
PACIFIC
PREMIER BANCORP, INC. AND SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
(dollars
in thousands)
|
||||||||||||
For
the Years ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net
income (loss)
|
$ | (460 | ) | $ | 708 | $ | 3,619 | |||||
Adjustments
to net income (loss):
|
||||||||||||
Depreciation
and amortization expense
|
1,017 | 967 | 812 | |||||||||
Provision
for loan losses
|
7,735 | 2,241 | 1,651 | |||||||||
Share-based
compensation expense
|
271 | 326 | 202 | |||||||||
Gain
on sale of other real estate owned
|
(28 | ) | - | (50 | ) | |||||||
Write
down of other real estate owned
|
332 | 57 | 122 | |||||||||
Loss
(gain) on sale and disposal on premises and equipment
|
25 | 3 | (200 | ) | ||||||||
Amortization
of premium/discounts on securities available for sale, net
|
70 | (150 | ) | (151 | ) | |||||||
Gain
on sale of loans held for sale
|
(7 | ) | (25 | ) | (40 | ) | ||||||
Loss
on sale and write down of investment securities available for
sale
|
1,343 | 4,886 | - | |||||||||
Purchase
and origination of loans held for sale
|
- | (408 | ) | (2,924 | ) | |||||||
Proceeds
from the sales of and principal payments from loans held for
sale
|
549 | 514 | 3,010 | |||||||||
Loss
(gain) on sale of loans held for investment
|
358 | (67 | ) | (3,680 | ) | |||||||
Deferred
income tax provision (benefit)
|
(1,831 | ) | (2,234 | ) | 259 | |||||||
Change
in accrued expenses and other liabilities, net
|
(31 | ) | (2,590 | ) | 1,074 | |||||||
Federal
Home Loan Bank stock dividend
|
- | (568 | ) | (813 | ) | |||||||
Income
from bank owned life insurance
|
(531 | ) | (526 | ) | (525 | ) | ||||||
Change
in accrued interest receivable and other assets, net
|
(3,084 | ) | 515 | 199 | ||||||||
Net
cash provided by operating activities
|
5,728 | 3,649 | 2,565 | |||||||||
CASH
FLOW FROM INVESTING ACTIVITIES
|
||||||||||||
Proceeds
from sale and principal payments on loans held for
investment
|
54,818 | 156,393 | 389,619 | |||||||||
Purchase
and origination of loans held for investment
|
(11,432 | ) | (160,075 | ) | (406,574 | ) | ||||||
Proceeds
from sale of other real estate owned
|
886 | 710 | 115 | |||||||||
Principal
payments on securities available for sale
|
14,430 | 11,811 | 5,711 | |||||||||
Purchase
of securities available for sale
|
(218,896 | ) | (33,401 | ) | (39,980 | ) | ||||||
Proceeds
from sale or maturity of securities available for sale
|
146,418 | 14,179 | 39,980 | |||||||||
Purchase
of premises and equipment
|
(167 | ) | (1,102 | ) | (1,660 | ) | ||||||
Proceeds
from sale and disposal of premises and equipment
|
- | 20 | 200 | |||||||||
Redemption
(purchase) of FHLB and FRB stock
|
- | 3,248 | (663 | ) | ||||||||
Net
cash used in investing activities
|
(13,943 | ) | (8,217 | ) | (13,252 | ) | ||||||
CASH
FLOW FROM FINANCING ACTIVITIES
|
||||||||||||
Net
increase in deposit accounts
|
161,606 | 70,393 | 47,286 | |||||||||
Proceeds
from FHLB advances and other borrowings
|
- | 27,835 | - | |||||||||
Repayments
of FHLB advances and other borrowings
|
(118,400 | ) | (115,900 | ) | (18,526 | ) | ||||||
Proceeds
from issuance of common stock, net of issuance cost
|
15,241 | - | - | |||||||||
Proceeds
from exercise of warrants
|
150 | - | - | |||||||||
Repurchase
of common stock
|
(383 | ) | (2,074 | ) | (1,092 | ) | ||||||
Net
cash provided by (used in) financing activities
|
58,214 | (19,746 | ) | 27,668 | ||||||||
Net
increase (decrease) in cash and cash equivalents
|
49,999 | (24,314 | ) | 16,981 | ||||||||
Cash
and cash equivalents, beginning of year
|
9,707 | 34,021 | 17,040 | |||||||||
Cash
and cash equivalents, end of year
|
$ | 59,706 | $ | 9,707 | $ | 34,021 | ||||||
SUPPLEMENTAL
CASH FLOW DISCLOSURES
|
||||||||||||
Interest
paid
|
$ | 20,455 | $ | 25,540 | $ | 32,114 | ||||||
Income
taxes paid
|
$ | 1,110 | $ | 2,765 | $ | 2,379 | ||||||
NONCASH
OPERATING ACTIVITIES DURING THE PERIOD
|
||||||||||||
Restricted
stock vested
|
$ | 104 | $ | 112 | $ | 127 | ||||||
NONCASH
INVESTING ACTIVITIES DURING THE PERIOD
|
||||||||||||
Loan
transfers to loans held for investment from loans held for
sale
|
$ | 126 | $ | - | $ | - | ||||||
Transfers
from loans to other real estate owned
|
$ | 4,533 | $ | 93 | $ | 760 | ||||||
Investment
securities available for sale purchased and not settled
|
$ | 8,238 | $ | - | $ | - |
PACIFIC
PREMIER BANCORP, INC., AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Description of Business and Summary of Significant Accounting
Policies
Principles of
Consolidation—The consolidated financial statements include the accounts
of Pacific Premier Bancorp, Inc., (the ‘‘Corporation’’) and its wholly owned
subsidiary, Pacific Premier Bank (the ‘‘Bank’’) (collectively, the
‘‘Company’’). The Company accounts for its investments in its
wholly-owned special purpose entity, PPBI Statutory Trust I, ( the “Trust”)
using the equity method under which the subsidiaries’ net earnings are
recognized in the Company’s Statement of Operations and the investment in the
Trust is included in Other Assets on the Company’s Balance Sheet. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Description of Business—The
Corporation, a Delaware corporation organized in 1997, is a California-based
bank holding company that owns 100% of the capital stock of the Bank, the
Corporation’s principal operating subsidiary. The Bank was incorporated and
commenced operations in 1983.
The principal business of the Company
is attracting deposits from the general public and investing those deposits,
together with funds generated from operations and borrowings, primarily in
multi-family (apartment buildings of five units or more) and commercial real
estate property loans. At December 31, 2009, the Company had six
depository branches located in the cities of Costa Mesa, Huntington
Beach, Los Alamitos, Newport Beach, San Bernardino, and Seal
Beach. The Company is subject to competition from other financial
institutions. The Company is subject to the regulations of certain
governmental agencies and undergoes periodic examinations by those regulatory
authorities.
Basis of Financial Statement
Presentation—The accompanying consolidated financial statements have been
prepared in conformity with account principles generally accepted in the United
States of America. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the balance
sheets and the results of operations for the reporting
periods. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses, the valuation of foreclosed real estate, OTTI on investment
securities available for sale and the deferred tax asset.
Cash and cash
equivalents—Cash and cash equivalents include cash on hand, due from
banks and fed funds sold. At December 31, 2009, $906,000 was allocated to cash
reserves required by the Federal Reserve for depository institutions based on
the amount of deposits held. The Company maintains amounts due from banks that
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
Securities—The Company has
established written guidelines and objectives for its investing
activities. At the time of purchase, management designates the
security as either held to maturity, available for sale or held for trading
based on the Company’s investment objectives, operational needs and
intent. The investments are monitored to ensure that those activities
are consistent with the established guidelines and objectives.
Securities Held to
Maturity—Investments in debt securities that management has the positive
intent and ability to hold to maturity are reported at cost and adjusted for
unamortized premiums and unearned discounts that are recognized in interest
income using the interest method over the period to maturity. If the
cost basis of these securities is determined to be other than temporarily
impaired, the amount of the impairment is charged to operations. The
Company had no investment securities classified as held to maturity at December
31, 2009 or 2008.
Securities Available for
Sale—Investments in debt securities that management has no immediate plan
to sell, but which may be sold in the future, are valued at fair value. Premiums
and discounts are amortized using the interest method over the remaining period
to the call date for premiums or contractual maturity for discounts and, in the
case of mortgage-backed securities, adjusted for anticipated
prepayments. Unrealized holding gains and losses, net of tax, are
excluded from earnings and reported as a separate component of stockholders’
equity as accumulated other comprehensive income. If the cost basis
of the security is deemed other than temporarily impaired the amount of the
impairment is charged to operations. Realized gains and losses
on the sales of securities are determined on the specific identification method,
recorded on a trade date basis based on the amortized cost basis of the specific
security and are included in noninterest income as net gain (loss) on investment
securities.
Securities Held to
Trading—Securities held for trading are carried at fair
value. Realized and unrealized gains and losses are reflected in
earnings. The Company had no investment securities classified as held
for trading at December 31, 2009 or 2008.
Impairment of
Investments—Declines in the fair value of individual held to maturity and
available for sale securities below their cost that are OTTI result in
write-downs of the individual securities to their fair value. The related
write-downs are included in operations as realized losses in the category of net
gain (loss) from sales of investment securities. In estimating OTTI losses,
management considers: (i) the length of time and the extent to which the market
value has been less than cost; (ii) the financial condition and near-term
prospects of the issuer; (iii) the intent and ability of the Company to retain
its investment in a security for a period of time sufficient to allow for any
anticipated recovery in market value; and (iv) general market conditions which
reflect prospects for the economy as a whole, including interest rates and
sector credit spreads.
Loans Held for Sale—The
Company identifies at origination those loans which foreseeably may be sold
prior to maturity as loans held for sale and records them at the lower of
amortized cost or fair value. Premiums paid and discounts obtained on
such loans are deferred as an adjustment to the carrying value of the loans
until the loans are sold. Interest is recognized as revenue when
earned according to the terms of the loans and when, in the opinion of
management, it is collectible. Loans are evaluated for
collectability, and if appropriate, previously accrued interest is
reversed. The Company may sell loans which had been held for
investment. In such occurrences, the loans are transferred to the
held for sale portfolio at the lower of amortized cost or fair
value. If any part of a decline in value of the loans transferred is
due to credit deterioration, that decline is recorded as a charge-off to the
allowance for loan losses at the time of transfer. Gains or losses on
sales of loans are recognized at the time of sale and are determined by the
difference between the net sales proceeds and the basis of the loans sold. There
were no loans held for sale at December 31, 2009. At December 31,
2008, loans held for sale consisted of the guaranteed portion of our SBA loans
and were carried at the lower of cost or market.
Loans Held for
Investment—Loans held for investment are carried at amortized cost, net
of discounts and premiums, deferred loan origination fees and costs and
allowance for loan losses. Net deferred loan origination fees and
costs on loans are amortized or accreted using the interest method over the
expected life of the loans. Amortization of deferred loan fees and costs are
discontinued for loans placed on nonaccrual. Any remaining deferred
fees or costs and prepayment fees associated with loans that payoff prior to
contractual maturity are included in loan interest income in the period of
payoff. Loan commitment fees received to originate or purchase a loan
are deferred and, if the commitment is exercised, recognized over the life of
the loan as an adjustment of yield or, if the commitment expires unexercised,
recognized as income upon expiration of the commitment. Loans held
for investment are not adjusted to the lower of cost or estimated market value
because it is management's intention, and the Company has the ability, to hold
these loans to maturity.
Interest
on loans is credited to income as earned. Interest receivable is accrued only if
deemed collectible. Loans on which the accrual of interest has been
discontinued are designated as nonaccrual loans. The accrual of interest on
loans is discontinued when principal or interest is past due 90 days based on
contractual terms of the loan or when, in the opinion of management, there is
reasonable doubt as to collection of interest. When loans are placed
on nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. Interest income generally is
not recognized on impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are applied as a reduction to
the loan principal balance. Interest accruals are resumed on such loans only
when they are brought current with respect to interest and principal and when,
in the judgment of management, the loans are estimated to be fully collectible
as to all principal and interest.
A loan is
considered to be impaired when it is probable that the Company will be unable to
collect all amounts due (principal and interest) according to the contractual
terms of the loan agreement. Measurement of impairment is based on the loan’s
expected future cash flows discounted at the loan’s effective interest rate,
measured by reference to an observable market value, if one exists, or the fair
value of the collateral if the loan is deemed collateral dependent. The Company
selects the measurement method on a loan-by-loan basis except those loans deemed
collateral dependent. All loans are generally charged-off at such
time the loan is classified as a loss.
Allowance for Loan Losses—The
Company maintains an allowance for loan losses at a level deemed appropriate by
management to provide for known or inherent risks in the portfolio at the
balance sheet date. The Company has implemented and adheres to an
internal asset review system and loss allowance methodology designed to provide
for the detection of problem assets and an adequate allowance to cover loan
losses. Management’s determination of the adequacy of the loan loss
allowance is based on an evaluation of the composition of the portfolio, actual
loss experience, industry charge-off experience on income property loans,
current economic conditions, and other relevant factors in the area in which the
Company’s lending and real estate activities are based. These factors
may affect the borrowers’ ability to pay and the value of the underlying
collateral. The allowance is calculated by applying loss factors to
loans held for investment according to loan program type and loan
classification. The loss factors are established based primarily upon
the Bank’s historical loss experience and the industry charge-off experience and
are evaluated on a quarterly basis. The unallocated allowance is based upon
management’s evaluation of various conditions, the effect of which is not
directly measured in the determination of the formula. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the
unallocated allowance include the following conditions that existed as of the
balance sheet date: (1) general economic and business conditions
affecting the key lending areas of the Company, (2) credit quality trends, (3)
loan volumes and concentrations, (4) recent loss experience in particular
segments of the portfolio, and (5) regulatory examination
results. Various regulatory agencies, as an integral part of
their examination process, periodically review the Company’s allowance for loan
losses. Such agencies may require the Bank to recognize
additions to the allowance based on judgments different from those of
management. In the opinion of management, and in accordance with the
credit loss allowance methodology, the present allowance is considered adequate
to absorb estimable and probable credit losses. Additions and
reductions to the allowance are reflected in current
operations. Charge-offs to the allowance are made when specific
assets are considered uncollectible or are transferred to other real estate
owned and the fair value of the property is less than the loan’s recorded
investment. Recoveries are credited to the allowance.
Although
management uses the best information available to make these estimates, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Company’s
control.
Other Real Estate Owned—The
Company obtains an appraisal and/or market valuation on all other real estate
owned at the time of possession. Real estate properties acquired through, or in
lieu of, loan foreclosure are recorded at fair value less cost to sell with any
excess loan balance charged against the allowance for estimated loan
losses. After foreclosure, valuations are periodically performed by
management. Any subsequent fair value losses are recorded to other
real estate owned operations with a corresponding write down to the asset. All
legal fees and direct costs, including foreclosure and other related costs are
expensed as incurred. Revenue and expenses from continued operations
are included in other real estate owned operations in the consolidated statement
of operations.
Premises and
Equipment—Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets, which
range from 40 years for buildings, seven years for furniture, fixtures and
equipment, and three years for computer and telecommunication
equipment. The cost of leasehold improvements is amortized using the
straight-line method over the shorter of the estimated useful life of the asset
or the term of the related leases.
The
Company periodically evaluates the recoverability of long-lived assets, such as
premises and equipment, to ensure the carrying value has not been
impaired. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Securities Sold Under Agreements to
Repurchase—The Company enters into sales of securities under agreement to
repurchase. These agreements are treated as financing arrangements
and, accordingly, the obligations to repurchase the securities sold are
reflected as liabilities in the Company’s consolidated financial
statements. The securities collateralizing these agreements are
delivered to several major national brokerage firms who arranged the
transactions. The securities are reflected as assets in the Company’s
consolidated financial statements. The brokerage firms may loan such
securities to other parties in the normal course of their operations and agree
to return the identical security to the Company at the maturity of the
agreements.
Subordinated
Debentures—Long-term borrowings are carried at cost, adjusted for
amortization of premiums and accretion of discounts which are recognized in
interest expense using the interest method. Debt issuance costs are
recognized in interest expense using the interest method over the life of the
instrument.
Income Taxes—Deferred tax
assets and liabilities are recorded for the expected future tax consequences of
events that have been recognized in the Company’s financial statements or tax
returns using the asset liability method. In estimating future tax consequences,
all expected future events other than enactments of changes in the tax law or
rates are considered. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date. Deferred tax assets are to be recognized for temporary
differences that will result in deductible amounts in future years and for tax
carryforwards if, in the opinion of management, it is more likely than not that
the deferred tax assets will be realized. As of December 31, 2009,
there was no valuation allowance deemed necessary against the Company’s deferred
tax asset.
Bank owned life
insurance—Bank owned life insurance is accounted for using the cash
surrender value method and is recorded at its realizable value. The change in
the net asset value is included in other assets and other noninterest
income.
Comprehensive Income—The
Company classifies items of other comprehensive income by their nature in the
financial statements and displays the accumulated other comprehensive income as
a separate component of stockholders’ equity on the Balance Sheet. Changes in unrealized gain
(loss) on available-for-sale securities net of income taxes is the only
component of accumulated other comprehensive income for the
Company.
Share-Based Compensation—The
Company recognizes in the income statement the grant-date fair value of stock
options and other equity-based forms of compensation issued to employees over
the employees’ requisite service period (generally the vesting
period).
Recent
Accounting Pronouncements
During 2009 , the
following accounting guidance relevant to the Company has been issued by the
Financial Accounting Standards Board (the “FASB”), and/or became
effective.
Fair Value
Measurements: In April 2009, accounting standards were amended
to provide additional guidance for determining the fair value of a financial
asset or financial liability when the volume and level of activity for such
asset or liability decreased significantly and also to provide guidance for
determining whether a transaction is orderly. The amendments were
effective for annual reporting periods ended after June 15,
2009. Adoption of the amendments in 2009 did not have a material
impact on the Company’s financial statements.
In
February 2008, the FASB issued instructions that delayed the effective date of
fair value measurement for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) for fiscal years beginning after November
15, 2008. Adoption of the fair value measurement rules in 2009 for
non-financial assets and non-financial liabilities subject to the delay did not
have a material impact on Company’s financial statements.
Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles: In June 2009,
the Financial Accounting Standards Board (“FASB”) issued an accounting standard
regarding The FASB Accounting Standards Codification TM (“Codification” or
“ASC”)(FASB ASC 105) that will become the source of authoritative U.S. generally
accepted accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On the effective date of this standard, all interim
and annual reporting periods ending after September 15, 2009, the Codification
will supersede all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative. We adopted this standard
on September 30, 2009 and the adoption did not have a material impact on the
Company’s financial statements.
Business
Combinations: On January 1, 2009, the Company adopted FASB ASC
805 which requires, among other things, the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination. The adoption of this standard had no effect on the
Company’s financial statements.
Other-Than-Temporary
Impairment: In April 2009, accounting standards were amended
to provide expanded guidance concerning the recognition and measurement of OTTI
of debt securities classified as available for sale or held to
maturity. The amendments require an entity to recognize the credit
component of an OTTI of a debt security in earnings and the noncredit component
in other comprehensive income when the entity does not intend to sell the
security and it is more likely than not that the entity will not be required to
sell the security prior to recovery. Expanded disclosures are also
required concerning such impairments. The amendments were effective
for annual reporting periods ended after June 15, 2009. Adoption of
the amendments in 2009 did not have a material impact on the Company’s financial
statements.
Subsequent Events: In
May 2009, the FASB issued guidance which requires the effects of events
that occur subsequent to the balance-sheet date be evaluated through the date
the financial statements are either issued or available to be
issued. Entities are to disclose the date through which
subsequent events have been evaluated and whether that date is the date the
financial statements were issued or the date the financial statements were
available to be issued. Entities are required to reflect in their financial
statements the effects of subsequent events that provide additional evidence
about conditions at the balance-sheet date (recognized subsequent
events). Entities are also prohibited from reflecting in their
financial statements the effects of subsequent events that provide evidence
about conditions that arose after the balance-sheet date (nonrecognized
subsequent events), but requires information about those events to be disclosed
if the financial statements would otherwise be misleading. This
guidance was effective for annual financial periods ended after June 15, 2009
with prospective application. The Bank adopted the guidance for the
year ended December 31, 2009 without an impact on the Company’s financial
statements.
Accounting for Transfers of Financial
Assets: FASB ASC 860 enhances reporting about transfers
of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. It
eliminates the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets. It also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during the
period. The standard will be effective January 1, 2010 and is not expected to
have an impact on the Company’s financial statements.
Fair Value Measurements and
Impairments of Securities: On June 30, 2009, the Company
adopted FASB ASC 825 which provides additional application guidance and enhances
disclosures regarding fair value measurements and impairments of securities, as
well as clarity and consistency in accounting for and presenting impairment
losses on securities. The standards give guidance to determining fair values
when there is no active market or where the price inputs being used represent
distressed sales. It reaffirms the need to use judgment to ascertain if a
formerly active market has become inactive and in determining fair values when
markets have become inactive. The standards also relate to fair value
disclosures for any financial instruments that are not currently reflected on
the balance sheet of companies at fair value. Previously, fair values for these
assets and liabilities were only disclosed once a year, These disclosures are
now required on a quarterly basis to provide qualitative and quantitative
information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value. Guidance on OTTI is intended to
bring greater consistency to the timing of impairment recognition, and provide
greater clarity to investors about the credit and noncredit components of
impaired debt securities that are not expected to be sold. The measure of
impairment in comprehensive income remains fair value. The standard also
requires increased and timelier disclosures sought by investors regarding
expected cash flows, credit losses, and an aging of securities with unrealized
losses. The adoption of this standard had no impact on the Company’s financial
statements.
Reclassifications –Certain
amounts reflected in the 2008 and 2007 consolidated financial statements have
been reclassified where practicable, to conform to the presentation for
2009. These classifications are of a normal recurring
nature.
2.
Regulatory Capital Requirements and Other Regulatory Matters
The
Company and the Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s and the Bank’s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of the Company’s and the Bank’s assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company’s and the Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain capital in order to meet certain capital ratios to be considered
adequately capitalized or well capitalized under the regulatory framework for
prompt corrective action. As of the most recent formal notification
from the Federal Reserve, the Bank was categorized as well capitalized. There
are no conditions or events since that notification that management believes
have changed the Bank’s categorization. As defined in applicable
regulations and set forth in the table below, at December 31, 2009, the Bank
continues to exceed the “well capitalized” standards for Tier I capital to
adjusted tangible assets of 5.00%, Tier I risk-based capital to risk-weighted
assets of 6.00% and total capital to risk-weighted assets of
10.00%.
In the
fourth quarter of 2009, the Company raised $15.5 million in capital by issuing
5,030,385 shares of its common stock at a public offering price of $3.25 per
share. The Company injected $14.0 million of the proceeds from the
offering into the Bank, which enhanced the Bank’s regulatory capital
ratios.
The
Company’s and Bank’s actual capital amounts and ratios are presented in the
table below:
Actual
|
Minimum
Required for Capital Adequacy Purposes
|
Required
to be Well Capitalized Under Prompt Corrective Action
Regulations
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||
At December 31, 2009
|
||||||||||||||||||||||||
Tier
1 Capital (to adjusted tangible assets)
|
||||||||||||||||||||||||
Bank
|
$ | 78,463 | 9.72 | % | $ | 32,300 | 4.00 | % | $ | 40,375 | 5.00 | % | ||||||||||||
Consolidated
|
79,801 | 9.89 | % | 32,275 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier
1 Risk-Based Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
78,463 | 13.30 | % | 23,600 | 4.00 | % | 35,401 | 6.00 | % | |||||||||||||||
Consolidated
|
79,801 | 13.41 | % | 23,798 | 4.00 | % | N/A | N/A | ||||||||||||||||
Total
Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
85,855 | 14.55 | % | 47,201 | 8.00 | % | 59,001 | 10.00 | % | |||||||||||||||
Consolidated
|
87,256 | 14.67 | % | 47,596 | 8.00 | % | N/A | N/A | ||||||||||||||||
At December 31, 2008
|
||||||||||||||||||||||||
Tier
1 Capital (to adjusted tangible assets)
|
||||||||||||||||||||||||
Bank
|
$ | 64,880 | 8.71 | % | $ | 29,808 | 4.00 | % | $ | 37,261 | 5.00 | % | ||||||||||||
Consolidated
|
67,859 | 8.99 | % | 30,199 | 4.00 | % | N/A | N/A | ||||||||||||||||
Tier
1 Risk-Based Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
64,880 | 10.71 | % | 24,229 | 4.00 | % | 36,343 | 6.00 | % | |||||||||||||||
Consolidated
|
67,859 | 11.11 | % | 24,437 | 4.00 | % | N/A | N/A | ||||||||||||||||
Total
Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
Bank
|
70,761 | 11.68 | % | 48,457 | 8.00 | % | 60,571 | 10.00 | % | |||||||||||||||
Consolidated
|
73,741 | 12.07 | % | 48,874 | 8.00 | % | N/A | N/A |
3.
Investment Securities
The
amortized cost and estimated fair value of securities were as
follows:
December 31,
2009
|
||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
|||||||||||||
Cost
|
Gain
|
Loss
|
Fair
Value
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Investment
securities available for sale:
|
||||||||||||||||
U.S.
Treasury
|
$ | 148 | $ | 6 | $ | - | $ | 154 | ||||||||
Municipal
bonds
|
17,918 | 200 | (153 | ) | 17,965 | |||||||||||
Mortgage-backed
securities
|
108,300 | 307 | (3,319 | ) | 105,288 | |||||||||||
Total
securities available for sale
|
126,366 | 513 | (3,472 | ) | 123,407 | |||||||||||
FHLB
stock
|
12,731 | - | - | 12,731 | ||||||||||||
Federal
Reserve Bank stock
|
1,599 | - | - | 1,599 | ||||||||||||
Total
equities held at cost
|
14,330 | - | - | 14,330 | ||||||||||||
Total
securities
|
$ | 140,696 | $ | 513 | $ | (3,472 | ) | $ | 137,737 |
December 31,
2008
|
||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
|||||||||||||
Cost
|
Gain
|
Loss
|
Fair
Value
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Investment
securities available for sale:
|
||||||||||||||||
U.S.
Treasury
|
$ | 148 | $ | 19 | $ | - | $ | 167 | ||||||||
Mortgage-backed
securities
|
61,345 | 997 | (5,903 | ) | 56,439 | |||||||||||
Total
securities available for sale
|
61,493 | 1,016 | (5,903 | ) | 56,606 | |||||||||||
FHLB
stock
|
12,731 | - | - | 12,731 | ||||||||||||
Federal
Reserve Bank stock
|
1,599 | - | - | 1,599 | ||||||||||||
Total
equities held at cost
|
14,330 | - | - | 14,330 | ||||||||||||
Total
securities
|
$ | 75,823 | $ | 1,016 | $ | (5,903 | ) | $ | 70,936 |
The
investment in FHLB stock is redeemable five years after the FHLB receives
written notice from the Bank and only if the Bank has excess stock at the time
of redemption. The investment in FHLB stock is periodically evaluated
for impairment based on, among other things, the capital adequacy of the FHLB
and its overall financial condition. No impairment losses have been recorded
through December 31, 2009.
At
December 31, 2009, MBS with an estimated value of $39.5 million and a book value
of $$39.7 million were pledged as collateral for the Bank’s three inverse
putable reverse repurchases totaling $28.5 million.
The
Company reviewed individual securities classified as available-for-sale to
determine whether a decline in fair value below the amortized cost basis is
other-than-temporary. If it is probable that the Company will be
unable to collect all amounts due according to contractual terms of the debt
security not impaired at acquisition, an OTTI shall be considered to have
occurred. If an OTTI occurs, the cost basis of the security would
have been written down to its fair value as the new cost basis and the write
down accounted for as a realized loss. Securities with OTTI at
December 31, 2009 consisted of 29 private label MBS with a book value of $2.2
million. The Company realized OTTI losses of $2.0 million in
2009. Additionally, in December 2008 the Bank took an OTTI charge of
$1.3 million. There were no OTTI charges in 2007.
The table
below shows the number, fair value and gross unrealized holding losses of the
Company’s investment securities by investment category and length of time that
the securities have been in a continuous loss position.
December
31, 2009
|
||||||||||||||||||||||||||||||||||||
Less
than 12 months
|
12
months or Longer
|
Total
|
||||||||||||||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||||||||||||||
Fair
|
Holding
|
Fair
|
Holding
|
Fair
|
Holding
|
|||||||||||||||||||||||||||||||
Number
|
Value
|
Losses
|
Number
|
Value
|
Losses
|
Number
|
Value
|
Losses
|
||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
Municipal
bonds
|
13 | $ | 11,303 | $ | (153 | ) | - | $ | - | $ | - | 13 | $ | 11,303 | $ | (153 | ) | |||||||||||||||||||
Mortgage-backed
securities
|
29 | 64,903 | (843 | ) | 63 | 4,761 | (2,476 | ) | 92 | 69,664 | (3,319 | ) | ||||||||||||||||||||||||
Total
|
42 | $ | 76,206 | $ | (996 | ) | 63 | $ | 4,761 | $ | (2,476 | ) | 105 | $ | 80,967 | $ | (3,472 | ) | ||||||||||||||||||
December
31, 2008
|
||||||||||||||||||||||||||||||||||||
Less
than 12 months
|
12
months or Longer
|
Total
|
||||||||||||||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||||||||||||||
Fair
|
Holding
|
Fair
|
Holding
|
Fair
|
Holding
|
|||||||||||||||||||||||||||||||
Number
|
Value
|
Losses
|
Number
|
Value
|
Losses
|
Number
|
Value
|
Losses
|
||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
Mortgage-backed
securities
|
107 | $ | 16,905 | $ | (5,882 | ) | 1 | $ | 1,573 | $ | (21 | ) | 108 | $ | 18,478 | $ | (5,903 | ) | ||||||||||||||||||
Total
|
107 | $ | 16,905 | $ | (5,882 | ) | 1 | $ | 1,573 | $ | (21 | ) | 108 | $ | 18,478 | $ | (5,903 | ) |
The
amortized cost and estimated fair value of investment securities available for
sale at December 31, 2009, by contractual maturity are shown in the table
below.
One
Year
|
More
than One
|
More
than Five Years
|
More
than
|
|
||||||||||||||||||||||||||||||||||||
or
Less
|
to
Five Years
|
to
Ten Years
|
Ten
Years
|
Total
|
||||||||||||||||||||||||||||||||||||
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||||||||||||||||||||
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
|||||||||||||||||||||||||||||||
(dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Investement
securities available for sale:
|
||||||||||||||||||||||||||||||||||||||||
U.S.
Treasury
|
$ | - | $ | - | $ | 74 | $ | 78 | $ | 74 | $ | 77 | $ | - | $ | - | $ | 148 | $ | 155 | ||||||||||||||||||||
Municipal
bonds
|
- | - | - | - | - | - | 17,918 | 17,965 | 17,918 | 17,965 | ||||||||||||||||||||||||||||||
Mortgage-backed
securities
|
- | - | 10,290 | 10,363 | 215 | 227 | 97,795 | 94,697 | 108,300 | 105,287 | ||||||||||||||||||||||||||||||
Total
investment securities available for sale
|
- | - | 10,364 | 10,441 | 289 | 304 | 115,713 | 112,662 | 126,366 | 123,407 | ||||||||||||||||||||||||||||||
Stock:
|
||||||||||||||||||||||||||||||||||||||||
FHLB
|
12,731 | 12,731 | - | - | - | - | - | - | 12,731 | 12,731 | ||||||||||||||||||||||||||||||
Federal
Reserve Bank
|
1,599 | 1,599 | - | - | - | - | - | - | 1,599 | 1,599 | ||||||||||||||||||||||||||||||
Total
stock
|
14,330 | 14,330 | - | - | - | - | - | - | 14,330 | 14,330 | ||||||||||||||||||||||||||||||
Total
securities
|
$ | 14,330 | $ | 14,330 | $ | 10,364 | $ | 10,441 | $ | 289 | $ | 304 | $ | 115,713 | $ | 112,662 | $ | 140,696 | $ | 137,737 |
The temporary
impairment in both years is a result of the change in market interest rates and
not the underlying issuers’ ability to repay. The Company has the
intent and ability to hold these securities until the temporary impairment is
eliminated. Accordingly, the Company has not recognized the temporary
impairment in earnings of either year.
In 2009,
net unrealized gains on investment securities available for sale were recognized
in stockholders’ equity to reduce the accumulated other comprehensive loss to
$3.0 million, or $1.7 million net of tax, at December 31, 2009 and from $4.9
million or $2.9 million net of tax, at December 31, 2008.
4.
Loans Held for Investment
Loans
held for investment consisted of the following at December 31:
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Real
estate loans:
|
||||||||
Multi-family
|
$ | 278,744 | $ | 287,592 | ||||
Commercial
investor
|
149,577 | 165,978 | ||||||
One-to-four
family
|
8,491 | 9,925 | ||||||
Construction
|
- | 2,733 | ||||||
Business
loans:
|
||||||||
Commercial
owner occupied
|
103,019 | 112,406 | ||||||
Commercial
and industrial
|
31,109 | 43,235 | ||||||
SBA
|
3,337 | 4,274 | ||||||
Other
loans
|
1,991 | 1,956 | ||||||
Total
gross loans
|
576,268 | 628,099 | ||||||
Plus
(less):
|
||||||||
Deferred
loan origination costs-net
|
(779 | ) | 252 | |||||
Allowance
for estimated loan losses
|
(8,905 | ) | (5,881 | ) | ||||
Loans
held for investment, net
|
$ | 566,584 | $ | 622,470 |
From time
to time, we may purchase or sell loans in order to manage concentrations,
maximize interest income, change risk profiles, improve returns and generate
liquidity.
The
Company grants residential and commercial loans held for investment to customers
located primarily in Southern California. Consequently, the underlying
collateral for our loans and a borrower’s ability to repay may be impacted
unfavorably by adverse changes in the economy and real estate market in the
region.
The
following summarizes activity in the allowance for loan losses for the years
ended December 31:
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Balance,
beginning of year
|
$ | 5,881 | $ | 4,598 | $ | 3,543 | ||||||
ALLL
Transfer In *
|
- | 8 | - | |||||||||
Provision
for loan losses
|
7,735 | 2,241 | 1,651 | |||||||||
Recoveries
|
100 | 208 | 105 | |||||||||
Charge-offs
|
(4,811 | ) | (1,174 | ) | (701 | ) | ||||||
Balance,
end of year
|
$ | 8,905 | $ | 5,881 | $ | 4,598 | ||||||
* Note: Represents
the addition of valuation reserves for overdrafts that were previously
held outside of the General Allowance.
|
The
Company does not accrue interest on loans 90 days or more past due or when, in
the opinion of management, there is reasonable doubt as to the collection of
interest. The Company had loans on nonaccrual status at December 31,
2009 of $10.0 million, 2008 of $5.2 million, and 2007 of $4.2
million. If such loans had been performing in accordance with
their original terms, the Company would have recorded additional loan interest
income of $781,000 in 2009, $491,000 in 2008 and $315,000 in 2007.
The
following summarizes information related impaired loans at December
31:
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Total
impaired loans
|
$ | 13,657 | $ | 5,200 | $ | 7,396 | ||||||
Related
general reserves on impaired loans
|
179 | 18 | 534 | |||||||||
Average
impaired loans for the year
|
11,228 | 5,353 | 3,963 | |||||||||
Total
interest income recognized on impaired loans
|
232 | 212 | 611 |
The
Company has no commitments to lend additional funds to debtors whose loans have
been impaired.
Under
applicable laws and regulations, the Bank may not make secured loans to one
borrower in excess of 25% of unimpaired capital plus surplus and likewise in
excess of 15% for unsecured loans. These loans-to-one-borrower
limitations result in a dollar limitation of $18.1 million for secured loans and
$10.9 million for unsecured loans at December 31, 2009. At December
31, 2009, the Bank’s largest aggregate outstanding balance of loans to one
borrower was $11.5 million of secured credit.
Total
loans and participations serviced for others were $36.5 million at December 31,
2009 and $33.7 million at December 31, 2008, for which we have no capitalized
servicing rights.
5.
Other Real Estate Owned
Other
real estate owned was $3.4 million at December 31, 2009 and $37,000 at December
31, 2008. The following summarizes the activity in the other real
estate owned for the years ended December 31:
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Balance,
beginning of year
|
$ | 37 | $ | 711 | ||||
Additions
– foreclosures
|
4,533 | 93 | ||||||
Sales
|
(871 | ) | (708 | ) | ||||
Write
downs
|
(319 | ) | (59 | ) | ||||
Balance,
end of year
|
$ | 3,380 | $ | 37 |
6.
Premises and Equipment
Premises
and equipment consisted of the following at December 31:
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Land
|
$ | 1,410 | $ | 1,410 | ||||
Premises
|
5,633 | 5,617 | ||||||
Leasehold
improvements
|
2,444 | 2,434 | ||||||
Furniture,
fixtures and equipment
|
3,672 | 4,575 | ||||||
Automobiles
|
83 | 83 | ||||||
Subtotal
|
13,242 | 14,119 | ||||||
Less:
accumulated depreciation
|
(4,529 | ) | (4,531 | ) | ||||
Total
|
$ | 8,713 | $ | 9,588 |
Depreciation expense was $1.0 million for 2009 and 2008 and $0.8 million for 2007.
7.
Deposit Accounts
Deposit
accounts and weighted average interest rates consisted of the following at
December 31:
Weighted
|
Weighted
|
|||||||||||||||
2009
|
Average
|
2008
|
Average
|
|||||||||||||
Balance
|
Interest
Rate
|
Balance
|
Interest
Rate
|
|||||||||||||
(dollars
in thousands)
|
||||||||||||||||
Transaction
accounts
|
||||||||||||||||
Noninterest-bearing
checking
|
$ | 33,885 | 0.00 | % | $ | 29,443 | 0.00 | % | ||||||||
Interest-bearing
checking
|
22,406 | 0.39 | % | 20,989 | 0.97 | % | ||||||||||
Money
market
|
77,687 | 1.17 | % | 23,463 | 2.00 | % | ||||||||||
Regular
passbook
|
61,779 | 1.33 | % | 14,401 | 2.56 | % | ||||||||||
Total
transaction accounts
|
195,757 | 0.93 | % | 88,296 | 1.18 | % | ||||||||||
Certificates
of deposit accounts
|
||||||||||||||||
Under
$100,000
|
217,001 | 2.15 | % | 187,805 | 3.82 | % | ||||||||||
$100,000
and over
|
205,976 | 2.23 | % | 181,027 | 3.75 | % | ||||||||||
Total
certificates of deposit accounts
|
422,977 | 2.18 | % | 368,832 | 3.79 | % | ||||||||||
Total
deposits
|
$ | 618,734 | 2.09 | % | $ | 457,128 | 3.51 | % |
The aggregate
annual maturities of certificates of deposit accounts at December 31, 2009 are
as follows:
2009
|
||||||||
Balance
|
Weighted
average interest rate
|
|||||||
(in
thousands)
|
||||||||
Within
3 months
|
$ | 89,282 | 1.92 | % | ||||
4
to 6 months
|
137,447 | 2.25 | % | |||||
7
to 12 months
|
70,918 | 1.99 | % | |||||
13
to 24 months
|
118,720 | 2.37 | % | |||||
25
to 36 months
|
5,209 | 2.72 | % | |||||
37
to 60 months
|
745 | 3.84 | % | |||||
Over
60 months
|
656 | 4.00 | % | |||||
Total
|
$ | 422,977 | 2.09 | % |
The weighted average cost of deposits
averaged 2.38% for 2009 and 3.51% for 2008.
Interest
expense on deposit accounts for the years ended December 31 is summarized as
follows:
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Checking
accounts
|
$ | 173 | $ | 246 | $ | 313 | ||||||
Passbook
accounts
|
545 | 431 | 84 | |||||||||
Money
market accounts
|
711 | 771 | 1,376 | |||||||||
Certificates
of deposit accounts
|
11,618 | 13,005 | 13,848 | |||||||||
Total
|
$ | 13,047 | $ | 14,453 | $ | 15,621 |
Accrued
interest on deposits, which is included in accrued expenses and other
liabilities, was $90,000 at December 31, 2009 and $178,000 at December 31,
2008.
8.
Federal Home Loan Bank Advances and Other Borrowings
At
December 31, 2009, FHLB borrowings totaled $63.0 million, compared to $181.4
million at December 31, 2008. FHLB advances were
collateralized by real estate loans with an aggregate principal balance of
$483.9 million and FHLB stock of $12.7 million at December 31, 2009 and real
estate loans of $508.4 million and FHLB stock of $12.7 million at
December 31, 2008.
The
following table summarizes activities in advances from the FHLB for the periods
indicated:
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(dollars
in thousands)
|
||||||||
Average
balance outstanding
|
$ | 127,653 | $ | 236,494 | ||||
Maximum
amount outstanding at any month-end during the year
|
150,000 | 303,500 | ||||||
Balance
outstanding at end of year (a)
|
63,000 | 181,400 | ||||||
Weighted
average interest rate during the year
|
4.77 | % | 4.24 | % | ||||
(a)
The 2009 FHLB advance carries a weighted average interest rate of 4.90%
and matures withing one year.
|
In addition to the collateral securing
existing advances, the Company had an additional $232 million in loans available
at the FHLB as collateral for any future advances as of December 31,
2009.
Credit
facilities have been established with Citigroup and Barclays Bank. The credit
facilities are secured by pledged investment securities. At December 31, 2009
and 2008, the Company had borrowings of $18.5 million with Citigroup and $10.0
million with Barclays Bank. The borrowings are secured by MBS with an estimated
fair value of $39.5 million.
At
December 31, 2009, the Bank had unsecured lines of credit with five banks for a
total amount of $35.0 million. At December 31, 2009 and 2008, the
Company had no outstanding balances against these lines. The
following summarizes activities in other borrowings:
Year
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(dollars
in thousands)
|
||||||||
Average
balance outstanding
|
$ | 28,500 | $ | 14,787 | ||||
Maximum
amount outstanding at any month-end during the year
|
28,500 | 28,500 | ||||||
Balance
outstanding at end of year
|
28,500 | 28,500 | ||||||
Weighted
average interest rate during the year
|
2.61 | % | 1.80 | % |
9.
Subordinated Debentures
On March 25, 2004 the Corporation
issued $10,310,000 of Floating Rate Junior Subordinated Deferrable Interest
Debentures (the “Debt Securities”) to PPBI Trust I, a statutory trust created
under the laws of the State of Delaware. The Debt Securities are
subordinated to effectively all borrowings of the Corporation and are due and
payable on April 7, 2034. Interest is payable quarterly on the Debt
Securities at three-month LIBOR plus 2.75% for a rate of 3.03% at December 31,
2009 and 7.57% at December 31 2008. The Debt Securities may be
redeemed, in part or whole, on or after April 7, 2009 at the option of the
Corporation, at par. The Debt Securities can also be redeemed at par
if certain events occur that impact the tax treatment or the capital treatment
of the issuance. The Corporation also purchased a 3% minority
interest totaling $310,000 in PPBI Trust I. The balance of the equity
of PPBI Trust I is comprised of mandatorily redeemable preferred securities
(“Trust Preferred Securities”) and is included in other assets. PPBI Trust I
sold $10,000,000 of Trust Preferred Securities to investors in a private
offering.
10.
Income Taxes
Income
taxes for the years ended December 31 consisted of the following:
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Current
income tax provision:
|
||||||||||||
Federal
|
$ | 953 | $ | 1,750 | $ | 1,554 | ||||||
State
|
791 | 517 | 294 | |||||||||
Total
current income tax provision
|
1,744 | 2,267 | 1,848 | |||||||||
Deferred
income tax provision (benefit):
|
||||||||||||
Federal
|
(1,250 | ) | (1,578 | ) | 198 | |||||||
State
|
(581 | ) | (656 | ) | 61 | |||||||
Total
deferred income tax provision (benefit)
|
(1,831 | ) | (2,234 | ) | 259 | |||||||
Total
income tax provision (benefit)
|
$ | (87 | ) | $ | 33 | $ | 2,107 |
A
reconciliation from statutory federal income taxes to the Company's effective
income taxes for the years ended December 31 are as follows:
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Statutory
federal income tax provision (benefit)
|
$ | (186 | ) | $ | 252 | $ | 1,662 | |||||
California
franchise tax (benefit), net of federal income tax effect
|
139 | (92 | ) | 374 | ||||||||
Other
|
(40 | ) | (127 | ) | 71 | |||||||
Total
|
$ | (87 | ) | $ | 33 | $ | 2,107 |
Deferred
tax assets (liabilities) were comprised of the following temporary difference
between the financial statement carrying amounts and the tax basis of assets at
December 31:
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Deferred
tax assets:
|
||||||||
Accrued
expenses
|
$ | 608 | $ | 514 | ||||
Depreciation
on premises and equipment
|
103 | 103 | ||||||
Net
operating loss
|
4,807 | 5,205 | ||||||
Allowance
for loan losses, net of bad debt charge-offs
|
3,991 | 2,637 | ||||||
Unrealized
losses on available for sale securities
|
1,217 | 2,011 | ||||||
Capital
loss on mutual funds
|
1,232 | 742 | ||||||
Other-than-temporary
impairment
|
1,489 | 579 | ||||||
Other
|
18 | 36 | ||||||
Total
deferred tax assets
|
13,465 | 11,827 | ||||||
Deferred
tax liabilities:
|
||||||||
State
taxes
|
(695 | ) | (500 | ) | ||||
Federal
Home Loan Bank stock dividends
|
(1,171 | ) | (669 | ) | ||||
Restricted
stock and options expense
|
7 | (14 | ) | |||||
Other
|
(141 | ) | (140 | ) | ||||
Total
deferred tax liabilities
|
(2,000 | ) | (1,323 | ) | ||||
Net
deferred tax asset
|
$ | 11,465 | $ | 10,504 |
At
December 31, 2009, there was no valuation allowance against the Company’s
deferred tax asset. The Company has a net operating loss carryforward
of approximately $12.4 million for federal income tax purposes which expires in
2023. In addition, the Company has a net operating loss carryforward
of approximately $5.5 million for California franchise tax purposes. However,
the state of California has suspended the net operating loss deduction
utilization for the tax years 2008 and 2009. The net operating loss
deduction for the state is now scheduled to expire in 2015. With the
completion of the secondary offering in October 2003, the Company had an
“ownership change” as defined under Internal Revenue Code Section
382. Under Section 382, which has also been adopted under California
law, if during any three-year period there is more than a 50 percentage point
change in the ownership of the Company, then the future use of any pre-change
net operating losses or built-in losses of the Company may be subject to an
annual percentage limitation based on the value of the company at the ownership
change date. The ownership change reduced the net operating loss
carryforward for federal tax purposes by $5.8 million and for state tax purposes
by $3.3 million. The annual usable net operating loss carryforward
going forward is approximately $932,000 per year.
As of
December 31, 2009, tax years for 2005 through 2009 remain open to audit by the
Internal Revenue Service and by the California state tax
authority. Currently, the Bank is undergoing an examination of its
2005 and 2006 income tax returns by the California Franchise Tax
Board. In connection with this examination, the state examiners
reviewed, among other matters, whether our enterprise zone net interest
deductions taken in tax years 2005 and 2006 are allowable. The
enterprise zone net interest deductions for 2005 totaled $2.4 million and for
2006 totaled $2.2 million. After their review, the state disallowed
our enterprise zone net interest deductions of $141,000 for the year ended
December 31, 2005 and $121,000 for the year ended December 31,
2006. Based on their findings, the Company recorded an additional
income tax for years 2005 through 2009 of $445,000.
11.
Commitments, Contingencies and Concentrations of Risk
Legal Proceedings – In
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 (the “Missouri Act”) by charging and receiving fees and costs
that were either wholly prohibited by or in excess of that allowed by the
Missouri 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, interest plus the right to rescind the mortgage loans or a right to
offset any illegal collected charges, interest against the principal amounts due
on the loans and punitive damages. In March 2005, the Bank’s motion
for dismissal due to limitations was denied by the trial court without
comment. The Bank’s “preemption” motion was denied in August 2006.
The Bank has answered the plaintiffs’ complaint and the parties have exchanged
and answered initial discovery requests. When the record is more
fully developed, the Bank intends to raise the limitations issue again in the
form of a motion for summary judgment.
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.
Lease Commitments – The
Company leases a portion of its facilities from non-affiliates under operating
leases expiring at various dates through 2023. The following schedule
shows the minimum annual lease payments, excluding any renewals and extensions,
property taxes, and other operating expenses, due under these
agreements:
Year
ending December 31,
|
||||
(in
thousands)
|
||||
2010
|
$ | 633 | ||
2011
|
660 | |||
2012
|
593 | |||
2013
|
585 | |||
2014
|
603 | |||
Thereafter
|
3,371 | |||
Total
|
$ | 6,445 |
Rental
expense under all operating leases totaled $646,000 for 2009, $643,000 for 2008,
and $664,000 for 2007.
Share-Based Compensation –
The following table provides a summary of the expenses the Company has
recognized related to share-based compensation awards. The table
below also shows the impact those expenses have had on diluted earnings per
share and the remaining expense associated with those awards for the years ended
December 31:
2009
|
2008
|
2007
|
||||||||||
(in
thousands, except per share data)
|
||||||||||||
Share-based
compensation expense:
|
||||||||||||
Stock
option expense
|
$ | 256 | $ | 214 | $ | 75 | ||||||
Restricted
stock expense
|
15 | 112 | 127 | |||||||||
Total
share-based compensation expense
|
271 | 326 | 202 | |||||||||
Total
share-based compensation expense, net of tax
|
$ | 160 | $ | 192 | $ | 119 | ||||||
Diluted
shares outstanding
|
5,642,589 | 6,210,387 | 6,524,753 | |||||||||
Impact
on diluted earnings per share
|
$ | 0.028 | $ | 0.031 | $ | 0.018 | ||||||
Unrecognized
compensation expense:
|
||||||||||||
Stock
option expense
|
$ | 148 | $ | 559 | $ | 38 | ||||||
Restricted
stock expense
|
- | 14 | 85 | |||||||||
Total
unrecognized share-based compensation expense
|
148 | 573 | 123 | |||||||||
Total
unrecognized share-based compensation expense, net of tax
|
$ | 87 | $ | 338 | $ | 73 |
Employment
Agreements—The Company has entered into a three-year employment agreement
with our Chief Executive Officer (“CEO”). This agreement provides for
the payment of a base salary and a bonus based upon the CEO’s individual
performance and the Company’s overall performance, provides a vehicle for the
CEO’s use, and provides for the payment of severance benefits upon termination
under specified circumstances. Additionally, the Bank has entered
into three-year employment agreements with the Chief Banking
Officer. The agreement provides for the payment of a base salary, a
bonus based upon the individual’s performance and the overall performance of the
Bank and the payment of severance benefits upon termination under specified
circumstances.
Availability of Funding
Sources—The Company funds substantially all of the loans, which it
originates or purchases, through deposits, internally generated funds, and/or
borrowings. The Company competes for deposits primarily on the basis
of rates, and, as a consequence, the Company could experience difficulties in
attracting deposits to fund its operations if the Company does not continue to
offer deposit rates at levels that are competitive with other financial
institutions. To the extent that the Company is not able to maintain
its currently available funding sources or to access new funding sources, it
would have to curtail its loan production activities or sell loans earlier than
is optimal. Any such event could have a material adverse effect on
the Company’s results of operations, financial condition and cash
flows.
12.
Benefit Plans
401(k) Plan—The Bank
maintains an Employee Savings Plan (the “401(k) Plan”) which qualifies under
Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, employees
may contribute between 1% to 50% of their compensation. In 2009, 2008
and 2007, the Bank matched 100% of contributions for the first three percent
contributed and 50% on the next two percent
contributed. Contributions made to the 401(k) Plan by the Bank
amounted to $161,000 for 2009, $186,000 for 2008 and $202,000 for
2007.
Pacific Premier Bancorp, Inc. 2004
Long-Term Incentive Plan (“the Plan”)—The Plan was approved by the
Corporation’s stockholders in May 2004. The Plan authorizes the
granting of options equal to 525,500 shares of the common stock of the
Corporation for issuances to executives, key employees, officers, and
directors. The Plan will be in effect for a period of ten years from
February 25, 2004, the date the Plan was adopted. Options granted
under the Plan will be made at an exercise price equal to the fair market value
of the stock on the date of grant. Awards granted to officers and
employees may include incentive stock options, nonstatutory stock options and
limited rights, which are exercisable only upon a change in control of the
Corporation. The options granted pursuant to the Plan originally
vested at a rate of 33.3% per year. On March 4, 2005, the Corporation chose to
accelerate the vesting on all outstanding options.
Below is
a summary of the activity in the Corporation’s 2000 Stock Incentive Plan and the
Plan for the years ended December 31, 2009, 2008, and 2007.
2009
|
2008
|
2007
|
||||||||||||||||||||||
Shares
|
Weighted
average exercise price per share
|
Shares
|
Weighted
average exercise price per share
|
Shares
|
Weighted
average exercise price per share
|
|||||||||||||||||||
Options
outstanding at the beginning of the year
|
633,550 | $ | 8.75 | 392,625 | $ | 10.72 | 335,225 | $ | 11.26 | |||||||||||||||
Granted
|
- | - | 265,750 | 5.90 | 111,250 | 12.07 | ||||||||||||||||||
Exercised
|
- | - | - | - | - | - | ||||||||||||||||||
Forfeited
& Expired
|
(80,050 | ) | 8.78 | (24,825 | ) | 9.45 | (53,850 | ) | 16.89 | |||||||||||||||
Options
outstanding at the end of the year
|
553,500 | $ | 8.74 | 633,550 | $ | 8.75 | 392,625 | $ | 10.72 | |||||||||||||||
Options
exercisable at the end of the year
|
374,250 | 376,800 | 300,375 | |||||||||||||||||||||
Weighted
average remaining contractual life of options outstanding at end of
year
|
6.1
Years
|
7.0
Years
|
8.9
Years
|
There
were no stock options exercised in 2009, 2008 or 2007. The aggregate
intrinsic value (the amount by which a call option is in the money, calculated
by taking the difference between the strike price and the market price of the
underlier) of options outstanding was zero at December 31, 2009, $11,000 at
December 31, 2008, and $119,000 at December 31, 2007.
The
amount charged against compensation expense in relation to the stock option was
$256,000 for 2009 and $214,000 for 2008. At December 31, 2009, unrecognized
compensation expense related to the options is approximately $90,569 for 2010,
$57,265 for 2011, and $248 for 2012.
There
were no options granted under the Plan during 2009. Options granted
under the Plan during 2008 and 2007 were valued using the Black-Scholes model
with the following average assumptions:
Year
Ended December 31,
|
||
2008
|
2007
|
|
Expected
volatility
|
29.3%
to 66.2%
|
10.3%
to 13.2%
|
Expected
term
|
10.0
Years
|
10.0
Years
|
Expected
dividends
|
None
|
None
|
Risk
free rate
|
2.69%
to 3.96%
|
4.64%
to 4.68%
|
Weighted-average
grant date fair value
|
$2.57
to $2.81
|
$2.78
to $3.12
|
During
2006, restricted stock awards were granted for 35,050 shares of the
Corporation’s common stock. These shares vested with respect to each
employee over a three-year period from the date of grant, provided the
individual remains in the employment of the Company as of the vesting
date. Additionally, these shares (or a portion thereof) could vest
earlier in the event of a change in control of the
Company. Compensation expenses relating to these grants were $15,000
for 2009 and $112,000 for 2008. At December 31, 2009, all restricted stock
awards were fully vested. The table below summarizes the restricted
stock award activity for the periods indicated.
2009
|
2008
|
2007
|
||||||||||||||||||||||
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
Average
|
Average
|
Average
|
||||||||||||||||||||||
Restricted
stock awards
|
Shares
|
Grant
Price
|
Shares
|
Grant
Price
|
Shares
|
Grant
Price
|
||||||||||||||||||
Outstanding
grants at beginning of year
|
8,900 | $ | 11.70 | 20,300 | $ | 11.63 | 34,300 | $ | 11.62 | |||||||||||||||
Granted
|
- | - | - | - | - | - | ||||||||||||||||||
Vested
|
(8,900 | ) | 11.70 | (10,566 | ) | 11.58 | (11,933 | ) | 11.60 | |||||||||||||||
Cancelled
|
- | - | (834 | ) | 11.34 | (2,067 | ) | 11.73 | ||||||||||||||||
Outstanding
grants at end of year
|
- | $ | - | 8,900 | $ | 11.70 | 20,300 | $ | 11.63 |
Restricted
stock awards were expensed evenly over the vesting period. At
December 31, 2009 there was zero remaining to be expensed for restricted stock
awards that had been granted under the Plan.
Salary Continuation Plan—The
Bank implemented a non-qualified supplemental retirement plan in 2006 (the
“Salary Continuation Plan”) for certain executive officers of the Bank. The
Salary Continuation Plan is unfunded. The amounts expensed in 2009 and 2008
under the Salary Continuation Plan amounted to $36,000 and $111,000,
respectively. As of December 31, 2009 and 2008, $321,000 and
$290,000, respectively, were recorded in other liabilities on the consolidated
statements of condition for the Salary Continuation Plan.
Long-Term Care Insurance
Plan—The Bank implemented a Long-Term Care Insurance Plan in September
2006 for the executive officers and directors of the Bank. The
non-employee directors may elect not to participate in the insurance
plan. For those who opt out, the amount of the insurance premium, up
to $4,000 annually, will be recorded each month to their deferred compensation
account with interest. The expense for 2009 and 2008 was $30,000 and
$33,000, respectively, for this plan. As of December 31, 2009 and 2008, $29,000
and $24,000, respectively, was recorded in other liabilities on the consolidated
statements of condition for the insurance plan.
Directors’ Deferred Compensation
Plan—The Bank created a Directors’ Deferred Compensation Plan in
September 2006 which allows directors to defer board of directors’ fees. The
deferred compensation is credited with interest by the Bank at prime plus one
percent and the accrued liability is payable upon retirement or resignation. The
Directors’ Deferred Compensation Plan is unfunded. The Company is
under no obligation to make matching contributions to the plan. At December 31,
2009 the liability for the plan was $102,000 compared to $62,000 at December 31,
2008. The interest expense for 2009 was $3,000, compared to $2,000
for 2008 and $2,000 for 2007.
13. Financial Instruments with Off
Balance Sheet Risk
The
Company is a party to financial instruments with off- balance sheet risk in the
normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit in the form of originating loans or providing funds under existing lines
or letters of credit. These commitments are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates and may
require payment of a fee. Since many commitments are expected to expire, the
total commitment amounts do not necessarily represent future cash
requirements. Commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amounts recognized in the
accompanying consolidated statements of financial condition.
The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of those
instruments. The Company controls credit risk of its commitments to
fund loans through credit approvals, limits and monitoring procedures. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company
evaluates each customer for creditworthiness.
The
Company receives collateral to support commitments when deemed
necessary. The most significant categories of collateral include real
estate properties underlying mortgage loans, liens on personal property and cash
on deposit with the Bank.
The
Company maintains an allowance for credit losses to provide for commitments
related to loans associated with undisbursed loan funds and unused lines of
credit. The allowance for these commitments was $13,000 at December
31, 2009 and $18,000 at December 31, 2008.
The
Company’s commitments to extend credit at December 31, 2009 were $13.0 million
and at December 31, 2008 was $14.4 million. The 2009 balance
primarily included $10.9 million of undisbursed C&I loan funds and $1.3
million in standby letters of credit.
14.
Fair Value of Financial Instruments
Fair Value of Financial
Instruments—The Company’s estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
However, considerable judgment is
required to develop the estimates of fair value. Accordingly, the estimates are
not necessarily indicative of the amounts the Company could have realized in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since the balance sheet date and, therefore, current
estimates of fair value may differ significantly from the amounts
presented.
Cash and Cash Equivalents—The
carrying amount approximates fair value due to their short-term repricing
characteristics.
Securities Available for
Sale—Fair values are based on quoted market prices from securities
dealers or readily available market quote systems.
FHLB and Federal Reserve Bank
Stock – The carrying value approximates the fair value based upon the
redemption provisions of the stock.
Loans Held for Sale—Fair
values are based on quoted market prices or dealer quotes.
Loans Held for Investment—The
fair value of gross loans receivable has been estimated using the present value
of cash flow method, discounting expected future cash flows by estimated market
interest rates for loans with similar characteristics, including credit ratings
and maturities. Consideration is also given to estimated prepayments
and credit losses.
Accrued Interest
Receivable/Payable—The carrying amount approximates fair
value.
Deposit Accounts—The fair
value disclosed for checking, passbook and money market accounts is the amount
payable on demand at the reporting date. The fair value of
certificates of deposit accounts is estimated using a discounted cash flow
calculation based on interest rates currently offered for certificate of
deposits of similar remaining maturities.
FHLB Advances and Other
Borrowings—The fair value disclosed for FHLB advances and other
borrowings is determined by discounting contractual cash flows at current market
interest rates for similar instruments with similar terms.
Subordinated Debentures – The
fair value of subordinated debentures is estimated by discounting the balance by
the current three-month LIBOR rate plus the current market
spread. The fair value is determined based on the maturity date as
the Company does not currently have intentions to call the
debenture.
Off-balance sheet commitments and
standby letters of credit – The notional amount disclosed for off-balance
sheet commitments and standby letters of credit is the amount available to be
drawn down all lines and letters of credit. The cost to assume is
calculated at 10% of the notional amount.
The fair
value estimates presented herein are based on pertinent information available to
management as of December 31, 2009 and 2008.
|
At
December 31, 2009
|
|||||||
Carrying
|
Estimated
|
|||||||
Amount
|
Fair
Value
|
|||||||
(in
thousands)
|
||||||||
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 59,706 | $ | 59,706 | ||||
Securities
available for sale
|
123,407 | 123,407 | ||||||
Federal
Reserve Bank and FHLB stock, at cost
|
14,330 | 14,330 | ||||||
Loans
held for investment, net
|
566,584 | 558,901 | ||||||
Accrued
interest receivable
|
3,520 | 3,520 | ||||||
Liabilities:
|
||||||||
Deposit
accounts
|
618,734 | 632,135 | ||||||
FHLB
advances
|
63,000 | 64,666 | ||||||
Other
borrowings
|
28,500 | 35,384 | ||||||
Subordinated
debentures
|
10,310 | 5,378 | ||||||
Accrued
interest payable
|
161 | 161 | ||||||
Notional
Amount
|
Cost
to Cede
or
Assume
|
|||||||
Off-balance
sheet commitments and standby letters of credit
|
$ | 13,027 | $ | 1,303 |
|
At
December 31, 2008
|
|||||||
Carrying
|
Estimated
|
|||||||
Amount
|
Fair
Value
|
|||||||
(in
thousands)
|
||||||||
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 9,707 | $ | 9,707 | ||||
Securities
available for sale
|
56,606 | 56,606 | ||||||
Federal
Reserve Bank and FHLB stock, at cost
|
14,330 | 14,330 | ||||||
Loans
held for sale, net
|
668 | 668 | ||||||
Loans
held for investment, net
|
622,470 | 620,136 | ||||||
Accrued
interest receivable
|
3,627 | 3,627 | ||||||
Liabilities:
|
||||||||
Deposit
accounts
|
457,128 | 463,591 | ||||||
FHLB
advances
|
181,400 | 187,225 | ||||||
Other
borrowings
|
28,500 | 31,482 | ||||||
Subordinated
debentures
|
10,310 | 6,732 | ||||||
Accrued
interest payable
|
237 | 237 | ||||||
Notional
Amount
|
Cost
to Cede
or
Assume
|
|||||||
Off-balance
sheet commitments and standby letters of credit
|
$ | 16,548 | $ | 1,655 |
15.
Fair Value Disclosures
Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. The fair value hierarchy prioritizes
inputs to valuation techniques used in fair value calculations. The
three levels of inputs are defined as follows:
Level 1 –
unadjusted quoted prices for identical assets or liabilities in active markets
accessible by the Company
Level 2 – inputs that are observable in
the marketplace other than those inputs classified as Level 1
Level 3 – inputs that are unobservable
in the marketplace and significant to the valuation
The Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs. If a
financial instrument uses inputs that fall in different levels of the hierarchy,
the instrument will be categorized based upon the lowest level of input that is
significant to the fair value calculation.
The
Company’s financial assets and liabilities measured at fair value on a recurring
basis include securities available for sale, loans held for sale, and impaired
loans. Securities available for sale include mortgage-backed
securities and equity securities. Loans held for sale include the
guarantee portion of our saleable SBA loans. Impaired loans include loans that
are in a non-accrual status and where the Bank has reduced the principal to the
value of the underlying collateral less the anticipated selling
cost.
Marketable
Securities. Where possible, the Company utilizes quoted market prices
to measure debt and equity securities; such items are classified as Level 1 in
the hierarchy and include equity securities, US government bonds and securities
issued by federally sponsored agencies. When quoted market prices for
identical assets are unavailable or the market for the asset is not sufficiently
active, varying valuation techniques are used. Common inputs in
valuing these assets include, among others, benchmark yields, issuer spreads,
forward mortgage-backed securities trade prices and recently reported
trades. Such assets are classified as Level 2 in the hierarchy and
typically include private label mortgage-backed securities and corporate bonds.
Pricing on these securities are provided to the Company by a pricing service
vendor. In the Level 3 category, the Company is classifying all the
securities that our pricing service vendor cannot price due to lack of trade
activity in these securities.
Loans
held for sale. The fair value of loans held for sale is determined, when
possible, using quoted secondary-market prices. If no such quoted price exists,
the fair value of a loan is determined using quoted prices for a similar asset
or assets, adjusted for the specific attributes of that loan.
A loan is
considered impaired when it is probable that payment of interest and principal
will not be made in accordance with the contractual terms of the loan agreement.
Impairment is measured based on the fair value of the underlying collateral or
the discounted expected future cash flows. The Company measures impairment on
all non-accrual loans for which it has reduced the principal balance to the
value of the underlying collateral less the anticipated selling cost. As such,
the Company records impaired loans as non-recurring Level 2 when the fair value
of the underlying collateral is based on an observable market price or current
appraised value. When current market prices are not available or the Company
determines that the fair value of the underlying collateral is further impaired
below appraised values, the Company records impaired loans as Level 3. At
December 31, 2009, substantially all the Company’s impaired loans were evaluated
based on the fair value of their underlying collateral based upon the most
recent appraisal available to management.
The
Company’s valuation methodologies may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair
values. While management believes the Company’s valuation
methodologies are appropriate and consistent with other market participants, the
use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair value
at the reporting date.
The
following fair value hierarchy table presents information about the Company’s
assets measured at fair value on a recurring basis at the dates
indicated:
At
December 31, 2009
|
||||||||||||||||
Fair
Value Measurement Using
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Assets
at
Fair
Value
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Marketable
securities
|
$ | 117,729 | $ | 5,055 | $ | 623 | $ | 123,407 | ||||||||
Total
assets
|
$ | 117,729 | $ | 5,055 | $ | 623 | $ | 123,407 | ||||||||
At
December 31, 2008
|
||||||||||||||||
Fair
Value Measurement Using
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Assets
at
Fair
Value
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Marketable
securities
|
$ | 39,019 | $ | 15,973 | $ | 1,614 | $ | 56,606 | ||||||||
Total
assets
|
$ | 39,019 | $ | 15,973 | $ | 1,614 | $ | 56,606 |
The
following table provides a summary of the changes in balance sheet carrying
values associated with Level 3 financial instruments during the twelve months
ended December 31, 2009:
Fair
Value Measurement Using
|
||||
Significant
Other Unobservable Inputs
|
||||
(Level
3)
|
||||
Marketable
|
||||
securities
|
||||
Beginning
Balance, January 1, 2009
|
$ | 1,614 | ||
Total
gains or losses (realized/unrealized):
|
||||
Included
in earnings (or changes in net assets)
|
(673 | ) | ||
Included
in other comprehensive income
|
(197 | ) | ||
Purchases,
issuances, and settlements
|
(121 | ) | ||
Transfer
in and/or out of Level 3
|
- | |||
Ending
Balance, December 31, 2009
|
$ | 623 |
The
following table provides a summary of the financial instruments the Company
measures at fair value on a non-recurring basis as of December 31,
2009:
Fair
Value Measurement Using
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Assets
at Fair Value
|
|||||||||||||
(in
thousands)
|
||||||||||||||||
Assets
|
||||||||||||||||
Impaired
Loans
|
$ | - | $ | 13,657 | $ | - | $ | 13,657 | ||||||||
Other
real estate owned
|
- | 3,380 | - | 3,380 | ||||||||||||
Total
assets
|
$ | - | $ | 17,037 | $ | - | $ | 17,037 |
16.
Earnings (loss) Per Share
Earnings
(loss) per share of common stock is calculated on both a basic and diluted basis
based on the weighted average number of common and common equivalent shares
outstanding, excluding common shares in treasury. Basic earnings (loss) per
share excludes dilution and is computed by dividing income available to
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted from the issuance of common stock that
then would share in earnings.
A
reconciliation of the numerators and denominators used in basic and diluted
earnings per share computations is presented in the table below. For
the year ended December 31, 2009, 533,500 options and 966,400 warrants were
excluded from the diluted earnings per share calculation due to the Company
recording a net loss for the year. Excluded from the diluted earnings
per share calculation were options of 606,050 for the year ended December 31,
2008 and 331,125 for the year ended December 31, 2007, as the exercise prices
exceeded the stock price at the end of each period.
Income/Loss)
|
Shares
|
Per
Share
|
||||||||||
(numerator)
|
(denominator)
|
Amount
|
||||||||||
(dollars
in thousands, except share data)
|
||||||||||||
For
the year ended December 31, 2009:
|
||||||||||||
Net
loss applicable to earnings per share
|
$ | (460 | ) | |||||||||
Basic
loss per share: loss available to common stockholders
|
(460 | ) | 5,642,589 | $ | (0.08 | ) | ||||||
Diluted
loss per share: loss available to common stockholders
|
$ | (460 | ) | 5,642,589 | $ | (0.08 | ) | |||||
For
the year ended December 31, 2008:
|
||||||||||||
Net
income applicable to earnings per share
|
$ | 708 | ||||||||||
Basic
earnings per share: Income available to common
stockholders
|
708 | 4,948,359 | $ | 0.14 | ||||||||
Effect
of dilutive securities : Warrants and stock option plans
|
- | 1,262,028 | ||||||||||
Diluted
earnings per share: Income available to common
stockholders
|
$ | 708 | 6,210,387 | $ | 0.11 | |||||||
For
the year ended December 31, 2007:
|
||||||||||||
Net
income applicable to earnings per share
|
$ | 3,619 | ||||||||||
Basic
earnings per share: Income available to common
stockholders
|
3,619 | 5,189,104 | $ | 0.70 | ||||||||
Effect
of dilutive securities : Warrants and stock option plans
|
- | 1,335,649 | ||||||||||
Diluted
earnings per share: Income available to common
stockholders
|
$ | 3,619 | 6,524,753 | $ | 0.55 |
17.
Related Parties
Loans to
our executive officers and directors are made in the ordinary course of business
and are made on substantially the same terms as comparable
transactions. For both 2009 and 2008, the Bank had three loans
outstanding to the partnership of McKennon Wilson & Morgan LLP, of which
Michael L. McKennon, a director of the Corporation, is a
partner. The first two loans were commercial loans at fixed rates of
7.00% and 8.50%, and the third loan was a commercial line of credit with a
variable rate at prime plus 50 basis points with a floor of
7.50%. All three of these loans were paid off in April
2009.
The
following table shows the activity of loans to all officers and directors of the
Company for the periods specified:
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Balance,
beginning of year
|
$ | 422 | $ | 387 | ||||
Originations/advances
|
- | 225 | ||||||
Principal
payments
|
422 | 190 | ||||||
Balance,
end of year
|
$ | - | $ | 422 |
At the
end of 2009 we had related party deposits of $1.5 million compared to $1.8
million at the end of 2008.
18.
Quarterly Results of Operations (Unaudited)
The
following is a summary of selected financial data presented below by quarter for
the years ended December 31:
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
(dollars
in thousands, except per share data)
|
||||||||||||||||
2009
|
||||||||||||||||
Interest
income
|
$ | 10,952 | $ | 11,295 | $ | 10,757 | $ | 10,435 | ||||||||
Interest
expense
|
5,675 | 5,306 | 5,004 | 4,269 | ||||||||||||
Provision
for estimated loan losses
|
1,160 | 2,374 | 2,001 | 2,200 | ||||||||||||
Noninterest
income
|
630 | (328 | ) | 256 | 139 | |||||||||||
Noninterest
expense
|
3,930 | 4,592 | 4,119 | 4,053 | ||||||||||||
Income
tax provision (benefit)
|
280 | (592 | ) | (104 | ) | 329 | ||||||||||
Net
income (loss)
|
$ | 537 | $ | (713 | ) | $ | (7 | ) | $ | (277 | ) | |||||
Earnings
(loss) per share:
|
||||||||||||||||
Basic
|
$ | 0.11 | $ | (0.15 | ) | -- | $ | (0.04 | ) | |||||||
Diluted
|
$ | 0.09 | $ | (0.15 | ) | -- | $ | (0.04 | ) | |||||||
2008
|
||||||||||||||||
Interest
income
|
$ | 11,944 | $ | 11,532 | $ | 11,570 | $ | 11,476 | ||||||||
Interest
expense
|
7,117 | 6,221 | 6,021 | 6,045 | ||||||||||||
Provision
for estimated loan losses
|
183 | 836 | 664 | 558 | ||||||||||||
Noninterest
income
|
678 | (2,753 | ) | 647 | (744 | ) | ||||||||||
Noninterest
expense
|
4,015 | 3,969 | 3,951 | 4,036 | ||||||||||||
Income
tax provision (benefit)
|
464 | (1,000 | ) | 581 | (12 | ) | ||||||||||
Net
income (loss)
|
$ | 843 | $ | (1,247 | ) | $ | 1,000 | $ | 105 | |||||||
Earnings
(loss) per share:
|
||||||||||||||||
Basic
|
$ | 0.17 | $ | (0.25 | ) | $ | 0.20 | $ | 0.02 | |||||||
Diluted
|
$ | 0.13 | $ | (0.25 | ) | $ | 0.16 | $ | 0.02 |
19.
Parent Company Financial Information
Pacific Premier Bancorp Inc. is a
California-based bank holding company organized in 1997 as a Delaware
corporation and owns 100% of the capital stock of the Bank, its principal
operating subsidiary. The Bank was incorporated and commenced operations in
1983. Condensed financial statements of Pacific Premier Bancorp, Inc.
only are as follows:
PACIFIC
PREMIER BANCORP, INC.
|
||||||||
STATEMENTS
OF FINANCIAL CONDITION
|
||||||||
(Parent
company only)
|
||||||||
At
December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 1,581 | $ | 773 | ||||
Investment
in subsidiaries
|
77,590 | 62,350 | ||||||
Deferred
income taxes
|
4,573 | 4,539 | ||||||
Other
assets
|
326 | 329 | ||||||
Total
Assets
|
$ | 84,070 | $ | 67,991 | ||||
Liabilities:
|
||||||||
Subordinated
debentures
|
$ | 10,310 | $ | 10,310 | ||||
Accrued
expenses and other liabilities
|
258 | 133 | ||||||
Total
Liabilities
|
10,568 | 10,443 | ||||||
Total
Stockholders’ Equity
|
73,502 | 57,548 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 84,070 | $ | 67,991 |
PACIFIC
PREMIER BANCORP, INC.
|
||||||||||||
STATEMENTS
OF OPERATIONS
|
||||||||||||
(Parent
company only)
|
||||||||||||
For
the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(in
thousands)
|
||||||||||||
Income:
|
||||||||||||
Interest
income
|
$ | 23 | $ | 6 | $ | 20 | ||||||
Noninterest
income
|
26 | 76 | 201 | |||||||||
Total
income
|
49 | 82 | 221 | |||||||||
Expense:
|
||||||||||||
Interest
expense
|
368 | 649 | 822 | |||||||||
Noninterest
expense
|
642 | 552 | 479 | |||||||||
Total
expense
|
1,010 | 1,201 | 1,301 | |||||||||
Loss
before income tax provision
|
(961 | ) | (1,119 | ) | (1,080 | ) | ||||||
Income
tax benefit
|
(395 | ) | (459 | ) | (411 | ) | ||||||
Net
loss (parent only)
|
(566 | ) | (660 | ) | (669 | ) | ||||||
Equity
in net earnings of subsidiaries
|
106 | 1,368 | 4,288 | |||||||||
Net
income (loss)
|
$ | (460 | ) | $ | 708 | $ | 3,619 |
PACIFIC
PREMIER BANCORP, INC.
|
||||||||||||
SUMMARY
STATEMENTS OF CASH FLOWS
|
||||||||||||
(Parent
company only)
|
||||||||||||
For
the Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
(in
thousands)
|
|||||||||||
Net
income (loss)
|
$ | (460 | ) | $ | 708 | $ | 3,619 | |||||
Adjustments
to reconcile net income to cash used in operating
activities:
|
||||||||||||
Share-based
compensation expense
|
271 | 333 | 202 | |||||||||
Equity
in net earnings of subsidiaries
|
(106 | ) | (1,368 | ) | (4,288 | ) | ||||||
Increase
(decrease) in accrued expenses and other liabilities
|
126 | (130 | ) | (108 | ) | |||||||
Decrease
(increase) in current and deferred taxes
|
(34 | ) | (41 | ) | 73 | |||||||
Decrease
(increase) in other assets
|
3 | 51 | (56 | ) | ||||||||
Net
cash used in operating activities
|
(200 | ) | (447 | ) | (558 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Investment
in subsidiaries
|
(14,000 | ) | - | - | ||||||||
Net
cash used in investing activities
|
(14,000 | ) | - | - | ||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
Dividend
from Bank
|
- | 2,700 | - | |||||||||
Proceeds
from issuance of common stock, net of issuance cost
|
15,241 | |||||||||||
Repurchase
of common stock
|
(383 | ) | (2,074 | ) | (1,092 | ) | ||||||
Proceeds
from exercise of warrants
|
150 | - | - | |||||||||
Net
cash provided by (used in) financing activities
|
15,008 | 626 | (1,092 | ) | ||||||||
Net
Increase (Decrease) In Cash And Cash Equivalents
|
808 | 179 | (1,650 | ) | ||||||||
Cash
And Cash Equivalents, Beginning Of Year
|
773 | 594 | 2,245 | |||||||||
Cash
And Cash Equivalents, End Of Year
|
$ | 1,581 | $ | 773 | $ | 595 |
None
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the
period covered by this report. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. In
addition, the design of disclosure controls and procedures must reflect the fact
that there are resource constraints and that management is required to apply its
judgment in evaluating the benefits of possible controls and procedures relative
to their costs.
Based on
our evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective as
of the end of the period covered by this report in providing reasonable
assurance that information we are required to disclose in 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, and that such
information 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.
Management’s
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with United States generally accepted accounting
principles. Our internal control over financial reporting includes
those policies and procedures that:
(1)
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
(2)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with United States
generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with the authorization of
its management and directors; and
|
(3)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Our management assessed the effectiveness of its internal control over financial
reporting as of December 31, 2009. In making this assessment,
management used the framework set forth in the report entitled “Internal Control—Integrated
Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO. The COSO framework summarizes each of
the components of a company’s internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information
and communication, and (v) monitoring. Based on this assessment, our
management believes that, as of December 31, 2009, our internal control over
financing reporting is effective based on those criteria.
The Company’s Annual
Report on Form 10-K does not include an attestation report of our registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only management’s report in its Annual
Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
We
regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new,
more efficient systems, consolidating activities, and migrating
processes.
There
were no changes in our internal controls over financial reporting during the
fiscal quarter to which this report relates that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
None
The
information required by this item with respect to our directors and certain
corporate governance practices is contained in our Proxy Statement for our 2010
Annual Meeting of Stockholders (the “Proxy Statement”),expected to be filed with
the SEC within 120 days after the end of the Company’s fiscal year ended
December 31, 2009, under the headings “Corporate Governance;” “Item
1—Election of Directors;” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” which information is incorporated herein by reference. The
information required by this item with respect to our executive officers is
contained in the Proxy Statement under the headings “Corporate Governance” and
“Section 16(a) Beneficial Ownership Reporting Compliance,” which information is
incorporated herein by reference.
We maintain a
code of ethics applicable to our Board of Directors, principal executive
officer, and principal financial officer, as well as all of our other employees.
Our code of ethics can be found on our internet website located at
www.ppbi.com.
The
information required by this item is contained in the Proxy Statement under the
headings “Executive Compensation;” “Compensation Committee Interlocks and
Insider Participation;” and “Compensation Committee Report,” which information
is incorporated herein by reference.
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2009, with respect
to options outstanding and available under the Company’s 2000 Stock Incentive
Plan and the Company’s 2004 Long-Term Incentive Plan.
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding
Options/Warrants
|
Weighted-Average
Exercise Price of Outstanding Options/Warrants
|
Number
of Securities Remaining Available for Future Issuance
|
|||||||||
Equity
compensation plans approved by security holders:
|
||||||||||||
2000
& 2004 Stock Incentive Plans
|
553,500 | $ | 8.74 | 58,101 | ||||||||
Equity
compensation plans not approved by security holders
|
- | - | - | |||||||||
Total
Equity Compensation plans
|
553,500 | $ | 8.74 | 58,101 |
Additional
information required by this item is contained in the Proxy Statement under the
headings “Principal Holders of Common Stock” and “Security Ownership of
Directors and Executives Officers,” which information is incorporated herein by
reference.
The
information required by this item is contained in the Proxy Statement under the
headings “Transactions with Certain Related Persons” and “Item 1—Election of
Directors”, which information is incorporated herein by reference.
The
information required by this item is contained in the Proxy Statement under the
heading “Item 2—Ratification of Appointment of Independent Auditors,” which
information is incorporated herein by reference.
(a) Documents
filed as part of this report.
|
(1)
|
The
following financial statements are incorporated by reference from Item 8
hereof:
|
Independent
Auditors’ Report.
Consolidated
Statements of Financial Condition as of December 31, 2009 and 2008.
Consolidated
Statements of Income for the Years Ended December 31, 2009, 2008 and
2007.
Consolidated
Statement of Stockholders’ Equity and Other Comprehensive Income for the Years
Ended December 31, 2009, 2008 and 2007.
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007.
Notes to
Consolidated Financial Statements.
|
(2)
|
All
schedules for which provision is made in the applicable accounting
regulation of the SEC are omitted because they are not applicable or the
required information is included in the consolidated financial statements
or related notes thereto.
|
|
(3)
|
The
following exhibits are filed as part of this Form 10-K, and this list
includes the Exhibit Index.
|
Exhibit No.
|
Description
|
3.1.0
|
Certificate
of Incorporation of Pacific Premier Bancorp, Inc. (1)
|
3.1.1
|
First
Certificate of Amendment to Certificate of Incorporation of Pacific
Premier Bancorp, Inc. (2)
|
3.1.2
|
Second
Certificate of Amendment to Certificate of Incorporation of Pacific
Premier Bancorp, Inc. (2)
|
3.1.3
|
Third
Certificate of Amendment to Certificate of Incorporation of Pacific
Premier Bancorp, Inc. (2)
|
3.1.4
|
Fourth
Certificate of Amendment to Certificate of Incorporation of Pacific
Premier Bancorp, Inc. (3)
|
3.2
|
Bylaws
of Pacific Premier Bancorp, Inc., as amended. (1)
|
4.1
|
Specimen
Stock Certificate of Pacific Premier Bancorp, Inc. (4)
|
4.2
|
Form
of Warrant to Purchase 1,166,400 Shares of Common Stock of Pacific Premier
Bancorp, Inc. (5)
|
4.3
|
Indenture
from PPBI Trust I. (7)
|
10.1
|
2000
Stock Incentive Plan. (6)*
|
10.2
|
Employment
Agreement between Pacific Premier Bancorp, Inc. and Pacific Premier Bank
and Steven Gardner dated December 19, 2007. (10)*
|
10.3
|
Employment
Agreement between Pacific Premier Bank and Kent Smith dated December 19,
2007. (10)*
|
10.4
|
Employment
Agreement between Pacific Premier Bank and Eddie Wilcox dated December 19,
2007. (10)*
|
10.5
|
Amended
and Restated Declaration of Trust from PPBI Trust I.
(7)
|
10.6
|
Guarantee
Agreement from PPBI Trust I. (7)
|
10.7
|
Salary
Continuation Agreements between Pacific Premier Bank and Steven R.
Gardner. (8)*
|
10.8
|
Salary
Continuation Agreements between Pacific Premier Bank and Kent Smith.
(8)*
|
10.9
|
Form
of Pacific Premier Bancorp, Inc. 2004 Long-Term Incentive Plan agreement.
(9)*
|
10.10
|
2004
Stock Incentive Plan (12)*
|
21
|
Subsidiaries
of Pacific Premier Bancorp, Inc. (Reference is made to “Item 1. Business”
for the required information.)
|
23
|
Consent
of Vavrinek, Trine, Day and Co., LLP.
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act.
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act.
|
|
________________
|
(1)
|
Incorporated
by reference from the Registrant’s Form 10-K filed with the SEC on March
31, 2003.
|
(2)
|
Incorporated
by reference from the Registrant’s Form 10-K/A filed with the SEC on
August 28, 2003.
|
(3)
|
Incorporated
by reference from the Registrant’s Form 10-Q filed with the SEC on August
14, 2003.
|
(4)
|
Incorporated
by reference from the Registrant’s Registration Statement on Form S-1
(Registration No. 333-20497) filed with the SEC on January 27,
1997.
|
(5)
|
Incorporated
by reference from the Registrant’s Proxy Statement filed with the SEC on
December 14, 2001.
|
(6)
|
Incorporated
by reference from the Registrant’s Proxy Statement filed with the SEC on
May 1, 2001.
|
(7)
|
Incorporated
by reference from the Registrant’s Form 10-Q filed with the SEC on May 3,
2004.
|
(8)
|
Incorporated
by reference from the Registrant’s Form 8-K filed with the SEC on May 19,
2006.
|
(9)
|
Incorporated
by reference from the Registrant’s Form 10-K filed with the SEC on April
4, 2007.
|
(10)
|
Incorporated
by reference from the Registrant’s Form 8-K filed with the SEC on December
21, 2007.
|
(11)
|
Incorporated
by reference from the Registrant’s Form 10-K filed with the SEC on April
15, 2008 and 10-K/A filed with the SEC on May 9,
2008.
|
(12)
Incorporated by reference from the Registrant’s Proxy Statement filed with the
SEC on April 23, 2004.
*
|
Management
contract or compensatory plan or
arrangement.
|
Pursuant
to the requirements of Section 13 or 15(d) 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
|
Steven
R. Gardner
|
|
President
and Chief Executive
Officer
|
DATED:
March 29, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/
Steven R. Gardner
|
President
and Chief Executive Officer
(principal
executive officer)
|
March
29, 2010
|
Steven
R. Gardner
|
||
/s/
Kent J. Smith
|
Senior
Vice President and Chief Financial Officer (principal financial and
accounting officer)
|
March
29, 2010
|
Kent
J. Smith
|
||
/s/
Ronald G. Skipper
|
Chairman
of the Board of Directors
|
March
29, 2010
|
Ronald
G. Skipper
|
||
/s/
John D. Goddard
|
Director
|
March
29, 2010
|
John
D. Goddard
|
||
/s/
Michael L. McKennon
|
Director
|
March
29, 2010
|
Michael
L. McKennon
|
||
/s/
Kenneth Boudreau
|
Director
|
March
29, 2010
|
Kenneth
Boudreau
|
||
/s/
Jeff C. Jones
|
Director
|
March
29, 2010
|
Jeff
C. Jones
|
||
/s/David
L. Hardin
|
Director
|
March
29, 2010
|
David
L. Hardin
|