| PACIFIC PREMIER BANCORP INC ITEM 1A RISK FACTORS Risk Factors You should carefully consider the following risk factors and all other information contained in this annual report on Form 10-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may impair our business |
| If any of the events described in the following risk factors occur, our business, results of operations and financial condition could be materially adversely affected |
| Our multi-family residential and commercial real estate loans are relatively unseasoned, and defaults on such loans would adversely affect our financial condition and results of operations |
| At December 31, 2005, our multi-family residential loans amounted to dlra459dtta7 million, or 76dtta0prca of our total loans |
| At December 31, 2005, our commercial real estate loans amounted to dlra125dtta4 million, or 20dtta7prca 31 ______________________________________________________________________ of our total loans |
| Our multi-family residential and commercial real estate loan portfolios consist primarily of loans originated after June 30, 2002 and are, consequently, relatively unseasoned |
| In addition, such loans originated after June 30, 2002 have an average loan balance as of December 31, 2005 of dlra765cmam000 in the case of multi-family loans and dlra1dtta1 million in the case of commercial real estate loans, so that a default on a multi-family or commercial real estate loan may have a greater impact on us than a default on a single-family residential loan which is generally smaller in size |
| Further, the payment on multi-family and commercial real estate loans is typically dependent on the successful operation of the project, which is affected by the supply and demand for multi-family residential units and commercial property within the relevant market |
| If the market for multi-family units and commercial property experiences a decline in demand, multi-family and commercial borrowers may suffer losses on their projects and be unable to repay their loans |
| Defaults on these loans would negatively affect our financial condition, results of operations and financial prospects |
| 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 large 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 that we originate 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 |
| Our origination of multi-family and commercial real estate loans is dependent on the mortgage brokers who refer these loans to us |
| Our primary method of originating multi-family and commercial real estate loans is through referrals by mortgage brokers |
| During 2005, five mortgage brokers have referred to us approximately 64dtta13prca of all the multi-family and commercial real estate loans in our loan portfolio |
| Although we have in-house account managers who have the responsibility of developing relationships with additional mortgage brokers which may refer us the types of loans we target, should we not be successful in developing relationships with additional mortgage brokers and should we lose referrals from one or more mortgage brokers on whom we depend for a large percentage of our multi-family and commercial real estate loans, our loan originations could be substantially less than we anticipate, thus reducing our anticipated income from these loans |
| 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 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 Board or otherwise, may have a 32 ______________________________________________________________________ significant effect on net interest income |
| The assets and liabilities may react differently to changes in overall market rates or conditions |
| Moreover, in periods of rising interest rates, financial institutions typically originate fewer mortgage loans adversely affecting our interest income on loans |
| 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 |
| We may experience loan losses in excess of our allowance for loan losses |
| We try to limit the risk that borrowers will fail to repay loans by carefully underwriting the loans, nevertheless losses can and do occur |
| We create an allowance for estimated loan losses in our accounting records, based on estimates of the following: · industry standards; · historical experience with our loans; · 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 |
| We maintain an allowance for loan losses at a level that we believe is adequate to absorb any specifically identified losses, as well as, any other losses inherent in our loan portfolio |
| However, changes in economic, operating and other conditions, including 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 OTS, as part of its supervisory function, periodically reviews our allowance for loan losses |
| Such 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 the OTS could also adversely affect our financial condition and results of operations |
| Upon exercise of the Warrant, shareholders will experience significant dilution in their shares of common stock |
| In 2002, a warrant (“the Warrant”) was issued in conjunction with a private placement |
| The holder of the Warrant has the right to purchase 1cmam166cmam400 shares of our common stock at an exercise price of dlra0dtta75 per share, which shares, once exercised, would represent approximately 18dtta2prca of our issued and outstanding shares as of December 31, 2005 |
| The Warrant is currently exercisable for an aggregate of 1cmam166cmam400 shares of our common stock |
| The trading price of our common stock has been significantly higher than dlra0dtta75 per share for the last three fiscal years and at December 31, 2005, the closing price of our common stock was dlra11dtta80 per share |
| Upon exercise of the Warrant, existing shareholders will experience significant dilution of the shares of our common stock that they hold |
| Adverse outcomes of litigation against us could harm our business and results of operations |
| We are currently involved in litigation involving the prior management’s origination and sale of subprime mortgages, as well as, other actions arising in the ordinary course of our business |
| We also anticipate that, due to the consumer-oriented nature of the subprime mortgage industry in which we previously actively operated and uncertainties with respect to the application of various laws and regulations in some circumstances, we may be named from time to time as a defendant in litigation 33 ______________________________________________________________________ involving alleged violations of federal and state consumer lending or other similar laws and regulations |
| A significant judgment against us in connection with any pending or future litigation could harm our business and results of operations |
| Poor economic conditions in California may cause us to suffer higher default rates on our loans and decreased value of the assets we hold as collateral |
| As a result, poor 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 |
| Further, a downturn in the Southern California real estate market could hurt our business |
| Our business activities and credit exposure are concentrated in Southern California |
| A downturn 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, 2005, approximately 98dtta1prca of our loan portfolio consisted of loans secured by real estate located in California, the substantial majority of which are located in Southern California |
| If there is a significant decline in real estate values, especially in Southern California, the collateral for our loans will provide less security |
| Real estate values in Southern California could be affected by, among other things, earthquakes and other natural disasters particular to Southern California |
| 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 |
| In addition, in order to pay cash dividends to our shareholders, we would most likely need to obtain funds from the Bank |
| The Bank’s ability, in turn, to pay dividends to us is limited by federal banking law |
| It is possible, depending on the financial condition of the Bank and other factors, that the OTS could assert that payment of dividends by the Bank is an unsafe or unsound practice |
| Federal law imposes conditions on the ability to acquire control of our common stock at specified threshold percentages, which could discourage a change in control |
| Acquisition of control of a federal savings bank or its holding company requires advance approval by the OTS Under federal law, the acquisition of more than 10prca of our common stock would result in a rebuttable presumption of control and the ownership of more than 25prca of our voting stock would result in conclusive control |
| Depending on the circumstances, the foregoing requirements may prevent or restrict a change in control of us |
| Our business may be adversely affected by the highly regulated environment in which we operate |
| We are subject to extensive federal and state legislation, regulation and supervision |
| Recently enacted, proposed and future legislation and regulations have had and are expected to continue to have a significant impact on the financial services industry |
| Some of the legislative and regulatory changes may benefit us |
| 34 ______________________________________________________________________ Anti-takeover defenses may delay or prevent future transactions Our Certificate of Incorporation and Bylaws, among other things: · divide the board of directors into three classes with directors of each class serving for a staggered three year period; · provides that our directors must fill vacancies on the board; · permit the issuance, without shareholder approval, of shares of preferred stock having rights and preferences determined by the board of directors; · provide that stockholders holding 80prca of our issued and outstanding shares must vote to approve certain business combinations and other transactions involving holders of more than 10prca of our common stock or our affiliates; · provide that stockholders holding 80prca of our issued and outstanding shares must vote to remove directors for cause; and · provide that record holders of our common stock who beneficially own in excess of 10prca of our common stock are not entitled to vote shares held by them in excess of 10prca of our common stock |
| In addition, Steven R Gardner, our President and Chief Executive Officer, has an employment agreement which provides that, in the event of a change of control in which Mr |
| Gardner’s employment is terminated, Mr |
| Gardner will be entitled to severance payments equal to two times his annual base salary plus an amount equal to his incentive bonus for the previous year |
| These provisions in our certificate of incorporation, by-laws and Mr |
| Gardner’s employment agreement 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 |
| 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 |
| Gardner could have a negative impact on the success of our new business strategy |
| In addition, we rely upon the services of John Shindler, our Executive Vice President and Chief Financial Officer, Eddie Wilcox, our Executive Vice President and Chief Banking Officer, and our ability to attract and retain highly skilled personnel |
| 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 |
| We do not maintain key-man life insurance on any employee nor have we entered into an employment agreement with any other employee other than Mr |
| Gardner entered into a three year employment agreement with both the Company and Bank on January 5, 2004 |
| Potential acquisitions may disrupt our business and dilute stockholder value |
| We have evaluated merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions |
| 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 35 ______________________________________________________________________ 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 |
| · Potential changes in banking or tax laws or regulations that may affect the target company |