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BANC > SEC Filings for BANC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for FIRST PACTRUST BANCORP INC

Form 10-Q for FIRST PACTRUST BANCORP INC


13-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion compares the consolidated financial condition of First PacTrust Bancorp, Inc. (the Company or Bancorp), at September 30, 2012, to its financial condition at December 31, 2011, and the results of operations for the three and nine months ended September 30, 2012 to the same periods in 2011. This discussion should be read in conjunction with the unaudited interim consolidated financial statements and footnotes included herein.

The Company is a multi-bank holding company of Pacific Trust Bank and Beach Business Bank (collectively, the Banks). The Company derives substantially all of its revenue from the banking services provided by the Banks. As of September 30, 2012, the Banks operate 19 banking offices in San Diego, Riverside, Orange, and Los Angeles Counties, CA and 23 loan production offices in California, Arizona, Oregon and Washington. The Company's assets consist primarily of loans and investment securities, which are funded by deposits, borrowings and capital. The primary source of revenue is net interest income, the difference between interest income on loans and investments, and interest expense on deposits and borrowed funds. The Company also generates non-interest income by providing fee based banking services and by the origination and sale of conventional conforming and FHV/VA residential mortgage loans to the secondary market. The Company's basic strategy is to maintain and grow net interest income and non-interest income by the retention of its existing customer base and the expansion of its core businesses and branch offices within its current market and plans to expand its banking offices further into southern California and its loan offices throughout the western United States. The Company's primary market risk exposure is interest rate risk and credit risk.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Assets. The Company's total assets increased by $670.7 million, or 67.1%, to $1.7 billion at September 30, 2012 from $999.0 million at December 31, 2011 primarily due to the acquisitions of Beach Business Bank, on July 1, 2012, and Gateway Business Bank, on August 18, 2012. Beach and Gateway added a combined total of $442.0 million in assets, net of cash paid in the acquisitions. The balance of the asset growth was largely accounted for by loan originations and purchases which partially accounted for the $427.4 million increase in the balance of the Company's loans receivables, net of allowance and an increase in the Company's loans held for sale, which stood at $110.3 million at September 30, 2012. The Company also saw an increase in total cash and cash equivalents of $77.6 million, an increase of $20.7 million in securities available for sale, an increase of $12.9 million in goodwill and other intangible assets from the Beach and Gateway acquisitions, and an increase of $12.4 million in the balance of other assets. These increases in total assets were partially reduced by a $6.0 million decline in balance of OREO.

Cash and cash equivalents. Cash and cash equivalents increased $77.6 million, or 174.4%, to $122.1 million at September 30, 2012 from $44.5 million at December 31, 2011. The acquisitions of Beach Business Bank and Gateway Business Bank added $98.5 million in cash and cash equivalents during the quarter ended September 30, 2012 without considering the $54.6 million of cash paid for the acquisitions. A portion of this cash was used to fund an increase in loans held for sale of $37.5 million.

The Company also acquired from Beach Business Bank time deposits in financial institutions totaling $4.7 million, which grew to $5.6 million at September 30, 2012.

Loans. Originated loans receivable, net of allowance, increased by $82.0 million, or 11.4%, to $798.3 million at September 30, 2012 from $716.4 million at December 31, 2011. The increase was due to loan originations exceeding net loan principal repayments, charge-offs and foreclosures during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the Company transferred a total of $3.8 million of loans to other real estate owned.

The Company also increased its loan portfolio through purchases. At September 30, 2012, purchased loan receivables totaled $404.6 million, net of allowance, an increase of $345.4 million when compared to the $59.2 million balance at December 31, 2011. The largest component was from the acquisitions of Beach Business Bank and Gateway Business Bank during the quarter ended September 30, 2012, which added $285.4 million of loans receivable balances. The loan balances acquired from Beach and Gateway exclude $72.8 million in loans held for sale, which are discussed below. The Banks also purchased other loans, including the purchase of $66.2 million of credit impaired loans.


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Loans held for sale. Through the acquisition of Gateway Business Bank, Pacific Trust Bank acquired $72.8 million in mortgage loans held for sale on August 18, 2012. Since that date, loans held for sale increased by $37.5 million to $110.3 million at September 30, 2012.

Investments. Securities classified as available-for-sale of $122.3 million at September 30, 2012 increased $20.7 million from December 31, 2011. Agency residential mortgage-backed securities and municipal securities totaling $56.1 million were purchased during the nine months ended September 30, 2012. In addition, the Company sold securities for $7.8 million and recognized a net loss on sale of $83 thousand during the nine months ended September 30, 2012.

Acquisition Related Intangible Assets. The acquisitions of Beach Business Bank and Gateway Business Bank resulted in an increase in intangible assets including $7.0 million in goodwill due to the acquisition of Beach Business Bank, $5.8 million in other intangible assets including $5.2 million in core deposit intangibles from the acquisitions of Beach and Gateway and $1.0 million for the Mission Hills Mortgage Bankers trade name acquired from Gateway and the Doctors Bank trade name acquired with the acquisition of Beach Business Bank, and $2.2 million in SBA and mortgage servicing rights from the Beach and Gateway acquisitions.

Premises and Equipment. Premises and equipment, net increased $4.9 million, or 46.4%, to $15.5 million at September 30, 2012 from $10.6 million at December 31, 2011 primarily due to additions to premises and equipment due to the acquisition of Beach Business Bank and Gateway Business Bank, the move to a new corporate headquarters in Irvine, California and the opening of three new branches in Newport Beach, Santa Monica and Tustin, California.

Allowance for Loan and Lease Losses. The Company maintains an allowance for loan and lease losses to absorb probable incurred losses inherent in the loan and lease portfolio at the balance sheet date. The allowance is based on ongoing assessment of the estimated probable losses presently inherent in the loan portfolio. In evaluating the level of the allowance for loan and lease losses, management considers the types of loans and leases and the amount of loans and leases in the portfolio, peer group information, historical loss experience, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This methodology takes into account many factors, including the Company's own historical and peer loss trends, loan and lease-level credit quality ratings, loan and lease specific attributes along with a review of various credit metrics and trends. The process involves subjective as well as complex judgments. The Company uses a three year loss experience of the Company and its peers in analyzing an appropriate reserve factor for all loans. In addition, the Company uses adjustments for numerous factors including those found in the Interagency Guidance on Allowance for Loan and Lease Losses, which include current economic conditions, loan and lease seasoning, underwriting experience, and collateral value changes among others. The Company evaluates all impaired loans and leases individually using guidance from ASC 310 primarily through the evaluation of cash flows or collateral values. During the third quarter 2012, the Company acquired Beach Business Bank and Gateway Business Bank and their loans and leases are treated under ASC 805, accounting for acquisitions. None of the acquired loans and leases are included in the allowances for loan and lease losses at the present time, but might be in the future should there be deterioration in the condition of the loans or leases after the purchase dates of Beach and Gateway. The acquired loans and leases include loans and leases that are accounted for under SOP 03-3, accounting for purchase credit impaired loans and leases. Additionally, during the nine months ended September 30, 2012, the Bank acquired three pools of loans which are SOP 03-3 loans. Those purchased credit impaired loan pools are not included in the allowances for loan and lease losses at the present time, but might be in the future should there be further deterioration in these loans after the purchase date should the impairment exceed the non-accretable yield. Loans and leases that were acquired from Beach Business Bank and Gateway Business Bank as part of the mergers that were considered credit impaired were written down at the acquisition dates in purchase accounting to an amount estimated to be collectible and a discount for accretable yield and the related allowance for loan and lease losses was not carried over to First PacTrust Bancorp, Inc.'s allowance.

The allowance for loan and lease losses on originated loans receivable at September 30, 2012 was $11.7 million, which represented 1.4% of the gross originated loans, as compared to $12.3 million, or 1.7%, of the gross originated loans outstanding at December 31, 2011. Of the $11.7 million allowance, $1.5 million were specific allowance allocations to impaired loans and leases, including loans and leases which are subject to troubled debt restructurings, with $10.1 million serving as a general allocation of allowance for loan and lease losses on originated loans and leases. The reduction in the allowance partially resulted from the Company charging off $2.5 million of previously established specific allowance allocations, primarily as a result of changes in reporting requirements for thrifts regulated by the OCC. Of the $2.5 million total specific allowance allocation charged off during the nine months ended September 30, 2012, $2.3 million related to one-to four-family first mortgage loans and $236 thousand related to land loans. The remaining charges-offs related to other revolving credit and installment loans. The Company's non-performing loans and leases, including non-performing and restructured loans and leases, also reflected the improved credit quality in the portfolio with a $3.1 million decline in gross non-performing loans and leases from $19.3 million at December 31, 2011 to $16.2 million at September 30, 2012. The Company provided $2.0 million to its provision for loan and lease losses during the nine months ended September 30, 2012 related primarily to new commercial real estate mortgage loan production.


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Non-Performing Assets. The following table is a summary of our non-performing assets at September 30, 2012 and December 31, 2011, consisting of non-performing loans and leases and other real estate owned as of such dates. Non-performing loans and leases include all nonaccrual loans and leases that are past due 90 days or more, including troubled debt restructured loans and leases on nonaccrual, and loans and leases past due 90 days and still accruing interest, of which there were none at September 30, 2012 and December 31, 2011. Non-performing loans and leases at September 30, 2012 and December 31, 2011 totaled $14.7 million and $16.3 million net of specific allowance allocations of $1.5 million and $2.9 million, respectively. Other real estate owned at September 30, 2012 and December 31, 2011 totaled $8.7 million and $14.7 million net of valuation allowances of $3.2 million and $4.1 million, respectively.

                                                     At September 30,          At December 31,
                                                           2012                     2011
Nonperforming loans and leases
Commercial:
Commercial and industrial                           $               -         $              -
Real estate mortgage                                             3,038                       -
Multi-family                                                     5,455                    3,090
Land                                                               334                    1,887
SBA                                                                 -                        -
Lease financing                                                     -                        -
Consumer:
Real estate 1-4 family first mortgage                            7,316                   14,272
Real estate 1-4 family junior lien mortgage                         36                       -
Other revolving credit and installment                               2                        5

Total nonperforming loans and leases                            16,181                   19,254
Other real estate owned                                          8,704                   14,692

Total nonperforming assets                          $           24,885        $          33,946


Ratios
Non-performing loans and leases to total gross
loans and leases, excluding loans held for sale                   1.33 %                   2.45 %
Non-performing assets to total assets                             1.49 %                   3.40 %

Troubled Debt Restructured Loans (TDRs). As of September 30, 2012, the Company had 34 loans and leases with an aggregate balance of $18.6 million classified as TDRs compared to loans and leases with an aggregate balance of $18.2 million at December 31, 2011 classified as TDRs. Specific allowance allocations totaling $783 thousand have been established for these loans and leases as of September 30, 2012 compared to $2.1 million at December 31, 2011. The difference in specific allowance allocations was largely due to charge offs during the nine months ended September 30, 2012, and were largely related to changes in reporting requirements for thrifts regulated by the OCC. When a loan or lease becomes a TDR the Company ceases accruing interest, and classifies it as non-accrual until the borrower demonstrates that the loan or lease is again performing.

As of September 30, 2012, of the 34 loans classified as TDRs, all 34 loans totaling $18.6 million are making payments according to their modified terms and are less than 90 days delinquent. Of the performing TDRs at September 30, 2012, $12.1 million are secured by single family residences, $0.4 million are secured by land, $0.2 million are SBA, $3.1 million are secured by multi-family residences, $1.6 million are secured by commercial real estate, $1.2 million are commercial and industrial and the remaining is comprised of an unsecured $2 thousand consumer revolving credit and installment.

Other Real Estate Owned Assets ("OREO"). During the nine months ended September 30, 2012, the Company foreclosed on 10 single family residential properties totaling $3.8 million. Additionally, the Company sold 19 single family residential properties. The Company also recorded a $205 thousand write-down of its OREO properties during the nine months ended September 30, 2012.


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All Other Assets. All other assets, including Other Assets increased $15.1 million, or 29.2% to $67.2 million at September 30, 2012 from $52.1 million at December 31, 2011. The increase was primarily the result of, a $4.8 million net increase in an affordable housing fund investment, a $3.4 million increase in derivative assets related to mortgage loans held for sale, a $1.6 million increase in taxes receivable, and various increases from other operational activities.

Deposits. Total deposits increased by $541.9 million, or 68.9%, to $1.3 billion at September 30, 2012 from $786.3 million at December 31, 2011. The Beach and Gateway acquisitions accounted for $414.3 million of this increase. Demand accounts increased $183.5 million, certificates of deposit increased $169.7 million, savings accounts increased $123.8 million, and money market accounts increased $64.9 million. Additional growth was achieved primarily from the opening of three new branches during the period as well as the formation of new customer relationships and the attraction of additional funds from existing customers. Total core deposits (total deposits less CDs) increased by 117.6% to $688.7 million at September 30, 2012, compared to $316.5 million at December 31, 2011. The Bank completed the opening of three new branches in Santa Monica, Tustin and Newport Beach, California during 2012, which the Company anticipates will contribute to future growth. The Bank is actively seeking additional production offices in core Southern California banking markets including Orange County and the Los Angeles area.

Federal Home Loan Bank ("FHLB") Advances. During the nine months ended September 30, 2012, $30.0 million of FHLB advances matured and $96.0 million of FHLB advances were obtained, resulting in a 330.0% increase to $86.0 million at September 30, 2012, from $20.0 million at December 31, 2011. The $86.0 million of advances have an average current yield of 0.42% and mature between 2012 and 2015.

Notes Payable. During the nine months ended September 30, 2012, the Company completed the issuance and sale of $33 million aggregate principal amount of its 7.50% Senior Notes due April 15, 2020. At September 30, 2012, the balance of the notes payable, net of discount was $31.8 million. Notes payable also includes secured borrowings from Beach Business Bank totaling $2.2 million. These notes are secured by 2 loans on the balance sheet of Beach Business Bank.

Reserve for loss reimbursements on sold loans. The acquisition of Gateway Business Bank included a $2.7 million reserve established to reimburse parties who previously purchased loans from Gateway for losses that may have resulted for which Gateway could be held responsible for. This includes current known cases and an estimate of possible future cases based on historical claims against Gateway. The Company also establishes a reserve on all new loans that are originated conventional conforming and FHA/VA mortgage loans that are for sale to the secondary markets.

Shareholders' Equity. Shareholders' equity increased $7.2 million, or 3.9%, to $191.7 million at September 30, 2012 from $184.5 million at December 31, 2011. Shareholders' equity increased due to a $12.1 million bargain purchase gain from the Gateway Business Bank acquisition which was accounted for as part of current year-to-date net income of $9.2 million. The balance of the change in shareholders' equity primarily due to a $1.3 million increase in the fair value of securities available-for-sale, a $1.0 million increase to recognize the value of the warrants issued to Beach shareholders as part of the consideration paid to Beach shareholders, and stock awards compensation of $0.9 million among other items, offset partially by the declaration of common stock cash dividends of $3.7 million and preferred stock cash dividends of $1.0 million.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

General. Net income for the three months ended September 30, 2012 increased $8.9 million, to $9.5 million from $644 thousand in the same period of the prior year, as a result of the factors discussed below.

Interest and Dividend Income.Interest and dividend income increased by $7.9 million, or 89.5%, to $16.7 million for the three months ended September 30, 2012, compared to $8.8 million for the three months ended September 30, 2011 as described below.

Interest income on loans increased $8.2 million, or 105.3%, to $15.9 million for the three months ended September 30, 2012 from $7.8 million for the three months ended September 30, 2011. The primary factor for the increase was a $506.1 million increase in the average balance of loans and leases receivable from $679.2 million for the three months ended September 30, 2011 to $1.2 million for the three months ended September 30, 2012 due to growth in loan originations and loans purchased during the period. The increase in interest income on loans and leases receivable was further increased by an 81 basis point increase in the average yield on loans and leases receivable to 5.38% due primarily to the increase in commercial real estate mortgage loan production yielding higher rates and the higher yield on purchased loans, including loans acquired from Beach Business Bank and Gateway Business Bank.


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Interest income on securities decreased $309 thousand to $708 thousand for the three months ended September 30, 2012 from $1.0 million for the three months ended September 30, 2011. Although there was a $45.9 million increase in the average balance of securities to $136.3 million, there was a 242 basis point decline in the average yield on the portfolio from 4.50% for the three months ended September 30, 2011 to 2.08% for the three months ended September 30, 2012. The decline in the average yield on the portfolio was due to the sale of higher yielding securities in the prior year as the Company sought the opportunity to improve the quality of its securities portfolio and to divest several of its private label residential mortgage-backed securities.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Also presented is the weighted average yield on interest-earning assets, rates paid on interest-bearing liabilities and the resultant net interest spread for the three months ended September 30, 2012 and September 30, 2011. No tax equivalent adjustments were made. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

                                                                     Three Months Ended September 30,
                                                                          (dollars in thousands)
                                                            2012                                           2011
                                                                        Annualized                                     Annualized
                                                                          Average                                        Average
                                           Average                        Yield/          Average                        Yield/
                                           Balance        Interest         Cost           Balance        Interest         Cost
INTEREST-EARNING ASSETS
Loans and leases receivable(1)           $ 1,185,277      $  15,928            5.38 %    $ 679,199      $    7,757            4.57 %
Securities(2)                                136,307            708            2.08 %       90,454           1,017            4.50 %
Other interest-earning assets(3)             110,860             86            0.31 %       59,347              49            0.33 %

Total interest-earning assets              1,432,444         16,722            4.68 %      829,000           8,823            4.24 %
Non-interest earning assets(4)                88,293                                        75,738

Total assets                             $ 1,520,737                                     $ 904,738

INTEREST-BEARING LIABILITIES
Savings                                  $   161,512            211            0.52 %    $ 134,589              95            0.28 %
NOW                                          246,156            102            0.17 %       65,582              18            0.11 %
Money market                                 221,208            166            0.30 %       86,722              62            0.29 %
Certificates of deposit                      571,555          1,099            0.77 %      415,887           1,072            1.03 %
FHLB advances                                 64,978             74            0.46 %       20,326              92            1.81 %
Capital lease                                    255              2            3.49 %           -               -               -
Long-term debt                                34,024            660            7.76 %           -               -               -

Total interest-bearing liabilities         1,299,688          2,314            0.72 %      723,106           1,339            0.76 %

Non-interest-bearing liabilities              28,474                                         8,137

Total liabilities                          1,328,162                                       731,243
Total shareholders' equity                   192,575                                       173,495

Total liabilities and shareholders'
equity                                   $ 1,520,737                                     $ 904,738

Net interest income/spread                                $  14,408            3.96 %                   $    7,484            3.48 %

Net interest margin(5)                                                         4.02 %                                         3.61 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities                                   110.21 %                                      114.64 %

(1) Average balances of nonperforming loans are included in the above amounts. Calculated net of deferred fees, premiums/discounts, and loss reserves.

(2) Calculated based on average amortized cost.

(3) Includes average FHLB stock at cost and average time deposits with other financial institutions.


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(4) Includes average balance of bank-owned life insurance (BOLI) investments of $18.6 million in 2012 and $18.3 million in 2011.

(5) Net interest income divided by average interest-earning assets.

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate, and (2) changes in rate, which are changes in rate multiplied by the old volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

                                                        Three Months Ended September 30, 2012
                                                            compared to September 30, 2011
                                                    Total             Change Due          Change Due
                                                   Change             To Volume            To Rate
                                                                    (In thousands)
Income from interest earning assets:
Loans, gross                                     $     8,171         $     26,439        $    (18,268 )
. . .
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