10-Q 1 d411197d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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 number 001-35522

 

 

FIRST PACTRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

(State or other jurisdiction of

incorporation or organization)

04-3639825

(IRS Employer Identification No.)

18500 Von Karman Ave, Suite 1100, Irvine, California

(Address of principal executive offices)

92612

(Zip Code)

(949) 236-5211

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    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 (Section 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  x    No  ¨

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 the 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   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of October 31, 2012 the registrant had outstanding 10,684,185 shares of voting common stock and 1,100,754 shares of Class B non-voting common stock.

 

 

 


Table of Contents

FIRST PACTRUST BANCORP, INC.

Form 10-Q Quarterly Report

Index

 

          Page  

PART I - Financial Information

  

Item 1

  

Financial Statements

     4   

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     55   

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

     67   

Item 4

  

Controls and Procedures

     68   

PART II - Other Information

  

Item 1

  

Legal Proceedings

     69   

Item 1A

  

Risk Factors

     69   

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

     70   

Item 3

  

Defaults Upon Senior Securities

     71   

Item 4

  

Mine Safety Disclosures

     71   

Item 5

  

Other Information

     71   

Item 6

  

Exhibits

     72   

SIGNATURES

     77   

 

2


Table of Contents

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

When used in this report and in public shareholder communications, in other documents of First PacTrust Bancorp, Inc. (the “Company,” “we,” “us” and “our”) filed with or furnished to the Securities and Exchange Commission (the “SEC”), or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” “guidance” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to our future financial performance, strategic plans or objectives, revenue, expense or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (i) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement for the Company’s pending acquisition of the Private Bank of California (“PBOC”); (ii) the outcome of any legal proceedings that may be instituted against the Company or PBOC; (iii) the inability to complete the PBOC transaction due to the failure to satisfy such transaction’s conditions to completion, including the receipt of regulatory approvals and the approval of the merger agreement by PBOC’s shareholders; (iv) risks that the proposed PBOC transaction, or the Company’s recently completed acquisitions of Beach Business Bank and Gateway Bancorp, may disrupt current plans and operations, the potential difficulties in customer and employee retention as a result of the transactions and the amount of the costs, fees, expenses and charges related to the transactions; (v) continuation or worsening of current recessionary conditions, as well as continued turmoil in the financial markets; (vi) the credit risks of lending activities, which may be affected by further deterioration in real estate markets and the financial condition of borrowers, may lead to increased loan and lease delinquencies, losses and nonperforming assets in our loan portfolio, and may result in our allowance for loan and lease losses not being adequate to cover actual losses and require us to materially increase our loan and lease loss reserves; (vii) the quality and composition of our securities portfolio; (viii) changes in general economic conditions, either nationally or in our market areas; (ix) continuation of the historically low short-term interest rate environment, changes in the levels of general interest rates, and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources; (x) fluctuations in the demand for loans and leases, the number of unsold homes and other properties and fluctuations in commercial and residential real estate values in our market area; (xi) results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan and lease losses, write-down asset values, increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (xii) legislative or regulatory changes that adversely affect our business, including changes in regulatory capital or other rules; (xiii) our ability to control operating costs and expenses; (xiv) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; (xv) errors in our estimates in determining fair value of certain of our assets, which may result in significant declines in valuation; (xvi) the network and computer systems on which we depend could fail or experience a security breach; (xvii) our ability to attract and retain key members of our senior management team; (xviii) costs and effects of litigation, including settlements and judgments; (xix) increased competitive pressures among financial services companies; (xx) changes in consumer spending, borrowing and saving habits; (xxi) adverse changes in the securities markets; (xxii) earthquake, fire or other natural disasters affecting the condition of real estate collateral; (xxiii) the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions; (xxiv) inability of key third-party providers to perform their obligations to us; (xxv) changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board or their application to our business or final audit adjustments, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; (xxvi) war or terrorist activities; and (xxvii) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this report and from time to time in other documents that we file with or furnish to the SEC. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update any such statements to reflect circumstances or events that occur after the date on which the forward-looking statement is made.

 

3


Table of Contents

ITEM 1 – FINANCIAL STATEMENTS

First PacTrust Bancorp, Inc.

Consolidated Statements of Financial Condition

(In thousands of dollars except share and per share data)

(Unaudited)

 

     September 30,
2012
     December 31,
2011
 
ASSETS      

Cash and due from banks

   $ 8,867       $ 6,755   

Interest-bearing deposits

     104,638         37,720   

Federal funds sold

     8,555         —     
  

 

 

    

 

 

 

Total cash and cash equivalents

     122,060         44,475   

Time deposits in financial institutions

     5,621         —     

Securities available for sale

     122,271         101,616   

Federal Home Loan Bank and other bank stock, at cost

     8,842         6,972   

Originated loans and leases receivable, net of allowance of $11,663 at September 30, 2012 and $12,257 at December 31, 2011

     798,347         716,377   

Purchased loans and leases receivable, net of allowance of $716 at September 30, 2012 and $523 at December 31, 2012

     404,648         59,232  

Loans held for sale

     110,291         —     

Servicing rights, net

     2,170         —     

Accrued interest receivable

     5,312         3,569   

Other real estate owned (OREO), net

     8,704         14,692   

Premises and equipment, net

     15,492         10,585   

Bank owned life insurance investment

     18,649         18,451   

Prepaid FDIC assessment

     1,622         2,405   

Deferred income tax

     7,441         7,643   

Goodwill

     7,039         —     

Other intangible assets, net

     5,841         —     

Other assets

     25,382         13,024   
  

 

 

    

 

 

 

Total assets

   $ 1,669,732       $ 999,041   
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY      

Deposits

     

Noninterest-bearing demand

   $ 88,616       $ 20,039   

Interest-bearing demand

     183,516         68,578   

Money market accounts

     253,557         188,658   

Savings accounts

     162,979         39,176   

Certificates of deposit

     639,553         469,883   
  

 

 

    

 

 

 

Total deposits

     1,328,221         786,334   

Advances from Federal Home Loan Bank

     86,000         20,000   

Notes payable, net

     34,018         —     

Reserve for loss reimbursements on sold loans

     2,665         —     

Accrued expenses and other liabilities

     27,089         8,212   
  

 

 

    

 

 

 

Total liabilities

     1,477,993         814,546   

Commitments and contingent liabilities

     —           —     

 

4


Table of Contents
     September 30,
2012
    December 31,
2011
 
SHAREHOLDERS’ EQUITY     

Preferred stock, $.01 par value per share, $1,000 per share liquidation preference for a total of $32,000; 50,000,000 shares authorized, 32,000 shares issued and outstanding at September 30, 2012 and December 31, 2011

     31,925        31,934   

Common stock, $.01 par value per share, 196,863,844 shares authorized; 11,900,952 shares issued and 10,683,327 shares outstanding at September 30, 2012; 11,756,636 shares issued and 10,581,704 shares outstanding at December 31, 2011

     119        117   

Class B non-voting non-convertible Common stock, $.01 par value per share, 3,136,156 shares authorized; 1,090,061 shares issued and outstanding at September 30, 2012 and 1,054,991 shares issued and outstanding at December 31, 2011

     11        11   

Additional paid-in capital

     153,467        150,786   

Retained earnings

     31,477        27,623   

Treasury stock, at cost (September 30, 2012-1,217,625 shares, December 31, 2011-1,174,932 shares)

     (25,638     (25,037

Accumulated other comprehensive income/(loss), net

     378        (939
  

 

 

   

 

 

 

Total shareholders’ equity

     191,739        184,495   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,669,732      $ 999,041   
  

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

First PacTrust Bancorp, Inc.

Consolidated Statements of Income and Comprehensive Income/(Loss)

(In thousands of dollars except share and per share data)

(Unaudited)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012     2011      2012     2011  

Interest and dividend income

         

Loans, including fees

   $ 15,928      $ 7,757       $ 35,060      $ 22,936   

Securities

     708        1,017         2,139        3,263   

Dividends and other interest-earning assets

     86        49         226        155   

Federal funds sold

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     16,722        8,823         37,425        26,354   

Interest expense

         

Savings

     211        95         233        283   

NOW

     102        18         162        50   

Money market

     166        62         557        189   

Certificates of deposit

     1,099        1,072         3,333        3,225   

Federal Home Loan Bank advances

     74        92         266        960   

Capital leases

     2        —           4        —     

Notes payable

     660        —           1,155        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     2,314        1,339         5,710        4,707   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     14,408        7,484         31,715        21,647   

Provision for loan and lease losses on originated loans

     894        823         1,808        1,274   

Provision for loan and lease losses on purchased loans

     137        —           193        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan and lease losses

     13,377        6,661         29,714        20,373   

Noninterest income

         

Customer service fees

     543        396         1,282        1,107   

Mortgage loan prepayment penalties

     46        54         62        80   

Loan servicing income

     146        —           146        —     

Income from bank owned life insurance

     69        77         198        221   

Net gain/(loss) on sales of securities available for sale

     (12     1,450         (83     2,887   

Net gain on sale of loans

     59        —           204        —     

Net gain on mortgage banking activities

     5,546        —           5,546        —     

Bargain purchase gain

     12,055        —           12,055        —     

Other

     1,060        35         1,244        119   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     19,512        2,012         20,654        4,414   

Noninterest expense

         

Salaries and employee benefits

     13,613        3,251         23,657        9,488   

Occupancy and equipment

     2,473        730         4,793        1,926   

Advertising

     395        71         848        182   

Professional fees

     3,788        667         5,318        1,416   

Stationery paper, supplies, and postage

     286        105         582        336   

Data processing

     1,037        356         1,946        972   

ATM costs

     93        81         277        223   

FDIC assessments

     291        222         971        997   

Provision for loss reimbursements on sold loans

     172        —           172        —     

Loan servicing and foreclosure expense

     83        327         788        783   

Operating loss on equity investment

     76        79         229        235   

OREO valuation allowance

     36        1,329         205        1,887   

Net (gain)/loss on sales of other real estate owned

     42        105         (466     924   

Amortization of intangible assets

     329        —           329        —     

Other general and administrative

     1,742        338         2,968        1,107   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     24,456        7,661         42,617        20,476   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

6


Table of Contents
     Three months ended
September 30,
    Nine months
ended September 30,
 
     2012     2011     2012     2011  

Income before income taxes

     8,433        1,012        7,751        4,311   

Income tax expense/(benefit)

     (1,110     368        (1,430     1,425   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9,543      $ 644      $ 9,181      $ 2,886   
  

 

 

   

 

 

   

 

 

   

 

 

 

Preferred stock dividends

   $ 328      $ 138      $ 1,042      $ 138   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

   $ 9,215      $ 506      $ 8,139      $ 2,748   

Basic earnings per common share

   $ 0.79      $ 0.04      $ 0.70      $ 0.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.79      $ 0.04      $ 0.70      $ 0.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss), before tax:

        

Change in net unrealized gains/(losses) on securities:

        

Net unrealized holding gains arising during the period

     817        (932     2,155        (2,408

Less: reclassification adjustment for (gains)/losses included in net income

     12        (1,450     83        (2,887
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains/(losses), net of reclassification adjustments

     829        (2,382     2,238        (5,295

Income tax expense/(benefit) related to items of other comprehensive income/(loss)

     341        (978     921        (2,179
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income/(loss), net of tax

     488        (1,404     1,317        (3,116
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income/(loss)

   $ 10,031      $ (760   $ 10,498      $ (230
  

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

7


Table of Contents

First PacTrust Bancorp, Inc.

Consolidated Statements of Shareholder’s Equity

(In thousands of dollars, except share and per share data)

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Unearned
ESOP
    Accumulated
Other
Comprehensive
Income (Loss), net
    Total  

Balance at January 1, 2011

   $ —         $ 109       $ 123,170      $ 35,773      $ (25,135   $ (507   $ 2,599      $ 136,009   

Net Loss

     —           —           —          (2,728     —          —          —          (2,728

Other comprehensive (loss), net

     —           —           —          —          —          —          (3,538     (3,538

Forfeiture and retirement of shares and common stock

     —           —           13        —          (13     —          —          —     

Stock option compensation expense

     —           —           816        —          —          —          —          816   

ESOP forfeitures used to reduce ESOP contribution

     —           —           7        —          —          —          —          7   

Stock awards earned

     —           —           412        —          —          —          —          412   

Issuance of stock awards

     —           —           (611     —          107        —          —          (504

Purchase of 5,224 shares of treasury stock

     —           —           —          —          (55     —          —          (55

Employee stock ownership plan shares earned

     —           —           98        —          —          507        —          605   

Tax benefit/(loss) of restricted share awards vesting

     —           —           (4     —          —          —          —          (4

Dividends declared ($.45 per common share)

     —           —           516        (4,888     —          —          —          (4,372

Repurchase of warrants – TARP

     —           —           (1,003     —          —          —          —          (1,003

Tax effect of ESOP

     —           —           256        —          —          —          —          256   

Tax effect of options redeemed

     —           —           147        —          —          —          —          147   

Reissuance of ESOP shares

     —           —           (59     —          59        —          —          —     

Preferred stock dividends

     —           —           —          (534     —          —          —          (534

Issuance of 32,000 shares of preferred stock, net of issuance costs of $66

     31,934         —           —          —          —          —          —          31,934   

Net proceeds from stock issuance

     —           19         27,028        —          —          —          —          27,047   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

8


Table of Contents
     Preferred
Stock
    Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Unearned
ESOP
     Accumulated
Other
Comprehensive
Income (Loss), net
    Total  

Balance at December 31, 2011

     31,934        128         150,786        27,623        (25,037     —           (939     184,495   

Net Income

     —         —           —         9,181        —         —          —         9,181   

Other comprehensive income, net

     —          —           —          —          —          —           1,317        1,317   

Forfeiture and retirement of 200 shares and common stock

     —          —           3        —          (120     —           —          (117 )

Forfeited share option

     —          —           (387     —          —          —           —          (387

Stock option compensation expense

     —          —           774        —          —          —           —          774   

RRP option compensation expense

     —          —           161        —          —          —           —          161   

Stock awards earned

     —          —           644        —          —          —           —          644   

Severance payment

     —          —           (129     —          —          —           —          (129

Issuance of common stock

     —          2        (2     —          —          —           —          —     

Purchase of 42,693 shares of treasury stock

     —          —           —          —          (481     —           —          (481

Dividends declared ($0.36 per common share)

     —          —           632        (4,285     —          —           —          (3,653

Purchase of preferred stock

     (9     —           —          —          —          —           —          (9

Preferred stock dividends

     —          —           —          (1,042     —          —           —          (1,042

Tax benefit/(loss) of RRP shares vesting

     —          —           (17     —          —          —           —          (17

Warrants issued with Beach Business Bank purchase

     —          —           1,009        —          —          —           —          1,009   

Capital raising expenses

     —          —           (7     —          —          —           —          (7
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2012

   $ 31,925      $ 130       $ 153,467      $ 31,477      $ (25,638   $ —         $ 378      $ 191,739   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

See accompanying notes to consolidated financial statements.

 

9


Table of Contents

First PacTrust Bancorp, Inc.

Consolidated Statements of Cash Flows

(In thousands of dollars)

(Unaudited)

 

     Nine months ended
September 30,
 
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 9,181      $ 2,886   

Adjustments to reconcile net income to net cash from operating activities

    

Bargain purchase gain

     (12,055     —     

Provision for loan and lease losses

     2,001        1,274   

Amortization of intangible assets

     329        —     

Provision for loss reimbursements on sold loans

     172        —     

Net gain on mortgage banking activities

     (5,546     —     

Gain on sale of loans

     (204     —     

Net amortization/(accretion) of securities

     861        (364

Net amortization of debt

     76        —     

Depreciation

     1,035        451   

Employee stock ownership plan compensation expense

     —          482   

Stock incentive compensation expense

     805        744   

Fair value adjustments of mortgage servicing rights

     (290     —     

Bank owned life insurance income

     (198     (221

Operating loss on equity investment

     229        235   

Net (gain)/loss on sales of securities available-for-sale

     83        (2,887

Net (gain)/loss on sales of other real estate owned

     (466     924   

Deferred income tax (benefit)/expense

     1,113        (2,136

Decrease in valuation allowances on other real estate owned

     (851     (1,942

Originations of loans held for sale

     (166,250     —     

Proceeds from loans held for sale

     128,804        —     

Net change in:

    

Deferred loan costs

     377        545   

Premiums and discounts on purchased loans

     (1,231     —     

Accrued interest receivable

     (3,951     311   

Other assets

     9,630        133   

Accrued interest payable and other liabilities

     3,979        3,735   
  

 

 

   

 

 

 

Net cash from operating activities

     (32,367     4,170   

Cash flows from investing activities

    

Proceeds from sales of securities available-for-sale

     7,712        50,846   

Proceeds from maturities, calls and principal repayments of securities available-for-sale

     34,512        19,470   

Purchases of securities available-for-sale

     (56,088     (84,483

Net cash acquired through acquisitions

     43,670        —     

Funding of equity investment

     (543     —     

Loan originations and principal collections, net

     (107,421     (44,589

Purchase of loans

     (66,528     —     

Redemption of Federal Home Loan Bank stock

     702        1,013   

Proceeds from sales of other real estate owned

     11,672        8,281   

Proceeds from sale of loans

     27,713        —     

Additions to premises and equipment

     (4,492     (3,492
  

 

 

   

 

 

 

Net cash from investing activities

     (109,091     (52,954

 

10


Table of Contents
     Nine months ended
September 30,
 
     2012     2011  

Cash flows from financing activities

    

Repurchase of warrants, TARP

     —          (1,003

Net increase in deposits

     126,625        65,301   

Repayments of Federal Home Loan Bank advances

     (30,053     (55,000

Proceeds from Federal Home Loan Bank advances

     96,000         

Net proceeds from issuance of common stock

     —          26,850   

Purchase of preferred stock

     (7     31,940   

Net proceeds from issuance of debt

     31,680        —     

Purchase of stock

     (490     (4

Tax benefit/(loss) from RRP shares vesting

     (17     (1

Tax effect of ESOP

     —          148   

Tax effect of options redeemed

     —          147   

Dividends paid on preferred stock

     (1,042     (138

Dividends paid on common stock

     (3,653     (3,456
  

 

 

   

 

 

 

Net cash from financing activities

     219,043        64,784   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     77,585        16,000   

Cash and cash equivalents at beginning of period

     44,475        59,100   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 122,060      $ 75,100   
  

 

 

   

 

 

 

Supplemental cash flow information

    

Interest paid on deposits and borrowed funds

   $ 5,636      $ 4,745   

Income taxes paid

     —          950   

Supplemental disclosure of noncash activities(1)

    

Transfer from loans to other real estate owned, net

     3,750        20,808   

Equipment acquired under capital leases

     365        —     

 

(1) See Note 3 for non-cash transactions included in the merger with Beach Business Bank and acquisition of Gateway Business Bank.

 

See accompanying notes to consolidated financial statements.

 

11


Table of Contents

FIRST PACTRUST BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(Amounts in thousands of dollars, except share and per share data)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of First PacTrust Bancorp, Inc. (the Company) and its wholly owned subsidiaries, Pacific Trust Bank and Beach Business Bank (collectively, the Banks, and individually the Bank, as the context may indicate) and PTB Property Holdings, LLC, as of September 30, 2012 and December 31, 2011 and for the three and nine month periods ended September 30, 2012 and September 30, 2011, except that the accounts of Beach Business Bank were not included for amounts prior to July 1, 2012. Significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (GAAP) are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2011 filed by the Company with the Securities and Exchange Commission. The December 31, 2011 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission, but does not include all of the disclosures required by U.S. generally accepted accounting principles.

Interim financial statements are subject to possible adjustment in connection with the annual audit of the Company’s financial statements for the year ending December 31, 2012. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation.

The results of operations for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Banks and PTB Property Holdings, LLC. All significant intercompany transactions and balances are eliminated in consolidation.

Nature of Operations: The principal business of the Company is the ownership of the Banks. Pacific Trust Bank is a federally chartered stock savings bank and Beach Business Bank is a California state chartered commercial bank. The Banks are members of the Federal Home Loan Bank (FHLB) system, and maintain insurance on deposit accounts with the Federal Deposit Insurance Corporation (FDIC).

The Banks are engaged in the business of retail banking, with operations conducted through nineteen banking offices serving San Diego, Los Angeles, Orange and Riverside Counties, California and twenty-three loan production offices in California, Arizona, Oregon and Washington. There are no significant concentrations of loans to any one industry or customer. However, the customers’ ability to repay their loans is significantly dependent on the real estate market and general economic conditions in the area.

On April 5, 2012, the Company announced that the Office of the Comptroller of the Currency (the OCC) terminated the August 2009 Memorandum of Understanding between the Office of Thrift Supervision (the OTS) which was succeeded as Pacific Trust Bank’s primary regulator effective July 21, 2011 by the Office of the Comptroller of the Currency and Pacific Trust Bank, effective April 4, 2012. The Memorandum of Understanding subjected Pacific Trust Bank to additional oversight by its regulator and placed certain restrictions on its business.

The accounting and reporting polices of the Company are based upon U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. Significant accounting policies followed by the Company are presented below.

Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan and lease losses, reserve for loss reimbursements on sold loans, servicing rights, other real estate owned, realization of deferred tax assets, goodwill, other intangible assets, mortgage banking derivatives, fair value estimate of private label residential mortgage-backed securities, and the fair value of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements.

Securities: Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available for sale or held-to-maturity are generally evaluated for OTTI under Statement of Financial Accounting Standards Accounting Standards Codification “ASC” 320, Accounting for Certain Investments in Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets.

In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by ASC 325 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the ASC 325 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If the Company intends to sell or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income or loss, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

12


Table of Contents

Affordable Housing Fund: The Company has two equity investments in affordable housing funds originally totaling $9.2 million for purposes of obtaining tax credits and for Community Reinvestment Act purposes. These investments are accounted for using the equity method of accounting. Under the equity method of accounting, the Company recognizes its ownership share of the profits and losses of the fund. The Company obtains tax credits from these investments which reduce income tax expense for a period of 10 years. These investments are regularly evaluated for impairment by comparing the carrying value to the remaining tax credits expected to be received. For the nine month periods ending September 30, 2012 and 2011, the Company’s share of the funds’ operating losses was $229 thousand and $235 thousand, respectively. The balance of the investments at September 30, 2012 and December 31, 2011 was $6.3 million and $1.6 million, respectively, and is included in other assets.

Concentration of Credit Risk: Most of the Company’s business activity is with customers located within San Diego, Los Angeles, Orange and Riverside Counties, California. Therefore, the Company’s exposure to credit risk is significantly affected by economic conditions in those areas.

Allowance for Loan and Lease Losses: The allowance for loan and lease losses is maintained at a level considered adequate by management to provide for probable incurred credit losses. The allowance is increased by provisions charged against income, while loan and lease losses are charged against the allowance when management deems a loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance. The Company performs an analysis of the adequacy of the allowance on a monthly basis. Management estimates the allowance balance required using past loan and lease loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans and leases, but the entire allowance is available for any loan or lease that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans and leases that are individually classified as impaired. A loan or lease is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan or lease agreement. The Company evaluates all impaired loans and leases individually under the guidance of ASC 310, primarily through the evaluation of collateral values and cash flows. Loans and leases for which the terms have been modified and where the borrower is experiencing financial difficulties are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans and leases that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan or lease and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan or lease is impaired, a portion of the allowance is allocated so that the loan or lease is reported, net, at the present value of estimated future cash flows using the loan’s or leases’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are also measured at the present value of estimated future cash flows using the loan’s or lease’s effective rate at inception or at the fair value of collateral if repayment is expected solely from the collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s or lease’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan or lease, the loan or lease is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan and lease losses.

Loans that were acquired during the third quarter of 2012 from Beach Business Bank and Gateway Business Bank that were considered credit impaired were written down at acquisition date in purchase accounting to an amount estimated to be collectible and the related allowance for loan and lease losses was not carried over to the First PacTrust Bancorp, Inc.’s allowance. Any losses on such loans are charged against the nonaccretable difference established in purchase accounting and are not reported as charge-offs until such non-accretable difference is fully utilized. See further discussion below under Purchased Credit Impaired Loans.

 

13


Table of Contents

The general component of the allowance for loan and lease losses covers loans and leases that are not impaired and is determined by portfolio segment and is based on actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans and leases; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans and leases; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; effects of changes in credit concentrations and other factors. The historical loss analysis is also combined with a comprehensive loan or lease to value analysis to analyze the associated risks in the current loan and lease portfolio. For 2011 and 2012, the Company used a three year loss look back for determining the level of its allowance for loan and lease losses. Prior to this, the Company used a one year look back. This change was made to better reflect the improving state of the loan and lease portfolio as delinquencies have declined and loan and lease losses have leveled. An updated loan or lease to value analysis is obtained from an independent firm semi-annually, most recently in May 2012. Management uses available information to recognize loan and lease losses, however, future loan and lease loss provisions may be necessary based on changes in the above mentioned factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses and may require the Bank to recognize additional provisions based on their judgment of information available to them at the time of their examination.

The following portfolio segments have been identified: commercial and industrial, commercial real estate mortgage, multi-family, land, SBA, construction, lease financing residential real estate one-to four- family first mortgage, residential real estate one-to four- family junior lien mortgage, and other revolving credit and installment loans. The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis includes all loans and leases delinquent over 60 days and non-homogenous loans and leases such as commercial and commercial real estate loans. Classification of problem one-to-four family-residential loans is performed on a monthly basis while analysis of non-homogenous loans is performed on a quarterly basis.

Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk than one-to four- family residential mortgage loans. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. Commercial business loans are also considered to have a greater degree of credit risk than one- to four-family residential mortgage loans due to the fact commercial business loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). SBA business loans are similar to commercial business loans, but have additional credit enhancement provided by the governmental agency, U.S. Small Business Administration, for up to 75% of the loan balance. Commercial equipment leases are also similar to commercial business loans in that the leases are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial equipment leases may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). Consumer and other real estate loans may entail greater risk than do one- to four- family residential mortgage loans given that collection of these loans is dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Negatively amortizing and interest only loans are also considered to carry a higher degree of credit risk due to their unique cash flows. Credit risk on this asset class is also managed through the completion of regular re-appraisals of the underlying collateral and monitoring of the borrower’s usage of this account to determine if the borrower is making monthly payments from external sources or “draw downs” on their line. In cases where the property values have declined to levels less than the original loan-to-value, or other levels deemed prudent by the Bank, the Bank may freeze the line and/or require monthly payments or principal reductions to bring the loan in balance.

Classified Assets: Federal regulations provide for the classification of loans, leases, and other assets, such as debt and equity securities considered by the OCC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. The Bank includes in its classification of “Substandard Assets” loans and leases that are performing under terms of a TDR, but where the borrower has yet to make twelve or more payments under the TDR, and where the loan or lease remains impaired, as well as loans and leases where the borrower is current in his or her payments on the subject classified loan or lease but may be a guarantor on another loan or lease that is classified as a result of weakness in the credit or collateral (“Relationship”). TDR loans and leases that have continued to make payments for twelve months or more, but where the collateral remains impaired, retain a “Substandard” classification. As of September 30, 2012, the Bank had $5.3 million of TDR loans and leases classified as “substandard” with less than twelve months of payment performance and $6.7 million of TDR loans and leases classified as “substandard” with payment performance for more than twelve months. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When an insured institution classifies problem assets as either substandard or doubtful, it may establish general or specific allowances for loan and lease losses in an amount deemed prudent by management and approved by the Board of Directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OCC, which may order the establishment of additional general or specific loss allowances.

 

14


Table of Contents

In connection with the filing of the Bank’s periodic reports with the OCC and in accordance with our classification of assets policy, the Bank regularly reviews the problem assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations.

Purchased Credit-Impaired Loans and Leases: The Company purchases loans and leases with and without evidence of credit quality deterioration since origination. Evidence of credit quality deterioration as of the purchase date may include statistics such as prior loan or lease modification history, updated borrower credit scores and updated loan or lease-to-value (LTV) ratios, some of which are not immediately available as of the purchase date. Purchased loans and leases with evidence of credit quality deterioration where the Company estimates that it will not receive all contractual payments are accounted for as purchased credit impaired loans and leases (PCI loans and leases). The excess of the cash flows expected to be collected on PCI loans and leases, measured as of the acquisition date, over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan or lease using a level yield methodology. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected is referred to as the nonaccretable difference. PCI loans and leases that have similar risk characteristics, primarily credit risk, collateral type and interest rate risk, are pooled and accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

The Company estimates cash flows expected to be collected over the life of the loan or lease using management’s best estimate of current key assumptions such as default rates, loss severity and payment speeds. If, upon subsequent evaluation, the Company determines it is probable that the present value of the expected cash flows have decreased, the PCI loan or lease is considered further impaired which will result in a charge to the provision for loan and lease losses and a corresponding increase to a valuation allowance included in the allowance for loan and lease losses. If, upon subsequent evaluation, it is probable that there is an increase in the present value of the expected cash flows, the Company will reduce any remaining valuation allowance. If there is no remaining valuation allowance, the Company will recalculate the amount of accretable yield as the excess of the revised expected cash flows over the current carrying value resulting in a reclassification from nonaccretable difference to accretable yield. The present value of the expected cash flows for PCI purchased loan pools is determined using the PCI loans’ effective interest rate, adjusted for changes in the PCI loans’ interest rate indexes. The present value of the expected cash flows for PCI loans and leases acquired through mergers with other banks includes, in addition to the above, an evaluation of the credit worthiness of the borrower. Loan and lease dispositions, which may include sales of loans and leases, receipt of payments in full from the borrower or foreclosure, result in removal of the loan or lease from the PCI loan pool. Write-downs are not recorded on the PCI loan or lease pool until actual losses exceed the remaining nonaccretable difference. To date, no write-downs have been recorded for the PCI loans and leases held by the Company, all of which were purchased by the Company during the nine months ended September 30, 2012.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the fair value as of each balance sheet date, as determined by outstanding commitments from investors or what secondary markets are currently offering for portfolios with similar characteristics. The fair value includes the servicing value of the loans as well as any accrued interest. Mortgage loans held for sale are generally sold with servicing rights released. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

SBA loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Gains or losses realized on the sales of SBA loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing asset or liability. Gains and losses on sales of SBA loans are included in noninterest income.

The Bank has elected to measure its residential mortgage loans held for sale at fair value, with changes in fair value during the period reflected in operations. Origination fees and costs are recognized in earnings at the time of origination for newly originated loans held for sale.

 

15


Table of Contents

All of the Bank’s mortgage loans held for sale are GSE or Government-eligible at September 30, 2012. These loans have reliable market price information and the fair value of these loans at September 30, 2012 was based on quoted market prices of similar assets and included the value of loan servicing.

In scenarios of market disruptions where the current secondary market prices generally relied on to value, GSE-eligible mortgage loans may not be readily available. In these circumstances, the Company may consider other factors, including: 1) quoted market prices for to-be-announced securities (for agency-eligible loans); 2) recent transaction settlements or traded but unsettled transactions for similar assets; 3) recent third party market transactions for similar assets; and 4) modeled valuations using assumptions the Bank believes would be used by market participants in estimating fair value (assumptions may include prepayment rates, interest rates, volatilities, mortgage spreads and projected loss rates).

Adjustments to reflect unrealized gains and losses resulting from changes in fair value and realized gains and losses upon ultimate sale of the loans are classified as part of net gain on mortgage banking activities included in noninterest income in the accompanying consolidated statements of income and comprehensive income/(loss).

Accounting for Derivative Instruments and Hedging Activities: The Company records its derivative instruments at fair value as either assets or liabilities in the accompanying consolidated statements of financial condition. The change in derivative instruments fair value is recorded in current earnings.

The Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is set prior to funding (interest rate lock commitments, or IRLCs). Interest rate lock commitments on mortgage loans (loan commitments) that are intended to be sold are considered derivatives and are recorded at fair value on the consolidated statements of financial condition with the change in fair value recorded in the consolidated statements of income and comprehensive income/(loss).

The estimated fair value is based on current market prices for similar instruments.

The Bank hedges the risk of the overall change in the fair value of loan commitments to borrowers by selling forward contracts on securities of GSE. Forward contracts on securities are considered derivative instruments. The Bank has not formally designated these derivatives as a qualifying hedge relationship and accordingly, accounts for such forward contracts as freestanding derivatives with changes in fair value recorded to earnings each period.

Servicing Rights – Mortgage (Fair Value Method): A servicing asset or liability is recognized when undertaking an obligation to service a financial asset under a mortgage servicing contract in certain situations, including a transfer of the servicer’s financial assets that meet the requirements for sale accounting. Such servicing asset or liability is initially measured at fair value with the income statement effect recorded in net gain on mortgage banking activities on the consolidated statements of income and comprehensive income/(loss).

Fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and are included with net gain on mortgage banking activities on the consolidated statements of income and comprehensive income/(loss). The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimates and actual prepayment speeds and default rates and losses. Currently the Company does not hedge the income statement effects of changes in fair value of the servicing assets.

Servicing fee income, which is reported on the consolidated statements of income and comprehensive income/(loss) as loan servicing income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Servicing fees totaled $146 thousand for both the three and nine months ended September 30, 2012 and $0 for the same periods in 2011. Late fees and ancillary fees related to loan servicing are not material.

For other servicing assets related to SBA servicing, the Bank records periodic amortization expense and assesses mortgage servicing rights for impairment.

Servicing Rights Related to Small Business Administration Loans: As a general course of business, the Bank originates and sells the guaranteed portion of its SBA loans. To calculate the gain/(loss) on sales of SBA loans, the Bank’s investment in the loan is allocated among the retained portion of the loan, the servicing retained, the interest-only strip and the sold portion of the loan, based on the relative fair market value of each portion. The gain/(loss) on the sold portion of the loan is recognized at the time of sale based on the difference between sale proceeds and the amount of the allocated investment to the sold portion of the loan.

 

16


Table of Contents

The portion of the servicing fees that represent contractually specified servicing fees (contractual servicing) is reflected as a servicing asset and is amortized over the estimated life of the servicing; in the event future prepayments exceed management’s estimates and future expected cash flows are inadequate to cover the servicing asset, impairment is recognized. The portion of servicing fees in excess of contractual servicing fees are reflected as interest-only (I/O) strips receivable, which is included in other assets on the accompanying consolidated statements of financial condition. The I/O strips receivable are carried at fair value, with unrealized gains and losses recorded in the consolidated statements of income and comprehensive income/(loss). Fair value adjustments were not significant at September 30, 2012.

Mortgage Loan Repurchase Obligations and Reserve for Loss Reimbursements on Sold Loans: In the ordinary course of business, as loans held for sale are sold, the Bank makes standard industry representations and warranties about the loans. The Bank may have to subsequently repurchase certain loans or reimburse certain investor losses due to defects that occurred in the origination of the loans. Such defects include documentation or underwriting errors. In addition, certain investor contracts require the Bank to repurchase loans from previous whole loan sales transactions that experience early payment defaults. If there are no such defects or early payment defaults, the Bank has no commitment to repurchase loans that it has sold. The level of reserve for loss reimbursements on sold loans is an estimate that requires considerable management judgment. The Bank’s reserve is based upon the expected future repurchase trends for loans already sold in whole loan sale transactions and the expected valuation of such loans when repurchased, and include first and second trust deed loans. At the point the loans are repurchased, the associated reserves are transferred to the allowance for loan and lease losses. At the point when loss reimbursements are made directly to the investor, the reserve for loss reimbursements on sold loans is charged for the losses incurred. At September 30, 2012 the reserve for loss reimbursements on sold loans was $2.7 million.

Goodwill and Other Intangible Assets: Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are periodically evaluated for impairment at the reporting unit level. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.

In accordance with ASU 2011-08 Intangibles – Goodwill and Other (Topic 350), an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. In other words, before the first step of the existing guidance, the entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of goodwill is less than carrying value. The qualitative assessment includes adverse events or circumstances identified that could negatively affect the reporting units’ fair value as well as positive and mitigating events. Such indicators may include, among others: a significant change in legal factors or in the general business climate; significant change in the Company’s stock price and market capitalization; unanticipated competition; and an action or assessment by a regulator. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step process is unnecessary. The entity has the option to bypass the qualitative assessment step for any reporting unit in any period and proceed directly to the first step of the exiting two-step process. The entity can resume performing the qualitative assessment in any subsequent period.

The first step of the goodwill impairment test is performed, when considered necessary, by comparing the reporting unit’s aggregate fair value to its carrying value. Absent other indicators of impairment, if the aggregate fair value exceeds the carrying value, goodwill is not considered impaired and no additional analysis is necessary. If the carrying value of the reporting unit were to exceed the aggregate fair value, a second step would be performed to measure the amount of impairment loss, if any. To measure any impairment loss the implied fair value would be determined in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill is less than the recorded goodwill an impairment charge would be recorded for the difference. No goodwill impairment charges were required for the three or nine months ended September 30, 2012. For the three and nine-months ended September 30, 2012, the Company’s qualitative assessment concluded that a two-step impairment test of goodwill was not necessary. Even though there was no goodwill impairment at September 30, 2012, adverse events may impact the recoverability of goodwill and could result in a future impairment charge which could have a material impact on the Company’s consolidated financial statements. Goodwill is the only intangible asset with an indefinite life on our consolidated statements of financial condition.

Other intangible assets consist of core deposit intangibles and trade name intangibles arising from whole bank and their subsidiaries acquisitions, and are amortized on an accelerated method over thier estimated useful lives of 2-7 years and 1-20 years, respectively.

 

17


Table of Contents

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company had a $7.0 million and $1.3 million valuation allowance for its net deferred tax asset at September 30, 2012 and December 31, 2011, respectively. See further discussion in Note 17, Income Taxes, of the Notes to Consolidated Financial Statements.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company is no longer subject to examination by U.S. Federal taxing authorities for years before 2008 and for all state income taxes before 2007.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company had $0 accrued for interest and penalties at September 30, 2012 and December 31, 2011.

Comprehensive Income/(Loss): Comprehensive income/(loss) consists of net income/(loss) and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale, net of tax, which is recognized as a separate component of shareholders’ equity.

Operating Segments: While the chief decision makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial services operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior period financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior period net income or shareholders’ equity.

Adoption of New Accounting Standards: In June 2011, the Financial Accounting Standards Board (FASB) issued an accounting standards update to increase the prominence of items included in other comprehensive income and facilitate the convergence of U.S. and International accounting principles. The update prohibits continued exclusive presentation of other comprehensive income in the statement of shareholders’ equity. The update requires that all non-owner changes in shareholders’ equity be presented in either a single continuous statement of income and comprehensive income or in two separate but continuous statements. The amendments in the update became effective for interim and annual periods beginning on or after December 15, 2011. The adoption of the amendments changed the presentation of the components of comprehensive income for the Company from being presented as part of the consolidated statements of shareholder’s equity to being included in a single continuous statement with the consolidated statements of income and comprehensive income/(loss).

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The standard was effective for interim and annual periods beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company’s consolidated operating results or financial condition, but the additional disclosures are included in Note 6.

In September 2011, the FASB issued an accounting standards update to the requirements of the annual testing of goodwill for impairment. The amendments in the update allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of the amendments did not impact the Company’s consolidated financial statements or disclosures.

Effective January 2012, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (ASU 2011-03). ASU 2011-03 is intended to improve financial reporting of repurchase agreements and refocus the assessment of effective control on a transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations. The guidance in ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011. The adoption of this update did not have a material impact on the consolidated financial statements.

 

18


Table of Contents

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). The amendments in ASU 2011-11 require the disclosure of information on offsetting and related arrangements for financial and derivative instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position. Amendments under ASU 2011-11 will be applied retrospectively for fiscal years, and interim periods within those years, beginning after January 1, 2013. The Company is evaluating the effect, if any, adoption of ASU 2011-11 will have on its consolidated financial statements.

Newly Issued But Not Yet Effective Accounting Standards: In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). This update increases the disclosure requirements surrounding derivative instruments that are offset within the balance sheet pursuant to the provisions of current GAAP. The objective of the update is to provide greater comparability between issuers reporting under U.S. GAAP versus IFRS and provide users the ability to evaluate the effect of netting arrangements on a company’s financial statements. The provisions of the update are effective for annual and interim periods beginning on or after January 1, 2013 and are not expected to add to the Company’s current level of disclosures.

NOTE 3 – BUSINESS COMBINATIONS

Beach Business Bank Merger

Effective July 1, 2012, the Company merged with Beach Business Bank (Beach) pursuant to the terms of the Agreement and Plan of Merger (the Merger Agreement) dated August 30, 2011, as amended October 31, 2011. At the effective time of the Merger, a newly formed and wholly owned subsidiary of the Company (Merger Sub) merged with and into Beach, with Beach continuing as the surviving entity in the Merger and a wholly owned subsidiary of the Company. Pursuant and subject to the terms of the Merger Agreement, each outstanding share of common stock, no par value, of Beach (other than specified shares owned by the Company, Merger Sub or Beach, and other than in the case of shares in respect of, or underlying, certain Beach options and other equity awards, which will be treated as set forth in the Merger Agreement) was converted into the right to receive $9.21415 in cash and one Warrant. Each Warrant entitles the holder to purchase 0.33 of a share of Company Common Stock at an exercise price of $14.00 per share of Company Common Stock for a period of one year. The aggregate cash consideration paid to Beach shareholders in the Merger was approximately $39.1 million. In addition, Beach shareholders received in aggregate the equivalent of 1,401,959 warrants of the Company’s common stock with an estimated fair value of $1.0 million.

Beach operates branches in Manhattan Beach, Long Beach, and Costa Mesa, California. Beach also has a division named The Doctors Bank®, which serves physicians and dentists nationwide. Additionally, Beach provides loans to small businesses based on SBA lending programs. Beach’s consolidated assets and equity (unaudited) as of June 30, 2012 totaled $311.9 million and $33.3 million, respectively, and its consolidated net income (unaudited) totaled $2.0 million for the year ended December 31, 2011 and $0.6 million for the six month period ended June 30, 2012 (unaudited). The acquired assets and liabilities were recorded at fair value at the date of acquisition and were reflected in the September 30, 2012 financial statements as such. The fair value estimates included in these financial statements are based on preliminary valuations. The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed during the fourth quarter of 2012.

In accordance with GAAP guidance for business combinations, the Company has expensed approximately $1.7 million of direct acquisition costs and recorded $7.0 million of goodwill and $4.5 million of other intangible assets. The other intangible assets are primarily related to core deposits and are being amortized on an accelerated basis over 2-7 years. For tax purposes purchase accounting adjustments, including goodwill are all non-taxable and/or non-deductible. The following table summarizes the fair value of the total consideration transferred as a part of the Beach merger as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.

 

     July 1, 2012  

Consideration:

  

Payment to Beach shareholders

   $ 39,145   

Value of stock warrants paid to Beach shareholders

     1,009   
  

 

 

 

Fair Value of Total Consideration Transferred

     40,154   
  

 

 

 

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:

  

Cash and due from banks

     5,867   

Federal funds sold and other short-term investments

     55,478   

 

19


Table of Contents
     July 1, 2012  

Interest-bearing time deposits in financial institutions

     4,674   

Securities available for sale

     5,661   

Loans

     229,722   

Stock in FHLB and other bank stock, at cost

     1,554   

Premises and equipment

     709   

Other real estate owned

     114   

Core deposit intangibles

     4,470   

Trade name intangible

     25   

Accrued interest receivable and other assets

     3,719   

Deposits

     (271,320

Other borrowings

     (2,315

Accrued interest and other liabilities

     (5,243
  

 

 

 

Total Identifiable Net Assets

     33,115   
  

 

 

 

Goodwill

   $ 7,039   
  

 

 

 

This acquisition was consistent with the Company’s strategy to build a regional presence in Southern California. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region.

Loans that were acquired from Beach Business Bank that were considered credit impaired were written down at the acquisition date in purchase accounting to an amount estimated to be collectible. In addition, the allowance for loan losses for all Beach loans was not carried over to First PacTrust Bancorp, Inc.’s allowance for loan and lease losses.

Gateway Bancorp Acquisition

Effective August 18, 2012, the Company acquired Gateway Bancorp, the holding company of Gateway Business Bank (Gateway) pursuant to the terms of the Stock Purchase Agreement (the Purchase Agreement) dated June 3, 2011, as amended on November 28, 2011, February 24, 2012, June 30, 2012, and July 31, 2012. The acquisition was accomplished by the merger of Gateway into PacTrust Bank. Under the terms of the Purchase Agreement, the Company purchased all of the issued and outstanding shares of Gateway Bancorp for $15.5 million in cash.

Gateway operated branches in Lakewood and Laguna Hills, California. As part of the acquisition, Mission Hills Mortgage Bankers (a division of Gateway), including its 22 loan production offices in California, Arizona, Oregon and Washington, became a division of PacTrust Bank. Gateway’s consolidated assets and equity (unaudited) as of August 17, 2012 totaled $175.2 million and $25.8 million, respectively, and its consolidated net loss (unaudited) totaled $8.3 million for the year ended December 31, 2011 and consolidated net income (unaudited) of $4.2 million for the year to date period ended August 17, 2012. The acquired assets and liabilities were recorded at fair value at the date of acquisition and were reflected in the September 30, 2012 financial statements as such. The fair value estimates included in these financial statements are based on preliminary valuations. The Company is aware of a potential receivable from the Internal Revenue Service, but the amount cannot be estimated at this time. With the exception of this item, the Company does not expect material variances from these estimates and expects that final valuation estimates will be completed during the fourth quarter of 2012.

In accordance with GAAP guidance for business combinations, the Company has expensed approximately $1.5 million of direct acquisition costs and recorded $12.1 million of bargain purchase gain and $1.7 million of other intangible assets. The other intangible assets are related to $720 thousand of core deposits, which are being amortized on an accelerated basis over 4—6 years, and $955 thousand of trade name intangible which is being amortized on an accelerated basis over 20 years. For tax purposes the purchase accounting adjustments and bargain purchase gain are non-taxable and/or non-deductible. Due to circumstances that Gateway Bancorp’s subsidiary faced at the time the acquisition was negotiated, which include regulatory orders and operating losses, the terms negotiated included a purchase price that was $5 million lower that the Gateway’s equity book value. The discount was further increased to $6.5 million in exchange for the elimination of any contingent liability to the shareholder of Gateway Bancorp related to mortgage repurchase risk. Due to delays in obtaining regulatory approval, the deal closed 9 months later than originally expected. This passage of time allowed Gateway to eliminate all regulatory orders, return to profitability and improve asset quality, increasing the book value of equity and reducing the expected discount on assets. As a result, the bargain purchase gain at the time of purchase grew to $12.1 million. The following table summarizes the fair value of the total consideration transferred as a part of the Gateway acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.

 

20


Table of Contents

 

     August 18, 2012  

Consideration:

  

Cash paid to Gateway shareholders

   $ 15,500   
  

 

 

 

Fair Value of Total Consideration Transferred

     15,500   
  

 

 

 

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:

  

Cash and due from banks

     2,070   

Federal funds sold and other short-term investments

     35,090   

Securities available for sale

     76   

Loans

     128,468   

Stock in FHLB of Indianapolis and other restricted stock, at cost

     1,018   

Premises and equipment

     741   

Trade name intangible

     955   

Core deposit intangible

     720   

Mortgage servicing rights

     1,636   

Derivative asset

     2,877   

Accrued interest receivable and other assets

     3,918   

Deposits

     (142,964

Accrued interest payable and other liabilities

     (7,050
  

 

 

 

Total Identifiable Net Assets

     27,555   
  

 

 

 

Bargain Purchase Gain

   $ (12,055
  

 

 

 

This acquisition was consistent with the Company’s strategy to build a regional presence in Southern California. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region.

Loans that were acquired from Gateway Business Bank that were considered credit impaired were written down at the acquisition date in purchase accounting to an amount estimated to be collectible and the related allowance for loan losses was not carried over to First PacTrust Bancorp, Inc.’s allowance for loan and lease losses.

Pro Forma Information

The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2011 after giving effect to certain adjustments. The unaudited pro forma information for the three and nine months ended September 30, 2012 and 2011, includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

     Pro Forma
Three Months Ended
September 30, 2012
    Pro Forma
Three Months Ended
September 30, 2011
 

SUMMARIZED INCOME STATEMENT DATA:

    

Net interest income

   $ 15,302      $ 12,245   

Provision for loan and lease losses expense

     1,091        1,478   

Non-interest income

     16,305        11,032   

Non-interest expense

     31,202        20,555   
  

 

 

   

 

 

 

Income (loss) before income taxes

     (686     1,244   

Income tax expense

     593        465   
  

 

 

   

 

 

 

Net income (loss)

   $ (1,279   $ 779   
  

 

 

   

 

 

 
     Pro Forma
Nine Months Ended
September 30, 2012
    Pro Forma
Nine Months Ended
September 30, 2011
 

SUMMARIZED INCOME STATEMENT DATA:

    

Net interest income

   $ 42,515      $ 35,879   

Provision for loan and lease losses expense

     2,911        2,615   

 

21


Table of Contents
     Pro Forma
Nine Months Ended
September 30, 2012
    Pro Forma
Nine Months Ended
September 30, 2011
 

Non-interest income

     38,532        27,585   

Non-interest expense

     77,515        58,474   
  

 

 

   

 

 

 

Income before income taxes

     621        2,375   

Income tax expense

     1,109        612   
  

 

 

   

 

 

 

Net income (loss)

   $ (488   $ 1,763   
  

 

 

   

 

 

 

The above unaudited pro forma financial information related to 2011 and 2012 includes acquisition/integration costs. The included acquisition integration costs totaled $0.6 million and $1.1 million for the three and nine months ended September 30, 2011, and $2.1 million and $3.1 million for the three and nine months ended September 30, 2012, respectively, on a pre-tax basis. Excluded from the above pro forma financials for the three and nine months ended September 30, 2012 is a revenue of $12.1 million related to the bargain purchase gain for the Gateway acquisition. The above unaudited pro forma financial information includes the provision for loan and lease losses recognized by Beach and Gateway prior to acquisition of $0.7 million and $1.3 million for the three and nine months ended September 30, 2011 and $0 and $0.9 million for the three and nine months ended September 30, 2012, respectively.

NOTE 4 – EMPLOYEE STOCK COMPENSATION

Stock Appreciation Rights Plan

A Stock Appreciation Rights Plan (“SARs”) provides for the issuance of shares to directors, and officers. Compensation expense is recognized over the vesting period of the rights based on the fair value as calculated using Black Scholes as of September 30, 2012, and adjusted each quarter. The SARs are to be settled in cash. One third of the SARs vested on the grant date and one third will vest on the first and second anniversaries of the grant date such that the SARs will be fully vested on the second anniversary of the grant date. During the three and nine months ended September 30, 2012, 500,000 shares were issued to an executive officer with a base price of $12.12 per share and a term of ten years. The Company did not issue any SARs prior to the third quarter of 2012. The weighted-average grant date fair value was $3.75 per share, or $1.9 million and an adjusted fair value as of September 30, 2012 of $3.67 per share or $1.8 million and was awarded on August 12, 2012. Compensation expense recognized for the SARs was $675.0 thousand for the three and nine months ended September 30, 2012. At September 30, 2012, there was $1.2 million of total unrecognized compensation cost related to the nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2 years. The grant date and September 30, 2012 fair value of the SARs was determined using the following assumptions.

 

     Grant Date        
     August 21, 2012     September 30, 2012  

SARs granted

     500,000        500,000   

Estimated fair value per share of SARs granted

   $ 3.90      $ 3.67   

Risk-free interest rate

     1.80     1.80

Expected term

     10 years        10 years   

Expected stock price volatility

     42.71     38.30

Dividend yield

     3.15     3.51

Separation and Settlement Agreement

The Company entered into a separation and settlement agreement with the Chief Executive Officer in which the Company agreed to severance pay in the amount of $832.0 thousand payable in 24 equal monthly installments of $34.7 thousand commencing on the first business day coincident with or next following the 60th day following the resignation date and on each one-month anniversary of the date of first payment until paid in full. In addition, the Company agreed to pay consideration for the cancellation of all of the Executive’s equity awards for a lump sum cash payment of $503.8 thousand. Under this agreement the Company recognized severance pay compensation expense totaling $1.2 million during the three and nine months ended September 30, 2012, and $129,000 was previously recognized as stock option plan expense.

NOTE 5 – EARNINGS PER COMMON SHARE

Basic earnings per common share were computed by dividing net income available to common shareholders after subtracting preferred stock dividends by the weighted average number of common shares outstanding. Diluted earnings per common share were computed by dividing net income available to common shareholders by the weighted average number of shares outstanding, adjusted for the dilutive effect, if any, of the outstanding stock options, restricted stock awards and warrants to purchase common stock. Computations for basic and diluted earnings per common share are provided below.

 

22


Table of Contents
    Three months ended
September 30,
    Nine months ended
September 30,
 
    2012     2011     2012     2011  

Basic

       

Net income

  $ 9,543      $ 644      $ 9,181      $ 2,886   

Less: Dividends and accretion on preferred stock

    328        138        1,042        138   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

  $ 9,215      $ 506      $ 8,139      $ 2,748   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

    11,702,974        11,542,752        11,677,532        10,326,009   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

  $ 0.79      $ 0.04      $ 0.70      $ 0.27   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

       

Net income available to common shareholders

  $ 9,215      $ 506      $ 8,139      $ 2,748   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings per common share

    11,702,974        11,542,752        11,677,532        10,326,009   

Add: Dilutive effects of stock options

    —          —          —          228   

Add: Dilutive effects of stock awards

    397        1,390        356        3,034   

Add: Dilutive effects of warrants

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Average shares and dilutive potential common shares

    11,703,371        11,544,142        11,677,888        10,329,271   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 0.79      $ 0.04      $ 0.70      $ 0.27   
 

 

 

   

 

 

   

 

 

   

 

 

 

Stock options totaling 528,569 shares, 1,635,000 warrants, 152,740 stock awards, and 1,401,959 warrants were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2012 because they were anti-dilutive. Options totaling 453,569 shares and 11,652 stock awards were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2011, respectively, because they were anti-dilutive. They were anti-dilutive since the exercise prices were greater than the average market price of the common stock.

NOTE 6 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair Value Hierarchy. ASC 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The topic describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Securities Available for Sale. The fair values of securities available for sale are generally determined by quoted market prices, if available (Level 1), or by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair values of the Company’s Level 3 securities are determined by the Company and an independent third-party provider using a discounted cash flow methodology. The methodology uses discount rates that are based upon observed market yields for similar securities. Prepayment speeds are estimated based upon the prepayment history of each bond and a detailed analysis of the underlying collateral. Gross weighted average coupon, geographic concentrations, loan to value, FICO and seasoning are among the different loan attributes that are factored into our prepayment curve. Default rates and severity are estimated based upon geography of the collateral, delinquency, modifications, loan to value ratios, FICO scores, and past performance.

 

23


Table of Contents

Impaired Loans and Leases. The fair value of impaired loans and leases with specific allocations of the allowance for loan and lease losses based on collateral values is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. For the three and nine months ended September 30, 2012, the Company charged off $226 thousand and $2.5 million, respectively, which primarily consisted of specific valuation allowance allocations related to changes in reporting requirements for OCC regulated thrifts which no longer permit the use of these specific valuation allowances for collateral dependent loans. For the three and nine months ended September 30, 2011, the Company experienced $439 thousand in specific allowance allocation expense and a specific allowance recovery of $2.0 million for these loans, respectively.

Loans Held for Sale. The fair value of loans held for sale is based on commitments outstanding from investors as well as what secondary markets are currently offering for portfolios with similar characteristics. Therefore, loans held for sale subjected to recurring fair value adjustments are classified as Level 2.

Derivative Assets and Liabilities. The Company’s derivative assets and liabilities are carried at fair value as required by GAAP and are accounted for as freestanding derivatives. The derivative assets are IRLCs with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked in that interest rate. These commitments are determined to be derivative instruments in accordance with GAAP. The derivative liabilities are hedging instruments (typically TBA securities) used to hedge the risk of fair value changes associated with changes in interest rates relating to its mortgage loan origination operations. The Company hedges the period from the interest rate lock (assuming a fall-out factor) to the date of the loan sale. The estimated fair value is based on current market prices for similar instruments. Given the meaningful level of secondary market activity for derivative contracts, active pricing is available for similar assets and accordingly, the Company classifies its derivative assets and liabilities as Level 2.

Servicing Rights – Other. The fair value of servicing rights related to non mortgage loans serviced for others is determined by an internal model developed by management that calculates the present value of the expected net servicing income from the portfolio. Because of the significance of unobservable inputs, these servicing rights are classified as Level 3.

Servicing Rights – Mortgage. The Bank retains servicing on some of its mortgage loans sold and elected the fair value option for valuation of these mortgage servicing rights. The value is based on a model that calculates the present value of the expected net servicing income from the portfolio. Because of the significance of unobservable inputs, these servicing rights are classified as Level 3.

I/O Strips Receivable. The fair value is determined by discounting future cash flows using discount rates and prepayment assumptions that market participants would use for similar financial instruments. Because of the significance of unobservable inputs, the I/O strips receivable are classified as Level 3.

Other Real Estate Owned Assets. Other real estate owned assets (OREO) are recorded at the fair value less estimated costs to sell at the time of foreclosure. The fair value of other real estate owned assets is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value. For the three and nine months ended September 30, 2012, the Company experienced $36 thousand and $205 thousand in valuation allowance expense for those assets, respectively. For the three and nine months ended September 30, 2011, the Company experienced $1.3 million and $1.9 million in valuation allowance expense for those assets, respectively.

Assets and Liabilities Measured on a Recurring and Non Recurring Basis

Available for sale securities, loans held for sale, derivative assets and liabilities, servicing rights – other, servicing rights – mortgage, and I/O strips receivable are measured at fair value on a recurring basis, whereas impaired loans and other real estate owned are measured at fair value on a non-recurring basis.

 

24


Table of Contents

 

          Fair Value Measurements at September 30, 2012 Using  
    Carrying
Value
    Quoted Prices in
Active Markets
for Identical
Assets
(Level One)
    Significant Other
Observable
Inputs
(Level Two)
    Significant
Unobservable Inputs
(Level Three)
 

Assets

       

Available-for-sale securities:

       

US government-sponsored agency securities (recurring)

  $ 2,718      $ —        $ 2,718     $ —     

State and Municipal securities (recurring)

    9,954        —          9,954        —     

Private label residential mortgage-backed securities (recurring)

    50,280        —          —          50,280   

Agency residential mortgage-backed securities (recurring)

    59,319        —          —          59,319   

Loans held for sale (recurring)

    110,291        —          110,291        —     

Derivative assets (recurring)

    3,370        —          3,370        —     

Servicing rights – other (recurring)

    561        —          —          561   

Servicing rights – mortgage (recurring)

    1,609        —          —          1,609   

I/O strips receivable (recurring)

    29        —          —          29   

Other real estate owned assets (non recurring)

       

Real estate 1-4 family first mortgage

    345        —          —          345   

Multi-family

    2,480        —          —          2,480   

Land

    2,427        —          —          2,427   

Liabilities

       

Derivative liabilities (recurring)

    3,051        —          3,051        —     

The table below presents a reconciliation of the investment securities available-for-sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine month periods ended September 30, 2012. Servicing rights – other, servicing rights – mortgage, and I/O strips receivable are also measured at fair value on a recurring basis using significant unobservable inputs (Level 3), and are reconciled in Note 11 – Servicing Rights.

 

25


Table of Contents
    Three months ended
September 30, 2012
    Nine months ended
September 30, 2012
 
    Private label  residential
mortgage-backed securities
    Private label  residential
mortgage-backed securities
 

Balance of recurring Level 3 assets at beginning of period

  $ 57,318      $ 76,203   

Total gains or (losses) (realized/unrealized):

   

Included in earnings—realized

    (12     (83

Included in earnings—unrealized

    —          —     

Included in other comprehensive income

    514        (9

Amortization of premium/discount

    (33     (160

Purchases

    —          —     

Sales, issuances and settlements

    (7,507     (25,671

Net transfers in and/or out of Level 3

    —          —     
 

 

 

   

 

 

 

Balance of recurring Level 3 assets at September 30, 2012

  $ 50,280      $ 50,280   
 

 

 

   

 

 

 
    Three months ended
September 30, 2012
    Nine months ended
September 30, 2012
 
    Agency residential
mortgage-backed securities
    Agency residential
mortgage-backed securities
 

Balance of recurring Level 3 assets at beginning of period

  $ 52,824      $ 15,659   

Total gains or (losses) (realized/unrealized):

   

Included in earnings—realized

    —          —     

Included in earnings—unrealized

    —          —     

Included in other comprehensive income

    161        2,057   

Amortization of premium/discount

    (396     (707

Purchases

    13,832        54,863   

Sales, issuances and settlements

    (7,102     (12,553

Net transfers in and/or out of Level 3

    —          —     
 

 

 

   

 

 

 

Balance of recurring Level 3 assets at September 30, 2012

  $ 59,319      $ 59,319   
 

 

 

   

 

 

 

There were no significant transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2012.

Other real estate owned which is measured at fair value less costs to sell having a valuation allowance, had a net carrying amount of $5.3 million, which is made up of the outstanding balance of $8.5 million, net of a valuation allowance of $3.2 million at September 30, 2012.

 

    Carrying
Value
    Fair Value Measurements at December 31, 2011 Using  
    Quoted Prices in
Active Markets
for Identical
Assets
(Level One)
    Significant Other
Observable
Inputs
(Level Two)
    Significant
Unobservable Inputs
(Level Three)
 

Assets

       

Available-for-sale securities:

       

U.S. government-sponsored entities and agency securities (recurring)

  $ 4,038      $ —        $ 4,038      $ —     

Municipal securities (recurring)

    5,713        —          5,713        —     

Private label residential mortgage-backed securities (recurring)

    76,203        —          —          76,203   

 

26


Table of Contents
     Carrying
Value
     Fair Value Measurements at December 31, 2011 Using  
      Quoted Prices in
Active Markets
for Identical
Assets
(Level One)
     Significant Other
Observable
Inputs
(Level Two)
     Significant
Unobservable Inputs
(Level Three)
 

Agency residential mortgage-backed securities (recurring)

     15,662         —          3         15,659   

Impaired loans: (non recurring)

           

Real estate 1-4 family first mortgage

     6,893         —           —           6,893   

Multi-family

     1,638         —           —           1,638   

Land

     1,164         —           —           1,164   

Other real estate owned assets: (non recurring)

           

Real estate 1-4 family first mortgage

     8,224         —           —           8,224   

Multi-family

     2,480         —           —           2,480   

Land

     3,988         —           —           3,988   

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine month periods ended September 30, 2011:

 

     Three months ended
September 30, 2011
    Nine months ended
September 30, 2011
 
     Investment
Securities
Available-for-sale
    Investment
Securities
Available-for-sale
 

Balance of recurring Level 3 assets at beginning of period

   $ 57,042      $ 54,246   

Total gains or losses (realized/unrealized):

    

Included in earnings—realized

     1,278        2,699   

Included in earnings—unrealized

     —          —     

Included in other comprehensive income (loss)

     (3,081     (6,073

Purchases

     37,830        69,033   

Sales, issuances and settlements

     (31,471     (58,307

Net transfers in and/or out of Level 3

     —          —     
  

 

 

   

 

 

 

Balance of recurring Level 3 assets at September 30, 2011

   $ 61,598      $ 61,598   
  

 

 

   

 

 

 

There were no significant transfers between Level 1 and Level 2 during the three or nine months ended September 30, 2011.

Impaired loans measured at fair value on a non-recurring basis with specific allowances allocations are measured for impairment using the fair value of the collateral for collateral dependent loans. These loans totaled $12.6 million and had a carrying amount of $9.7 million, net of specific allowance allocations of $2.9 million at December 31, 2011.

Other real estate owned which is measured at fair value less costs to sell having a valuation allowance, had a net carrying amount of $14.7 million, which is made up of the outstanding balance of $18.8 million, net of a valuation allowance of $4.1 million at December 31, 2011.

 

27


Table of Contents

The following table presents quantitative information about level 3 fair value measurements at September 30, 2012:

 

     Fair value     

Valuation Technique(s)

  

Unobservable Input(s)

   Range (Weighted
Average)

Private label residential mortgage backed securities (recurring)

   $ 50,280      

Discounted cash flow

  

Voluntary prepayment rate

Collateral default rate

Loss severity at default

   0.83 to 22.77 (10.93)

0.03 to 23.57 (5.05)

9.97 to 103.74 (52.14)

Agency residential mortgage based securities (recurring)

     59,319      

Discounted cash flow

  

Voluntary prepayment rate

   0.0% to 50.16% (21.24%)

Servicing rights-other (recurring)

     561      

Discounted cash flow

  

Discount rate

Estimated life

   7.25 to 15.0%

36 to 72 months

Servicing rights-mortgage (recurring)

     1,609      

Discounted cash flow

  

Discount rate

Prepayment rate

   10.5%

14.8%

Servicing rights-I/O strips receivable (recurring)

     29      

Discounted cash flow

  

Discount rate

Prepayment rate

   10.5%

13.7%

Other real estate owned assets – 1-4 family first mortgage (non-recurring)

     345      

Sales comparison approach

  

Adjustment for differences between the comparable sales

   0% to 0% (0%)

Other real estate owned assets – Multi-family (non-recurring)

     2,480      

Sales comparison approach

  

Adjustment for differences between the comparable sales

   51.2% to 50.6% (18.42%)

Other real estate owned assets – Land (non-recurring)

     2,427      

Sales comparison approach

  

Adjustment for differences between the comparable sales

   -37.7% to -7.50% (18.42%)

The significant unobservable inputs used in the fair value measurement of the Company’s private label and agency residential mortgage backed securities are prepayment rates, collateral default rates, and loss severity in the event of default. Significant increases/(decreases) in any of those inputs in isolation would result in a significantly lower/(higher) fair value measurement. Generally, a change in the assumption used for the collateral default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

The significant unobservable inputs used in the fair value measurement of the Company’s servicing rights include the discount and estimated cash flows. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results.

The carrying amounts and estimated fair values of financial instruments, at September 30, 2012 and December 31, 2011 were as follows:

 

            Fair Value Measurements at September 30, 2012 Using  
     Carrying
Value
     Level One      Level Two      Level Three      Total  

Financial assets

              

Cash and cash equivalents

   $ 122,060       $ 122,060       $ —         $ —         $ 122,060   

Time deposits in financial institutions

     5,621         5,621         —           —           5,621   

Securities available-for-sale

     122,271         —           12,672         109,599         122,271   

FHLB stock

     8,842         N/A         N/A         N/A         N/A   

Loans receivable, net, including loans held for sale

     1,202,995         —           —           1,214,636         1,214,636   

Loans held for sale

     110,291         —           110,291         —           110,291   

Accrued interest receivable

     5,312         11        78        5,223         5,312   

Derivative assets

     3,370         —           3,370         —           3,370   

I/O strips receivable

     29         —           —           29         29   

Financial liabilities

              

Deposits

     1,328,221         688,668         635,803         —           1,324,471   

Advances from FHLB

     86,000         —           86,146         —           86,146   

Notes payable

     34,018         35,923         —           —           35,923   

Derivative liabilities

     2,767         —           2,767         —           2,767   

Accrued interest payable

     770         525         245         —           770   

 

28


Table of Contents
            Fair Value Measurements at December 31, 2011 Using  
     Carrying
Value
    
Level One
    
Level Two
    
Level Three
    
Total
 

Financial assets

              

Cash and cash equivalents

   $ 44,475       $ 44,475       $ —         $ —         $ 44,475   

Securities available-for-sale

     101,616         —           9,754         91,862         101,616   

FHLB stock

     6,972         N/A         N/A         N/A         N/A   

Loans receivable, net

     775,609         —           —           777,053         777,053   

Accrued interest receivable

     3,569         3         8         3,558         3,569   

Financial liabilities

              

Deposits

     786,334         316,451         472,509         —           788,960   

Advances from FHLB

     20,000         —           20,095         —           20,095   

Accrued interest payable

     217         1         216         —           217   

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that re-price frequently and fully. The methods for determining the fair values for securities available for sale, derivative assets and liabilities, and I/O strips were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of long-term debt is based on current rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material (or is based on the current fees or costs that would be charged to enter into or terminate such arrangements) and is not presented.

NOTE 7 – SECURITIES AVAILABLE FOR SALE

The following tables summarize the amortized cost and fair value of the available-for-sale investment securities portfolio at September 30, 2012 and December 31, 2011, respectively, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

2012

          

Available-for-sale

          

U.S. government-sponsored entities and agency securities

   $ 2,712       $ 6       $ —        $ 2,718   

State and Municipal securities

     9,660         294         —          9,954   

Private label residential mortgage-backed securities

     50,296         274         (290     50,280   

Agency residential mortgage-backed securities

     58,960         472         (113     59,319   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 121,628       $ 1,046       $ (403   $ 122,271   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

2011

          

Available-for-sale

          

U.S. government-sponsored entities and agency securities

   $ 4,000       $ 38       $ —        $ 4,038   

Municipal securities

     5,641         88         (16     5,713   

Private label residential mortgage-backed securities

     78,029         27         (1,853     76,203   

Agency residential mortgage-backed securities

     15,541         121         —          15,662   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities available for sale

   $ 103,211       $ 274       $ (1,869   $ 101,616   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

29


Table of Contents

The amortized cost and fair value of the available-for-sale securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

     September 30, 2012  
     Amortized
Cost
     Fair
Value
 

Maturity

     

Available-for-sale

     

Within one year

   $ 712       $ 713   

One to five years

     4,524         4,577   

Five to ten years

     887         947   

Greater than ten years

     6,249         6,435   

Private label residential mortgage backed and agency residential mortgage-backed securities

     109,256         109,599   
  

 

 

    

 

 

 

Total

   $ 121,628       $ 122,271   
  

 

 

    

 

 

 

At September 30, 2012 and December 31, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

The following table summarizes the investment securities with unrealized losses at September 30, 2012 by aggregated major security type and length of time in a continuous unrealized loss position:

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Available-for-sale

               

Private label residential mortgage-backed securities

   $ 7,439       $ (40   $ 18,051       $ (250   $ 25,490       $ (290

Agency residential mortgage-backed securities

     15,222         (113     —           —          15,222         (113
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 22,661       $ (153   $ 18,051       $ (250   $ 40,712       $ (403
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the investment securities with unrealized losses at December 31, 2011 by aggregated major security type and length of time in a continuous unrealized loss position:

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Available-for-sale

               

Municipal securities

   $ 1,072       $ (16   $ —         $ —        $ 1,072       $ (16

Private label residential mortgage-backed securities

     64,911         (1,763     8,145         (90     73,056         (1,853
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 65,983       $ (1,779   $ 8,145       $ (90   $ 74,128       $ (1,869
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

As of September 30, 2012, the Company’s securities available for sale portfolio consisted of eighty-one securities, twenty-seven of which were in an unrealized loss position. The unrealized losses are related to the Company’s private label and agency residential mortgage-backed securities as discussed below.

The Company’s private label residential mortgage-backed securities that are in an unrealized loss position had a fair value of $25.5 million with unrealized losses of $290 thousand at September 30, 2012. The Company’s agency residential mortgage-backed securities that are in an unrealized loss position had a fair value of $15.2 million with unrealized losses of $113 thousand at September 30, 2012. The Company’s residential mortgage-backed securities were rated AA or above at purchase and are not within the scope of ASC 325. The Company monitors to insure it has adequate credit support and as of September 30, 2012, the Company believes there is no other than temporary impairment (OTTI) and it does not have the intent to sell these securities and it is not likely that it will be required to sell the securities before their anticipated recovery. Of the Company’s $122.3 million securities portfolio at September 30, 2012, $112.9 million were rated AAA, AA or A, and $6.5 million were rated BBB based on the most recent credit rating as of September 30, 2012. One municipal security totaling $2.9 million was not rated at September 30, 2012. The Company considers the lowest credit rating for identification of OTTI. During the first quarter of 2012, the Company sold one downgraded security for a net loss of $39 thousand and during the second quarter of 2012, the Company sold two downgraded securities for a net loss of $32 thousand. During the third quarter of 2012, the Company sold one downgraded security for a net loss of $12 thousand.

 

30


Table of Contents

During the three and nine months ended September 30, 2012 and 2011, the Company determined that no securities were other-than-temporarily impaired.

NOTE 8 – LOANS AND LEASES

Loans and leases receivable consist of the following:

 

     Originated Loans Receivable Outstanding (1)  
     September 30, 2012     December 31, 2011  

Commercial:

    

Commercial and industrial

   $ 17,926      $ 9,019   

Real estate mortgage

     198,932        124,013   

Multi-family

     23,481        27,596   

Land

     909        2,375   

SBA

     3,341        —     

Construction

     —          —     

Lease financing

     —          —     

Consumer:

    

Real estate 1-4 family first mortgage

     548,650        546,760   

Real estate 1-4 family junior lien mortgage

     8,250        9,219   

Other revolving credit and installment

     7,789        8,604   
  

 

 

   

 

 

 

Total

     809,278        727,586   

Net deferred loan costs

     732        1,048   

Allowance for loan and lease losses

     (11,663     (12,257
  

 

 

   

 

 

 

Loans and leases receivable, net

   $ 798,347      $ 716,377   
  

 

 

   

 

 

 

 

    Purchased Loans and Leases Receivable Outstanding (1)     Purchased Credit-Impaired Loan and Lease Portfolio  
    September 30, 2012     December 31, 2011     September 30, 2012     December 31, 2011  

Commercial:

       

Commercial and industrial

  $ 56,521      $ —        $ 7,290      $ —     

Real estate mortgage

    80,613        —          22,829        —     

Multi-family

    81,876        59,694       852        —     

Land

    27        —          327        —     

SBA

    40,573        —          6,817        —     

Construction

    4,712        —          —          —     

Lease financing

    5,031        —          —          —     

Consumer:

       

Real estate 1-4 family first mortgage

    25,784        —          66,354        —     

Real estate 1-4 family junior lien mortgage

    5,609        —          59        —     

Other revolving credit and installment

    90        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    300,836        59,694       104,528        —     

 

31


Table of Contents
     Purchased Loans and Leases Receivable Outstanding (1)     Purchased Credit-Impaired Loan and Lease Portfolio  
     September 30, 2012     December 31, 2011     September 30, 2012      December 31, 2011  

Net deferred loan costs

     —          61       —           —     

Allowance for loan and lease losses

     (716     (523     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Loans and leases receivable, net

   $ 300,120      $ 59,232     $ 104,528       $ —     
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) Does not include purchased credit-impaired loans and leases.

At September 30, 2012, the Company had a total of $376.1 million in interest only mortgage loans and $20.5 million in loans with potential for negative amortization. At December 31, 2011, the Company had a total of $382.0 million in interest only mortgage loans and $23.4 million in loans with potential for negative amortization. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization, however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on loan-to-value ratios.

Activity in the allowance for loan and lease losses is summarized as follows for the three and nine months ended September 30, 2012 and 2011:

 

     Three months ended September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Balance at beginning of period

   $ 11,448      $ 8,431      $ 12,780      $ 14,637   

Loans charged off

     (226     (382     (2,547     (7,117

Recoveries of loans previously charged off

     126        121        145        199   

Provision for loan losses

     1,031        823        2,001        1,274   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30

   $ 12,379      $ 8,993      $ 12,379      $ 8,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

The following tables present the activity in the allowance for loan and lease losses and the recorded investment in loans and leases by portfolio segment, and is based on the impairment method for the three and nine months ended September 30, 2012 and 2011. Recorded investment in loans and leases excludes accrued interest receivable of $4.7 million at September 30, 2012, and accrued interest receivable and net deferred loan costs totaled $3.3 million and $1.1 million, respectively at December 31, 2011, as they are not considered to be material.

 

     Commercial
and
Industrial
     Commercial
Real Estate
Mortgage
     Multi-
family
    Land     SBA      Construction      Lease
Financing
     Real Estate
1-4 family
first
mortgage
    Real Estate
1-4 family
junior lien
mortgage
    Other
Revolving
Credit and
Installment
    TOTAL  

Allowance for loan and lease losses:

                           

Balance as of June 30, 2012

   $ 128       $ 3,302       $ 1,292      $ 11      $ —         $ —         $ —         $ 6,528      $ 64      $ 123      $ 11,448   

Charge-offs

     —           —           —          —          —           —           —           (226     —          —          (226

Recoveries

     —           —           —          —          —           —           —           126        —          —          126   

Provision

     185        363         181        97        82         —           67        4        55        (3     1,031   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

   $ 313       $ 3,665       $ 1,473      $ 108      $ 82       $ —         $ 67      $ 6,432      $ 119      $ 120      $ 12,379   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 128       $ 1,998       $ 1,541      $ 236      $ —         $ —         $ —         $ 8,635      $ 110      $ 132      $ 12,780   

Charge-offs

     —           —           —          (236     —           —           —           (2,304     —          (7     (2,547

Recoveries

     —           —           —          —          —           —           —           143        —          2        145   

Provision

     185         1,667         (68     108        82         —           67         (42     9        (7     2,001   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2012

   $ 313       $ 3,665       $ 1,473      $ 108      $ 82       $ —         $ 67       $ 6,432      $ 119      $ 120      $ 12,379   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2011

   $ 68       $ 655       $ 692      $ 278      $ —         $ —         $ —         $ 6,161      $ 360      $ 217      $ 8,431   

Charge-offs

     —           —           68        (57     —           —           —           (275     (108     (10     (382

Recoveries

     —           —           —          1        —           —           —           116        —          4        121   

Provision

     —           558         (218     (210     —           —           —           784        17        (108     823   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011

   $ 68       $ 1,213       $ 542      $ 12      $ —         $ —         $ —         $ 6,786      $ 269      $ 103      $ 8,993   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2010

   $ 50       $ 332       $ 2,389      $ 1,067      $ —         $ —         $ —         $ 10,191      $ 258      $ 350      $ 14,637   

Charge-offs

     —           —           (2,068     (1,900     —           —           —           (3,021     (108     (20     (7,117

Recoveries

     —           —           —          24        —           —           —           165        —          10        199   

Provision

     18         881         221        821        —           —           —           (549     119        (237     1,274   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2011

   $ 68       $ 1,213       $ 542      $ 12      $ —         $ —         $ —         $ 6,786      $ 269      $ 103      $ 8,993   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents
     Commercial
and
Industrial
     Commercial
Real Estate
Mortgage
     Multi-
family
     Land      SBA      Construction      Lease
Financing
     Real Estate
1-4 family
first
mortgage
     Real Estate
1-4 family
junior lien
mortgage
     Other
Revolving
Credit and
Installment
     TOTAL  

Balance as of September 30, 2012

                                

Originated individually evaluated for impairment

   $ —         $ 380       $ 613       $ 98       $ —         $ —         $ —         $ 458       $ —         $ —         $ 1,549   

Originated collectively evaluated for impairment

     313         3,285         211         10         82         —           —           5,974         119         120         10,114   

Purchased individually evaluated for impairment

     —           —           —           —           —           —           —           —           —           —           —     

Purchased collectively evaluated for impairment

     —           —           649         —           —           —           67         —           —           —           716   

Acquired with deteriorated credit quality

     —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 313       $ 3,665       $ 1,473       $ 108       $ 82       $ —         $ 67       $ 6,432       $ 119       $ 120      $ 12,379   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                                

Originated individually evaluated for impairment

   $ —         $ 3,038       $ 5,455       $ 334       $ —         $ —         $ —         $ 13,960       $ —         $ 3       $ 22,790   

Originated collectively evaluated for impairment

     17,855         195,137         17,971         573         3,343         —           —           536,300         8,255         7,786         787,220   

Purchased individually evaluated for impairment

     —           —           —           —           —           —           —           —           —           —           —     

Purchased collectively evaluated for impairment

     56,521         80,613         81,876         27         40,573         4,712         5,031         25,784         5,609         90         300,836   

Acquired with deteriorated credit quality

     7,290         22,829         852         327         6,817         —           —           66,354         59         —           104,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 81,666       $ 301,617       $ 106,154       $ 1,261       $ 50,733       $ 4,712       $ 5,031       $ 642,398       $ 13,923       $ 7,879       $ 1,215,374   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of December 31, 2011:

                                

Originated individually evaluated for impairment

   $ —         $ —         $ 663       $ 236       $ —         $ —         $ —         $ 2,815       $ —         $ —         $ 3,714   

Originated collectively evaluated for impairment

     128         1,998         355         —           —           —           —           5,820         110         132         8,543   

 

34


Table of Contents
     Commercial
and
Industrial
     Commercial
Real Estate
Mortgage
     Multi-
family
     Land      SBA      Construction      Lease
Financing
     Real Estate
1-4 family
first
mortgage
     Real Estate
1-4 family
junior lien
mortgage
     Other
Revolving
Credit and
Installment
     TOTAL  

Purchased individually evaluated for impairment

     —           —           —           —           —           —           —           —           —           —           —     

Purchased collectively evaluated for impairment

     —           —           523         —           —           —           —           —           —           —           523   

Acquired with deteriorated credit quality

     —           —           —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 128       $ 1,998       $ 1,541       $ 236       $ —         $ —         $ —         $ 8,635       $ 110       $ 132       $ 12,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                                

Originated individually evaluated for impairment

   $ —         $ —