First PacTrust Bancorp, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. The registrant filed as First PacTrust Bancorp, Inc. The quarter’s results are not directly comparable with Q1 2012 because Beach Business Bank and Gateway Bancorp were acquired in 2012 and mortgage-banking operations expanded.
Business context and financial performance
The company operated PacTrust Bank and Beach Business Bank, with 19 banking offices and 31 loan-production offices. Its activities included retail and commercial banking, mortgage origination and sales, and purchases of seasoned residential loan portfolios. Unless otherwise noted, figures below are in millions of dollars.
- Profit and earnings: Net income was $0.9 million, up from $0.4 million in Q1 2012. Net income available to common shareholders was $0.6 million versus a $0.02 million loss; diluted EPS was $0.05 versus breakeven as reported.
- Interest income and margins: Net interest income increased 73% to $15.4 million. Net interest margin was 3.70%, up from 3.62%; net interest spread was 3.52%, down from 3.56%.
- Noninterest income and expenses: Noninterest income was $17.9 million, including $16.4 million of mortgage-banking gains. Noninterest expense rose to $29.6 million from $8.2 million, reflecting acquisitions and mortgage-banking growth, including salaries, commissions, occupancy, and professional fees. The efficiency ratio was 88.80%, compared with 87.62%.
- Credit costs and asset quality: The loan-loss provision was $2.2 million, versus $0.7 million. The allowance for loan and lease losses was $16.0 million. Nonaccrual loans, excluding purchased credit-impaired loans, declined to $16.5 million from $23.0 million at year-end; loans more than 89 days past due were $7.8 million, with none still on accrual. Net charge-offs were $0.6 million, down from $2.3 million.
- Cash flow: Operating cash flow was negative $3.5 million and investing cash flow was negative $347.7 million, principally reflecting loan purchases and originations. Financing cash flow was positive $365.8 million, including a $392.5 million increase in deposits. Cash and cash equivalents ended at $123.2 million, up from $108.6 million at year-end.
- Balance sheet and liquidity: Total assets increased 21.9% to $2.05 billion. Net loans and leases were $1.61 billion, up 30.6%; deposits were $1.70 billion, up 30.0%. Available-for-sale securities fell to $99.7 million from $121.4 million. The company reported $50.0 million of FHLB advances and $82.0 million of notes payable, net. It said the banks could borrow an additional $319.6 million from the FHLB and had $114.8 million of Federal Reserve credit lines available. Certificates of deposit totaling approximately $437.8 million were scheduled to mature within one year.
- Capital: Shareholders’ equity was $188.3 million. The company reported total risk-based capital of 15.48%, Tier 1 risk-based capital of 14.23%, and a Tier 1 leverage ratio of 9.94%. Both banks reported capital ratios above their applicable well-capitalized thresholds.
Material changes and notable items
- Three seasoned residential mortgage loan pools were purchased during the quarter. Their unpaid principal balance at acquisition was $451.5 million and fair value was $332.3 million. At March 31, purchased credit-impaired loans had a $373.9 million outstanding balance and $218.5 million carrying amount; estimated expected collections were $294.4 million.
- Mortgage banking generated $16.4 million of reported gains. The mortgage unit originated $332.8 million and sold $331.7 million of loans; management reported an 11.4 million gain and a 3.4% margin on those sales. This activity was a major contributor to noninterest income and should be distinguished from recurring banking income.
- Gross deposits grew substantially, while noninterest-bearing deposits declined $51.9 million. Management attributed deposit growth to its core-deposit strategy and a campaign that brought in $255 million of core deposits.
- OREO declined to $1.8 million from $4.5 million at year-end, largely reflecting sales and write-downs. The allowance increased from $14.4 million.
- For Q1 2012, Beach’s results were not included because it was acquired effective July 1, 2012. Management also identified acquisitions and loan-pool purchases as important reasons for the year-over-year changes.
Outlook, risks, contingencies, and unusual items
- Pending Private Bank of California acquisition: Regulatory approvals were received in March, but PBOC shareholder approval and other closing conditions remained outstanding. PBOC reported March 31 assets of $674.3 million, net loans of $376.3 million, and deposits of $580.7 million. Consideration included 2,083,333 First PacTrust shares and up to approximately $24.9 million cash, subject to an adjustment mechanism. The agreement’s termination date was extended to July 5, 2013; management expected completion by then but gave no assurance.
- Management strategy: The company planned to expand its Southern California banking franchise, mortgage operations, commercial lending, SBA lending, and purchases of seasoned residential loans. It added seven loan-production offices during the quarter. No specific earnings or revenue guidance was provided.
- Credit and concentration risks: The loan portfolio remained materially exposed to real estate and Southern California. Nontraditional mortgages were $396.3 million, or 24.4% of gross loans; management identified their interest-only, balloon-payment, and potential negative-amortization features as credit risks. Management noted that future provisions could increase, including for purchased credit-impaired loans if expected cash flows deteriorate.
- Mortgage repurchase exposure: The reserve for losses on sold loans was $3.5 million after a $0.26 million provision and $0.24 million of payments. The business is subject to representation-and-warranty and repurchase claims.
- Debt and rate exposure: Senior notes bear interest at 7.50% and mature in 2020. Management identified interest-rate risk as its principal market risk; its modeled net portfolio value fell 15.0% under an immediate +300 basis-point rate shock. The filing cautions that this model has limitations.
- Other contingencies and governance: The company disclosed a patent lawsuit relating to products similar to Green Accounts; management considered the claim without merit and did not expect a material effect, while noting no assurance. A mortgage-services agreement with CS Financial, a firm connected to a director and to relatives and affiliated entities of the CEO, carried a $100,000 monthly fee; $0.2 million was paid in Q1. The filing also disclosed an announced buyback authorization for up to 10% of outstanding common shares over 12 months.
- Controls and taxes: Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The company had a $7.6 million net deferred tax asset, net of a $7.8 million valuation allowance, and said realization depended on tax-planning actions and future income.
Important facts for investors to verify
- Whether the PBOC acquisition closed, its final consideration, and the resulting capital, funding, integration costs, and earnings effects.
- Whether mortgage-banking gains and margins remain sustainable, and how results perform apart from loan-sale gains and fair-value changes.
- Performance and expected collections on the newly purchased loan pools, including subsequent delinquency, credit deterioration, and allowance or impairment requirements.
- Credit trends in nontraditional mortgages and the broader real-estate portfolio, including nonaccruals, charge-offs, collateral values, and reserve adequacy.
- Deposit retention and pricing, particularly the substantial certificate maturities, and the company’s funding needs as loans grow.
- Potential mortgage repurchase claims, the patent litigation outcome, the related-party services arrangement, and any actual repurchases under the buyback program.