First PacTrust Bancorp, Inc. — Form 10-Q, quarter ended September 30, 2012
Issuer identity: The supplied filing is for First PacTrust Bancorp, Inc., not Banc of California, Inc. Investors should verify that this is the intended filing. Unless noted otherwise, financial amounts below are in U.S. dollars; balance-sheet and nine-month cash-flow amounts are as of or for the period ended September 30, 2012.
Business context and reporting period
The company is a bank holding company operating Pacific Trust Bank and Beach Business Bank, with retail banking and mortgage lending concentrated in Southern California and loan-production offices across the western United States. The third-quarter results include Beach Business Bank from July 1 and Gateway Business Bank from August 18, 2012; the prior-year comparison does not include those acquired operations. Consequently, year-over-year comparisons are materially affected by acquisitions.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest and dividend income | $16.7 million | $8.8 million | $37.4 million | $26.4 million |
| Net interest income | $14.4 million | $7.5 million | $31.7 million | $21.6 million |
| Net interest margin | 4.02% | 3.61% | 3.69% | 3.59% |
| Provision for loan and lease losses | $1.0 million | $0.8 million | $2.0 million | $1.3 million |
| Noninterest income | $19.5 million | $2.0 million | $20.7 million | $4.4 million |
| Noninterest expense | $24.5 million | $7.7 million | $42.6 million | $20.5 million |
| Net income | $9.5 million | $0.6 million | $9.2 million | $2.9 million |
| Net income available to common shareholders / diluted EPS | $9.2 million / $0.79 | $0.5 million / $0.04 | $8.1 million / $0.70 | $2.7 million / $0.27 |
Q3 income before taxes was $8.4 million, with a $1.1 million income-tax benefit. For the nine months, income before taxes was $7.8 million and the tax benefit was $1.4 million. Reported earnings include significant acquisition-related and mortgage-banking items described below.
- Balance sheet and liquidity: Total assets were $1.67 billion, versus $999.0 million at December 31, 2011. Cash and cash equivalents were $122.1 million; available-for-sale securities were $122.3 million; deposits were $1.33 billion; and shareholders’ equity was $191.7 million.
- Loans: Originated loans, net, were $798.3 million; purchased loans, net, were $404.6 million; and loans held for sale were $110.3 million. The allowance for originated loans was $11.7 million, or 1.4% of gross originated loans.
- Credit quality: Nonperforming loans and leases were $16.2 million gross; total nonperforming assets were $24.9 million, or 1.49% of assets, down from $33.9 million and 3.40% at year-end 2011. Nonaccrual loans were $14.7 million net of specific allocations. Net charge-offs were $2.4 million for the nine months, compared with $6.9 million in 2011.
- Cash flow: Cash and cash equivalents increased $77.6 million to $122.1 million. Nine-month operating cash flow was negative $32.4 million, investing cash flow was negative $109.1 million, and financing cash flow was positive $219.0 million. Loan originations held for sale contributed to operating cash outflow; acquisitions and financing inflows supported the increase in cash.
- Borrowings and capital: FHLB advances were $86.0 million. The company had $34.0 million of notes payable, including $33.0 million principal of 7.50% senior notes due April 2020. Company regulatory capital ratios were 11.5% core, 14.4% Tier 1 risk-based and 15.6% total risk-based; the filing states the banks exceeded applicable well-capitalized requirements.
- Commitments: $486.2 million of certificates of deposit were scheduled to mature within one year. The banks reported $111.4 million of unused credit lines, $1.4 million of letters of credit, and additional borrowing capacity of $176.8 million at the FHLB and $121.8 million at the Federal Reserve. Management expected a significant portion of maturing deposits to remain, but gave no assurance.
Material changes versus comparable periods
- Reported Q3 net income rose to $9.5 million from $0.6 million; nine-month net income increased to $9.2 million from $2.9 million. Acquisitions, a bargain-purchase gain and mortgage-banking activity make these comparisons non-like-for-like.
- Q3 net interest income nearly doubled, reflecting substantially higher average loan balances and an increase in average loan yield. Net interest margin improved 41 basis points year over year in Q3 and 10 basis points for the nine-month period.
- Noninterest income included a $12.1 million Gateway bargain-purchase gain and $5.5 million of mortgage-banking income in Q3 2012; neither item was present in the prior-year quarter. The nine-month securities-sale result changed from a $2.9 million gain in 2011 to an $83,000 loss in 2012.
- Expense growth reflected the acquired businesses and expansion, as well as $1.2 million of CEO separation-related compensation, $0.7 million of stock-appreciation-rights expense, and higher acquisition-related professional fees. The company expensed approximately $1.7 million of Beach acquisition costs and $1.5 million of Gateway acquisition costs.
- Assets and deposits increased sharply following the Beach and Gateway transactions. Nonperforming assets declined from year-end, and OREO fell to $8.7 million from $14.7 million.
Outlook, commentary, risks and unusual items
- Outlook: No formal earnings or revenue guidance is provided. Management described plans to grow core banking and mortgage businesses, expand Southern California branches and loan-production offices, and pursue organic growth. Its tax-asset assessment assumes sufficient taxable income in 2013–2015 to realize at least 51% of the net deferred tax asset; this is an estimate, not a performance guarantee.
- Pending acquisition: The company agreed to acquire The Private Bank of California (PBOC), with closing expected in the second quarter of 2013, subject to shareholder and regulatory approvals and other conditions. Consideration includes 2,083,333 company common shares and approximately $24.9 million cash, subject to an adjustment. Completion and expected benefits are uncertain.
- Acquisition accounting: Gateway generated a $12.1 million bargain-purchase gain. The company recorded $7.0 million of goodwill from Beach and $5.8 million of other intangible assets. Preliminary purchase-accounting valuations were expected to be finalized in Q4 2012; Gateway also had a potential IRS receivable whose amount could not be estimated.
- Taxes: A $7.0 million valuation allowance was recorded against deferred tax assets, up from $1.3 million at year-end. Management cited the three-year cumulative pretax loss as negative evidence, balanced against forecasts and other positive evidence. Acquired tax-loss carryforwards are subject to annual limitations, and some California losses may expire unused.
- Credit and market risks: Lending is concentrated in real estate-dependent California markets. Commercial and multifamily real-estate loans were $490.3 million, or 40.4% of gross loans, versus 28.0% at year-end. The portfolio also includes interest-only and potential negative-amortization loans. Further economic or property-value deterioration could increase losses and provisions. Mortgage-banking income is sensitive to interest rates, origination volumes and secondary-market programs; the company also has substantial mortgage forward commitments and loan locks.
- Funding and interest-rate risks: Two FHLB advances totaling $61.0 million matured in October 2012. The company expected to replace these as needed through borrowing or deposits. The filing identifies interest-rate risk as its principal market risk; modeled net portfolio value for the combined banks fell 4.1% under an immediate 400-basis-point rate increase.
- Contingency and governance: A patent lawsuit brought by CMG Financial Services remained pending; management believed the claim lacked merit and did not expect a material impact, but could not assure the outcome. The filing also reports the CEO’s departure and separation agreement, including $832,000 severance and $503,800 for cancellation of equity awards. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
- Regulatory development: The OCC terminated Pacific Trust Bank’s August 2009 Memorandum of Understanding effective April 4, 2012.
Most important facts for investors to verify
- Confirm the issuer: this filing is for First PacTrust Bancorp, Inc., despite the request naming Banc of California, Inc.
- Separate recurring operating performance from the $12.1 million bargain-purchase gain, mortgage-banking income, acquisition costs and other unusual compensation items.
- Review acquisition integration results and the status, conditions and eventual economics of the proposed PBOC merger.
- Assess the allowance and acquired-loan accounting against portfolio growth, real-estate concentrations, nonperforming assets and purchased credit-impaired loan assumptions.
- Verify deposit retention and funding plans around the $486.2 million of CDs due within a year and the $61.0 million FHLB maturity reported for October 2012.
- Monitor realization of deferred tax assets, acquisition-related tax limitations, mortgage-banking exposure and the outcomes of the pending litigation.