Business context and reporting period
Filing identity: This is First PacTrust Bancorp, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed March 28, 2013. Although the request metadata names Banc of California, the filing identifies the registrant as First PacTrust Bancorp, Inc. The company operated PacTrust Bank and, following its July 2012 acquisition, Beach Business Bank. It served Southern California through banking offices and operated a multistate mortgage-lending platform acquired with Gateway Bancorp.
Results are not directly comparable with 2011: First PacTrust acquired Beach on July 1 and Gateway on August 18, 2012. The acquisitions added substantial loans, deposits, employees and mortgage-banking activity.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Total assets at year-end | $1.683 billion | $999.0 million |
| Net loans and leases, excluding loans held for sale | $1.234 billion | $775.6 million |
| Deposits at year-end | $1.306 billion | $786.3 million |
| Net interest income | $46.6 million | $29.1 million |
| Net interest margin | 3.71% | 3.53% |
| Provision for loan and lease losses | $5.5 million | $5.4 million |
| Noninterest income | $36.6 million | $4.9 million |
| Noninterest expense | $71.6 million | $31.7 million |
| Net income (loss) | $6.0 million | $(2.7) million |
| Net income (loss) available to common shareholders | $4.6 million | $(3.3) million |
| Basic and diluted earnings (loss) per common share | $0.40 | $(0.31) |
| Net cash from operating activities | $(33.0) million | $13.6 million |
- Year-end cash and cash equivalents were $108.6 million; available-for-sale securities were $121.4 million.
- Year-end borrowings were $156.9 million: $75.0 million in FHLB advances and $81.9 million carrying value of senior notes. The notes have $88.0 million aggregate principal, bear 7.50% interest and mature in 2020. The filing reports $50 million of FHLB advances due within 2013; it also notes that $38 million matured in January 2013.
- Both banks and the holding company exceeded applicable regulatory “well-capitalized” thresholds. Consolidated holding-company ratios were 10.15% core capital, 13.71% Tier 1 risk-based capital and 14.97% total risk-based capital.
- Credit quality improved in some measures: nonperforming assets fell to $27.5 million from $33.9 million, and net charge-offs declined to $3.8 million from $7.2 million. However, nonperforming loans rose to $23.0 million from $19.3 million. The allowance was $14.4 million, or 1.16% of gross loans.
Material changes versus the prior comparable period
- Assets, loans and deposits expanded largely because of the Beach and Gateway acquisitions. Loans and leases increased by $458.4 million, while deposits rose by $520.0 million; $414.3 million of deposit growth came from acquired businesses.
- Net interest income increased with loan growth, including acquired loans and purchased credit-impaired loans. Average loan yield rose to 4.99% from 4.55%; lower funding costs also supported the margin improvement.
- Noninterest income included $21.3 million of mortgage-banking gains and an $11.6 million Gateway bargain-purchase gain. These items materially boosted reported income and should not be assumed to recur at the same level.
- Noninterest expense more than doubled, driven by acquired staff and mortgage commissions, occupancy, professional fees and data-processing costs. The company said salaries and commissions were expected to rise in 2013 with a full year of acquired operations.
- For the fourth quarter of 2012, the company reported a $3.2 million net loss, versus $9.5 million net income in the third quarter. Fourth-quarter loan-loss provision was $3.5 million, compared with $1.0 million in the third quarter. The filing attributes the higher provision to loan growth, deterioration in legacy credits and added general reserves associated with the portfolio’s nontraditional mortgage concentration.
- Operating cash flow was negative $33.0 million, with mortgage-loan originations and sales significantly affecting cash flows. Cash increased overall, supported in part by financing proceeds and cash acquired in the transactions.
Outlook, risks, contingencies and unusual items
- Outlook: Management described improving but still weak local economic conditions and expected near-term growth in mortgage and SBA activity. No formal earnings or financial guidance is provided. The company expected higher 2013 operating costs from the acquisitions and indicated it expected to complete the pending Private Bank of California acquisition in the second quarter of 2013, subject to shareholder and regulatory approvals.
- Acquisition risk: The proposed Private Bank of California transaction contemplated 2,083,333 First PacTrust shares plus cash, subject to adjustments. Closing, integration, customer and employee retention, and anticipated benefits were uncertain.
- Credit and concentration risk: Residential real estate represented 52.8% of gross loans and the loan book was concentrated in Southern California. Nontraditional mortgages were $368.2 million, or 29.5% of gross loans; 14.1% of that portfolio had estimated LTV above 100%. The acquired re-performing loan pools had $64.9 million carrying value at year-end, with approximately 6% delinquent and 0.2% in foreclosure.
- Funding and interest-rate risk: $467.9 million of certificates of deposit were scheduled to mature in 2013. Management cited deposit competition, liquidity access, interest-rate changes and borrower payment sensitivity as risks. A modeled 300-basis-point rate increase reduced estimated net portfolio value by 15% at year-end 2012; the filing cautions that the model relies on assumptions.
- Mortgage and other exposures: Mortgage-loan sales carry representation-and-warranty and repurchase exposure; the reserve was $3.5 million. Mortgage-banking income depends on origination volumes, interest rates and secondary-market demand. A patent lawsuit involving Green Loan-related products was described as without merit by the company, which did not expect a material impact but gave no assurance.
- Tax and regulation: The company recorded an $8.4 million deferred-tax-asset valuation allowance and reported a $7.6 million net deferred tax asset. Proposed Basel III and Dodd-Frank rules could increase capital and compliance burdens. Its banks relied on dividends for holding-company funding, but no dividends were paid by the banks to the parent in 2012.
- Related-party arrangement: PacTrust Bank entered a consulting and management-services agreement with CS Financial, controlled by a bank director, for $100,000 monthly. The filing says independent special committees and boards reviewed and approved the agreement.
- Controls and audit: The auditor gave unqualified opinions on the 2012 financial statements and internal controls. Management and the auditor excluded acquired Beach and Gateway controls—covering $454.2 million in assets and $31.3 million in revenue—from the year-end internal-control assessment.
Important facts for investors to verify
- Reconcile the 2012 profit to recurring earnings by separating the Gateway bargain-purchase gain, mortgage-banking gains, acquisition costs and other unusual items.
- Track subsequent credit performance, charge-offs and reserve adequacy, especially for nontraditional mortgages, acquired re-performing loans and commercial real estate.
- Verify deposit retention and liquidity after the 2013 certificate maturities and FHLB repayments, and assess the cost and capacity of replacement funding.
- Confirm whether the Private Bank of California acquisition closed, its final consideration and tangible-equity terms, and the resulting capital and integration effects.
- Assess whether mortgage-banking volumes and margins can support the enlarged cost base, and whether loan repurchase claims remain within the $3.5 million reserve.
- Review the full financial statements and notes for cash-flow drivers, deferred-tax-asset realization, related-party payments, litigation developments and the effect of acquired entities’ excluded controls.