Business context and reporting period
This is First PacTrust Bancorp, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The request identifies Banc of California, Inc.; that is not the registrant named in the supplied filing. First PacTrust was a community bank operating primarily in San Diego and Riverside counties, with a new Los Angeles loan-production office. The report describes expansion across Southern California and pending acquisitions.
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance and position
- Third-quarter results: Net interest income was $7.5 million, down 8.0% from $8.1 million a year earlier. Net income was $0.6 million versus $3.0 million; net income available to common shareholders was $0.5 million versus $2.8 million. Basic and diluted EPS were $0.04 versus $0.66.
- Nine-month results: Net interest income was $21.6 million, down 3.8% from $22.5 million. Net income rose to $2.9 million from $1.4 million; common earnings were $2.7 million versus $0.7 million. EPS was $0.27 versus $0.17.
- Interest income and costs: Third-quarter interest income fell 17.1% to $8.8 million, while interest expense fell 46.4% to $1.3 million. For nine months, interest income declined 15.4% to $26.4 million and interest expense declined 45.5% to $4.7 million. Reported net interest margin was 3.61% for the quarter and 3.59% for the nine months; the comparable 2010 figures were 4.03% and 3.65%.
- Noninterest items: Securities-sale gains were $1.5 million in Q3 and $2.9 million for nine months, compared with none in 2010. Noninterest expense rose 99.2% to $7.7 million in Q3 and 57.1% to $20.5 million for nine months, including higher staffing, professional fees, real-estate-owned (OREO) valuation charges and, year to date, a $1.1 million change-of-control benefits accrual.
- Assets and funding at September 30: Total assets were $929.0 million, up 7.8% from year-end 2010. Net loans were $695.7 million; deposits were $711.6 million, up 10.1%; cash and cash equivalents were $75.1 million. FHLB advances fell to $20.0 million from $75.0 million.
- Credit and foreclosed property: The allowance for loan losses was $9.0 million, or 1.3% of gross loans, versus $14.6 million, or 2.1%, at year-end. Nine-month net charge-offs were $6.9 million. Reported nonperforming loans, net of specific allowances, declined to $8.3 million from $19.9 million; OREO rose to $20.6 million from $6.6 million. The filing reports $18.1 million past due overall, including $9.2 million more than 90 days past due; $10.9 million of loans were on nonaccrual.
- Cash flow and liquidity: Nine-month operating cash flow was $8.1 million versus $18.2 million; investing cash flow was negative $56.8 million versus positive $22.1 million; financing cash flow was positive $64.8 million versus negative $35.0 million. Ending cash and cash equivalents were $75.1 million. The Bank reported $46.5 million in unused credit lines, $297.1 million of CDs due within one year, and borrowing capacity of $173.9 million at FHLB and $110.0 million at the Federal Reserve.
- Capital: Shareholders’ equity was $191.5 million, up from $136.0 million at year-end. The Bank reported core capital of 14.33%, Tier 1 risk-based capital of 19.68%, and total risk-based capital of 20.73%, above stated regulatory minimums. It was subject to an MOU and committed to higher capital thresholds while that agreement remained in force.
Material changes versus comparable periods
- Q3 net income fell sharply year over year despite lower funding costs: lower loan and securities interest income, increased operating expenses and OREO charges outweighed the securities gain.
- Nine-month net income improved largely alongside lower loan-loss provision ($1.3 million versus $8.6 million) and securities-sale gains, while net interest income declined and expenses increased.
- Asset quality measures were mixed: nonperforming loans and the allowance declined, but OREO increased substantially following foreclosures and transfers from loans. Management attributed the allowance decline largely to charge-offs of problem loans.
- Funding shifted toward deposits and away from FHLB borrowing. Equity increased following common and preferred stock issuances.
Outlook, commentary, risks and unusual items
Management expected lower funding costs, lending initiatives and a reduction in nonperforming loans to support earnings in coming quarters; these are forward-looking expectations, not quantified guidance. The company planned continued Southern California expansion. A new branch opened in Century City on October 20, 2011.
The company had agreements to acquire Gateway Bancorp for up to $17 million in cash, subject to conditions and regulatory approvals, with an expected Q4 2011 close; and to merge with Beach Business Bank, with an expected mid-2012 close subject to approvals. Neither closing was assured. Integration, customer retention, cost savings, and execution were identified risks.
Other material risks include local economic and real-estate weakness, borrower defaults and collateral values, adjustable-rate and interest-only lending, and regulatory oversight. About 81% of gross loans were single-family mortgage and home-equity loans; approximately $82.3 million of such loans had loan-to-value ratios above 100%. The Bank remained subject to an MOU, including restrictions on brokered deposits. Securities included $61.6 million of private-label mortgage-backed securities valued using significant unobservable inputs; management reported no other-than-temporary impairment at quarter-end. The $9.0 million net deferred tax asset depended on future realization. Management stated that no legal matters were believed to have a material financial-statement effect.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for First PacTrust Bancorp, not Banc of California, Inc.
- Assess the sustainability of earnings excluding securities-sale gains and the effect of higher operating costs and compensation.
- Review OREO valuations, foreclosure activity, charge-offs, nonaccrual loans, TDR performance and allowance adequacy.
- Verify the status, terms, regulatory approvals and integration assumptions for the Gateway and Beach Business Bank transactions.
- Monitor compliance with the regulatory MOU, capital commitments, deposit maturities and available borrowing capacity.
- Evaluate valuation and credit risks in private-label mortgage-backed securities, and the assumptions supporting deferred tax asset realization.