Exhibit 99.2
THE PRIVATE BANK OF CALIFORNIA
FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
CONTENTS
FINANCIAL STATEMENTS | ||||
Balance Sheet | 1 | |||
Statements of Income | 2 | |||
Statements of Comprehensive Income | 3 | |||
Statements of Changes in Shareholders’ Equity | 4 | |||
Statements of Cash Flows | 5 | |||
Notes to Financial Statements | 6-24 | |||
THE PRIVATE BANK OF CALIFORNIA
BALANCE SHEET
SEPTEMBER 30, 2012
(UNAUDITED)
ASSETS | ||||
Cash and Noninterest-Bearing Due from Banks | $ | 28,391,000 | ||
Interest-Bearing Due from Banks | 8,247,000 | |||
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TOTAL CASH AND CASH EQUIVALENTS | 36,638,000 | |||
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Interest-Bearing Time Deposits in Other Financial Institutions | 735,000 | |||
Securities Available-for-Sale, at Fair Value (Amortized Cost of $307,149,000) | 313,190,000 | |||
Loans | 331,845,000 | |||
Allowance for Credit Losses | (5,928,000 | ) | ||
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NET LOANS | 325,917,000 | |||
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Premises and Equipment | 1,424,000 | |||
Federal Home Loan Bank Stock, at Cost | 3,453,000 | |||
Accrued Interest Receivable and Other Assets | 3,716,000 | |||
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TOTAL ASSETS | $ | 685,073,000 | ||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||
Noninterest-Bearing Deposits | $ | 272,863,000 | ||
Interest-Bearing Deposits | 307,628,000 | |||
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TOTAL DEPOSITS | 580,491,000 | |||
Borrowings | 49,627,000 | |||
Accrued Interest Payable and Other Liabilities | 2,543,000 | |||
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TOTAL LIABILITIES | 632,661,000 | |||
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Shareholders’ Equity: | ||||
Preferred Stock - 10,000,000 Shares Authorized; Series C 10,000 Shares Issued and Outstanding | 10,000,000 | |||
Common Stock - No Par Value; 20,000,000 Shares Authorized; 3,873,801 Shares Issued and Outstanding | 37,315,000 | |||
Additional Paid-In Capital | 2,768,000 | |||
Accumulated Deficit | (1,226,000 | ) | ||
Accumulated Other Comprehensive Income | 3,555,000 | |||
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TOTAL SHAREHOLDERS’ EQUITY | 52,412,000 | |||
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 685,073,000 | ||
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The accompanying notes are an integral part of these financial statements.
1
THE PRIVATE BANK OF CALIFORNIA
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011
(UNAUDITED)
| 2012 | 2011 | |||||||
INTEREST INCOME | ||||||||
Interest and Fees on Loans | $ | 10,151,000 | $ | 8,284,000 | ||||
Interest on Securities Available-for-Sale | 4,490,000 | 4,041,000 | ||||||
Other Interest Income | 29,000 | 29,000 | ||||||
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TOTAL INTEREST INCOME | 14,670,000 | 12,354,000 | ||||||
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INTEREST EXPENSE | ||||||||
Interest on Interest-Bearing Demand Deposits | 14,000 | 28,000 | ||||||
Interest on Money Market and Savings Accounts | 500,000 | 620,000 | ||||||
Interest on Time Deposits | 758,000 | 508,000 | ||||||
Interest on Borrowings | 78,000 | 62,000 | ||||||
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TOTAL INTEREST EXPENSE | 1,350,000 | 1,218,000 | ||||||
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NET INTEREST INCOME | 13,320,000 | 11,136,000 | ||||||
Provision for Credit Losses | 796,000 | 788,000 | ||||||
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NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 12,524,000 | 10,348,000 | ||||||
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NONINTEREST INCOME | ||||||||
Gain on Sale of Securities, Net | 1,314,000 | 362,000 | ||||||
Other | 268,000 | 118,000 | ||||||
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TOTAL NONINTEREST INCOME | 1,582,000 | 480,000 | ||||||
NONINTEREST EXPENSE | ||||||||
Salaries and Employee Benefits | 7,652,000 | 6,010,000 | ||||||
Occupancy | 884,000 | 693,000 | ||||||
Furniture and Equipment | 433,000 | 256,000 | ||||||
Other | 2,929,000 | 2,311,000 | ||||||
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TOTAL NONINTEREST EXPENSE | 11,898,000 | 9,270,000 | ||||||
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INCOME BEFORE INCOME TAXES | 2,208,000 | 1,558,000 | ||||||
Income Taxes | 640,000 | 1,000 | ||||||
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NET INCOME | 1,568,000 | 1,557,000 | ||||||
Preferred Stock Dividends and Discount Accretion | (75,000 | ) | (415,000 | ) | ||||
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NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | $ | 1,493,000 | $ | 1,142,000 | ||||
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NET INCOME AVAILABLE TO COMMON SHAREHOLDERS-PER SHARE: | ||||||||
Basic | $ | 0.39 | $ | 0.30 | ||||
Diluted | 0.38 | 0.30 | ||||||
The accompanying notes are an integral part of these financial statements.
2
THE PRIVATE BANK OF CALIFORNIA
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011
(UNAUDITED)
| 2012 | 2011 | |||||||
Net income | $ | 1,568,000 | $ | 1,557,000 | ||||
Other comprehensive income, before tax: | ||||||||
Unrealized gain on securities: | ||||||||
Unrealized holding gains arising during the period | 3,290,000 | 5,288,000 | ||||||
Less reclassification adjustment for gains included in net income | (1,314,000 | ) | (362,000 | ) | ||||
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OTHER COMPREHENSIVE INCOME, BEFORE TAX | 1,976,000 | 4,926,000 | ||||||
Income taxes related to other comprehensive income | 819,000 | 1,723,000 | ||||||
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OTHER COMPREHENSIVE INCOME, AFTER TAX | 1,157,000 | 3,203,000 | ||||||
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COMPREHENSIVE INCOME | $ | 2,725,000 | $ | 4,760,000 | ||||
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The accompanying notes are an integral part of these financial statements.
3
THE PRIVATE BANK OF CALIFORNIA
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011
(UNAUDITED)
| Accumulated | ||||||||||||||||||||||||||||
| Common Stock | Additional | Other | ||||||||||||||||||||||||||
| Preferred Stock | Number of Shares | Amount | Paid-In Capital | Accumulated Deficit | Comprehensive Income (Loss) | Total | ||||||||||||||||||||||
Balance at December 31, 2010 | $ | 5,552,000 | 3,816,501 | $ | 36,870,000 | $ | 2,326,000 | $ | (4,316,000 | ) | $ | (724,000 | ) | $ | 39,708,000 | |||||||||||||
Stock-Based Compensation and Net Issuance of Restricted Shares of Common Stock | — | 6,333 | — | 298,000 | — | — | 298,000 | |||||||||||||||||||||
Discount Accretion on Preferred Stock | 171,000 | — | — | — | (171,000 | ) | — | — | ||||||||||||||||||||
Redemption of Series A and B Preferred Stock | (5,723,000 | ) | — | — | — | — | — | (5,723,000 | ) | |||||||||||||||||||
Issuance of Series C Preferred Stock | 10,000,000 | — | — | — | — | — | 10,000,000 | |||||||||||||||||||||
Dividends Declared on Preferred Stock | — | — | — | (74,000 | ) | (170,000 | ) | — | (244,000 | ) | ||||||||||||||||||
Net Income | — | — | — | — | 1,557,000 | — | 1,557,000 | |||||||||||||||||||||
Change in Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Tax | — | — | — | — | — | 3,203,000 | 3,203,000 | |||||||||||||||||||||
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Balance at September 30, 2011 | $ | 10,000,000 | 3,822,834 | $ | 36,870,000 | $ | 2,550,000 | $ | (3,100,000 | ) | $ | 2,479,000 | $ | 48,799,000 | ||||||||||||||
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Balance at December 31, 2011 | $ | 10,000,000 | 3,820,854 | $ | 36,870,000 | $ | 2,633,000 | $ | (2,719,000 | ) | $ | 2,398,000 | $ | 49,182,000 | ||||||||||||||
Stock-Based Compensation and Net Issuance of Restricted Shares of Common Stock | — | 16,647 | — | 184,000 | — | — | 184,000 | |||||||||||||||||||||
Exercise of Stock Options | — | 36,300 | 445,000 | (49,000 | ) | — | — | 396,000 | ||||||||||||||||||||
Dividends Declared on Preferred Stock | — | — | — | — | (75,000 | ) | — | (75,000 | ) | |||||||||||||||||||
Net Income | — | — | — | — | 1,568,000 | — | 1,568,000 | |||||||||||||||||||||
Change in Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Tax | — | — | — | — | — | 1,157,000 | 1,157,000 | |||||||||||||||||||||
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Balance September 30, 2012 | $ | 10,000,000 | 3,873,801 | $ | 37,315,000 | $ | 2,768,000 | $ | (1,226,000 | ) | $ | 3,555,000 | $ | 52,412,000 | ||||||||||||||
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The accompanying notes are an integral part of these financial statements.
4
THE PRIVATE BANK OF CALIFORNIA
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011
(UNAUDITED)
| 2012 | 2011 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 1,568,000 | $ | 1,557,000 | ||||
Adjustments to Reconcile Net Income to Net Cash From Operating Activities: | ||||||||
Depreciation and Amortization | 382,000 | 191,000 | ||||||
Securities Amortization and Accretion, net | 2,664,000 | 1,948,000 | ||||||
Provision for Credit Losses | 796,000 | 788,000 | ||||||
Deferred Tax Expense (Benefit) | (160,000 | ) | (753,000 | ) | ||||
Gain on Sale of Securities, net | (1,314,000 | ) | (362,000 | ) | ||||
Stock-Based Compensation Expense | 184,000 | 298,000 | ||||||
Other, net | 144,000 | (303,000 | ) | |||||
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NET CASH FROM OPERATING ACTIVITIES | 4,264,000 | 3,364,000 | ||||||
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INVESTING ACTIVITIES: | ||||||||
Change in Interest-Bearing Time Deposits in Other Financial Institutions | 148,000 | (97,000 | ) | |||||
Purchase of Securities Available-for-Sale | (165,635,000 | ) | (139,317,000 | ) | ||||
Proceeds from Maturities and Principal Reductions of Securities Available-for-Sale | 37,772,000 | 31,890,000 | ||||||
Proceeds from Sale of Securities Available-for-Sale | 82,669,000 | 52,034,000 | ||||||
Net Increase in Loans | (30,226,000 | ) | (57,350,000 | ) | ||||
Purchase of Federal Home Loan Bank Stock | (735,000 | ) | (1,065,000 | ) | ||||
Purchases of Premises and Equipment | (380,000 | ) | (749,000 | ) | ||||
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NET CASH USED IN INVESTING ACTIVITIES | (76,387,000 | ) | (114,654,000 | ) | ||||
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FINANCING ACTIVITIES: | ||||||||
Net Increase in Noninterest-Bearing Deposits | 43,090,000 | 37,034,000 | ||||||
Net Increase in Interest-Bearing Deposits | 40,645,000 | 63,630,000 | ||||||
Net Change in Borrowings | 797,000 | 19,896,000 | ||||||
Dividends Paid on Preferred Stock | (75,000 | ) | (244,000 | ) | ||||
Redemption of Preferred Stock Series A and B | — | (5,723,000 | ) | |||||
Proceeds from Issuance of Preferred Stock Series C | — | 10,000,000 | ||||||
Proceeds from Exercise of Stock Options | 363,000 | — | ||||||
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NET CASH FROM FINANCING ACTIVITIES | 84,820,000 | 124,593,000 | ||||||
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INCREASE IN CASH AND CASH EQUIVALENTS | 12,697,000 | 13,303,000 | ||||||
Cash and Cash Equivalents at Beginning of Period | 23,941,000 | 18,935,000 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 36,638,000 | $ | 32,238,000 | ||||
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Supplemental Disclosures of Cash Flow Information: | ||||||||
Interest Paid | $ | 1,362,000 | $ | 1,238,000 | ||||
Taxes Paid | 405,000 | 750,000 | ||||||
The accompanying notes are an integral part of these financial statements.
5
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited financial statements of The Private Bank of California (the “Bank”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), prevailing practices in the banking industry and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with GAAP, have been condensed or omitted pursuant to SEC rules and regulations. Nevertheless, the Bank believes that the disclosures are adequate to make the information presented not misleading. These interim financial statements should be read in conjunction with the 2011 audited financial statements and notes thereto of The Private Bank of California included elsewhere in this registration statement.
In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the financial position of the Bank and the results of its operations for the interim periods presented. The results of operations for interim periods are not necessarily indicative of the results expected for any subsequent period or for the full year.
The Bank has evaluated subsequent events for recognition and disclosure through November 14, 2012, which is the date the financial statements were available to be issued.
NOTE B – ADOPTION OF RECENT ACCOUNTING STANDARDS
The following accounting pronouncements applicable to the Bank were recently issued or became effective during the nine months ended September 30, 2012:
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. Certain amendments clarify the intent about the application of existing fair value measurement and disclosure requirements. The amendments in ASU 2011-04 apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, liability or instrument classified in a reporting entity’s shareholders’ equity in the financial statements. ASU 2011-04 became effective for the Bank on January 1, 2012 and required additional fair value disclosures, but did not have a material impact on the Bank’s financial position or results of operations.
In June 2011, the FASB issued ASU 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 eliminates the option of presenting changes in other comprehensive income as part of the statement of changes in shareholders’ equity. All non-owner changes in shareholders’ equity must be presented either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 did not change the items that must be reported in other comprehensive income. Additionally, the guidance requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or
6
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE B – ADOPTION OF RECENT ACCOUNTING STANDARDS - Continued
statements where the components of net income and the components of other comprehensive income tax are presented. ASU 2011-05 was effective for the Bank for the fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU 2011-12,Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 indefinitely defers the requirements within ASU 2011-05 to present the reclassification amounts from other comprehensive income to net income as a separate component on the income statement. ASU 2011-12, which shares the same effective date as ASU 2011-05, does not defer the remaining requirements of ASU 2011-05. The Bank adopted the provisions of ASU 2011-05 and ASU 2011-12, which resulted in new statements of comprehensive income for the nine months ended September 30, 2012 and 2011. The adoption of ASU 2011-05 and ASU 2011-12 had no impact on the Bank’s balance sheet and statements of income.
NOTE C – SECURITIES
Debt and equity securities have been classified in the balance sheet according to management’s intent. The carrying amount of securities available-for-sale and their approximate fair values at September 30, 2012 were as follows:
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
U.S. Treasury Securities | $ | 211,000 | $ | — | $ | — | $ | 211,000 | ||||||||
U.S. Government Agency: | ||||||||||||||||
Obligations | 5,989,000 | 30,000 | — | 6,019,000 | ||||||||||||
Mortgage-Backed Securities | 248,051,000 | 3,564,000 | (308,000 | ) | 251,307,000 | |||||||||||
State and Municipal Bonds | 48,040,000 | 2,502,000 | (46,000 | ) | 50,496,000 | |||||||||||
Corporate Bonds | 4,858,000 | 309,000 | (10,000 | ) | 5,157,000 | |||||||||||
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| $ | 307,149,000 | $ | 6,405,000 | $ | (364,000 | ) | $ | 313,190,000 | ||||||||
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The Bank had two corporate bonds at September 30, 2012 with a fair value of $991,000 and an unrealized loss of $9,000 that had been in a continuous loss position for more than 12 months.
All unrealized losses are considered to be temporary and the unrealized losses have not been recognized into earnings because the issuers are of high credit quality, management has the intent and ability to hold the securities for the foreseeable future, and the unrealized losses are primarily due to changes in interest rates subsequent to purchase of the securities. As the securities approach maturity, fair value and the Bank’s amortized cost are expected to converge.
7
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE C – SECURITIES - Continued
At September 30, 2012, the fair value of securities pledged to secure the borrowing capacity and borrowings discussed in Note F, as well as bankruptcy deposits, was $252,816,000.
The scheduled contractual maturities of securities at September 30, 2012 were as follows. Expected maturities may differ from contractual maturities as mortgage-backed securities and certain state and municipal bonds in the Bank’s portfolio can be prepaid, called or refunded without penalty.
| Amortized Cost | Fair Value | |||||||
| Less Than One Year | $ | 101,000 | $ | 101,000 | ||||
| One Year to Five Years | 610,000 | 611,000 | ||||||
| Over Five Years to Ten Years | 39,231,000 | 40,327,000 | ||||||
| Over Ten Years | 267,207,000 | 272,151,000 | ||||||
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| $ | 307,149,000 | $ | 313,190,000 | |||||
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During the nine months ended September 30, 2012, the Bank received proceeds of $82,669,000 and recognized gross gains and losses of $1,329,000 and $15,000, respectively, on the sale of securities available-for-sale. During the nine months ended September 30, 2011, the Bank received proceeds of $52,034,000 and recognized gross gains and losses of $618,000 and $256,000, respectively, on the sale of securities available-for-sale.
NOTE D – LOANS
The Bank’s loan portfolio consists primarily of loans to borrowers within Los Angeles County, California. A summary of the Bank’s loans as of September 30, 2012 is as follows:
Commercial | $ | 118,205,000 | ||
Real Estate: | ||||
Home Equity Lines of Credit | 71,497,000 | |||
Other Residential | 24,667,000 | |||
Commercial | 85,322,000 | |||
Acquisition, Development and Construction | 17,690,000 | |||
Consumer and Other | 14,429,000 | |||
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| 331,810,000 | ||||
Net Deferred Loan Costs | 35,000 | |||
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| $ | 331,845,000 | |||
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8
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE D – LOANS - Continued
A summary of the changes in the allowance for credit losses follows for the nine months ended September 30, 2012 and 2011:
| 2012 | 2011 | |||||||
Beginning Balance | $ | 5,322,000 | $ | 3,872,000 | ||||
Additions to the Allowance Charged to Expense | 796,000 | 788,000 | ||||||
Recoveries on Loans Charged-Off | 70,000 | 68,000 | ||||||
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| 6,188,000 | 4,728,000 | |||||||
Less Loans Charged-Off | (260,000 | ) | (184,000 | ) | ||||
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Ending Balance | $ | 5,928,000 | $ | 4,544,000 | ||||
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The table on the following page presents the activity in the allowance for credit losses for the nine months ended September 30, 2012 and 2011, and the recorded investment in loans and impairment method as of September 30, 2012, by portfolio segment.
9
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE D – LOANS - Continued
| Commercial | Real Estate | Consumer and Other | Total | |||||||||||||
| September 30, 2012 | ||||||||||||||||
Allowance for Credit Losses: | ||||||||||||||||
Beginning of Year | $ | 1,925,000 | $ | 3,306,000 | $ | 91,000 | $ | 5,322,000 | ||||||||
Provisions | 94,000 | 418,000 | 284,000 | 796,000 | ||||||||||||
Charge-offs | (215,000 | ) | — | (45,000 | ) | (260,000 | ) | |||||||||
Recoveries | 63,000 | 6,000 | 1,000 | 70,000 | ||||||||||||
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End of Period | $ | 1,867,000 | $ | 3,730,000 | $ | 331,000 | $ | 5,928,000 | ||||||||
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Reserves: | ||||||||||||||||
Specific | $ | 5,000 | $ | 238,000 | $ | — | $ | 243,000 | ||||||||
General | 1,862,000 | 3,492,000 | 331,000 | 5,685,000 | ||||||||||||
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| $ | 1,867,000 | $ | 3,730,000 | $ | 331,000 | $ | 5,928,000 | |||||||||
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Loans Evaluated for Impairment: | ||||||||||||||||
Individually | $ | 96,000 | $ | 3,968,000 | $ | — | $ | 4,064,000 | ||||||||
Collectively | 118,206,000 | 195,137,000 | 14,438,000 | 327,781,000 | ||||||||||||
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| $ | 118,302,000 | $ | 199,105,000 | $ | 14,438,000 | $ | 331,845,000 | |||||||||
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| September 30, 2011 | ||||||||||||||||
Allowance for Credit Losses: | ||||||||||||||||
Beginning of Year | $ | 1,309,000 | $ | 2,532,000 | $ | 31,000 | $ | 3,872,000 | ||||||||
Provisions | 406,000 | 341,000 | 41,000 | 788,000 | ||||||||||||
Charge-offs | (26,000 | ) | (158,000 | ) | — | (184,000 | ) | |||||||||
Recoveries | 66,000 | — | 2,000 | 68,000 | ||||||||||||
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End of Period | $ | 1,755,000 | $ | 2,715,000 | $ | 74,000 | $ | 4,544,000 | ||||||||
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Reserves: | ||||||||||||||||
Specific | $ | — | $ | — | $ | — | $ | — | ||||||||
General | 1,755,000 | 2,715,000 | 74,000 | 4,544,000 | ||||||||||||
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| $ | 1,755,000 | $ | 2,715,000 | $ | 74,000 | $ | 4,544,000 | |||||||||
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Loans Evaluated for Impairment: | ||||||||||||||||
Individually | $ | — | $ | — | $ | — | $ | — | ||||||||
Collectively | 112,069,000 | 156,809,000 | 3,506,000 | 272,384,000 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
| $ | 112,069,000 | $ | 156,809,000 | $ | 3,506,000 | $ | 272,384,000 | |||||||||
|
|
|
|
|
|
|
| |||||||||
10
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE D – LOANS - Continued
The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Bank uses the following definitions for risk ratings:
Pass - Loans classified as pass include loans not meeting the risk ratings defined below.
Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Bank’s credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Impaired - A loan is considered impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, all loans classified as troubled debt restructurings are considered impaired.
The risk category of loans was as follows as of September 30, 2012:
| Pass | Special Mention | Substandard | Impaired | Total | ||||||||||||||||
| September 30, 2012 | ||||||||||||||||||||
Commercial | $ | 114,764,000 | $ | 3,432,000 | $ | 10,000 | $ | 96,000 | $ | 118,302,000 | ||||||||||
Real Estate: | ||||||||||||||||||||
Home Equity Lines of Credit | 69,255,000 | — | 658,000 | 1,684,000 | 71,597,000 | |||||||||||||||
Other Residential | 22,379,000 | — | — | 2,284,000 | 24,663,000 | |||||||||||||||
Commercial | 85,182,000 | — | — | — | 85,182,000 | |||||||||||||||
Acquisition, Development and Construction | 13,331,000 | — | 4,332,000 | — | 17,663,000 | |||||||||||||||
Consumer and Other | 14,215,000 | 223,000 | — | — | 14,438,000 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| $ | 319,126,000 | $ | 3,655,000 | $ | 5,000,000 | $ | 4,064,000 | $ | 331,845,000 | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
11
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE D – LOANS - Continued
Past due and nonaccrual loans were as follows as of September 30, 2012:
| Still Accruing | ||||||||||||
| 30-89 Days Past Due | Over 90 Days Past Due | Nonaccrual | ||||||||||
Commercial | $ | — | $ | — | $ | 96,000 | ||||||
Real Estate: | ||||||||||||
Home Equity Lines of Credit | — | — | 1,684,000 | |||||||||
Other Residential | — | — | 2,284,000 | |||||||||
Consumer and Other | 26,000 | — | — | |||||||||
|
|
|
|
|
| |||||||
| $ | 26,000 | $ | — | $ | 4,064,000 | |||||||
|
|
|
|
|
| |||||||
Information relating to individually impaired loans was as follows as of September 30, 2012:
| Impaired Loans-With Allowance | Impaired Loans-With No Allowance | |||||||||||||||||||
| Unpaid Principal Balance | Recorded Investment | Related Allowance | Unpaid Principal Balance | Recorded Investment | ||||||||||||||||
Commercial | $ | 96,000 | $ | 96,000 | $ | 5,000 | $ | — | $ | — | ||||||||||
Real Estate: | ||||||||||||||||||||
Home Equity Lines of Credit | 1,684,000 | 1,684,000 | 87,000 | — | — | |||||||||||||||
Other Residential | 2,284,000 | 2,284,000 | 151,000 | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| $ | 4,064,000 | $ | 4,064,000 | $ | 243,000 | $ | — | $ | — | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The average balance of individually impaired loans during the nine months ended September 30, 2012 and 2011 was $2,759,000 and $271,000, respectively. No interest income was recognized on individually impaired loans during the nine months ended September 30, 2012 and 2011.
As of September 30, 2012, the Bank had a recorded investment of $2,178,000 primarily in residential real estate loans on nonaccrual status that are classified as troubled debt restructurings.
12
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE E – DEPOSITS
A summary of deposits as of September 30, 2012 is as follows:
Noninterest-Bearing Demand | $ | 272,863,000 | ||
Interest-Bearing Demand | 21,387,000 | |||
Money Market and Savings | 210,070,000 | |||
Time Deposits Under $100,000 | 1,198,000 | |||
Time Deposits $100,000 and Over | 74,973,000 | |||
|
| |||
| $ | 580,491,000 | |||
|
|
At September 30, 2012, the scheduled maturities of time deposits were:
| Less Than One Year | $ | 34,601,000 | ||
| One to Five Years | 29,358,000 | |||
| Over Five to Ten Years | 12,212,000 | |||
|
| |||
| $ | 76,171,000 | |||
|
|
As of September 30, 2012, included in time deposits $100,000 and over are negotiable certificates of deposit issued by the Bank for interest rate risk management purposes totaling $37,375,000. $25,162,000 and $12,213,000 of these negotiable certificates of deposit mature in one to five years and over five to ten years, respectively. Also, the Bank has the option to call $30,734,000 of these negotiable certificates of deposit at least quarterly with appropriate notice.
As of September 30, 2012, the Bank had four deposit relationships that represent approximately 19% of the Bank’s total deposits.
NOTE F – BORROWING ARRANGEMENTS
As a member of the Federal Home Loan Bank of San Francisco (“FHLBSF”), the Bank may borrow against a line of credit with a maximum financing availability of 25% of its total assets, adjusted quarterly, subject to the pledge of eligible collateral as well as other terms and conditions. As of September 30, 2012, the Bank had a total financing availability of $73,470,000 based upon the amount of FHLBSF capital stock owned and collateralized by securities available-for-sale, with an estimated fair value of approximately $98,515,000. As of September 30, 2012, the Bank had four FHLBSF advances outstanding totaling $49,627,000 and maturing on various dates through January 9, 2013, at a weighted-average interest rate of .30%. The Bank may also borrow from the discount window and other financing facilities available through the Federal Reserve Bank of San Francisco (“FRBSF”), subject to the pledge of eligible collateral. As of September 30, 2012, the Bank had pledged securities available-for-sale with an estimated fair value of $150,002,000 to the FRBSF and had no outstanding FRBSF borrowings.
13
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE F – BORROWING ARRANGEMENTS - Continued
The Bank may borrow up to $9,000,000 on an unsecured basis from two of its correspondent banks to meet short-term liquidity needs. As of September 30, 2012, there were no borrowings under the lines. The Bank also has a $10,000,000 secured line of credit from one of its correspondent banks relating to standby letters of credit generally issued on behalf of Bank customers. As of September 30, 2012, the Bank had pledged securities available-for-sale with an estimated fair value of $4,088,000 to collateralize $3,264,000 of standby letters of credit issued under this arrangement.
NOTE G – INCOME TAXES
The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and deferred tax liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Bank’s effective tax rate for the nine months ended September 30, 2012 was 28.99% and is lower than the statutory rate of 41.15% primarily due to state and municipal bond interest income, which is exempt from federal income taxes. The Bank’s effective tax rate for the nine months ended September 30, 2011 was 0.05% and is lower than the statutory rate of 41.15% primarily due to state and municipal bond interest income and utilization of the Bank’s valuation allowance for deferred taxes. There have not been any material changes to the Bank’s deferred taxes as of September 30, 2012 from that which was reported at December 31, 2011, except for deferred taxes related to the increased unrealized gain on the sale of securities available-for-sale.
NOTE H – OTHER NONINTEREST EXPENSE
Other noninterest expense for the nine months ended September 30, 2012 and 2011 was comprised of the following:
| 2012 | 2011 | |||||||
Legal and Other Professional Fees | $ | 558,000 | $ | 445,000 | ||||
Data Processing | 471,000 | 320,000 | ||||||
Board of Directors Fees and Expenses | 168,000 | 178,000 | ||||||
FDIC and DFI Assessments | 373,000 | 328,000 | ||||||
Printing, Stationery and Supplies | 104,000 | 96,000 | ||||||
Client-Related Services and Costs | 410,000 | 306,000 | ||||||
Other | 845,000 | 638,000 | ||||||
|
|
|
| |||||
| $ | 2,929,000 | $ | 2,311,000 | |||||
|
|
|
| |||||
14
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE I – EARNINGS PER SHARE (“EPS”)
The following is a reconciliation of net income and shares outstanding to the income and the number of shares used to compute EPS for the nine months ended September 30, 2012 and 2011:
| 2012 | 2011 | |||||||||||||||
| Income | Shares | Income | Shares | |||||||||||||
Net Income as Reported | $ | 1,568,000 | — | $ | 1,557,000 | — | ||||||||||
Less Preferred Stock Dividends and Discount Accretion | (75,000 | ) | — | (415,000 | ) | — | ||||||||||
Weighted Average Shares Outstanding | — | 3,833,629 | — | 3,826,378 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Used for Basic EPS | $ | 1,493,000 | 3,833,629 | $ | 1,142,000 | 3,826,378 | ||||||||||
|
|
|
| |||||||||||||
Dilutive Effect of Stock Options | 113,360 | — | ||||||||||||||
|
|
|
| |||||||||||||
Used in Diluted EPS | $ | 1,493,000 | 3,946,989 | $ | 1,142,000 | 3,826,378 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
NOTE J – STOCK-BASED COMPENSATION
On May 17, 2008, shareholders approved amendments to the Bank’s 2005 Stock Option Plan (“Plan”) to provide for the grant of restricted stock awards and other types of equity-based compensation in addition to stock options. The maximum number of shares to be issued under the amended Plan (“2005 Stock Incentive Plan”) did not change from the 1,089,000 shares of common stock authorized in the Plan.
Officers and key employees may be granted both incentive and nonqualified stock options, while directors and other consultants, who are not also an officer or employee, may be granted nonqualified stock options only. Stock options will be granted at a price not less than 100% of the fair market value of the Bank’s common stock on the date of the grant, generally vest over a period of three to four years, and expire no later than 10 years from the date of the grant. As of September 30, 2012, there were 808,250 fully-vested incentive and nonqualified stock options outstanding under the terms of the 2005 Stock Incentive Plan, with a weighted-average price of $10.32 and weighted-average remaining contractual term of 3.1 years. During the nine months ended September 30, 2012, an option for 36,300 shares was exercised at $10.00 per share and 5,000 shares were forfeited. During the nine months ended September 30, 2011, no options were exercised and options to acquire 15,000 shares of common stock were forfeited.
15
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE J – STOCK-BASED COMPENSATION - Continued
Restricted stock awards may be granted to employees and directors for no cash consideration or for such amount as determined by the Board of Directors with discretionary terms and conditions. As of September 30, 2012, all of the outstanding restricted stock awards were granted by the Bank for no cash consideration with a vesting term of three years. A summary of changes in the Bank’s unvested restricted stock awards for the nine months ended September 30, 2012 and 2011 is as follows:
| 2012 | 2011 | |||||||||||||||
| Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | |||||||||||||
Outstanding at Beginning of Year | 112,916 | $ | 8.26 | 112,916 | $ | 8.32 | ||||||||||
Granted | 17,980 | 9.18 | 16,000 | 8.23 | ||||||||||||
Shares Vested and Issued | (42,563 | ) | 8.13 | (4,353 | ) | 8.26 | ||||||||||
Forfeited or Expired | (1,333 | ) | 8.34 | (6,647 | ) | 8.73 | ||||||||||
|
|
|
| |||||||||||||
Outstanding at End of Period | 87,000 | $ | 8.51 | 117,916 | $ | 8.29 | ||||||||||
|
|
|
| |||||||||||||
As of September 30, 2012, there was $256,000 of total unrecognized compensation cost related to unvested shares of restricted stock granted under the Plan, to be recognized as $62,000 in the three months ending December 31, 2012, $123,000 in 2013, $56,000 in 2014 and $15,000 in 2015.
The Bank recognized stock-based compensation expense related to outstanding stock options and restricted stock grants of $184,000 and $298,000 for the nine months ended September 30, 2012 and 2011, respectively.
NOTE K – REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation (“FDIC”) and the Department of Financial Institutions (“DFI”). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
16
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE K – REGULATORY MATTERS - Continued
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2012, that the Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 2012, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action; there are no conditions or events since that notification that management believes have changed the Bank’s category. To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Bank’s actual capital amounts and ratios (dollar amounts in thousands):
| Amount of Capital Required | ||||||||||||||||||||||||
| Actual | For Capital Adequacy Purposes | To Be Well- Capitalized Under Prompt Corrective Provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of September 30, 2012: | ||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) | $ | 53,406 | 14.74 | % | $ | 28,979 | 8.00 | % | $ | 36,223 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) | 48,857 | 13.49 | % | 14,489 | 4.00 | % | 21,734 | 6.00 | % | |||||||||||||||
Tier 1 Capital (to Average Assets) | 48,857 | 7.33 | % | 26,667 | 4.00 | % | 33,334 | 5.00 | % | |||||||||||||||
The California Financial Code provides that a bank may not make cash distributions to its shareholders in excess of the lesser of the Bank’s undivided profits or the Bank’s net income for its last three fiscal years less the amount of any distributions made by the Bank to shareholders during the same period without the prior approval of the Commissioner of the DFI.
During the nine months ended September 30, 2012 and 2011, the Bank made cash dividend payments totaling $75,000 and $244,000, respectively, to the United States Department of the Treasury (“Treasury”) on issued Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), Fixed Rate Non-Cumulative Perpetual Warrant Preferred Stock, Series B (“Series B Preferred Stock”), and Variable Rate Non-Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”). The dividend payments were approved by the Commissioner of the DFI.
17
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE L – COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank enters into financial commitments to meet the financing needs of its clients. These financial commitments are primarily commitments to extend credit, which involve, to varying degrees, elements of credit risk not recognized in the Bank’s financial statements. The Bank’s exposure to credit loss in the event of nonperformance on commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements.
As of September 30, 2012, the Bank had undisbursed loan commitments of $129,325,000, whose contractual amount represents credit risk, and established related allowance for potential losses of $285,000, which is reported in other liabilities in the balance sheet.
The Bank leases various facilities under noncancelable operating leases expiring though 2019. At September 30, 2012, the future minimum lease rental payable under noncancelable operating lease commitments was as follows:
2012 | $ | 293,000 | ||
2013 | 962,000 | |||
2014 | 928,000 | |||
2015 | 683,000 | |||
Thereafter | 353,000 | |||
|
| |||
| $ | 3,219,000 | |||
|
|
In the ordinary course of business, the Bank is involved in matters of litigation. In the opinion of management, disposition of such matters is not expected to have a material effect on the Bank’s financial statements as of September 30, 2012.
NOTE M – PREFERRED STOCK
In 2009 the Bank entered into a Purchase Agreement with the Treasury, pursuant to which the Bank issued and sold 5,450 shares of the Bank’s preferred stock as Series A Preferred Stock and 273 shares as Series B Preferred Stock, for an aggregate purchase price of $5,450,000 in cash. On September 1, 2011, the Bank liquidated the Series A and B Preferred Stock for the redemption value of $5,723,000.
The discount of $273,000 was accreted against retained earnings over the life of the Series B Preferred Stock, reducing the reported income available for common shareholders. The Series A Preferred Stock qualified as Tier 1 capital and paid non-cumulative dividends at a rate of 5% per annum. The Series B Preferred Stock also qualified as Tier 1 capital and paid non-cumulative dividends at a rate of 9% per annum.
18
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE M – PREFERRED STOCK - Continued
On September 1, 2011, as part of the Treasury’s Small Business Lending Fund (“SBLF”) program, the Bank entered into a Small Business Lending Fund Securities Purchase Agreement (“SBLF Purchase Agreement”) with the Treasury. Under the SBLF Purchase Agreement, the Bank issued 10,000 shares of Series C Preferred Stock and received $10,000,000 from the Treasury. The Series C Preferred Stock shares qualify as Tier 1 capital and pay quarterly dividends at a variable rate that can range from 1% to 9% per annum.
Each quarter for the first 10 quarters, the dividend rate will vary based on the percent change in the Bank’s outstanding small business loan balances over an established baseline. The rate computed in the tenth quarter will be the rate that is used for the next two years. After four and one-half years, the dividend rate will be 9% per annum regardless of the change in the Bank’s small business loan balances. For the nine months ended September 30, 2012 and the period from September 1 to September 30, 2011, the Bank qualified for a 1% per annum dividend rate.
NOTE N – FAIR VALUE OF ASSETS AND LIABILITIES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. Accounting Standards Codification Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including financial assets and financial liabilities that are measured and reported at fair value on a recurring basis and a nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed below.
In accordance with accounting guidance, the Bank groups its financial assets and financial liabilities measured at fair value into three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:
| • | Level 1 - Observable unadjusted quoted market prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. |
| • | Level 2 - Significant other observable market-based inputs, other than Level 1 prices such as quoted prices for similar assets or liabilities or unobservable inputs that are corroborated by market data. This includes quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, either directly or indirectly. This would include those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace. |
19
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE N – FAIR VALUE OF ASSETS AND LIABILITIES - Continued
| • | 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. Assets measured utilizing Level 3 are for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. These assumptions are not corroborated by market data. This is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. Management uses a combination of reviews of the underlying financial statements, appraisals and management’s judgment regarding credit quality to determine the value of the financial asset or liability. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes the financial assets and financial liabilities measured at fair value on a recurring basis, aggregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, as of September 30, 2012:
| Total Carrying Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Securities Available-for-Sale | $ | 313,190,000 | $ | — | $ | 313,190,000 | $ | — | ||||||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Bank may be required periodically to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis. These instruments are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment and when fair value is below cost at the end of or during the reporting period for assets measured at the lower of cost or market.
The following table presents the balances of financial assets and financial liabilities measured at fair value on a nonrecurring basis, by caption and by level within the fair value hierarchy, as of September 30, 2012:
| Total Carrying Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Collateral-Dependent Impaired Loans, Net of Specific Reserves of $243,000 | $ | 3,821,000 | $ | — | $ | — | $ | 3,821,000 | ||||||||
20
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE N – FAIR VALUE OF ASSETS AND LIABILITIES - Continued
The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2012:
| Fair Value | Valuation Technique | Significant Unobservable Inputs | Significant Unobservable Inputs Values | |||||||||
Collateral-Dependent Impaired Loans, Net of Specific Reserves of $243,000 | $ | 3,821,000 | Appraisal value | Estimated collateral value of property or asset | Various depending on property type and location or asset type | |||||||
Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies. Due to the considerable judgment required to develop estimates of fair value, the estimates presented below are not necessarily indicative of the amounts the Bank could have realized in a current market exchange as of September 30, 2012. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
The table below presents the carrying amounts and estimated fair values of financial instruments as of September 30, 2012:
| Carrying | Fair Value Measurements Using: | |||||||||||||||||||
| Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and Cash Equivalents | $ | 36,638,000 | $ | 36,638,000 | $ | 36,638,000 | $ | — | $ | — | ||||||||||
Interest-Bearing Time Deposits | 735,000 | 735,000 | — | 735,000 | — | |||||||||||||||
Securities Available-for-Sale | 313,190,000 | 313,190,000 | — | 313,190,000 | — | |||||||||||||||
Loans, Net | 325,917,000 | 327,104,000 | — | — | 327,104,000 | |||||||||||||||
Federal Home Loan Bank Stock | 3,453,000 | 3,453,000 | — | 3,453,000 | — | |||||||||||||||
Accrued Interest Receivable | 2,045,000 | 2,045,000 | — | 2,045,000 | — | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Noninterest-Bearing Deposits | 272,863,000 | 272,863,000 | 272,863,000 | — | — | |||||||||||||||
Time Deposits | 76,171,000 | 75,943,000 | — | 75,943,000 | — | |||||||||||||||
Other Interest-Bearing Deposits | 231,457,000 | 231,457,000 | — | 231,457,000 | — | |||||||||||||||
Borrowings | 49,627,000 | 49,627,000 | — | 49,627,000 | — | |||||||||||||||
Accrued Interest Payable | 104,000 | 104,000 | — | 104,000 | — | |||||||||||||||
21
THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE N – FAIR VALUE OF ASSETS AND LIABILITIES - Continued
The following methods and assumptions were used by the Bank in estimating fair values of financial instruments. Many of these estimates are subjective in nature and involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of those assets due to the short-term nature of the assets.
Interest-Bearing Time Deposits at Other Financial Institutions
The carrying amounts reported in the balance sheet for interest-bearing time deposits at other financial institutions approximate the fair value of these assets due to the short-term nature of the assets.
Securities Available-for-Sale
The fair values of securities available-for-sale are determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).
Loans, Net
For the balances reported at September 30, 2012, the fair value for loans is estimated by discounting the expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities, adjusted for the allowance for credit losses. Loans are segregated by type such as commercial and industrial, commercial real estate, construction and other loans with similar credit characteristics, and are further segmented into fixed and variable interest rate loan categories. Expected future cash flows are projected based on contractual cash flows, adjusted for estimated prepayments.
Impaired Loans
The fair value of impaired loans is determined based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans if the loan is collateral dependent, or based on the discounted cash flows for noncollateral-dependent loans, and these loans are classified at Level 3 in the fair value hierarchy. Collateral on collateral-dependent loans may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals performed by qualified licensed appraisers hired by the Company. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. For unsecured loans, the estimated
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THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE N – FAIR VALUE OF ASSETS AND LIABILITIES - Continued
Future discounted cash flows of the business or borrower are used in evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is considered to be a restricted equity security whose carrying value approximates its fair value.
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair values.
Non-Maturing Deposits
The fair values for non-maturing deposits (deposits with no contractual termination date), which include the Bank’s noninterest-bearing demand deposits, interest-bearing demand deposits, and money market and savings deposits, are equal to their carrying amounts, which represent the amounts payable on demand.
Time Deposits
The fair values of time deposits are estimated using a discounted cash flow calculation that applies current market deposit interest rates to the Bank’s current certificate of deposit interest rates for similar term certificates.
Borrowings
The fair value of borrowings is based upon the market price of similar instruments issued with similar contractual terms.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material.
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THE PRIVATE BANK OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)
NOTE O – PENDING MERGER
On August 21, 2012, First PacTrust Bancorp, Inc. (“Company”), a Maryland corporation, entered into an Agreement and Plan of Merger (“Merger Agreement”) by and among the Company; Beach Business Bank (“Beach”), a California corporation, state-chartered bank and wholly owned subsidiary of the Company; and the Bank. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, the Bank will merge with and into Beach (“Merger”), with Beach as the surviving corporation.
Subject to the terms and conditions set forth in the Merger Agreement, which has been unanimously approved by each Board of Directors of the Company, Beach and the Bank, at the effective date of the Merger, each outstanding share of the Bank’s common stock will be converted to the right to receive (i) a pro rata share of 2,083,333 shares of common stock of the Company (“Company Common Stock”), subject to the payment of cash in lieu of fractional shares and (ii) a pro rata share of $24,887,513 in cash (“Merger Consideration”). If the value of the Merger Consideration would otherwise exceed an amount equal to 1.30 times the Bank’s tangible common equity as reflected in the Bank’s balance sheet as of the last business day of the calendar month immediately preceding the closing of the Merger after subtracting certain unaccrued one-time Merger-related costs and expenses, the cash portion of the Merger Consideration will be adjusted downward until the value of the Merger Consideration is equal to such amount. For the purposes of determining the value of the Merger Consideration in the foregoing calculation, the value of the Company Common Stock to be issued in the Merger will be deemed to be $12.00 per share. In the Merger, each outstanding share of the Bank’s Series C preferred stock will be converted into one share of a new series of Company preferred stock.
The Merger is subject to approvals by the applicable banking regulatory agencies governing the Company, Beach and the Bank, as well as approval by the Bank’s shareholders.
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