UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
C
OMMISSION
FILE
NUMBER
001-35026
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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95-3673456
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1021 Anacapa St.
Santa Barbara, California
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93101
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(Address of principal executive offices)
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(Zip Code)
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(805) 564-6405
(Registrants telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value per share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
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No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
x
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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x
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
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No
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The aggregate market value of the voting stock held by non-affiliates computed June 30, 2011, based on the sales prices on that date
of $31.79 per share: Common Stock$245,869,904. All directors and executive officers have been deemed, solely for the purpose of the foregoing calculation, to be affiliates of the registrant; however, this determination does not
constitute an admission of affiliate status for any of these shareholders.
As of February 29, 2012, there were 32,940,687 shares of the
issuers common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: Portions of registrants Proxy Statement for the Annual Meeting of Shareholders on May 10, 2012 are incorporated by reference into Part III.
TABLE OF CONTENTS
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PART I
Forward-Looking Statements
This Annual
Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Pacific Capital Bancorp
(the Company or PCBC) intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these provisions. All statements, other than statements of historical fact, are
forward-looking statements for purposes of federal and state securities laws, including, but not limited to, statements about anticipated future operating and financial performance, financial position and liquidity, business prospects,
strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, capital and financing needs and availability, acquisition and divestiture opportunities, plans and objectives of management for future
operations, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as will likely result, aims, anticipates, believes,
could, estimates, expects, hopes, intends, may, plans, projects, seeks, should, will, and variations of these words
and similar expressions are intended to identify these forward-looking statements.
Forward-looking statements are
based on the Companys current expectations and assumptions regarding its business, the regulatory environment, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent
uncertainties, risks and changes in circumstances that are difficult to predict. The Companys actual results may differ materially from those contemplated by the forward-looking statements. The Company cautions the reader of these statements
therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, the following:
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Inability to continuously satisfy the requirements of the Operating Agreement dated September 2, 2010 by and between Santa Barbara
Bank & Trust, N.A. (the Bank, or SBB&T) and the Office of the Comptroller of the Currency;
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Inability to continually satisfy the requirements of the Written Agreement dated May 11, 2010 by and between the Company and the Federal
Reserve Bank of San Francisco, and any further regulatory actions;
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Inability to close the proposed merger with
UnionBanCal Corporation when expected or at all
because required regulatory or other
approvals and other conditions to closing are not received or satisfied on a timely basis or at all;
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Reputational risks and the reaction of the Companys customers and employees to the proposed merger;
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Diversion of the Companys resources and Managements time and focus on merger-related issues;
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Inability to generate assets on acceptable terms or at all;
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Managements ability to effectively execute the Companys business plan;
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Inability to raise additional capital, if and when necessary, on acceptable terms or at all;
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Inability to receive dividends from the Bank;
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Costs and effects of legal and regulatory developments, including the resolution of legal proceedings or regulatory or other governmental
inquiries, and the results of regulatory examinations or reviews;
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Changes in capital classification;
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The impact of current economic conditions and the Companys results of operations on its ability to borrow additional funds to meet its
liquidity needs;
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Local, regional, national and international economic conditions and events and the impact they may have on the Company and its clients;
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Changes in the economy affecting real estate values;
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Inability to attract and retain deposits;
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Changes in the level of non-performing assets and charge-offs;
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Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;
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Changes in the financial performance and/or condition of the Banks borrowers;
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Effect of additional provision for loan losses;
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Long-term negative trends in the Companys market capitalization;
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Effects of any changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the
Federal Reserve System;
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Inflation, interest rate, cost of funds, securities market and monetary fluctuations;
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Acts of war or terrorism, natural disasters such as earthquakes or fires, or the effects of pandemic flu;
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The timely development and acceptance of new products and services and perceived overall value of these products and services by users;
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Changes in consumer spending, borrowings and savings habits;
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Technological changes, including the implementation of new systems;
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Changes in the Companys organization, management, compensation and benefit plans;
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Competitive pressures from other financial institutions;
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Continued consolidation in the financial services industry;
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Inability to maintain or increase market share and control expenses;
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Impact of reputational risk on such matters as business generation and retention, funding and liquidity;
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Rating agency downgrades;
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Continued volatility in the credit and equity markets and its effect on the general economy;
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Effect of changes in laws and regulations (including the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010)
and other changes in laws concerning banking, taxes and securities with which the Company and its subsidiaries must comply;
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Effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting
Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;
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Other factors that are described under the heading Risk Factors in this Form 10-K; and
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The Companys success at managing the risks involved in the foregoing items.
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Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date the forward-looking statements are made, whether as a result of new information, future developments or otherwise, except as may be required by law.
Definition of Terms
Specific accounting and banking industry terms and acronyms used throughout this document are defined in the glossary on pages 204 through 206.
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Organizational Structure and History
Pacific Capital Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the BHCA). The Company provides a wide range of banking, investing and
trust services to its clients primarily through its wholly-owned subsidiary, Santa Barbara Bank & Trust, N.A. and its subsidiaries. The Bank is a nationally chartered federal bank regulated primarily by the Office of the Comptroller of the
Currency (OCC).
The Bank combines the breadth of financial products typically associated with a larger financial
institution with the type of individual client service that is typically found in a community bank. The Bank provides full service banking, including all aspects of checking and savings accounts, private and commercial lending, investment advisory
and trust services, and several other banking products and services. Products and services are offered through retail locations and other distribution channels to consumers and businesses operating throughout the Central Coast of California, in
eight contiguous counties including Santa Barbara, Ventura, Los Angeles, Monterey, San Luis Obispo, Santa Clara, Santa Cruz and San Benito. The Company is headquartered in Santa Barbara, California.
At December 31, 2011, the Company had five wholly-owned subsidiaries. The Bank is consolidated in the financial statements of the
Company. Four are unconsolidated subsidiaries used as business trusts in connection with issuance of trust-preferred securities as described in Note 15, Other Borrowings of the Consolidated Financial Statements on page 178 of this Form
10-K.
The Bank has three wholly-owned consolidated subsidiaries. Morton Capital Management (MCM) and R.E. Wacker
Associates, Inc. (REWA) are registered investment advisors that provide investment advisory services to individuals, foundations, retirement plans and select institutional clients. The third subsidiary, PCB Service Corporation, is
utilized as a trustee of deeds of trust in which the Bank is the beneficiary. The Bank also retains ownership in several low income housing tax credit partnerships (LIHTCP) that are not consolidated into the Companys Consolidated
Financial Statements. For additional information regarding the Bank investment in LIHTCP, refer to Note 1, Summary of Significant Accounting Policies of the Consolidated Financial Statements.
The Bank commenced operations in 1960 as Santa Barbara National Bank. In 1982, Santa Barbara Bancorp, a bank holding company, was formed
and became the sole owner of the Bank through an exchange of the Bank stock for Santa Barbara Bancorp stock. In 1998, Santa Barbara Bancorp merged with another bank holding company, which used First National Bank of Central California and South
Valley National Bank as brand names for its subsidiary bank. Santa Barbara Bancorp changed its name to Pacific Capital Bancorp in connection with the merger. In 2002, the two banks were consolidated into one national bank charter, Pacific Capital
Bank, N.A. (PCBNA). On May 26, 2011, the Company announced the change in name of its national banking subsidiary from Pacific Capital Bank, National Association, to Santa Barbara Bank & Trust, National Association. This name change
does not affect the name of the holding company, which remains Pacific Capital Bancorp. The name change was in conjunction with the Companys strategy to consolidate its five bank brand names: First Bank of San Luis Obispo, First National Bank
of Central California, South Valley National Bank, and San Benito Bank, into a single brand name of Santa Barbara Bank & Trust. All retail branches and other lines of the Banks business will operate under the Santa Barbara Bank & Trust
name. At December 31, 2011, SBB&T conducted its banking services with 47 retail branches. At December 31, 2011, SBB&T conducted its banking services with 47 retail branches.
On August 31, 2010, the Company completed a series of transactions including a $500 million private placement to SB Acquisition
Company LLC, a wholly-owned subsidiary of Ford Financial Fund, L.P. (SB Acquisition); the exchange of preferred stock held by the United States Department of the
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Treasury (U.S. Treasury) for common stock; and the completion of a cash tender offer for any and all outstanding trust preferred securities and subordinated bank notes (collectively,
the Recapitalization Transaction). For additional information regarding the Recapitalization Transaction refer to the Managements Discussion and Analysis (MD&A) section beginning on page 40.
On December 30, 2010, the Company changed its state of incorporation from California to Delaware. Other than the change in corporate
domicile, the reincorporation did not result in any change in the business, physical location, management, assets, liabilities or total shareholders equity of the Company, nor did it result in any change in location of the Companys
employees, including the Companys management. Additionally, the reincorporation did not alter any shareholders percentage ownership interest or number of shares owned in the Company. The shareholders equity section of the
accompanying consolidated financial statements has been restated retroactively to give effect to the reincorporation. Such reclassification had no effect on the results of operations or the total amount of shareholders equity.
On December 28, 2010, the Company effected a 1-for-100 reverse stock split, as reflected at the open of trading on the following
day. All prior per share and dividend amounts have been restated to reflect this split throughout this document.
Recent Developments
Agreement and Plan of Merger
On March 9, 2012, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with UnionBanCal Corporation, a Delaware corporation (UBC). The Merger Agreement
provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Pebble Merger Sub Inc. (Merger Sub), a corporation formed in Delaware as a wholly-owned subsidiary of UBC, will merge with and into the
Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of UBC (the Merger). Pursuant to the Merger Agreement, upon consummation of the Merger, each outstanding share of common stock of the Company
will be converted into the right to receive $46.00 per share in cash. Consummation of the Merger is subject to certain customary conditions, including, among others, the absence of any injunction or other legal prohibition on the completion of the
Merger, regulatory approvals of the Board of Governors of the Federal Reserve System (the Reserve Board), the Japan Financial Services Agency and the OCC and expiration of applicable waiting periods. On March 9, 2012, following the
execution of the Merger Agreement, SB Acquisition, the holder of 25,000,000 shares of the Companys common stock, constituting approximately 76% of the outstanding shares of the Companys common stock, delivered to the Company its action
by written consent adopting and approving the Merger Agreement and the Merger. No further approval of the stockholders of the Company is required to approve the Merger Agreement and the Merger.
The Company and UBC have made customary representations, warranties and covenants in the Merger Agreement, including, among others,
covenants (i) to use reasonable best efforts to obtain any necessary regulatory approvals; (ii) not to take any actions that would reasonably be expected to materially delay the obtainment of regulatory approvals; and (iii) for the Company to
conduct its business in the ordinary course of business during the interim period between the execution of the Merger Agreement and consummation of the Merger. The Merger Agreement provides certain customary termination rights for both UBC and the
Company. There is no assurance that the Company, UBC and Merger Sub will complete the Merger.
The foregoing description of
the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is filed as Exhibit 2.2 hereto and is incorporated by reference herein.
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Termination of Consent Order
On December 30, 2011, the OCC notified the Bank that the Consent Order issued by the OCC on May 11, 2010 (as modified on
September 2, 2010) was terminated effective as of December 28, 2011.
Early Redemption of Subordinated Debt
On December 19, 2011, the Company completed the early redemption of all of its outstanding subordinated debentures. The subordinated
debentures, which had a $35.0 million principal amount and were scheduled to mature in December 2013, were redeemed at a price equal to 100% of the principal amount, plus accrued interest on the subordinated debentures through December 19,
2011. As a result of this redemption, the Company recognized a pre-tax charge of $4.7 million during the fourth quarter of 2011, related to the non-cash fair valuation of the subordinated debt in connection with the Companys recapitalization
in August 2010. This redemption will reduce interest expense by approximately $1.1 million (pre-tax) in 2012.
End of Deferral Period on
Trust Preferred Securities
On December 15, 2011, the Company instructed the trustees for its outstanding trust
preferred securities to end the deferral of its obligation to make regularly scheduled interest payments on the trust preferred securities. To end this deferral, the Company deposited an aggregate of $5.6 million with the trustees for the trust
preferred securities for the upcoming interest payment dates. The deposits, which were paid by the trustees to the holders of the trust preferred securities, brought the Companys obligations current under the applicable agreements. The cash
payment of the accrued interest had no effect on the results of operations because the Company had accrued the expense of each deferred interest payment at the nominal rate on a compounded basis.
Employees
At
December 31, 2011, the Company employed 1,029 full-time equivalent employees. The Companys employees are not represented by a union or covered by a collective bargaining agreement. Management believes that its employee relations are good.
The Companys definition of Management is the executive team of the Company and its subsidiaries.
Competition
The banking and financial services business is highly competitive. The increasingly competitive environment faced by banks is a result
primarily of changes in laws and regulations, changes in technology and product delivery systems, and the continued consolidation among financial services providers. The Company competes for loans, deposits, trust and investment advisory services
and clients with other commercial banks, savings and loan associations, securities and brokerage companies, investment advisors, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank
financial service providers. Many competitors are much larger in total assets and capitalization, have greater access to capital markets, including foreign markets, and/or offer a broader range of financial services.
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Economic Conditions and Legislative and Regulatory Developments
The Companys profitability, like most financial institutions, is primarily dependent on interest rate differentials. These rates are
highly sensitive to many factors that are beyond the Companys control and cannot be predicted, such as inflation, recession and unemployment, and the impact that future changes in domestic and foreign economic conditions might have on the
Company. A more detailed discussion of the Companys interest rate risks and the mitigation of those risks begins on page 87.
The Companys business is also influenced by the monetary and fiscal policies of the Federal government and the policies of regulatory agencies. The Board of Governors of the Federal Reserve System
(the Reserve Board) implements national monetary policies (with objectives such as maintaining price stability and reducing unemployment) through its open-market operations in U.S. Government securities, by adjusting the required level
of reserves for depository institutions subject to its reserve requirements, and by varying the target Federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Reserve Board in these areas influence
the growth of bank loans, investments, and deposits and also affect interest earned on interest earning assets and interest paid on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on the
Company cannot be predicted.
From time to time, Federal and State legislation is enacted that may have the effect of
materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. In response to the economic downturn and financial industry
instability, legislative and regulatory initiatives were, and are expected to continue to be, introduced and implemented, which substantially increases the regulation of the financial services industry. Moreover, especially in the current economic
environment, bank regulatory agencies have responded to concerns and trends identified in examinations, and this has resulted in the increased issuance and continuation of enforcement actions to financial institutions requiring action to address
credit quality, liquidity and risk management and capital adequacy, as well as other safety and soundness concerns.
Regulation and
Supervision
General
The Company and its subsidiaries are subject to significant regulation and restrictions by Federal and State laws and regulatory agencies. These regulations and restrictions are intended primarily for the
protection of depositors and the Deposit Insurance Fund (DIF), and secondarily for the stability of the U.S. banking system. They are not intended for the benefit of shareholders of financial institutions. The following discussion
of key statutes and regulations is a summary and does not purport to be complete nor does it address all applicable statutes and regulations. This discussion is qualified in its entirety by reference to the statutes and regulations referred to in
this discussion.
Regulatory Developments
On September 2, 2010, the Bank entered into the Operating Agreement with the OCC, pursuant to which, among other things, the Bank agreed to maintain total capital at least equal to 12.0% of
risk-weighted assets and Tier 1 capital at least equal to 8.0% of adjusted total assets and to not pay any dividend or reduce its capital without the prior non-objection of the OCC and unless at least three years shall have elapsed since the
effective date of the Operating Agreement. The Bank believes it is in full compliance with the Operating Agreement.
On
May 11, 2010, the Company entered into the Written Agreement with the Federal Reserve Bank of San Francisco (the Reserve Bank). The Written Agreement restricts the payment of dividends by the Company, as well as the taking of
dividends or any other payment representing a reduction in capital
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from the Bank, without the prior approval of the Reserve Bank. The Written Agreement further requires that the Company not incur, increase, or guarantee any debt, repurchase or redeem any shares
of its stock, or pay any interest or principal on subordinated debt or trust preferred securities, in each case without the prior approval of the Reserve Bank. The Written Agreement also requires the Company to develop a capital plan, which shall
address, among other things, current and future capital requirements, including compliance with the minimum capital ratios, the adequacy of the capital, the source and timing of additional funds, and procedures to notify the Reserve Bank no more
than thirty days after the end of any quarter in which the Companys consolidated capital ratios or the Banks capital ratios fall below the required minimums. The Company will also be required to provide notice to the Reserve Bank
regarding the appointment of any new director or senior executive officer. Finally, the board of directors of the Company is required to submit written progress reports to the Reserve Bank within thirty days after the end of each calendar quarter.
The Company believes it is in full compliance with the Written Agreement.
Until December 28, 2011, the Bank was also
subject to a Consent Order issued by the OCC on May 11, 2010 (as modified, the Consent Order), which had required the Bank to, among other things, take actions and implement improvement programs with respect to its strategic plan,
management, credit policy, consumer mortgage and commercial credit risks, impaired and criticized loans, allowance for loan and lease losses (ALLL), funding and liquidity. On December 30, 2011, the Bank was notified by the OCC that
the Consent Order was terminated effective as of December 28, 2011.
Bank Holding Company Regulation
As a bank holding company, the Company is subject to regulation and examination by the Reserve Board under the BHCA. Accordingly, the
Company is subject to the Reserve Boards regulations and its authority to:
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Require periodic reports and such additional information as the Reserve Board may require;
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Require bank holding companies to maintain increased levels of capital;
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Require that bank holding companies serve as a source of financial and managerial strength to subsidiary banks and commit resources as necessary to
support each subsidiary bank;
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Restrict the ability of bank holding companies to declare dividends or obtain dividends or other distributions from their subsidiary banks;
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Terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the Reserve Board believes
the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary;
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Take formal or informal enforcement action or issue other supervisory directives and assess civil money penalties for non-compliance under certain
circumstances;
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Require the prior approval of senior executive officer or director changes and prohibit golden parachute payments, including change in control
agreements, or new employment agreements with such payment terms, which are contingent upon termination;
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Regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt
and require prior approval to purchase or redeem securities in certain situations; and
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Approve acquisitions and mergers with banks and consider certain competitive, management, financial or other factors in granting these approvals in
addition to similar California or other state banking agency approvals which may also be required.
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Subject
to prior notice or Reserve Board approval, bank holding companies may generally engage in, or acquire shares of companies engaged in activities determined by the Reserve Board to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. Bank holding
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companies which elect and retain financial holding company status pursuant to the Gramm-Leach-Bliley Act of 1999 (GLBA) may engage in these nonbanking activities and
broader securities, insurance, merchant banking and other activities that are determined to be financial in nature or are incidental or complementary to activities that are financial in nature without prior Reserve Board approval.
Pursuant to GLBA and Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) in order to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding
company must be well-capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the Community Reinvestment Act (CRA), which requires banks to help meet the credit
needs of the communities in which they operate. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or require all activities to conform to
those permissible for a bank holding company. The Company has not elected financial holding company status and neither the Company nor the Bank has engaged in any activities determined by the Reserve Board to be financial in nature or incidental or
complementary to activities that are financial in nature.
It is the Reserve Boards view that in serving as a source of
strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain financial
flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding companys failure to meet its source-of-strength obligations may constitute an unsafe and unsound practice or a violation
of the Reserve Bank regulations, or both. The source of strength doctrine, now required by statute pursuant to Dodd-Frank, most directly affects bank holding companies where a bank holding companys subsidiary bank fails to maintain adequate
capital levels. In such a situation, the subsidiary bank will be required by the banks federal regulator to take prompt corrective action. See Prompt Corrective Action Provisions below.
Bank Regulation
The
Bank, as a nationally chartered bank, is subject to primary supervision, periodic examination, and regulation by the OCC. To a lesser extent, the Bank is also subject to certain regulations promulgated by the Reserve Board and the Federal Deposit
Insurance Corporation (the FDIC), as administrator of the DIF. The federal bank regulatory agencies have extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies
with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety and soundness
concerns before an institutions capital becomes impaired. The guidelines establish operational and managerial standards generally relating to: (1) internal controls, information systems, and internal audit systems; (2) loan
documentation; (3) credit underwriting; (4) interest rate exposure; (5) asset growth and asset quality; and (6) compensation, fees, and benefits. Further, the regulatory agencies have adopted safety and soundness guidelines for
asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves. If, as a result of an examination, the OCC should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Banks operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, the OCC, and separately the
FDIC as insurer of the Banks deposits, have authority to:
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Require affirmative action to correct any conditions resulting from any violation or practice;
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Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the Bank from being deemed
well-capitalized and restrict its ability to accept certain brokered deposits;
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Restrict the Banks payment of dividends;
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Restrict the Banks growth geographically, by products and services, or by mergers and acquisitions;
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Enter into informal or formal enforcement orders, including memoranda of understanding, written agreements and consent or cease and desist orders or
prompt corrective action orders to take corrective action and cease unsafe and unsound practices;
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Require the prior approval of senior executive officer or director changes and prohibit golden parachute payments, including change in control
agreements, or new employment agreements with such payment terms, which are contingent upon termination;
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Remove officers and directors and assess civil monetary penalties; and
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Take possession of and close and liquidate the Bank.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
Dodd-Frank
significantly revised and expanded the rulemaking, supervisory and enforcement authority of the federal bank regulatory agencies. Dodd-Frank impacts many aspects of the financial industry and, in many cases, will impact larger and smaller financial
institutions and community banks differently over time. Many of the following key provisions of Dodd-Frank affecting the financial industry are now either effective or are in the proposed rule or implementation stage:
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The creation of a Financial Services Oversight Counsel to identify emerging systemic risks and improve interagency cooperation;
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Expanded FDIC authority to conduct the orderly liquidation of certain systemically significant non-bank financial companies in addition to
depository institutions;
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The establishment of strengthened capital and liquidity requirements for banks and bank holding companies, including minimum leverage and risk-based
capital requirements no less than the strictest requirements in effect for depository institutions as of the date of enactment;
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The requirement by statute that bank holding companies serve as a source of financial strength for their depository institution subsidiaries;
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Enhanced regulation of financial markets, including the derivative and securitization markets, and the elimination of certain proprietary trading
activities by banks (the Volcker Rule);
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The termination of investments by the U.S. Treasury under the Troubled Asset Relief Program (TARP);
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The elimination and phase out of trust preferred securities from Tier 1 capital with certain exceptions;
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A permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 and an extension of federal deposit
coverage until January 1, 2013, for the full net amount held by depositors in non-interesting bearing transaction accounts;
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Authorization for financial institutions to pay interest on business checking accounts;
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Changes in the calculation of FDIC deposit insurance assessments, such that the assessment base will no longer be the institutions deposit
base, but instead, will be its average consolidated total assets less its average tangible equity;
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The elimination of remaining barriers to de novo interstate branching by banks;
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Expanded restrictions on transactions with affiliates and insiders under Section 23A and 23B of the Federal Reserve Act and lending limits for
derivative transactions, repurchase agreements, and securities lending and borrowing transactions;
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The elimination of the Office of Thrift Supervision and the transfer of oversight of thrift institutions and their holding companies to the OCC or
the FDIC and Reserve Board;
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Provisions that affect corporate governance and executive compensation at most United States publicly traded companies, including
(i) stockholder advisory votes on executive compensation, (ii) executive compensation clawback requirements for companies listed on national securities exchanges in the event of materially inaccurate statements of earnings,
revenues, gains or other criteria, (iii) enhanced independence requirements for compensation committee members, and (iv) giving the Securities and Exchange Commission (SEC) authority to adopt proxy access rules which would
permit stockholders of publicly traded companies to nominate candidates for election as director and have those nominees included in a companys proxy statement; and
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The creation of a Bureau of Consumer Financial Protection, which is authorized to promulgate and enforce consumer protection regulations relating to
bank and non-bank financial products and which may examine and enforce its regulations on banks with more than $10 billion in assets.
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The numerous rules and regulations that have been promulgated and are yet to be promulgated and finalized under Dodd-Frank are likely to significantly impact the Companys operations and compliance
costs, such as changes in FDIC assessments, the permitted payment of interest on demand deposits and projected enhanced consumer compliance requirements. More stringent capital, liquidity and leverage requirements are expected to impact the
Companys business as Dodd-Frank is fully implemented. The federal agencies have issued many proposed rules pursuant to provisions of Dodd Frank which will apply directly to larger institutions with either more than $50 billion in assets or
more than $10 billion in assets, such as proposed regulations for financial institutions deemed systemically significant, proposed rules requiring capital plans and stress tests and the Reserve Boards proposed rules to implement the Volcker
Rule, as well as a final rule for the largest (over $250 billion in assets) and internationally active banks setting a new minimum risk-based capital floor. These and other requirements and policies imposed on larger institutions, such as expected
countercyclical requirements for increased capital in times of economic expansion and a decrease in times of contraction, may subsequently become expected best practices for smaller institutions. Therefore, as a result of the changes
required by Dodd-Frank, the profitability of the Companys business activities may be impacted and the Company may be required to make changes to certain of its business practices. Such developments and new standards would require the Company
to devote even more management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.
Dividends and Other Transfer of Funds
Dividends from the Bank constitute
the principal source of income to the Company. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends. The Bank is subject first to corporate restrictions on its ability to pay dividends. Prior OCC
approval is also required for the Bank to declare a dividend if the total of all dividends (common and preferred), including the proposed dividend, declared by the Bank in any calendar year will exceed its net retained income of that year to date
plus the retained net income of the preceding two calendar years. In addition, the banking agencies have the authority under their safety and soundness guidelines and prompt correct action regulations to require their prior approval or to prohibit
the Bank from paying dividends, depending upon the Banks financial condition, if such payment is deemed to constitute an unsafe or unsound practice. Further, the Bank may not pay a dividend if it would be undercapitalized
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after the dividend payment is made. As discussed above in Regulatory Developments, as a result of the Written Agreement and Operating Agreement, both OCC and Reserve Board approval is
required before the Bank may declare or pay any dividends to the Company.
It is Reserve Board policy that bank holding
companies should generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organizations expected future needs and financial condition. It is also
Reserve Board policy that bank holding companies should not maintain dividend levels that undermine the companys ability to be a source of strength to its banking subsidiaries. In consideration of the recent financial and economic environment,
the Reserve Board has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are strong. As discussed above in
Regulatory Developments, as a result of the Written Agreement, Reserve Board approval is required before the Company may declare or pay any dividends to its shareholders.
Capital Requirements
Bank holding companies and banks are subject to
various regulatory capital requirements administered by State and Federal banking agencies. Increased capital requirements are expected as a result of expanded authority set forth in Dodd-Frank and the Basel III international supervisory
developments discussed below. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors.
The current risk-based capital guidelines for bank holding companies and banks adopted by the federal banking agencies are expected to provide a measure of capital that reflects the degree of risk
associated with a banking organizations operations for both transactions reported on the balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements.
The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater risks
and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Bank holding companies and banks engaged in significant trading activity may also be subject to the market risk capital guidelines and be required to
incorporate additional market and interest rate risk components into their risk-based capital standards.
Qualifying capital
is classified depending on the type of capital:
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Tier 1 capital
currently includes common equity and trust preferred securities, subject to certain criteria and quantitative
limits. The capital received from trust preferred offerings also qualifies as Tier 1 capital, subject to the new provisions of Dodd-Frank. Under Dodd-Frank, depository institution holding companies with more than $15 billion in total
consolidated assets as of December 31, 2009, will no longer be able to include trust preferred securities as Tier 1 regulatory capital after the end of a three-year phase-out period beginning 2013, and would need to replace any outstanding
trust preferred securities issued prior to May 19, 2010, with qualifying Tier 1 regulatory capital during the phase-out period. For institutions with less than $15 billion in total consolidated assets, existing trust preferred capital
will still qualify as Tier 1. Small bank holding companies with less than $500 million in assets could issue new trust preferred which could still qualify as Tier 1, however the market for any new trust preferred capital raises is
uncertain.
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Tier 2 capital
includes hybrid capital instruments, other qualifying debt instruments, a limited amount of the ALLL, and a
limited amount of unrealized holding gains on equity securities. Following the phase-out period under Dodd-Frank, trust preferred securities will be treated as Tier 2 capital.
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Tier 3 capital
consists of qualifying unsecured debt. The sum of Tier 2 and Tier 3 capital may not exceed the
amount of Tier I capital.
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Under the current capital guidelines, there are three fundamental capital
ratios: a Tier 1 leverage ratio, a Tier 1 risk-based capital ratio, and a total risk-based capital ratio. To be deemed well-capitalized, a bank must have a Tier 1 leverage ratio, a Tier 1 risk-based capital ratio, and
a total risk-based capital ratio of at least 5.0%, 6.0%, and 10.0%, respectively. At December 31, 2011, the respective capital ratios of the Company and the Bank exceeded the minimum percentage requirements to be deemed
well-capitalized.
In addition to the requirements of Dodd-Frank and Basel III, the federal banking agencies may
change existing capital guidelines or adopt new capital guidelines in the future and have required many banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to
be deemed well-capitalized, in which case institutions may no longer be deemed well-capitalized and may therefore be subject to restrictions on taking brokered deposits.
The Company and the Bank are also required to maintain a leverage capital ratio designed to supplement the risk-based capital guidelines. Banks and bank holding companies that have received the highest
rating of the five categories used by regulators to rate banks and that are not anticipating or experiencing any significant growth must maintain a ratio of Tier 1 capital (net of all intangibles) to adjusted total assets of at least 3.0%. All
other institutions are required to maintain a leverage ratio of at least 100 to 200 basis points above the 3.0% minimum, for a minimum of 4.0% to 5.0%. Pursuant to federal regulations, banks must maintain capital levels commensurate with the
level of risk to which they are exposed, including the volume and severity of problem loans. Federal regulators may, however, set higher capital requirements when a banks particular circumstances warrant.
As discussed in Regulatory Developments, the Bank is required to maintain a minimum Tier 1 leverage ratio of 8.0% and a
minimum total risk-based capital ratio of 12.0% pursuant to the Operating Agreement. However, the Bank is allowed to accept brokered deposits and is qualified to be deemed well-capitalized. As of December 31, 2011, the
Companys leverage capital ratio was 12.4%, the Companys total risk-based capital ratio was 20.2%, and the Companys Tier 1 risk-based ratio was 19.6%, all ratios exceeding regulatory minimums to be considered well-capitalized. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital Resources.
Basel
Accords
The current risk-based capital guidelines which apply to the Company and the Bank are based upon the 1988 capital
accord (referred to as Basel I) of the International Basel Committee on Banking Supervision (the Basel Committee), a committee of central banks and bank supervisors and regulators from the major industrialized countries. The
Basel Committee develops broad policy guidelines for use by each countrys supervisors in determining the supervisory policies they apply. A new framework and accord, referred to as Basel II, evolved from 2004 to 2006 out of the efforts to
revise capital adequacy standards for internationally active banks. Basel II emphasizes internal assessment of credit, market and operational risk; supervisory assessment and market discipline in determining minimum capital requirements and
became mandatory for large or core international banks outside the United States in 2008 (total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more). Basel II was optional for others,
and if adopted, must first be
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complied within a parallel run for two years along with the existing Basel I standards. The Company is not required to comply with Basel II and has not elected to apply the Basel II
standards.
The United States federal banking agencies issued a proposed rule for banking organizations that do not use the
advanced approaches under Basel II. While this proposed rule generally parallels the relevant approaches under Basel II, it diverges where United States markets have unique characteristics and risk profiles. A definitive final rule has
not yet been issued. The United States banking agencies indicated, however, that they would retain the minimum leverage requirement for all United States banks.
In 2010 and 2011, the Basel Committee finalized proposed reforms on capital and liquidity, generally referred to as Basel III, to reconsider regulatory capital standards, supervisory and risk-management
requirements and additional disclosures to further strengthen the Basel II framework in response to the worldwide economic downturn. Although Basel III is intended to be implemented by participating countries for large, internationally active
banks, its provisions are likely to be considered by United States banking regulators in developing new regulations applicable to other banks in the United States. Basel III provides for increases in the minimum Tier 1 common equity ratio
and the minimum requirement for the Tier 1 capital ratio. Basel III additionally includes a capital conservation buffer on top of the minimum requirement designed to absorb losses in periods of financial and economic distress;
and an additional required countercyclical buffer percentage to be implemented according to a particular nations circumstances. These capital requirements are further supplemented under Basel III by a non-risk-based leverage ratio.
Basel III also reaffirms the Basel Committees intention to introduce higher capital requirements on securitization and trading activities.
The Basel III liquidity proposals have three main elements: (i) a liquidity coverage ratio designed to meet the banks liquidity needs over a 30-day time horizon under an acute
liquidity stress scenario, (ii) a net stable funding ratio designed to promote more medium and long term funding over a one year time horizon, and (iii) a set of monitoring tools that the Basel Committee indicates should be
considered as the minimum types of information that banks should report to supervisors.
Implementation of Basel III in
the United States will require regulations and guidelines by United States banking regulators, which may differ in significant ways from the recommendations published by the Basel Committee. It is unclear how United States banking regulators will
define well-capitalized in their implementation of Basel III and to what extent and when smaller banking organizations in the United States will be subject to these regulations and guidelines. Basel III standards, if adopted,
would lead to significantly higher capital requirements, higher capital charges and more restrictive leverage and liquidity ratios. The Basel III standards, if adopted, could lead to significantly higher capital requirements, higher capital
charges and more restrictive leverage and liquidity ratios. The standards would, among other things:
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Impose more restrictive eligibility requirements for Tier 1 and Tier 2 capital;
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Increase the minimum Tier 1 common equity ratio to 4.5%, net of regulatory deductions, and introduce a capital conservation buffer of an
additional 2.5% of common equity to risk-weighted assets, raising the target minimum common equity ratio to 7.0%;
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Increase the minimum Tier 1 capital ratio to 8.5% inclusive of the capital conservation buffer;
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Increase the minimum total capital ratio to 10.5% inclusive of the capital conservation buffer; and
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Introduce a countercyclical capital buffer of up to 2.5% of common equity or other fully loss absorbing capital for periods of excess credit growth.
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Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3.0%, based on a measure
of total exposure rather than total assets, and new liquidity standards. The new Basel III capital standards will be phased in from January 1, 2013 until January 1, 2019.
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United States banking regulators must also implement Basel III in conjunction with the
provisions of Dodd-Frank related to increased capital and liquidity requirements. The regulations ultimately applicable to the Company may be substantially different from the Basel III final framework. Requirements to maintain higher levels of
capital or to maintain higher levels of liquid assets could adversely impact the Companys net income and return on equity.
Prompt
Corrective Action Provisions
The Federal Deposit Insurance Act (FDIA) provides a framework for regulation of
depository institutions and their affiliates, including parent holding companies, by their federal banking regulators. Among other things, it requires the relevant federal banking regulator to take prompt corrective action with respect
to a depository institution if that institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate federal banking regulator
under the prompt corrective action rules generally depend upon an institutions classification within five capital categories as defined in the regulations. The relevant capital measures are the capital ratio, the Tier 1 capital ratio, and
the leverage ratio.
A depository institutions capital tier under the prompt corrective action regulations will depend
upon how its capital levels compare with various relevant capital measures and the other factors established by the regulations. A banks prompt corrective action capital category is determined solely for the purpose of applying the prompt
corrective action regulations and the capital category may not constitute an accurate representation of the banks overall financial condition or prospects for other purposes. A bank will be: (i) well-capitalized if the
institution has a leverage ratio of 5.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a total risk-based capital ratio of 10.0% or greater, and is not subject to any order or written directive by any such regulatory
authority to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if the institution has a leverage ratio of 4.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and
a total risk-based capital ratio of 8.0% or greater, and is not well-capitalized; (iii) undercapitalized if the institution has a leverage ratio of less than 4.0%, a Tier 1 risk-based capital ratio of less than
4.0%, or a total risk-based capital ratio that is less than 8.0%; (iv) significantly undercapitalized if the institution has a leverage ratio of less than 3.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a total
risk-based capital ratio of less than 6.0%; and (v) critically undercapitalized if the institutions tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or
deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying
any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital
restoration plan. The regulatory agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institutions capital. In
addition, for a capital restoration plan to be acceptable, the depository institutions parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide
appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institutions total assets at the time it became undercapitalized and
(ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
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Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions are subject to the appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository
institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound
condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the
institution were in the next lower category (but may not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
Deposit Insurance
The
FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC insures
client deposits through the DIF up to prescribed limits for each depositor. Pursuant to Dodd-Frank, the maximum deposit insurance amount has been permanently increased to $250,000 and all noninterest-bearing transaction accounts are insured through
December 31, 2012. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. Due to the greatly increased number of bank
failures and losses incurred by DIF, as well as the recent extraordinary programs in which the FDIC has been involved to support the banking industry generally, the DIF was substantially depleted and the FDIC has incurred substantially increased
operating costs. In November 2009, the FDIC adopted a requirement for institutions to prepay in 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012.
As required by Dodd-Frank, the FDIC adopted a new DIF restoration plan which became effective on January 1, 2011. Among other
things, the plan: (1) raises the minimum designated reserve ratio, which the FDIC is required to set each year, to 1.35% (from the former minimum of 1.15%) and removes the upper limit on the designated reserve ratio (which was formerly capped
at 1.5%) and consequently on the size of the fund; (2) requires that the fund reserve ratio reach 1.35% by 2020; (3) eliminates the requirement that the FDIC provide dividends from the fund when the reserve ratio is between 1.35% and 1.5%
(4) continues the FDICs authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.5%, but grants the FDIC sole discretion in determining whether to suspend or limit the declaration or payment of
dividends. The FDIA continues to require that the FDICs Board of Directors consider the appropriate level for the designated reserve ratio annually and, if changing the designated reserve ratio, engage in notice-and-comment rulemaking before
the beginning of the calendar year. The FDIC has set a long term goal of getting its reserve ratio up to 2% of insured deposits by 2027.
On February 7, 2011, the FDIC approved a final rule, which was effective for the quarter beginning April 1, 2011, as mandated by Dodd-Frank, changing the deposit insurance assessment system from
one that is based on total domestic deposits to one that is based on average consolidated total assets minus average tangible equity. In addition, the final rule creates a scorecard-based assessment system for larger banks (those with more than
$10 billion in assets) and suspends dividend payments if the DIF reserve ratio exceeds 1.5%, but provides for decreasing assessment rates when the DIF reserve ratio reaches certain thresholds. Larger insured depository institutions will likely
pay higher
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assessments to the DIF than under the old system. Additionally, the final rule includes a new adjustment for depository institution debt whereby an institution would pay an additional premium
equal to 50 basis points on every dollar of long term, unsecured debt held as an asset that was issued by another insured depository institution (excluding debt guaranteed under the Temporary Liquidity Guarantee Program (TLGP)) to
the extent that all such debt exceeds 3% of the other insured depository institutions Tier 1 capital.
The
Banks FDIC insurance expense totaled $9.7 million for 2011. FDIC insurance expense includes deposit insurance assessments and Financing Corporation (FICO) assessments related to outstanding FICO bonds to fund interest payments on
bonds to recapitalize the predecessor to the DIF. These assessments will continue until the FICO bonds mature in 2017. Total FICO assessments for the Company totaled $427,000 for 2011.
The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. If there are additional
bank or financial institution failures or if the FDIC otherwise determines, the Bank may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases in FDIC insurance premiums
may have a material and adverse affect on the Companys earnings and could have a material adverse effect on the value of, or market for, the Companys common stock.
The FDIC may terminate a depository institutions deposit insurance upon a finding that the institutions financial condition is unsafe or unsound or that the institution has engaged in unsafe
or unsound practices that pose a risk to the DIF or that may prejudice the interest of the banks depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Banks charter by the OCC.
Operations and Consumer Compliance Laws
The Bank must comply with numerous federal anti-money laundering, data security, privacy and consumer protection statutes and implementing regulations, including the USA PATRIOT Act of 2001, the Foreign
Account Tax Compliance Act (effective 2013), the Bank Secrecy Act, the CRA, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the Fair Housing Act,
the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the National Flood Insurance Act and various Federal and State privacy protection laws. Noncompliance with these laws could subject the Bank to lawsuits and could also
result in administrative penalties, including, fines and reimbursements. The Bank and the Company are also subject to Federal and State laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair
competition.
These laws and regulations mandate certain disclosure and reporting requirements and regulate the manner in
which financial institutions must deal with clients when taking deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not
limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.
Dodd-Frank provides for the creation of the Bureau of Consumer Financial Protection as an independent entity within the Reserve Board. This bureau is a new regulatory agency for United States banks. It
has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards, and contains provisions on mortgage-related matters
such as steering incentives, determinations as to a borrowers ability to repay and prepayment penalties. The bureaus functions include investigating consumer complaints, conducting market research, rulemaking, supervising and
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examining banks consumer transactions, and enforcing rules related to consumer financial products and services. Banks with less than $10 billion in assets, such as the Bank, will
continue to be examined for compliance by their primary Federal banking agency.
Regulation of Non-bank Subsidiaries
MCM and REWA, operating subsidiaries of the Bank, are registered investment advisors subject to regulation and supervision by the SEC.
Further, the banking agencies expect banking organizations in their oversight role over functionally regulated subsidiaries, such as registered investment advisors, to assure appropriate controls are maintained that include:
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Establishing alternative sources of emergency support from the parent holding company, non-bank affiliates or external third parties prior to
seeking support from the Bank;
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Instituting effective policies and procedures for identifying potential circumstances triggering the need for financial support and the process for
obtaining such support;
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Implementing effective controls, including stress testing and compliance reviews;
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Implementing policies and procedures to ensure compliance with disclosure and advertising requirements to clearly differentiate the investments in
advised funds from obligations of the Bank or insured deposits; and
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Ensuring proper management, regulatory and financial reporting of contingent liabilities arising out of its investment advisory activities.
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Securities Laws
The Companys common stock is publicly held and listed on NASDAQ Stock Market, and the Company is subject to the periodic reporting, information, proxy solicitation, insider trading, corporate
governance and other requirements and restrictions of the Securities Exchange Act of 1934, as amended (the Exchange Act), and the regulations of the SEC promulgated thereunder as well as listing requirements of NASDAQ. Dodd-Frank
includes the following provisions that affect corporate governance and executive compensation at most U.S. publicly traded companies, including the Company: (1) stockholder advisory votes on executive compensation, (2) executive
compensation clawback requirements for companies listed on national securities exchanges in the event of materially inaccurate statements of earnings, revenues, gains or other criteria, (3) enhanced independence requirements for
compensation committee members, and (4) Securities and Exchange Commission (the SEC) authority to adopt proxy access rules which would permit shareholders of publicly traded companies to nominate candidates for election as director
and have those nominees included in a companys proxy statement.
The Company is also subject to the accounting oversight
and corporate governance requirements of Sarbanes-Oxley Act (SOX), including, among other things, required executive certification of financial presentations, requirements for board audit committees and their members, and disclosure of
controls and procedures and internal control over financial reporting.
Available Information
The Company maintains an internet website at
http://www.pcbancorp.com
. The Company makes available its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act and other information related to the Company free of charge, through the
Companys Investor Relations page of this site as soon as reasonably practicable after it electronically files those documents with, or otherwise furnishes them to, the SEC. The Companys internet website and the information contained
therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K.
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Segments
The Company had two reportable operating segments at December 31, 2011. These segments are determined based on product line and the types of clients served. The Commercial & Community
Banking segment provides loans and deposit products to individuals, commercial enterprises, non-profit organizations, public agencies, and trusts. The Wealth Management segment provides trust and investment advisory services to the same client base.
The All Other segment is not considered an operating segment, but includes all corporate administrative support departments such as human resources, legal, finance and accounting, treasury, information technology, internal audit, risk management,
facilities management, marketing, and the Banks holding company.
As disclosed in Note 23, Discontinued
OperationsRAL and RT Programs of the Consolidated Financial Statements, the RAL and RT Programs, which had been reported as a separate operating segment in prior years, was sold in January 2010, and is reported now as discontinued
operations.
The financial results for each segment are based on products and services provided within each operating segment
with various Management assumptions to calculate the indirect credits and charges for funds which also includes an allocation of certain expenses from the All Other segment. The financial results by segment and Management assumptions are explained
in Note 24, Segments of the Consolidated Financial Statements beginning on page 192.
Commercial & Community Banking
The Commercial & Community Banking segment is the aggregation of client sales and service activities typically
found in a bank. This segment includes all lending and deposit products of the Bank. Loan products offered by the Commercial & Community Banking segment include traditional commercial and industrial (commercial) and commercial
real estate loans, lines of credit, letters of credit, asset based lending, construction loans, land acquisition and development loans to small business and middle market commercial clients. Loan products offered to individual clients include
residential real estate loans, home equity lines and loans, and consumer loans.
Residential real estate loans consist of
first and second mortgage loans secured by trust deeds on 1 to 4 unit single family homes. The Company has specific underwriting and pricing guidelines based on the credit worthiness of the borrower and the value of the collateral, including credit
score, debt-to-income ratio of the borrower and loan-to-value ratio. The Company also sells some loans on the secondary market that may not meet the Companys underwriting guidelines but do meet the underwriting requirements of Freddie Mac and
Fannie Mae. Home equity lines of credit are generally secured by a second trust deed on a single 1 to 4 unit family home. The interest rate on home equity lines is a variable index rate while term residential mortgage loans can have either variable
or fixed interest rates.
Consumer loans and lines of credit are extended with or without collateral to provide financing for
purposes such as the purchase of recreational vehicles, automobiles, or to provide liquidity. The Company has specific underwriting guidelines which consider the borrowers credit history, debt-to-income ratio and loan-to-value ratio for
secured loans. The consumer loans typically have fixed interest rates.
Commercial loan products are underwritten and
customized to meet specific client needs. The Company considers several factors in order to extend the loan including the borrowers historical loan repayment, company management, current economic conditions, industry specific risks, capital
structure, potential collateral, and financial projections. In making commercial real estate secured loan decisions, the Company considers the purpose of the requested loan and nature of the collateral.
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Lending policies require loan approval oversight, approval authority limits, and are structured to reduce the risk on the Companys balance sheet and reduce concentrations of commercial real
estate loans. In 2011, a new lending platform was established to produce high quality, low risk loans primarily on multifamily properties located in California. The origination of commercial real estate loans in 2009, and 2010, was limited and
closely monitored. Commercial real estate loans which are in Purchased Credit Impaired (PCI) Loan Pools are only renewed if they meet the more stringent underwriting criteria. The Company continually evaluates its underwriting standards
to ensure that it is effectively managing its credit exposure given changes in collateral values, market conditions, and types of borrowers.
Deposit products offered by the Commercial & Community Banking segment include checking, savings, money market accounts, individual retirement accounts (IRAs) and certificates of
deposit (CDs). The Commercial & Community Banking segment serves clients through traditional banking branches, loan production centers, Automated Teller Machines (ATM) through client contact call centers and online
banking.
Included in the Commercial & Community Banking segment are the associated administrative departments to
support their products and activities such as loan servicing, credit administration, special assets department, research, delinquency management unit, central vault operations, retail banking administration and retail and commercial lending
administration departments.
Wealth Management
The Wealth Management segment includes the Banks trust department and the investment advisory services division which is comprised of the two registered investment advisors, MCM and REWA, which are
subsidiaries of the Bank. The Wealth Management segment provides investment reviews, analysis and customized portfolio management for separately managed accounts, full service brokerage, trust and fiduciary services, equity and fixed income
management, and real estate and specialty asset management.
Discontinued Operations
On January 14, 2010, the Company entered into an agreement for the sale of its Refund Anticipation Loan (RAL) and Refund
Transfer (RT) Programs segment. Management determined that the sale of the RAL and RT Programs met the requirements as a discontinued operation for the Company in accordance with the accounting guidance for
Impairment and Disposal of
Long-Lived Assets
. Accordingly, the financial results from the RAL and RT Programs have been reclassified within the Companys Consolidated Financial Statements and presented separately as discontinued operations.
Foreign Operations
The Company has no foreign operations. However, the Company does provide loans, letters of credit and other trade-related services to a
number of domestic businesses that conduct trade activities outside the United States.
Client Concentration
Neither the Company nor either of the reportable segments has any client relationships that individually account for 10% or more of
consolidated or segment revenues, respectively.
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In the
course of conducting its business operations, the Company is exposed to a variety of risks, some of which are inherent in the financial services industry and others of which are more specific to its own business. The following discussion addresses
some of the key risks that could affect the Companys business, operations, and financial condition. Other factors that could affect the Companys financial condition and operations are discussed elsewhere in this Form 10-K and in other
documents the Company files with the SEC. The risks identified below are not intended to be a comprehensive list of all risks faced by the Company and additional risks that the Company may currently view as not material may also impair its business,
operations and financial condition.
Continued or worsening general economic or business conditions, particularly in California where
the Companys business is concentrated, could have an adverse effect on the Companys business, results of operations and financial condition.
The Companys operations, loans and the collateral securing its loan portfolio are concentrated in the State of California. The Companys success depends upon the business activity, population,
income levels, deposits and real estate activity in this market. As a result, the Company may be particularly susceptible to the adverse economic conditions in California and in the eight counties where its business is concentrated.
Since late 2007, the United States and the State of California in particular have experienced difficult economic conditions. Weak
economic conditions are characterized by, among other indicators, deflation, increased levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and
commercial real estate price declines and lower home sales and commercial activity. All of those factors are generally detrimental to the Companys business.
In addition, the Companys ability to assess the creditworthiness of customers and to estimate the losses inherent in its credit exposure is made more complex by these difficult market and economic
conditions. Adverse economic conditions could reduce the Companys growth rate, affect the ability of its customers to repay their loans and generally affect the Companys financial condition and results of operations.
While some economic trends have shown signs of improving in recent months, the Company cannot be certain that market and economic
conditions will substantially improve in the near future. Recent and ongoing events at the state, national and international levels continue to create uncertainty in the economy and financial markets and could adversely impact economic conditions in
the Companys market area. A worsening of these conditions would likely exacerbate the adverse effects of the recent market and economic conditions on the Company and its customers. As a result, the Company may experience additional increases
in foreclosures, delinquencies and customer bankruptcies as well as more restricted access to funds. Any such negative events may have an adverse effect on the Companys business, financial condition, results of operations and stock price.
Moreover, because of the Companys geographic concentration, it is less able to diversify its credit risks across multiple markets to the same extent as regional or national financial institutions.
The Company and the Bank continue to be subject to certain agreements with their regulators.
The Company remains subject to enhanced supervisory review pursuant to the Written Agreement, and the Bank remains subject to enhanced
supervisory review pursuant to the Operating Agreement. See Regulation and SupervisionRegulatory Developments for a discussion of the terms of the Written Agreement and Operating Agreement. While the Company and the Bank has made
every effort necessary to comply with the requirements of the Written Agreement and Operating Agreement,
22
there can be no assurance that the Company will be able to comply fully with the provisions of the Written Agreement or that the Bank will be able to comply fully with the provisions of the
Operating Agreement, that compliance with the Written Agreement and Operating Agreement will not be more time consuming or more expensive than anticipated, that compliance with the Written Agreement and Operating Agreement will enable the Company
and the Bank to sustain profitable operations, or that efforts to comply with the Written Agreement and Operating Agreement will not have adverse effects on the operations and financial condition of the Company or the Bank. In addition, the Company
and the Bank cannot determine whether or when the Written Agreement and Operating Agreement will be lifted or terminated. Even if they are lifted or terminated, in whole or in part, the Company and the Bank may remain subject to supervisory
enforcement actions that restrict their activities.
The Company and the Bank are subject to extensive regulation.
The financial services industry is extensively regulated. The Bank is subject to extensive regulation, supervision and examination by the
OCC and the FDIC. As a bank holding company, the Company is subject to regulation and oversight by the Reserve Board. Federal and State regulation is designed primarily to protect the deposit insurance funds and consumers, and not to benefit the
Companys shareholders. Recent government efforts to strengthen the U.S. financial system have resulted in the imposition of additional regulatory requirements, including expansive financial services regulatory reform legislation in the form of
Dodd-Frank. Dodd-Frank will have material implications for the Company and the entire financial services industry. Among other things it will or potentially could:
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Affect the levels of capital and liquidity with which the Company must operate and how the Company plans capital and liquidity levels;
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Subject the Company to new and/or higher fees paid to various regulatory entities, including but not limited to deposit insurance fees to the FDIC;
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Impact the Companys ability to invest in certain types of entities or engage in certain activities;
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Restrict the nature of the Companys incentive compensation programs for executive officers;
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Subject the Company to a new Consumer Financial Protection Bureau, with very broad rule-making and enforcement authorities; and
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Subject the Company to new and different litigation and regulatory enforcement risks.
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The full impact of this legislation on the Company and its business strategies and financial performance cannot be known at this time,
and may not be known for a number of years. However, these impacts are expected to be substantial and some of them are likely to adversely affect the Company and its financial performance. Other regulations affecting banks and other financial
institutions, such as Dodd-Frank, are undergoing continuous review and change frequently; the ultimate effect of such changes cannot be predicted. Because the Companys business is highly regulated, compliance with such regulations and laws may
increase its costs and limit its ability to pursue business opportunities. There can be no assurance that proposed laws, rules and regulations will not be adopted in the future, which could (i) make compliance much more difficult or expensive,
(ii) restrict the Companys ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by the Company,
or (iv) otherwise materially and adversely affect the Companys business or prospects for business.
The Company may be
subject to more stringent capital requirements.
Dodd-Frank requires the federal banking agencies to establish stricter
risk-based capital requirements and leverage limits to apply to banks and bank holding companies. In addition, the Basel III standards recently announced by the Basel Committee, if adopted, could lead to significantly higher
23
capital requirements, higher capital charges and more restrictive leverage and liquidity ratios. The standards would, among other things, impose more restrictive eligibility requirements for Tier
1 and Tier 2 capital; increase the minimum Tier 1 common equity ratio to 4.5%, net of regulatory deductions, and introduce a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target minimum
common equity ratio to 7.0%; increase the minimum Tier 1 capital ratio to 8.5% inclusive of the capital conservation buffer; increase the minimum total capital ratio to 10.5% inclusive of the capital buffer; and introduce a countercyclical capital
buffer of up to 2.5% of common equity or other fully loss absorbing capital for periods of excess credit growth. Basel III also introduces a non-risk adjusted Tier 1 leverage ratio of 3.0%, based on a measure of total exposure rather than total
assets, and new liquidity standards.
The new Basel III capital standards will be phased in from January 1, 2013 until
January 1, 2019, and it is not yet known how these standards will be implemented by U.S. regulators generally or how they will be applied to financial institutions of the Companys size. Implementation of these standards, or any other new
regulations, may adversely affect the Companys ability to pay dividends, or require it to restrict growth or raise capital, including in ways that may adversely affect its results of operations or financial condition.
The Companys allowance for loan losses may not be adequate to cover actual losses.
A significant source of risk arises from the possibility that the Company could sustain losses because borrowers, guarantors, and related
parties may fail to perform in accordance with the terms of their loans. This risk is normally addressed by means of an ALLL in the amount of Managements estimate of losses inherent in the Companys loan portfolio. As explained in Note 2,
Business Combinations Investment Transaction to the Consolidated Financial Statements, the Company was required under generally accepted accounting principles in the United States (GAAP) to estimate the fair value of
its loan portfolio as of the close of business on August 31, 2010 (the Transaction Date), and write the portfolio down to that estimate. For most loans, this meant computing the net present value of estimated cash flows to be received
from borrowers. The ALLL that had been maintained as an estimate of losses inherent in the loan portfolio was eliminated in this accounting. A new ALLL has been established for loans made subsequent to the Transaction Date and for any subsequent
lowering of the estimate of cash flows to be received from the PCI loans held.
The estimate of fair value as of the
Transaction Date was based on economic conditions at the time and on Managements projections regarding both future economic conditions and the ability of the Companys borrowers to continue to repay their loans. However, the estimate of
fair value may prove to be overly optimistic and the Company may suffer losses in excess of those estimated as of that date. The ALLL established for new loans or for revised estimates may prove to be inadequate to cover actual losses especially if
economic or other conditions worsen.
While Management believes that both the estimate of fair value and the ALLL are adequate
to cover current losses, no underwriting and credit monitoring policies and procedures that the Company could adopt to address credit risk could provide complete assurance that there will not be unexpected losses. These losses could have a material
adverse effect on the Companys business, financial condition, results of operations and cash flows. In addition, federal regulators periodically evaluate the adequacy of the Companys ALLL and may require the Company to increase its
provision for loan losses or recognize further loan charge-offs based on judgments different from those of Management.
A substantial portion of the Companys loan portfolio is comprised of commercial real estate loans and commercial business
loans.
At December 31, 2011, $1.59 billion, or 43.4% of the Companys loan portfolio consisted of commercial
real estate loans. These commercial real estate loans constituted a greater percentage of the Companys
24
loan portfolio than any other loan category, including 1 to 4 family residential real estate loans, which totaled $1.04 billion, or 28.4%, of the Companys loan portfolio, and commercial
loans, which totaled $189.2 million, or 5.2%, of the Companys loan portfolio. Commercial real estate loans and commercial loans generally expose a lender to greater risk of nonpayment and loss than 1 to 4 family loans because repayment of the
loans often depends on the successful operation of the property and/or the income stream of the borrower. Commercial loans expose the Company to additional risks since they are generally secured by business assets that may depreciate over time. Such
loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to 1 to 4 family loans. Also, many of the Companys commercial borrowers have more than one loan outstanding with the Company.
Consequently, an adverse development with respect to one loan or one credit relationship can expose the Company to a significantly greater risk of loss compared to an adverse development with respect to a 1 to 4 family loan. Changes in economic
conditions that are out of the control of the borrower and lender could impact the value of the security for the loan, the future cash flow of the affected property or borrower, or the marketability of a construction project with respect to loans
originated for the acquisition and development of property. Additionally, any decline in real estate values may be more pronounced with respect to commercial real estate properties than residential real estate properties.
Liquidity risk could impair the Companys ability to fund operations and jeopardize its financial condition.
Liquidity is essential to the Companys business. An inability to raise funds through deposits, borrowings, the sale of loans and
other sources could have a material adverse effect on the Companys liquidity. The Companys access to funding sources in amounts adequate to finance its activities could be impaired by factors that affect it specifically or the financial
services industry in general. Factors that could detrimentally impact the Companys access to liquidity sources include a decrease in the level of the Companys business activity due to a market downturn, adverse regulatory action against
the Company or the Bank, a reduction in the Companys credit ratings, an increase in costs of capital in financial capital markets, or a decrease in depositor or investor confidence in the Company. The Companys ability to acquire deposits
or borrow could also be impaired by factors that are not specific to it, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.
The Companys business is subject to interest rate risk and variations in interest rates may negatively affect its financial performance.
A substantial portion of the Companys income is derived from the differential or spread between the
interest earned on loans, securities and other interest earning assets, and the interest paid on deposits, borrowings and other interest bearing liabilities. Interest rates are highly sensitive to many factors that are beyond the Companys
control, including general economic conditions and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans and investment
securities) and liabilities (such as CD), the effect on net interest income depends on the cash flows associated with the maturity of the asset or liability. Asset/liability management policy may not be successfully implemented and from time to time
the Companys risk position is not balanced. An unanticipated rapid decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities,
and therefore on the level of net interest income. For instance, any rapid increase in interest rates in the future could result in interest expense increasing faster than interest income because of fixed rate loans and longer term investments.
Further, substantially higher interest rates could reduce loan demand and may result in slower loan growth than previously experienced. This could have an adverse negative effect on the Companys earnings.
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Market and other constraints on the Companys loan origination volumes may lead to continued
pressure on its interest and fee income.
Due to the poor economic conditions in the markets in which the Company
operates and other factors, the Company expects continued pressure on new loan originations in the near term. If the Company is unable to increase loan volumes, there will be continued pressure on its interest income and fees generated from its
lending operations. Unless the Company is able to offset the lower interest income and fees with increased activity in other areas of its operations, its total revenues may decline relative to its total noninterest expenses. The Company expects that
it may be difficult to find new revenue sources in the near term.
As a bank holding company, the Company is substantially dependent on
its subsidiaries for dividends, distributions and other payments.
Substantially all of the Companys activities
are conducted through the Bank, and, consequently, as the parent company of the Bank, the principal source of funds from which the Company services debt and pays its obligations and dividends is the receipt of dividends from the Bank. Pursuant to
the Operating Agreement, the Bank may not pay a dividend or make a capital distribution to the Company until September 2, 2013. From and after September 2, 2013, the Bank may not pay a dividend or make a capital distribution to the Company
without the prior written consent of the OCC. The Written Agreement also restricts the Company from taking any dividends or any other payment representing a reduction in capital from the Bank without the prior approval of the Reserve Board.
The Company faces strong competition from financial services companies and other companies that offer banking
services.
The Company faces increased competition from financial services companies and other companies that offer
banking services. The Company conducts most of its operations in California. Increased competition in its markets may result in a reduction in loans or deposits it may acquire. Ultimately, the Company may not be able to compete successfully against
current and future competitors. These competitors include national banks, regional banks and other community banks. The Company also faces competition from many other types of financial institutions, including savings institutions, industrial banks,
finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, the Companys competitors include major financial companies whose greater resources may afford them a
marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit clients and a
range in quality of products and services provided, including new technology-driven products and services. If the Company is unable to attract and retain banking clients, it may be unable to continue loan growth and level of deposits.
The actions and commercial soundness of other financial institutions could affect the Companys ability to engage in routine funding
transactions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other
relationships. The Company has exposure to different industries and counterparties, and executes transactions with various counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge
funds, and other institutional clients. Defaults by financial services institutions, even rumors or questions about one or more financial services institutions or the financial services industry in general, could lead to market wide liquidity
problems and further, could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. In
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addition, the Companys credit risk may increase when the presumed value of collateral held by it cannot be realized or can only be liquidated at prices not sufficient to recover the full
amount of the loan or derivative exposure due to the Company. Any such losses could materially and adversely affect the Companys results of operations.
The Company faces operational risks that may result in unexpected losses.
The Company faces various operational risks that arise from the potential that inadequate information systems, operational problems, failures in internal controls, breaches of security systems, fraud, the
execution of unauthorized transactions by employees, or any number of unforeseen catastrophes could result in unexpected losses. The Company maintains a system of internal controls to mitigate against such occurrences and maintains insurance
coverage for such risks, but should such an event occur that is not prevented or detected by the Companys internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on the
Companys business, financial condition or results of operations.
The Company relies on communications, information, operating and
financial control systems technology from third party service providers, and it may suffer an interruption in or breach of security of those systems.
The Company relies heavily on third party service providers for much of its communications, information, operating and financial control systems technology, including its internet banking services and
data processing systems. Any failure or interruption of these services or systems or breaches in security of these systems could result in failures or interruptions in the Companys client relationship management, general ledger, deposit,
servicing, and/or loan origination systems. The occurrence of any failures or interruptions may require the Company to identify alternative sources of such services. The Company may not be able to negotiate terms that are as favorable to it, or may
not be able to obtain services with similar functionality as found in its existing systems without the need to expend substantial resources, if at all. The occurrence of a breach of security of these systems could damage the Companys
reputation, result in a loss of customers or expose the Company to possible financial liability.
The Company is exposed to risk of
environmental liabilities with respect to properties to which it takes title.
In the course of its business, the
Company may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a governmental entity or to third parties for property damage, personal
injury, investigation and cleanup costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated
with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, the Company may be subject to common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from the property. If the Company ever became subject to significant environmental liabilities, its business, financial condition, liquidity and results of operations could be materially and adversely affected.
A natural disaster could harm the Companys business.
Historically, California, in which a substantial portion of the Companys business is located, has been susceptible to natural
disasters, such as earthquakes, floods and wild fires. The nature and level of natural disasters cannot be predicted. These natural disasters could harm the Companys operations through interference with communications, including the
interruption or loss of the Companys
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computer systems, which could prevent or impede the Company from gathering deposits, originating loans and processing and controlling its flow of business, as well as through the destruction of
facilities and the Companys operational, financial and management information systems. Additionally, natural disasters could negatively impact the values of collateral securing the Companys loans and interrupt borrowers abilities
to conduct their business in a manner to support their debt obligations, either of which could result in losses and increased provisions for loan losses.
Managing reputational risk is important to attracting and maintaining clients, investors and employees.
Threats to the Companys reputation can come from many sources, including adverse sentiment about financial services institutions generally, unethical practices, employee misconduct, breaches of the
Companys information technology security systems, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our clients. The Company has policies and procedures in place
to protect its reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding the Companys business, employees, or clients, with or without merit, may result in the loss of
clients, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.
The Company is
dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect its prospects.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California banking
industry. The process of recruiting personnel with the combination of skills and attributes required to carry out the Companys strategies is often lengthy. In addition, legislation and regulations which impose restrictions on executive
compensation may make it more difficult for the Company to retain and recruit key personnel. The Companys success depends to a significant degree upon its ability to attract and retain qualified management, loan origination, finance,
administrative, marketing, and technical personnel, and upon the continued contributions of its management and personnel. In particular, the Companys success has been and continues to be highly dependent upon the abilities of key executives,
including its Chief Executive Officer.
The Company may issue securities that could dilute the ownership of its existing shareholders
and may adversely affect the market price of its common stock.
The Company may elect to raise capital in the future to
enhance its capital levels, improve its capital ratios, provide capital for acquisitions, increase liquidity available for operations and other opportunities, or for other reasons. If the Company raises funds by issuing equity securities or
instruments that are convertible into equity securities, the percentage ownership of its existing shareholders will be reduced, the new equity securities may have rights, preferences and privileges superior to those of its common stock and
additional issuances could be at a purchase price that is lower than the available market price for its common stock. The market price of the Companys common stock could decline as a result of sales of a large number of shares of common stock,
preferred stock or similar securities in the market as a result of future sales of common stock or the perception that such sales could occur. The Company may also issue equity securities as consideration for acquisitions that could be dilutive to
existing shareholders.
As a controlled company, the Company is exempt from certain NASDAQ corporate governance
requirements.
The Companys common stock is currently traded on NASDAQ. NASDAQ generally requires a majority of
directors to be independent and requires independent director oversight over the
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nominating and executive compensation functions. However, under the rules applicable to NASDAQ, if another company owns more than 50% of the voting power of a listed company, that company is
considered a controlled company and is exempt from rules relating to independence of the Board of Directors and the compensation and nominating committees. The Company is a controlled company because SB Acquisition Company LLC,
beneficially owns more than 50% of the Companys outstanding voting stock. Accordingly, the Company is exempt from certain corporate governance requirements and holders of the Companys common stock may not have all the protections that
these rules are intended to provide.
A majority of the Companys common stock is held by a single shareholder.
SB Acquisition owns approximately 76.0% of the Companys outstanding common stock and has two representatives on the Board of
Directors. Accordingly, SB Acquisition has a controlling influence over the election of directors to the Board of Directors and over corporate policy, including decisions to enter into mergers or other extraordinary transactions. In pursuing its
economic interests, SB Acquisition may make decisions with respect to fundamental corporate transactions that may be different from the decisions of other shareholders.
The price of the Companys common stock may be volatile or may decline.
The trading price of the Companys common stock may fluctuate significantly as a result of a number of factors, many of which are outside the Companys control. In addition, the stock market is
subject to fluctuations in the share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of the Companys common stock. Among the
factors that could affect stock price are:
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Actual or anticipated quarterly fluctuations in the Companys operating results and financial condition;
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Changes in financial estimates or publication of research reports and recommendations by financial analysts with respect to the Companys
common stock or those of other financial institutions;
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Failure to meet analysts loan and deposit volume, revenue, asset quality or earnings expectations;
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Speculation in the press or investment community generally or relating to the Companys reputation or the financial services industry;
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Actions by the Companys shareholders, including sales of common stock by existing shareholders and/or directors and executive officers;
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Fluctuations in the stock price and operating results of the Companys competitors;
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Future sales of the Companys equity or equity-related securities;
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Proposed or adopted regulatory changes or developments;
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Investigations, proceedings, or litigation that involve or affect the Company;
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The performance of the national and California economy and the real estate markets in California; or
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General market conditions and, in particular, developments related to market conditions for the financial services industry.
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The trading volume of the Companys common stock is limited.
The Companys common stock trades on NASDAQ under the symbol PCBC and trading volume is modest. The limited trading
market for the Companys common stock may lead to exaggerated
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fluctuations in market prices and possible market inefficiencies, as compared to a more actively traded stock. It may also make it more difficult to dispose of such common stock at expected
prices, especially for holders seeking to dispose of a large number of such stock.
Resales of the Companys common stock in the
public market may cause the market price of the common stock to fall.
The Company has provided customary registration
rights to SB Acquisition, which owns approximately 76.0% of the Companys outstanding common stock, and to the U.S. Treasury, which owns approximately 11.0% of the Companys outstanding common stock. If either SB Acquisition or the U.S.
Treasury elects to sell its shares, such sales or attempted sales could result in significant downward pressure on the market price of the common stock and actual price declines.
The Companys common stock is equity and therefore is subordinate to the Companys indebtedness and any preferred stock.
Shares of the Companys common stock are equity interests in the Company, do not constitute indebtedness, and, therefore, are not
insured against loss by the FDIC or by any other public or private entity. Such common stock will rank junior to all indebtedness and other non-equity claims on the Company with respect to assets available to satisfy claims on the Company, including
in a liquidation of the Company. Additionally, holders of such common stock are subject to the prior dividend and liquidation rights of any holders of our preferred stock then outstanding.
Anti-takeover provisions could negatively impact the Companys shareholders.
Various provisions of the Companys certificate of incorporation and bylaws and certain other actions the Company has taken could delay or prevent a third-party from acquiring control of it even if
doing so might be beneficial to its shareholders. These include, among other things, the authorization to issue blank check preferred stock by action of the Board of Directors acting alone, thus without obtaining shareholder approval.
The BHCA and the Change in Bank Control Act of 1978, as amended, together with federal regulations, require that, depending on the particular circumstances, either regulatory approval must be obtained or notice must be furnished to the appropriate
regulatory agencies and not disapproved prior to any person or entity acquiring control of a national bank, such as the Bank. These provisions may prevent a merger or acquisition that would be attractive to shareholders and could limit
the price investors would be willing to pay in the future for the Companys common stock.
The Company will be
subject to business uncertainties while the Merger with UBC is pending that could adversely affect its financial results. Failure to complete the Merger with UBC could also negatively impact the Companys stock price and future business and
financial results.
On March 12, 2012, the Company announced the execution of a definitive merger agreement with UBC.
Uncertainty about the effect of the Merger on employees or customers may have an adverse effect on the Company. Although the Company intends to take steps designed to reduce any adverse effects, these uncertainties may impair its ability to attract,
retain and motivate key personnel until the Merger is completed and for a period of time thereafter, and could cause customers and others that deal with the Company to seek to change existing business relationships.
Employee retention and recruitment may be particularly challenging prior to the completion of the Merger, as employees and prospective
employees may experience uncertainty about their future roles with the combined company. If, despite the Companys retention and recruiting efforts, key employees depart or fail to accept employment with the Company because of issues relating
to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the Companys business operations and financial results could be adversely affected.
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In addition, the Merger Agreement restricts the Company, without UBCs consent, from
taking certain specified actions, including making certain capital expenditures and investments, entering into new or changing existing lines of business and opening or closing branch offices until the Merger occurs or the Merger Agreement
terminates. These restrictions may prevent the Company from making other changes to its business prior to consummation of the Merger or termination of the Merger Agreement even if the Company believes those changes would be advantageous to it.
Termination of the Merger Agreement may negatively affect the Company.
If the Merger Agreement is terminated, the Company may suffer various adverse consequences, including:
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Its business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of Management on the proposed
Merger, without realizing any of the anticipated benefits of completing the Merger;
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|
¡
|
|
The market price of its common stock might decline to the extent that the market price prior to termination reflects a market assumption that the
proposed Merger will be completed; and
|
|
¡
|
|
The payment of a termination fee, if required under the circumstances, may adversely affect its financial condition and liquidity.
|
UBC may be unable to obtain the approvals required to complete the Merger with the Company.
The completion of the Merger is subject to numerous customary conditions. Among other things, before the Merger may be completed, UBC and
its affiliates must make various filings with the Reserve Board, the Japan Financial Services Agency and the OCC and receive the approvals or non-objections of those agencies. The Company cannot provide assurance as to whether or when UBC will
receive the required approvals or non-objections and delays in the receipt of approvals would have the effect of delaying completion of the Merger. In addition, these governmental authorities may impose conditions on their approvals, including
restrictions or conditions on the business or operations of UBC after the Merger that could cause UBC to abandon the Merger.
The Company will incur significant transaction costs in connection with the Merger Agreement and the Merger that could materially
impact its financial performance and results.
The Company will incur significant merger transaction costs, including
legal, accounting, financial advisory and other costs relating to the Merger Agreement and the Merger. The costs, either individually or in combination, could have a material adverse affect on the Companys financial results.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
Both the
Company and the Bank are headquartered at 1021 Anacapa Street in Santa Barbara, California. In addition, the Company occupies six administrative offices for support department operations in Santa Barbara, Ventura, Monterey and Los Angeles counties.
These offices are reported in the All Other segment and include human resources, information technology, bank operations, finance and accounting, and other support functions.
31
At December 31, 2011, the Bank owned 12 and leased 35 retail branch locations. These 47
offices are located in the Los Angeles, Monterey, San Benito, San Luis Obispo, Santa Barbara, Santa Clara, Santa Cruz, and Ventura counties and are reported in the Commercial & Community Banking segment. In addition, the Bank
owns two and leased three offices used for a combination of wealth management and loan production. These five offices are located in Santa Barbara, Monterey, Los Angeles, and San Francisco counties.
The Wealth Management segment provides service and administrative support to their clients through five locations. These
leased offices are located in San Luis Obispo, Santa Barbara and Los Angeles counties in California, and in New York. The Banks trust administration department is located in Santa Barbara. In addition, there are several wealth management
advisors located within the retail branch locations.
ITEM 3.
|
LEGAL PROCEEDINGS
|
The
Company has been named in lawsuits filed by clients and others. These lawsuits are described in Note 17, Commitments and Contingencies, of the Consolidated Financial Statements beginning on page 181. The Company does not expect that
these suits will have any material impact to its financial condition or operating results.
The Company is involved in various
other litigation of a routine nature that is being handled and defended in the ordinary course of the Companys business. In the opinion of Management, based in part on consultation with legal counsel, the resolution of these litigation matters
will not have a material impact to the Companys financial condition or operating results.
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
32
PART II
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market Information
The Companys common stock trades on the NASDAQ Global Select Market under the symbol PCBC. As of February 29, 2012,
there were approximately 2,827 holders of record of the Companys common stock. On December 28, 2010, the Company effected a 1-for-100 reverse stock split, as reflected at the open of trading on the following day. All prior per share and
dividend amounts have been restated to reflect this split. The following table presents the high and low sales prices and dividends paid for the Companys common stock for each quarterly period for the last two years as reported by the NASDAQ
Global Select Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
Dividends
Declared
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31
|
|
$
|
28.44
|
|
|
$
|
22.74
|
|
|
$
|
|
|
Three Months Ended September 30
|
|
|
31.84
|
|
|
|
23.76
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
32.34
|
|
|
|
29.30
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
31.39
|
|
|
|
26.38
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31
|
|
|
92.00
|
|
|
|
22.00
|
|
|
|
|
|
One Month Ended September 30
|
|
|
98.00
|
|
|
|
78.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Months Ended August 31
|
|
$
|
166.00
|
|
|
$
|
62.00
|
|
|
$
|
|
|
Three Months Ended June 30
|
|
|
549.00
|
|
|
|
62.00
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
245.00
|
|
|
|
97.00
|
|
|
|
|
|
Dividends
The Companys Board of Directors has responsibility for the oversight and approval of the declaration of dividends. The timing and amount of any future dividends will depend on the Companys
near and long term earnings capacity, current and future capital position, investment opportunities, statutory and regulatory limitations, general economic conditions and other factors deemed relevant by the Companys Board of Directors. No
assurances can be given that any dividends will be paid in the future or, if payment is made, will continue to be paid.
Under
the terms of the Written Agreement, the Company may not pay cash dividends on its common stock without the prior approval of the Reserve Board. For a discussion of additional regulatory restrictions on the payment of dividends, see Regulation
and SupervisionDividends and Other Transfer of Funds. In addition, under the terms of the Merger Agreement, the Company may not pay cash dividends on its common stock without the prior approval of UBC.
33
The principal source of funds from which the Company may pay dividends is the receipt of
dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations. The Bank is subject first to corporate restrictions on its ability to pay dividends. The Bank may not pay a dividend if it would be
undercapitalized after the dividend payment is made. Pursuant to the Operating Agreement, the Bank may not pay a dividend or make a capital distribution to the Company without prior approval from the OCC or until September 2, 2013. The Written
Agreement also restricts the taking of dividends or any other payment representing a reduction in capital from the Bank, without the prior approval of the Reserve Board. Furthermore, OCC approval is required for the Bank to declare a dividend if the
total of all dividends (common and preferred), including the proposed dividend, declared by the Bank in any calendar year will exceed its net retained income of that year to date plus the retained net income of the preceding two calendar years. In
addition, the banking agencies have the authority under their safety and soundness guidelines and prompt correct action regulations to require their prior approval or to prohibit the Bank from paying dividends, depending upon the Banks
financial condition, if such payment is deemed to constitute an unsafe or unsound practice.
Stock Performance
The following graph shows a five year comparison of cumulative total returns for the Companys common stock, the Standard &
Poors 500 Stock Index and the NASDAQ Bank Index, each of which assumes an initial value of $100 and reinvestment of dividends.
34
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information at December 31, 2011, with respect to shares of Company common stock that may be issued
under the Companys existing equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Plan category
|
|
Number of securities to
be issued upon exercise
of
outstanding options,
warrants, and rights (a)
|
|
|
Weighted-average exercise
price of
outstanding
options, warrants, and
rights (b)
|
|
|
Number of securities
remaining available for future
issuance under
equity
compensation plans
(excluding securities reflected
in column (a)) (c)
|
|
Equity compensation plans approved by security holders
|
|
|
122,657
|
|
|
$
|
365.12
|
|
|
|
1,986,579
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
122,657
|
|
|
$
|
365.12
|
|
|
|
1,986,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included in column (a) are unexercised stock options and restricted stock units granted to directors and employees through current and expired
option plans as of December 31, 2011. This amount excludes 15,120 warrants issued to the U.S. Treasury since they are not compensatory.
|
(b)
|
This does not include restricted stock or restricted stock units, because they do not have an exercise price.
|
(c)
|
Securities remaining available for issuance are from the 2010 Equity Incentive Plan.
|
35
ITEM 6.
|
SELECTED FINANCIAL DATA
|
The following table compares selected financial data for the past five years. Explanations for the year-to-year changes may be found in
Managements Discussion & Analysis in Item 7, and in the Companys Consolidated Financial Statements and the accompanying notes that are presented in Item 8 of this Form 10-K. The following data has been derived from the
Consolidated Financial Statements of the Company and should be read in conjunction with those statements and the notes thereto, which are included in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars and shares in thousands,
except per share amounts)
|
|
At or
Twelve Months
Ended
December 31,
2011
|
|
|
At or
Four
Months
Ended
December 31,
2010
|
|
|
|
|
At
or
Eight
Months
Ended
August 31,
2010
|
|
|
At
or
Twelve
Months
Ended
December 31,
2009
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
271,294
|
|
|
$
|
84,740
|
|
|
|
|
$
|
189,700
|
|
|
$
|
353,272
|
|
Interest expense
|
|
|
43,950
|
|
|
|
12,568
|
|
|
|
|
|
80,328
|
|
|
|
153,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
227,344
|
|
|
|
72,172
|
|
|
|
|
|
109,372
|
|
|
|
199,631
|
|
Provision for loan losses
|
|
|
5,555
|
|
|
|
590
|
|
|
|
|
|
171,583
|
|
|
|
352,398
|
|
Noninterest income
|
|
|
50,818
|
|
|
|
20,072
|
|
|
|
|
|
35,797
|
|
|
|
57,561
|
|
Noninterest expense
|
|
|
202,559
|
|
|
|
65,884
|
|
|
|
|
|
149,963
|
|
|
|
380,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income tax benefit
|
|
|
70,048
|
|
|
|
25,770
|
|
|
|
|
|
(176,377
|
)
|
|
|
(475,447
|
)
|
Income tax benefit
|
|
|
(474)
|
|
|
|
|
|
|
|
|
|
(4,742
|
)
|
|
|
(18,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations
|
|
|
70,522
|
|
|
|
25,770
|
|
|
|
|
|
(171,635
|
)
|
|
|
(456,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expense)/income from discontinued operations, net
|
|
|
|
|
|
|
(26)
|
|
|
|
|
|
6,731
|
|
|
|
35,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
70,522
|
|
|
|
25,744
|
|
|
|
|
|
(164,904
|
)
|
|
|
(421,261
|
)
|
Dividends and accretion on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
6,938
|
|
|
|
9,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to common shareholders
|
|
$
|
70,522
|
|
|
$
|
25,744
|
|
|
|
|
$
|
(171,842
|
)
|
|
$
|
(431,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
1.02
|
|
|
|
|
$
|
(359.07
|
)
|
|
$
|
(977.78
|
)
|
Diluted (1)
|
|
$
|
2.14
|
|
|
$
|
0.86
|
|
|
|
|
$
|
(359.07
|
)
|
|
$
|
(977.78
|
)
|
Earnings per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
14.08
|
|
|
$
|
75.72
|
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
14.08
|
|
|
$
|
75.72
|
|
Earnings/(loss) per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
1.02
|
|
|
|
|
$
|
(359.50
|
)
|
|
$
|
(923.46
|
)
|
Diluted (1)
|
|
$
|
2.14
|
|
|
$
|
0.85
|
|
|
|
|
$
|
(359.50
|
)
|
|
$
|
(923.46
|
)
|
Book value per common share
|
|
$
|
23.16
|
|
|
$
|
19.53
|
|
|
|
|
$
|
20.11
|
|
|
$
|
402.27
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,904
|
|
|
|
25,331
|
|
|
|
|
|
478
|
|
|
|
467
|
|
Diluted
|
|
|
32,913
|
|
|
|
30,126
|
|
|
|
|
|
478
|
|
|
|
467
|
|
(1)
|
Loss per diluted common shares for the periods ended August 31, 2010, and December 31, 2010, 2009, and 2008, is calculated using
basic weighted average shares outstanding.
|
(continued on next page)
36
ITEM 6.
|
SELECTED FINANCIAL DATACONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars and shares in thousands,
except per share amounts)
|
|
At
or
Twelve
Months
Ended
December
31,
2011
|
|
|
At or
Four
Months
Ended
December
31,
2010
|
|
|
|
|
At
or
Eight
Months
Ended
August
31,
2010
|
|
|
At
or
Twelve
Months
Ended
December
31,
2009
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
3,660,961
|
|
|
$
|
3,761,517
|
|
|
|
|
$
|
4,016,126
|
|
|
$
|
5,166,431
|
|
Total assets
|
|
$
|
5,850,022
|
|
|
$
|
6,085,548
|
|
|
|
|
$
|
7,215,476
|
|
|
$
|
7,542,255
|
|
Total deposits
|
|
$
|
4,617,040
|
|
|
$
|
4,906,788
|
|
|
|
|
$
|
5,190,223
|
|
|
$
|
5,373,819
|
|
Long term debt & other borrowings (2)
|
|
$
|
66,524
|
|
|
$
|
125,755
|
|
|
|
|
$
|
1,000,932
|
|
|
$
|
1,311,828
|
|
Total shareholders equity
|
|
$
|
761,970
|
|
|
$
|
642,683
|
|
|
|
|
$
|
581,913
|
|
|
$
|
364,603
|
|
Operating and Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
1.2%
|
|
|
|
1.2%
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Return on average shareholders equity
|
|
|
10.0%
|
|
|
|
12.8%
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Tier 1 leverage ratio
|
|
|
12.4%
|
|
|
|
10.3%
|
|
|
|
|
|
n/a
|
|
|
|
5.3%
|
|
Tier 1 risk-based capital ratio
|
|
|
19.6%
|
|
|
|
16.1%
|
|
|
|
|
|
n/a
|
|
|
|
7.8%
|
|
Total risk-based capital ratio
|
|
|
20.2%
|
|
|
|
16.4%
|
|
|
|
|
|
n/a
|
|
|
|
10.4%
|
|
Dividend payout ratio
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
Preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
527,167
|
|
|
$
|
176,742
|
|
Average total assets
|
|
$
|
5,896,365
|
|
|
$
|
6,282,969
|
|
|
|
|
$
|
7,377,931
|
|
|
$
|
8,593,630
|
|
Average total equity
|
|
$
|
707,276
|
|
|
$
|
603,958
|
|
|
|
|
$
|
288,642
|
|
|
$
|
599,998
|
|
Ending common shares outstanding
|
|
|
32,905
|
|
|
|
32,901
|
|
|
|
|
|
2,722
|
|
|
|
467
|
|
Cash dividends declared
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
11.00
|
|
(2)
|
Includes obligations under capital lease.
|
(continued on next page)
37
ITEM 6.
|
SELECTED FINANCIAL DATACONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
(dollars and shares in thousands,
except per share amounts)
|
|
At
or
Twelve
Months
Ended
December
31,
2008
|
|
|
At
or
Twelve
Months
Ended
December
31,
2007
|
|
|
|
|
|
|
|
|
|
Results of Operations:
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
411,148
|
|
|
$
|
468,795
|
|
Interest expense
|
|
|
171,107
|
|
|
|
212,117
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
240,041
|
|
|
|
256,678
|
|
Provision for loan losses
|
|
|
196,567
|
|
|
|
21,314
|
|
Noninterest income
|
|
|
56,557
|
|
|
|
86,146
|
|
Noninterest expense
|
|
|
254,135
|
|
|
|
205,335
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income tax (benefit)/expense
|
|
|
(154,104
|
)
|
|
|
116,175
|
|
Income tax (benefit)/expense
|
|
|
(65,996
|
)
|
|
|
38,987
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from continuing operations
|
|
|
(88,108
|
)
|
|
|
77,188
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net
|
|
|
65,358
|
|
|
|
23,700
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
|
(22,750
|
)
|
|
|
100,888
|
|
Dividends and accretion on preferred stock
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income applicable to common shareholders
|
|
$
|
(23,844
|
)
|
|
$
|
100,888
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(190.30
|
)
|
|
$
|
164.93
|
|
Diluted (1)
|
|
$
|
(190.30
|
)
|
|
$
|
163.88
|
|
Earnings per share from discontinued operations:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
141.16
|
|
|
$
|
50.64
|
|
Diluted
|
|
$
|
141.16
|
|
|
$
|
50.32
|
|
(Loss)/earnings per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(51.50
|
)
|
|
$
|
215.57
|
|
Diluted (1)
|
|
$
|
(51.50
|
)
|
|
$
|
214.20
|
|
Book value per common share
|
|
$
|
1,314.44
|
|
|
$
|
1,449.80
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
463
|
|
|
|
468
|
|
Diluted
|
|
|
463
|
|
|
|
471
|
|
(1)
|
Loss per diluted common shares for the periods ended August 31, 2010, and December 31, 2010, 2009, and 2008, is calculated using
basic weighted average shares outstanding.
|
(continued on next page)
38
ITEM 6.
|
SELECTED FINANCIAL DATA CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
(dollars and shares in thousands,
except per share amounts)
|
|
At
or
Twelve
Months
Ended
December
31,
2008
|
|
|
At
or
Twelve
Months
Ended
December
31,
2007
|
|
|
|
|
|
|
|
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
Loans held for investment
|
|
$
|
5,764,856
|
|
|
$
|
5,359,155
|
|
Total assets
|
|
$
|
9,573,020
|
|
|
$
|
7,374,115
|
|
Total deposits
|
|
$
|
5,266,725
|
|
|
$
|
4,737,238
|
|
Long term debt & other borrowings (2)
|
|
$
|
1,510,240
|
|
|
$
|
1,405,602
|
|
Total shareholders equity
|
|
$
|
788,437
|
|
|
$
|
668,356
|
|
Operating and Capital Ratios:
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
n/a
|
|
|
|
1.4%
|
|
Return on average shareholders equity
|
|
|
n/a
|
|
|
|
15.3%
|
|
Tier 1 leverage ratio
|
|
|
8.8%
|
|
|
|
8.0%
|
|
Tier 1 risk-based capital ratio
|
|
|
11.8%
|
|
|
|
9.7%
|
|
Total risk-based capital ratio
|
|
|
14.6%
|
|
|
|
12.3%
|
|
Dividend payout ratio
|
|
|
n/a
|
|
|
|
41.1%
|
|
|
|
|
Preferred stock
|
|
$
|
175,907
|
|
|
$
|
|
|
Average total assets
|
|
$
|
7,870,804
|
|
|
$
|
7,491,946
|
|
Average total equity
|
|
$
|
727,298
|
|
|
$
|
657,667
|
|
Ending common shares outstanding
|
|
|
466
|
|
|
|
461
|
|
Cash dividends declared
|
|
$
|
88.00
|
|
|
$
|
88.00
|
|
(2)
|
Includes obligations under capital lease.
|
39
ITEM 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The Company provides a wide range of banking, investment advisory and trust services to its clients primarily through its wholly-owned
subsidiary, SBB&T, and its subsidiaries. For over 50 years, the Bank has served clients through relationship banking. The Bank combines the breadth of financial products typically associated with a larger financial institution with the type of
individual client service that is found in a community bank. The Bank provides full service banking, including all aspects of checking and savings, private and commercial lending, investment advisory services, trust, and other banking products and
services. Products and services are offered through retail branch offices, commercial and wealth management centers and other distribution channels to consumers and businesses operating throughout the Central Coast of California, in eight contiguous
counties including Santa Barbara, Ventura, Monterey, Santa Cruz, Santa Clara, San Benito, San Luis Obispo and Los Angeles. The Company is headquartered in Santa Barbara, California.
On the Transaction Date pursuant to the terms of an Investment Agreement dated April 29, 2010 (the Investment
Agreement), between the Company, the Bank and SB Acquisition, the Company issued shares to SB Acquisition (Investment Transaction). The aggregate consideration paid to the Company by SB Acquisition for these securities was $500
million in cash for 98.1% of the Companys voting securities. As a result of the Investment Transaction, pursuant to which SB Acquisition acquired and controlled 98.1% of the voting securities of the Company, the Company followed the
acquisition or purchase method of accounting as required by the Business Combinations Topic of the Accounting Standards Codification (ASC) Topic 805,
Business Combinations
(ASC 805).
As a result of the Investment Transaction and the application of purchase accounting, the Companys balance sheets and results of
operations from periods prior to the Transaction Date are labeled as Predecessor Company and are not comparable to balances and results of operations from periods subsequent to the Transaction Date, which are labeled as Successor
Company. The lack of comparability arises from the assets and liabilities having a new accounting basis as a result of recording them at their fair values as of the Transaction Date rather than at their historical cost basis recorded in the
predecessor period. To call attention to this lack of comparability and as required by the accounting and reporting guidance, the Company has placed a heavy black line between the Successor Company and Predecessor Company columns in the Consolidated
Financial Statements and in the tables in the notes to the Consolidated Financial Statements and in this MD&A discussion.
The following discussion and analysis should be read in conjunction with the Companys Consolidated Financial Statements and notes,
herein referred to as the Consolidated Financial Statements included and incorporated by reference herein. Bancorp or the Banks holding company will be used in this discussion when referring only to the
holding company as distinct from the consolidated company which is referred to as PCBC or the Company and the Bank or SBB&T will be used when referring to Santa Barbara Bank & Trust, N.A.
F
INANCIAL
H
IGHLIGHTS
OF
2011
Successor Company
Net income for the twelve months ended December 31,
2011, was $70.5 million, or $2.14 per diluted share.
The significant factors impacting the Companys net income for the
twelve months ended December 31, 2011, were:
|
¡
|
|
Financial results continued to be positively effected by purchase accounting adjustments related to the Recapitalization Transaction;
|
|
¡
|
|
Improved net interest margin to 4.17% for the twelve months ended December 31, 2011, compared to 3.75% for the four months ended
December 31, 2010;
|
40
|
¡
|
|
Provision for loan losses remained low as a result of the purchase accounting adjustments made in conjunction with the Recapitalization Transaction;
|
|
¡
|
|
Eliminated $1.2 billion in wholesale funding since the Investment Transaction which reduced interest expense; and
|
|
¡
|
|
Incurred additional expense to support improvement in technology and operational infrastructure enhancements.
|
Recent Developments
On March 9, 2012, the Company entered into Merger Agreement with UBC. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will
merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of UBC. Pursuant to the Merger Agreement, upon consummation of the Merger, each outstanding share of common stock of the Company
will be converted into the right to receive $46.00 per share in cash. Consummation of the Merger is subject to certain customary conditions, including, among others, the absence of any injunction or other legal prohibition on the completion of the
Merger, regulatory approvals of the Reserve Board, the Japan Financial Services Agency and the OCC and expiration of applicable waiting periods. On March 9, 2012, following the execution of the Merger Agreement, SB Acquisition, the holder of
25,000,000 shares of the Companys common stock, constituting approximately 76% of the outstanding shares of the Companys common stock, delivered to the Company its action by written consent adopting and approving the Merger Agreement and
the Merger. No further approval of the stockholders of the Company is required to approve the Merger Agreement and the Merger. For more information regarding the Merger Agreement and the Merger, see Item 1. BusinessRecent
Developments.
F
INANCIAL
H
IGHLIGHTS
OF
2010
AND
2009
Successor Company
Net
income applicable to common shareholders for the four months ended December 31, 2010, was $25.7 million, or $0.85 per diluted share. Income from continuing operations for the four months ended December 31, 2010 was $25.8 million, or $0.86
per diluted share.
The significant factors impacting the Companys net income applicable to common shareholders for the
four months ended December 31, 2010 were:
|
¡
|
|
Financial results were significantly improved after the application of purchase accounting due to the Recapitalization Transactions as described in
more detail below;
|
|
¡
|
|
Provision for loan losses related only to loans originated after the Transaction Date as a result of the purchase accounting adjustments explained
in detail in the section below;
|
|
¡
|
|
Interest expense on CDs was reduced relative to the amount that would otherwise have been recognized by the application of purchase accounting. The
fair value of these deposits was higher than their recorded amount resulting in a premium being recognized for these deposits. This premium is amortized against interest expense, reducing it to an amount lower than the nominal interest rate for
these deposits; and
|
|
¡
|
|
Overall interest expense decreased substantially as the result of the prepayment of $802.4 million of Federal Home Loan Bank (FHLB)
advances in the first week of September 2010.
|
41
The Impacts of the Investment Transaction on the Companys Financial Condition and Results of
Operations
Impacts on Capital and Liquidity
The $500 million paid by SB Acquisition in the Investment Transaction provided new capital to the Company. Almost all of this capital was contributed to the Bank to meet the enhanced regulatory minimum
capital ratios required by the Operating Agreement. Additionally, the Company was able to repay a significant amount of its debt immediately following the Investment Transaction.
Impacts on Financial Condition and Results of Operations from Purchase Accounting
Because of the high proportion of voting securities in the Company acquired by SB Acquisition, the Investment Transaction is considered an acquisition for accounting purposes and must be accounted for in
the financial statements of the acquirer by using acquisition or purchase accounting. With the purchase accounting pushed down from SB Acquisition to the Company, the Companys assets and liabilities are reported in the
Companys Consolidated Financial Statements at their fair value at the transaction date. Based on the purchase price of $500 million and the $478.3 million of fair value of net assets acquired, the transaction resulted in initial goodwill of
$21.7 million. The methodology used in determining the fair values of each of the major categories of assets and liabilities and the amounts of the adjustments as of the Transaction Date are described in detail in Note 2, Business Combination
Investment Transaction of the Consolidated Financial Statements.
The most significant fair value adjustments
resulting from the application of the purchase accounting were made to loans. ASC 805 requires that all loans held by the Company on the Transaction Date be recorded at their fair value. Rather than provide an ALLL to recognize the uncertainty of
receiving the full amount of the contractual payments from borrowers, as is normally done for loans held for investment, this uncertainty is instead considered in estimating the fair value of the loans. Therefore, stating loans at their fair value
results in no ALLL being provided for acquired loans as of the date they are acquired.
At the Transaction Date, loans held by
the Bank had shown evidence of credit deterioration since origination, and it was probable that not all contractually required principal and interest payments would be collected. Such impaired loans identified at the time of the acquisition were
accounted for using the measurement provision for PCI loans, per ASC 310-30,
Receivables, Loans and Debt Securities Acquired with Deteriorated Credit Quality
(ASC 310-30) herein referred to as PCI Term Pools. The
special accounting for PCI loans not only requires that they are recorded at fair value at the date of acquisition and that any related ALLL may not be carried forward past the Transaction Date, but it also governs how interest income will be
recognized on these loans and how any further deterioration in credit quality after the Transaction Date will be recognized and reported.
Management has elected to have PCI loans aggregated into several pools based on common risk characteristics as allowed under accounting guidance of ASC 310-30. Each pool is accounted for as a single asset
with a single composite discount rate and an aggregate expectation of cash flows. Both the accretion of interest income and the comparison of actual cash flows to expected cash flows are completed at the pool level rather than by individual loans.
Once loans are placed into pools, the integrity of the pool must be maintained. Therefore, all activity such as payments, charge-offs, recoveries, and prepayments received must be applied to the loan pool in which the loan was placed at the
Transaction Date. Payments which are in excess of expectations in one pool may not be applied to other pools to avoid the recognition of impairment for deficient payments within another pool. Loans may not be removed from a pool, added to a pool, or
moved from one pool to another. Only the disposal of a loan, which may include sales of loans to third parties, receipt of payments in full or in part by the borrower, foreclosure of the collateral, or charge-off will result in the removal of a loan
from a loan pool. When a loan is removed from a pool, it is removed at its carrying amount.
42
Quarterly, the Company compares actual cash flows to expected cash flows for PCI Term Pools
to determine whether such cash flows are substantially the same as was expected at the time the loans expected cash flow were last estimated. A significant decrease in the actual cash flows as compared to expected cash flows may require
Management to revise its expectations for future cash flows. If, based on Managements evaluation, estimates for future cash flows are less than previously expected, the Company may establish an ALLL through a charge to the provision for loan
losses. A significant increase in actual cash flows as compared to expected cash flows will first result in the reduction of any allowance that had previously been established for a pool, and then an increase to interest income through the
adjustment of the accretable yield.
Some loans that otherwise meet the definition of credit impaired, such as revolving lines
of credit, are specifically excluded from the scope of the accounting guidance in ASC 310-30 and are accounted for using ASC 310-20,
Receivables, Nonrefundable Fees and Other Costs
(ASC 310-20) herein will refer to these loans as
PCI Revolving Pools. PCI Revolving Pools were also required to be fair valued with the application of purchase accounting and were acquired at a discount. Management also considers these revolving lines of credit to be credit impaired
and has pooled these revolving lines of credit purchased through the Investment Transaction.
Because PCI loans are written
down at acquisition to an amount estimated to be collectible and aggregated into pools, the classification and disclosures are at a pool level regardless of the underlying individual loan performance. Loans within PCI Term Pools are not reported as
delinquent, nonaccrual, impaired or troubled debt restructured (TDRs), since the pools are evaluated as single units of account, even though some of the underlying loans may be contractually past due, placed on nonaccrual, impaired or
TDRs. Loans within PCI Revolving Pools are required by accounting guidance to be reported as delinquent, nonaccrual, impaired or TDRs despite being evaluated as a pool at the Transaction Date.
While the most significant adjustments from purchase accounting related to loans, other balances and results of operations were impacted
as well. The effect of the purchase accounting adjustments on these other balances and results of operations are described within each section of this discussion and analysis.
Predecessor Company
Net loss applicable to common shareholders for the
eight months ended August 31, 2010, and the twelve months ended December 31, 2009, was $171.8 million or $359.50 per diluted share and $431.3 million or $923.46 per diluted share, respectively.
For the eight months ended August 31, 2010, and for the twelve months ending December 31, 2009, the differences between the net
loss applicable to common shareholders and the net loss from continuing operations is attributable to the operating results from the discontinued operations, the accrual of dividends on the Companys Series B Fixed Rate Cumulative Perpetual
Preferred Stock (the Series B Preferred Stock) and the accretion of the warrants issued with the Series B Preferred Stock.
The significant factors impacting the Companys net loss applicable to common shareholders for the eight months ended August 31, 2010, were:
|
¡
|
|
Provision for loan losses for continuing operations was $171.6 million for the period compared to $352.4 million for 2009, as the Company began to
experience a lower rate of growth in credit problems;
|
|
¡
|
|
The continuing decline in outstanding loan balances due to payments, prepayments, charge-offs, and the Companys decision to reduce loan
originations reduced interest income;
|
|
¡
|
|
The Companys decision to maintain over $1.0 billion in cash to mitigate uncertainty to depositors generated a significant amount of negative
interest spread related to the difference between interest earned on cash balances and interest paid on borrowings;
|
43
|
¡
|
|
The Company sold securities realizing a gain of $5.7 million;
|
|
¡
|
|
Other expense was impacted by the transaction costs to execute the Investment Transaction, including investment banker, attorney, and consulting
fees; and
|
|
¡
|
|
The Company sold its RAL and RT Programs in January 2010 for a net gain of $8.2 million.
|
The impact to the Company from these items will be discussed in more detail throughout the analysis sections of the MD&A section of
this Form 10-K.
R
ESULTS
OF
O
PERATIONS
I
NTEREST
I
NCOME
The Companys primary source of revenue is interest income. The discussion below concerning interest income from loans for the various periods presented relate to the Commercial & Community
Banking segment, while the discussion below concerning interest income from investment securities, trading assets and other interest income all pertain to the Companys treasury department activities, and are included in the All Other segment.
The Wealth Management segment does not earn interest income. The accounting for interest income for loans and securities is explained in detail in Note 1, Summary of Significant Accounting Policies of the Consolidated Financial
Statements.
44
The following table presents a summary of interest income for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Months
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
25,251
|
|
|
$
|
7,655
|
|
|
|
|
$
|
24,034
|
|
|
$
|
49,778
|
|
Real estatecommercial
|
|
|
150,350
|
|
|
|
46,812
|
|
|
|
|
|
90,159
|
|
|
|
158,558
|
|
Real estateresidential 1 to 4 family
|
|
|
59,446
|
|
|
|
20,860
|
|
|
|
|
|
33,438
|
|
|
|
62,798
|
|
Consumer loans
|
|
|
6,006
|
|
|
|
1,551
|
|
|
|
|
|
18,950
|
|
|
|
31,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
241,053
|
|
|
|
76,878
|
|
|
|
|
|
166,581
|
|
|
|
303,057
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
3
|
|
|
|
|
|
219
|
|
|
|
530
|
|
U.S. Agency securities
|
|
|
1,363
|
|
|
|
618
|
|
|
|
|
|
5,626
|
|
|
|
16,362
|
|
Asset-backed securities
|
|
|
73
|
|
|
|
81
|
|
|
|
|
|
92
|
|
|
|
139
|
|
Collateralized mortgage obligations and mortgage-backed securities
|
|
|
17,922
|
|
|
|
3,274
|
|
|
|
|
|
6,388
|
|
|
|
10,937
|
|
State and municipal securities
|
|
|
8,628
|
|
|
|
2,896
|
|
|
|
|
|
7,727
|
|
|
|
14,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,986
|
|
|
|
6,872
|
|
|
|
|
|
20,052
|
|
|
|
42,759
|
|
Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
5,131
|
|
Other
|
|
|
2,255
|
|
|
|
990
|
|
|
|
|
|
2,924
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$
|
271,294
|
|
|
$
|
84,740
|
|
|
|
|
$
|
189,700
|
|
|
$
|
353,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
Interest income was $271.3 million and $84.7 million for the twelve months ended December 31, 2011, and four months ended December 31, 2010, respectively. Interest income from loans was
positively impacted by the application of purchase accounting adjustments, while interest income from securities was negatively impacted.
At the Transaction Date, loans were placed into pools with similar risk characteristics and each pool was fair valued as described in Financial Highlights of 2010 and 2009 at the beginning of
the MD&A and in Note 1, Summary of Significant Accounting Policies. Fair value was determined by estimating the principal and interest cash flows expected to be collected after discounting at the prevailing market rate of interest.
Interest income is recognized for PCI Term Pools based on the discount rate for each pool over the remaining life of the PCI Loan Pools using the effective interest method. The cash flows for the PCI Term Loans have been performing better than
expected and, therefore the majority of the discount rates for PCI Term Pools increased resulting in improved interest income during 2011. For PCI Revolving Pools and loans originated or purchased since the Transaction Date, interest income is being
recognized based on the terms of the loans. PCI Revolving Pools were valued at a discount on the Transaction Date. Accounting guidance does not allow the accretion of a discount if such accretion would bring the net carrying amount above the net
realizable value. When it is significantly probable the net realizable value of a PCI Revolving Pool is greater than the carrying amount of the pool, the discount will begin to accrete into interest income over the remaining life of the pool using
the effective interest method.
In contrast, the fair value at the Transaction Date for the investment securities portfolio
was higher than the carrying value and a premium was recognized because market interest rates had declined since most of the securities had been purchased. The premium is amortized against interest income over the terms of the various securities,
reducing interest income. During 2011, $549.0 million of
45
investment securities were purchased which increased the average balance to $1.37 billion at a rate of 2.04% for the twelve months ended December 31, 2011, from $1.04 billion at a rate of
1.98% for the four months ended December 31, 2010.
Predecessor Company
Interest income for the eight months ended August 31, 2010, was $189.7 million and $353.3 million for the twelve months ended
December 31, 2009. Interest income from both loans and securities gradually decreased during the periods as overall interest rates continued to decline and average balances declined. Loan balances were reduced by loan sales and charge-offs. The
Company also restricted lending activity to maintain the Companys capital ratios which resulted in a decline in loan balances as maturing loans were not matched by new originations.
Interest income from trading and available for sale (AFS) securities decreased as a result of selling a majority of the
trading securities during the third quarter of 2009, and from sales, calls and maturities of securities from the AFS portfolio. During the eight months ended August 31, 2010, and twelve months ended December 31, 2009, $347.0 million and
$701.6 million, respectively of investment securities were called or sold. The investment securities called were mostly U.S. Agency securities while investment securities sold were mostly mortgage backed securities (MBS). At the same
time, the interest rate for some of the adjustable rate investment securities was reduced due to the decrease in long term interest rates. The Companys decision to maintain a substantial amount of liquidity to mitigate uncertainty to
depositors rather than to redeploy these funds into higher yielding assets also contributed to the decline in interest income.
I
NTEREST
E
XPENSE
The Company incurs interest expense from interest payments made to depositors and for other borrowings. Interest expense from deposits pertain to the Commercial & Community Banking operating
segment, while interest expense from borrowings or debt almost all pertain to the Companys treasury department related activity and therefore are included in the All Other segment. Wealth Management incurs interest expense only for the capital
lease on the building occupied by the Companys trust department. For more information regarding leases, refer to the section titled Leases in Note 1, Summary of Significant Accounting Policies of the Consolidated
Financial Statements for an explanation of the accounting for a capital lease.
The following table presents a summary of interest expense for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Months
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
1,636
|
|
|
$
|
640
|
|
|
|
|
$
|
1,702
|
|
|
$
|
6,015
|
|
Money market deposit accounts
|
|
|
1,665
|
|
|
|
569
|
|
|
|
|
|
1,499
|
|
|
|
4,932
|
|
Savings deposits
|
|
|
1,758
|
|
|
|
612
|
|
|
|
|
|
1,406
|
|
|
|
2,842
|
|
Time certificates of deposit
|
|
|
20,251
|
|
|
|
4,933
|
|
|
|
|
|
41,903
|
|
|
|
69,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,310
|
|
|
|
6,754
|
|
|
|
|
|
46,510
|
|
|
|
83,629
|
|
Securities sold under agreements to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
repurchase and Federal funds purchased
|
|
|
9,585
|
|
|
|
1,771
|
|
|
|
|
|
5,392
|
|
|
|
10,127
|
|
Other borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances and other long term debt
|
|
|
8,249
|
|
|
|
3,680
|
|
|
|
|
|
27,709
|
|
|
|
58,722
|
|
Other borrowings
|
|
|
806
|
|
|
|
363
|
|
|
|
|
|
717
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,055
|
|
|
|
4,043
|
|
|
|
|
|
28,426
|
|
|
|
59,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
43,950
|
|
|
$
|
12,568
|
|
|
|
|
$
|
80,328
|
|
|
$
|
153,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Successor Company
Each of the categories of interest expense was significantly impacted by the application of purchase accounting adjustments. At the Transaction Date, market interest rates had declined from what they were
when a large proportion of the Companys fixed rate time CDs and repurchase agreements were issued. The decline in interest rates caused the carrying value of these liabilities to decrease and premiums were recognized for these liabilities to
record them at their fair value. These premiums are being amortized over the terms of the related liabilities, reducing interest expense since the Transaction Date. During 2011, the average balance of interest-bearing deposits declined $413.0
million due to maturing client and broker CDs which originally had high interest rates but, due to the amortization of the premium from the purchase accounting adjustments, interest expense was reduced to market interest rates. As the amortization
of the premium decreases, new CDs are originated at interest rates above the purchased accounting adjusted interest rates, increasing the average interest rate for deposits to 71 basis points for the twelve month period ended December 31, 2011,
compared to 51 basis points for the four month period ended December 31, 2010.
For the twelve months ended
December 31, 2011, the average balance of other borrowings decreased to $108.8 million from $145.6 million for the four months ended December 31, 2010. This decrease is attributable to the maturity and redemption of $53.0 million of
subordinated debt during 2011. At December 31, 2011, there are no borrowings outstanding with the FHLB since all of borrowings from the FHLB were either prepaid in September 2010, or matured in the fourth quarter of 2010. The Investment
Transaction provided excess liquidity which enabled the Company to reduce outstanding debt in 2010, and reduce future borrowing expense. The Company also repurchased $68.0 million of its subordinated debt at the Transaction Date contributing further
to the year over year decline in interest expense. The remaining subordinated debt and the Companys trust preferred securities had a fair value less than their face values resulting in accretable discounts, which has increased interest expense
since the Transaction Date.
The securities sold under agreements to repurchase had a fair value in excess of their principal
amount resulting in a premium; the amortization of which reduced interest expense to less than the amount paid to creditors. Despite the market trend of declining interest rates, the average rates on repurchase agreements increased due to the change
in the interest rates for a $100.0 million repurchase agreement from a floating rate of 3 month London Inter-Bank Offered Rate (LIBOR) less 25 basis points to a fixed rate of 4.12%. This interest rate reset occurred in February 2011.
Predecessor Company
Interest expense for the eight months ended August 31, 2010, was substantially lower than the twelve months ended December 31, 2009, as more of the Companys fixed rate liabilities, CDs and
FHLB advances, matured. They were replaced by liabilities that were priced at lower current market rates.
N
ET
I
NTEREST
M
ARGIN
An important measure of a financial institutions earning capacity is
its net interest margin. This measure is computed by dividing the difference between interest income and interest expense, or net interest income, by average earning assets. As a financial intermediary, a bank earns money by borrowing from
depositors and debt-holders and lending some of those funds to loan clients and by purchasing investments. By combining the average yield earned on interest earning assets with the average interest cost to hold those assets, the net interest margin
measures both the institutions ability to earn its desired yield on its assets and its efficiency in obtaining the funding that supports those assets. The net interest margin differs from, and is lower than the net interest spread, which is
the difference between the average yield earned on interest bearing assets and the average rate paid on interest bearing liabilities, because a portion of the Companys interest earning assets are funded by noninterest bearing liabilities.
47
The net interest margin is improved by higher yields earned on interest earning assets,
lower rates paid on interest bearing liabilities, funding a larger proportion of earning assets with noninterest bearing liabilities, and by lowering the amount of nonearning assets that must be funded. Yields earned on assets and paid on
liabilities tend to move in tandem with each other as the market interest rate environment changes, but it is generally harder to improve the net interest margin in a low interest rate environment because there is a point beyond which deposit rates
cannot be reduced, and still retain clients, while yields on assets may continue to decline. Conversely, as market interest rates rise, deposit rates will generally not rise as fast or as much and the net interest margin may thereby be improved.
The following tables set forth average balances, interest income and interest expense for the twelve months ended December
31, 2011, the four months ended December 31, 2010, the eight months ended August 31, 2010, and for the twelve months ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
For the Twelve Months Ended
December 31, 2011
|
|
|
|
Average
Balance
|
|
|
Interest/
Expense (3)
|
|
|
Yield/
Rate (3)
|
|
|
|
(dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits in other financial institutions
|
|
$
|
322,830
|
|
|
$
|
771
|
|
|
|
0.24
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,163,380
|
|
|
|
19,358
|
|
|
|
1.66
|
%
|
Non taxable
|
|
|
203,877
|
|
|
|
8,628
|
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
1,367,257
|
|
|
|
27,986
|
|
|
|
2.04
|
%
|
Loans: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
239,803
|
|
|
|
25,251
|
|
|
|
10.53
|
%
|
Real estatecommercial (2)
|
|
|
2,199,472
|
|
|
|
150,350
|
|
|
|
6.84
|
%
|
Real estateresidential 1 to 4 family
|
|
|
1,187,783
|
|
|
|
59,446
|
|
|
|
5.00
|
%
|
Consumer loans
|
|
|
58,104
|
|
|
|
6,006
|
|
|
|
10.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross
|
|
|
3,685,162
|
|
|
|
241,053
|
|
|
|
6.54
|
%
|
Other interest earning assets
|
|
|
81,716
|
|
|
|
1,484
|
|
|
|
1.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
5,456,965
|
|
|
|
271,294
|
|
|
|
4.97
|
%
|
Noninterest earning assets
|
|
|
439,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,896,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest bearing transaction accounts
|
|
$
|
1,759,912
|
|
|
|
5,059
|
|
|
|
0.29
|
%
|
Time certificates of deposit
|
|
|
1,812,543
|
|
|
|
20,251
|
|
|
|
1.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
3,572,455
|
|
|
|
25,310
|
|
|
|
0.71
|
%
|
Borrowed funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
319,088
|
|
|
|
9,585
|
|
|
|
3.00
|
%
|
Other borrowings
|
|
|
108,838
|
|
|
|
9,055
|
|
|
|
8.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
427,926
|
|
|
|
18,640
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
4,000,381
|
|
|
|
43,950
|
|
|
|
1.10
|
%
|
Noninterest bearing demand deposits
|
|
|
1,101,214
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
87,494
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
707,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
5,896,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/margin
|
|
|
|
|
|
$
|
227,344
|
|
|
|
4.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans are included in loan balances. Interest income includes related net deferred fee income.
|
(2)
|
Commercial real estate loans include multifamily residential real estate loans.
|
(3)
|
Includes impact of accretion or amortization of discounts and premiums.
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
For the Four Months
Ended
December 31, 2010
|
|
|
|
|
For the Eight Months
Ended
August 31, 2010
|
|
|
|
Average
Balance
|
|
|
Interest/
Expense (3)
|
|
|
Yield/
Rate (3)
|
|
|
|
|
Average
Balance
|
|
|
Interest/
Expense (3)
|
|
|
Yield/
Rate (3)
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits in other financial institutions
|
|
$
|
740,199
|
|
|
$
|
599
|
|
|
|
0.24
|
%
|
|
|
|
$
|
1,030,268
|
|
|
$
|
2,241
|
|
|
|
0.33
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
4,998
|
|
|
|
143
|
|
|
|
4.30
|
%
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
825,991
|
|
|
|
3,976
|
|
|
|
1.44
|
%
|
|
|
|
|
737,155
|
|
|
|
12,325
|
|
|
|
2.51
|
%
|
Non taxable
|
|
|
214,987
|
|
|
|
2,896
|
|
|
|
4.04
|
%
|
|
|
|
|
238,375
|
|
|
|
7,727
|
|
|
|
4.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
1,040,978
|
|
|
|
6,872
|
|
|
|
1.98
|
%
|
|
|
|
|
980,528
|
|
|
|
20,195
|
|
|
|
3.09
|
%
|
Loans: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
502,178
|
|
|
|
7,655
|
|
|
|
4.56
|
%
|
|
|
|
|
820,380
|
|
|
|
24,034
|
|
|
|
4.40
|
%
|
Real estatecommercial (2)
|
|
|
2,114,524
|
|
|
|
46,812
|
|
|
|
6.64
|
%
|
|
|
|
|
2,511,673
|
|
|
|
90,159
|
|
|
|
5.38
|
%
|
Real estateresidential 1 to 4 family
|
|
|
1,202,298
|
|
|
|
20,860
|
|
|
|
5.21
|
%
|
|
|
|
|
935,245
|
|
|
|
33,438
|
|
|
|
5.36
|
%
|
Consumer loans
|
|
|
80,345
|
|
|
|
1,551
|
|
|
|
5.78
|
%
|
|
|
|
|
574,519
|
|
|
|
18,950
|
|
|
|
4.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross
|
|
|
3,899,345
|
|
|
|
76,878
|
|
|
|
5.91
|
%
|
|
|
|
|
4,841,817
|
|
|
|
166,581
|
|
|
|
5.16
|
%
|
Other interest earning assets
|
|
|
81,636
|
|
|
|
391
|
|
|
|
1.43
|
%
|
|
|
|
|
83,364
|
|
|
|
683
|
|
|
|
1.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
5,762,158
|
|
|
|
84,740
|
|
|
|
4.41
|
%
|
|
|
|
|
6,935,977
|
|
|
|
189,700
|
|
|
|
4.10
|
%
|
Noninterest earning assets
|
|
|
520,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,057
|
|
|
|
|
|
|
|
|
|
Total assets from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,282,969
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,377,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest bearing transaction accounts
|
|
$
|
1,605,435
|
|
|
|
1,821
|
|
|
|
0.34
|
%
|
|
|
|
$
|
1,591,632
|
|
|
|
4,607
|
|
|
|
0.43
|
%
|
Time certificates of deposit
|
|
|
2,379,972
|
|
|
|
4,933
|
|
|
|
0.62
|
%
|
|
|
|
|
2,706,043
|
|
|
|
41,903
|
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
3,985,407
|
|
|
|
6,754
|
|
|
|
0.51
|
%
|
|
|
|
|
4,297,675
|
|
|
|
46,510
|
|
|
|
1.63
|
%
|
Borrowed funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
325,442
|
|
|
|
1,771
|
|
|
|
1.63
|
%
|
|
|
|
|
314,009
|
|
|
|
5,392
|
|
|
|
2.58
|
%
|
Other borrowings
|
|
|
145,611
|
|
|
|
4,043
|
|
|
|
8.31
|
%
|
|
|
|
|
1,127,676
|
|
|
|
28,426
|
|
|
|
3.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
471,053
|
|
|
|
5,814
|
|
|
|
3.69
|
%
|
|
|
|
|
1,441,685
|
|
|
|
33,818
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
4,456,460
|
|
|
|
12,568
|
|
|
|
0.85
|
%
|
|
|
|
|
5,739,360
|
|
|
|
80,328
|
|
|
|
2.11
|
%
|
Noninterest bearing demand deposits
|
|
|
1,112,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020,775
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
109,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,257
|
|
|
|
|
|
|
|
|
|
Total liabilities from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,897
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
603,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
6,282,969
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,377,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/margin
|
|
|
|
|
|
$
|
72,172
|
|
|
|
3.75
|
%
|
|
|
|
|
|
|
|
$
|
109,372
|
|
|
|
2.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans are included in loan balances. Interest income includes related net deferred fee income.
|
(2)
|
Commercial real estate loans include multifamily residential real estate loans.
|
(3)
|
Includes impact of accretion or amortization of discounts and premiums.
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
|
For the Twelve Months Ended
December 31, 2009
|
|
|
|
Average
Balance
|
|
|
Interest/
Expense (3)
|
|
|
Yield/
Rate (3)
|
|
|
|
(dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits in other financial institutions
|
|
$
|
603,223
|
|
|
$
|
1,635
|
|
|
|
0.27
|
%
|
Federal funds sold
|
|
|
329
|
|
|
|
1
|
|
|
|
0.30
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
106,623
|
|
|
|
5,131
|
|
|
|
4.81
|
%
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
854,005
|
|
|
|
27,968
|
|
|
|
3.27
|
%
|
Non taxable
|
|
|
306,547
|
|
|
|
14,791
|
|
|
|
4.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
1,267,175
|
|
|
|
47,890
|
|
|
|
3.78
|
%
|
Loans: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,088,847
|
|
|
|
49,778
|
|
|
|
4.57
|
%
|
Real estatecommercial (2)
|
|
|
2,785,416
|
|
|
|
158,558
|
|
|
|
5.69
|
%
|
Real estateresidential 1 to 4 family
|
|
|
1,086,122
|
|
|
|
62,798
|
|
|
|
5.78
|
%
|
Consumer loans
|
|
|
632,350
|
|
|
|
31,923
|
|
|
|
5.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, gross
|
|
|
5,592,735
|
|
|
|
303,057
|
|
|
|
5.42
|
%
|
Other interest earning assets
|
|
|
80,382
|
|
|
|
689
|
|
|
|
0.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
7,543,844
|
|
|
|
353,272
|
|
|
|
4.68
|
%
|
Noninterest earning assets
|
|
|
381,358
|
|
|
|
|
|
|
|
|
|
Total assets from discontinued operations
|
|
|
668,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,593,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest bearing transaction accounts
|
|
$
|
1,849,045
|
|
|
|
13,788
|
|
|
|
0.75
|
%
|
Time certificates of deposit
|
|
|
2,580,600
|
|
|
|
69,841
|
|
|
|
2.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
4,429,645
|
|
|
|
83,629
|
|
|
|
1.89
|
%
|
Borrowed funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase and Federal funds purchased
|
|
|
336,434
|
|
|
|
10,127
|
|
|
|
3.01
|
%
|
Other borrowings
|
|
|
1,441,866
|
|
|
|
59,885
|
|
|
|
4.15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowed funds
|
|
|
1,778,300
|
|
|
|
70,012
|
|
|
|
3.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
6,207,945
|
|
|
|
153,641
|
|
|
|
2.47
|
%
|
Noninterest bearing demand deposits
|
|
|
1,003,647
|
|
|
|
|
|
|
|
|
|
Other noninterest bearing liabilities
|
|
|
113,612
|
|
|
|
|
|
|
|
|
|
Total liabilities from discontinued operations
|
|
|
668,428
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
599,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
8,593,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/margin
|
|
|
|
|
|
$
|
199,631
|
|
|
|
2.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans are included in loan balances. Interest income includes related net deferred fee income.
|
(2)
|
Commercial real estate loans include multifamily residential real estate loans.
|
(3)
|
Includes impact of accretion or amortization of discounts and premiums.
|
50
The impacts from changes in interest rates and from the purchase accounting adjustments on
interest income and interest expense during these periods are discussed above under Interest Income, and Interest Expense of this discussion and analysis. The net interest margin is usually adversely impacted by nonperforming
loans, with the exception of PCI Term Pools, because the Company generally ceases the accrual of interest on nonperforming loans, while those balances continue to be included in the average balances for loans. Interest income recognized on PCI Term
Pools is based on an expected cash flows model; therefore regardless of the performance classification of individual loans within these pools, the Company recognizes accretion based on expectations of future cash flows, and whether or not those cash
flows can be reasonably estimated.
Successor Company
The net interest margin was impacted during 2011, primarily by higher yields on interest earning assets, driven in part by increased yields on PCI Term Pools and from additional purchases of investment
securities, as the Company made efforts to further deploy additional liquidity. Interest bearing liabilities were positively impacted by higher rate deposits maturing.
Rate and volume variance analyses allocate the change in interest income and expense between the portions which are due to changes in the yield earned or rate paid for specific categories of assets and
liabilities and the portion which is due to changes in the average balance between the two periods. The Company is unable to provide a rate and volume variance for 2011, and 2010, because these periods are not comparable as a result of purchase
accounting requirements as explained at the beginning of this discussion.
P
ROVISION
FOR
L
OAN
L
OSSES
Quarterly, the Company determines the amount of ALLL that is adequate to provide for losses inherent
in the Companys loan portfolio. The provision for loan losses is determined by the net change in the ALLL from one period to another for loans originated or purchased since the Transaction Date. The Company may establish an additional ALLL for
PCI Term Pools through a charge to the provision for loan losses when impairment is determined due to lower than expected cash flows. If, through the Companys quarterly evaluation of expected cash flows, it determines there has been a
significant and probable increase in expected cash flows, the Company may reverse any previously established allowance for PCI Term Pools through an adjustment to the provision for loan losses, to the extent that any previous allowance has been
established.
For PCI Revolving Pools, quarterly the Company evaluates credit performance to determine if there has been a
further deterioration in the credit quality of the underlying loans beyond the purchase discount. To the extent that the credit performance is worse than previously expected, the Company may establish an allowance for PCI Revolving Pools through a
provision for loan losses. If credit performance is better than previously expected, the Company may begin to accrete the purchase discount for PCI Revolving Pools into interest income. Since the Transaction Date, the Company has not established an
allowance for PCI Revolving Pools, nor did the Company accrete any portion of the purchase discount.
For a detailed
discussion of the Companys ALLL, refer to the Allowance for Loan and Lease Loss section of this document, the Critical Accounting Policies section starting on page 83 of the MD&A, Note 1, Summary of Significant Accounting
Policies, and Note 7, Allowance for Loan and Lease Losses within the Consolidated Financial Statements of this Form 10-K. All of the provision for loan losses is reported in the Commercial & Community Banking operating
segment.
51
A summary of the provision for loan losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Provision for loan losses
|
|
$
|
5,555
|
|
|
$
|
590
|
|
|
|
|
$
|
171,583
|
|
|
$
|
352,398
|
|
Successor Company
The provision for loan losses was $5.6 million and $590,000 for the twelve months ended December 31, 2011, and for the four months ended December 31, 2010, respectively. The increase in the
provision for loan losses was mostly attributable to the origination of new loans and loan purchases. During 2011, the Company originated new loans with a carrying value of $273.0 million at December 31, 2011, and purchased loans with a
carrying value of $315.0 million. In addition, as part of the Companys quarterly assessment of expected cash flows for PCI Term Pools, an allowance of $867,000 was established for one of the PCI Term Pools which had re-forecasted cash flows
below previous expectations.
The provision for loan losses was significantly impacted by purchase accounting adjustments. As
a result of the Investment Transaction and the application of the accounting guidance for business combinations, the ALLL for the loans purchased was required to be eliminated and the purchased loans were recorded at their fair value at the
Transaction Date as described in Note 1, Summary of Significant Accounting Policies of the Consolidated Financial Statements. Consequently, no ALLL is provided for PCI Loan Pools at the Transaction Date. The provision for loan
losses for the four months ended December 31, 2010, of $590,000 related to newly originated loans during the period following the Investment Transaction, with a carrying balance of $16.4 million as of December 31, 2010.
Predecessor Company
Provision for loan losses for the eight months ended August 31, 2010 and twelve months ended December 31, 2009 was $171.6 million and
$352.4 million, respectively. The decrease in the provision for loan losses relates to reduction in outstanding balance of loans resulting from a reduction in loan originations and the high level of charge-offs in the prior year as well as a
slowdown in rate of credit deterioration of the overall loan portfolio.
The increase in the provision for loan losses for
2009, reflects the impact from the change in the ALLL model methodology.
N
ONINTEREST
I
NCOME
Noninterest income primarily consists of fee income received from the operations of the Bank and gains or losses from sales of assets. Fee
income is generated by servicing deposit relationships, trust and investment advisory fees, and fees and commissions earned on certain transactions from Bank operations. The service charges and fees and gains and losses on asset sales relate to the
Community & Commercial Banking segment while the trust and investment advisory fees are from the Wealth Management segment. Gains and losses from the sales of securities are from the treasury departments management of the investment
securities and is reflected in the All Other segment.
52
The following table presents a summary of noninterest income for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
$
|
23,583
|
|
|
$
|
7,579
|
|
|
|
|
$
|
14,901
|
|
|
$
|
24,884
|
|
Trust and investment advisory fees
|
|
|
21,014
|
|
|
|
6,743
|
|
|
|
|
|
14,035
|
|
|
|
21,247
|
|
(Loss)/gain on securities, net
|
|
|
(251
|
)
|
|
|
(32
|
)
|
|
|
|
|
5,667
|
|
|
|
10,970
|
|
Other
|
|
|
6,472
|
|
|
|
5,782
|
|
|
|
|
|
1,194
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
50,818
|
|
|
$
|
20,072
|
|
|
|
|
$
|
35,797
|
|
|
$
|
57,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
Noninterest income was $50.8 million for the twelve months ended December 31, 2011, and $20.1 million for the four months ended December 31, 2010. The largest portions of noninterest income are
from service charges and fees and trust and investment advisory fees. Service charges and fees consist of service charges on deposit and loan accounts. These fees are generated from the Commercial & Community Banking segment. For the twelve
and four month periods ended December 31, 2011, and December 31, 2010, service charges and fees from deposit accounts were $13.1 million and $4.0 million, respectively. Other service charges and fees include charges for a wide range of
services provided to clients such as ATMs, safe deposit boxes, bank card fees, loan servicing fees, late charges for loans and wire transfer fees. These fees have remained relatively steady during the reported periods.
Trust and investment advisory fees are primarily from the management of clients assets and are included in the Wealth Management
segment. As the balance and the value of the assets increase, fees increase. In the latter part of 2011, assets under management increased as new client accounts were opened and the overall values of assets under management increased.
There was little or no effect on the components of noninterest income resulting from purchase accounting for the Investment Transaction,
except for the gain or loss on securities. In accordance with GAAP, AFS securities were already reported at fair value before the Investment Transaction, the excess of fair value over the amortized cost having been previously recognized in Other
Comprehensive Income (OCI) as an unrealized gain net of tax. With the elimination of OCI as of the Transaction Date, this gain has effectively been realized in the form of a premium which is amortized as a reduction of interest income.
Consequently, any sales after the Transaction Date of securities that were held in the portfolio at the Transaction Date will result in a smaller gain or a larger loss because of the increased basis from the purchase accounting adjustment. As the
premiums are amortized over the remaining lives of the securities, the impact of the increased basis will be less.
Predecessor Company
The largest portion of service charges and fees consists of service charges on deposit accounts. For the eight month
period ended August 31, 2010, and the twelve month period ended December 31, 2009, service charges on deposits were $9.1 million and $15.3 million, respectively. The declining trend in service charges over the respective periods related
primarily to the increase in waivers of such fees in order to retain clients as the financial condition of the Company deteriorated.
For the eight months ended August 31, 2010, the Company recognized a net gain on securities of $5.7 million. This amount resulted primarily from a $4.5 million gain on the sale of $48.6 million of
MBS
53
and municipal securities and the call of $143.2 million of U.S. Agency and municipal securities from the AFS portfolio during the first quarter of 2010. For the twelve months ended
December 31, 2009, there was a net gain on securities of $11.0 million, primarily resulting from the sale of U.S. Agency securities and municipal securities during the fourth quarter of 2009 in which gains of $3.9 million and $6.9 million were
realized, respectively. Additional discussion regarding the activity in the investment securities portfolio is disclosed in the Investment Securities section of the MD&A and in Note 4, Investment Securities of the
Consolidated Financial Statements.
Other Noninterest Income
The table below discloses the largest items included in other noninterest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance income (1)
|
|
$
|
2,798
|
|
|
$
|
967
|
|
|
|
|
$
|
2,074
|
|
|
$
|
3,154
|
|
Gain/(loss) on asset sales (2)
|
|
|
775
|
|
|
|
4,598
|
|
|
|
|
|
1,188
|
|
|
|
(4,814
|
)
|
Net loss on LIHTCP (3)
|
|
|
(2,846
|
)
|
|
|
(1,554
|
)
|
|
|
|
|
(4,416
|
)
|
|
|
(3,680
|
)
|
Other
|
|
|
5,745
|
|
|
|
1,771
|
|
|
|
|
|
2,348
|
|
|
|
5,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,472
|
|
|
$
|
5,782
|
|
|
|
|
$
|
1,194
|
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Derived from increase in cash surrender value of insurance policies.
|
(2)
|
Represents gains/losses from loan sales and OREO sales and valuation.
|
(3)
|
Losses derived from LIHTCP sales and operations.
|
Successor Company
Other noninterest income was $6.5 million and $5.8
million for the twelve months ended December 31, 2011, and for the four months ended December 31, 2010, respectively. The decrease in other noninterest income for the twelve months ended December 31, 2011, was primarily attributable
the decrease in gain on asset sales. For the twelve months ended December 31, 2011, gain on sale of loans was $1.1 million, gain on sale of LIHTCPs of $962,000 and a net loss on other real estate owned (OREO) activity of $205,000.
For the four months ended December 31, 2010, gains from the sale of loans was $1.6 million and a net gain from OREO activity of $3.0 million was recorded. Gains or losses on securities, life insurance income, and monthly losses from the
Banks investment in LIHTCP are recorded in the All Other segment.
54
N
ONINTEREST
E
XPENSE
The following table presents a summary of noninterest expense for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
97,042
|
|
|
$
|
28,128
|
|
|
|
|
$
|
58,816
|
|
|
$
|
103,228
|
|
Net occupancy expense
|
|
|
23,011
|
|
|
|
7,711
|
|
|
|
|
|
15,494
|
|
|
|
26,214
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,710
|
|
Other
|
|
|
82,506
|
|
|
|
30,045
|
|
|
|
|
|
75,653
|
|
|
|
122,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
202,559
|
|
|
$
|
65,884
|
|
|
|
|
$
|
149,963
|
|
|
$
|
380,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
Salaries and benefits were not impacted by any of the purchase accounting adjustments from the Investment Transaction but has increased as the Company hired additional staff to support the enhancement of
the Companys operating platform and to support the anticipated growth in 2012.
Net occupancy expense for the twelve
months and four months ended December 31, 2011, and 2010, was impacted by purchase accounting resulting in decreased lease expense and increased depreciation expense on owned buildings. The Company had entered into long term leases when the
economy was stronger and demand was higher for commercial space. These lease payments are higher than current market rates. The revaluation of the leases resulted in the recognition of a liability for unfavorable lease payments. This amount is
amortized as a reduction of lease expense over the contractual lease terms. The fair value of the Companys owned properties was higher than the amortized cost as of the Transaction Date because these buildings were acquired many years ago when
commercial properties had lower prices.
Predecessor Company
The Company significantly scaled back lending activities and sold businesses to respond to a significant reduction in net revenues and capital due to the economic slowdown and the related deterioration of
credit quality of its loan portfolio. Accordingly, salaries and benefits continued to trend lower as the Company reduced staff through lay-offs and hiring freezes, and reduced the benefits, and bonuses for employees. Net occupancy expense also
declined in the first eight months of 2010, from 2009, as the Company consolidated locations to reduce overall expenses.
In
the second quarter of 2009, Management concluded that the entire balance of goodwill for all reporting units was impaired and recorded a $128.7 million impairment charge. The impairment of goodwill occurred due to the increasingly uncertain economic
environment, significant continued decline in the Companys market capitalization, and continued elevated credit losses. Additional information regarding the determination to impair the Companys goodwill is in Note 9, Goodwill and
Intangible Assets of the Consolidated Financial Statements.
55
Other Noninterest Expense
The table below summarizes the significant items included in other noninterest expense from continuing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
14,472
|
|
|
$
|
4,633
|
|
|
|
|
$
|
10,782
|
|
|
$
|
22,882
|
|
Regulatory assessments
|
|
|
11,962
|
|
|
|
6,305
|
|
|
|
|
|
13,094
|
|
|
|
18,988
|
|
Other intangible expense
|
|
|
8,580
|
|
|
|
2,982
|
|
|
|
|
|
621
|
|
|
|
1,184
|
|
Software expense
|
|
|
7,361
|
|
|
|
3,876
|
|
|
|
|
|
8,660
|
|
|
|
15,383
|
|
Customer deposit service and support
|
|
|
6,777
|
|
|
|
2,344
|
|
|
|
|
|
4,961
|
|
|
|
8,271
|
|
Furniture, fixtures and equipment, net
|
|
|
4,954
|
|
|
|
1,344
|
|
|
|
|
|
3,488
|
|
|
|
7,147
|
|
Acceleration of discount on redemption of subordinated debt
|
|
|
4,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing expense
|
|
|
4,343
|
|
|
|
1,970
|
|
|
|
|
|
2,369
|
|
|
|
5,526
|
|
Earnout liability
|
|
|
3,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies and postage
|
|
|
3,747
|
|
|
|
1,344
|
|
|
|
|
|
2,740
|
|
|
|
5,135
|
|
Telephone and data
|
|
|
3,058
|
|
|
|
889
|
|
|
|
|
|
2,288
|
|
|
|
4,380
|
|
Marketing
|
|
|
2,785
|
|
|
|
1,181
|
|
|
|
|
|
1,349
|
|
|
|
3,096
|
|
Other real estate owned expense
|
|
|
2,402
|
|
|
|
1,566
|
|
|
|
|
|
2,643
|
|
|
|
1,884
|
|
FHLB advance prepayment penalties
|
|
|
|
|
|
|
|
|
|
|
|
|
864
|
|
|
|
3,798
|
|
LIHTCP impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,958
|
|
Ford investment transaction expense
|
|
|
|
|
|
|
|
|
|
|
|
|
13,063
|
|
|
|
|
|
Reserve for off-balance sheet commitments
|
|
|
(2,847
|
)
|
|
|
32
|
|
|
|
|
|
1,886
|
|
|
|
8,245
|
|
Other
|
|
|
6,254
|
|
|
|
1,579
|
|
|
|
|
|
6,845
|
|
|
|
7,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,506
|
|
|
$
|
30,045
|
|
|
|
|
$
|
75,653
|
|
|
$
|
122,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
Other noninterest expense decreased when comparing the twelve months ended December 31, 2011 to the annualized four months ended December 31, 2010. This decrease is mostly attributable to a
decrease in regulatory assessments due to the Banks improved financial condition. Also contributing to the decrease in other noninterest expense was a reduction in the reserve for off-balance sheet commitments related to a decrease in unfunded
loan commitments, reduced loan servicing expense, telephone and data expense and OREO expense. These decreases were offset by a one-time, non-cash charge of $4.7 million related to the early redemption of $35.0 million of subordinated debt and a
$3.9 million increase in the estimated earnout liability associated with the final payments for the purchase of the Banks two registered investment advisors.
56
P
ROVISION
FOR
I
NCOME
T
AXES
The benefit for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve
Months
Ended
December 31,
2011
|
|
|
Four
Months
Ended
December 31,
2010
|
|
|
Eight
Months
Ended
August 31,
2010
|
|
|
Twelve
Months
Ended
December 31,
2009
|
|
Total tax benefit on continuing operations
|
|
$
|
(474
|
)
|
|
$
|
|
|
|
$
|
(4,741
|
)
|
|
$
|
(18,823
|
)
|
Successor Company
As required by GAAP, the Company uses the asset and liability method for reporting its income tax provision expense or benefit. Under this method, income tax expense is recorded for events that increase
the Companys tax liabilities and benefit is recorded for events that decrease them. The primary impact for income tax expense is the Companys annual taxable income or loss. There are also items within income and expense that, due to tax
regulations, are recognized in different periods for tax return purposes than for financial reporting purposes. These items, which are defined in terms of assets or liabilities having different bases for income tax and financial reporting, represent
temporary differences. The Company is required to provide in its financial statements for the eventual liability or deduction in its tax return for these temporary differences until the item of income or expense has been recognized for
financial reporting and for taxes resulting in the basis being the same for both. The provision is recorded in the form of deferred tax expense or benefit as the temporary basis differences arise, with the accumulated amount recognized as a deferred
tax liability or asset. Deferred tax assets represent future deductions in the Companys income tax return, while deferred tax liabilities represent future payments to tax authorities.
The most significant deferred tax asset relates to the valuation of loans and the ALLL. For tax purposes, the purchase accounting
valuation adjustment is not recognized. Also, since the loan loss provision expense is deductible for income taxes only to the extent a bank has actually had to charge-off its loans, most banks have significant deferred tax assets. There is a lower
basis in loans for financial reporting because the basis of the loans has effectively been partially written down by the amount of the provision expense. If a loan is charged-off, the income tax basis will be lowered to equal the financial reporting
basis and a tax deduction will be taken. If the loan is instead repaid, the basis for financial reporting will be written up to the income tax basis through a reduction in provision for loan losses and the deferred tax asset will be reduced because
there will not be future tax deductions for a loss.
As a result of the Investment Transaction, the Company incurred an
ownership change under Section 382 of the Internal Revenue Code. The ownership change may limit the amount of certain items of the net deferred tax asset including net operating losses and credit carryforwards.
Managements determination of the realization of net deferred tax assets is based upon Managements judgment of various future
events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax asset will not be realized. The Company currently has a valuation allowance of $248.3 million against net deferred tax assets of $249.8 million (excluding the deferred tax liability related to the
indefinite-lived trade name intangible of $5.2 million). Management continues to assess the impact of the Companys performance and the economic climate on the realizability of its deferred
57
tax asset on a quarterly basis. The amount of deferred tax assets considered realizable is subject to adjustment in future periods. Management will continue to monitor all available evidence
related to the Companys ability to utilize its deferred tax assets. The income tax expense or benefit in future periods will be reduced or increased to the extent of offsetting decreases or increases to the deferred tax asset valuation
allowance.
The $474,000 tax benefit for the twelve months ended December 31, 2011, primarily consists of; (1) a
current state tax expense of $1.6 million related to the pre-tax income of $70.0 million offset by a release of the valuation allowance of $1.5 million, and (2) a tax benefit of $604,000 for favorable settlements with state tax authorities
concerning prior amended tax returns and carryback claims.
Predecessor Company
In the second quarter of 2009, the Company determined that the only tax benefits that were more likely-than-not to be realized were those
that could be carried back against the income taxes paid for prior years. Consequently, at June 30, 2009, a valuation allowance was established through a noncash charge offsetting the entire net deferred tax asset, the realization of which was
not assured through a carryback of losses against taxes already paid. The $18.8 million tax benefit for the twelve months ended December 31, 2009, primarily consist of; (1) a tax benefit of $159.1 million related to the pre-tax loss of
$475.4 million offset by a valuation allowance of $133.6 million, (2) the creation of a valuation allowance of $10.8 million relating to existing deferred balances and (3) a tax benefit of $4.1 million for amended tax returns filed for tax years
2005 through 2007.
The Company still had a valuation allowance substantially offsetting its deferred tax assets, but the
deferred tax asset decreased in the eight months ended August 31, 2010. One component of the deferred tax asset is the temporary difference related to unrealized gains and losses on AFS securities. As disclosed in Note 4, Investment
Securities of the Consolidated Financial Statements, as interest rates decreased during 2010, unrealized gains increased and unrealized losses decreased. The tax effect of these changes is to increase the deferred tax liability or decrease the
deferred tax asset. With these changes the valuation allowance needed to be reduced so as not to exceed the net deferred tax asset related to the AFS securities. This reduction of the valuation allowance was recorded through the income tax benefit
for the eight months ended August 31, 2010. There was also an adjustment to the deferred tax asset and valuation allowance as the Company changed its estimate of the amount of past taxes it could claim through carryback.
For additional information related to the Companys provision for income taxes, refer to Note 11, Deferred Tax Asset and Tax
Provision of the Consolidated Financial Statements and the discussion of income taxes and deferred tax assets in the Critical Accounting Policies section of this Form 10-K.
B
ALANCE
S
HEET
A
NALYSIS
C
ASH
AND
C
ASH
E
QUIVALENTS
Successor Company
The Companys cash and cash equivalents decreased by $273.1 million or 55.1% since December 31, 2010, to $222.7 million at
December 31, 2011. The decrease in cash and cash equivalents was primarily due to the purchase of $315.0 million of loans, the purchase of $549.0 million of investment securities, and the repayment of $53.0 million of long term subordinated
debt during the twelve months ended December 31, 2011. These were offset by $365.8 million from the sale, call, maturity, and principle pay-downs of investment securities, a decrease of deposits of $289.7 million due to the maturity of high
interest rate client and broker CDs, and by a payment from the Internal Revenue Service (IRS) of $50.1 million for a tax receivable related to the re-filing of previous years tax returns.
58
I
NVESTMENT
S
ECURITIES
The Companys security portfolio is utilized as collateral for borrowings, required collateral for public agencies and trust clients
deposits, CRA support, and to manage liquidity, capital and interest rate risk.
At December 31, 2011, 2010, and 2009,
the Company held the following investment securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
Company
|
|
|
|
|
Predecessor
Company
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
December 31,
|
|
(dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
2009
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
5,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
5,403
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
|
|
|
|
|
|
11,432
|
|
U.S. Agency securities
|
|
|
114,906
|
|
|
|
268,443
|
|
|
|
|
|
607,930
|
|
Mortgage-backed securities
|
|
|
237,044
|
|
|
|
197,912
|
|
|
|
|
|
169,058
|
|
Collateralized mortgage obligations
|
|
|
938,964
|
|
|
|
608,425
|
|
|
|
|
|
113,934
|
|
Asset-backed securities
|
|
|
|
|
|
|
1,754
|
|
|
|
|
|
1,271
|
|
State and municipal securities
|
|
|
212,511
|
|
|
|
201,566
|
|
|
|
|
|
250,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
|
1,503,425
|
|
|
|
1,278,100
|
|
|
|
|
|
1,153,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
1,503,425
|
|
|
$
|
1,278,100
|
|
|
|
|
$
|
1,159,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
Trading securities
In the revaluation conducted for the Investment
Transaction, the Company eliminated the trading portfolio, since there were no immediate plans to sell these securities. Because trading securities are always carried at their fair value with any offsetting changes recorded already to income, no
purchase adjustment was necessary in the revaluation.
Available for sale securities
The balance of AFS securities was $1.50 billion and $1.28 billion at December 31, 2011, and December 31, 2010, respectively. The
increase of $225.3 million is attributable primarily to the purchase of $477.6 million of Collateralized Mortgage Obligation (CMO) securities, offset by $161.9 million of principal payments on CMO securities, and the maturity of $90.0
million of U.S. Agency securities.
59
The table below summarizes the maturity distribution of the securities portfolio at
December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
One year
or less
|
|
|
After one
year to five
years
|
|
|
After five
years to
ten years
|
|
|
After
ten years
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Maturity distribution:
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities
|
|
$
|
76,241
|
|
|
$
|
38,665
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
114,906
|
|
Mortgage-backed securities and collateralized mortgage obligations
|
|
|
2,286
|
|
|
|
1,011,235
|
|
|
|
145,526
|
|
|
|
16,961
|
|
|
|
1,176,008
|
|
State and municipal securities
|
|
|
5,366
|
|
|
|
22,479
|
|
|
|
49,224
|
|
|
|
135,442
|
|
|
|
212,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
83,893
|
|
|
$
|
1,072,379
|
|
|
$
|
194,750
|
|
|
$
|
152,403
|
|
|
$
|
1,503,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities
|
|
|
0.81
|
%
|
|
|
0.96
|
%
|
|
|
|
|
|
|
|
|
|
|
0.86
|
%
|
Mortgage-backed securities and collateralized mortgage obligations
|
|
|
1.13
|
%
|
|
|
1.73
|
%
|
|
|
2.84
|
%
|
|
|
3.14
|
%
|
|
|
1.89
|
%
|
State and municipal securities
|
|
|
1.39
|
%
|
|
|
2.00
|
%
|
|
|
3.74
|
%
|
|
|
4.65
|
%
|
|
|
4.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall weighted average
|
|
|
0.86
|
%
|
|
|
1.71
|
%
|
|
|
3.07
|
%
|
|
|
4.48
|
%
|
|
|
2.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The timing of the payments for MBS and CMO securities in the above table is based on the contractual
terms of the underlying loans adjusted for estimated prepayments. Issuers of certain investment securities have retained the right to call these securities before contractual maturity.
For additional information on impairment of investment securities and credit ratings of investment securities refer to Note 4,
Investment Securities of the Consolidated Financial Statements.
L
OAN
P
ORTFOLIO
The Company offers a full range of lending products and banking services to households, professionals, and businesses, including
commercial and residential real estate loans, commercial and industrial loans, and consumer loans. All assets, income, and expenses related to these activities are reported in the Commercial & Community Banking operating segment.
60
The table below summarizes the distribution of the carrying value of the Companys
loans held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
1,040,126
|
|
|
$
|
897,478
|
|
|
|
|
$
|
1,097,172
|
|
|
$
|
1,267,818
|
|
|
$
|
1,257,306
|
|
Multifamily
|
|
|
344,643
|
|
|
|
254,511
|
|
|
|
|
|
275,069
|
|
|
|
273,644
|
|
|
|
278,935
|
|
Commercial
|
|
|
1,588,852
|
|
|
|
1,745,589
|
|
|
|
|
|
2,018,039
|
|
|
|
2,126,654
|
|
|
|
1,727,138
|
|
Construction and land
|
|
|
185,400
|
|
|
|
234,837
|
|
|
|
|
|
501,934
|
|
|
|
670,834
|
|
|
|
758,041
|
|
Revolving1 to 4 family
|
|
|
249,857
|
|
|
|
280,753
|
|
|
|
|
|
360,113
|
|
|
|
328,325
|
|
|
|
268,763
|
|
Commercial loans
|
|
|
189,226
|
|
|
|
266,702
|
|
|
|
|
|
726,225
|
|
|
|
871,761
|
|
|
|
873,292
|
|
Consumer loans
|
|
|
49,977
|
|
|
|
60,713
|
|
|
|
|
|
113,008
|
|
|
|
144,216
|
|
|
|
155,288
|
|
Other loans
|
|
|
12,880
|
|
|
|
20,934
|
|
|
|
|
|
74,871
|
|
|
|
81,604
|
|
|
|
40,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment
|
|
$
|
3,660,961
|
|
|
$
|
3,761,517
|
|
|
|
|
$
|
5,166,431
|
|
|
$
|
5,764,856
|
|
|
$
|
5,359,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of loans to total loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
28.4%
|
|
|
|
23.9%
|
|
|
|
|
|
21.2%
|
|
|
|
22.0%
|
|
|
|
23.5%
|
|
Multifamily
|
|
|
9.4%
|
|
|
|
6.8%
|
|
|
|
|
|
5.3%
|
|
|
|
4.7%
|
|
|
|
5.2%
|
|
Commercial
|
|
|
43.4%
|
|
|
|
46.3%
|
|
|
|
|
|
39.1%
|
|
|
|
36.9%
|
|
|
|
32.2%
|
|
Construction and land
|
|
|
5.1%
|
|
|
|
6.2%
|
|
|
|
|
|
9.7%
|
|
|
|
11.6%
|
|
|
|
14.1%
|
|
Revolving1 to 4 family
|
|
|
6.8%
|
|
|
|
7.5%
|
|
|
|
|
|
7.0%
|
|
|
|
5.7%
|
|
|
|
5.0%
|
|
Commercial loans
|
|
|
5.2%
|
|
|
|
7.1%
|
|
|
|
|
|
14.1%
|
|
|
|
15.2%
|
|
|
|
16.3%
|
|
Consumer loans
|
|
|
1.4%
|
|
|
|
1.6%
|
|
|
|
|
|
2.2%
|
|
|
|
2.5%
|
|
|
|
2.9%
|
|
Other loans
|
|
|
0.3%
|
|
|
|
0.6%
|
|
|
|
|
|
1.4%
|
|
|
|
1.4%
|
|
|
|
0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
The loans in the table above include PCI Loan Pools, and loans originated or purchased since the Transaction Date. Included in the PCI Loan Pools are purchase accounting adjustments, as more fully
discussed in the Critical Accounting Policies of the MD&A and in Note 1 Summary of Significant Accounting Policies of the Consolidated Financial Statements. At the Transaction Date, all of the loans in the Companys loan
portfolio were aggregated into pools of loans, and recorded at their fair values, which significantly impacted the carrying amounts for the Companys loans. Additionally, the amounts presented above include deferred loan origination fees and
costs, extension fees, and commitment fees.
As described in the Critical Accounting Policies of the MD&A and Note 1,
Summary of Significant Accounting Policies of the Consolidated Financial Statements, the Company has elected an accounting policy based on expected cash flows in the accounting for term loans subsequent to the Transaction Date in
accordance with ASC 310-30, and push-down accounting requirements for loan portfolios acquired in a business combination, and such loans are referred herein as PCI Term Pools. Some loans that otherwise meet the definition as credit
impaired, such as revolving lines of credit, are specifically excluded from the PCI Term Pools as per accounting guidance in ASC 310-30, and are referred to as PCI Revolving Pools. PCI term and revolving loans have been pooled based on
similar risk characteristics, and are accounted for as a single asset. The accounting for PCI Term and PCI Revolving Pools is significantly different from the accounting for loans originated after the Transaction Date. At December 31, 2011, and
2010, a majority of loans included in Loans Held for Investment are PCI Term and PCI Revolving Pools.
61
To assist the reader with understanding of the PCI Term and PCI Revolving Pools versus the
loans originated or purchased after the Transaction Date, the following table provides a summary of the carrying balance and unpaid principal balance of the loans held for investment at December 31, 2011, and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Originated
or
Purchased Since
Transaction Date
|
|
|
PCI Term
Pools
|
|
|
PCI Revolving
Pools
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
296,257
|
|
|
$
|
679,282
|
|
|
$
|
64,587
|
|
|
$
|
1,040,126
|
|
Multifamily loans
|
|
|
151,417
|
|
|
|
191,850
|
|
|
|
1,376
|
|
|
|
344,643
|
|
Commercial
|
|
|
114,307
|
|
|
|
1,454,837
|
|
|
|
19,708
|
|
|
|
1,588,852
|
|
Construction
|
|
|
1,793
|
|
|
|
179,646
|
|
|
|
3,961
|
|
|
|
185,400
|
|
Revolving1 to 4 family
|
|
|
3,890
|
|
|
|
5,949
|
|
|
|
240,018
|
|
|
|
249,857
|
|
Commercial loans
|
|
|
11,622
|
|
|
|
56,806
|
|
|
|
120,798
|
|
|
|
189,226
|
|
Consumer loans
|
|
|
6,404
|
|
|
|
22,342
|
|
|
|
21,231
|
|
|
|
49,977
|
|
Other loans
|
|
|
2,335
|
|
|
|
5,838
|
|
|
|
4,707
|
|
|
|
12,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment
|
|
$
|
588,025
|
|
|
$
|
2,596,550
|
|
|
$
|
476,386
|
|
|
$
|
3,660,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance
|
|
$
|
594,386
|
|
|
$
|
2,841,625
|
|
|
$
|
557,023
|
|
|
$
|
3,993,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2010
|
|
|
|
Originated After
the Transaction
Date
|
|
|
PCI Term
Pools
|
|
|
PCI Revolving
Pools
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
7,652
|
|
|
$
|
814,770
|
|
|
$
|
75,056
|
|
|
$
|
897,478
|
|
Multifamily loans
|
|
|
|
|
|
|
252,379
|
|
|
|
2,132
|
|
|
|
254,511
|
|
Commercial
|
|
|
|
|
|
|
1,718,029
|
|
|
|
27,560
|
|
|
|
1,745,589
|
|
Construction
|
|
|
|
|
|
|
227,424
|
|
|
|
7,413
|
|
|
|
234,837
|
|
Revolving1 to 4 family
|
|
|
1,237
|
|
|
|
5,451
|
|
|
|
274,065
|
|
|
|
280,753
|
|
Commercial loans
|
|
|
2,553
|
|
|
|
115,799
|
|
|
|
148,350
|
|
|
|
266,702
|
|
Consumer loans
|
|
|
1,155
|
|
|
|
34,491
|
|
|
|
25,067
|
|
|
|
60,713
|
|
Other loans
|
|
|
3,807
|
|
|
|
9,458
|
|
|
|
7,669
|
|
|
|
20,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment
|
|
$
|
16,404
|
|
|
$
|
3,177,801
|
|
|
$
|
567,312
|
|
|
$
|
3,761,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unpaid principal balance
|
|
$
|
16,376
|
|
|
$
|
3,494,683
|
|
|
$
|
668,988
|
|
|
$
|
4,180,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
At December 31, 2011, loans held for investment were $100.6 million lower than that reported at December 31, 2010. The majority of the decline can be attributed to declines in the PCI Term and
Revolving Loan Pools, which is primarily reflective of pay-downs and pay-offs within those loan pools. Declines in PCI Loan Pools were offset by a $571.6 million increase in loans originated or purchased after the Transaction Date, of which $315.0
million can be attributed to loan purchases during 2011. For additional information concerning loans the Company purchased during the twelve months ended December 31, 2011, see Note 5, Loans of the Consolidated Financial Statements.
62
Predecessor Company
2009 Compared to 2008
The loan portfolio at December 31, 2009, was
$5.17 billion compared to $5.76 billion at December 31, 2008, a decrease of $598.4 million. This decrease was mostly due to the reclassification of loans held for investment to loans held for sale of $170.6 million and charge-offs of $228.3
million. The loan sales were comprised of $77.3 million of residential loans, $87.2 million of commercial real estate loans and $6.1 million of commercial loans. Due to the high concentration of commercial real estate loans, the Company began to
reduce its concentrations in commercial real estate loans during 2009.
2008 Compared to 2007
The loan portfolio at December 31, 2008, was $5.76 billion, an increase of $405.7 million from December 31, 2007. A majority of
this increase occurred in the commercial real estate loan portfolio which increased $399.5 million during 2008. This increase was partially offset by a decrease in the construction portfolio of $87.2 million. During 2008, the Company sold Small
Business Administration (SBA) loans for a gain on sale of $1.2 million, residential real estate loans for a gain on sale of $774,000 and various other types of loans in conjunction with the sale of two branches in October 2008.
Discussion regarding the amounts and reasons for charge-offs during the years mentioned above is included in the section
below titled Loan Losses.
Loan Balances by Maturity
The following table provides a maturity distribution for loans held for investment, and summarizes the balances by interest rate type for
each loan category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Due in
one year
or less
|
|
|
Due after
one year to
five years
|
|
|
Due after
five years
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
$
|
4,964
|
|
|
$
|
5,852
|
|
|
$
|
332,785
|
|
|
$
|
343,601
|
|
Fixed rate
|
|
|
5,450
|
|
|
|
7,181
|
|
|
|
683,894
|
|
|
|
696,525
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
2,878
|
|
|
|
24,171
|
|
|
|
291,549
|
|
|
|
318,598
|
|
Fixed rate
|
|
|
743
|
|
|
|
11,837
|
|
|
|
13,465
|
|
|
|
26,045
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
35,028
|
|
|
|
508,838
|
|
|
|
625,013
|
|
|
|
1,168,879
|
|
Fixed rate
|
|
|
43,992
|
|
|
|
237,960
|
|
|
|
138,021
|
|
|
|
419,973
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
57,867
|
|
|
|
40,120
|
|
|
|
11,756
|
|
|
|
109,743
|
|
Fixed rate
|
|
|
49,375
|
|
|
|
22,610
|
|
|
|
3,672
|
|
|
|
75,657
|
|
Revolving1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
13,809
|
|
|
|
132,582
|
|
|
|
102,094
|
|
|
|
248,485
|
|
Fixed rate
|
|
|
539
|
|
|
|
698
|
|
|
|
135
|
|
|
|
1,372
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
60,514
|
|
|
|
37,638
|
|
|
|
62,250
|
|
|
|
160,402
|
|
Fixed rate
|
|
|
6,370
|
|
|
|
19,678
|
|
|
|
2,776
|
|
|
|
28,824
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
4,544
|
|
|
|
1,109
|
|
|
|
20,054
|
|
|
|
25,707
|
|
Fixed rate
|
|
|
1,111
|
|
|
|
6,397
|
|
|
|
16,762
|
|
|
|
24,270
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating rate
|
|
|
5,076
|
|
|
|
2,286
|
|
|
|
326
|
|
|
|
7,688
|
|
Fixed rate
|
|
|
1,134
|
|
|
|
2,560
|
|
|
|
1,498
|
|
|
|
5,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment
|
|
$
|
293,394
|
|
|
$
|
1,061,517
|
|
|
$
|
2,306,050
|
|
|
$
|
3,660,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Of the total for loans held for investment in the above table, 65.1% have some variability
in interest rates. Some of the loans reset immediately with a short term index such as LIBOR or Prime, or they may be fixed for a period of time after origination and then reset periodically until maturity.
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
The Company has established an ALLL, representing Managements best estimate of probable credit losses inherent in the loan portfolio
as of the date of the balance sheet. The ALLL is increased by charges made to current period earnings and recoveries on previously charged-off loans, and is reduced by charge-offs related to loan balances deemed by Management to be uncollectable.
The table below summarizes the estimated Allowance for Loan and Lease Losses by loan type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
1,952
|
|
|
$
|
120
|
|
|
|
|
$
|
23,523
|
|
|
$
|
16,294
|
|
|
$
|
3,180
|
|
Multifamily
|
|
|
783
|
|
|
|
|
|
|
|
|
|
5,867
|
|
|
|
3,184
|
|
|
|
890
|
|
Commercial
|
|
|
722
|
|
|
|
|
|
|
|
|
|
44,672
|
|
|
|
22,472
|
|
|
|
5,368
|
|
Construction
|
|
|
20
|
|
|
|
|
|
|
|
|
|
61,506
|
|
|
|
34,050
|
|
|
|
3,391
|
|
Revolving1 to 4 family
|
|
|
315
|
|
|
|
28
|
|
|
|
|
|
22,885
|
|
|
|
11,111
|
|
|
|
2,365
|
|
Commercial loans
|
|
|
585
|
|
|
|
206
|
|
|
|
|
|
95,546
|
|
|
|
40,494
|
|
|
|
22,567
|
|
Consumer loans
|
|
|
327
|
|
|
|
69
|
|
|
|
|
|
18,853
|
|
|
|
13,303
|
|
|
|
7,082
|
|
Other loans
|
|
|
824
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
5,528
|
|
|
$
|
520
|
|
|
|
|
$
|
272,852
|
|
|
$
|
140,908
|
|
|
$
|
44,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of loans to total loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
28.4%
|
|
|
|
23.9%
|
|
|
|
|
|
21.2%
|
|
|
|
22.0%
|
|
|
|
23.5%
|
|
Multifamily
|
|
|
9.4%
|
|
|
|
6.8%
|
|
|
|
|
|
5.3%
|
|
|
|
4.7%
|
|
|
|
5.2%
|
|
Commerical
|
|
|
43.3%
|
|
|
|
46.3%
|
|
|
|
|
|
39.1%
|
|
|
|
36.9%
|
|
|
|
32.2%
|
|
Construction
|
|
|
5.1%
|
|
|
|
6.2%
|
|
|
|
|
|
9.7%
|
|
|
|
11.6%
|
|
|
|
14.1%
|
|
Revolving1 to 4 family
|
|
|
6.8%
|
|
|
|
7.5%
|
|
|
|
|
|
7.0%
|
|
|
|
5.7%
|
|
|
|
5.0%
|
|
Commercial loans
|
|
|
5.2%
|
|
|
|
7.1%
|
|
|
|
|
|
14.1%
|
|
|
|
15.2%
|
|
|
|
16.3%
|
|
Consumer loans
|
|
|
1.4%
|
|
|
|
1.6%
|
|
|
|
|
|
2.2%
|
|
|
|
2.5%
|
|
|
|
2.9%
|
|
Other loans
|
|
|
0.4%
|
|
|
|
0.6%
|
|
|
|
|
|
1.4%
|
|
|
|
1.4%
|
|
|
|
0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
The ALLL of $5.5 million and $520,000 at December 31, 2011 and 2010, respectively, relate primarily to loans originated and loans purchased since the Transaction Date. During 2011, the Company
originated or purchased new loans with an approximate carrying value as of December 31, 2011 of $588.0 million and $4.7 million of the ALLL is attributable to these loans. During 2011, the Company also established an allowance of $867,000 for
one PCI Term Pool, which is reflective of the Companys revised estimate for future cash flows from a pool being below previous expectations. Management performs quarterly assessments of cash flows for PCI Term Pools. To the extent revised
estimates for cash flows are below previous expectations, the Company may record additional provisions for loan losses, further increasing the allowance for PCI Term Pools. However, if Managements periodic assessment indicates there has been a
probable and significant increase in the level of expected future cash flows, the Company may record a credit to the provision for loan losses, reducing the allowance for PCI Term Pools to the extent that an allowance was previously established.
64
The ALLL for new and purchased loans as a percentage of the new and purchased loan portfolio
was 0.79% as of December 31, 2011, compared to 3.2% reported as of December 31, 2010. The decrease in this ratio primarily relates to a decline in historical loss rates at December 31, 2011, compared to December 31, 2010, as well
as greater diversification across the new and purchased loans portfolio among loan types for which the Company has historically experienced lower loss rates. As of December 31, 2011, a majority of the $588.0 million of new and purchased loans
were considered current with only $503,000 reported as 30-89 days past due. No loans within the new and purchased loans portfolio were considered nonperforming at December 31, 2011, and 2010.
As a result of the Investment Transaction and the application of purchase accounting for business combinations, the ALLL of $282.6
million immediately preceding the Investment Transaction for the loans purchased was eliminated. An ALLL for the PCI Loan Pools was not established at the Transaction Date since the loans were recorded at their fair value in accordance with GAAP.
The fair value of PCI Loan Pools recorded at the Transaction Date included an estimate for credit losses expected to be incurred over the remaining lives of the pools of loans. For additional information regarding the accounting for ALLL and PCI
Term and Revolving Pools, refer to the Critical Accounting Policies within this MD&A and, Note 7, Allowance for Loan and Lease Losses and Credit Quality and Note 1, Summary of Significant Accounting Policies of the
Consolidated Financial Statements.
Predecessor Company
The ALLL was $272.9 million at December 31, 2009, compared to $140.9 million at December 31, 2008, an increase of $131.9 million. The increase in ALLL was intended to cover the increase in the
estimated losses that were inherent in the loan portfolio, but not yet identified. As the recession continued into 2009, Management changed its methodology with respect to how the ALLL was determined in order to better reflect how the continued
deterioration of economic conditions was expected to impact the level of losses inherent in the Companys loan portfolio. The increase in ALLL was also impacted by the higher level of net charge-offs and an escalating level of nonperforming
loans during 2009, compared to 2008. Net charge-offs are discussed below in the section Loan Losses. The increase in the ALLL of $96.1 million at December 31, 2008, compared to 2007, was also primarily attributable to the
deteriorating economic environment as the country entered a recession in 2008.
ALLL Model Methodology
Successor Company
The
Company has continued to use the ALLL methodology used by the Predecessor Company prior to the Investment Transaction. The ALLL model uses both quantitative and qualitative factors to determine the estimate of the ALLL. Quantitative factors are
based primarily on historical credit losses for each portfolio of similar loans over a time horizon or look-back period. The Company generally uses historical credit losses over the past six quarters as a basis for its quantitative
factors.
Qualitative factors are generally used to increase historical loss rates based on the Companys estimate of the
losses inherent in the outstanding loan portfolio that are not fully captured by the quantitative factors alone. Qualitative factors taken into consideration in the ALLL model are: concentrations of types of loans, loan growth, control environment,
delinquency and classified loan trends, Management and staffing experience and turnover, economic conditions, results of independent loan reviews, underlying collateral values, competition, regulatory, legal issues, structured finance and syndicated
national credits, and other factors. These qualitative factors are applied as adjustments to the historical loss rates when Management believes they are necessary to better reflect current conditions.
65
Predecessor Company
The Company used both quantitative and qualitative factors when determining the level of estimated ALLL. Quantitative factors are based primarily on historical credit losses for each portfolio of similar
loans over a look-back period. The Company used historical credit losses over the past six quarters as a basis for its quantitative factors. A change in the ALLL methodology occurred in the second quarter of 2009 when Management
shortened the timeframe utilized for estimating historical loss rates from the last seven years to the most recent six quarters in its ALLL calculation. The intent in changing the methodology of the ALLL calculation was to better capture current
risk conditions which had precipitously deteriorated starting in 2008. The shorter time frame, coupled with less reliance on qualitative factors, was determined to be more responsive to the increasing risk seen in economic conditions and rapidly
deteriorating real estate collateral values. The change in methodology in the second quarter of 2009 caused a one-time increase of $113.7 million in the ALLL through a charge to the provision for loan losses. The shortened timeframe placed more
weight in the estimation process on the recent quarters in which the Bank had experienced the highest historical losses in its history. In addition to changing the look-back period, the Bank had also increased the ALLL in response to
increases in impaired loans and delinquent loans. The increase in impaired loans was due to declines in collateral values which required balances of individual impaired loans to be charged-off to the fair value of the collateral. This increased the
historical loss rates, which in turn impacted the estimate of losses not yet identified. At December 31, 2009, 2008 and 2007, the Bank had $277.2 million, $157.4 million and $54.2 million of impaired loans, respectively. These impaired loans
had specific ALLL reserves of $17.5 million, $17.8 million and $3.9 million at December 31, 2009, 2008 and 2007, respectively.
The ALLL model places added emphasis on the qualitative factor, concentration of types of loans. Management monitors
concentration risks and target concentration ratios for 14 different loan types. An increase in the concentration of loans could require that additional reserves be established to address concentration risk.
The ALLL model also placed particular emphasis on the qualitative factor underlying loan collateral. To the extent that
collateral values are declining on an accelerated basis, this qualitative factor could be increased. If the inverse were to occur to collateral values, the qualitative factor could be decreased. The determination of changes to this qualitative
factor is made through the loan appraisal process as follows:
|
1.
|
Collateral value deterioration is monitored based on market conditions utilizing third party data and data derived from appraisal operations.
Management utilizes a quarterly report to determine when a reappraisal of the collateral is necessary during the loan review process. The appraisals for collateral in a deteriorating market are examined for existing validity to determine if
revaluation is necessary. Trend monitoring is provided, analyzed and reported by the Banks real estate advisory services department to the Board of Directors Loan Committee.
|
|
2.
|
Portfolio reappraisal screening is based on identifying categories of collateral that represent an elevated risk and performing reappraisals of
those properties secured by collateral of these types en masse. A phased approach is undertaken to minimize the impact to the Banks operations, but still provide updated information for better risk management practices centered on the
transactions representing the greatest risk. Further, as subsequent
|
66
|
transactions occur for existing loans, a methodology is employed that covers not only the target property, but other surrounding properties that are collateral for other loans and that may be
exposed to similar risk characteristics.
|
Reserve for Off-Balance Sheet Commitments
In addition to the exposure to credit losses from outstanding loans, the Company is also exposed to credit losses from certain off-balance
sheet commitments such as unused commitments from revolving lines of credit, letters of credit and interest rate swaps to the extent these commitments are funded. Because the available funds have not yet been disbursed on these commitments the
estimated losses are not included in the calculation of ALLL. The reserve for off-balance sheet commitments is an estimated loss contingency which is included in other liabilities on the Consolidated Balance Sheets. The adjustments to the reserve
for off-balance sheet commitments are reported as a component of noninterest expense. This reserve is for estimated losses that may occur when the Company is contractually obligated to fund these instruments and must seek repayment from a party that
may not be as financially sound in the current period as it was when the commitment was originally made.
As with its
outstanding loans, the Company applies the same historical loss rates and qualitative factors to off-balance sheet lending commitments in determining an estimate of losses inherent in off-balance sheet contractual obligations, adjusted for an
estimated commitment usage factor.
The table below summarizes the reserve for off-balance sheet commitments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor
Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
19,032
|
|
|
$
|
19,000
|
|
|
|
|
$
|
16,259
|
|
(Reductions)/additions, net
|
|
|
(2,848
|
)
|
|
|
32
|
|
|
|
|
|
2,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
16,184
|
|
|
$
|
19,032
|
|
|
|
|
$
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2009
|
|
|
Twelve Months
Ended
December 31,
2008
|
|
|
Twelve Months
Ended
December 31,
2007
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,014
|
|
|
$
|
1,107
|
|
|
$
|
1,448
|
|
Additions/(reductions), net
|
|
|
8,245
|
|
|
|
6,907
|
|
|
|
(341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
16,259
|
|
|
$
|
8,014
|
|
|
$
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
The reserve for off-balance sheet commitments was $16.1 million and $19.0 million at December 31, 2011, and 2010, respectively. The reserve for off-balance sheet commitments relates to new loan
originations following the Transaction Date, as well as existing commitments to lend related to certain PCI Loan Pools. During the year ended December 31, 2011, the Company reduced the reserve for off-balance sheet commitments, through a credit
to noninterest expense, by $2.8 million. The reduction was related to a decline in the balance of PCI Revolving Pools that have revolving privileges.
During the four months ended December 31, 2010, the Company recorded a provision for unfunded commitments, through a charge to noninterest expense, of $32,000, related to loans originated with
67
unfunded loan commitments during the period following the Transaction Date. The Successor Company adopted the same methodology for the reserve for off-balance sheet commitments that the
Predecessor Company used.
Predecessor Company
The Company recorded charges to income of $2.7 million and $8.2 million for the eight months ended August 31, 2010, and the twelve months ended December 31, 2009, respectively, to increase the
reserve for off-balance sheet commitments due to the continued downturn of the economy, and due to the change in the ALLL methodology in 2009, as described above.
L
OAN
L
OSSES
The table below summarizes the
beginning and ending balances of the ALLL and charge-offs and recoveries by loan category for the years presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor Company
|
|
|
|
|
Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
520
|
|
|
$
|
282,632
|
|
|
|
|
$
|
272,852
|
|
Purchase accounting adjustment
|
|
|
|
|
|
|
(282,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
20,154
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
1,955
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
28,780
|
|
Construction
|
|
|
300
|
|
|
|
|
|
|
|
|
|
30,594
|
|
Revolving1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
8,048
|
|
Commercial loans
|
|
|
25
|
|
|
|
|
|
|
|
|
|
63,780
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
19
|
|
|
|
|
|
|
|
|
|
8,824
|
|
Other loans
|
|
|
267
|
|
|
|
96
|
|
|
|
|
|
5,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
611
|
|
|
|
96
|
|
|
|
|
|
167,979
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
718
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
2,483
|
|
Revolving1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
1,129
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
2,967
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
1
|
|
|
|
|
|
|
|
|
|
1,938
|
|
Other loans
|
|
|
63
|
|
|
|
26
|
|
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
64
|
|
|
|
26
|
|
|
|
|
|
9,813
|
|
Net charge-offs
|
|
|
547
|
|
|
|
70
|
|
|
|
|
|
158,166
|
|
Adjustments from loan sales and acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,637
|
)
|
Provision for loan and lease losses
|
|
|
5,555
|
|
|
|
590
|
|
|
|
|
|
171,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
5,528
|
|
|
$
|
520
|
|
|
|
|
$
|
282,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued on next page)
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2009
|
|
|
Twelve Months
Ended
December 31,
2008
|
|
|
Twelve Months
Ended
December 31,
2007
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
140,908
|
|
|
$
|
44,843
|
|
|
$
|
64,669
|
|
Purchase accounting adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
34,952
|
|
|
|
12,360
|
|
|
|
375
|
|
Multifamily
|
|
|
1,566
|
|
|
|
740
|
|
|
|
|
|
Commercial
|
|
|
8,701
|
|
|
|
10,678
|
|
|
|
|
|
Construction
|
|
|
98,792
|
|
|
|
49,355
|
|
|
|
25
|
|
Revolving1 to 4 family
|
|
|
9,857
|
|
|
|
4,317
|
|
|
|
1,020
|
|
Commercial loans
|
|
|
55,644
|
|
|
|
21,935
|
|
|
|
4,908
|
|
Leases
|
|
|
|
|
|
|
21
|
|
|
|
6,354
|
|
Consumer loans
|
|
|
10,130
|
|
|
|
7,176
|
|
|
|
14,243
|
|
Other loans
|
|
|
8,619
|
|
|
|
791
|
|
|
|
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
228,261
|
|
|
|
107,373
|
|
|
|
27,690
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
2,343
|
|
|
|
1,106
|
|
|
|
|
|
Multifamily
|
|
|
324
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,131
|
|
|
|
885
|
|
|
|
489
|
|
Construction
|
|
|
809
|
|
|
|
59
|
|
|
|
|
|
Revolving1 to 4 family
|
|
|
226
|
|
|
|
92
|
|
|
|
5
|
|
Commercial loans
|
|
|
1,224
|
|
|
|
2,153
|
|
|
|
1,203
|
|
Leases
|
|
|
|
|
|
|
|
|
|
|
1,232
|
|
Consumer loans
|
|
|
3,247
|
|
|
|
3,281
|
|
|
|
4,075
|
|
Other loans
|
|
|
133
|
|
|
|
115
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
9,437
|
|
|
|
7,691
|
|
|
|
7,173
|
|
Net charge-offs
|
|
|
218,824
|
|
|
|
99,682
|
|
|
|
20,517
|
|
Adjustments from loan sales and acquisitions
|
|
|
(1,630
|
)
|
|
|
(820
|
)
|
|
|
(20,623
|
)
|
Provision for loan and lease losses
|
|
|
352,398
|
|
|
|
196,567
|
|
|
|
21,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
272,852
|
|
|
$
|
140,908
|
|
|
$
|
44,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
Net charge-offs significantly declined following the fair valuation of the loan portfolio at the Transaction Date. Charge-offs recorded during the twelve months ended December 31, 2011, and the four
months ended December 31, 2010, relate primarily to loans that were originated subsequent to the Transaction Date.
The
Companys policy for the accounting for PCI Term Pools is based on expectations of future cash flows, and as a result the Company only records losses to the extent that projections for future cash flows are lower than the Companys
previous expectations. The Company establishes an allowance for estimated losses on PCI Term Pools, and records charges against the allowance to the extent the carrying balance for those pools are no longer deemed collectable. For the year ended
December 31, 2011, charge-offs related to PCI Term Pools totaled $300,000, and can be attributed to one pool in
69
which Management believed a portion of that pools carrying value was no longer collectable. The Company did not record any losses on PCI Loan Pools during the four months ended
December 31, 2010.
Predecessor Company
During the first eight months of 2010, net charge-offs were $158.2 million. A majority of these charge-offs were in the commercial real estate and construction and land loan portfolio which began to
experience higher levels of net charge-offs due to declines in underlying collateral values. The Company increased the ALLL in response to the decline in collateral values. In addition, during 2010, some of the impaired loans for which the Company
had been utilizing a discounted cash flow approach in the valuation of impairment in prior periods, were re-assessed using the value of the underlying collateral due to the reliance on the sale of collateral for repayment of the loan. These write
downs to the underlying collateral value account for a significant amount of the increase in charge-offs in the commercial loan portfolio. This change in approach required additional charge-offs in order to carry certain loans at the estimated value
of their underlying collateral.
Net charge-offs were $218.8 million for the year ended December 31, 2009, an increase of
$119.1 million compared to the year ended December 31, 2008. The increase in net charge-offs was primarily driven by the downturn in the economy during 2009. This economic downturn further reduced collateral values and caused businesses to
reduce their workforce or close operations, contributing to rising unemployment, which made it difficult for many clients to repay their obligations to the Bank. Declining collateral values also resulted in further impairment of loans which
increased the charge-offs during 2009. Most of this increase in net charge-offs occurred within the construction, residential and commercial loan portfolios and accounted for $185.0 million of the net charge-offs during 2009.
N
ONPERFORMING
A
SSETS
Nonaccrual and Restructured Loans
When a borrower discontinues making
payments as contractually required by the note, the Company must determine whether it is appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has
become delinquent by more than 90 days and/or when Management determines that the repayment of principal and collection of interest is unlikely. The Company may decide that it is appropriate to continue to accrue interest on certain loans more than
90 days delinquent if they are well secured by collateral and collection is in process. While still accruing interest, these loans are normally regarded as nonperforming and therefore are reported as such in the table below.
When a loan is placed in a nonaccrual status, any accrued but uncollected interest for the loan is reversed out of interest income in the
period in which the status is changed. Subsequent payments received from the client are applied to principal and no further interest income is recognized until the principal has been made current or until circumstances have changed such that
payments are again consistently received as contractually required. In the case of commercial clients, the pattern of payment must also be accompanied by a positive change in the financial condition of the borrower.
A loan may be restructured when the Bank determines that a borrowers financial condition has deteriorated, but still has the
ability to repay the loan. A loan is considered to be TDR when the
70
original terms have been modified in favor of the borrower such that either principal or interest has been forgiven, contractual payments are deferred, or the interest rate is below a market
rate. Once a loan has been restructured for a client, the Bank considers the loan to be nonaccrual for a minimum of six months. Once the borrower has made their payments as contractually required for six months, the loan is reviewed and a
determination is made whether the loan can begin to accrue interest. The Company participated in U.S. Treasurys Home Affordable Modification Program (HAMP), but does not have any covered loans through a loss sharing agreement with
the FDIC.
Other Real Estate Owned
Real estate acquired through foreclosure on a loan or by surrender of the real estate in lieu of foreclosure is called OREO. OREO is originally recorded in the Companys financial records
at the fair value of the property, less estimated costs to sell. If the outstanding balance of the loan is greater than the fair value of the OREO at the time of foreclosure, the difference is charged-off against the ALLL.
Once the collateral is foreclosed on and the property becomes an OREO, Management periodically obtains valuations to determine if further
valuation adjustments are required. OREOs are carried at fair value less the estimated costs to sell. If there is a decrease in the fair value of the property on the valuation date, the decrease in value is charged to noninterest income as a
valuation adjustment. During the time the property is held, all related operating and maintenance costs are expensed as incurred. All income produced from OREOs is included in noninterest income. All gains and losses on sale of OREOs is recorded in
noninterest income within the other income line item of the financial statements.
71
The table below summarizes the Companys nonaccrual, past due loans, TDRs and OREO for
the last five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
December 31,
2009
|
|
|
December 31,
2008
|
|
|
December 31,
2007
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
2,896
|
|
|
$
|
1,696
|
|
|
|
|
$
|
37,889
|
|
|
$
|
27,974
|
|
|
$
|
4,540
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
8,295
|
|
|
|
1,724
|
|
|
|
|
|
Commercial
|
|
|
426
|
|
|
|
469
|
|
|
|
|
|
48,442
|
|
|
|
16,640
|
|
|
|
3,494
|
|
Construction
|
|
|
320
|
|
|
|
|
|
|
|
|
|
136,309
|
|
|
|
107,150
|
|
|
|
37,522
|
|
Revolving1 to 4 family
|
|
|
6,842
|
|
|
|
5,161
|
|
|
|
|
|
4,256
|
|
|
|
3,713
|
|
|
|
2,156
|
|
Commercial loans
|
|
|
5,275
|
|
|
|
5,716
|
|
|
|
|
|
51,265
|
|
|
|
19,017
|
|
|
|
22,606
|
|
Consumer loans
|
|
|
155
|
|
|
|
214
|
|
|
|
|
|
4,561
|
|
|
|
2,983
|
|
|
|
1,551
|
|
Other loans
|
|
|
481
|
|
|
|
945
|
|
|
|
|
|
98
|
|
|
|
7,409
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
16,395
|
|
|
|
14,201
|
|
|
|
|
|
291,115
|
|
|
|
186,610
|
|
|
|
72,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
2,751
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
375
|
|
|
|
|
|
9,182
|
|
|
|
7,740
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
255
|
|
|
|
|
|
320
|
|
|
|
1,811
|
|
|
|
|
|
Commercial loans
|
|
|
|
|
|
|
6,945
|
|
|
|
|
|
4,783
|
|
|
|
893
|
|
|
|
130
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
3,241
|
|
|
|
705
|
|
|
|
|
|
Other loans
|
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
145
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days or more and still accruing
|
|
|
|
|
|
|
7,910
|
|
|
|
|
|
17,532
|
|
|
|
14,045
|
|
|
|
1,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
732
|
|
|
|
|
|
|
|
|
|
18,593
|
|
|
|
1,376
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
32,145
|
|
|
|
1,452
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
22,406
|
|
|
|
28,250
|
|
|
|
|
|
Revolving1 to 4 family
|
|
|
|
|
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
305
|
|
|
|
|
|
|
|
|
|
15,493
|
|
|
|
2,659
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructured loans
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
89,129
|
|
|
|
33,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
17,432
|
|
|
|
22,111
|
|
|
|
|
|
397,776
|
|
|
|
234,392
|
|
|
|
73,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
12,941
|
|
|
|
12,254
|
|
|
|
|
|
4,657
|
|
|
|
|
|
|
|
447
|
|
Multifamily
|
|
|
1,440
|
|
|
|
444
|
|
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
8,582
|
|
|
|
5,816
|
|
|
|
|
|
7,177
|
|
|
|
3,217
|
|
|
|
2,910
|
|
Construction
|
|
|
29,339
|
|
|
|
21,743
|
|
|
|
|
|
26,002
|
|
|
|
2,929
|
|
|
|
|
|
Revolving1 to 4 family
|
|
|
|
|
|
|
282
|
|
|
|
|
|
123
|
|
|
|
412
|
|
|
|
|
|
Commercial loans
|
|
|
|
|
|
|
228
|
|
|
|
|
|
810
|
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total OREO
|
|
|
52,302
|
|
|
|
40,767
|
|
|
|
|
|
39,263
|
|
|
|
7,100
|
|
|
|
3,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
69,734
|
|
|
$
|
62,878
|
|
|
|
|
$
|
437,039
|
|
|
$
|
241,492
|
|
|
$
|
76,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Successor Company
Nonperforming Loans
At December 31, 2011, and 2010, there were $17.6
million and $22.1 million of nonperforming loans. These nonperforming loans are from the PCI Revolving Pools. The reporting for nonperforming loans was significantly impacted by the purchase accounting adjustments and the application of ASC 310-30
for PCI Term Pools. The accounting for PCI Term Pools and PCI Revolving Pools is described in Note 1, Summary of Significant Accounting Policies and Note 6, Purchased Credit Impaired Pools of the Consolidated Financial
Statements. At the Transaction Date, all loans were written down to their fair value. Therefore, no loans recorded as of the Transaction Date are classified as nonaccrual or TDRs except for loans which are in the PCI Revolving Pools that are
accounted for in accordance with ASC 310-20. At December 31, 2011, and 2010, there were no loans which had been originated after the Transaction Date which are considered to be nonperforming.
If interest due on nonaccrual and TDRs had been accrued under the original terms of the loans, $1.3 million would have been recorded as
interest income during the twelve months ended December 31, 2011. Interest income recognized on nonaccrual loans and TDRs during the twelve months ended December 31, 2011, was $287,000.
OREO
The balance of
OREO as of December 31, 2011, was $52.3 million, an increase from December 31, 2010, of $11.5 million. This is the result of the addition of $63.5 million of OREO properties, sales of $45.4 million and an increase in the valuation
allowance of $6.6 million.
Predecessor Company
Nonperforming Loans
At December 31, 2009, there were $291.1 million
of nonaccrual loans, an increase in nonaccrual loans of $104.5 million since December 31, 2008. This increase was a result of the continued downturn of the economy as discussed in the ALLL section above. The increase in nonaccrual loans was
mostly from the commercial real estate loan portfolio of $50.2 million, commercial loan portfolio of $36.7 million, and residential real estate loan portfolio of $12.6 million since December 31, 2008.
The increase in nonaccrual loans of $114.4 million, when comparing the balance from December 31, 2007, to December 31, 2008,
was mostly attributed to the economic downturn that started during the latter part of 2008. Of this increase, $63.9 million was associated with the construction loan portfolio, $18.8 million was related to the commercial real estate loan portfolio
and $14.6 million was related to residential real estate loan portfolio.
The Company had TDRs of $89.1 million at
December 31, 2009, compared to $33.7 million at December 31, 2008. The economic downturn also contributed to the increase in TDRs. At December 31, 2009, there were TDRs in all of the loan portfolios as the Bank worked with its clients
to modify their loan or loan terms so that they could be current with their loan payments. At December 31, 2009, the largest increase in TDRs were in the commercial real estate loan portfolio which increased by $36.5 million since
December 31, 2008. There was also an increase in TDRs in the commercial and residential real estate loan portfolios which was offset by a decrease in TDRs in the construction loan portfolio due to charge-offs. At December 31, 2008, the
construction loan portfolio accounted for $28.3 million of the TDRs which was a majority of the total TDRs.
OREO
During the eight months ended August 31, 2010, a substantial number of new properties were added to OREO through foreclosure. These
were primarily commercial real estate and construction and land
73
properties. OREO was $39.3 million at December 31, 2009, an increase of $32.2 million from a year earlier. The increase in OREO in 2009 occurred primarily in the construction and commercial
real estate loan portfolios. During 2009, the Bank sold $16.3 million of OREO properties at a loss of $1.1 million.
I
MPAIRED
L
OANS
A loan is identified as impaired when based on current information and events, it is probable that interest and principal will not be collected according to the contractual terms of the loan agreement.
Generally, impaired loans are classified as nonaccrual. However, there are some loans that are deemed impaired, because of doubt regarding collectability of interest and principal in accordance with the contractual terms of the loan, but are both
fully secured by collateral and are current with interest and principal payments. These impaired loans may not be classified as nonaccrual. After Management determines a loan is impaired, it obtains the fair value of the collateral securing the
loan, if the loan is deemed collateral dependent, or an observable market price for the loan, to measure the extent to which the loan is impaired. If the loan is not deemed collateral dependent or an observable market price for the loan cannot be
obtained, Management measures impairment based on expectations of future cash flows from the loan, discounted at the loans effective interest rate. If the fair value of the collateral, an observable market price, or estimates for discounted
future cash flows from a loan is less than the Companys recorded investment in the loan, a valuation allowance is established through a charge to provision for loan losses.
Impaired loans purchased as part of the Investment Transaction are accounted for under ASC 310-30, Loans and Debt Securities
Acquired with Deteriorated Credit Quality, using an accounting policy based on expected cash flows, and are therefore not given recognition in the financial statements as individually impaired loans. These loans are also referred to as PCI
Term Pools. Should the Company determine that it can no longer reasonably estimate the amount and timing of future cash flows from such loan pools the Company would cease accretion on these loan pools.
Impaired loans that are revolving in nature, acquired as part of the Investment Transaction, have certain attributes that meet the
definition of a PCI loan, but are specifically excluded from the scope of ASC 310-30. Such loans, referred to as PCI Revolving Pools, are no longer considered impaired loans because the loans were recorded at fair value on the Transaction Date in
accordance with ASC 310-20 and an estimate of future credit losses was included in the purchase discount recorded for those loan pools. However, since loans from the PCI Revolving Pools are specifically excluded from the accounting for PCI loans
under ASC 310-30, the Company is required under current accounting guidance to include the underlying loans in the PCI Revolving Pools within its credit quality disclosures for impaired loans. Therefore, impaired loan credit quality disclosures,
including those related to nonaccruing loans and TDRs, include loans from the PCI Revolving Pools.
Successor Company
At December 31, 2011, the Company had impaired loans of $1.0 million all of which were from PCI Revolving Pools. The Company had no
impaired loans as of December 31, 2010.
74
G
OODWILL
AND
O
THER
I
NTANGIBLE
A
SSETS
Successor Company
Goodwill and other intangible assets were recorded as a result of the Investment Transaction as disclosed in Note 2, Business Combination Investment Transaction of the Consolidated
Financial Statements of this Form 10-K. At December 31, 2011, goodwill and other intangible assets is comprised of the following items:
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
|
(dollars in thousands)
|
|
Goodwill
|
|
$
|
26,550
|
|
Core deposit intangible
|
|
|
31,040
|
|
Customer relationship intangible
|
|
|
16,724
|
|
Trade name intangible
|
|
|
12,471
|
|
Mortgage and other loan servicing rights
|
|
|
2,378
|
|
Other
|
|
|
92
|
|
|
|
|
|
|
Total
|
|
$
|
89,255
|
|
|
|
|
|
|
During the third quarter of 2011, the Company completed the annual goodwill impairment testing and no
impairment was recognized. At December 31, 2011, and 2010, the Company did not have a triggering event or any significant adverse events which would have led Management to believe that goodwill might have become impaired. Intangible
assets are amortized over their estimated lives. For additional information regarding goodwill and other intangible assets refer to Note 9, Goodwill and Intangible Assets of the Consolidated Financial Statements.
FHLB S
TOCK
AND
O
THER
I
NVESTMENTS
As explained in Note 1, Summary of Significant Accounting Policies, the Company is required to hold FHLB and Reserve Bank
stock to maintain its credit lines with these institutions. The balance of FHLB stock and other investments declined $7.9 million from December 31, 2010, to $76.4 million at December 31, 2011, primarily due to the Companys
repurchases of FHLB and Reserve Bank stock which were held by the Bank in excess of the required amount to support its permitted credit line.
O
THER
A
SSETS
Included within other assets are OREO, bank-owned life insurance (BOLI), and LIHTCPs.
Successor Company
The
Company had OREO of $52.3 million and $40.8 million as of December 31, 2011, and 2010, respectively. For additional information regarding OREO, refer to the section above, OREO in the Nonperforming Assets section of this MD&A.
The Company had BOLI of $101.2 million at December 31, 2011, and $98.3 million at December 31, 2010. The increase in BOLI is attributed to increased cash surrender value of the insurance policies. The Companys investments in LIHTCPs
were $10.0 million at December 31, 2011, and $37.8 million at December 31, 2010. The decrease in LIHTCPs were from the sale of several of the Banks investments in these partnerships during 2011.
75
D
EPOSITS
The average balance of deposits by category and the average effective interest rates paid on deposits is summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
For the Twelve
Months Ended
December 31, 2011
|
|
|
For the Four
Months
Ended
December 31, 2010
|
|
|
|
|
For the Eight
Months Ended
August 31, 2010
|
|
|
For the Twelve
Months Ended
December 31, 2009
|
|
(dollars in thousands)
|
|
Average
Balance
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Rate
|
|
|
|
|
Average
Balance
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
921,858
|
|
|
|
0.18
|
%
|
|
$
|
918,413
|
|
|
|
0.21
|
%
|
|
|
|
$
|
946,077
|
|
|
|
0.27
|
%
|
|
$
|
1,036,354
|
|
|
|
0.58
|
%
|
Money market deposit accounts
|
|
|
346,603
|
|
|
|
0.48
|
%
|
|
|
289,566
|
|
|
|
0.59
|
%
|
|
|
|
|
282,719
|
|
|
|
0.80
|
%
|
|
|
446,690
|
|
|
|
1.10
|
%
|
Savings accounts
|
|
|
491,451
|
|
|
|
0.36
|
%
|
|
|
397,456
|
|
|
|
0.46
|
%
|
|
|
|
|
362,836
|
|
|
|
0.58
|
%
|
|
|
366,001
|
|
|
|
0.78
|
%
|
Time certificates of deposit for $100,000 or more
|
|
|
921,336
|
|
|
|
1.23
|
%
|
|
|
1,205,339
|
|
|
|
0.62
|
%
|
|
|
|
|
1,251,225
|
|
|
|
2.70
|
%
|
|
|
1,582,469
|
|
|
|
2.64
|
%
|
Time certificates of deposit for less than $100,000
|
|
|
891,207
|
|
|
|
1.00
|
%
|
|
|
1,174,633
|
|
|
|
0.62
|
%
|
|
|
|
|
1,454,818
|
|
|
|
2.00
|
%
|
|
|
998,131
|
|
|
|
2.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
3,572,455
|
|
|
|
0.71
|
%
|
|
|
3,985,407
|
|
|
|
0.51
|
%
|
|
|
|
|
4,297,675
|
|
|
|
1.63
|
%
|
|
|
4,429,645
|
|
|
|
1.89
|
%
|
Demand deposits
|
|
|
1,101,214
|
|
|
|
|
|
|
|
1,112,943
|
|
|
|
|
|
|
|
|
|
1,020,775
|
|
|
|
|
|
|
|
1,003,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,673,669
|
|
|
|
|
|
|
$
|
5,098,350
|
|
|
|
|
|
|
|
|
$
|
5,318,450
|
|
|
|
|
|
|
$
|
5,433,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
The Bank had average deposits of $4.67 billion and $5.10 billion for the twelve months ended December 31, 2011, and the four months ended December 31, 2010, respectively. The decrease in
deposits is primarily due to the maturity of high rate brokered and client time deposits that matured and were not renewed. This decrease was offset by an increase in the average balance of savings, money market and Negotiable Order of Withdrawal
(NOW) accounts. Included in the balance of deposits is the remaining purchase accounting adjustment; a $5.5 million premium at December 31, 2011, resulting from the Investment Transaction which fair valued the time CDs with a $24.7
million premium due to the difference in time deposit interest rates to market rates on the Transaction Date. The amortization of the premium reduces interest expense over the estimated life of the time CDs.
Predecessor Company
Deposits had an average balance of $5.32 billion at August 31, 2010. The decrease is mostly attributed to the maturity of brokered
CDs which decreased $390.9 million since December 31, 2009. The Bank was able to offset these maturities with an increase in retail CDs.
76
Certificates of Deposit of $100,000 or More
The table below discloses the distribution of maturities of CDs or time deposits of $100,000 or more at December 31, 2011, 2010, and
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor Company
|
|
|
|
|
Company
|
|
(dollars in thousands)
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
|
December 31,
2009
|
|
Three months or less
|
|
$
|
130,754
|
|
|
$
|
233,955
|
|
|
|
|
$
|
316,414
|
|
Over three months through six months
|
|
|
117,809
|
|
|
|
245,399
|
|
|
|
|
|
252,144
|
|
Over six months through one year
|
|
|
262,489
|
|
|
|
299,765
|
|
|
|
|
|
774,805
|
|
Over one year
|
|
|
321,133
|
|
|
|
268,750
|
|
|
|
|
|
150,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
832,185
|
|
|
$
|
1,047,869
|
|
|
|
|
$
|
1,494,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
O
THER
B
ORROWINGS
Successor Company
Other borrowings decreased $54.5 million, or 45.0% since
December 31, 2010, to $66.5 million as of December 31, 2011. This decrease was primarily due to the maturity of $18.0 million of subordinated debt during the third quarter of 2011, and the early redemption of $35.0 million of subordinated
debt in December 2011.
C
ONTRACTUAL
O
BLIGATIONS
AND
O
FF
-B
ALANCE
S
HEET
A
RRANGEMENTS
The Company has entered into a number of transactions, agreements, or
other contractual arrangements whereby it has obligations that must be settled by cash or contingent obligations in the event certain specified conditions occur. The table below lists the Companys contractual obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Total
|
|
|
Less than
one year
|
|
|
One to
three
years
|
|
|
Three to
five years
|
|
|
More
than
five years
|
|
|
|
(dollars in thousands)
|
|
Deposits
|
|
$
|
4,611,497
|
|
|
$
|
4,098,943
|
|
|
$
|
277,284
|
|
|
$
|
234,257
|
|
|
$
|
1,013
|
|
Repurchase Agreements
|
|
|
300,206
|
|
|
|
206
|
|
|
|
25,000
|
|
|
|
75,000
|
|
|
|
200,000
|
|
Operating lease obligations
|
|
|
90,125
|
|
|
|
11,838
|
|
|
|
20,473
|
|
|
|
13,600
|
|
|
|
44,214
|
|
Capital lease obligations
|
|
|
30,625
|
|
|
|
794
|
|
|
|
1,831
|
|
|
|
2,025
|
|
|
|
25,975
|
|
Subordinated debt issued by the Company
|
|
|
69,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,426
|
|
Purchase obligations for service providers
|
|
|
55,242
|
|
|
|
29,435
|
|
|
|
15,491
|
|
|
|
10,316
|
|
|
|
|
|
Other
|
|
|
15,209
|
|
|
|
796
|
|
|
|
14,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (1)
|
|
$
|
5,172,330
|
|
|
$
|
4,142,012
|
|
|
$
|
354,492
|
|
|
$
|
335,198
|
|
|
$
|
340,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts shown exclude purchase accounting adjustments and represent only actual contractual obligations requiring repayment.
|
77
Other Commitments and Obligations
In addition to the contractual obligations above, the Bank routinely enters into commitments to extend credit to clients. The same credit
practices are used in extending these commitments as in extending loans to the Banks clients. These commitments are described in Note 5, Loans of the Companys Consolidated Financial Statements.
Off-Balance Sheet Reserve
As explained in Note 1, Summary of Significant Accounting Policies and Note 5, Loans of the Consolidated Financial
Statements the Company must establish a reserve for off-balance sheet commitments for known or estimated losses relating to letters of credit or other unfunded loan commitments.
The Company has derivative instruments as disclosed in Note 12, Derivative Instruments of the Consolidated Financial
Statements.
CAPITAL RESOURCES
Capital Adequacy Standards
PCBC and SBB&T are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements as specified by the regulatory framework for prompt corrective action could cause the regulators to initiate certain mandatory or discretionary actions that, if undertaken, could have a direct material effect on the
Companys Consolidated Financial Statements. For additional information regarding the Companys capital refer to Note 18, Shareholders Equity and Note 20, Regulatory Capital Requirements of the Consolidated
Financial Statements of the 2010 Form 10-K .
PCBC and SBB&Ts regulatory capital ratios as of December 31,
2011, and December 31, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Total Risk-
Based Capital
|
|
|
Tier 1
Capital
|
|
|
Risk-
Weighted
Assets
|
|
|
Tangible
Average
Assets
|
|
|
Total
Risk-
Based
Capital
Ratio
|
|
|
Tier 1
Risk-
Based
Capital
Ratio
|
|
|
Tier 1
Leverage
Ratio
|
|
|
|
(dollars in thousands)
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCBC (consolidated)
|
|
$
|
736,816
|
|
|
$
|
715,062
|
|
|
$
|
3,657,172
|
|
|
$
|
5,768,824
|
|
|
|
20.2
|
%
|
|
|
19.6
|
%
|
|
|
12.4
|
%
|
SBB&T
|
|
$
|
667,405
|
|
|
$
|
645,651
|
|
|
$
|
3,657,180
|
|
|
$
|
5,766,623
|
|
|
|
18.3
|
%
|
|
|
17.7
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCBC (consolidated)
|
|
$
|
646,324
|
|
|
$
|
633,938
|
|
|
$
|
3,909,351
|
|
|
$
|
6,149,932
|
|
|
|
16.5
|
%
|
|
|
16.2
|
%
|
|
|
10.3
|
%
|
SBB&T
|
|
$
|
575,049
|
|
|
$
|
562,663
|
|
|
$
|
3,909,482
|
|
|
$
|
6,133,212
|
|
|
|
14.7
|
%
|
|
|
14.4
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
Minimum Capital Ratios required by the Operating Agreement
|
|
|
|
|
|
|
|
12.0
|
%
|
|
|
n/a
|
|
|
|
8.0
|
%
|
Generally required minimum ratios to be classified as well-capitalized
|
|
|
|
10.0
|
%
|
|
|
6.0
|
%
|
|
|
5.0
|
%
|
Generally required minimum ratios to be classified as adequately capitalized
|
|
|
|
8.0
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
The minimum capital ratios required to be considered well-capitalized and adequately
capitalized under generally applicable regulatory guidelines are included in the table above. As of December 31, 2011, and December 31, 2010, both the Company and the Bank met the minimum levels for the three regulatory ratios to be
considered well-capitalized.
On September 2, 2010, the Bank entered into the Operating Agreement with the
OCC, pursuant to which, among other things, the Bank agreed to maintain total risk-based capital at least equal to 12.0%
78
of risk-weighted assets, and Tier 1 capital at least equal to 8.0% of adjusted total assets, and to not pay any dividend or reduce its capital without the prior non-objection of the OCC and
unless at least three years have elapsed since the effective date of the Operating Agreement. The Bank was in compliance with these minimum capital ratios at December 31, 2011, with a Tier 1 leverage ratio of 11.2% and a total risk-based
capital ratio of 18.3%.
Additional Capital
In order to ensure adequate levels of capital, the Company conducts an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and the level of risk.
As part of this ongoing assessment, the Board of Directors reviews the various components of capital, the costs, benefits and impact of raising additional capital and the availability of alternative sources of capital. Based on the Board of
Directors analysis of the Companys capital needs (including any capital needs arising out of its financial condition and results of operations or from any acquisitions it may make) and the input of the regulators, the Company could
decide or be required by its regulators to raise additional capital.
The Companys ability to raise additional capital
if and when needed will depend on conditions in the capital markets, which are outside the Companys control, and on the Companys financial performance. Accordingly, the Company cannot be certain of its ability to raise additional capital
on acceptable terms. If the Company cannot raise additional capital if and when necessary, its results of operations and financial condition could be materially and adversely affected, and it may be subject to further supervisory action. In
addition, if the Company were to raise additional capital through the issuance of additional shares, its stock price could be adversely affected, depending on the terms of any shares it were to issue and the percentage ownership of existing
shareholders would be reduced.
Dividends from the Bank
The principal source of funds from which the Banks holding company services its debt and pays its obligations and dividends is the receipt of dividends from the Bank. The availability of dividends
from the Bank is limited by various statutes and regulations. Pursuant to the Operating Agreement, the Bank may not pay a dividend or make a capital distribution to the Banks holding company without prior approval from the OCC or until
September 2, 2013. The Written Agreement also restricts the taking of dividends or any other payment representing a reduction in capital from the Bank, without the prior approval of the Reserve Bank. At December 31, 2011, the Banks
holding company held $67.3 million in cash, which is sufficient to service its debts for the foreseeable future.
Dividends on Common Stock
In the second quarter of 2009, the Board of Directors elected to suspend the payment of cash dividends on its common stock
to preserve capital and liquidity. As a result of the Written Agreement, Reserve Bank approval will be required before the Company can resume paying cash dividends on its common stock. In addition, under the terms of the Merger Agreement, the
Company may not pay cash dividends on its common stock without the prior approval of UBC.
L
IQUIDITY
Liquidity risk is the risk of an institution being unable to meet obligations when they come due and includes an inability to manage
unplanned decreases or changes in funding sources. Liquidity risks can be segmented into two categories, either exogenous or endogenous risks. Exogenous risks are systemic in nature and typically outside the control of an organization and affect all
market participants to varying extents (e.g. the disruptions in the overall asset securitization market). Endogenous risks are localized to a specific organization and are usually within its control (e.g. poor liquidity management).
79
The Company believes that maintaining a strong liquidity position, including in stressed
conditions, is imperative for it to operate in a safe and sound manner. The Companys policy is to hold enough cash on hand to meet its daily cash needs and to withstand estimated daily cash outflows under a severe stress scenario. In addition,
the Companys policy is to meet long term cash flow needs through its available funding capacity and liquid investment securities and to withstand future cash outflows under a severe stress scenario. The Company also maintains a conservative
and diversified funding base to the extent possible, and to hold high credit quality investment securities that can be quickly turned into cash. A key component of the Companys liquidity risk management framework is the development of a sound
and accurate process to identify and measure liquidity risk.
The Company believes that it is important to have in place
comprehensive liquidity and funding policies that are intended to maintain significant flexibility to address specific liquidity events and to address broader industry or market liquidity events. The Company has policies in place regarding liquidity
to ensure that the Company is following sound liquidity risk management principles. In putting together these policies, the Company has considered recent guidance provided by the Basel Committee and the FDIC.
The Company measures liquidity risk through the use of projected cash flow models that identify potential future net funding shortfalls
by estimating expected cash inflows and outflows arising from assets, liabilities, derivatives, operations, and off-balance sheet arrangements over a variety of time horizons, under normal conditions and a range of stress scenarios, including
scenarios of severe stress. These models allow the Company to effectively manage the timing of incoming cash flows with outgoing cash flows, and to identify and remediate potential future net funding shortfalls below the Board of Directors
approved risk tolerances.
Given the importance of being able to rapidly respond to negative liquidity events, the Company
maintains a formal contingency funding plan (CFP) that clearly sets out the strategies to be taken if certain negative liquidity events were to occur. The Companys CFP identifies negative liquidity triggering events; establishes
clear lines of responsibility for action; describes the specific procedures or actions to be taken, in priority order, for the initial response; and documents the communication and escalation procedures if initial responses do not resolve the
problem. The Company believes that it is currently maintaining sufficient liquidity to meet its cash needs and to withstand a severe stressed liquidity event.
Successor Company
Current Liquidity Status
At December 31, 2011, the Bank had a total facility and unused borrowing capacity of $1.46 billion at the FHLB. The Bank had unused
borrowing capacity with the Reserve Bank of $319.6 million at December 31, 2011.
Maturity of Liabilities
At December 31, 2011, the Bank had a total of $154.6 million of brokered CDs. The CDs have maturities from January 2012 through
January 2014, with no more than $42.6 million maturing in any one month and no more than $43.7 million maturing in any one quarter. The retail CDs of $1.40 billion at December 31, 2011 have maturities through 2019. The Bank expects that most
maturing retail CDs will roll over into new certificates.
80
A summary of retail CDs by maturity is as follows.
|
|
|
|
|
|
|
Successor
Company
|
|
|
|
December
31,
2011
|
|
|
|
|
(dollars in thousands)
|
|
90 days or less
|
|
$
|
220,269
|
|
91 - 180 days
|
|
|
209,107
|
|
181 - 270 days
|
|
|
152,732
|
|
271 - 366 days
|
|
|
305,546
|
|
One to three years
|
|
|
277,284
|
|
Three to five years
|
|
|
234,257
|
|
Over five years
|
|
|
763
|
|
|
|
|
|
|
Total
|
|
$
|
1,399,958
|
|
|
|
|
|
|
Liquidity Ratio
A prevailing liquidity ratio used in the banking industry is the net non-core funding dependence ratio as defined by regulatory practice. This ratio measures the proportion of long term assets such as
loans and securities with remaining maturities of over one year that are funded by non-core funding sources and short term non-core funding sources. The Companys net non-core funding dependency ratio was 8.96% at December 31, 2011.
C
RITICAL
A
CCOUNTING
P
OLICIES
A number of critical accounting policies are used in the preparation of the Companys Consolidated Financial Statements. The
Companys accounting policies for significant balance sheet and statement of operation accounts are disclosed in Note 1, Summary of Significant Accounting Policies of the Consolidated Financial Statements beginning on page 107.
Management believes that a number of these policies are critical to the understanding of the Companys financial condition and results of operations, because they involve estimates which materially impact those results, require
Managements judgment to ascertain the values of assets and liabilities, or are otherwise less subject to precise measurement. This section is intended to: (1) identify those critical accounting policies used in the preparation of the
Companys Consolidated Financial Statements; (2) clarify the methodology used in determining these estimates; (3) identify assumptions used in determining these estimates; and (4) provide insight to the potential impact those
estimates have on the presentation of the Companys financial condition, changes in financial condition and results of operations.
The preparation of Consolidated Financial Statements in accordance with GAAP requires Management to make certain estimates and assumptions that affect the amounts of reported assets and liabilities as
well as contingent assets and liabilities as of the date of these financial statements. Some of these critical estimates concern past events that are uncertain or otherwise not subject to direct measurement. Others involve predictions regarding
future events. As events occur and these estimates and assumptions are confirmed or are shown to require adjustment, they affect the reported amounts of revenues and expenses during the reporting period(s). Although Management believes these
estimates and assumptions to be reasonably accurate, actual results may differ.
These critical accounting policies include:
|
¡
|
|
Accounting for purchased credit impaired loans;
|
|
¡
|
|
Allowance for loan and lease losses;
|
81
|
¡
|
|
Accounting for income taxes; and
|
Purchase
Accounting
As explained in Note 2, Business Combination Investment Transaction of the Consolidated
Financial Statements, purchase accounting requires that assets purchased, liabilities assumed, and noncontrolling interests all be reported in the acquirers financial statements at their fair value at the date of acquisition. Accounting
guidance also requires the application of push down accounting, whereby the fair value adjustments of assets, liabilities, and noncontrolling interests to fair value and the resultant goodwill are shown in the financial statements of the
acquiree. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methodology used to obtain the fair values to
apply purchase accounting is disclosed in Note 3, Fair Value of Financial Instruments of the Consolidated Financial Statements.
A majority of the Companys assets and liabilities are financial instruments. With the revaluation of financial instruments associated with the Investment Transaction, a premium or discount resulted,
and is amortized or accreted over the remaining life of the assets and liabilities. To the extent that the revaluation does not reflect fair value, the amount of amortization or accretion could be misstated, thereby impacting the Companys
Consolidated Statements of Operations.
The estimated fair values of assets acquired and liabilities assumed were primarily
based on information that was available to the Company as of the Transaction Date. The accounting guidance for acquisitions stipulates that if additional information becomes available to the acquirer relevant to the fair value of assets or
liabilities as of the acquisition date, the acquirer may make adjustments to those fair values to reflect this additional information, with corresponding increases or decreases to goodwill during what is referred to as a measurement
period. The measurement period is not to exceed one year.
Accounting for Purchased Credit Impaired Loans
As explained in Note 1, Summary of Significant Accounting Policies and Note 6, Purchased Credit Impaired Pools of
the Consolidated Financial Statements, loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable, at the date of acquisition, that the acquirer will not
collect all contractually required principal and interest payments, are accounted for using the guidance for PCI loans. In addition, the American Institute of Certified Public Accountants (AICPA) reached an understanding with the SEC
that permits an acquirer to elect to account for acquired loans that are not impaired by means of either expected cash flows or contractual cash flows. This understanding is documented in a letter from the AICPA to the SEC dated December 18,
2009. The Company has elected an accounting policy to apply expected cash flows accounting guidance to all loans subject to the business combination and push-down accounting requirements for loan portfolios acquired in a business combination. These
loans are referred to as PCI Term Pools.
Management periodically evaluates actual cash flows and compares those cash flows to
that which was previously expected for PCI Term Pools. Any significant differences identified may require Management to revise its expectations for future cash flows. If, based on Managements evaluation of actual cash flows, estimates for
future cash flows are less than previously expected, the Company may establish an ALLL through a charge to the provision for loan losses. If Managements evaluation of actual cash flows suggests future cash flows will be significantly greater
than previously expected, the
82
Company may reduce any ALLL that had previously been established, and then increase interest income through an adjustment to the accretable yield. Adjustments to the accretable yield may impact
interest income and yields for PCI Term Pools and such changes could be materially different from period to period.
There is
inherent uncertainty in the process of estimating the amount and timing of expected cash flows, because these estimates depend on factors outside of the Companys control, such as borrower behavior and/or external economic conditions.
Additionally, Management must exercise judgment with respect to the estimation of amounts and timing of cash flows. To the extent that expected cash flows are overestimated, the Company may realize provision for loan losses in future periods. If
expected cash flows are underestimated, interest income recognized in current periods may have been understated, while interest income in future periods may be recognized at a higher rate.
Acquired loans with revolving privileges are not within the scope of ASC 310-30, but the accounting for purchase discounts on pooled
revolving lines of credit is permitted in accordance with ASC 310-20. Individual revolving lines of credit that had been originated prior to the Investment Transaction were placed in pools of loans with similar risk characteristics and are referred
to as PCI Revolving Pools. PCI Revolving Pools were recorded at fair value at the Transaction Date, based on expected cash flows. Expectations for cash flows on PCI Revolving Pools included estimates for losses inherent in the pools at
the Transaction Date. A new carrying amount was established for each of the PCI Revolving Pools based on its fair value, which represents its net realizable value. The difference between the former carrying value and the net realizable value is the
purchase discount.
Ordinarily, the purchase discount for revolving lines of credit would be accreted into interest income
over the remaining term of the line. However, since PCI Revolving Pools were recorded at the Transaction Date at their net realizable value, Management has determined the Company will not accrete the purchase discount into interest income until the
carrying value of the PCI Revolving Pools is significantly below the net realizable value. Management periodically assesses the net realizable value of each PCI Revolving Pool to determine when it will be appropriate to accrete the purchase discount
into interest income in accordance with ASC 310-20. To the extent that Management believes that there has been a reduction in the net realizable value of a pool relative to its carrying amount due to higher credit loss expectations, the Company will
record an ALLL through a charge to the provision for loan losses. To the extent Management has determined there has been a significant increase in the net realizable value of a pool relative to its carrying, due of lower credit loss expectations,
the Company will begin to accrete or increase the accretion of the purchase discount into interest income. To the extent the purchase discount does not reflect the fair value for PCI Revolving Pools, the amount of the accretion could be misstated
and there would be an impact to the Companys Consolidated Statements of Operations.
Allowance for Loan and Lease Losses
As of December 31, 2011, the majority of the Companys loan portfolio was comprised of PCI Loan Pools.
Consequently, credit concerns regarding these loans are accounted for as discussed in the preceding two sections. The ALLL discussion below relates only to those loans that have been originated or purchased after the Investment Transaction. However,
as more loans are originated or purchased in future periods, the ALLL will be attributable to a progressively larger proportion of the Companys loan portfolio.
Credit risk is inherent in the business of extending loans and leases to borrowers. The Company establishes an estimated allowance for these inherent loan losses, which is established through charges to
current period earnings. These charges are recorded as a provision for loan losses. All specifically identifiable and quantifiable losses are charged off against the ALLL when realized. The ALLL represents Managements estimate of loan losses
inherent but not identified within the loan portfolio at each balance sheet date.
83
The Company formally determines the adequacy of the ALLL on a quarterly basis. This
determination is based on the periodic assessment of the credit quality or grading of loans. Loans are initially graded when originated or purchased. Loans are periodically reviewed through the Banks loan review process, when facts
demonstrate there has been a change in the credit risks of a borrower, or upon the renewal of a loan to determine if a change in the credit grade is warranted. Reassessments of credit risk grades for larger problem loans occur at least quarterly.
After reviewing the grades in the loan portfolio, the second step is to estimate the loss that may be present in the loans.
The estimation takes into consideration the loan grade and other factors such as:
|
¡
|
|
Loan pool segmentation;
|
|
¡
|
|
Historical loss analysis;
|
|
¡
|
|
Identification, review, and valuation of impaired loans;
|
|
¡
|
|
Changes in the economy impacting lending activities;
|
|
¡
|
|
Changes in the concentrations of various loan types;
|
|
¡
|
|
Changes in the growth rate or volume of lending activities;
|
|
¡
|
|
Changes in the trends for delinquent and problem loans;
|
|
¡
|
|
Changes in the control environment or procedures;
|
|
¡
|
|
Changes in the management and staffing effectiveness;
|
|
¡
|
|
Changes in the loan review effectiveness;
|
|
¡
|
|
Changes in the underlying collateral values of loans;
|
|
¡
|
|
Changes in the competition/regulatory/legal issues;
|
|
¡
|
|
Unanticipated events; and
|
|
¡
|
|
Changes and additional valuation for structured financing and syndicated national credits.
|
GAAP, banking regulations, and sound banking practices require that the Company record this estimate of inherent losses in the form of an
ALLL. If the previously recorded ALLL is less than the current estimate, the Company must record additional provision for loan loss as an expense to increase the balance of the allowance to a level that is commensurate with the Companys
revised estimate for an adequate allowance. Conversely, if the previously recorded allowance is more than the current estimate, the Company reduces the allowance through a credit to provision for loan losses.
The Company attempts to use all available relevant information when estimating inherent losses, but there can be no assurance that all
relevant information is made available to it or that all available information is recognized as relevant. There is a significant amount of uncertainty surrounding the process of estimating losses. An estimate that understates inherent losses will
result in a larger amount of provision expense being required in future periods as the actual losses become apparent. An estimate that overstates inherent losses will have resulted in too much expense to have been recognized in the current period.
Accounting for Income Taxes
The Company is subject to the income tax laws of the U.S. and those states and municipalities in which it has business operations. These tax laws are complex and subject to different interpretations by
the taxpayer and the relevant governmental taxing authorities. The Company must make judgments and
84
interpretations about the application of these inherently complex tax laws when determining the provision for income taxes. Disputes over interpretations of the tax laws may be settled with the
taxing authorities upon examination or audit.
The Company uses the asset and liability method, which recognizes a liability
or asset representing the tax effects of future deductible or taxable amounts attributable to events that have been recognized in the Consolidated Financial Statements. Due to tax regulations, several items of income and expense are recognized in
different periods for tax return purposes than for financial reporting purposes, representing temporary differences. The Company is required to provide in its financial statements for the eventual liability or deduction in its tax return
for these temporary differences until the item of income or expense has been recognized for both financial reporting and for tax purposes. The provision is recorded in the form of deferred tax expense or benefit as the temporary differences arise,
with the accumulated amount recognized as a deferred tax liability or asset.
Deferred tax assets represent future deductions
in the Companys income tax return, while deferred tax liabilities represent future payments to tax authorities. When realization of the benefit of a deferred tax asset is uncertain, the Company is required to recognize a valuation allowance
against it. Management evaluates the Companys deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including the Companys historical profitability and
projections of future taxable income.
If Management determines, based on available evidence at the time, that it is more
likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance against the deferred tax asset must be established. Prior to the Investment Transaction, the Company had been in a cumulative pretax loss
position. For purposes of establishing a deferred tax valuation allowance, this cumulative pretax loss position is considered significant objective evidence that the Company may not be able to realize the Companys deferred tax assets in the
future. Consequently, the Company has established a valuation allowance that offsets the deferred tax assets that are not assured of recoverability through carrybacks against taxes previously paid.
In evaluating the likelihood of realizing the benefit of the deferred tax asset, Management estimates future taxable income based on
Managements business plans and ongoing tax planning strategies against which the deferred tax asset may be applied. The determination to reverse a portion of the valuation allowance once it has demonstrated a sustainable return to
profitability is subject to considerable judgment, this event could occur at the point the Company has experienced consecutive profitable quarters coupled with a forecast of sufficient continuing profitability. This reversal could occur as a single
event or over a period of time, depending upon the level of forecasted taxable income, the degree of risk related to realizing the forecasted taxable income, and the estimated risk related to credit quality. Management assesses the impact of the
Companys performance for the realizability of its net deferred tax asset on a quarterly basis.
In establishing a
provision for income tax expense, Management must make judgments and interpretations about the application are inherently complex tax laws. Management estimates when in the future certain items will affect taxable income and evaluates uncertain tax
positions in accordance with ASC 740,
Income Taxes.
The Company is also subject to routine corporate tax audits by the various tax jurisdictions. Quarterly, a review of uncertain tax positions is completed and due to changing facts and
circumstances, such as the closing of a tax audit or the refinement of an estimate, there may be an adjustment to the income tax recognized. To the extent that the final tax outcome of these matters is different than the amounts recorded, such
differences will impact income tax expense in the period in which such determination is made. The estimates and judgments made relating to income taxes are complex and are subject to interpretation. There can be no assurances that the estimated
amounts used to calculate the income tax positions could not be challenged by a tax jurisdiction and if challenged, the financial impact could material to the Companys Consolidated Statements of Operations.
85
This information should be read in conjunction with Note 11, Deferred Tax Assets and
Tax Provision of the Consolidated Financial Statements for additional information relating to the Companys recorded provision (benefit) for income taxes and deferred tax assets and liabilities.
Goodwill
Goodwill
represents the excess of the purchase price of an acquisition over the estimated fair value of the assets received, liabilities assumed, and noncontrolling interests. Goodwill must be reviewed for impairment whenever there is evidence to suggest
that the reason an acquirer paid more than the estimated value of the net assets no longer is present, but not less frequently than once per year. This evidence may be in the form of a triggering event or a series of events or developments.
Testing goodwill for impairment consists of a two-part test to determine the fair value of goodwill. In Step 1, the fair
value of the reporting unit is determined and compared to its carrying value including goodwill. If the fair value of the reporting unit is more than its carrying value, goodwill is not impaired. If the fair value of the reporting unit is less than
its carrying value, the company must proceed with Step 2. In Step 2, the implied fair value of goodwill is estimated. The implied fair value of goodwill is the excess of fair value of the reporting unit over the fair value of the assets acquired,
liabilities assumed, and noncontrolling interests of the reporting unit as they would be determined in an acquisition. If the carrying amount of the goodwill is more than its implied fair value, goodwill is impaired and an impairment charge must be
recognized.
Both the process of initially recording goodwill and the subsequent review for impairment involve significant
judgment. Since goodwill is calculated as the excess between the purchase price on an acquisition and the fair value of the net assets acquired, which is an estimate, goodwill is itself an estimate dependent on the judgments made to estimate the
fair value of the Companys assets, liabilities, and noncontrolling interests. If the resulting estimate of goodwill proves to be overstated, then a subsequent impairment charge would need to be recorded to earnings to recognize that
overstatement. The process of assessing impairment involves judgment regarding future prospects, business conditions, and how much weight to assign to differences between the Company and similar institutions when comparing financial results.
86
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk is the risk of the change in the value of financial instruments due to movements in market factors. The preponderance of market risk that the Company assumes is from interest rate risk.
Interest rate risk is the risk to earnings or capital arising from movements in interest rates. The economic perspective for market risk focuses on the value of assets or liabilities in todays interest rate environment and the sensitivity of
those values to changes in interest rates.
Interest rate risk arises from differences between the timing of rate changes and
the timing of cash flows (repricing risk); from changing rate relationships between different yield curves affecting assets or liabilities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from
interest-related options embedded in assets or liabilities (option risk). The evaluation of interest rate risk also considers the potential effect on fee income that is sensitive to changes in interest rates.
For financial instruments that are recorded at fair value, their positions are marked-to-market and changes in the market value of the
financial instrument are immediately identified through either earnings or other comprehensive income, both of which impact capital. As with most commercial banks, the Company records most of its financial instruments at historical cost. A separate
approach is used to identify market risks for all financial instruments. The Company uses Economic Value of Equity (EVE) shock simulation model to identify the impact of market risk to capital and forecasted Net Interest Income
(NII) shock simulation to identify the impact of interest rate risk to earnings.
EVE shock simulations model the
effects of an instantaneous, sustained and identical change in all market interest rates (in increments of +/- 100 basis points) on assets and liabilities, and measures the resulting increase or decrease to the Companys equity position.
EVE is the discounted value of future cash flows of all interest rate sensitive assets minus the discounted value of all interest rate sensitive liabilities, plus the book value of tangible noninterest rate sensitive assets minus tangible
noninterest rate sensitive liabilities.
NII shock simulations model the impact of an instantaneous, sustained and identical
change in all market interest rates (in increments of +/- 100 basis points) on future NII. NII simulates the effects that repricing has on both interest rate sensitive assets and liabilities. Shock analysis is objective and facilitates
comparability. It is not entirely realistic in that it assumes an instantaneous and equal impact on all market rates and not all market rates respond in a parallel fashion to rising or falling interest rates. This causes asymmetry in the magnitude
of changes in NII and net economic value resulting from the hypothetical increases and decreases in interest rates. Also, the current low rate environment with implied zero rate floors prevents a true parallel shift for downward rate shocks.
The Company measures its market risk exposure by performing +/- 200 basis point EVE shock simulations and measures the
increase or decrease to the Companys EVE position. The Companys Board of Directors has set a 15% limit for the change in equity in such simulation. The Company measures interest rate risk by performing +/- 200 basis point NII shock
simulation and measures the increase or decrease in NII against the projected NII assuming the forward curve over the next twelve months. The Board of Directors has set a 10% limit for the change in NII in such simulation. At December 31, 2011,
and December 31, 2010, the Company met the Board of Directors approved limits for both EVE and NII.
Financial
instruments respond differently from each other in a rising or falling interest rate environment. The response of each instrument depends on its structure including the contractual term, repricing features, amortization or bullet features, expected
prepayments or runoff rates, rate indices, caps, floors, etc. The mismatch of these types of features between interest rate sensitive assets versus interest rate sensitive liabilities may significantly impact market risk exposure.
87
The Company manages its interest rate exposure by monitoring potential asset and liability
mismatches and, when necessary, reduces them. This may include changing the mix of repricing features as financial instruments come due, product pricing and buying or selling financial instruments with offsetting features.
The Company can also manage its financial instrument exposure by entering into derivative contracts such as futures, forwards, swaps, or
option contracts. Accordingly, the Companys evaluation of market risk considers both derivative positions along with the non-derivative positions intended to be hedged. While derivative instruments are effective hedging tools, the Company
generally has been successful at maintaining its interest rate risk profile within policy limits strictly from proactive asset/liability strategies without the use of derivatives.
EVE Summary
The results of modeled EVE interest rate shock for
December 31, 2011, and December 31, 2010, are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVE Shock Summary Report December 31, 2011
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
DN 200
|
|
|
Base
|
|
|
UP 200
|
|
|
Total assets
|
|
$
|
6,131
|
|
|
$
|
5,887
|
|
|
$
|
5,547
|
|
|
Total liabilities
|
|
|
5,524
|
|
|
|
5,180
|
|
|
|
4,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value
|
|
$
|
607
|
|
|
$
|
707
|
|
|
$
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14.2
|
%
|
|
|
|
|
|
|
15.0
|
%
|
|
Policy limit for change in rate
|
|
|
-15.0
|
%
|
|
|
|
|
|
|
-15.0
|
%
|
|
Within limit
|
|
|
Yes
|
|
|
|
|
|
|
|
Yes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVE Shock Summary ReportDecember 31, 2010
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
DN 200
|
|
|
Base
|
|
|
UP 200
|
|
|
Total assets
|
|
$
|
6,169
|
|
|
$
|
5,891
|
|
|
$
|
5,619
|
|
|
Total liabilities
|
|
|
5,601
|
|
|
|
5,301
|
|
|
|
5,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value
|
|
$
|
568
|
|
|
$
|
590
|
|
|
$
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-3.7
|
%
|
|
|
|
|
|
|
-0.7
|
%
|
|
Policy limit for change in rate
|
|
|
-15.0
|
%
|
|
|
|
|
|
|
-15.0
|
%
|
|
Within limit
|
|
|
Yes
|
|
|
|
|
|
|
|
Yes
|
|
|
Successor Company
At December 31, 2011, and December 31, 2010, the Companys modeled EVE was $707 million and $590 million, respectively. Assuming an instantaneous 200 basis points increase in interest
rates, the Companys projected EVE would increase by approximately $106 million or 15.0% from the $707 million base amount at
88
December 31, 2011, and decrease $4 million or 0.7% from the $590 million base amount at December 31, 2010. Assuming an instantaneous 200 basis point decrease in interest rates, the
Companys projected EVE would decrease by $100 million or 14.2% at December 31, 2011, and decrease by $22 million or 3.7% at December 31, 2010. These changes are within the Companys policy limit of a 15% decline in EVE. Note,
the current low rate environment prevents a true parallel shock analysis in a downward interest rate environment, which distort EVE results.
NII Summary
The results
of modeled NII interest rate shock for the forward twelve months beginning December 31, 2011, and December 31, 2010, are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NII Shock Summary Report December 31, 2011
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
DN 200
|
|
|
Base
|
|
|
UP 200
|
|
|
Interest income
|
|
$
|
232
|
|
|
$
|
242
|
|
|
$
|
274
|
|
|
Interest expense
|
|
|
28
|
|
|
|
35
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
204
|
|
|
$
|
207
|
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.4
|
%
|
|
|
|
|
|
|
7.0
|
%
|
|
Policy limit for change in rate
|
|
|
-10.0
|
%
|
|
|
|
|
|
|
-10.0
|
%
|
|
Within limit
|
|
|
Yes
|
|
|
|
|
|
|
|
Yes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NII Shock Summary Report December 31, 2010
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
DN 200
|
|
|
Base
|
|
|
UP 200
|
|
|
Interest income
|
|
$
|
232
|
|
|
$
|
245
|
|
|
$
|
284
|
|
|
Interest expense
|
|
|
32
|
|
|
|
42
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
200
|
|
|
$
|
203
|
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-1.5
|
%
|
|
|
|
|
|
|
7.9
|
%
|
|
Policy limit for change in rate
|
|
|
-10.0
|
%
|
|
|
|
|
|
|
-10.0
|
%
|
|
Within limit
|
|
|
Yes
|
|
|
|
|
|
|
|
Yes
|
|
|
Successor Company
At December 31, 2011, the Companys modeled projection for net interest income over the next twelve months was $207 million. Assuming an instantaneous 200 basis points increase in interest
rates, the Companys projected NII would increase by approximately $15 million or 7.0% from the $207 million base amount. Assuming an instantaneous 200 basis point decrease in interest rates, including a rate floor at zero percent, the
Companys projected NII would decrease by $3 million or 1.4%. These changes are within the Companys policy limit of a 10% decline in NII.
At December 31, 2010, the Companys modeled projection for net interest income over the next twelve months was $203 million. Assuming an instantaneous 200 basis point increase in interest rates,
the
89
Companys projected NII would increase by approximately $16 million or 7.9% from the $203 million base amount. Assuming an instantaneous 200 basis point decrease in interest rates, including
a rate floor at zero percent, the Companys projected NII would decrease by $3 million or 1.5%. These changes are within the Companys policy limit of a 10% decline in NII.
The above factors impacted overall sensitivity of the Companys EVE and NII to changes in interest rates by increasing the
proportion of assets and liabilities that are either insensitive to rate changes or by lengthening the average maturity so that the effect of rate changes would be delayed.
The model utilizes certain assumptions that address optionality. These assumptions include the following:
|
¡
|
|
Clients have the option to prepay their loans or withdraw their non-maturing deposits;
|
|
¡
|
|
Issuers have the option to prepay or call their debt, on some of the securities held by the Company;
|
|
¡
|
|
The Company has the option to prepay or call certain types of its debt;
|
|
¡
|
|
The Company has the option to re-price its administered deposits; and
|
|
¡
|
|
Loans include features such as interest rate resets, imbedded caps and floors, and other aspects of loan terms and conditions.
|
There are various limitations inherent in modeling both EVE and NII sensitivity analyses. Certain
assumptions may not reflect the manner in which actual yields and costs respond to market changes. Similarly, prepayment estimates and similar assumptions are subjective in nature, involve uncertainties and therefore cannot be determined with
precision. Changes in interest rates may also affect the Companys operating environment and operating strategies as well as those of the Companys competitors. In addition, certain adjustable rate assets have contractual limits on the
magnitude of rate changes over specified periods of time. The Companys NII sensitivity analyses may provide a strong indication of the Companys interest rate risk exposure however, actual performance may differ from modeled results.
There are no material positions, instruments or transactions that are not included in the modeling nor do any included instruments have special features that are not included.
90
ITEM 8.
|
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Audited consolidated financial statements and related documents required by this item are included in this Annual Report on Form 10-K on the pages indicated:
|
|
|
|
|
Managements Report of Internal Controls Over Financial Reporting
|
|
|
92
|
|
|
|
Reports of Independent Registered Public Accounting Firm
s
|
|
|
93
|
|
|
|
Consolidated Balance Sheets as of December 31, 2011, and 2010
|
|
|
96
|
|
|
|
Consolidated Statements of Operations for the twelve months ended December 31, 2011, the four months ended December
31, 2010, the eight months ended August 31, 2010, and the twelve months ended December 31, 2009
|
|
|
97
|
|
|
|
Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income/(Loss) for the twelve months ended December
31, 2011, the four months ended December 31, 2010, the eight months ended August 31, 2010, and the twelve months ended December 31, 2009
|
|
|
99
|
|
|
|
Consolidated Statements of Cash Flows for the twelve months ended December 31, 2011, the four months ended December
31, 2010, the eight months ended August 31, 2010, and the twelve months ended December 31, 2009
|
|
|
103
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
107
|
|
|
|
The following unaudited supplementary data is included in this Annual Report on Form 10-K on the page indicated:
|
|
|
|
|
|
|
Consolidated Quarterly Financial Data (Unaudited)
|
|
|
201
|
|
91
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders
Pacific Capital Bancorp
Management of Pacific Capital Bancorp is responsible for
establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. The Companys internal control over financial reporting is designed by,
or under the supervision of the Companys Chief Executive Officer and Chief Financial Officer and effected by the Companys Board of Directors, Management, and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Companys internal control over financial reporting includes those policies and procedures
that:
|
(1)
|
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Company;
|
|
(2)
|
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with general
accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
|
|
(3)
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets
that could have a material effect on the financial statements.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
The Companys Management assessed the
effectiveness of the Companys internal control over financial reporting as of December 31, 2011, using the criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal ControlIntegrated Framework. Based on this assessment, management believes that, as of December 31, 2011, the Companys internal control over financial reporting is effective.
KPMG LLP, the independent registered public accounting firm that audited the Companys consolidated financial statements
included in this Annual Report on Form 10-K for the year ended December 31, 2011, has issued an audit report on the effectiveness of the Companys internal control over financial reporting in accordance with the standards of the Public
Company Accounting Oversight Board that appears on page 95.
92
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Pacific Capital Bancorp:
We have audited the accompanying consolidated balance
sheet of Pacific Capital Bancorp and subsidiaries (the Company) as of December 31, 2011, and the related consolidated statements of operations, changes in shareholders equity and comprehensive income (loss), and cash
flows for the year ended December 31, 2011. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Pacific Capital Bancorp and subsidiaries as of December 31, 2011, and the results of their operations and their cash flows for the year ended December 31, 2011, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), Pacific Capital Bancorps internal control over financial reporting as of December 31, 2011, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2012 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
(signed) KPMG LLP
Los Angeles, California
March 15, 2012
93
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Pacific Capital Bancorp
We have
audited the accompanying consolidated balance sheet of Pacific Capital Bancorp and subsidiaries (the Company) as of December 31, 2010 (Successor), and the related consolidated statements of operations, changes in shareholders equity and
comprehensive income (loss), and cash flows for the period September 1, 2010 through December 31, 2010 (Successor), the period January 1, 2010 through August 31, 2010 (Predecessor), and the year ended December 31, 2009
(Predecessor). These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Pacific Capital Bancorp and subsidiaries at December 31, 2010 (Successor), and the consolidated results of their operations and their cash flows for the period September 1, 2010
through December 31, 2010 (Successor), the period January 1, 2010 through August 31, 2010 (Predecessor), and the year ended December 31, 2009 (Predecessor), in conformity with U.S. generally accepted accounting principles.
Los Angeles, California
March 25, 2011
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Pacific Capital Bancorp:
We have audited Pacific Capital Bancorps internal
control over financial reporting as of December 31, 2011, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pacific Capital
Bancorps management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A
companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Pacific Capital Bancorp maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2011, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of Pacific Capital Bancorp and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, changes in shareholders equity and comprehensive income (loss), and cash flows for the year ended
December 31, 2011, and our report dated March 15, 2012 expressed an unqualified opinion on those consolidated financial statements.
(signed) KPMG LLP
Los Angeles, California
March 15, 2012
95
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
49,324
|
|
|
$
|
45,820
|
|
Interest bearing demand deposits in other financial institutions
|
|
|
173,408
|
|
|
|
450,044
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
222,732
|
|
|
|
495,864
|
|
Investment securities available for sale
|
|
|
1,503,425
|
|
|
|
1,278,100
|
|
Loans held for sale
|
|
|
3,072
|
|
|
|
16,512
|
|
Loans held for investment
|
|
|
3,660,961
|
|
|
|
3,761,517
|
|
Allowance for loan and lease losses
|
|
|
(5,528
|
)
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
Net loans held for investment
|
|
|
3,655,433
|
|
|
|
3,760,997
|
|
Premises and equipment, net
|
|
|
75,749
|
|
|
|
71,465
|
|
FHLB stock and other investments
|
|
|
76,356
|
|
|
|
84,235
|
|
Goodwill and other intangible assets
|
|
|
89,255
|
|
|
|
93,700
|
|
Other assets
|
|
|
224,000
|
|
|
|
284,675
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
5,850,022
|
|
|
$
|
6,085,548
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
1,175,532
|
|
|
$
|
1,099,260
|
|
Interest bearing
|
|
|
3,441,508
|
|
|
|
3,807,528
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
4,617,040
|
|
|
|
4,906,788
|
|
Securities sold under agreements to repurchase and Federal funds purchased
|
|
|
315,919
|
|
|
|
321,237
|
|
Other borrowings
|
|
|
66,524
|
|
|
|
121,014
|
|
Other liabilities
|
|
|
88,569
|
|
|
|
93,826
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
5,088,052
|
|
|
|
5,442,865
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock ($0.001 par value; 50,000 authorized; 32,905 and 32,901 shares issued and outstanding at December 31, 2011, and
December 31, 2010, respectively)
|
|
|
33
|
|
|
|
33
|
|
Paid in capital
|
|
|
651,066
|
|
|
|
650,010
|
|
Retained earnings
|
|
|
96,266
|
|
|
|
25,744
|
|
Accumulated other comprehensive income/(loss)
|
|
|
14,605
|
|
|
|
(33,104
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
761,970
|
|
|
|
642,683
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
5,850,022
|
|
|
$
|
6,085,548
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
96
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
241,053
|
|
|
$
|
76,878
|
|
|
|
|
$
|
166,581
|
|
|
$
|
303,057
|
|
Investment securities
|
|
|
27,986
|
|
|
|
6,872
|
|
|
|
|
|
20,052
|
|
|
|
42,759
|
|
Trading assets
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
5,131
|
|
Other
|
|
|
2,255
|
|
|
|
990
|
|
|
|
|
|
2,924
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INTEREST INCOME
|
|
|
271,294
|
|
|
|
84,740
|
|
|
|
|
|
189,700
|
|
|
|
353,272
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
25,310
|
|
|
|
6,754
|
|
|
|
|
|
46,510
|
|
|
|
83,629
|
|
Securities sold under agreements to repurchase and Federal funds purchased
|
|
|
9,585
|
|
|
|
1,771
|
|
|
|
|
|
5,392
|
|
|
|
10,127
|
|
Other borrowings
|
|
|
9,055
|
|
|
|
4,043
|
|
|
|
|
|
28,426
|
|
|
|
59,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INTEREST EXPENSE
|
|
|
43,950
|
|
|
|
12,568
|
|
|
|
|
|
80,328
|
|
|
|
153,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME
|
|
|
227,344
|
|
|
|
72,172
|
|
|
|
|
|
109,372
|
|
|
|
199,631
|
|
Provision for loan losses
|
|
|
5,555
|
|
|
|
590
|
|
|
|
|
|
171,583
|
|
|
|
352,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME/(LOSS) AFTER PROVISION FOR LOAN LOSSES
|
|
|
221,789
|
|
|
|
71,582
|
|
|
|
|
|
(62,211
|
)
|
|
|
(152,767
|
)
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees
|
|
|
23,583
|
|
|
|
7,579
|
|
|
|
|
|
14,901
|
|
|
|
24,884
|
|
Trust and investment advisory fees
|
|
|
21,014
|
|
|
|
6,743
|
|
|
|
|
|
14,035
|
|
|
|
21,247
|
|
(Loss)/gain on securities, net
|
|
|
(251
|
)
|
|
|
(32
|
)
|
|
|
|
|
5,667
|
|
|
|
10,970
|
|
Other
|
|
|
6,472
|
|
|
|
5,782
|
|
|
|
|
|
1,194
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NONINTEREST INCOME
|
|
|
50,818
|
|
|
|
20,072
|
|
|
|
|
|
35,797
|
|
|
|
57,561
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
97,042
|
|
|
|
28,128
|
|
|
|
|
|
58,816
|
|
|
|
103,228
|
|
Net occupancy expense
|
|
|
23,011
|
|
|
|
7,711
|
|
|
|
|
|
15,494
|
|
|
|
26,214
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,710
|
|
Other
|
|
|
82,506
|
|
|
|
30,045
|
|
|
|
|
|
75,653
|
|
|
|
122,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NONINTEREST EXPENSE
|
|
|
202,559
|
|
|
|
65,884
|
|
|
|
|
|
149,963
|
|
|
|
380,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME/(LOSS) BEFORE INCOME TAX BENEFIT
|
|
|
70,048
|
|
|
|
25,770
|
|
|
|
|
|
(176,377
|
)
|
|
|
(475,447
|
)
|
Income tax benefit
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
(4,742
|
)
|
|
|
(18,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) FROM CONTINUING OPERATIONS
|
|
|
70,522
|
|
|
|
25,770
|
|
|
|
|
|
(171,635
|
)
|
|
|
(456,624
|
)
|
(Expense)/income from discontinued operations, net of tax
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
(1,429
|
)
|
|
|
35,363
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
8,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expense)/income from discontinued operations, net
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
6,731
|
|
|
|
35,363
|
|
NET INCOME/(LOSS)
|
|
|
70,522
|
|
|
|
25,744
|
|
|
|
|
|
(164,904
|
)
|
|
|
(421,261
|
)
|
Dividends and accretion on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
6,938
|
|
|
|
9,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) APPLICABLE TO COMMON SHAREHOLDERS
|
|
$
|
70,522
|
|
|
$
|
25,744
|
|
|
|
|
$
|
(171,842
|
)
|
|
$
|
(431,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued on next page)
97
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share amounts)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Earnings/(loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
1.02
|
|
|
|
|
$
|
(359.07
|
)
|
|
$
|
(977.78
|
)
|
Diluted
|
|
$
|
2.14
|
|
|
$
|
0.86
|
|
|
|
|
$
|
(359.07
|
)
|
|
$
|
(977.78
|
)
|
Earnings per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
14.08
|
|
|
$
|
75.72
|
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
14.08
|
|
|
$
|
75.72
|
|
Earnings/(loss) per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
1.02
|
|
|
|
|
$
|
(359.50
|
)
|
|
$
|
(923.46
|
)
|
Diluted
|
|
$
|
2.14
|
|
|
$
|
0.85
|
|
|
|
|
$
|
(359.50
|
)
|
|
$
|
(923.46
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,904
|
|
|
|
25,331
|
|
|
|
|
|
478
|
|
|
|
467
|
|
Diluted
|
|
|
32,913
|
|
|
|
30,126
|
|
|
|
|
|
478
|
|
|
|
467
|
|
Dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
11.00
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
98
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME/(LOSS)
(dollars and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
Retained
Earnings
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid in
Capital
|
|
|
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
181
|
|
|
$
|
175,907
|
|
|
|
466
|
|
|
$
|
11,659
|
|
|
$
|
120,137
|
|
|
$
|
9,203
|
|
|
$
|
471,531
|
|
|
$
|
788,437
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(421,261
|
)
|
|
|
(421,261
|
)
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on AFS securities,
net of tax of $249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342
|
)
|
|
|
|
|
|
|
(342
|
)
|
Impairment loss on securities
included in earnings,
net of tax of $2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Realized gain on sale and
calls of AFS securities included in
earnings, net of tax of $3,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,557
|
)
|
|
|
|
|
|
|
(4,557
|
)
|
Postretirement expense
obligation arising during period,
net of tax of $213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
|
|
(293
|
)
|
Postretirement curtailment gain,
net of tax of $1,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,615
|
)
|
|
|
|
|
|
|
(2,615
|
)
|
Postretirement plan amendment,
net of tax of $11,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,804
|
|
|
|
|
|
|
|
15,804
|
|
Transition adjustment to
initially apply FASB ASC 320-10-65-1,
net of tax of $2,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,850
|
)
|
|
|
|
|
|
|
(2,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(416,112
|
)
|
Amortization of preferred
stock discount
|
|
|
|
|
|
|
835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(835
|
)
|
|
|
|
|
Accrued stock dividends not paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,162
|
)
|
|
|
(9,162
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
Restricted stock grants (1)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
30
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
2,912
|
|
Cash dividends declared
at $11.00 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,189
|
)
|
|
|
(5,189
|
)
|
Transition adjustment to
initially apply FASB ASC 320-10-65-1,
net of tax of $2.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,850
|
|
|
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
181
|
|
|
|
176,742
|
|
|
|
467
|
|
|
|
11,689
|
|
|
|
123,886
|
|
|
|
14,352
|
|
|
|
37,934
|
|
|
|
364,603
|
|
(continued on next page)
99
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME/(LOSS)
(dollars and shares in thousands)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
Retained
Earnings
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid in
Capital
|
|
|
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164,904
|
)
|
|
|
(164,904
|
)
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on AFS securities, net of tax of $6,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,587
|
|
|
|
|
|
|
|
8,587
|
|
Realized gain on sale and calls of AFS securities included in earnings, net of tax of $2,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,055
|
)
|
|
|
|
|
|
|
(3,055
|
)
|
Postretirement expense obligation arising during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,888
|
)
|
|
|
|
|
|
|
(1,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161,260
|
)
|
Amortization of preferred stock discount
|
|
|
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(583
|
)
|
|
|
|
|
Accrued stock dividends not paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,354
|
)
|
|
|
(6,354
|
)
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
401
|
|
Restricted stock activity (1)
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
116
|
|
|
|
2,322
|
|
|
|
|
|
|
|
|
|
|
|
2,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2010
|
|
|
181
|
|
|
|
177,325
|
|
|
|
472
|
|
|
|
11,805
|
|
|
|
126,609
|
|
|
|
17,996
|
|
|
|
(133,907
|
)
|
|
|
199,828
|
|
(continued on next page)
100
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME/(LOSS)
(dollars and shares in thousands)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
Retained
Earnings
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid in
Capital
|
|
|
|
|
Successor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of accumulated dividends of Series B
Preferred Stock for
Series D Preferred Stock
|
|
|
14
|
|
|
|
14,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,517
|
|
Purchase accounting
adjustments
|
|
|
|
|
|
|
(119,676
|
)
|
|
|
|
|
|
|
(11,805
|
)
|
|
|
(117,071
|
)
|
|
|
(17,996
|
)
|
|
|
133,907
|
|
|
|
(132,641
|
)
|
Issuance of Preferred and
Common Stock to SB
Acquisition Company
|
|
|
455
|
|
|
|
455,000
|
|
|
|
2,250
|
|
|
|
3
|
|
|
|
44,997
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
Acquirer costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,889
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,889
|
)
|
Issuance of common
stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 1, 2010
|
|
|
650
|
|
|
|
527,166
|
|
|
|
2,722
|
|
|
|
3
|
|
|
|
46,855
|
|
|
|
|
|
|
|
|
|
|
|
574,024
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,744
|
|
|
|
25,744
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,136
|
)
|
|
|
|
|
|
|
(33,136
|
)
|
Realized loss on sale and calls of AFS securities included in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,360
|
)
|
Conversion of Series C and Series D Preferred Stock to Common Stock
|
|
|
(650
|
)
|
|
|
(527,166
|
)
|
|
|
26,356
|
|
|
|
26
|
|
|
|
527,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights offering, net
|
|
|
|
|
|
|
|
|
|
|
3,822
|
|
|
|
4
|
|
|
|
76,015
|
|
|
|
|
|
|
|
|
|
|
|
76,019
|
|
Restricted stock activity (1)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
32,901
|
|
|
|
33
|
|
|
|
650,010
|
|
|
|
(33,104
|
)
|
|
|
25,744
|
|
|
|
642,683
|
|
(continued on next page)
101
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME/(LOSS)
(dollars and shares in thousands)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Accumulated
Other
Comprehensive
Income/(Loss)
|
|
|
Retained
Earnings
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid in
Capital
|
|
|
|
|
Successor Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,522
|
|
|
|
70,522
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on AFS securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,960
|
|
|
|
|
|
|
|
47,960
|
|
Realized loss on sale and calls of AFS securities included in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(251
|
)
|
|
|
|
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,231
|
|
Stock option compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
Restricted stock activity (1)
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
|
|
|
$
|
|
|
|
|
32,905
|
|
|
$
|
33
|
|
|
$
|
651,066
|
|
|
$
|
14,605
|
|
|
$
|
96,266
|
|
|
$
|
761,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The amount recognized as compensation expense related to restricted stock awards for the twelve months ended December 31, 2009, the eight
months ended August 31, 2010, the four months ended December 31, 2010, and the twelve months ended December 31, 2011, was $3.0 million, $2.5 million, $0, and $870,000, respectively.
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
102
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations
|
|
$
|
70,522
|
|
|
$
|
25,770
|
|
|
|
|
$
|
(171,635
|
)
|
|
$
|
(456,624
|
)
|
Net (loss)/income from discontinued operations
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
6,731
|
|
|
|
35,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
70,522
|
|
|
|
25,744
|
|
|
|
|
|
(164,904
|
)
|
|
|
(421,261
|
)
|
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
5,555
|
|
|
|
590
|
|
|
|
|
|
171,583
|
|
|
|
352,398
|
|
Depreciation, amortization and accretion
|
|
|
12,005
|
|
|
|
(2,576
|
)
|
|
|
|
|
11,004
|
|
|
|
19,627
|
|
Accretion of acquired loans
|
|
|
(193,136
|
)
|
|
|
(66,396
|
)
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,064
|
|
|
|
|
|
|
|
|
|
2,888
|
|
|
|
3,853
|
|
Deferred income taxes
|
|
|
(1,494
|
)
|
|
|
|
|
|
|
|
|
(4,014
|
)
|
|
|
62,907
|
|
Net amortization of discounts and premiums for investment securities
|
|
|
5,397
|
|
|
|
2,071
|
|
|
|
|
|
(941
|
)
|
|
|
(5,418
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,710
|
|
Low income housing tax credit partnership impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,876
|
|
Operating lease impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
1,860
|
|
|
|
|
|
Gain on benefit curtailment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,511
|
)
|
Losses on acceleration of discount on redemption of subordinated debt
|
|
|
4,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sale of assets
|
|
|
(7,821
|
)
|
|
|
(4,724
|
)
|
|
|
|
|
(11,294
|
)
|
|
|
(9,736
|
)
|
Loans originated for sale and principal collections, net
|
|
|
17,746
|
|
|
|
16,512
|
|
|
|
|
|
14,992
|
|
|
|
19,211
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
50,171
|
|
|
|
(14,183
|
)
|
|
|
|
|
(27,278
|
)
|
|
|
(84,409
|
)
|
Assets from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,482,833
|
)
|
Other liabilities
|
|
|
(1,066
|
)
|
|
|
(22,606
|
)
|
|
|
|
|
18,254
|
|
|
|
3,334
|
|
Liabilities from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,482,833
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
1,644
|
|
|
|
208,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES
|
|
|
(36,316
|
)
|
|
|
(65,568
|
)
|
|
|
|
|
13,794
|
|
|
|
282,117
|
|
(continued on next page)
103
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from loan sales
|
|
|
3,298
|
|
|
|
9,226
|
|
|
|
|
|
37,628
|
|
|
|
168,276
|
|
Loan originations and principal collections, net
|
|
|
538,142
|
|
|
|
305,055
|
|
|
|
|
|
501,700
|
|
|
|
185,022
|
|
Purchase of loans held for investment
|
|
|
(314,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of available for
sale securities
|
|
|
10,709
|
|
|
|
|
|
|
|
|
|
69,133
|
|
|
|
127,601
|
|
Principal pay downs, calls and maturities of
available for sale securities
|
|
|
355,059
|
|
|
|
121,790
|
|
|
|
|
|
462,282
|
|
|
|
1,172,610
|
|
Purchase of available for sale securities
|
|
|
(549,032
|
)
|
|
|
(555,548
|
)
|
|
|
|
|
(232,314
|
)
|
|
|
(1,270,328
|
)
|
Purchase of Federal Home Loan Bank stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(705
|
)
|
Purchase of Federal Reserve Bank stock
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale/(investment) in low income housing tax credit partnership
|
|
|
15,774
|
|
|
|
(528
|
)
|
|
|
|
|
(1,122
|
)
|
|
|
(5,742
|
)
|
Purchase of premises and equipment, net
|
|
|
(13,900
|
)
|
|
|
(585
|
)
|
|
|
|
|
(767
|
)
|
|
|
(8,453
|
)
|
Proceeds from redemption of Federal Reserve Bank stock
|
|
|
2,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from redemption of Federal Home Loan Bank stock
|
|
|
7,889
|
|
|
|
2,700
|
|
|
|
|
|
5,415
|
|
|
|
|
|
Proceeds from sale of other real estate owned, net
|
|
|
51,379
|
|
|
|
18,569
|
|
|
|
|
|
12,373
|
|
|
|
14,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES
|
|
|
106,403
|
|
|
|
(99,321
|
)
|
|
|
|
|
854,328
|
|
|
|
383,221
|
|
(continued on next page)
104
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in deposits
|
|
|
(282,297
|
)
|
|
|
(271,760
|
)
|
|
|
|
|
(208,265
|
)
|
|
|
107,094
|
|
Net (decrease)/increase in short term borrowings
|
|
|
(7,125
|
)
|
|
|
(1,024
|
)
|
|
|
|
|
(39,416
|
)
|
|
|
3,538
|
|
Proceeds from long term debt and other borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
275,000
|
|
Repayment of long term debt and other borrowings
|
|
|
(789
|
)
|
|
|
(879,118
|
)
|
|
|
|
|
(331,083
|
)
|
|
|
(502,472
|
)
|
Repayment of subordinated debt upon tender
|
|
|
(53,000
|
)
|
|
|
(44,200
|
)
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series C Preferred Stock
|
|
|
|
|
|
|
455,000
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from rights offering
|
|
|
|
|
|
|
76,019
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
Acquirer expense
|
|
|
|
|
|
|
(7,889
|
)
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Cash dividends paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,189
|
)
|
Cash dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,107
|
)
|
Other, net
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(343,219
|
)
|
|
|
(627,972
|
)
|
|
|
|
|
(503,813
|
)
|
|
|
(124,210
|
)
|
(continued on next page)
105
Pacific Capital Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(273,132
|
)
|
|
|
(792,861
|
)
|
|
|
|
|
364,309
|
|
|
|
541,128
|
|
CASH AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
495,864
|
|
|
|
1,288,725
|
|
|
|
|
|
924,416
|
|
|
|
383,288
|
|
CASH AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF PERIOD
|
|
$
|
222,732
|
|
|
$
|
495,864
|
|
|
|
|
$
|
1,288,725
|
|
|
$
|
924,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
49,477
|
|
|
$
|
15,691
|
|
|
|
|
$
|
81,512
|
|
|
$
|
153,606
|
|
Income taxes
|
|
|
4,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Non-cash investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net transfers from loans held for investment to loans held for sale
|
|
|
3,838
|
|
|
|
112
|
|
|
|
|
|
53,756
|
|
|
|
172,212
|
|
Net transfers from loans held for sale to loans held for investment
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to other real estate owned
|
|
|
63,474
|
|
|
|
15,383
|
|
|
|
|
|
32,734
|
|
|
|
48,242
|
|
Investment tax credit commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328
|
|
Transfers from loans held for sale to available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,660
|
|
Transfers from trading securities to available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
3,759
|
|
|
|
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends declared not paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,057
|
|
Conversion of Series C Preferred Stock to common stock in conjunction with the Investment Transaction
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455,000
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Conversion of Series D Preferred Stock to common stock in conjunction with the Investment Transaction
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72,167
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The accompanying notes are an integral part of these Consolidated Financial Statements.
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Nature of Operations
Pacific Capital Bancorp (the Company or PCBC) is a bank holding company organized under the laws of the state of Delaware. The Company provides a full range of commercial and
consumer banking services to households, professionals, and businesses through its wholly-owned subsidiary Santa Barbara Bank & Trust, National Association (the Bank or SBB&T). These banking services include
depository, lending and wealth management services. The Banks lending products include commercial and industrial (commercial), consumer, commercial and residential real estate loans and Small Business Administration
(SBA) loans. Depository services include checking, interest bearing checking (NOW), money market demand accounts (MMDA), savings, and certificate of deposit (CD) accounts, as well as safe deposit
boxes, travelers checks, money orders, foreign exchange services, and cashiers checks. The Bank also offers a wide range of wealth management services through a full service trust operation and two registered investment advisors that are
wholly-owned subsidiaries, Morton Capital Management (MCM) and R.E. Wacker Associates (REWA). The Bank conducts its banking in the counties of Santa Barbara, Ventura, Los Angeles, Monterey, San Luis Obispo, Santa Clara, Santa
Cruz, and San Benito.
Basis of Presentation
The accompanying audited Consolidated Financial Statements and related footnotes have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) for
year-end financial information and with the Securities and Exchange Commissions (SEC) instructions for Form 10-K, and conform to practices within the financial services industry. All inter-company balances and transactions are
eliminated in consolidation. The Consolidated Financial Statements refer to Management within the disclosures. The Companys definition of Management is the executive management team of the Company and its subsidiaries.
The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the
amount of assets and liabilities as well as disclosures of contingent assets and liabilities at the date of the financial statements. Although Management believes these estimates to be reasonably accurate, actual amounts may differ. Certain amounts
in the 2010, and 2009, Consolidated Financial Statements have been reclassified to be comparable with classifications used in the 2011, Consolidated Financial Statements.
Recapitalization through the Investment Transaction and Purchase Accounting
On August 31, 2010, pursuant to the terms of an Investment Agreement (the Investment Agreement), dated as of April 29, 2010, by and among the Company, the Bank and SB Acquisition
Company LLC, a wholly-owned subsidiary of Ford Financial Fund, L.P. (the Investor), the Company issued to the Investor (i) 2,250,000 shares of common stock at a purchase price of $20.00 per share and (ii) 455,000 newly created
shares of its Series C Convertible Participating Voting Preferred Stock (the Series C Preferred Stock) at a purchase price of $1,000 per share (the purchase and sale of these securities, the Investment Transaction). The
aggregate consideration paid to the Company by the Investor for these securities was $500 million in cash.
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As a result of the Investment Transaction, pursuant to which the Investor acquired and
controlled 98.1% of the voting securities of the Company, the Company followed the acquisition or purchase method of accounting as required by the Business Combinations Topic of the Accounting Standard Codification (ASC) Topic 805
,
Business Combinations
(ASC 805). Under the rules of the SEC Staff Accounting Bulletin T. 5J,
New Basis of Accounting Required in Certain Circumstances
(SEC SAB T. 5J) or ASC 805-50-S99, the application of
push down accounting is required.
As a result of the adjustments required by purchase accounting, the
Companys balance sheets and results of operations from periods through August 31, 2010, are labeled as Predecessor Company and are not comparable to balance sheets and results of operations from periods after the close of
business on August 31, 2010 (the Transaction Date), which are labeled as Successor Company. Purchase accounting requires that the assets purchased, the liabilities assumed, and noncontrolling interests all be reported in
the acquirers financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill. Although the $500 million in cash from the Investor was received on August 31, 2010, the
purchase accounting adjustments are reflected in the Consolidated Financial Statements after the close of business on the Transaction Date. The purchase accounting transactions are reflected within the Successor Companys Consolidated Financial
Statements. Acquisition accounting requires that the valuation of assets, liabilities, and noncontrolling interests be recorded in the acquirees records as well. Accordingly, the Companys Consolidated Financial Statements and
transactional records prior to the Investment Transaction reflect the historical accounting basis of assets and liabilities and are labeled Predecessor Company, while such records subsequent to the Investment Transaction are labeled
Successor Company and reflect the push down basis of accounting for the new fair values in the Companys Consolidated Financial Statements. This change in accounting basis is represented in the Consolidated Financial Statements by a
vertical or horizontal black line which appears between the columns or rows entitled Successor Company and Predecessor Company on the statements or in separate tables labeled Successor Company and
Predecessor Company, and in the relevant notes of the Consolidated Financial Statements. The black line signifies that the amounts shown for the periods prior to and subsequent to the Investment Transaction may not be comparable.
In addition to the new accounting basis established for assets, liabilities and noncontrolling interests, purchase accounting
requires the reclassification of any retained earnings from periods prior to the acquisition to be recognized as common share equity and the elimination of any accumulated other comprehensive income (AOCI) or loss and paid in capital
within the Companys Shareholders Equity section of the Companys Consolidated Financial Statements. Accordingly, retained earnings and AOCI since the Transaction Date represent only the results of operations subsequent to the
Transaction Date.
For authorized shares and stock issuances related to the Investment Transaction refer to Note 2,
Business Combinations - Investment Transaction of the Consolidated Financial Statements.
Consolidation of Subsidiaries and
Variable Interest Entities
The Company has five wholly-owned subsidiaries: SBB&T, a banking subsidiary, and four
unconsolidated subsidiaries used as business trusts in connection with issuance of trust preferred securities as described in Note 15, Other Borrowings of these Consolidated Financial Statements.
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SBB&T has three wholly owned consolidated subsidiaries:
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MCM and REWA, registered investment advisors that provide investment advisory services to individuals, foundations, retirement plans and select
institutional clients; and
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PCB Service Corporation, utilized as a trustee of deeds of trust in which SBB&T is the beneficiary.
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SBB&T also retains ownership in several low income housing tax credit partnerships (LIHTCP) that generate tax credits.
These partnerships are not consolidated into these Consolidated Financial Statements. These investments historically have played a role in meeting SBB&Ts Community Reinvestment Act (CRA) requirements as well as providing tax
credits to reduce the Companys taxable income. The Company does not have any other entities that should be considered for consolidation.
Recent Accounting Pronouncements
During the twelve months ended December 31, 2011, the following accounting pronouncements applicable to the Company were issued or became effective:
In January 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings (TDR) in Update No. 2010-20 (ASU 2011-01). The ASU 2011-01 disclosures for TDRs are delayed until the
FASB completes its deliberations on what constitutes a TDR. In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The ASU clarifies which
loan modifications constitute TDR and is intended to assist creditors in determining whether a modification of the terms of a receivable meet the criteria to be considered a TDR, both for purposes of recording an impairment loss and for disclosure
of TDRs. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial
difficulties. The guidance was effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011. At the same time it adopts ASU 2011-02, the Company will be required to disclose
the activity-based information about TDRs that was previously deferred by ASU No. 2011-01. The adoption of the new guidance has not had a material impact on the Companys Consolidated Financial Statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in GAAP and
International Financial Reporting Standards (IFRS), which updates Topic 820:
Fair Value Measurements
. This update is effective for interim and annual reporting periods beginning after December 15, 2011, and should be applied
prospectively. Early adoption is not permitted. The adoption of the new guidance is not expected to have a material impact on the Companys Consolidated Financial Statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income which updates Topic 220:
Comprehensive Income
. The
FASBs objective in updating this area of the codification is to
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increase comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income (OCI). This update requires
all non-owner changes in stockholders equity to be presented in either a single continuous statement of comprehensive income, or in two separate but consecutive statements. The provisions of this update are effective for interim and annual
periods beginning after December 15, 2011.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for
Impairment, which updates Topic 350:
Intangibles Goodwill and Other
. The provisions of ASU 2011-08 permit an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity must
then perform a quantitative analysis in its test for impairment. The provisions of ASU 2011-08 are effective for fiscal years beginning after December 15, 2011, and should be applied to annual and interim goodwill impairment testing. Early
adoption is permitted provided that the entity has not yet performed its annual impairment test for goodwill. The adoption of the new guidance is not expected to have a material impact on the Companys Consolidated Financial Statements.
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which updates Topic 210:
Balance Sheet. The provisions of ASU 2011-11 require an entity to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions executed
under a master netting or similar arrangement. ASU 2011-11 was issued to enable users of financial statements to better understand the effects or potential effects of those arrangements on its financial position. The provisions of ASU 2011-11 do not
change the accounting for instruments and transactions eligible for offsetting in the statement of financial position, but rather provide for additional disclosure about such instruments and transactions within the Consolidated Financial Statements.
The Company is required to adopt the provisions of ASU 2011-11 retrospectively for all annual reporting periods beginning on or after January 1, 2013, and all interim periods within those annual periods. The adoption of the provisions within
ASU 2011-11 is not expected to have a material impact on the Companys Consolidated Financial Statements.
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 2011-05, which updates Topic 220:
Comprehensive Income
. The purpose of this ASU is to defer only those changes within ASU 2011-05 that relate to the presentation of reclassification adjustments, allowing the FASB additional time to redeliberate on how reclassification
adjustments out of AOCI should be presented in an entitys financial statements. All other requirements within ASU 2011-05 are not affected by ASU 2011-12. The Company is required to adopt the provisions of ASU 2011-12 all annual and interim
periods beginning after December 15, 2011. The adoption of the provisions within ASU 2011-12 is not expected to have a material impact on the Companys Consolidated Financial Statements.
Cash Reserve Requirement
All depository institutions are required by law to maintain reserves against their transaction deposits. The Banks reserves must be held in cash or with the Federal Reserve Bank of San Francisco
(Reserve Bank). The amount of the reserve may vary each day as banks are permitted to meet this requirement
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by maintaining the specified amount as an average balance over a two-week period. The average daily cash reserve balances required to be maintained by the Bank totaled approximately $26.1 million
in 2011, and $23.2 million in 2010. In addition, the Bank must maintain sufficient balances to cover the checks written by the Banks clients that are clearing through the Reserve Bank because they have been deposited at other banks. The Bank
had cash reserves in excess of the required daily cash reserve and to cover the checks written by the Banks clients during 2011, and 2010.
Trading Assets
The identification of a trading asset is determined
at the time of purchase. Trading securities are recorded at fair value on a recurring basis. Trading assets are reported on the Consolidated Balance Sheets at their estimated fair value. The changes in the fair value of the trading securities are
reported in noninterest income as they occur. All trading assets were transferred to the available for sale (AFS) portfolio at the Transaction Date.
Investment Securities
All investment securities are debt securities
and are classified as AFS. The appropriate classification is determined at the time of purchase. Securities classified as AFS are reported as an asset on the Consolidated Balance Sheets at their estimated fair value. As the fair value of AFS
securities changes, the changes are reported (net of income tax, if applicable) as an element of OCI. When AFS securities, specifically identified, are sold, the unrealized gain or loss is reclassified from OCI to noninterest income.
When the estimated fair value of a security is lower than the book value, a security is considered to be temporarily impaired. On a
quarterly basis, Management evaluates any securities in a loss position to determine whether the impairment is other-than-temporary. If there is intent to sell the security or if the Company will be required to sell the security or if the Company
believes it will not recover the entire cost basis of the security, the security is other-than-temporarily impaired and impairment is recognized. The amount of impairment resulting from credit loss is recognized in earnings and impairment related to
all other factors, such as general market conditions, is recognized in OCI.
Management considers a number of factors in its
analysis of whether a decline in a securitys estimated fair value is other-than-temporary. Certain factors considered include, but are not limited to: (a) the length of time and the extent to which the security has been in an unrealized
loss position, (b) changes in the financial condition of the issuer, (c) the payment structure of debt securities, (d) adverse changes in ratings issued by rating agencies, (e) and the intent and ability of the Company to hold
the security for a period of time sufficient to allow for any anticipated recovery in fair value. Interest income is recognized based on the coupon rate, and is increased by the accretion of discounts earned or decreased by the amortization of
premiums paid over the contractual life of the security using the effective interest method.
The Bank is a member of both the
Reserve Bank and the Federal Home Loan Bank of San Francisco (FHLB), and as a condition of membership in both organizations, it is required to purchase stock. In the case of the Reserve Bank, the amount of stock that is required to be
held is based on the Banks capital. The required ownership of FHLB stock is based on the borrowing capacity used by the Bank. These investments are considered equity securities with no actively traded market. Therefore, the
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shares are considered restricted investment securities and reported in FHLB stock and other investments in the Consolidated Balance Sheets. Such investments are carried at cost, which is equal to
the value at which they may be redeemed. The dividend income received from the stock is reported in interest income.
Loans Held for
Sale
Periodically, the Company originates or identifies loans it expects to sell prior to maturity. When loans are
originated or identified to be sold, they are recorded as held for sale and reported at the lower of cost or fair value with any adjustment for net unrealized losses reported in noninterest income. Generally the fair value of loans held for sale is
based on what secondary markets are currently offering for loans with similar characteristics or based on an agreed upon sales price. A loans cost basis includes unearned deferred fees and costs, and premiums and discounts. These loans are
generally held between 30 to 90 days from their origination date. Due to the short period of time loans are held for sale, deferred fees or expenses are not amortized. Any subsequent decreases in fair value are recognized in noninterest income, and
increases in fair value are not recognized until the loans are sold. If a loan has been reported as held for sale and is then determined that it is unlikely to be sold, the loan is reclassified to loans held for investment at the lower of cost or
fair value. The majority of loans held for sale by the Company are residential real estate loans. Loans classified as held for sale are disclosed in Note 5, Loans of these Consolidated Financial Statements.
Loans Held for Investment
Loans held for investment, except for Purchased Credit Impaired (PCI) Loan Pools described below, are reported at their outstanding principal balances net of any unearned income, cumulative
charge-offs, unamortized deferred fees and costs on originated loans and unamortized premiums or discounts on purchased loans.
Loans originated or purchased since the Transaction Date are included in Loans Held for Investment within these Consolidated
Financial Statements and are referred to within these Consolidated Financial Statements as Loans originated or purchased since the Transaction Date. At December 31, 2011, a majority of the loans reported as Loans Held for Investment
are in PCI Loan Pools. The accounting for PCI Loan Pools is significantly different from the accounting for loans originated or purchased since the Transaction Date. The accounting policies for the loans originated or purchased since the Transaction
Date is covered within this section, while the accounting for PCI Loan Pools is described in the section below called Accounting for PCI Loan Pools.
Interest income on loans originated or purchased since the Transaction Date is accrued daily, except for loans in a nonaccrual status. Loan fees collected for the origination of loans less direct loan
origination costs (net deferred loan fees) are amortized over the contractual life of the loan through interest income. If a loan has scheduled payments, the amortization of the net deferred loan fee is calculated using the effective interest method
over the contractual life of the loan. If the loan does not have scheduled payments, such as a line of credit, the net deferred loan fee is recognized as interest income on a straight line basis over the contractual life of the loan commitment. Loan
fees received for loan commitments are recognized as interest income over the term of the commitment. Premiums and discounts recorded in connection with the purchase of loans are accounted for in a similar manner as net deferred loan origination
fees. Any premium or discount from a loan purchase is recognized in
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interest income over the life of the contractual life of the loan through interest income. When loans are repaid, any remaining unamortized balances of unearned fees, deferred fees and costs,
premiums, and discounts are recognized in interest income.
Unfunded Loan Commitments and Letters of Credit
Letters and lines of credit are commitments to extend credit and standby letters of credit to the Banks clients. These commitments
meet the financing needs of the Banks clients in the normal course of business and are commitments with off-balance sheet risk since the Bank has committed to issuing funds to or on behalf of clients, but there is no current loan
outstanding. Included in unfunded loan commitments are secured and unsecured lines of credit.
Lines of credit are obligations
to lend money to a borrower. Credit risk arises when the borrowers current financial condition may indicate less ability to pay than when the commitment was originally made. Standby letters of credit and financial guarantees are conditional
commitments issued by the Company to guarantee the performance of a client to a third party in borrowing arrangements. In the case of standby letters of credit, the risk arises from the possibility of the failure of the client to perform according
to the terms of a contract. In such a situation, the third party might draw on the standby letter of credit to pay for completion of the contract and the Company would have to look to its client to repay these funds to the Company with interest. The
Company uses the same credit policies in making commitments and conditional obligations as it would for a loan to that client.
The Company has exposure to losses from unfunded loan commitments and letters of credit. Since the funds have not been disbursed on these
commitments, they are not reported as loans outstanding. Losses related to these commitments are not included in the allowance for loan and losses (ALLL) reported in Note 7, Allowance for Loan and Lease Losses and Credit
Quality of these Consolidated Financial Statements. Instead, they are accounted for as a separate loss contingency or reserve within other liabilities on the Companys Consolidated Balance Sheets. This reserve is discussed within Note 1,
Summary of Significant Accounting Policies in a section called Reserve for Unfunded Commitments.
Prior to the funding of a loan, the Company may provide an interest rate lock commitment for mortgage loans that will be originated with
the intent to sell. The Company may also enter into mandatory delivery contracts, which are loan sale agreements in which the Company has committed to deliver a certain principal amount of mortgage loans to a third party investor at a specified
price on or before a specified date. These interest rate lock commitments and mandatory delivery contracts qualify as derivatives under GAAP. The fair value of the interest rate lock commitments is based on the change in interest rates between the
date the interest rate lock commitment is executed and the date the loan is funded. The fair value of the mandatory delivery contracts is calculated by comparing the price on the contract accepted date to the price on the actual sale date. The fair
value of these derivatives is reported as other assets or other liabilities and changes in the fair values are reflected through noninterest income in the Companys Consolidated Financial Statements.
Accounting for PCI Loan Pools
Loans acquired in a transfer, including business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not
collect all contractually required principal and interest payments, are accounted for using the guidance
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for PCI Loan Pools, which is contained in the ASC 310-30,
Receivables, Loans and Debt Securities Acquired with Deteriorated Credit Quality
(ASC 310-30). In addition, the
American Institute of Certified Public Accountants (AICPA) reached an understanding with the SEC that permits an acquirer to elect to account for acquired loans that are not impaired by means of expected cash flows rather than
contractual cash flows. This understanding is documented in a letter from the AICPA to the SEC dated December 18, 2009. The Company has elected an accounting policy to apply expected cash flows accounting guidance to all loans subject to the
business combination, and push-down accounting requirements for loan portfolios acquired in a business combination, and will herein be referred to as PCI Term Pools.
Some loans that otherwise meet the definition of credit impaired, such as revolving lines of credit, are specifically excluded from the
scope of the accounting guidance in ASC 310-30 and are accounted for using ASC 310-20,
Receivables, Nonrefundable Fees and Other Costs
(ASC 310-20). However, Management considers these revolving lines of credit to also be credit
impaired and has pooled these revolving lines of credit purchased through the Investment Transaction and herein will refer to these loans as PCI Revolving Pools.
PCI Term Pools
PCI Term Pools are initially recorded at fair value,
and any related ALLL from before the acquisition was reversed. Fair value is determined by estimating the principal and interest cash flows expected to be collected after discounting at the prevailing market rate of interest. The difference between
contractual cash flows and expected cash flows, on an undiscounted basis, represents the nonaccretable difference. The difference between undiscounted expected cash flows and discounted expected cash flows represents the accretable yield. The
Companys estimate for expected cash flows on PCI Loan Pools takes into consideration estimated prepayments based on the characteristics of the loans contained in each loan pool, and expected charge-offs and recoveries of the PCI Loan Pools.
The accretable yield is recognized in interest income over the remaining life of the pool of loans using the effective interest method or cost recovery method if the cash flows are not estimable.
Management has elected to aggregate PCI term loans into several pools based on common risk characteristics as allowed under ASC 310-30.
Each pool is accounted for as a single asset with a single composite discount rate and an aggregate expectation of cash flows. Both the accretion of interest income and the comparison of actual cash flows to expected cash flows are completed at the
pool level rather than on individual loans. The Company has aggregated all of the PCI term loans acquired at the Transaction Date into the pools. PCI term loans may not be removed from a pool, added to a pool, or moved from one pool to another. All
activity such as payments, charge-offs, recoveries, and prepayments received are applied to the loan pool in which the loan was placed at the Transaction Date. Payments which are in excess of expectations in one pool may not be applied to other
pools to avoid the recognition of impairment for deficient payments within another pool. Only the payoff or prepayment by the borrower, foreclosure of the collateral, or charge-off, or disposal of a loan, as a result of sales of loans to third
parties, will result in the removal of a loan from a loan pool. When a loan is removed from a pool, it is removed at its carrying amount.
The Company periodically compares actual cash flows to expected cash flows for PCI Term Pools to determine whether actual cash flows are substantially the same as was expected at the time the loans
expected cash flows were last estimated. Differences in actual cash flows from that previously expected may result in a revision to the Companys estimate for expected cash flows. If upon
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reevaluation of expected cash flows the Company determines that as a result of credit deterioration there will be less expected cash flows than previously estimated, an ALLL is established
through a charge to the provision for loan losses and an impairment is recorded. Other changes in cash flows due to changes in interest rates, certain refinancings or prepayments are accounted for prospectively as an adjustment to the discount rate
on the pool. If reevaluation of expected cash flows indicates there is a significant and probable increase over that previously expected, the Company would decrease any previously established ALLL, and record an adjustment to interest income through
the change in the discount rate used to calculate the accretable yield.
Because PCI Term Pools are written down at
acquisition to an amount estimated to be collectible and aggregated into pools, the classification and disclosures are at pool levels regardless of the underlying individual loan performance. PCI Term Pools are not reported as nonaccrual, impaired
or TDRs even though some of the underlying loans may be contractually past due, on nonaccrual, impaired or TDRs, as the pool is evaluated as a single unit of account. If the Company determines it can no longer reasonably estimate future cash flows
for a PCI Term Pool, the Company would cease accretion on such pools.
PCI Revolving Pools
As mentioned above, acquired loans with revolving features are excluded from ASC 310-30. The accounting for purchase discounts on pooled
revolving lines of credit is determined in accordance with ASC 310-20. Individual revolving lines of credit that had been originated prior to the Investment Transaction were placed in pools with similar risk characteristics in accordance with ASC
310-20. PCI Revolving Pools were recorded at fair value at the Transaction Date, similar to PCI Term Pools, based on expected cash flows, which included estimated losses inherent in those pools at the Transaction Date. A new carrying amount was
established for PCI Revolving Pools based on their fair value, which represents its net realizable value. The difference between the carrying value and the net realizable value is the purchase discount.
Because of the uncertainty in the underlying cash flows associated with the PCI Revolving Pools at the Transaction Date, Management has
determined that the purchase discount should not be accreted until it is significantly probable that the net realizable value exceeds the net carrying amount. Therefore, the Company has only recorded interest income on these pools based at the
contractual rate of the underlying loans, to the extent considered collectible. Management periodically reassesses the net realizable value of each PCI Revolving Pool and records interest income relating to the purchase discount in accordance with
ASC 310-20. Such amounts are recognized in income using the effective interest method over the period the revolving line of credit is active, assuming that borrowings are outstanding for the maximum term provided in the loan contract. In the event
that credit losses are higher than expectations, the Company records an ALLL to the extent that the carrying value exceeds the amounts expected to be collected.
Unlike PCI Term Pools, accounting guidance requires that disclosures be made on the underlying loans in PCI Revolving Pools even though such loans were recorded at fair value on the Transaction Date. As a
result, the underlying loans in PCI Revolving Pools are reported as contractually delinquent, nonaccrual, impaired, or TDRs to the extent applicable.
Allowance for Loan and Lease Losses
Credit risk is inherent in the
business of extending loans and leases to borrowers. This credit risk is addressed through a valuation allowance termed ALLL. The ALLL represents a creditors estimate of
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loan losses inherent within the loan portfolio at each balance sheet date and is netted against the outstanding loan balance. The ALLL reduces the carrying amount to the creditors estimate
of what will be collected from borrowers. The ALLL is established through charges to current period earnings by recording a provision for loan losses. When losses become specifically identifiable and quantifiable, the loan balance is reduced through
recording a charge-off against the ALLL. Should payments be received on charged-off loans, the payment is credited to the ALLL as a recovery.
Charge-offs of loans are generally processed by policy as well as by regulatory guidance. Secured consumer loans, including residential real estate loans, that are 120 days past due are written down to
the fair value of the collateral. Unsecured consumer loans are charged-off once the loan is 120 days past due. Decisions on when to charge-off commercial loans and loans secured by commercial real estate are made on an individual basis rather than
length of delinquency, though it is a factor in the decision. The financial resources of the borrower and/or guarantor and the nature and value of any collateral are other factors considered such as if the loan is for business purposes or to a
consumer.
The purchase accounting guidance for business combinations significantly impacted the Companys ALLL as of the
Transaction Date. The revaluation of assets required by this accounting guidance resulted in all loans being reported at their fair value as of the Transaction Date. The fair value is presumed to take into account the contractual payments on loans
that are not expected to be received, and consequently no ALLL was carried over for the Companys loans as of the Transaction Date. In accordance with purchase accounting guidance, charge-offs and recoveries related to loans within PCI Term
Pools and PCI Revolving Pools are not to be recorded through the ALLL. Instead, charge-offs and recoveries related to PCI Loan Pools are recorded against the purchase accounting adjustment for loans in the PCI Term Pools, and against the purchase
discount for loans within PCI Revolving Pools. Subsequent to the Transaction Date, the ALLL is comprised of the Companys estimate of losses inherent in successor loans originated or purchased since the Transaction Date; the differential
between current expected cash flows and prior expected cash flows for PCI Term Pools when current expected cash flows are less than prior expected cash flows as a result of credit deterioration; and the amount of credit losses inherent in PCI
Revolving Pools in excess of the net realizable value.
Credit risk grades are assigned to all loans for the overall
monitoring of credit risk within the loan portfolio. For PCI Loan Pools, the individual loans within each pool are assigned a credit grade but, then are aggregated to review the total credit risk of each pool which then monitored by Management for
each loan pool and monitoring of expected cash flows. For loans originated or purchased since the Transaction Date, credit risk grades are monitored by Management on a loan by loan basis.
Portfolio Segments
When the Companys credit administration
department reviews and updates credit risk rating for loans, there are two main groups or portfolio segments; Commercial Loans and Consumer Loans. The risk characteristics and the approach to reviewing the credit risk for each portfolio segment is
described in the following paragraphs.
Commercial Loans
Commercial loans consist of multifamily loans, commercial real estate loans, construction, and commercial lines of credit. Such loans are
made primarily to borrowers to provide financing for the acquisition of or development of commercial properties, including the construction of single family,
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multifamily, and multi-unit commercial properties. Commercial loans are subject to underwriting standards and processes specific to the risks related to each credit, including but not limited to:
geographic location of the project, and/or operations of the borrower, financial condition of the borrower and/or guarantor(s), debt service coverage analyses, and knowledge of local economic conditions. Risks associated with commercial loans are
largely related to general economic conditions, changes in, and sustainability of cash flows for the underlying business servicing the obligation, declines in collateral values for collateral dependent loans, and in the case of certain construction
loans, the ability of the borrower to obtain longer-term financing. The Company mitigates and monitors risk associated with such loans through its internal review and risk grading process, making loans to in-market borrowers, controlling loan
structure, and monitoring the financial condition of the underlying business/borrower.
Credit risk grades of large problem
loans in the commercial loan portfolio are reviewed, at a minimum, quarterly. A credit risk grade for a commercial loan may be assessed and generally require a credit risk grade change when the following events occur:
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Review of borrower financial statements or non receipt of borrower financial statements when requested;
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Appearance on delinquency reports;
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Outside credit inquires;
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Identified facts demonstrate change in risk of nonpayment;
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Historical payment experience;
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Current economic trends;
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Emerging industry problems; and
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Contact with borrower provides new credit information.
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Consumer Loans
Consumer loans consist largely of residential and revolving
1 to 4 family loans, and consumer installment loans. The majority of the consumer portfolio is comprised of financing for single family dwellings, which are predominately owner-occupied. Such loans are typically made based on the borrowers
financial condition, credit scores, debt-to-income ratios, and the type, location, and value of the underlying collateral. Risks associated with such loans are primarily related to general economic conditions, including the level of unemployment,
and declines in the value of the underlying collateral. Consumer loans made for purposes other than for the financing of residential real estate, are typically secured and unsecured shorter-term loans made to borrowers for various purposes,
including automobile and recreational vehicle purchases, and personal liquidity needs. Risks associated with such loans are primarily dependent on general economic conditions, which influence the financial condition of the borrower and their ability
to repay the loan, or a shortfall in the collateral value in the event of default by the borrower. The Company primarily makes such loans to in-market borrowers,
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and bases lending decisions on factors related to the financial condition of the borrower. Risks associated with these loans are mitigated in part by the smaller amount of the individual loans
spread across many borrowers.
Credit risk ratings in the consumer loan portfolio are assessed and generally require a credit
risk rating change when the following events occur:
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Deterioration of credit score;
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Appearance on delinquency reports;
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Identified facts demonstrate change in risk of nonpayment;
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Historical payment experience; and
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Contact with borrower provides new credit information.
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The change in a borrowers credit risk grade is not limited to the listing above. Quarterly, the Companys credit administration department obtains a credit score refreshment report which
assesses consumer loan borrowers credit scores to identify borrowers which could have a deterioration of credit score which would trigger a credit risk grade change for a borrower. Once a credit risk grade is assessed for a loan, its
classification is determined based on the expectation of repayment. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those loans that are classified as
substandard or doubtful consistent with regulatory guidelines as described below.
Loans Classified as Substandard
A substandard loan is a loan which is inadequately protected by a current sound worth and paying capacity of the borrower or the
collateral pledged, if any. The extension of credit has a well defined weakness and/or the Company identifies a distinct possibility that a loss will be incurred if the deficiency identified is not corrected. When a loan is classified as substandard
it does not necessarily imply there is a loss exposure in a specific loan, but a loss potential does exist.
Loans Classified as Doubtful
Loans classified as doubtful have all of the weaknesses inherent in a loan classified as substandard with an added
characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values highly questionable and improbable. After reviewing the credit risk ratings in the loan portfolio, the
second step is to develop an estimate of the loss inherent in individual loans or groups of similar loans. The estimation of probable losses takes into consideration the loan credit risk ratings and other factors such as:
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Loan pool segmentation;
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Historical loss analysis;
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Identification, review, and valuation of impaired loans;
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Changes in the economy impacting lending activities;
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Changes in the concentrations of various loan types;
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Changes in the growth rate or volume of lending activities;
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Changes in the trends for delinquent and problem loans;
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Changes in the control environment or procedures;
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Changes in the management and staffing effectiveness;
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Changes in the loan review effectiveness;
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Changes in the underlying collateral values of loans;
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Changes in the competition/regulatory/legal issues;
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Unanticipated events; and
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Changes and additional valuation for structured financing and syndicated national credits.
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The amount of the allowance recorded at the end of the prior reporting period is then compared with the new estimate of inherent loss. If
additional allowance is required to cover the revised estimate, the additional amount is provided through a charge to provision for loan losses. If the recorded allowance is higher than the revised estimate, the allowance is reduced by a negative
provision for loan losses.
PCI Loan Pools were recorded at fair value as of the Transaction Date based on the acquirers
estimate of collections/cash flows to be received. When reviewing cash flows for PCI Loan Pools, Management must make a determination whether the estimate of expected cash flows from these loans needs to be revised. This determination is based on
actual cash flows received, general market conditions, and any information available about borrowers and their financial condition that would lead Management to conclude that expected cash flows will be substantially different from what was
previously estimated. Of the factors noted above for PCI Loan Pools, those that relate specifically to the borrower, to the economy, and to credit deterioration seen for similar borrowers or similar businesses or industries will be most relevant.
As is indicated in the section above for PCI Loan Pools, the Company has aggregated all of these loans into pools with
similar risk characteristics that have become the individual units of accounting. The estimates of expected cash flows are therefore calculated at the pool level. An unfavorable change in the estimate of expected cash flows due to credit may require
the recognition of impairment by establishing an ALLL on a pool by pool basis. A favorable change in the estimate of expected cash flows would result in reversing any allowance previously established allowance due to an unfavorable change, but no
negative allowance is recorded if the favorable change exceeds any previously recorded allowance. The excess expected cash flows are accreted into income over the remaining estimated terms of the loans in the pool. Further information on the ALLL is
provided in Note 7, Allowance for Loan and Lease Losses and Credit Quality of these Consolidated Financial Statements.
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ALLL Model Methodology
The Company considers both quantitative and qualitative factors when determining the level of estimated ALLL. Quantitative factors are based primarily on historical credit losses for each portfolio of
similar loans over a time horizon or look-back period. The Company generally uses historical credit losses over the past six quarters as a basis for its quantitative factors. The look-back period has been the past six quarters since the
second quarter of 2009, when Management shortened the timeframe to better capture current risk conditions. The shorter time frame, coupled with less reliance on qualitative factors, was determined to be more responsive to the increasing risk seen in
economic conditions and rapidly deteriorating real estate collateral values over the last few years.
Qualitative factors are
generally used to adjust historical loss rates based on the Companys estimate of the losses inherent in the outstanding balance of the loan portfolio that are not fully captured by the quantitative factors alone. Qualitative factors taken into
consideration in calculations of the ALLL include: concentrations of types of loans, loan growth, control environment, delinquency and classified loan trends, Management and staffing experience and turnover, economic conditions, results of
independent loan review, underlying collateral values, competition, regulatory, legal issues, structured finance and syndicated national credits, and other factors. These qualitative factors are applied as adjustments to the historical loss rates
when Management believes they are necessary to better reflect current conditions.
Nonaccrual Loans, Impaired Loans, and Restructures of
Troubled Debt
As discussed above in the PCI Loan Pools section, the accounting for PCI loans has implications for
classification and reporting disclosures of loans classified as nonaccrual, impaired, or TDRs. Because the Companys loans were written down to fair value and pooled as of the Transaction Date, the carrying amount of these loans in the
Companys Consolidated Financial Statements is based upon amounts estimated to be collected. PCI Term Pools are not classified as nonaccrual, impaired or TDRs even though some of the underlying loans may be contractually past due,
nonperforming, or restructured as TDRs. PCI Term Pools are accounted for and reported as a single unit of account, based on expectations for future cash flows, in accordance with ASC 310-30, and therefore the performance of the underlying loans
within PCI Term Pools are not reported in the Companys Consolidated Financial Statements.
The reporting for PCI
Revolving Pools differs from that of PCI Term Pools, because the accounting and reporting for such loans is not within the scope of ASC 310-30, and therefore the underlying loans are required to be reported and accounted for as delinquent,
nonaccrual, impaired or TDR. Quarterly, PCI Loan Pools are assessed for the overall collectibility of the expected cash flows on a pool by pool basis.
For all loans originated or purchased since the Transaction Date, when an individual borrower discontinues making payments as contractually required by the note, the Company must determine whether it is
appropriate to continue to accrue interest. Generally, the Company places loans in a nonaccrual status and ceases recognizing interest income when the loan has become delinquent by 90 or more days and/or when Management determines that the repayment
of principal and collection of interest is unlikely. The Company may decide that it is appropriate to continue to accrue interest on certain loans 90 or more days delinquent if they are well secured by collateral and collection is in process.
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When a loan is placed on nonaccrual status, any accrued but uncollected interest for the
loan is reversed out of interest income in the period in which the status is changed. Subsequent payments received from the client are applied to principal and no further interest income is recognized until the principal has been paid in full or
until circumstances have changed such that payments are again consistently received as contractually required. In the case of commercial clients, the pattern of payment must also be accompanied by a positive change in the financial condition of the
borrower.
A loan is identified as impaired when it is probable that interest and principal will not be collected according to
the contractual terms of the loan agreement. However, there are some loans that are termed impaired because of doubt regarding collectability of interest and principal according to the contractual terms, which are both fully secured by collateral
and are current in their interest and principal payments. Once a loan is identified as impaired, the amount of any impairment is determined based on the extent to which the Companys recorded investment in the loan exceeds the loans
estimated fair value. The Company determines an impaired loans fair value based on either the present value of the expected future cash flows discounted at the loans effective interest rate, or the fair value of the collateral securing
the loan. When using the fair value of the collateral securing an impaired loan as the basis for measuring impairment, the Company takes into consideration estimated costs to sell the collateral when determining the loans fair value. A
valuation allowance is established for an impaired loan through a charge to earnings when the fair value of the loan is less than the Companys recorded investment in the loan. An impaired loan may be placed back on accrual if the loan is no
longer considered to be impaired. For additional information in obtaining the fair value of a loan, refer to Note 3, Fair Value of Financial Instruments of these Consolidated Financial Statements.
A loan may be restructured when the Company determines that a borrowers financial condition has deteriorated, but still has the
ability to repay at least some portion of the loan. A loan is considered to be a TDR when the borrower is experiencing financial difficulty, and the original terms have been modified in favor of the borrower such that either principal or interest
has been forgiven, contractual payments are deferred, or the interest rate is reduced (i.e. a concession in accordance with ASU 2011-02). A loan may also be considered a TDR when the loan of a financially troubled borrower is renewed with the same
terms as were offered when the borrower was not troubled, because it is normally expected that interest rates will be higher to cover the increased credit risk from a troubled borrower. Generally, when a loan is identified as a TDR, the loan is also
disclosed as an impaired loan.
Additional information regarding loans classified nonaccrual, impaired, and TDRs is disclosed
in Note 7, Allowance for Loan and Lease Losses and Credit Quality of these Consolidated Financial Statements.
Premises and
Equipment
Premises and equipment are reported at cost less accumulated depreciation. Depreciation is expensed over the
estimated useful lives of the assets. The Company depreciates assets utilizing straight line depreciation. The estimated useful lives of premises and equipment are as follows:
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Buildings
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40 years
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Building improvements
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3 40 years
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Furniture and equipment
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5 7 years
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Electronic equipment and software
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3 10 years
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Leasehold improvements are amortized over the terms of the leases or the estimated
useful lives of the improvements, whichever is shorter. Management annually reviews premises and equipment in order to determine if facts and circumstances suggest that the value of an asset is not recoverable.
Leases
The
Company leases a majority of its branches and support offices. Most of these leases are operating leases for which a monthly rental expense is recognized. However, when the terms of the lease are such that the Company is leasing the building for
most of its useful economic life or the present value of the sum of lease payments represents most of the fair value of the building, the transaction is accounted for as a capital lease. In a capital lease, the building is recognized as an asset of
the Company and the net present value of the contracted lease payments is recognized as a long term liability. The long term liability recognized as part of a capital lease is accounted for using the interest method, and is included in other
borrowings of the Companys Consolidated Financial Statements. The Companys capital leases were recorded at fair value in conjunction with the Investment Transaction. The amortization charge relating to assets recorded under capital
leases is included with depreciation expense.
Some of the Companys leases have cost-of-living adjustments based on the
consumer price index. Some of the leases have fixed increases provided for in the terms or increases based on the index but have a minimum increase irrespective of the change in index. In these cases, the total fixed or minimum lease expense is
recognized on a straight line basis over the term of the lease. As part of the purchase accounting due to the Investment Transaction, the Company evaluated all of its leases. A liability was recorded as of the Transaction Date because the
contractual operating lease payments were above the current market rates for several leased properties in aggregate. The contractual obligations for operating and capital leases are disclosed in Note 8, Premises and Equipment of these
Consolidated Financial Statements.
Goodwill and Intangible Assets
Intangible assets are generally acquired through an acquisition with exception of mortgage serving rights. If the benefit of the
intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirers intent to do so, the acquired intangible asset will be a
separately recognized asset. Such intangible assets are subject to amortization over their useful lives unless they have an indefinite life. Among these identifiable intangible assets are core deposit intangibles (CDI), customer
relationship intangible (CRI), and trade name intangible. The Company amortizes CDI and CRI over their estimated useful lives.
Any excess of the purchase price over the estimated fair value of the assets received and liabilities assumed is an unidentifiable intangible asset and is recorded as goodwill. Goodwill must be reviewed
for impairment when there is evidence to suggest that the estimated fair value of the net assets is lower than the carrying value, or at a minimum of once a year. This evidence may be in the form of a triggering event or a series of events or
developments.
Testing goodwill for impairment consists of a two-part test to determine the fair value of goodwill. In Step 1,
the fair value of the reporting unit is determined and compared to its carrying value including goodwill. If the fair value of the reporting unit is more than its carrying value, goodwill is not
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impaired. If the fair value of the reporting unit is less than its carrying value, the company must proceed with Step 2. In Step 2, the implied fair value of goodwill is estimated. The implied
fair value of goodwill is the excess of fair value of the reporting unit over the fair values of the assets and liabilities of the reporting unit as they would be determined in an acquisition. If the carrying amount of the goodwill is more than its
implied fair value, it is impaired and an impairment charge must be recognized.
All of the goodwill recognized in the
Companys Consolidated Financial Statements as of December 31, 2011, and 2010 is the result of the purchase accounting for the Investment Transaction. Additional information regarding goodwill and the computation of goodwill at
December 31, 2011, is disclosed in Note 2, Business Combination Investment Transaction and Note 9, Goodwill and Intangible Assets of these Consolidated Financial Statements.
Included in goodwill and other intangible assets are mortgage and other loan servicing rights associated with the sale of loans for which
the servicing of the loan is retained. The Company receives a fee for servicing these loans. The right to receive this fee for performing servicing is of value to the Company and could be sold should the Company choose to do so. Companies engaged in
selling loans and retaining servicing rights for a fee are required to recognize servicing rights as an asset or liability. The rights are recorded at the net present value of the fees that will be collected, less estimated servicing costs, which
approximates the fair value. Loan servicing rights are amortized into noninterest income in proportion to, and over the period of, estimated future net servicing income. Estimates of the lives of the loans are based on several industry standard
sources and take into consideration prepayment rates expected in the current market interest rate environment.
Each quarter
Management evaluates servicing rights for impairment. Impairment occurs when the fair value of loan servicing rights is less than amortized cost. The rates at which consumers prepay their loans are impacted by changes in interest
ratesprepayments generally increase as interest rates fall, and generally decrease as interest rates rise so the value of the servicing right changes with changes in interest rates. When prepayments increase, the Company will collect less
servicing fees, and the value of the servicing rights declines. A valuation of the servicing assets is performed at each reporting period and reductions to the servicing assets carrying value are made when the carrying balance is higher than
the fair value of the servicing asset utilizing the lower of cost or fair value valuation methodology.
Bank Owned Life Insurance
Bank owned life insurance (BOLI) involves the purchase of life insurance by the Company on a chosen group
of employees. The Company is the owner and beneficiary of the policies. This life insurance investment is carried as an asset at the cash surrender value of the underlying policies. In cases where the Company is a joint beneficiary of the policies,
the Company has recorded a liability for the portion of the cash surrender value owned by the other party. Income from the increase in cash surrender value of the policies is reflected in noninterest income. The cash surrender value approximates
fair value.
Other Real Estate Owned
Real estate acquired through foreclosure on a loan or by the surrender of real estate in lieu of foreclosure is referred to as other real estate owned (OREO). When real estate is foreclosed
on, the
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collateral is transferred to OREO at estimated fair value less costs to sell. If the outstanding balance of the loan is greater than the fair value of the OREO at the time of foreclosure, the
excess of the loan balance over the fair value is charged-off against the ALLL or PCI Loan Pools valuation adjustment before recording the asset as an OREO. OREO is maintained in the Companys Consolidated Financial Statements at the
lower of its carrying value or fair value of the OREO, less estimated costs to sell. OREOs are recorded as other assets within the Consolidated Financial Statements.
Once the collateral is foreclosed on and the property becomes an OREO, Management periodically obtains appraisals to determine if further valuation adjustments are required. Valuation adjustments are also
required when the listing price to sell an OREO has had to be reduced below the current carrying value. If there is a decrease in the fair value of the property from the last valuation, the decrease in value is charged against noninterest income.
During the time the property is held, all related operating and maintenance costs are expensed as incurred. Increases in the values of properties are not recognized until sale. All income produced from OREOs, such as from renting the property, is
included in noninterest income.
Securities Sold Under Agreement to Repurchase
The Company enters into repurchase agreements whereby it sells securities or loans to another institution and agrees to repurchase them at
a later date for an amount in excess of the sale price. While in form these are agreements to sell and repurchase, in substance they are secured borrowings in which the excess of the repurchase price over the sale price represents interest expense.
This expense is accrued over the term of the borrowing. For security or collateral, the Company must pledge assets with a higher fair value than the amount borrowed. Information about the amounts held and the interest rates may be found in Note 14,
Securities Sold Under Agreements to Repurchase and Federal Funds Purchased of these Consolidated Financial Statements. There was a purchase accounting premium recorded as a result of the Investment Transaction for the repurchase
agreements based on current market rates for similar instruments.
Other Borrowings
Management utilizes a variety of sources to raise borrowed funds at competitive rates, including FHLB borrowings and subordinated debt.
FHLB borrowings typically carry rates approximating the London Inter-Bank Offered Rate (LIBOR) for the equivalent term because they are secured with investments or high quality loans. Interest is accrued on a monthly basis based on the
outstanding borrowings interest rate and is included in interest expense.
In past periods, a majority of the long term and
short term debt of the Company were advances with the FHLB. Long term funding through the FHLB is collateralized by pledging qualifying loans and/or securities. Virtually all of the FHLB advances were repaid by the Company in early September 2010
from the proceeds received in the Investment Transaction and deposits maintained at the Reserve Bank. Purchase accounting adjustments were made based on current market rates for similar instruments. Refer to Note 15, Other Borrowings of
these Consolidated Financial Statements for the current period activity within long term debt and other borrowings.
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Reserve for Off-Balance Sheet Commitments
The Company has exposure to losses from unfunded loan commitments and letters of credit. Since the funds have not been disbursed on these
commitments, they are not reported as loans outstanding. Estimated losses related to these commitments are not included in the ALLL reported in Note 7, Allowance for Loan and Lease Losses and Credit Quality of these Consolidated
Financial Statements. Instead, they are accounted for as a separate loss contingency or reserve as a liability within other liabilities on the Companys Consolidated Balance Sheets also referred to as a Reserve for Off-Balance Sheet
Commitments. Losses are experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from a party that may not be as financially sound in the current period as it was when the
commitment was originally made.
The reserve for off-balance sheet commitments originated after the Transaction Date applies
the same historical loss rates and qualitative factors used in the calculation for ALLL to the off-balance sheet obligations in determining an estimate of losses inherent in these contractual obligations. For off-balance sheet commitments made prior
to the Investment Transaction, a different model is utilized. This model assesses the unfunded commitments for the same group of loans at the Transaction Date at the end of each quarter and applies an estimated funding factor and probability of
default for the remaining unfunded commitments to estimate the required reserve. To the extent that the credit exposure has increased, additional reserve for off-balance sheet commitments will increase and to the extent the credit exposure has
decreased, the off balance-sheet reserve will decrease.
The estimate of reserves for off-balance sheet commitments is
included as a contingent liability under the provisions of ASC 450,
Loss Contingencies
and is reported within other liabilities and is adjusted for changes in the estimated reserve requirement by an adjustment to noninterest expense.
Additional disclosure regarding the Companys reserve for off-balance sheet commitments is located in Note 5, Loans of these Consolidated Financial Statements.
Derivative Financial Instruments
GAAP requires that all derivatives
be recorded at their fair value on the balance sheet. Certain derivative transactions that meet specified criteria qualify for hedge accounting under GAAP. The Company does not hold any derivatives that meet the criteria for hedge accounting. Gains
or losses associated with changes in fair value of derivative financial instruments are immediately recognized in noninterest income.
Trust Assets and Investment and Advisory Fees
The Company has a trust department and two registered investment advisory subsidiaries, MCM and REWA, each of which have fiduciary responsibility for the assets that they manage on behalf of clients.
These assets are not owned by the Company and are not reflected in the Consolidated Balance Sheets. Fees for most trust services are based on the market value of client assets, and the fees are accrued monthly. All of the activity for the trust
department and investment and advisory services are reported in the Wealth Management segment.
Stock-Based Compensation
The Company grants nonqualified stock options, restricted stock, performance stock options and performance restricted
stock to directors and employees as a form of compensation. All stock-based
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compensation is accounted for in accordance with GAAP which requires compensation expense for the issuance of stock-based compensation be recognized over the vesting period of the share-based
award or when it is probable that the performance stock grants performance measures will be met.
The amount of compensation
expense to be recognized for options is based on the fair value of the options, utilizing the Black-Scholes-Merton technique, at the date of the grant. The Company historically utilized a binomial pricing model up until the Investment Transaction.
After the Transaction Date, management began using the Black-Scholes-Merton technique since this model provides a more appropriate stock option valuation. The fair value for the options is estimated based on the length of their term, the volatility
of the stock price in past periods, and other factors. The expected term is calculated using the simplified method. The simplified method is used because historical stock option exercise data may not provide a reasonable basis upon which to estimate
the expected term. Expected volatility is based on historical volatility of the Companys stock price. Details regarding the accounting for stock-based compensation expense are disclosed in Note 18, Shareholders Equity of
these Consolidated Financial Statements.
A valuation model is not used for pricing restricted stock because the value is
based on the closing price of the Companys stock on the grant date. The total value of the restricted stock is the number of shares granted multiplied by the stock price.
The amount of compensation expense to be recognized for performance stock grants is based on the probability of meeting specific
performance goals. These estimates are reassessed at each reporting period, and if the probability has changed, the amount of expense is adjusted based on the most recent assessment of probability.
Discontinued OperationsRAL and RT Programs
The Refund Anticipation Loan (RAL) and Refund Transfer (RT) Programs were sold in January 2010, requiring that the assets and liabilities of these programs be reported in the
Consolidated Balance Sheets as Assets from discontinued operations and as Liabilities from discontinued operations, and that the results of operations from these programs be reported in a single line net of tax in the
Consolidated Statements of Operations as (Expense)/income from discontinued operations, net. An abbreviated statement of operations for the programs is provided in Note 23, Discontinued Operations RAL and RT Programs.
Because the sale of the programs occurred before the start of the 2010 tax season, there were only staff and operating expenses in 2010.
Income Taxes
The
Company uses the asset and liability method, which recognizes a liability or asset representing the tax effects of future deductible or taxable amounts attributable to events that have been recognized in these Consolidated Financial Statements. Due
to tax regulations, several items of income and expense are recognized in different periods for tax return purposes than for financial reporting purposes. These items represent temporary differences. The Company is required to provide in
its Consolidated Financial Statements for the eventual liability or deduction in its tax return for these temporary differences until the item of income or expense has been recognized for both financial reporting and for taxes. The provision is
recorded in the form of deferred tax expense or benefit as the temporary differences arise, with the accumulated amount recognized as a deferred tax liability or asset. Deferred tax assets represent future deductions in the Companys income tax
return, while deferred tax
126
Pacific Capital Bancorp and Subsidiaries
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N
OTE
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S
UMMARY
OF
S
IGNIFICANT
A
CCOUNTING
P
OLICIES
C
ONTINUED
|
liabilities represent future payments to tax authorities. In August 2011, in connection with the Investment Transaction, the Company recorded a deferred tax liability of $5.2 million related to
an indefinite life trade name intangible. This related deferred tax liability will remain on the Companys Consolidated Financial Statements as long as the SBB&T trade name intangible exists.
When realization of the benefit of a deferred tax asset is uncertain, the Company is required to recognize a valuation allowance. The
valuation allowance recorded by the Company in 2009, and maintained through the current period due to a lack of assurance of future taxable income against which to apply the benefit. The Company expects to reverse a portion of the valuation
allowance once it has demonstrated a sustainable return to profitability. While reversal of the valuation allowance is subject to considerable judgment, this event could occur at the point the Company has experienced consecutive profitable quarters
coupled with a forecast of sufficient continuing profitability. This reversal could occur as a single event or over a period of time, depending upon the level of forecasted taxable income, the degree of risk related to realizing the forecasted
taxable income, and the estimated risk related to credit quality. Management assesses the impact of Company performance on the realizability of its net deferred tax asset on a quarterly basis.
Earnings Per Share
The computation of basic earnings per share for all periods presented in the Consolidated Statements of Operations is based on the
weighted average number of shares outstanding during each period retroactively adjusted for the reverse stock split effective December 28, 2010. Diluted earnings per share include the effect of common stock equivalents for the Company, which
consist of shares issuable on the exercise of outstanding options and restricted stock awards and common stock warrants.
The
number of options assumed to be exercised is computed using the treasury stock method. This method assumes that all options with an exercise price lower than the average stock price for the period have been exercised at the average
market price for the period and that the proceeds from the assumed exercise have been used for market repurchases of shares at the average market price. Normally, the Company would receive a tax benefit for the difference between the market price
and the exercise price of nonqualified options when options are exercised. The treasury stock method also assumes that the tax benefit from the assumed exercise of options is used to retire shares thereby lowering the number of shares assumed to be
exercised. Options that have an exercise price higher than the average market price are excluded from the computation because they are anti-dilutive. When the Companys net income available to common shareholders is in a loss position, the
diluted earnings per share calculation utilizes only the average shares outstanding, because assuming the exercise of stock options or warrants would lower the loss per share. Once stock options are exercised, restricted stock vests, or once a
performance measurement has been met, the shares are included in the actual weighted average shares outstanding rather than as common stock equivalents.
Statement of Cash Flows
For purposes of reporting cash flows,
cash and cash equivalents includes cash and due from banks, Federal funds sold, and securities purchased under agreements to resell. Federal funds sold and securities purchased under agreements to resell are one-day transactions, with
the Companys funds being returned to it the next business day.
127
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OTE
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S
UMMARY
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S
IGNIFICANT
A
CCOUNTING
P
OLICIES
C
ONTINUED
|
Segments
GAAP requires that the Company disclose certain information related to the performance of various segments of its business. Segments are defined based on how the chief operating decision maker of the
Company views the Companys operations. Management has determined that the Company has two reportable operating segments: (1) Commercial & Community Banking and (2) Wealth Management. The All Other segment is not considered
an operating segment, but includes all corporate administrative support departments such as human resources, legal, finance and accounting, treasury, information technology, internal audit, risk management, facilities management, marketing, and the
Banks holding company. In the first quarter of 2010, the RAL and RT Programs were sold and were reported as discontinued operations. Up until the sale of the RAL and RT Programs, they were a separate operating segment but, due to the sale and
treatment as discontinued operations, this segment was removed from this disclosure. The factors used in determining these reportable segments are explained in Note 24, Segments of these Consolidated Financial Statements.
N
OTE
2.
|
|
B
USINESS
C
OMBINATION
I
NVESTMENT
T
RANSACTION
|
Investment Transaction
On August 31, 2010, pursuant to the terms of an Investment Agreement, dated as of April 29, 2010, by and among the Company, the Bank and SB Acquisition Company LLC, a wholly-owned subsidiary of
Ford Financial Fund, L.P., the Company issued to the Investor (i) 2,250,000 shares of common stock at a purchase price of $20.00 per share and (ii) 455,000 newly created shares of its Series C Convertible Participating Voting Preferred
Stock (the Series C Preferred Stock) at a purchase price of $1,000 per share. As a result of the Investment Agreement, the Investor acquired and controlled 98.1% of the voting securities of the Company and followed the acquisition method
of accounting and applied purchase accounting as described below.
On September 23, 2010, immediately
following the effectiveness of an amendment to the Companys articles of incorporation increasing the total number of authorized shares of common stock to 50,000,000 the outstanding shares of Series C Preferred Stock converted into 22,750,000
shares of common stock. After the conversion of Series C Preferred Stock to common stock, the Investor had an aggregate of 25,000,000 shares of common stock.
On December 28, 2010, the Company effected a 1-for-100 reverse stock split, reducing its authorized common shares from 5 billion to 50 million. Outstanding shares were reduced from 3.29 billion to
32.9 million. All outstanding stock options and warrants to purchase stock, and their respective exercise prices, were adjusted for this reverse stock split. All per share amounts for both the Predecessor Company and the Successor Company in the
Companys Consolidated Financial Statements have been restated to reflect this reverse stock split.
Closing of the Exchange
On August 31, 2010 (the Exchange Closing Date), pursuant to the terms of an Exchange Agreement (the
Exchange Agreement), dated as of July 26, 2010, by and between the Company and the United States Department of the Treasury (Treasury), the Company and Treasury exchanged all 180,634 shares of the Companys Series B
Fixed Rate Cumulative Perpetual Preferred Stock, having a liquidation amount of $180.6 million (the Series B Preferred Stock), issued by the Company to
128
Pacific Capital Bancorp and Subsidiaries
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N
OTE
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USINESS
C
OMBINATION
I
NVESTMENT
T
RANSACTION
C
ONTINUED
|
Treasury under the Troubled Asset Relief Program Capital Purchase Program(TARP CPP), plus accrued but unpaid dividends on such shares of Series B Preferred Stock (which were
approximately $14.4 million as of the Exchange Closing Date), for 195,045 newly created shares of the Companys Series D Fixed Rate Cumulative Mandatorily Convertible Preferred Stock (the Series D Preferred Stock) having an
aggregate liquidation amount equal to approximately $195.0 million. As part of the terms of the Exchange Agreement, the Company and Treasury also agreed to amend and restate the terms of the warrant to purchase 15,120 shares of common stock
currently held by Treasury to provide for an exercise price of $20.00 per share and for a ten-year term following the Exchange Closing Date.
On September 24, 2010, following the effectiveness of the amendment to the articles of incorporation and the satisfaction of certain other conditions set forth in the Certificate of Determination of
Preferences of Series D Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, each outstanding share of Series D Preferred Stock converted into one share of common stock. As a result, upon the conversion of the Series D Preferred Stock, the
Company issued 3,608,332 shares of common stock in the aggregate to Treasury.
Tender Offers for Trust Preferred Securities and
Subordinated Debt
On May 17, 2010, the Company commenced cash tender offers for any and all of its outstanding trust
preferred securities and the Bank commenced cash tender offers for any and all of its outstanding subordinated debt securities. As of the expiration of the tender offers, on August 27, 2010 at 5:00 p.m., New York City time (the
Tender Expiration Date), the Bank had received valid tenders from holders of $68.0 million in aggregate principal amount of subordinated debt securities. The Company did not receive valid tenders from holders of any trust preferred
securities. On August 31, 2010, the Bank accepted for purchase, and made payment for, all subordinated debt securities validly tendered prior to the Tender Expiration Date. No shares of our common stock were issued as consideration
for the tender offers.
Cash tender offers on August 31, 2010, were completed for $50.0 million in aggregate principal
amount of the Banks Subordinated Debenture due 2014 and $18.0 million in aggregate principal amount of the Banks 9.22% Subordinated Bank Notes due 2011, in each case at a purchase price of $650 per $1,000 in principal amount of such
securities. Additional capital of $24.0 million was recorded in retained earnings for the cash tender in the Predecessor Company since the cash tender offer was a condition of the Investment Transaction.
Shareholder Rights Offering
On October 18, 2010, the Company commenced a rights offering pursuant to which shareholders of record on August 30, 2010, were entitled to purchase, in the aggregate, up to approximately
7.27 million shares of common stock. The rights offering expired at 5:00 p.m., New York City time, on November 19, 2010. Shareholders exercised subscription rights to purchase 3.82 million shares of common stock at a subscription
price of $20.00 per share. In total, the Company raised gross proceeds of approximately $76.4 million before expenses.
Purchase Accounting
Purchase accounting was applied due to 98.1% of the voting securities of the Company being issued to the Investor when the
$500.0 million in cash investment proceeds were received by the Company.
129
Pacific Capital Bancorp and Subsidiaries
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OTE
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C
ONTINUED
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Purchase accounting requires that the assets purchased, the liabilities assumed, and noncontrolling interests all be reported in the acquirers financial statements at their fair value, with
any excess of purchase consideration over the net assets being reported as goodwill. As part of the valuation, intangible assets were identified and a fair value was determined as required by the accounting guidance for business combinations.
Accounting guidance also requires the application of push down accounting, whereby the adjustments of assets and liabilities to fair value and the resultant goodwill are shown in the financial statements of the acquiree.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The methodology used to estimate the fair values to apply purchase accounting are disclosed below and in Note 3, Fair Value of Financial Instruments of these Consolidated Financial
Statements. The following table summarizes the Investment Transaction:
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Purchase price:
|
|
$
|
500,000
|
|
|
|
Financial Assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,744,310
|
|
Investment securities
|
|
|
879,549
|
|
Loans
|
|
|
4,028,872
|
|
Goodwill
|
|
|
26,550
|
|
Intangible assets
|
|
|
75,271
|
|
Other assets
|
|
|
459,188
|
|
|
|
|
|
|
|
|
|
7,213,740
|
|
Financial Liabilities:
|
|
|
|
|
Deposits
|
|
|
5,190,223
|
|
Other borrowings
|
|
|
1,317,379
|
|
Other liabilities
|
|
|
124,087
|
|
|
|
|
|
|
|
|
|
6,631,689
|
|
|
|
Net financial assets
|
|
|
582,051
|
|
Less: Noncontrolling interest
|
|
|
82,051
|
|
|
|
|
|
|
|
|
$
|
500,000
|
|
|
|
|
|
|
The above estimated fair values of assets acquired and liabilities assumed were primarily based on
information that was available as of the Transaction Date. The accounting guidance for acquisitions anticipates that additional information may become available relevant to the fair value of assets or liabilities as of the acquisition date. During
what is termed a measurement period not to exceed one year, the acquirer may make adjustments to the fair values to reflect this additional information with corresponding increases or decreases to goodwill. During the period of
January 1, 2011, through August 31, 2011, the Company made additional adjustments to the purchase price allocation, within the measurement period. The table above, includes all of the measurement period adjustments for the Investment
Transaction. These adjustments are discussed in Note 9, Goodwill and Intangible Assets of these Consolidated Financial Statements. The net effect of these adjustments was an increase to goodwill of $4.9 million.
130
Pacific Capital Bancorp and Subsidiaries
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N
OTE
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B
USINESS
C
OMBINATION
I
NVESTMENT
T
RANSACTION
C
ONTINUED
|
A summary and description of the major classes of assets and liabilities fair valued in
conjunction with applying purchase accounting is as follows:
Cash and Cash Equivalents
The fair value of cash and cash equivalents is the balance outstanding of $1.74 billion held at the Transaction Date. This amount includes
the $500.0 million in proceeds from the Investment Transaction.
Investment Securities
Investment securities available for sale are reported at fair value and were $879.5 million on the Transaction Date. The fair value of the
investment securities is based on values obtained from a third party which are based on recent activity for the same or similar securities. Prior to the Investment Transaction, the amortized cost or accounting basis of these securities was $846.5
million. In accounting for the Investment Transaction, the difference between the accounting basis and the fair value was recognized as a purchase accounting adjustment and the difference between the fair value and the par amount of the security
became the new premium or discount for each security held by the Company to be amortized over their remaining terms using the effective interest method.
Loans
All loans in the held for investment loan portfolio at the
Transaction Date were reviewed and a fair value of $4.03 billion was assigned in accordance with the accounting guidance for receivables. The recorded investment in loans prior to the Investment Transaction was $4.46 billion. All loans acquired are
considered to be PCI Term Pools or PCI Revolving Pools in accordance with ASC 310-30 and ASC 310-20, respectively as disclosed in Note 1, Summary of Significant Accounting Policies of these Consolidated Financial Statements. The fair
value was based on an analysis conducted by the Investors acquisition team and independent third parties using assumptions consistent with those used by a market participant. Factors considered in determining fair values depending on the loan
type were:
|
¡
|
|
Changes in market interest rates since the date of origination;
|
|
¡
|
|
Debt to equity or net worth ratios for borrowers;
|
|
¡
|
|
Historical loss experience by type of loan;
|
|
¡
|
|
Loan files lacking current financial data related to borrowers and guarantors;
|
|
¡
|
|
Borrowers experiencing problems such as operating losses, marginal working capital, inadequate cash flow, or business interruptions;
|
|
¡
|
|
Loans secured by collateral that is not readily marketable or that is susceptible to deterioration in realizable value;
|
|
¡
|
|
Loans to borrowers in industries experiencing economic instability; and
|
|
¡
|
|
Loan documentation and compliance exceptions.
|
For additional information regarding the PCI Term Pools and PCI Revolving Pools, refer to Note 6, Purchased Credit Impaired Pools of these Consolidated Financial Statements.
131
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
2.
|
B
USINESS
C
OMBINATION
I
NVESTMENT
T
RANSACTION
C
ONTINUED
|
Goodwill
As disclosed above, the excess of purchase consideration over the net assets being reported at fair value resulted in goodwill of $26.6 million. The goodwill primarily represents the value of the
Companys deposit franchise and therefore was mostly attributed to the Commercial & Community Banking segment. The calculation of goodwill requires significant estimates by Management for each reporting unit, such as, which peer
companies to use; the application of market multiples of publicly traded peer companies and a determination of the appropriate control premium, if any; the forecasting of future income; a calculation of discounted cash flows; and other methodologies
used to obtain the fair value of the underlying assets and liabilities. Recognizing that not all information relevant to the fair value of assets and liabilities will be immediately available at the time of an acquisition, GAAP permits adjustments
to goodwill during a measurement period not to exceed one year. The Company made some such adjustments through August 31, 2011, as discussed in Note 9, Goodwill and Intangible Assets, of these Consolidated Financial Statements. The
table above that summarizes the Investment Transaction includes the effect of those adjustments. There were no additions to or reductions of goodwill during 2010, and 2011, other than from this transaction.
The Investment Transaction was nontaxable and, as a result, there is no tax basis in the goodwill. Accordingly, none of the goodwill
associated with the acquisition is deductible for tax purposes.
132
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
2.
|
B
USINESS
C
OMBINATION
I
NVESTMENT
T
RANSACTION
C
ONTINUED
|
Other Intangible assets
A summary of the other intangible assets identified as part of the Investment Transaction and the respective estimated useful lives over which the intangible assets will be amortized as a noninterest
expense are shown in the following table:
|
|
|
|
|
|
|
|
|
Intangible Description
|
|
Fair
Value
|
|
|
Estimated
Useful Life
(In Years)
|
|
(dollars in thousands)
|
|
Customer deposit intangible:
|
|
$
|
39,779
|
|
|
|
10.0
|
|
|
|
|
Customer relationship intangible:
|
|
|
|
|
|
|
|
|
PCB trust department
|
|
|
12,142
|
|
|
|
13.8
|
|
MCM
|
|
|
4,364
|
|
|
|
13.1
|
|
REWA:
|
|
|
2,708
|
|
|
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,214
|
|
|
|
|
|
|
|
|
Trade name:
|
|
|
|
|
|
|
|
|
Santa Barbara Bank & Trust
|
|
|
12,471
|
|
|
|
Indefinite
|
|
MCM
|
|
|
49
|
|
|
|
3.3
|
|
REWA
|
|
|
29
|
|
|
|
3.3
|
|
All other trade names
|
|
|
188
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,737
|
|
|
|
|
|
|
|
|
Loan servicing rights:
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
2,201
|
|
|
|
22.7
|
|
SBA
|
|
|
1,182
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,383
|
|
|
|
|
|
|
|
|
Non-compete agreements:
|
|
|
|
|
|
|
|
|
REWA
|
|
|
113
|
|
|
|
3.3
|
|
MCM
|
|
|
45
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
$
|
75,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Deposit Intangible
The CDI valuation was based on the Banks transaction related deposit accounts, interest rates on the deposits compared to the market rate on the date of the transaction and estimated life of those
deposits. The value of noninterest bearing deposits makes up the largest portion of the CDI. An acquired deposit base is viewed as a potential cost savings to the acquirer. The value of the CDI is the present value of the difference between a market
participants cost of obtaining alternative funds and the cost to maintain the acquired deposit base. The present value is calculated over the estimated life of the deposit base.
The amounts and types of deposit accounts evaluated for the CDI were $1.54 billion of demand deposit accounts, $658.1 million of MMDA and
$363.3 million of savings accounts. The CDI valuation was $27.5 million for demand deposit accounts, $11.9 million for money market accounts, and $332,000 for
133
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
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USINESS
C
OMBINATION
I
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T
RANSACTION
C
ONTINUED
|
savings accounts. The estimated useful life of 10 years shown in the table above is the maximum life these deposits are expected to be retained at the Company. Some deposits are assumed to be
withdrawn prior to this maximum life and accordingly, amortization of the CDI is not straight line.
CDs were not included in
the valuation of CDI because their rates are such that it is not more advantageous to maintain these specific deposits than it would be to replace them with new term deposits at the current lower rates available in the market. As discussed below,
the higher rates associated with these accounts required the recognition of an additional liability.
Customer Relationship Intangible
The CRI was based on the assets under management on the Transaction Date. CRI is created when a customer relationship
exists between an entity and its customer if the entity has information about the customer and has regular contact with the customer, and the customer has the ability to make direct contact with the entity. Customer relationships meet the
contractual-legal criterion if an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date. Customer relationships also may arise through means other than contracts, such as
through regular contact by sales or service representatives.
The value of the CRI is based on the present value of future
cash flows arising from the management of trusts and investment advisory fees generated from the Companys trust department, MCM and REWA based on the assets under management at August 31, 2010, and the forecasted income generated from
these relationships. The valuation of this intangible asset involved three steps: determining the useful life of the intangible asset, determining the resulting cash flows of the intangible and determining the discount rate. The assets under
management as of the Transaction Date were $2.05 billion for the the Companys trust department, $838.4 million for MCM and $438.8 million for REWA.
Trade Name Intangible
Trademarks, service marks and other registered marks
(collectively referred to as the Trade Name) can have great significance to clients. The function of a mark is to indicate to the consumer the sources from which goods and services originate. A high level of public recognition of a Trade
Name is likely to result in a high degree of buyer acceptance. The consumer identifies the particular product characteristics with the Trade Name, and this association can help sell the product. When the products reputation has been
established in conjunction with the use of the Trade Name, the marketability of the product is often greatly enhanced. A Trade Name that has been established over time and serves to enhance the future revenue prospects of the target company will
have value to an acquirer.
The trade name intangible had a fair value of $12.7 million as of the Transaction Date and the
trade name and the estimated value for each trade name used by the Company are disclosed in the table above. The trade names included in All other trade names are First National Bank of Central California, South Valley National Bank, First Bank of
San Luis Obispo and San Benito Bank.
The trade name value was based on the estimated income from each trade name used by the
Company. The trade name for SBB&T has an indefinite life because when there are no legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of an intangible asset to the reporting entity, the useful life
of the asset shall be considered to be indefinite. The term
134
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
2.
|
B
USINESS
C
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T
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C
ONTINUED
|
indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizonthat is,
there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity.
Other Assets
A majority
of the other assets held by the Company did not have a fair value adjustment as part of the purchase accounting since their carrying value approximated fair value. These included such other assets as accrued interest receivable and required stock
ownership in the FHLB and Reserve Bank.
The following table summarizes the other items which were reviewed and recorded at
fair value as part of the purchase accounting.
|
|
|
|
|
Other Asset Description
|
|
Fair Value
|
|
(dollars in thousands)
|
|
BOLI
|
|
$
|
94,758
|
|
OREO
|
|
|
40,943
|
|
LIHTCP
|
|
|
39,438
|
|
Interest rate swaps
|
|
|
14,138
|
|
Owned buildings and land
|
|
|
31,555
|
|
Post retirement asset
|
|
|
15,260
|
|
|
|
|
|
|
|
|
$
|
236,092
|
|
|
|
|
|
|
Deposits
Term deposits were not included as part of the CDI valuation because the rates on the Companys term deposits do not represent an advantage relative to what market rates for term deposits were on the
Transaction Date. Instead, a separate valuation of term deposit liabilities was conducted. The term deposits which were evaluated for purchase accounting consisted of CDs, brokered deposits and Certificate of Deposit Account Registry Services
(CDARS) CDs. The fair value of these deposits was determined by first stratifying the deposit pool by quarterly maturity and calculating the average interest rate for each maturity bucket. Then cash flows were projected by period and
discounted to present value using current market interest rates. Based on the characteristics of the certificates, either a retail rate or a brokered CDs rate was used.
CD liabilities had a fair value of $2.08 billion as of the Transaction Date, compared to a carrying value of $2.06 billion for an amortizable premium of $17.8 million. Brokered Deposit liabilities had a
fair value of $389.8 million as of August 31, 2010, compared to a carrying value of $383.3 million for an amortizable premium of $6.6 million. CDARs liabilities had a fair value of $37.6 million as of the Transaction Date, compared to a
carrying value of $37.3 million for an amortizable premium of $300,000. The Company amortizes these premiums into income as a reduction of interest expense using the effective interest method over the weighted average term.
Other Borrowings
Included in long term debt and other borrowings in the summary table above are FHLB advances, subordinated debt, securities sold under
agreements to repurchase and trust preferred debt securities.
135
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
2.
|
B
USINESS
C
OMBINATION
I
NVESTMENT
T
RANSACTION
C
ONTINUED
|
These were fair valued by developing cash flow estimates for each of these debt instruments based on scheduled principal payments, current interest rates on similar securities with comparable
remaining terms, and prepayment penalties. The amortization term for any premium or discount was calculated based on scheduled principal payments. Once the cash flows were determined, a market rate for comparable debt was used to discount the cash
flows to the present value. The Company amortizes the premium and accretes the discount into income using the effective interest method over the contractual term as an adjustment to interest expense.
FHLB advances had a fair value of $879.1 million as of the Transaction Date, compared to a book value of $823.4 million for an
amortizable premium of $55.7 million. The subordinated debt had a fair value of $42.7 million as of the Transaction Date compared to a book value of $53.0 million with an accretable discount of $10.3 million. Securities sold under agreements to
repurchase had a fair value of $324.4 million as of the Transaction Date, compared to a carrying value of $304.3 million for an amortizable premium of $20.0 million. The trust preferred securities had a fair value of $51.1 million as of the
Transaction Date compared to a book value of $69.4 million with an accretable discount of $18.2 million.
Other Liabilities
As part of the purchase accounting, contingent liabilities were required to be fair valued. The Companys contingent liabilities are
for the subsequent earn-out payment amounts related to the acquisition of MCM and REWA as described below.
Earnout Liability
When the Company acquired MCM and REWA, a portion of the purchase price was deferred and structured as an earnout payment
in future periods. A discounted cash flow methodology based on projected earnings before depreciation and tax was used to estimate the fair value of these contractual obligations at the Transaction Date. The earnout liability had a fair value of
$11.5 million as of the Transaction Date, based on the forecasted income for these subsidiaries owned by the Bank for the earnout periods, excluding depreciation and income taxes.
Deferred Tax Liability
A deferred tax liability of $5.2 million was
recognized for the SBB&T indefinite life trade name intangible within the one year measurement period after the Investment Transaction. This deferred tax liability will remain on the Companys Consolidated Financial Statements as long as
the SBB&T trade name exists.
Lease Liability
The Company operates approximately 60 properties under long term leases. Two of these are capital leases and the remainder are operating leases. The classification of leases as operating or capital was
not changed in applying purchase accounting.
A third party reviewed the terms of all of the Companys leases as of
August 31, 2010. When reviewing the leases, the contractual lease payments and terms were compared to the current market conditions for a similar location and building leased. The Companys leases were considered to be unfavorable
136
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
2.
|
B
USINESS
C
OMBINATION
I
NVESTMENT
T
RANSACTION
C
ONTINUED
|
relative to the market terms of leases at the Transaction Date to the extent that the existing lease terms were higher than the current market terms, and a liability of $5.1 million was
recognized as part of the purchase accounting.
Transaction Expenses
The Company incurred approximately $12.6 million of expenses in connection with the transaction, consisting of $7.8 million of investment
banking services, $4.4 million of legal services, and $375,000 of accounting and valuation services. These transaction costs were recorded in the Predecessor Company operating expenses as services were provided. Additionally, as required by the
Investment Agreement, the Company reimbursed certain transaction-related third party due diligence, valuation and legal costs of the Investor of approximately $7.9 million. The $7.9 million of expenses were recorded as a reduction of the $500.0
million of proceeds received from the issuance of preferred and common shares in the successor period.
There were no
indemnification assets identified in this business combination, nor were there any contingent consideration assets or liabilities to be recognized.
N
OTE
3.
|
|
F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
|
The accounting guidance for fair value establishes a framework for measuring fair value and establishes a three-level
valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
|
|
|
Level 1:
|
|
Observable quoted prices in active markets for identical assets and liabilities.
|
|
|
Level 2:
|
|
Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the market.
|
|
|
Level 3:
|
|
Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
|
Fair value is defined as the amount at which an asset (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The assets and liabilities which are fair valued on a recurring basis are described below and contained in the following tables.
In addition, the Company may be required to record other assets and liabilities at fair value on a nonrecurring basis. These nonrecurring fair value adjustments involve the lower of carrying value or fair value accounting and write downs resulting
from impairment of assets. The following methods and assumptions were used to estimate the fair value of each class of financial instruments that are recorded in the Companys Consolidated Financial Statements at fair value on a recurring and
nonrecurring basis.
Investment Securities
Investment securities are recorded at fair value on a recurring basis. Where quoted prices are available in an active market for identical assets, securities are classified within Level 1 of the valuation
137
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
3.
|
F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
C
ONTINUED
|
hierarchy. Such quoted prices are available for the Companys United States Department of the Treasury (U.S. Treasury) securities. The remainder of the Companys
securities are quoted using observable market information for similar assets which requires the Company to report and use Level 2 pricing for them. When observable market information is not available for securities or there is limited activity or
less transparency around inputs, such securities would be classified within Level 3 of the valuation hierarchy. The Company does not have any securities within the Level 3 hierarchy.
Derivatives
The Companys swap derivatives are not listed on an
exchange and are instead executed over the counter (OTC). As no quoted market prices exist for such instruments, the Company values these OTC derivatives primarily based on third party broker pricing indications and valuation techniques
that use readily observable market parameters. As a result, the swap values are classified within Level 2 of the fair value hierarchy.
As discussed in Note 1, Summary of Significant Accounting Policies, of these Consolidated Financial Statements, prior to the funding of a mortgage loan, the Company may provide an interest
rate lock commitment and mandatory delivery contracts for mortgage loans originated for sale that qualify as derivatives under GAAP. The value of the interest rate lock commitments is based on the change in interest rates between the date the
interest rate lock commitment is executed and the date the loan is funded. The interest rates used to fair value these derivatives are from similar assets in observable markets. The value of the mandatory delivery contract is calculated by comparing
the price on the contract accepted date to the price on the actual sale date on similar assets that are currently being sold. As a result, these derivatives are classified within Level 2 of the fair value hierarchy.
Foreclosed Collateral
Foreclosed collateral is carried at fair value less estimated cost to sell. Fair value is determined by the lower of suggested market
prices obtained from independent certified appraisers, the current listing price, or the net present value of expected cash flows of the asset received. When the fair value of the collateral is based on a current appraised value or the appraised
value, the asset is classified as nonrecurring Level 2. When a net present value technique using the cash flows of the asset received is used, the asset is classified as nonrecurring Level 3.
Mortgage and Other Loan Servicing Rights
Servicing rights are carried at
the lower of aggregate cost or estimated fair value. Servicing rights are subject to quarterly impairment testing. When the fair value of the servicing rights is lower than their carrying value, impairment is recorded by establishing or increasing
the amount of a valuation allowance so that the net carrying amount is equal to the fair value. The Company uses independent third parties to value the servicing rights. The valuation model takes into consideration discounted cash flows using
current interest rates and prepayment speeds for each type of the underlying asset being serviced. The Company uses discounted cash flows to obtain the fair value for servicing rights and therefore servicing rights are classified as nonrecurring
Level 3.
138
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
3.
|
F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
C
ONTINUED
|
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis at December 31, 2011, and December 31, 2010, are summarized
in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Fair Value Measurements at Reporting
|
|
|
|
Successor
Company
As of
December 31,
2011
|
|
|
Quoted prices
in active
markets for
identical assets
(Level
1)
|
|
|
Active
markets for
similar
assets
(Level 2)
|
|
|
Unobservable
inputs
(Level 3)
|
|
|
|
(dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities
|
|
$
|
114,906
|
|
|
$
|
|
|
|
$
|
114,906
|
|
|
$
|
|
|
Collateralized mortgage obligations
|
|
|
938,963
|
|
|
|
|
|
|
|
938,963
|
|
|
|
|
|
Mortgage-backed securities (1)
|
|
|
237,045
|
|
|
|
|
|
|
|
237,045
|
|
|
|
|
|
State and municipal securities
|
|
|
212,511
|
|
|
|
|
|
|
|
212,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
|
1,503,425
|
|
|
|
|
|
|
|
1,503,425
|
|
|
|
|
|
Fair value swap asset
|
|
|
9,200
|
|
|
|
|
|
|
|
9,200
|
|
|
|
|
|
Fair value of derivative loan contracts
|
|
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
1,512,633
|
|
|
$
|
|
|
|
$
|
1,512,633
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value swap liability
|
|
$
|
9,242
|
|
|
$
|
|
|
|
$
|
9,242
|
|
|
$
|
|
|
Fair value of derivative loan contracts
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
9,244
|
|
|
$
|
|
|
|
$
|
9,244
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The mortgage-backed securities (MBS) included in the tables above are residential MBS.
|
(continued on next page)
139
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
3.
|
F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring Fair Value Measurements at
Reporting
|
|
|
|
Successor
Company
As
of
December 31,
2010
|
|
|
Quoted prices
in active
markets for
identical assets
(Level
1)
|
|
|
Active
markets for
similar
assets
(Level 2)
|
|
|
Unobservable
inputs
(Level 3)
|
|
|
|
(dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities
|
|
$
|
268,443
|
|
|
$
|
|
|
|
$
|
268,443
|
|
|
$
|
|
|
Collateralized mortgage obligations
|
|
|
608,425
|
|
|
|
|
|
|
|
608,425
|
|
|
|
|
|
Mortgage-backed securities (1)
|
|
|
197,912
|
|
|
|
|
|
|
|
197,912
|
|
|
|
|
|
Asset-backed securities
|
|
|
1,754
|
|
|
|
|
|
|
|
1,754
|
|
|
|
|
|
State and municipal securities
|
|
|
201,566
|
|
|
|
|
|
|
|
201,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities
|
|
|
1,278,100
|
|
|
|
|
|
|
|
1,278,100
|
|
|
|
|
|
Fair value swap asset
|
|
|
10,692
|
|
|
|
|
|
|
|
10,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
1,288,792
|
|
|
$
|
|
|
|
$
|
1,288,792
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value swap liability
|
|
$
|
11,240
|
|
|
$
|
|
|
|
$
|
11,240
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
11,240
|
|
|
$
|
|
|
|
$
|
11,240
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The MBS included in the tables above are residential MBS.
|
140
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
3.
|
F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
C
ONTINUED
|
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company is required to periodically measure certain financial assets at fair value on a nonrecurring basis. The
financial assets identified in the table below are fair value measurements that resulted from the application of lower of cost or fair value accounting and were written-down to the fair value during the twelve months ended December 31, 2011,
and the four months ended December 31, 2010. The amounts disclosed in the table below represent the fair value as of the date of the most recent fair value adjustment. A summary of the assets that had nonrecurring fair value measurements to the
carrying value during the period are summarized in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring Fair Value Measurements at Reporting
|
|
|
|
|
|
|
Successor
Company
|
|
|
Quoted
prices
in
active
markets for
identical
assets
(Level 1)
|
|
|
Active
markets
for
similar
assets
(Level 2)
|
|
|
Unobservable
inputs
(Level 3)
|
|
|
Losses for
the
twelve
months ended
December 31,
2011
|
|
|
|
Twelve
months ended
December 31,
2011
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Foreclosed collateral
|
|
$
|
27,701
|
|
|
$
|
|
|
|
$
|
27,701
|
|
|
$
|
|
|
|
$
|
6,585
|
(1)
|
Servicing rights
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
|
|
170
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
28,043
|
|
|
$
|
|
|
|
$
|
27,701
|
|
|
$
|
342
|
|
|
$
|
6,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring Fair Value Measurements at Reporting
|
|
|
|
|
|
|
Successor
Company
|
|
|
Quoted
prices
in
active
markets for
identical
assets
(Level 1)
|
|
|
Active
markets
for
similar
assets
(Level 2)
|
|
|
Unobservable
inputs
(Level 3)
|
|
|
Losses for
the
four
months ended
December 31,
2010
|
|
|
|
Four months
ended
December 31,
2010
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Foreclosed collateral
|
|
$
|
1,412
|
|
|
$
|
|
|
|
$
|
1,412
|
|
|
$
|
|
|
|
$
|
152
|
(1)
|
Servicing rights
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
236
|
|
|
|
10
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
1,648
|
|
|
$
|
|
|
|
$
|
1,412
|
|
|
$
|
236
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Losses were recognized due to the decline in real estate values.
|
(2)
|
Losses were recognized due to the decline in interest rates, which resulted in higher prepayments.
|
There were no liabilities measured at fair value on a nonrecurring basis for the periods presented within this note of these Consolidated
Financial Statements. There were no transfers in or out of the Companys Level 3 financial assets during the periods presented within this note of these Consolidated Financial Statements by reason of a change in the methodology for establishing
the fair value.
141
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
3.
|
F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
C
ONTINUED
|
Disclosure of the Fair Value of Financial Instruments
The disclosure below provides the carrying value and fair value of the financial instruments which are not carried on the Companys
Consolidated Financial Statements at fair value or are carried at the lower of cost or fair value and not disclosed in the recurring or nonrecurring fair value measurements in the tables above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(dollars in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
49,324
|
|
|
$
|
49,324
|
|
|
$
|
45,820
|
|
|
$
|
45,820
|
|
Interest bearing demand deposits in other financial institutions
|
|
|
173,408
|
|
|
|
173,408
|
|
|
|
450,044
|
|
|
|
450,044
|
|
Loans held for investment, net
|
|
|
3,655,433
|
|
|
|
3,704,493
|
|
|
|
3,760,997
|
|
|
|
3,723,796
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,617,040
|
|
|
|
4,636,267
|
|
|
|
4,906,788
|
|
|
|
4,920,051
|
|
Other borrowings
|
|
|
66,524
|
|
|
|
70,735
|
|
|
|
121,014
|
|
|
|
120,184
|
|
Securities sold under agreements to repurchase
|
|
|
315,919
|
|
|
|
318,370
|
|
|
|
319,737
|
|
|
|
318,354
|
|
Federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
1,500
|
|
A summary of the valuation methodology used to disclose the fair value of the financial instruments in
the table above is as follows:
Cash and Due from Banks and Interest Bearing Demand Deposits in Other Financial Institutions
The carrying values of cash and interest bearing demand deposits in other financial institutions represent the fair value.
Loans Held for Investment, net
The carrying value of the loans held for investment at December 31, 2011, and December 31, 2010, was significantly impacted by the write down to fair value at the Transaction Date due to the
application of purchase accounting related to the Investment Transaction. At the Transaction Date, the loans purchased were at fair value based on the contractual cash flows expected to be collected. The fair value presented above is calculated
based on the present value of expected principal and interest cash flows. The carrying value of the loans is net of the ALLL which represents Managements evaluation of expected credit losses inherent in those loan portfolios. These methods are
based on the entrance price concept versus the exit price concept described in ASC 820
, Fair Value Measurements
.
The
methods used to estimate the fair value of loans are sensitive to the assumptions and estimates used. While Management has attempted to use assumptions and estimates that best reflect the Companys loan portfolio and current market conditions,
a greater degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, readers are cautioned in using this information for purposes of evaluating the financial condition and/or value of the Company in
and of itself or in comparison with any other company.
142
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
3.
|
F
AIR
V
ALUE
OF
F
INANCIAL
I
NSTRUMENTS
C
ONTINUED
|
Deposits
The fair value of demand deposits, money market accounts, and savings accounts is the amount payable on demand at December 31, 2011, and December 31, 2010. The fair value of fixed-maturity CDs
is estimated by discounting the interest and principal payments using the rates currently offered for deposits of similar remaining maturities.
Other Borrowings
The
fair value of trust preferred securities is estimated by discounting the interest and principal payments using current market rates for comparable securities.
Securities Sold Under Agreements to Repurchase
The fair value of
repurchase agreements is determined by reference to rates in the wholesale repurchase market. The rates paid to the Companys clients are slightly lower than rates in the wholesale market and, consequently, the fair value will generally be less
than the carrying amount. The fair value of the long term repurchase agreements is determined in the same manner as other borrowings, above.
Federal Funds Purchased
The carrying value of Federal funds purchased is a reasonable estimate of the fair value.
Disclosed Fair Value of Financial Instruments is not Equivalent to Franchise Value
The financial instruments disclosed in this note include such items as securities, loans, deposits, debt, and other instruments.
Disclosure of fair values is not required for certain assets and liabilities that are not financial instruments such as obligations for pension and other postretirement benefits, premises and equipment, prepaid expenses, and income tax assets and
liabilities. Accordingly, the aggregate fair value of amounts presented in this note does not purport to represent, and should not be considered representative of, the underlying market or franchise value of the Company. Further, due to
a variety of alternative valuation techniques and approaches permitted by the fair value measurement accounting standards as well as the significant assumptions that are required to be made in the process of valuation, the determinations or
estimations of fair value for many of the financial instruments disclosed in this note could and do differ between various market participants. A direct comparison of the Companys fair value information with that of other financial
institutions may not be appropriate.
N
OTE
4.
|
|
I
NVESTMENT
S
ECURITIES
|
Trading Securities
At December 31, 2011, and December 31, 2010, the Company did not hold any trading securities. As discussed in Note 2, Business Combination Investment Transaction of these
Consolidated Financial Statements, the securities which were held in the Companys trading portfolio were transferred to the AFS portfolio on the Transaction Date as part of the Investment Transaction.
143
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
4.
|
I
NVESTMENT
S
ECURITIES
C
ONTINUED
|
A summary of investment securities held by the Company at December 31, 2011, and
2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(dollars in thousands)
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities (1)
|
|
$
|
114,278
|
|
|
$
|
628
|
|
|
$
|
|
|
|
$
|
114,906
|
|
Mortgage-backed securities (2)
|
|
|
232,737
|
|
|
|
4,378
|
|
|
|
(71
|
)
|
|
|
237,044
|
|
Collateralized mortgage obligations (3)
|
|
|
931,875
|
|
|
|
9,471
|
|
|
|
(2,382
|
)
|
|
|
938,964
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities
|
|
|
209,930
|
|
|
|
4,583
|
|
|
|
(2,002
|
)
|
|
|
212,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
1,488,820
|
|
|
$
|
19,060
|
|
|
$
|
(4,455
|
)
|
|
$
|
1,503,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(dollars in thousands)
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities (1)
|
|
$
|
268,383
|
|
|
$
|
174
|
|
|
$
|
(114
|
)
|
|
$
|
268,443
|
|
Mortgage-backed securities (2)
|
|
|
200,918
|
|
|
|
140
|
|
|
|
(3,146
|
)
|
|
|
197,912
|
|
Collateralized mortgage obligations (3)
|
|
|
619,621
|
|
|
|
288
|
|
|
|
(11,484
|
)
|
|
|
608,425
|
|
Asset-backed securities
|
|
|
1,754
|
|
|
|
|
|
|
|
|
|
|
|
1,754
|
|
State and municipal securities
|
|
|
220,528
|
|
|
|
14
|
|
|
|
(18,976
|
)
|
|
|
201,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
1,311,204
|
|
|
$
|
616
|
|
|
$
|
(33,720
|
)
|
|
$
|
1,278,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
U.S. Agency securities are general obligations that are not backed by the full faith and credit of the United States government and consist of
Government Sponsored Enterprises issued by the Federal Farm Credit, Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Federal Home Loan Bank and Tennessee Valley Authority.
|
(2)
|
MBS are securitized mortgage loans that are not backed by the full faith and credit of the United States Government and consist of Government
Sponsored Enterprises which guarantee the collection of principal and interest payments. The securities primarily consist of securities issued by FHLMC and FNMA.
|
(3)
|
Collateralized mortgage obligations (CMOs) are securities which pool together mortgages and separate them into short, medium, or
long term positions called tranches. The CMOs in the table above primarily consist of securities issued by Government National Mortgage Association (GNMA), FNMA, FHLMC and private label.
|
Available for Sale Securities
At December 31, 2011, and 2010, the Company held $1.50 billion and $1.28 billion, respectively, of securities in its AFS portfolio. Unrealized gains or losses relating to AFS securities are accounted
for by adjusting the carrying amount of the securities. An offsetting entry after the adjustment for taxes at the Companys corporate effective tax rate, when applicable, is recognized in OCI.
144
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
4.
|
I
NVESTMENT
S
ECURITIES
C
ONTINUED
|
Fair values are obtained from independent sources based on current market prices for the
specific security held by the Company or for a security with similar characteristics. If a security is in an unrealized loss position, Management is required to determine whether or not the security is temporarily or permanently impaired.
The following table shows all AFS securities that are in an unrealized loss position and temporarily impaired as of
December 31, 2011, and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
|
(dollars in thousands)
|
|
Municipal bonds
|
|
$
|
6,359
|
|
|
$
|
(21
|
)
|
|
$
|
45,230
|
|
|
$
|
(1,981
|
)
|
|
$
|
51,589
|
|
|
$
|
(2,002
|
)
|
Mortgage-backed securities
|
|
|
2,784
|
|
|
|
(36
|
)
|
|
|
2,910
|
|
|
|
(35
|
)
|
|
|
5,694
|
|
|
|
(71
|
)
|
Collateralized mortgage obligations
|
|
|
184,141
|
|
|
|
(1,978
|
)
|
|
|
1,450
|
|
|
|
(404
|
)
|
|
|
185,591
|
|
|
|
(2,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
193,284
|
|
|
$
|
(2,035
|
)
|
|
$
|
49,590
|
|
|
$
|
(2,420
|
)
|
|
$
|
242,874
|
|
|
$
|
(4,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2010
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
|
(dollars in thousands)
|
|
U.S. Treasury/U.S. Agencies
|
|
$
|
115,909
|
|
|
$
|
(114
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
115,909
|
|
|
$
|
(114
|
)
|
Municipal bonds
|
|
|
197,916
|
|
|
|
(18,976
|
)
|
|
|
|
|
|
|
|
|
|
|
197,916
|
|
|
|
(18,976
|
)
|
Mortgage-backed securities
|
|
|
160,966
|
|
|
|
(3,146
|
)
|
|
|
|
|
|
|
|
|
|
|
160,966
|
|
|
|
(3,146
|
)
|
Collateralized mortgage obligations
|
|
|
572,986
|
|
|
|
(11,484
|
)
|
|
|
|
|
|
|
|
|
|
|
572,986
|
|
|
|
(11,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,047,777
|
|
|
$
|
(33,720
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,047,777
|
|
|
$
|
(33,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011, and December 31, 2010, 142 and 526 AFS securities were in a loss
position, respectively. The $4.5 million and $33.7 million of unrealized losses for the AFS portfolio as of December 31, 2011, and December 31, 2010, respectively, are primarily a result of changes in market interest rates. The fair value
is based on current market prices obtained from independent sources for each security held. If a security is in an unrealized loss position, Management is required to determine whether or not the security is temporarily or permanently impaired. At
December 31, 2011, the issuers of these securities have not, to the Companys knowledge, established any cause for default on these securities and the most recent credit ratings on all securities have an investment grade rating, except for
one security. The one security which has a credit rating below investment grade is a municipal bond which is current on all interest payments and is a General Obligation Municipal Bond. At December 31, 2011, Management does not intend to sell
any of the securities in a loss position nor are there any conditions present at December 31, 2011, that would require Management to sell them. As such, Management does not believe that there are any securities that are other-than-temporarily
impaired as of December 31, 2011.
145
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
4.
|
I
NVESTMENT
S
ECURITIES
C
ONTINUED
|
Contractual Maturities for Securities Portfolio
The amortized cost and estimated fair value of debt securities at December 31, 2011, and 2010, by weighted average contractual
maturity, are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
Amortized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(dollars in thousands)
|
|
Available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In one year or less
|
|
$
|
83,611
|
|
|
$
|
83,892
|
|
|
$
|
101,430
|
|
|
$
|
100,821
|
|
After one year through five years
|
|
|
1,063,218
|
|
|
|
1,072,379
|
|
|
|
785,739
|
|
|
|
775,438
|
|
After five years through ten years
|
|
|
190,895
|
|
|
|
194,750
|
|
|
|
258,091
|
|
|
|
252,180
|
|
After ten years
|
|
|
151,096
|
|
|
|
152,404
|
|
|
|
165,944
|
|
|
|
149,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
1,488,820
|
|
|
$
|
1,503,425
|
|
|
$
|
1,311,204
|
|
|
$
|
1,278,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities will differ from contractual maturities because borrowers or issuers have the right
to call or prepay investment securities. Changes in interest rates may also impact borrowers or issuers of investment securities and cause them to prepay investment securities earlier than the contractual term.
Sales and Calls of Securities
The following table summarizes the securities sold and called for the last three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Twelve Months Ended
December
31, 2011
|
|
|
Four Months Ended
December
31, 2010
|
|
|
|
Proceeds
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
|
Proceeds
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
|
|
(dollars in thousands)
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
10,709
|
|
|
$
|
27
|
|
|
$
|
(228
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Calls
|
|
$
|
61,481
|
|
|
$
|
|
|
|
$
|
(50
|
)
|
|
$
|
72,584
|
|
|
$
|
|
|
|
$
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
|
Eight Months Ended
August 31,
2010
|
|
|
Twelve Months Ended
December
31, 2009
|
|
|
|
Proceeds
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
|
Proceeds
|
|
|
Gross
Gains
|
|
|
Gross
Losses
|
|
|
|
(dollars in thousands)
|
|
Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
180,086
|
|
|
$
|
7,517
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
69,133
|
|
|
$
|
5,926
|
|
|
$
|
(433
|
)
|
|
$
|
127,601
|
|
|
$
|
10,944
|
|
|
$
|
|
|
Calls
|
|
$
|
277,855
|
|
|
$
|
343
|
|
|
$
|
(169
|
)
|
|
$
|
573,955
|
|
|
$
|
94
|
|
|
$
|
(3,174
|
)
|
146
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
4.
|
I
NVESTMENT
S
ECURITIES
C
ONTINUED
|
Interest Income
The following table summarizes interest income from investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December
31, 2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Interest income for Trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
143
|
|
|
$
|
5,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income for trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
5,131
|
|
|
|
|
|
|
|
Interest income for AFS securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
|
|
|
|
3
|
|
|
|
|
|
219
|
|
|
|
530
|
|
U.S. Agency securities
|
|
|
1,363
|
|
|
|
618
|
|
|
|
|
|
5,626
|
|
|
|
16,362
|
|
Asset-backed securities
|
|
|
73
|
|
|
|
81
|
|
|
|
|
|
92
|
|
|
|
139
|
|
CMOs and MBS
|
|
|
17,922
|
|
|
|
3,274
|
|
|
|
|
|
6,388
|
|
|
|
10,937
|
|
Nontaxable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal securities
|
|
|
8,628
|
|
|
|
2,896
|
|
|
|
|
|
7,727
|
|
|
|
14,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income for AFS securities
|
|
|
27,986
|
|
|
|
6,872
|
|
|
|
|
|
20,052
|
|
|
|
42,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
27,986
|
|
|
$
|
6,872
|
|
|
|
|
$
|
20,195
|
|
|
$
|
47,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pledged Securities
Securities with a carrying value of approximately $688.3 million and $671.2 million at December 31, 2011, and 2010, respectively, were pledged to secure public funds, trust deposits, repurchase
agreements and other borrowings as required or permitted by law.
Investment in FHLB and Reserve Bank Stock
The Companys investment in stock of the FHLB was $54.3 million and $64.8 million at December 31, 2011, and 2010,
respectively. As with other investment securities, the investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. Based on the current capital
adequacy, liquidity position and recent credit ratings of the FHLB, Management believes there is no impairment in the Companys investment at December 31, 2011, and that the cost of the investment approximates fair value. The
Companys investment in stock of the Reserve Bank was $18.8 million and $18.2 million at December 31, 2011, and 2010, respectively. The investments of FHLB and Reserve Bank stock are included in FHLB stock and other investments on the
Companys Consolidated Balance Sheets.
Loans Held for Sale
At December 31, 2011, and 2010, the carrying value of loans held for sale was $3.1 million, and $16.5 million, respectively, and represents residential 1 to 4 family unit loans.
147
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
5.
|
L
OANS
C
ONTINUED
|
Loans held for investment
The composition of the Companys loans held for investment portfolio at carrying value is as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
1,040,126
|
|
|
$
|
897,478
|
|
Multifamily
|
|
|
344,643
|
|
|
|
254,511
|
|
Commercial
|
|
|
1,588,852
|
|
|
|
1,745,589
|
|
Construction
|
|
|
185,400
|
|
|
|
234,837
|
|
Revolving1 to 4 family
|
|
|
249,857
|
|
|
|
280,753
|
|
Commercial loans
|
|
|
189,226
|
|
|
|
266,702
|
|
Consumer loans
|
|
|
49,977
|
|
|
|
60,713
|
|
Other loans
|
|
|
12,880
|
|
|
|
20,934
|
|
|
|
|
|
|
|
|
|
|
Total loans held for investment
|
|
$
|
3,660,961
|
|
|
$
|
3,761,517
|
|
|
|
|
|
|
|
|
|
|
The table above includes PCI Term Pools and PCI Revolving Pools, which were recorded at fair value at the
Transaction Date. The loan balances above are net of deferred loan origination fees, commitment extension fees and origination costs of $1.1 million and $22,000 at December 31, 2011, and 2010, respectively. The unamortized net deferred costs at
December 31, 2011, and 2010, relate only to loans originated after the Transaction Date. Unamortized net deferred fees were eliminated in the purchase accounting at the Transaction Date.
A summary of the carrying balances of loans originated since the Transaction Date are as follows, and excludes loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
296,257
|
|
|
$
|
7,652
|
|
Multifamily
|
|
|
151,417
|
|
|
|
|
|
Commercial
|
|
|
114,307
|
|
|
|
|
|
Construction
|
|
|
1,793
|
|
|
|
|
|
Revolving1 to 4 family
|
|
|
3,890
|
|
|
|
1,237
|
|
Commercial loans
|
|
|
11,622
|
|
|
|
2,553
|
|
Consumer loans
|
|
|
6,404
|
|
|
|
1,155
|
|
Other loans
|
|
|
2,335
|
|
|
|
3,807
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
588,025
|
|
|
$
|
16,404
|
|
|
|
|
|
|
|
|
|
|
148
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
5.
|
L
OANS
C
ONTINUED
|
Loan Purchases
The following table summarizes loans the Company purchased during:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor
Company
|
|
(dollars in thousands)
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
109,713
|
|
|
$
|
|
|
|
|
|
$
|
|
|
Multifamily
|
|
|
112,012
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
101,793
|
|
|
|
|
|
|
|
|
|
|
|
Net, purchase discount
|
|
|
(8,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans purchased
|
|
$
|
314,990
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
During the twelve months ended December 31, 2011, the Company purchased $323.5 million of loans at a net discount of $8.5 million. Residential real estate 1 to 4 family units, loans were purchased at
a premium, while commercial real estate and multifamily loans were purchased at a discount. The loans purchased during the twelve months ended December 31, 2011, are performing and not considered purchased credit impaired.
The determination to not classify loans purchased at a discount as purchased credit impaired was based on due diligence performed prior
to their purchase. When reviewing and selecting loans for purchase, the Company required that the loans have no delinquencies during the previous 36 months, i.e. all contractual payments had been made on time. In addition, a majority of the loans
purchased were seasoned loans which were originated prior to 2005. All these loans were assigned an internal credit risk grade of Pass.
There were no loan purchases during the four months ended December 31, 2010.
Predecessor
Company
There were no loan purchases during the eight months ended August 31, 2010.
149
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
5.
|
L
OANS
C
ONTINUED
|
Loan Sales and Transactions
A summary of the loan sale activities by loan portfolio, excluding SBA loans, is below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Months
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
$
|
65,636
|
|
|
$
|
81,789
|
|
|
|
|
$
|
106,014
|
|
|
$
|
296,074
|
|
Commercial loans
|
|
|
|
|
|
|
12,526
|
|
|
|
|
|
16,522
|
|
|
|
5,763
|
|
Commercial real estate and construction loans
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
1,840
|
|
|
|
86,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans sold, net carrying value
|
|
$
|
68,136
|
|
|
$
|
94,315
|
|
|
|
|
$
|
124,376
|
|
|
$
|
388,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on loans sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on residential real estate loans
|
|
$
|
1,085
|
|
|
$
|
1,602
|
|
|
|
|
$
|
1,382
|
|
|
$
|
3,521
|
|
Net gain on commercial loans
|
|
|
|
|
|
|
|
|
|
|
|
|
3,520
|
|
|
|
|
|
Net gain/(loss) on commercial real estate and construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
(1,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain on loans sold
|
|
$
|
1,085
|
|
|
$
|
1,602
|
|
|
|
|
$
|
5,033
|
|
|
$
|
2,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold with servicing released:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
$
|
29,716
|
|
|
$
|
75,590
|
|
|
|
|
$
|
85,250
|
|
|
$
|
140,300
|
|
Commercial loans
|
|
|
|
|
|
|
12,526
|
|
|
|
|
|
16,522
|
|
|
|
5,763
|
|
Commercial real estate and construction loans
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
1,840
|
|
|
|
86,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans sold with servicing released, net carrying value
|
|
$
|
32,216
|
|
|
$
|
88,116
|
|
|
|
|
$
|
103,612
|
|
|
$
|
232,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold with servicing retained:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate loans
|
|
$
|
35,920
|
|
|
$
|
6,199
|
|
|
|
|
$
|
20,764
|
|
|
$
|
155,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans sold with servicing retained, net carrying value
|
|
$
|
35,920
|
|
|
$
|
6,199
|
|
|
|
|
$
|
20,764
|
|
|
$
|
155,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing rights recorded on loans sold:
|
|
$
|
365
|
|
|
$
|
67
|
|
|
|
|
$
|
227
|
|
|
$
|
1,715
|
|
|
|
|
|
|
|
Residential real estate loans sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold that were originated for sale
|
|
$
|
65,325
|
|
|
$
|
81,675
|
|
|
|
|
$
|
90,474
|
|
|
$
|
222,644
|
|
Loans sold from held for investment portfolio
|
|
$
|
311
|
|
|
$
|
114
|
|
|
|
|
$
|
15,540
|
|
|
$
|
73,430
|
|
Pledged Loans
At December 31, 2011, loans secured by residential and commercial real estate with principal balances totaling $45.9 million were pledged to the FHLB as collateral for borrowings. At
December 31, 2010, $1.88 billion in loans were pledged to the FHLB and $545.8 million were pledged to the Reserve Bank. These amounts pledged do not represent the amount of outstanding borrowings that are required to be supported by collateral.
The Company maintains an excess of collateral at these institutions so that it may borrow without having to first transfer collateral to them.
150
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
5.
|
L
OANS
C
ONTINUED
|
Unfunded Loan Commitments and Letters of Credit
As of December 31, 2011, and 2010, the contractual commitments for unfunded commitments and letters of credit are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Total
|
|
|
Less than
one
year
|
|
|
One to
three
years
|
|
|
Three to
five
years
|
|
|
More
than
five years
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Unfunded commitments
|
|
$
|
488,611
|
|
|
$
|
145,827
|
|
|
$
|
60,156
|
|
|
$
|
81,248
|
|
|
$
|
201,380
|
|
Standby letters of credit and financial guarantees
|
|
|
69,426
|
|
|
|
40,553
|
|
|
|
13,417
|
|
|
|
3,119
|
|
|
|
12,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
558,037
|
|
|
$
|
186,380
|
|
|
$
|
73,573
|
|
|
$
|
84,367
|
|
|
$
|
213,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2010
|
|
|
|
Total
|
|
|
Less than
one
year
|
|
|
One
to
three years
|
|
|
Three to
five
years
|
|
|
More
than
five years
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Unfunded commitments
|
|
$
|
533,237
|
|
|
$
|
149,067
|
|
|
$
|
47,451
|
|
|
$
|
85,723
|
|
|
$
|
250,996
|
|
Standby letters of credit and financial guarantees
|
|
|
70,809
|
|
|
|
20,102
|
|
|
|
26,224
|
|
|
|
14,382
|
|
|
|
10,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
604,046
|
|
|
$
|
169,169
|
|
|
$
|
73,675
|
|
|
$
|
100,105
|
|
|
$
|
261,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in unfunded loan commitments are secured and unsecured lines and letters of credit and loans
which have approved applications, but they have not been funded. Letters and lines of credit are commitments to extend credit and standby letters of credit for the Banks clients. These commitments meet the financing needs of the Banks
clients in the normal course of business and are commitments with off-balance sheet risk since the Bank has committed to issuing funds to or on behalf of clients, but there is no current loan outstanding.
Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a
client to a third party in borrowing arrangements. At December 31, 2011, the maximum undiscounted future payments that the Company could be required to make were $558.0 million. Approximately 33.4% of these arrangements mature within one year.
The Company generally has recourse to recover from the client any amounts paid under these guarantees. Most of the guarantees are fully collateralized by the same types of assets used as loan collateral, however several are unsecured.
The Company anticipates that a majority of the above commitments will not be fully drawn on by clients. Consumers do not tend to borrow
the maximum amounts available under their home equity lines and businesses typically arrange for credit lines in excess of their expected needs to handle contingencies. A majority of the lines of credit are adjustable rate commitments that are tied
to prime or a base-lending rate. If a rate is fixed on a line of credit, the commitments are not usually for more than three months.
The Company has exposure to loan losses from unfunded loan commitments and letters of credit. Since the funds have not been disbursed on these commitments, they are not reported as loans
151
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
5.
|
L
OANS
C
ONTINUED
|
outstanding. Loan losses related to these commitments are not included in the ALLL reported in Note 7, Allowance for Loan and Lease Losses and Credit Quality of these
Consolidated Financial Statements; instead, they are accounted for as a separate loss contingency or reserve, and reported as a liability within other liabilities on the Companys Balance Sheets. The reserve for the unfunded loan commitments
and letters of credit was $16.2 million and $19.0 million at December 31, 2011, and 2010, respectively. The reserve for unfunded loan commitments declined $2.8 million in 2011, primarily due to the expiration of commitments.
The table below summarizes the reserve for unfunded loan commitments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Months
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
19,032
|
|
|
$
|
19,000
|
|
|
|
|
$
|
16,259
|
|
|
$
|
8,014
|
|
Additions/(reductions), net
|
|
|
(2,848
|
)
|
|
|
32
|
|
|
|
|
|
2,741
|
|
|
|
8,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
16,184
|
|
|
$
|
19,032
|
|
|
|
|
$
|
19,000
|
|
|
$
|
16,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration of Lending Activities
The Company monitors concentrations within four broad categories: industry, geography, product, and collateral. The Companys lending activities are primarily conducted in the market areas where the
Company has branch offices in the state of California and therefore has a concentration of loans in the central coast of California. From time-to-time, the Company has originated or purchased loans on properties in other states.
With respect to collateral, the Bank has a concentration of loans collateralized by real estate, which is somewhat diversified by the
type of real estate collateral. Collateral for real estate secured loans include 1-4 units of single family residential, multifamily residential, and commercial buildings of various types. At December 31, 2011, commercial real estate loans
comprised 43.4% of the Companys loan portfolio but diversified among types of property and types of commercial businesses.
The Company has a diversity of products it provides to clients. The Commercial & Community Banking segment serves consumers and small businesses by offering lines of credit, equity lines and loans,
automobile loans, and residential mortgage loans. This segment also serves large business clients with traditional commercial lending products such as commercial and commercial real estate loans, lines of credit, letters of credit, asset based
lending, foreign exchange services and treasury management.
Related Parties
In the ordinary course of business, the Company has extended credit to directors and executive officers of the Company. These related
party loans totaled $1.9 million and $17.3 million at December 31, 2011, and 2010, respectively. At December 31, 2011, the maturities of the related party loans were approximately 30 years, and were made to senior officers of the Company.
Such loans are subject to ratification by the Board of Directors, exclusive of the borrowing director or officer. Federal banking regulations require that any such extensions of credit not be offered on terms more favorable than would be offered to
non-related party borrowers of similar credit worthiness.
152
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
6.
|
|
P
URCHASED
C
REDIT
I
MPAIRED
P
OOLS
|
As discussed in Note 1, Summary of Significant Accounting Policies of the Consolidated Financial
Statements, the Company has classified all of the loans acquired on the Transaction Date as PCI loans and pooled the purchased loans into pools of loans which have similar risk characteristics. PCI loans which have revolving lines of credit are
referred to as PCI Revolving Pools while the remainder of the loans purchased are referred to as PCI Term Pools.
The
following table summarizes all of the loans purchased on the Transaction Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
PCI Term
|
|
|
PCI
Revolving
|
|
|
|
|
|
|
Pools
|
|
|
Pools
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Contractually required payments including interest
|
|
$
|
6,039,204
|
|
|
$
|
978,874
|
|
|
$
|
7,018,078
|
|
Difference related to credit
|
|
|
(1,781,386)
|
|
|
|
(289,679)
|
|
|
|
(2,071,065)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected
|
|
|
4,257,818
|
|
|
|
689,195
|
|
|
|
4,947,013
|
|
Difference related to interest
|
|
|
(851,397)
|
|
|
|
(75,526)
|
|
|
|
(926,923)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
3,406,421
|
|
|
$
|
613,669
|
|
|
$
|
4,020,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual principal and interest payments by loan type at the Transaction Date for the PCI Term
Pools were as follows:
|
|
|
|
|
|
|
Successor Company
|
|
|
|
September 1,
|
|
(dollars in thousands)
|
|
2010
|
|
Contractually required payments receivable of PCI Term Pools purchased during the year:
|
|
|
|
|
Commercial
|
|
$
|
4,425,989
|
|
Consumer
|
|
|
1,613,215
|
|
|
|
|
|
|
|
|
$
|
6,039,204
|
|
|
|
|
|
|
|
|
Cash flows expected to be collected for PCI Term Pools at acquisition:
|
|
$
|
4,257,818
|
|
Fair value of PCI Term Pools at acquisition:
|
|
$
|
3,406,421
|
|
153
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
6.
|
P
URCHASED
C
REDIT
I
MPAIRED
P
OOLS
C
ONTINUED
|
The following table summarizes the accretable yield or income expected to be collected
for PCI Term Pools purchased:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
(dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
785,001
|
|
|
$
|
|
|
Accretable yield for new loans purchased (1)
|
|
|
|
|
|
|
851,397
|
|
Accretion of income (2)
|
|
|
(193,136
|
)
|
|
|
(66,396
|
)
|
Reclassification from nonaccretable difference
related to improvement in credit loss expectations (3)
|
|
|
56,512
|
|
|
|
|
|
Reclassification to nonaccretable difference related to changes in prepayment expectations and other factors (4)
|
|
|
(71,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
577,105
|
|
|
$
|
785,001
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Accretable yield based on expected cash flows at the purchase date.
|
(2)
|
Accretion of income represents the recognition of the discount rate used to present value the expected cash flows.
|
(3)
|
Relates to changes in credit loss expectations.
|
(4)
|
Relates primarily to changes in prepayment expectations, and also relates to changes in spot rates for variable rate loans.
|
The following table summarizes the balance of PCI Term Pools:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December
31,
2011
|
|
|
December
31,
2010
|
|
|
|
|
|
(dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
679,282
|
|
|
$
|
814,770
|
|
Multifamily loans
|
|
|
191,850
|
|
|
|
252,379
|
|
Commercial
|
|
|
1,454,837
|
|
|
|
1,718,029
|
|
Construction
|
|
|
179,646
|
|
|
|
227,424
|
|
Revolving1 to 4 family
|
|
|
5,949
|
|
|
|
5,451
|
|
Commercial loans
|
|
|
56,806
|
|
|
|
115,799
|
|
Consumer loans
|
|
|
22,342
|
|
|
|
34,491
|
|
Other loans
|
|
|
5,838
|
|
|
|
9,458
|
|
|
|
|
|
|
|
|
|
|
Total PCI term poolscarrying balance
|
|
$
|
2,596,550
|
|
|
$
|
3,177,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PCI term poolsunpaid principal balance
|
|
$
|
2,841,625
|
|
|
$
|
3,494,683
|
|
|
|
|
|
|
|
|
|
|
154
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
6.
|
P
URCHASED
C
REDIT
I
MPAIRED
P
OOLS
C
ONTINUED
|
The following table summarizes the balance of the PCI Revolving Pools:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December
31,
2011
|
|
|
December
31,
2010
|
|
|
|
|
|
(dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
64,587
|
|
|
$
|
75,056
|
|
Multifamily loans
|
|
|
1,376
|
|
|
|
2,132
|
|
Commercial
|
|
|
19,708
|
|
|
|
27,560
|
|
Construction
|
|
|
3,961
|
|
|
|
7,413
|
|
Revolving1 to 4 family
|
|
|
240,018
|
|
|
|
274,065
|
|
Commercial loans
|
|
|
120,798
|
|
|
|
148,350
|
|
Consumer loans
|
|
|
21,231
|
|
|
|
25,067
|
|
Other loans
|
|
|
4,707
|
|
|
|
7,669
|
|
|
|
|
|
|
|
|
|
|
Total PCI revolving poolscarrying balance
|
|
$
|
476,386
|
|
|
$
|
567,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PCI revolving poolsunpaid principal balance
|
|
$
|
557,023
|
|
|
$
|
668,988
|
|
|
|
|
|
|
|
|
|
|
N
OTE
7.
|
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
|
The following table summarizes the ALLL for the year ended December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Twelve Months Ended December 31, 2011
|
|
|
|
Beginning
Balance at
December 31,
2010
|
|
|
Charge-offs
|
|
|
Recoveries
|
|
|
Provision for
loan and
lease losses
|
|
|
Ending
Balance at
December 31,
2011
|
|
|
|
(dollars in thousands)
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
120
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,832
|
|
|
$
|
1,952
|
|
Multifamily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
783
|
|
|
|
783
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722
|
|
|
|
722
|
|
Construction
|
|
|
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
320
|
|
|
|
20
|
|
Revolving1 to 4 family
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
71
|
|
Commercial loans
|
|
|
206
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
256
|
|
|
|
437
|
|
Consumer loans
|
|
|
69
|
|
|
|
(19
|
)
|
|
|
1
|
|
|
|
276
|
|
|
|
327
|
|
Other loans
|
|
|
97
|
|
|
|
(267
|
)
|
|
|
63
|
|
|
|
456
|
|
|
|
349
|
|
Purchased credit impaired loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
520
|
|
|
$
|
(611
|
)
|
|
$
|
64
|
|
|
$
|
5,555
|
|
|
$
|
5,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
At December 31, 2011, the majority of the ALLL relates to loans the Company
originated or purchased since the Transaction Date. During the twelve months ended December 31, 2011, the Company established an ALLL for one PCI Term Pool in the amount of $867,000, which resulted from Managements revised expectations
for future cash flows being lower than previous estimates. As of December 31, 2011, cash flows from all other PCI Loan Pools were within Managements expectations, and no additional ALLL was required to be recognized.
The following table summarizes the ALLL for the twelve months ended December 31, 2011, the four months ended December 31, 2010,
the eight months ended August 31, 2010, and for the year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Months
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period continuing operations
|
|
$
|
520
|
|
|
$
|
282,632
|
|
|
|
|
$
|
272,852
|
|
|
$
|
140,908
|
|
Purchase accounting adjustment
|
|
|
|
|
|
|
(282,632
|
)
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off
|
|
|
(611
|
)
|
|
|
(96
|
)
|
|
|
|
|
(167,979
|
)
|
|
|
(228,261
|
)
|
Recoveries on loans previously charged-off
|
|
|
64
|
|
|
|
26
|
|
|
|
|
|
9,813
|
|
|
|
9,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(547
|
)
|
|
|
(70
|
)
|
|
|
|
|
(158,166
|
)
|
|
|
(218,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
5,555
|
|
|
|
590
|
|
|
|
|
|
171,583
|
|
|
|
352,398
|
|
Adjustments from loan sales
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,637
|
)
|
|
|
(1,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period continuing operations
|
|
$
|
5,528
|
|
|
$
|
520
|
|
|
|
|
$
|
282,632
|
|
|
$
|
272,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $282.6 million purchase accounting adjustment noted in the table above during the four months ended
December 31, 2010, reflects the required adjustment to the ALLL as of the Transaction Date. The $520,000 ALLL balance reported as of December 31, 2010, relates to the Companys estimate of credit losses inherent in the $16.4 million
of loans originated subsequent to the Transaction Date.
156
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
The following tables disaggregate the ALLL and the recorded investment in loans by
impairment methodology at December 31, 2011, and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Allowance for Loan and Lease Losses
|
|
|
|
December 31, 2011
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Individually evaluated for impairment (1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment (2)
|
|
|
2,311
|
|
|
|
2,350
|
|
|
|
4,661
|
|
Acquired with deteriorated credit qualityTerm (3)
|
|
|
148
|
|
|
|
719
|
|
|
|
867
|
|
Acquired with deteriorated credit qualityRevolving (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,459
|
|
|
$
|
3,069
|
|
|
$
|
5,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Recorded Investment in Loans
|
|
|
|
December 31, 2011
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Individually evaluated for impairment (1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment (2)
|
|
|
279,139
|
|
|
|
308,886
|
|
|
|
588,025
|
|
Acquired with deteriorated credit qualityTerm (3)
|
|
|
1,888,977
|
|
|
|
707,573
|
|
|
|
2,596,550
|
|
Acquired with deteriorated credit qualityRevolving (4)
|
|
|
150,550
|
|
|
|
325,836
|
|
|
|
476,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,318,666
|
|
|
$
|
1,342,295
|
|
|
$
|
3,660,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by
ASU 2010-20 regarding allowance for impaired loans originated after the Transaction Date.
|
(2)
|
Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to
amendments by ASU 2010-20 regarding allowance for unimpaired loans.
|
(3)
|
Represents the related loan carrying value determined in accordance with ASC 310-30 , ReceivablesLoans and Debt Securities Acquired with
Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI Term Loan Pools in accordance with ASC 450-20.
|
(4)
|
Represents the related loan carrying value for revolving loan pools accounted for in accordance with ASC 310-20, Receivables, Nonrefundable Fees and
Other Costs and pursuant to amendments by ASU 2010-20 regarding allowance for PCI Revolving Loan Pools. Included in this amount are $1.0 million of TDRs, of which $732,000 were from the consumer loan portfolio, and $305,000 were from the commercial
loan portfolio.
|
157
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Allowance for Loan and Lease Losses
|
|
|
|
December 31, 2010
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Individually evaluated for impairment (1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment (2)
|
|
|
206
|
|
|
|
314
|
|
|
|
520
|
|
Acquired with deteriorated credit qualityTerm (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired with deteriorated credit qualityRevolving (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
206
|
|
|
$
|
314
|
|
|
$
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Recorded Investment in
Loans
December 31, 2010
|
|
|
|
Commercial
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Individually evaluated for impairment (1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collectively evaluated for impairment (2)
|
|
|
2,553
|
|
|
|
13,851
|
|
|
|
16,404
|
|
Acquired with deteriorated credit qualityTerm (3)
|
|
|
2,323,089
|
|
|
|
854,712
|
|
|
|
3,177,801
|
|
Acquired with deteriorated credit qualityRevolving (4)
|
|
|
193,124
|
|
|
|
374,188
|
|
|
|
567,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,518,766
|
|
|
$
|
1,242,751
|
|
|
$
|
3,761,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents loans individually evaluated for impairment in accordance with ASC 310-10, Receivables (formerly FAS 114), and pursuant to amendments by
ASU 2010-20 regarding allowance for impaired loans originated after the Transaction Date.
|
(2)
|
Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and pursuant to
amendments by ASU 2010-20 regarding allowance for unimpaired loans.
|
(3)
|
Represents the related loan carrying value determined in accordance with ASC 310-30 , ReceivablesLoans and Debt Securities Acquired with
Deteriorated Credit Quality (formerly SOP 03-3) and pursuant to amendments by ASU 2010-20 regarding allowance for PCI Term Loan Pools in accordance with ASC 450-20.
|
(4)
|
Represents the related loan carrying value for revolving loan pools accounted for in accordance with ASC 310-20, Receivables, Nonrefundable Fees and
Other Costs and pursuant to amendments by ASU 2010-20 regarding allowance for PCI Revolving Loan Pools.
|
Nonperforming
Loans
Nonperforming loans include nonaccrual loans, loans past due 90 days which are accruing interest, and TDRs. The
reporting for nonperforming loans was significantly impacted by the Investment Transaction as described in Note 1, Summary of Significant Accounting Policies and Note 6, Purchased Credit Impaired Pools of these Consolidated
Financial Statements, because all loans were recorded at their fair value at the Transaction Date, and the majority of the Companys loans as of the Transaction Date are accounted for as PCI loans under ASC 310-30. At December 31, 2011,
and 2010, all of the nonperforming loans reported in the table below are from the PCI Revolving Pools. All loans originated or purchased after the Transaction date were considered performing at December 31, 2011, and 2010.
158
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
The table below summarizes loans classified as nonperforming:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December
31,
2011
|
|
|
December
31,
2010
|
|
|
|
|
|
(dollars in thousands)
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
2,896
|
|
|
$
|
1,696
|
|
Commercial
|
|
|
426
|
|
|
|
469
|
|
Construction
|
|
|
320
|
|
|
|
|
|
Revolving1 to 4 family
|
|
|
6,842
|
|
|
|
5,161
|
|
Commercial loans
|
|
|
5,275
|
|
|
|
5,716
|
|
Consumer loans
|
|
|
155
|
|
|
|
214
|
|
Other loans
|
|
|
481
|
|
|
|
945
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans (1)
|
|
|
16,395
|
|
|
|
14,201
|
|
Loans past due 90 days or more on accrual status:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
375
|
|
Construction
|
|
|
|
|
|
|
255
|
|
Commercial loans
|
|
|
|
|
|
|
6,945
|
|
Other loans
|
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 90 days or more on accrual status
|
|
|
|
|
|
|
7,910
|
|
Troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
732
|
|
|
|
|
|
Commercial loans
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructured loans (2)
|
|
|
1,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
$
|
17,432
|
|
|
$
|
22,111
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Nonaccrual loans do not include TDRs that have been placed in on nonaccruing status.
|
(2)
|
All TDRs were placed on nonaccruing status at December 31, 2011 and were from the PCI Revolving Pools.
|
159
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
Classified and Nonclassified Loans
The following table summarizes classified and nonclassified loans as defined in Note 1, Summary of Significant Accounting
Policies of these Consolidated Financial Statements. The amounts are reported at the net carrying amounts at December 31, 2011, and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Non-Classified
|
|
|
Classified
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Loans Originated or Purchased Since Transaction Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
296,257
|
|
|
$
|
|
|
|
$
|
296,257
|
|
Multifamily loans
|
|
|
151,417
|
|
|
|
|
|
|
|
151,417
|
|
Commercial
|
|
|
114,307
|
|
|
|
|
|
|
|
114,307
|
|
Construction
|
|
|
1,793
|
|
|
|
|
|
|
|
1,793
|
|
Revolving1 to 4 family
|
|
|
3,890
|
|
|
|
|
|
|
|
3,890
|
|
Commercial loans
|
|
|
11,622
|
|
|
|
|
|
|
|
11,622
|
|
Consumer loans
|
|
|
6,404
|
|
|
|
|
|
|
|
6,404
|
|
Other loans (1)
|
|
|
2,222
|
|
|
|
113
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
587,912
|
|
|
|
113
|
|
|
|
588,025
|
|
PCI Revolving Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
59,505
|
|
|
|
5,082
|
|
|
|
64,587
|
|
Multifamily loans
|
|
|
1,376
|
|
|
|
|
|
|
|
1,376
|
|
Commercial
|
|
|
18,923
|
|
|
|
785
|
|
|
|
19,708
|
|
Construction
|
|
|
3,641
|
|
|
|
320
|
|
|
|
3,961
|
|
Revolving1 to 4 family
|
|
|
227,889
|
|
|
|
12,129
|
|
|
|
240,018
|
|
Commercial loans
|
|
|
107,268
|
|
|
|
13,530
|
|
|
|
120,798
|
|
Consumer loans
|
|
|
20,542
|
|
|
|
689
|
|
|
|
21,231
|
|
Other loans
|
|
|
4,054
|
|
|
|
653
|
|
|
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
443,198
|
|
|
|
33,188
|
|
|
|
476,386
|
|
PCI Term Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
595,104
|
|
|
|
84,178
|
|
|
|
679,282
|
|
Multifamily loans
|
|
|
180,971
|
|
|
|
10,879
|
|
|
|
191,850
|
|
Commercial
|
|
|
1,158,546
|
|
|
|
296,291
|
|
|
|
1,454,837
|
|
Construction
|
|
|
69,318
|
|
|
|
110,328
|
|
|
|
179,646
|
|
Revolving1 to 4 family
|
|
|
2,086
|
|
|
|
3,863
|
|
|
|
5,949
|
|
Commercial loans
|
|
|
34,937
|
|
|
|
21,869
|
|
|
|
56,806
|
|
Consumer loans
|
|
|
21,563
|
|
|
|
779
|
|
|
|
22,342
|
|
Other loans
|
|
|
4,662
|
|
|
|
1,176
|
|
|
|
5,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,067,187
|
|
|
|
529,363
|
|
|
|
2,596,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,098,297
|
|
|
$
|
562,664
|
|
|
$
|
3,660,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Classified loans represent overdrafts subsequent to the Investment Transaction.
|
160
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2010
|
|
|
|
Non-Classified
|
|
|
Classified
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Loans Originated Since Transaction Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
7,652
|
|
|
$
|
|
|
|
$
|
7,652
|
|
Revolving1 to 4 family
|
|
|
1,237
|
|
|
|
|
|
|
|
1,237
|
|
Commercial loans
|
|
|
2,553
|
|
|
|
|
|
|
|
2,553
|
|
Consumer loans
|
|
|
1,155
|
|
|
|
|
|
|
|
1,155
|
|
Other loans (1)
|
|
|
3,723
|
|
|
|
84
|
|
|
|
3,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,320
|
|
|
|
84
|
|
|
|
16,404
|
|
PCI Revolving Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
71,792
|
|
|
|
3,264
|
|
|
|
75,056
|
|
Multifamily loans
|
|
|
2,132
|
|
|
|
|
|
|
|
2,132
|
|
Commercial
|
|
|
26,296
|
|
|
|
1,264
|
|
|
|
27,560
|
|
Construction
|
|
|
6,786
|
|
|
|
627
|
|
|
|
7,413
|
|
Revolving1 to 4 family
|
|
|
261,516
|
|
|
|
12,549
|
|
|
|
274,065
|
|
Commercial loans
|
|
|
122,157
|
|
|
|
26,193
|
|
|
|
148,350
|
|
Consumer loans
|
|
|
24,031
|
|
|
|
1,036
|
|
|
|
25,067
|
|
Other loans
|
|
|
6,319
|
|
|
|
1,350
|
|
|
|
7,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521,029
|
|
|
|
46,283
|
|
|
|
567,312
|
|
PCI Term Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
693,931
|
|
|
|
120,839
|
|
|
|
814,770
|
|
Multifamily loans
|
|
|
239,922
|
|
|
|
12,457
|
|
|
|
252,379
|
|
Commercial
|
|
|
1,329,513
|
|
|
|
388,516
|
|
|
|
1,718,029
|
|
Construction
|
|
|
83,939
|
|
|
|
143,485
|
|
|
|
227,424
|
|
Revolving1 to 4 family
|
|
|
1,285
|
|
|
|
4,166
|
|
|
|
5,451
|
|
Commercial loans
|
|
|
60,296
|
|
|
|
55,503
|
|
|
|
115,799
|
|
Consumer loans
|
|
|
33,167
|
|
|
|
1,324
|
|
|
|
34,491
|
|
Other loans
|
|
|
6,872
|
|
|
|
2,586
|
|
|
|
9,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,448,925
|
|
|
|
728,876
|
|
|
|
3,177,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,986,274
|
|
|
$
|
775,243
|
|
|
$
|
3,761,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Classified loans represent overdrafts subsequent to the Investment Transaction.
|
The Company closely monitors and assesses credit quality and credit risk in the loan portfolio on an ongoing basis. Loan credit risk
grades and classifications of loans are reviewed and updated periodically. The credit risk grades for large classified loans are reviewed at a minimum on a quarterly basis as disclosed in Note 1, Summary of Significant Accounting
Policies of these Consolidated Financial Statements.
161
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
The Company uses internally assigned credit risk grades in the monitoring of the credit
quality of the loan portfolio. Changes in credit risk grades serve as indications of potential problem loans, and improvement or worsening of existing problem loans, which assist the Company with the process of determining the ultimate
collectability of the loan portfolio for loans originated or purchased since the Transaction Date and assists with determining future cash flows for the PCI Loan Pools. Changes in balances of classified and nonclassified loans are factors that
impact the required level of the ALLL for new and purchased loans since the Transaction Date under the Companys periodic evaluation of the adequacy of the ALLL. Changes in classified and nonclassified loans are also considered by the Company
in its periodic evaluation of cash flows from PCI Loan Pools, but do not necessarily indicate impairment or the need for an ALLL or a reversal of a previously established ALLL for PCI Loan Pools, as such loans are accounted based on expected cash
flows, as more fully described in Note 1, Summary of Significant Accounting Policies, of these Consolidated Financial Statements. Changes in credit risk grades for PCI Loan Pools serve primarily as a basis for the Company to manage the
underlying credit quality and collection efforts of loans within PCI Loan Pools, and for the establishment of assumptions used by the Company in estimating cash flows expected to be collected from these pools in future periods.
Aging of Past Due Loans
A majority of the loans held by the Company have been pooled into PCI Term Pools and none of the pools were considered to be past due at
December 31, 2011, and 2010, when reporting on a pooled basis in accordance with ASC 310-30. The following tables provide the aging of past due loans on an individual loan basis at the net carrying amount at December 31, 2011, and 2010.
162
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Current
|
|
|
30-89 Days
Past
Due
|
|
|
90+ Days Past
Due - Still
Accruing
|
|
|
Nonaccrual (1)
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Loans Originated or Purchased Since Transaction Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
296,257
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
296,257
|
|
Multifamily loans
|
|
|
151,314
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
151,417
|
|
Commercial
|
|
|
114,306
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
114,307
|
|
Construction
|
|
|
1,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,793
|
|
Revolving1 to 4 family
|
|
|
3,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,890
|
|
Commercial loans
|
|
|
11,321
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
11,622
|
|
Consumer loans
|
|
|
6,335
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
6,404
|
|
Other loans
|
|
|
2,306
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
587,522
|
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
588,025
|
|
PCI Revolving Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
58,973
|
|
|
|
1,986
|
|
|
|
|
|
|
|
3,628
|
|
|
|
64,587
|
|
Multifamily loans
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,376
|
|
Commercial
|
|
|
19,206
|
|
|
|
76
|
|
|
|
|
|
|
|
426
|
|
|
|
19,708
|
|
Construction
|
|
|
3,641
|
|
|
|
|
|
|
|
|
|
|
|
320
|
|
|
|
3,961
|
|
Revolving1 to 4 family
|
|
|
231,777
|
|
|
|
1,399
|
|
|
|
|
|
|
|
6,842
|
|
|
|
240,018
|
|
Commercial loans
|
|
|
106,642
|
|
|
|
8,576
|
|
|
|
|
|
|
|
5,580
|
|
|
|
120,798
|
|
Consumer loans
|
|
|
20,941
|
|
|
|
135
|
|
|
|
|
|
|
|
155
|
|
|
|
21,231
|
|
Other loans
|
|
|
4,179
|
|
|
|
47
|
|
|
|
|
|
|
|
481
|
|
|
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
446,735
|
|
|
|
12,219
|
|
|
|
|
|
|
|
17,432
|
|
|
|
476,386
|
|
PCI Term Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
630,441
|
|
|
|
30,553
|
|
|
|
18,288
|
|
|
|
|
|
|
|
679,282
|
|
Multifamily loans
|
|
|
186,190
|
|
|
|
3,741
|
|
|
|
1,919
|
|
|
|
|
|
|
|
191,850
|
|
Commercial
|
|
|
1,407,344
|
|
|
|
22,593
|
|
|
|
24,900
|
|
|
|
|
|
|
|
1,454,837
|
|
Construction
|
|
|
111,171
|
|
|
|
1,917
|
|
|
|
66,558
|
|
|
|
|
|
|
|
179,646
|
|
Revolving1 to 4 family
|
|
|
2,304
|
|
|
|
|
|
|
|
3,645
|
|
|
|
|
|
|
|
5,949
|
|
Commercial loans
|
|
|
47,105
|
|
|
|
907
|
|
|
|
8,794
|
|
|
|
|
|
|
|
56,806
|
|
Consumer loans
|
|
|
22,088
|
|
|
|
227
|
|
|
|
27
|
|
|
|
|
|
|
|
22,342
|
|
Other loans
|
|
|
4,999
|
|
|
|
37
|
|
|
|
802
|
|
|
|
|
|
|
|
5,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,411,642
|
|
|
|
59,975
|
|
|
|
124,933
|
|
|
|
|
|
|
|
2,596,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,445,899
|
|
|
$
|
72,697
|
|
|
$
|
124,933
|
|
|
$
|
17,432
|
|
|
$
|
3,660,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
At December 31, 2011, $10.2 million of nonaccruing loans were current, and $1.7 million of nonaccruing loans were 30-89 days past due.
|
163
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2010
|
|
|
|
Current
|
|
|
30-89 Days
Past Due
|
|
|
90+ Days Past
Due - Still
Accruing
|
|
|
Nonaccrual (1)
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Loans Originated Since Transaction Date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
7,652
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,652
|
|
Multifamily loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving1 to 4 family
|
|
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,237
|
|
Commercial loans
|
|
|
2,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,553
|
|
Consumer loans
|
|
|
1,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,155
|
|
Other loans
|
|
|
3,776
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
3,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,373
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
16,404
|
|
PCI Revolving Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
71,473
|
|
|
|
1,887
|
|
|
|
|
|
|
|
1,696
|
|
|
|
75,056
|
|
Multifamily loans
|
|
|
2,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,132
|
|
Commercial
|
|
|
26,248
|
|
|
|
468
|
|
|
|
375
|
|
|
|
469
|
|
|
|
27,560
|
|
Construction
|
|
|
6,397
|
|
|
|
761
|
|
|
|
255
|
|
|
|
|
|
|
|
7,413
|
|
Revolving1 to 4 family
|
|
|
264,805
|
|
|
|
4,099
|
|
|
|
|
|
|
|
5,161
|
|
|
|
274,065
|
|
Commercial loans
|
|
|
129,746
|
|
|
|
5,943
|
|
|
|
6,945
|
|
|
|
5,716
|
|
|
|
148,350
|
|
Consumer loans
|
|
|
24,168
|
|
|
|
685
|
|
|
|
|
|
|
|
214
|
|
|
|
25,067
|
|
Other loans
|
|
|
5,484
|
|
|
|
905
|
|
|
|
335
|
|
|
|
945
|
|
|
|
7,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530,453
|
|
|
|
14,748
|
|
|
|
7,910
|
|
|
|
14,201
|
|
|
|
567,312
|
|
PCI Term Pools:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
|
767,231
|
|
|
|
18,273
|
|
|
|
29,266
|
|
|
|
|
|
|
|
814,770
|
|
Multifamily loans
|
|
|
243,869
|
|
|
|
5,726
|
|
|
|
2,784
|
|
|
|
|
|
|
|
252,379
|
|
Commercial
|
|
|
1,589,908
|
|
|
|
21,988
|
|
|
|
106,133
|
|
|
|
|
|
|
|
1,718,029
|
|
Construction
|
|
|
131,473
|
|
|
|
10,658
|
|
|
|
85,293
|
|
|
|
|
|
|
|
227,424
|
|
Revolving1 to 4 family
|
|
|
1,954
|
|
|
|
1,006
|
|
|
|
2,491
|
|
|
|
|
|
|
|
5,451
|
|
Commercial loans
|
|
|
83,808
|
|
|
|
7,062
|
|
|
|
24,929
|
|
|
|
|
|
|
|
115,799
|
|
Consumer loans
|
|
|
33,347
|
|
|
|
833
|
|
|
|
311
|
|
|
|
|
|
|
|
34,491
|
|
Other loans
|
|
|
8,160
|
|
|
|
121
|
|
|
|
1,177
|
|
|
|
|
|
|
|
9,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,859,750
|
|
|
|
65,667
|
|
|
|
252,384
|
|
|
|
|
|
|
|
3,177,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,406,576
|
|
|
$
|
80,446
|
|
|
$
|
260,294
|
|
|
$
|
14,201
|
|
|
$
|
3,761,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
At December 31, 2010, $6.6 million of nonaccruing loans were current, and $1.4 million of nonaccruing loans were 30-89 days past due.
|
164
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
7.
|
A
LLOWANCE
FOR
L
OAN
AND
L
EASE
L
OSSES
AND
C
REDIT
Q
UALITY
C
ONTINUED
|
Impaired Loans
Impaired loans outstanding as of the Transaction Date were recorded at fair value based on expectations of future cash flows. All previously identified individual impaired loans prior to the Transaction
Date are now in the PCI Loan Pools. Pooled loans are measured for impairment at the pool level, based on estimates for aggregate cash flows expected to be collected from the pool. At December 31, 2011, and 2010, all PCI Term Pools were
considered performing.
The table below summarizes the average balance of impaired loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Months
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investment in impaired loans for the period
|
|
$
|
437
|
|
|
$
|
|
|
|
|
|
$
|
375,064
|
|
|
$
|
223,633
|
|
Interest income recognized on impaired loans during the periods for which the average recorded investment
in impaired loans is presented in the table above, as well as the amount of interest income recognized using the cash-basis method of accounting for those periods was not material.
Troubled Debt Restructurings
The following table provides a summary of the
principal balance of loans modified as TDRs, as well as the number of loans modified as TDRs, during the twelve months ended December 31, 2011:
|
|
|
0000000000
|
|
|
|
0000000000
|
|
|
|
0000000000
|
|
|
|
0000000000
|
|
|
|
PCI Revolving Loans
|
|
|
New and Purchased Loans
|
|
(dollars in thousands)
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
Residential1 to 4 family
|
|
$
|
890
|
|
|
|
7
|
|
|
$
|
|
|
|
|
|
|
Commercial loans
|
|
|
421
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Revolving1 to 4 family
|
|
|
345
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs during the period
|
|
$
|
1,656
|
|
|
|
12
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modifications made during the twelve months ended December 31, 2011, that are considered TDRs
involve reductions in interest rates, extensions of terms, and reductions in periodic contractual payments for a specified period of time. At December 31, 2011, there were no commitments to lend additional funds to borrowers whose terms have
been modified as TDRs. The Company considers TDRs that are more than 30 days past due on their contractual principal and interest payments to be in payment default with respect to their modified terms. There were no defaulted payments on loans
modified as TDRs during 2011.
As discussed in Note 1, Summary of Significant Accounting Policies of these
Consolidated Financial Statements, the aggregation of loans into pools at the Transaction Date, along with the application of ASC 310-30, eliminated the requirement for the PCI Term Pools to be evaluated on the underlying individual loan performance
and classification as TDRs.
165
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
8.
|
|
P
REMISES
AND
E
QUIPMENT
|
The following table summarizes the premises and equipment at December 31, 2011, and 2010:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December
31,
2011
|
|
|
December
31,
2010
|
|
|
|
|
|
(dollars in thousands)
|
|
Land
|
|
$
|
9,636
|
|
|
$
|
9,636
|
|
Buildings and improvements
|
|
|
35,442
|
|
|
|
35,065
|
|
Leasehold improvements
|
|
|
23,393
|
|
|
|
20,392
|
|
Furniture, fixtures and equipment
|
|
|
19,775
|
|
|
|
9,607
|
|
Developed software
|
|
|
1,075
|
|
|
|
1,183
|
|
|
|
|
|
|
|
|
|
|
Total premises and equipment
|
|
|
89,321
|
|
|
|
75,883
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(13,572
|
)
|
|
|
(4,418
|
)
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
$
|
75,749
|
|
|
$
|
71,465
|
|
|
|
|
|
|
|
|
|
|
As part of the purchase accounting adjustment, premises and equipment were recorded at fair value and any
accumulated depreciation was eliminated at the Transaction Date. There was no capitalized interest expense for any of the periods reported in the Consolidated Statements of Operations.
Successor Company
Depreciation expense for premises and equipment
was $9.6 million and, $4.4 million for the twelve months ended December 31, 2011, and for the four months ended December 31, 2010, respectively. Developed software depreciation expense was $57,000 and, $1.1 million for the twelve months
ended December 31, 2011, and the four months ended December 31, 2010, respectively.
Predecessor Company
Depreciation expense for premises and equipment was $10.2 million, and $18.1 million for the eight months ended August 31, 2010, and
the year ended December 31, 2009, respectively. Developed software depreciation expense was $2.5 million, and $5.0 million for the eight months ended August 31, 2010, and the year ended December 31, 2009, respectively.
Lease Obligations
The
following table shows the contractual lease obligations of the Company at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
|
(dollars in thousands)
|
|
Less than
one
year
|
|
|
One
to
three years
|
|
|
Three
to
five years
|
|
|
More
than
five years
|
|
|
Total
|
|
|
December
31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cancelable leases
|
|
$
|
11,838
|
|
|
$
|
20,473
|
|
|
$
|
13,600
|
|
|
$
|
44,214
|
|
|
$
|
90,125
|
|
|
$
|
101,150
|
|
Capital leases
|
|
|
794
|
|
|
|
1,831
|
|
|
|
2,025
|
|
|
|
25,975
|
|
|
|
30,625
|
|
|
|
34,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease obligations
|
|
$
|
12,632
|
|
|
$
|
22,304
|
|
|
$
|
15,625
|
|
|
$
|
70,189
|
|
|
$
|
120,750
|
|
|
$
|
135,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
8.
|
P
REMISES
AND
E
QUIPMENT
C
ONTINUED
|
Successor Company
The Company leases most of its office locations and substantially all of these office leases contain multiple five-year renewal options and provisions for increased rents, principally for property taxes
and maintenance. At December 31, 2011, the minimum commitments under non-cancelable leases for the next five years and thereafter are shown in the above table. The amounts in the table for minimum rentals are not reported net of the contractual
obligations of sub-tenants. Sub-tenants leasing space from the Company under these operating leases are contractually obligated to the Company for approximately $1.5 million at December 31, 2011. Approximately 95% of these payments are due to the
Company over the next three years. Total rental expense, net of sublease income, for premises included in noninterest expense was $11.1 million for the twelve months ended December 31, 2011, and $3.7 million in the four months ended
December 31, 2010.
Additional disclosure regarding capital leases is in Note 15, Other Borrowings of these
Consolidated Financial Statements.
Predecessor Company
Total rental expense, net of sublease income, for premises included in noninterest expense was $7.3 million for the eight months ended August 31, 2010, and $11.6 million for the twelve months ended
December 31, 2009.
N
OTE
9.
|
|
G
OODWILL
AND
I
NTANGIBLE
A
SSETS
|
Goodwill and intangible assets reported on the Consolidated Balance Sheet for December 31, 2011, and
December 31, 2010, is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Goodwill
|
|
$
|
26,550
|
|
|
$
|
21,672
|
|
Core deposit intangible
|
|
|
31,040
|
|
|
|
37,469
|
|
Customer relationship intangible
|
|
|
16,724
|
|
|
|
18,684
|
|
Trade name intangible
|
|
|
12,471
|
|
|
|
12,669
|
|
Mortgage and other loan servicing rights
|
|
|
2,378
|
|
|
|
3,065
|
|
Other
|
|
|
92
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,255
|
|
|
$
|
93,700
|
|
|
|
|
|
|
|
|
|
|
167
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
9.
|
G
OODWILL
AND
I
NTANGIBLE
A
SSETS
C
ONTINUED
|
Goodwill
Successor Company
Goodwill was recorded as a result of the Investment
Transaction as disclosed in Note 2, Business CombinationInvestment Transaction of these Consolidated Financial Statements. Since December 31, 2010, adjustments to goodwill were recorded up until August 31, 2011, the end
of the measurement period for the Investment Transaction. A summary of the adjustments made to goodwill during the period of January 1, 2011, through August 31, 2011, are as follows:
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Beginning balance at December 31, 2010
|
|
$
|
21,672
|
|
Adjustments to goodwill relating to:
|
|
|
|
|
Deferred tax liability
|
|
|
5,244
|
|
Capital lease liability adjustments
|
|
|
(4,328
|
)
|
Loan valuation
|
|
|
2,370
|
|
Earnout liability
|
|
|
2,113
|
|
Transaction costs
|
|
|
(577
|
)
|
Customer relationship intangible
|
|
|
56
|
|
|
|
|
|
|
Total adjustments
|
|
|
4,878
|
|
|
|
|
|
|
Ending balance at August 31, 2011
|
|
$
|
26,550
|
|
|
|
|
|
|
Once the measurement period for the Investment Transaction closed on August 31, 2011, goodwill was
re-allocated by reporting segment based on the fair value of each reporting segment. The table below presents the allocation of goodwill by segment:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(dollars in thousands)
|
|
Segment:
|
|
|
|
|
|
|
|
|
Commercial & Community Banking
|
|
$
|
21,627
|
|
|
$
|
19,152
|
|
Wealth Management
|
|
|
4,923
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,550
|
|
|
$
|
21,672
|
|
|
|
|
|
|
|
|
|
|
The Company assessed goodwill for impairment during the third quarter of 2011, and no impairment was
identified. At December 31, 2011, there was no evidence of any triggering events or developments which would require the goodwill to be reassessed for impairment.
Predecessor Company
The Predecessor Company had recognized goodwill and
several other intangible assets from earlier acquisitions and registered investment advisors. The goodwill from these transactions had been determined to be impaired and was written off in the second quarter of 2009, by an impairment charge of
$128.7 million. The goodwill impairment charge by operating segment was $114.1 million for the Commercial & Community Banking segment, and $14.6 million for the Wealth Management segment. These actions were taken due to the following
factors: i) current economic conditions in the Companys
168
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
9.
|
G
OODWILL
AND
I
NTANGIBLE
A
SSETS
C
ONTINUED
|
markets, ii) the prolonged deterioration that has occurred throughout the banking and financial services industry and related valuations of such companies, including the Companys, from a
capital markets perspective, iii) the deteriorated condition of the Company as evidenced by continued current quarterly losses, and iv) requirements under the Banks agreement with the Office of the Comptroller of the Currency (the
OCC) for increased capital levels which the Bank had not been able to achieve. The goodwill impairment testing was performed by Management with the assistance and input of a third party.
Other Intangible Assets
The Company has five types of identifiable intangible assets: CDI, CRI, trade name intangibles, non-compete intangibles, and mortgage and other loan servicing rights. All intangible assets are amortized
over their estimated lives, where applicable. The core deposit, the customer relationship, the trade name, and the non-compete intangibles are created when a company acquires another company. The loan servicing rights are created when loans are sold
but the right to service the loans is retained by the seller. The elimination of the other intangible assets appear as Purchase accounting adjustments and the recognition of any new intangibles due to the Investment Transaction appear as
Additions, in the following table which summarizes the changes in the other intangible assets by class.
A summary of the activity
for other intangible assets is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Deposit
Intangible
|
|
|
Customer
Relationship
Intangible
|
|
|
Trade Name
Intangible
|
|
|
Mortgage
Servicing
Rights
|
|
|
|
(dollars in thousands)
|
|
Predecessor Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
1,500
|
|
|
$
|
3,099
|
|
|
$
|
|
|
|
$
|
4,533
|
|
Amortization
|
|
|
(370
|
)
|
|
|
(230
|
)
|
|
|
|
|
|
|
(978
|
)
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280
|
|
Valuation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, August 31, 2010
|
|
$
|
1,130
|
|
|
$
|
2,869
|
|
|
$
|
|
|
|
$
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Transaction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustment
|
|
$
|
(1,130
|
)
|
|
$
|
(2,869
|
)
|
|
$
|
|
|
|
$
|
(3,801
|
)
|
Additions
|
|
|
39,779
|
|
|
|
19,270
|
|
|
|
12,737
|
|
|
|
3,450
|
|
Successor Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 1, 2010
|
|
|
39,779
|
|
|
|
19,270
|
|
|
|
12,737
|
|
|
|
3,450
|
|
Amortization
|
|
|
(2,310
|
)
|
|
|
(586
|
)
|
|
|
(68
|
)
|
|
|
(375
|
)
|
Valuation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
37,469
|
|
|
|
18,684
|
|
|
|
12,669
|
|
|
|
3,065
|
|
Amortization
|
|
|
(6,429
|
)
|
|
|
(1,904
|
)
|
|
|
(198
|
)
|
|
|
(892
|
)
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
Valuation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
Purchase accounting adjustment
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
31,040
|
|
|
$
|
16,724
|
|
|
$
|
12,471
|
|
|
$
|
2,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
9.
|
G
OODWILL
AND
I
NTANGIBLE
A
SSETS
C
ONTINUED
|
Core Deposit Intangibles
CDI recorded in the Predecessor Company were created when the Company acquired other banks. These intangibles were amortized over their estimated useful lives up until the Investment Transaction when they
were re-valued. The new core deposit intangible is being amortized over an estimated life of 10 years.
Customer Relationship Intangibles
CRI were created when the Company acquired MCM and REWA in 2006, and 2008, respectively. The customer relationship
intangibles were re-valued in the purchase accounting for the Investment Transaction and new intangibles were recorded for the new estimated fair value. In addition to the new intangibles for the two investment management subsidiaries, a new CRI was
established for the value of the customer relationships relating to SBB&Ts trust department. The CRI are amortized based on estimated undiscounted cash flows over a period of approximately 13 years.
Trade Name Intangibles
In the purchase accounting for the Investment Transaction, the Company recorded intangible assets for the value of its trade names. These
included the names for its bank brands and the two registered investment advisor subsidiaries, MCM and REWA. The total trade name intangible recorded was $12.7 million with $12.5 million relating to the Companys primary bank brand name, Santa
Barbara Bank & Trust. During 2011, the Company completed a name re-branding project which discontinued the use of its other bank brand names, and has fully amortized the other trade names. At December 31, 2011, the remaining trade name
of Santa Barbara Bank & Trust is expected to be used indefinitely and therefore, is not being amortized.
Mortgage and Other Loan
Servicing Rights
Mortgage servicing rights are generated when the Bank sells a loan and retains the servicing of the loan
for a fee. The right to receive a fee for servicing the loan has a value and therefore an intangible asset is recognized based on the fair value of the rights at the time of the loan sale. The Bank has had servicing rights for several years. When
the Investment Transaction occurred, these servicing rights were re-valued. Since the Investment Transaction, the Bank has continued to sell loans and retain the servicing rights. The servicing rights are amortized over the estimated life of the
loans sold. At December 31, 2011, the Company serviced $490.0 million in loans for investors. The majority of these loans are 1 to 4 family mortgage loans. The right to service these loans was retained and the Company recorded servicing rights
which, are included in goodwill and other intangible assets of these Consolidated Financial Statements.
Non-compete Intangibles
With the purchases of MCM and REWA, a separate intangible for the non-compete agreements was recorded. This intangible
asset was eliminated in the purchase accounting for the Investment Transaction and new intangible assets totaling $158,000 for the value of non-compete agreements were recorded. These intangibles are being amortized over a period of 40 months.
170
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
9.
|
G
OODWILL
AND
I
NTANGIBLE
A
SSETS
C
ONTINUED
|
Remaining Amortization of Intangible Assets
Below is a summary of estimated amortization expense for all amortizing intangible assets over the next five years and
thereafter. Goodwill and the SBB&T trade name intangible are not amortized, therefore, not included in the following table:
|
|
|
|
|
Year
|
|
(dollars in thousands)
|
|
2012
|
|
$
|
7,592
|
|
2013
|
|
|
6,801
|
|
2014
|
|
|
6,180
|
|
2015
|
|
|
5,429
|
|
2016
|
|
|
4,998
|
|
Thereafter
|
|
|
19,321
|
|
|
|
|
|
|
Total
|
|
$
|
50,321
|
|
|
|
|
|
|
A summary of the OREO by loan type is as follows:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(dollars in thousands)
|
|
OREO:
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Residential1 to 4 family
|
|
$
|
12,941
|
|
|
$
|
12,254
|
|
Multifamily loans
|
|
|
1,440
|
|
|
|
444
|
|
Commercial
|
|
|
8,582
|
|
|
|
5,816
|
|
Construction
|
|
|
29,339
|
|
|
|
21,743
|
|
Revolving1 to 4 family
|
|
|
|
|
|
|
282
|
|
Commercial loans
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
Total OREO
|
|
$
|
52,302
|
|
|
$
|
40,767
|
|
|
|
|
|
|
|
|
|
|
Below is a summary of the OREO valuation allowance activity over the last three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Beginning balance
|
|
$
|
134
|
|
|
$
|
2,660
|
|
|
|
|
$
|
4,801
|
|
|
$
|
|
|
Purchase accounting valuation adjustment
|
|
|
|
|
|
|
(2,660
|
)
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
6,585
|
|
|
|
153
|
|
|
|
|
|
3,186
|
|
|
|
6,078
|
|
Sales
|
|
|
(3,845
|
)
|
|
|
(19
|
)
|
|
|
|
|
(5,327
|
)
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,874
|
|
|
$
|
134
|
|
|
|
|
$
|
2,660
|
|
|
$
|
4,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
11.
|
|
D
EFERRED
T
AX
A
SSETS
AND
T
AX
P
ROVISION
|
The components of income tax benefit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
(1,446
|
)
|
|
$
|
(72,601
|
)
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,979
|
)
|
|
|
44,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,425
|
)
|
|
|
(27,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
719
|
|
|
|
(9,129
|
)
|
Deferred
|
|
|
(1,494
|
)
|
|
|
|
|
|
|
|
|
(1,035
|
)
|
|
|
18,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total State
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
(316
|
)
|
|
|
9,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax benefit from continuing operations
|
|
$
|
(474
|
)
|
|
$
|
|
|
|
|
|
$
|
(4,741
|
)
|
|
$
|
(18,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
19,045
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision on discontinuing operations
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
25,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax credits included in the computation of the tax provision were $4.3, $4.0, and $6.0 million for the
twelve months ended December 31, 2011, the four months ended December 31, 2010, and the twelve months ended December 31, 2009, respectively.
The reconciliations of the federal statutory income tax rate to the Companys effective income tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Federal income tax at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Valuation allowance
|
|
|
(29.5
|
)
|
|
|
(21.0
|
)
|
|
|
|
|
(40.6
|
)
|
|
|
(30.7
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.7
|
)
|
Tax-exempt income
|
|
|
(5.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
1.8
|
|
|
|
1.1
|
|
State taxes, net
|
|
|
6.8
|
|
|
|
6.9
|
|
|
|
|
|
6.5
|
|
|
|
5.3
|
|
Tax credits
|
|
|
(6.1
|
)
|
|
|
(15.5
|
)
|
|
|
|
|
|
|
|
|
1.3
|
|
Transaction expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
Other, net
|
|
|
(1.9
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
2.6
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate for continuing operations
|
|
|
(0.7
|
)%
|
|
|
|
%
|
|
|
|
|
2.7
|
%
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
11.
|
D
EFERRED
T
AX
A
SSETS
AND
T
AX
P
ROVISION
C
ONTINUED
|
Significant components of the Companys net deferred tax asset and liability at
December 31, 2011, and 2010, are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(dollars in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loans and allowance for loan losses
|
|
$
|
185,445
|
|
|
$
|
206,916
|
|
State net operating loss carryforward
|
|
|
29,340
|
|
|
|
28,922
|
|
Federal net operating loss carryforward
|
|
|
45,672
|
|
|
|
45,699
|
|
Low income housing partnership credits
|
|
|
18,898
|
|
|
|
12,532
|
|
Nonaccrual loan interest
|
|
|
12,194
|
|
|
|
12,460
|
|
Goodwill and intangible amortization
|
|
|
10,590
|
|
|
|
2,443
|
|
Restricted stock compensation
|
|
|
421
|
|
|
|
4,657
|
|
Alternative minimum tax (AMT) credits
|
|
|
4,253
|
|
|
|
3,496
|
|
Lease liability and other purchase accounting
|
|
|
3,291
|
|
|
|
6,273
|
|
Other
|
|
|
26,980
|
|
|
|
34,057
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
337,084
|
|
|
|
357,455
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
FHLB stock
|
|
|
6,762
|
|
|
|
6,437
|
|
Loan costs
|
|
|
5,806
|
|
|
|
3,988
|
|
State taxes
|
|
|
25,933
|
|
|
|
27,162
|
|
Premium on securities
|
|
|
9,797
|
|
|
|
13,613
|
|
Core deposit intangible
|
|
|
14,229
|
|
|
|
17,176
|
|
Trade name intangible
|
|
|
5,243
|
|
|
|
|
|
Other
|
|
|
18,588
|
|
|
|
25,721
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
86,358
|
|
|
|
94,097
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before unrealized gains on securities & valuation allowance
|
|
|
250,726
|
|
|
|
263,358
|
|
Unrealized (gains)/losses on AFS securities
|
|
|
(6,142
|
)
|
|
|
13,920
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
244,584
|
|
|
|
277,278
|
|
Valuation allowance
|
|
|
(248,333
|
)
|
|
|
(277,278
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(3,749
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognizes deferred tax assets and liabilities for the future tax consequences related to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for tax credits. Management evaluates the Companys deferred tax assets for recoverability using a consistent
approach which considers the relative impact of negative and positive evidence, including the Companys historical profitability and projections of future taxable income. The Company is required to establish a valuation allowance for deferred
tax assets and record a charge to income if Management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized.
173
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
11.
|
D
EFERRED
T
AX
A
SSETS
AND
T
AX
P
ROVISION
C
ONTINUED
|
During the second quarter of 2009, Management concluded that it was more likely than not
that the Company would not generate sufficient future taxable income in the foreseeable future to realize all of the Companys deferred tax assets. Managements conclusion was based on the consideration of the relative weight of the
available evidence, including the rapid deterioration of market conditions and the uncertainty of the impact of future market conditions on the Companys results of operations. As a result, at June 30, 2009, the Company recorded a full
valuation allowance against the deferred tax asset because of the uncertainty regarding when the Company will generate sufficient taxable income to utilize the future tax benefit.
For the three year period ended December 31, 2011, the Company is in a cumulative pretax loss position. For purposes of establishing
a deferred tax valuation allowance, this cumulative pretax loss position is considered significant, objective evidence that the Company may not be able to realize some portion of the deferred tax assets in the future. The Companys cumulative
pretax loss position was caused by the large amount of loan losses resulting from the weak housing and credit market conditions, which deteriorated dramatically during 2009. Additional credit losses were taken in the eight months ended
August 31, 2010. Additionally, as a result of the Investment Transaction on August 31, 2010, the Company incurred an ownership change under Section 382 of the Internal Revenue Code. The ownership change will limit the utilization, for
tax purposes, of certain items of the net deferred tax asset including net operating losses, recognized built-in-losses and credit carryforwards.
As of December 31, 2011, the Company had $130.5 million and $270.7 million of federal and state net operating loss and recognized built-in-loss carryforwards that expire at various times starting in
2030. The Company also had $18.7 million of federal tax credit carryforwards that expire in various years starting in 2029, $200,000 of California tax credit carryforwards with an indefinite carryforward period and $4.3 million of alternative
minimum tax credit carryforwards that have an indefinite carryforward period.
At December 31, 2011, and 2010, Management
concluded that there were no significant uncertain tax positions requiring recognition or disclosure in the Companys Consolidated Financial Statements as required under ASC 740,
Income Taxes
regarding accounting for uncertainty in
income taxes.
The Company files income tax returns in the U.S. Federal jurisdiction and various state jurisdictions where the
Companys income is subject to taxation. In 2011, the California Franchise Tax Board substantially concluded its audit of the Companys 20022006 tax years, which resulted in an increase in state tax receivable and state tax benefit
of $460,000. Pursuant to the statute of limitations, the Company remains open to audit by the Internet Revenue Service (IRS) for the 2007 2010 tax years and by various state taxing authorities for 2004 2010 tax years.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments
historically have been minimal and immaterial to financial results. In the event the Company has an assessment from a taxing authority, any resulting interest and penalties are recognized as a component of income tax expense.
The Company allocates tax expense between the parent company and its subsidiaries based on Federal banking law and regulation. The
Companys tax sharing policy provides for the settlement of taxes between each relevant subsidiary as if the subsidiary had filed a separate return. The parent only statement of operations is presented in Note 27, Pacific Capital Bancorp
(Parent Company Only Financials), of these Consolidated Financial Statements.
174
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
12.
|
|
D
ERIVATIVE
I
NSTRUMENTS
|
The Company has entered into interest rate swap agreements with clients to assist them in mitigating their interest
rate risk exposure associated with the loans they have with the Company. At the same time, the Company entered into offsetting interest rate swap agreements with other financial institutions to mitigate the Companys interest rate risk exposure
associated with the swap agreements with its clients. At December 31, 2011, the Company had swaps with matched terms with an aggregate notional amount of $122.4 million and a fair value of $9.2 million. The fair values of these swaps are
recorded as other assets and other liabilities in the Companys balance sheet. Changes in the fair value of these swaps, which occur due to changes in interest rates, are recorded in the Companys statement of operations. Because of the
matched terms of the swaps with clients and with other financial institutions, the adjustments for the change in fair value offset each other.
Swap agreements with clients are secured by the collateral arrangements for the underlying loans these clients have with the Company. Nonetheless, the Company may suffer a loss if the collateral has
decreased in value since the swap was originated and the value of the collateral is insufficient to cover both the loan and the swap. The Company provides for these losses through the establishment of a reserve account in other liabilities much like
the reserve established for potential losses from off-balance sheet commitments. For the twelve months ended December 31, 2011, the four months ended December 31, 2010, the eight months ended August 31, 2010, and the twelve months
ended December 31, 2009, the Company recorded charges of $506,000, $173,000, $675,000, and $1.3 million, respectively, in noninterest expense in its statement of operations to increase the reserve to address the risk of default by clients on
their swaps.
The table below summarizes deposits by type, including purchase accounting adjustments:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(dollars in thousands)
|
|
Noninterest bearing deposits
|
|
$
|
1,175,532
|
|
|
$
|
1,099,260
|
|
Interest bearing deposits:
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
954,621
|
|
|
|
936,728
|
|
Money market deposit accounts
|
|
|
384,989
|
|
|
|
314,362
|
|
Other savings deposits
|
|
|
542,935
|
|
|
|
434,896
|
|
Time certificates of $100,000 or more
|
|
|
832,185
|
|
|
|
1,047,869
|
|
Other time deposits
|
|
|
726,778
|
|
|
|
1,073,673
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,617,040
|
|
|
$
|
4,906,788
|
|
|
|
|
|
|
|
|
|
|
Maturity of Deposits
All of the deposits may be withdrawn immediately since they do not have a maturity date, except for CDs which have a contractual maturity date. Since the majority of the deposits do not have a maturity
date, they are reflected in the table below as maturing in less than one year.
175
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
13.
|
D
EPOSITS
C
ONTINUED
|
A summary of the deposits by their contractual maturity is in the following table:
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December
31,
2011
|
|
|
|
(dollars in thousands)
|
|
Less than one year
|
|
$
|
4,098,943
|
|
One to three years
|
|
|
277,284
|
|
Three to five years
|
|
|
234,257
|
|
More than 5 years
|
|
|
1,013
|
|
Premium
|
|
|
5,543
|
|
|
|
|
|
|
|
|
$
|
4,617,040
|
|
|
|
|
|
|
As of December 31, 2011, the Company had $197.6 million of securities pledged as collateral for the
Banks Local Agency deposits.
N
OTE
14.
|
|
S
ECURITIES
S
OLD
U
NDER
A
GREEMENTS
TO
R
EPURCHASE
AND
F
EDERAL
F
UNDS
P
URCHASED
|
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase (repos) are borrowings by the Company collateralized by pledged investment securities. The Company enters into repos for various terms:
overnight, several weeks and multi-year periods. Throughout the year, repos with terms of several weeks to several months are offered to clients that wish to place funds with the Company in excess of the $250,000 Federal Deposit Insurance Corp
(FDIC) limit on deposit insurance.
The following table summarizes repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
|
|
|
|
|
|
Weighted average interest rate at end of period
|
|
|
3.09%
|
|
|
|
2.79%
|
|
|
|
|
|
2.47%
|
|
|
|
3.54%
|
|
Weighted average interest rate for the period
|
|
|
3.00%
|
|
|
|
1.64%
|
|
|
|
|
|
2.61%
|
|
|
|
3.06%
|
|
Average outstanding balance
|
|
$
|
319,088
|
|
|
$
|
322,755
|
|
|
|
|
$
|
310,012
|
|
|
$
|
330,274
|
|
Total balance at end of period
|
|
$
|
315,919
|
|
|
$
|
319,737
|
|
|
|
|
$
|
322,825
|
|
|
$
|
314,231
|
|
Maximum outstanding at any month-end
|
|
$
|
319,336
|
|
|
$
|
321,544
|
|
|
|
|
$
|
322,825
|
|
|
$
|
338,327
|
|
Interest expense
|
|
$
|
9,585
|
|
|
$
|
1,770
|
|
|
|
|
$
|
5,389
|
|
|
$
|
10,119
|
|
176
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
14.
|
S
ECURITIES
S
OLD
U
NDER
A
GREEMENTS
TO
R
EPURCHASE
AND
F
EDERAL
F
UNDS
P
URCHASED
C
ONTINUED
|
The following table summarizes repurchase agreements by maturity:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(dollars in thousands)
|
|
Up to 30 days
|
|
$
|
|
|
|
$
|
584
|
|
31 to 90 days
|
|
|
206
|
|
|
|
206
|
|
One to three years
|
|
|
26,512
|
|
|
|
|
|
Three to five years
|
|
|
79,614
|
|
|
|
107,940
|
|
More than five years
|
|
|
209,587
|
|
|
|
211,007
|
|
|
|
|
|
|
|
|
|
|
Total repurchase agreements
|
|
$
|
315,919
|
|
|
$
|
319,737
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Purchased
Federal funds purchased consist of unsecured overnight borrowings from other financial institutions.
The following table summarizes Federal funds purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Weighted average interest rate at end of period
|
|
|
0.00%
|
|
|
|
0.13%
|
|
|
|
|
|
0.13%
|
|
|
|
0.13%
|
|
Weighted average interest rate for the period
|
|
|
0.00%
|
|
|
|
0.13%
|
|
|
|
|
|
0.13%
|
|
|
|
0.24%
|
|
Average outstanding balance
|
|
$
|
|
|
|
$
|
2,687
|
|
|
|
|
$
|
3,997
|
|
|
$
|
6,708
|
|
Total balance at end of period
|
|
$
|
|
|
|
$
|
1,500
|
|
|
|
|
$
|
3,000
|
|
|
$
|
7,900
|
|
Maximum outstanding at any month-end
|
|
$
|
|
|
|
$
|
4,400
|
|
|
|
|
$
|
7,500
|
|
|
$
|
11,500
|
|
Interest expense
|
|
$
|
|
|
|
$
|
1
|
|
|
|
|
$
|
3
|
|
|
$
|
16
|
|
177
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
15.
|
|
O
THER
B
ORROWINGS
|
The following table summarizes long term debt and other borrowings:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
2011
|
|
|
December 31,
2010
|
|
|
|
(dollars in thousands)
|
|
Other short term borrowings:
|
|
|
|
|
|
|
|
|
Amounts due to the Federal Reserve Bank (1)
|
|
$
|
|
|
|
$
|
5,831
|
|
|
|
|
|
|
|
|
|
|
Total short term borrowings
|
|
|
|
|
|
|
5,831
|
|
Long term debt:
|
|
|
|
|
|
|
|
|
Subordinated debt issued by the Bank
|
|
|
|
|
|
|
44,409
|
|
Subordinated notes payable (2)
|
|
|
51,664
|
|
|
|
51,188
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
|
51,664
|
|
|
|
95,597
|
|
|
|
|
|
|
|
|
|
|
Total long term debt and other short term borrowings
|
|
|
51,664
|
|
|
|
101,428
|
|
|
|
|
|
|
|
|
|
|
Obligation under capital lease
|
|
|
14,860
|
|
|
|
19,586
|
|
|
|
|
|
|
|
|
|
|
Total long term debt and other borrowings
|
|
$
|
66,524
|
|
|
$
|
121,014
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Balances are Treasury, Tax and Loan (TT&L) funds from client held by the Bank on behalf of the Reserve Bank.
|
(2)
|
Includes the Bancorps subordinated notes payable to unconsolidated trusts issuing trust preferred securities. Also referred to as trust
preferred securities within these Consolidated Financial Statements.
|
Other Short Term Borrowings
Other short term borrowings consist of TT&L deposits collected from clients held by the Bank until the funds are requested by the
Reserve Bank.
The following table summarizes additional information for other short term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Weighted average interest rate at end of period
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
|
|
0.00%
|
|
|
|
0.20%
|
|
Weighted average interest rate for the period
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
|
|
0.10%
|
|
|
|
0.43%
|
|
Average outstanding balance (1)
|
|
$
|
3,517
|
|
|
$
|
3,725
|
|
|
|
|
$
|
7,171
|
|
|
$
|
47,825
|
|
Total balance at end of period (1)
|
|
$
|
|
|
|
$
|
5,831
|
|
|
|
|
$
|
3,374
|
|
|
$
|
26,484
|
|
Maximum outstanding at any month-end
|
|
$
|
4,338
|
|
|
$
|
5,831
|
|
|
|
|
$
|
25,087
|
|
|
$
|
165,916
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
5
|
|
|
$
|
206
|
|
(1)
|
Included in the balances are TT&L funds from clients on behalf of the U.S. Treasury. The funds received and held for TT&Ls do not incur
interest expense, therefore no interest expense or rates are disclosed for these borrowings in the table, above.
|
178
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
15.
|
O
THER
B
ORROWINGS
C
ONTINUED
|
Federal Home Loan Bank Advances
As a member of FHLB the Company has established a credit line. The borrowing capacity is determined based on asset size among other
factors. The Company is required to pledge assets to securitize its borrowings line. As of December 31, 2011, and 2010, there were no FHLB advances outstanding. As of December 31, 2011, the Company had a line of credit with the FHLB of
$1.25 billion, with investment securities and loans pledged as collateral with an estimated market value of $1.60 billion for the line.
Subordinated Debt Issued by the Bank
In December 2011, the Company completed the early redemption of its outstanding floating rate junior subordinated debentures, resulting in a $4.7 million non-cash charge to noninterest expense. The
subordinated debentures were scheduled to mature on December 17, 2013, and were redeemed at an aggregate redemption price of $35.0 million, representing 100% of the principal amount, plus accrued and unpaid interest through December 2011.
The cash amounts paid by the Company upon redemption of the subordinated debentures were made from cash on hand.
Subordinated Debt Issued
by the Company
This subordinated debt was issued through business trusts which in turn issued trust preferred securities
in conjunction with issuing the debt to the Company. The first three subordinated debt instruments below were issued by Pacific Crest Capital, Inc. prior to its acquisition by the Company in 2004. The fourth instrument was issued by the Company.
This subordinated debt qualifies as Tier 1 capital for the Company and because in each case the proceeds from the debt were contributed to the respective subsidiary bank as additional paid-in capital, the debt also qualifies as Tier 1 capital for
the Bank.
At the Transaction Date, an accretable discount of $18.2 million was recognized when applying the fair value
required for purchase accounting. At December 31, 2011, the remaining discount was $17.8 million. This discount is being accreted over the lives of each individual issuance. During the years ended December 31, 2011, and December 31,
2010, $477,000 and $118,000, respectively were accreted as an increase of interest expense.
The subordinated debt issued by
the Company is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owed
to
|
|
Amount Owed (1)
|
|
|
Current Rate
|
|
|
Maturity
|
|
|
Call Date
|
|
|
Spread over
LIBOR
if not called
|
|
|
|
(dollars in thousands)
|
|
PCC Trust I
|
|
$
|
13,750
|
|
|
|
3.83
|
%
|
|
|
2033
|
|
|
|
Quarterly
|
|
|
|
3.25
|
%
|
PCC Trust II
|
|
|
6,190
|
|
|
|
3.58
|
%
|
|
|
2033
|
|
|
|
Quarterly
|
|
|
|
3.15
|
%
|
PCC Trust III
|
|
|
10,310
|
|
|
|
3.50
|
%
|
|
|
2033
|
|
|
|
Quarterly
|
|
|
|
3.10
|
%
|
PCB Trust I
|
|
|
39,176
|
|
|
|
2.25
|
%
|
|
|
2036
|
|
|
|
Quarterly
|
|
|
|
1.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts shown exclude purchase accounting adjustments and represent only contractual obligations requiring repayment.
|
179
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
15.
|
O
THER
B
ORROWINGS
C
ONTINUED
|
Capital Lease
At December 31, 2011, the Company had two capital leases for a total obligation under the capital leases of $14.9 million. One capital lease relates to a property in which one of the Companys
branches is located. The other capital lease is for a property in which the Companys trust operations has its primary office.
In July 2009, the Company assigned the first of these outstanding capital leases to a third party; however, the Company retained an obligation to ensure the capital lease payments are made to the lessee
over the then remaining lease term of 28 years. Due to this obligation, the Company continues to record this capital lease on its Consolidated Balance Sheets. At December 31, 2011, the accumulated amortization of the capital lease included in
accumulated depreciation was $321,000; the implied interest rate was 6.0%; and the capital lease obligation was $7.1 million.
The second of the two capital leases was entered into in the first quarter of 2009, and requires the Company to make monthly payments
through 2038. At December 31, 2011, the accumulated amortization of the capital lease included in accumulated depreciation was $324,000; the implied interest rate was 6.0%; and the capital lease obligation was $7.8 million. Total lease payments
were $706,000 for the twelve months ended December 31, 2011. The lease provides for specific increases during its term. As of December 31, 2011, the total minimum sublease rent to be received under noncancelable subleases was $1.5 million.
Both of the above capital leases contain no significant restrictive covenants or triggering events as to the issuance of
other debt or require payment in full prior to the scheduled maturity.
N
OTE
16.
|
|
E
MPLOYEE
401K
AND
S
TOCK
O
WNERSHIP
P
LANS
|
The Companys profit-sharing plan has two components. The Salary Savings Plan component is authorized under
Section 401(k) of the Internal Revenue Code. The other component is the Incentive & Investment Plan (I&I Plan), which permits profit sharing contributions by the Company to be invested in various mutual funds
chosen by the employees. The Company made no contributions to the I&I Plan during 2011, 2010, or 2009. The administrative expenses for these plans are paid by the Company.
For the Salary Savings Plan, an employee may defer up to 80% of pre-tax salary in the plan up to a maximum dollar amount set each year by the IRS. Until 2010, the Company matched 100% of the first 3% of
the employees compensation that the employee elected to defer and 50% of the next 3%, but not more than 4.5% of the employees total compensation. In January 2010, the Company announced the suspension of the 401(k) match described above
beginning on March 1, 2010. In January 2011, the Company reinstated the employee match, and recorded expense for matching contributions of $1.1 million during 2011. In 2010, prior to the suspension and in 2009, the employers matching
contributions were $505,000 and $2.5 million, respectively.
The Companys Employee Stock Ownership Plan
(ESOP) was initiated in January 1985. The ESOP was a plan whereby the Company could make annual, discretionary contributions for the benefit of eligible employees. Substantially all of the contributions were invested in the
Companys common stock. The ESOP was merged into the Salary Savings plan on August 27, 2010, and the ESOP was dissolved. Total contributions by the Company to the ESOP plan were $0, and $2,000 for the years ended December 31, 2010,
and 2009, respectively.
180
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
17.
|
|
C
OMMITMENTS
AND
C
ONTINGENCIES
|
Contractual Lease Obligations
The contractual obligations for leases are disclosed in Note 8, Premises and Equipment of these Consolidated Financial Statements.
Contractual Commitments for Unfunded Loans and Letter of Credits
For a
summary and more information on the contractual commitments for unfunded loan commitments and letters of credit as of December 31, 2011, refer to Note 5, Loans of these Consolidated Financial Statements.
Legal Matters
The
plaintiffs, the Company, and the other defendants entered into an agreement to settle all claims in the previously disclosed consolidated shareholder derivative and direct complaints of Monty and Clem. Following a hearing on January 19, 2012,
the trial court approved the settlement and entered judgment dismissing the lawsuit with prejudice. The settlement does not have any material effect on the Companys financial position, results of operation, or cash flow. The Company is
involved in various other lawsuits of a routine nature that are being handled and defended in the ordinary course of the Companys business. Expenses are being incurred in connection with defending the Company, but in the opinion of Management,
based in part on consultation with legal counsel, the resolution of these lawsuits will not have a material impact on the Companys financial position, results of operations, or cash flows.
N
OTE
18.
|
|
S
HAREHOLDERS
E
QUITY
|
Authorized Shares and Stock Issuance
On August 31, 2010, when the Investment Agreement was executed, there were additional shares issued. Following the Transaction Date, there were additional shares authorized, a reverse stock split and
a rights offering. All of this activity is disclosed in Note 2, Business Combination Investment Transaction of these Consolidated Financial Statements.
Stock Repurchases
Pursuant to the Written Agreement, the Company is
prohibited from repurchasing any shares of common stock, without the prior approval of the Reserve Board.
Stock Plans
On December 1, 2010, the Companys shareholders adopted the 2010 Equity Incentive Plan effective as of December 29, 2010,
with 2,138,850 shares authorized for stock compensation. The 2010 Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights (SARs), restricted stock and restricted stock units to officers,
employees, non-employee directors, and consultants. The 2010 Plan has assigned the Board of Directors as the Administrator of the plan, with wide discretion in determining the terms and conditions of the awards and circumstances under which an award
may be amended. All awards granted under these plans will have an exercise price set at a minimum of 100% of the market value of the Companys common stock on the date of the grant
181
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
18.
|
S
HAREHOLDERS
E
QUITY
C
ONTINUED
|
except for any employee that owns stock with total combined voting power of more than 10% of all classes of stock, in which case the exercise price shall be no less than 110% of the fair market
value on the date of the grant. During 2011, the Company granted restricted stock, performance based nonqualified stock options and performance based restricted stock units. Restricted stock granted to employees under this plan vest over a four year
period in 25% annual increments on the grant anniversary date. Restricted stock granted to outside directors vest 100% after one year following the grant date. Performance based shares are granted to employees and the number of shares that vest is
subject to the achievement of specified performance goals. Any shares that satisfy the performance goals will then become subject to time based vesting of 50% on the first anniversary of the last day of the fiscal year in which the option or
restricted stock unit was granted and the remaining 50% on the second anniversary of the last day of the fiscal year in which this option or restricted stock unit was granted. Of the original authorized shares, 1,986,579 remain for future awards as
of December 31, 2011.
Upon adoption of the 2010 Equity Incentive Plan, the 2002 Stock Plan, and the 2008 Equity
Incentive Plan were terminated. No further grants can be made from these two terminated plans, but shares will continue to be issued as restricted stock granted prior to the termination of plans vests or as stock option grants are exercised. Since
the stock option grants have exercise prices which are significantly higher than the Companys current stock price, it is unlikely that the outstanding stock options will be exercised. All stock options granted have a 10 year contractual term
and were granted with an exercise price set at the market value of the Companys common stock on the date of the grant. As discussed below, all stock options and restricted stock that were outstanding from the terminated plans were fully
expensed at the Transaction Date.
Nonqualified Stock Options
The table below summarizes the assumptions used in calculating the fair value of the nonqualified stock options granted over the last three years and the weighted average grant date fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Expected volatility
|
|
|
54%-56%
|
|
|
|
|
|
|
|
|
|
72%-80%
|
|
|
|
52%-70%
|
|
Weighted average volatility
|
|
|
56%
|
|
|
|
|
|
|
|
|
|
73%
|
|
|
|
59%
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0%-5.0%
|
|
Expected term (in years)
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
6.8
|
|
|
|
6.8
|
|
Risk-free rate
|
|
|
1.1%-2.2%
|
|
|
|
|
|
|
|
|
|
3.1%-3.3%
|
|
|
|
2.2%-3.3%
|
|
Weighted average value at grant date
|
|
$
|
16.89
|
|
|
$
|
|
|
|
|
|
$
|
81.63
|
|
|
$
|
272.94
|
|
182
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
18.
|
S
HAREHOLDERS
E
QUITY
C
ONTINUED
|
A summary of nonqualified stock option activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31, 2011
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding shares at January 1, 2011
|
|
|
9,444
|
|
|
$
|
2,194
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
43,713
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled and expired
|
|
|
(1,322
|
)
|
|
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares at December 31, 2011
|
|
|
51,835
|
|
|
$
|
365
|
|
|
|
8.7
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2011
|
|
|
50,942
|
|
|
$
|
373
|
|
|
|
8.6
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2011
|
|
|
6,504
|
|
|
$
|
2,445
|
|
|
|
3.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified stock option compensation expense is recognized over the vesting period in accordance with
ASC 718-040,
Stock Compensation
. The following table presents additional information about stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Nonqualified stock option compensation expense
|
|
$
|
194
|
|
|
$
|
|
|
|
|
|
$
|
401
|
|
|
$
|
867
|
|
Tax benefit recognized from stock option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit realized from option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011, there was $530,000 of total unrecognized compensation cost related to
non-vested stock options. That cost is expected to be recognized over a weighted average remaining period of 1.5 years.
The
outstanding stock options at the Transaction Date were not impacted by the Investment Transaction, i.e., the vesting periods remained unchanged. However, the unvested options were valued for the application of purchase accounting and the resulting
unrecognized compensation expense was recognized as of the Transaction Date.
Restricted Stock and Restricted Stock Units
Compensation expense for restricted stock is measured based on the closing price of the stock on the day of the grant. The compensation
expense is generally recognized over the vesting period. However, when the shares were valued for the application of purchase accounting, and given the relatively low value, the compensation expense was immediately recognized as of the Transaction
Date. The terms of
183
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
18.
|
S
HAREHOLDERS
E
QUITY
C
ONTINUED
|
the unvested restricted stock issued under the 2008 Plan became immediately vested with the close of the Investment Transaction. Unvested restricted stock issued under the 2002 Plan were not
impacted by the Investment Transaction and will vest according to the terms of that plan.
A summary of restricted stock
activity for the twelve months ended December 31, 2011, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
Nonvested shares at January 1, 2011
|
|
|
1,462
|
|
|
$
|
2,003
|
|
Granted
|
|
|
108,558
|
|
|
|
31
|
|
Vested
|
|
|
(2,661
|
)
|
|
|
806
|
|
Forfeited
|
|
|
(14
|
)
|
|
|
3,201
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares at December 31, 2011
|
|
|
107,345
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
The following table presents additional information about restricted stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Restricted stock compensation expense
|
|
$
|
870
|
|
|
$
|
|
|
|
|
|
$
|
2,486
|
|
|
$
|
2,986
|
|
Tax benefit recognized from restricted stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total value of shares vested
|
|
|
2,145
|
|
|
|
99
|
|
|
|
|
|
4,870
|
|
|
|
3,697
|
|
Successor Company
The weighted average grant date fair value of restricted stock granted during the twelve months ended December 31, 2011, was $31.23. There were no restricted stock grants during the four months ended
December 31, 2010. At December 31, 2011, there was $2.4 million of unrecognized compensation expense for unvested restricted stock with an expected weighted average remaining period of 1.7 years to be recognized.
Predecessor Company
The
weighted average grant date fair value of restricted stock granted during the eight months ended August 31, 2010, and twelve months ended December 31, 2009, was $164.41 and $783.98, respectively.
184
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
19.
|
|
E
ARNINGS
P
ER
S
HARE
|
The following table presents a reconciliation of basic earnings per share and diluted earnings per share. The
denominator of the diluted earnings per share ratio includes the effect of dilutive securities. The securities outstanding that are potentially dilutive are employee stock options, restricted stock and common stock warrants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars and shares in thousands, except per share amounts)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Net income/(loss) from continuing operations
|
|
$
|
70,522
|
|
|
$
|
25,770
|
|
|
|
|
$
|
(171,635
|
)
|
|
$
|
(456,624
|
)
|
(Expense)/income from discontinued operations, net of tax
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
(1,429
|
)
|
|
|
35,363
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
8,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expense)/income from discontinued operations, net
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
6,731
|
|
|
|
35,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
70,522
|
|
|
|
25,744
|
|
|
|
|
|
(164,904
|
)
|
|
|
(421,261
|
)
|
Dividends and accretion on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
6,938
|
|
|
|
9,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to common shareholders
|
|
$
|
70,522
|
|
|
$
|
25,744
|
|
|
|
|
$
|
(171,842
|
)
|
|
$
|
(431,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
32,904
|
|
|
|
25,331
|
|
|
|
|
|
478
|
|
|
|
467
|
|
Dilutive effect of stock grants
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock warrants
|
|
|
4
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of incremental shares from assumed conversion
|
|
|
|
|
|
|
4,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
32,913
|
|
|
|
30,126
|
|
|
|
|
|
478
|
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents excluded from computation of diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
31
|
|
|
|
9,641
|
|
|
|
|
|
11,315
|
|
|
|
13,060
|
|
Common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,120
|
|
Earnings/(loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
1.02
|
|
|
|
|
$
|
(359.07
|
)
|
|
$
|
(977.78
|
)
|
Diluted (1)
|
|
$
|
2.14
|
|
|
$
|
0.86
|
|
|
|
|
$
|
(359.07
|
)
|
|
$
|
(977.78
|
)
|
Earnings per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
14.08
|
|
|
$
|
75.72
|
|
Diluted (1)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
14.08
|
|
|
$
|
75.72
|
|
Earnings/(loss) per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
1.02
|
|
|
|
|
$
|
(359.50
|
)
|
|
$
|
(923.46
|
)
|
Diluted (1)
|
|
$
|
2.14
|
|
|
$
|
0.85
|
|
|
|
|
$
|
(359.50
|
)
|
|
$
|
(923.46
|
)
|
(1)
|
Common stock equivalents are not included in the computation of the diluted weighted average shares outstanding when they are anti-dilutive. No
common stock equivalents are included in the computation of the diluted weighted average shares outstanding when there is a net loss for reporting period.
|
185
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
19.
|
E
ARNINGS
P
ER
S
HARE
C
ONTINUED
|
For the Predecessor Company, no dilutive shares were included in the computation of
diluted earnings per share because all of the periods presented have a net loss.
15,120 common stock warrants were issued in
conjunction with the preferred stock issued to the U.S. Treasury in November 2008, and were renegotiated as part of the Investment Agreement.
N
OTE
20.
|
|
R
EGULATORY
C
APITAL
R
EQUIREMENTS
|
On September 2, 2010, the Bank entered into the Operating Agreement with the OCC, pursuant to which, among other
things, the Bank agreed to maintain total capital at least equal to 12% of risk-weighted assets and Tier 1 leverage at least equal to 8% of adjusted total assets and to not pay any dividend or reduce its capital without the prior non-objection of
the OCC and unless at least three years shall have elapsed since the effective date of the Operating Agreement. The Bank was in compliance with these minimum capital ratios at December 31, 2011, with a total risk-based capital ratio of 18.3%
and a Tier 1 leverage ratio of 11.2%.
The Companys and SBB&T capital ratios as of December 31, 2011, and 2010,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Total
Risk
Based
Capital
|
|
|
Tier 1
Capital
|
|
|
Risk-
Weighted
Assets
|
|
|
Tangible
Average
Assets
|
|
|
Total
Risk
Based
Capital
Ratio
|
|
|
Tier
1
Risk
Based
Capital
Ratio
|
|
|
Tier 1
Leverage
Ratio
|
|
|
|
(dollars in thousands)
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCBC (consolidated)
|
|
$
|
736,816
|
|
|
$
|
715,062
|
|
|
$
|
3,657,172
|
|
|
$
|
5,768,824
|
|
|
|
20.2
|
%
|
|
|
19.6
|
%
|
|
|
12.4
|
%
|
SBB&T
|
|
$
|
667,405
|
|
|
$
|
645,651
|
|
|
$
|
3,657,180
|
|
|
$
|
5,766,623
|
|
|
|
18.3
|
%
|
|
|
17.7
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCBC (consolidated)
|
|
$
|
646,324
|
|
|
$
|
633,938
|
|
|
$
|
3,909,351
|
|
|
$
|
6,149,932
|
|
|
|
16.5
|
%
|
|
|
16.2
|
%
|
|
|
10.3
|
%
|
SBB&T
|
|
$
|
575,049
|
|
|
$
|
562,663
|
|
|
$
|
3,909,482
|
|
|
$
|
6,133,212
|
|
|
|
14.7
|
%
|
|
|
14.4
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital Ratios required by the Operating Agreement
|
|
|
|
|
|
|
|
12.0
|
%
|
|
|
n/a
|
|
|
|
8.0
|
%
|
Generally required minimum ratios to be classified as well-capitalized
|
|
|
|
10.0
|
%
|
|
|
6.0
|
%
|
|
|
5.0
|
%
|
Generally required minimum ratios to be classified as adequately capitalized
|
|
|
|
8.0
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Risk-weighted assets are computed by applying a weighting factor from 0% to 100% to the carrying amount
of the assets as reported in the balance sheet and to a portion of off-balance sheet items such as loan commitments and letters of credit. The definitions and weighting factors are all specified in the regulations. However, the capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The minimum ratios that must be maintained under the regulatory requirements to meet the standard of adequately capitalized and the minimum ratios required to meet the regulatory standards of
well capitalized are presented above, along with the higher minimum capital ratios that SBB&T must continue to meet to remain in compliance with the Operating Agreement.
186
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
21.
|
|
N
ONINTEREST
I
NCOME
|
The table below discloses the largest items included in other noninterest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance income
|
|
$
|
2,798
|
|
|
$
|
967
|
|
|
|
|
$
|
2,074
|
|
|
$
|
3,154
|
|
Gain/(loss) on asset sales
|
|
|
775
|
|
|
|
4,598
|
|
|
|
|
|
1,188
|
|
|
|
(4,814
|
)
|
Net loss on LIHTCP
|
|
|
(2,846
|
)
|
|
|
(1,554
|
)
|
|
|
|
|
(4,416
|
)
|
|
|
(3,680
|
)
|
Other
|
|
|
5,745
|
|
|
|
1,771
|
|
|
|
|
|
2,348
|
|
|
|
5,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,472
|
|
|
$
|
5,782
|
|
|
|
|
$
|
1,194
|
|
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N
OTE
22.
|
|
N
ONINTEREST
E
XPENSE
|
The table below discloses the largest items included in other noninterest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Other Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services
|
|
$
|
14,472
|
|
|
$
|
4,633
|
|
|
|
|
$
|
10,782
|
|
|
$
|
22,882
|
|
Regulatory assessments
|
|
|
11,962
|
|
|
|
6,305
|
|
|
|
|
|
13,094
|
|
|
|
18,988
|
|
Other intangible expense
|
|
|
8,580
|
|
|
|
2,982
|
|
|
|
|
|
621
|
|
|
|
1,184
|
|
Software expense
|
|
|
7,361
|
|
|
|
3,876
|
|
|
|
|
|
8,660
|
|
|
|
15,383
|
|
Customer deposit service and support
|
|
|
6,777
|
|
|
|
2,344
|
|
|
|
|
|
4,961
|
|
|
|
8,271
|
|
Furniture, fixtures and equipment, net
|
|
|
4,954
|
|
|
|
1,344
|
|
|
|
|
|
3,488
|
|
|
|
7,147
|
|
Acceleration of discount on redemption of subordinated debt
|
|
|
4,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan servicing expense
|
|
|
4,343
|
|
|
|
1,970
|
|
|
|
|
|
2,369
|
|
|
|
5,526
|
|
Earnout liability
|
|
|
3,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplies and postage
|
|
|
3,747
|
|
|
|
1,344
|
|
|
|
|
|
2,740
|
|
|
|
5,135
|
|
Telephone and data
|
|
|
3,058
|
|
|
|
889
|
|
|
|
|
|
2,288
|
|
|
|
4,380
|
|
Marketing
|
|
|
2,785
|
|
|
|
1,181
|
|
|
|
|
|
1,349
|
|
|
|
3,096
|
|
Other real estate owned expense
|
|
|
2,402
|
|
|
|
1,566
|
|
|
|
|
|
2,643
|
|
|
|
1,884
|
|
FHLB advance prepayment penalties
|
|
|
|
|
|
|
|
|
|
|
|
|
864
|
|
|
|
3,798
|
|
LIHTCP impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,958
|
|
Ford investment transaction expense
|
|
|
|
|
|
|
|
|
|
|
|
|
13,063
|
|
|
|
|
|
Reserve for off-balance sheet commitments
|
|
|
(2,847
|
)
|
|
|
32
|
|
|
|
|
|
1,886
|
|
|
|
8,245
|
|
Other
|
|
|
6,254
|
|
|
|
1,579
|
|
|
|
|
|
6,845
|
|
|
|
7,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,506
|
|
|
$
|
30,045
|
|
|
|
|
$
|
75,653
|
|
|
$
|
122,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
23.
|
|
D
ISCONTINUED
O
PERATIONS
RAL
AND
RT P
ROGRAMS
|
On January 14, 2010, the Company entered into an agreement with Santa Barbara Tax Products Group, LLC
(SBTPG), whereby SBTPG agreed to purchase the assets of the RAL and RT Programs segment for $10.0 million. The agreement provided for, and the Company received, a payment of $5.0 million at closing and an additional $5.0 million on
March 15, 2010. The agreement further stipulated that SBTPG would make an additional cash payment based on the number of RALs processed by SBTPG between January 1, 2010, and April 30, 2010. SBTPG was not able to process RALs during
this period and therefore no further payments were received for the sale of the RAL and RT Programs. The Company sold the RAL and RT Programs segment due to changes in the regulatory and legislative environments which had significantly altered the
Banks ability to offer RALs for the 2010 tax season and the value of the segment to the Company.
Due to the short
period of time between when the agreement was signed and the purchase was finalized, there was not enough time for SBTPG to set up the operations required to process the RT checks and Automated Clearing House transactions or to set up basic
accounting functions like accounts payable, payroll, and benefit plans. Therefore, as part of the agreement to sell the RAL and RT Programs, the Company also entered into a transition agreement whereby the Company would process the RT activity for
SBTPG for the 2010 tax season. The transition agreement also required the Company to process the invoices for the RAL and RT Programs through April 30, 2010, and retain the employees associated with the RAL and RT Programs through
March 31, 2010. All funds expended for the processing of invoices and employee related costs were reimbursed by SBTPG starting on January 15, 2010. There are other minimal obligations to provide support to SBTPG through the remainder of
2010.
Beginning March 31, 2010, the Company reported the RAL and RT Programs as discontinued operations and all prior
periods were retrospectively revised to reflect the operations from the RAL and RT Programs as discontinued operations throughout these Consolidated Financial Statements and the accompanying notes. On October 5, 2010, the Company filed a
Current Report on Form 8-K recasting its Consolidated Financial Statements for all periods presented in certain sections of its Form 10-K, as amended, to present the RAL and RT Programs as discontinued operations.
188
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
23.
|
D
ISCONTINUED
O
PERATIONS
RAL
AND
RT P
ROGRAMS
C
ONTINUED
|
A gain on the sale of the programs was recognized in the first quarter of 2010. A
summary of the items related to the gain on sale of the RAL and RT Programs is as follows:
|
|
|
|
|
(dollars in thousands)
|
|
Proceeds received from purchaser:
|
|
$
|
10,000
|
|
|
|
Assets sold:
|
|
|
|
|
Leasehold improvements
|
|
|
678
|
|
Furniture, fixtures & equipment
|
|
|
1,399
|
|
Prepaid assets
|
|
|
2,110
|
|
|
|
|
|
|
Total assets sold
|
|
|
4,187
|
|
|
|
Liabilities sold:
|
|
|
|
|
Accrued expenses
|
|
|
2,321
|
|
Deferred rent
|
|
|
164
|
|
|
|
|
|
|
Total liabilities sold
|
|
|
2,485
|
|
|
|
|
|
|
Assets less liabilities sold
|
|
|
1,702
|
|
|
|
|
|
|
Expenses incurred as part of the sale
|
|
|
138
|
|
|
|
|
|
|
Gain on sale
|
|
$
|
8,160
|
|
|
|
|
|
|
Products Offered
Prior to the sale of the business, the Company offered two products related to the electronic filing of tax returns. The products were designed to provide taxpayers with faster access to funds claimed by
them as a refund on their tax returns. This access may be in the form of a loan from the Company secured by the refund claim, a RAL, or in the form of a facilitated electronic transfer or check prepared by their tax preparer, a RT. The RAL and RT
Programs were highly seasonal. Approximately 90% of the activity occurred in the first quarter of each year.
Refund
Anticipation Loans
RALs are short term consumer loans offered to taxpayers, secured by their anticipated tax refund and
subject to an underwriting process prior to approval. At the request of the taxpayer, the refund claim is paid by the IRS to the Bank once the tax return has been processed. This constitutes the source of repayment of the RAL. Funds received from
the IRS above the sum of the RAL less associated contractual fees were remitted to the taxpayer by the Bank.
The RAL funds
advanced by the Bank were generally repaid by the IRS within several weeks. Therefore, the processing costs and provision for loan loss represent the major costs of these loans. This cost structure was different than for other loans for which the
cost of funds during the term of the loan is the major cost for the Company. Because of RALs short duration, the Bank could not recover the processing costs through interest calculated over the term of the loan. Consequently, the Bank had
structured the fees to have a fixed component to cover processing costs and a variable component to cover loan losses and the cost of funds. The client signed a promissory note. This means that the Company reported fees received for RALs as interest
income.
Net interest income for RALs was $141.3 million for the year ended December 31, 2009. The sale of the programs
took place prior to the beginning of the tax season, so no RALs were offered in 2010, or thereafter.
189
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
23.
|
D
ISCONTINUED
O
PERATIONS
RAL
AND
RT P
ROGRAMS
C
ONTINUED
|
Unpaid RALs outstanding at the end of each year were charged off. Therefore, no RALs
were reported as of December 31 of each year. As shown in the tables in Note 5, Loans and Note 7, Allowance for Loan and Lease Losses, there were no RALs or allowance for RAL losses at December 31 of each year.
RTs
An RT is the facilitation of an electronic transfer of an income tax refund directly to the taxpayer. The Company acts as a conduit from the IRS and State tax authorities to the taxpayer enabling an
expedited delivery of the taxpayers income tax refund. There is no credit risk or borrowing cost for the Company because the funds are only delivered to the taxpayer after receipt by the Bank of the refund directly from the IRS. Payment of an
RT is made in one of two ways. The Company either authorizes the tax preparer to provide a check directly to the taxpayer or the Company pays the refund into a taxpayers bank account through direct deposit.
Fees Earned on RALs and RTs
Income from the RAL and RT Programs consists of the fees earned on these products. Fees earned on RALs are reported in interest income because the client has signed a promissory note while fees earned on
RTs are reported in noninterest income. The Company originated these products through three channels: Jackson Hewitt, other professional tax preparers and self filers. Regardless of the program a basic fee per product was charged. The fees charged
for the products differed by source due to varying contractual terms.
RAL Provision for Loan Losses
Losses related to RALs occurred when the IRS did not pay the amount claimed as a refund on the taxpayers return remitting funds
associated with a particular tax return. This occurred for a number of reasons, including errors in the tax return and tax return fraud. The provision for RAL losses was $74.5 million for the year ended December 31, 2009, no provision for RAL
loan losses was recorded in 2010, or thereafter.
RTs were the facilitation of the payment from the IRS to the taxpayer made
only after the Bank had received the refund from the IRS, so there was no extension of credit and no losses associated with them.
190
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
23.
|
D
ISCONTINUED
O
PERATIONS
RAL
AND
RT P
ROGRAMS
C
ONTINUED
|
The following table presents a summary of the items classified as discontinued
operations in the Companys Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve Months
Ended
December 31,
2011
|
|
|
Four Months
Ended
December 31,
2010
|
|
|
|
|
Eight Months
Ended
August 31,
2010
|
|
|
Twelve Months
Ended
December 31,
2009
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
$
|
151,611
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,933
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,396
|
|
Securities sold under agreements to repurchase and Federal funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Long term debt and other borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,611
|
|
Net interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,322
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,784
|
|
Noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
8,160
|
|
|
|
|
|
Refund transfer fees
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
68,315
|
|
Service charges and fees
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
8,163
|
|
|
|
70,904
|
|
Noninterest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
686
|
|
|
|
13,586
|
|
Occupancy expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
1,467
|
|
Refund program fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,428
|
|
Other
|
|
|
|
|
|
|
23
|
|
|
|
|
|
698
|
|
|
|
14,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
|
|
|
|
23
|
|
|
|
|
|
1,432
|
|
|
|
76,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before provision for income taxes
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
6,731
|
|
|
|
61,023
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from discontinued operations
|
|
$
|
|
|
|
$
|
(26
|
)
|
|
|
|
$
|
6,731
|
|
|
$
|
35,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
23.
|
D
ISCONTINUED
O
PERATIONS
RAL
AND
RT P
ROGRAMS
C
ONTINUED
|
Since the RAL and RT programs were sold on January 14, 2010, there was no income
and expense incurred for the year ended December 31, 2011. The majority of the income and expenses incurred for the eight months ended August 31, 2010, were the income and expenses incurred during the first 14 days of the year. Most of the
expenses incurred after January 14, 2010, have been reimbursed by SBTPG with the exception of some of the overhead expenses and transactional expenses for the servicing of RTs. The reimbursements from SBTPG were recorded as a reduction of
expense.
The segments are aligned based on how the Companys Board of Directors has set performance goals for the Chief
Executive Officer (the CEO) and his management team. The Company has two operating business segments: Commercial & Community Banking and Wealth Management. The All Other segment is not considered an operating segment, but
includes all corporate administrative support departments such as human resources, legal, finance and accounting, treasury, information technology, internal audit, risk management, facilities management, marketing, executive management and the
Banks holding company. The operations and expenses reported in the All Other segment cannot specifically be allocated to the operating segments based on the services provided. The administrative departments which specifically support the
operating segments have been identified and reported within the operating segment.
The financial results and determination of
the new operating segments were based on the major business lines of the Bank and the products and services offered to the clients of each segment, as well as how the chief operating decision maker of the Company measures performance and allocates
resources.
A summary of the operating segments products and services and clients are below:
Commercial & Community Banking
The Commercial & Community Banking reportable segment is the aggregation of client sales and service activities typically found in a bank. This reportable segment includes all lending and deposit
products of the Bank. Clients include small business and middle market companies as well as individuals in the communities which the Bank serves.
Loan products offered by the Commercial & Community Banking segment include traditional commercial and industrial (commercial) and commercial real estate loans, lines of credit,
letters of credit, asset based lending, construction loans, land acquisition and development loans to small business and middle market commercial clients. Loan products offered to individual clients include residential real estate loans, home equity
lines and loans, and consumer loans.
Deposit products offered by the Commercial & Community Banking segment include
checking, savings, money market accounts, individual retirement accounts and certificates of deposit. Other products include foreign exchange services, treasury services and debit card services. The Commercial & Community Banking segment
serves clients through traditional banking branches, loan production centers, Automated Teller Machines and through client contact call centers and online banking.
192
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
24.
|
S
EGMENTS
C
ONTINUED
|
Included in the Commercial & Community Banking segment are the associated
administrative departments to support their products and activities such as loan servicing, credit administration, special assets department, research, wire room, delinquency management unit, central vault operations, retail banking administration
and retail and commercial lending administration departments.
Wealth Management
The Wealth Management reportable segment includes the trust and investment advisory services division and the two registered investment
advisors, MCM and REWA which are subsidiaries of the Bank. The Wealth Management segment provides investment reviews, analysis and customized portfolio management for separately managed accounts, full service brokerage, trust and fiduciary services,
equity and fixed income management and real estate and specialty asset management.
All Other
This reportable segment consists of administrative support areas of the Company and is not considered an operating segment of the Company.
The All Other segment is presented in the segment tables above to reflect unallocated operating segments to the consolidated totals of the Companys Consolidated Financial Statements. The administrative support units include the Companys
executive administration, risk management, information technology operations, marketing, human resources, corporate real estate, legal, treasury, and finance and accounting areas of the Company. The income and expense generated by the All Other
segment is from the investment securities portfolio and the borrowings which is managed by the treasury department and allocated to the operating segments as part of the allocation process in preparing segment balance sheets.
Indirect Credit (Charge) for Funds
Included in Indirect credit/(charge) for funds is an allocation of net interest income between segments with the All Other segment being used for the funding center. The indirect
credit/(charge) for funds is calculated by analyzing average earning assets and average interest bearing liabilities plus average noninterest bearing deposits. If a segments average earning assets are greater, the net average assets are
multiplied by the net cost of funds to calculate the indirect charge for funds as the segment does not have enough liabilities to fund the assets of the segment. If a segment has more interest bearing liabilities than assets, then the net average
interest bearing liabilities are multiplied by the net cost of funds and the segment receives an indirect credit for funds.
The Company has no operations in foreign countries to require disclosure by geographical area. The Company has no single client
generating 10% or more of total revenues. The following tables present information for each specific operating segment regarding assets, profit or loss, and specific items of revenue and expense that are included in the measure of segment profit or
loss reviewed by the CEO. Included in the table is an All Other segment which includes the administrative support units, the Banks holding company, and balancing of the funding uses and sources activity that are not allocated to
the two operating segments.
193
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
24.
|
S
EGMENTS
C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
Commercial &
Community
Banking
|
|
|
Wealth
Management
|
|
|
All Other
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Interest income
|
|
$
|
241,085
|
|
|
$
|
|
|
|
$
|
30,209
|
|
|
$
|
271,294
|
|
Interest expense
|
|
|
22,821
|
|
|
|
|
|
|
|
21,129
|
|
|
|
43,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
218,264
|
|
|
|
|
|
|
|
9,080
|
|
|
|
227,344
|
|
Provision for loan losses
|
|
|
5,555
|
|
|
|
|
|
|
|
|
|
|
|
5,555
|
|
Noninterest income
|
|
|
29,281
|
|
|
|
21,648
|
|
|
|
(111
|
)
|
|
|
50,818
|
|
Noninterest expense
|
|
|
168,107
|
|
|
|
24,410
|
|
|
|
10,042
|
|
|
|
202,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct income/(loss) before tax
|
|
|
73,883
|
|
|
|
(2,762
|
)
|
|
|
(1,073
|
)
|
|
|
70,048
|
|
Indirect credit/(charge) for funds
|
|
|
32,628
|
|
|
|
129
|
|
|
|
(32,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations before tax
|
|
$
|
106,511
|
|
|
$
|
(2,633
|
)
|
|
$
|
(33,830
|
)
|
|
$
|
70,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,075,622
|
|
|
$
|
28,568
|
|
|
$
|
1,745,832
|
|
|
$
|
5,850,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Four Months Ended December 31, 2010
|
|
|
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
Commercial &
Community
Banking
|
|
|
Wealth
Management
|
|
|
All Other
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Interest income
|
|
$
|
76,879
|
|
|
$
|
|
|
|
$
|
7,861
|
|
|
$
|
84,740
|
|
Interest expense
|
|
|
5,785
|
|
|
|
161
|
|
|
|
6,622
|
|
|
|
12,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/(loss)
|
|
|
71,094
|
|
|
|
(161
|
)
|
|
|
1,239
|
|
|
|
72,172
|
|
Provision for loan losses
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
590
|
|
Noninterest income
|
|
|
13,834
|
|
|
|
6,922
|
|
|
|
(684
|
)
|
|
|
20,072
|
|
Noninterest expense
|
|
|
31,949
|
|
|
|
5,087
|
|
|
|
28,848
|
|
|
|
65,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct income/(loss) before tax
|
|
|
52,389
|
|
|
|
1,674
|
|
|
|
(28,293
|
)
|
|
|
25,770
|
|
Indirect credit/(charge) for funds
|
|
|
10,400
|
|
|
|
13
|
|
|
|
(10,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations before tax
|
|
$
|
62,789
|
|
|
$
|
1,687
|
|
|
$
|
(38,706
|
)
|
|
$
|
25,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,955,316
|
|
|
$
|
39,856
|
|
|
$
|
2,090,376
|
|
|
$
|
6,085,548
|
|
194
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
24.
|
S
EGMENTS
C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
|
Eight Months Ended August 31, 2010
|
|
|
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
Commercial &
Community
Banking
|
|
|
Wealth
Management
|
|
|
All Other
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Interest income
|
|
$
|
166,580
|
|
|
$
|
|
|
|
$
|
23,120
|
|
|
$
|
189,700
|
|
Interest expense
|
|
|
38,192
|
|
|
|
317
|
|
|
|
41,819
|
|
|
|
80,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/(loss)
|
|
|
128,388
|
|
|
|
(317
|
)
|
|
|
(18,699
|
)
|
|
|
109,372
|
|
Provision for loan losses
|
|
|
171,583
|
|
|
|
|
|
|
|
|
|
|
|
171,583
|
|
Noninterest income
|
|
|
18,782
|
|
|
|
14,236
|
|
|
|
2,779
|
|
|
|
35,797
|
|
Noninterest expense
|
|
|
58,070
|
|
|
|
9,093
|
|
|
|
82,800
|
|
|
|
149,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct (loss)/income before tax
|
|
|
(82,483
|
)
|
|
|
4,826
|
|
|
|
(98,720
|
)
|
|
|
(176,377
|
)
|
Indirect (charge)/credit for funds
|
|
|
(2,784
|
)
|
|
|
27
|
|
|
|
2,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income/from continuing operations before tax
|
|
$
|
(85,267
|
)
|
|
$
|
4,853
|
|
|
$
|
(95,963
|
)
|
|
$
|
(176,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,213,132
|
|
|
$
|
35,903
|
|
|
$
|
2,966,441
|
|
|
$
|
7,215,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor Company
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
Commercial &
Community
Banking
|
|
|
Wealth
Management
|
|
|
All Other
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Interest income
|
|
$
|
303,055
|
|
|
$
|
2
|
|
|
$
|
50,215
|
|
|
$
|
353,272
|
|
Interest expense
|
|
|
71,886
|
|
|
|
454
|
|
|
|
81,301
|
|
|
|
153,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/(loss)
|
|
|
231,169
|
|
|
|
(452
|
)
|
|
|
(31,086
|
)
|
|
|
199,631
|
|
Provision for loan losses
|
|
|
352,398
|
|
|
|
|
|
|
|
|
|
|
|
352,398
|
|
Noninterest income
|
|
|
31,360
|
|
|
|
21,566
|
|
|
|
4,635
|
|
|
|
57,561
|
|
Noninterest expense
|
|
|
225,494
|
|
|
|
29,354
|
|
|
|
125,393
|
|
|
|
380,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct loss before tax
|
|
|
(315,363
|
)
|
|
|
(8,240
|
)
|
|
|
(151,844
|
)
|
|
|
(475,447
|
)
|
Indirect (charge)/credit for funds
|
|
|
(21,735
|
)
|
|
|
74
|
|
|
|
21,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before tax
|
|
$
|
(337,098
|
)
|
|
$
|
(8,166
|
)
|
|
$
|
(130,183
|
)
|
|
$
|
(475,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,039,611
|
|
|
$
|
16,070
|
|
|
$
|
2,486,574
|
|
|
$
|
7,542,255
|
|
195
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
25.
|
|
R
EGULATORY
M
ATTERS
|
On September 2, 2010, the Bank entered into the Operating Agreement with the OCC, pursuant to which, among other
things, the Bank agreed to maintain total risk based capital at least equal to 12% of risk-weighted assets and Tier 1 leverage at least equal to 8% of adjusted total assets and to not pay any dividend or reduce its capital without the prior
non-objection of the OCC and unless at least three years shall have elapsed since the effective date of the Operating Agreement. The Bank was in compliance with these minimum capital ratios at December 31, 2011, and December 31, 2010, with
a Tier 1 leverage ratio of 11.2% and 9.2%, respectively and, a total risk-based capital ratio of 18.3% and 14.7%, respectively. In addition, as of December 31, 2011, the Bank was not permitted to pay dividends to the Company, because of the
requirement for the non-objection of the OCC and because of legal limitations on the amount of dividends which may be paid by the Bank to the Company that are determined based on the Banks capital and earnings. The Bank was also subject to the
Consent Order originally issued by the OCC on May 11, 2010, up until the termination of the Consent Order on December 28, 2011.
On May 11, 2010, the Company entered into the Written Agreement with the Reserve Bank. The Written Agreement restricts the payment of dividends by the Company, as well as the taking of dividends or
any other payment representing a reduction in capital from the Bank, without the prior approval of the Reserve Bank. The Written Agreement further requires that the Company and its nonbank subsidiaries not incur, increase, or guarantee any debt,
repurchase or redeem any shares of its stock, or pay any interest or principal on subordinated debt or trust preferred securities, in each case without the prior approval of the Reserve Bank. The Written Agreement also requires the Company to
develop a capital plan for the Company, which shall address, among other things, the Companys current and future capital requirements, including compliance with the minimum capital ratios, the adequacy of the capital, the source and timing of
additional funds, and procedures to notify the Reserve Bank no more than thirty days after the end of any quarter in which the Companys consolidated capital ratios or the Banks capital ratios fall below the required minimums. The Company
will also be required to provide notice to the Reserve Bank regarding the appointment of any new director or senior executive officer. Finally, the Board of Directors of the Company is required to submit written progress reports to the Reserve Bank
within thirty days after the end of each calendar quarter.
Any material failure to comply with the provisions of the Written
Agreement or Operating Agreement could result in additional enforcement actions by the Reserve Bank and the OCC. While the Company and the Bank intend to take such actions as may be necessary to comply with the requirements of the Written Agreement
and Operating Agreement, there can be no assurance that the Company will be able to comply fully with the provisions of the Written Agreement or that the Bank will be able to comply fully with the provisions of the Operating Agreement, that
compliance with the Written Agreement and Operating Agreement will not be more time consuming or more expensive than anticipated, that compliance with the Written Agreement and Operating Agreement will enable the Company and the Bank to resume
profitable operations, or that efforts to comply with the Written Agreement and Operating Agreement will not have adverse effects on the operations and financial condition of the Company or the Bank.
N
OTE
26.
|
|
S
UBSEQUENT
E
VENTS
|
On March 9, 2012, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with
UnionBanCal Corporation, a Delaware corporation (UBC). The Merger
196
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
26.
|
|
S
UBSEQUENT
E
VENTS
C
ONTINUED
|
Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Pebble Merger Sub Inc., a corporation formed in Delaware as a wholly owned subsidiary of
UBC, will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of UBC (the Merger). Pursuant to the Merger Agreement, upon consummation of the Merger, each outstanding
share of common stock of the Company will be converted into the right to receive $46.00 per share in cash. Consummation of the Merger is subject to certain customary conditions, including, among others, the absence of any injunction or other legal
prohibition on the completion of the Merger, regulatory approvals of the Board of Governors of the Federal Reserve System, the Japan Financial Services Agency and the OCC and expiration of applicable waiting periods. On March 9, 2012, following the
execution of the Merger Agreement, SB Acquisition, the holder of 25,000,000 shares of the Companys common stock, constituting approximately 76% of the outstanding shares of the Companys common stock, delivered to the Company its action
by written consent adopting and approving the Merger Agreement and the Merger. No further approval of the stockholders of the Company is required to approve the Merger Agreement and the Merger.
Shares of the Companys common stock that are owned by dissenting stockholders will be entitled only to such rights and payments as
are granted by Section 262 of the Delaware General Corporation Law. Each outstanding option to purchase shares of common stock under the Companys stock plans (each, a Company Option), whether vested or unvested, will be cancelled
and converted into the right to receive, with respect to each share subject to such Company Option, an amount in cash equal to $46.00 minus the exercise price per share of the Company Option immediately prior to the effective time of the Merger.
Each award of restricted shares of the Company common stock and each share-based award outstanding under the Company stock plans will fully vest and be converted into the right to receive, with respect to each share subject to such award, $46.00 in
cash.
As of the date of the Merger Agreement, there were outstanding warrants to purchase 15,120 shares of the Companys
common stock held by the U.S. Treasury (the Treasury Warrants). Pursuant to the Merger Agreement and the terms of the Treasury Warrants, at the effective time of the Merger, each outstanding Treasury Warrant will cease to represent a
warrant to purchase common stock of the Company and will be converted automatically into a right to exercise such Treasury Warrant in accordance with its terms to receive an amount in cash equal to $46.00 multiplied by the number of shares of
Company common stock issuable upon the exercise of such Treasury Warrant immediately prior to the execution of the Merger Agreement.
The Company and UBC have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) to use reasonable best efforts to obtain any necessary
regulatory approvals; (ii) not to take any actions that would reasonably be expected to materially delay the obtainment of regulatory approvals and (iii) for the Company to conduct its business in the ordinary course of business during the interim
period between the execution of the Merger Agreement and consummation of the Merger. The Merger Agreement provides certain customary termination rights for both UBC and the Company. There is no assurance that the Company, UBC and Merger Sub will
complete the Merger.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in
its entirety by reference to the full text of the Merger Agreement, which is filed as Exhibit 2.2 hereto and is incorporated by reference herein.
197
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
27.
|
|
P
ACIFIC
C
APITAL
B
ANCORP
(P
ARENT
C
OMPANY
O
NLY
F
INANCIALS
)
|
The condensed financial statements of the Bancorp are presented on the following pages.
PACIFIC CAPITAL BANCORP
Balance Sheets
(dollars and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
67,251
|
|
|
$
|
75,593
|
|
Premises and equipment, net
|
|
|
54
|
|
|
|
|
|
Investment in subsidiary
|
|
|
742,127
|
|
|
|
620,501
|
|
Other assets
|
|
|
4,354
|
|
|
|
2,732
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
813,786
|
|
|
$
|
698,826
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Long term debt and other borrowings
|
|
$
|
51,664
|
|
|
$
|
51,188
|
|
Other liabilities
|
|
|
152
|
|
|
|
4,955
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
51,816
|
|
|
|
56,143
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock ($0.001 par value; 50,000 authorized; 32,905 and 32,901 shares issued and outstanding at
December 31, 2011, and December 31, 2010, respectively)
|
|
|
33
|
|
|
|
33
|
|
|
|
Paid in capital
|
|
|
651,066
|
|
|
|
650,010
|
|
Retained earnings
|
|
|
96,266
|
|
|
|
25,744
|
|
Accumulated other comprehensive income/(loss)
|
|
|
14,605
|
|
|
|
(33,104
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
761,970
|
|
|
|
642,683
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
813,786
|
|
|
$
|
698,826
|
|
|
|
|
|
|
|
|
|
|
198
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
27.
|
P
ACIFIC
C
APITAL
B
ANCORP
(P
ARENT
C
OMPANY
O
NLY
F
INANCIALS
)C
ONTINUED
|
PACIFIC CAPITAL BANCORP
Statement of Operations
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
|
|
Twleve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Monhts
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity/(deficit) in earnings of subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed from continuing operations, net of tax
|
|
$
|
73,419
|
|
|
$
|
27,186
|
|
|
|
|
$
|
(147,742
|
)
|
|
$
|
(440,410
|
)
|
Undistributed from discontinued operations, net of tax
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
6,731
|
|
|
|
35,363
|
|
Interest income
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,467
|
)
|
|
|
(778
|
)
|
|
|
|
|
(1,297
|
)
|
|
|
(2,212
|
)
|
Other income
|
|
|
3
|
|
|
|
20
|
|
|
|
|
|
39
|
|
|
|
(70
|
)
|
Noninterest expense
|
|
|
(2,687
|
)
|
|
|
(658
|
)
|
|
|
|
|
(16,254
|
)
|
|
|
(2,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) before income taxes
|
|
|
68,328
|
|
|
|
25,744
|
|
|
|
|
|
(158,523
|
)
|
|
|
(410,043
|
)
|
Income tax (benefit)/provision
|
|
|
(2,194
|
)
|
|
|
|
|
|
|
|
|
6,381
|
|
|
|
11,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
70,522
|
|
|
|
25,744
|
|
|
|
|
|
(164,904
|
)
|
|
|
(421,261
|
)
|
Dividends and accretion on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
6,938
|
|
|
|
9,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS) APPLICABLE TO COMMON SHAREHOLDERS
|
|
$
|
70,522
|
|
|
$
|
25,744
|
|
|
|
|
$
|
(171,842
|
)
|
|
$
|
(431,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
27.
|
P
ACIFIC
C
APITAL
B
ANCORP
(P
ARENT
C
OMPANY
O
NLY
F
INANCIALS
)C
ONTINUED
|
PACIFIC CAPITAL BANCORP
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars in thousands)
|
|
Twelve
Months
Ended
December
31,
2011
|
|
|
Four
Months
Ended
December
31,
2010
|
|
|
|
|
Eight
Months
Ended
August
31,
2010
|
|
|
Twelve
Months
Ended
December
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) applicable to common shareholders
|
|
$
|
70,522
|
|
|
$
|
25,744
|
|
|
|
|
$
|
(164,904
|
)
|
|
$
|
(421,261
|
)
|
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in subsidiaries earnings, net of dividends
|
|
|
(73,419
|
)
|
|
|
(27,160
|
)
|
|
|
|
|
141,011
|
|
|
|
405,047
|
|
Depreciation and accretion
|
|
|
487
|
|
|
|
153
|
|
|
|
|
|
70
|
|
|
|
176
|
|
Stock-based compensation
|
|
|
1,064
|
|
|
|
|
|
|
|
|
|
2,140
|
|
|
|
3,853
|
|
Net change in other assets
|
|
|
(2,120
|
)
|
|
|
2,532
|
|
|
|
|
|
(5,912
|
)
|
|
|
7,979
|
|
Net change in other liabilities
|
|
|
(4,803
|
)
|
|
|
(10,897
|
)
|
|
|
|
|
16,636
|
|
|
|
1,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED INOPERATING ACTIVITIES
|
|
|
(8,269
|
)
|
|
|
(9,628
|
)
|
|
|
|
|
(10,959
|
)
|
|
|
(2,935
|
)
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital acquisitions
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Advances and investment in subsidiaries
|
|
|
|
|
|
|
(485,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES
|
|
|
(65
|
)
|
|
|
(485,500
|
)
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Cash dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,107
|
)
|
Cash dividends paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,189
|
)
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series C Preferred Stock
|
|
|
|
|
|
|
455,000
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from rights offering
|
|
|
|
|
|
|
76,019
|
|
|
|
|
|
|
|
|
|
|
|
Acquirer expense
|
|
|
|
|
|
|
(7,889
|
)
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
|
|
|
(8
|
)
|
|
|
568,130
|
|
|
|
|
|
(49
|
)
|
|
|
(7,370
|
)
|
(DECREASE)/INCREASE IN CASH AND DUE FROM BANKS
|
|
|
(8,342
|
)
|
|
|
73,002
|
|
|
|
|
|
(11,008
|
)
|
|
|
(10,296
|
)
|
CASH AND DUE FROM BANKS, AT BEGINNING OF PERIOD
|
|
|
75,593
|
|
|
|
2,591
|
|
|
|
|
|
13,599
|
|
|
|
23,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND DUE FROM BANKS, AT END OF PERIOD
|
|
$
|
67,251
|
|
|
$
|
75,593
|
|
|
|
|
$
|
2,591
|
|
|
$
|
13,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
28.
|
C
ONSOLIDATED
Q
UARTERLY
F
INANCIAL
D
ATA
(U
NAUDITED
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
(dollars and shares in thousands, except per share amounts)
|
|
Three
Months
Ended
December
31,
2011
|
|
|
Three
Months
Ended
September
30,
2011
|
|
|
Three
Months
Ended
June
30,
2011
|
|
|
Three
Months
Ended
March
31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
66,811
|
|
|
$
|
66,048
|
|
|
$
|
71,939
|
|
|
$
|
66,496
|
|
Interest expense
|
|
|
9,790
|
|
|
|
10,200
|
|
|
|
11,776
|
|
|
|
12,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
57,021
|
|
|
|
55,848
|
|
|
|
60,163
|
|
|
|
54,312
|
|
Provision for loan losses
|
|
|
1,302
|
|
|
|
787
|
|
|
|
1,799
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
55,719
|
|
|
|
55,061
|
|
|
|
58,364
|
|
|
|
52,645
|
|
Loss on securities, net
|
|
|
|
|
|
|
(35
|
)
|
|
|
(212
|
)
|
|
|
(4
|
)
|
Noninterest income (1)
|
|
|
12,444
|
|
|
|
13,028
|
|
|
|
12,743
|
|
|
|
12,854
|
|
Noninterest expense
|
|
|
56,013
|
|
|
|
48,096
|
|
|
|
50,187
|
|
|
|
48,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (benefit)/expense
|
|
|
12,150
|
|
|
|
19,958
|
|
|
|
20,708
|
|
|
|
17,232
|
|
Income tax (benefit)/expense
|
|
|
(165
|
)
|
|
|
(515
|
)
|
|
|
(266
|
)
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
12,315
|
|
|
$
|
20,473
|
|
|
$
|
20,974
|
|
|
$
|
16,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.64
|
|
|
$
|
0.51
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.64
|
|
|
$
|
0.51
|
|
Earnings per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.64
|
|
|
$
|
0.51
|
|
Diluted
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
$
|
0.64
|
|
|
$
|
0.51
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
32,905
|
|
|
|
32,905
|
|
|
|
32,903
|
|
|
|
32,903
|
|
Diluted
|
|
|
32,918
|
|
|
|
32,958
|
|
|
|
32,916
|
|
|
|
32,909
|
|
(1)
|
Noninterest income is net of gain on securities.
|
201
Pacific Capital Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED
N
OTE
28.
|
C
ONSOLIDATED
Q
UARTERLY
F
INANCIAL
D
ATA
(U
NAUDITED
)C
ONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
|
Predecessor Company
|
|
(dollars and shares in thousands, except per share amounts)
|
|
Three
Months
Ended
December
31,
2010
|
|
|
One
Month
Ended
September
30,
2010
|
|
|
|
|
Two
Months
Ended
August
31,
2010
|
|
|
Three
Months
Ended
June
30,
2010
|
|
|
Three
Months
Ended
March
31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
62,572
|
|
|
$
|
22,168
|
|
|
|
|
$
|
44,393
|
|
|
$
|
69,988
|
|
|
$
|
75,319
|
|
Interest expense
|
|
|
8,547
|
|
|
|
4,021
|
|
|
|
|
|
19,391
|
|
|
|
30,123
|
|
|
|
30,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
54,025
|
|
|
|
18,147
|
|
|
|
|
|
25,002
|
|
|
|
39,865
|
|
|
|
44,505
|
|
Provision for loan losses
|
|
|
535
|
|
|
|
55
|
|
|
|
|
|
15,000
|
|
|
|
56,718
|
|
|
|
99,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/(loss) after provision for loan losses
|
|
|
53,490
|
|
|
|
18,092
|
|
|
|
|
|
10,002
|
|
|
|
(16,853
|
)
|
|
|
(55,360
|
)
|
(Loss)/gain on securities, net
|
|
|
(1
|
)
|
|
|
(31
|
)
|
|
|
|
|
679
|
|
|
|
477
|
|
|
|
4,511
|
|
Noninterest income (1)
|
|
|
16,057
|
|
|
|
4,047
|
|
|
|
|
|
8,760
|
|
|
|
6,544
|
|
|
|
14,826
|
|
Noninterest expense
|
|
|
48,735
|
|
|
|
17,149
|
|
|
|
|
|
47,338
|
|
|
|
51,305
|
|
|
|
51,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income tax (benefit)/expense
|
|
|
20,811
|
|
|
|
4,959
|
|
|
|
|
|
(27,897
|
)
|
|
|
(61,137
|
)
|
|
|
(87,343
|
)
|
Income tax (benefit)/expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,809
|
)
|
|
|
(2,982
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations
|
|
|
20,811
|
|
|
|
4,959
|
|
|
|
|
|
(26,088
|
)
|
|
|
(58,155
|
)
|
|
|
(87,392
|
)
|
Expense from discontinued operations, net of tax
|
|
|
(25
|
)
|
|
|
(1
|
)
|
|
|
|
|
(36
|
)
|
|
|
(162
|
)
|
|
|
(1,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
|
20,786
|
|
|
|
4,958
|
|
|
|
|
|
(26,124
|
)
|
|
|
(58,317
|
)
|
|
|
(80,463
|
)
|
Dividend and accretion on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
1,756
|
|
|
|
2,660
|
|
|
|
2,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) available to common shareholders
|
|
$
|
20,786
|
|
|
$
|
4,958
|
|
|
|
|
$
|
(27,880
|
)
|
|
$
|
(60,977
|
)
|
|
$
|
(82,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.68
|
|
|
$
|
0.51
|
|
|
|
|
$
|
(51.66
|
)
|
|
$
|
(124.00
|
)
|
|
$
|
(186.74
|
)
|
Diluted
|
|
$
|
0.68
|
|
|
$
|
0.17
|
|
|
|
|
$
|
(51.66
|
)
|
|
$
|
(124.00
|
)
|
|
$
|
(184.76
|
)
|
(Loss)/earnings per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
14.81
|
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
14.65
|
|
Earnings/(loss) per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.68
|
|
|
$
|
0.51
|
|
|
|
|
$
|
(55.21
|
)
|
|
$
|
(130.01
|
)
|
|
$
|
(177.32
|
)
|
Diluted
|
|
$
|
0.68
|
|
|
$
|
0.17
|
|
|
|
|
$
|
(55.21
|
)
|
|
$
|
(130.01
|
)
|
|
$
|
(175.44
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,451
|
|
|
|
9,631
|
|
|
|
|
|
505
|
|
|
|
469
|
|
|
|
468
|
|
Diluted
|
|
|
30,462
|
|
|
|
29,094
|
|
|
|
|
|
505
|
|
|
|
469
|
|
|
|
473
|
|
(1)
|
Noninterest income is net of gain on securities.
|
202
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
Based on their evaluation of the Companys disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act), the Companys Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Form 10-K, such disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and
forms and is accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Internal Control over Financial Reporting
Managements Annual Report on Internal Control Over Financial Reporting.
Managements report on the Companys internal control over financial reporting is set forth on page 92 and is
incorporated herein by reference.
Attestation Report of the Independent Public Accounting Firm.
The
attestation report of KPMG LLP on the Companys internal control over financial reporting is set forth on page 95 and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting.
During the fiscal quarter ended December 31, 2011,
there was no change in the Companys internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
ITEM 9B.
|
OTHER INFORMATION
|
None.
203
GLOSSARY
Accretion:
Accretion is the recognition as interest income of the excess of the par
value of a security over its cost at the time of purchase.
AOCI:
Accumulated Other Comprehensive Income
AFS:
Available for sale
AICPA:
American Institute of Certified Public Accountants
ALLL:
Allowance for loan and lease loss
ASC:
Accounting Standards Codification
ASU:
Accounting Standards Update
ATM:
Automated Teller Machine
Average balances:
Average balances
are daily averages, i.e., the average is computed using the balances for each day of the year, rather than computing the average of the first and last day of the year.
Basis Points:
Basis points are a percentage expressed by multiplying a percentage by 100. For example, 1.0% is 100 basis points.
Basis risk:
The risk that financial instruments have interest rates that differ in how often they change, the extent to which they
change, and whether they change sooner or later than other interest rates.
BHCA:
Bank Holding Company Act
BOLI:
Bank Owned Life Insurance
BSA:
Bank Secrecy Act
CD:
Certificate of Deposit
CDARs:
Certificate of Deposit Account Registry Service
CDI:
Core Deposit Intangible
CEO:
Chief Executive Officer
CFO:
Chief Financial Officer
CFP:
Contingency Funding Plan
CMO:
Collateralized Mortgage Obligation
Coupon rate:
The stated
rate of the loan or security.
COSO:
Committee of Sponsoring Organizations
CRA:
Community Reinvestment Act
CRI:
Customer Relationship Intangible
Credit risk:
The risk that a
debtor will not repay according to the terms of the debt contract.
DIF:
Deposit Insurance Fund
Dodd-Frank:
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Effective tax rate:
The effective tax rate is the amount of the combined current and deferred tax expense divided by the
Companys income before taxes as reported in the Consolidated Statements of Operations.
ESOP:
Employee Stock
Ownership Plan
Economic Value of Equity (EVE):
A cash flow calculation that takes the present value of all asset cash
flows and subtracts the present value of all liability cash flows.
FASB:
Financial Accounting Standards Board
FBSLO:
First Bank of San Luis Obispo
FDIA:
Federal Deposit Insurance Act
FDIC:
Federal Deposit
Insurance Corporation
FHLB:
Federal Home Loan Bank
FHLMC:
Federal Home Loan Mortgage Corporation
FICO:
Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the DIF
FNB:
First National Bank of Central California
204
GLOSSARYC
ONTINUED
FNMA:
Federal National Mortgage Association
FRB:
Federal Reserve Bank
GAAP:
Accounting Principles generally accepted in the United States.
GLBA:
Gramm-Leach-Bliley Act
GNMA:
Government National Mortgage Association
HAMP:
Home
Affordable Modification Program
I&I Plan:
Incentive and Investment Plan, which permits contributions by the
Company to be invested in various mutual funds chosen by the Employees.
Interest rate risk:
The risk of adverse
impacts of changes in interest rates on financial instruments.
IRC:
Internal Revenue Code
IRS:
Internal Revenue Service
JH:
Refers to both Jackson Hewitt, Inc. and Jackson Hewitt Technology Service.
LIBOR:
London Inter-Bank Offered Rate
LIHTCP:
Low Income Housing
Tax Credit Partnership
LSR:
Loan Servicing Right
Market risk:
The risk that the market values of assets or liabilities on which the interest rate is fixed will increase or
decrease with changes in market interest rates.
MCM:
Morton Capital Management
MD&A:
Management Discussion and Analysis
MBS:
Mortgage Backed Securities
MSR:
Mortgage Servicing Right
NASDAQ:
National Association of Securities Dealers Automated Quotations
Net Interest Income (NII):
Net interest income is the difference between the interest earned on the loans and securities
portfolios and the interest paid on deposits and wholesale borrowings.
Net interest margin:
Net interest margin is net
interest income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those
assets.
NOW:
Negotiable Order of Withdrawal
OCC:
Office of the Comptroller of the Currency
OCI:
Other
Comprehensive Income
OREO:
Other Real Estate Owned
OTC:
Over the counter
OTTI:
Other-than-temporary impairment
PATRIOT Act:
Under the
PATRIOT Act, financial institutions are required to establish and maintain anti-money laundering programs.
PCBC:
Pacific Capital Bancorp
PCBNA:
Pacific Capital Bank, National Association
PCI:
Purchased Credit Impaired loans
RAL:
Refund anticipation loan
RAL and RT Programs:
There are two
products related to income tax returns filed electronically, RAL and RT. The Company provided these products to taxpayers who filed their returns electronically nationwide.
Repos:
Repurchase agreements are a form of lending or borrowing whereby the legal form of the transaction is the purchase or sale of securities with the later re-sale or re-purchase at a higher
price than the original transaction. The excess of the re-sale or re-purchase price over the original price represents interest income or expense.
205
GLOSSARYC
ONTINUED
Reserve Bank
Federal Reserve Bank of San Francisco
Reserve Board
Board of Governors of the Federal Reserve System
REWA:
R.E. Wacker Associates
RT:
Refund transfer
SAR:
Stock Appreciation Right
Sarbanes-Oxley Act:
In 2002, the Sarbanes-Oxley Act (SOX) was enacted as Federal legislation. This legislation imposes
a number of new requirements on financial reporting and corporate governance on all corporations.
SB Acquisition:
SB
Acquisition Company LLC
SBA:
Small Business Administration
SBB:
San Benito Bank
SBB&T:
Santa Barbara Bank & Trust
SBTPG:
Santa Barbara Tax Products Group, LLC
SEC:
Securities and Exchange Commission
SBNB:
Santa Barbara National Bank
SOX:
Sarbanes-Oxley Act
SVNB:
South Valley National Bank
TLGP:
FDICs Temporary Liquidity Guarantee Program
TARP:
Troubled Asset Relief Program
TARP CPP:
TARP Capital Purchase Program
TDR:
Troubled debt restructured, restructured loans
TT&L:
Treasury tax and loan
U.S. Treasury:
United States
Department of the Treasury
206
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item is incorporated by reference from the Companys Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders to be held on May 10, 2012.
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The information required by this item is incorporated by reference from the Companys Definitive Proxy Statement for the 2012 Annual
Meeting of Shareholders to be held on May 10, 2012.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated by reference from the Companys Definitive Proxy Statement for the 2012 Annual
Meeting of Shareholders to be held on May 10, 2012.
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by this item is incorporated by reference from the Companys Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders to be held on May 10, 2012.
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required by this item is incorporated by reference from the Companys Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders to be held on May 10, 2012.
207
PART IV
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)
|
1. FINANCIAL STATEMENTS
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The listing of financial statements required by this item is set forth in the index under Item 8 of this Annual Report on Form 10-K.
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2.
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FINANCIAL STATEMENT SCHEDULES
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The listing of supplementary financial statement schedules required by this item is set forth in the index under Item 8 of this Annual Report on Form 10-K.
The listing of exhibits required by this item is set forth in the Exhibit Index beginning on page 210 of this Annual Report on Form 10-K, which Exhibit Index indicates each exhibit that is a
management contract or compensatory plan or arrangement.
See exhibits listed in Exhibit Index on page 210 of this report.
(c)
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FINANCIAL STATEMENT SCHEDULES
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There are no financial statement schedules required by Regulation S-X that have been excluded from the annual report to shareholders.
208
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report
to be signed by the undersigned, thereunto duly authorized.
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Pacific Capital Bancorp
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By
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/s/ Carl B. Webb
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March 15, 2012
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Carl B. Webb
Chief Executive Officer
(Principal Executive Officer)
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Date
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By
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/s/Mark K. Olson
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March 15, 2012
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Mark K. Olson
Chief Financial Officer
(Principal Financial Officer)
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Date
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the dates indicated.
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/s/ Gerald J. Ford
Gerald J. Ford
Chairman of the Board
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March 15, 2012
Date
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/s/ Carl B. Webb
Carl B. Webb
Chief Executive Officer
(Principal Executive Officer)
Director
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March 15, 2012
Date
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/s/ George S. Leis
George S. Leis
President & Chief Operating Officer Director
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March 15, 2012
Date
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/s/H. Gerald Bidwell
H. Gerald Bidwell
Director
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March 15, 2012
Date
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/s/ Edward E. Birch
Edward E. Birch
Director
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March 15, 2012
Date
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/s/S. Lachlan Hough
S. Lachlan Hough
Director
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March 15, 2012
Date
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/s/ Roger C. Knopf
Roger C. Knopf
Director
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March 15, 2012
Date
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/s/William R. Loomis, Jr.
William R. Loomis, Jr.
Director
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March 15, 2012
Date
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/s/ John R. Mackall
John Mackall
Director
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March 15, 2012
Date
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/s/Richard A. Nightingale
Richard A. Nightingale
Director
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March 15, 2012
Date
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/s/ Kathy J. Odell
Kathy J. Odell
Director
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March 15, 2012
Date
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209
EXHIBIT INDEX TO PACIFIC CAPITAL BANCORP FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2011
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Exhibit
Number
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Description
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2.1
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Agreement and Plan of Merger dated as of December 30, 2010, by and between Pacific Capital Bancorp and Pacific Capital Merger Sub, Inc., incorporated
herein by reference to Exhibit 2.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010.
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2.2
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Agreement and Plan of Merger dated as of March 9, 2012, by and among UnionBankCal Corporation, Pebble Merger Sub Inc. and Pacific Capital
Bancorp.
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3.1
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Certificate of Incorporation, as amended, of Pacific Capital Bancorp, incorporated herein by reference to Exhibit 3.1 to the Current Report on Form
8-K of Pacific Capital Bancorp filed December 30, 2010.
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3.2
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Bylaws of Pacific Capital Bancorp, incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K of Pacific Capital Bancorp for
the fiscal year ended December 31, 2010.
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4.1
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Amended and Restated Warrant dated August 31, 2010, incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K of Pacific
Capital Bancorp filed on September 2, 2010.
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10.1
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Pacific Capital Bancorp Amended and Restated Directors Stock Option Plan, as amended and restated effective October 1994, incorporated herein by
reference to Exhibit 10.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.1.1
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Amendment Regarding Change in Control to Pacific Capital Bancorp Amended and Restated Directors Stock Option Plan dated December 10, 1998, incorporated
herein by reference to Exhibit 10.1.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.2
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1998 Amended and Restated Trust Agreement of Pacific Capital Bancorp Voluntary Employees Beneficiary Association, effective as of December 30,
1998, by and between Pacific Capital Bancorp and Santa Barbara Bank & Trust, incorporated herein by reference to Exhibit 10.2 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010.
x
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10.2.1
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Amendment Number One to 1998 Amended and Restated Trust Agreement of Pacific Capital Bancorp Voluntary Employees Beneficiary Association,
effective as of April 29, 2010, by and between Pacific Capital Bancorp and Santa Barbara Bank & Trust, incorporated herein by reference to Exhibit 10.2.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended
December 31, 2010. x
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10.3
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Pacific Capital Bancorp Amended and Restated 1996 Directors Stock Plan, as amended November 2004, incorporated herein by reference to Exhibit 10.3 to
the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.3.1
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Form of Directors Stock Option Agreement for the Pacific Capital Bancorp Amended and Restated 1996 Directors Stock Plan, incorporated herein by
reference to Exhibit 10.8.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2009. x
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10.3.2
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Form of Directors Reload Stock Option Agreement for the Pacific Capital Bancorp Amended and Restated 1996 Directors Stock Plan, incorporated herein by
reference to Exhibit 10.1.8.2 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2004. x
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210
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Exhibit
Number
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Description
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10.4
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Pacific Capital Bancorp 1998 Amended and Restated Key Employee Retiree Health Plan dated December 30, 1998, incorporated herein by reference to
Exhibit 10.1.5 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2004. x
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10.4.1
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Notice of Changes to Pacific Capital Bancorp 1998 Amended and Restated Key Employee Health Plan, effective as of March 1, 2010, incorporated herein by
reference to Exhibit 10.4.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.5
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Pacific Capital Bancorp 1998 Amended and Restated Retiree Health Plan (Non-Key Employees) dated December 30, 1998, incorporated herein by reference
to Exhibit 10.6.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2004. x
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10.5.1
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Notice of Changes to Pacific Capital Bancorp 1998 Amended and Restated Health Plan (Non-Key Employees), effective as of March 1, 2010, incorporated
herein by reference to Exhibit 10.5.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.6
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Pacific Capital Bancorp Amended and Restated Incentive and Investment and Salary Savings Plan, effective as of January 1, 2009, incorporated herein
by reference to Exhibit 10.6 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.6.1
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First Amendment to the Pacific Capital Bancorp Amended and Restated Incentive and Investment and Salary Savings Plan, effective as of March 1, 2010,
incorporated herein by reference to Exhibit 10.6.1 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.6.2
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Second Amendment to the Pacific Capital Bancorp Amended and Restated Incentive and Investment and Salary Savings Plan, effective as of August 20, 2010,
incorporated herein by reference to Exhibit 10.6.2 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.6.3
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Third Amendment to the Pacific Capital Bancorp Amended and Restated Incentive and Investment and Salary Savings Plan, effective as of August 26, 2010,
incorporated herein by reference to Exhibit 10.6.3 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.6.4
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Fourth Amendment to the Pacific Capital Bancorp Amended and Restated Incentive and Investment and Salary Savings Plan, effective as of January 1, 2011,
incorporated herein by reference to Exhibit 10.6.4 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.7
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Pacific Capital Bancorp 2002 Stock Plan, as amended and restated as of December 12, 2006, incorporated herein by reference to Exhibit 10.1 to the
Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2009. x
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10.7.1
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Form of Restricted Stock Agreement for the Pacific Capital Bancorp 2002 Stock Plan, incorporated herein by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Pacific Capital Bancorp for the fiscal quarter ended June 30, 2008. x
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10.7.2
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Form of Stock Option Agreement for the Pacific Capital Bancorp 2002 Stock Plan, incorporated herein by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q of Pacific Capital Bancorp for the fiscal quarter ended June 30, 2008. x
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211
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Exhibit
Number
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Description
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10.7.3
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Form of Restricted Reload Stock Option Agreement for the Pacific Capital Bancorp 2002 Stock Plan, incorporated herein by reference to Exhibit 10.1.3 to
the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2009. x
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10.8
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Pacific Capital Bancorp Deferred Compensation Plan, effective January 1, 2005, incorporated herein by reference to Exhibit 10.1.15 to the Annual
Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2005. x
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10.8.1
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Amendment to Pacific Capital Bancorp Deferred Compensation Plan, effective as of November 8, 2010, incorporated herein by reference to Exhibit 10.8.1
to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2010. x
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10.9
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Pacific Capital Bancorp Summary of Non-Employee Director Compensation, effective July 1, 2007, incorporated herein by reference to Exhibit 99.1 to
the Current Report on Form 8-K of Pacific Capital Bancorp filed September 25, 2007. x
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10.10
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Pacific Capital Bancorp 2008 Equity Incentive Plan, incorporated herein by reference to Exhibit A to the Definitive Proxy Statement on Schedule 14A
of Pacific Capital Bancorp filed March 19, 2008. x
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10.10.1
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Form of Notice of Grant and Restricted Stock Agreement for Non-employee Directors for the Pacific Capital Bancorp 2008 Equity Incentive Plan,
incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Pacific Capital Bancorp for the fiscal quarter ended June 30, 2008. x
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10.10.2
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Form of Notice of Grant and Restricted Stock Agreement for the Pacific Capital Bancorp 2008 Equity Incentive Plan, incorporated herein by reference to
Exhibit 10.24.2 to the Annual Report on Form 10-K of Pacific Capital Bancorp for the fiscal year ended December 31, 2008. x
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10.11
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Employment Agreement dated March 11, 2010, by and among Pacific Capital Bank, N.A., Pacific Capital Bancorp and George S. Leis, incorporated herein
by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed on March 17, 2010. x
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10.11.1
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First Amendment to Employment Agreement dated as of October 12, 2010, by and among Pacific Capital Bancorp, Pacific Capital Bank, N.A. and George S.
Leis, incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed October 13, 2010. x
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10.12
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Form of Consent, executed by each of the senior executive officers and certain other employees of Pacific Capital Bancorp, incorporated herein by
reference to Exhibit 10.4 to the Current Report on Form 8-K of Pacific Capital Bancorp filed September 2, 2010. x
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10.13
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Form of Waiver, executed by each of the senior executive officers and certain other employees of Pacific Capital Bancorp, incorporated herein by
reference to Exhibit 10.5 to the Current Report on Form 8-K of Pacific Capital Bancorp filed September 2, 2010. x
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10.14
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Pacific Capital Bancorp 2010 Equity Incentive Plan, incorporated herein by reference to Annex C to the Definitive Information Statement on Schedule
14C of Pacific Capital Bancorp filed December 6, 2010. x
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10.14.1
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Form of Notice of Grant and Stock Option Agreement for the Pacific Capital Bancorp 2010 Equity Incentive Plan, incorporated herein by reference to
Exhibit 10.2 to the Registration Statement on Form S-8 of Pacific Capital Bancorp filed December 29, 2010. x
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212
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Exhibit
Number
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Description
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10.14.2
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Form of Notice of Grant and Restricted Stock Agreement for the Pacific Capital Bancorp 2010 Equity Incentive Plan, incorporated herein by reference to
Exhibit 10.3 to the Registration Statement on Form S-8 of Pacific Capital Bancorp filed December 29, 2010. x
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10.14.3
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Form of Restricted Stock Unit Agreement for the Pacific Capital Bancorp 2010 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to
the Current Report on Form 8-K of Pacific Capital Bancorp filed June 15, 2011. x
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10.15
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Letter Agreement dated as of November 21, 2008, including the Securities Purchase AgreementStandard Terms incorporated by reference therein, by
and between the United States Department of the Treasury and Pacific Capital Bancorp, incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed November 26, 2008.
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10.16
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Purchase and Sale Agreement dated January 14, 2010, by and among Santa Barbara Tax Products Group, LLC, Pacific Capital Bank, N.A. and Pacific
Capital Bancorp, incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed January 15, 2010.
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10.17
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Business Transition Agreement dated January 14, 2010, by and between Pacific Capital Bank, N.A. and Santa Barbara Tax Products Group, LLC,
incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pacific Capital Bancorp filed January 15, 2010.
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10.18
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Investment Agreement dated April 29, 2010, by and among Pacific Capital Bancorp, Pacific Capital Bank, National Association and SB Acquisition
Company LLC, incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed May 4, 2010.
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10.18.1
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Exhibits to Investment Agreement dated April 29, 2010, by and among Pacific Capital Bancorp, Pacific Capital Bank, National Association and SB
Acquisition Company LLC, incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pacific Capital Bancorp filed May 4, 2010.
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10.19
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Written Agreement dated May 11, 2010, by and between Pacific Capital Bancorp and the Board of Governors of the Federal Reserve System, incorporated
herein by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Pacific Capital Bancorp for the fiscal quarter ended March 31, 2010.
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10.20
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Consent Order dated May 11, 2010, issued by the Comptroller of the Currency in the matter of Pacific Capital Bank, National Association, incorporated
herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q of Pacific Capital Bancorp for the fiscal quarter ended March 31, 2010.
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10.20.1
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Modification of Existing Consent Order dated September 2, 2010, issued by the Comptroller of the Currency in the matter of Pacific Capital Bank,
National Association, incorporated herein by reference to Exhibit 10.28 to the Registration Statement on Form S-1 of Pacific Capital Bancorp filed October 5, 2010.
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10.20.2
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Termination of Consent Orders dated December 28, 2010, issued by the Comptroller of the Currency in the matter of Santa Barbara Bank & Trust,
National Association.
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213
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Exhibit
Number
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Description
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10.21
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Stipulation and Consent to the Issuance of a Consent Order dated May 11, 2010, by and between the Comptroller of the Currency and Pacific Capital
Bank, National Association, incorporated herein by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q of Pacific Capital Bancorp for the fiscal quarter ended March 31, 2010.
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10.22
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Exchange Agreement dated as of July 26, 2010, by and between Pacific Capital Bancorp and the United States Department of the Treasury, incorporated
herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed July 27, 2010.
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10.22.1
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Annex A to the Exchange Agreement dated as of July 26, 2010, by and between Pacific Capital Bancorp and the United States Department of the
TreasuryForm of Warrant, incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K of Pacific Capital Bancorp filed July 27, 2010.
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10.22.2
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Annex B to the Exchange Agreement dated as of July 26, 2010, by and between Pacific Capital Bancorp and the United States Department of the
TreasuryForm of New Certificate of Determination, incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K of Pacific Capital Bancorp filed July 27, 2010.
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10.23
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Registration Rights Agreement dated as of August 31, 2010, by and between Pacific Capital Bancorp and SB Acquisition Company LLC, incorporated herein
by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed on September 2, 2010.
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10.24
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Form of Indemnification Agreement, by and between Pacific Capital Bank, N.A. and its directors and certain officers, incorporated herein by reference
to Exhibit 10.3 to the Current Report on Form 8-K of Pacific Capital Bancorp filed on September 2, 2010.
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10.25
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Form of Indemnification Agreement, by and between Pacific Capital Bancorp and its directors and certain officers, incorporated herein by reference to
Exhibit 10.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed on December 30, 2010.
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10.26
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Pacific Capital Bancorp 2011 Annual Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of Pacific
Capital Bancorp filed on March 8, 2011. x
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16.1
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Letter dated June 15, 2011, from Ernst & Young LLP to the United States Securities and Exchange Commission, incorporated herein by reference to
Exhibit 16.1 to the Current Report on Form 8-K of Pacific Capital Bancorp filed on June 15, 2011.
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21.
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Subsidiaries of the registrant.
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23.1
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Consent of KPMG LLP.
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23.2
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Consent of Ernst & Young LLP.
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31.
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Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.1
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Certification of Carl B. Webb.
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31.2
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Certification of Mark K. Olson.
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32.
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Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Carl B. Webb and Mark K. Olson.
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214
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Exhibit
Number
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Description
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101.INS
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XBRL Instance Document.
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101.SCH
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XBRL Taxonomy Extension Schema Document.
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document.
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document.
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document.
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document.
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Shareholders may obtain a copy of any exhibit by writing to:
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Carol Zepke, Corporate Secretary
Pacific Capital Bancorp
P.O. Box 60839
Santa Barbara, CA 93160
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x
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Indicates management contract or compensatory plan or arrangement.
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215