Edgar Filing: FIRST PACTRUST BANCORP INC

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-35522

FIRST PACTRUST BANCORP, INC.

(Exact name of registrant as specified in its charter)


Maryland		04-3639825
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
18500 Von Karman Ave, Suite 1100, Irvine, California		92612
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (949) 236-5211

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share

7.50% Senior Notes Due April 15, 2020

(Title of class)

The NASDAQ Stock Market LLC

(Name of each exchange on which registered)

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 ¨. 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 ¨. 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 x. NO ¨.

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 x NO ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s 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. ¨

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 definition of “large accelerated filer,” “accelerated filer,” “and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ YES. x NO.

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on the NASDAQ Stock Market LLC as of June 29, 2012, was $123.8 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of March 3, 2013, the registrant had outstanding 10,806,368 shares of voting common stock and 1,112,188 shares of Class B non-voting common stock.

DOCUMENTS INCORPORATED BY REFERENCE

PART III of Form 10-K—Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held in 2013.

FIRST PACTRUST BANCORP, INC. AND SUBSIDIARIES

FORM 10-K

December 31, 2012

INDEX


		Page
	PART I
Item 1	Business		1
Item 1A	Risk Factors		46
Item 1B	Unresolved Staff Comments		60
Item 2	Properties		60
Item 3	Legal Proceedings		63
Item 4	Mine Safety Disclosures		63

	PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities		64
Item 6	Selected Financial Data		67
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		69
Item 7A	Quantitative and Qualitative Disclosures about Market Risk		95
Item 8	Financial Statements and Supplementary Data		97
Item 9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		181
Item 9A	Controls and Procedures		181
Item 9B	Other Information		183

	PART III
Item 10	Directors and Executive Officers and Corporate Governance		184
Item 11	Executive Compensation		184
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		184
Item 13	Certain Relationships and Related Transactions and Director Independence		185
Item 14	Principal Accountant Fees and Services		185

	PART IV
Item 15	Exhibits and Financial Statement Schedules		186
	Signatures		191

PART I

Item 1. Business

General

First PacTrust Bancorp, Inc. is a multi-bank holding company of Pacific Trust Bank, a federal savings bank (“PacTrust Bank”), and Beach Business Bank, a California-chartered bank (“Beach” and collectively with PacTrust Bank, the “Banks”). First PacTrust was incorporated under Maryland law in March 2002 to hold all of the stock of PacTrust Bank upon completion in August 2002 of PacTrust Bank’s conversion from the mutual to the stock form of ownership and the concurrent initial public offering of First PacTrust’s common stock. Beach became a wholly owned subsidiary of First PacTrust through an acquisition we completed in July 2012. See “—Recent Acquisitions.” Unless the context otherwise requires, all references to “First PacTrust” refer to First PacTrust Bancorp, Inc. excluding its consolidated subsidiaries and all references to the “Company,” “we,” “us” or “our” refer to First PacTrust Bancorp, Inc. including its consolidated subsidiaries.

As a bank holding company, First PacTrust generally is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by regulation or order of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), have been identified as activities closely related to the business of banking or managing or controlling banks. First PacTrust is not an operating company and its assets primarily consist of the outstanding stock of the Banks, a non-banking subsidiary formed to hold real estate, cash and fixed income investments. From time to time, First PacTrust has purchased impaired loans and leases, investments and other real estate owned (“OREO”) from the Banks to assure the Banks’ safety and soundness. First PacTrust has no significant liabilities at the holding company level other than $82.7 million in Senior Notes and related interest payments, compensation of its executive employees and directors, as well as expenses related to strategic initiatives. First PacTrust also utilizes the support staff and offices of the Banks and pays the Banks for these services. If First PacTrust expands or changes its business in the future, it may hire additional employees of its own.

The Banks offer a variety of financial services to meet the banking and financial needs of the communities we serve. PacTrust Bank is headquartered in Orange County, California, and Beach is headquartered in Los Angeles County, California, and as of December 31, 2012 the Banks operated 19 banking offices in San Diego, Riverside, Orange, and Los Angeles Counties in California and 24 single family mortgage loan production offices in California, Arizona, Oregon and Washington.

The principal business of PacTrust Bank consists of attracting retail deposits from the general public and investing these funds primarily in loans secured by first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, multi-family and commercial real estate and commercial business loans. PacTrust Bank solicits deposits in PacTrust Bank’s market area and, to a lesser extent, from institutional depositors nationwide and may accept brokered deposits.

PacTrust Bank consumer product and service offerings include checking, savings, money market, certificates of deposit, retirement accounts as well as mobile, online & telephone banking, automated bill payment, electronic statements, safe deposit boxes, direct deposit and wire transfers. Bank customers also have the ability to access their accounts through a nationwide network of over 30,000 surcharge-free ATMs.

PacTrust Bank offers its business customers services including commercial and industrial lending, Small Business Administration (“SBA”) lending, equipment leasing & financing, cash & treasury management, card payment services, remote deposit, ACH origination and employer/employee retirement planning.

Beach is a community bank engaged in the general commercial banking business. Beach offers a variety of deposit and loan products to individuals and small to mid-sized businesses. Beach’s business plan emphasizes

providing highly specialized financial services in a personalized manner to individuals and businesses in its service area. Through a division called The Doctors Bank^®, Beach also serves physicians and dentists nationwide. In addition, Beach specializes in providing SBA loans, as member of the SBA’s Preferred Lender Program.

As a bank holding company, First PacTrust is subject to regulation by the Federal Reserve Board. As a federal savings bank, PacTrust Bank is subject to regulation primarily by the Office of the Comptroller of the Currency (the “OCC”). As a California-chartered bank that is not a member of the Federal Reserve System, Beach is subject to regulation primarily by the California Department of Financial Institutions (the “DFI”) and the Federal Deposit Insurance Corporation (the “FDIC”). See “Regulation and Supervision.”

The principal executive offices of the Company are located at 18500 Von Karman Avenue, Suite 1100, California, and its telephone number is (949) 236-5211. First PacTrust’s voting common stock is listed on the NASDAQ Stock Market under the symbol BANC and its 7.50% Senior Notes Due April 15, 2020 are listed on the NASDAQ Stock Market under the symbol BANC.L.

The reports, proxy statements and other information that First PacTrust files with the SEC, as well as news releases, are available free of charge through the Company’s Internet site at http://www.firstpactrustbancorp.com. This information can be found on the First PacTrust Bancorp, Inc. “News” or “SEC Filings” pages of our Internet site. The annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed and furnished pursuant to Section 13(a) of the Exchange Act are available as soon as reasonably practicable after they have been filed or furnished to the SEC. Reference to the Company’s Internet address is not intended to incorporate any of the information contained on our Internet site into this document.

Strategy

First PacTrust strives to be a quality high performing community bank holding company for the long-term benefit of our shareholders, customers and employees. Our overall strategy is comprised of specific growth and operating objectives. The key elements of that strategy are:

Growth Strategies

•

Expand our franchise through acquisitions or the establishment of new branches or banks in markets that offer regional continuity, such as the greater Southern California market.

•

Continue as a public company with a common stock that is quoted and traded on a national stock market. In addition to providing access to growth capital, we believe a “public currency” provides flexibility in structuring acquisitions and will allow us to attract and retain qualified management through equity-based compensation.

•

Diversify the residential lending platform through additional lending channels such as correspondent lending, warehouse lending and wholesale lending, which will result in expanding production sources and broadening our own product mix and geographic concentration.

•

Enhance the residential lending product mix and loan sale alternatives by seeking Ginnie Mae approval to originate qualified loans that are subsequently sold as mortgage backed securities with a full government credit guaranty.

•

Expand and enhance our mortgage banking operations. As a result of our 2012 Gateway Bancorp (“Gateway”) acquisition, we acquired a well established mortgage banking platform (Mission Hills Mortgage Banking). The platform provided us with 24 loan production offices in California, Arizona, Oregon and Washington.

•

Increase our SBA production. SBA loans provide us an option to portfolio or to sell the guaranteed portion of loans in the secondary market. The 2012 acquisitions of Beach and Gateway provided us with a well established SBA platform from which to grow. With centralized underwriting in Southern California and strong marketing personnel, we anticipate both interest income and non-interest income will continue to increase in the near term.

•

Purchases of credit impaired loan pools. We completed three bulk acquisitions of credit impaired loans during 2012 (subsequent to the Beach and Gateway acquisitions), at a significant discount to both the current property value of the collateral and the note balance. We intend to continue the purchase of such loans where we believe we can obtain an attractive risk adjusted return as part of our portfolio diversification.

•

Expand our commercial lending portfolios to diversify both our customer base and maturities of the loan portfolio and to benefit from the low cost deposits associated with individual accounts and the professional, general business and service industries that are common commercial borrowers. During 2012, we successfully completed two acquisitions that included a team of local commercial lending officers which has given us a greater network and far greater capacity to attract commercial relationships.

•

Continue to grow our commercial real estate lending by leveraging the backgrounds and contacts of our experienced lending officers to expand market share.

Operating Strategies

•

Sustained focus on residential lending profit margins by building a scalable platform and continuously driving efficiency and productivity gains through implementation of technology and process enhancements.

•

Enhance our risk management functions by proactively managing sound procedures and committing experienced human resources to this effort. We seek (i) to identify risks in all functions of our business, including credit, operations and asset and liability management, (ii) to evaluate such risks and their trends and (iii) to adopt strategies to manage such risks based upon our evaluations.

•

Maintain high asset quality by continuing to utilize rigorous loan underwriting standards and credit risk management practices.

•

Continue to actively manage interest rate and market risks by closely matching the volume and maturity of our interest sensitive assets to our interest sensitive liabilities in order to mitigate adverse effects of rapid changes in interest rates on either side of our balance sheet.

•

Expand residential, commercial and industrial, as well as small business relationships which commonly are associated with deposits that are a lower cost and more stable funding source.

Recent Acquisitions

Beach. On July 1, 2012, we completed our acquisition of Beach for aggregate cash consideration of approximately $39.1 million plus one-year warrants to purchase up to an aggregate of 1.4 million shares of First PacTrust common stock at an exercise price of $14.00 per share. As of July 1, 2012, Beach had total assets of $312.0 million, total loans of $229.7 million and total deposits of $271.3 million. Upon the completion of the acquisition, Beach became a wholly owned subsidiary of First PacTrust.

Gateway. On August 18, 2012, we completed our acquisition of Gateway, the holding company for Gateway Business Bank, for an aggregate purchase price of $15.4 million in cash. In connection with the acquisition, Gateway Business Bank was merged into PacTrust Bank. As of August 18, 2012, Gateway Business Bank had total assets of $178.0 million, total loans of $131.3 million and total deposits of $143.0 million. The acquisition

included Mission Hills Mortgage Bankers (“MHMB”), the mortgage banking division of Gateway Business Bank. From 2006 through the acquisition date, MHMB has originated over $6.3 billion of mostly prime mortgage loans, a majority of which have been sold servicing-released through correspondent relationships with financial institutions including through Government Sponsored Enterprises (“GSEs”). Prior to merging with PacTrust Bank, Gateway Business Bank independently operated two full service branches in Laguna Hills and Lakewood, California and MHMB operated 24 retail mortgage production offices throughout California, Oregon, Washington and Arizona. MHMB now operates as a division of PacTrust Bank.

Pending Acquisition

Private Bank of California

On August 21, 2012, First PacTrust and Beach entered into a definitive agreement to acquire all the outstanding stock of The Private Bank of California, a California-chartered bank (“PBOC”). Pursuant to the agreement, if the PBOC merger is completed, PBOC will merge with and into Beach (or at the option of First PacTrust, PacTrust Bank). At December 31, 2012, PBOC had total assets of $712.4 million, total loans, net of allowance for loan losses, of $367.4 million and total deposits of $582.1 million. PBOC provides a range of financial services, including credit and deposit products as well as cash management services, from its headquarters located in the Century City area of Los Angeles, California as well as a full-service branch in Hollywood and a loan production office in downtown Los Angeles. PBOC’s target clients include high-net worth and high income individuals, business professionals and their professional service firms, business owners, entertainment service businesses and non-profit organizations.

If the PBOC merger is completed, each holder of PBOC common stock will receive a proportional share of 2,083,333 shares of First PacTrust common stock and $24,887,513 in cash, in each case subject to certain adjustments. If the total value of the merger consideration, calculated for this purpose using $12.00 as the value of one share of First PacTrust common stock, would otherwise exceed an amount equal to 1.30 times PBOC’s tangible common equity as of the last business day of the month immediately prior to the closing of the merger (after subtracting from tangible common equity certain unaccrued one-time PBOC merger-related costs and expenses) then the cash portion of the merger consideration will be adjusted downward until the total value of the merger consideration is equal to such amount. We plan to finance the cash portion of the merger consideration with cash on hand.

In addition, if the PBOC merger is completed, each share of preferred stock issued by PBOC as part of the Small Business Lending Fund (“SBLF”) program of the United States Department of Treasury (10,000 shares in the aggregate with a liquidation preference amount of $1,000 per share) will be converted automatically into one substantially identical share of First PacTrust preferred stock. The terms of the preferred stock to be issued by First PacTrust in exchange for the PBOC preferred stock are substantially identical to the preferred stock previously issued by First PacTrust (and currently outstanding) as part of its own participation in the SBLF program (32,000 shares in the aggregate with a liquidation preference amount of $1,000 per share).

Completion of the PBOC merger is subject to certain conditions, including receipt of approval of the shareholders of PBOC and regulatory approvals. The acquisition will be accounted for under the acquisition method of accounting. We expect to complete the transaction in the second quarter of 2013, although we cannot assure you that the transaction will close on that timetable or at all.

The Palisades Group

On November 30, 2012, First PacTrust entered into a Units Purchase Agreement, dated as of November 30, 2012 (the “Agreement”), by and among First PacTrust, Stephen Kirch, Jack Macdowell and The Palisades Group, LLC (“Palisades”), pursuant to which First PacTrust has an irrevocable option to purchase for an aggregate consideration of $500,000 (i) all of the currently issued and outstanding membership interests in

Palisades, which are presently held by Messrs. Kirch and Macdowell, and (ii) newly-issued membership interests in Palisades. Of the $500,000 aggregate consideration payable by First PacTrust in respect of the Agreement, $450,000 is expected to be retained by Palisades as working capital. The option is exercisable in First PacTrust’s sole discretion. In the event the option is exercised, the purchase of the membership interests contemplated by the Agreement will be subject to the satisfaction of certain closing conditions, including among other matters, the receipt of all required regulatory approvals, the amendment and restatement of the Palisades limited liability company agreement in a form satisfactory to First PacTrust, and the execution of agreements providing for the continued employment of Messrs. Kirch and Macdowell by Palisades on terms satisfactory to First PacTrust. First PacTrust entered into the Agreement in connection with its ongoing evaluation of certain non-deposit operations and strategies, including First PacTrust’s and its subsidiaries’ mortgage portfolio strategies.

Palisades was formed in 2012 and seeks to provide certain management, advisory and administrative services to mortgage loan portfolios held by public and private investors. Palisades currently provides such services to PacTrust Bank.

Acquisitions of Credit Impaired Loans

During the course of 2012, the Company completed three bulk acquisitions of generally performing residential mortgage loans whose characteristics and payment history were consistent with borrowers that demonstrated a willingness and ability to remain in the residence pursuant to the current terms of the mortgage loan agreement. The Company was able to acquire these loans at a significant discount to both current property value at acquisition and note balance. For each acquisition the Company was able to utilize it’s background in mortgage credit analysis to re-underwrite the borrower’s credit to arrive at what it believes to be an attractive risk adjusted return for a highly collateralized investment in performing mortgage loans. The acquisition program implemented and executed by the Company involved a multifaceted due diligence process that included compliance reviews, title analyses, review of modification agreements, updated property valuation assessments, collateral inventory and other undertakings related to the scope of due diligence. In aggregate, the purchase price of the loans was less than 70% of current property value at the time of acquisition based on a third party broker price opinion, and less than 60% of note balance at the time of acquisition. Commonly referred to as “re-performing” loans, these loans were discounted because either (i) the borrower was delinquent at the time of the loan purchase or had previously been delinquent and had become current prior to our purchase of the loan, or (ii) because of a decline in the value of the property securing the loan since the date the loan was originated, the loan had an outstanding principal balance in excess of value of the underlying property and had an effective loan-to-value ratio of over 100%.

The Company acquired these loans with an unpaid principal balance of $114.8 million and a carrying value of $66.7 million. As of December 31, 2012, the unpaid principal balance of these loans was $108.3 million and the carrying value was $64.9 million. At the time of acquisition, approximately 97.1% of the mortgage loans had the original terms modified at some point since origination by a prior owner or servicer. The mortgage loans had a current weighted average interest rate of 4.13%, determined by the unpaid principal balance as of December 31, 2012. The weighted average credit score of the borrowers comprising the mortgage loans at or near the time of acquisition determined by the current principal balance and excluding those with no credit score on file was 632. The average property value determined by a broker price opinion obtained by third party licensed real estate professionals at or around the time of acquisition was $252,406. Approximately 97% of the loans were performing loans, 3% were delinquent and no loans were in foreclosure at the date of acquisition. Approximately 86.0% of the borrowers by current principal balance had made their last 12 scheduled monthly payments at the time the loans sold (or, in some cases calculated as making the last 11 scheduled monthly payments), and 99.1% had made their last six scheduled monthly payments. The mortgage loans are secured by residences located across 42 states, with California having the greatest geographic concentration at 31.5% of the unpaid principal balance at December 31, 2012.

At December 31, 2012, approximately 94% of the loans were performing, 6% were delinquent and 0.2% were in foreclosure.

Forward-Looking Statements

This Form 10-K contains various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on assumptions and describe our future plans and strategies and our expectations. These forward-looking statements are generally identified by words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar words. Our ability to predict results or the actual effect of future plans or strategies is uncertain. Factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (i) the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement for the Company’s pending acquisition of PBOC; (ii) the outcome of any legal proceedings that may be instituted against the Company or PBOC; (iii) the inability to complete the PBOC transaction due to the failure to satisfy such transaction’s conditions to completion, including the receipt of regulatory approvals and the approval of the merger agreement by PBOC’s shareholders; (iv) risks that the proposed PBOC transaction, or the Company’s recently completed acquisitions of Beach and Gateway, may disrupt current plans and operations, the potential difficulties in customer and employee retention as a result of the transactions and the amount of the costs, fees, expenses and charges related to the transactions; (v) continuation or worsening of current recessionary conditions, as well as continued turmoil in the financial markets; (vi) the credit risks of lending activities, which may be affected by further deterioration in real estate markets and the financial condition of borrowers, may lead to increased loan and lease delinquencies, losses and nonperforming assets in our loan and lease portfolio, and may result in our allowance for loan and lease losses not being adequate to cover actual losses and require us to materially increase our loan and lease loss reserves; (vii) the quality and composition of our securities portfolio; (viii) changes in general economic conditions, either nationally or in our market areas; (ix) continuation of the historically low short-term interest rate environment, changes in the levels of general interest rates, and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources; (x) fluctuations in the demand for loans and leases, the number of unsold homes and other properties and fluctuations in commercial and residential real estate values in our market area; (xi) results of examinations of us by regulatory authorities and the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan and lease losses, write-down asset values, increase our capital levels, or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (xii) legislative or regulatory changes that adversely affect our business, including changes in regulatory capital or other rules; (xiii) our ability to control operating costs and expenses; (xiv) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; (xv) errors in our estimates in determining fair value of certain of our assets, which may result in significant declines in valuation; (xvi) the network and computer systems on which we depend could fail or experience a security breach; (xvii) our ability to attract and retain key members of our senior management team; (xviii) costs and effects of litigation, including settlements and judgments; (xix) increased competitive pressures among financial services companies; (xx) changes in consumer spending, borrowing and saving habits; (xxi) adverse changes in the securities markets; (xxii) earthquake, fire or other natural disasters affecting the condition of real estate collateral; (xxiii) the availability of resources to address changes in laws, rules or regulations or to respond to regulatory actions; (xxiv) inability of key third-party providers to perform their obligations to us; (xxv) changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board or their application to our business or final audit adjustments, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; (xxvi) war or terrorist activities; and (xxvii) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described in this report.

We do not undertake, and specifically disclaim, any obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Lending Activities

General. The Company offers a number of different commercial and consumer loan products, including commercial and industrial loans, commercial real estate mortgage loans, multi-family mortgage loans, SBA guaranteed business loans, construction loans, lease financing, single family 1-4 unit residential mortgage loans, home equity lines of credit (“HELOCs”), home equity loans and other consumer loans.

The Company’s commercial and consumer loans carry either a fixed or an adjustable rate of interest. At December 31, 2012, the Company’s net loan portfolio totaled $1.2 billion, which constituted 73.3% of our total assets. The breakdown of total gross loans in the portfolio was: 51.1% 1-4 residential (the “SFR Mortgage Portfolio”), 27.3% commercial real estate mortgages, 9.1% commercial multi-family, 6.4% commercial and industrial, 1.7% HELOCs, home equity loans and other consumer installment credit, 0.5% construction, 2.9% SBA, and 0.9% lease financing.

As of December 31, 2012, $658.6 million, or 52.8% of our total gross loan and lease portfolio was secured by single-family mortgage loans and home equity lines of credit. The Company’s SFR mortgage portfolio is comprised of a combination of traditional, fully-amortizing and non-traditional mortgage loans. The Company’s non-traditional mortgage loan portfolio includes our Green Account Loans (“Green Loans”), interest only mortgage loans, and mortgage loans with potential for negative amortization. At December 31, 2012, the balance of the Company’s non-traditional mortgage (“NTM”) portfolio totaled $368.2 million, or 29.5% of the total gross loan portfolio, of which first mortgage Green Loans totaled $206.0 million or 16.5%. Green Loans are first and second mortgage lines of credit with linked checking accounts that allow all types of deposits and withdrawals to be performed, including direct deposit, check debit cards, ATM, ACH debits and credits, and internet banking and bill payment transactions. Also, at December 31, 2012, the Company had a total of $143.0 million in interest-only mortgage loans and $19.3 million in mortgage loans with potential for negative amortization.

In the case of PacTrust Bank, as of December 31, 2012, the Executive Vice President of Lending and the Chief Credit Officer may each approve loans to one borrower or group of related borrowers up to $2.5 million. The President/Chief Executive Officer (“CEO”) in combination with the Chief Credit Officer may approve loans to one borrower or group of related borrowers up to $5.0 million. The Management Loan Committee may approve loans to one borrower or group of related borrowers up to $10.0 million, with no single loan exceeding $5.0 million. The Board Loan Committee must approve loans over these amounts or outside our general loan policy.

In the case of Beach, as of December 31, 2012, the CEO in combination with the Chief Credit Officer may approve loans up to $1.5 million. Loans in excess of $1.5 million are presented to Beach’s Directors Loan Committee for final approval.

At December 31, 2012, the maximum amount which PacTrust Bank could have loaned to any one borrower and the borrower’s related entities was approximately $43.2 million on a secured basis and $25.9 million on an unsecured basis.

At December 31, 2012, the maximum amount which Beach could have loaned to any one borrower and the borrower’s related entities was approximately $8.7 million on a secured basis and $5.2 million on an unsecured basis.

The following table presents information concerning the composition of the Company’s loan and lease portfolio in dollar amounts and in percentages as of the dates indicated.


	December 31,
	2012						2011						2010						2009						2008
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in Thousands)
Commercial:
Commercial and industrial	$	80,393			6.5	%	$	9,019			1.1	%	$	6,744			1.0	%	$	6,782			0.9	%	$	7,348			0.9	%
Real estate mortgage		339,888			27.3			126,388			16.1			61,396			8.9			64,002			8.4			57,016			7.1
Multi-family		113,674			9.1			85,605			10.9			33,040			4.8			34,235			4.5			34,831			4.3
SBA		36,120			2.9			—			0.0						0.0			—			0.0			—			0.0
Construction		6,648			0.5			—			0.0			—			0.0			—			0.0			17,835			2.2
Lease financing		11,203			0.9			—			0.0			—			0.0			—			0.0			—			0.0
Consumer:
Real estate 1-4 family first mortgage		637,071			51.1			546,760			69.6			568,854			82.3			633,118			83.4			670,401			82.9
HELOCs, home equity loans, and other consumer installment credit		21,562			1.7			17,823			2.3			20,954			3.0			20,983			2.8			21,319			2.6

Total loans		1,246,559			100.0	%		785,595			100.0	%		690,988			100.0	%		759,120			100.0	%		808,750			100.0	%
Net deferred loan costs		447						1,109						1,824						2,262						2,581
Unamortized purchase premium		1,465						1,685						—						—						—
Allowance for loan losses		(14,448	)					(12,780	)					(14,637	)					(13,079	)					(18,286	)

Total loans receivable, net	$	1,234,023					$	775,609					$	678,175					$	748,303					$	793,045

The following table shows loan and lease originations, purchases, sales, and repayment activities excluding loans originated for sale, for the periods indicated.


	Year Ended December 31,
	2012			2011			2010
	(In thousands)
Originations by type:
Adjustable rate:
Real estate—one- to four-family	$	183,343		$	44,554		$	3,552
Multi-family, commercial and land		72,142			12,826			3,742
SBA		5,216			—			—
Construction or development		16,961			—			—
Consumer and other		5,268			64,851			89,389
Commercial and industrial		32,329			—			—

Total adjustable-rate		315,259			122,231			96,683
Fixed rate:
Real estate—one-to four-family		2,382			—			—
Multi-family, commercial and land		95,640			76,299			—
SBA		2,970			—			—
Non-real estate-consumer		150			97			387
Commercial and industrial		2,103			493			871

Total fixed-rate		103,245			76,889			1,258
Total loans originated		418,504			199,120			97,941
Purchases:
Real estate—one- to four-family		66,718			—			182
Multi-family, commercial and land		18,674			58,027			—
Construction or development		—			—			—
Lease financing		14,487			—			—
Consumer and other		—			—			—
Commercial and industrial		—			—			—

Total loans purchased		99,879			58,027			182
Acquired in business combinations		288,285			—			—
Repayments:
Principal repayments		(276,399	)		(162,700	)		(158,573	)
Sales		(70,438	)		—			—
Increase (decrease) in other items, net		(1,417	)		2,987			(9,424	)

Net increase (decrease)	$	458,414		$	97,434		$	(69,874	)

Commercial and Industrial Loans.

Commercial and industrial loans are made to finance operations, provide working capital, or to finance the purchase of assets, equipment or inventory. A borrower’s cash flow from operations is generally the primary source of repayment. Accordingly, our policies provide specific guidelines regarding debt coverage and other important financial ratios. Commercial and industrial loans include lines of credit and commercial term loans. Lines of credit are extended to businesses or individuals based on the financial strength and integrity of the borrower and guarantor(s) and generally are collateralized by short-term assets such as accounts receivable, inventory, equipment or real estate and have a maturity of one year or less. Commercial term loans are typically made to finance the acquisition of fixed assets or refinance short-term debt originally used to purchase fixed assets. Commercial term loans generally have terms of one to five years. They may be collateralized by the asset being acquired or other available assets.

Commercial and industrial loans include short-term secured and unsecured business and commercial loans with maturities typically ranging up to 5 years (up to 10 years if a SBA loan), accounts receivable financing typically for 1-5 years (up to 10 years if a SBA loan), and equipment leases up to 6 years. The interest rates on these loans generally are adjustable and usually are indexed to The Wall Street Journal’s prime rate and will vary based on market conditions and be commensurate to the credit risk. Where it can be negotiated, loans are written with a floor rate of interest. Generally, lines of credit are granted for no more than a 12-month period.

Commercial and industrial loans, including accounts receivable and inventory financing, generally are made to businesses that have been in operation for at least 5 years or less if a SBA loan, including start ups. To qualify for such loans, prospective borrowers generally must have debt-to-net worth ratios not exceeding 3-to-1, operating cash flow sufficient to demonstrate the ability to pay obligations as they become due, and good payment histories as evidenced by credit reports. We attempt to control our risk by generally requiring loan-to-value (“LTV”) ratios of not more than 80% and by closely and regularly monitoring the amount and value of the collateral in order to maintain that ratio.

The Company’s commercial and industrial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of our credit analysis. In order to mitigate the risk of borrower default, we generally require collateral to support the credit or, in the case of loans made to businesses, personal guarantees from their owners, or both. In addition, all such loans must have well-defined primary and secondary sources of repayment. Nonetheless, these loans are believed to carry higher credit risk than traditional single-family home loans.

Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent in part upon general economic conditions). The Company’s commercial business loans are usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. See “—Asset Quality—Non-Accrual Loans and Leases” in Item 1.

Commercial and industrial loan growth also assists in the growth of our deposits because many commercial loan borrowers establish noninterest-bearing (demand) and interest-bearing transaction deposit accounts and banking services relationships with us. Those deposit accounts help us to reduce our overall cost of funds and those banking services relationships provide us with a source of non-interest income.

At December 31, 2012 and 2011, commercial and industrial loans totaled $80.4 million or 6.4% and $9.0 million or 1.2% respectively, of the total gross loans. This increase was due to the acquisition of commercial loans in the Beach acquisition and origination of $134.0 million of commercial loans in 2012.

Commercial Real Estate Mortgage and Multi-Family Real Estate Lending. A focus of the Company is the funding of commercial real estate and multi-family loans. These loans are secured primarily by multi-family dwellings, and a limited amount of retail establishments, hotels, motels, warehouses, and office buildings, commercial and industrial buildings primarily located in the Company’s market area, and throughout the West Coast. At December 31, 2012, commercial real estate and multi-family loans totaled $339.9 million, or 27.3%, and $113.7 million, or 9.1%, respectively, of the Company’s total gross loans, as compared to $126.4 million, or 16.1%, and $85.6 million, or 10.9%, respectively, of the Company’s total gross loans, at December 31, 2011.

The Company’s loans secured by multi-family and commercial real estate are originated with either a fixed or adjustable interest rate. The interest rate on adjustable-rate loans is based on a variety of indices, generally determined through negotiation with the borrower. Loan-to-value ratios on these loans typically do not exceed

75% of the appraised value of the property securing the loan. These loans typically require monthly payments, may contain balloon payments and have maximum maturities of 30 years.

Loans secured by multi-family and commercial real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. The Company generally requires an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family and commercial real estate loans are performed by independent state licensed fee appraisers approved by management. See “—Loan and Lease Originations, Purchases, Sales and Repayments.” The Company generally maintains a tax or insurance escrow account for loans secured by multi-family and commercial real estate. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is generally required to provide periodic financial information.

Loans secured by multi-family and commercial real estate properties generally involve a greater degree of credit risk than one-to-four single family residential mortgage loans. These loans typically involve large balances to single borrowers or groups of related borrowers.

Because payments on loans secured by multi-family and commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “—Asset Quality—Non-Accrual Loans and Leases” in Item 1.

Small Business Administration Loans. The Company provides numerous SBA loan products, primarily through Beach Business Bank which has the distinction of Preferred Lenders Program (“PLP”) status within the SBA. Beach’s PLP status generally gives it the authority to make the final credit decision and have most servicing and liquidation authority. The Company provides the following SBA products:

•

7(a)—These loans provide the Company with a guarantee from the SBA of the United States Government for up to 85% of the loan amount for loans up to $5 million. Generally the guaranty percentage for loans in excess of $150,000 is 75%. There are term loans that can be used for a variety of purposes including expansion, renovation, new construction, and equipment purchases. Depending on collateral, these loans can have terms ranging from 7 to 25 years. The guaranteed portion of these loans is often sold into the secondary market.

•

Cap Lines—Also guaranteed up to 85% and typically used for working capital purposes, secured by accounts receivable and/or inventory. These lines are up to $5 million and can be issued on an interest only basis for up to 10 years.

•

504 Loans—These are real estate loans in which the lender can advance up to 90% of the purchase price; retain 50% as a first trust deed; and, have a Certified Development Company (“CDC”) retain the 2^nd position for 40%. CDC’s are licensed by the SBA. Required equity of the borrower is 10%. Terms of the first trust deed are typically similar to market rates for conventional real estate loans, while the CDC establishes rates and terms for the second trust deed loan.

•

SBA Express—These loans offer a 50% guaranty by the SBA and are up to a maximum of $350,000. These loans are typically revolving lines and have maturities of up to 7 years.

SBA lending is subject to federal legislation that can affect the availability and funding of the program. This dependence on legislative funding might cause future limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business.

The Company’s portfolio of SBA loans is subject to certain risks, including, but not limited to: (i) the effects of economic downturns on the Southern California economy; (ii) interest rate increases; (iii) deterioration of the

value of the underlying collateral; and (iv) deterioration of a borrower’s or guarantors financial capabilities. We attempt to reduce the exposure of these risks through: (a) reviewing each loan request and renewal individually; (b) adhering to written loan policies; (c) adhering to SBA policies and regulations; (e) obtaining independent third party appraisals; and (f) obtaining external independent credit reviews. SBA loans normally require monthly installment payments of principal and interest and therefore are continually monitored for past due conditions. In general, the Company receives and reviews financial statements and other documents of borrowing customers on an ongoing basis during the term of the relationship and responds to any deterioration identified.

Beach Business Bank has historically been ranked as one of the top 100 Banks in the country in SBA lending volume.

At December 31, 2012, SBA loans totaled $36.1 million or 2.9% of total gross loans. The Company did not originate any SBA loans in 2011.

Construction Lending. Our construction lending primarily relates to one-to-four single family properties. From time to time the Company has purchased participations in real estate construction loans, however, it has not done so since 2008. The Company may in the future originate or purchase loans or participations in construction loans. The Company had $6.6 million in construction loans at December 31, 2012, or 0.5% of total gross loans compared to zero at December 31, 2011.

Lease Financing. Commercial equipment leasing and financing was introduced as a product in the third quarter of 2012 to meet the needs of small and medium sized business for growth through investments in commercial equipment. The Company provides full payout capital leases and equipment finance agreements for essential use equipment to small and medium sized business nationally. The terms are 1 to 6 years in length and generally provide more flexibility to meet the equipment obsolescence needs of small and medium sized business than traditional business loans.

Commercial equipment leases and loans are secured by the business assets being financed. These assets are secured by a Uniform Commercial Code Form 1(“UCC1”) filing on the specific assets as well as a commercial guaranty of the business and generally a personal guaranty of the owner(s) of the business. During the year ended December 31, 2012, the Company had purchased 391 contracts for $11.8 million with no losses. As of December 31, 2012, the Company had $11.2 million outstanding, or 0.9% of total loans.

Real Estate 1-4 Family First Mortgages. A significant focus for the Company is the origination of loans secured by first mortgages on one- to four-family residences in San Diego, Orange, Los Angeles and Riverside Counties, California as well as the states of Arizona, Washington and Oregon.

The Company offers a variety of loan products catering to the specific needs of borrowers, including fixed rate and adjustable rate mortgages with either 30-year or 15-year terms. The Company offers conventional mortgages eligible for sale to Fannie Mae or Freddie Mac, government insured Federal Housing Administration (“FHA”) and Veteran Affairs (“VA”) mortgages, and jumbo loans that generally meet conventional underwriting criteria except that the loan amount exceeds Fannie Mae or Freddie Mac limits.

The Company’s residential lending division includes both a direct-to-consumer retail mortgage business and a wholesale mortgage business. In the retail business, Company loan officers are located either in our call center in Irvine, Bank branches, or loan production offices and originate mortgage loans directly to consumers. The wholesale mortgage business originates residential mortgage loans submitted to the Company by outside mortgage brokers for underwriting and funding. The Company does not originate loans defined as high cost by state or federal regulators.

A majority of residential mortgage loans originated by the Company are made to finance the purchase or the refinance of existing loans on owner-occupied homes with a smaller percentage used to finance non-owner

occupied homes. A majority of the Company’s loan originations for the held for investment portfolio are collateralized by real properties located in Southern California; however the Bank originates loans through its retail loan production offices throughout California and in the states of Arizona, Washington and Oregon, and to a lesser extent, in certain other states through its retail call center or mortgage brokers.

The Company generally underwrites one- to four-family loans based on the applicant’s income and credit history and the appraised value of the subject property. Generally, the Company requires private mortgage insurance for conventional loans with a loan to value greater than 80% of the lesser of the appraised value or purchase price, and FHA insurance or a VA guaranty for government loans. Properties securing our one- to four-family loans are appraised by independent fee appraisers approved by management. The Company requires borrowers to obtain title insurance, hazard insurance, and flood insurance, if necessary.

The Company currently originates one- to four-family mortgage loans on either a fixed- or an adjustable-rate basis, as consumer demand and the Banks’ risk management dictates. The Company’s pricing strategy for mortgage loans includes setting interest rates that are competitive with other local financial institutions.

Adjustable-rate mortgages (“ARM”) loans are offered with flexible initial and periodic repricing dates, ranging from one year to seven years through the life of the loan. The Company uses a variety of indices to reprice ARM loans. During the year ended December 31, 2012, the Company originated $183.3 million of one- to four-family ARM loans with terms up to 30 years.

During the course of 2012, the Bank completed three bulk acquisitions of generally performing real estate one-to-four family first mortgage loans whose characteristics and payment history were consistent with borrowers that demonstrated a willingness and ability to remain in the residence pursuant to the current terms of the mortgage loan agreement. At December 31, 2012, the unpaid principal balance of these loans was $108.3 million with a carrying value of $64.9 million. Approximately 94% of these loans were performing, 6% were delinquent and 0.2% were in foreclosure at December 31, 2012

The Company has grown its residential mortgage business to approximately $185.7 million in loan originations in 2012 excluding the bulk acquisition discussed above from approximately $44.6 million in loans in 2011.

The Company sells a majority of the mortgage loans it originates to various investors in the secondary market and may not service these loans after sale of the loans. However, a percentage of adjustable rate mortgage loans are held for investment, and the Company services these loans. Loans sold to investors are subject to certain indemnification provisions, including the repurchase of loans sold and the repayment of sales proceeds to investors under certain conditions. In addition, if a customer defaults on a mortgage payment within the first few payments after the loan is sold, the Company may be required to repurchase the loan at the full amount paid by the purchaser.

At December 31, 2012 and 2011, real estate one-to-four family first mortgages totaled $637.1 million, or 51.1% and $546.8 million or 69.6% respectively, of total gross loans.

HELOCs, Home Equity Loans and Other Consumer Credit. The Company offers a variety of secured consumer loans, including second trust deed home equity loans and home equity lines of credit and loans secured by savings deposits. The Company also offers a limited amount of unsecured loans. The Company originates consumer and other real estate loans primarily in its market area. Consumer loans generally have shorter terms to maturity or variable interest rates, which reduce our exposure to changes in interest rates, and carry higher rates of interest than do conventional one-to-four family residential mortgage loans. Management believes that offering consumer loan products helps to expand and create stronger ties to the Company’s existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

The Company’s second deed of trust home equity lines of credit totaled $21.6 million, and comprised 1.7% of the total gross loans at December 31, 2012. Other home equity lines of credit have a seven or ten year draw period and require the payment of 1.0% or 1.5% of the outstanding loan balance per month (depending on the terms) during the draw period. Following receipt of payments, the available credit includes amounts repaid up to the credit limit. Home equity lines of credit with a 10 year draw period have a balloon payment due at the end of the draw period. For loans with shorter term draw periods, once the draw period has lapsed, generally the payment is fixed based on the loan balance and prevailing market interest rates at that time.

The Company proactively monitors changes in the market value of all home loans contained in its portfolio. The Company’s credit risk management policy requires the purchase of independent, third party valuations of every property in its residential loan portfolio twice during the year. The most recent valuations were as of November 30, 2012. The Company has the right to adjust, and has adjusted, existing lines of credit to address current market conditions subject to the terms of the loan agreement and covenants. At December 31, 2012, unfunded commitments totaled $10.9 million on other consumer lines of credit. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower.

Non-Traditional Mortgage Loans

The Company’s non-traditional mortgage portfolio (“NTM”) is comprised of three interest only products: the Green Account Loans (“Green Loans”), the hybrid interest only adjustable rate mortgage (“ARM”) and a small number of negatively amortizing ARM loans (“Neg Am”). As of December 31, 2012 and 2011, the non-traditional mortgages totaled $368.2 million or 29.5% and $374.0 million or 47.6% of the total gross loan portfolio, respectively which is a decrease of $5.8 million or 1.6%.

Included in the Company’s loan and lease portfolio are Non-Traditional Mortgage Loans in dollar amounts and in percentages as of the dates indicated:


	December 31,
	(Dollars in thousands)
	2012								2011								2010								2009								2008
	Count		Amount			Percent			Count		Amount			Percent			Count		Amount			Percent			Count		Amount			Percent			Count		Amount			Percent
Green loans		239	$	206,004			55.94	%		277	$	228,205			61.02	%		255	$	228,823			53.75	%		239	$	220,078			44.41	%		224	$	201,636			35.99	%
Interest-only		191		142,978			38.83			203		124,249			33.22			272		166,766			39.17			382		243,710			49.18			489		323,321			57.71
Negative amortization		40		19,262			5.23			45		21,525			5.76			52		30,142			7.08			55		31,755			6.41			61		35,293			6.30

Total NTM loans		470	$	368,244			100.00	%		525	$	373,979			100.00	%		579	$	425,731			100.00	%		676	$	495,543			100.00	%		774	$	560,250			100.00	%

Total gross loan portfolio			$	1,246,559							$	785,595							$	690,988							$	759,120							$	808,750
Percentage of NTM to total gross loan portfolio				29.5	%							47.6	%							61.6	%							65.3	%							69.3	%

The Company’s non-traditional mortgage portfolio (dollars reported in thousands) consists of the following property types as of the dates indicated:


	December 31, 2012
	Green						I/O						Neg Am						Total
	Amount			Percent			Amount			Percent			Amount			Percent
Real estate 1-4 family first mortgage	$	198,351			96.3	%	$	142,865			99.9	%	$	19,262			100.0	%	$	360,478
Real estate 1-4 family junior lien mortgage		7,653			3.7			113			0.1			—			—			7,766
Multi-family		—			—			—			—			—			—			—
Land		—			—			—			—			—			—			—
Commercial real estate mortgage		—			—			—			—			—			—			—

Total NTM	$	206,004			100.0	%	$	142,978			100.0	%	$	19,262			100.0	%	$	368,244

Percentage to Total		55.9	%					38.8	%					5.2	%					100.0	%

	December 31, 2011
	Green						I/O						Neg Am						Total
	Amount			Percent			Amount			Percent			Amount			Percent
Real estate 1-4 family first mortgage	$	219,502			96.2	%	$	122,248			98.4	%	$	21,525			100.0	%	$	363,275
Real estate 1-4 family junior lien mortgage		8,703			3.8			114			0.1			—			—			8,817
Multi-family		—			—			—			—			—			—			—
Land		—			—			1,887			1.5			—			—			1,887
Commercial real estate mortgage		—			—			—			—			—			—			—

Total NTM	$	228,205			100.0	%	$	124,249			100.0	%	$	21,525			100.0	%	$	373,979

Percentage to Total		61.0	%					33.2	%					5.8	%					100.0	%

	December 31, 2010
	Green						I/O						Neg Am						Total
	Amount			Percent			Amount			Percent			Amount			Percent
Real estate 1-4 family first mortgage	$	215,395			94.1	%	$	148,185			88.9	%	$	30,142			100.0	%	$	393,722
Real estate 1-4 family junior lien mortgage		9,260			4.0			182			0.1			—			—			9,443
Multi-family		—			—			—			—			—			—			—
Land		4,168			1.8			18,399			11.0			—			—			22,567
Commercial real estate mortgage		—			—			—			—			—			—			—

Total NTM	$	228,823			100.0	%	$	166,766			100.0	%	$	30,142			100.0	%	$	425,731

Percentage to Total		53.7	%					39.2	%					7.1	%					100.0	%

	December 31, 2009
	Green						I/O						Neg Am						Total
	Amount			Percent			Amount			Percent			Amount			Percent
Real estate 1-4 family first mortgage	$	208,945			94.9	%	$	224,404			92.1	%	$	31,755			100.0	%	$	465,104
Real estate 1-4 family junior lien mortgage		8,661			3.9			451			0.2			—			—			9,112
Multi-family		—			—			—			—			—			—			—
Land		2,472			1.1			18,855			7.7			—			—			21,327
Commercial real estate mortgage		—			—			—			—			—			—			—

Total NTM	$	220,078			100.0	%	$	243,710			100.0	%	$	31,755			100.0	%	$	495,543

Percentage to Total		44.4	%					49.2	%					6.4	%					100.0	%

	December 31, 2008
	Green						I/O						Neg Am						Total
	Amount			Percent			Amount			Percent			Amount			Percent
Real estate 1-4 family first mortgage	$	192,586			95.5	%	$	301,494			93.2	%	$	35,293			100.0	%	$	529,373
Real estate 1-4 family junior lien mortgage		8,252			4.1			196			0.1			—			—			8,448
Multi-family		—			—			—			—			—			—			—
Land		798			0.4			21,631			6.7			—			—			22,429
Commercial real estate mortgage		—			—			—			—			—			—			—

Total NTM	$	201,636			100.0	%	$	323,321			100.0	%	$	35,293			100.0	%	$	560,250

Percentage to Total		36.0	%					57.7	%					6.3	%					100.0	%

The initial credit guidelines for the non-traditional mortgage portfolio were established based on borrower Fair Isaac Company (“FICO”) score, loan-to-value, property type, occupancy type, loan amount, and geography. Additionally from an ongoing credit risk management perspective, the Company has assessed that the most significant performance indicators for NTMs to be loan-to-value and FICO scores. On a semi-annual basis, the Company performs loan reviews of the NTM loan portfolio that includes refreshing FICO scores on the Green Loans and HELOCs and ordering third party automated valuation models (“AVM”) to confirm collateral value.

The table below reflects loan-to-value stratification for the single family residential one-to-four NTM mortgage loans as of the periods indicated:


	December 31, 2012
	Green							I/O							Neg Am							Total
LTV’s⁽¹⁾	Count		Amount		Percent			Count		Amount		Percent			Count		Amount		Percent			Count		Amount		Percent
	(Dollars in thousands)
<61		51	$	59,546		30.0	%		60	$	47,295		33.1	%		11	$	2,442		12.6	%		122	$	109,283		30.3	%
61-80		63		51,934		26.2			72		59,025		41.3			4		1,225		6.4			139		112,184		31.1
81-100		61		62,518		31.5			27		17,578		12.3			11		8,120		42.2			99		88,216		24.5
>100		37		24,353		12.3			31		18,967		13.3			14		7,475		38.8			82		50,795		14.1

Total		212	$	198,351		100.0	%		190	$	142,865		100.0	%		40	$	19,262		100.0	%		442	$	360,478		100.0	%


	December 31, 2011
	Green							I/O							Neg Am							Total
LTV’s⁽¹⁾	Count		Amount		Percent			Count		Amount		Percent			Count		Amount		Percent			Count		Amount		Percent
	(Dollars in thousands)
<61		64	$	53,917		24.6	%		67	$	40,809		33.4	%		10	$	2,263		10.5	%		141	$	96,989		26.7	%
61-80		69		85,014		38.7			46		34,169		28.0			6		4,831		22.4			121		124,014		34.1
81-100		66		50,973		23.2			43		24,565		20.1			9		7,713		35.9			118		83,251		22.9
>100		46		29,598		13.5			47		22,705		18.5			20		6,718		31.2			113		59,021		16.3

Total		245	$	219,502		100.0	%		203	$	122,248		100.0	%		45	$	21,525		100.0	%		493	$	363,275		100.0	%

⁽¹⁾	LTV represents estimated current loan to value as current unpaid principal balance divided by estimated property value.

The table below represents the Company’s non-traditional mortgage loans by period in which amortization payments begin or balances are due at maturity within the years indicated:


	December 31,
	2012				2013				2014				2015
Loan Type:	Count		Principal		Count		Principal		Count		Principal		Count		Principal
	(Dollars in thousands)
Green (1)		1	$	367		-	$	-		1	$	4,259		-	$	-
Interest Only (2)		13		3,189		49		32,866		23		12,429		22		16,099
Neg Am (3)		40		19,262		-		-		—		-		-		-

Total NTM		54	$	22,818		49	$	32,866		24	$	16,687		22	$	16,099


	December 31,
	2016				2017				Thereafter				Total
Loan Type:	Count		Principal		Count		Principal		Count		Principal		Count		Principal
	(Dollars in thousands)
Green (1)		-	$	-		-	$	-		237	$	201,378		239	$	206,004
Interest Only (2)		26		21,032		23		17,407		35		39,956		191		142,978
Neg Am (3)		-		-		-		-		—		-		40		19,262

Total NTM		26	$	21,032		23	$	17,407		272	$	241,334		470	$	368,244

(1)	Green Loans typically have a 15 year balloon maturity

(2)	Interest Only loans typically switch to a amortizing basis after 3, 5, or 7 years.

(3)	$2.6 million or 13.5% of negative amortization loans have begun amortizing and $16.7 million or 86.5% are subject to negative amortization.

Green Account Loans

At December 31, 2012, one-to-four single family residential mortgage loans totaled $637.1 million, or 51.1% of total gross loans, including the portion of the Company’s Green Loans of $198.4 million that are secured by first trust deeds. At December 31, 2011, one-to-four single family residential mortgage first trust deed loans totaled $546.8 million or 69.6% of our total gross loan and lease portfolio including $219.5 million of the Company’s Green Loan portfolio that are secured by first trust deeds. At December 31, 2012 Green Loan unfunded commitments totaled $16.8 million. As of December 31, 2012 and 2011, the Green Loans were 78% and 81%, respectively owner occupied. The Company no longer originates Green Loans.

Green Loans are single family residence first mortgage lines of credit with a linked checking account that allows all types of deposits and withdrawals to be performed. The loans are generally interest only with a 15 year balloon payment due at maturity.

Transactions posted to the checking account are cleared on a daily basis against the loan, effectively bringing the checking account balance to zero on a daily basis. If the outstanding balance of the loan is paid down to a zero balance, excess funds remain in the linked checking account. Subsequent debit activity will use these funds before the line of credit is accessed.

The finance charge is calculated based on the current interest rate and daily outstanding principal balance. On the payment due date, depending on availability on the line of credit, the payment may be paid by an advance to the loan resulting in the borrower not making a payment. Borrowers who choose to make a payment do so by making a deposit into the linked checking account that is applied to the loan in a daily sweep.

The initial credit guidelines for Green Loans were established based on FICO score, loan-to-value, property type, occupancy type, loan amount, and geography. Additionally from an ongoing credit risk management perspective, the Company has assessed that the most significant performance indicators for NTMs to be loan-to-value and FICO scores. On a semi-annual basis, the Company performs loan reviews of the NTM loan portfolio that includes refreshing FICO scores on the Green Loans and HELOCs and ordering AVMs to confirm collateral value.

At the time of origination, FICOs were based on the primary wage earners’ mid FICO score and the lower of two mid FICO scores for full and alternative documentation, respectively. 76% of the FICO scores exceeded 700 at the time of origination. The table below represents the Company’s Green Loan 1-4 family first mortgages by FICO category as of the dates indicated:


	FICO score at December 31, 2012							FICO score at June 30,2012							Changes in count and amounts
	Count		Amount		Percentage			Count		Amount		Percentage			Count change			Amount change			Percentage change
	(Dollars in thousands)							(Dollars in thousands)
800+		10	$	8,133		4.1	%		23	$	14,028		7.1	%		(13	)	$	(5,895	)		-42.0	%
700-799		120		101,188		51.0			100		95,141		48.0			20			6,047			6.4
600-699		55		60,052		30.3			52		51,054		25.7			3			8,998			17.6
<600		15		12,887		6.5			11		9,090		4.6			4			3,797			41.8
No FICO (1)		12		16,091		8.1			26		29,038		14.6			(14	)		(12,947	)		-44.6

Total		212	$	198,351		100.0	%		212	$	198,351		100.0	%		—			—			0.0	%

(1)	No FICO scores reflect foreign nationals and trusts for which credit scores do not exist.

Interest Only Mortgage Loans

As of December 31, 2012, the interest-only mortgage loans increased by $18.8 million or 15.1% to $143.0 million from $124.2 million in 2011. The Company reduced its overall interest-only mortgage loans to the total gross loan portfolio by 4.3% from 15.8% to 11.5% primarily due to our loan portfolio growth.


	December 31,
	2012					2011					2010					2009					2008
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real estate 1-4 family first mortgage	$	142,865		99.9	%	$	122,248		98.4	%	$	148,185		88.9	%	$	224,404		92.1	%	$	301,494		93.2	%
Real estate 1-4 family junior lien mortgage		113		0.1			114		0.1			183		0.1			451		0.2			196		0.1
Land		—		0.0			1,887		1.5			18,398		11.0			18,855		7.7			21,631		6.7

Total Interest Mortgage Only loans	$	142,978		100.0	%	$	124,249		100.0	%	$	166,766		100.0	%	$	243,710		100.0	%	$	323,321		100.0	%

Interest-only mortgage loans are primarily single family residence first mortgage loans with payment features that allow interest-only payments during the first one, three, or five years during which time the interest rate is fixed before converting to fully amortizing payments. Following the expiration of the fixed interest rate, the interest rate and payment begins to adjust on an annual basis, with fully amortizing payments that include principal and interest calculated over the remaining term of the loan. The loan can be secured by owner or non-owner occupied properties that include one-to-four single family units and second homes.

Originations of interest only mortgage loans were $53.7 million and $29.3 million for 2012 and 2011, respectively.

Loans with the Potential for Negative Amortization

As of December 31, 2012 and 2011 the negative amortization loan balance continued to decline to $19.3 million from $21.5 million. We discontinued origination of negative amortization loans in 2007. As of December 31, 2012 and 2011, zero and $0.9 million, respectively, of the Company’s loans that had the potential for negative amortization were non-performing. These loans pose a potentially higher credit risk because of the lack of principal amortization and potential for negative amortization, however, management believes the risk is mitigated through the Company’s loan terms and underwriting standards, including its policies on LTV ratios.

Included in the Company’s loan and lease portfolio segments are loans with the potential for negative amortization in dollar amounts and percentages as of the dates indicated:


	December 31,
	2012					2011					2010					2009					2008
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Real estate 1-4 family first mortgage	$	19,262		100.0	%	$	21,525		100.0	%	$	30,142		100.0	%	$	31,755		100.0	%	$	35,293		100.0	%
Real estate 1-4 family junior lien mortgage		—		0.0			—		0.0			—		0.0			—		0.0			—		0.0
Land		—		0.0			—		0.0			—		0.0			—		0.0			—		0.0

Total loans with the potential for Negative Amortization	$	19,262		100.0	%	$	21,525		100.0	%	$	30,142		100.0	%	$	31,755		100.0	%	$	35,293		100.0	%

Adjustable Rate Mortgages

ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s minimum monthly payment rises, increasing the potential for default (See “Asset Quality in Item 1). At December 31, 2012, the Company’s one- to four family ARM loan portfolio comprised of $567.0 million of first deed of trust loans and $13.9 million of loans secured by subordinated or junior liens, 45.5% and 1.1% respectively, of our gross loan and lease portfolio. At December 31, 2012, the fixed-rate one-to-four family mortgage loan portfolio comprised of $70.1 million of first deed of trust loans and $319 thousand of loans secured by subordinated or junior liens, 5.6% and less than 1.0%, respectively, of the Company’s gross loan and lease portfolio. The interest rate sensitivity composition of the Company’s loan and lease portfolio did not significantly change during 2012. At December 31, 2012, $19.7 million of the Company’s ARM loan portfolio were non-performing loans.

The following table shows the composition of the Company’s loan and lease portfolio by fixed- and adjustable-rate at the dates indicated.


	December 31,
	2012						2011						2010						2009						2008
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in Thousands)
FIXED-RATE
Commercial:
Commercial and industrial	$	18,239			1.5%		$	6			0.0%		$	500			0.1%		$	511			0.1%		$	525			0.1%
Real estate mortgage		160,498			12.9			59,580			7.6			36,013			5.2			38,810			5.1			47,222			5.8
Multi-family		55,295			4.4			3,075			0.4			22,532			3.3			21,992			2.9			22,693			2.8
SBA		1,755			0.1			—			0.0			—			0.0			—			0.0			—			0.0
Construction		—			0.0			—			0.0			—			0.0			—			0.0			—			0.0
Lease financing		11,203			0.9			—			0.0			—			0.0			—			0.0			—			0.0
Consumer:
Real estate 1-4 family first mortgage		70,089			5.6			7,643			1.0			4,542			0.6			5,635			0.7			7,980			0.99
HELOCs, home equity loans, and other consumer installment credit		1,138			0.1			378			0.1			621			0.09			1,010			0.1			924			0.11

Total fixed rate loans		318,217			25.5			70,682			9.00			64,208			9.3			67,958			9.0			79,344			9.8

ADJUSTABLE-RATE
Commercial:
Commercial and industrial		62,154			5.0			9,013			1.2			6,244			0.9			6,271			0.8			6,823			0.9
Real estate mortgage		179,390			14.4			66,808			8.5			25,383			3.7			25,192			3.3			9,794			1.2
Multi-family		58,379			4.7			82,530			10.5			10,508			1.5			12,243			1.6			12,138			1.5
SBA		34,365			2.8			—			0.0			—			0.0			—			0.0			—			0.0
Construction		6,648			0.5			—			0.0			—			0.0			—			0.0			17,835			2.2
Lease financing		—			0.0			—			0.0			—			0.0			—			0.0			—			0.0
Consumer:
Real estate 1-4 family first mortgage		566,982			45.5			539,117			68.6			564,312			81.7			627,483			82.7			662,421			81.9

HELOCs, home equity loans, and other consumer installment credit		20,424			1.6			17,445			2.2			20,333			2.9			19,973			2.6			20,395			2.5

Total adjustable-rate loans		928,342			74.5			714,913			91.0			626,780			90.7			691,162			91.0			729,406			90.2

Total loans		1,246,559			100.00	%		785,595			100.00	%		690,988			100.00	%		759,120			100.00	%		808,750			100.00%
Net deferred loan costs		447						1,109						1,824						2,262						2,581
Unamortized purchase premium		1,465						1,685						—						—						—
Allowance for loan losses		(14,448	)					(12,780	)					(14,637	)					(13,079	)					(18,286	)

Total loans receivable, net	$	1,234,023					$	775,609					$	678,175					$	748,303					$	793,045

The following schedule illustrates the contractual maturity of the Company’s loan and lease portfolio at December 31, 2012. (Dollars in thousands)


	Commercial
	Commercial and Industrial					Real Estate Mortgage					Multi-Family					SBA
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due During Years Ending December 31, 2013(1)	$	34,131		5.6	%	$	21,014		6.5	%	$	14,232		6.1	%	$	73		6.4	%
2014		4,221		5.8			21,513		5.1			2,004		5.3			624		8.4
2015 and 2016		14,216		4.9			38,455		5.7			6,293		5.3			1,117		7.3
2017 to 2021		22,184		5.5			125,008		5.3			47,086		5.3			15,766		6.1
2022 to 2036		5,641		5.3			122,516		5.5			34,097		5.0			18,343		5.4
2037 and following		—		—			11,382		4.6			9,962		5.5			197		4.9

Total	$	80,393		5.4	%	$	339,888		5.5	%	$	113,674		5.3	%	$	36,120		5.8	%


	Commercial										Consumer
	Construction					Lease Financing					Real Estate 1-4 Family First Mortgage					HELOCs, Home Equity Loans and Other Consumer Installment Credit					TOTALS
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due During Years Ending December 31, 2013(1)	$	3,524		5.7	%	$	—		—		$	8,473		7.6	%	$	520		5.1	%	$	81,967		6.0	%
2014		3,124		5.4			226		8.4	%		4,555		4.7			197		3.2			36,464		5.3
2015 and 2016		—		—			1,182		8.9			86		5.5			2,536		3.4			63,885		5.7
2017 to 2021		—		—			6,397		9.0			61,750		3.4			6,292		3.3			284,483		5.0
2022 to 2036		—		—			3,398		10.0			318,595		3.6			10,319		4.5			512,909		4.3
2037 and following		—		—			—		—			243,612		4.6			1,698		3.9			266,851		4.6

Total	$	6,648		5.6	%	$	11,203		9.3	%	$	637,071		4.0	%	$	21,562		4.3	%	$	1,246,559		4.7	%

(1)	Includes demand loans and leases, loans and leases having no stated maturity and overdraft loans.

The following schedule illustrates the Company’s loan and lease portfolio at December 31, 2012 as the loans and leases reprice. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the loan reprices. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. (Dollars in thousands)


	Commercial
	Commercial and Industrial					Real Estate Mortgage					Multi-Family					SBA
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due During Years Ending December 31, 2013	$	40,685		5.4	%	$	93,101		5.6	%	$	42,887		5.4	%	$	34,204		5.6	%
2014		8,288		5.0			29,224		5.5			5,795		5.6			53		15.3
2015 and 2016		6,096		5.5			42,838		5.9			7,358		5.3			432		13.7
2017 to 2021		21,023		5.6			120,186		5.1			49,882		5.3			584		11.8
2022 to 2036		4,301		5.3			46,273		5.7			5,579		5.0			847		8.8
2037 and following		—		—			8,266		4.9			2,173		4.5			—		—

Total	$	80,393		5.4	%	$	339,888		5.5	%	$	113,674		5.3	%	$	36,120		5.8	%


	Commercial										Consumer
	Construction					Lease Financing					Real Estate 1-4 Family First Mortgage					HELOCs, Home Equity Loans and Other Consumer Installment Credit					TOTALS
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
Due During Years Ending December 31, 2013(1)	$	6,648		5.6	%	$	—		—		$	371,516		3.6	%	$	16,062		3.4	%	$	605,103		4.3	%
2014		—		—			226		8.9	%		56,364		4.6			—		—			99,950		5.0
2015 and 2016		—		—			1,182		8.9			51,206		5.3			21		19.7			109,133		5.8
2017 to 2021		—		—			6,397		9.0			78,379		3.7			284		9.1			276,735		4.9
2022 to 2036		—		—			3,398		10.0			17,889		4.9			4,311		6.0			82,598		5.6
2037 and following		—		—			—		—			61,717		5.4			884		3.9			73,040		5.1

Total	$	6,648		5.6	%	$	11,203		9.3	%	$	637,071		4.0	%	$	21,562		4.3	%	$	1,246,559		4.7	%

(1)	Includes demand loans and leases, loans and leases having no stated maturity and overdraft loans.

The total amount of loans and leases due after December 31, 2012 which have predetermined interest rates is $318.2 million, while the total amount of loans and leases due after such date which have floating or adjustable interest rates is $928.3 million.

Loan and Lease Originations, Purchases, Repayments, and Servicing

The Company originates real estate secured loans primarily through MHMB (a division of PacTrust Bank), other mortgage brokers and banking relationships. Loans originated are either: eligible for sale to Fannie Mae and Freddie Mac, government insured FHA or VA, held by the Company, or sold to private investors.

The Company also originates consumer and real estate loans on a direct basis through our marketing efforts and our existing and walk-in customers. The Company originates both adjustable and fixed-rate loans, however, the ability to originate loans is dependent upon customer demand for loans in our market areas. Demand is affected by competition and the interest rate environment. During the last few years, the Company has significantly increased origination of ARM loans. The Company has also purchased ARM loans secured by one-to four-family residences and participations in construction and commercial real estate loans in the past. During 2012, the Company purchased ARM loans secured by purchased commercial real estate and multi-family properties totaling $18.7 million, and lease financing receivables totaling $11.8 million. Loans and participations purchased must conform to the Company’s underwriting guidelines or guidelines acceptable to the management loan committee.

During the course of 2012, the Company completed three bulk acquisitions of generally performing residential mortgage loans whose characteristics and payment history were consistent with borrowers that demonstrated a willingness and ability to remain in the residence pursuant to the current terms of the mortgage loan agreement. The Company was able to acquire these loans at a significant discount to both current property value at acquisition and note balance. For each acquisition the Company was able to utilize it’s background in mortgage credit analysis to re-underwrite the borrower’s credit to arrive at what it believes to be an attractive risk adjusted return for a highly collateralized investment in performing mortgage loans. The acquisition program implemented and executed by the Company involved a multifaceted due diligence process that included compliance reviews, title analyses, review of modification agreements, updated property valuation assessments, collateral inventory and other undertakings related to the scope of due diligence. In aggregate, the purchase price of the loans was less than 70% of current property value at the time of acquisition based on a third party broker price opinion, and less than 60% of note balance at the time of acquisition. The Bank acquired these loans with an unpaid principal balance of $114.8 million and carrying value of $66.7 million. As of December 31, 2012 the unpaid principal balance of these loans was $ 108.3 million and carrying value of $ 64.9 million.

Servicing

One to four single family residential real estate loans held in the portfolio are serviced in house, pursuant to secondary market guidelines. When a borrower fails to make a payment on a mortgage loan, a late charge notice is mailed 16 days after the due date. All delinquent accounts are reviewed by a collector, who attempts to cure the delinquency by contacting the borrower prior to the loan becoming 30 days past due. If the loan becomes 60 days delinquent, the collector will generally contact the borrower by phone, send a personal letter and/or engage a field service company to visit the property in order to identify the reason for the delinquency. Once the loan becomes 90 days delinquent, contact with the borrower is made requesting payment of the delinquent amount in full, or the establishment of an acceptable repayment plan to bring the loan current. When a loan becomes 90 days delinquent, a drive-by inspection is made and if an acceptable repayment plan has not been agreed upon, a collection officer will generally initiate foreclosure or refer the account to the Company’s counsel to initiate foreclosure proceedings.

For SBA, construction, lease financing and consumer loans a similar process is followed, with the initial written contact being made once the loan is 10 days past due with a follow-up notice at 16 days past due. Follow-up contacts are generally on an accelerated basis compared to the SFR mortgage loan procedure.

Asset Quality

Accruing Loans and Leases in Past Due Status. The following table is a summary of our performing loans and leases that were past due at least 30 days but less than 90 days past due as of December 31, 2012 and December 31, 2011. The Company ceases accruing interest, and therefore classifies as non-performing, any loan or lease to which principal or interest has been in default for period of 90 days or more, or if repayment in full of interest or principal is not expected.


	December 31, 2012			December 31, 2011
	(Dollars in Thousands)
Performing loans past due 30 to 89 days:
Commercial:
Commercial and industrial	$	255		$	—
Real estate mortgage		775			291
Multi-family		—			—
SBA		136
Construction		—
Lease financing		118			—
Consumer:
Real estate 1-4 family mortgage		7,797			10,669
HELOC, home equity loans, and other consumer installment credit		27			4

Total performing loans past due 30 to 89 days	$	9,108		$	10,964

Ratios:
Performing loans past due 30 to 89 days as a percentage of total loans		0.69	%		1.40	%
Performing loans past due 90 days or more as a percentage of total loans		0.00	%		0.00	%
Total performing loans in past due status as a percentage of total loans		0.69	%		1.40	%

Non Traditional Mortgage Loan Delinquency. As of December 31, 2012 and 2011, $11.7 million or 3.2% and $10.2 million or 2.7%, respectively of the NTM portfolio were greater than 30 days delinquent.

The table below represents the Company’s non-traditional mortgage loan delinquency status as of the dates indicated:


	December 31,
	2012															2011
	Current			30+			60+			90+			Total			Current			30+			60+			90+			Total
	(Dollars in thousands)															(Dollars in thousands)
Green	$	196,441		$	1,410		$	2,495		$	5,658		$	206,004		$	225,599		$	630			$—		$	1,976		$	228,205
Interest-Only		141,218			795			58			907			142,978			118,280			2,517			512			2,940			124,249
Negative Amortization		18,841			—			421			—			19,262			19,905			734			—			886			21,525

Total Real Estate 1-4 family first mortgages	$	356,500		$	2,205		$	2,974		$	6,565		$	368,244		$	363,784		$	3,881		$	512		$	5,802		$	373,979

Percentage to total		96.8	%		0.6	%		0.8	%		1.8	%		100.0	%		97.3	%		1.0	%		0.1	%		1.6	%		100.0	%

Nonaccrual Loans and Leases. The following table summarizes our nonaccrual loans and leases, at the dates indicated. This table includes troubled debt restructured loans on nonaccrual. There were no loans or leases past due 90 days or more and still accruing interest at December 31, 2012, 2011, 2010, 2009 and 2008. Nonaccrual loans and leases at December 31, 2012, 2011, 2010, 2009 and 2008, totaling $21.7 million, $16.3 million, $35.4 million and $40.6 million and $31.0 million, respectively, were net of specific reserve allocations of $1.3 million, $2.9 million, $3.4 million, $5.6 million and $13.2 million, respectively.


	December 31, 2012		December 31, 2011		December 31, 2010		December 31, 2009		December 31, 2008
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	—
Real estate mortgage		2,906		1,887		9,715		7,247		9,377
Multi-Family		5,442		3,090		8,502		10,519		5,412
SBA		141		—		—		—		—
Construction		—		—		—		—		17,835
Lease financing		—		—		—		—
Consumer:
Real estate 1-4 family first mortgage		14,503		14,272		20,611		24,443		11,503
HELOC, home equity loans, and other consumer installment credit		1		5		2		3,963		92

Total nonaccrual loans and leases	$	22,993	$	19,254	$	38,830	$	46,172	$	44,219

Non-Performing Assets. Non-performing assets consist of (i) loans on non-accrual status which are loans on which the accrual of interest has been discontinued and include restructured loans when there has not been a history of past performance on debt service in accordance with the contractual terms of the restructured loans, (ii) loans 90 days or more past due and still accruing interest, and (iii) other real estate owned, or OREO, which consists of real properties which have been acquired by foreclosure or similar means and which the Company holds for sale.

Loans are placed on non-accrual status when, in the opinion of the Company’s management, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless the Company believes the loan is adequately collateralized and the loan is in the process of collection. However, in certain instances, the Company may place a particular loan on non-accrual status earlier, depending upon the individual circumstances involved in loan’s delinquency. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of unpaid amounts on such a loan are applied to reduce principal when received, except when the ultimate collectability of principal is probable, in which case interest payments are credited to income. Non-accrual loans may be restored to accrual status if and when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans not meeting the criteria for non-accrual treatment.

The following table is a summary of our non-performing loans and leases, including non-performing restructured loans and leases at December 31, 2012 and 2011. This table includes troubled debt restructured loans on nonaccrual. There were no loans or leases past due 90 days or more and still accruing interest at December 31, 2012 and 2011. Non-performing loans and leases at December 31, 2012 and 2011 totaling $21.7 million and $16.3 million were net of specific reserve allocations of $1.3 million and $2.9 million, respectively. Other real estate owned at December 31, 2012 and 2011 totaling $4.5 million and $14.7 million was net of specific reserve allocations of $2.1 million and $4.1 million, respectively.


	At December 31, 2012		At December 31, 2011
	(In thousands)
Commercial:
Commercial and industrial	$	—	$	—
Real estate mortgage		2,906		1,887
Multi-Family		5,442		3,090
SBA		141		—
Construction		—		—
Lease financing		—		—
Consumer:
Real estate 1-4 family first mortgage		14,503		14,272
HELOC, home equity loans, and other consumer installment credit		1		5

Total nonperforming loans		22,993		19,254
Other real estate owned		4,527		14,692

Total nonperforming assets	$	27,520	$	33,946

Troubled Debt Restructured Loans and Leases (TDRs). Loans that the Company modifies or restructures where the debtor is experiencing financial difficulties and makes a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances are classified as troubled debt restructurings (“TDRs”). TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. A workout plan between a borrower and the Company is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated.

As of December 31, 2012, the Company had 33 loans and leases with an aggregate balance of $18.7 million classified as TDR. Specific valuation allowances totaling $0.6 million have been established for these loans and leases. When a loan or lease becomes a TDR the Company ceases accruing interest, and classifies it as non-accrual until the borrower demonstrates that the loan or lease is again performing.

As of December 31, 2012, of the 33 loans and leases classified as TDRs, 31 loans and leases totaling $17.2 million are making payments according to their modified terms and are less than 90-days delinquent. Of the aforementioned $17.2 million in TDR loans and leases, $10.5 million are secured by single-family residential real estate, $1.9 million are secured by commercial real estate, $3.1 million are secured by multi-family and the remaining is comprised of commercial and industrial loans of $1.2 million, SBA loans of $423 thousand and an unsecured $1 thousand consumer loan. Two TDR loans with an aggregate balance of $1.5 million are over 90 days delinquent and are secured by SFRs.

Other Real Estate Owned. At December 31, 2012, other real estate acquired in settlement of loans and leases totaled $4.5 million, net of a valuation allowance of $2.1 million, based on the fair value of the collateral less estimated costs to sell.

Classified Assets. Federal regulations provide for the classification of loans and leases and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve or charge-off is not warranted.

When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allocation allowances for loan and lease losses in an amount deemed prudent by management and approved by the Board of Directors. General allocation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allocation allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its specific allocation allowances is subject to review by the OCC (in the case of PacTrust Bank) and the FDIC (in the case of Beach), which may order the establishment of additional general or specific loss allocation allowances.

In connection with the filing of the Banks’ periodic reports with the OCC and FDIC and in accordance with policies for our classification of assets, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review of assets, at December 31, 2012, the Company had classified assets (including OREO) totaling $33.0 million, of which all was classified as substandard. The total amount classified represented 17.5% of the Company’s shareholders equity and 2.0% of the Company’s total assets at December 31, 2012.

The following table displays the Company’s risk categories including non-traditional mortgages, as of December 31, 2012.


	December 31, 2012
	Pass		Special Mention		Substandard		Doubtful		Not Rated		TOTAL
	(Dollars in thousands)
Commercial
Commercial and industrial	$	73,579	$	—	$	—	$	—	$	—	$	73,579
Real estate mortgage		310,977		1,618		4,469		—		—		317,064
Multi-family		109,059		—		5,178		—		—		114,237
SBA		30,296		18		154		—		—		30,468
Construction		6,623		—		—		—		—		6,623
Lease financing		11,202		—		—		—		—		11,202
Consumer
Real estate 1-4 family first mortgage		543,928		11,222		18,451		—		—		573,601
HELOC, home equity loans, and other consumer installment credit		21,071		193		213		—		—		21,477

Total	$	1,106,735	$	13,051	$	28,465	$	—	$	—	$	1,148,251

Non-Traditional Mortgage Classified Assets. The Company’s non-traditional mortgage risk management and credit monitoring policy includes reviewing delinquency, FICO scores, and collateral values on the non-traditional mortgage loan portfolio. Loan reviews are performed on the NTM portfolio on a semi-annual basis and management believes the loan reviews are an effective method to proactively identify any borrower who may be experiencing financial difficulty before they fail to make loan payments. Part of the loan review includes risk rating each loan according to performance factor that include FICO scores, LTV, and delinquency.

The table below represents the Company’s non-traditional mortgage loans by credit risk categories as of the dates indicated:


	December 31, 2012
	Pass			Special Mention			Substandard			Doubtful		Total
							(Dollars in thousands)
Green	$	192,188		$	7,119		$	6,697		$	—	$	206,004
Interest-Only		135,679			230			7,069			—		142,978
Negative Amortization		18,841			421			—			—		19,262

Total Real Estate 1-4 family first loans	$	346,708		$	7,770		$	13,766		$	—	$	368,244

Percent to total for each loan category		94.2	%		2.1	%		3.7	%		—		100.0	%

	December 31, 2011
	Pass			Special Mention			Substandard			Doubtful		Total
							(Dollars in thousands)
Green	$	209,656		$	9,369		$	9,180		$	—	$	228,205
Interest-Only		109,281			6,064			8,904			—		124,249
Negative Amortization		19,331			1,309			885			—		21,525

Total Real Estate 1-4 family first loans	$	338,268		$	16,742		$	18,969		$	—	$	373,979

Percent to total for each loan category		90.4	%		4.5	%		5.1	%		—		100.0	%

Provision for Loan and Lease Losses. While the past year has been a challenging operating environment, we believe that the national and local Southern California economies are both improving. Two economic metrics that most significantly affect the Bank are unemployment and home prices, that are trending positively, albeit slowly. Unemployment in Southern California is still high but declining. Home prices have stabilized with some pockets in Southern California seeing prices appreciate. The Company saw declines in the level and composition of the Banks’ non-performing and classified assets between December 31, 2011 and December 31, 2012. While the Company’s non-performing and classified assets are trending downward, the Company’s loan and lease loss provision was relatively stable for the year ended December 31, 2012 of $5.5 million, compared to a loan and lease loss provision of $5.4 million for the year ended December 31, 2011. The provision for loan and lease losses is charged or credited to income to adjust our allowance for loan and lease losses to reflect probable losses presently inherent in the loan and lease portfolio based on the factors discussed below under “Allowance for Loan and Lease Losses.”

Allowance for Loan and Lease Losses. The allowance for loan and lease losses (“ALLL”) represents management’s best estimate of the probable losses inherent in the existing loan and lease portfolio. The ALLL is increased by the provision for loan losses charged to expense and reduced by loan and lease charge-offs, net of recoveries.

Management evaluates the Company’s ALLL on a quarterly basis, or more often if needed. Management believes the ALLL is a “critical accounting estimation” because it is based upon the assessment of various

quantitative and qualitative factors affecting the collectability of loans and lease, including current economic conditions, past credit experience, delinquency status, the value of the underlying collateral, if any, and a continuing review of the portfolio of loans and leases.

The Company’s ALLL is based on a number of quantitative and qualitative factors, including levels and trends of past due and non-accrual loans and leases, TDR, asset classifications, loan and lease credit risk grades, changes in the volume and mix of loans and leases, collateral value, historical loss experience, peer group loss experience, size and complexity of individual credits, and economic conditions. Provisions for loan and lease losses are provided on both a specific and general basis.

The Company incorporates statistics provided by the FDIC regarding loss percentages experience by banks in the western United States, as well as an internal three-year loss history, to establish potential risk based on the type of collateral, if any, securing each loan and lease. As an additional comparison, data from local banks with the Company’s peer group is reviewed to determine the nature and scope of their losses to date. These reviews provide an understanding of the geographic and size trends in the local banking community.

Specifically, our allowance methodology contains three key elements: (i) amounts based on specific evaluations of impaired loans and leases; (ii) amounts of estimated losses by loans and leases segmentation and by risk rating; and (iii) amounts for qualitative factors, including environmental and general economic factors that indicate probable losses were incurred but were not captured through the other elements of our ALLL process. In addition, for loans and leases measured at fair value on the acquisition date, and deemed to be non-impaired, our allowance methodology captures deterioration in credit quality and other inherent risks of such acquired assets experienced after the purchase date.

Impaired loans and leases are identified at each reporting date based on certain criteria and the majority of which are individually reviewed for impairment. Nonaccrual loans and leases and all performing restructured loans are reviewed individually for the amount of impairment, if any. A loan or lease is considered impaired when it is probable that we will be unable to collect all amounts due according to the original contractual terms of the agreement. We measure impairment of a loan based upon the fair value of the loan’s collateral if the loan is collateral-dependent, or the present value of cash flows, discounted at the loan’s effective interest rate, if the loan is not collateral-dependent. We measure impairment of a lease based upon the present value of the scheduled lease and residual cash flows, discounted at the lease’s effective interest rate. Increased charge-offs or additions to specific reserves generally result in increased provisions for credit losses.

Our loan and lease portfolio, excluding impaired loans and leases which are evaluated individually, is evaluated by segmentation. The segmentations we currently evaluate are:

•

Commercial real estate—manufacturing

•

Commercial real estate—retail

•

Commercial real estate—office

•

Commercial real estate—industrial

•

Commercial real estate—hospitality

•

Commercial real estate—other

•

Legacy condo conversion

•

Leasing

•

Single family residence—owner occupied, 1^st trust deed

Amortizing

Interest only now amortizing

Interest only

Negative amortization

Green Loans

•

Single family residence—non-owner occupied, 1^st trust deed

Amortizing

Interest only now amortizing

Interest only

Negative amortization

Green Loans

•

2^nd trust deeds

•

Consumer

Within these loan segments, we then evaluate loans and leases not adversely classified, which we refer to as “pass” credits, separately from adversely classified loans and leases. The adversely classified loans and leases are further grouped into three credit risk rating categories: “special mention,” “substandard,” and “doubtful.” See “—Asset Quality—Classified Assets.”

In addition, we may refer to the loans and leases classified as “substandard” and “doubtful” together as “criticized” loans and leases.

The allowance amounts for “pass” rated loans and leases and those loans and leases adversely classified, which are not reviewed individually, are determined using historical loss rates. The historical loss rates are updated quarterly based on historical losses.

Finally, in order to ensure our allowance methodology is incorporating recent trends and economic conditions, we perform a qualitative analysis, including the consideration of environmental and general economic factors to our ALLL methodology including: (i) credit concentrations; (ii) delinquency trends; (iii) economic and business conditions; (iv) the quality of lending management and staff; (v) lending policies and procedures; (vi) loss and recovery trends; (vii) nature and volume of the portfolio; (viii) nonaccrual and problem loan trends; (ix) usage trends of unfunded commitments; (x) and other adjustments for items not covered by other factors.

Management periodically reviews the quantitative and qualitative loss factors utilized in its analysis of the specific and general ALLL in an effort to incorporate the current status of the factors described above.

Although management believes the level of the ALLL as of December 31, 2012 was adequate to absorb probable losses in the portfolio, declines and/or improvements in economics of the Company’s primary markets or other factors could result in losses that cannot be reasonably predicted at this time.

Although we have established an ALLL that we consider appropriate, there can be no assurance that the established ALLL will be sufficient to offset losses on loans and leases in the future. Management also believes that the reserve for unfunded loan commitments is appropriate. In making this determination, we use the same methodology for the reserve for unfunded loan commitments as we do for the allowance for loan and lease losses and consider the same quantitative and qualitative factors, as well as an estimate of the probability of advances of the commitments correlated to their credit risk rating.

At December 31, 2012, our ALLL was $14.4 million or 1.16% of the total gross loans. Assessing the allowance for loan and lease losses is inherently subjective as it requires making material estimates, including the

amount and timing of future cash flows expected to be received on impaired loans and leases that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, reflects estimated probable losses presently inherent in our loan and lease portfolios.

The following table sets forth an analysis of our allowance for loan and lease losses.


	Year Ended December 31,
	2012			2011			2010			2009			2008
	(Dollars in Thousands)
Balance at beginning of period	$	12,780		$	14,637		$	13,079		$	18,286		$	6,240
Charge-offs
Commercial:
Commercial and industrial		—			—			—			—			(647	)
Real Estate mortgage		(987	)		(1,899	)		(2,695	)		(6,266	)		—
Multi-family		—			(2,136	)		—			—			—
SBA		(64	)		—			—			—			—
Construction		—			—			—			(12,557	)		—
Lease financing		—			—			—			—			—
Consumer:
Real Estate 1-4 family first mortgage		(3,006	)		(3,276	)		(4,747	)		(1,666	)		(461	)
HELOC’s, home equity loans, and other consumer installment credit		(14	)		(201	)		(89	)		(2,016	)		(443	)

Loans charged off		(4,071	)		(7,512	)		(7,531	)		(22,505	)		(1,551	)
Recoveries
Commercial:
Commercial and industrial		—			—			—			—			—
Real Estate mortgage		—			24			6			—			—
Multi-family		—			68			—			—			—
SBA		14			—			—			—			—
Construction		—			—			—			—			—
Lease financing		—			—			—			—			—
Consumer:
Real Estate 1-4 family first mortgage		221			165			92			—			—
HELOC’s, home equity loans, and other consumer installment credit		4			10			34			2

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