firstcal.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 2009
 
OR
 
¨
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 000-52498
 
FIRST CALIFORNIA FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
   
Delaware
38-3737811
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
 
   
3027 Townsgate Road, Suite 300
Westlake Village, California
91361
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (805) 322-9655
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
    Yes  ¨    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
Large accelerate filer  
¨
Accelerated filer
¨
         
 
Non-accelerated filer
¨  
Smaller reporting company  
x
 
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
    Yes  ¨    No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
11,627,008 shares of Common Stock, $0.01 par value, as of November 6, 2009
 
 
 

 

FIRST CALIFORNIA FINANCIAL GROUP, INC.
QUARTERLY REPORT ON
FORM 10-Q
 
For the Quarterly Period Ended September 30, 2009
 
TABLE OF CONTENTS
 
   
Page
     
3
     
17
     
41
     
41
   
     
42
     
42
     
42
     
42
     
42
     
42
     
42
   
43


PART I—FINANCIAL INFORMATION
 
 
Financial Statements
 
FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
 
(in thousands)
 
September 30,
2009
   
December 31,
2008
 
Cash and due from banks
  $ 42,753     $ 13,712  
Federal funds sold
    61,395       35,415  
Securities available-for-sale, at fair value
    302,378       202,462  
Loans held-for-sale
          31,401  
Loans, net
    928,714       780,373  
Premises and equipment, net
    20,702       20,693  
Goodwill
    60,720       50,098  
Other intangibles, net
    11,997       8,452  
Deferred tax assets, net
    514       2,572  
Cash surrender value of life insurance
    11,682       11,355  
Foreclosed property
    6,120       327  
Accrued interest receivable and other assets
    22,653       21,185  
                 
Total assets
  $ 1,469,628     $ 1,178,045  
                 
Non-interest checking
  $ 297,995     $ 189,011  
Interest checking
    83,717       22,577  
Money market and savings
    320,816       198,606  
Certificates of deposit, under $100,000
    140,122       191,888  
Certificates of deposit, $100,000 and over
    282,381       215,513  
                 
Total deposits
    1,125,031       817,595  
Securities sold under agreements to repurchase
    45,000       45,000  
Federal Home Loan Bank advances
    104,000       122,000  
Junior subordinated debentures
    26,740       26,701  
Accrued interest payable and other liabilities
    7,799       7,826  
                 
Total liabilities
    1,308,570       1,019,122  
                 
Perpetual preferred stock; authorized 2,500,000 shares
               
Series A - $0.01 par value, 1,000 shares issued and outstanding as of September 30, 2009 and December 31, 2008
    1,000       1,000  
Series B - $0.01 par value, 25,000 shares issued and outstanding as of September 30, 2009 and December 31, 2008
    23,056       22,713  
Common stock, $0.01 par value; authorized 25,000,000 shares; 11,972,034 shares issued at September 30, 2009 and 11,807,624 shares issued at December 31, 2008; 11,625,633 and 11,462,964 shares outstanding at September 30, 2009 and December 31, 2008
    118       118  
Additional paid-in capital
    136,389       135,603  
Treasury stock, 346,401 shares at cost at September 30, 2009 and 344,660 shares at December 31, 2008
    (3,061 )     (3,050 )
Retained earnings
    8,600       11,559  
Accumulated other comprehensive loss
    (5,044 )     (9,020 )
                 
Total shareholders’ equity
    161,058       158,923  
                 
Total liabilities and shareholders’ equity
  $ 1,469,628     $ 1,178,045  
 
See accompanying notes to consolidated financial statements.


FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
 
   
Three months ended Sept. 30,
   
Nine months ended Sept. 30,
 
(in thousands, except per share data)
 
2009
   
2008
   
2009
   
2008
 
Interest and fees on loans
  $ 13,331     $ 12,674     $ 39,144     $ 39,391  
Interest on securities
    2,819       2,870       9,847       8,827  
Interest on federal funds sold and interest bearing deposits
    78       4       368       18  
                                 
Total interest income
    16,228       15,548       49,359       48,236  
                                 
Interest on deposits
    2,938       2,960       9,519       10,375  
Interest on borrowings
    1,455       1,801       4,512       5,599  
Interest on junior subordinated debentures
    439       439       1,365       1,316  
                                 
Total interest expense
    4,832       5,200       15,396       17,290  
                                 
                                 
Net interest income before provision for loan losses
    11,396       10,348       33,963       30,946  
Provision for loan losses
    4,117       300       10,296       950  
                                 
Net interest income after provision for loan losses
    7,279       10,048       23,667       29,996  
                                 
Service charges on deposit accounts
    1,111       729       3,199       1,885  
Loan sales and commissions
    22       143       76       382  
Net gain on sale of securities
    1,639             4,310        
Net gain (loss) on derivatives
          (1 )           857  
Impairment loss on securities
                (565 )      
Other income
    158       146       565       865  
                                 
Total noninterest income
    2,930       1,017       7,585       3,989  
                                 
Salaries and employee benefits
    5,011       4,076       16,032       13,423  
Premises and equipment
    1,558       1,117       4,871       3,322  
Data processing
    862       293       1,812       1,008  
Legal, audit and other professional services
    541       530       1,758       1,386  
Printing, stationery and supplies
    197       160       600       492  
Telephone
    237       203       764       540  
Directors’ expense
    142       112       398       322  
Advertising, marketing and business development
    245       286       1,144       939  
Postage
    39       36       190       151  
Insurance and regulatory assessments
    849       364       2,504       932  
Loss on and expense of foreclosed property
    193             442        
Amortization of intangible assets
    417       298       1,210       893  
Market value loss on loans held-for-sale
                709        
Other expenses
    1,003       709       2,513       2,001  
                                 
Total noninterest expense
    11,294       8,184       34,947       25,409  
                                 
                                 
Income (loss) before provision for income taxes
    (1,085 )     2,881       (3,695 )     8,576  
Provision (benefit) for income taxes
    (949 )     1,120       (1,898 )     3,342  
                                 
Net income (loss)
  $ (136 )   $ 1,761     $ (1,797 )   $ 5,234  
                                 
                                 
Earnings (loss) per common share:
                               
Basic
  $ (0.04 )   $ 0.15     $ (0.23 )   $ 0.46  
Diluted
  $ (0.04 )   $ 0.15     $ (0.23 )   $ 0.45  
 
See accompanying notes to consolidated financial statements.


FIRST CALIFORNIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
 
   
Nine Months Ended Sept. 30,
 
(in thousands)
 
2009
   
2008
 
Net income (loss)
  $ (1,797 )   $ 5,234  
Adjustments to reconcile net income (loss) to net cash from operating activities:
               
Provision for loan losses
    10,296       950  
Stock-based compensation costs
    774       415  
Gain on sales of securities and loans
    (4,310 )     (162 )
Gain on settlement of derivatives
          (857 )
Loss on sale of foreclosed property
    72        
Market value loss on loans held-for-sale
    709        
Impairment loss on securities
    565        
Amortization (accretion) of net premiums (discounts) on securities available-for-sale
    578       (254 )
Depreciation and amortization of premises and equipment
    1,194       1,087  
Amortization of core deposit and trade name intangibles
    1,210       893  
FHLB stock dividends
          (324 )
Origination of loans held-for-sale
          (13,277 )
Proceeds from sale of, and payments received from, loans held-for-sale
    181       24,908  
Increase in cash surrender value of life insurance
    (327 )     (317 )
Decrease in deferred tax assets
    2,058        
Increase in accrued interest receivable and other assets, net of effects from acquisition
    (446 )     (3,983 )
Decrease in accrued interest payable and other liabilities, net of effects from acquisition
    (427 )     (5,913 )
                 
Net cash provided by operating activities
    10,330       8,400  
                 
Purchases of securities available-for-sale, net of effects from acquisition
    (171,273 )     (25,748 )
Proceeds from repayment and maturities of securities available-for-sale
    48,567       33,318  
Proceeds from sales of securities available-for-sale
    120,483        
Proceeds from redemption of Federal Home Loan Bank stock
          1,581  
Purchases of Federal Home Loan Bank and other stock
    (54 )     (4,257 )
Net change in federal funds sold, net of effects from acquisition
    87,110       (725 )
Loan originations and principal collections, net of effects from acquisition
    (35,082 )     (28,262 )
Purchases of premises and equipment, net of effects from acquisition
    (1,039 )     (3,547 )
Proceeds from sale of foreclosed property
    949       42  
Net cash paid in acquisition
    (48,790 )      
                 
Net cash provided (used) in investing activities
    871       (27,598 )
                 
Net increase (decrease) in noninterest-bearing deposits, net of effects of acquisition
    14,737       (2,740 )
Net increase (decrease) in interest-bearing deposits, net of effects of acquisition
    21,885       (573 )
Net increase (decrease) in FHLB advances and other borrowings
    (17,961 )     25,659  
Dividends paid on preferred stock
    (819 )      
Purchases of treasury stock
    (11 )     (666 )
Proceeds from exercise of stock options
    9       86  
                 
Net cash (used) provided by financing activities
    17,840       21,766  
                 
Change in cash and due from banks
    29,041       2,568  
Cash and due from banks, beginning of period
    13,712       17,413  
                 
Cash and due from banks, end of period
  $ 42,753     $ 19,981  
                 
                 
Supplemental cash flow information:
               
Cash paid for interest
  $ 13,953     $ 15,813  
Cash paid for income taxes
  $ 950     $ 6,188  
Supplemental disclosure of noncash items:
               
Net change in unrealized (loss) gain on securities available-for-sale
  $ 5,520     $ (4,957 )
Net change in unrealized loss on cash flow hedges
  $     $ (95 )
Transfer of loans to foreclosed property
  $ 6,893     $  
Transfer of loans held-for-sale to loans
  $ 31,221     $  
 
See accompanying notes to consolidated financial statements.
 
 
5

 
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
 
Organization and nature of operations – First California Financial Group, Inc., or First California, or the Company, is a bank holding company incorporated under the laws of the State of Delaware and headquartered in Westlake Village, California. The principal asset of the Company is the capital stock of First California Bank, or the Bank. The Bank is a full-service commercial bank headquartered in Westlake Village, California, chartered under the laws of the State of California and subject to supervision by the California Commissioner of Financial Institutions and the Federal Deposit Insurance Corporation, or the FDIC. The FDIC insures the Bank’s deposits up to the maximum legal limit.
 
On January 23, 2009, the Bank assumed the insured, non-brokered deposits of 1st Centennial Bank, totaling approximately $270 million from the FDIC. The Bank also purchased from the FDIC approximately $178 million in cash and cash equivalents, $89 million in securities and $101 million in loans related to 1st Centennial Bank. The assumption of deposits and purchase of assets from the FDIC, or the FDIC-assisted 1st Centennial Bank transaction, was an all-cash transaction with an aggregate transaction value of $48.8 million. The Bank recorded $10.6 million in goodwill in connection with this transaction. All six of the former 1st Centennial Bank branches have been fully integrated into the Bank’s full-service branch network.
 
The Bank serves the comprehensive financial needs of businesses and consumers in Los Angeles, Orange, Riverside, San Diego, San Bernardino and Ventura counties through 17 full-service branch locations.
 
Consolidation – The accompanying condensed consolidated financial statements include, in conformity with generally accepted accounting principles in the United States of America, the accounts of the Company, the Bank and SC Financial, an inactive subsidiary of First California. The Company does not consolidate the accounts of FCB Statutory Trust I and First California Statutory Trust I, or the Trusts, in the consolidated financial statements. The Company does include however the junior subordinated debentures issued by the Company to the Trusts on the consolidated balance sheets. Results of operations for the nine months ended September 30, 2009 include the effects of the FDIC-assisted 1st Centennial Bank transaction from the date of the transaction. All material intercompany transactions have been eliminated.
 
Basis of presentation – The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnote disclosures normally required by generally accepted accounting principles for complete financial statements. In our opinion, all normal recurring adjustments necessary for a fair presentation are reflected in the unaudited condensed consolidated financial statements. Operating results for the period ended September 30, 2009 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2009. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2008 Annual Report on Form 10-K. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 13, 2009, the date the financial statements were available to be issued.
 
Reclassifications – Certain reclassifications have been made to the 2008 consolidated financial statements to conform to the current year presentation.
 
Management’s estimates and assumptions – The preparation of the consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported revenues and expenses for the reporting periods. Actual results could differ significantly from those estimates. Significant estimations made by management primarily involve the calculation of the allowance for loan losses, the carrying amount of deferred tax assets, the assessments for impairment related to goodwill and securities, the estimated fair value of financial instruments and the effectiveness of derivative instruments in offsetting changes in fair value or cash flows of hedged items.
 
Allowance for loan losses – The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes that the collectability of principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. The evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquency and nonaccruals, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national level, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior eight quarters. Various regulatory agencies, as a regular part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations. The allowance for loan losses was $12.1 million at September 30, 2009 and $8.0 million at December 31, 2008.
 
 
6

 
Deferred income taxes – Deferred income tax assets and liabilities represent the tax effects of the differences between the book and tax basis of the various balance sheet assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance for deferred tax assets. There was no valuation allowance at September 30, 2009 or December 31, 2008. There were net deferred tax assets of $0.5 million at September 30, 2009 and $2.6 million at December 31, 2008.
 
Derivative instruments and hedging – The Company assesses the effectiveness of derivative instruments designated in cash flow hedging relationships in off-setting changes in the overall cash flows of designated hedged transactions on a quarterly basis. During 2008, the effectiveness assessments indicated that the instruments were partially effective. To the extent the transactions were not effective the unrealized gains or losses on those instruments were reflected directly in current period earnings. During 2008, the Company also owned an interest rate floor, which was not designated in a hedging relationship. Accordingly, all changes in fair value of the floor were recognized directly in current period earnings. The Company owned no derivative instruments in 2009.
 
Assessments of impairment – Goodwill is assessed for impairment on an annual basis or at interim periods if an event occurs or circumstances change which may indicate a change in the implied fair value of the goodwill. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. First California uses independent data where possible in determining the fair value of the Company and in determining appropriate market factors used in the fair value calculations. At December 31, 2008, the annual assessment resulted in the conclusion that goodwill was not impaired. At September 30, 2009, because of the net loss for the first nine months of 2009, an interim assessment was performed and resulted in the conclusion that goodwill was not impaired.
 
An impairment assessment is performed regularly on the securities available-for-sale portfolio in accordance with Financial Accounting Standards Board, or FASB, accounting standards codification guidance related to the consideration of impairment related to certain debt and equity securities. All of the securities classified as available-for-sale are debt securities.
 
If the Company does not intend to sell, and it is more likely than not that the entity is not required to sell, a debt security before recovery of its cost basis, other-than-temporary impairment should be separated into (a) the amount representing credit loss and (b) the amount related to other factors. The amount of the other-than-temporary impairment related to credit loss is recognized in earnings and other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). Other-than-temporary declines in fair value are assessed based on the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, the long-term financial outlook of the issuer, and the expected future cash flows from the security. The Company concluded that there was one security with an other-than-temporary impairment of $565,000 at June 30, 2009. There were no additional other-than-temporary impairments recorded at September 30, 2009. Please see the “Securities” section of Management’s Discussion and Analysis in this document for a detailed explanation of the impairment analysis process. The Company will continue to evaluate the securities portfolio for other-than-temporary impairment at each reporting date and can provide no assurance there will not be an other-than-temporary impairment in future periods.
 
NOTE 2 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In December 2007, the FASB issued an accounting standard codification update related to business combinations which was effective on January 1, 2009. This accounting guidance changes the way acquisitions are accounted for in the following ways: (1) the measurement date for consideration transferred, including equity securities, is the date when control is obtained, generally the closing date; previously, equity securities issued in a business combination were measured at the combination’s announcement date; (2) acquisition and restructuring costs are generally expensed as incurred rather than being considered part of the cost of the business combination; (3) contractual contingencies are measured on the closing date at fair value with adjustments to such fair value recorded in earnings when new information is obtained; and (4) contingent consideration is measured at its fair value on the closing date with subsequent adjustments based on changes in fair value. The Company adopted this accounting standards update effective January 1, 2009, and applied this new standard to the FDIC-assisted 1st Centennial Bank transaction.
 
In June 2008, the FASB issued accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities. This accounting standards update clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities and are included in the two-class method of computing basic and diluted earnings per share. The Company adopted this accounting guidance update effective January 1, 2009 and this did not have a material impact on the Company’s financial condition, operating results or earnings (loss) per share amounts and disclosures.
 
In April 2009, the FASB issued the following three accounting standards updates intended to provide additional guidance and enhance disclosures regarding fair value measurements and impairment of securities:
 
The first accounting standards update related to fair value measurements provides additional guidance for estimating fair value for an asset or liability when the volume and level of activity for the asset or liability have decreased significantly in relation to normal market activity. This accounting standard update also provides guidance on identifying circumstances that indicate a transaction was not orderly. The provisions of this accounting standards update were effective for the Company’s interim period ended on June 30, 2009. The adoption of this accounting standards update did not have a material impact on the Company’s results of operations, financial condition, or cash flows.
 
 
7

 
The second accounting standards update related to fair value measurements requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of this accounting standards update were effective for the Company’s interim period ended on June 30, 2009. These accounting standards updates related to fair value measurements amend only the disclosure requirements about fair value of financial instruments in interim periods. The adoption of this accounting standards update did not affect the Company’s financial position or results of operations and only resulted in increased financial statement disclosures.
 
The third accounting standards update related to fair value measurements amends current other-than-temporary impairment guidance in generally accepted accounting principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This accounting standards update does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. However, it does change the presentation of other-than-temporary impairments in the financial statements. Under this accounting standards update, only credit-related losses will be realized through the income statement. Interest rate and other market-related losses will be recorded in other comprehensive income on the balance sheet and will not affect the cost basis of the security. The provisions of this accounting standards update was effective for the Company’s interim period ended on June 30, 2009. The adoption of the provisions of this accounting standards update did not have a material effect on the Company’s results of operations, financial condition, or cash flows because the Company had not previously incurred any other-than-temporary impairment charges. The adoption of this accounting standards update also increased financial statement disclosures.
 
NOTE 3 – ACQUISITION
 
On January 23, 2009, or the Transaction Date, the Bank assumed the insured, non-brokered deposits of 1st Centennial Bank from the FDIC, acting in its capacity as receiver of 1st Centennial Bank. Under the terms of the purchase and assumption agreement between the Bank and the FDIC, the Bank also purchased certain assets from the FDIC at the close of the transaction. The Bank paid cash consideration of $48.8 million to the FDIC for the assets acquired and liabilities assumed. The Bank continues to operate the former 1st Centennial Bank’s six branch locations as part of the Bank’s seventeen branch locations. The Company desired this transaction to enter into new markets and to assume a diversified deposit portfolio with a large percentage of stable core deposits.
 
Under the acquisition method of accounting, the Bank recorded the assets acquired and liabilities assumed based on their estimated fair values as of the Transaction Date. Results of operations for the nine months ended September 30, 2009 include the effects of the assumption of deposits and purchase of assets from the FDIC from the Transaction Date. The excess of the purchase price over the estimated fair values of the underlying assets acquired, the identified intangible assets, and liabilities assumed was allocated to goodwill. Thus, goodwill represents intangible assets that do not qualify for separate recognition.
 
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the Transaction Date.
 
(Dollars in thousands)
     
Assets Acquired:
     
Federal Funds sold
  $ 113,090  
Securities
    88,969  
Loans
    101,217  
Goodwill
    10,606  
Core deposit intangible
    4,755  
Other assets
    1,365  
         
Total assets acquired
    320,002  
         
         
Liabilities Assumed:
       
Deposits
    269,688  
Other liabilities
    1,524  
         
Total liabilities assumed
    271,212  
         
Total cash consideration paid to FDIC
  $ 48,790  
 
The Bank based the allocation of the purchase price above on the fair values of the assets acquired and the liabilities assumed. All of the resulting goodwill is expected to be deductible for tax purposes.
 
The following information presents the pro forma results of operations for the nine months ended September 30, 2009, as though the transaction had occurred on January 1, 2009. The pro forma data was derived by combining the historical consolidated financial information of First California and the results of operations from the assets purchased and liabilities assumed from the FDIC using the acquisition method of accounting for business combinations. The pro forma results do not necessarily indicate results that would have been obtained had the transaction actually occurred on January 1, 2009 or the results that may be achieved in the future.
 
(in thousands, except per share data)
 
Pro forma
Nine months ended
September 30, 2009
 
Net interest income
  $ 34,569  
Noninterest income
    7,672  
Noninterest expense
    35,169  
Provision for loan losses
    10,296  
         
Loss before provision for income taxes
    (3,224 )
Income tax benefit
    (1,656 )
         
Net loss
  $ (1,568 )
         
Pro forma loss per common share:
       
Basic
  $ (0.14 )
Diluted
  $ (0.14 )
Pro forma weighted average shares:
       
Basic
  11,598  
Diluted
  11,598  
 
 
 
 
8

 
 
The amount of net revenue from the assets acquired and liabilities assumed since the Transaction Date included in the consolidated statement of operations is $6.5 million. The net income included in the consolidated statement of operations from the assets acquired and liabilities assumed since the Transaction Date is $836,000.
 
The assets purchased and liabilities assumed were comprised mainly of specific securities, loans and deposit accounts. It is impractical to present comparative pro forma results as if the acquisition occurred at the beginning of the period ended September 30, 2008 as the balances and rates of the individual assets and liabilities is in some cases not applicable (did not exist in prior period) or the individual account balance and/or rate during the prior period is not known.
 
Per the terms of the purchase and assumption agreement, the Bank was given the exclusive option to purchase 1st Centennial Bank loans at par from the FDIC during the 30-day period subsequent to the Transaction Date. The Bank purchased $101 million of loans at par from the FDIC under this option and recorded these loans at fair value, which materially approximates the amortized cost of the loans, given that the loans were performing in accordance with the loan contracts at interest rates that approximate market rates at the time of acquisition.
 
The following table presents the composition of the 1st Centennial loans purchased from the FDIC (in millions):
 
Commercial mortgage
  $ 42.9  
Commercial loans and lines
    40.9  
Residential 1-4 mortgages
    10.0  
Multifamily mortgages
    4.9  
Construction
    2.0  
Home equity & consumer
    0.5  
         
Total
  $ 101.2  
 
In June 2009, the Bank exercised its option to purchase approximately $400,000 of furniture, fixtures and equipment related to the six branch locations at fair value from the FDIC. The Bank also negotiated and executed new leases approximating current market rents for the six branch locations. Other settlements are still pending with the FDIC, and once settled, may result in adjustments to the above amounts, including goodwill.
 
 
9

 
NOTE 4 – SECURITIES
 
The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities available-for-sale at September 30, 2009 and December 31, 2008 are summarized as follows:
 
   
September 30, 2009
 
(in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
U.S. Treasury notes
  $ 31,025     $ 30     $ (3 )   $ 31,052  
U.S. government agency notes
    50,002       1,054             51,056  
U.S. government agency collateralized mortgage obligations
    49,528       69       (29 )     49,568  
U.S. government agency mortgage-backed securities
    105,609       970       (38 )     106,541  
Private label collateralized mortgage obligations
    46,219       21       (9,436 )     36,804  
Municipal securities
    23,593       1,511       (2 )     25,102  
Other domestic debt securities
    4,867             (2,612 )     2,255  
                                 
Securities available-for-sale
  $ 310,843     $ 3,655     $ (12,120 )   $ 302,378  
                                 
       
   
December 31, 2008
 
(in thousands)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
U.S. government agency notes
  $ 2,000     $ 20     $     $ 2,020  
U.S. government agency collateralized mortgage obligations
    8,934       278       (5 )     9,207  
U.S. government agency mortgage-backed securities
    129,060       3,197       (46 )     132,211  
Private label collateralized mortgage obligations
    54,184             (15,493 )     38,691  
Municipal securities
    17,327       220       (123 )     17,424  
Other domestic debt securities
    4,941             (2,032 )     2,909  
                                 
Securities available-for-sale
  $ 216,446     $ 3,715     $ (17,699 )   $ 202,462  
 
The Company performs regular impairment analyses on the securities available-for-sale portfolio in accordance with FASB accounting standards codification guidance related to the consideration of impairment related to certain debt and equity securities. If it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the debt security not impaired at acquisition, an other-than-temporary impairment is considered to have occurred. When an other-than-temporary impairment occurs, the cost basis of the security is written down to its fair value (as the new cost basis) and the write-down is accounted for as a realized loss if it is credit related. Other-than-temporary declines in fair value are assessed based on the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, the long-term financial outlook of the issuer, the expected future cash flows and our ability and intent on holding the securities until the fair values recover.
 

 
10


The following table shows the gross unrealized losses and amortized cost of the Company’s securities with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2009 and December 31, 2008. This table excludes the one security with an other-than-temporary impairment at September 30, 2009.
 
   
At September 30, 2009
 
   
Less Than 12 Months
   
Greater Than 12 Months
   
Total
 
(in thousands)
 
Amortized
Cost
   
Unrealized
Losses
   
Amortized
Cost
   
Unrealized
Losses
   
Amortized
Cost
   
Unrealized
Losses
 
U.S. Treasury notes
  $ 7,739     $ (3 )   $     $     $ 7,739     $ (3 )
U.S. government agency mortgage-backed securities
    9,632       (38 )                 9,632       (38 )
U.S. government agency collateralized mortgage obligations
    5,045       (29 )                 5,045       (29 )
Private-label collateralized mortgage obligations
    3,959       (155 )     32,138       (7,302 )     36,097       (7,457 )
Municipal securities
                173       (2 )     173       (2 )
Other domestic debt securities
                4,867       (2,612 )     4,867       (2,612 )
                                                 
    $ 26,375     $ (225 )   $ 37,178     $ (9,916 )   $ 63,553     $ (10,141 )
 
   
At December 31, 2008
 
   
Less Than 12 Months
   
Greater Than 12 Months
   
Total
 
(in thousands)
 
Amortized
Cost
   
Unrealized
Losses
   
Amortized
Cost
   
Unrealized
Losses
   
Amortized
Cost
   
Unrealized
Losses
 
U.S. government agency mortgage-backed securities
  $ 3,611     $ (46 )   $     $     $ 3,611     $ (46 )
U.S. government agency collateralized mortgage obligations
    1,476       (5 )                 1,476       (5 )
Private-label collateralized mortgage obligations
    51,107       (15,205 )     3,078       (288 )     54,185       (15,493 )
Municipal securities
    7,360       (121 )     173       (2 )     7,533       (123 )
Other domestic debt securities
                4,941       (2,032 )     4,941       (2,032 )
                                                 
    $ 63,554     $ (15,377 )   $ 8,192     $ (2,322 )   $ 71,746     $ (17,699 )
 
The Company performed discounted cash flow analyses for our private-label collateralized mortgage obligations rated less than investment grade at September 30, 2009. These analyses used the current month, last three month and last twelve month historical prepayment speeds, the cumulative default rates and the loss severity rates to determine if there was an other-than-temporary impairment at September 30, 2009. One security with an amortized cost basis of $6.3 million and an unrealized loss of $1.9 million was deemed to be other-than-temporarily impaired at September 30, 2009.  The Company recognized an other-than-temporary impairment loss of $565,000 on this security at June 30, 2009 and did not recognize any additional other-than-temporary impairment loss in the third quarter of 2009.  As of December 31, 2008, the Company did not identify any securities that were other-than-temporarily impaired. Please see the “Securities” section of Management’s Discussion and Analysis in this document for a detailed explanation of the impairment analysis process. The Company will continue to evaluate the securities portfolio for other-than-temporary impairment at each reporting date and can provide no assurance there will not be an other-than-temporary impairment in future periods.
 
The following table presents the other-than-temporary impairment activity related to credit loss, which is recognized in earnings, and the other-than-temporary impairment activity related to all other factors, which are recognized in other comprehensive income.
 
   
Three Months Ended September 30, 2009
 
(in thousands)
 
Impairment
Related to
Credit Loss
   
Impairment
Related to
Other Factors
   
Total
Impairment
 
Recognized as of beginning of period
  $ 565     $     $ 565  
Charges on securities for which OTTI was not previously recognized
                 
                         
Recognized as of end of period
  $ 565     $     $ 565  

 
11

 
The amortized cost and estimated fair value of securities by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
At September 30, 2009
 
   
Amortized
Cost
   
Fair Value
 
   
(in thousands)
 
Due in one year or less
  $ 15,379     $ 15,384  
Due after one year through five years
    69,484       69,783  
Due after five years through ten years
    46,950       47,772  
Due after ten years
    179,030       169,439  
                 
Total
  $ 310,843     $ 302,378  
 
The Company has a $8.4 million investment in Federal Home Loan Bank of San Francisco (FHLB) stock. The FHLB stock is carried at cost at September 30, 2009, as the stock can only be redeemed at par. The Company considered the long-term nature of the investment and our intent and ability to hold this investment for a period of time sufficient to recover our recorded investment and determined it was not impaired at September 30, 2009.
 
NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The loan portfolio by type consists of the following:
 
(in thousands)
 
At
September 30,
2009
   
At
December 31,
2008
 
Commercial mortgage
  $ 365,540     $ 302,016  
Commercial loans and lines of credit
    250,422       228,958  
Multifamily mortgage
    134,096       51,607  
Construction and land development
    94,721       133,054  
Home mortgage
    51,747       45,202  
Home equity loans and lines of credit
    38,638       22,568  
Installment and credit card
    5,687       5,016  
                 
Total loans
    940,851       788,421  
Allowance for loan losses
    (12,137 )     (8,048 )
                 
Loans, net
  $ 928,714     $ 780,373  
                 
Loans held-for-sale
  $     $ 31,401  
 
Loans held-for-sale at December 31, 2008 represented performing multifamily residential loans originated from January 2008 to December 2008 at interest rates which approximated market rates. In the first quarter of 2009, the Company identified two prospective buyers for these loans and they undertook their purchase due diligence shortly after year-end. The Company accepted a bid from one of these buyers in March subject to completion of due diligence. This prospective buyer aggregates loans and re-sells them to the Federal National Mortgage Association (or FNMA). Subsequent to accepting the bid, FNMA changed its underwriting and documentation standards and, while the Company did work with the prospective buyer and our borrowers to meet these new standards, the Company ultimately determined not to pursue the sale and returned these performing, multifamily mortgage loans to the regular loan portfolio. A market loss of $709,000 was recognized in noninterest expense for the second quarter of 2009 to write down these loans to the lower of cost or market value.
 
At September 30, 2009, loans with a balance of $516.1 million were pledged as security for Federal Home Loan Bank, or FHLB, advances. Loan balances include net deferred fees of $1.5 million and $1.8 million at September 30, 2009 and December 31, 2008, respectively.
 
Most of the Company’s lending activity is with customers located in the six Southern California counties where our branches are located. The Company has no significant credit exposure to any individual customer; however, the economic condition in Southern California could adversely affect customers. A significant portion of our loans are collateralized by real estate. Changes in the economic condition in Southern California could adversely affect the value of real estate.

 
12

 
Changes in the allowance for loan losses were as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Dollars in thousands)
 
Beginning balance
  $ 11,955     $ 7,893     $ 8,048     $ 7,828  
Provision for loan losses
    4,117       300       10,296       950  
Loans charged-off
    (4,079 )     (206 )     (6,590 )     (917 )
Recoveries on loans charged-off
    144       12       383       138  
                                 
Ending balance
  $ 12,137     $ 7,999     $ 12,137     $ 7,999  
                                 
                                 
Allowance to gross loans
    1.29 %     1.02 %     1.29 %     1.02 %
 
Past due loans and foreclosed assets consist of the following:
 
(dollars in thousands)
 
At
September 30,
2009
   
At
December 31,
2008
 
Accruing loans past due 30 - 89 days
  $ 7,314     $ 2,644  
Accruing loans past due 90 days or more
  $ 2,970     $ 429  
Nonaccrual loans
  $ 39,330     $ 8,475  
Foreclosed assets
  $ 6,120     $ 327  
 
There were $39.3 million and $8.5 million of nonaccrual loans at September 30, 2009 and December 31, 2008, respectively. Had these loans performed according to their original terms, additional interest income of approximately $676,000 and $162,000 would have been recognized in the three months ended September 30, 2009 and September 30, 2008, respectively. Had these loans performed according to their original terms, additional interest income of approximately $1,317,000 and $400,000 would have been recognized in the nine months ended September 30, 2009 and September 30, 2008, respectively.
 
The Company considers a loan to be impaired when, based on current information and events, the Company does not expect to be able to collect all amounts due according to the loan contract, including scheduled interest payments. Due to the size and nature of the loan portfolio, impaired loans are determined by periodic evaluation on an individual loan basis. The average balance of impaired loans was $32.7 million for the nine months ended September 30, 2009 and $10.6 million for the nine months ended September 30, 2008. Impaired loans were $41.4 million at September 30, 2009 and $34.5 million at December 31, 2008. Loan loss allowances for individually impaired loans are computed in accordance with FASB accounting standards related to accounting by creditors for impairment of a loan and are based on either the estimated collateral value less estimated selling costs (if the loan is a collateral-dependent loan), or the present value of expected future cash flows discounted at the loan’s effective interest rate. Of the $41.4 million of impaired loans at September 30, 2009, $3.7 million had specific allowances of $0.6 million. Of the $34.5 million of impaired loans at December 31, 2008, $2.0 million had specific allowances of $0.6 million.
 
NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS
 
Goodwill was $60.7 million at September 30, 2009 and $50.1 million at December 31, 2008. The $10.6 million increase in goodwill represents the goodwill recognized from the purchase of certain assets and the assumption of certain deposit liabilities from the FDIC in its capacity as receiver of 1st Centennial Bank. No impairment loss was recognized for the periods ended September 30, 2009 and December 31, 2008.
 
Core deposit intangibles, net of accumulated amortization, were $9.0 million at September 30, 2009 and $5.2 million at December 31, 2008. The increase in core deposit intangibles is due to the $4.7 million core deposit intangible recognized from the assumption of certain deposit liabilities from the FDIC in its capacity as receiver of 1st Centennial Bank. Amortization expense for the three months ended September 30, 2009 and 2008 was $316,000 and $198,000, respectively. Amortization expense for the nine months ended September 30, 2009 and 2008 was $910,000 and $593,000, respectively.
 
Trade name intangible, net of accumulated amortization, was $3.0 million at September 30, 2009 and $3.3 million at December 31, 2008. Amortization expense for the three months ended September 30, 2009 and 2008 was $100,000 in each period. Amortization expense for the nine months ended September 30, 2009 and 2008 was $300,000 in each period.
 

 
13


NOTE 7 – EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) per share, or EPS, excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of common stock options under the Company’s stock option plans and if common shares were issued from the conversion of the convertible preferred stock.
 
The following table illustrates the computations of basic and diluted EPS for the periods indicated:
 
   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
(in thousands, except per share data)
 
Diluted
   
Basic
   
Diluted
   
Basic
   
Diluted
   
Basic
   
Diluted
   
Basic
 
Net income (loss) as reported
  $ (136 )   $ (136 )   $ 1,761     $ 1,761     $ (1,797 )   $ (1,797 )   $ 5,234     $ 5,234  
Less preferred stock dividend declared
    (313 )     (313 )                 (819 )     (819 )            
                                                                 
Income (loss) available to common shareholders
  $ (449 )   $ (449 )   $ 1,761     $ 1,761     $ (2,616 )   $ (2,616 )   $ 5,234     $ 5,234  
                                                                 
                                                                 
Weighted average common shares outstanding
    11,631       11,631       11,466       11,466       11,598       11,598       11,478       11,478  
                                                                 
Restricted stock
                                               
Convertible preferred stock
                278                         276        
                                                                 
Net effect of dilutive securities
                278                         276        
                                                                 
                                                                 
Weighted average common shares outstanding (1)
    11,631       11,631       11,744       11,466       11,598       11,598       11,754       11,478  
                                                                 
                                                                 
Earnings (loss) per common share
  $ (0.04 )   $ (0.04 )   $ 0.15     $ 0.15     $ (0.23 )   $ (0.23 )   $ 0.45     $ 0.46  
 
_______________________
(1)
In accordance with FASB accounting standards related to earnings per share, due to the net loss for the three and nine months ended September 30, 2009, the impact of securities convertible to common stock is not included as its effect would be anti-dilutive.
 
NOTE 8 – COMPREHENSIVE INCOME (LOSS)
 
Comprehensive income (loss) is the change in equity during a period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) was as follows:
 
   
Three months ended Sept. 30,
   
Nine months ended Sept. 30,
 
(dollars in thousands)
 
2009
   
2008
   
2009
   
2008
 
Other comprehensive income (loss):
                       
Unrealized loss on interest rate swaps used in cash flow hedges
  $     $     $     $ (226 )
Unrealized gain (loss) on securities available-for-sale
    5,271       (1,999 )     9,830       (7,849 )
Reclassification adjustment for gains included in net income (loss)
    (1,639 )           (4,310 )      
                                 
Other comprehensive income (loss), before tax
    3,632       (1,999 )     5,520       (8,075 )
Income tax benefit (expense) related to items of other comprehensive income (loss)
    (1,479 )     678       (1,544 )     3,023  
                                 
Other comprehensive income (loss)
    2,153       (1,321 )     3,976       (5,052 )
Net income (loss)
    (136 )     1,761       (1,797 )     5,234  
                                 
Comprehensive income
  $ 2,017     $ 440     $ 2,179     $ 182  
 

 
14


NOTE 9 – FAIR VALUE MEASUREMENT
 
FASB accounting standards codification related to fair value measurements defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurement. This standard applies to all financial assets and liabilities that are being measured and reported at fair value on a recurring and non-recurring basis. Upon adoption of this accounting standard update, there was no cumulative effect adjustment to beginning retained earnings and no impact on the financial statements in the first quarter of 2008.
 
As defined in the FASB accounting standards codification, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2009 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) for identical instruments that are highly liquid, observable and actively traded in over-the-counter markets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable and can be corroborated by market data. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
 
The Company uses fair value to measure certain assets and liabilities on a recurring basis when fair value is the primary measure for accounting. This is done primarily for available-for-sale securities and derivatives. Fair value is used on a nonrecurring basis to measure certain assets when applying lower of cost or market accounting or when adjusting carrying values, such as for loans held-for-sale, collateral dependent impaired loans, and foreclosed property. Fair value is also used when evaluating impairment on certain assets, including securities, goodwill, core deposit and other intangibles, for valuing assets and liabilities acquired in a business combination and for disclosures of financial instruments as required by FASB accounting standards codification related to fair value disclosure reporting.
 
The following tables present information on the assets measured and recorded at fair value on a recurring and nonrecurring basis at September 30, 2009.
 
(in thousands)
 
Fair value at
Sept. 30, 2009
   
Financial Assets Measured at Fair Value on a
Recurring Basis as of
September 30, 2009, Using
 
 
Quoted prices in
active markets
for identical
assets
(Level 1)
   
Other
observable
inputs
(Level 2)
   
Significant
unobservable
inputs
(Level 3)
 
Available-for-sale securities
  $ 302,378     $     $ 302,378     $  
                                 
Total assets measured at fair value on a recurring basis
  $ 302,378     $     $ 302,378     $  
                                 
   
Fair value at
Sept. 30, 2009
   
Assets Measured at Fair Value on a
Non-Recurring Basis as of
September 30, 2009, Using
 
(in thousands)
 
Quoted prices in
active markets
for identical
assets
(Level 1)
   
Other
observable
inputs
(Level 2)
   
Significant
unobservable
inputs
(Level 3)
 
Collateral dependent impaired loans
  $ 3,745     $     $     $ 3,745  
Foreclosed property
    6,120                   6,120  
                                 
Total assets measured at fair value on a non-recurring basis
  $ 9,865     $     $     $ 9,865  
 
The following methods were used to estimate the fair value of each class of financial instrument above:
 
Securities – Fair values for securities are obtained from a third-party pricing service for identical or comparable assets. The market valuations include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair value.

 
15


 
Collateral dependent impaired loans – Impaired loans are measured and recorded at the lower of cost basis or the fair valueof the underlying collateral credit support on a nonrecurring basis. The impaired loans shown are collateral dependent and, accordingly, are measured based on the fair value of such collateral. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.
 
Foreclosed assets – Foreclosed assets are measured and recorded at the lower of cost basis or fair value on a nonrecurring basis. The foreclosed assets shown are collateral dependent and, accordingly, are measured based on the fair value of such collateral. The fair value of each asset’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 3 measurement.
 
FASB accounting standards codification requires that the Company disclose estimated fair values for its financial instruments during annual and interim reporting periods. Fair value estimates, methods and assumptions, set forth below for our financial instruments, are made solely to comply with the requirements of the disclosures regarding fair value of financial instruments. The following describes the methods and assumptions used in estimating the fair values of financial instruments, excluding financial instruments already recorded at fair value as described above in our SFAS No. 157 disclosures.
 
Cash and cash equivalents – The carrying amounts of cash and federal funds sold approximate their fair value.
 
Loans – Loans are not measured at fair value on a recurring basis. Therefore, the following valuation discussion relates to estimating the fair value to be disclosed under fair value disclosure requirements. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms and by credit risk categories. The fair values of loans is then estimated by discounting scheduled cash flows through the estimated maturity using estimated market prepayment speeds and estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Loans, other than those held-for-sale, are not normally purchased and sold by the Company, and there are no active trading markets for much of this portfolio.
 
Deposits – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts and fixed-term certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
 
Federal Home Loan Bank advances and other borrowings – The fair value of the FHLB advances and other borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
 
Junior subordinated debentures – The fair value of the debentures is estimated using a discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements.
 
Off-balance sheet instruments – Off-balance sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.
 
The following table estimates fair values and the related carrying amounts of the Company’s financial instruments:
 
   
At September 30, 2009
 
(in thousands)
 
Carrying
Amount
   
Estimated
Fair Value
 
Financial assets:
           
Cash, due from banks and federal funds sold
  $ 104,148     $ 104,148  
Securities available-for-sale
    302,378       302,378  
FHLB and other stock
    9,829       9,829  
Loans, net
    928,714       864,725  
Financial liabilities:
               
Demand deposits, money market and savings
  $ 702,528     $ 702,528  
Time certificates of deposit
    422,503       426,348  
FHLB advances and other borrowings
    149,000       155,216  
Junior subordinated debentures
    26,740       12,060  
 
These fair value disclosures represent the Company’s best estimates based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of the various instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in the above methodologies and assumptions could significantly affect the estimates.
 
 
16

 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Statement
 
This Quarterly Report on Form 10-Q contains certain forward-looking statements about us, which statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:
 
 
revenues are lower than expected;
 
 
credit quality deterioration which could cause an increase in the provision for loan losses;
 
 
competitive pressure among depository institutions increases significantly;
 
 
changes in consumer spending, borrowings and savings habits;
 
 
our ability to successfully integrate acquired entities or to achieve expected synergies and operating efficiencies within expected time-frames or at all;
 
 
technological changes;
 
 
the cost of additional capital is more than expected;
 
 
a change in the interest rate environment reduces interest margins;
 
 
asset/liability repricing risks and liquidity risks;
 
 
general economic conditions, particularly those affecting real estate values, either nationally or in the market areas in which we do or anticipate doing business are less favorable than expected;
 
 
a slowdown in construction activity;
 
 
the effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
 
 
recent volatility in the credit or equity markets and its effect on the general economy;
 
 
demand for the products or services of First California and the Bank, as well as their ability to attract and retain qualified people;
 
 
the costs and effects of legal, accounting and regulatory developments; and
 
 
regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule.
 
If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied or projected by, the forward-looking information and statements contained in this document. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. The forward-looking statements are made as of the date of this document and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements. All forward-looking statements contained in this document, and all subsequent written and oral forward-looking statements attributable to us or any other person acting on our behalf, are expressly qualified by these cautionary statements. The following discussion and analysis should be read in conjunction with our quarterly unaudited interim consolidated financial statements, and notes thereto, contained in this report, which have been prepared in accordance with generally accepted accounting principles, and with our 2008 Form 10-K, which is incorporated herein by reference.
 
Overview
 
First California Financial Group, Inc., or First California, or the Company, is a bank holding company which serves the comprehensive banking needs of businesses and consumers in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties through our wholly-owned subsidiary, First California Bank, or the Bank. The Bank is a state chartered commercial bank which provides traditional business and consumer banking products ranging from construction finance, entertainment finance and commercial real estate lending via 17 full-service branch locations. The Company also has two unconsolidated statutory business trust subsidiaries, First California Capital Trust I and FCB Statutory Trust I, which raised capital through the issuance of trust preferred securities.
 
At September 30, 2009, we had consolidated total assets of $1.5 billion, gross loans of $940.9 million, deposits of $1.1 billion and shareholders’ equity of $161.1 million. At December 31, 2008, we had consolidated total assets of $1.2 billion, gross loans of $788.4 million, deposits of $817.6 million and shareholders’ equity of $158.9 million.
 
 
17

 
For the third quarter of 2009, we had a net loss of $0.1 million, compared with net income of $1.8 million for the third quarter of 2008. Our net loss for the first nine months of 2009 was $1.8 million, compared to net income for the first nine months of 2008 of $5.2 million.
 
After a dividend payment of $312,500 on our Series B preferred shares, we incurred a loss per diluted common share of $0.04 for the 2009 third quarter. Our 2008 third quarter net income on a diluted per common share basis was $0.15. Our net loss for the first nine months of 2009, after Series B preferred share dividends of $819,000, was $0.23 per diluted common share. Our net income for the first nine months of 2008 on a diluted per common share basis was $0.45.
 
Critical accounting policies
 
We based our discussion and analysis of our consolidated results of operations and financial condition on our unaudited consolidated interim financial statements and our audited consolidated financial statements which have been prepared in accordance with generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, income and expense, and the related disclosures of contingent assets and liabilities at the date of these consolidated financial statements. We believe these estimates and assumptions to be reasonably accurate; however, actual results may differ from these estimates under different assumptions or circumstances. The following are our critical accounting policies and estimates.
 
Allowance for loan losses
 
We establish the allowance for loan losses through a provision charged to expense. We charge-off loan losses against the allowance when we believe that the collectability of the loan is unlikely. The allowance is an amount that we believe will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans and prior loan loss experience. The evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquency and nonaccruals, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national level, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior eight quarters. Various regulatory agencies, as a regular part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. The allowance for loan losses was $12.1 million at September 30, 2009 and was $8.0 million at December 31, 2008.
 
Deferred income taxes
 
We recognize deferred tax assets subject to our judgment that realization of the assets are more-likely-than-not. We establish a valuation allowance when we determine that realization of income tax benefits may not occur in future years. There were net deferred tax assets of $0.5 million at September 30, 2009 and net deferred tax assets of $2.6 million at December 31, 2008. There was no valuation allowance at either period end.
 
Derivative instruments and hedging
 
For derivative instruments designated in cash flow hedging relationships, we assess the effectiveness of the instruments in off-setting changes in the overall cash flows of designated hedged transactions on a quarterly basis. Beginning in the second quarter of 2008, we no longer had any derivative instruments designated in cash flow hedging relationships on our consolidated balance sheet. For the first nine months of 2008, we also had an interest rate floor for which we did not designate a hedging relationship. Accordingly, we recognized all changes in fair value of the interest rate floor directly in current period earnings. We owned no derivative instruments in 2009.
 
Assessments of impairment
 
We assess goodwill for impairment on an annual basis, or at interim periods if an event occurs or circumstances change which may indicate a change in the implied fair value of the goodwill. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. We perform our annual impairment assessment at the end of our fiscal year to determine the fair value of the Company and to determine appropriate market factors used in the fair value calculations. At December 31, 2008, the annual assessment resulted in the conclusion that goodwill was not impaired. At September 30, 2009, because of the net loss for the nine months ended September 30, 2009, we performed an interim assessment and concluded that goodwill was not impaired.
 
We perform regularly an impairment analysis on our securities portfolio in accordance with the FASB accounting standards codification guidance related to consideration of impairment related to certain debt and equity securities. If we do not intend to sell, and it is more likely than not that we are not required to sell, a debt security before recovery of its cost basis, other-than-temporary impairment should be separated into (a) the amount representing credit loss and (b) the amount related to other factors. The amount of the other-than-temporary impairment related to credit loss is recognized in earnings and other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss). Other-than-temporary declines in fair value are assessed based on the duration the security has been in a continuous unrealized loss position, the severity of the decline in value, the rating of the security, the long-term financial outlook of the issuer, the expected future cash flows and our ability and intent on holding the securities until the fair values recover.
 
 
18

 
Based upon the results of our other-than-temporary impairment analysis as of June 30, 2009, we recorded an other-than-temporary impairment loss of $565,000 on one security. The Company did not record any additional other-than-temporary impairment loss in the third quarter of 2009. Please see the “Securities” section of Management’s Discussion and Analysis in this document for a detailed explanation of our impairment analysis process. We will continue to evaluate our securities portfolio for other-than-temporary impairment at each reporting date and we can provide no assurance there will not be another other-than-temporary loss in future periods.
 
Recent Developments
 
FDIC-assisted 1st Centennial Bank Transaction
 
On January 23, 2009, the Bank assumed the insured, non-brokered deposits of 1st Centennial Bank, totaling approximately $270 million, from the FDIC. Under the terms of the purchase and assumption agreement with the FDIC, the Bank also purchased from the FDIC approximately $178 million in cash and cash equivalents, $89 million in securities and $101 million in loans related to 1st Centennial Bank. The assumption of deposits and purchase of assets from the FDIC was an all-cash transaction with an aggregate transaction value of $48.8 million. The Bank recorded $10.6 million in goodwill in connection with this transaction. We have since fully integrated all six of the former 1st Centennial Bank branches into the Bank’s full-service branch network.
 
Emergency Economic Stabilization Act of 2008 (Troubled Asset Relief Program – Capital Purchase Program)
 
In response to the financial crisis affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008, or the EESA, became law. Through its authority under the EESA, the United States Treasury, or the Treasury, announced in October 2008 the Troubled Asset Relief Program - Capital Purchase Program, or the CPP, a program designed to bolster healthy institutions, like us, by making $250 billion of capital available to U.S. financial institutions in the form of preferred stock.
 
We participated in the CPP in December 2008 so that we could continue to lend and support our current and prospective clients, especially during this unstable economic environment. Since our participation in the CPP, we were able to increase the average balance of our commercial and consumer loans by $194.6 million, or 30 percent, from December 31, 2008 to September 30, 2009. Under the terms of our participation, we received $25 million in exchange for the issuance of preferred stock and a warrant to purchase common stock, and became subject to various requirements, including certain restrictions on paying dividends on our common stock and repurchasing our equity securities, unless the Treasury has consented. Additionally, in order to participate in the CPP, we were required to adopt certain standards for executive compensation and corporate governance. These standards generally apply to the Chief Executive Officer, Chief Financial Officer and the three next most highly compensated senior executive officers, and include (1) ensuring that incentive compensation of senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required claw-back of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) limiting golden parachute payments to certain senior executives; and (4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive. To date, we have complied with these requirements, but the Secretary of the Treasury is empowered under EESA to adopt other standards, with which we would be required to comply. Additionally, the bank regulatory agencies, Treasury and the Office of Special Inspector General, also created by the EESA, have issued guidance and requests to the financial institutions that participated in the CPP to document their plans and use of CPP funds and their plans for addressing the executive compensation requirements associated with the CPP. We will respond to such requests accordingly.
 
In February 2009, the U.S. Congress enacted the American Recovery and Reinvestment Act of 2009, or the ARRA, was enacted. Among other provisions, the ARRA amended the EESA and contains requirements imposed on financial institutions like us which have already participated in the CPP. These requirements expand the initial executive compensation restrictions under the CPP to include, among other things, application of the required claw-back provision to our top 25 most highly compensated employees, prohibition of certain bonuses to our top five most highly compensated employees, expanded limitations on golden parachute payments to top ten most highly compensated employees, implementation of a company-wide policy regarding excessive and luxury expenditures, and requirement of a shareholder advisory vote on our executive compensation.1 Under the new ARRA requirements, we may redeem early the shares issued to the Treasury under the CPP without any penalty or requirement to raise new capital, as previously required under the original terms of the CPP. However, until the shares are redeemed and for so long as we continue to participate in the CPP, we will remain subject to these expanded requirements and any other requirements applicable to CPP participants that may be subsequently adopted.
_________________
 
1
At our Annual Meeting of Stockholders held on May 27, 2009, all matters presented before the meeting were approved by the requisite vote, including a substantial majority of votes cast in favor of our executive compensation, as set forth in our ‘Say on Pay’ item.
 
 
19

 
On June 10, 2009, Treasury issued an interim final rule implementing and providing guidance on the executive compensation and corporate governance provisions of EESA, as amended by ARRA. The regulations were published in the Federal Register on June 15, 2009 and set forth the following requirements:
 
 
Evaluation of employee compensation plans and potential to encourage excessive risk or manipulation of earnings;
 
 
Compensation committee discussion, evaluation and review of senior executive officer compensation plans and other employee compensation plans to ensure that they do not encourage unnecessary and excessive risk;
 
 
Compensation committee discussion, evaluation and review of employee compensation plans to ensure that they do not encourage manipulation of reported earnings;
 
 
Compensation committee certification and disclosure requirements regarding evaluation of employee compensation plans;
 
 
“Claw-back” of bonuses based on materially inaccurate financial statements or performance metrics;
 
 
Prohibition on golden parachute payments;
 
 
Limitation on bonus payments, retention awards and incentive compensation;
 
 
Disclosure regarding perquisites and compensation consultants;
 
 
Prohibition on gross-ups;
 
 
Luxury or excessive expenditures policy;
 
 
Shareholder advisory resolution on executive compensation; and
 
 
Annual compliance certification by principal executive officer and principal financial officer.
 
Additionally, the regulations provided for the establishment of the Office of the Special Master for TARP Executive Compensation with authority to review certain payments and compensation structures.
 
In general, neither the requirements of EESA, as amended by ARRA, nor Treasury’s regulations promulgated thereunder apply retroactively prior to June 15, 2009, the date the regulations were published in the Federal Register. The regulations confirm that the bonus payment limitation does not apply to amounts accrued or paid prior to June 15, 2009, and the golden parachute prohibition applies only to payments due to departures on or after June 15, 2009. Many of the requirements apply only during the period during which an obligation arising from financial assistance under the TARP remains outstanding, disregarding unexercised warrants but, for companies that have already received financial assistance, no earlier than June 15, 2009. For companies that become Troubled Asset Relief Program, or TARP, recipients following June 15, 2009, the requirements and restrictions generally become effective when the company receives TARP funds.
 
The EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000. The increase in deposit insurance expires at the end of 2013 and deposit insurance premiums paid by the banking industry were unaffected by this increase. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. Effective February 2009, the FDIC adopted a rule to uniformly increase 2009 FDIC deposit assessment rates by 7 to 9 cents for every $100 of domestic deposits. The FDIC also assessed a special assessment of 5 cents on each institution’s assets minus Tier 1 capital as of June 30, 2009, to restore the deposit insurance fund reserves. Our special assessment amount was $668,000. The FDIC has recently adopted a rule requiring insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009, along with each institution’s risk-based deposit insurance assessment for the third quarter of 2009. FDIC insurance premiums are expected to increase significantly in 2009 compared to prior years. Annual FDIC insurance expense was $682,000 in 2008 and $164,000 in 2007. With the 5 basis point special assessment included, we estimate our 2009 FDIC insurance expense will be approximately $3.0 million.
 
In addition, the FDIC has implemented two temporary programs under the Temporary Liquidity Guaranty Program, or the TLGP, to provide deposit insurance for the full amount of most non-interest bearing transaction accounts through the end of 2009 and to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012. The Bank is participating in the deposit insurance program. Under the deposit insurance program, through December 31, 2009, the FDIC guarantees all noninterest-bearing transaction accounts for the entire amount in the account. Coverage under this program is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules. The FDIC charges “systemic risk special assessments” to depository institutions that participate in the TLGP.

 
20

 
Results of operations – for the three and nine months ended September 30, 2009 and 2008
 
Our earnings are derived predominantly from net interest income, which is the difference between interest and fees earned on loans, securities and federal funds sold (these asset classes are commonly referred to as interest-earning assets) and the interest paid on deposits, borrowings and debentures (these liability classes are commonly referred to as interest-bearing funds). The net interest margin is net interest income divided by average interest-earning assets.
 
Our net interest income for the third quarter of 2009 was $11.4 million, up from $10.3 million for the same period a year ago. The net interest margin (tax equivalent) for the third quarter of 2009 was 3.50 percent compared with 4.18 percent for the same quarter last year. Our net interest income for the nine months ended September 30, 2009 increased to $34.0 million from $30.9 million for the nine months ended September 30, 2008. Our net interest margin (tax equivalent) for the first nine months of 2009 was 3.60 percent, compared to 4.17 percent for the same period last year. The increase in our net interest income reflects the increase in our interest-earning assets from the FDIC-assisted 1st Centennial Bank transaction and from the growth in our lending activities. The decrease in our net interest margin reflects the effect of higher levels of lower-yielding Federal funds sold and the decrease in rates earned on interest-earning assets, offset in part by the decrease in the rates paid for our interest-bearing funds.
 
The following table presents the distribution of our average assets, liabilities and shareholders’ equity in combination with the total dollar amounts of interest income from average interest earning assets and the resultant yields, and the dollar amounts of interest expense and average interest bearing liabilities, expressed in both dollars and rates for the three and nine months ended September 30, 2009 and 2008. Loans include loans held-for-sale and loans on non-accrual status.
 
   
Three months ended September 30,
 
   
2009
   
2008
 
(dollars in thousands)
 
Average
Balance
   
Interest
Income/
Expense
   
Weighted
Average
Yield/Rate
   
Average
Balance
   
Interest
Income/
Expense
   
Weighted
Average
Yield/Rate
 
Loans2
  $ 935,848     $ 13,331       5.65 %   $ 778,104     $ 12,674       6.48 %
Securities
    262,664       2,819       4.49 %     213,699       2,870       5.54 %
Federal funds sold and deposits with banks
    108,165       78       0.29 %     850       4       1.87 %
                                                 
Total earning assets
    1,306,677     $ 16,228       4.97 %     992,653     $ 15,548       6.26 %
                                                 
Non-earning assets
    152,404                       129,391                  
                                                 
Total average assets
  $ 1,459,081                     $ 1,122,044                  
                                                 
                                                 
Interest bearing checking
  $ 80,514     $ 65       0.32 %   $ 58,911     $ 105       0.71 %
Savings and money market
    290,894       839       1.14 %     183,262       723       1.57 %
Certificates of deposit
    441,737       2,034       1.83 %     316,341       2,132       2.68 %
                                                 
Total interest bearing deposits
    813,145       2,938       1.43 %     558,514       2,960       2.11 %
                                                 
Borrowings
    151,930       1,455   &