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EX-5.1 - OPINION OF SKADDEN ARPS, SLATE, MEAGHER & FLOM LLP - First California Financial Group, Inc.dex51.htm
EX-2.2 - PURCHASE AND ASSUMPTION AGREEMENT - First California Financial Group, Inc.dex22.htm
EX-1.1 - FORM OF UNDERWRITING AGREEMENT - First California Financial Group, Inc.dex11.htm
EX-23.1 - CONSENT OF MOSS ADAMS LLP - First California Financial Group, Inc.dex231.htm
Table of Contents

As filed with the Securities and Exchange Commission on December 8, 2009

Registration No. 333-160816

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

FIRST CALIFORNIA FINANCIAL GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   6022   38-3737811

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

3027 Townsgate Road, Suite 300

Westlake Village, California 91361

(805) 322-9655

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Romolo Santarosa

Chief Financial Officer

First California Financial Group, Inc.

3027 Townsgate Road, Suite 300

Westlake Village, California 91361

(805) 322-9655

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gregg A. Noel, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

300 South Grand Avenue

Los Angeles, California 90071

(213) 687-5000

(213) 687-5600 – Facsimile

 

Patrick S. Brown, Esq.

Sullivan & Cromwell LLP

1888 Century Park East

Los Angeles, California 90067-1725

(310) 712-6600

(310) 712-8800 – Facsimile

 

 

Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

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

(Do not check if a smaller reporting company)

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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SUBJECT TO COMPLETION, DATED DECEMBER 8, 2009

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

7,500,000 Shares

LOGO

Common Stock

 

 

We are offering 7,500,000 shares of our common stock, par value $0.01 per share. Our common stock is traded on the NASDAQ Global Market under the symbol “FCAL.” On December 4, 2009, the last reported sale price of our common stock on the NASDAQ Global Market was $3.58 per share.

These shares of common stock are not savings accounts, deposits, or other obligations of our bank subsidiary or any of our non-bank subsidiaries and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 5 to read about factors you should consider before buying our common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total

Public offering price

   $                 $             

Underwriting discounts and commissions

   $      $  

Proceeds to First California Financial Group, Inc. (before expenses)

   $      $  

 

 

Keefe, Bruyette & Woods also may purchase up to an additional 1,125,000 shares of our common stock within 30 days of the date of this prospectus to cover over-allotments, if any.

Keefe, Bruyette & Woods expects to deliver the common stock in book-entry form only, through the facilities of The Depository Trust Company, against payment on or about                     , 2009.

Keefe, Bruyette & Woods

The date of this prospectus is                     , 2009.


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements about the financial condition, results of operations and business of the Company. These statements may include statements regarding the projected performance of the Company for the period following the completion of the offering. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “will,” “plans” or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties. Some of the factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following possibilities:

 

   

revenues are lower than expected;

 

   

credit quality deterioration which could cause an increase in the provision for credit 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 Board of Governors of the Federal Reserve, or the Federal Reserve Board or FRB;

 

   

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.

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. You are cautioned not to place undue reliance on such statements, which speak only as of the date of this prospectus. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Actual results of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict. Accordingly, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

We urge investors to review carefully the section of this prospectus entitled “Risk Factors” in evaluating the forward-looking statements contained in this prospectus. Unless required by law, we do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events.

 

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We have not, and the underwriter has not, authorized any person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriter is not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date of this prospectus, unless the information specifically indicates that another date applies. First California Financial Group, Inc.’s business, financial condition, results of operations and prospects may have changed since such dates.

Unless otherwise indicated or unless the context requires otherwise, all references in this prospectus to “First California Financial Group, Inc.,” “First California,” the “Company,” “we,” “us,” “our,” or similar references, mean First California Financial Group, Inc. References to “First California Bank” or the “Bank” mean our wholly owned banking subsidiary. References to the “mergers” mean the merger of National Mercantile Bancorp with and into First California and the merger of FCB Bancorp with and into First California, collectively.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC. You may read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The internet address of the SEC’s website is www.sec.gov. Such reports and other information concerning First California can also be inspected at the offices of First California at 3027 Townsgate Road, Suite 300, Westlake Village, California 91361 and can also be retrieved by accessing our website (www.fcalgroup.com). Information on our website is not part of this prospectus.

This prospectus, which is a part of a registration statement on Form S-1 that we have filed with the SEC under the Securities Act of 1933, as amended, or the Securities Act, omits certain information set forth in the registration statement. Accordingly, for further information, you should refer to the registration statement and its exhibits on file with the SEC. Furthermore, statements contained in this prospectus concerning any document filed as an exhibit are not necessarily complete and, in each instance, we refer you to the copy of such document filed as an exhibit to the registration statement.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and may not contain all the information that you need to consider in making your investment decision. You should carefully read this entire prospectus, as well as the information to which we refer you, before deciding whether to invest in the common stock. You should pay special attention to the “Risk Factors” section of this prospectus to determine whether an investment in the common stock is appropriate for you.

About First California Financial Group, Inc.

First California is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. First California’s primary function is to coordinate the general policies and activities of its bank subsidiary, First California Bank, as well as to consider from time to time other legally available investment opportunities.

First California was incorporated under the laws of the State of Delaware on June 7, 2006. The Company was formed as a wholly owned subsidiary of National Mercantile Bancorp, a California corporation, or National Mercantile, for the purposes of facilitating the merger of National Mercantile and FCB Bancorp, a California corporation, or FCB. On March 12, 2007, National Mercantile merged with and into First California, and immediately thereafter, FCB merged with and into First California. As a result of the mergers, the separate corporate existence of National Mercantile and FCB ceased, and First California succeeded, and assumed all the rights and obligations of, National Mercantile, whose principal assets were the capital stock of two bank subsidiaries, Mercantile National Bank, or Mercantile, and South Bay Bank, N.A., or South Bay, and the rights and obligations of FCB, whose principal assets were the capital stock of First California Bank. On June 18, 2007, First California integrated its bank subsidiaries into First California Bank.

First California Bank is a full-service commercial bank headquartered in Westlake Village, California. First California Bank is chartered under the laws of the State of California and is subject to supervision by the California Commissioner of Financial Institutions. The Federal Deposit Insurance Corporation, or FDIC, insures its deposits up to the maximum legal limit.

At September 30, 2009, we had total assets of $1.5 billion, gross loans of $940.9 million, deposits of $1.1 billion, and shareholders’ equity of $161.1 million.

Our common stock is traded on the NASDAQ Global Market under the symbol “FCAL.” Our principal executive offices are located at 3027 Townsgate Road, Suite 300, Westlake Village, California 91361. Our telephone number is (805) 322-9655.

Risk Factors

An investment in our common stock involves certain risks. You should carefully consider the risks described under “Risk Factors” beginning on page 5 of this prospectus, as well as other information included in this prospectus, including our consolidated financial statements and the notes thereto, before making an investment decision.

 

 

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The Offering

The following summary of the offering contains basic information about the offering and the common stock and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of the common stock, please refer to the section of this prospectus entitled “Description of Capital Stock.”

 

Issuer

First California Financial Group, Inc.

 

Common stock offered

7,500,000 shares of common stock, par value $0.01 per share.

 

Over-allotment option

We have granted the underwriter an option to purchase up to an additional 1,125,000 shares of common stock within 30 days of the date of this prospectus in order to cover over-allotments, if any.

 

Common stock outstanding after this offering

19,127,008 shares of common stock.(1)(2)

 

Use of proceeds

We intend to use the net proceeds of this offering for general corporate purposes, including funding working capital requirements, supporting growth of First California’s banking business from internal growth and from possible acquisitions, and regulatory capital needs related to any such growth and acquisitions. We also may contribute some portion of the net proceeds to the capital of the Bank, which would use such amount for similar general corporate purposes.

 

Market and trading symbol for the common stock

Our common stock is listed and traded on the NASDAQ Global Market under the symbol “FCAL.”

 

(1) The number of shares of common stock outstanding immediately after the closing of this offering is based on 11,627,008 shares of common stock outstanding as of December 4, 2009.

 

(2) Unless otherwise indicated, the number of shares of common stock presented in this prospectus excludes:

 

   

1,125,000 shares of common stock issuable pursuant to the exercise of the underwriter’s over-allotment option;

 

   

1,299,948 shares of common stock issuable under our stock compensation plans;

 

   

297,965 shares of common stock issuable upon the conversion of the Series A Preferred Stock; and

 

   

599,042 shares of common stock issuable upon the exercise of the warrant held by the U.S. Treasury. If this offering and/or any other qualified equity offerings that we may make prior to December 31, 2009 result in aggregate gross proceeds of at least $25 million, the number of shares of common stock underlying the warrant then held by the U.S. Treasury will be reduced by 50% to 299,521 shares.

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following tables set forth our consolidated statement of operations data for the nine months ended September 30, 2009 and 2008 and for the years ended December 31, 2008 and 2007 and our consolidated balance sheet and other data as of September 30, 2009 and as of December 31, 2008 and 2007.

The summary consolidated statement of operations data for the years ended December 31, 2008 and 2007, and the summary consolidated balance sheet data as of December 31, 2008 and 2007, have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

The summary consolidated statement of operations data for the nine months ended September 30, 2009 and 2008, and the summary consolidated balance sheet data as of September 30, 2009, have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited condensed consolidated financial information for the interim periods presented include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth therein. Historical results are not necessarily indicative of future results and the interim results are not necessarily indicative of our expected results for the full fiscal year.

You should read the following summary financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the related notes for the fiscal year ended December 31, 2008 and for the fiscal quarter ended September 30, 2009 included elsewhere in this prospectus.

 

    For the Nine
Months Ended September 30,
  For the Year Ended December 31,
    2009     2008             2008                       2007          
    (Unaudited)        
    (Amounts and numbers in thousands except share and per share
amounts)

Statement of Operations Data:

       

Interest Income

  $ 49,359      $ 48,236   $ 63,235   $ 65,750

Interest Expense

    15,396        17,290     22,453     25,506

Net Interest Income

    33,963        30,946     40,782     40,244

Provision for Loan Losses

    10,296        950     1,150    

Non-interest Income

    7,585        3,989     5,381     8,047

Non-interest Expenses

    34,947        25,409     35,105     37,045
                         

Income (Loss) Before Provision for Income Taxes

    (3,695     8,576     9,908     11,246

Provision (Benefit) for Income Taxes

    (1,898     3,342     3,542     4,158
                         

Net Income (Loss)

  $ (1,797   $ 5,234   $ 6,366   $ 7,088
                         

Less Preferred Stock Dividend Declared

    (819            
                         

Net Income (Loss) Available to Common Shareholders

  $ (2,616   $ 5,234   $ 6,366   $ 7,088
                         

Basic Earnings (Loss) Per Common Share

  $ (0.23   $ 0.46   $ 0.56   $ 0.68
                         

Diluted Earnings (Loss) Per Common Share

  $ (0.23   $ 0.45   $ 0.54   $ 0.66
                         

Weighted Average Common Shares

       

Basic

    11,597,632        11,478,124     11,457,231     10,467,619

Diluted

    11,597,632        11,754,050     11,844,049     10,731,694

 

 

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     As of
September 30,
    As of December 31,  
     2009     2008     2007  
     (Unaudited)              
     (Amounts and numbers in thousands except ratios)  

Balance Sheet Data:

      

Total Assets

   $ 1,469,628      $ 1,178,045      $ 1,108,842   

Securities Available-for-Sale, at Fair Value

     302,378        202,462        231,095   

Loans Held-for-Sale

            31,401        11,454   

Loans, Net

     928,714        780,373        738,351   

Total Deposits

     1,125,031        817,595        761,080   

Federal Home Loan Bank Advances

     104,000        122,000        123,901   

Junior Subordinated Debentures

     26,740        26,701        26,648   

Total Shareholders’ Equity

     161,058        158,923        136,867   

Equity-to-Assets Ratio(1)

     10.96     13.49     12.34

Financial Performance:

      

Net Income (Loss) to Beginning Equity

     (1.13 )%      4.65     15.73

Net Income (Loss) to Average Equity (ROAE)

     (1.50 )%      4.59     6.98

Net Income (Loss) to Average Assets (ROAA)

     (0.17 )%      0.56     0.75

Net Interest Margin (TE)(2)

     3.60     4.08     4.64

Efficiency Ratio(3)

     90.60     73.45     63.18

Credit Quality:

      

Allowance for Loan Losses

   $ 12,137      $ 8,048      $ 7,828   

Allowance/Total Loans

     1.29     1.02     1.05

Total Non-Accrual Loans

   $ 39,330      $ 8,475      $ 5,720   

Non-Accrual Loans/Average Loans

     4.31     1.08     0.84

Net Charge-offs

   $ 6,207      $ 930      $ 466   

Net Charge-offs/Average Loans

     0.91     0.12     0.07

Regulatory Capital Ratios

      

For the Company:

      

Total Capital to Risk Weighted Assets

     12.47     16.62     13.35

Tier 1 Capital to Risk Weighted Assets

     11.34     15.70     12.43

Tier 1 Capital to Average Assets

     8.81     12.77     10.42

For the Bank:

      

Total Capital to Risk Weighted Assets

     11.62     12.27     11.98

Tier 1 Capital to Risk Weighted Assets

     10.48     11.35     11.05

Tier 1 Capital to Average Assets

     8.10     9.26     9.24

 

(1) Total shareholders’ equity divided by total assets.

 

(2) Net interest income (tax equivalent) divided by total average earning assets.

 

(3) Non-interest expense, excluding amortization of intangibles, divided by the sum of net interest income and non-interest income (excluding gains or losses from securities transactions).

 

 

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RISK FACTORS

An investment in our common stock involves certain risks. Before making an investment decision, you should read carefully and consider the risk factors below relating to this offering. You should also refer to other information contained in this prospectus, including our consolidated financial statements and the related notes. Additional risks and uncertainties not presently known to us at this time or that we currently deem immaterial may also materially and adversely affect our business and operations.

Risks Related to Recent Economic Conditions and Governmental Response Efforts

Our business has been and may continue to be adversely affected by current conditions in the financial markets and economic conditions generally.

The global, U.S. and California economies are experiencing significantly reduced business activity and consumer spending as a result of, among other factors, disruptions in the capital and credit markets during the past year. Dramatic declines in the housing market during the past year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:

 

   

a decrease in the demand for loans or other products and services offered by us;

 

   

a decrease in the value of our loans or other assets secured by consumer or commercial real estate;

 

   

a decrease to deposit balances due to overall reductions in the accounts of customers;

 

   

an impairment of certain intangible assets or investment securities;

 

   

a decreased ability to raise additional capital on terms acceptable to us or at all; or

 

   

an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs and provision for credit losses, which would reduce our earnings.

Until conditions improve, we expect our business, financial condition and results of operations to be adversely affected.

Recent and future legislation and regulatory initiatives to address current market and economic conditions may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy.

Recent and future legislative and regulatory initiatives to address current market and economic conditions, such as the Emergency Economic Stabilization Act of 2008, or EESA, or the American Recovery and Reinvestment Act of 2009, or ARRA, may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy. EESA was enacted in October 2008 to restore confidence and stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. The U.S. Treasury and banking regulators have implemented, and likely will continue to implement, various other programs under this legislation to address capital and liquidity issues in the banking system, including the Troubled Asset Relief Program, or TARP, the Capital Purchase Program, or CPP, President Obama’s Financial Stability Plan announced in February 2009, the ARRA and the FDIC’s Temporary Liquidity Guaranty Program, or TLGP. There can be no assurance as to the actual impact that any of the recent, or future, legislative and regulatory initiatives will have on the financial markets and the overall economy. Any failure of these initiatives to help stabilize or improve the financial markets and the economy, and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

 

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Current levels of market volatility are unprecedented.

The capital and credit markets have been experiencing volatility and disruption for more than a year. The volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

Additional requirements under our regulatory framework, especially those imposed under ARRA, EESA or other legislation intended to strengthen the U.S. financial system, could adversely affect us.

Recent government efforts to strengthen the U.S. financial system, including the implementation of ARRA, EESA, the TLGP and special assessments imposed by the FDIC, subject participants to additional regulatory fees and requirements, including corporate governance requirements, executive compensation restrictions, restrictions on declaring or paying dividends, restrictions on share repurchases, limits on executive compensation tax deductions and prohibitions against golden parachute payments. These requirements, and any other requirements that may be subsequently imposed, may have a material and adverse affect on our business, financial condition, and results of operations.

Risks Related to Our Business

Our growth presents certain risks, including a possible decline in credit quality or capital adequacy.

The asset growth experienced by National Mercantile and FCB in the years prior to the mergers and by First California after the mergers presents certain risks. While we believe we have maintained good credit quality notwithstanding such growth, rapid growth is frequently associated with a decline in credit quality. Accordingly, continued asset growth could lead to a decline in credit quality in the future. In addition, continued asset growth could cause a decline in capital adequacy for regulatory purposes, which could in turn cause us to have to raise additional capital in the future to maintain or regain “well capitalized” status as defined under applicable banking regulations.

Our performance and growth are dependent on maintaining a high quality of service for our customers, and will be impaired by a decline in our quality of service.

Our growth will be dependent on maintaining a high quality of service for customers of First California. As a result of the mergers and the corresponding growth, it may become increasingly difficult to maintain high service quality for our customers. This could cause a decline in our performance and growth with respect to net income, deposits, assets and other benchmarks.

The fair value of our investment securities can fluctuate due to market conditions out of our control.

Our investment securities portfolio is comprised mainly of U.S. government agency mortgage-backed securities, U.S. government agency and private-label collateralized mortgage obligations and municipal securities. At September 30, 2009, gross unrealized losses on our investment portfolio were $12.1 million. The majority of unrealized losses at September 30, 2009 were related to a type of mortgage-backed security also known as private-label collateralized mortgage obligations. As of September 30, 2009, the fair value of these securities were $36.8 million, representing approximately 12% of our securities portfolio. We also own one pooled trust preferred security, rated triple-A at purchase, with an amortized cost basis of $4.9 million and an unrealized loss of $2.6 million at September 30, 2009. This unrealized loss is primarily caused by a severe disruption in the market for these securities.

Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include but are not limited to

 

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rating agency downgrades of the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and continued instability in the credit markets. Any of these mentioned factors could cause an other-than-temporary impairment in future periods and result in a realized loss.

If borrowers and guarantors fail to perform as required by the terms of their loans, we will sustain losses.

A significant source of risk for First California arises from the possibility that losses will be sustained if our borrowers and guarantors fail to perform in accordance with the terms of their loans and guaranties. This risk increases when the economy is weak. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.

Our allowance for loan losses may not be adequate to cover actual losses.

In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for probable loan and lease losses. Our allowance for loan losses may not be adequate to cover actual loan and lease losses, and future provisions for credit losses could materially and adversely affect our operating results. Our allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Federal and state regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. While we believe that our allowance for loan losses is adequate to cover probable losses, it is possible that we will further increase the allowance for loan losses or that regulators will require increases. Either of these occurrences could materially and negatively affect our earnings.

The banking business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest margin is affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. We may not be able to minimize our interest rate risk. In addition, while an increase in the general level of interest rates may increase our net interest margin and loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest margin, asset quality, loan origination volume and overall profitability.

We face strong competition from financial services companies and other companies that offer banking services which could negatively affect our business.

We conduct our banking operations primarily in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties, California. Increased competition in these markets may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that we offer in our service areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular,

 

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competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.

Additionally, banks and other financial institutions with larger capitalizations and financial intermediaries not subject to bank regulatory restrictions have larger lending limits than we have and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened low-end production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios and our results of operations and financial condition may otherwise be adversely affected.

We may incur impairments to goodwill.

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. It is our practice to perform the annual impairment assessment at the end of our fiscal year and to use independent data to assist us in determining the fair value of the Company and in determining appropriate market factors to be 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 our net loss for the first nine months of 2009, an interim assessment was performed and resulted in the conclusion that goodwill was not impaired. A significant decline in our stock price, a significant decline in our expected future cash flows, a significant adverse change in the business climate or slower growth rates could result in impairment of our goodwill. If we were to conclude that a future write-down of our goodwill is necessary, then we would record the appropriate non-cash charge, which could have an adverse effect on our operating results and financial position.

Changes in economic conditions, in particular an economic slowdown in Southern California, could materially and negatively affect our business.

Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control. A deterioration in economic conditions, whether caused by national or local concerns, in particular an economic slowdown in Southern California, could result in the following consequences, any of which could hurt our business materially: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decrease; low cost or noninterest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans. The State of California and certain local governments in our market area continue to face fiscal challenges upon which the long-term impact on the State’s or the local economy cannot be predicted.

A portion of the Company’s loan portfolio consists of construction and land development loans in Southern California, which have greater risks than loans secured by completed real properties.

At September 30, 2009, First California had outstanding construction and land development loans in Southern California in the amount of approximately $94.7 million, representing approximately 10% of its loan portfolio. These types of loans generally have greater risks than loans on completed homes, multifamily properties and commercial properties. A construction loan generally does not cover the full amount of the

 

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construction costs, so the borrower must have adequate funds to pay for the balance of the project. Price increases, delays and unanticipated difficulties can materially increase these costs. Further, even if completed, there is no assurance that the borrower will be able to sell the project on a timely or profitable basis, as these are closely related to real estate market conditions, which can fluctuate substantially between the start and completion of the project. If the borrower defaults prior to completion of the project, the value of the project will likely be less than the outstanding loan, and we could be required to complete construction with our own funds to minimize losses on the project.

Further disruptions in the real estate market could materially and negatively affect our business.

There has been a slow-down in the real estate market due to negative economic trends and credit market disruption, the impacts of which are not yet completely known or quantified. At September 30, 2009 approximately 73% of our loans are secured by real estate. Any further downturn in the real estate market could materially and adversely affect our business because a significant portion of our loans is secured by real estate. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. An increase in losses on defaulted loans may have a material impact on our financial condition and results of operations, by reducing income, increasing expenses, and leaving less cash available for lending and other activities.

Substantially all real property collateral for the Company is located in Southern California. Real estate values have declined recently, particularly in California. If real estate sales and appreciation continue to weaken, especially in Southern California, the collateral for our loans would provide less security. Real estate values could be affected by, among other things, an economic recession or slowdown, an increase in interest rates, earthquakes, brush fires, flooding and other natural disasters particular to California.

We are subject to extensive regulation which could adversely affect our business.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Given the current disruption in the financial markets and potential new regulatory initiatives, including the Obama administration’s recent financial regulatory reform proposal, new regulations and laws that may affect us are increasingly likely. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact our operations. These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted in the future, which could (1) make compliance much more difficult or expensive, (2) restrict our ability to originate, broker or sell loans or accept certain deposits, (3) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (4) otherwise adversely affect our business or prospects for business. In addition, it is likely that we will be required to pay significantly higher FDIC premiums in the future because market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. Moreover, the FDIC recently decided to require depository institutions to prepay deposit insurance premiums. On November 12, 2009, the FDIC issued a final rule requiring all insured depository institutions to prepay on December 30, 2009 their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Under the rule, the assessment rate for the fourth quarter of 2009 and for 2010 will be based on each institution’s total base assessment rate for the third quarter of 2009, and the assessment rate for 2011 and 2012 will be equal to the third quarter assessment rate plus an additional 3 basis points. In addition, each institution’s base assessment rate for each period will be calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. Based on our FDIC quarterly invoice for September 30, 2009, we estimate that our prepayment amount should not exceed $10 million. Increases in our FDIC premium add to our cost of operations and, accordingly, adversely affect our results of operations.

 

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Moreover, banking regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations.

Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Our internal operations are subject to a number of risks.

We are subject to certain operational risks, including, but not limited to, data processing system failures and errors, customer or employee fraud, security breaches of our computer systems and catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls and uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.

We face reputation and business risks due to our interactions with business partners, service providers and other third parties.

We rely on third parties in a variety of ways, including to provide key components of our business infrastructure or to further our business objectives. These third parties may provide services to us and our clients or serve as partners in business activities. We rely on these third parties to fulfill their obligations to us, to accurately inform us of relevant information and to conduct their activities professionally and in a manner that reflects positively on us. Any failure of our business partners, service providers or other third parties to meet their commitments to us or to perform in accordance with our expectations could harm our business and operations, financial performance, strategic growth or reputation.

We face risks in connection with our strategic undertakings.

If appropriate opportunities present themselves, we may engage in strategic activities, which may include acquisitions, investments, asset purchases or other business growth initiatives or undertakings. There can be no assurance that we will successfully identify appropriate opportunities, that we will be able to negotiate or finance such activities or that such activities, if undertaken, will be successful.

In order to finance future strategic undertakings, we might obtain additional equity or debt financing. Such financing might not be available on terms favorable to us, or at all. If obtained, equity financing could be dilutive and the incurrence of debt and contingent liabilities could have a material adverse affect on our business, results of operations and financial condition.

 

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Our ability to execute strategic activities successfully will depend on a variety of factors. These factors likely will vary based on the nature of the activity but may include our success in integrating the operations, services, products, personnel and systems of an acquired company into our business, operating effectively with any partner with whom we elect to do business, retaining key employees, achieving anticipated synergies, meeting management’s expectations and otherwise realizing the undertaking’s anticipated benefits. Our ability to address these matters successfully cannot be assured. In addition, our strategic efforts may divert resources or management’s attention from ongoing business operations and may subject us to additional regulatory scrutiny. If we do not successfully execute a strategic undertaking, it could adversely affect our business, financial condition, results of operations, reputation and growth prospects. In addition, if we were to conclude that the value of an acquired business had decreased and that the related goodwill had been impaired, that conclusion would result in an impairment of goodwill charge to us, which would adversely affect our results of operations.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

We depend heavily on the services of our President and Chief Executive Officer, C. G. Kum, our Executive Vice President and Chief Financial Officer, Romolo C. Santarosa and a number of other key management personnel. The loss of any of their services or that of other key personnel could materially and adversely affect our future results of operations and financial condition. Our success also depends in part on our ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the banking industry and we may not be successful in attracting or retaining the personnel we require.

The imposition of certain restrictions on our executive compensation as a result of our decision to participate in the CPP may have material adverse effects on our business and results of operations.

As a result of our election to participate in the CPP, we must adopt the U.S. Treasury’s standards for executive compensation and corporate governance for the period during which the U.S. Treasury holds equity issued under the CPP. These standards would generally apply to our Chief Executive Officer, our Chief Financial Officer and the three next most highly compensated executive officers, referred to collectively as the senior executive officers. The standards include: (1) ensuring that incentive compensation for senior executive officers does not encourage unnecessary and excessive risks that threaten the value of our Company and the Bank, (2) requiring a clawback of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate, (3) prohibiting golden parachute payments to a senior executive officer, and (4) our agreement not to deduct for tax purposes compensation paid to a senior executive officer in excess of $500,000. In particular, the change to the deductibility limit on executive compensation may increase our income tax expense in future periods if compensation to a senior executive officer exceeds $500,000. In conjunction with its purchase of the Series B Preferred Stock, the U.S. Treasury acquired a warrant to purchase 599,042 shares of our common stock. A portion of the warrant is immediately exercisable and has a term of 10 years. Therefore, we could potentially be subject to the executive compensation and corporate governance restrictions for a ten-year period as a result of our participation in the CPP.

If we are unable to redeem the Series B Preferred Stock within five years, the cost of this capital to us will increase substantially.

If we are unable to redeem the Series B Preferred Stock prior to February 15, 2014, the cost of this capital to us will increase substantially on that date, from 5.0% per annum (approximately $1.25 million annually) to 9.0% per annum (approximately $2.25 million annually). Depending on our financial condition at the time, this increase in the annual dividend rate on the Series B Preferred Stock could have a material negative effect on our liquidity and our earnings available to common shareholders.

 

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Risks Related to Our Common Stock

Certain preferences and rights of preferred stockholders of First California may negatively affect the rights of holders of First California common stock.

First California’s certificate of incorporation authorizes its Board of Directors to issue up to 2,500,000 shares of preferred stock and to determine the rights, preferences, powers and restrictions granted or imposed upon any series of preferred stock without prior stockholder approval. The preferred stock that may be authorized could have preference over holders of First California common stock with respect to dividends and other distributions upon the liquidation or dissolution of First California. If First California’s Board of Directors authorizes the issuance of additional series of preferred shares having a voting preference over common stock, such issuances may inhibit or delay the approval of measures supported by holders of common stock that require stockholder approval and consequently may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and Board of Directors. Accordingly, such issuance could substantially impede the ability of public stockholders to benefit from a change in control or change of our management and Board of Directors and, as a result, may adversely affect the market price of our common stock and the stockholders’ ability to realize any potential change of control premium.

Currently, in the event of a voluntary or involuntary liquidation or dissolution, holders of our Series A Preferred Stock are entitled to receive a liquidation preference of $1,000 plus an amount equal to 8.5% per annum of the $1,000, which is deemed to have commenced accrual on December 10, 2001. Also, holders of our Series B Preferred Stock are entitled to receive a liquidation preference of $1,000 plus an accrued amount equal to 5.0% per annum of the $1,000, if any. These amounts are payable out of the assets of First California before any distribution to holders of common stock. If the number of preferred shares having a similar liquidation preference increases, the chance that holders of common stock may receive a smaller distribution upon liquidation or dissolution may be higher.

Certain restrictions will affect our ability to declare or pay dividends and repurchase our shares as a result of our decision to participate in the CPP.

As a result of our participation in the CPP, our ability to declare or pay dividends on any of our common stock has been limited. Specifically, we are not able to declare dividend payments on our common, junior preferred or pari passu preferred stock if we are in arrears on the dividends on our Series B Preferred Stock. Further, we are not permitted to pay dividends on our common stock without the U.S. Treasury’s approval until the third anniversary of the investment unless the Series B Preferred Stock has been redeemed or transferred. In addition, our ability to repurchase our shares has been restricted. The U.S. Treasury’s consent generally will be required for us to make any stock repurchases until the third anniversary of the investment by the U.S. Treasury unless the Series B Preferred Stock has been redeemed or transferred. Further, common, junior preferred or pari passu preferred stock may not be repurchased if we are in arrears on the Series B Preferred Stock dividends to the U.S. Treasury.

Our ability to pay dividends to holders of our common stock may be restricted by Delaware law and under the terms of indentures governing the trust preferred securities we have issued.

Our ability to pay dividends to our stockholders is restricted in specified circumstances under indentures governing the trust preferred securities we have issued, and we may issue additional securities with similar restrictions in the future. In addition, our ability to pay any dividends to our stockholders is subject to the restrictions set forth under Delaware law. We cannot assure you that we will meet the criteria specified under these agreements or under Delaware law in the future, in which case we may not be able to pay dividends on our common stock even if we were to choose to do so.

 

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We do not expect to pay dividends on our common stock in the foreseeable future.

We have never paid a cash dividend on our common stock and we do not expect to pay a cash dividend in the foreseeable future. We presently intend to retain earnings and increase capital in furtherance of our overall business objectives. We will periodically review our dividend policy in view of the operating performance of the company, and may declare dividends in the future if such payments are deemed appropriate.

We are a holding company and depend on our banking subsidiary for dividends, distributions and other payments.

We are a holding company that conducts substantially all our operations through our banking subsidiary, First California Bank. As a result, our ability to make dividend payments on our common stock depends upon the ability of First California Bank to make payments, distributions and loans to us. The ability of First California Bank to make payments, distributions and loans to us is limited by, among other things, its earnings, its obligation to maintain sufficient capital, and by applicable regulatory restrictions. For example, if, in the opinion of an applicable regulatory authority, First California Bank is engaged in or is about to engage in an unsafe or unsound practice, which could include the payment of dividends under certain circumstances, such authority may take actions requiring that First California Bank refrain from the practice. Additionally, under applicable California law, First California Bank generally cannot make any distribution (including a cash dividend) to its stockholder, us, in an amount which exceeds the lesser of: (1) the retained earnings of First California Bank and (2) the net income of First California Bank for its last three fiscal years, less the amount of any distributions made by First California Bank to its stockholder during such period. If First California Bank is not able to make payments, distributions and loans to us, we will be unable to pay dividends on our common stock.

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell the common stock when you want to or at prices you find attractive.

We cannot predict how our common stock will trade in the future. The market value of our common stock will likely continue to fluctuate in response to a number of factors including the following, most of which are beyond our control, as well as the other factors described in this “Risk Factors” section of this prospectus beginning on page 5:

 

   

actual or anticipated quarterly fluctuations in our operating and financial results;

 

   

developments related to investigations, proceedings or litigation that involve us;

 

   

changes in financial estimates and recommendations by financial analysts;

 

   

dispositions, acquisitions and financings;

 

   

actions of our current stockholders, including sales of our common stock by existing stockholders and our directors and executive officers;

 

   

fluctuations in the stock price and operating results of our competitors;

 

   

regulatory developments; and

 

   

developments related to the financial services industry.

Only a limited trading market exists for our common stock, which could lead to significant price volatility.

Our common stock was designated for listing on the NASDAQ Global Market in March 2007 under the trading symbol “FCAL” and trading volumes since that time have been modest. The limited trading market for

 

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our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock. In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue or that stockholders will be able to sell their shares.

A holder with as little as a 5% interest in First California could, under certain circumstances, be subject to regulation as a “bank holding company.”

Any entity (including a “group” composed of natural persons) owning 25% or more of the outstanding First California common stock, or 5% or more if such holder otherwise exercises a “controlling influence” over First California, may be subject to regulation as a “bank holding company” in accordance with the Bank Holding Company Act of 1956, as amended, or the BHCA. In addition, (1) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve Board under the BHCA to acquire or retain 5% or more of the outstanding First California common stock and (2) any person other than a bank holding company may be required to obtain the approval of the Federal Reserve Board under the Change in Bank Control Act to acquire or retain 10% or more of the outstanding First California common stock. Becoming a bank holding company imposes certain statutory and regulatory restrictions and burdens, and might require the holder to divest all or a portion of the holder’s investment in First California. In addition, because a bank holding company is required to provide managerial and financial strength for its bank subsidiary, such a holder may be required to divest investments that may be deemed incompatible with bank holding company status, such as a material investment in a company unrelated to banking.

Concentrated ownership of our common stock creates risks for our stockholders, including a risk of sudden changes in our share price.

As of December 4, 2009, First California’s directors, executive officers and other affiliates of First California owned approximately 50% of First California’s outstanding common stock (not including vested option shares). As a result, if all of these stockholders were to take a common position, they would be able to significantly affect the election of directors, with respect to which stockholders are authorized to use cumulative voting, as well as the outcome of most corporate actions requiring stockholder approval, such as the approval of mergers or other business combinations. Such concentration may also have the effect of delaying or preventing a change in control of First California. In some situations, the interests of First California’s directors and executive officers may be different from other stockholders.

Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large stockholders of a significant portion of that stockholder’s holdings could have a material adverse effect on the market price of our common stock. Furthermore, a group of our large stockholders can demand that we register their shares under certain circumstances. Any such increase in the number of our publicly registered shares may cause the market price of our common stock to decline or fluctuate significantly.

There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.

We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.

 

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USE OF PROCEEDS

We expect to receive net proceeds from this offering of approximately $             (or approximately $             if the underwriter exercises its over-allotment option in full), after deduction of underwriting discounts and commissions and estimated expenses payable by us.

We intend to use the net proceeds of this offering for general corporate purposes, including funding working capital requirements, supporting growth of First California’s banking business from internal growth and from possible acquisitions, and regulatory capital needs related to any such growth and acquisitions. We also may contribute some portion of the net proceeds to the capital of the Bank, which would use such amount for similar general corporate purposes.

 

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CAPITALIZATION

The following table sets forth our actual cash and due from banks, capitalization, per common share book values, and regulatory capital ratios, each as of September 30, 2009 and as adjusted to give effect to the issuance of the common stock offered hereby and the use of proceeds with respect thereto, as described in the “Use of Proceeds” section of this prospectus.

 

     As of September 30, 2009
         Actual             As Adjusted(1)    
     (Dollars in thousands, except per share data)

Cash and due from banks

   $ 42,753      $             
              

Junior subordinated debentures

   $ 26,740      $  

Shareholders’ equity

    

Preferred stock, authorized 2,500,000 shares, $0.01 par value

    

Series A – issued and outstanding 1,000 shares, actual and as adjusted

     1,000     

Series B – issued and outstanding 25,000 shares, actual and as adjusted

     23,056     

Common stock, authorized 25,000,000 shares, $0.01 par value; issued 11,972,034 shares, actual; issued 19,472,034 shares, as adjusted; outstanding 11,625,633 shares, actual; outstanding 19,125,633 shares, as adjusted

     118     

Additional paid-in capital

     136,389     

Treasury stock, 346,401 shares at cost, actual and as adjusted

     (3,061  

Retained earnings

     8,600     

Accumulated other comprehensive income (loss)

     (5,044  
              

Total shareholders’ equity

     161,058     
              

Total capitalization(2)

   $ 187,798      $  
              

Per Common Share

    

Common book value per share

   $ 11.78     

Tangible common book value per share

     5.53     

Regulatory Capital Ratios

    

For the Company:

    

Total capital to risk weighted assets

     12.47  

Tier 1 capital to risk weighted assets

     11.34  

Tier 1 capital to average assets

     8.81  

For the Bank:

    

Total capital to risk weighted assets

     11.62  

Tier 1 capital to risk weighted assets

     10.48  

Tier 1 capital to average assets

     8.10  

 

(1) Assumes that 7,500,000 shares of our common stock are sold in this offering at $             per share and that the net proceeds thereof are approximately $             million after deducting underwriting discounts and commissions and our estimated expenses. If the underwriter’s over-allotment option is exercised in full, net proceeds will increase to approximately $             million.

 

(2) Includes shareholders’ equity and junior subordinated debentures.

 

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PRICE RANGE OF COMMON STOCK

The common stock of First California began trading on the NASDAQ Global Market under the symbol “FCAL” on March 13, 2007. Prior to that time, the common stock of National Mercantile, our predecessor, traded on the NASDAQ Capital Market under the symbol “MBLA”.

The information in the following table indicates the high and low sales prices for National Mercantile’s common stock from January 1, 2007 to March 12, 2007 and for our common stock from March 13, 2007 to December 4, 2009, as reported by NASDAQ. Because of the limited market for National Mercantile’s common stock before March 13, 2007 and our common stock after that time, these prices may not be indicative of the fair market value of the common stock. The information does not include transactions for which no public records are available. The trading prices in such transactions may be higher or lower than the prices reported below.

As of December 4, 2009, we had approximately 11,627,008 shares of common stock outstanding, held of record by approximately 479 stockholders. The last reported sales price of our common stock on the NASDAQ Global Market on December 4, 2009 was $3.58 per share.

 

Quarter Ended

   High    Low

2009

     

December 31 (through December 4)

   $ 5.05    $ 3.26

September 30

   $ 6.48    $ 4.32

June 30

   $ 8.45    $ 3.89

March 31

   $ 7.75    $ 3.62

2008

     

December 31

   $ 8.60    $ 4.71

September 30

   $ 9.00    $ 5.17

June 30

   $ 9.15    $ 5.50

March 31

   $ 9.25    $ 7.11

2007

     

December 31

   $ 10.50    $ 6.90

September 30

   $ 12.30    $ 9.25

June 30

   $ 13.95    $ 11.32

March 31

   $ 13.96    $ 12.60

DIVIDEND POLICY

From our inception and until the completion of the mergers in March 2007, we were a “business combination shell company,” conducting no operations or owning or leasing any real estate or other property. Accordingly, we did not pay any dividends to our sole stockholder, National Mercantile, prior to the mergers, nor have we paid any dividends to our common stockholders since the completion of the mergers. We do not currently expect to pay a cash dividend to our common stockholders in the foreseeable future. We presently intend to retain earnings and increase capital in furtherance of our overall business objectives. We will periodically review our dividend policy in view of our operating performance, and may declare dividends in the future if such payments are deemed appropriate.

In addition, we cannot declare or pay a dividend on our common stock without the consent of the U.S. Treasury until the third anniversary of the date of the CPP investment, or December 19, 2011, unless prior to such third anniversary the Series B Preferred Stock is redeemed in whole or the U.S. Treasury has transferred all of the Series B Preferred Stock to third parties. We also may not pay dividends on our capital stock if we are in default or have elected to defer payments of interest under our junior subordinated debentures.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion is designed to provide a better understanding of significant trends related to the consolidated results of operations and financial condition of First California and its wholly owned subsidiaries. When we say “we,” “our” or “us”, we mean First California and its consolidated subsidiaries after the mergers. This discussion and information is derived from our audited consolidated financial statements and related notes for the two years ended December 31, 2008 and 2007 and our unaudited consolidated financial statements and related notes for the periods ended September 30, 2009 and 2008. You should read this discussion in conjunction with those consolidated financial statements appearing elsewhere in this prospectus.

We were a wholly owned subsidiary of National Mercantile formed to facilitate the reincorporation merger with National Mercantile and the merger with FCB completed on March 12, 2007. Accordingly, our historical balance sheet and results of operations before the mergers are the same historical information of National Mercantile. We accounted for the FCB merger using the purchase method of accounting; accordingly, our balance sheet includes the estimates of the fair value of the assets acquired and liabilities assumed from FCB. Our results of operations for the twelve months ended December 31, 2007 include the operations of FCB from the date of acquisition.

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. 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 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 total assets of $1.2 billion, gross loans of $788.4 million, deposits of $817.6 million and shareholders’ equity of $158.9 million.

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.

 

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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

Goodwill arises from business combinations and represents the value attributable to the unidentifiable intangible elements in our acquired businesses. Goodwill is initially recorded at fair value and is subsequently evaluated at least annually for impairment in accordance with the Financial Accounting Standards Board, or FASB, Accounting Standard Codification Update Related to Business Combinations. We perform this annual test as of December 31 of each year. Evaluations are also performed on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, a significant decrease in the market capitalization of the Company, an unanticipated change in the competitive environment, and a decision to change the operations or dispose of a significant business unit or product line.

The first step in this evaluation process is to determine if a potential impairment exists and, if the results of this exercise demonstrate potential impairment we next embark on a second step to determine the amount of impairment loss, if any. The computations required in these two exercises requires us to make a number of estimates and assumptions. In completing the first step, we determine the fair value of the Company. In determining the fair value, we calculate the value using a combination of three separate methods: the trading multiple of comparable publicly traded financial institutions; the acquisition premium of comparable acquisitions of financial institutions; and the discounted present value of our estimates of future cash flows. Critical assumptions that are used as part of these calculations include:

 

   

selection of comparable publicly traded companies, based upon location, size and business composition;

 

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selection of market comparable acquisition transactions, based on location, size, business composition, and date of the transaction;

 

   

the discount rate applied to future earnings, based upon an estimate of the cost of capital;

 

   

the potential future earnings of the Company; and

 

   

the relative weight given to the valuations derived by the three methods described.

If the first step indicates a potential impairment, we next determine or estimate the “implied fair value” of the goodwill. This process estimates the fair value of the Company’s individual assets and liabilities in the same manner as if a purchase of the Company were taking place. To do this, we must determine the fair value of the assets, liabilities and identifiable intangible assets of the Company based upon the best available information. We estimate the fair market value of all of the tangible assets, identifiable intangible assets and liabilities of the Company in accordance with the FASB Accounting Guidance Related to Fair Value Measurements. Loans, deposits with maturities, and debt are valued using assumptions regarding future cash flows, appropriate discount rates and other estimates, such as credit and market liquidity assumptions, to comply with the FASB Accounting Guidance Related to Fair Value Measurements. Deposits with no maturities are valued at book value. Owned properties are appraised, while for furniture, fixtures and equipment it is assumed book value approximates fair market value. Identifiable intangible assets such as core deposit intangibles and trade name intangibles are also identified and valued. If the implied fair value of goodwill calculated in this exercise is less than the carrying amount of goodwill, an impairment is indicated and the carrying value of goodwill is written down to its estimated fair value.

Effective December 31, 2008, we performed our annual goodwill impairment evaluation. Upon completion of the first step of the evaluation process, we concluded that potential impairment of goodwill existed. The second step was completed with the assistance of an independent valuation firm and our internal valuation resources and resulted in our conclusion that goodwill was not impaired at December 31, 2008. 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 also review our securities on an ongoing basis for the presence of other-than-temporary impairment, with formal reviews performed quarterly. Other-than-temporary losses on an individual security is recognized as a realized loss through earnings when it is probable that we will not collect all of the contractual cash flows of that security or we are unable to hold the security to recovery.

Our other-than-temporary impairment evaluation process conforms to the FASB Accounting Standards Codification Guidance Related to the Consideration of Impairment Related to Certain Debt and Equity Securities. These rules require us to take into consideration current market conditions, fair value in relationship to cost, extent and nature of change in fair value, issuer rating changes and trends, current analysts’ evaluations, all available information relevant to the collectability of debt securities, our ability and intent to hold the security until a recovery of fair value, which may be maturity, and other factors when evaluating for the existence of other-than-temporary impairment in our securities. At December 31, 2008 we evaluated the unrealized loss in our securities portfolio and concluded that there was no other-than-temporary impairment. 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. 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.

 

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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 EESA became law. Through its authority under the EESA, the U.S. Treasury announced in October 2008 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 U.S. 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, U.S. 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 ARRA. 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 our 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

 

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executive compensation.1 Under the new ARRA requirements, we may redeem early the shares issued to the U.S. 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.

On June 10, 2009, the U.S. 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 the U.S. 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 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

 

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.

 

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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 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 transaction account deposit insurance program. Under the deposit insurance program, through December 31, 2009, the FDIC guarantees all noninterest-bearing 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.

Results of Operations

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.

 

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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
 

Loans(2)

   $ 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    3.80     195,771      1,801    3.66

Junior subordinated debentures

     26,733      439    6.57     26,683      439    6.58
                                

Total borrowed funds

     178,663      1,894    4.21     222,454      2,240    4.01
                                

Total interest bearing funds

     991,808    $ 4,832    1.93     780,968    $ 5,200    2.65
                                

Noninterest checking

     295,444           192,289      

Other liabilities

     11,554           12,266      

Shareholders’ equity

     160,275           136,521      
                        

Total liabilities and shareholders’ equity

   $ 1,459,081         $ 1,122,044      
                        

Net interest income

      $ 11,396         $ 10,348   

Net interest margin (tax equivalent)(1)

         3.50         4.18

 

(1) Includes tax equivalent adjustments primarily related to tax-exempt income on securities.
(2) Interest on loans includes loan fees and costs, which totaled $(0.1) million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively, and zero and $0.7 million for the nine months ended September 30, 2009 and 2008, respectively. The average loan balance includes loans held-for-sale and nonaccrual loans where nonaccrual interest is excluded.

 

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     Nine 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
 

Loans(2)

   $ 913,256    $ 39,144    5.73   $ 778,337    $ 39,391    6.76

Securities

     272,706      9,847    5.08     220,837      8,827    5.50

Federal funds sold and deposits with banks

     90,467      368    0.54     909      18    2.65
                                

Total earning assets

     1,276,429    $ 49,359    5.21     1,000,083    $ 48,236    6.48
                        

Non-earning assets

     155,190           126,071      
                        

Total average assets

   $ 1,431,619         $ 1,126,154      
                        

Interest bearing checking

   $ 77,096    $ 168    0.29   $ 57,667    $ 342    0.79

Savings and money market

     256,122      2,077    1.08     200,533      2,928    1.95

Certificates of deposit

     460,044      7,274    2.11     296,235      7,105    3.20
                                

Total interest bearing deposits

     793,262      9,519    1.60     554,435      10,375    2.49
                                

Borrowings

     158,466      4,512    3.81     201,612      5,599    3.71

Junior subordinated debentures

     26,720      1,365    6.81     26,670      1,316    6.58
                                

Total borrowed funds

     185,186      5,877    4.24     228,282      6,915    4.05
                                

Total interest bearing funds

     978,448    $ 15,396    2.10     782,717    $ 17,290    2.95
                                

Noninterest checking

     280,036           192,704      

Other liabilities

     12,808           13,528      

Shareholders’ equity

     160,327           137,205      
                        

Total liabilities and shareholders’ equity

   $ 1,431,619         $ 1,126,154      
                        

Net interest income

      $ 33,963         $ 30,946   

Net interest margin (tax equivalent)(1)

         3.60         4.17

 

(1) Includes tax equivalent adjustments primarily related to tax-exempt income on securities.
(2) Interest on loans includes loan fees and costs, which totaled $(0.1) million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively, and zero and $0.7 million for the nine months ended September 30, 2009 and 2008, respectively. The average loan balance includes loans held-for-sale and nonaccrual loans where nonaccrual interest is excluded.

Our net interest income changes with the level and mix of average interest-earning assets and average interest-bearing funds. We call the changes between periods in interest-earning assets and interest-bearing funds balance changes. We measure the effect on our net interest income from balance changes by multiplying the change in the average balance between the current period and the prior period by the prior period average rate.

Our net interest income also changes with the average rate earned or paid on interest-earning assets and interest-bearing funds. We call the changes between periods in average rates earned and paid rate changes. We measure the effect on our net interest income from rate changes by multiplying the change in average rates earned or paid between the current period and the prior period by the prior period average balance.

We allocate the change in our net interest income attributable to both balance and rate on a pro rata basis to the change in average balance and the change in average rate.

 

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Three months ended September 30,

2009 to 2008 due to:

 

(in thousands)

   Rate     Volume     Total  

Interest income

      

Interest on loans

   $ (1,913   $ 2,570      $ 657   

Interest on securities

     (709     658        (51

Interest on Federal funds sold and deposits with banks

     (363     437        74   
                        

Total interest income

     (2,985     3,665        680   
                        

Interest expense

      

Interest on deposits

     1,372        (1,349     23   

Interest on borrowings

     (58     403        345   

Interest on junior subordinated debentures

     1        (1     —     
                        

Total interest expense

     1,315        (947     368   
                        

Net interest income

   $ (1,670   $ 2,718      $ 1,048   
                        

 

    

Nine months ended September 30,

2009 to 2008 due to:

 

(in thousands)

   Rate     Volume     Total  

Interest income

      

Interest on loans

   $ (7,075   $ 6,828      $ (247

Interest on securities

     (1,053     2,073        1,020   

Interest on Federal funds sold and deposits with banks

     (1,355     1,705        350   
                        

Total interest income

     (9,483     10,606        1,123   
                        

Interest expense

      

Interest on deposits

     5,325        (4,469     856   

Interest on borrowings

     (111     1,198        1,087   

Interest on junior subordinated debentures

     (46     (3     (49
                        

Total interest expense

     5,168        (3,274     1,894   
                        

Net interest income

   $ (4,315   $ 7,332      $ 3,017   
                        

The provision for loan losses was $4.1 million for the three months ended September 30, 2009 compared with $0.3 million for the three months ended September 30, 2008. The increase in the provision for the third quarter of 2009 reflects the higher level of net loan charge-offs in the period. Net loan charge-offs increased to $3.9 million for the three months ended September 30, 2009 compared with $194,000 for the same period last year. One loan relationship that had a $2.0 million owner-occupied commercial mortgage and $5.4 million of secured business loans abruptly discontinued business during the third quarter. We recognized $3.1 million of loan charge-offs on this loan relationship, $2.6 million related to the secured business loans and $0.5 million related to the owner-occupied commercial mortgage loan.

The provision for loan losses was $10.3 million for the nine months ended September 30, 2009 compared with $1.0 million for the nine months ended September 30, 2008. The increase in the provision and the related allowance for loan losses reflects our assessment of, among other things, estimated loss factors assigned to specific types of loans, changes and trends in the level of delinquencies, nonaccrual loans and loan charge-offs, changes in the value of collateral, changes in local and regional economic and business conditions, and the judgment of information available to the bank regulatory agencies at the conclusion of their examination process.

Our service charges, fees and other income for the three months ended September 30, 2009 increased to $1.3 million, up 45 percent from $0.9 million for the three months ended September 30, 2008. Our service charges, fees and other income for the nine months ended September 30, 2009 increased to $3.8 million, up 37 percent from $2.8 million for the nine months ended September 30, 2008. The increase in the amount of service

 

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charges on deposits and other income reflects the increase in our core deposit base and other business activities in the past year and the effect of the additional six branches from the FDIC-assisted 1st Centennial Bank transaction.

We estimated the effectiveness of our interest rate swaps in off-setting changes in cash flow of hedged items and determined that a portion of these instruments were ineffective during the three and nine months ended September 30, 2008. We recognize the unrealized gains and losses related to the ineffective portion of our interest rate swaps in noninterest income. We also had an interest rate floor for which we did not designate a hedging relationship and we recognize all changes in fair value of the interest rate floor directly in current period earnings. For the three months ended September 30, 2008, we recognized losses of $1,000 and for the nine months ended September 30, 2008, we recognized gains of $857,000, all related to the ineffective interest rate swaps and the non-hedged interest rate floor. We terminated the interest rate swap contracts in the second quarter of 2008 and the interest rate floor contract expired in December 2008. We no longer own any derivative instruments in 2009.

During the first nine months of 2009, we did not sell any loans compared to loans sold of $24.7 million for a gain of $175,000 in the first nine months of 2008. In addition, we brokered loans for commissions of $76,000 for the first nine months of 2009 compared with $207,000 for the first nine months of 2008. We had no loans held-for-sale at the end of the third quarter of 2009 compared with $31.4 million at December 31, 2008.

We also recognized in noninterest income an other-than-temporary impairment loss of $565,000 on one security based upon the results of our other-than-temporary impairment analysis at June 30, 2009. 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.

In the third quarter of 2009, we sold $47.8 million of securities and realized gains of $1.6 million. For the first nine months of 2009 we sold $116.2 million of securities and realized gains of $4.3 million. There were no securities transactions in the first nine months of 2008.

Our noninterest expense for the three months ended September 30, 2009 was $11.3 million compared with $8.2 million for the three months ended September 30, 2008. Our noninterest expense for the nine months ended September 30, 2009 was $34.9 million compared with $25.4 million for the nine months ended September 30, 2008. The increase in noninterest expense for quarter and year-to-date periods reflects the growth in the number of offices and the number of employees arising from the FDIC-assisted 1st Centennial Bank transaction as well as several other items, most notably FDIC insurance premiums. The number of offices has grown from 12 in the third quarter of 2008 to 17 offices in the third quarter of 2009. Our number of employees also has grown by approximately 15 percent since the third quarter of 2008.

In addition to the growth in branches and personnel, we also incurred costs of approximately $51,000 for the 2009 third quarter and $774,000 for the first nine months of 2009 associated with the FDIC-assisted 1st Centennial Bank transaction. These costs represent transitional personnel, legal and professional services as well as data processing, postage, supplies, stationary and other expenses attendant to the conversion and integration of 1st Centennial Bank. We completed the system conversion and integration of 1st Centennial Bank in the 2009 second quarter.

During the 2009 third quarter, in response to the continuing economic recession and current business activity levels, we reduced our workforce by approximately 10 percent. We expect personnel expenses will fall approximately $2.2 annually because of this action. We incurred separation expenses of approximately $235,000 in the 2009 third quarter.

 

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In addition, during the third quarter of 2009, we closed a branch unrelated to the FDIC-assisted 1st Centennial Bank transaction that reduced the number of offices to 17. We expect to save approximately $175,000 annually because of this action. We transferred the deposit relationships of this office to near-by offices and we do not anticipate that we will experience a significant decline in deposit balances.

We acquired real estate through a foreclosure and sold previously foreclosed upon real estate in the quarter ended September 30, 2009. The cost of foreclosed real estate and the loss on sale of foreclosed real estate was $193,000 for the third quarter of 2009 and $442,000 for the nine months ended September 30, 2009. We had no comparable expense for all periods of 2008.

The FDIC charged all institutions a special insurance assessment as of June 30, 2009. We estimated our special insurance assessment would be $675,000 and charged that amount to noninterest expense in the second quarter of 2009. Our actual assessment was $668,000 and the difference between our estimate and the actual amount was included in third quarter noninterest expense. The FDIC may assess an additional special insurance assessment before the end of 2009. In addition, the FDIC increased regular insurance premiums. With a larger deposit base and increased premiums, our regular FDIC insurance expense for the 2009 third quarter was $720,000 compared with $168,000 for the 2008 third quarter. For the first nine months ended September 30, 2009, our regular FDIC insurance expense was $1,473,000 compared with $507,000 for the same period a year ago.

The income tax benefit was $1.9 million for the nine months ended September 30, 2009 compared with an income tax provision of $3.3 million for the same period in 2008. The combined federal and state effective tax rate for the nine months ended September 30, 2009 was 51.4 percent compared with 39.0 percent for the same period in 2008. The effective tax rate can fluctuate from period to period based upon the expected level of taxable income for a period and the percentage impact permanent tax versus book differences have on the expected book income.

Our efficiency ratio was 86 percent for the third quarter of 2009 compared with 69 percent for the third quarter of 2008. Our efficiency ratio was 91 percent for the first nine months of 2009 compared with 70 percent for the first nine months of 2008. The efficiency ratio is the percentage relationship of noninterest expense, excluding amortization of intangibles, to the sum of net interest income and noninterest income, excluding gains or losses on security sales. The increase in the efficiency ratio for all periods reflects the integration and conversion expenses related to the FDIC-assisted 1st Centennial Bank transaction and the lag between these costs and the revenue from the full deployment of the newly acquired liquid assets as well as the expenses related to foreclosed property, the increase in FDIC deposit insurance premiums and special assessment, the market loss on loans held-for-sale and the impairment loss on securities.

Results of Operations

Years ended December 31, 2008 and 2007

Net income for the year ended December 31, 2008 was $6.4 million or 54 cents per diluted common share compared with net income of $7.1 million or 66 cents per diluted common share in 2007. Net income for 2007 was affected by the mergers completed in the first quarter of 2007. Our 2007 net income includes nine months and 19 days of combined results as well as the effect of merger-related gains and charges.

Net interest income

Net interest income is the difference between interest earned on assets and interest incurred on liabilities. Taxable-equivalent net interest income is the largest component of First California’s revenue. By its nature, net interest income is especially vulnerable to changes in the mix and amounts of interest-earning assets and interest-bearing liabilities. In addition, changes in the interest rates and yields associated with these assets and liabilities

 

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significantly impact net interest income. See “—Interest Rate Risk” on page 72 for further discussion of how we manage the portfolios of interest-earning assets and interest-bearing liabilities and associated risk.

Net interest income for 2008 was $40.8 million compared with $40.2 million last year. Average interest-earning assets for 2008 were $1.01 billion, up 16 percent from $873 million last year. The yield on average interest-earning assets for 2008 declined to 6.26% from 7.57%. The decline in the yield outpaced the benefit from growth in average interest-earning assets which resulted in a decline in interest income of $2.5 million.

The increase in average interest-earning assets was supported by an increase in average interest-bearing liabilities, principally time certificates of deposits and Federal Home Loan Bank, or FHLB, advances. Average interest-bearing liabilities increased to $789.3 million from $642.6 million, up 23 percent from last year. The rate paid on average interest- bearing liabilities fell to 2.84% from 3.97% last year. The decline in the rate paid outpaced the added expense of more interest-bearing liabilities resulting in a reduction in interest expense of $3.1 million. Together, the decline in interest expense exceeded the decline in interest income resulting in a 1 percent increase in net interest income for 2008.

The net interest margin (on a taxable equivalent basis) was 4.08% in 2008 compared with 4.64% in 2007. The decreased net interest margin for 2008 compared to 2007 resulted primarily from loan yields decreasing more and faster than deposit rates and a decline in the percentage relationship of noninterest-bearing demand deposits to total interest-bearing liabilities.

Throughout 2008, the FRB lowered the federal funds rate seven times by approximately 400 basis points. In contrast, our net interest margin declined 56 basis points for the 2008 year. A decrease in interest rates generally has a more immediate impact on our variable rate loans. Marketplace deposit rates generally respond more slowly to changes in interest rates and limit our ability to reduce rates quickly. Our interest rate risk management practices are designed to create stability in our net interest margin; however, we anticipate that our net interest margin will continue to experience downward pressure due to marketplace deposit rates.

 

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The following table presents the average balances, the amount of interest earned or incurred and the applicable taxable equivalent yields for interest-earning assets and the costs of interest-bearing liabilities that generate net interest income:

Average Balance Sheet and Analysis of Net Interest Income

 

    Year Ended  
    December 31, 2008     December 31, 2007     December 31, 2006  
    Average
Amount
    Interest
Income/
Expense
  Weighted
Average
Yield/
Rate
    Average
Amount
    Interest
Income/
Expense
  Weighted
Average
Yield/
Rate
    Average
Amount
    Interest
Income/
Expense
  Weighted
Average
Yield/
Rate
 
    (Dollars in thousands)  

Assets:

                 

Federal funds sold and securities purchased under agreements to resell

  $ 2,715      $ 28   1.05   $ 2,056      $ 99   4.83   $ 1,661      $ 86   5.18

Due from banks-interest-bearing

    59        2   2.56     11,329        26   0.23     2,538        131   5.16

Securities available-for-sale

    221,623        11,684   5.44     176,259        9,236   5.40     96,104        5,087   5.29

Securities held-to-maturity

    —          —     —       —          —     —          2,307        96   4.16

Loans (1) (2)

    785,371        51,521   6.56     683,074        56,389   8.26     351,882        30,100   8.55
                                               

Total interest earning assets

    1,009,768        63,235   6.26     872,718        65,750   7.57     454,492        35,500   7.81
                             

Noninterest earning assets:

                 

Cash and due from banks – demand

    19,170            3,798            14,066       

Other assets

    118,030            78,150            22,879       

Allowance for loan losses and net unrealized gain/loss on securities available-for-sale

    (12,131         (7,630         (5,933    
                                   

Total assets

  $ 1,134,837          $ 947,036          $ 485,504       
                                   

Liabilities and shareholders’ equity:

                 

Interest-bearing deposits:

                 

Checking

  $ 47,526        215   0.45   $ 39,186        328   0.84   $ 30,737      $ 221   0.72

Money market and savings

    204,351        3,627   1.77     223,509        7,185   3.21     124,319        3,439   2.77

Time certificates of deposit:

                 

$100,000 or more

    209,483        5,939   2.84     165,319        7,076   4.28     83,993        3,600   4.29

Under $100,000

    106,851        3,616   3.38     82,796        3,732   4.51     23,708        838   3.53
                                               

Total time certificates of deposit

    316,334        9,555   3.02     248,115        10,808   4.36     107,701        4,438   4.12
                                               

Total interest-bearing deposits

    568,211        13,397   2.36     510,810        18,321   3.59     262,757        8,098   3.08

FHLB advances

    148,748        5,583   3.75     61,806        3,003   4.87     13,991        700   5.00

Junior subordinated debentures

    26,675        1,755   6.58     25,057        1,676   6.69     15,464        1,546   10.00

Federal funds purchased and securities sold under agreements to repurchase

    45,676        1,718   3.76     45,000        2,506   5.57     33,108       1,808   5.46 %
                                               

Total interest-bearing liabilities

    789,310        22,453   2.84     642,673        25,506   3.97     325,320        12,152   3.74
                             

Noninterest-bearing liabilities:

                 

Noninterest-bearing demand deposits

    190,939            193,630            114,701       

Other liabilities

    15,901            9,235            4,728       

Shareholders’ equity

    138,687            101,498            40,755       
                                   

Total liabilities and shareholders’ equity

  $ 1,134,837          $ 947,036          $ 485,504       
                                   

Net interest income

    $ 40,782       $ 40,244       $ 23,348  
                             

Net interest margin (tax equivalent)

      4.08       4.64       5.14

 

(1) The average balance of nonperforming loans has been included in loans.
(2) Yields and amounts earned on loans include loan fees of $0.8 million, $3.0 million and $1.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

 

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Net interest income is affected by changes in the level and mix of average earning assets and average interest-bearing funds. The changes between periods in these balances are referred to as balance changes. The effect on net interest income from changes in average balances is measured by multiplying the change in the average balance between the current period and the prior period by the prior period average rate. Net interest income is also affected by changes in the average rate earned or paid on earning assets and interest-bearing funds and these are referred to as rate changes. The effect on net interest income from changes in average rates is measured by multiplying the change in the average rate between the current period and the prior period by the prior period average balance. Changes attributable to both rate and volume are allocated on a pro rata basis to the change in average volume and the change in average rate.

Increase (Decrease) in Net Interest Income/Expense Due to Change in Average Volume and Average Rate (1)

 

     2008 vs 2007     2007 vs 2006  
     Increase
(Decrease) due to:
    Net
Increase
(Decrease)
    Increase
(Decrease) due to:
    Net
Increase
(Decrease)
 
     Volume     Rate       Volume     Rate    
     (Dollars in thousands)  

Interest Income:

            

Federal funds sold

   $ 32      $ (103   $ (71   $ 19     $ (6   $ 13   

Due from banks – interest-bearing

     (26     2        (24     20        (125     (105

Securities available-for-sale

     2,732        (284     2,448        4,200        (51     4,149   

Securities held-to-maturity

     —          —          —          (96     —          (96

Loans (2)

     8,483        (13,351     (4,868     27,341        (1,052     26,289   
                                                

Total interest-earning assets

     11,221        (13,736     (2,515     31,484        (1,234     30,250   
                                                

Interest Expense:

            

Interest-bearing deposits:

            

Checking

     70        (183     (113     70        37        107   

Money market and savings

     (615     (2,943     (3,558     3,189        557        3,746   

Time certificates of deposit:

            

$100,000 or more

     1,890        (3,027     (1,137     1,836        (1,704     132   

Under $100,000

     1,087        (1,203     (116     5,050        1,188        6,238   
                                                

Total time certificates of deposit

     2,977        (4,230     (1,253     6,886        (516     6,370   
                                                

Total interest-bearing deposits

     2,432        (7,356     (4,924     10,145        78        10,223   

FHLB advances

     4,241        (1,661     2,580        2,383        (80     2,303   

Junior subordinated debentures

     109        (30     79        959        (829     130   

Federal funds purchased and securities sold under agreements to repurchase

     38       (826 )     (788     649        49       698  
                                                

Total interest-bearing liabilities

     6,820        (9,873     (3,053     14,136        (782     13,354   
                                                

Net interest income

   $ 4,401      $ (3,863   $ 538      $ 17,348      $ (452   $ 16,896   
                                                

 

(1) The change in interest income or interest expense that is attributable to both changes in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of changes in each.
(2) Table does not include interest income that would have been earned on nonaccrual loans.

 

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Provision for loan losses

We have experienced positive asset quality measures—low levels of delinquencies, low levels of nonaccrual loans, and low levels of net charge-offs—for an extended period of time. As a result, there was no provision for loan losses for the year ended December 31, 2007. However, due to the current economic climate, increased charge-offs and our ongoing evaluation of credit quality in our loan portfolio, we recorded a provision for loan losses of $1,150,000 for the year ended December 31, 2008.

Increased provisions for loan losses may be required in the future based on loan growth, the effect changes in economic conditions, such as inflation, unemployment, market interest rate levels, and real estate values may have on the ability of our borrowers to repay their loans, and other negative conditions specific to our borrowers’ businesses.

Noninterest income

Noninterest income was $5.4 million for 2008 compared with $8.0 million for 2007.

Service charges on deposit accounts were $2.8 million for 2008, up 77 percent from $1.6 million for 2007. The increase in deposit activity fees in 2008 was due primarily to an increase in customers utilizing fee-generating services such as cash management and on-line banking services and a smaller percentage of fees waived.

Earnings on cash surrender value of life insurance were $424,000 in 2008 compared to $343,000 for 2007. The increase in earnings reflects a higher average cash surrender value during 2008 as compared to 2007.

Due to decreased demand in the secondary markets, the staffing in our Commercial Mortgage Division was reduced in the first quarter of 2008 and loan sale activity and loan commissions from brokered loans declined in 2008 versus 2007. Commercial and multifamily mortgages originated and sold in 2008 totaled approximately $19.9 million. Gains from these sales were $17,000. Commercial and multifamily mortgages originated and sold in 2007 totaled approximately $76.1 million. Gains from these sales were $1.79 million. Loan commissions on brokered commercial and multifamily mortgages were $207,500 in 2008 compared to $224,000 in 2007. We do not expect the demand in the secondary markets will increase in the near term. Similarly, due to decreased demand in the U.S. Small Business Administration, or SBA, secondary markets, we reduced the staffing in our SBA department in the first quarter of 2009. SBA loans originated and sold in 2008 and 2007 totaled approximately $3.8 million and $2.1 million. Gains from these sales were $158,000 and $98,000, respectively. Loan commissions on SBA 504 loans were $69,500 and $185,000 for 2008 and 2007. We do not expect the demand in the SBA secondary markets will increase in the near term.

Noninterest income also includes a recognized pre-tax gain of $2.4 million from the sale of the bank charters of Mercantile and South Bay to United Central Bank and The Independent Bankers Bank, respectively, during the second quarter of 2007.

Other income includes gains from non-hedge derivatives of $1,042,000 in 2008 versus $224,000 in 2007. The increase in 2008 is due to the decrease in market rates throughout 2008 which produced gains on our interest rate floor contracts. Our last derivative contract expired in December 2008.

 

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The following table presents a summary of noninterest income:

 

     For the years ended
December 31,
     2008     2007
     (in thousands)

Service charges on deposit accounts

   $ 2,756      $ 1,557

Earnings on cash surrender value of life insurance

     424        343

Commissions on brokered loans

     277        409

Net gain on sale of loans

     175        1,790

Net gain (loss) on sale of securities

     (22     89

Net servicing fees

     87        58

Gain on sale of bank charters

     —          2,375

Gain on derivatives

     1,042        224

Other income

     642        1,202
              

Total noninterest income

   $ 5,381      $ 8,047
              

Noninterest expense

Noninterest expense for 2008 was $35.1 million down 5.2 percent from $37.0 million for 2007. The decrease in 2008 primarily reflects a decrease in merger and integration-related expenses, as well as a loss on the early termination of debt incurred in 2007. A key measure tracked by us is the efficiency ratio. This ratio measures noninterest expense, excluding amortization of intangibles, to the sum of net interest income and noninterest income. Gains or losses from securities transactions are excluded from noninterest income. The efficiency ratio was 73.45 percent for 2008 compared with 63.18 percent for 2007.

The following table presents a summary of noninterest expense:

 

     For the years ended
December 31,
     2008    2007
     (in thousands)

Salaries and employee benefits

   $ 18,526    $ 17,514

Premises and equipment

     4,813      4,040

Data processing

     1,313      1,047

Legal, audit, and other professional services

     1,962      1,353

Printing, stationary, and supplies

     691      490

Telephone

     752      532

Directors’ fees

     434      514

Advertising and marketing

     1,324      1,029

Postage

     199      159

Amortization of intangibles

     1,190      1,029

Integration and conversion expenses

     —        5,443

Loss on early termination of debt

     —        1,564

Other expenses

     3,901      2,331
             

Total noninterest expense

   $ 35,105    $ 37,045
             

We launched an integration program shortly after the mergers which combined our three banks under a single brand—First California Bank. We recognized integration and conversion pre-tax charges of $5.44 million in 2007. These charges primarily include $2.3 million severance for the former chief executive officer, chief financial officer, and chief credit officer of National Mercantile and $1.8 million to exit National Mercantile technology. In connection with the integration of the banks, we installed the existing First California Bank

 

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technology in all Mercantile and South Bay offices and incurred selective staff reductions. We believe the integration program created operating efficiencies and eliminated redundancies.

In January 2007, we elected to redeem all of the $15.5 million outstanding 10.25% fixed rate junior subordinated debentures due July 25, 2031. The debentures were redeemable at a price of 107.6875% of the principal amount outstanding plus accrued interest. As a result, we incurred a pre-tax charge of $1.6 million in the first quarter of 2007 which is reflected in our 2007 non-interest expense.

To redeem the July 2031 debentures, we issued $16.5 million 6.80% fixed/floating rate junior subordinated debentures due March 15, 2037. For the first five years, the interest rate is fixed. Thereafter, the interest rate resets quarterly to the 3-month LIBOR rate plus 1.60%. These debentures are redeemable at par, in whole or in part, any time on or after March 15, 2012. We expect to save in the initial 5-year period approximately $500,000 per year in pre-tax interest expense from the early redemption of the former and the issuance of the new debentures.

Income taxes

The provision for income taxes was $3.5 million for 2008 compared with $4.2 million for 2007. The effective tax rate was 35.8 percent for 2008 compared with 37.0 percent for 2007.

The combined federal and state statutory rate for 2008 was 42.05 percent and for 2007 was 41.15 percent. The effective tax rates were less than the combined statutory tax rate primarily as a result of excluding from taxable income interest income on municipal securities and the earnings on the cash surrender value of life insurance.

Financial position—September 30, 2009 compared with December 31, 2008

Lending and credit risk

We provide a variety of loan and credit-related products and services to meet the needs of borrowers primarily located in the six Southern California counties where our branches are located. Business loans, represented by commercial real estate loans, commercial loans and construction loans comprise the largest portion of the loan portfolio. Consumer or personal loans, represented by home mortgage, home equity and installment loans, comprise a smaller portion of the loan portfolio.

Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with us or otherwise to perform as agreed. All activities in which success depends on counterparty, issuer, or borrower performance have credit risk. Credit risk is present any time we extend, commit or invest funds; whenever we enter into actual or implied contractual agreements for funds, whether on or off the balance sheet, credit risk is present.

All categories of loans present credit risk. Major risk factors applicable to all loan categories include changes in international, national and local economic conditions such as interest rates, inflation, unemployment levels, consumer and business confidence and the supply and demand for goods and services.

Commercial real estate loans rely upon the cash flow originating from the underlying real property. Commercial real estate is a cyclical industry; general economic conditions and local supply and demand affect the commercial real estate industry. In the office sector, the demand for office space is highly dependent on employment levels. Consumer spending and confidence affect the demand for retail space and the levels of retail rents in the retail sector. The industrial sector has exposure to the level of exports, defense spending and inventory levels. Vacancy rates, location and other factors affect the amount of rental income for commercial property. Tenants may relocate, fail to honor their lease or go out of business. In the multifamily residential sector, the affordability of ownership housing, employment conditions and the vacancy of existing inventory

 

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heavily influences the demand for apartments. Population growth or decline and changing demographics, such as increases in the level of immigrants or retirees, are also factors influencing the multifamily residential sector.

Construction loans provide developers or owners with funds to build or improve properties; developers ultimately sell or lease these properties. Generally, construction loans involve a higher degree of risk than other loan categories because they rely upon the developer’s or owner’s ability to complete the project within specified cost and time limits. Cost overruns can cause the project cost to exceed the project sales price or exceed the amount of the committed permanent funding. Any number of reasons, such as poor weather, material or labor shortages, labor difficulties, or redoing substandard work to pass inspection, can delay construction projects. Furthermore, changes in market conditions or credit markets may affect a project’s viability once completed.

Commercial loans rely upon the cash flow originating from the underlying business activity of the enterprise. The manufacture, distribution or sale of goods or sale of services are not only affected by general economic conditions but also by the ability of the enterprise’s management to adjust to local supply and demand conditions, maintain good labor, vendor and customer relationships, as well as market, price and sell their goods or services for a profit. Customer demand for goods and services of the enterprise may change because of competition or obsolescence.

Home mortgages and home equity loans and lines of credit use first or second trust deeds on a borrower’s real estate property, typically their principal residence, as collateral. These loans depend on a person’s ability to regularly pay the principal and interest due on the loan and, secondarily, on the value of real estate property that serves as collateral for the loan. Generally, home mortgages involve a lower degree of risk than other loan categories because of the relationship of the loan amount to the value of the residential real estate and a person’s reluctance to forego their principal place of residence. General economic conditions and local supply and demand, however, affect home real estate values. Installment loans and credit card lines also depend on a person’s ability to regularly pay principal and interest on a loan; however, generally these are unsecured loans or, if secured, the collateral value can rapidly decline as is the case for automobiles. A person’s ability to service debt is highly dependent upon their continued employment or financial stability. Job loss, divorce, illness and bankruptcy are just a few of the risks that may affect a person’s ability to service their debt.

Our appraisal policy with respect to real estate secured loans is to obtain an appraisal for the following extensions of credit:

 

  1. All business loans in excess of $1,000,000 where real estate was taken as collateral but where the sale or rental of the real estate is not the primary source of repayment;

 

  2. All business loans in excess of $250,000 where real estate was taken as collateral and where the sale or rental of the real estate is the primary source of repayment; and

 

  3. All real estate secured loans in excess of $250,000.

For all new loans and loans being renewed or extended that require an appraisal, a current appraisal is required, which means an appraisal report with an “as of” date and a property inspection date that are not more than six months before the date of the loan funding. Updated appraisal reports are obtained only in accordance with Uniform Standards of Professional Appraisal Practice guidelines or, in order to determine the useful life of an existing appraisal. In general, the useful life of an appraisal, regardless of amount, is deemed to be the life of the originating loan, unless:

 

  A. There has been a deterioration in the borrower’s performance and there is an increasing likelihood of a forced liquidation of the property and the existing appraisal is older than two years, and/or

 

  B. There has been deterioration in the property’s value due to a significant depreciation in local real estate values, lack of maintenance, changes in zoning, environmental contamination, or other circumstances.

Since the risks in each category of loan changes based on a number of factors, it is not possible to state whether a particular type of lending carries with it a greater or lesser degree of risk at any specific time in the economic

 

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cycle. Generally, in a stabilized economic environment, home mortgage loans have the least risk, followed by home equity loans, multifamily property loans, commercial property loans, commercial loans and lines and finally construction loans. However, this ordering may vary from time to time and the degree of risk from the credits with the least risk to those with the highest risk profile may expand or contract with the general economy.

We manage credit risk through Board approved policies and procedures. At least annually, the Board reviews and approves these policies. Lending policies provide us with a framework for consistent loan underwriting and a basis for sound credit decisions. Lending policies specify, among other things, the parameters for the type or purpose of the loan, the required debt service coverage and the required collateral requirements. Credit limits are also established and certain loans require approval by the Directors’ Loan Committee. The Directors’ Audit Committee also engages a third party to perform a credit review of the loan portfolio to ensure compliance with policies and assist in the evaluation of the credit risk inherent in the loan portfolio.

Loans

Loans increased $152.4 million, or 19 percent, to $940.9 million at September 30, 2009 from $788.4 million at December 31, 2008. This increase includes the effect of the reclassification of $31.4 million of loans held-for-sale. Loan growth was primarily the result of $101 million of loans we acquired in connection with the FDIC-assisted 1st Centennial Bank transaction.

 

(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   

The loan categories above are derived from bank regulatory reporting standards for loans secured by real estate; however, a portion of the mortgage loans above are loans that we consider to be a commercial loan for which we have taken real estate collateral as additional support or from an abundance of caution. In these instances, we are not looking to the real property as its primary source of repayment, but rather as a secondary or tertiary source of repayment.

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, we identified two prospective buyers for these loans and they undertook their purchase due diligence shortly after year-end. We 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 FNMA. Subsequent to accepting the bid, FNMA changed its underwriting and documentation standards and, while we did work with the prospective buyer and our borrowers to meet these new standards, we ultimately determined not to pursue the sale and returned these performing, multi-family mortgage loans to our regular loan portfolio. Even though these loans are performing, buyers in the current marketplace would require a yield higher than the current interest rates on these loans. We recognized a market value loss of $709,000 in noninterest expense for the second quarter of 2009 to write down these loans to the lower of cost or market value.

 

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Commercial mortgage loans, the largest segment of our portfolio, were 39 percent of total loans at September 30, 2009 compared with 38 percent at December 31, 2008. We had 370 commercial mortgage loans with an average balance of $991,000 at September 30, 2009 compared to 323 commercial mortgage loans with an average balance of $938,000 at December 31, 2008. Many different commercial property types collateralize our commercial mortgage loans. Our top three categories have been office, industrial, and retail, representing approximately 66 percent of commercial mortgage loans. In addition, most of our commercial property lending is in the six Southern California counties where our branches are located. The following is a table of our commercial mortgage lending by county.

 

Commercial mortgage loans by region/county

(in thousands)

   At
September 30,
2009
   At
December 31,
2008

Southern California

     

Los Angeles

   $ 180,738    $ 154,669

Orange

     28,377      31,808

Ventura

     93,613      87,770

Riverside

     22,063      8,549

San Bernardino

     17,653      9,834

San Diego

     16,064      2,966

Santa Barbara

     237      236
             

Total Southern California

     358,745      295,832
             

Northern California

     

Alameda

     330      342

Contra Costa

     416      434

Fresno

     2,489      2,512

Imperial

     373      —  

Kern

     1,059      1,115

Madera

     562      561

Placer

     627      635

Sacramento

     362      —  

Solano

     280      285

Tulare

     297      300
             

Total Northern California

     6,795      6,184
             

Total commercial mortgage

   $ 365,540    $ 302,016
             

The following table shows the distribution of our commercial mortgage loans by property type.

 

Commercial mortgage loans by property type

(in thousands)

   At
September 30,
2009
   At
December 31,
2008

Industrial/warehouse

   $ 90,476    $ 60,171

Office

     79,392      59,183

Retail

     70,214      57,799

Hotel

     14,053      14,522

Mixed use

     12,547      9,334

Assisted living

     11,378      11,478

Medical

     11,355      15,174

Self storage

     10,345      10,081

Restaurant

     9,848      11,636

All other

     55,932      52,638
             

Total commercial loans

   $ 365,540    $ 302,016
             

 

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We generally underwrote commercial mortgage loans with a maximum loan-to-value of 70 percent and a minimum debt service coverage ratio of 1.25. Beginning in the third quarter of 2009 we changed the maximum loan-to-value to 60 percent and the minimum debt service coverage ratio to 1.35. We believe these changes to our loan origination policies were prudent given the current economic environment. The weighted average loan-to-value percentage of our commercial real estate portfolio is 57.9 percent and the weighted average debt service coverage ratio is 1.54 at September 30, 2009. These criteria may become more conservative depending on the type of property. We focus on cash flow; consequently, regardless of the value of the collateral, the commercial real estate project must provide sufficient cash flow, or alternatively the principals must supplement the project with other cash flow, to service the debt. We generally require the principals to guarantee the loan. We also “stress-test” commercial mortgage loans to determine the potential effect changes in interest rates, vacancy rates, and lease or rent rates would have on the cash flow of the project. Additionally, at least on an annual basis, we require updates on the cash flow of the project and, where practicable, we visit the properties.

Commercial loans represent the next largest category of loans and were 27 percent of total loans at September 30, 2009, down from 29 percent at December 31, 2008. We had 741 commercial loans with an average balance of $337,000 at September 30, 2009 compared to 796 commercial loans with an average balance of $288,000 at December 31, 2008. Unused commitments on commercial loans were $43.0 million at September 30, 2009 compared with $103.5 million at December 31, 2008. Working capital, equipment purchases or business expansion are the typical purposes for commercial loans. Commercial loans may be unsecured or secured by assets such as equipment, inventory, accounts receivables, and real property. Personal guarantees of the business owner may also be present. Additionally, these loans may also have partial guarantees from the SBA or other federal or state agencies. Broadly diversified business sectors with the largest sectors in real estate/construction, finance and insurance, healthcare, manufacturing and professional services comprise the commercial loan portfolio. Below is a table of our loans by business sector.

 

Commercial loans by industry/sector

(in thousands)

   At
September 30,
2009
   At
December 31,
2008

Services

   $ 68,683    $ 56,298

Information

     58,965      55,510

Real estate

     58,929      54,200

Trade

     27,137      24,865

Manufacturing

     16,111      10,620

Healthcare

     12,571      13,731

Transportation and warehouse

     7,815      8,796

Other

     211      4,938
             

Total commercial loans

   $ 250,422    $ 228,958
             

We underwrite commercial loans with maturities not to exceed seven years and we generally require full amortization of the loan within the term of the loan. We underwrite traditional working capital lines for a 12 month period and have a 30-day out-of-debt requirement. Accounts receivable and inventory financing revolving lines of credit have an annual maturity date, a maximum advance rate, and an annual field audit for lines of $200,000 or more. Third-party vendors perform field audits for our accounts receivable and inventory financing revolving lines of credit. The maximum advance rate for accounts receivable is 80 percent and the maximum advance rate for eligible inventory is 50 percent.

Construction and land loans represent 10 percent of total loans at September 30, 2009, down from 17 percent at December 31, 2008. At September 30, 2009, we had 39 projects with an average commitment of $3,078,000 compared with 49 projects with an average commitment of $3,442,000 at December 31, 2008. Construction loans represent single-family, multifamily and commercial building projects as well as land development loans. The decline in construction and land loans since the end of 2008 reflects principally the successful completion and sale of projects as well as the general reduction in new business activity. At

 

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September 30, 2009, 26 percent of these loans, or $24.7 million, represent single-family residential construction projects; 12 percent, or $11.2 million, were multi-family residential construction projects; 43 percent, or $40.5 million, were commercial projects; and, 19 percent, or $18.3 million, were land development projects.

Construction loans are typically short term, with maturities ranging from 12 to 18 months. For commercial projects, we have had a maximum loan-to-value requirement of 75 percent of the appraised value. For residential projects, the maximum loan-to-value has been 80 percent. Beginning in the third quarter of 2009 we changed the maximum loan-to-value to 70 percent for both commercial and residential projects. The weighted average loan-to-value ratio for our construction and land portfolio is 72.1 percent at September 30, 2009. At September 30, 2009, we have only eight projects for which we capitalize interest income. Capitalized interest income for the nine months ended September 30, 2009 was $371,000 for these eight projects. At the borrower’s expense, we use a third party vendor for funds control, lien releases and inspections. In addition, we regularly monitor the marketplace and the economy for evidence of deterioration in real estate values.

Below is a table of our construction and land loans by county.

 

Construction and land loans by county

(in thousands)

   At September 30, 2009    At December 31, 2008
     Commitment    Outstanding    Commitment    Outstanding

Los Angeles

   $ 51,317    $ 46,136    $ 91,254    $ 66,390

Orange

     6,872      6,670      8,550      3,650

Ventura

     57,685      37,801      56,101      50,290

Riverside

     4,155      4,114      2,984      2,958

San Bernardino

     —        —        414      417

San Diego

     —        —        736      738

Santa Barbara

     —        —        8,611      8,611
                           

Total construction and land loans

   $ 120,029    $ 94,721    $ 168,650    $ 133,054
                           

We are mindful of the recent developments in our marketplace and have supplemented our regular monitoring practices by updating project appraisals, re-evaluating estimated project marketing time and re-evaluating the sufficiency of the original loan commitment to absorb interest charges (i.e., interest reserves). We are also re-evaluating the ability of the project sponsor, where applicable, to successfully complete other projects funded by other institutions. In circumstances where the interest reserve was not sufficient, the project sponsor has made payments to us from their general resources or the project sponsor placed with us the proceeds from a portion of the project sales. While we believe that our monitoring practices are adequate, we cannot assure you that there will not be further delinquencies, lengthened project marketing time or declines in real estate values.

 

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Multifamily residential mortgage loans were 14 percent of total loans at September 30, 2009, up from 7 percent at December 31, 2008. We had approximately 156 multifamily loans with an average balance of $862,000 at September 30, 2009, compared to approximately 68 multifamily loans with an average balance of $755,000 at December 31, 2008. Apartments mostly located in our six-county market area serve as collateral for our multifamily mortgage loans. The entire amount of $31.2 million, representing the loans held-for-sale which were transferred back to loans in the second quarter of 2009, were multifamily loans located in Los Angeles, Orange and Ventura counties. We underwrite multifamily mortgage loans in a fashion similar to commercial mortgage loans previously described. The weighted average loan-to-value percentage is 60.8% and the weighted average debt service coverage ratio is 1.28 of our multifamily portfolio at September 30, 2009. Below is a table of our multifamily mortgage loans by county.

 

Multifamily mortgage loans by region/county

(in thousands)

   At
September 30,
2009
   At
December 31,
2008

Southern California

     

Los Angeles

   $ 88,529    $ 15,574

Orange

     17,252      17,774

Ventura

     7,712      3,842

San Bernardino

     4,284      3,925

San Diego

     5,078      3,016

Santa Barbara

     1,135      —  
             

Total Southern California

     123,990      44,131
             

Northern California

     

Alameda

     799      806

Calaveras

     1,378      1,387

Fresno

     252      256

Kern

     2,696      —  

Merced

     674      681

Monterey

     385      388

Mono

     232      235

San Francisco

     1,351      1,363

San Luis Obispo

     500      504

Santa Clara

     705      711

Santa Cruz

     1,134      1,145
             

Total Northern California

     10,106      7,476
             

Total multifamily mortgage

   $ 134,096    $ 51,607
             

 

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The table below illustrates the distribution of our loan portfolio by loan size at September 30, 2009. We distributed all loans by loan balance outstanding except for construction loans, which we distributed by loan commitment. At September 30, 2009, 33 percent of our loans were less than $1 million and 75 percent of our loans were less than $5 million. We believe the high number of smaller-balance loans aids in the mitigation of credit risk; however, a prolonged and deep recession can affect a greater number of borrowers.

 

     September 30, 2009  
     Less
than
$500,000
    $500,000
to
$999,999
    $1,000,000
to
$2,999,999
    $3,000,000
to
$4,999,999
    $5,000,000
to
$9,999,999
    $10,000,000
to
$25,000,000
 

Commercial mortgage

      12   15   34   12   20   7

Commercial loans and lines of credit

      24   11   33   13   10   9

Construction and land development

      2   3   13   26   32   24

Multifamily mortgage

      12   31   42   0   15   0

Home mortgage

      30   25   19   0   26   0

Home equity loans and lines of credit

      37   24   19   20   0   0

Installment and credit card

      88   12   0   0   0   0
                                         

Totals

      17   16   31   11   17   8

Allowance for loan losses

We maintain an allowance for loan losses to provide for inherent losses in the loan portfolio. We establish the allowance through a provision charged to expense. We charge-off all loans judged to be uncollectible against the allowance while we credit any recoveries on loans to the allowance. We charge-off commercial and real estate loans—construction, commercial mortgage, and home mortgage—by the time their principal or interest becomes 120 days delinquent unless the loan is well-secured and in the process of collection. We charge-off consumer loans by the time they become 90 days delinquent unless they too are well-secured and in the process of collection. We also charge-off deposit overdrafts when they become more than 60 days old. We evaluate secured loans on a case by case basis to determine the ultimate loss potential to us subsequent to the sale of collateral. In those cases where the collateral value is less than the loan, we charge-off the loan to reduce the balance to a level equal to the net realizable value of the collateral.

Our loan policy provides procedures designed to evaluate and assess the risk factors associated with our loan portfolio, to enable us to assess such risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. We assess the allowance on a monthly basis and undertake a more critical evaluation quarterly. At the time of the monthly review, the Board of Directors will examine and formally approve the adequacy of the allowance. The quarterly 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.

Our evaluation of the adequacy of the allowance for loan losses includes a review of individual loans to identify specific probable losses and also assigns estimated loss factors to specific groups or types of loans to calculate possible losses. In addition, we estimate the probable loss on previously accrued but unpaid interest. We refer to these as quantitative considerations. Our evaluation also considers subjective factors such as changes in local and regional economic and business conditions, financial improvement or deterioration in business sectors and industries, changes in lending practices, changes in personnel, changes in the volume and level of past due and nonaccrual loans and concentrations of credit. We refer to these as qualitative considerations.

We have historically experienced positive asset quality measures—low levels of delinquencies, low levels of nonaccrual loans, and low levels of net loan charge-offs—for an extended period of time. As a result, our 2008

 

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quarterly loan loss provisions were not significant. Our loan loss provisions for the third quarter and nine months ended September 30, 2009 were $4.1 million and $10.3 million, respectively. The larger loan loss provision in 2009 as compared with prior periods is based upon the factors considered in the following discussion.

Our assessment of the allowance for loan losses considered, among other things, estimated loss factors assigned to specific types of loans, changes and trends in the level of delinquencies, nonaccrual loans and loan charge-offs, changes in the value of collateral, changes in the local and regional economic and business conditions, the judgment of the bank regulatory agencies at the conclusion of their examination process with respect to information available to them during such examination process and the significant growth in loans arising from the FDIC-assisted 1st Centennial Bank transaction. More specifically, we revised upward, in the first quarter of 2009, our estimated loss factors for our qualitative considerations because of the following considerations.

We considered the increased trend in the level of our delinquencies, nonaccrual loans and loan charge-offs. Total past due loans and nonaccrual loans increased to $49.6 million at September 30, 2009 from $35.5 million at June 30, 2009, $14.8 million at March 31, 2009 and $11.5 million at December 31, 2008. Foreclosed property was $6.1 million at September 30, 2009 compared with $6.8 million at June 30, 2009, $1.1 million at March 31, 2009 and $0.3 million at December 31, 2008. Net loan charge-offs were $3,935,000 for the third quarter of 2009, $430,000 for the second quarter of 2009 and $1,842,000 for the first quarter of 2009 compared with $194,000 for the third quarter of 2008, $15,000 for the second quarter of 2008 and $570,000 for the first quarter of 2008. For the first nine months of 2009, net loan charge-offs were $6.2 million compared with $0.8 million for the first nine months of 2008.

We considered the prolonged marketing time and declining sales prices for our completed construction loan portfolio. Our construction and land loan portfolio was 10 percent of total loans at September 30, 2009 compared with 14 percent at March 31, 2009 and 17 percent at December 31, 2008. This loan portfolio declined principally from successful marketing and sales efforts, however, the continued disruption in the residential and commercial mortgage loan markets and the continued downward pressure on real estate values may adversely affect these loans.

We considered our entry into a new market area with new lending personnel arising from the FDIC-assisted 1st Centennial Bank transaction. This market area has experienced severe declines in real estate values, a large number of business and personal bankruptcies and several bank failures. We evaluated the credit risk of the loans acquired in the transaction and the loans originated since the transaction using the same standards as for our other loans; however, we are mindful the difficulties confronting businesses in this new market area may adversely affect these loans.

Finally, we considered the possible length and depth of the economic recession and the impact it might have on our borrowers and the judgment of the bank regulatory agencies at the conclusion of their examination process with respect to information available to them during such examination process.

As a result, we increased the allowance for loan losses to $12.1 million at September 30, 2009 from $8.0 million at December 31, 2008. The provision for loan losses was $4.1 million for the third quarter of 2009, compared with $0.3 million for the third quarter of 2008. The increased provision for loan losses in 2009 is primarily attributable to the increase in delinquency trends, nonaccrual loan levels and higher net loan charge-offs. For the first nine months of 2009, the provision for loan losses was $10.3 million compared with $1.0 million for the first nine months of 2008. Due to the current economic climate, we anticipate delinquency trends, nonaccrual loan levels, and net loan charge-offs to be higher than our 2008 and 2007 historical experience. As such, we anticipate our provision for loan losses will change from quarter to quarter based on our determination of the adequacy of the allowance for loan losses at each period end and that our total provision for loan losses will be higher than our 2008 and 2007 historical experience.

 

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The ratio of the allowance for loan losses to loans was 1.29 percent at September 30, 2009 compared with 1.02 percent at December 31, 2008. While we believe that our allowance for loan losses was adequate at September 30, 2009 and December 31, 2008, the determination of the allowance is a highly judgmental process and we cannot assure you that we will not further increase or decrease the allowance or that bank regulators will not require us to increase or decrease the allowance in the future. The following table presents activity in the allowance for loan losses:

 

     Three Months Ended
September 30,
    Nine Months Ended
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 loans

     1.29     1.02     1.29     1.02

Net loans charged-off (annualized) to average loans

     1.68     0.10     0.91     0.13

The following table presents the net loan charge-offs (recoveries) by loan type for the periods indicated.

 

(in thousands)

   Nine Months Ended
September 30, 2009
    Nine Months Ended
September 30, 2008

Construction

   $ 853      $ —  

Home mortgage

     736        —  

Commercial loans & lines

     3,364        216

Commercial mortgage

     1,269        —  

Consumer

     (15     563
              

Total

   $ 6,207      $ 779
              

Net loan charge-offs for the nine months ended September 30, 2009 were $6.2 million compared with $779,000 for the same period last year. In the 2009-third quarter, one loan relationship that had a $2.0 million owner-occupied commercial mortgage and $5.4 million of secured business loans abruptly discontinued business. We realized $3.1 million of loan charge-offs on this loan relationship, $2.6 million related to the secured business loans and $0.5 million related to the owner-occupied commercial mortgage loan. In addition, we realized a $0.5 million charge-off on a $1.8 million nonaccrual commercial mortgage loan on which we began foreclosure in the 2009-third quarter. In the 2009-first quarter, we realized $0.7 million of loan charge-offs related to five home mortgage loans. We purchased 110 home mortgage loans in 2005, 2006 and 2007 with an original unpaid principal balance of $55.7 million. A national mortgage company services these loans for us. At September 30, 2009 there were 56 and $23.5 million of these purchased home mortgage loans remaining. Also in the first half of 2009, we realized a $0.6 million loan charge-off on a construction loan. The borrower could not overcome engineering issues and abandoned the project. In addition, in the 2009-second quarter, we received a $0.2 million recovery on a consumer loan charged-off in the first quarter of 2008.

 

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The following table illustrates the significant net loan charge-offs for the nine months ended September 30, 2009:

 

Description

   Construction
and Land
    Home
Mortgage
    Commercial
Loans
    Commercial
Mortgage
    Installment     Total  

$7.4 MM business loan relationship

   $ —        $ —        $ 2.6      $ 0.5      $ —        $ 3.1   

$1.8 MM office building

     —          —          —          0.5        —          0.5   

$55.7 MM purchased home mortgage portfolio

     —          0.7        —          —          —          0.7   

$0.6 MM construction loan

     0.6        —          —          —          —          0.6   

$0.6 MM consumer loan

     —          —          —          —          (0.2     (0.2

All other loan charge-offs and recoveries, net

     0.3        —          0.8        0.3        0.1        1.5   
                                                

Net loan charge-offs 2009-nine month period

   $ 0.9      $ 0.7      $ 3.4      $ 1.3      $ (0.1   $ 6.2   
                                                

Average loan balance for 2009-nine month period

   $ 112.7      $ 81.0      $ 226.1      $ 489.2      $ 4.3      $ 913.3   
                                                

Net loan charge-offs (annualized) to average loans

     1.06     1.15     2.01     0.35     -0.47     0.91

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

Nonaccrual loans and loans past due 90 days or more and accruing increased to $42.3 million at September 30, 2009 from $8.9 million at December 31, 2008. These non-performing loans, as a percentage of total loans, were 4.5 percent at the end of the third quarter compared with 1.1 percent at December 31, 2008. We added 12 loans or $15.3 million to nonaccrual loans in the 2009 third quarter and we received pay-offs for 2 loans of $2.7 million. Since the end of 2008, we added 21 loans or $41.3 million to nonaccrual loans; we received pay-offs for 3 loans of $2.9 million; and we foreclosed upon 3 loans for $6.6 million and reclassified them to foreclosed property.

Our largest nonaccrual loan is a $22.5 million completed office complex construction loan in Ventura County. This project began in the 2007 first quarter and consists of 31 buildings on 13 acres. We filed a notice of default in the 2009 third quarter. Nine units sold in 2008 and four units are presently in escrow. These escrows total approximately $4.0 million and we expect them to close in the 2009-fourth quarter or 2010-first quarter. We obtained our most current appraisal in the 2008 fourth quarter and will pursue a new appraisal in the 2009 fourth quarter. Our most current appraisal indicates a loan-to-value of approximately 60 percent. Accordingly, we have no specific loss allowance for this loan.

Our next largest nonaccrual loan relationship represents two completed high-end homes in the coastal communities of Los Angeles County for $7.6 million. We filed notices of default in the 2009 third quarter. Our most current appraisals indicate loan-to-value of approximately 80 percent. Accordingly, we have no specific loss allowance for this loan relationship.

 

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Our third largest nonaccrual loan relationship represents a $1.6 million owner-occupied commercial mortgage loan and $2.6 million of business loans to a borrower who abruptly discontinued business in the 2009 third quarter. These amounts are after charge-offs of $0.5 million and $2.6 million, respectively. We have, since the end of the 2009 third quarter, received proceeds of approximately $0.5 million from the sale of equipment and collection of accounts receivable. While we are making every attempt to maximize proceeds from the collection of accounts receivable and the sale of assets, we cannot assure you that there will not be further loan charge-offs on this relationship. We estimated at September 30, 2009 a specific loss allowance of $0.5 million for this loan relationship and this estimate may increase in subsequent periods.

We have one other nonaccrual loan in excess of $1 million and that is a $1.3 million office building in Riverside County. We filed a notice of default in the 2009 third quarter, realized a charge-off of $0.5 million in the 2009 third quarter and anticipate completing our foreclosure in the 2009 fourth quarter or 2010 first quarter. We estimate that the carrying value of the loan approximates the net proceeds we will receive through the sale of the office building.

The following table presents the activity in our nonaccrual loan category for the periods indicated.

 

    Three months ended September 30,     Nine months ended September 30,  
    2009     2008     2009     2008  

(dollars in thousands)

  # of Loans     $ Amount     # of Loans     $ Amount     # of Loans     $ Amount     # of Loans     $ Amount  

Beginning balance

  11      $ 26,957      4      $ 6,627      7      $ 8,475      1      $ 5,720   

New loans added

  12        15,280      4        2,098      21        41,253      7        3,005   

Repurchase of SBA-guaranteed participation

  —          —        —          —        —          136      —          —     

Loans transferred to foreclosed property

  (1     (119   —          —        (3     (6,612   —          —     

Payoffs of existing loans

  (2     (2,729   —          —        (3     (2,938   —          —     

Partial charge offs on existing loans

  —          —        —          —        —          (323   —          —     

Charge offs on existing loans

  —          —        (1     (83   (2     (560   (1     (83

Payments on existing loans

  —          (59   —          (6   —          (101   —          (6
                                                       

Ending balance

  20      $ 39,330      7      $ 8,636      20      $ 39,330      7      $ 8,636   
                                                       

Foreclosed property at September 30, 2009 consists of a $6.0 million vacant land property and a $0.1 million single family 1-4 property.

 

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The following table presents the activity of our foreclosed property for the periods indicated.

 

     Three months ended September 30,    Nine months ended September 30,  
     2009     2008    2009     2008  

(dollars in thousands)

   # of
Properties
    $ Amount     # of
Properties
   $ Amount    # of
Properties
    $ Amount     # of
Properties
   $ Amount  

Beginning balance

   3      $ 6,828      1    $ 154    2      $ 327      1    $ 197   

New properties added

   1        126      1      119    3        6,893      1      119   

Writedowns of existing properties

   (1     (136   —        —      (1     (151   —        —     

Sales proceeds received

   (1     (698   —        —      (2     (949   —        (43
                                                     

Ending balance

   2      $ 6,120      2    $ 273    2      $ 6,120      2    $ 273   
                                                     

The allowance for losses on undisbursed commitments was $97,000 and $102,000 at September 30, 2009, and December 31, 2008, respectively. The allowance for losses on undisbursed commitments is included in “accrued interest payable and other liabilities” on the consolidated balance sheets.

The following table presents the allocation of the allowance for loan losses to each loan category and the percentage relationship of loans in each category to total loans:

 

     September 30, 2009     December 31, 2008  

(in thousands)

   Allocation of
the allowance
by loan
category
   Percent of Loans in
Category to Total
loans
    Allocation of
the allowance
by loan
category
   Percent of Loans in
Category to Total
loans
 

Commercial mortgage

   $ 3,585    39   $ 2,309    38

Multifamily mortgage

     1,463    14     389    7

Commercial loans

     3,736    27     2,328    29

Construction loans

     2,529    10     1,986    17

Home equity loans

     337    4     172    3

Home mortgage

     438    5     334    6

Installment and credit card

     49    1     40    —     
                          

Subtotal

     12,137    100     7,558    100

Unallocated

     —          490   
                          

Total

   $ 12,137    100   $ 8,048    100
                          

Unallocated amounts represent some of the qualitative considerations which we do not attribute to any one loan category. The decrease in the unallocated amount from December 31, 2008 to September 30, 2009 is due to attributing more of the qualitative factors to individual loan categories in the current period than was done historically. The amounts or proportions displayed above should not be interpreted as charge-offs to the allowance that we may incur. We based the amounts attributed to each loan category on the analysis described above.

We consider a loan to be impaired when, based on current information and events, we do 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, we determine impaired loans by periodic evaluation on an individual loan basis. The average investment in 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. Allowances for losses for individually impaired

 

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loans are computed in accordance with SFAS No. 114 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.

Investing, funding and liquidity risk

Liquidity risk is the risk to earnings or capital arising from the inability to meet obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources as well as the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

We manage bank liquidity risk through Board approved policies and procedures. The Directors review and approve these policies at least annually. Liquidity risk policies provide us with a framework for consistent evaluation of risk and establish risk tolerance parameters. Management’s Asset and Liability Committee meets regularly to evaluate liquidity risk, review and establish deposit interest rates, review loan and deposit in-flows and out-flows and reports quarterly to the Directors’ Balance Sheet Management Committee on compliance with policies. The Directors’ Audit Committee also engages a third party to perform a review of management’s asset and liability practices to ensure compliance with policies.

Our primary source of funds continues to be core deposits (representing checking, savings and small balance retail certificates of deposit). At September 30, 2009, core deposits totaled $802.0 million. At December 31, 2008, core deposits totaled $503.8 million. The increase is a result of the core deposits acquired in connection with the FDIC-assisted 1st Centennial Bank transaction and organic deposit growth throughout our branch network. Core deposits represent a significant low-cost source of funds that support our lending activities and represent a key part of our funding strategy. We seek and stress the importance of both loan and deposit relationships with customers in our business plans.

Alternative funding sources include large balance certificates of deposits, brokered deposits, federal funds purchased from other institutions, securities sold under agreements to repurchase and borrowings. Total alternative funds used at September 30, 2009 declined to $472.1 million from $579.0 million at December 31, 2008.

In addition, we have lines of credit with other financial institutions providing for federal funds facilities up to a maximum of $27.0 million. The lines of credit support short-term liquidity needs and we cannot use them for more than 30 consecutive days. These lines are unsecured, have no formal maturity date and can be revoked at any time by the granting institutions. There were no borrowings under these lines of credit at September 30, 2009 or December 31, 2008. We also have a $13.4 million secured borrowing facility with the Federal Reserve Bank of San Francisco which had no balance outstanding at September 30, 2009 or December 31, 2008. In addition, we had approximately $156.0 million of available borrowing capacity on the Bank’s secured FHLB borrowing facility at September 30, 2009.

The primary sources of liquidity for the Company, on a stand-alone basis, include the dividends from the Bank and, historically, our ability to issue trust preferred securities and secure outside borrowings. The ability of the Company to obtain funds for its cash requirements, including payments on the junior subordinated debentures underlying our outstanding trust preferred securities and the dividend on our series B preferred stock, is largely dependent upon the Bank’s earnings. The Bank is subject to restrictions under certain federal and state laws and regulations which limit its ability to transfer funds to the Company through intercompany loans, advances or cash dividends. The DFI under its general supervisory authority as it relates to a bank’s capital requirements regulates dividends paid by state banks, such as the Bank. A state bank may declare a dividend without the approval of the DFI as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the

 

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total of net profits for three previous fiscal years less any dividends paid during such period. During the first nine months of 2009, we received no dividends from the Bank. The amount of dividends available for payment by the Bank to the Company at September 30, 2009 without prior approval from bank regulators was $14.9 million. The Company has $8.7 million in cash on deposit with the Bank at September 30, 2009.

As of September 30, 2009 and December 31, 2008, we had $26.7 million of junior subordinated debentures outstanding from two issuances of trust preferred securities. First California Capital Trust I’s capital securities have an outstanding balance of $16.5 million, mature on March 15, 2037, and are redeemable, at par, at the Company’s option at any time on or after March 15, 2012. The securities have a fixed annual rate of 6.80% until January 15, 2012, and a variable annual rate thereafter, which resets quarterly, equal to the 3-month LIBOR rate plus 1.60% per annum. FCB Statutory Trust I’s capital securities have an outstanding balance of $10.3 million, mature on December 15, 2035, and are redeemable, at par, at the Company’s option at any time on or after December 15, 2010. The securities have a fixed annual rate of 6.145% until December 15, 2010, and a variable annual rate thereafter, which resets quarterly, equal to the 3-month LIBOR rate plus 1.55% per annum.

Securities

We classify securities as ‘available-for-sale’ for accounting purposes and, as such, report them at their fair, or market, values in our balance sheets. We use quoted market prices for fair values. We report as ‘other comprehensive income or loss’, net of tax changes in the fair value of our securities (that is, unrealized holding gains or losses) and carry these cumulative changes as accumulated comprehensive income or loss within shareholders’ equity until realized.

Securities, at amortized cost, increased by $94.4 million, or 44 percent, from $216.4 million at December 31, 2008 to $310.8 million at September 30, 2009. The increase is primarily due to the securities acquired in connection with the FDIC-assisted 1st Centennial Bank transaction, net of securities sold in the first nine months of 2009.

Net unrealized holding losses were $8.5 million at September 30, 2009 and were $14.0 million at December 31, 2008. As a percentage of securities, at amortized cost, net unrealized holding losses were 2.72 percent and 6.46 percent at the end of each respective period. Securities are comprised largely of U.S. government agency mortgage-backed securities, U.S. government agency and private-label collateralized mortgage obligations and U.S. government agency notes. We perform regularly an impairment analysis on our securities portfolio. Other-than-temporary impairment occurs when it is probable that we will be unable to collect all amounts due according to the contractual terms of the debt security not impaired at acquisition. When an other-than-temporary impairment occurs, we write-down the cost basis of the security to its fair value and establish a new cost basis. We recognize the write-down as a loss in our income statement 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.

 

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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 majority of unrealized losses at September 30, 2009 relate to a type of mortgage-backed security also known as private-label collateralized mortgage obligations, or CMOs. As of September 30, 2009, the fair value of these securities was $36.8 million, representing 12 percent of our securities portfolio. Gross unrealized losses related to these securities amounted to $9.4 million, or 20 percent of the aggregate cost basis of these securities as of September 30, 2009. The gross unrealized losses associated with these securities were primarily due to extraordinarily high investor yield requirements resulting from an extremely illiquid market, significant uncertainty about the future condition of the mortgage market and the economy, and continued deterioration in the credit performance of loan collateral underlying these securities, causing these securities to be valued at significant discounts to their acquisition cost. All of these securities had credit rating agency grades of triple-A at purchase and, except for five of these securities, various rating agencies have reaffirmed these securities’ investment grade status as of September 30, 2009. The aggregate amortized cost basis of these five securities is $27.7 million at September 30, 2009. One CMO with an amortized cost basis of $6.3 million has an unrealized loss of $1.9 million as of September 30, 2009. As of September 30, 2009, this security was rated triple-C by one rating agency. The current delinquency and default rates of the collateral for this security are above original expectations at the time of our purchase. We performed a discounted cash flow analysis for this security using the current month, last three month and last twelve month historical prepayment speed, the cumulative default

 

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rate and the loss severity rate to determine if there was other-than-temporary impairment as of September 30, 2009. A credit loss is the difference between our best estimate of the present value of the cash flows expected to be collected and the amortized cost basis of the security. Our discounted cash flow analysis resulted in a shortfall of estimated contractual cash flows to the tranche of this security owned by us. Therefore, for this security, we recognized an other-than-temporary impairment loss of $565,000 as of June 30, 2009. We further determined that no additional other-than-temporary impairment loss was necessary for the third quarter of 2009. We will continue to monitor the credit performance of this security and if the performance deteriorates from current levels, we may recognize an additional other-than-temporary impairment loss in future periods.

We performed a similar discounted cash flow analysis as described above for the four other CMO securities rated less than investment grade at September 30, 2009. All four of these analyses indicated that there was no shortfall of future cash flows to the tranche of the securities owned by us. As we have the ability and intention to hold these securities for a sufficient amount of time, during which the fair value may recover to cost or the security matures, we did not deem these securities other-than-temporarily impaired at September 30, 2009.

The issuers of the remaining CMO securities in our portfolio have not, to our knowledge, established any cause for default on these securities and the credit performance of the underlying collateral is within expected parameters.

We also own one pooled trust preferred security, rated triple-A at purchase, with an amortized cost basis of $4.9 million and an unrealized loss of $2.6 million at September 30, 2009. The severe disruption in the market for these securities contributed to this unrealized loss. One credit rating agency has now rated the security single-A while another has rated the security triple-B-. The senior tranche owned by us has a significant collateral margin at September 30, 2009. There is minimal default experience within this security and there is no evidence of a shortage of contractual cash flows to the tranche of the security owned by us. As we have the ability and intention to hold this security for a sufficient amount of time, during which the fair value may recover to cost or the security matures, we do not consider this security to be other-than-temporarily impaired at September 30, 2009.

The remainder of our securities portfolio consists mainly of U.S. Treasury securities, U.S. government agency mortgage-backed securities, U.S. government agency collateralized mortgage obligations and various municipal securities. One of these municipal securities has been in a continuous unrealized loss position for twelve months or longer as of September 30, 2009. This security had a credit rating agency grade of triple-A upon purchase and various rating agencies have reaffirmed this securities’ long-term investment grade status of single-A at September 30, 2009. The aggregate gross unrealized loss for this security is $2,000 at September 30, 2009. The issuer of this security has not, to our knowledge, established any cause for default on this security. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention to hold these securities for a sufficient amount of time, during which their fair values may recover to cost or the securities may mature. As such, we do not consider these securities to be other-than-temporarily impaired at September 30, 2009.

If current conditions in the mortgage markets and general business and economic conditions continue to deteriorate further, the fair value of our securities may decline further and we may experience other-than-temporary impairment on other securities in future periods, as well as further impairment of the one security deemed other-than-temporarily impaired. We will continue to evaluate our securities portfolio for other-than-temporary impairment at each reporting date and we can provide no assurance that there will not be an other-than-temporary impairment loss in future periods.

 

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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
                    

Deposits

Deposits represent our primary source of funds for funding our lending activities. The following table presents the average balance and the average rate paid on each deposit category for the periods indicated:

 

     Nine months ended September 30,  
     2009     2008  

(in thousands)

   Average
Balance
   Rate     Average
Balance
   Rate  

Average core deposits

          

Noninterest bearing checking

   $ 280,036      $ 192,704   

Interest checking

     77,096    0.29     57,667    0.79

Savings and money market accounts

     256,122    1.08     200,533    1.95

Retail time deposits less than $100,000

     109,904    2.05     57,427    4.91
                          

Total average core deposits

     723,158    0.73     508,331    1.42
                          

Average noncore deposits

          

Brokered time deposits less than $100,000

     68,991    3.30     25,584    3.91

Time deposits of $100,000 or more

     281,588    1.85     213,224    2.67
                          

Total average core and noncore deposits

   $ 1,073,737    1.19   $ 747,139    1.99
                          

The significant increase in deposits from the prior period is primarily due to the acquisition of $270 million of non-brokered insured deposits in connection with the FDIC-assisted 1st Centennial Bank transaction. Interest paid on deposits decreased in 2009 compared to 2008 reflecting the significant decreases in market interest rates during the period.

Large balance certificates of deposit (that is, balances of $100,000 or more) were $282.4 million at September 30, 2009. Large balance certificates of deposit were $215.5 million at December 31, 2008. A portion of these large balance time deposits represent time deposits placed by the State Treasurer of California with the Bank. The time deposit program is one element of a pooled investment account managed by the State Treasurer for the benefit of the State of California and all participating local agencies. The pooled investment account has approximately $63 billion of investments of which approximately $8 billion represent time deposits placed at various financial institutions. At September 30, 2009, and December 31, 2008, State of California time deposits placed with us, with original maturities of three months, were $110.0 million. We believe that the State Treasurer will continue this program; we also believe, if it becomes necessary to replace these deposits, that we have sufficient alternative funding capacity or the ability to establish large balance certificates of deposit rates that will enable us to attract deposits in sufficient amounts. The remainder of time deposits represents time deposits accepted from customers in our market area.

 

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We use brokered time deposits to supplement our liquidity and achieve other asset liability management objectives. We include these deposits in the balance sheet line ‘Certificates of deposit, under $100,000’. Brokered deposits are wholesale time deposits in denominations less $100,000 placed by rate sensitive customers that do not have any other significant relationship with us. Professionals operating under established investment criteria manage most wholesale funds and the brokered deposits are typically in amounts that are within the FDIC deposit insurance limit. As a result, these funds are generally very sensitive to credit risk and interest rates, and pose greater liquidity risk to a bank. They may refuse to renew the time deposits at maturity if higher rates are available elsewhere or if they perceive that creditworthiness is deteriorating. At September 30, 2009, we had brokered deposits of $48.0 million, all of which have maturities within 12 months. At December 31, 2008, we had brokered deposits of $115.0 million, of which $95.7 million had maturities within 12 months.

At September 30, 2009, the scheduled maturities of time certificates of deposit in denominations of $100,000 or more were as follows:

 

(Dollars in thousands)

    

Three months or less

   $ 157,070

Over three months to twelve months

     92,329

Over twelve months

     32,982
      
   $ 282,381
      

Borrowings

Borrowings are comprised of FHLB advances and securities sold under agreements to repurchase. At September 30, 2009, we had $149.0 million of borrowings outstanding, of which $45.0 million was comprised of securities sold under agreements to repurchase and $104.0 million of FHLB advances. For our FHLB advances, the following table presents the amounts and weighted average interest rates outstanding.

 

     Nine Months Ended September 30, 2009     Year Ended December 31, 2008  

(in thousands)

   Federal Home
Loan Bank
Advances
   Weighted
average
interest rate
    Federal Home
Loan Bank
Advances
   Weighted
average
Interest rate
 

Amount outstanding at end of period

   $ 104,000    3.83   $ 122,000    3.88

Maximum amount outstanding at any month-end during the period

   $ 122,000    3.88   $ 196,463    3.29

Average amount outstanding during the period

   $ 113,465    3.85   $ 148,748    3.75

The following table presents the maturities of FHLB term advances:

 

     At September 30, 2009     At December 31, 2008  

(dollars in thousands)

   Amount    Maturity
Year
   Weighted
Average
Interest Rate
    Amount    Maturity
Year
   Weighted
Average
Interest Rate
 
   $ 5,500    2009    3.97   $ 28,500    2009    3.72
     42,000    2010    3.70     40,000    2010    3.82
     13,000    2011    3.21     11,000    2011    3.42
     18,500    2012    4.03     17,500    2012    4.12
     17,500    2014    4.24     17,500    2014    4.24
     7,500    2017    4.07     7,500    2017    4.07
                        
   $ 104,000         $ 122,000      
                        

 

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The following table presents maturities of securities sold under agreements to repurchase:

 

     At September 30, 2009     At December 31, 2008  

(dollars in thousands)

   Amount    Maturity
Year
   Weighted
Average
Interest Rate
    Amount    Maturity
Year
   Weighted
Average
Interest Rate
 
   $ 15,000    2011    3.64   $ 15,000    2011    3.64
     20,000    2013    3.60     20,000    2013    3.60
     10,000    2014    3.72     10,000    2014    3.72
                        
   $ 45,000         $ 45,000      
                        

Capital resources

The following table presents, at the dates indicated, certain information regarding the regulatory capital and required minimum amounts of regulatory capital for the period.

 

     Actual     For Capital
Adequacy Purposes
    To be Well
Capitalized Under
Prompt Corrective
Action Provision
 

(in thousands)

   Amount    Ratio     Amount    Ratio     Amount    Ratio  

September 30, 2009

               

Total capital (to risk weighted assets)

               

First California Financial Group, Inc.

   $ 134,680    12.47   $ 86,398    8.00     

First California Bank

     125,101    11.62     86,159    8.00   107,699    10.00

Tier I capital (to risk weighted assets)

               

First California Financial Group, Inc.

     122,446    11.34     43,199    4.00     

First California Bank

     112,867    10.48     43,080    4.00   64,619    6.00

Tier I capital (to average assets)

               

First California Financial Group, Inc.

     122,446    8.81     55,577    4.00     

First California Bank

     112,867    8.10     55,756    4.00   69,695    5.00

December 31, 2008

               

Total capital (to risk weighted assets)

               

First California Financial Group, Inc.

   $ 147,680    16.62   $ 71,102    8.00     

First California Bank

     109,022    12.27     71,110    8.00   88,888    10.00

Tier I capital (to risk weighted assets)

               

First California Financial Group, Inc.

     139,530    15.70     35,551    4.00     

First California Bank

     100,873    11.35     35,555    4.00   53,333    6.00

Tier I capital (to average assets)

               

First California Financial Group, Inc.

     139,530    12.77     43,699    4.00     

First California Bank

     100,873    9.26     43,568    4.00   54,460    5.00

We recognize that a strong capital position is vital to growth, continued profitability, and depositor and investor confidence. Our policy is to maintain sufficient capital at not less than the well-capitalized thresholds established by banking regulators.

Financial Instruments with Off-Balance Sheet Risk

In the normal course of business to meet the financing needs of our customers, we are party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in our consolidated financial statements. The contract amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

 

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The contractual amount of commitments to extend credit and letters of credit written represents our exposure to credit loss in the event of nonperformance by the other party to these financial instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. We may or may not require collateral or other security to support financial instruments with credit risk, depending on our loan underwriting guidelines.

The following summarizes our outstanding commitments at September 30, 2009 and December 31, 2008:

 

(in thousands)

   September 30,
2009
   December 31,
2008

Financial instruments whose contract amounts contain credit risk:

     

Commitments to extend credit

   $ 180,767    $ 152,077

Commercial and standby letters of credit

     1,597      444
             
   $ 182,364    $ 152,521
             

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Total commitment amounts do not necessarily represent future cash requirements because many expire without use. We may obtain collateral for the commitment based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties.

Letters of credit written are conditional commitments issued by us to guarantee the performance of a customer to a third party. These guarantees support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Credit risk for letters of credit is essentially the same as that for loan facilities to customers. When we deem collateral necessary, we will hold cash, marketable securities, or real estate as collateral supporting those commitments.

As of September 30, 2009 and December 31, 2008, we maintained an allowance for losses on undisbursed commitments of $97,000 and $102,000, respectively. The allowance is included in “accrued interest payable and other liabilities” on the consolidated balance sheets.

Financial Position—December 31, 2008 compared with December 31, 2007

Lending and credit risk

We provide a variety of loan and credit-related products and services to meet the needs of borrowers primarily located in the California counties of Ventura, Los Angeles and Orange. Business loans, represented by commercial real estate loans, commercial loans and construction loans comprise the largest portion of the loan portfolio. Consumer or personal loans, represented by home mortgage, home equity and installment loans, comprise a smaller portion of the loan portfolio.

Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with us or otherwise to perform as agreed. Credit risk is found in all activities in which success depends on counterparty, issuer, or borrower performance. Credit risk is present any time funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet.

All categories of loans present credit risk. Major risk factors applicable to all loan categories include changes in international, national and local economic conditions such as interest rates, inflation, unemployment levels, consumer and business confidence, volatility in the stock market and real estate market and the supply and demand for goods and services.

Commercial real estate loans rely upon the cash flow originating from the underlying real property. Commercial real estate is a cyclical industry that is affected not only by general economic conditions but also by

 

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local supply and demand. In the office sector, the demand for office space is highly dependent on employment levels. In the retail sector, the demand for retail space and the levels of retail rents are affected by consumer spending and confidence. The industrial sector has exposure to the level of exports, defense spending and inventory levels. Vacancy rates, location and other factors affect the amount of rental income for commercial property. Tenants may relocate, fail to honor their lease or go out of business. In the multifamily residential sector, the demand for apartments is heavily influenced by the affordability of ownership housing, employment conditions and the vacancy of existing inventory. Population growth or decline and changing demographics, such as increases in the level of immigrants or retirees, are also factors influencing the multifamily residential sector.

Commercial loans rely upon the cash flow originating from the underlying business activity of the enterprise. The manufacture, distribution or sale of goods or sale of services are not only affected by general economic conditions but also by the ability of the enterprise’s management to adjust to local supply and demand conditions, maintain good labor, vendor and customer relationships, as well as market, price and sell their goods or services for a profit. Customer demand for goods and services of the enterprise may change because of competition or obsolescence.

Construction loans provide developers or owners with funds to build or improve properties that will ultimately be sold or leased. Construction loans are generally considered to involve a higher degree of risk than other loan categories because they rely upon the developer’s or owner’s ability to complete the project within specified cost and time limits. Cost overruns can cause the project cost to exceed the project sales price or exceed the amount of the committed permanent funding. Construction projects also can be delayed for a number of reasons such as poor weather, material or labor shortages, labor difficulties, or substandard work that must be redone to pass inspection.

Home mortgages and home equity loans and lines of credit are secured by first or second trust deeds on a borrower’s real estate property, typically their principal residence. These loans are dependent on a person’s ability to regularly pay the principal and interest due on the loan and, secondarily, on the value of real estate property that serves as collateral for the loan. Home mortgages are generally considered to involve a lower degree of risk than other loan categories because of the relationship of the loan amount to the value of the residential real estate and a person’s reluctance to forego their principal place of residence. Home real estate values however are not only affected by general economic conditions but also on local supply and demand. Installment loans and credit ca