BANC OF CALIFORNIA, INC. - FORM 8-K/A - EX-99.2

Attached files

file	filename
8-K/A - BANC OF CALIFORNIA, INC.	fptb-8k091712.htm
EX-23.1 - BANC OF CALIFORNIA, INC.	ex23-1.htm
EX-23.2 - BANC OF CALIFORNIA, INC.	ex23-2.htm
EX-99.5 - BANC OF CALIFORNIA, INC.	ex99-5.htm
EX-99.4 - BANC OF CALIFORNIA, INC.	ex99-4.htm

EXHIBIT 99.2

BEACH BUSINESS BANK

FINANCIAL STATEMENTS

JUNE 30, 2012 AND DECEMBER 31, 2011

INDEX TO BEACH FINANCIAL STATEMENTS

Beach Unaudited Financial Statements:
Statement of Financial Condition, June 30, 2012	F-1
Statements of Income for the Six Months Ended June 30, 2012 and 2011	F-3
Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2011	F-4
Statements of Changes in Shareholders' Equity for the Year Ended December 31, 2011 and the Six Months Ended June 30, 2012	F-5
Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	F-6
Notes to Financial Statements, June 30, 2012 and 2011 (Unaudited)	F-7

BEACH BUSINESS BANK

STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

ASSETS
	June 30, 2012			December 31, 2011

Cash and Due from Banks	$	5,867,295		$	4,904,010
Interest-Bearing Deposits in Financial Institutions		43,548,104			23,289,307
Federal Funds Sold		11,930,000			5,755,000
TOTAL CASH AND CASH EQUIVALENTS		61,345,399			33,948,317

Time Deposits in Financial Institutions		4,673,939			6,214,238

Investment Securities Available for Sale		5,602,940			5,824,992

Loans Held for Sale		-			14,079,107

Loans:
Construction and Land Development		6,149,618			5,700,713
Real Estate - Other		139,874,970			139,235,889
Commercial		95,628,857			101,773,149
Consumer		185,226			245,421
TOTAL LOANS		241,838,671			246,955,172
Net Deferred Loan (Fees) Costs		(654,404	)		(459,138	)
Allowance for Loan Losses		(5,831,710	)		(5,941,560	)
NET LOANS		235,352,557			240,554,474

Premises and Equipment		450,082			307,846
Federal Home Loan and Other Bank Stock, at Cost		1,516,033			1,447,846
Deferred Income Tax		600,000			495,000
Other Real Estate Owned ("OREO")		114,205			-
Accrued Interest and Other Assets		2,289,772			2,255,511

TOTAL ASSETS	$	311,944,927		$	305,127,331

The accompanying notes are an integral part of these financial statements.

F-1

BEACH BUSINESS BANK

STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY
	June 30, 2012			December 31, 2011
Deposits:
Noninterest-Bearing Demand	$	83,567,370		$	66,987,403
Interest-bearing Demand		15,854,145			18,302,295
Money Market Accounts		39,453,522			34,744,294
Savings		118,509,394			115,596,210
Time Deposits Under $100,000		3,459,295			7,762,409
Time Deposits $100,000 and Over		10,216,324			7,664,494
TOTAL DEPOSITS		271,060,050			251,057,105
Other Borrowings		2,315,214			13,500,000
Accrued Interest and Other Liabilities		5,251,260			5,493,222
TOTAL LIABILITIES		278,626,524			270,050,327

Commitments and Contingencies		-			-

Shareholders' Equity:
Preferred Stock - 10,000,000 Shares Authorized, No Par Value,
Series A Shares and Series B Shares Issued and
Outstanding 6,000 and 300, Respectively		-			3,153,110
Common Stock - 30,000,000 Shares Authorized, No Par Value;
Shares Issued and Outstanding, 4,248,360 in 2012
4,046,733 in 2011		38,819,067			37,821,835
Additional Paid-in Capital		1,355,181			1,341,400
Accumulated Deficit		(6,863,368	)		(7,264,237	)
Accumulated Other Comprehensive Income - Unrecognized
Gain on Available-for-Sale Securities		7,523			24,896
TOTAL SHAREHOLDERS' EQUITY		33,318,403			35,077,004

	$	311,944,927		$	305,127,331

The accompanying notes are an integral part of these financial statements.

F-2

BEACH BUSINESS BANK

STATEMENTS OF INCOME

For the Six Months Ended June 30, 2012 and 2011

(Unaudited)

	For the Six Months Ended
	June 30, 2012			June 30, 2011
INTEREST INCOME
Interest and Fees on Loans	$	7,193,063		$	7,606,707
Interest on Interest-Bearing Deposits		44,840			52,902
Interest on Investment Securities		98,775			109,894
Interest on Federal Funds Sold		8,607			16,192
TOTAL INTEREST INCOME		7,345,285			7,785,695
INTEREST EXPENSE
Interest-bearing demand deposits		37,224			44,809
Interest on Money Market		128,270			164,928
Interest on Savings		466,897			622,696
Interest on Time Deposits		237,024			469,521
Interest on Other Borrowings		135			54
TOTAL INTEREST EXPENSE		869,550			1,302,008
NET INTEREST INCOME		6,475,735			6,483,687
Provision for Loan Losses		850,000			686,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,625,735			5,797,687
NONINTEREST INCOME
Service Charges, Fees and Other		315,408			291,186
Loan Servicing		258,003			201,022
Gain on Sale of Loans		715,360			608,989
Gain on Sale of OREO		44,372			1,900
		1,333,143			1,103,097
NONINTEREST EXPENSE
Salaries and Employee Benefits		3,451,643			3,335,618
Occupancy and Equipment Expense		538,629			550,780
Data Processing Expense		209,297			160,762
Professional Services Expense		243,088			424,069
Regulatory Expense		211,510			230,257
OREO Expense		39,543			25,875
Other Expenses		1,671,550			1,175,674
		6,365,260			5,903,035
INCOME BEFORE INCOME TAXES		593,618			997,749
Income Taxes		-			-
NET INCOME		593,618			997,749
Less Preferred Stock Dividends and Discount Accretion		(192,749	)		(193,500	)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	400,869		$	804,249

NET INCOME PER SHARE - BASIC	$	0.10		$	0.20

NET INCOME PER SHARE - DILUTED	$	0.09		$	0.20

The accompanying notes are an integral part of these financial statements.

F-3

BEACH BUSINESS BANK

STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	For the Six Months Ended
	June 30, 2012			June 30, 2011

Net Income	$	593,618		$	997,749

Other Comprehensive Income, Net of Tax:
Net Unrealized Gain on Available-for-Sale Securities,
Net of Tax of $8,249 and $0 in 2012 and 2011, Respectively		(17,373	)		(15,515	)

Comprehensive Income	$	576,245		$	982,234

The accompanying notes are an integral part of these financial statements.

F-4

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the Year Ended December 31, 2011 and the Six Months Ended June 30, 2012

(Unaudited)

																				Accumulated
				Preferred Stock						Common Stock										Other
	Comprehensive			Number of						Number of				Additional			Accumulated			Comprehensive
	Income			Shares			Amount			Shares		Amount		Paid-in Capital			Deficit			Income			Total

Balance at December 31, 2010					6,300		$	6,093,110			4,036,984	$	37,779,845	$	1,245,400		$	(8,986,398	)	$	51,762		$	36,183,719

Stock-Based Compensation															137,990									137,990

Dividends Paid on Preferred Stock																		(249,833	)					(249,833	)
Accretion on Preferred Stock								60,000										(60,000	)					-
Redemption of Preferred Stock					(3,000	)		(3,000,000	)															(3,000,000	)

Issuance of Stock to Employees in
Exchange for Services Rendered											9,749		41,990		(41,990	)								-
Comprehensive Income:
Net Income	$	2,031,994																2,031,994						2,031,994
Unrealized Gain on
Available-for-Sale Securities		(26,866	)																		(26,866	)		(26,866	)
Total Comprehensive Income	$	2,005,128

Balance at December 31, 2011					3,300			3,153,110			4,046,733		37,821,835		1,341,400			(7,264,237	)		24,896			35,077,004

Stock-Based Compensation															190,020									190,020

Dividends Paid on Preferred Stock																		(45,859	)					(45,859	)
Accretion on Preferred Stock								146,890										(146,890	)					-
Redemption of Preferred Stock					(3,300	)		(3,300,000	)															(3,300,000	)

Issuance of Stock to Employees in
Exchange for Services Rendered											55,627		247,387					-						247,387
Exercise of Stock Options											146,000		749,845					-						749,845
Cancellation of Stock Options															(176,239	)								(176,239	)
Comprehensive Income:
Net Income	$	593,618																593,618						593,618
Unrealized Loss on
Available-for-Sale Securities		(17,373	)																		(17,373	)		(17,373	)
Total Comprehensive Income	$	576,245

Balance at June 30, 2012					-		$	-			4,248,360	$	38,819,067	$	1,355,181		$	(6,863,368	)	$	7,523		$	33,318,403

The accompanying notes are an integral part of these financial statements.

F-5

BEACH BUSINESS BANK

STATEMENTS OF CASH FLOWS

(Unaudited)

	June 30, 2012			June 30, 2011
OPERATING ACTIVITIES
Net Income	$	593,618		$	997,749
Adjustments to Reconcile Net Income to Net Cash
From Operating Activities:
Depreciation and Amortization		108,709			99,545
Stock-Based Compensation		190,020			48,000
Deferred Taxes		(96,000	)		-
Provision for Loan Losses		850,000			686,000
Other Real Estate Owned Write down and Loss on Sale		-			93,632
Loans Originated for Sale		-			(7,715,843	)
Proceeds from Sale of Loans		14,722,049			8,460,113
Gain on Sale of OREO		(44,395	)		(1,900	)
Gain on Sale of SBA Loans		(715,360	)		(608,989	)
Other Items		(353,036	)		1,490,878
NET CASH FROM OPERATING ACTIVITIES		15,255,605			3,549,185

INVESTING ACTIVITIES
Net Change in Time Deposits in Other Banks		1,540,299			(1,546,012	)
Purchase of Securities Available for Sale		(2,000,000	)		(2,000,000	)
Proceeds from Maturities of Securities Available for Sale		2,195,000			190,000
Net Change in Loans		4,310,130			6,140,433
Proceeds from the Sale of Other Real Estate Owned		121,887			178,783
Purchases of Federal Home Loan Bank and Other Bank Stock		(68,187	)		(192,400	)
Purchases of Premises and Equipment		(250,945	)		(113,239	)
NET CASH FROM INVESTING ACTIVITIES		5,848,184			2,657,565

FINANCING ACTIVITIES
Net Increase in Demand Deposits and Savings Accounts		21,754,230			907,193
Net Decrease in Time Deposits		(1,751,285	)		(1,825,362	)
Net Change in Other Borrowings		(11,184,786	)		(3,753,828	)
Repurchase of Preferred Stock		(3,300,000	)		-
Cancellation of Stock Options		(45,859	)		(163,500	)
Payment of Dividends on Preferred Stock		(176,239	)
Exercise of Stock Options and Restricted Stock		997,232
NET CASH FROM FINANCING ACTIVITIES		6,293,293			(4,835,497	)
INCREASE IN CASH
AND CASH EQUIVALENTS		27,397,082			1,371,253
Cash and Cash Equivalents at Beginning of Period		33,948,317			39,561,100
CASH AND CASH
EQUIVALENTS AT END OF YEAR	$	61,345,399		$	40,932,353

Supplemental Disclosures of Cash Flow Information:
Interest Paid	$	869,464		$	1,332,878
Taxes Paid/(Refunded), net	$	660,000		$	(1,043,161	)
Transfer of Loans to Other Real Estate Owned	$	114,205		$	252,029
Loans to Facilitate the Sale of Other Real Estate Owned	$	-		$	250,000

The accompanying notes are an integral part of these financial statements.

F-6

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 1 – Basis of Presentation

The accompanying unaudited financial statements of Beach Business Bank (the “Bank”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC). The interim financial statements included herein have been prepared by Beach Business Bank, without audit, in accordance with accounting principles generally accepted in the United States of America and the SEC rules and regulations. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, the Bank believes that the disclosures are adequate to make the information presented not misleading. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in this registration statement.

In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the financial position of the Bank with respect to the interim consolidated financial statements and the results of its operations for the interim period ended June 30, 2012, have been included. The results of operations for interim periods are not necessarily indicative of the results for a full year. Certain reclassifications were made to prior year’s presentations to conform to the current year. These reclassifications had no material impact on the Bank’s previously reported financial statements.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities as of the dates and for the periods presented. A significant estimate included in the accompanying financial statements is the allowance for loan losses. Actual results could differ from those estimates.

The significant accounting policies that the Company applies are detailed in Note A – summary of significant Accounting Policies, of the Company’s audited financial statements for the year ended December 31, 2011. There have been no changes to these policies or their application other than as noted below, related to the adoption of standard updates issued by the Financial Accounting Standards Board (“FASB”)

F-7

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 2 – Recently Issued Accounting Pronouncements Adopted

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendment in this guidance will be effective for interim and annual reporting periods beginning after December 15, 2011. The amendment did not significantly impact the Bank.

In September 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. This amendment will be effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this amendment will change the presentation of the components of comprehensive income for the Bank as part of the statement of shareholders' equity.

Newly Issued But Not Yet Effective Accounting Standards: In December 2011, the FASB issued an accounting standards update to increase the disclosure requirements surrounding derivative instruments that are offset within the balance sheet pursuant to the provisions of current generally accepted accounting principles. The objective of the update is to provide greater comparability between issuers reporting under U.S. versus International accounting principles and provide users the ability to evaluate the effect of netting arrangements on a company’s financial statements. The provisions of the update are effective for annual and interim periods beginning on or after January 1, 2013 and are not currently expected to add to the Bank’s current level of disclosures.

F-8

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 3 – Investment Securities

Debt and equity securities have been classified in the statements of condition according to management’s intent. The carrying amount of securities and their approximate fair values at June 30, 2012 and December 31, 2011 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-Sale:

June 30, 2012
U.S. Government Agency Securities	$	2,702,069	$	18,751	$	(2,880	)	$	2,717,940
State and Municipal Securities		2,885,000		-		-		$	2,885,000
	$	5,587,069	$	18,751	$	(2,880	)	$	5,602,940

December 31, 2011
U.S. Government Agency Securities	$	2,703,499	$	41,493	$	-		$	2,744,992
State and Municipal Securities		3,080,000		-		-			3,080,000
	$	5,783,499	$	41,493	$	-		$	5,824,992

Investment securities carried at approximately $721,000 at June 30, 2012 and $1,741,000 at December 31, 2011, respectively, were pledged to secure public deposits and for other purposes as permitted or required by law.

The scheduled maturities of securities at June 30, 2012 were as follows:

			Available-for-Sale
	Amortized			Fair
	Cost			Value

Due in One Years to Three Years	$	702,069		$	720,820
Due from Three Years to Five Years		2,000,000			1,997,120
Due after Ten Years		2,885,000			2,885,000

	$	5,587,069		$	5,602,940

F-9

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 - Loans

The Bank's loan portfolio consists primarily of loans to borrowers within Southern California. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank's market area and, as a result, the Bank's loan and collateral portfolios are, to some degree, concentrated in those industries.

The Bank also originated SBA loans and other governmental guaranteed loans which it periodically sells to governmental agencies and institutional investors. Revenues generated from the origination of loans guaranteed by the Small Business Administration under its various programs and sale of the guaranteed portions of those loans contribute to the Bank's income. Funding for these SBA programs depends on annual appropriations by the U.S. Congress.

The Bank was servicing approximately $72,542,000 in SBA loans previously sold as of June 30, 2012.

A summary of the changes in the allowance for loan losses for the periods indicated is as follows:

	Six Months Ended June 30,
	2012			2011

Beginning Balance	$	5,941,560		$	5,941,989
Additions to the Allowance Charged to Expense		850,000			686,000
Net (charge-offs) recoveries:
Loans Charged-off		1,004,734			621,934
Recoveries		44,884			13,812
Total net (charge-offs) recoveries		959,850			608,122


Ending Balance	$	5,831,710		$	6,019,867


Net (charge-off's) recoveries to average loans		0.38	%		0.24	%
Allowance for loan losses to total loans		2.41	%		2.42	%


Total Loans	$	241,839,000		$	249,074,000
Average Loans	$	253,782,000		$	255,457,000

F-10

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 – Loans - Continued

The following table presents, by portfolio segment, the changes in the allowance for loan losses, the recorded investment in loans and impairment method as of the dates and for the periods indicated (dollars in thousands):

	Construction
	and Land			Real Estate -
June 30, 2012	Development			Other			Commercial			Consumer			Total
Allowance for Loan Losses:
Beginning of Year	$	74		$	3,633		$	2,095		$	140		$	5,942
Provisions		24			183			661			(18	)		850
Charge-offs		-			(596	)		(409	)		-			(1,005	)
Recoveries		-			15			30			-			45
End of Year	$	98		$	3,235		$	2,377		$	122		$	5,832
Reserves:
Specific	$	-		$	126		$	537		$	-		$	663
General		98			3,109			1,840			122			5,169
	$	98		$	3,235		$	2,377		$	122		$	5,832
Loans Evaluated for Impairment:
Individually	$	1,130		$	1,571		$	3,718		$	-		$	6,420
Collectively		5,020			138,303			91,911			185			235,418
	$	6,150		$	139,874		$	95,629		$	185		$	241,838

December 31, 2011
Allowance for Loan Losses:
Beginning of Year	$	91		$	3,822		$	1,890		$	139		$	5,942
Provisions		(17	)		930			580			1			1,494
Charge-offs		-			(1,164	)		(463	)		-			(1,627	)
Recoveries		-			45			88			-			133
End of Year	$	74		$	3,633		$	2,095		$	140		$	5,942
Reserves:
Specific	$	-		$	62		$	26		$	-		$	88
General		74			3,571			2,069			140			5,854
	$	74		$	3,633		$	2,095		$	140		$	5,942
Loans Evaluated for Impairment:
Individually	$	1,145		$	1,457		$	1,909		$	-		$	4,511
Collectively		4,556			137,779			99,864			245			242,444
	$	5,701		$	139,236		$	101,773		$	245		$	246,955

F-11

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 - Loans - Continued

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Bank uses the following definitions for risk ratings:

Pass - Loans classified as pass include loan not meeting the risk ratings defined below.

Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Impaired - A loan is considered impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

F-12

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 - Loans – Continued

The risk category of loans by class of loans based upon the most recent internal loan classifications as of the dates indicated (dollars in thousands):

			Special
June 30, 2012	Pass		Mention		Substandard		Impaired		Total

Construction and Land Development	$	5,020	$	-	$	-	$	1,130	$	6,150
Real Estate - Other
1-4 Family Residential		30,772		-		112		-		30,884
Commercial Real Estate and Other		103,114		2,767		1,538		1,571		108,990
Commercial		85,326		4,063		2,521		3,718		95,629
Consumer		185		-		-		-		185

	$	224,417	$	6,830	$	4,171	$	6,420	$	241,838

December 31, 2011
Construction and Land Development	$	4,556	$	-	$	-	$	1,145	$	5,701
Real Estate - Other
1-4 Family Residential		31,618		-		115		-		31,733
Commercial Real Estate and Other		102,690		312		3,044		1,457		107,503
Commercial		92,025		5,913		1,926		1,909		101,773
Consumer		245		-		-		-		245
	$	231,134	$	6,225	$	5,085	$	4,511	$	246,955

F-13

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 - Loans - Continued

Past due and nonaccrual loans were as follows as of the dates indicated (dollars in thousands):

	Still Accruing
	30-59 Days		60-89 Days		Over 90 Days
June 30, 2012	Past Due		Past Due		Past Due		Nonaccrual
Construction and Land Development	$	-	$	-	$	-	$	1,130
Real Estate - Other
1-4 Family Residential		-		-		-		-
Commercial Real Estate and Other		-		-		-		1,057
Commercial		-		-		-		940
Consumer		-		-		-		-
	$	-	$	-	$	-	$	3,127

December 31, 2011
Construction and Land Development	$	-	$	-	$	-	$	1,145
Real Estate - Other
1-4 Family Residential		-		-		-		-
Commercial Real Estate and Other		-		-		-		1,457
Commercial		-		-		-		418
Consumer		-		-		-		-
	$	-	$	-	$	-	$	3,020

F-14

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 - Loans - Continued

The following tables present, by loan category, the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of the dates and for the periods indicated (dollars in thousands):

	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
June 30, 2012	Balance		Investment		Allowance		Investment		Recognized
With no Related Allowance Recorded
Construction and Land Development	$	1,981	$	1,130	$	-	$	1,138	$	-
Real Estate - Other
1-4 Family Residential		-		-		-		-		-
Commercial Real Estate and Other		1,095		704		-		779		2
Commercial		2,947		2,827		-		2,892		52
With an Allowance Recorded
Construction and Land Development		-		-		-		-		-
Real Estate - Other
1-4 Family Residential		-		-		-		-		-
Commercial Real Estate and Other		2,699		867		126		890		-
Commercial		1,413		892		537		1,052		-
Consumer		-		-		-		-		-
	$	10,135	$	6,420	$	663	$	6,751	$	54

December 31, 2011
With no Related Allowance Recorded
Construction and Land Development	$	1,989	$	1,145	$	-	$	1,151	$	-
Real Estate - Other
1-4 Family Residential		-		-		-		-		-
Commercial Real Estate and Other		1,791		1,210		-		1,357		-
Commercial		1,979		1,779		-		2,305		24
With an Allowance Recorded
Construction and Land Development		-		-		-		-		-
Real Estate - Other
1-4 Family Residential		-		-		-		-		-
Commercial Real Estate and Other		264		247		62		266		-
Commercial		139		130		26		138		-
Consumer		-		-		-		-		-
	$	6,162	$	4,511	$	88	$	5,217	$	24

Interest income included above recognized on the cash basis amounted to zero for the six months ended June 30, 2012 and for the twelve months ended December 31, 2011, respectively.

F-15

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 - Loans - Continued

The Bank has allocated approximately $116,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012. The Bank has committed to lend no additional amounts to customers with outstanding loans that are classified as troubled debt restructurings as of June 30, 2012.

During the six months ended June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk or a temporary forbearance with regard to the payment of principal or interest.

There were two modifications involving a reduction of the stated interest rate of the loan or involving an extension of the maturity date. Three modifications involving temporary forbearance of principal or interest were for periods ranging from three to six months.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2012 (dollars in thousands):

			Pre-		Post-
			Modification		Modification
	Number of		Recorded		Recorded
June 30, 2012	Loans		Investment		Investment
Construction and Land Development			$	-	$	-
Real Estate - Other
1-4 Family Residential				-		-
Commercial Real Estate and Other		2		681,986		681,986
Commercial		3		1,815,817		1,815,817
Consumer				-		-
		5	$	2,497,803	$	2,497,803
December 31, 2011
Construction and Land Development			$	-	$	-
Real Estate - Other
1-4 Family Residential				-		-
Commercial Real Estate and Other		2		584		584
Commercial		5		1,547		1,547
Consumer				-		-
		7	$	2,131	$	2,131

F-16

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 4 - Loans - Continued

The troubled debt restructurings described in the previous table did not increase the allowance for loan losses and resulted in no charge-offs during the six months ended June 30, 2012.

There was one loan which was modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2012. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. As a result of this default there was no impact to the allowance for loan losses.

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period ended June 30, 2012:

		Recorded
		Investment
	Number of	at Date of
June 30, 2012	Loans	Default
TDR's that Defaulted
Commercial Real Estate:
Construction and Land Development	-	$-
Multifamily	-	-
Other	1	264
Residential Real Estate	-	-
Commercial	-	-
	1	$264

		Recorded
		Investment
	Numberof	atDateof
December 31, 2011	Loans	Default
TDR's that Defaulted
Commercial Real Estate:
Construction and Land Development	-	$-
Multifamily	-	-
Other	3	917
Residential Real Estate	-	-
Commercial	1	132
	4	$1,049

F-17

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 5 – Other Expense

Other expenses as of June 30 are comprised of the following:

	2012		2011

Marketing and Business Promotion	$	208,276	$	289,924
Office Expenses		179,176		182,752
Insurance		31,249		18,819
Director Fees and Expenses		96,353		89,434
Collection Expenses		168,627		335,999
Merger Expenses		798,894		-
Other Expenses		188,975		258,746

	$	1,671,550	$	1,175,674

NOTE 6 – Earnings Per Share (“EPS”)

The following is a reconciliation of net income (loss) and shares outstanding to the income and number of shares used to compute EPS as of June 30:

	June 30, 2012					June 30, 2011
	Income			Shares		Income			Shares

Net Income (Loss) as Reported	$	593,618				$	997,749
Accretion of Preferred Stock		(146,890	)				(30,000	)
Dividends Paid on Preferred Stock		(45,859	)				(163,500	)
Weighted Average Shares Outstanding					4,084,978					4,036,984
Used in Basic EPS		400,869			4,084,978		804,249			4,036,984
Dilutive Effect of Outstanding:
Stock Options					68,538					837
Restricted Stock Grants					95,886					42,474

Used in Dilutive EPS	$	400,869			4,249,402	$	804,249			4,080,295

F-18

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 6 – Earnings Per Share (“EPS”) - Continued

At June 30, 2012 and 2011 there were zero and 567,900 stock options, respectively, that could potentially dilute earnings per share that were not included in the computation of diluted earnings per share because to do so would have been antidilutive.

NOTE 7 – Commitments and Contingencies

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those commitments. Commitments to extend credit (such as the unfunded portion on lines of credit and commitments to fund new loans) as of June 30, 2012 and December 31, 2011 amount to approximately $49.1 million and $46.1 million respectively, of which approximately $653,000 and $1.7 million are related to standby letters of credit, respectively. The Bank uses the same credit policies in these commitments as for all of its lending activities. As such, the credit risk involved in these transactions is essentially the same as that involved in extending loan facilities to customers.

Because of the nature of its activities, the Bank is from time to time subject to pending and threatened legal actions, which arise out of the normal course of their business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

NOTE 8 – Stock Based Compensation

The Bank’s 2003 Stock Plan was approved by its shareholders in May 2003. Under the terms of the 2003 Stock Plan, officers and key employees may be granted both nonqualified and incentive stock options and directors and other consultants, who are not also an officer or employee, may only be granted nonqualified stock options. The Plan provides for options to purchase 1,100,000 shares of common stock at a price not less than 100% of the fair market value of the stock on the date of grant. However, at the time of any grant of an option under this plan, the total number of shares that may be optioned and sold under the Plan, taking into consideration all previously issued option grants, shall be limited to no more than 15% of the total number of shares of stock issued and outstanding. Based on this limitation, the maximum number of shares which could have been granted as of June 30, 2012 was 637,254. Stock options expire no later than five to ten years from the date of the grant and generally vest over four years. The Plan provides for accelerated vesting if there is a change of control, as defined in the Plan. The Bank has recognized stock-based compensation cost of $190,000 for the first six months ended June 30, 2012. Tax benefits related to stock-based compensation were approximately $10,000.

F-19

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 8 – Stock Based Compensation - Continued

The Bank entered into an Agreement and Plan of Merger, dated as of August 30, 2011, as amended on October 31, 2011, with First PacTrust Bancorp, Inc., pursuant to which, subject to the terms and conditions of the Agreement and Plan of Merger, the Bank is to be merged with a wholly owned subsidiary of First PacTrust Bancorp, Inc. The Merger will constitute a “Terminating Event” of the Bank’s Stock Plan and all of the shares in the plan which are not exercised were cancelled at the effective time of the Merger, July 1, 2012.

A summary of the status of the Bank’s stock option plan as of June 30, 2012 and changes during the first six months thereon is presented below:

					Weighted-
			Weighted-		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value

Outstanding at Beginning of Year		509,600	$	8.55
Granted		-	$	-
Exercised		146,000	$	5.13
Forfeited/Cancelled		363,600	$	9.92

Outstanding at June 30, 2012		-	$	-	0Years	None

Options Exercisable		-	$	-	0Years	None

Options exercised in 2012 had an intrinsic value of approximately $1,343,000. There was no unrecognized compensation cost relating to the stock option plan as of June 30, 2012. In connection with the proposed merger discussed in Note Q of the December 31, 2011 financial statements, the Bank cancelled 123,400 stock options for $1.43 per option. The fair value of the options of approximately $176,000 was charged to additional paid in capital.

F-20

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 8 – Stock Based Compensation - Continued

The Bank grants restricted common stock in connection with its annual incentive programs. As of June 30, 2012 restricted stock of 28,872 shares will vest over a three year period provided certain annual and net income goals are met. The Bank recognized compensation costs of approximately $100,000 and related tax benefits of $41,000 for the six months ended June 30, 2012. The total fair value of shares vested in 2012 was approximately $869,000. A summary of the restricted stock activity for the first six months of 2012 is presented below:

				Weighted-
				Average
				Grant-Date
	Shares			Fair Value

Nonvested at December 31, 2011		113,115		$	4.65
New Stock Grants		11,299		$	8.85
Shares Vested and Issued		(95,411	)	$	5.00
Shares Forfeited/Cancelled		(131	)	$	4.97

Nonvested at June 30, 2012		28,872		$	4.97

F-21

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 9 – Fair Value Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including both those financial assets and liabilities that are measured and reported at fair value on a recurring basis and a non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed below.

In accordance with accounting guidance, the Company groups it financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:

·	Level 1 – Observable unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities or unobservable inputs that are corroborated by market data. This includes quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data, either directly or indirectly. This would include those financial instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 – Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Assets measured utilizing level 3 are for positions that are not traded in active markets or are subject to transfer restrictions, and or where valuations are adjusted to reflect illiquidity and or non-transferability. These assumptions are not corroborated by market data. This is comprised of financial instruments whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. Management uses a combination of reviews of the underlying financial statements, appraisals and management’s judgment regarding credit quality to determine the value of the financial asset or liability.

The following methods and assumptions were used by the Bank in estimating fair values of financial instruments. Many of these estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.

F-22

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 9 – Fair Value Measurement - Continued

Cash and Cash Equivalents: The carrying amounts reported in the Balance sheet for cash and cash equivalents approximate the fair values of those assets due to the short-term nature of the assets.

Interest Bearing Deposits at Other Financial Institutions: The carrying amounts reported in the balance sheet for interest bearing deposits at other financial institutions approximates the fair value of these assets due to the short-term nature of the assets.

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities relationship to other benchmark quoted securities (Level 2).

Loans: For the balances reported at June 30, 2012 and December 31, 2011, the fair value for loans is estimated by discounting the expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities, adjusted for the allowance for loan loss. Loans are segregated by type such as commercial and industrial, commercial real estate, construction and other loans with similar credit characteristics and are further segmented into fixed and variable interest rate loan categories. Expected future cash flows are projected based on contractual cash flows, adjusted for estimated prepayments.

Impaired Loans: The fair value of impaired loans is determined based on an evaluation at the time the loan is originally identified as impaired, and periodically thereafter, at the lower of cost or fair value. Fair value on impaired loans is measured based on the value of the collateral securing these loans, if the loan is collateral dependent, or based on the discounted cash flows for non-collateral dependent loans, and are classified at a level 3 in fair value hierarchy. Collateral on collateral dependent loans may be real estate and/or business assets including equipment, inventory and/or accounts receivable and is determined based on appraisals performed by qualified licensed appraisers hired by the Bank. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. For unsecured loans, the estimated future discounted cash flows of the business or borrower are used in evaluating the fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

F-23

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 9 – Fair Value Measurement - Continued

Other Real Estate Owned: The fair value of other real estate owned is generally based on real estate appraisals (unless more current market information is available) less estimated costs of sale. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Non-Maturing Deposits: The fair values for non-maturing deposits (deposits with no contractual termination date), which includes the Bank’s non-interest bearing demand deposits, interest bearing transaction accounts money market deposits and savings accounts are equal to their carrying amounts, which represent the amounts payable on demand. Because the carrying value and fair value are by definition identical, these balances are not listed in the following tables.

Maturing Deposits: The fair values of fixed maturity certificates of deposit (time deposits) are estimated using a discounted cash flow calculation that applies current market deposit interest rates to the Bank’s current certificate of deposit interest rates for similar term certificates. The carrying amount of accrued interest payable approximates its fair value.

Off-Balance Sheet Financial Instruments: The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar arrangements. The fair value of these financial instruments is not material.

Assets Measured at Fair Value on a Recurring Basis

The following table summarized the financial assets and financial liabilities measured at fair value on a recurring basis as of the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair values.

F-24

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 9 – Fair Value Measurement - Continued

The following table summarizes the financial assets and financial liabilities measured at fair value on a recurring basis as of the dates indicated, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total Carrying		Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
June 30, 2012

Securities Available for Sale	$	5,603,000	$	-	$	5,603,000	$	-


December 31, 2011

Securities Available for Sale	$	5,825,000	$	-	$	5,825,000	$	-

Assets Measured at Fair Value on a Non-recurring Basis

The Bank may be required periodically, to measure certain financial assets and financial liabilities at fair value on a non-recurring basis, that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These included assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of or during the period

F-25

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 9 – Fair Value Measurement - Continued

The following table presents the balances of assets and liabilities measured at fair value on a non-recurring basis by caption and by level within the fair value hierarchy as of the dates indicated.

	Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
June 30, 2012

Collateral-Dependent Impaired
Loans, Net of Specific Reserves	$	22,000	$	-	$	-	$	22,000
Other Real Estate Owned	$	114,000	$	-	$	-	$	114,000

December 31, 2011

Collateral-Dependent Impaired
Loans, Net of Specific Reserves
Commercial	$	222,000	$	-	$	-	$	222,000
Other Real Estate Owned	$	-	$	-	$	-	$	-

The following table presents the significant unobservable inputs used in the fair value measurements for Level 3 assets measured at fair value on a non-recurring basis as of the dates indicated:

				Significant
			Valuation	Unobservable
	Fair Value		Technique	Inputs	Range
June 30, 2012

Collateral-Dependent Impaired
Loans with Specific Valuation				Estimated
Allowance and or Partial			Appraisal	Collateral value
Charge-offs	$	22,000	Value	of property	5% to 20%

				Estimated
			Appraisal	Collateral value
Other real estate owned	$	114,000	Value	of property	5% to 20%

F-26

BEACH BUSINESS BANK

NOTES TO FINANCIAL STATEMENTS

June 30, 2012

Unaudited

NOTE 9 – Fair Value Measurement – Continued

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at June 30, 2012 and December 31, 2011.

	June 30, 2012
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and Cash Equivalents	$	5,867	$	5,867	$	5,867	$	-	$	-
Deposits in Other Financial Institutions		60,152		60,152		60,152
Investment Securities		5,603		5,603				5,603
Loans Held for Sale		-		-
Loans, net		235,353		238,846						238,846
FHLB and Other Bank Stock		1,516		1,516						1,516
Accrued Interest Receivable		846		846						846

Financial Liabilities:
Noninterest-bearing Demand		84,304		84,304		84,304
Interest-Bearing Deposits		187,505		190,618				190,618
Other Borrowings		2,315		2,315				2,315
Accrued Interest		44		44		44

	December31,2011
	Carrying
	Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and Cash Equivalents	$	33,948	$	33,948	$	33,948	$	-	$	-
Deposits in Other Financial Institutions		6,214		6,214		6,214
Investment Securities		5,825		5,825				5,825
Loans Held for Sale		14,079		14,079				14,079
Loans, net		240,554		244,204						244,204
FHLB and Other Bank Stock		1,448		1,448						1,448
Accrued Interest Receivable		1,000		846						846

Financial Liabilities:
Noninterest-bearing Demand		66,987		66,987		66,987
Interest-Bearing Deposits		184,070		184,699				184,699
Other Borrowings		13,500		13,500				13,500
Accrued Interest		44		44		44

F-27

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