Banc of California Inc (BANC) 2011 Q2 法說會逐字稿

Hello and welcome to First PacTrust Bancorp, Inc. August 1, 2011, second quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. (Operator Instructions)

I'd now like to turn the conference over to Mr. James Sheehy, Executive Vice President, Secretary and Treasurer for First PacTrust Bancorp. Mr. Sheehy, you may begin.

Thank you, good afternoon, everyone, and thanks for joining us for today's second quarter 2011 earnings investor conference call. With me on the call today are First PacTrust Bancorp's President and Chief Executive Officer, Gregory A. Mitchell. Also here to assist Mr. Mitchell and answer your questions later during this teleconference is the Company's Chief Financial Officer and Treasurer, Marangal Domingo. Today's conference call is being recorded for replay via phone. A copy of this recording will be available later on the Company's investor relations website.

Before I turn it over to Greg, I want to remind everyone that as always elements of this presentation are forward-looking and are based on our best view of the world and our business as we see them today. Those elements can change as the world changes, please interpret them in that light. The forward-looking statements in today's first-quarter earnings release and 8-K filing also apply to our comments. Those documents are available on our firstPacTrustbancorp.com investor relations website as are other 8-Ks filed regarding investor presentation material and other matters. A PDF file of the investor presentation for the second-quarter earnings slide show for this earnings conference call can be found on the Company's investor relations website under the link entitled news and market data. Then click on either the presentations or the investor conference calls link. We will have time for question and answers at the end of presentation. And now I'll turn it over to our President and CEO, Greg Mitchell.

Well thank you, Jim, and most importantly, thank you to all the shareholders, market makers and research analysts that have taken such a keen interest in First PacTrust Bancorp and Pacific Trust Bank. We're here for you and we're really working as a team to build something that we can all be proud of as an organization. In that regard, I'm particularly pleased with the progress that was made by First PacTrust Bancorp and Pacific Trust Bank to execute on our strategy of growth and achieve what I think are some great long-term benefits for the shareholders of Pacific Trust Bank. And in the next few minutes, myself, Marito Domingo and perhaps others will work to give you a sense of what happened this quarter.

Before jumping into some of the details though, I thought I'd address some of the highlights of this quarter. One of the most interesting things of the quarter is our June announcement of the acquisition of Gateway Business Bank and its division Mission Hills Mortgage Bankers, which is something that we're particularly excited about because as a first acquisition, it's a transaction that gives us a substantial source of non-interest income while also being immediately accretable to our tangible book value and to the earnings of the Corporation. I think we've made good progress in working with the folks at Mission Hills Mortgage Bankers and Gateway in starting to prepare for the transition of that organization into Pacific Trust Bank.

Additionally, I'm very pleased with the progress that was made by our group of underwriters led by Baird & Co. to complete a placement of roughly $26.1 million of new equity at a pricing about $15.50 a share at the end of June. That offering was well received by the market and I think Bancorp and the Banks should make good use of those proceeds in the months and years to come, and we're certainly appreciative of those of you who participated in that effort.

Finally, we've made substantial progress in ramping up our loan production at Pacific Trust Bancorp. During the last quarter's call, I indicated that our staff was now on board, that we've built some infrastructure and we're beginning to build a pipeline of high-quality commercial real estate assets and residential assets. This quarter we produced nearly $40 million of production with a weighted average yield in excess of 5%. When you think about matching that off of the funding costs sub 80 basis points, you can see that we're living towards our promise of delivering a 4% net interest margin on a go forward basis. So I'm very pleased with the progress that was achieved there.

Likewise, out of the retail banking platform, we opened our new office in San Marcos, showed very strong deposit growth out of our La Jolla office and announced 2 additional locations which were in the strategically important Los Angeles market. So by the end of 2011, we'll have an office in Century City and in Santa Monica to pursue our business strategies in those important markets.

Equally important is that our retail banking division made excellent progress in reaching out to our existing customer base, increasing the cross-sell ratio, holding deposits and greatly lowering the funding costs. Again for the second quarter, the Bank showed very substantial reductions in the overall cost of deposits, and this quarter we benefited heavily from a reduction in cost of funds as we were able to repay yet more of the federal home loan bank advances. So we're now in a position where, while our margin has been challenged a bit by repricing of our single-family residential mortgage assets, we expect significant improvement in that metric as these deposit gathering and funding advantages kick in and as our loan production group continues to produce solid quantities of high-yielding assets.

And then finally from an asset quality perspective, I think we made very good progress in clearing out a number of the long-term delinquencies and classified assets that exist at the Bank and moving the proverbial pig well along into the intestines of the python such that we have now relatively low levels of classified assets in the -- and delinquent assets in the 30, 60 and 90-day buckets. And that was evidenced by the large increase in the level of OREO as that portfolio continues to work its way through. So if I look at our success in executing on growth, I'm pleased with the M&A front, I'm pleased with our front -- our progress on the retail banking and commercial lending front and very pleased to have welcomed a new CFO to the organization, Marito Domingo, whose already contributed a great deal to the Bank through purchases and securities, creating some further discipline on our finance program within the Company and continuing to strengthen the platform for future growth. So with that, I'll turn your attention to the deck that we've provided and ask Marito, if you would start getting the attendees an overview of second quarter earnings?

Thanks, Greg, and good afternoon, everybody. I'm on page 3 of the deck for those of you who want to follow visually as well. But we had strong results in the quarter, $1.5 million in net earnings to common, that was up $800,000 from the linked quarter, and it was a very good result, it was the first increase after 3 quarters of decline of the period. Adjusting for some non-core items including a $1.1 million gain on sale, our tax adjusted -- our core earnings was $1 million pretty much steady with where we were in the first quarter of the year. Most notably, the quality of earnings has improved, or is improving. As Greg mentioned we now have organic loan growth coming out of our commercial real estate and single-family transactions. And we have proven ourselves in terms of deposit growth in our -- through our de novo branches. Also, as Greg mentioned, we have improvement in the credit quality, but not just in our loan portfolio, but the sales of securities that provided us the $1.1 million gain on sale were actually classified assets, so even in a securities portfolio today, we have basically cleaned that out as well.

On page 4, we show you our loan yields, and the quarter actually did show some improvement. Most notably in the balance perspective, again after 4 quarters of decline, we are finally showing the ending balance increasing. And the production that Greg mentioned about $33 million averaging 5.5%. And if you compare that to the average yearly portfolio, you're running around 4.5%. You can clearly see that as we gain traction on the production side, we will start moving the needle on the loan yield side from this quarter and the quarters to come. The other thing that is improving the metrics here for us on the loan side. While we do have prepayments and the resetting of the arms, it's the fact that the credit metrics is also improving particularly in the drag that the non-performing assets have had as we have to reverse interest on 90 plus day delinquent assets.

Turning our attention to deposits and costs of deposits. Greg headlined this from that perspective. Balances did grow. La Jolla actually contributed about $16 million of the growth. And San Marcos, even though it opened mid-June, actually did contribute part of that growth about $17 million all together. Including some low cost state deposits, actually that accounted for about 70% of the $52 million of growth in deposits that we are showing for the quarter. And the other thing notable is the cost of deposits continue to climb and we continue to see opportunities for it to decline 6 basis points from 80 basis points in the first quarter to 74 basis points in the second quarter.

The net result is our interest margin, which you can see on page 6. We did end up seeing a decline. If you look at the yield on earning assets, that drove much of the decline. And it was really driven by the yield on our securities portfolio. As we mentioned, we did sell impaired investments, which were higher yielding and we did replace those with lower yielding but more liquid investments at the holding Company. On the other side, we did see also notable growth of the ratio of earning assets to interest-bearing liabilities. And as we deployed those in higher yielding assets, notably the fact that our current yield on earning assets is 4.36%, but with the deployment into loans, we should start to see these spreads expanding in the second half of this year.

Turning our attention to non-interest income on page 7, we did see a fairly sizable spike in non-interest income. That was largely due to the gain on sale as mentioned previously. But more notably if you look at our customer service fees, they did increase again showing the change in mix and the discipline in sales activities that we have today in the branches. We also benefit in the quarter from a $26,000 pre-pay penalty, which we did not see in Q1. So our pre-payments are now coming in as a result of where rates are and also reflective of the quality of our borrowers today.

On page 8, non-interest expense, we're showing about a $800,000 decline from $6.8 million in Q1 to $6 million this quarter. Much of that difference is actually in the fact that we booked a change of control expense in Q1. But drilling down and looking at very specific line items on employee and salary expenses, much of that is now being invested in branch personnel and loan production personnel to drive organic growth and revenues. Also on the professional services side, that is now reflecting more M&A activity. We are showing -- a good chunk of that professional service expense is actually due to as we had mentioned before an acquisition that we chose to withdraw from in a very disciplined fashion. We withdrew from the bidding war for a bank in Orange County. And then finally, OREO expense did decline from quarter to quarter. However, as you all well know, this expense will be driven by the completion of the resolution activities that we have. And as Greg mentioned, our OREO balances did go up as we're resolving -- or maturing many of those problem assets in that regard. At this point, I'm going to actually pause and turn the presentation back to Greg, who will walk us through credit quality.

Great, thank you, Marito, and thank you again for all you've done already for First PacTrust Bank and the Bank. I think the shareholders will continue to see the efforts of that in future periods. It's sort of important to note on the credit metrics, the pre-payments were faster than expected as Marito and I both indicated this in our earlier remarks, and that's largely as a result of the fact that this is a very high-quality portfolio. And unlike many banks that have borrowers that are unable to refinance in the market or who have limited equity, we continue to have strong equity positions on the part of our borrowers and strong credit metrics. And that's one of the reasons that we're able to continue to defend the lower ALLL allowance that I'll come to in a moment. In addition, part of the credit effort of this quarter was really focused on driving down our level of classified assets plus OREO as a percentage of capital at the Bank level and at Bancorp level, which puts us at a better position to further strengthen our relationships with our regulators and allow us to continue to acquire and integrate companies that may have distressed assets. Obviously from a strategic perspective, the point is the cleaner you are, the more ability you have to look at other opportunities within the market.

So the credit quality and provisions, and I'm looking at page 9 of the deck, the early delinquencies levels are really at the lowest level during the past 5 quarters. And as we look forward into 2011, we see continued reductions in the 30, 60 and 90-day categories, so that is a positive trend on a go forward basis. Our OREO activity increased substantially during the quarter as we cleared long-term distressed assets out of the sort of hope and a prayer category and into aggressive action. Management's been taking very direct efforts to clear that OREO, and we expect to see very good progress in clearing those balances through the balance of 2011 with a goal of having relatively low levels of OREO and low levels of NPLs by the end of Q4. The ALLL as a percent of non-performing loans remained constant, indicating while the ALLL was declining, the levels of classified assets and distressed assets were declining at a faster pace.

Improved asset quality, you can see the trends on page 10, showing pretty sharp declines in the 30s, 60s and 90s within our portfolio. And again, we expect that trend to continue for the balance of the year, that's been brought about through more diligent collection calls, so I-- tip of the hat to our credit services folks. And improvements in the broader market which have allowed borrowers to renew their commitment to their property. So that's resulted in some borrowers coming back who were 30 or 60 days delinquent and restating that loan and bringing it current and demonstrating that they have the capacity to do so on a go forward basis.

And then finally back to the OREO, it rose to $15 million largely concentrated in just a handful of assets. Some of the lingering asset that we've discussed in prior quarters continue to hang with us. We are hopeful that a large percentage of these OREOs will clear in the third quarter of 2011. But as I indicated earlier, we feel confident that we'll see substantial progress in clearing these assets for the balance of the year. It's important to note that most of these construction and land loans that have been with us for an extended period have been written down to less than 20% of their original loan balances. So in a market that continues to show weakness, we feel that we are properly reserved for those OREO and have some potential for recoveries when those assets cure.

And then finally capital. As I mentioned earlier on the call, we were successful in raising approximately $26 million largely through the leadership of Robert Baird, D.A. Davidson, Wunderlich Securities and FIG Partners in an overnight offering. That offering was completed about 80% retail investors, 20% institutional investors. And while the stock has certainly been under attack for the last few days, we continue to believe that that was a good purchase on the part of those new shareholders. Strong capital position at the Bank, on a bank level we're at about 12% capital giving us plenty of capacity to fuel organic growth and to add acquisitions to the Bank and the holding Company continues to maintain strong resources to drop down additional capital to the organization as needed while also serving as a source of strength to allow us to potentially move distressed assets from PacTrust or any potential acquisitions up to the holding Company. So it's a very envious position to be in. We also believe that we will hear a definitive answer from the Department of Treasury by the 27 of August on our application for SBLF. 90% of those proceeds will be dropped down do the bank giving the bank further capital to pursue organic growth and strategic initiatives.

And then finally an update on the Gateway merger. The merger and integration activities are well underway. We're expecting a closure in the fourth quarter of 2011. Gateway has been making very good progress in complying with the covenants under the deal and continue to build a franchise we can all be proud of. So I'm very thankful for what the Gateway and Mission Hills Mortgage Bankers folks have done over the last quarter. As most of you know, we are now an OCC regulated and fed holding company regulated entity. We've had very constructive meetings with the Office of the Comptroller of Currency regarding our current and future plans and expect to have similar meetings with the Fed early this month. And we think that they will like what we've done, where we're going and how we're going about achieving our strategic objectives. And then earlier as I mentioned, we opened San Marcos and are well on our way to opening Santa Monica in Century City.

And then finally because there's been a fair amount of concern in the market about liquidity and how financial institutions may react to the ongoing budget discussions and potential outflows from financial institutions, First PacTrust maintains very high levels of available liquidity and we can withstand pretty much any tsunami that comes at us. So we've developed contingency plans to deal with any potential liquidity challenge that may come before us.

So finally as a summary, we've delivered strong earnings growth while building for growth. We've continued to make good investments in people, systems and controls to position us as the Bank of choice and the consolidator of choice in California. The $1.5 million in earnings in Q2, as Marito mentioned earlier, $800,000 up linked prior, improved credit metrics, improved quality of earnings, strong capitol positions and strong liquidity. And if you go back to the investment thesis of PacTrust, we believe that when you combine a scalable balance sheet, a strong management team and a solid capital base, you're likely to benefit now and in future periods from the changes that go on in the markets around us. I'm going to stop at that point and ask the Operator to open the line for questions.

(Operator Instructions) Brett Villaume of FIG Partners.

Hello, Brett, how are you today?

Good. Greg, on the last conference call, you explained a little bit more detail about the relaunch of the retail lending ops. And I was hoping that you could give us sort of your opinion about I guess this quarter yet about $10 million in production there, did that live up to or extremely exceed your expectations? And what do you think might happen?

Actually, Brett, those levels are a little below our production targets for the quarter. But it took some time to sort of build that pipeline within that organization and we expect in subsequent quarters continued progress in building those totals. I think some of the guidance that we provided before is yes we believed that for the full year of 2011, we could have done about $100 million in SFR production. So at only $10 million for that quarter, it leaves pretty large chunk for productions in Q3 and Q4. Is that response to your question, Brett?

Yes, that's great. The great deposit growth at the La Jolla branch, is that likely to continue? And do you think the San Marcos might see better growth next-- this quarter?

Yes, we think so-- well yes we think San Marcos will show much better growth this quarter. It was really only open for 1.5 weeks in the quarter, so not a lot of chance for our customers to come in and bank there. We brought in a great Manager, who came to us most recently from City Bank in the San Marcos branch. We're directly across the street from a US Bank branch that consolidated with that office and we know there's some unhappy customers there so we think that we'll do some good things in San Marcos. And again part of the thesis, Brett, was find great locations, populate them with great Managers, and build a great branch with a rated deposit accumulation that's greater than what is normally seen in a de novo strategy. We expect to do the same in Santa Monica and Los Angeles, excuse me, Santa Monica and Century City and have already identified some great Managers for those facilities.

Thanks. Do you have a target or preferred percent of your securities holdings that you'd like to earnings at-- earning assets?

Well long term we think the regulatory community is moving to a place where securities represent 20% of a bank's asset base. So long term, we're focusing on those targets.

Then my final question is just one of sort of housekeeping, I was curious if you had an amount of reduction in NIM that was due to interest reversals?

I don't have that handy, Brett, but we can get that to you.

Okay. Thank you very much.

Thank you.

Don Worthington of Raymond James.

Hello, good afternoon, Don.

Hello, Greg, hi, Marito. Just a couple more questions, in terms of change and control expenses, are you done with that?

We still have some that we'll be absorbed, I would say they're not terribly material. I think in the first quarter, we announced the change of control payments for Hans and that accrual. And also announced in there that there remained an obligation of X, and I don't recall that X. Some of that will likely be absorbed for the balance of 2011, but I would not consider it to be a huge number.

Okay. And any update on your assumptions of the Gateway acquisition, and particularly what I'm looking for is what you think the runoff might be of the loans and deposits between now and the close?

Well there-- I think the deposits will largely stay at current levels to slight reductions. Gateway has chosen to keep their deposit levels high because they're largely funding the mortgage banking activity for Mission Hills Mortgage Bankers. We would not be adverse to seeing some shrinkage in that portfolio and we budgeted for shrinkage in that portfolio because they're largely paying up for CDs, and that's sort of not our style of business. The loan portfolio I think at Gateway has done well in the rehab, the factoring and in the SBA and commercial portfolios. So we're not anticipating a material attrition out of that portfolio. But you need to remember, Don, that of that $200 million bank, there's really only $80 million in a permanent portfolio, so it's relatively insignificant. The bulk of their assets are in cash.

Okay. And what about the NPA level there?

I think the NPA level should be continue to decline. We looked at our levels of non-performing assets and classified assets plus OREO as a percentage of capital on a pro forma basis and are comfortable with those levels.

Okay.

The other thing that's important to remember, Don, is that on the stuff that is sort of hairy from an NPA perspective, those assets will have pretty substantial write-downs as a result of FAS 141R adjustments. So there's pretty big reserves built against those.

Okay. And then I guess my last question in terms of securities gains, it sounds like you pretty much eliminated the classified securities and there probably won't be much more in the way of security gains going forward, is that fair?

That's a fair statement. And I think it's important, Marito touched on this a bit during the call, we had-- we saw a fair amount of market risk outside of the fact that there were classified securities, but a fair amount of market risk and continue to hold those. So rather than sort of continue to carry them around for the high yield, given all the things that are going out of the market around us, we thought it was appropriate to dispose of them when we did. And Marito, through his experience, the Treasury has been pretty successful in acquiring some pretty high quality relatively strong yield securities to replace them. But there certainly have been a give up relative to those 7 % plus yields.

Okay. All right, thank you.

Thank you.

Andrew Leisch of Sandler O'Neill.

Hello, Andrew.

How are you?

Good.

I'm just curious if you can discuss the salaries and benefits line a little bit. Because excluding the change in control payment in the first quarter, it looks like it was up around $340,000, $350,000 or so to about $2.9 million. Is that where we should look at it going forward?

Marito, you want to speak to that?

I didn't calculate that high of an increase, so I'll give you a call a little later to reconcile. But part of that expense was actually my coming in. So as we had disclosed, there were some up front-- not payments but calculations for the stock and the options. So we do have though ongoing option expense for all the Executives going forward. And I think Greg had mentioned before, actually in prior calls I know he's mentioned it, the investment in Management team was about $4 million for the year. So I think that that-- we're living to that expectation. There's still room in that number if Greg has not filled up the whole $4 million, but we're tracking to that level as we grow here from that perspective. So to sum up-- to answer your question, yes the trend is correct. I do want to check with you on the level to make sure that we're on track on that side.

Please do, yes. And then looking at the SGIC expense line item and given the new calculation, I would have thought that would have come down a bit in the quarter. How should we look at that in the next several quarters with the new formula?

Actually, doesn't the new formula kick in--

Yes, let us get back to you on that, Andrew.

All right, thanks. That's it for me. No other questions.

Thank you.

Brett Robinson of Sterne, Agee.

Hello, Brett, how are you doing?

I'm doing well thanks, how are you?

Great.

Wanted to ask on the net charge-offs that you had in the quarter, could you give us a little more color or granularity around what you actually went through and then the resolution process that you're looking at in the back half of the year kind of what-- what kind of properties you're expecting to move out of the non-accrual bucket?

Yes, there's a couple things that were going on as we continue to charge stuff off. In the thrift world for the concept of specific valuation allowances is highly utilized or instead of just charging off a credit at the time you'd show impairment, you do a specific valuation using FAS 114. In the OCC environment, our experience has been that when you have a impairment or a distress, rather than applying a specific valuation allowance, you take a charge-off and then get a recovery in the period in which it's repaid. So we've taken in the past, the practice was once it had been delinquent for more than 180 days, it would be taken SVA to charge-off. We've become a little more aggressive in that sort of cleaning out some of the SVAs on the existing non-performing asset portfolio.

In addition to that as we worked through some of our non-performing loans where there was a short sale in process or we needed to take a harder look at what the real value was to clear those assets, we did some specific charge-offs to clear distressed assets. I think from a modeling perspective where you may be going is what can we expect in future periods as it relates to additional charge-offs on the NPAs and the REOs that are in the portfolio, and I think that what we know today, I think we're-- we've written these things down to a level that they should clear at. While there may be some areas where we're long, it wouldn't be much and we think there's other assets where we're probably more conservative than we need to. So net/net we shouldn't see meaningful net charge-offs in future periods, and quite frankly, I think we could see some potential recoveries in the REO side.

Okay, that's good color around that. And maybe just a follow up to make sure I understand, you've got $1.3 million I believe of specific reserves. Is that essentially what you're anticipating addressing in the second half of the year in terms of those credits?

Yes, part of it is we have some TDRs that are performing TDRs. But we have specific valuation allowances against those consistent with FAS 114. So we anticipate full recovery on those assets over time and are not expecting a loss on those assets. But notwithstanding, we have to have that provision in place for that asset class.

Okay, good color. And then wanted just to ask around the question on loan production and just the pipeline especially, given what should be a higher ramp going forward, are we expecting that the loan portfolio should show pretty solid growth in the second half of the year or do pay-offs negate that to some degree?

I think for the balance of the year, we should be in a position unless there's something remarkable that happens in the rate environment and people can suddenly get 2% mortgages in a refi market, I think we should have net growth in the loan portfolio for the balance of 2011. And you should see, to Marito's earlier point, expansion in the NIM as we achieve superior pricing on new production relative to those assets that are being paid off. I think one of things that's also important for the NIM in this quarter is that a lot of that production came in late in the quarter. So the interest income didn't benefit fully from that level of production. So in Q3, you'll see the full impact from that Q1 production, plus the incremental growth, the average balance growth of what comes in in Q3. And then Q4 obviously you'll get the benefit, the full benefit of the Q3 production.

Okay, great. And then just one last quick one, maybe just a general comment around what you're seeing from an M&A environment perspective in California?

It's-- I'm very encouraged by what I'm seeing from an M&A perspective in California. We continue to have a considerable amount of reverse inquiry into the organization. And like other people who are sort of public consolidator's, we're certainly having conversations with other institutions that we find to be very interesting and very additive to the long-term strategic direction of First PacTrust Bancorp and Pacific Trust Bank.

Okay, great. Thanks for all the color, Greg.

Thank you.

Bryce Rowe of Robert Baird.

Thanks, good afternoon.

Hello, Bryce.

Just a couple questions here, Greg. When in the quarter were the classified securities sold? Just trying to get a feel of where the average security yield might go in the third quarter.

They were sold in June. So probably second-- first or second week of June.

Okay. Any idea or any guidance as to where securities yields might go next quarter or this quarter?

Marito, do you want to speak to that?

Well can't give you the exact number, but suffice it to say that we are actually putting on securities today roughly around a 3.5% to 4% level. And obviously we gave up here some securities that were in the 7%, 8% level from that perspective. But we have replaced the balances and added some actually in the last of couple weeks. Jim and I have been very active buying, so we've replaced those securities. But that would be the delta on that portfolio.

The other thing is giving you a pickup on the securities side to offset some of that give up from getting rid of the classified securities is we also have had a pretty large position in cash, which is being reinvested into higher yielding securities. So--

And loans.

We sold roughly $11 million in securities and have brought more than $11 million in our originating loans. So there's some offsets that give up.

Okay, you guys mentioned certain ARMs that repriced in the quarter. Can you talk about the potential for more repricing activity here in the next year or so?

Yes, we do 3/1 and 5/1 type of ARMs from that perspective. Resets are not very large so you're not really seeing a big impact on the portfolio. However, it does take 1 basis point or 2 in that regard. The real driver has been of the last several quarters has really been in part the pre-paids, we had heavy pre-paids in the fourth quarter. And in this quarter also impacting it especially as we were coming into this year and new Management team was revealing policies on delinquencies and the like. We had a huge spike in loans that we pushed through into 90 plus and that had significant impact as well. So those were larger impacts. So I would say that as we start to produce these assets around 5%, 5.5% level, I think they will be more than-- that will more offset the impact of the resets.

And while we're not expecting significant levels of reversal of interest income as a result of loans going on non-accrual, again that sort of goes back to improvement in the overall credit portfolio, we are anticipating a modest level of recovery as a number of these long-term non-performing assets cure. So we think that, and we discussed this in the 8-K, that we anticipate some level of interest income expansion as a result of recoveries in future periods.

And one important point throughout this discussion as we're mixing sort of NPAs and securities and Greg alluded to the high level of cash that we have that we're now deploying into higher yielding assets, is the quality of the balance sheet, the component that is now part of earning assets is actually shifted to the positive, and that will contribute to earnings as we go. So it is a mixture of all these things that should create positive momentum.

Right, okay and I got just one more question if you don't mind. On the Gateway transaction, I assume you guys have done a little bit more work around the purchase accounting, any more direction as to what kind of bargain purchase gain we might see when that deal closes?

No. We're doing another review under FAS 141 this quarter in anticipation of just that question. I think we provided some guidance in the initial disclosure on Gateway and don't have any new color to add and really won't until, Bryce, until after this FAS 141 new review is completed.

Okay. Thank you.

Gary Tenner of D.A. Davidson.

Hello, good afternoon, Gary.

Hello, my questions have largely been answered, but just a couple of quick ones here. In terms of non-accrual loan inflows this quarter, could you just give us what those were for the quarter?

I don't have that handy. We can get that to you, Gary.

Okay, that's fine.

I think we showed in the K a table, but those were [1231] to [630]. We can give you a table and there will be a table I think in the Q that show the activities sequentially by quarter.

Okay, that's perfect.

And if that doesn't do it, then you can give us a call.

Okay, sounds good. And then in terms of the tax rate being lower this quarter, how should we be looking at the tax rate?

Well taxes, as you know, well part of it is we do have some investments that provide us a lower tax rate. Income from that investment actually assisted in lowering the tax rate at this juncture. So what you saw for the quarter obviously it adjusts somewhat the first quarter results as well. So when you combine them, our estimated tax rate will be in the low 30%s, and that's where it currently stands. Obviously that'll change once we close Gateway from that perspective and can bring that into our assumptions. But you know how these more likely than that type of discussions go. So it should remain there and then after Gateway, the number will likely change.

Okay. Great. Those are the only 2 questions I had. Thanks, guys.

Arthur Burns of Deltec.

Hello, good afternoon, Arthur.

I'm well, Greg, thank you. I don't want to be a pain to you, but I'd like an answer to a question that has to do with capital increases. And we invested with you initially when you put the money -- the money was raised to have you come in I think it was last fall. I had spoken to you subsequent to that about whether or not you had enough capital to both grow through acquisition and organically and was under the impression that you had told me yes, and I wake up one morning and you've had an overnight capital raise of some $28.5 million-odd as I recall. And I wonder A, why? And B, what can I think about that going forward?

Thank you for that, Arthur.

I don't know that you want to thank me for it, but I'm asking anyhow.

No, I actually do. Because I've addressed this question with others, so I'm happy to do it in this format. Clearly when we completed the $60 million raise last November, we did share with you and with others a belief that at $60 million we had sufficient capital to grow the balance sheet $2 million over the next 5 years without needing to raise additional capital on the organic growth strategy. I think we also talked about--

I think I remember a slide to that effect.

Absolutely. Absolutely. And we also talked about the goal of conceivably growing to $5 billion over the next 5 years with the potential for share issuances to target institutions or potentially some cash transactions or combination of cash and stock. What we have found since then is for a lot of reasons in the market an increased interest on the part of some selling shareholders and selling institutions to have a larger percentage of cash in their proposals. And that acquirer's that had the capacity to provide cash and stock seemed to be better suited to complete transactions. An example of that was Gateway, where we're going to be using about $17 million of cash to complete that transaction, $14.5 million as an initial payment -- or up to $14.5 million as an initial payment, $2.5 million later.

We also thought, Arthur, that given what we saw in the M&A arena, and sort of other stuff that I really can't speak to at length in this call, that it would have been prudent for the Company to raise a relatively small level of additional capital at the time we did it. And I believe, and I wouldn't have moved forward with this if I didn't believe it, I believe that the level of EPS dilution, short-term EPS dilution that we take as a result of that offering, should be more than offset by added EPS accretion from subsequent transactions. Otherwise, it would have been fool hearted.

Fair enough. And what about the future?

I think that we have no current plans to raise additional capital at this time and have really enough capital today to grow sort of $800 million in relatively short order, so that's a nice position to be in. I would not anticipate subsequent equity offerings. If they were to come, they would come contemporaneously with an acquisition.

Fair enough, Greg.

Is that-- I want to be sort of totally transparent. I really appreciate the question, Arthur.

Thank you very much. Bye.

And there are no further questions.

Well once again, I want to thank you all for your investment in First PacTrust Bancorp and the support that many of you have given to myself and the Management team. We are very excited about the future of this organization as we continue to execute on both our organic strategy and our acquisitive strategy. While the markets around us continue to be frothy with turbulence, we think it creates opportunities for companies like ours to seize the day and to create something of great value. So we thank you again. And as always, we look forward to receiving your questions or comments throughout the month. Have a wonderful day.

This concludes today's First PacTrust Bancorp August 1, 2011 second-quarter earnings investor conference call. You may now disconnect.