Banc of California Inc (BANC) 2012 Q1 法說會逐字稿

Good afternoon. My name is Vernell and I will be your conference operator today. At this time, I would like to welcome everyone to the first-quarter earnings 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). Thank you, Mr. Herrin, you may begin your conference.

Yes, thank you very much. Good morning, everyone and thank you for joining us for today's first-quarter 2012 earnings conference call. With me today on the call is First PacTrust Bancorp's President and Chief Executive Officer, Gregory Mitchell. Also on the call and available to answer questions later is our CFO, Marito Domingo.

Today's conference call is being recorded for replay via phone and a copy of the 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 based on our best view of the world and our businesses 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 8-K filing also apply to our comments today. That document is available on our FirstPacTrustBancorp.com investor relations website as are other 8-Ks filed regarding investor presentation materials and other matters. A PDF file of the investor presentation slideshow 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 a Q&A at the end of this presentation and now I'll turn it over to our President and CEO, Greg Mitchell.

Thank you very much, Richard and thank you all for joining us on our first-quarter 2012 conference call. Again, as always, I want to thank all of our investors, research analysts and others for their interest in First PacTrust Bancorp. We hope you are as proud of our achievements as we are. And we hope that you share our optimism for the future of First PacTrust Bancorp.

More broadly, our strategy here at First PacTrust Bancorp was to become the bank of choice in Southern California, a consolidator of choice of Southern California and to generate qualitative earnings, which we believe will result in outsized share prices in the coming years.

Our goal in achieving that was on multiple fronts. First, we wanted to focus on margin expansion. Second, we wanted to focus on the construction of a fortress balance sheet. Third, we wanted to demonstrate to the market that we could continue to generate high-quality loans organically while also positioning the bank to benefit from acquisitions. And I am pleased to say that the bank has made solid progress on all fronts in the first quarter of 2012.

While earnings were lower than I think some would have expected and higher than others, Bancorp generated roughly $400,000 in net income with roughly zero income available to common shareholders as a result of the payment of dividends on our SBLF funds. Those levels were slightly higher than consensus and there were a number of noise items in it, which, if you excluded, would have contributed to about $1.2 million in earnings for the first quarter. Those numbers were generally ahead of consensus.

Importantly, some core fundamentals to franchise development and earnings became even more evident in the first quarter of 2012 and I hope to highlight them during this call. While many institutions throughout the United States continue to show anemic loan growth and in fact, balance sheet shrinkage, PacTrust was successful in generating about $84 million in asset growth and we reached $1.1 billion in total assets by the end of the quarter. Pretty substantial quarter-over-quarter and year-over-year growth. I am pleased to say that the production team in Los Angeles has continued to exceed expectations, as have our branch folks as they continue to grow deposits throughout the branches.

$57 million in organic production with a yield of 505 basis points. So we are now at roughly $828 million in loans, 23% year-over-year growth, impressive in my mind on any count. Our retail deposit gathering network generated $68 million of deposits in Q1 and a 68 basis point cost of funds. Importantly, while the deposit costs remained relatively flat, the bank was successful in lengthening the duration of a number of its CDs. So in periods where rates rise, the bank should see the benefit of that in future periods. So very pleased with what is happening out at the retail banking network.

A combination of that strong loan growth and continued control of our funding costs contributed to a 27 basis point or 7.6% increase in our net interest margin. That compares favorably to trends and continues to help us as we march towards our goal of a 4% net interest margin on a consistent basis.

As it relates to cleaning up the legacy portfolio, remarkably PacTrust reduced total delinquencies to just $7.1 million, or 0.85% of total loans. That is a 62% reduction linked quarters and an 87% reduction from March 31, 2012 to 2011. I am particularly impressed with the progress that our credit team has made in dealing with legacy assets while continuing to board very high-quality loans on a prospective basis.

Non-accrual loans continued to decline. Classified loans declined by 21%. REO declined by $13 million and importantly, that REO decline, while the bank was able to recognize about a $300,000 recovery or gain on sale of that REO, which is a good indicator in my mind of the bank's success in properly evaluating -- excuse me -- properly valuing these REO assets.

Our GVA grew largely in support of our loan production while the total ALLL declined as a result of a change in our call report filings from an OTS format to an OCC format. For those who are not familiar with that, under OCC guidelines, specific valuation allowances are essentially not permitted and banks simply charge off a loan rather than establish a specific valuation allowance. So we had plenty of capacity to do that and are quite comfortable with the level of our reserves at this stage.

In addition, we continue to make good progress on the closing of our integration with Beach Business Bank and Gateway Business Bank and I am pleased to report that both companies are now profitable and the investment thesis in those companies remain sound. And I'll spend a little more time on that as we go through the deck.

Again, as I discussed earlier, roughly $377,000 in net income, pre-tax pre-provision of about $1.1 million. The margin rose, as we discussed. We had a $400,000 increase in labor expense during the first quarter, largely driven by change in control payments to former executive officers with some additional expense for de novo branching and other activities.

Our pre-tax pre-provision earnings has good momentum and is definitely in line with our plan and importantly, we are generating those levels of earnings while continuing to support a number of infrastructure expenses and absorbing a number of the M&A charges that were planned in connection with the acquisitions of Beach and Gateway Business Banks.

So turning to lending and now I am on page 4 of the investor deck. Year-end balances increased by roughly $52.7 million, significant progress. Importantly, we were able to generate that production without offering concessions on price, so an average coupon of 505 basis points. In the realm of innovation, the bank purchased a portfolio of roughly $19 million of performing and re-performing single-family residential loans at a relatively steep discount to their market value and at a steep discount to their BPO. We are pleased with the way this portfolio has performed and continue to look for opportunities to help the bank and quite frankly help consumers throughout the United States as they deal with opportunities to reposition their residential housing debt.

Non-accrual loans, $18.3 million. Importantly, included in that non-accrual loan is just $2.6 million of loans that are truly non-performing. So of those $18.3 million of non-accruals, roughly $15.7 million is performing under their contractual terms, but has been placed on non-accrual as a result of those loans being on a cost recovery basis, TDR status or some other means. So very pleased with the production there.

SBLF, $12.9 million in new SBLF production in the quarter at a yield of 5.51%. So we are getting good volume and good pricing. Thus far, we have generated just under $20 million and continue to be on target for hitting our completion of our SBLF bogey by the end of the second quarter of 2012. As a reminder, SBLF repricing is lagged by one quarter, so investors will not see the full benefit of that 1% rate until the third quarter of 2012.

Deposits, again very impressed with what has happened out of our retail banking network. Very good growth in deposits. The de novo offices added about $25 million in the quarter, so our investment thesis there of taking some short-term hits from an earnings perspective to create long-term value from a franchise perspective are paying off. And again, they are performing ahead of plan. I have discussed the cost of funds already, discussed the maturity of the CDs already.

It is important to note that as we focus on the change in mix within our network, we opened 951 new consumer and business checking accounts in Q1. Those are very significant numbers in my mind to prove the thesis that the businesses that are going out and aggressively seeking to take advantage of the destabilization that exists in the market today are going to be successful. And again, a tip of the hat to Gaylin Anderson, our Head of Retail Banking and the entire team for their efforts to go out and get the business when others seem to be sort of focusing on other items. So good for them.

We have added a chart on page 6 of the deck looking at activity within our de novo network. Interesting, you will see that, since March of 2011, La Jolla has generated roughly $32 million in deposits. That is our first de novo. You can see strong growth in the rest of the de novos that we have added throughout the Company. Our target for many of these de novos was an 18-month breakeven point. We think we will outperform that based upon the level of deposit growth that has come into those offices.

Many have questioned why we are out opening de novo branches when there is an abundance of cash in the market. Our view is that there is real value to be created from a franchise perspective by going out and opening offices, generating more stable funding costs, which will help us when rates rise and will help us immensely when the market once again values core deposits. So we certainly don't like the earnings drag, but we are happy to make the investment because we think we will get strong returns on a go-forward basis.

Flipping to page 7 of the deck, our net interest margin again expanded, largely driven by changes in the mix of loans and increased production there, so 28 basis points of additional interest income from lending. Average earning assets grew $85 million, interest-bearing liabilities again $88 million. Cost of funds remained flat at 68 bps. Importantly, if you look at year-over-year 2011 to 2012, our net interest margin has now recovered to 2011 -- Q1 2011 levels, but yet the risk content within our portfolio has changed markedly to where this is now essentially a AAA securities portfolio and a high-quality loan portfolio with low levels of delinquencies. So that is a qualitative margin that I think people should take note of.

Non-interest income, not a lot of activity there. The bank continued to make progress in sales of its alternative investments, merchant processing activities, payroll activities as we begin to go out to small businesses throughout Southern California and begin to harvest some of the opportunities that exist within our branch network. We saw a modest level of gain in the first quarter and expect to see more in subsequent quarters.

We chose to sell one security that had been scheduled for -- expected to be downgraded and took a small loss in connection with that security of roughly $39,000. Non-interest expense continues to be high as we make investments in the future. Non-interest expense declined by roughly $3 million from year-end. A lot of that was attributable to OREO and foreclosure costs that we absorbed in the fourth quarter.

We added additional staff to the bank in the first quarter, largely in support of our retail banking network. We also had some temporary staffing in connection with our relocation of our corporate facilities from Chula Vista to Irvine. The bank in prior periods made substantial use of outside auditors, consultants and others to perform services performed by employees. As we move into a high-growth platform, it has become clear to us and clear to our regulators that the bank is better off financially and from a security perspective using internal staff.

So while you see an increase in our salary expenses, we expect that you will see a reduction in our consulting and professional services fees and quite frankly, we expect to see very good returns from the new labor that we have added to the bank. And as I discussed earlier, OREO expenses have declined relative to fourth quarter of last year.

If you look at slide 10, I am very proud of this. Significantly improved credit metrics. You are looking at, particularly at the shaded area for Q4 -- should be Q1 '12 data -- should show $3.7 million in delinquencies in the 30 to 59 level with just $2.6 million in the 90 day. Very substantial reductions from the prior quarter and very substantial reductions from the prior period. We believe that the proverbial pig has made it through the python and expect to see more stability in the loan portfolio in future periods.

I am also pleased with the level of NPA to assets and as discussed earlier, that NPA to assets number of 2.9% includes a significant level of accruing loans that are classified as non-performing or non-accrual, but are performing under their contractual terms. So the absolute level of non-performers is in my mind very, very low.

Again, from a credit quality perspective, some levels of charge-offs, largely resulting from the change in accounting, from an OTS to an OCC framework. So very pleased with the direction of credit quality shown on page 11.

Page 12 of the deck, we call your attention to the big changes in the SVA. Notably, you can see that ALLL declined from $12.8 million at the end of Q4 to $11.2 million at the end of Q1 2012. Substantially all of that was attributable to the change in classifications. The bank did, as mentioned earlier, increase the level of GVAs in support of new loan production and further refinements of our qualitative factors within our FAS 5 methodology. We are very comfortable with the level and of our reserves at this stage and very comfortable with the methodology that is now in place at PacTrust.

Finally, as it relates to OREO, this would be on page 13 of your deck, the bank sold 10 OREO. We now have a total of 20 assets, five of which are at the holding company. We continue to make good progress in reducing the levels of OREO and look forward to continuing to convert those into earning assets.

As it relates to capital, PacTrust continues to maintain very strong levels of available capital at the subsidiary level and at the holding company level. We have sufficient capacity to support the integration of Gateway Business Bank into the bank while maintaining the high capital levels and support the integration of Beach Business Bank into the holding company while maintaining strong capital and liquidity levels. Book value at March 31 was roughly $13.04.

Page 15 of our deck, we summarize a number of key items and initiatives. The Beach acquisition is on track. We are presently awaiting FRB approval, which we expect to be received shortly. Unfortunately, moving from a single regulator of OTS to a multiple regulator of OTS, OCC, FRB and now with Beach, the State Banking Department has added a bit of complexity.

Also, quite frankly, and to the credit of the regulators, they are still finding their way on how to get through the new application processes and protocols that are coming out of Frank-Dodd. Since PacTrust will become a bank holding company as a result of the acquisition of Beach, the Fed is wanting to do some added diligence on Beach and PacTrust and I think that is largely complete.

The Gateway merger is awaiting OCC approval. Recently, the OCC granted an extension of time to allow them to process the application. There are some issues as it relates to activities at Gateway that we are expecting to be resolved shortly. So we continue to expect that transaction to close promptly. Expect it to be mid-2012 and we continue to expect Beach to close this quarter.

Importantly, both Gateway and Beach generated positive core earnings. Gateway showing very good earnings out of its mortgage banking activity, which, if you recall, that was our investment thesis for that activity. Beach has continued to show very good earnings out of its core banking facility with a very strong net interest margin, a solid performance within its loan portfolio. So we continue to view Beach as an outstanding platform for PacTrust to enter the C&I and SBA lending arenas.

From a liquidity perspective, we continue to have sufficient on-balance sheet liquidity to fund our daily activities and all of our planned M&A work. As many of you noted, we completed a $33 million gross, $31.2 million net sale of senior notes last week with the assistance of a number of underwriters that was I think largely well-received by the market. And to the best of my knowledge was the first time a small community bank had been successful in completing an offering of this type.

On a tax-affected basis, we are very happy with the cost of that debt and we believe that the earnings that should be coming from Bancorp and its subsidiaries will justify that expense and cause that to be an accretive addition to our overall funding.

And then finally at the holding company, we have securities now of about $101.5 million or 9.3% of assets. A very important achievement in the first quarter of this year and I am personally very pleased and honored with this is that the OCC chose to lift the MOU that existed between First PacTrust -- excuse me -- Pacific Trust Bank and the Office of Thrift Supervision.

For those of you who followed our filings, that MOU related to ALLL methodology, concentration risk, investment portfolio, a number of items. We have been regulated -- or excuse me -- been examined many times and found to be in satisfactory condition by the Fed and by the OCC. Those findings help us obviously as we continue to execute our strategy of growth from an organic perspective and an M&A perspective.

So finally to summarize the quarter, $84 million in asset growth, qualitative growth, very happy with what was in there, strong organic growth, expansion in the NIM, delinquencies declined. We built for future earnings, maintain a strong capital position, maintain a very strong liquidity position and obviously have a solid relationship with our regulators while, all the while, making good progress on the integration of two important companies.

Some have asked in prior meetings whether or not PacTrust is continuing to focus on other M&A activity while it waits for these two institutions to close. The answer to that is yes. We continue to receive a fair amount of reverse inquiry from other parties and hope to continue to build our franchise both organically and acquisitively in the months and years to come. So with that, operator, I will open it up for questions and I look forward to hearing from you all.

(Operator Instructions). Joe Gladue.

Good morning.

Good morning, Joe.

First off, just wondering if you could update us on how much is left in potential change-in-control exposure?

Yes, we still have two employees that continue to hold change-in-control contracts. I am not expecting a change with either of those employees. I would guess, Joe, and this is sort of an educated guess, that it is about $0.5 million.

Okay. I wanted to ask about the, I guess, liquidity on the balance sheet. You still have, I guess, still building some of that up and you, of course, just went out and did the debt offering. And I guess in relation to loan purchases, cut down on purchases this quarter. Do you think you will have enough loan origination volume to soak some of that up or are you still going to be growing liquidity over the next quarter or two?

No, we have plenty of loan growth. What we have forecasted to the Street and to our regulators is 20% year-over-year growth organically and that is -- we will be done with our own resources. We don't really need to do purchased assets. Our team has been very successful in building a strong organic pipeline.

So the mix, if you think about it for modeling purposes, is sort of 20% cash and securities, 80% loans. We also have sufficient cash at the holding company to pay for the acquisitions. Since the Beach -- our stock is presently trading below $13.50 a share, we needed to be prepared to use cash for -- cash out of the Beach shareholders. That will be roughly $35 million.

All right. And finally, you did mention that you thought the SBLF rate would -- you'd get the full benefit of that in the third quarter. Will the second quarter be somewhere in between that 5% and the full benefit 1%?

Yes, it is below 3.5% now. I don't recall the exact number.

Okay. I guess that was it.

Andrew?

Hi, sorry, sorry. I couldn't hear my name called out. Good quarter, guys. I have got a couple questions for you. First off, the loans that you purchased, I mean a 9.5% yield is pretty strong. I am just kind of curious, like who would want to give up a loan like that? Because it is so tough to grow assets right now, why is this bank even selling loans?

Well, there has been a fair amount of displacement in the mortgage market over the last couple of years and some of the large banks in the United States have taken very substantial discounts on underwater mortgages and have those loans as classified assets on their books. So they are looking for opportunities to reduce some of their exposure to those loans and there is the capacity for people with the sort of systems and perhaps a little bit of expertise to buy these performing and re-performing loans.

The yield is coming not from the stated yield on the loan itself, but largely coming from some of the accretion of discount on the way the loans are actually purchased. So we would be happy to give you sort of lots of data on how this program is structured and how PacTrust realizes that yield.

So that is kind of what I assumed, but I am also curious, like how likely do you think you are to purchase more of these given that just residential mortgages are still close to 70% of the loan portfolio?

Well, I think we'd be very selective, Andrew. Also in the realm of sort of concentration risk, we wouldn't want that asset class to probably go above in the aggregate of $75 million. So if you looked at it as sort of total size, it would be somewhere between the $20 million we have now and $75 million. And there is doubt as to whether we would get to the higher end of that range given that the opportunity to buy with the credit metrics that we are looking for has waned as more people have jumped into this market.

PacTrust, when they look at those types of portfolios, is very, very sensitive to buy it at an appropriate level to BPO and we are seeing the bids in the market for those types of pools widen quite substantially. And we are not going to chase the pools at the risk of taking credit loss.

Got you. That is great information. Thanks for taking my questions.

(technical difficulty).

Hey, Don.

Hey, Greg. I want to follow up a little bit on the loan purchases a little further. Do you have any like a weighted average LTV or location information on the loans purchased?

On the single families?

Yes.

It is really throughout the United States. Pretty heavy concentrations in California and Florida. And the way the program is designed is that 100% of the portfolio is reappraised. Essentially BPOs are done on every property. There is physical site visits to every property and the bank is buying these loans or buying the credits at anywhere from 65% to 72% of BPO. So you have got a lot of credit support and you have very long-term payment histories with borrowers.

I think many of us on the call may know friends who are in homes that are underwater, but we also know that those friends are going to stay in their houses for extended periods because they have got the capacity to pay. Nonetheless, those loans are classified as other institutions. So we are seeing opportunities to buy those types of relationships.

Okay, thanks. And then on the Gateway transaction, when you say mid-2012, does that place it primarily third quarter?

We continue to hope for a second-quarter close. We are in a regulatory abyss and I can't predict when they will finally issue that approval. I would hope it's second quarter. We also have a 15-day waiting period with DOJ on once the OCC has finally issued their approval. So I don't mean to be evasive. It's just one of those things that I don't control, Don.

Yes, okay. And then I guess my last question, in terms of the extension of CDs, what types of term and rate are you offering on those?

Marito, do you want to cover that?

Yes, we have gone from about 12 months out to about 48 months, staying on the 48-month CDs somewhere between 1.2% to 1.4% depending on the time of day. So just trying to extend out some of the maturities as we see the CRE loan production come in with roughly about a five-year term.

Okay, great. Thank you very much.

Bryce Rowe, Robert W. Baird.

Hey, good morning, Bryce.

Hello, Greg. How are you?

Great.

A couple questions for you. Could you all talk about the mix of new loans being added? Obviously, you have got the purchased single-family, but the balance of the loan growth I assume is largely commercial real estate.

Correct. It is all commercial real estate. So from a proportional perspective, it is about one-third single-family, two-thirds CRE coming in the portfolio. The CRE is coming in at levels sort of 5.5% coupons in general with 0.5 to 0.75 of a point. The yield on the total portfolio is being diluted from some of the SFR that is coming in in the sort of 4%s from a yield perspective.

And Greg, any commentary around competitive pricing for the commercial real estate loans? As you guys have been more active in that area for the last six to nine months, can you just talk about how competition has gotten more intense or not?

Competition has become much more intense. We are seeing financial institutions and other intermediaries offering very long terms at ridiculous rates. We saw somebody last week take a deal from us. They did a 10-year note at 3 7/8. That is just, to my mind, insanity. While that is a nice spread to the 10 year, it is not someplace that we want to go.

We are doing another study within the bank of price and credit movements within our market. We expect to have that done within a couple of weeks. Our growth goals for CRE are not horribly aggressive for 2012. We are looking at a couple hundred million dollars in production. What we have been doing with Chang's and Matt's leadership is looking at a lot of deals and finding those transactions where we can compete and get paid for the value that we are delivering through structure, speed or some other activity and just losing the low yield business.

So just to put a sharper point on that, Chang and his team looked at in excess of $1 billion in loans last year in order to produce roughly $170 million in volume. So not a big pull-through rate, but they were paid for those efforts by getting what I'd characterize as strong credits with strong pricing.

Okay. And what is the average size of the new CRE loans coming into the bank?

I would say, on average, it is probably $3 million, $4 million.

Okay, okay. One last question, kind of switching gears, with the Beach transaction likely being a cash transaction, obviously, you will have a little bit more pressure on tangible common equity, tangible assets. Any thoughts around the dividend, the cash dividend and where it sits today and any possible changes to that cash dividend?

Not at this stage. It is something that the Board is looking at and that is -- that will be a decision made by the Board at the holding company. We understand some of the concern in the market for sort of a high-growth company paying dividends. And some of the word that has come out from others is why are you paying a dividend of 4%; you may be able to do something less. We are aware of all that and I think are looking at the topic. But I don't want to suggest and I don't want to leave the call suggesting that we are going to be immediately reducing the dividend or eliminating the dividend because that is not -- that is not something that -- we haven't reached that conclusion yet.

All right, thanks, Greg.

Kevin Reynolds, Wunderlich Securities.

Kind of following up on the loan question that Bryce just asked. You talked about CRE loans. Are you starting to see though like a broadening out at all or is the story still share movement? Are you seeing new demand out there in the marketplace or signs that that might be picking up across the commercial book?

We are -- well, we are seeing a little more demand on the classic commercial side. That is not an area that PacTrust has been competing in heavily in the past. Now there, I am talking about C&I. From a CRE perspective, yes, there continues to be a pretty good volume of loans that are being refinanced just because they have reached maturity with their other lenders. So we are seeing activity there, we are seeing probably more buyers come into the market now wanting to pick up those assets, both domestic buyers and foreign buyers. So there is clearly more activity. I don't know if that's a response to your question or not, Kevin.

I think that helps a little. The next question I wanted to ask, with the two mergers pending and I guess expected to close, one -- well, I guess over the next few months, let's say, your recruitment plans -- I know that's obviously a big part of the legacy franchise, building it out for the future. Do you have any thoughts about slowing that down or do you just sort of power through that with these two acquisitions about to close? And how do you look as you go towards I guess the end of this calendar year?

I think we have staffed up a fair amount to deal with the integrations. As we look at our 2012 staffing plans, we don't see a lot of additional recruitment efforts outside of perhaps a couple more branches coming into 2012. So I think we have got the right people in our audit function and our call center function. Yes, we may add some additional people to finance to deal with the more complex regulatory reporting requirements that we are now facing, but I would not expect to see a material change in recruitment. We are also looking to leverage the talent of people that exist at Beach Business Bank and Gateway Business Bank as we continue to grow.

Okay. What about on the line?

Executive officers?

Well, no, just out there -- the producers out on the line. Just your relationship managers and all, do you still have a pipeline of folks that you are talking to bringing over?

Yes. Our chief lending officers continue to look for strong producers. We've picked up -- we now have I think four full-time account managers that are working to build business. I am not sure that we will need to acquire additional producers in 2012 to hit our target. There is typically a lag from the point you bring somebody into the bank to the time they begin to produce their first and second loans. Many of our folks have come in within the last few months and are beginning to sort of hit their strides from a production perspective. So as we sequence out loan growth throughout 2012, we feel pretty confident that we have got the right number of bodies in place to meet 2012 objectives.

As we look towards 2013, you may see some staff adds coming in late in the year to support goals in 2013. But again, we are hopeful that we can give the staff that exist at Beach and Gateway, those great producers there, some additional tools and hope to leverage their relationships and expertise to hit the target.

Okay. Nice cover of the American Banker Magazine by the way.

Yes, I haven't seen it yet. I was told that they airbrushed out my three chins.

I was going to say you might want to go ahead and grab one real quick before it becomes a collector's item on eBay.

Yes. Thanks, Kevin.

Gary Tenner, D.A. Davidson.

Good morning, guys. Just a couple of questions. First off, on the loan purchase in the quarter, what was the timing of when that loan purchase occurred?

Early January.

Okay, that was part of the -- okay. That was January. And then just you kind of highlighted about $1.2 million I think of kind of noise expenses in the quarter. Other than the change-in-control payments, can you go into a little more detail?

I don't know that it was $1.2 million in noise. We had $1.2 million net of the -- if you excluded REO charges and the provisions, the pre-pre would have been about $1.2 million. We had probably another $100,000, $150,000 in M&A expenses, but we have some legal expenses related to the class action suit that came against Beach Business Bank. We had some legal expenses that came at us in connection with our patent infringement suit that we are at. Those are another probably $100,000. We had some temporary labor expenses as it relates to the relocation from our facilities in Chula Vista to Irvine. So a handful of expenses, but they didn't amount to $1.2 million.

Okay, I must have misunderstood then. I think you said $1.2 million would have been the number, right, which is what you just repeated a minute ago.

Right. So I guess my point is we had about $1.2 million in pre-pre and that $1.2 million I thought was pretty sound given the fact that we were able to absorb some of those other expenses.

Okay. All right, thank you for taking the questions.

Brett Villaume, FIG Partners.

I wanted to see if you could provide any additional color on the Gateway loan production and what we can expect there once that comes online.

Yes, Gateway loan production has been pretty strong. They are doing now between $80 million and $90 million a month in production out of their retail platforms. We believe that those numbers, absent some massive change in the market, should be sustainable and perhaps even enhanced. What has helped Gateway recently and helped other mortgage companies that are in your coverage universe is the spreads. The gain on sales have been better in the last couple of months than in prior periods.

Also, importantly with Gateway, they have been working aggressively to deal with some of their repurchase risk issues. So that has improved -- helped to improve profitability. What I would suggest you do, Brett, and it will be out there tomorrow, is to look at the call report data that is filed by Gateway Business Bank because it will give you a little more information on the level of production and the gain on sale.

Great, thank you. I also wanted to ask you -- I saw your classified loans were mentioned in there and it's falling to $25.5 million. Do you have a number for special mention credits?

We do. I don't have that off the top of my head. Marito or I can give you a call on that later today. It will be in the Q, which comes out in roughly a week, week and a half.

Okay, great. Well, thank you very much.

Brett Rabatin, Sterne Agee.

Hi, Greg. Wanted to also ask about Gateway. Was just curious if you expected them to benefit from HARP II and then also I was curious around you mentioned that the regulators were taking a look at some stuff they were doing. I don't know if you can provide any color around what they were exactly looking at in terms of Gateway.

I didn't catch the question on benefit from something.

HARP II.

Do you expect them to get any meaningful benefit from the HARP II program the government is running? Some of the mortgage operations I am talking to are starting to see that have an impact on their balances in terms of refi activity.

Brett, this is Marito. The folks at Gateway through Mission Hills are primarily purchase type originators. They do have some refi volume, but I would assume that they are -- they continue to show strong purchase volume. So I wouldn't see a significant pickup in their production at least based on who we know who they are. But that is all we can say sort of what we are seeing as opposed to any further activity or ramp-up. So they are primarily a purchase transaction type of shop.

Okay. And then around the other topic, just around the regulators taking a look at them, is that a standard thing or are they looking at something specific? Can you (multiple speakers)?

I think it is standard. I mean it is -- many institutions in California have had their share of problems. Gateway has previously disclosed that it had some orders. Those are being resolved.

Okay, great, thank you.

Thank you. At this time, I'm showing that we have no further questions in queue.

Well, listen, once again, I want to thank you all very much for your interest in First PacTrust Bancorp. I am disappointed that the markets have not fully appreciated the achievements that we have had at the institution as reflected in our stock price. My sense is that there is a fair amount of overhang related to uncertainty over the closing of the Beach transactions and the Gateway transactions. We are certainly doing everything we can to cause those to close in a timely fashion while at the same time preparing heavily for the successful integrations of those companies into PacTrust.

But as I step back and look at the quarter, I am pleased with the margin expansion, with the execution on our organic deposit gathering and loan gathering activities, our innovation in some of the purchased asset activity and just the general direction of quality growth within our organization. So we appreciate your support. Those of you who are shareholders in our Company, we especially appreciate your support and we take seriously our commitment to serve as good custodians for the funds that you have entrusted to us.

So again, thank you all. If any of you have further questions, feel free to contract me, Marito, Richard or any of us and we hope to respond to you in a prompt manner. Thank you again and have a great day. Bye-bye.

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