COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2013

Commitments and Contingencies Disclosure [Abstract]

NOTE 11 – COMMITMENTS AND CONTINGENCIES

In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may or may not require collateral or other security to support financial instruments with credit risk, depending on its loan underwriting guidelines.

The following summarizes the Company’s outstanding commitments:


		March 31, 2013		December 31, 2012
	(in thousands)

Financial instruments whose contract amounts contain credit risk:
Commitments to extend credit		$	162,591	$	161,395
Commercial and standby letters of credit			5,472		1,651

		$	168,063	$	163,046

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties.

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary.

The allowance for losses on undisbursed commitments was $86,000 at March 31, 2013 and December 31, 2012. The reserve is included in accrued interest payable and other liabilities on the balance sheets.

The nature of the Company’s business causes it to be involved in ordinary routine legal proceedings from time to time. Although the ultimate outcome and amount of liability, if any, with respect to these legal proceedings to which we are currently a party cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, except as described below, any resulting liability is not likely to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flow.

Nine lawsuits have been filed in the Superior Court of the State of California, County of Los Angeles by various former clients of political campaign and non-profit organization treasurer Kinde Durkee. The lawsuits are entitled (i) Wardlaw, et al. v. First California Company, et al. (Case No. SC114232) (the “Wardlaw Action”), filed September 23, 2011; (ii) Lou Correa for State Senate, et al. v. First California Company, et al. (Case No. BC479872) (the “Correa Action”), filed February 29, 2012; (iii) Committee to Re-elect Lorreta Sanchez, et al. v. First California Company, et al. (Case No. BC479873) (the “Sanchez Action”), filed February 29, 2012, (iv) Holden for Assembly v. First California Company, et al. (Case No. BC 489604) (“Holden Action”), filed August 3, 2012; (v) Latino Diabetes Ass’n v. First California Company, et al. (Case No. BC 489605) (“LDA Action”), filed August 3, 2012; (vi) Jose Solorio Assembly Officeholder Committee, et al. v. First California Company, et al. (Case No. 492855) (“Solorio Action”), filed September 27, 2012; (vii) Foster for Treasurer 2014, et al. v. First California Company, et al. (Case No. BC 492878) (“Foster Action”), filed September 27, 2012; (viii) Los Angeles County Democratic Central Committee, et al. v. First California Company, et al. (Case No. BC 492854) (“LACDCC Action”), filed September 27, 2012; and (ix) National Popular Vote, et al. v. First California Bank, et al. (Case No. BC501213) (“NPV Action”), filed February 19, 2013. Plaintiffs in each of the cases claim, among other things, that the Company aided and abetted a fraud and unlawful conversion by Ms. Durkee and/or her affiliated company of funds held in accounts at the Company. Based largely on the same alleged conduct, plaintiffs also assert claims for an alleged violation of California Business & Professions Code Section 17200 and for declaratory relief. Plaintiffs seek compensatory and punitive damages, as well as various forms of equitable and declaratory relief.

Each of the cases is pending before the same judge, who is coordinating their progress. Except for the NPV Action, the Company has answered each of the complaints in the cases in which the Company has been served, and the parties are engaged in discovery. A trial date has not yet been scheduled in any of the actions.

On September 23, 2011, the Company filed a Complaint-in-Interpleader in the Superior Court of the State of California, County of Los Angeles (Case No. BC470182), pursuant to which the Company interplead the sum of $2,539,049 as the amounts on deposit in accounts at the Company that were controlled by Ms. Durkee on behalf of the several hundred named defendants (the “Interpleader Action”). The Company seeks an order requiring the defendants to interplead and litigate their respective claims, discharging the Company from any and all liability, and restraining proceedings or actions against the Company by the defendants. The Company also seeks its costs and reasonable attorneys’ fees. The Interpleader Action has been related to the other actions, described above, and is pending before the same judge.

On June 18, 2012, the Company moved for summary judgment in the Interpleader Action. At hearings held on October 3, 2012, November 2, 2012, and January 25, 2013, the Court entered summary judgment with respect to a majority of the accounts at issue.

On November 20, 2012, a purported stockholder of the Company filed a lawsuit in connection with the proposed merger between the Company and PacWest announced on November 6, 2012. Captioned Paul Githens v. C.G. Kum, et al., Case No. BC496018, the suit was filed in the Superior Court of the State of California, Los Angeles County, against the Company, its directors, and PacWest. It is brought as a putative class action and alleges that the Company’s directors breached certain alleged fiduciary duties to the Company’s stockholders by approving the merger agreement pursuant to an allegedly unfair process and at an allegedly unfair price. It alleges that PacWest aided and abetted those breaches. The suit seeks, among other things, to enjoin consummation of the merger. On January 24, 2013, the plaintiff filed an amended complaint, adding claims that the defendants failed to disclose material information concerning the merger. On March 4, 2013, the court sustained the defendants’ demurrers to the plaintiff’s complaint with leave to amend. On March 14, 2013, the plaintiff filed an amended complaint.

On March 17, 2013, the Company and PacWest entered into a memorandum of understanding with the plaintiff in the suit regarding the settlement of the suit. In connection with the settlement of the suit, we made supplemental disclosures to the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on February 13, 2013, by filing a Form 8-K filed with the SEC on March 18, 2013. The memorandum of understanding also contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including court approval following notice to the Company’s stockholders. In the event that the parties enter into a stipulation of settlement, a hearing will be scheduled at which the Superior Court of the State of California will consider the fairness, reasonableness and adequacy of the settlement. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the proposed merger, the merger agreement and any disclosure made in connection therewith, pursuant to terms that will be disclosed to the Company’s stockholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiff’s counsel will file a petition in the Superior Court of the State of California for an award of attorneys’ fees and expenses to be paid by the Company or its successor. The settlement will not affect the consideration that the Company’s stockholders are entitled to receive in the merger. There can be no assurance that the parties will enter into a stipulation of settlement, or that the court will approve any proposed settlement. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.

Merchant card processing guarantees represent the Bank’s indirect obligations in connection with the processing of credit and debit card transactions on behalf of merchants. The EPS division provides transaction processing services to various merchants through an independent third party vendor (“ISO”) with respect to credit and debit cards and has potential liability for card transaction processing services. The nature of the liability arises as a result of a billing dispute (“chargeback”) between a merchant and a cardholder that is ultimately resolved in the cardholder’s favor. The merchant is liable to refund the amount to the cardholder. In general, if the ISO is unable to collect this amount from the merchant, the ISO bears the loss for the amount of the chargeback refund paid to the cardholder. If the ISO and merchant are insolvent or incapable of paying the chargeback, the Bank bears the risk and responsibility to pay the chargeback.

Our risk of loss is mitigated as the cash flows between the Bank and the merchant are settled on a net basis with the networks (Visa, MasterCard and Discover) directly through the Bank, and the Bank has the right to offset any payments with cash flows otherwise due to the merchant. Additionally, the Bank retains cash reserve accounts on balance to offset risk for merchants and the ISO. To further mitigate this risk the Bank may delay settlement. The Bank may require at any time an increase to reserve account balances. The Bank also maintains an insurance policy of $10.0 million for losses due to fraud.

The Bank’s maximum potential contingent liability related to merchant card processing services is estimated to be the total volume of card transactions that meet the requirements to be valid chargeback transactions at any given time. However, the Bank believes that the maximum exposure is not representative of the actual potential loss exposure based on the Bank’s historical experience. The Bank assesses the probability and amount of its contingent liability related to merchant card processing based on the financial strength of the ISO, the extent and nature of unresolved charge-backs and its historical loss experience. For the three months ended March 31, 2013 and 2012, the Bank incurred no losses related to merchant card processing activities.

Prepaid card services guarantees represent the Bank’s indirect obligations in connection with the processing of prepaid card transactions on cards issued by the Bank. The EPS division provides card issuing and sponsorship services through various third party service providers (“Program Managers”), who are considered third-party affiliates of the Bank, with respect to various prepaid card programs and has potential liability for prepaid card processing services. The nature of the liability arises from possible non-compliance with legal and regulatory requirements related to the prepaid card programs. The prepaid card programs are subject to federal, state and local laws and regulations including anti-money laundering laws, escheatment laws, privacy and safeguard laws, banking regulations and consumer protection laws. These laws are continuously evolving and sometimes ambiguous or inconsistent, and the extent to particular practices of the Bank and its Program Managers is at times unclear. Any failure to comply with applicable law, either by us or our Program Managers could result in restrictions on our ability to provide our products and services, as well as the imposition of civil fines, restitution to customers and other penalties.

If the Bank is subject to monetary losses, such as payment of restitution to prepaid card customers, related to prepaid card services, the contracts between the Bank and the Program Managers require the Program Managers to provide indemnification to the Bank. However, based on the financial strength of the Program Managers or other factors, the Bank may potentially be liable for the payment of the fines or penalties because we are the issuing bank of the cards. If a Program Manager is required to pay restitution to its customers, based on the financial strength of the Program Manager or other factors, the Bank may potentially be liable for the payment of the restitution because we are the issuing bank of the cards.

The Bank assesses the probability and amount of its contingent liability related to prepaid card services based on the financial strength of the Program Managers, the extent and nature of known violations of laws and regulations and historical trends in loss experience. The Company requires the Program Managers to maintain a specific cash reserve accounts on deposit the Company to mitigate risk. The Bank may require at any time an increase to reserve account balances. The Bank also maintains an insurance policy of $10.0 million for losses due to fraud. For the three months ended March 31, 2013 and 2012, the Bank incurred no losses related to prepaid card services.

- Definition

The entire disclosure for commitments and contingencies.

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+ Details

First California Financial Group, Inc. 10-Q