ITEM 1. BUSINESS
General
First Community Bancorp (individually and on a consolidated basis, where appropriate, the "Company") is a California corporation registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company's principal business is to serve as a holding company for its banking subsidiaries. As of December 31, 2001, those subsidiaries were Rancho Santa Fe National Bank ("Rancho Santa Fe"), First Community Bank of the Desert ("First Community") and First Professional Bank, N.A. ("First Professional"). On January 31, 2002, the Company acquired Pacific Western National Bank ("Pacific Western"), and combined Pacific Western, First Professional and First Community under the name "Pacific Western National Bank." On March 7, 2002, the Company acquired W.H.E.C., Inc. ("WHEC"), the holding company of Capital Bank of North County ("Capital Bank"). At the time of the merger, Capital Bank, WHEC's sole subsidiary, was merged into Rancho Santa Fe. Pacific Western and Rancho Santa Fe are referred herein as the "Banks". Discussions about
the Banks as of and for the periods ended December 31, 2001 refer only to Rancho Santa Fe, First Community and First Professional.
Rancho Santa Fe, a federally chartered commercial bank organized in 1982, is a community bank serving the commercial, industrial, professional, real estate and private banking markets of San Diego County. In May 2000, the Company acquired both Rancho Santa Fe and First Community. First Community, a California chartered commercial bank organized in 1980, was a community bank established to serve the commercial, industrial, professional, real estate and private banking markets of San Bernardino and Riverside Counties. In January 2001, the Company acquired First Professional, a federally chartered commercial bank serving Los Angeles County.
The Banks are full-service community banks offering a broad range of banking products and services including: accepting time and demand deposits, originating commercial loans, consumer loans, real estate and construction loans, Small Business Administration guaranteed loans ("SBA" loans) and mortgage loans and making other investments. The Banks' loans are primarily short-term and adjustable rate. At December 31, 2001, the gross loans of the Banks totaled approximately $502,090,000 of which approximately 49% consisted of commercial loans, 49% consisted of real estate loans and 2% consisted of consumer and other loans. Special services and requests beyond the lending limits of the Banks can be arranged through correspondent banks.
The Company, through the Banks, derives its income primarily from interest received on real estate loans, commercial loans and consumer loans and, to a lesser extent, on fees from the sale of SBA loans originated, interest on investment securities, fees received in connection with loans and other services offered (including SBA loan servicing), and deposit services. The Company's major operating expenses are the interest it pays on deposits and borrowings, salaries and general operating expenses. The Banks rely on a foundation of locally generated deposits. Management believes it has a relatively low cost of funds due to a high percentage of low cost and noninterest bearing deposits. The Company's operations, like those of other financial institutions operating in California, are significantly influenced by economic conditions in California, including the strength of the real estate market, and the fiscal and regulatory policies of the federal government and the regulatory authorities that govern financial institutions. See "-Supervision and Regulation."
The Company is committed to maintaining premier, relationship-based community banks in Southern California which serve the needs of small to medium sized businesses and the owners and employees of those businesses. The strategy for serving the Company's target markets is the delivery of a finely-focused set of value-added products and services that satisfy the primary needs of the Company's customers, emphasizing superior service and relationships as opposed to transaction volume.
The Company operates in one business segment: banking.
Strategic Evolution
First Community Bancorp
The Company was organized on October 22, 1999 as a California corporation for the purpose of becoming a bank holding company and to acquire all the outstanding capital stock of Rancho Santa Fe.
First Community Acquisition
On May 31, 2000, the Company completed its formation and combined Rancho Santa Fe with First Community as its wholly-owned subsidiaries. Shareholders for both banks approved the transaction at their respective Shareholder Meetings held on May 31, 2000. Under the terms of the merger agreement, each shareholder of First Community received 0.30 shares of Company common stock for each share of First Community common stock. Each Rancho Santa Fe share was exchanged for one share of Company common stock. At the same time as completion of the merger, the Company's
common stock was listed on NASDAQ under the symbol FCBP. The Company accounted for the merger as a "pooling-of-interests."
The merger created a $318 million bank holding company operating in the markets of Northern San Diego County and the desert communities of the Coachella Valley and Morongo Basin. Each bank operated under its own name with Rancho Santa Fe having branches in Rancho Santa Fe, San Diego's Golden Triangle, Escondido and Carlsbad. First Community had branches in Palm Springs, Indian Wells, Cathedral City, Yucca Valley and Twenty-nine Palms.
First Professional Merger
On January 16, 2001, the Company acquired Professional Bancorp, Inc. ("Professional") and its wholly-owned subsidiary, First Professional. Shareholders of Professional received either $8.00 in cash or 0.55 shares of Company common stock for each share of Professional common stock. Professional shareholders had the option to choose either cash or stock consideration. The purchase price received by shareholders of Professional totaled approximately 504,747 shares of Company common stock and approximately $8.9 million in cash, resulting in a total purchase price of approximately $16.3 million.
First Charter Acquisition
On October 8, 2001, the Company acquired First Charter Bank, N.A. Shareholders of First Charter received 0.008635 of a share of Company common stock for each share of First Charter common stock. Approximately 661,609 shares were issued in this acquisition, resulting in a total purchase price of approximately $14.2 million. First Charter was merged into First Professional with First Professional as the surviving entity.
Pacific Western Acquisition
On January 31, 2002, the Company acquired Pacific Western. The shareholders and option holders of Pacific Western were paid approximately $36.6 million in cash. Upon completion of this acquisition, Pacific Western and First Community were merged with First Professional Bank. The resulting bank will operate as Pacific Western National Bank and will be headquartered in Santa Monica, California.
W.H.E.C., Inc. Acquisition
On March 7, 2002, the Company acquired WHEC, the holding company of Capital Bank of North County. The Company issued 1.1 million shares of its common stock in exchange for all of the outstanding common shares and options of WHEC. At the time of the merger, Capital Bank, WHEC's sole subsidiary, was merged into Rancho Santa Fe National Bank. As of March 7, 2002, Mr. Robert Sporrer, former Chairman of WHEC, became a director and Chief Executive Officer of Rancho Santa Fe.
As of December 31, 2001, the Company had assets of approximately $770 million. As of March 7, 2002, the Company is approximately $1.2 billion in assets and has two wholly-owned banking subsidiaries, Rancho Santa Fe National Bank with eight branches in San Diego County, and Pacific Western National Bank with sixteen branches in Los Angeles, Orange, Riverside and San Bernardino Counties.
Management Changes
In October of 2001, the Company's Chief Financial Officer, Arnold Hahn, unexpectedly passed away. In the interim, Matt Wagner, the Company's President and Chief Executive Officer has acted as Chief Financial Officer. On April 1, 2002 Lynn Hopkins will assume the responsibilities as Chief
Financial Officer of the Company. Also on April 1, 2002, Suzanne Brennan will join the Company as Executive Vice President and Manager of Operations and Systems.
Business of the Company
Banking Business
The Company, through the Banks, provides banking and other financial services throughout Southern California to small and medium sized businesses and the owners and employees of those businesses. The Banks offer a broad range of banking products and services, including many types of business, personal savings and checking accounts and other consumer banking services. The Banks originate several types of loans, including secured and unsecured commercial and consumer loans, commercial and residential real estate mortgage loans, SBA loans and construction loans. The Banks' loans are primarily short-term and adjustable rate. Special services or requests beyond the lending limits of the Banks can be arranged through correspondent banks. The Banks have a network of ATMs and offer access to ATM networks through other major banks. The Banks issue MasterCard and Visa credit and debit cards through a correspondent bank and are also merchant depositories for cardholder drafts under Visa and MasterCard. The Banks can provide investment and international banking services through correspondent banks.
The Company, through the Banks, concentrates its lending activities in three principal areas:
(1) Real Estate Loans. Real estate loans are comprised of construction loans, miniperm loans collateralized by first or junior deeds of trust on specific properties and equity lines of credit. The properties collateralizing real estate loans are principally located in the Company's primary market areas of Los Angeles, San Bernardino, Riverside and San Diego counties in California and the contiguous communities. The construction loans are comprised of loans on residential and income producing properties that generally have terms of less than two years and typically bear an interest rate that floats with the prime rate or another established index. The miniperm loans finance the purchase and/or ownership of income producing properties. Miniperm loans are generally made with an amortization schedule ranging from fifteen to twenty-five years with a lump sum balloon payment due in one to ten years. Equity lines of credit are revolving lines of credit collateralized by junior deeds of trust on real properties. They bear a rate of interest that floats with the prime rate and have maturities of five years. From time to time, the Company purchases participation interests in loans made by other institutions. These loans are subject to the same underwriting criteria and approval process as loans made directly by the Company. The Banks' real estate portfolio is subject to certain risks, including (i) a possible downturn in the Southern California economy, especially like the one which occurred during the early 1990s, (ii) interest rate increases, (iii) reduction in real estate values in Southern California and (iv) continued increase in competitive pricing and loan structure. The Banks strive to reduce the exposure to such risks by (a) reviewing each loan request and renewal individually, (b) using a dual signature approval system whereby both the marketing and credit administration departments must approve each request individually and (c) strict adherence to written loan policies, including, among other factors, minimum collateral requirements and maximum loan-to-value ratio requirements. Each loan request is reviewed on the basis of the Bank's ability to recover both principal and interest in view of the inherent risks.
(2) Commercial Loans. Commercial loans are made to finance operations, to provide working capital or for specific purposes, such as to finance the purchase of assets, equipment or inventory. Since a borrower's cash flow from operations is generally the primary source of repayment, the Company's policies provide specific guidelines regarding required debt coverage and other important financial ratios. Commercial loans include lines of credit and commercial term loans. Lines of credit are extended to businesses or individuals based on the financial strength and
integrity of the borrower and generally (with some exceptions) are collateralized by short-term assets such as accounts receivable, inventory, equipment or real estate and have a maturity of one year or less. Such lines of credit bear an interest rate that floats with the prime rate, LIBOR or another established index. Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short-term debt originally used to purchase fixed assets or, in rare cases, to finance the purchase of businesses. Commercial term loans generally have terms from one to five years. They may be collateralized by the asset being acquired or other available assets and bear interest which either floats with the prime rate, LIBOR or another established index or is fixed for the term of the loan. The Banks' portfolio of commercial loans is subject to certain risks, including (i) a possible downturn in the Southern California economy, (ii) interest rate increases and (iii) the deterioration of a company's financial capabilities. The Banks strive to reduce the exposure to such risks through (a) a dual signature approval system and (b) strict adherence to written loan policies. In addition, loans based on short-term asset values are monitored on a monthly or quarterly basis. In general, the Banks receive and review financial statements of borrowing customers on an ongoing basis during the term of the relationship and respond to any deterioration noted.
(3) Consumer Loans. Consumer loans include personal loans, auto loans, boat loans, home improvement loans, equipment loans, revolving lines of credit and other loans typically made by banks to individual borrowers. The Banks' consumer loan portfolio is subject to certain risks, including (i) amount of credit offered to consumers in the market, (ii) interest rates increases and (iii) consumer bankruptcy laws which allow consumers to discharge certain debts. The Banks strive to reduce the exposure to such risks through the direct approval of all consumer loans by (a) using a dual signature system of approval and (b) strict adherence to written credit policies.
As part of its efforts to achieve long-term stable profitability and respond to a changing economic environment in Southern California, the Company is investigating all possible options to augment its traditional focus by broadening its customer services. Possible avenues of growth and future diversification include more branch locations, expanded days and hours of operation and new types of lending, brokerage, annuity and mutual funds products.
Business Concentrations
No individual or single group of related accounts is considered material in relation to the Company's assets or the Banks' assets or deposits, or in relation to the overall business of the Banks or the Company. However, approximately 57% of the Company's loan portfolio held for investment at December 31, 2001 consisted of real estate-related loans, including construction loans, miniperm loans, real estate mortgage loans and commercial loans secured by real estate. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Loans". Moreover, the business activities of the Company are currently focused in Southern California, with the majority of its business concentrated in Los Angeles, San Diego, Riverside, Orange and San Bernardino Counties. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in the Southern California economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company's operations in Southern California exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region.
Competition
The banking business in California, specifically in the Banks' primary service areas, is highly competitive with respect to both loans and deposits as well as other banking and mortgage banking services. The market is dominated by a relatively small number of major banks with a large number of offices and full-service operations over a wide geographic area. Among the advantages such major banks have in comparison to the Banks are their ability to finance and engage in wide-ranging
advertising campaigns and to allocate their investment assets to regions of higher yield and demand. Such banks offer certain services which are not offered directly by the Banks. In addition, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Banks. Other entities, in both the public and private sectors, seeking to raise capital through the issuance and sale of debt or equity securities also provide competition for the Banks in the acquisition of deposits. Banks also compete with money market funds and other money market instruments which are not subject to interest rate ceilings. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card and other consumer finance services (including on-line banking services and personal finance software). Competition for deposit and loan products remains strong from both banking and non-banking firms and this competition directly effects the rates of those products and the terms on which they are offered to consumers.
Technological innovation continues to contribute to greater competition in domestic and international financial services markets. Technological innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services previously limited to traditional banking products. In addition, customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, self-service branches and in-store branches.
Mergers between financial institutions have placed additional pressure on banks within the industry to consolidate their operations, reduce expenses and increase revenues to remain competitive. In addition, competition has intensified due to federal and state interstate banking laws, which permit banking organizations to expand geographically with fewer restrictions than in the past. These laws allow banks to merge with other banks across state lines, thereby enabling banks to establish or expand banking operations in the Company's most significant markets. The competitive environment is also significantly impacted by federal and state legislation which make it easier for non-bank financial institutions to compete with the Company.
Economic factors, along with legislative and technological changes, will have an ongoing impact on the competitive environment within the financial services industry. As an active participant in financial markets, the Company strives to anticipate and adapt to dynamic competitive conditions, but there can be no assurance as to their impact on the Company's future business or results of operations or as to the Company's continued ability to anticipate and adapt to changing conditions. In order to compete with other competitors in their primary service areas, the Banks attempt to use to the fullest extent possible the flexibility which the Banks' independent status permits, including an emphasis on specialized services, local promotional activity and personal contacts. Each of the Banks strives to offer highly personalized banking services. In addition, the Company intends to continue diversifying its services and banking products and to cross-market services and banking products provided by one of the Banks but not the other. The Company believes that through the cross-marketing of products, the Banks can distinguish themselves from other community banks which they compete with based on the range of services provided and products offered. However, there can be no assurance the Company will be able to diversify its services and/or banking products or successfully compete with its competitors in its primary service area.
Employees
As of March 1, 2002, Rancho Santa Fe had 53 full time equivalent employees, Pacific Western had 232 full time equivalent employees, and the Company had 42 full time equivalent employees in addition to those employed by the Banks.
Financial and Statistical Disclosure
Statistical information relating to the Company and its subsidiaries is presented within "Item 6. Selected Financial Data; Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; Item 7A. Qualitative and Quantitative Disclosure About Market Risk." This information should be read in conjunction with the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data."
Supervision and Regulation
General
The banking and financial services businesses in which the Company engages are highly regulated. Such regulation is intended, among other things, to protect depositors insured by the Federal Deposit Insurance Corporation (the "FDIC") and the entire banking system. The commercial banking business is also influenced by the monetary and fiscal policies of the federal government and the policies of the Federal Reserve Board (the "Board"). The Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Board in these areas influence the growth of bank loans, investments and deposits and also effects interest rates charged on loans and paid on deposits. Indirectly such actions may also impact the ability of non-bank financial institutions to compete with the Banks. The nature and impact of any future changes in monetary policies cannot be predicted.
The laws, regulations and policies effecting financial services businesses are continuously under review by Congress and state legislatures and federal and state regulatory agencies. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and before various bank regulatory agencies and other professional agencies. Changes in the laws, regulations or policies that impact the Company cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company.
Bank Holding Company Regulation
The Company, as a bank holding company, is subject to regulation under the BHCA. As a bank holding company, the Company is registered with and is subject to regulation by the Board under the Bank Holding Company Act as amended. In accordance with Board policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances where the Company might not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Board. The Company is also required to file with the Board periodic reports of the Company's operations and such additional information regarding the Company and its subsidiaries as the Board may require. Pursuant to the BHCA, the Company is required to obtain the prior approval of the Board before it acquires all or substantially all of the assets of any bank or ownership or control of voting shares of any bank if, after giving effect to such acquisition, it would own or control, directly or indirectly, more than 5 percent of such bank.
Under the BHCA, the Company may not engage in any business other than managing or controlling banks or furnishing services to its subsidiaries that the Board deems to be so closely related to banking as "to be a proper incident thereto." The Company is also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking activities or the Board determines
that the activity is so closely related to banking to be a proper incident to banking. The Board's approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.
Additionally, bank holding companies that meet certain eligility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the Board, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies. As of the date of this filing, the Company does not operate as a financial holding company.
The BHCA and regulations of the Board also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock.
The Company's earnings and activities are affected by legislation, by regulations and by local legislative and administrative bodies and decisions of courts in the jurisdictions in which the Company and the Banks conduct business. For example, these include limitations on the ability of the Banks to pay dividends to the Company and the ability of the Company to pay dividends to its shareholders. It is the policy of the Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Various federal and state statutory provisions limit the amount of dividends that subsidiary banks and savings associations can pay to their holding companies without regulatory approval. In addition to these explicit limitations, the federal regulatory agencies have general authority to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
In addition, banking subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral for a loan or extension of credit to any person or company, issue a guarantee or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary's capital stock and surplus on an individual basis or 20 percent of such subsidiary's capital stock and surplus on an aggregate basis. Such transactions must be on terms and conditions that are consistent with safe and sound banking practices. A bank and its subsidiaries generally may not purchase a "low-quality asset," as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral.
The Board has cease and desist powers over parent bank holding companies and non-banking subsidiaries where the action of a parent bank holding company or its non-financial institutions represent an unsafe or unsound practice or violation of law. The Board has the authority to regulate debt obligations, other than commercial paper, issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.
Regulation of the Banks
The Banks are extensively regulated under both federal and state law.
The Banks are insured by the FDIC, which currently insures deposits of each member bank to a maximum of $100,000 per depositor. For this protection, the Banks, as is the case with all insured banks, pay a semi-annual statutory assessment and are subject to the rules and regulations of the FDIC. First Community is a member of the Federal Reserve System and is subject to primary regulation by the Board. Rancho Santa Fe and Pacific Western are national banks and therefore regulated primarily by the Office of the Comptroller of the Currency.
Various requirements and restrictions under the laws of the State of California and the United States effect the operations of the Banks. State and federal statutes and regulations relate to many aspects of the Banks' operations, including standards for safety and soundness, reserves against deposits, interest rates payable on deposits and loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, fair lending requirements, Community Reinvestment Act activities and loans to affiliates. Further, the Banks are required to maintain certain levels of capital. The following are the regulatory capital guidelines and the actual capitalization levels for Rancho Santa Fe, First Community, First Professional and the Company as of December 31, 2001:
Hazardous Waste Clean-Up
Since the Company is not involved in any business that manufactures, uses or transports chemicals, waste, pollutants or toxins that might have a material adverse effect on the environment, its primary exposure to environmental laws is through its lending activities. Based on a general survey of the loan portfolios of the Banks, conversations with local appraisers and the type of lending currently and historically done by the Banks, the Company is not aware of any potential liability for hazardous waste contamination that would be reasonably likely to have a material adverse effect on the Company as of March 1, 2002.
USA Patriot Act
On October 26, 2001, the President signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act. Title III of the USA Patriot Act requires financial institutions, including the Banks, to help prevent, detect and prosecute international money laundering and the financing of terrorism. The Banks have augmented their systems and procedures to accomplish this. The Secretary of the Treasury has proposed additional regulations to further implement Title III. Although we cannot predict when and in what form these regulations will be adopted, we believe that the cost of compliance with Title III of the USA Patriot Act is not likely to be material to the Company.
Federal Deposit Insurance
Because of favorable loss experience and a healthy reserve ratio in the Bank Insurance Fund (BIF) of the FDIC, well-capitalized and well-managed banks, including the Banks, have in recent years paid minimal premiums for FDIC insurance. A number of factors suggest that as early as the second half of 2002, even well-capitalized and well-managed banks will be required to pay premiums for deposit
insurance. The amount of any such premiums will depend on the outcome of legislative and regulatory initiatives as well as the BIF loss experience and other factors, none of which we are in position to predict at this time.
BIS Guidelines
The U.S. federal bank regulatory agencies' risk-capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision (the "BIS"). The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines that each country's supervisors can use to determine the supervisory policies they apply. In January 2001 the BIS released a proposal to replace the 1988 capital accord with a new capital accord that would set capital requirements for operational risk and refine the existing capital requirements for credit risk and market risk exposures. Operational risk is defined to mean the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. The 1988 capital accord does not include separate capital requirements for operational risk. The events of September 11, 2001 demonstrate the importance for financial institutions of managing operational risks. This BIS proposal outlines several alternatives for capital assessment of operational risks, including two standardized approaches and an "internal measurement approach" tailored to individual institutions' circumstances. The BIS has stated that its objective is to finalize a new capital accord in 2002 and for member countries to implement the new accord in 2005. The ultimate timing for new accord and the specifics of capital assessments for addressing operational risk are uncertain. However, we expect that a new capital accord addressing operational risk will eventually be adopted by the BIS and implemented by the U.S. federal bank regulatory agencies. We cannot determine whether new capital requirements that may arise out of a new BIS capital accord will increase or decrease minimum capital requirements applicable to the Company and its Banks.
ITEM 2.
ITEM 2. PROPERTIES
Rancho Santa Fe Properties
Rancho Santa Fe's principal office is located at 6110 El Tordo, Rancho Santa Fe, California 92067. As of March 1, 2002, Rancho Santa Fe had a total of five properties consisting of four branch offices and one operations location. All locations are leased.
Pacific Western Properties
Pacific Western's principal office is located at 120 Wilshire Blvd., Santa Monica, California 90401. As of March 1, 2002, Pacific Western had a total of nineteen properties consisting of sixteen branch offices, two annex offices and one operations center. Four locations are owned and fifteen are leased.
For additional information regarding properties of the Company and of the Banks, see "Item 8. Financial Statements and Supplementary Data."
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
General
From time to time, the Company and the Banks are party to claims and legal proceedings arising in the ordinary course of business. Management of the Company evaluates the Company's and/or the Banks' exposure to the cases individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is determinable and the loss is probable.
Management of the Company and of the Banks believes that there are no material litigation matters at the current time. However, litigation is inherently uncertain and no assurance can be given
that any current or future litigation will not result in any loss which might be material to the Company and/or the Banks.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to the shareholders of the Company, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Marketplace Designation and Sales Price Information
The Company's common stock trades on the Nasdaq National Market® under the symbol "FCBP." Prior to June 1, 2000, trading in Rancho Santa Fe's common stock occurred solely "over the counter," and was not extensive. Consequently, the prices listed before that date represent quotations by dealers making a market in Rancho Santa Fe common stock and reflect inter-dealer prices, without adjustments for mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. Prior to June 1, 2000, trading in the Company's common stock was limited in volume and may not be a reliable indicator of its market value. On June 1, 2000, the Company's common stock was designated for quotation on the Nasdaq National Market®. The prices listed below for periods prior to June 1, 2000 are the prices of Rancho Santa Fe. Prices subsequent to June 1, 2000 are prices for the Company as reported by the Nasdaq National Market®.
The Company believes, based on the records of the transfer agent, that the number of record holders of the Company's common stock as of March 1, 2002 was approximately 1,342.
The following table summarizes those trades of Company common stock of which management is aware, setting forth the approximate high and low trade prices for each quarterly period ended since January 1, 1999:
On March 1, 2002, the approximate high and low trade price for the Company's common stock was $20.50 and $20.45, respectively.
Dividends
The ability of the Company to pay dividends to its shareholders is subject to the restrictions set forth in the California General Corporation Law (the "CGCL"). The CGCL provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The CGCL further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets two conditions: (i) the corporation's assets equal at least 11/4 times its liabilities and (ii) the corporation's current assets equal at least its current liabilities or, alternatively, if the average of the corporation's earnings before taxes on income and interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, the corporation's current assets equal at least 11/4 times its current liabilities. The Company's ability to pay dividends is also subject to certain other limitations. See "Item 1. Business-Supervision and Regulation."
The primary source of income of the Company is the receipt of dividends from the Banks. The availability of dividends from the Banks is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank in question, and other factors, that the Board and/or the Office of the Comptroller of the Currency could assert that payment of dividends or other payments is an unsafe or unsound practice. In addition, the Company's ability to pay dividends is limited by a Revolving Credit Agreement, dated as of June 26, 2000 (the "Credit Agreement"), between the Company and the Northern Trust Company which provides that the Company may not declare or pay any dividend, other than dividends payable in the Company's common stock or in the ordinary course of business exceeding 50% of net income per fiscal quarter of the Company before goodwill amortization and any restructuring charges incurred in connection with any merger, consolidation or other restructuring contemplated by transactions similar to a merger. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity"; and Note 16 of Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."
Holders of the Company's common stock are entitled to receive dividends declared by the Company's Board of Directors out of funds legally available under the laws of the State of California, subject to the rights of holders of any preferred stock of the Company that may be issued in the future. In January 1998, the Company's Board of Directors (the Rancho Santa Fe Board prior to June 2000) approved the institution of a quarterly dividend and thereafter declared the following dividends:
The Company's management believes that it will be able to continue paying quarterly dividends. However, because the Company must comply with the CGCL and banking regulations, there can be no assurance that the Company will continue to pay dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth statistical information relating to the Company and its subsidiaries for each of the years in the five-year period ended December 31, 2001. This data should be read in conjunction with the audited consolidated financial statements as of December 31, 2001 and 2000 and for each of the years in the three-year period ended December 31, 2001 and related notes included elsewhere herein. See "Item 8. Financial Statements and Supplementary Data."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company had total assets of approximately $770,217,000 at December 31, 2001 as compared to total assets of approximately $358,287,000 at December 31, 2000. At January 31, 2002, the Company had total assets of approximately $1,050,000,000 after giving effect to the Pacific Western acquisition. The Company's total deposits increased from approximately $316,938,000 at December 31, 2000 to approximately $677,167,000 at December 31, 2001. The Pacific Western acquisition added approximately $239,000,000 of deposits as of January 31, 2002. Common shareholders' equity increased $27,525,000 million from $27,772,000 million at December 31, 2000 to $55,297,000 million at December 31, 2001. The increases in assets, deposits and shareholders' equity are primarily due to the acquisitions of First Professional and First Charter and the related common stock issuances.
At March 7, 2002, the Company had total assets of approximately $1,196,000,000 after giving effect to WHEC acquisition. The WHEC acquisition added approximately $93,000,000 in net loans and approximately $135,000,000 in deposits.
Critical Accounting Policies
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.
Our significant accounting policies and practices are described in Note 1 to the consolidated financial statements. We believe that the estimates and assumptions that are most important to the portrayal of the Company's financial condition and results of operations, in that they require management's most subjective judgments, to form the basis for the accounting policies deemed to be most critical to the Company. These critical accounting policies include the following:
Allowance for loan losses
The Company's policy with respect to the allowance for loan losses is more fully described in Note 1 to the consolidated financial statements. The Company maintains an allowance for loan losses at an amount which it believes is sufficient to provide adequate protection against losses in the portfolio. Management's periodic evaluation of the adequacy of the allowance is based on such factors as the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that have occurred but are not yet known that may affect the borrower's ability to repay, the estimated value of underlying collateral, and economic conditions. As management utilizes information currently available to evaluate the allowance for loan losses, the allowance for loan losses is subjective and may be adjusted in the future depending on changes in economic conditions or other factors.
During the time the Company holds collateral, it is subject to credit risks, including risks of borrower defaults, bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods). Although management has established
an allowance for loan losses that it considers adequate, there can be no assurance that the established allowance for loan losses will be sufficient to offset losses on mortgage loans in the future.
Results of Operations
Earnings Performance. The Company reported net earnings for the year ended December 31, 2001 of $6,110,000, compared to $1,904,000 for the year ended December 31, 2000, an increase of $4,206,000, or 220.9%. The Company reported net earnings for the year ended December 31, 2000 of $1,904,000, compared with $4,264,000 for 1999, a decrease of $2,360,000 or 55.3%. In 2001, basic earnings per share and diluted earnings per share were $1.30 and $1.23, respectively, compared with $0.49 and $0.47 in 2000 and $1.10 and $1.05 in 1999. The increase in net earnings for the year ended December 31, 2001 was primarily due to the acquisitions of First Professional and First Charter, as well as, the absence of nonrecurring merger costs of $3,561,000 incurred in 2000. The decrease in net earnings for the year ended December 31, 2000 was primarily attributable to nonrecurring merger costs of $3,561,000 related to the First Community Acquisition. Before these nonrecurring merger costs net income would have been $4,702,000, or a 10.3% increase from 1999. The Company's improved earnings performance, before nonrecurring merger costs, between 2000 and 1999 is primarily attributable to an increase in net interest income arising from a greater quantity of interest-earnings assets particularly in the loan segment. The Company believes that the demand for loans increased in the Banks' market areas due to a strong local economy as well as low interest rates. In addition to the growth in earning assets, a general improvement in operating efficiencies contributed to the Company's earnings performance.
The following is a condensed summary of the statement of earnings along with selected profitability ratios:
Analysis of Net Income
Net Interest Income. Net interest income, which constitutes one of the principal sources of income for the Company, represents the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income is affected by changes in both interest rates and the volume of average earning assets and interest-bearing liabilities. The following tables provide information
concerning average interest-earning assets and interest-bearing liabilities, interest earned and paid and the related yields and rates on major categories for the periods indicated:
Analysis of Average Rates and Balances
(1)Includes nonaccrual loans and loan fees
(2)Yields on loans and securities have not been adjusted to a tax-equivalent basis because the impact is not material Net interest income before provision for loan losses was $31,863,000 for the year ended December 31, 2001 compared to $20,907,000 in 2000, an increase of $10,956,000 or 52.4%. The increase was attributable to an increase in average interest earning assets of $291,073,000 in 2001 compared to an increase of average interest bearing liabilities of $173,467,000, a net increase of $117,606,000. The rate earned on interest earning assets decreased to 7.21% in 2001 compared to 9.39% in 2000. The decrease was attributable to a decreased interest rate environment in 2001 over 2000 due to decreases in interest rates by the Federal Reserve Bank. Average net loans outstanding during 2001 was $395,337,000 and yielded 8.36% compared to average loans outstanding of $228,638,000 in 2000 that yielded 10.49%. The increase in average loans outstanding of $166,699,000 in
2001 was primarily due to the acquisitions of First Professional and First Charter, which accounted for $118,099,000 of the increase, and the remaining $48,600,000 was due to internal growth.
Average investments outstanding during 2001 were $107,277,000 earning interest at a yield of 5.91%, compared with $47,620,000 and 6.21% in 2000. Average Federal funds sold were $95,260,000 and yielded 3.90% in 2001 compared with $26,602,000 and 6.15% in 2000. Average deposits with financial institutions were $286,000 and yielded 4.90% in 2001 compared to $4,227,000 and 6.08% in 2000. These changes in yields are comparable to the changes in interest rates in the general economy over the same period.
Average outstanding interest-bearing liabilities were $378,714,000 and paid an average of 2.97% compared to $205,247,000 and 3.86% in 2000. The increase in average balances is primarily due to the acquisitions of First Professional and First Charter. These changes in interest costs are comparable to the changes in interest rates in the general economy over this period of time.
Net interest income before provision for loan losses was $20,907,000 for the year ended December 31, 2000 compared to $17,717,000 in 1999, an increase of $3,190,000 or 18.0%. The increase was attributable to an increase in average interest earning assets of $38,661,000 in 2000 compared to an increase of average interest bearing liabilities of $24,082,000, a net increase of $14,579,000. The rate earned on interest earning assets increased to 9.39% in 2000 compared to 8.72% in 1999. The increase was attributable to an increased interest rate environment in 2000 over 1999 due to increases in interest rates by the Federal Reserve Bank. Average net loans outstanding during 2000 was $228,638,000 and yielded 10.49% compared to average loans outstanding of $187,811,000 in 1999 that yielded 10.15%. The increase in average loans outstanding of $40,827,000 in 2000 was due to a continued strong economic climate in Southern California throughout the year and the Company's successful efforts to exploit this economic climate.
Average investments outstanding during 2000 were $47,620,000 earning interest at a yield of 6.21%, compared with $45,731,000 and 5.72% in 1999. Average Federal funds sold were $26,602,000 and yielded 6.15% in 2000 compared with $28,372,000 and 4.86% in 1999. Average deposits with financial institutions were $4,227,000 and yielded 6.08% in 2000 compared to $6,512,000 and 5.45% in 1999. These changes in yields are comparable to the changes in interest rates in the general economy over the same period.
Average outstanding interest-bearing liabilities were $205,247,000 and paid an average of 3.86% compared to $181,165,000 and 3.14% in 1999. The increase in average balances is due to the general increase in economic activity in this period of time and the Company's success in taking advantage of this increase. These changes in interest costs are comparable to the changes in interest rates in the general economy over this period of time.
As discussed above, the Company's net interest income is affected by the change in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change," as well as yields earned on interest-earning assets and rates paid on deposits and other borrowed funds, referred to as a "rate change."
The following table reflects changes in interest income and expense attributable to changes in volume and interest rates of significant interest-bearing assets and liabilities:
Analysis of Volume and Interest Rates
(1)Includes nonaccrual loans and loan fees
(2)Yields on loans and securities have not been adjusted to a tax-equivalent basis because the impact is not material The change in interest income/expense attributable to volume reflects the change in volume times the prior year's rate and the change in interest income/expense attributable to rate reflects the change in rates times the current year's volume. The change in rate/volume has been allocated to the change attributed to rate.
Provision for Loan Losses. The amount of the provision for loan losses in each year is a charge against earnings in that year. The amount of provision is based upon management's evaluation of the loan portfolio, past loan loss experience, general economic conditions and other pertinent factors.
The Company provided $639,000 for loan losses for the year ended December 31, 2001 compared to $520,000 in the prior year. The allowance for loan losses was $11,209,000, or 2.23% of total loans outstanding, as of December 31, 2001, compared with an allowance for loan losses of $3,930,000, or 1.56% of total loans outstanding, as of December 31, 2000. This increase in the allowance for loan losses is primarily due the acquisitions of First Professional and First Charter. Net loans charged off in 2001 increased by $5,703,000 to $6,318,000 compared to $615,000 in net loans charged off for the year ended December 31, 2000. Included in the net loans charged off of $6,318,000 in 2001, $4,805,000 of First Professional loans were charged off during the first quarter associated with the First Professional acquisition.
The Company provided $520,000 for loan losses for the year ended December 31, 2000 compared to $518,000 in the prior year. The small change in the provision for loan losses, even with the increase in loans and the small increase in impaired loans, is reflective of the improved credit quality of the
Company's loan portfolio during the year ended December 31, 2000. The allowance for loan losses was $3,930,000, or 1.56% of total loans outstanding, compared with an allowance for loan losses of $4,025,000, or 1.95% of total loans outstanding, as of December 31, 1999. Net loans charged off in 2000 increased by $337,000 to $615,000 compared to $278,000 in net loans charged off for the year ended December 31, 1999.
Noninterest Income. The following table sets forth the details of noninterest income for the years ended December 31, 2001 and 2000:
Noninterest income increased $2,712,000, or 110.0%, to $5,177,000 for the year ended December 31, 2001 compared with $2,465,000 in 2000. The increase in income is due primarily to the acquisitions of First Professional and First Charter. SBA loan servicing fees decreased $81,000, or 30.2%, to $187,000 in 2001 compared with $268,000 in 2000. The primary reason for this decrease was the average decrease in SBA loans serviced by the Company in the current year. The increase in gain on sale of loans is due to the increase in SBA activity as a result of the lower interest rate environment in 2001.
The following table sets forth the details of noninterest income for the year ended December 31, 2000 and 1999:
Noninterest income increased $161,000, or 7.0%, to $2,465,000 for the year ended December 31, 2000 compared with $2,304,000 in 1999. SBA loan servicing fees increased $98,000, or 57.6%, to $268,000 in 2000 compared with $170,0000 in 1999. The primary reason for this increase was the increase in SBA loans serviced by the Company from current year and prior year loan sales. Merchant discount fees, net of expenses, increased $23,000, or 27.4%, to $107,000 in 2000 compared with $84,000 in 1999 due to the increased activity of the Company's merchant customer base. The decline in gain on sale of loans is due to the decline in SBA activity as a result of the higher interest rate environment in
2000. Other noninterest income increased $69,000, or 13.2%, in 2000 to $591,000 compared with $522,000 in 1999. The increase was attributable to small increases in several other income categories.
Noninterest Expense. The following table sets forth the details of noninterest expense for the years ended December 31, 2001 and 2000:
Total noninterest expenses increased $7,770,000, or 42.8%, to $25,915,000 for 2001 compared with $18,145,000 in 2000. The increases in the noninterest expense categories are due primarily to the acquisitions of First Professional and First Charter offset by nonrecurring merger costs in 2000 of $3,561,000.
The following table sets forth the details of noninterest expense for the years ended December 31, 2000 and 1999:
Total noninterest expenses increased $6,072,000, or 50.3%, to $18,145,000 for 2000 compared with $12,073,000 in 1999. Included in the year 2000 noninterest expense was $3,561,000 in pre-tax, non-recurring expenses associated with the merger of Rancho Santa Fe and First Community. Salaries and employee benefits increased $1,050,000, or 18.7%, to $6,673,000 in 2000 compared with $5,623,000 in 1999. This increase is a result of increased staff levels necessary to accommodate the increased level of business at the Company and required to manage a larger company.
Occupancy and furniture and equipment expenses increased $272,000, or 12.5%, to $2,455,000 in 2000 compared with $2,183,000 in 1999. This increase is primarily due to increased depreciation at First Community and increased rent expense at Rancho Santa Fe. Legal and other professional services, consisting of audit, tax and accounting services, data processing and other outside services, increased $445,000, or 30.3%, to $1,914,000 in 2000 compared with $1,469,000 in 1999. The increase in 2000 was mostly the result of outsourcing more activities, especially at First Community. This was partially offset by more favorable data processing contracts.
Advertising increased $130,000, or 42.6%, in 2000 to $435,000 compared with $305,000 in 1999. The increase was a result of the Company's plan to become recognized as "The Community Bank" as competitors are being purchased by larger institutions. Real estate owned and property held-for-sale expenses increased $174,000, or 95.6%, to $356,000 in 2000 compared with $182,000 in 1999. The Company wrote down its other real estate owned to the current market value of the properties.
Other noninterest expenses increased $400,000, or 22.3%, to $2,194,000 in 2000 compared with $1,794,000 in 1999. Other noninterest expense consists of many different categories, none of which account for a majority of the increase. The largest reasons for the increase are attributable to increases in expenses associated with the growth in loans and deposits such as loan expense and customer service expenses such as courier costs and customer analysis expense.
Income Taxes. The provision for income taxes was $4,376,000, $2,803,000, and $3,166,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Effective tax rates were 41.7%, 59.5%, and 42.6% for the years ended December 31, 2001, 2000 and 1999, respectively. The effective tax rate in 2000 is higher than the previous year and current year due to the nondeductability of certain merger costs.
Financial Condition
Loans. The following table presents the balance of each major category of loans at the dates indicated:
The Company's loan portfolio net of allowance for loan losses, deferred fees and costs totaled $490,531,000 as of December 31, 2001. This represents an increase of $243,909,000, or 98.9%, compared to December 31, 2000. The First Professional and First Charter acquisitions accounts for approximately $160,000,000 of the increase. The remaining increase, approximately $84,000,000, was
due to internal growth. Loans have increased consistently over the past five years. In 2000, net loans increased $44,545,000, or 22.0%, compared with 1999. The Company focuses on small to medium sized commercial and real estate secured lending and loans guaranteed by the Small Business Administration.
The following table presents the Company's interest rate sensitivity analysis at the dates indicated with respect to individual categories of loans and provides separate analyses with respect to fixed interest rate loans and floating interest rate loans:
Loan Repricing or Maturing
As of December 31, 2001
Nonperforming Loans. The following table sets forth certain information with respect to the Company's nonaccrual loans and accruing loans for which payments of principal and interest were contractually past due 90 days or more:
Nonperforming Loans
Loans are generally placed on nonaccrual status when the borrowers are past due 90 days and when payment in full of principal or interest is not expected. At the time a loan is placed on nonaccrual status, any interest income previously accrued but not collected is reversed and charged against current period income. Income on nonaccrual loans is subsequently recognized only to the extent cash is received and the loan's principal balance is deemed collectible. Loans are restored to accrual status only when the loans become both well secured and are in the process of collection.
Interest income of $596,000, $413,000 and $158,000 would have been recorded for the years ended December 31, 2001, 2000 and 1999, respectively, if nonaccrual loans had been performing in accordance with their original terms. Interest income of $110,000 $60,000 and $76,000 was recorded on loans subsequently transferred to a nonaccrual status for the years ended December 31, 2001, 2000 and 1999, respectively.
On December 31, 2001, the Company had $4,672,000 of loans on nonaccrual status, compared to $2,271,000 and $1,845,000 on December 31, 2000 and 1999, respectively. As of December 31, 2001 and 2000, there were no loans past due over 90 days and still accruing interest. On December 31, 1999, the Company had $75,000 of loans that were past due 90 days or more and still accruing interest, compared to $243,000 on December 31, 1998.
Allowance for Loan Losses. The Company's allowance is available to absorb future loan losses. The current level of the allowance for loan losses is a result of management's assessment of the risk within the loan portfolio based on the information obtained in the credit reporting processes. The Company utilizes a risk-rating system on loans and a monthly credit review and reporting process. This assessment of risk takes into account the composition of the loan portfolio, review of specific problem loans, previous loan experience, current and anticipated economic conditions and other factors which, in management's judgment, deserve recognition.
The following table presents the changes in the Company's allowance for loan losses as of the dates indicated:
Analysis of Allowance for Loan Losses
The allowance for loan losses at December 31, 2001 was $11,209,000 or 2.23% of total loans outstanding, net of deferred fees and costs, an increase from $3,930,000 or 1.56% of total loans, net of deferred fees and costs, at the end of 2000. The increase in the allowance for loan losses as a percentage of total loans, net of deferred fees and costs, is primarily due to the First Professional and First Charter acquisitions. Management believes that the allowance for loan losses of $11,209,000 at December 31, 2001 is adequate to cover known and inherent risks in the loan portfolio.
The following table allocates the allowance for loan losses based on management's judgment of potential losses in the respective areas. While management has allocated reserves to various portfolio segments for purposes of this table, the allowance for loan losses is general and is available for the portfolio in its entirety:
Allocation of Allowance for Loan Losses
Investment Portfolio. The investment activities of the Company are designed to assist in maximizing income consistent with quality and liquidity requirements, to supply collateral to secure public funds, to provide a means for balancing market and credit risks and to provide consistent income and market value throughout changing economic times.
The Company's portfolio consists of U.S. Treasury and U.S. Government agency obligations, mortgage-backed securities, obligations of states and political subdivisions, and Federal Reserve Bank and Federal Home Loan Bank stock. First Community's investment portfolio contains no investments in any one issuer in excess of 10% of the Company's total equity. Exempt from this calculation are securities of the U.S. Treasury and U.S. government agencies.
The following table presents the composition of the Company's investment portfolio at the dates indicated:
Investment Portfolio
For the investment portfolio as of December 31, 2001, the following table presents a summary of yields and maturities:
Analysis of Investment Yields and Maturities
December 31, 2001
(1)Yields on securities have not been adjusted to a fully tax-equivalent basis because the impact is not material Deposits. The following table presents a summary of the Company's average deposits as of the dates indicated and average rate paid:
Analysis of Average Deposits
For time deposits $100,000 or more, the following table presents a summary of maturities for the time periods indicated:
Maturity of Time Deposits of $100,000 or More
Average deposits for the period through December 31, 2001 were $600,811,000 compared with $305,487,000 in 2000, an increase of $295,324,000 or 96.7%. This significant increase in average deposits is due primarily to the acquisitions of First Professional and First Charter. Average deposits for the period through December 31, 2000 were $305,487,000 compared with $267,838,000 in 1999, an increase of $37,649,000 or 14.1%. This increase was due to the Company's continuing business development activities.
Borrowings. The Company and the Banks have various lines of credit available. The Company also borrows funds from time to time on a short term or overnight basis from the FHLB or other financial institutions.
Federal Funds Arrangements with Commercial Banks. As of December 31, 2001 and 2000, the Company had unsecured lines of credit in the amount of $23,000,000 and $14,000,000, respectively, from correspondent banks. These lines are renewable annually. As of December 31, 2001, 2000 and 1999, there were no balances outstanding. The average balances were $11,000, $462,000 and $82,000 in 2001, 2000 and 1999, respectively. The highest balance at any month-end was $0, $10,400,000, and $700,000 in 2001, 2000 and 1999, respectively. The average rate paid was 1.70%, 5.90% and 4.90% in 2001, 2000 and 1999, respectively
Borrowing arrangements at the Federal Reserve Discount Window. As of December 31, 2001 and 2000, the Company had a Fed discount limit of approximately $3,971,000 and $4,737,000, respectively, none of which was used in 2001 or 2000.
Federal Home Loan Bank Lines of Credit. As of December 31, 2001 and 2000, the Company had a Federal Home Loan Bank limit of approximately $9,942,000 and $15,551,000, respectively, none of which was outstanding as of December 31, 2001 or 2000 and none of which was used during 2001 or 2000. The availability of the lines of credit, as well as adjustments in deposit programs, provide for liquidity in the event that the level of deposits should fall abnormally low. These sources provide that funding thereof, may be withdrawn depending upon the financial strength of the Company.
Treasury, Tax and Loan Note. The Company participates in the Treasury, Tax and Loan Note program. The Company has a limit of $1,700,000 at the Federal Reserve Bank. Treasury, Tax and Loan balances fluctuate based on the amounts deposited by customers and the amounts called for payment by the Federal Reserve Bank. As of December 31, 2001, 2000 and 1999, the balance outstanding under the Note program was $431,000 $1,689,000 and $1,657,000, respectively. The average balances under the Note program were $719,000 in 2001, $800,000 in 2000 and $711,000 in 1999. The highest balance at any month-end was $1,437,000 in 2001 and $1,700,000 in 2000 and 1999. The average rate paid was 3.78%, 5.30% and 5.00% in 2001, 2000 and 1999, respectively.
Revolving Line of Credit. In May 2000 the Company executed a Revolving Credit Agreement with The Northern Trust Company for $5,000,000. Shares of common stock of Rancho Santa Fe have been pledged as collateral against the Revolving Credit Agreement. In January 2001 the Company executed the first Amendment to the Revolving Credit Agreement increasing the credit line to $10,000,000 and
modifying certain covenants to reflect the Company's larger size and the Professional Merger. Shares of common stock of First Community have been pledged as additional collateral against the Revolving Credit Agreement. The loan agreement contains covenants that impose certain restrictions on activities of the Company and its financial condition. Such covenants include minimum net worth ratios, maximum debt ratios, a minimum return on average assets, a dividend limitation and minimum and maximum credit quality ratios. As of December 31, 2001 the Company, and where applicable, its subsidiaries were in compliance with each of such covenants or had obtained the appropriate waivers. The maximum outstanding amount during 2001 and 2000 was $7,650,000 and $2,450,000, respectively. The average outstanding amount during 2001and 2000 was $5,383,000 and $305,000, respectively. The loan bears interest at the prime rate less 75 basis points. As of December 31, 2001 and 2000, the interest rates were 4.00% and 8.75%, respectively. The Company pays a fee of 25 basis points on the unused amount. At December 31, 2001 and 2000, there were no outstanding balances under this line of credit.
Trust Preferred Securities
In September 2000 the Company issued $8,000,000 of trust preferred securities bearing a fixed interest rate of 10.60% and maturing in thirty years. These instruments were issued to fund part of the Professional Merger.
In November 2001 the Company issued $10,000,000 of trust preferred securities bearing a variable interest rate, which is reset semi-annually, at the 6-Month LIBOR plus 3.75%, provided the rate will not exceed 11% through December 2006, and maturing in thirty years. The initial interest rate was set at approximately 6.00% and the next interest rate reset date is June 8, 2002.
In December 2001 the Company issued another $10,000,000 of trust preferred securities bearing a variable interest rate, which is reset quarterly, at the 3-Month LIBOR plus 3.60%, provided the rate will not exceed 12.50% through December 2006, and maturing in thirty years. The initial interest rate was set at 5.60% and the next interest rate reset date is March 18, 2002.
Capital Resources.
Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines which compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. Banks are required to maintain a minimum total risk-based capital ratio of 8% of which at least 4.0% must be Tier 1 capital. Banking organizations considered to be "well capitalized" must maintain a minimum leverage ratio of 5% and a minimum risk-based capital ratio of 10% of which at least 6.0% must be Tier 1 capital.
The following table presents regulatory capital requirements and risk-based capital levels of the Company:
As of December 31, 2001, the Company exceeded each of the capital requirements of the Federal Reserve Board and was deemed to be "well capitalized." In addition, each of the Banks exceeded the capital requirements of its primary federal banking regulator and was deemed to be "well capitalized."
Liquidity.
Liquidity management requires an ability to meet financial commitments when contractually due and to respond to other demands for funds. The Company has an Asset/Liability Management Committee responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving the Company's financial objectives. The Company's Asset /Liability Management Committees meet regularly to review funding capacities, current and forecasted loan demand and investment opportunities.
Funds are held in cash and cash equivalents, which are comprised of cash on hand, cash due from banks and federal funds sold. Cash and cash equivalents at December 31, 2001 totaled $104,703,000, or 13.6% of total assets, compared with $52,655,000, or 14.7%, at December 31, 2000. Deposits increased during 2001 to $677,167,000 an increase of $360,229,000 or 113.7%. Loans, net of deferred loan fees, increased to $501,740,000 an increase of $251,188,000 or 100.3% during 2001. Investments also increased in 2001 to $128,593,000 from $46,313,000 in 2000, an increase of $82,280,000 or 177.7%. All of these increases are due primarily due to the acquisitions of First Professional and First charter, as well as, the issuance of an additional $20,000,000 of trust preferred securities.
As an additional source of liquidity, the Banks maintains lines of credit for $23,000,000 with correspondent banks for purchase of overnight funds. These lines are subject to availability of funds. The Banks also have a combined Fed discount window limit of approximately $3,971,000 as well as a credit line with the Federal Home Loan Bank which would allow the Banks to borrow up to approximately $9,942,000. Historically, the Banks has infrequently used its borrowing capabilities. The Company has a revolving line of credit with Northern Trust Company of Chicago.
The ability of the Company to obtain funds for the payment of dividends and for other cash requirements is largely dependent upon its earnings. Dividends paid by a national bank such as Rancho Santa Fe and Pacific Western, are regulated by the Office of the Comptroller of the Currency under its general supervisory authority as it relates to a bank's capital requirements. A national bank may declare a dividend without the approval of the Office of the Comptroller of the Currency as long as the total dividends declared in a calendar year does not exceed the total of net profits for that year combined with the retained profits for the preceding two years.
The Company defines "Cash Liquidity" as cash and cash equivalents plus securities less pledged assets and the reserve requirement divided by total deposits and borrowings less assets, mainly securities and loans, pledged for deposit balances. The Company manages Cash Liquidity on a consolidated basis and will sell or borrow federal funds between the Banks and will participate in loans based upon the liquidity needs of each of the Banks subject to certain regulatory limitations. At December 31, 2001, Cash Liquidity at the Company was 30.2% compared to Cash Liquidity of 22.2% at December 31, 2000. The increase in Cash Liquidity from $64,843,000 at December 31, 2000 to $203,513,000 at December 31, 2001 was primarily due to the acquisition of First Professional. At the time of acquisition, First Professional had Cash Liquidity of approximately 41%.
The Company's primary sources of liquidity are the receipt of dividends from the Banks, the ability to raise capital and a revolving line of credit (See "-Borrowings"). The availability of dividends from the Banks is limited by various statutes and regulations of state and federal law (See "Item 5. Market For Registrant's Common Equity and Related Stockholders Matters-Dividends"). During 2001 the Company received additional dividends of $1,500,000 from Rancho Santa Fe and $500,000 from First Community Bank of the Desert. (See Note 9 of Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" and "-Liquidity, Interest Rate Risk and Market Risk").
Recent Accounting Pronouncements
See Note 1 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for information on current accounting pronouncements and their impact on the Company's consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. The Company does not have any market risk sensitive instruments entered into for trading purposes. Significant changes in interest rates affect the composition, yield and cost of balance sheet components. The rate sensitivity of these assets and liabilities is monitored and matched to control the risk associated with movements in rates. The Asset/Liability Management Committee for the Company meets quarterly to monitor and formulate strategies and policies to provide sufficient levels of net interest income while maintaining acceptable levels of interest rate sensitivity, risk and liquidity. The primary objective of rate sensitivity management is to ensure earnings stability by minimizing the sensitivity of net interest income to fluctuations in interest rates. The Company uses gap analysis and other systems to measure, monitor and adapt to changing interest rate environments. The Company monitors and evaluates its interest rate risk position on a quarterly basis using traditional gap analysis and an analysis of the sensitivity of net interest income to changes in interest rates and an analysis of the impact of changes in interest rates on the market value of equity. Gap analysis calculates the mismatches over certain time periods between assets and liabilities whose interest rates are subject to repricing at their contractual maturity dates or repricing period.
Management uses various asset/liability strategies to manage the repricing characteristics of its assets and liabilities to ensure that exposure to interest rate fluctuations is limited within the Company guidelines of acceptable levels of risk-taking. Hedging strategies, including the terms and pricing of loans and deposits, and managing the deployment of its securities, are used to reduce mismatches in interest rate repricing opportunities of portfolio assets and their funding sources. When appropriate, management may utilize instruments such as interest rate floors, caps and swaps to hedge its interest rate position. A Board of Directors approved hedging policy statement governs the use of these instruments. As of December 31, 2001, the Company had not utilized any interest rate swap or other such financial derivative to alter its interest rate risk profile.
One way to measure the impact that future changes in interest rates will have on net interest income is through a cumulative gap measure. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. Generally, a liability sensitive gap position indicates that there would be a net positive impact on the net interest margin of the Company for the period measured in a declining interest rate environment since the Company's liabilities would reprice to lower market rates before its assets. A net negative impact would result from an increasing interest rate environment. Conversely, an asset sensitive gap indicates that there would be a net positive impact on the net interest margin in a rising interest rate environment since the Company's assets would reprice to higher market interest rates before its liabilities.
The following table sets forth the distribution of repricing opportunities of the Company's interest-earning assets and interest-bearing liabilities, the interest rate sensitivity gap for the period (i.e., interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate sensitivity gap and the cumulative gap as a percentage of total assets and total interest-earning assets as of December 31, 2001. The table also sets forth the time periods during which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. The interest rate relationships between the repriceable assets and repriceable liabilities are not necessarily constant and may be affected by many factors, including the behavior of customers in response to changes in interest rates. This table should, therefore, be used only as a guide as to the possible effect changes in interest rates might have on the net interest margins of the Company.
Interest Rate Sensitivity
As of December 31, 2001
Note: All amounts are reported at their contractual maturity or repricing periods. This analysis makes certain assumptions as to interest rate sensitivity of savings and NOW accounts which have no stated maturity and have had very little price fluctuation in the past three years. Money market accounts are repriced at discretion of management and generally are more rate sensitive.
At December 31, 2001, the Company had $547,032,000 million in assets and $419,452,000 million in liabilities repricing within one year. This means that $127,579,000 million more of the Company's interest rate sensitive assets than the Company's interest rate sensitive liabilities will change to the then current rate (changes occur due to the instruments being at a variable rate or because the maturity of the instrument requires its replacement at the then current rate). The ratio of interest-earning assets to interest-bearing liabilities maturing or repricing within one year at December 31, 2001 is 130%. Interest income is likely to be affected to a greater extent than interest expense for any changes in interest rates within one year from December 31, 2001. If rates were to fall during this period, interest income would decline by a greater amount than interest expense and net income would decrease. Conversely, if rates were to rise, the opposite would apply.
Management is continuing to take steps to reduce the positive gap of the Company by lengthening the maturities in its investment portfolio and originating more fixed rate assets. Management strives to maintain a balance between its interest-earning assets and interest-bearing liabilities in order to minimize the impact on net interest income due to changes in market rates. Management realizes that its deposit base has large non-interest costing balances which increase its margins, but make it more difficult for the Company to maintain the net interest margin in a falling interest rate environment.
While stability of the Company's margin is desirable, management will constantly evaluate the cost trade-off hedging away its advantage in non-interest costing balances.
In order to measure interest rate risk at December 31, 2001, the Company also used a simulation model to project changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the difference between net interest income forecasted using a rising and a falling interest rate scenario and net interest income forecast using a base market interest rate derived from the current treasury yield curve. For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or decreased, on an instantaneous and sustained basis, by 100 and 200 basis points. At December 31, 2001, the Company's net interest income exposure related to these hypothetical changes in market interest rate was slightly outside the current guidelines established by the Banks. The Asset/Liability Committee has made the determination to remain more asset sensitive in the short term due to the expected growth in loans and the current low rate environment.
Sensitivity for Net Interest Income
(Dollars in thousands)
The Company measures the impact of market interest rate changes on the net present value of estimated cash flows from its assets, liabilities and off-balance sheet items, defined as market value of equity, using a simulation model. This simulation model assesses the changes in market value of interest rate sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest rates of 100 and 200 basis points. At December 31, 2001, the Company's market value of equity exposure related to these changes in market interest rates was within the current guidelines established by the Banks.
Market Value of Portfolio Equity
(Dollars in Thousands)
The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, asset prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company may undertake in response to changes in interest rates. Actual results may vary.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors
First Community Bancorp:
We have audited the accompanying consolidated balance sheets of First Community Bancorp and subsidiaries (the "Company") as of December 31, 2001 and 2000 and the related consolidated statements of earnings, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Bancorp and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and certain provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001.
/s/ KPMG LLP
San Diego, California
February 8, 2002, except
as to Note 24 of the
notes to the financial
statements, which is as of
March 7, 2002.
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
See accompanying notes to consolidated financial statements.
FIRSTCOMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 2001, 2000 and 1999
See accompanying notes to consolidated financial statements.
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 2001, 2000 and
See accompanying notes to consolidated financial statements.
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
See accompanying notes to consolidated financial statements.
FIRST COMMUNITY BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
(1) Nature of Operations and Summary of Significant Accounting Policies
First Community Bancorp (the "Company") was, at December 31, 2001, the holding company for Rancho Santa Fe National Bank ("Rancho Santa Fe"), First Professional Bank ("First Professional") and First Community Bank of the Desert ("First Community") (collectively the "Banks") and its wholly owned subsidiary, Desert Community Properties, Inc.
On May 31, 2000, a subsidiary of the Company merged with and into First Community pursuant to an Agreement and Plan of Merger, by and between the Company, Rancho Santa Fe and First Community (the "First Community Acquisition"). As a result of the First Community Acquisition, First Community became a wholly owned subsidiary of the Company. The First Community Acquisition was accounted for by the pooling-of-interests method of accounting, and accordingly, the financial information for all periods presented herein has been restated to present the combined consolidated financial condition and results of operations of the Company, Rancho Santa Fe and First Community as if the First Community Acquisition had been in effect for all periods presented.
On January 16, 2001, Professional Bancorp, Inc. merged with and into the Company, with the Company as the surviving entity. At that time First Professional Bank, N.A. became a wholly owned subsidiary of the Company. This acquisition was accounted for using purchase accounting.
On October 8, 2001, the Company completed the acquisition of all of the outstanding common and preferred stock of First Charter Bank, N.A. First Charter has been merged into First Professional Bank, N.A. with First Professional as the surviving entity. This acquisition was accounted for using purchase accounting.
The Company conducts business through the Banks. At December 31, 2001, Rancho Santa Fe, First Professional and First Community were full service banks with four, five and five banking offices, respectively. The Banks are subject to the laws of the State of California and federal regulations governing the financial services industry. The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to regulation and supervision by the Federal Reserve Board. The areas served by the Banks are San Diego, Los Angeles, Riverside and San Bernardino counties.
(a) Basis of Presentation
The accounting and reporting policies of the Company and its wholly owned subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. All significant intercompany balances and transactions have been eliminated. The following is a description of the more significant accounting policies:
(b) Investment Securities and Securities Available-for-Sale
Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold securities until maturity, they are classified as held-to-maturity. Investment securities held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts over the period to call or maturity of the related security using the interest method. Securities to be held for indefinite periods of time, but not necessarily to be held-to-maturity or on a long-term basis, are classified as available-for-sale and carried at fair value with unrealized gains or losses reported as a separate component of shareholders' equity in accumulated other comprehensive income, net of applicable
income taxes. Realized gains or losses on the sale of securities available-for-sale, if any, are determined using the amortized cost of the specific securities sold. If a decline in the fair value of a security below its amortized cost is judged by management to be other than temporary, the cost basis of the security is written down to fair value and the amount of the write-down is included in operations. Securities available-for-sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk and other related factors. Securities are individually evaluated for appropriate classification, when acquired; consequently, similar types of securities may be classified differently depending on factors existing at the time of purchase.
(c) Loans and Loan Fees
Loans are stated at the principal amount outstanding. Interest income is recorded on the accrual basis in accordance with the terms of the respective loan. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to the collectibility in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Loans are restored to accrual status when the loans become both well-secured and are in the process of collection.
Nonrefundable loan fees and related direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The net deferred fees or costs are recognized as an adjustment to interest income over the contractual life of the loans using the interest method or taken into income when the related loans are sold. The amortization of loan fees is discontinued on nonaccrual loans.
(d) Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Gains or losses resulting from sales of loans are recognized at the date of settlement and are based on the difference between the cash received and the carrying value of the related loans less related transaction costs. A transfer of financial assets in which control is surrendered is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in the exchange. Liabilities and derivative financial instruments issued or obtained by the transfer of financial assets are measured at fair value, if practicable. Assets or other retained interests received by the transfer are measured by allocating the previous carrying value between the asset sold and the asset or retained interest received, if any, based on their relative fair values at the date of the sale. The Company records the cash gain on the sale of the guaranteed portion of SBA loans.
(e) Comprehensive Income
Comprehensive income consists of net earnings and net unrealized gains (losses) on securities available-for-sale, net and is presented in the consolidated statements of shareholders' equity and comprehensive income.
(f) Allowance for Loan Losses
An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio and other extensions of credit, including off-balance sheet credit extensions. The allowance is based upon a continuing review of the portfolio, past loan loss experience, current economic conditions which may affect the borrowers' ability to pay, and the underlying collateral value of the loans. Loans which are deemed to be uncollectible
are charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance.
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the original contractual terms of the loan agreement. If the measurement of impairment for the loan is less than the recorded investment in the loan, a valuation allowance is established with a corresponding charge to the provision for loan losses.
Management believes that the allowance for loan losses is adequate. In making its evaluation of the adequacy of the allowance for loan losses, management considers the Company's historical experience, the volume and type of lending conducted by the Company, the amounts of classified and nonperforming assets, regulatory policies, general economic conditions and other factors regarding the collectibility of loans in the Company's portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. These agencies may require the Company to recognize additions to the allowance based on their judgments related to information available to them at the time of their examinations.
(g) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to noninterest expense using the straight-line method over the estimated useful lives of the assets which range from two to twenty-five years. Leasehold improvements are capitalized and amortized to noninterest expense on a straight-line basis over the terms of the leases or the estimated useful lives of the improvements, whichever is shorter.
(h) Other Real Estate Owned
Other real estate owned is recorded at the fair value of the property at the time of acquisition. Fair value is based on current appraisals less estimated selling and holding costs. The excess of the recorded loan balance over the estimated fair value of the property at the time of acquisition is charged to the allowance for loan losses. Any subsequent write downs are charged to noninterest expense and recognized as a valuation allowance. Subsequent increases in the fair value of the asset less selling costs reduce the valuation allowance, not below zero, and are credited to income. Operating expenses of such properties, and gains and losses on their disposition are included in noninterest expense.
(i) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash, due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.
(j) Federal Reserve Bank and Federal Home Loan Bank Stock
Investments in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) stock, which are carried at cost because they can only be redeemed at par, are required investments based on the Banks' capital stock or the amount of borrowing.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(l) Goodwill
Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over the remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved.
(m) Stock Option Plan
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the pro forma disclosure provisions of SFAS No. 123.
(n) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the carrying value of deferred tax assets. Actual results could differ from those estimates.
(o) New Accounting Standards
In June 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported separately from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provision of Statement 142. Statement 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and subsequently FASB Statement No. 144 after its adoption.
The Company adopted the provisions of Statement 141 as of July 1, 2001, and Statement 142 is effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life
acquired in a purchase business combination completed after June 30, 2001, but before Statement 142 is adopted in full, are not amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized and tested for impairment prior to the adoption of Statement 142.
Upon adoption of Statement 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition separate from goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provision of Statement 142. Impairment is measured as the excess carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment evaluation, the Statement will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. The Company will then have up to six months from January 1, 2002 to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. The second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings.
As of the date of adoption of Statement 142, the Company has unamortized goodwill in the amount of $9,793,000 and no unamortized identifiable intangible assets, which will be subject to the transition provisions of Statement 142. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's consolidated financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt Statement No. 143 on January 1, 2003.
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Statement No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. The Company adopted Statement No. 144 on January 1, 2002.
(p) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year's presentation.
(2) Securities Available-for-Sale
The amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale as of December 31, 2001 and 2000 are as follows:
The maturity distribution based on amortized cost and fair value as of December 31, 2001, by contractual maturity, is shown below. Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities are not included in the table.
There were no sales of securities during 2001. Proceeds from the sale of securities available-for-sale during 2000 and 1999 were $1,489,000 and $1,499,000, respectively. Gross losses of $11,000 and $2,000 were realized on sales in 2000 and 1999, respectively.
(3) Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses and fair value of investment securities held-to-maturity as of December 31, 2001 and 2000 are as follows:
The maturity distribution based on amortized cost and fair value as of December 31, 2001, by contractual maturity, is shown below. Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
As of December 31, 2001 and 2000, investment securities held-to-maturity with an amortized cost of $2,385,000 and $4,358,000, respectively, and securities available-for-sale with a fair value of $20,596,000 and $22,611,000, respectively, (Note 2) totaling $22,981,000 and $26,969,000, respectively, were pledged as security for public deposits and other purposes as required by various statutes and agreements.
(4) Loans and Related Allowance for Loan Losses and Other Real Estate Owned
As of December 31, 2001 and 2000, loans consist of the following:
The Company grants commercial, real estate and consumer loans to customers in the regions the Banks serve in southern California. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the strength of the real estate market and the economy in general in the Banks' primary service areas. Should the real estate market experience an overall decline in property values or should other events occur, including, but not limited to, adverse economic conditions (which may or may not affect real property values) the ability of borrowers to make timely scheduled principal and interest payments on the Company's loans may be adversely affected, and in turn may result in increased delinquencies and foreclosures. In the event of foreclosures under such conditions, the value of the property acquired may be less than the appraised value when the loan was originated and may, in some instances, result in insufficient proceeds upon disposition to recover the Company's investment in the foreclosed property.
Nonaccrual loans totaling $4,672,000, $2,271,000 and $1,845,000 were outstanding as of December 31, 2001, 2000 and 1999, respectively. There were no loans that were past due 90 days or more and still accruing interest as of December 31, 2001 and 2000. Loans that were past due 90 days or more and still accruing interest were $75,000 as of December 31, 1999. Interest income of $596,000,
$413,000 and $158,000 would have been recorded for the years ended December 31, 2001, 2000 and 1999, respectively, if nonaccrual loans had been performing in accordance with their original terms. Interest income of $110,000, $60,000 and $76,000 was recorded on loans subsequently transferred to a nonaccrual status for the years ended December 31, 2001, 2000 and 1999, respectively.
A summary of the activity in the allowance for loan losses is as follows:
The Company measures its impaired loans by using the fair value of the collateral if the loan is collateral-dependent and the present value of the expected future cash flows discounted at the loan's effective interest rate if the loan is not collateral-dependent. As of December 31, 2001 and 2000, all impaired loans were collateral-dependent. The Company recognizes income from impaired loans on the accrual basis unless the loan is on nonaccrual status. Income from loans on nonaccrual status is recognized to the extent cash is received and the loan's principal balance is deemed collectible. The following table presents a breakdown of impaired loans and any impairment allowance related to impaired loans as of December 31, 2001 and 2000:
Based on the Company's evaluation process to determine the level of the allowance for loan losses mentioned previously and the fact that a majority of the Company's nonperforming loans are secured, management believes the allowance level to be adequate as of December 31, 2001 to absorb the estimated known and inherent risks identified through its analysis. For the years ended December 31, 2001, 2000 and 1999, interest income of $0, $31,000 and $76,000 was recorded on impaired loans, respectively, and the average balance of impaired loans was $8,367,000, $1,841,000 and $1,409,000, respectively.
The following is the activity in the valuation allowance for other real estate owned:
(5) Premises and Equipment
Premises and equipment as of December 31, 2001 and 2000 are as follows:
Depreciation and amortization expense for the years ended December 31, 2001, 2000 and 1999 was $1,255,000, $940,000 and $807,000, respectively.
(6) Deposits
Interest bearing deposits as of December 31, 2001 and 2000 are comprised of the following:
The following summarizes the maturity of time deposits as of December 31, 2001:
Interest expense on deposits for the years ended December 31, 2001, 2000 and 1999 is comprised of the following:
(7) Fair Value of Financial Instruments
Estimated fair values for the Company's financial instruments and a description of the methodologies and assumptions used to determine such amounts follows:
(a) Cash and Due from Banks and Federal Funds Sold
The carrying amount is assumed to be the fair value because of the liquidity of these instruments.
(b) Time Deposits in Financial Institutions
The carrying amount is assumed to be the fair value given the short-term nature of these deposits.
(c) Investment Securities
Fair values are based on quoted market prices available as of the balance sheet date. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
(d) Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and further segmented into fixed and adjustable rate interest terms and by credit risk categories. The fair value estimates do not take into consideration the value of the loan portfolio in the event the loans had to be sold outside the parameters of normal operating activities.
The fair value of fixed rate loans and non-performing or adversely classified adjustable rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. The discount rates used for performing fixed rate loans are the Company's current offer rates for comparable instruments with similar terms.
The fair value of performing adjustable rate loans is estimated to be carrying value. These loans reprice frequently at market rates and the credit risk is not considered to be greater than normal.
(e) Deposits
The fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, savings and checking accounts, is equal to the amount payable on demand as of the balance sheet date. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. No value has been assigned to the Company's long-term relationships with its deposit customers (core deposit intangible).
(f) Borrowings
The carrying amount is assumed to be the fair value because rates paid are the same as rates currently offered for borrowings with similar remaining maturities and characteristics.
(g) Trust Preferred Securities
The fair value of the trust preferred securities is based on the discounted value of contractual cash flows for fixed rate securities. The discount rate is estimated using the rates currently offered for similar securities of similar maturity. The fair value of trust preferred securities with variable rates is deemed to be the carrying value.
(h) Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties.
(i) Limitations
Fair value estimates are made at a specific point in time and are based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on what management believes to be conservative judgments regarding expected future cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Since the fair values have been estimated as of December 31, 2001 and 2000, the amounts that will actually be realized or paid at settlement or maturity of the instruments could be significantly different.
The fair values of the Company's financial instruments as of December 31, 2001 and 2000 are as follows:
(8) Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2001 and 2000 are as follows:
Based upon projections for future taxable income over the next year in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.
For the years ended December 31, 2001, 2000 and 1999, the components of income taxes consist of the following:
A reconciliation of total income taxes for the years ended December 31, 2001, 2000 and 1999 to the amount computed by applying the applicable statutory federal income tax rate of 34% to earnings before income taxes follows:
As of December 31, 2001 and 2000, taxes receivable (payable) totaled $1,120,000 and $(560,000), respectively.
The Company has available at December 31, 2001 and 2000 approximately $13,824,000 and $406,000, respectively, of unused federal operating loss carryforwards that may be applied against future taxable income through. The applications of the net operating loss and other carryforwards are subject to annual IRC Section 382 limitations.
(9) Borrowings and Trust Preferred Securities
Federal Funds Arrangements with Commercial Banks
As of December 31, 2001 and 2000, the Company had unsecured lines of credit in the amount of $23,000,000 and $14,000,000, respectively, from correspondent banks. These lines are renewable annually. The Company borrows funds from time to time on a short term or overnight basis. As of December 31, 2001, 2000 and 1999, there were no balances outstanding. The average balances were $11,000, $462,000 and $82,000 in 2001, 2000 and 1999, respectively. The highest balance at any month-end was $0, $10,400,000 and $700,000 in 2001, 2000 and 1999, respectively. The average rate paid was 1.70%, 5.90% and 4.90% in 2001, 2000 and 1999, respectively
Borrowing arrangements at the Federal Reserve Discount Window
As of December 31, 2001 and 2000, the Company had a Fed discount limit of approximately $3,971,000 and $4,737,000, respectively, none of which was outstanding as of December 31, 2001 or 2000 and none of which was used in 2001 or 2000.
Federal Home Loan Bank Lines of Credit
As of December 31, 2001 and 2000, the Company had a Federal Home Loan Bank limit of approximately $9,942,000 and $15,551,000, respectively, none of which was outstanding as of December 31, 2001 or 2000 and none of which was used during 2001 or 2000. The availability of the lines of credit, as well as adjustments in deposit programs, provide for liquidity in the event that the level of deposits should fall abnormally low. These sources provide that funding thereof may be withdrawn depending upon the financial strength of the Company.
Treasury, Tax and Loan Note
The Company participates in the Treasury, Tax and Loan Note program. The Company has a limit of $1,700,000 at the Federal Reserve Bank. Treasury, Tax and Loan balances fluctuate based on the amounts deposited by customers and the amounts called for payment by the Federal Reserve Bank. As of December 31, 2001 and 2000, the balance outstanding under the Note program was $431,000 and $1,689,000, respectively. The average balances under the Note program were $719,000 in 2001, $800,000 in 2000 and $711,000 in 1999. The highest balance at any month-end was $1,437,000 in 2001 and $1,700,000 in 2000 and 1999. The average rate paid was 3.78%, 5.30% and 5.00% in 2001, 2000 and 1999, respectively.
Revolving Line of Credit
In May 2000, the Company executed a Revolving Credit Agreement with The Northern Trust Company for $5,000,000. Shares of common stock of Rancho Santa Fe have been pledged as collateral against the note payable. In January 2001, the Company executed the first Amendment to the Revolving Credit Agreement increasing the credit line to $10,000,000 and modifying certain covenants to reflect the Company's larger size and the Professional Merger. Shares of common stock of Rancho Santa Fe and First Community were pledged as collateral. The loan agreement contains covenants that impose certain restrictions on activities of the Company and its financial condition. Such covenants include minimum net worth ratios, maximum debt ratios, a minimum return on average assets, a dividend limitation and minimum and maximum credit quality ratios. As of December 31, 2001, the Company, and where applicable, its subsidiaries were in compliance with each of such covenants or had obtained the appropriate waivers. The maximum outstanding amount during 2001 and 2000 was $7,650,000 and $2,450,000, respectively. The average outstanding amount during 2001and 2000 was $5,383,000 and $305,000, respectively. The loan bears interest at the prime rate less 75 basis points. As of December 31, 2001 and 2000, the interest rates were 4.00% and 8.75%, respectively. The Company pays a fee of 25 basis points on the unused amount. At December 31, 2001 and 2000, there were no outstandings under this line of credit.
Trust Preferred Securities
In September 2000, the Company issued $8,000,000 of trust preferred securities bearing a fixed interest rate of 10.60% and maturing in thirty years. These instruments were issued to fund part of the Professional Merger (see note 19).
In November 2001, the Company issued $10,000,000 of trust preferred securities bearing a variable interest rate, which is reset semi-annually, at the 6-Month LIBOR plus 3.75%, provided the rate will
not exceed 11% through December 2006, and maturing in thirty years. The initial interest rate was set at approximately 6.00% and the next interest rate reset date is June 8, 2002.
In December 2001, the Company issued another $10,000,000 of trust preferred securities bearing a variable interest rate, which is reset quarterly, at the 3-Month LIBOR plus 3.60%, provided the rate will not exceed 12.50% through December 2006, and maturing in thirty years. The initial interest rate was set at 5.60% and the next interest rate reset date is March 18, 2002.
These securities are considered tier 1 capital for regulatory purposes.
(10) Stock Options and Warrants
At the time of the First Community Acquisition, all outstanding stock options of First Community were converted into stock options of the Company at an exchange rate of 0.30 shares. The following disclosures reflect the combination of the Company, First Community and Rancho Santa Fe stock option data.
The Company has a stock option plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to officers, directors and key employees. The Plan authorizes grants of options to purchase up to 1,075,079 shares of authorized but unissued Company common stock. Stock options are granted with an exercise price greater than or equal to the stock's fair market value at the date of grant. Stock options have terms not to exceed 10 years from the date of the grant and vest and become fully exercisable in installments determined at the date of grant. All of First Community's stock options vested at the time of the First Community Acquisition.
As of December 31, 2001, there were 152,564 additional shares available for grant under the Plan. The per share weighted-average fair value of stock options granted during 2001, 2000 and 1999 was $3.37, $2.43 and $1.57, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2001-expected dividend yield 2.01%, risk-free interest rate of 4.85%, volatility of 26% and an expected life of 2.5 years; 2000-expected dividend yield 2.42%, risk-free interest rate of 5.75%, volatility of 22% and an expected life of 2.5 years; 1999-expected dividend yield 2.32%, risk-free interest rate of 5.27%, no volatility and an expected life of 5 years;
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below:
Stock option activity during the periods indicated is as follows:
As of December 31, 2001, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $4.00 to $19.10 and 4.5 years, respectively. As of December 31, 2001, the number of options exercisable was 396,694 and the weighted-average exercise price of those options was $11.49.
As of December 31, 2001, there are two meaningful exercise price ranges. The first is a range of $4.00 to $5.00. There are 18,750 options in this range of which all are exercisable. The weighted-average exercise price is $4.51 and the weighted-average contractual life is 4.5 years. The second range is from $9.50 to $19.10. There are 761,261 options in this range of which 377,944 are exercisable. The weighted-average exercise price is $14.03 and the weighted-average contractual life is 4.7 years.
During 1995, the Company issued to certain shareholders warrants for 83,555 shares of common stock. The warrants entitle these shareholders to acquire a like number of shares of common stock for an exercise price of $4.80 per share. The warrants were all exercised during the year ended December 31, 2000.
(11) Employee Benefit Plans
The Banks have 401(k) plans for the benefit of substantially all employees. Amounts accrued and charged to expense were $57,000, $25,000 and $14,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
(12) Net Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations:
(13) Lease Commitments
As of December 31, 2001, aggregate minimum rental commitments for certain real property under noncancellable operating leases having an initial or remaining term of more than one year are as follows:
Total gross rental expense for the years ended December 31, 2001, 2000 and 1999 was $2,083,000, $861,000 and $815,000, respectively. There are no contingent rental payments applicable to any of the leases. Most of the leases provide that the Company pay maintenance, insurance and certain other operating expenses applicable to the leased premises in addition to the monthly minimum payments. Management expects that in the normal course of business, leases that expire will be renewed or replaced by other leases.
Total rental income for the years ended December 31, 2001, 2000 and 1999 was approximately $4,000, $98,000 and $121,000, respectively.
(14) Commitments and Contingencies
The Banks are party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
Commitments to extend credit amounting to $174,040,000 and $87,900,000 were outstanding as of December 31, 2001 and 2000, respectively. 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, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit and financial guarantees amounting to $11,459,000 and $2,850,000 were outstanding as of December 31, 2001 and 2000, respectively. Standby letters of credit and financial guarantees 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 private borrowing arrangements. Most guarantees will expire within one year. The Company generally requires collateral or other security to support financial instruments with credit risk. Management does not anticipate that any material loss will result from the outstanding commitments to extend credit, standby letters of credit or financial guarantees.
(15) Restricted Cash Balances
The Company is required to maintain reserve balances with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserves held at the Federal Reserve Bank for the years ended December 31, 2001 and 2000 were approximately $7,015,000 and $7,156,000, respectively.
(16) Dividend Availability
Holders of Company common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available therefor under certain federal laws and regulations governing the banking and financial services business. In addition, the Banks are subject to certain restrictions under certain federal laws and regulations governing banks which limit their ability to transfer funds to the Company through intercompany loans, advances or cash dividends.
During 2001, 2000 and 1999, the Company paid $1,690,000, $1,156,000 and $742,000, respectively, in dividends and transferred $342,000 in 2000 and $526,000 in 1999 from retained earnings to common stock in accordance with guidelines of the Office of the Comptroller of the Currency.
(17) Litigation
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company.
(18) Regulatory Matters
The Company, as a bank holding company, is subject to regulation by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended.
The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of the Company's and the Banks' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Company and the Banks have met all capital adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the regulatory agencies categorized the Company and each of the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company and the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company's or any of the Banks' categories.
Actual capital amounts and ratios for the Company and the Banks as of December 31, 2001 and 2000 are presented in the following table:
(19) Acquisitions
Separate Company Information for Pooling-of-Interest Acquisitions
On May 31, 2000, the Company completed its formation and combined Rancho Santa Fe with First Community as its wholly-owned subsidiaries. Shareholders for both banks approved the transaction at their respective Shareholder Meetings held on May 31, 2000. Under the terms of the merger agreement, each shareholder of First Community received 0.300 shares of Company common stock for each share of First Community common stock. Each Rancho Santa Fe share was exchanged for one share of Company common stock. At the same time as completion of the merger, the Company became
listed on NASDAQ under the symbol FCBP. The merger was accounted for using pooling-of-interests accounting.
The following table presents certain financial data reported separately by each company and on a combined basis for the year ended December 31:
Pro Forma Information for Purchase Acquisitions
On January 16, 2001, the Company acquired Professional Bancorp, Inc. ("Professional") and its wholly-owned subsidiary, First Professional Bank, N.A. ("First Professional"). Shareholders of Professional received either $8.00 in cash or 0.55 shares of First Community common stock for each share of Professional common stock. Professional shareholders had the option to choose either cash or stock consideration. The purchase price received by shareholders of Professional totaled 504,747 shares of First Community common stock and approximately $8,858,000 in cash resulting in a total purchase price of approximately $16,333,000. For Professional shareholders receiving stock, 0.55 shares of Company common stock was received for each share of Professional common stock.
The purchase price adjustment to arrive at the estimated fair value of assets acquired and liabilities assumed relating to the Professional acquisition is summarized below:
On October 8, 2001, the Company acquired all of the outstanding common and preferred stock of First Charter Bank, N.A. Shareholders of First Charter received 0.008635 shares of First Community common stock for each share of First Charter common stock. Approximately 661,600 shares of First
Community common stock were issued. The price of First Community common stock on the acquisition date was $21.50 resulting in a total purchase price of approximately $14,225,000. First Charter has been merged into First Professional Bank, N.A. with First Professional as the surviving entity.
The purchase price adjustment to arrive at the estimated fair value of assets acquired and liabilities assumed relating to the First Charter acquisition is summarized below:
The following table presents unaudited pro forma results of operations of the Company for the years ended December 31, 2001 and 2000 as if the acquisition of Professional and First Charter had been effective at the beginning of 2000. The unaudited pro forma results include (1) the historical accounts of the Company and of the acquired businesses; and (2) pro forma adjustments, as may be required, including the amortization of the excess purchase price over the fair value of the net assets acquired, and the applicable tax effects of these adjustments.
The unaudited combined pro forma summary of operations is intended for informational purposes only and is not necessarily indicative of the future operating results of the Company or operating results that would have occurred had these acquisitions been in effect for all the years presented.
Unaudited Combined Pro Forma Summary of Operations
(20) Condensed Financial Information of Parent Company
The parent company only condensed balance sheets, condensed statements of income and condensed statements of cash flows information is presented as of and for the years ended December 31, 2001 and 2000 and for each of the years in the three-year period ended December 31, 2001 are as follows:
(21) Quarterly Results of Operations (Unaudited)
(22) Comprehensive Income
(23) Related Party Transactions
Belle Plaine Partners, Inc. ("Belle Plaine") serves as a financial advisor to the Company under an engagement letter dated May 2, 1995. In that capacity, the Company paid Belle Plaine fees of $619,000 in connection with the First Community Acquisition which closed on May 31, 2000. Belle Plaine provided financial advice, but was not paid a fee for the Professional Merger. Belle Plaine also provided financial advice for the First Charter acquisition and was paid a fee of $458,000.
As of December 31, 2000, the Company had loans outstanding to related parties of approximately $4,975,000 and commitments outstanding of approximately $8,428,000. These loans and commitments are at market rates and terms.
(24) Subsequent Events
On January 31, 2002, the Company completed the acquisition of Pacific Western National Bank. The shareholders and option holders of Pacific Western were paid approximately $36.6 million. Upon completion of this acquisition, Pacific Western and First Community were merged with First Professional Bank. The resulting bank will operate as Pacific Western National Bank and will be headquartered in Santa Monica, California. To fund this acquisition, the Company raised approximately $20 million in two separate trust preferred offerings, which closed during the fourth quarter of 2001. In addition, approximately $23 million was raised in a rights offering that closed on January 23, 2002. In the rights offering, the Company issued 1,194,805 shares of common stock at a price of $19.25 per share. The acquisition of Pacific Western was accounted for using purchase accounting.
The purchase price adjustment to arrive at the estimated fair value of assets acquired and liabilities assumed relating to the Pacific Western acquisition is summarized below:
These preliminary purchase price adjustments are subject to further refinement, including the determination of a core deposit premium.
On March 7, 2002, the Company completed the acquisition of all of the outstanding common stock and options of W.H.E.C., Inc., the holding company of Capital Bank of North County ("Capital Bank"). The shareholders of Capital Bank were given approximately 0.2353 shares of Company common stock for each share of Capital Bank common stock. The Company issued approximately 1.1 million shares and the aggregate purchase price amounted to approximately $24.5 million. Upon completion of this acquisition, Capital Bank was merged with Rancho Santa Fe National Bank, a wholly-owned subsidiary of the Company. The resulting bank will operate as Rancho Santa Fe National Bank and will be headquartered in Rancho Santa Fe, California. The acquisition of Capital Bank was accounted for using purchase accounting.
The purchase price adjustment to arrive at the estimated fair value of assets acquired and liabilities assumed relating to the W.H.E.C. acquisition is summarized below:
These preliminary purchase price adjustments are subject to further refinement, including the determination of a core deposit premium.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item can be found in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and is incorporated herein by this reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item can be found in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item can be found in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item can be found in the Company's Proxy Statement for the 2002 Annual Meeting of Shareholders, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The consolidated financial statements of First Community Bancorp and its subsidiaries and independent auditors' report are included in Part II (Item 8) of this Form 10-K
2.Financial Statement Schedules
All financial statement schedules have been omitted, as inapplicable.
3.Exhibits
The following documents are included or incorporated by reference in this Annual Report on Form 10-K:
(b) Reports on Form 8-K
On October 19, 2001, the Company filed a Current Report on Form 8-K reporting the consummation of the acquisition of First Charter Bank, N.A. pursuant to Item 2 of Form 8-K. The Current Report included pro forma combined condensed balance sheets at June 30, 2001 and December 31, 2000 and pro forma combined condensed income statements for the six months ended June 30, 2001 and the year ended December 31, 2000. The report incorporated by reference the audited consolidated balance sheets for the years ended December 31, 2000 and 1999 and the audited consolidated statements of operations and stockholders' equity and comprehensive income (loss) and cash flows for the years ended December 31, 2000, 1999 and 1998 of First Charter Bank, N.A. The report also incorporated by reference the unaudited consolidated balance sheet as of June 30, 2001 and unaudited consolidated statements of operations and comprehensive income (loss) and cash flows for the six months ended June 30, 2001 and June 30, 2000 of First Charter Bank, N.A. On October 24, 2001, the company filed an amendment to the Current Report on Form 8-K/A correcting certain information in the Pro Forma combined condensed financial statements of the Company.
(c) Exhibits
The exhibits listed in Item 14(a)3 are incorporated by reference or attached hereto.
(d) Excluded Financial Statements
Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST COMMUNITY BANCORP
Dated: March 29, 2002
By:
/s/ MATTHEW P. WAGNER Matthew P. Wagner
(President, Chief Executive Officer and
Acting Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Date
/s/ MATTHEW P. WAGNER Matthew P. Wagner
President, Chief Executive Officer, Acting Chief Financial Officer and Director
March 29, 2002
/s/ JOHN M. EGGEMEYER John M. Eggemeyer
Chairman and Director
March 29, 2002
/s/ JAMES A. BOYCE James A. Boyce
Director
March 29, 2002
/s/ ROBERT E. HERRMANN Robert E. Herrmann
Director
March 29, 2002
/s/ TIMOTHY B. MATZ Timothy B. Matz
Director
March 29, 2002
/s/ ROBERT A. SCHOELLHORN Robert A. Schoellhorn
Director
March 29, 2002
/s/ PAUL I. STEVENS Paul I. Stevens
Director
March 29, 2002
/s/ ROBERT A. STINE Robert A. Stine
Director
March 29, 2002
/s/ DAVID S. WILLIAMS David S. Williams
Director
March 29, 2002
PART I
PART II
Analysis of Net Income
Analysis of Average Rates and Balances
Analysis of Volume and Interest Rates
FIRST COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000
FIRSTCOMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 31, 2001, 2000 and 1999
FIRST COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity and Comprehensive Income Years ended December 31, 2001, 2000 and 1999
FIRST COMMUNITY BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999
FIRST COMMUNITY BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001 and 2000
PART III
PART IV
SIGNATURES