Back to GetFilings.com




QuickLinks -- Click here to rapidly navigate through this document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

OR


o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                               to                              

Commission File Number: 00-30747


FIRST COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)

CALIFORNIA   33-0885320
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer Identification Number)

6110 El Tordo, P.O. Box 2388, Rancho Santa Fe, California

 

92067
(Address of principal executive offices)   (Zip Code)

(858) 756-3023
(Registrant's telephone number, including area code)


        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        As of May 4, 2004 there were 15,459,737 shares of the registrant's common stock outstanding, excluding 522,000 shares of restricted stock.





TABLE OF CONTENTS

 
   
  Page
PART I—FINANCIAL INFORMATION    
  ITEM 1.   Consolidated Financial Statements (Unaudited)   3
    Unaudited Condensed Consolidated Balance Sheets   3
    Unaudited Condensed Consolidated Statements of Earnings   4
    Unaudited Condensed Consolidated Statements of Comprehensive Income   5
    Unaudited Condensed Consolidated Statements of Cash Flows   6
    Notes to Unaudited Condensed Consolidated Financial Statements   7
  ITEM 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   14
  ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk   30
  ITEM 4.   Controls and Procedures   30
PART II—OTHER INFORMATION   31
  ITEM 1.   Legal Proceedings   31
  ITEM 2.   Changes in Securities   31
  ITEM 3.   Defaults Upon Senior Securities   32
  ITEM 4.   Submission of Matters to a Vote of Security Holders   32
  ITEM 5.   Other Information   32
  ITEM 6.   Exhibits and Reports on Form 8-K   33
SIGNATURES   34

2



PART I—FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements (Unaudited)


UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 
  March 31,
2004

  December 31,
2003

 
 
  (In thousands, except share data)

 
Assets:              
Cash and due from banks   $ 98,049   $ 101,968  
Federal funds sold     8,700     2,600  
   
 
 
  Total cash and cash equivalents     106,749     104,568  
Interest-bearing deposits in financial institutions     359     311  
Investments:              
  Federal Reserve Bank and Federal Home Loan Bank stock, at cost     15,182     14,662  
  Securities available-for-sale (amortized cost of $318,046 at March 31, 2004 and $420,531 at December 31, 2003)     318,642     417,656  
   
 
 
  Total investments     333,824     432,318  
Loans, net of fees     1,715,605     1,595,837  
Less: allowance for loan losses     (28,058 )   (25,752 )
   
 
 
  Net loans     1,687,547     1,570,085  
Premises and equipment, net     13,995     14,004  
Deferred income taxes     14,519     15,577  
Accrued interest receivable     8,111     7,432  
Goodwill     223,138     199,919  
Core deposit and customer relationship intangible assets     23,559     22,037  
Cash surrender value of life insurance     50,827     50,287  
Other assets     12,881     5,789  
   
 
 
  Total Assets   $ 2,475,509   $ 2,422,327  
   
 
 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 
Liabilities:              

Noninterest-bearing deposits

 

$

844,667

 

$

814,365

 
Interest-bearing deposits     1,126,127     1,135,304  
   
 
 
  Total deposits     1,970,794     1,949,669  
Accrued interest payable and other liabilities     27,076     21,597  
Short-term borrowings     10,800     53,700  
Subordinated debentures     121,654     59,798  
   
 
 
  Total Liabilities     2,130,324     2,084,764  
Shareholders' Equity:              
Preferred stock; authorized 5,000,000 shares; no shares issued and outstanding          
Common stock, no par value; authorized 30,000,000 shares; issued and outstanding 15,928,081 and 15,893,141 at March 31, 2004 and December 31, 2003 (includes 469,000 and 460,000 shares of restricted stock, respectively)     309,020     308,336  
Retained earnings     49,308     44,706  
Unearned equity compensation     (13,488 )   (13,811 )
Accumulated other comprehensive income:              
  Unrealized gains (losses) on securities available-for-sale, net     345     (1,668 )
   
 
 
  Total Shareholders' Equity     345,185     337,563  
   
 
 
  Total Liabilities and Shareholders' Equity   $ 2,475,509   $ 2,422,327  
   
 
 
Book value per share   $ 21.67   $ 21.24  

See "Notes to Unaudited Condensed Consolidated Financial Statements."

3



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

 
  Three Months Ended
March 31,

 
  2004
  2003
 
  (In thousands, except per share data)

Interest income:            
  Interest and fees on loans   $ 26,225   $ 25,611
  Interest on interest-bearing deposits in financial institutions     2     3
  Interest on investment securities     3,121     2,317
  Interest on federal funds sold     74     67
   
 
  Total interest income     29,422     27,998
   
 
Interest expense:            
  Interest expense on deposits     1,771     2,881
  Interest expense on short-term borrowings     68     22
  Interest expense on subordinated debentures     1,249     654
   
 
  Total interest expense     3,088     3,557
   
 
Net interest income     26,334     24,441
  Provision for loan losses         120
   
 
  Net interest income after provision for loan losses     26,334     24,321
   
 
Noninterest income:            
  Service charges and fees on deposit accounts     2,299     2,134
  Other commissions and fees     859     1,064
  Gain on sale of loans     171     138
  Gain on sale of securities     30    
  Gain on sale of other real estate owned         318
  Increase in cash surrender value of life insurance     507     312
  Other income     211     110
   
 
  Total noninterest income     4,077     4,076
   
 
Noninterest expense:            
  Salaries and employee benefits     9,725     8,009
  Occupancy     2,314     2,344
  Furniture and equipment     739     772
  Data processing     1,025     1,293
  Other professional services     672     545
  Business development     265     200
  Communications     497     540
  Insurance and assessments     379     327
  Cost of real estate owned         157
  Intangible asset amortization     691     588
  Other     1,558     1,425
   
 
  Total noninterest expense     17,865     16,200
   
 
Earnings before income taxes     12,546     12,197
Income taxes     5,046     4,964
   
 
  Net earnings   $ 7,500   $ 7,233
   
 
Per share information:            
Number of shares (weighted average)            
  Basic     15,451.6     15,330.1
  Diluted     15,962.3     15,775.9
Net earnings per share            
  Basic   $ 0.49   $ 0.47
  Diluted   $ 0.47   $ 0.46
Dividends declared per share   $ 0.1875   $ 0.15

See "Notes to Unaudited Condensed Consolidated Financial Statements."

4



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
  Three Months Ended March 31,
 
  2004
  2003
 
  (In thousands)

Net earnings   $ 7,500   $ 7,233
Other comprehensive income, net of related income taxes:            
  Unrealized gains on securities:            
  Unrealized holding gains arising during the period     1,871     71
  Reclassifications of realized losses included in income     142    
   
 
Other comprehensive income     2,013     71
   
 
Comprehensive income   $ 9,513   $ 7,304
   
 

See "Notes to Unaudited Condensed Consolidated Financial Statements."

5



UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Three Months Ended March 31,
 
 
  2004
  2003
 
 
  (In thousands)

 
Cash flows from operating activities:              
  Net earnings   $ 7,500   $ 7,233  
    Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:              
    Depreciation and amortization     2,168     2,218  
    Provision for loan losses         120  
    Gain on sale of OREO         (318 )
    Gain on sale of loans     (171 )   (138 )
    Gain on sale of securities     (30 )    
    Real estate valuation adjustments         153  
    Loss on sale of premises and equipment     4      
    Amortization of unearned compensation related to restricted stock     654      
    Accrued and deferred income taxes, net     2,095     3,270  
    Increase in other assets     (2,725 )   (3,224 )
    Decrease in accrued interest payable and other liabilities     (4,112 )   (11,032 )
    Dividends on FHLB stock     (25 )   (7 )
   
 
 
  Net cash provided by (used in) operating activities     5,358     (1,725 )
   
 
 
Cash flows from investing activities:              
  Net cash and cash equivalents acquired (paid) in acquisition of:              
    Bank of Coronado         372  
    First Community Financial Corporation     (36,035 )    
  Net (increase) decrease in loans outstanding     (47,302 )   11,541  
  Proceeds from sale of loans     2,719     2,146  
  Net (increase) decrease in interest-bearing deposits in financial institutions     (48 )   816  
  Maturities of investment securities     38,442     60,558  
  Proceeds from sale of securities available-for-sale     64,662     7,367  
  Purchases of securities available-for-sale     (1,275 )   (50,563 )
  Net purchases of FRB and FHLB stock     (495 )   (2,693 )
  Proceeds from sale of OREO         1,881  
  Purchases of premises and equipment, net     (693 )   (1,330 )
  Proceeds from sale of premises and equipment     12      
   
 
 
  Net cash provided by investing activities     19,987     30,095  
   
 
 
Cash flows from financing activities:              
  Net increase (decrease) in deposits:              
    Non interest-bearing     30,302     1,596  
    Interest-bearing     (9,177 )   (47,943 )
  Proceeds from issuance of subordinated debentures     61,856      
  Proceeds from exercise of stock options     353     660  
  Net decrease in short-term borrowings     (103,600 )   (1,223 )
  Cash dividends paid     (2,898 )   (2,302 )
   
 
 
  Net cash used in financing activities     (23,164 )   (49,212 )
   
 
 
  Net increase (decrease) in cash and cash equivalents     2,181     (20,842 )
  Cash and cash equivalents at beginning of period     104,568     124,366  
   
 
 
  Cash and cash equivalents at end of period   $ 106,749   $ 103,524  
   
 
 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 
  Cash paid during period for interest   $ 2,914   $ 3,600  
  Cash paid during period for income taxes     1,008     950  
  Transfer from loans to loans held-for-sale     2,549     2,008  

See "Notes to Unaudited Condensed Consolidated Financial Statements."

6



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2004

NOTE 1—BASIS OF PRESENTATION

        We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as a holding company for our banking subsidiaries. As of March 31, 2004, those subsidiaries were First National Bank, which we refer to as First National, and Pacific Western National Bank, or Pacific Western. We refer to Pacific Western and First National herein as the "Banks" and when we say "we", "our" or the "Company", we mean the Company on a consolidated basis with the Banks. When we refer to "First Community" or to the holding company, we are referring to the parent company on a stand-alone basis.

        We completed twelve acquisitions from May 2000 through March 31, 2004. This includes the merger whereby the former Rancho Santa Fe National Bank and First Community Bank of the Desert became wholly-owned subsidiaries of the Company in a pooling-of-interests transaction. The other acquisitions have been accounted for using the purchase method of accounting and, accordingly, their operating results have been included in the consolidated financial statements from their respective dates of acquisition. We completed Professional Bancorp and First Charter Bank during 2001, Pacific Western National Bank, W.H.E.C., Inc., Upland Bank, Marathon Bancorp and First National Bank during 2002, and Bank of Coronado and Verdugo Banking Company during 2003. On March 1, 2004, we acquired First Community Financial Corporation, which we refer to as FC Financial, using the purchase method of accounting. On April 16, 2004, we completed the acquisition of Harbor National Bank, or Harbor National, and merged Harbor National into Pacific Western. Discussions about the Company and the Banks as of and for the quarter ended March 31, 2004 do not include Harbor National.

        The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated.

        Our financial statements reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The interim operating results are not necessarily indicative of operating results for the full year.

        Prior to December 31, 2003, the Company issued $58 million of trust preferred securities. Pursuant to FASB Interpretation No. 46R ("FIN 46R"), Consolidation of Variable Interest Entities, issued in December 2003, we deconsolidated our trust preferred entities at December 31, 2003. The overall effect of the deconsolidation on our financial position and operating results was not material.

        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. Actual results could differ from those

7


estimates. Material estimates subject to change in the near term include, among other items, the allowance for loan losses, the carrying values of intangible assets and the realization of deferred tax assets.

        Certain prior year amounts have been reclassified to conform to the current year's presentation.

NOTE 2—ACQUISITIONS

        We completed the following acquisitions during the time period of January 1, 2003 to March 31, 2004, using the purchase method of accounting, and accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective dates of acquisition:

Acquisition

  Bank of
Coronado

  Verdugo
Banking
Company

  FC Financial
 
Date Acquired

  January
2003

  August
2003

  March
2004

 
Assets Acquired:                    
  Cash and cash equivalents   $ 11,974   $ 33,075   $ 3,965  
  Interest-bearing deposits in financial institutions     100          
  Investment securities     2,699          
  Loans, net     63,891     147,471     72,708  
  Premises and equipment     261     82     106  
  Goodwill     7,250     22,080     23,219  
  Core deposit and customer relationship intangible assets     714     4,376     2,213  
  Other assets     1,601     4,467     2,251  
   
 
 
 
Total assets acquired     88,490     211,551     104,462  
   
 
 
 
Liabilities Assumed:                    
  Noninterest-bearing deposits     (17,079 )   (48,642 )    
  Interest-bearing deposits     (56,007 )   (119,111 )    
  Short-term borrowings             (60,700 )
  Accrued interest payable and other liabilities     (3,802 )   (9,545 )   (3,762 )
   
 
 
 
Total liabilities assumed     (76,888 )   (177,298 )   (64,462 )
   
 
 
 
Total cash consideration paid   $ 11,602   $ 34,253   $ 40,000  
   
 
 
 

Bank of Coronado Acquisition.

        On January 9, 2003, we acquired Bank of Coronado. We paid $11.6 million in cash in exchange for all of the outstanding common shares and options of Bank of Coronado. At the time of the merger, Bank of Coronado was merged into First National.

Verdugo Banking Company Acquisition.

        On August 22, 2003, we acquired Verdugo Banking Company. We paid approximately $34.3 million in cash for all outstanding shares of common stock and options. At the time of the merger, Verdugo Banking Company was merged into Pacific Western.

8



First Community Financial Corporation.

        On March 1, 2004, we acquired FC Financial, a privately-held commercial finance company based in Phoenix, Arizona. We paid $40.0 million in cash for all of the outstanding common stock and options of FC Financial. At the time of the acquisition FC Financial became a wholly-owned subsidiary of First National.

Merger Related Liabilities.

        The activity in our merger-related liability for the three months ended March 31, 2004 is as follows:

 
  Severance
and
Employee-
related

  System
Conversion
and
Integration

  Asset Write-
downs, Lease
Terminations
and Other
Facilities-related

  Other(1)
  Total
 
Balance at December 31, 2003   $ 1,178   $ 431   $ 3,712   $ 616   $ 5,937  
Additions related to 2004 acquisitions     150     200     20     2,175     2,545  
Non-cash write-downs and other     (7 )       (45 )   7     (45 )
Cash outlays     (266 )   (222 )   (643 )   (1,984 )   (3,115 )
   
 
 
 
 
 
Balance at March 31, 2004   $ 1,055   $ 409   $ 3,044   $ 814   $ 5,322  
   
 
 
 
 
 

(1)
Included in other are investment banking and professional fees.

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

        We adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142, on January 1, 2002. Goodwill and intangible assets arise from purchase business combinations and SFAS No. 142 requires all business combinations to be accounted for under the purchase method of accounting. SFAS No. 142 addresses the initial recognition and measurement of goodwill and other intangible assets acquired as a result of a business combination and the recognition and measurement of those assets subsequent to acquisition. Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized, but instead are tested for impairment annually, or more frequently, whenever certain events occur. We performed our annual test for impairment as of June 30, 2003, and concluded that there was no impairment in our goodwill at that time.

        SFAS No. 142 also requires intangible assets with definite lives to be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. We recorded the aggregate values of the core deposit and customer relationship intangibles separate from goodwill and are amortizing them over their estimated useful lives of 10 years and 55 months, respectively. The customer relationship intangible for the FC Financial acquisition is based on a preliminary estimate of value. Accordingly, the amount of this asset and its useful life are subject to change.

9



        The changes in the carrying amounts of goodwill and other intangible assets for the three months ended March 31, 2004 are as follows:

 
  Goodwill
  Core Deposit
and Customer
Relationship
Intangible

 
 
  (In Thousands)

 
Balance as of December 31, 2003   $ 199,919   $ 22,037  
FC Financial acquisition     23,219     2,213  
Amortization         (691 )
   
 
 
Balance as of March 31, 2004   $ 223,138   $ 23,559  
   
 
 

NOTE 4—NET EARNINGS PER SHARE

        The following is a summary of the calculation of basic and diluted net earnings per share for the three months ended March 31, 2004 and 2003:

 
  Three Months Ended
March 31,

 
  2004
  2003
 
  (In thousands, except per share data)

Net earnings   $ 7,500   $ 7,233

Weighted average shares outstanding used for basic net earnings per share

 

 

15,451.6

 

 

15,330.1
Effect of dilutive stock options and restricted stock     510.7     445.8
   
 
Diluted weighted average shares outstanding     15,962.3     15,775.9
   
 

Net earnings per share:

 

 

 

 

 

 
  Basic   $ 0.49   $ 0.47
  Diluted   $ 0.47   $ 0.46

        Diluted earnings per share does not include all potentially dilutive shares that may result from outstanding stock options and restricted and performance stock awards which may eventually vest. As of March 31, 2004 and 2003, the number of stock options and shares of restricted and performance stock which were outstanding but not included in the calculation of diluted net earnings per share were 987,714 and 755,169.

NOTE 5—STOCK COMPENSATION

Stock Options.

        The Company adopted the fair value method of accounting for stock options effective January 1, 2003, using the prospective method of transition specified in Statement of Financial Accounting Standard ("SFAS") No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. The cost of all stock options granted on or after January 1, 2003, is based on their fair value and is included as a component of salaries and employee benefits expense over the vesting period for such options. The effect of adoption had no material effect on either the Company's financial condition or results of operations. For stock options granted prior to January 1, 2003, the Company continues to apply the intrinsic value-based method of accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, under which

10



compensation cost is recognized only when the option exercise price is less than the fair market value of the underlying stock on the date of grant.

        Had we determined compensation expense based on the fair value at the grant date for all of our stock options granted, our net earnings and related earnings per share would have been reduced to the pro forma amounts indicated in the table below:

 
  Three Months Ended March 31,
 
 
  2004
  2003
 
 
  (In thousands, except per share data)

 
Reported net earnings   $ 7,500   $ 7,233  
Add: Stock based compensation expense included in net earnings, net of tax     379      
Deduct: All stock based compensation expense, net of tax     (580 )   (173 )
   
 
 
Pro forma net earnings   $ 7,299   $ 7,060  
   
 
 

Basic net earnings per share as reported

 

$

0.49

 

$

0.46

 
Pro forma basic net earnings per share   $ 0.47   $ 0.46  
Diluted net earnings per share as reported   $ 0.47   $ 0.47  
Pro forma diluted net earnings per share   $ 0.46   $ 0.45  

Restricted Stock.

        During the second half of 2003, and during the first three months of 2004, the Compensation, Nominating and Governance ("CNG") Committee of the Company's Board of Directors awarded aggregate grants of 214,000 shares of restricted common stock and 255,000 shares of performance common stock to officers of the Company and its subsidiaries, pursuant to the Company's 2003 Stock Incentive Plan (the "Plan"). The granted shares of restricted common stock will vest over a service period of three to four years. The granted shares of performance common stock will vest in full or in part on the date the CNG Committee, as Administrator of the Plan, determines that the Company achieved certain financial goals established by the CNG Committee and set forth in the grant documents. The granted shares of performance common stock expire seven years from the date of grant. Prior to vesting of the restricted common stock or performance common stock, each grant recipient is entitled to dividend rights with respect to the shares of granted stock, subject to termination of such rights under the terms of the Plan. Only vested shares of restricted common stock or performance stock may be voted by the grant recipient. Both restricted common stock and performance common stock vest immediately upon a change in control.

        At the time the shares of restricted and performance common stock were granted, the fair market value of the common stock was approximately $15.1 million. Such amount was recorded within shareholders' equity by increasing common stock and recording unearned equity compensation. The unearned equity compensation is being amortized to compensation expense over the vesting periods by use of the straight-line method. Performance stock vesting could be over a shorter period if related financial targets are met earlier than anticipated. Compensation expense related to the restricted and performance stock awards approximated $654,000 during the three months ended March 31, 2004, and is included in salaries and employee benefits expense in the accompanying consolidated statements of earnings.

11



NOTE 6—SUBORDINATED DEBENTURES

        In December 2003, the FASB modified and reissued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46R). The original Interpretation 46 issued in January 2003 was adopted by us in the first quarter of 2003 and had no effect on our financial position or operating results. FIN 46R requires the deconsolidation of trust preferred entities, and we adopted this pronouncement on December 31, 2003. As a result of adoption, we deconsolidated our trust preferred entities at December 31, 2003. Based on our current operations and structure, FIN 46R is not expected to have any further effect on our financial position and operating results.

        The Company had an aggregate of $121.7 million of subordinated debentures outstanding at March 31, 2004. The subordinated debentures were issued in seven separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by us, which in turn issued trust preferred securities. Within limitations, these securities are presently considered Tier 1 capital for regulatory purposes and the proceeds from the issuance of the securities were used primarily to fund several of our acquisitions. We are permitted to call the debentures in the first five years if the prepayment election relates to one of the following three events: (i) a change in the tax treatment of the debentures stemming from a change in the IRS laws; (ii) a change in the regulatory treatment of the underlying trust preferred securities as Tier 1 capital; and (iii) a requirement to register the underlying trust as a registered investment company. However, redemption in the first five years will be subject to a prepayment penalty. Trust I may not be called for 10 years from the date of issuance unless one of the three events described above has occurred and then a prepayment penalty applies. In addition, there is a prepayment penalty if this debenture is called 10 to 20 years from the date of its issuance and it may be called at par after 20 years. The proceeds of the subordinated debentures were used primarily to fund several of our acquisitions.

        The following table summarizes the terms of each issuance:

Series

  Date issued
  Amount
  Maturity
Date

  Earliest
Call Date
By Company
Without
Penalty

  Fixed or
Variable
Rate

  Rate Adjuster
  Current
Rate

  Next
Reset Date

 
  (Dollars in thousands)

Trust I   9/7/2000   $ 8,248   9/7/2030   9/7/2020   Fixed   N/A   10.60%   N/A
Trust II   12/18/2001     10,310   12/18/2031   12/18/2006   Variable   3-month LIBOR +3.60 % 4.71%   6/17/2004
Trust III   11/28/2001     10,310   12/8/2031   12/8/2006   Variable   6-month LIBOR +3.75 % 4.98%   6/7/2004
Trust IV   6/26/2002     10,310   6/26/2032   6/26/2007   Variable   3-month LIBOR +3.55 % 4.66%   6/25/2004
Trust V   8/15/2003     10,310   9/17/2033   9/17/2008   Variable   3-month LIBOR +3.10 % 4.21%   6/16/2004
Trust VI   9/3/2003     10,310   9/15/2033   9/15/2008   Variable   3-month LIBOR +3.05 % 4.16%   6/15/2004
Trust VII   2/4/2004     61,856   4/23/2034   04/23/2009   Variable   3-month LIBOR +2.75 % 3.92%   7/23/2004

NOTE 7—DIVIDEND APPROVAL

       On April 21, 2004, our Board of Directors declared a quarterly cash dividend of $0.22 per common share payable on May 28, 2004 to shareholders of record on May 14, 2004.

NOTE 8—SUBSEQUENT EVENTS

        On April 8, 2004, First National Bank entered into a memorandum of understanding, an informal administrative action, with the Office of the Comptroller of the Currency, which we refer to as the OCC, with respect to First National's compliance with Bank Secrecy Act/Anti-Money Laundering ("BSA/AML") regulations. The memorandum requires us to evaluate and strengthen our BSA/AML program and processes. The memorandum is limited in scope to BSA/AML issues and management believes that it will have no material impact on our operating results or financial condition and that,

12



unless we fail to adequately address the concerns of the OCC, the memorandum will not constrain our business. Management is committed to resolving the issues addressed in the memorandum as promptly as possible.

        On April 16, 2004 we acquired Harbor National Bank, or Harbor National, based in Newport Beach, California. We paid $35.5 million in cash for all the outstanding common stock and options of Harbor National. Harbor National had approximately $173 million in assets as of the acquisition date.

        An unaudited summary of our allocation of the Harbor National purchase price follows. The allocation is preliminary and will change as further information is obtained.

 
  Harbor National
 
 
  (Dollars in thousands)

 
Cash and cash equivalents   $ 35,851  
Securities     4,361  
Net loans     131,943  
Premises and equipment     1,277  
Other assets     3,995  
Intangible assets     24,402  
Deposits     (160,439 )
Other liabilities     (5,890 )
   
 
Total cash purchase price   $ 35,500  
   
 

13



ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

        This Quarterly Report on Form 10-Q (the "Quarterly Report") contains certain forward-looking information about the Company and its subsidiaries, which statements are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:

        If any of these risks or uncertainties materializes, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. The Company assumes no obligation to update such forward-looking statements.

Overview

        We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as the holding company for our subsidiary banks, First National Bank and Pacific Western National Bank, which we refer to as the Banks. Through the holding company structure, First Community attempts to create operating efficiencies for the Banks by

14



consolidating core administrative, operational and financial functions that serve both of the Banks. The Banks are allocated expenses by the holding company for the services performed on their behalf, pursuant to an expense allocation agreement, which the Company believes are lower than the Banks would incur absent the holding company structure.

        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, including asset-based lending and factoring, real estate and construction loans, Small Business Administration guaranteed loans, or SBA loans, consumer loans, mortgage loans, international loans for trade finance and other business-oriented products. At March 31, 2004, our gross loans totaled $1,721.5 million of which approximately 33% consisted of commercial loans, 64% consisted of commercial real estate loans, including construction loans, and 3% consisted of consumer and other loans. The portfolio's value and credit quality is affected in large part by real estate trends in Southern California. These percentages also include some foreign loans, primarily to individuals or entities with business in Mexico, representing 5% of total loans. Special services and requests beyond the lending limits of the Banks can be arranged through correspondent banks.

        The Banks compete actively for deposits, and we tend to solicit noninterest-bearing deposits. In managing the top line of our business, we focus on loan growth and loan yield, deposit cost, and net interest margin, as net interest income accounts for 87% of our net revenues (net interest income plus noninterest income).

        On March 1, 2004, we acquired First Community Financial Corporation, or FC Financial, and established FC Financial as a wholly-owned operating subsidiary of First National. On April 16, 2004, we completed the acquisition of Harbor National Bank, or Harbor National, and merged Harbor National into Pacific Western. Discussions about the Company and the Banks as of and for the quarter ended March 31, 2004 do not include Harbor National.

Key Performance Indicators

        Among other factors, our operating results depend generally on the following:

        Net interest income is the excess of interest earned on our interest-earning assets over the interest paid on our interest-bearing liabilities. Our primary interest-earning assets are loans and investment securities. Our primary interest-bearing liabilities are deposits, borrowings, and subordinated debentures. We attempt to increase our net interest income by maintaining a high level of noninterest-bearing deposits. At March 31, 2004, approximately 43% of our deposits were noninterest-bearing. We further reduce interest expense by limiting our borrowings, and funding our loans through deposits. Although we have borrowing capacity under various credit lines, we have traditionally borrowed funds only for short term liquidity needs such as managing deposit flows and interim acquisition financing. Our general policy is to price our deposits in the bottom half or third-quartile of our competitive peer group, resulting in deposit products that bear interest rates at somewhat lower yields. While our deposit balances will fluctuate depending on deposit holders' perceptions of alternative yields available in the market, we attempt to minimize these variances by attracting a high percentage of noninterest-bearing deposits, which have no expectation of yield.

        We generally seek new lending opportunities in the $500,000 to $5 million range, try to limit loan maturities for commercial loans to one year, for construction loans up to 18 months, and for commercial real estate loans up to ten years, and price lending products so as to preserve our interest

15


spread and net interest margin. We may often encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we offer.

        We maintain an allowance for loan losses. Loss provisions are charged to operations as and when needed, actual loan losses are charged to the allowance, and recoveries on loans previously charged off are credited to the allowance. We stress credit quality in originating and monitoring the loans we make and measure our success by the level of our nonperforming assets and the corresponding level of our allowance. Through focusing on credit quality, the loan portfolio of the Company is generally better than the quality of the loan portfolios we have acquired. Following acquisitions, we generally work to remove problem loans from the portfolio or allow lower credit quality loans to mature, and seek to replace such loans with obligations from borrowers with higher quality credit. Changes in economic conditions, however, such as increases in the general level of interest rates, could negatively impact our customers and lead to increased provision for loan losses.

        Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing and communications. We measure success in controlling such costs through monitoring of the efficiency ratio. We calculate the efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income. The consolidated efficiency ratios have been as follows:

Quarterly Period

  Ratio
 
First quarter 2003   56.8 %
Second quarter 2003   52.0 %
Third quarter 2003   56.8 %
Fourth quarter 2003   53.9 %
First quarter 2004   58.8 %

        Additionally, our operating results have been influenced significantly by acquisitions. The ten acquisitions we completed from January 1, 2001 through March 31, 2004, added approximately $2.3 billion in assets. Our assets at March 31, 2004 total approximately $2.5 billion. Our noninterest expenses have increased for all periods presented because of our acquisitions.

Critical Accounting Policies

        The Company's accounting policies are fundamental to understanding management's discussion and analysis of results of operations and financial condition. The Company has identified several policies as being critical because they require management to make particularly difficult, subjective and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for loan losses, the fair value of financial instruments, and the carrying values of goodwill, other intangible assets and deferred tax assets. For further information, refer to our December 31, 2003 annual report on Form 10-K.

Results of Operations

        We analyze our performance based on net earnings determined in accordance with accounting principles generally accepted in the United States. The comparability of financial information is affected by our acquisitions. Operating results include the operations of acquired entities from the

16


dates of acquisition. The following table presents net earnings and summarizes per share data and key financial ratios:

 
  For the Three Months Ended March 31,
 
 
  2004
  2003
 
 
  (In thousands, except per share data)

 
Net interest income   $ 26,334   $ 24,441  
Noninterest income     4,077     4,076  
   
 
 
Revenues     30,411     28,517  
Provision for loan losses         120  
Noninterest expense     17,865     16,200  
Income taxes     5,046     4,964  
   
 
 
Net earnings(1)   $ 7,500   $ 7,233  
   
 
 
Average interest-earning assets   $ 2,048,501   $ 1,833,544  
Profitability measures:              
Basic net earnings per share   $ 0.49   $ 0.47  
Diluted net earnings per share   $ 0.47   $ 0.46  
Return on average assets     1.23 %   1.34 %
Return on average equity     8.87 %   9.22 %
Efficiency ratio     58.8 %   56.8 %

(1)
Our quarterly results include Bank of Coronado subsequent to January 9, 2003; Verdugo Banking Company subsequent to August 22, 2003; and FC Financial subsequent to March 1, 2004.

        The slight improvement in net earnings resulted from increased net interest income and a high level of credit quality. The increase in interest-earning assets is due, in part, to the assets acquired in the Verdugo and FC Financial acquisitions and organic loan growth. The increase in the efficiency ratio is due to revenue growth not keeping pace with the expense increase.

        The increases in revenues and noninterest expense in the first quarter of 2004 are due to acquisitions and incentive accruals, as well as one-time charges totaling $152,000 after taxes for operational losses and the writedown of a Community Reinvestment Act investment inherited from a 2002 acquisition. During the first quarter we also increased our borrowings to fund our 2004 acquisitions without having the benefit of the acquired entities' earnings for the entire period. The interest expense that was not offset by acquired entities net earnings was approximately $276,000. For further information on our acquisitions, see Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein.

        Net Interest Income.    Net interest income, which is one of our principal sources of income, 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 interest-earning assets and interest-bearing liabilities. The following table presents, for the periods indicated, the distribution

17



of average assets, liabilities and shareholders' equity, as well as interest income and yields earned on average interest-earning assets and interest expense on average interest-bearing liabilities.

 
  For the Three Months Ended March 31,
 
 
  2004
  2003
 
 
  Average
Balance

  Interest
Income or
Expense

  Average
Yield or
Cost

  Average
Balance

  Interest
Income or
Expense

  Average
Yield or
Cost

 
 
  (Dollars in thousands)

 
ASSETS                                  
Interest-earning assets:                                  
Loans, net of deferred fees and costs(1)(2)   $ 1,613,554   $ 26,225   6.54 % $ 1,482,473   $ 25,611   6.95 %
Investment securities(2)     404,408     3,121   3.10 %   324,790     2,317   2.87 %
Federal funds sold     30,045     74   0.99 %   24,248     67   1.11 %
Other earning assets     494     2   1.63 %   2,033     3   0.59 %
   
 
 
 
 
 
 
  Total interest-earning assets     2,048,501     29,422   5.78 %   1,833,544     27,998   6.14 %
Noninterest-earning assets:                                  
Other assets     402,543               347,525            
   
           
           
  Total assets   $ 2,451,044             $ 2,181,069            
   
           
           

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Interest-bearing liabilities:                                  
Deposits                                  
  Interest checking   $ 181,293     28   0.06 % $ 162,843     87   0.21 %
  Money market     602,404     810   0.54 %   554,120     984   0.71 %
  Savings     74,314     23   0.12 %   78,171     130   0.67 %
  Time certificates of deposit     280,493     910   1.31 %   323,481     1,680   2.09 %
   
 
 
 
 
 
 
  Total interest-bearing deposits     1,138,504     1,771   0.63 %   1,118,615     2,881   1.04 %
Other interest-bearing liabilities     110,731     1,317   4.78 %   43,621     676   6.23 %
   
 
 
 
 
 
 
  Total interest-bearing liabilities     1,249,235     3,088   0.99 %   1,162,236     3,557   1.23 %
Noninterest-bearing liabilities:                                  
  Demand deposits     825,901               670,968            
  Other liabilities     35,985               29,788            
   
           
           
  Total liabilities     2,111,121               1,862,992            
Shareholders' equity     339,923               318,077            
   
           
           
Total liabilities and shareholders' equity   $ 2,451,044             $ 2,181,069            
   
           
           
Net interest income         $ 26,334             $ 24,441      
         
           
     
Net interest spread               4.79 %             4.91 %
               
             
 
Net interest margin               5.17 %             5.41 %
               
             
 

(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 increased during the first quarter of 2004 compared to 2003 due to the Company adding approximately $215 million in average interest-earning assets from a combination of organic loan growth and the acquisitions of Bank of Coronado, Verdugo Banking Company and FC

18



Financial. This increase in average interest-earning assets was offset, however, by a decline in yield. Such decline resulted from the low interest rate environment during all of 2003 and extending into 2004. As higher rate assets ran off, they were replaced with assets at then current lower market rates.

        We continued our efforts to reduce the cost of our deposits by pricing down interest-bearing products and by targeting growth of the demand deposit base. The low interest rate environment enabled us to lower our deposit cost to 0.36% for the first quarter of 2004. Our interest expense on other interest-bearing liabilities, which consist of borrowings and subordinated debentures, increased during 2004 compared to 2003 because of the trust preferred securities issuances used to fund our acquisitions.

        Our net interest margin was 5.17% for the first quarter of 2004 compared to 5.06% and 5.41% for the fourth and first quarters of 2003. The decline from the first quarter of 2003 is largely attributable to the low interest rate environment. The increase from the fourth quarter of 2003 is attributable to a combination of organic loan growth of $45.0 million and to the loans from the FC Financial acquisition which by themselves yielded 13.3% for March 2004. We estimated that the FC Financial loan portfolio acquired on March 1, 2004, added 10 basis points to our net interest margin for the quarter.

        Provision for Loan Losses.    There was no provision for loan losses during the first quarter of 2004 compared to $120,000 made in the first quarter of 2003. Based on the credit quality indicators we monitor and our allowance for loan losses methodology, no provision was deemed necessary in this quarter. The allowance for loan losses was $28.1 million at March 31, 2004, and represented 1.64% of loans net of deferred fees and costs. The ratio of the allowance for loan losses to loans net of deferred fees and costs was 1.61% at December 31, 2003, and 1.68% at March 31, 2003. During this quarter, the allowance was increased by $3.3 million, representing the allowance on the loan portfolio acquired in the FC Financial acquisition.

        Noninterest Income.    The following table summarizes noninterest income by category for the periods indicated:

 
  Three Months Ended(1)
 
  March 31,
2004

  December 31,
2003

  September 30,
2003

  June 30,
2003

  March 31,
2003

 
  (In thousands)

Service charges and fees on deposit accounts   $ 2,299   $ 2,362   $ 2,219   $ 2,279   $ 2,134
Other commissions and fees     859     939     1,104     884     1,064
Gain on sale of loans     171     192     135     448     138
Gain on sale of securities     30             1,756    
Increase in cash surrender value of life insurance     507     518     523     510     312
Other income     211     368     896     187     110
Gain on sale of OREO                 22     318
   
 
 
 
 
  Total noninterest income   $ 4,077   $ 4,379   $ 4,877   $ 6,086   $ 4,076
   
 
 
 
 

(1)
Our quarterly results include Bank of Coronado subsequent to January 9, 2003; Verdugo Banking Company subsequent to August 22, 2003 and FC Financial subsequent to March 1, 2004.

        Noninterest income for the first quarter of 2004 was up slightly from the same period of 2003. When the gain on sale of other real estate owned is excluded from the first quarter of 2003, noninterest income increased $319,000. Total noninterest income decreased by $302,000 for the first quarter of 2004 compared to the fourth quarter of 2003. The decline was due to a favorable legal settlement, the timing of the annual customer account analysis charges, and the elimination of First National's escrow department, all of which occurred in the fourth quarter of 2003. Our loan sales relate primarily to selling the guaranteed portions of SBA loans. The variances between periods in the gain

19


on sale of loans is due to timing of the sales and the principal balances sold. The quarterly volumes of loans sold during the first quarter of 2004, and the fourth, third, second and first quarters of 2003 were approximately $2.5 million, $2.1 million, $2.7 million, $1.4 million, and $2.0 million, respectively. We sold at a gain of $30,000 approximately $64.6 million of investment securities during the first quarter of 2004 and used the proceeds to repay $60.7 million of FC Financial debt. The decline in other income in the first quarter of 2004 compared to the fourth and third quarters of 2003 is due primarily to favorable legal settlements of $175,000 and $650,000 recorded in those quarters.

        Noninterest Expense.    The following table summarizes noninterest expense by category for the periods indicated:

 
  Three Months Ended(1)
 
 
  March 31,
2004

  December 31,
2003

  September 30,
2003

  June 30,
2003

  March 31,
2003

 
 
  (Dollars in thousands)

 
Salaries and employee benefits   $ 9,725   $ 8,266   $ 8,082   $ 8,050   $ 8,009  
Occupancy     2,314     2,407     2,567     2,093     2,344  
Furniture and equipment     739     853     817     815     772  
Data processing     1,025     1,199     1,168     1,204     1,293  
Other professional services     672     388     723     554     545  
Business development     265     273     316     221     200  
Communications     497     524     613     519     540  
Insurance and assessments     379     370     410     400     327  
Cost of OREO                 11     157  
Intangible asset amortization     691     722     632     587     588  
Other     1,558     1,548     1,692     1,415     1,425  
   
 
 
 
 
 
  Total noninterest expense   $ 17,865   $ 16,550   $ 17,020   $ 15,869   $ 16,200  
   
 
 
 
 
 
Efficiency ratio     58.8 %   53.9 %   56.8 %   52.0 %   56.8 %
Noninterest expense as a percentage of average assets     2.93 %   2.67 %   2.93 %   2.93 %   3.01 %

(1)
Our quarterly results include Bank of Coronado subsequent to January 9, 2003; Verdugo Banking Company subsequent to August 22, 2003; and FC Financial subsequent to March 1, 2004.

        The increase in noninterest expense for the first quarter of 2004 compared to the first quarter of 2003 was due to several factors. Compensation expense increased due to acquisitions, incentive compensation, and amortization of restricted stock. Intangible asset amortization increased because of the Verdugo Banking Company and FC Financial acquisitions; we expect the run rate on intangible asset amortization to be $772,000 for the next several quarters. Other noninterest expense increased $262,000 due to one-time charges for operational losses and the writedown of a CRA investment at First National Bank that was made prior to our acquisition of First National in September 2002.

        Our incentive compensation expense for the first quarter of 2004, which is accrued during the year and generally paid-out during the first quarter of the following year, was $952,000 higher than that of the fourth quarter of 2003 and $565,000 higher than that of the first quarter of 2003. The increase from the prior year's quarter is due largely to the Company's increased size. The increase from the immediately preceding quarter is due to a full incentive accrual because employees are on track to meet their goals for the year. We review the adequacy of our incentive compensation accruals quarterly by analyzing underlying goal attainment, and make adjustments as appropriate.

        The first quarter of 2004 includes stock compensation of $654,000 related to 469,000 shares of our common stock underlying restricted stock awards and performance stock awards made to employees

20



during the latter half of 2003 through March 31, 2004. Stock compensation expense related to these awards is expected to be $659,000 per quarter for the rest of 2004, assuming there are no further grants or forfeitures. There was no stock compensation expense during the first quarter of 2003.

        Income Taxes.    Our normal effective income tax rate is approximately 42.0%, representing a blend of the statutory federal income tax rate of 35.0% and the California income tax rate of 10.84%. Due to the exclusion from taxable income of income on certain investments, our actual effective income tax rates were 40.2% and 40.7% for the three months ended March 31, 2004 and 2003.

Balance Sheet Analysis

        Loans.    The following table presents the balance of each major category of loans at the dates indicated:

 
  At March 31, 2004
  At December 31, 2003
 
 
  Amount
  % of total
  Amount
  % of total
 
 
  (Dollars in thousands)

 
Loan Category:                      
Domestic:                      
  Commercial   $ 494,394   29 % $ 426,796   26 %
  Real estate, construction     358,212   21 %   347,321   22 %
  Real estate, mortgage     749,875   43 %   712,390   45 %
  Consumer     31,503   2 %   31,383   2 %
Foreign:                      
  Commercial     71,993   4 %   67,821   4 %
  Other     15,553   1 %   14,895   1 %
   
 
 
 
 
Gross loans     1,721,530   100 %   1,600,606   100 %
         
       
 
Less: allowance for loan losses     (28,058 )       (25,752 )    
Less: deferred fees and costs     (5,925 )       (4,769 )    
   
     
     
Total net loans   $ 1,687,547       $ 1,570,085      
   
     
     

        Net loans increased 7.5%, or $117.5 million for the quarter ended March 31, 2004 from year-end 2003. This increase is attributable to the $76.0 million loan portfolio acquired in the FC Financial acquisition along with organic loan growth of $45.0 million experienced during the first quarter.

21


        Allowance for Loan Losses.    The following table presents the changes in our allowance for loan losses for the periods indicated:

 
  As of or for the Periods Ended
 
 
  3 Months
3/31/04

  Year
12/31/03

  3 Months
3/31/03

 
 
  (Dollars in thousands)

 
Balance at beginning of period   $ 25,752   $ 24,294   $ 24,294  
Loans charged off:                    
  Commercial     (1,013 )   (3,331 )   (1,131 )
  Real estate—construction              
  Real estate—mortgage              
  Consumer     (171 )   (1,145 )   (538 )
  Foreign     (341 )        
   
 
 
 
  Total loans charged off     (1,525 )   (4,476 )   (1,669 )
   
 
 
 
Recoveries on loans charged off:                    
  Commercial     461     2,453     1,199  
  Real estate—construction              
  Real estate—mortgage     5     84      
  Consumer     92     468     161  
  Foreign     15          
   
 
 
 
Total recoveries on loans charged off     573     3,005     1,360  
   
 
 
 
Net loans charged off     (952 )   (1,471 )   (309 )
   
 
 
 
Provision for loan losses         300     120  
Additions due to acquisitions     3,258     2,629     633  
   
 
 
 
Balance at end of period   $ 28,058   $ 25,752   $ 24,738  
   
 
 
 

Ratios:

 

 

 

 

 

 

 

 

 

 
Allowance for loan losses to loans, net     1.64 %   1.61 %   1.68 %
Allowance for loan losses to nonaccrual loans     365.4 %   347.5 %   179.9 %
Annualized net charge offs to average loans     0.24 %   0.10 %   0.08 %

        The allowance for loan losses increased by $2.3 million at March 31, 2004 compared to the balance at December 31, 2003. The increase in the allowance is primarily due to $3.3 million of allowance from the FC Financial acquisition, offset by the amount of net charge offs in the first quarter. The percentage of allowance for loan losses to loans, net of deferred fees and costs, has remained relatively static. Management utilizes information currently available to evaluate the allowance for loan losses. However, the allowance for loan losses is subjective in nature and may be adjusted in the future depending on changes in economic conditions or other factors. 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 loans in the future.

        Credit Quality.    We define nonperforming assets to include (i) loans past due 90 days or more and still accruing; (ii) loans which have ceased accruing interest, which we refer to as "nonaccrual loans"; and (iii) assets acquired through foreclosure, including other real estate owned. "Impaired loans" are loans for which it is probable that we will not be able to collect all amounts due according to the original contractual terms of the loan agreement. Nonaccrual loans may include impaired loans and are those on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or payments of principal or interest have become contractually past due 90 days.

22



        Management is not aware of any additional significant loss potential that has not already been included in the estimation of the allowance for loan losses. As of March 31, 2004, we had no loans past due 90 days and still accruing interest.

        The following table shows the historical trends in our loans, allowance for loan losses, nonperforming assets and key credit quality statistics as of and for the periods indicated:

 
  As of or for the Periods Ended
 
 
  3 Months
3/31/04

  12 Months
12/31/03

  9 Months
9/30/03

  6 Months
6/30/03

  3 Months
3/31/03

 
 
  (Dollars in thousands)

 
Loans, net of deferred fees and costs   $ 1,715,605   $ 1,595,837   $ 1,546,664   $ 1,432,423   $ 1,475,062  
Allowance for loan losses     28,058     25,752     25,768     23,881     24,738  
Average loans, net of deferred fees and costs     1,613,554     1,493,211     1,469,124     1,468,145     1,482,473  
Nonaccrual loans     7,678     7,411     9,509     9,725     13,750  
Other real estate owned                 136     1,401  
   
 
 
 
 
 
  Nonperforming assets   $ 7,678   $ 7,411   $ 9,509   $ 9,861   $ 15,151  
   
 
 
 
 
 
Impaired loans, gross   $ 7,678   $ 7,411   $ 9,509   $ 9,725   $ 13,750  
Allocated allowance for loan losses     (1,668 )   (2,267 )   (2,358 )   (1,791 )   (2,855 )
   
 
 
 
 
 
  Net investment in impaired loans   $ 6,010   $ 5,144   $ 7,151   $ 7,934   $ 10,895  
   
 
 
 
 
 
Charged-off loans year-to-date   $ 1,525   $ 4,476   $ 4,142   $ 3,192   $ 1,669  
Recoveries year-to-date     (573 )   (3,005 )   (2,687 )   (1,846 )   (1,360 )
   
 
 
 
 
 
  Net charge-offs   $ 952   $ 1,471   $ 1,455   $ 1,346   $ 309  
   
 
 
 
 
 
Allowance for loan losses to loans, net of deferred fees and costs     1.64 %   1.61 %   1.67 %   1.67 %   1.68 %
Allowance for loan losses to nonaccrual loans and leases     365.4 %   347.5 %   271.0 %   245.6 %   179.9 %
Allowance for loan losses to nonperforming assets     365.4 %   347.5 %   271.0 %   242.2 %   163.3 %
Nonperforming assets to loans and OREO     0.45 %   0.46 %   0.61 %   0.69 %   1.03 %
Annualized net charge offs to average loans, net of deferred fees and costs     0.24 %   0.10 %   0.13 %   0.18 %   0.08 %
Nonaccrual loans to loans, net of deferred fees and costs     0.45 %   0.46 %   0.61 %   0.68 %   0.93 %

        Nonaccrual loans as a percentage of net loans has steadily declined, reaching 0.45% at March 31, 2004. Such decline is attributable to our loan monitoring process, as well as the impact the low interest rate environment has on the ability of borrowers to repay loans.

        The increase in nonaccrual loans from December 31, 2003, relates primarily to two credits aggregating $1.4 million that were placed into nonaccrual status in March. Subsequent to March 31, 2004, one of the loans, having a balance of $497,000, paid off. The second loan is collateralized, is in the process of collection, and is expected to be significantly reduced.

        Charged off loans for the first quarter of 2004 were $1.5 million and include two loans totaling $1.3 million. These are isolated problem loans and not representative of loan quality trends in the loan portfolio.

23



        Deposits.    The following table presents the balance of each major category of deposits at the dates indicated:

 
  At March 31, 2004
  At December 31, 2003
 
 
  Amount
  % of deposits
  Amount
  % of deposits
 
 
  (Dollars in thousands)

 
Noninterest-bearing   $ 844,667   43 % $ 814,365   42 %
Interest-bearing:                      
  Interest checking     171,983   9     181,223   9  
  Money market accounts     608,655   30     585,628   30  
  Savings     74,694   4     72,876   4  
  Time deposits under $100,000     97,961   5     110,720   6  
  Time deposits over $100,000     172,834   9     184,857   9  
   
 
 
 
 
Total interest-bearing     1,126,127   57     1,135,304   58  
   
 
 
 
 
Total deposits   $ 1,970,794   100 % $ 1,949,669   100 %
   
 
 
 
 

Regulatory Matters

        The regulatory capital guidelines as well as the actual capital ratios for First National, Pacific Western, and the Company as of March 31, 2004, are as follows:

 
  Minimum
Regulatory
Requirements

  Actual
 
 
  Well
Capitalized

  First
National

  Pacific
Western

  Company
Consolidated

 
Tier 1 leverage capital ratio   5.00 % 10.92 % 8.76 % 10.08 %
Tier 1 risk-based capital ratio   6.00 % 11.75 % 9.96 % 11.13 %
Total risk-based capital   10.00 % 13.00 % 11.08 % 12.52 %

        We have issued and outstanding trust preferred securities totaling $118.0 million, a portion of which is treated as regulatory capital for purposes of determining the Company's Tier I capital ratios. The Company believes that the Board of Governors of the Federal Reserve System, which is the holding Company's banking regulator, may rule on continued inclusion of trust preferred securities in regulatory capital. At this time, it is not possible to estimate the effect, if any, on the Company's Tier I regulatory capital as a result of any future action taken by the Board of Governors of the Federal Reserve System.

        On April 8, 2004, First National Bank entered into a memorandum of understanding, an informal administrative action, with the Office of the Comptroller of the Currency, which we refer to as the OCC, with respect to First National's compliance with Bank Secrecy Act/Anti-Money Laundering ("BSA/AML") regulations. The memorandum requires us to evaluate and strengthen our BSA/AML program and processes. The memorandum is limited in scope to BSA/AML issues and management believes that it will have no material impact on our operating results or financial condition and that, unless we fail to adequately address the concerns of the OCC, the memorandum will not constrain our business. Management is committed to resolving the issues addressed in the memorandum as promptly as possible.

Liquidity Management

        Liquidity.    The goals of our liquidity management are to ensure the ability of the Company and our Banks to meet their financial commitments when contractually due and to respond to other demands for funds such as the ability to meet the cash flow requirements of customers who may be

24


either depositors wanting to withdraw funds or borrowers who may need assurance that sufficient funds will be available to meet their credit needs. We have an Asset/Liability Management Committee, or ALM Committee, responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving our financial objectives. Our Asset/Liability Management Committee meets regularly to review funding capabilities, current and forecasted loan demand and investment opportunities. The Company's off-balance sheet commitments relate primarily, but not exclusively, to unfunded loan commitments and collectively totaled $661.1 million as of March 31, 2004.

        Historically, the overall liquidity source of the Banks is their core deposit base. The Banks have not relied on large denomination time deposits. To meet short-term liquidity needs, the Banks maintain what we believe are adequate balances in Federal funds sold, interest-bearing deposits in financial institutions and investment securities having maturities of five years or less. On a consolidated basis, liquid assets (cash, Federal funds sold, interest-bearing deposits in other financial institutions and investment securities available-for-sale) as a percent of total deposits were 21.6% and 26.8% as of March 31, 2004 and December 31, 2003.

        As an additional source of liquidity, the Banks maintain aggregate lines of credit of $110.0 million with correspondent banks for the purchase of overnight funds. These lines are subject to availability of funds. The Banks have also established secured borrowing relationships with the Federal Home Loan Bank of San Francisco, which we refer to as the FHLB, which would allow the Banks to borrow up to approximately $241 million in the aggregate. Historically, the Banks have borrowed overnight from the FHLB and have infrequently used the correspondent bank lines of credit. Additionally, to meet liquidity needs, the Banks are permitted to, and frequently may, loan to and borrow from each other in accordance with federal regulations.

        On a stand-alone basis, the Company's sources of liquidity include dividends from the Banks and our ability to raise capital, issue subordinated debt and secure outside borrowings. The ability of the Company to obtain funds for the payment of dividends to our shareholders and for other cash requirements is largely dependent upon the Banks' earnings. The amount of dividends that the Banks may pay to the Company is restricted by regulatory guidelines. The Company has issued $121.7 million in subordinated debt including $61.9 million issued in the first quarter of 2004 to help finance the FC Financial and Harbor National acquisitions. The Company has established two revolving lines of credit totaling $30.0 million with substantially the same borrowing terms. The Company is able to borrow at a rate equal to the lending banks' federal funds rate plus 1.50%, and as of March 31, 2004, the Company did not have any debt outstanding under these revolving lines of credit.

        Contractual Obligations.    The known contractual obligations of the Company at March 31, 2004 are as follows:

 
  At March 31, 2004
 
  Within
One Year

  One to
Three Years

  Three to
Five Years

  After
Five Years

  Total
Short-Term Debt Obligations   $ 10,800   $   $   $   $ 10,800
Long-Term Debt Obligations                 121,654     121,654
Operating Lease Obligations     6,638     11,809     9,401     21,114     48,962
Other contractual obligations     3,331     6,663     1,666         11,660
   
 
 
 
 
  Total   $ 20,769   $ 18,472   $ 11,067   $ 142,768   $ 193,076
   
 
 
 
 

        Debt obligations and operating lease obligations are discussed in the Notes to Consolidated Financial Statements included in our December 31, 2003 annual report on Form 10-K. The other contractual obligations relate to our minimum liability associated with our data and item processing contract with a third-party provider.

25



        The contractual obligations table above does not include our merger-related liability which was $5.3 million at March 31, 2004. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements contained in "Item 1. Consolidated Financial Statements (Unaudited)."

        We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity, and continued deposit gathering activities. We have in place various borrowing mechanisms for shorter-term liquidity needs.

Asset/Liability Management and Interest Rate Sensitivity

        Interest Rate Risk.    Our market risk arises primarily from credit risk and interest rate risk inherent in our lending and deposit gathering activities. To manage our credit risk, we rely on adherence to our strong underwriting standards and loan policies as well as our allowance for loan losses methodology. To manage our exposure to changes in interest rates, we perform asset and liability management activities which are governed by guidelines pre-established by our ALM Committee and approved by our Board of Directors. Our ALM Committee monitors our compliance with our asset/liability policies. These policies focus on providing sufficient levels of net interest income while considering acceptable levels of interest rate exposure as well as liquidity and capital constraints.

        Market risk sensitive instruments are generally defined as derivatives and other financial instruments, which include investment securities, loans, deposits and borrowings. At March 31, 2004, we had not used any derivatives to alter our interest rate risk profile. However, both the repricing characteristics of our fixed rate loans and floating rate loans which have reached their floors, as well as our significant percentage of noninterest-bearing deposits compared to interest-earning assets may influence our interest rate risk profile. Our financial instruments include loans receivable, Federal funds sold, interest-bearing deposits in financial institutions, Federal Reserve Bank and Federal Home Loan Bank stock, investment securities, deposits, borrowings and subordinated debentures. At March 31, 2004, we had interest-sensitive assets of $2,058.5 million while interest-sensitive liabilities totaled $1,258.6 million.

        We measure our interest rate risk position on a quarterly basis using three methods: (i) net interest income simulation analysis; (ii) market value of equity modeling; and (iii) traditional gap analysis. The results of these analyses are reviewed by the ALM Committee quarterly. If hypothetical changes to interest rates cause changes to our simulated net present value of market equity and/or net interest income outside our pre-established limits, we may adjust our asset and liability mix in an effort to bring our interest rate risk exposure within our established limits. We evaluated the results of our net interest income simulation and market value of equity model prepared as of March 31, 2004. These models indicate that our interest rate sensitivity is within limits set by our Board of Directors and that our balance sheet is asset-sensitive. An asset-sensitive balance sheet suggests that in a rising interest rate environment, our net interest margin would increase and during a falling or sustained low interest rate environment, our net interest margin would decrease. The models assume, however, a static balance sheet, i.e., no change in the mix or size of the loan, investment and deposit portfolios.

        Net interest income simulation.    We used a simulation model to measure the estimated changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of March 31, 2004. This model is an interest rate risk management tool and the results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. We have assumed no growth in either our interest-sensitive assets or liabilities over the next 12 months; therefore, the results reflect an interest rate shock to a static balance sheet.

        This analysis calculates the difference between net interest income forecasted using increasing and declining interest rate scenarios and net interest income forecasted using a base market interest rate

26


derived from the current treasury yield curve. In order to arrive at the base case, we extend our balance sheet at March 31, 2004 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products' pricing methodology in effect as of March 31, 2004. Based on such repricings, we calculated estimated net interest income and net interest margin. The effects of certain balance sheet attributes, such as fixed-rate loans, floating rate loans that have reached their floors and the volume of noninterest-bearing deposits as a percentage of earning assets, impact our assumptions and consequently the results of our interest rate risk management model. Changes that vary significantly from our assumptions include loan and deposit growth or contraction, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, all of which may have significant effects on our net interest income.

        The net interest income simulation model includes various assumptions regarding the repricing relationship for each of our assets and liabilities. Many of our assets are floating rate loans, which are assumed to reprice immediately and to the same extent as the change in market rates according to their contracted index. Some loans and investment vehicles include the opportunity of prepayment (imbedded options) and the simulation model uses national indexes to estimate these prepayments and reinvest the proceeds therefrom at current simulated yields. Our non-term deposit products reprice more slowly, usually changing less than the change in market rates and at our discretion.

        Further, because the simulation analysis assumes no growth in the balance sheet and that its structure will remain similar to the structure at March 31, 2004, it does not account for all factors that impact this analysis, including changes by management to mitigate the impact of interest rate changes or the impact a change in interest rates may have on our credit risk profile, loan prepayment estimates and spread relationships which can change regularly. Interest rate changes create changes in actual loan prepayment rates which will differ from the market estimates we used in this analysis. Management reviews the model assumptions for reasonableness on a quarterly basis. The following table presents forecasted net interest income and net interest margin for the next 12 months using a base market rate and the estimated change to the base scenario given immediate and sustained upward and downward movements in interest rates of 100, 200 and 300 basis points.

Interest rate scenario

  Estimated Net
Interest Income

  Percentage
Change
From Base

  Estimated
Net Interest
Margin

  Estimated Net Interest
Margin Change
From Base

 
 
  (Dollars in thousands)

 
Up 300 basis points   $ 120,076   12.6 % 5.65 % 0.62 %
Up 200 basis points   $ 114,169   7.0 % 5.37 % 0.35 %
Up 100 basis points   $ 108,602   1.8 % 5.11 % 0.09 %
BASE CASE   $ 106,668     5.02 %  
Down 100 basis points   $ 103,851   (2.6 )% 4.89 % (0.13 )%
Down 200 basis points   $ 97,162   (8.9 )% 4.58 % (0.44 )%
Down 300 basis points   $ 90,240   (15.4 )% 4.26 % (0.77 )%

        Our simulation results as of March 31, 2004 indicate our interest rate risk position was asset sensitive as the simulated impact of an immediate upward movement in interest rates results in increases in net interest income over the subsequent 12 month period while an immediate downward movement in interest rates would result in a decrease in net interest income over the next 12 months. We tend to discount the simulated results of a downward movement in interest rates as not realistic given current market interest rates. However, our net interest margin may compress in future periods if our financial instruments continue to reprice downward in this sustained low interest rate environment.

        Market value of equity.    We measure the impact of market interest rate changes on the net present value of estimated cash flows from our assets, liabilities and off-balance sheet items, defined as the market value of equity, using a simulation model. This simulation model assesses the changes in the

27



market value of our interest-sensitive financial instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest rates of 100, 200 and 300 basis points. This analysis assigns significant value to our noninterest-bearing deposit balances which may not necessarily be realized in a bargain sale. The projections are by their nature forward-looking and therefore inherently uncertain, and include various assumptions regarding cash flows and interest rates. This model is an interest rate risk management tool and the results are not necessarily an indication of our actual future results. Actual results may vary significantly from the results suggested by the market value of equity table. Actual loan prepayments and deposit attrition, changes in the mix of our earning assets or funding sources, and future asset/liability management decisions, among others, may vary significantly from our assumptions.

        The base case is determined by applying various current market discount rates to the estimated cash flows from the different types of assets, liabilities and off-balance sheet items existing at March 31, 2004. The following table shows the projected change in the market value of equity for the set of rate shocks presented as of March 31, 2004.

Interest rate scenario

  Estimated
Market Value

  Percentage
change
From Base

  Percentage of
total assets

  Ratio of
Estimated Market
Value to
Book Value

 
 
  (Dollars in thousands)

 
Up 300 basis points   $ 557,334   11.2 % 22.5 % 161.5 %
Up 200 basis points   $ 544,476   8.6 % 22.0 % 157.7 %
Up 100 basis points   $ 528,440   5.4 % 21.3 % 153.1 %
BASE CASE   $ 501,229     20.2 % 145.2 %
Down 100 basis points   $ 466,832   (6.9 )% 18.9 % 135.2 %
Down 200 basis points   $ 433,011   (13.6 )% 17.5 % 125.4 %
Down 300 basis points   $ 396,852   (20.8 )% 16.0 % 115.0 %

        The results of our market value of equity model indicate that an immediate and sustained increase in interest rates would increase the market value of equity from the base case while a decrease in interest rates would decrease the market value of equity.

        Gap analysis.    As part of the interest rate management process we use a gap analysis. A gap analysis provides information about the volume and repricing characteristics and relationship between the amounts of interest-sensitive assets and interest-bearing liabilities at a particular point in time. An effective interest rate strategy attempts to match the volume of interest sensitive assets and interest bearing liabilities repricing over different time intervals. The main focus of this interest rate management tool is the gap sensitivity identified as the cumulative one year gap.

28


 
  At March 31, 2004
Amounts Maturing or Repricing In

 
  3 Months
Or Less

  Over 3 Months
to 12 Months

  Over 1 Year
to 5 Years

  Over
5 Years

  Nonrate-
Bearing(1)

  Total
 
  (Dollars in thousands)

ASSETS                                    
  Cash and deposits in other financial institutions   $ 69   $ 290   $   $   $ 98,049   $ 98,408
  Federal funds sold     8,700                     8,700
  Investment securities     38,402     18,082     242,269     35,071         333,824
  Loans, net of deferred fees and costs     1,216,214     60,770     396,029     42,592         1,715,605
  Other assets                     318,972     318,972
   
 
 
 
 
 
  Total assets     1,263,385     79,142     638,298     77,663     417,021     2,475,509
   
 
 
 
 
 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Noninterest-bearing demand deposits                     844,667     844,667
  Interest-bearing demand, money market and savings     855,332                     855,332
  Time certificates of deposit     155,914     100,609     14,152     120         270,795
  Short term borrowings     10,800                             10,800
  Subordinated debentures     113,406             8,248         121,654
  Other liabilities                     27,076     27,076
  Shareholders' equity                     345,185     345,185
   
 
 
 
 
 
  Total liabilities and shareholders' equity   $ 1,135,452   $ 100,609   $ 14,152   $ 8,368   $ 1,216,928   $ 2,475,509
   
 
 
 
 
 
 
Period Gap

 

$

127,933

 

$

(21,467

)

$

624,146

 

$

69,295

 

$

(799,907

)

 

 
  Cumulative interest rate-sensitive assets   $ 1,263,385   $ 1,342,527   $ 1,980,825   $ 2,058,488            
  Cumulative interest rate-sensitive liabilities   $ 1,135,452   $ 1,236,061   $ 1,250,213   $ 1,258,581            
  Cumulative Gap   $ 127,933   $ 106,466   $ 730,612   $ 799,907            
  Cumulative interest-earning assets to cumulative interest-bearing liabilities     111.3 %   108.6 %   158.4 %   163.6 %          
  Cumulative gap as a percent of:                                    
    Total assets     5.2 %   4.3 %   29.5 %   32.3 %          
    Interest-earning assets     6.2 %   5.2 %   35.5 %   38.9 %          

(1)
Assets or liabilities which do not have a stated interest rate.

        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 management's discretion and generally are more rate sensitive.

        The preceding table indicates that we had a positive one year cumulative gap of $106.5 million, or 4.3% total assets, at March 31, 2004. This gap position suggests that we are asset-sensitive and if rates were to increase, our net interest margin would most likely increase. Conversely, if rates were to fall during this period, interest income would decline by a greater amount than interest expense and net income would decrease. The ratio of interest-earning assets to interest-bearing liabilities maturing or repricing within one year at March 31, 2004 is 108.6%. This one year gap position indicates that interest income is likely to be affected to a greater extent than interest expense for any changes in interest rates within one year from March 31, 2004.

        The gap table has inherent limitations and actual results may vary significantly from the results suggested by the gap table. The gap table is unable to incorporate certain balance sheet characteristics or factors. The gap table assumes a static balance sheet, like the net interest income simulation, and, accordingly, looks at the repricing of existing assets and liabilities without consideration of new loans and deposits that reflect a more current interest rate environment. Unlike the net interest income

29



simulation, however, the interest rate risk profile of certain deposit products and floating rate loans that have reached their floors cannot be captured effectively in a gap table. Although the table shows the amount of certain assets and liabilities scheduled to reprice in a given time frame, it does not reflect when or to what extent such repricings actually may occur. For example, interest-bearing demand, money market and savings deposits are shown to reprice in the first 3 months, but we may choose to reprice these deposits more slowly and incorporate only a portion of the movement in market rates based on market conditions at that time. Alternatively, a loan which has reached its floor may not reprice even though market rates change causing such loan to act like a fixed rate loan regardless of its scheduled repricing date. For example, a loan already at its floor would not reprice if the adjusted rate was less than its floor. The gap table as presented is not able to factor in the flexibility we believe we have in repricing either deposits or the floors on our loans.

        We believe the estimated effect of a change in interest rates is better reflected in our net interest income and market value of equity simulations which incorporate many of the factors mentioned.


ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

        Please see the section above titled "Asset/Liability Management and Interest Rate Sensitivity" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" which provides an update to our quantitative and qualitative disclosure about market risk. This analysis should be read in conjunction with text under the caption "Quantitative and Qualitative Disclosure About Market Risk" in our annual report on Form 10-K for the year ended December 31, 2003, which text is incorporated herein by reference. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Item 2 regarding such forward-looking information.


ITEM 4. Controls and Procedures

        As of the end of the period covered by this report, an evaluation was carried out by the Company's management, with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective.

        There have been no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

30



PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings.

        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 2. Changes in Securities

Recent Sales of Unregistered Securities

        During the quarter ended March 31, 2004 and since its inception in May 2000, the Company has issued unregistered debt securities through seven offerings of trust preferred securities. The details of those offerings are set forth below:

 
   
   
  Consideration
   
   
   
 
   
   
  Exemption
from
Registration
Claimed

   
   
Securities Sold

  Date
Offering
Completed

  Underwriters or
Other Purchasers

  Aggregate
Offering
Price

  Underwriting
Discounts/
Commissions

  Terms of
Conversion
or Exercise

  Use of
Proceeds

 
  (In thousands)

Trust Preferred Securities   9/7/2000   First Tennessee Capital Markets/Keefe, Bruyette and Woods, Inc.   $ 8,248   $ 240   Yes (1)   N/A   Acquisition financing
Trust Preferred Securities   12/18/2001   First Tennessee Capital Markets/Keefe, Bruyette and Woods, Inc.   $ 10,310   $ 300   Yes (1)   N/A   Acquisition financing
Trust Preferred Securities   11/28/2001   Sandler O'Neill & Partners, L.P.   $ 10,310   $ 300   Yes (1)   N/A   Acquisition financing
Trust Preferred Securities   6/26/2002   First Tennessee Capital Markets/Keefe, Bruyette and Woods, Inc.   $ 10,310   $ 200   Yes (1)   N/A   Acquisition financing
Trust Preferred Securities   8/15/2003   First Tennessee Capital Markets/Keefe, Bruyette and Woods, Inc.   $ 10,310   $ 150   Yes (1)   N/A   Acquisition financing
Trust Preferred Securities   9/3/2003   Trapeza CDO IV, LLC   $ 10,310       Yes (1)   N/A   Acquisition financing
Trust Preferred Securities   2/5/2004   Cohen Bros. & Co./Friedman, Billings, Ramsey & Co., Inc.   $ 61,856   $ 300   Yes (1)   N/A   Acquisition financing

(1)
The trust preferred securities were sold to Qualified Institutional Buyers pursuant to Rule 144A promulgated pursuant to the Securities Act of 1933, as amended, or 1933 Act. At the same time as each of the above 144A transactions, the Company sold junior subordinated debentures to the trust that issued the trust preferred securities in an amount, in each case, corresponding to the amount of the trust preferred securities. Such sales were made in reliance on the exemption in Section 4(2) of the 1933 Act.

31


        Additional information regarding the offering of our debt securities and the trust preferred securities is set forth in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in "Part I. Financial Information, Item 1. Consolidated Financial Statements (Unaudited)" hereto.

Repurchases of Common Stock

        Through the Company's Directors Deferred Compensation Plan, or the DDCP, participants in the plan may reinvest deferred amounts in the Company's common stock. The Company has the discretion whether to track purchases of common stock as if made, or to fully fund the DDCP via purchases of common stock with deferred amounts. Purchases of Company common stock by the rabbi trust of the DDCP are considered repurchases of common stock by the Company since the rabbi trust is an asset of the Company. Actual purchases of Company common stock via the DDCP are made through open market purchases pursuant to the terms of the DDCP, which since the amendment of the DDCP in August 2003 includes a predetermined formula and schedule for the purchase of such stock in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the DDCP, generally purchases are actually made or deemed to be made in the open market on the 15th of the month (or the next trading day), beginning March 15th, following the day on which deferred amounts are contributed to the DDCP. Listed in the table below are the actual purchases made by the DDCP during the quarter ended March 31, 2004:

 
  Total
Shares
Purchased

  Average
Price Per
Share

  Shares Purchased As
Part of a Publicly-
Announced Program

  Maximum
Shares Still
Available for
Repurchase

January 1 – January 31, 2004         N/A   N/A
February 1 – February 29, 2004         N/A   N/A
March 1 – March 31, 2004   6,135   $ 38.70   N/A   N/A
   
 
 
 
Total   6,135   $ 38.70   N/A   N/A


ITEM 3. Defaults Upon Senior Securities

        None.


ITEM 4. Submission of Matters to a Vote of Security Holders

        None.


ITEM 5. Other Information

        On April, 16, 2004, the Company completed its acquisition of Harbor National Bank, a $173 million-asset bank based in Newport Beach, California. With the completion of this acquisition, Harbor National merged into Pacific Western National Bank, a wholly-owned subsidiary of First Community Bancorp. On April 19, 2004, First Community announced that it had also completed converting Harbor National to Pacific Western's operating platform and systems. First Community paid Harbor shareholders $13.28 in cash per share of Harbor National Bank common stock and paid approximately $35.5 million for all of the outstanding options and shares of common stock of Harbor National.

        On April 21, 2004, the Company announced its results of operations and financial condition for the quarter ended March 31, 2004. The Company also announced that the Board of Directors had declared a quarterly cash dividend of $0.22 per common share, a 17% increase over the previous quarterly cash dividend of $0.1875 per share. The cash dividend will be payable on May 28, 2004 to shareholders of record on May 14, 2004.

32




ITEM 6. Exhibits and Reports on Form 8-K

(a)   Exhibits.

Exhibit
Number

  Description
3.1   Articles of Incorporation of First Community Bancorp, as amended to date (Exhibit 3.1 to Form 10-Q filed on November 14, 2002 and incorporated herein by this reference).

3.2

 

Bylaws of First Community Bancorp, as amended to date (Exhibit 4.2 to Form S-3 filed on June 11, 2002 and incorporated herein by this reference).

31.1

 

Section 302 Certifications.

32.1

 

Section 906 Certifications.

(b)   Reports on Form 8-K.

        On January 27, 2004, the Company filed a Current Report on Form 8-K including a press release, dated January 26, 2004, announcing the results of operations and financial condition for the quarter and fiscal year ended December 31, 2003.

        On February 9, 2004, the Company filed a Current Report on Form 8-K including a press release, dated February 5, 2004, announcing the signing of a definitive agreement to acquire First Community Financial Corp. for $40 million in cash, and announcing the completion of a $60 million offering of trust preferred securities.

        On February 27, 2004, the Company filed a Current Report on Form 8-K announcing the resignation of Leon Kassel from the Board of Directors on February 26, 2004.

33




SIGNATURES

        Pursuant to the requirements 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

Date: May 6, 2004

 

/s/  
VICTOR R. SANTORO          
Victor R. Santoro
Executive Vice President and Chief Financial Officer

34




QuickLinks

TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2004
PART II—OTHER INFORMATION
SIGNATURES