QuickLinks -- Click here to rapidly navigate through this document



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


FORM 10-K

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

For the fiscal year ended December 31, 2007

OR

o

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

Commission File No. 00-30747


FIRST COMMUNITY BANCORP
(Exact Name of Registrant as Specified in Its Charter)

California
(State or Other Jurisdiction of
Incorporation or Organization)
  33-0885320
(I.R.S. Employer
Identification Number)
401 West "A" Street
San Diego, California

(Address of Principal Executive Offices)
 
92101-7917
(Zip Code)

Registrant's telephone number, including area code:
(619) 233-5588

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange on Which Registered
Common stock, no par value The Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ý No o

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o No ý

         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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "Accelerated Filer and Large Accelerated Filer" in Rule 12b-2 of the Exchange Act. (check one): Large Accelerated filer    ý    Accelerated filer    o    Non-Accelerated filer    o    Smaller reporting company    o

         Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.)   Yes o No ý

         As of June 30, 2007, the aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the average high and low sales prices on The Nasdaq Stock Market LLC as of the close of business on June 30, 2007, was approximately $1.6 billion. Registrant does not have any nonvoting common equities.

         As of February 21, 2008, there were 27,147,419 shares of registrant's common stock outstanding, excluding 1,010,033 shares of unvested restricted stock.

DOCUMENTS INCORPORATED BY REFERENCE

         The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company's definitive proxy statement for its 2008 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and such information is incorporated herein by this reference.




PART I        
  ITEM 1.   Business   3
    General   3
    Strategic Evolution and Acquisition Strategy   4
    Banking Business   6
    Employees   10
    Financial and Statistical Disclosure   10
    Supervision and Regulation   10
    Available Information   17
    Forward-Looking Information   17
  ITEM 1A.   Risk Factors   18
  ITEM 1B.   Unresolved Staff Comments   23
  ITEM 2.   Properties   23
  ITEM 3.   Legal Proceedings   23
  ITEM 4.   Submission of Matters to a Vote of Security Holders   24
PART II        
  ITEM 5.   Market For Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities   25
    Marketplace Designation, Sales Price Information and Holders   25
    Dividends   25
    Securities Authorized for Issuance under Equity Compensation Plans   27
    Recent Sales of Unregistered Securities and Use of Proceeds   27
    Repurchases of Common Stock   27
    Five-Year Stock Performance Graph   29
  ITEM 6.   Selected Financial Data   30
  ITEM 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   31
    Overview   31
    Key Performance Indicators   31
    Critical Accounting Policies   33
    Results of Operations   36
    Financial Condition   45
    Borrowings   53
    Capital Resources   54
    Liquidity   55
    Contractual Obligations   56
    Off-Balance Sheet Arrangements   56
    Recent Accounting Pronouncements   57
  ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk   57
  ITEM 8.   Financial Statements and Supplementary Data   63
    Contents   63
    Management's Report on Internal Control Over Financial Reporting   64
    Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting    
    Report of Independent Registered Public Accounting Firm   65
    Consolidated Balance Sheets as of December 31, 2007 and 2006   67
    Consolidated Statements of Earnings for the Years Ended December 31, 2007, 2006 and 2005   68
    Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005   69
    Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005   70
    Notes to Consolidated Financial Statements   71
  ITEM 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   116
  ITEM 9A.   Controls and Procedures   116
  ITEM 9B.   Other Information   116
PART III        
  ITEM 10.   Directors, Executive Officers and Corporate Governance of the Registrant   117
  ITEM 11.   Executive Compensation   117
  ITEM 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters   117
  ITEM 13.   Certain Relationships and Related Transactions, and Director Independence   117
  ITEM 14.   Principal Accountant Fees and Services   117
PART IV        
  ITEM 15.   Exhibits and Financial Statement Schedules   118
SIGNATURES   122
CERTIFICATIONS    

2



PART I

ITEM 1.    BUSINESS

General

        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 subsidiary. As of December 31, 2007 and 2006, our sole banking subsidiary is Pacific Western Bank. We refer to Pacific Western herein as the "Bank" and when we say "we", "our" or the "Company", we mean the Company on a consolidated basis with Pacific Western. When we refer to "First Community" or to the holding company, we are referring to the parent company on a stand-alone basis. As of December 31, 2005, our banking subsidiaries were Pacific Western National Bank which we also refer to as Pacific Western, and First National Bank, which we refer to as First National. Pacific Western National Bank converted from a national banking charter to a state bank charter under the name of Pacific Western Bank on September 13, 2006. At the time of its charter conversion, Pacific Western also withdrew from membership in the Federal Reserve System and became a "nonmember" bank. Additionally, on October 26, 2006, following the completion of the acquisition of Community Bancorp Inc. and the subsequent merger of its wholly-owned subsidiary, Community National Bank with and into First National, we completed our plan of consolidation by merging First National, with and into Pacific Western, with Pacific Western as the surviving entity in an "as if" pooling transaction. All references to Pacific Western, or the Bank, prior to September 13, 2006 refer to Pacific Western National Bank, and references on or after September 13, 2006 refer to Pacific Western Bank.

        On June 25, 2007 we acquired Business Finance Capital Corporation, or BFCC, a commercial finance company based in San Jose, California, and parent company to BFI Business Finance, or BFI. At the time of the acquisition, BFCC was merged out of existence and BFI became a wholly-owned subsidiary of Pacific Western. On January 4, 2006, we acquired Cedars Bank, or Cedars, which was merged with and into Pacific Western. On May 9, 2006, we acquired Foothill Independent Bancorp, or Foothill. At the time of acquisition Foothill was merged with and into the First Community Bancorp and Foothill's wholly-owned subsidiary, Foothill Independent Bank, was merged with and into Pacific Western.

        Pacific Western is a full-service community bank offering a broad range of banking products and services through 60 branch offices located in Los Angeles, Orange, Riverside, San Bernardino and San Diego Counties, California. We accept time and demand deposits, fund loans including real estate, construction, SBA and commercial loans, and offer other business oriented banking products. Our operations are primarily located in Southern California and the Bank focuses on conducting business with small to medium size businesses and the owners and employees of those businesses in our marketplace. We also operate in Arizona, Northern California, the Pacific Northwest, and Texas through our asset-based lending division doing business as First Community Financial, which we refer to as FCF, BFI, and SBA loan production offices. At December 31, 2007, our assets totaled $5.2 billion, of which gross loans, excluding loans held for sale, totaled $4.0 billion. At this date approximately 23% were commercial loans, 53% were commercial real estate loans, 10% were commercial real estate construction loans, 8% were residential real estate construction loans, 5% were residential real estate loans and 1% were consumer and other loans. These percentages include some foreign loans, primarily to individuals or entities with business in Mexico, representing 1% of total loans.

        We generate our income primarily from the interest received on the various loan products and investment securities and fees from providing deposit services, foreign exchange services and extending credit. Our major operating expenses are the interest paid by the Bank on deposits and borrowings, employee compensation and general operating expenses. The Bank relies on a foundation of locally generated deposits to fund loans. Our Bank has a relatively low cost of funds due to a high percentage of noninterest-bearing and low cost deposits to total deposits. Our operations, similar to other financial

3



institutions with operations predominately focused in Southern California, are significantly influenced by economic conditions in Southern California, including the strength of the real estate market, the fiscal and regulatory policies of the federal and state government and the regulatory authorities that govern financial institutions. See "—Supervision and Regulation." Through our SBA loan production offices and our asset-based lending operations with production and marketing offices in Arizona, Northern California, the Pacific Northwest and Texas, we are also subject to the economic conditions affecting these markets.

        We are committed to maintaining premier, relationship-based community banking in Southern California, serving the needs of small to medium-sized businesses and the owners and employees of those businesses, as well as serving the needs of growing businesses that may not yet meet the credit standards of the Bank through tightly controlled asset-based lending and factoring of accounts receivable. The strategy for serving our target markets is the delivery of a finely-focused set of value- added products and services that satisfy the primary needs of our customers, emphasizing superior service and relationships as opposed to transaction volume or low pricing.

Strategic Evolution and Acquisition Strategy

        The Company was organized on October 22, 1999 as a California corporation for the purpose of becoming a bank holding company and to acquire all the outstanding capital stock of Rancho Santa Fe National Bank, First National's predecessor.

        We have grown rapidly through a series of acquisitions. The following chart summarizes the completed acquisitions since our inception, some of which are described in more detail below. See also Note 2 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for further details regarding our acquisitions.

Date

  Institution/Company Acquired
May 2000   Rancho Santa Fe National Bank
May 2000   First Community Bank of the Desert
January 2001   Professional Bancorp, Inc.
October 2001   First Charter Bank
January 2002   Pacific Western National Bank
March 2002   W.H.E.C., Inc.
August 2002   Upland Bank
August 2002   Marathon Bancorp
September 2002   First National Bank
January 2003   Bank of Coronado
August 2003   Verdugo Banking Company
March 2004   First Community Financial Corporation
April 2004   Harbor National Bank
August 2005   First American Bank
October 2005   Pacific Liberty Bank
January 2006   Cedars Bank
May 2006   Foothill Independent Bancorp
October 2006   Community Bancorp Inc.
June 2007   Business Finance Capital Corporation

4


        We have financed our acquisitions, in part, with cash raised from the sale of our common stock or from the issuance of subordinated debentures. In January 2006, we raised $109.5 million via the sale of 1.9 million shares of our common stock in a registered public offering. The proceeds of the January 2006 offering were used to provide regulatory capital to support the acquisition of Cedars Bank. We have outstanding a total of $138.5 million in subordinated debentures as follows: $8.2 million issued in 2000, $20.6 million issued in 2003, $61.9 million issued in 2004, and $47.8 million acquired in our acquisitions of Foothill and Community Bancorp. In June 2007, we retired $10.3 million of subordinated debentures issued in 2002. See Note 8 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." As described in more detail below, we have also financed certain acquisitions with the exchange of our common stock for the stock of the target company. Below is a summary of the acquisitions which have occurred since the beginning of 2005.

        On August 12, 2005, we acquired First American Bank, or First American, based in Rosemead, California. We paid approximately $59.7 million in cash to First American shareholders, and caused First American to pay $2.6 million in cash for all outstanding options to purchase First American common stock. The aggregate deal value was approximately $62.3 million. We made this acquisition to expand our presence in Los Angeles County, California. At the time of the acquisition, First American was merged into Pacific Western.

        On October 7, 2005, we acquired Pacific Liberty Bank, or Pacific Liberty, based in Huntington Beach, California. We issued 783,625 shares of our common stock to the Pacific Liberty shareholders and caused Pacific Liberty to pay $5.0 million in cash for all outstanding options to purchase Pacific Liberty common stock. The aggregate deal value was approximately $41.6 million. We made this acquisition to expand our presence in Orange County, California. At the time of the acquisition, Pacific Liberty was merged into Pacific Western.

        On January 4, 2006, we acquired Cedars Bank, or Cedars, based in Los Angeles, California. We paid approximately $120.0 million in cash for all of the outstanding shares of common stock and options of Cedars. We made this acquisition to expand our presence in Los Angeles, California. At the time of the acquisition, Cedars was merged into Pacific Western. In January 2006, we issued 1,891,086 shares of common stock for net proceeds of $109.5 million. We used these proceeds to augment our regulatory capital in support of the Cedars acquisition.

        On May 9, 2006, we acquired Foothill Independent Bancorp, or Foothill, based in Glendora, California. We issued 3,946,865 shares of our common stock to the Foothill shareholders and caused Foothill to pay $10.2 million in cash for all outstanding options to purchase Foothill common stock. The aggregate deal value was approximately $242.5 million. At the time of the acquisition, Foothill was merged with and into the Company and Foothill Independent Bank, a wholly-owned subsidiary of Foothill, was merged with and into Pacific Western. We made this acquisition to expand our presence in Los Angeles, Riverside and San Bernardino Counties of California.

        On October 26, 2006, we acquired Community Bancorp Inc., or Community Bancorp, based in Escondido, California. We issued 4,677,908 shares of our common stock to the Community Bancorp

5


shareholders and caused Community Bancorp to pay $6.1 million in cash for all outstanding options to purchase Community Bancorp common stock. The aggregate deal value for financial reporting purposes was approximately $268.7 million. At the time of the acquisition, Community Bancorp was merged with and into the Company and Community National Bank, a wholly-owned subsidiary of Community Bancorp, was merged with and into First National. We made this acquisition to expand our presence in the San Diego and Riverside Counties of California.

        On June 25, 2007 we acquired Business Finance Capital Corporation, or BFCC, a commercial finance company based in San Jose, California, and parent company to BFI Business Finance, or BFI. We issued 494,606 shares of our common stock to the BFCC common shareholders, paid $5.9 million in cash to preferred shareholders of BFCC and caused BFCC to pay $1.4 million in cash for all outstanding options to purchase BFCC common stock. The aggregate deal value was $35.0 million. BFI is an asset-based lender that lends primarily to growing businesses throughout California and the northwestern United States. At the time of the acquisition, BFCC was merged out of existence and BFI became a subsidiary of Pacific Western. We made this acquisition, which we refer to as the BFI acquisition, to expand our asset-based lending business and further diversify our loan portfolio.

Banking Business

        The Bank is a full-service community bank that offers a broad range of banking products and services, including many types of business and personal money market and checking accounts and other commercial and consumer banking services, including foreign exchange services. We generate our income primarily from the interest received on various loan products and investment securities, and fees from providing deposit services, foreign exchange services and extending credit. The Bank originates several types of loans, including secured and unsecured commercial and consumer loans, commercial real estate mortgage loans, SBA loans and construction loans. We extend credit to customers located primarily in the counties we serve, and through certain programs we also extend credit and make commercial and real estate loans to businesses located in Mexico. Special services, including international banking services, multi-state deposit services and investment services, or requests beyond the lending limits of the Bank can be arranged through correspondent banks. The Bank issues ATM and debit cards, has a network of ATMs and offers access to ATM networks through other major service providers. We focus on providing these banking and financial services throughout Southern California to small and medium-sized businesses and the owners and employees of those businesses. We also provide asset-based lending and factoring of accounts receivable to small businesses located throughout the western United States through BFI based in San Jose, California, FCF based in Phoenix, Arizona and marketing offices in Dallas, Houston and San Antonio, Texas, Bellevue, Washington and Los Angeles and Orange Counties, California.

        Through the Bank, the Company concentrates its lending activities in four principal areas:

6


7


        No individual or single group of related accounts is considered material in relation to our total assets or to the assets or deposits of the Bank, or in relation to the overall business of the Company. However, approximately 76% of our loan portfolio held for investment at December 31, 2007 consisted of real estate-related loans, including construction loans, miniperm loans, commercial real estate mortgage loans and commercial loans secured by commercial real estate. See "Item 7. Management's

8


Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Loans." Moreover, our business activities are currently focused primarily in Southern California, with the majority of our business concentrated in Los Angeles, Riverside, Orange, San Bernardino and San Diego Counties. Consequently, our results of operations and financial condition are dependent upon the general trends in the Southern California economies and, in particular, the residential and commercial real estate markets. The concentration of our operations in Southern California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region. We conduct foreign lending activities including commercial and real estate lending, consisting predominantly of loans to individuals or entities located in Mexico. All of our foreign loans are denominated in U.S. dollars and most are collateralized by assets located in the United States or guaranteed or insured by businesses located in the United States. We have continued to allow our foreign loan portfolio to repay in the ordinary course of business without making any new privately-insured foreign loans other than those under existing commitments. We also conduct asset-based lending and factoring of accounts receivable primarily in Arizona, Northern California, the Pacific Northwest, and Texas.

        The banking business in California, and specifically in the Bank's primary service areas, is highly competitive with respect to originating loans, generating deposits and providing other banking services. The market is dominated by a relatively small number of major banks with a large number of offices and full-service operations over a wide geographic area. Among the advantages such major banks have in comparison to the Bank is their ability to finance and engage in wide-ranging advertising campaigns and to invest in regions of higher yield and demand. These competitors offer certain services which we do not offer directly and by virtue of their greater total capitalization, such banks have substantially higher lending limits than we offer. Other entities, in both the public and private sectors, seeking to raise capital through the issuance and sale of debt or equity securities also compete with us for the acquisition of deposits. In recent years, increased competition has also developed from specialized finance and non-finance companies that offer wholesale finance, credit card and other consumer finance services (including on-line banking services and personal financial software). Competition for deposit and loan products remains strong from both banking and non-banking institutions and this competition directly affects the rates of those products and the terms on which they are offered to consumers and businesses.

        Technological innovation continues to contribute to greater competition in domestic and international financial services markets. Technological innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services previously limited to traditional banking products. In addition, customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer, ATMs, self-service branches and in-store branches.

        Mergers between financial institutions have placed additional pressure on banks within the industry to consolidate their operations, reduce expenses and increase revenues to remain competitive. In addition, competition has intensified due to federal and state interstate banking laws, which permit banking organizations to expand geographically with fewer restrictions than in the past. These laws allow banks to merge with other banks across state lines, thereby enabling banks to establish or expand banking operations in our most significant markets. The competitive environment is also significantly affected by federal and state legislation which make it easier for non-bank financial institutions to compete with us.

        Economic factors, along with legislative and technological changes, will have an ongoing impact on the competitive environment within the financial services industry. We work to anticipate and adapt to dynamic competitive conditions, but we can make no assurance as to the effectiveness of these efforts on our future business or results of operations or as to our continued ability to anticipate and adapt to

9



changing conditions. In order to compete with other financial services providers in our primary service areas, we attempt to use, to the fullest extent possible, the flexibility which our independent status permits, including an emphasis on specialized services, local promotional activity and personal contacts. We strive to offer highly personalized banking services and to continually improve our range of banking services provided and products offered. We believe that through focusing on providing services tailored to meet the needs of our customers and by cross-marketing our products, we can be competitive with and distinguish ourselves from other community banks and financial services providers in our marketplace. However, we can provide no assurance that we will be able to sufficiently improve our services and/or banking products or successfully compete in our primary service areas.

Employees

        As of February 15, 2008, Pacific Western had 860 full time equivalent employees and First Community had 21 full time equivalent employees.

Financial and Statistical Disclosure

        Certain of our statistical information is presented within "Item 6. Selected Financial Data," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 7A. Qualitative and Quantitative Disclosure About Market Risk." This information should be read in conjunction with the consolidated financial statements contained in "Item 8. Financial Statements and Supplementary Data."

Supervision and Regulation

        The banking and financial services business in which we engage is highly regulated. Such regulation is intended, among other things, to protect depositors insured by the Federal Deposit Insurance Corporation, or FDIC, and the entire banking system. The commercial banking business is also influenced by the monetary and fiscal policies of the federal government and the policies of the Federal Reserve Bank, or FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. Indirectly, such actions may also impact the ability of non-bank financial institutions to compete with the Bank. The nature and impact of any future changes in monetary policies cannot be predicted.

        The laws, regulations and policies affecting financial services businesses are continuously under review by Congress, state legislatures and federal and state regulatory agencies. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the California legislature and by various bank regulatory agencies and other professional agencies. Changes in the laws, regulations or policies that impact us cannot necessarily be predicted, but they may have a material effect on our business and earnings.

        As a bank holding company, First Community is registered with and subject to regulation by the FRB under the Bank Holding Company Act of 1956, as amended, or the BHCA. In accordance with

10


FRB policy, First Community is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where it might not otherwise do so. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to such a commonly controlled institution. Under the BHCA, we are subject to periodic examination by the FRB. We are also required to file with the FRB periodic reports of our operations and such additional information regarding the Company and its subsidiaries as the FRB may require. Pursuant to the BHCA, we are required to obtain the prior approval of the FRB before we acquire all or substantially all of the assets of any bank or ownership or control of voting shares of any bank if, after giving effect to such acquisition, we would own or control, directly or indirectly, more than 5 percent of such bank.

        Under the BHCA, we may not engage in any business other than managing or controlling banks or furnishing services to our subsidiaries that the FRB deems to be so closely related to banking as "to be a proper incident thereto." We are also prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any company unless the company is engaged in banking activities or the FRB determines that the activity is so closely related to banking to be a proper incident to banking. The FRB's approval must be obtained before the shares of any such company can be acquired and, in certain cases, before any approved company can open new offices.

        Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance activities and any other activity that the FRB, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, we do not operate as a financial holding company.

        The BHCA and regulations of the FRB also impose certain constraints on the redemption or purchase by a bank holding company of its own shares of stock.

        Our earnings and activities are affected by legislation, by regulations and by local legislative and administrative bodies and decisions of courts in the jurisdictions in which we and the Bank conduct business. For example, these include limitations on the ability of the Bank to pay dividends to us and our ability to pay dividends to our shareholders. It is the policy of the FRB that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. Various federal and state statutory provisions limit the amount of dividends that subsidiary banks and savings associations can pay to their holding companies without regulatory approval. In addition to these explicit limitations, the federal regulatory agencies have general authority to prohibit a banking subsidiary or bank holding company from engaging in an unsafe or unsound banking practice. Depending upon the circumstances, the agencies could take the position that paying a dividend would constitute an unsafe or unsound banking practice. In addition, as discussed below under "—Regulation of the Bank", a bank holding company such as the Company is required to maintain minimum ratios of Tier 1 capital and total capital to total risk-weighted assets, as well as a minimum ratio of Tier 1 capital to total adjusted quarterly average assets as defined in such regulations.

11


        In addition, banking subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates. Subject to certain exceptions set forth in the Federal Reserve Act, a bank can make a loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate, accept securities of an affiliate as collateral for a loan or extension of credit to any person or company, issue a guarantee or accept letters of credit on behalf of an affiliate only if the aggregate amount of the above transactions of such subsidiary does not exceed 10 percent of such subsidiary's capital stock and surplus on an individual basis or 20 percent of such subsidiary's capital stock and surplus on an aggregate basis. Such transactions must be on terms and conditions that are consistent with safe and sound banking practices. A bank holding company and its subsidiaries generally may not purchase a "low-quality asset," as that term is defined in the Federal Reserve Act, from an affiliate. Such restrictions also prevent a holding company and its other affiliates from borrowing from a banking subsidiary of the holding company unless the loans are secured by collateral.

        The FRB has cease and desist powers over parent bank holding companies and non-banking subsidiaries where the action of a parent bank holding company or its non-financial institutions represent an unsafe or unsound practice or violation of law. The FRB has the authority to regulate debt obligations, other than commercial paper, issued by bank holding companies by imposing interest ceilings and reserve requirements on such debt obligations.

        The Bank is extensively regulated under both federal and state law.

        Pacific Western is insured by the FDIC, which currently insures non-IRA deposits of each insured bank to a maximum of $100,000 per depositor and IRA deposits of each insured bank to a maximum of $250,000 per depositor. For this protection, Pacific Western, as is the case with all insured banks, pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC. Additionally, Pacific Western is a state-chartered bank and is regulated by the California Department of Financial Institutions, or DFI.

        Various requirements and restrictions under federal and state law affect the operations of the Bank. Federal and state statutes and regulations relate to many aspects of the Bank's operations, including standards for safety and soundness, reserves against deposits, interest payable on certain deposit products, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, fair lending requirements, Community Reinvestment Act activities and loans to affiliates.

        Further, each of the Company and the Bank is required to maintain certain levels of capital. The FRB and the FDIC have substantially similar risk-based capital ratio and leverage ratio guidelines for banking organizations. The guidelines are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the guidelines, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization's assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution's or holding company's capital, in turn, is classified in one of three tiers, depending on type:

12


        The following are the regulatory capital guidelines and the actual capitalization levels for Pacific Western and the Company as of December 31, 2007:

 
  Adequately Capitalized
  Well Capitalized
  Pacific Western
  Company Consolidated
 
 
  (greater than or equal to)
   
   
 
Total risk-based capital ratio   8.00 % 10.00 % 12.90 % 11.92 %
Tier 1 risk-based capital ratio   4.00 % 6.00 % 11.65 % 10.67 %
Tier 1 leverage capital ratio   4.00 % 5.00 % 12.07 % 11.06 %

        The Company issued subordinated debentures to trusts that were established by us or entities we have acquired, which, in turn, issued trust preferred securities, which totaled $131.0 million at December 31, 2007. We retired $10.0 million of our trust preferred securities during 2007. Our trust preferred securities are currently included in our Tier I capital for purposes of determining the Company's Tier I and total risk-based capital ratios. The FRB has promulgated a modification of the capital regulations affecting trust preferred securities. Under this modification, effective March 31, 2009, the Company will be required to use a more restrictive formula to determine the amount of trust preferred securities that can be included in regulatory Tier I capital. At that time, the Company will be allowed to include in Tier I capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders' equity, less goodwill net of any related deferred income tax liability. The regulations currently in effect through December 31, 2008 limit the amount of trust preferred securities that can be included in Tier I capital to 25% of the sum of core capital elements without a deduction for goodwill. We have determined that our Tier I capital ratios would remain above the well-capitalized level had the modification of the capital regulations been in effect at December 31, 2007. We expect that our Tier I capital ratios will be at or above the existing well capitalized levels on March 31, 2009, the first date on which the modified capital regulations must be applied.

        The FDIC and FRB risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision, or BIS. The BIS is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines that each country's supervisors can use to determine the supervisory policies they apply. The BIS has been working for a number of years on revisions to the 1988 capital accord and in June 2004 released the final version of its proposed new capital framework, with an update in November 2005, or BIS II. BIS II proposes two approaches for setting capital standards for credit risk—an internal ratings-based approach tailored to individual institutions' circumstances (which for many asset classes is itself broken into a "foundation" approach and an "advanced" or "A-IRB" approach, the availability of which is subject to additional restrictions) and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. BIS II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures.

        The U.S. banking and thrift agencies are developing proposed revisions to their existing capital adequacy regulations and standards based on BIS II. In September 2006, the agencies issued a notice of proposed rulemaking setting forth a definitive proposal for implementing BIS II in the United States that would apply only to internationally active banking organizations—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of

13



$10 billion or more—but that other U.S. banking organizations could elect but would not be required to apply. In November 2007, the agencies adopted a definitive final rule for implementing BIS II in the United States that would apply only to internationally active banking organizations, or "core banks"—defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more. The final rule will be effective as of April 1, 2008. At the same time, the agencies announced their intention to issue a proposed rule that provide other U.S. banking organizations an option to adopt a "standardized approach" under BIS II. This new proposal, which is intended to be finalized before the core banks may start their first transition period year under BIS II, will replace the agencies' earlier proposed amendments to existing risk-based capital guidelines to make them more risk sensitive (formerly referred to as the "BIS I-A" approach).

        The Company is not required to comply with BIS II. The Company determined that it will not adopt the BIS II approach when it becomes effective.

Prompt Corrective Action

        The Federal Deposit Insurance Corporation Improvement Act, or FDICIA, requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Pursuant to FDICIA, the FDIC promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified as undercapitalized if its total risk-based capital is less than 8% or its Tier 1 risk-based capital or leverage ratio is less than 4%. An institution that, based upon its capital levels, is classified as "well capitalized", "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if a bank is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the federal bank regulator, and the holding company must guarantee the performance of that plan.

        In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal or state banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties. The enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.

        Since we are not involved in any business that manufactures, uses or transports chemicals, waste, pollutants or toxins that might have a material adverse effect on the environment, our primary exposure to environmental laws is through our lending activities and through properties or businesses we may own, lease or acquire. Based on a general survey of the Bank's loan portfolio, conversations

14


with local appraisers and the type of lending currently and historically done by the Bank, we are not aware of any potential liability for hazardous waste contamination that would be reasonably likely to have a material adverse effect on the Company as of February 15, 2008.

        The Sarbanes-Oxley Act of 2002 aims to restore the credibility lost as a result of high profile corporate scandals by addressing, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. The Nasdaq Stock Market has adopted corporate governance rules intended to allow shareholders to more easily and effectively monitor the performance of companies and directors. The principal provisions of the Sarbanes-Oxley Act, many of which have been interpreted through regulations released in 2003, provide for and include, among other things: (i) the creation of the Public Company Accounting Oversight Board; (ii) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; (iv) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (v) an increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with that company's independent auditors; (vi) requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; (vii) requirements that companies disclose whether at least one member of the audit committee is a "financial expert" (as such term is defined by the SEC) and if not disclosed, why the audit committee does not have a financial expert; (viii) expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; (ix) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on nonpreferential terms and in compliance with other bank regulatory requirements; (x) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; (xi) a range of enhanced penalties for fraud and other violations; and (xii) expanded disclosure and certification relating to an issuer's disclosure controls and procedures and internal controls over financial reporting.

        As a result of the Sarbanes-Oxley Act, and its implementing regulations, we have incurred substantial costs to interpret and ensure ongoing compliance with the law and its regulations. Future changes in the laws, regulation, or policies that impact us cannot necessarily be predicted and may have a material effect on our business and earnings.

        The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the Patriot Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Company, to implement new policies and procedures or amend existing policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers. The Patriot Act and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC and other federal banking agencies to evaluate the effectiveness of an

15


applicant in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act. The Company has augmented its systems and procedures to accomplish this. We believe that the ongoing cost of compliance with the Patriot Act is not likely to be material to the Company.

        Because of favorable loss experience and a healthy reserve ratio in the Deposit Insurance Fund (formerly known as the Bank Insurance Fund), or DIF, of the FDIC, well-capitalized and well-managed banks, including the Bank, have in recent years paid minimal premiums for FDIC insurance. The FDIC notified banks that beginning in 2007, it would increase the premiums for deposit insurance. Concurrently, a deposit premium refund, in the form of credit offsets for future premiums, was granted to banks that were in existence on December 31, 1996 and paid deposit insurance premiums prior to that date. Pacific Western and many of our acquired institutions met the qualifications and we received credits during 2007 which offset all of our 2007 premiums. For 2008, only 90% of the premiums may be offset against these credits. The amount of any future premiums will depend on the DIF loss experience, legislation or regulatory initiatives and other factors, none of which we are in position to predict at this time.

        The Community Reinvestment Act of 1977, or the CRA, generally requires insured depository institutions to identify the communities they serve and to make loans and investments, offer products, and provide services designed to meet the credit needs of these communities. The CRA also requires banks to maintain comprehensive records of its CRA activities to demonstrate how it is meeting the credit needs of their communities; these documents are subject to periodic examination by the FDIC. During these examinations, the FDIC rates such institutions' compliance with CRA as "Outstanding," "Satisfactory," "Needs to Improve" or "Substantial Noncompliance." The CRA requires the FDIC to take into account the record of a bank in meeting the credit needs of the entire communities served, including low-and moderate income neighborhoods, in determining such rating. Failure of an institution to receive at least a "Satisfactory" rating could inhibit such institution or its holding company from undertaking certain activities. The Bank received a CRA rating of "Satisfactory" as of its most recent examination.

        The FRB and other bank regulatory agencies have adopted final guidelines for safeguarding confidential, personal customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. We have adopted a customer information security program to comply with such requirements.

        The Gramm-Leach-Bliley Act of 1999 and the California Financial Information Privacy Act require financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statutes require explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the Bank's policies and procedures. Pacific Western has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of the Bank.

16


Available Information

        We maintain an Internet website at www.firstcommunitybancorp.com, and a website for Pacific Western at www.pacificwesternbank.com. At www.firstcommunitybancorp.com and via the "Investor Relations" link at the Bank's website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room, located at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You may obtain copies of the Company's filings on the SEC site. These documents may also be obtained in print upon request by our shareholders to our Investor Relations Department.

        We have adopted a written code of ethics that applies to all directors, officers and employees of the Company, including our principal executive officer and senior financial officers, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission promulgated thereunder. The code of ethics, which we call our Code of Business Conduct and Ethics, is available on our corporate website, www.firstcommunitybancorp.com in the section entitled "Corporate Governance." In the event that we make changes in, or provide waivers from, the provisions of this code of ethics that the SEC requires us to disclose, we intend to disclose these events on our corporate website in such section. In the Corporate Governance section of our corporate website, we have also posted the charters for our Audit Committee and our Compensation, Nominating and Governance Committee, as well as our Corporate Governance Guidelines. In addition, information concerning purchases and sales of our equity securities by our executive officers and directors is posted on our website.

        Our Investor Relations Department can be contacted at First Community Bancorp, 275 N. Brea Blvd., Brea, CA 92821, Attention: Investor Relations, telephone 714-671-6800, or via e-mail to investor-relations@firstcommunitybancorp.com.

        All website addresses given in this document are for information only and are not intended to be an active link or to incorporate any website information into this document.

Forward-Looking Information

        This Annual Report on Form 10-K contains certain forward-looking information about the Company, 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. We caution 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:

17


        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. We assume no obligation to update such forward-looking statements. For additional information concerning risks and uncertainties related to us and our operations, please refer to Items 1 through 7A of this Annual Report.

ITEM 1A.    RISK FACTORS

        Ownership of our common stock involves risk. You should carefully consider, in addition to the other information set forth herein, the following risk factors.

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

        Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or "spread" between the interest earned on loans, securities and other interest earning assets, and interest paid on deposits, borrowings and other interest bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest earning assets and interest bearing liabilities. Changes in market interest rates generally affect loan volume, loan yields, funding sources and funding costs.

        While an increase in the general level of interest rates may increase our net interest margin and loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest on and principal of their obligations. In addition, an increase in market interest rates on loans is generally associated with a lower volume of loan originations, which may reduce earnings. Following a decline in the general level of interest rates, our ability to maintain a positive net interest spread is dependant on our ability to reduce the interest paid on deposits, borrowings, and other interest bearing liabilities. We cannot provide assurance that we would be able to lower the rates paid on deposit accounts to support our liquidity requirements as lower rates may result in deposit outflows.

18



Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, liquidity, and overall profitability. We cannot assure you that we can minimize our interest rate risk.

We face strong competition from financial services companies and other companies that offer banking services which could negatively affect our business.

        We conduct our banking operations primarily in Southern California. Increased competition in our market may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that we offer in our service area. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.

        Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to grow the levels of our loans and deposits and our results of operations and financial condition may be adversely affected.

        The recent disruption in the credit markets has had the effect of decreasing the overall liquidity in the marketplace. Competition from financial institutions seeking to maintain adequate liquidity has placed upward pressure on the rates paid on certain deposit accounts at the same time the level of market interest rates has declined. To maintain adequate levels of liquidity, without exhausting secondary sources of liquidity, we may incur increased deposit costs.

Changes in economic conditions, in particular an economic slowdown in Southern California, could materially and negatively affect our business.

        Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control. A deterioration in economic conditions, whether caused by national or local concerns, in particular an economic slowdown in Southern California, could result in the following consequences, any of which could hurt our business materially: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decrease; low cost or noninterest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers' borrowing power, and reducing the value of assets and collateral associated with our existing loans. These circumstances may lead to an increase in nonaccrual and classified loans, which generally results in a provision for credit losses and in turn reduces the Company's net earnings. The State of California continues to face fiscal challenges, the long-term effects of which on the State's economy cannot be predicted.

19


A downturn in the real estate market could negatively affect our business.

        There has been a slow-down in the real estate market due to disruptions in the credit markets, the effects of which are not yet completely known or quantified. At December 31, 2007, 53% of our loans were secured by commercial real estate, 10% were secured by commercial real estate construction projects, 8% were secured by residential real estate construction projects and 5% were secured by residential real estate. We have observed tighter credit underwriting and higher premiums on liquidity, both which may place downward pressure on real estate values. Any further downturn in the real estate market could negatively affect our business because a significant portion of our loans is secured by real estate. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. Substantially all of our real property collateral is located in Southern California. If there is a significant decline in real estate values, especially in Southern California, the collateral for our loans would provide less security. Real estate values could be affected by, among other things, an economic slowdown, an increase in interest rates, earthquakes and other natural disasters particular to California.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

        We currently depend heavily on the services of our chairman, John Eggemeyer, our chief executive officer, Matthew Wagner, and a number of other key management personnel. The loss of Mr. Eggemeyer's or Mr. Wagner's services or that of other key personnel could materially and adversely affect our results of operations and financial condition. Our success also depends, in part, on our ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the banking industry and we may not be successful in attracting or retaining the personnel we require.

We are subject to extensive regulation which could adversely affect our business.

        Our operations are subject to extensive regulation by federal and state governmental authorities, and we are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact our operations. There can be no assurance that these proposed laws, rules and regulations, or any other laws, rules or regulations, will not be adopted in the future, which could (i) make compliance much more difficult or expensive, (ii) restrict our ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (iv) otherwise adversely affect our business or prospects for business. Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us. For more information, please see the section entitled "Item 1. Business—Supervision and Regulation" above.

We are exposed to transactional, country and legal risk related to our foreign loans that is in addition to risks we face on loans to U.S. based borrowers.

        A portion of our loan portfolio is represented by credit we extend and loans we make to businesses located outside the United States, predominantly in Mexico. These loans, which include commercial loans, real estate loans and credit extensions for the financing of international trade, are subject to risks in addition to risks we face with our loans to businesses located in the United States including, but not limited to transaction risk, country risk and legal risk. While these loans are denominated in U.S. dollars, the ability of the borrower to repay may be affected by fluctuations in the

20



borrower's home country currency relative to the U.S. dollar. Additionally, while most of our foreign loans are insured by U.S.-based institutions, guaranteed by a U.S.-based entity, or collateralized with U.S.-based assets or real property, our ability to collect in the event of default is subject to a number of conditions, as well as deductibles and co-payments with respect to insurance, and we may not be successful in obtaining partial or full repayment or reimbursement from the insurers. Furthermore, foreign laws may restrict our ability to foreclose on, take a security interest in, or seize collateral located in the foreign country.

We are exposed to risk of environmental liabilities with respect to properties to which we take title.

        In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Our ability to pay dividends is restricted by law and contractual arrangements and depends on capital distributions from the Bank which are subject to regulatory limits.

        Our ability to pay dividends to our shareholders is subject to the restrictions set forth in California law. In addition, our ability to pay dividends to our shareholders is restricted in specified circumstances under indentures governing the trust preferred securities we have issued and under the revolving credit agreement to which we are a party. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters—Dividends" in Part II of this Annual Report for more information on these restrictions. We cannot assure you that we will meet the criteria specified under California law or under these agreements in the future, in which case we may reduce or stop paying dividends on our common stock.

The primary source of our income from which we pay dividends is the receipt of dividends from the Bank.

        The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the Board of Governors of the Federal Reserve System, the FDIC and/or the DFI could assert that payment of dividends or other payments is an unsafe or unsound practice. In the event the Bank is unable to pay dividends to us, it is likely that we, in turn, would have to reduce or stop paying dividends on our common stock. Our failure to pay dividends on our common stock could have a material adverse effect on the market price of our common stock. See "Item 1. Business—Supervision and Regulation" above for additional information on the regulatory restrictions to which we and the Bank are subject.

Only a limited trading market exists for our common stock which could lead to price volatility.

        Our common stock was designated for quotation on The Nasdaq Stock Market in June 2000 and trading volumes since that time have been modest. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock. In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue or that shareholders will be able to sell their shares.

21


Our allowance for credit losses may not be adequate to cover actual losses.

        In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance and a reserve for unfunded loan commitments which, when combined, we refer to as the allowance for credit losses. Our allowance for credit losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results. Our allowance for credit losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Our federal and state regulators, as an integral part of their examination process, review our loans and allowance for credit losses. While we believe our allowance for credit losses is appropriate for the risk identified in the Company's loan portfolio, we cannot assure you that we will not further increase the allowance for credit losses, that it will be sufficient to cover losses, or that regulators will not require us to increase this allowance. Any of these occurrences could materially and negatively affect our earnings. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Annual Report for more information.

Our acquisitions may subject us to unknown risks.

        We have completed 19 acquisitions since May 2000, including the acquisition of two bank subsidiaries around which the Company was initially formed. Certain events may arise after the date of an acquisition, or we may learn of certain facts, events or circumstances after the closing of an acquisition, that may affect our financial condition or performance or subject us to risk of loss. These events include, but are not limited to: litigation resulting from circumstances occurring at the acquired entity prior to the date of acquisition; loan downgrades and credit loss provisions resulting from underwriting of certain acquired loans determined not to meet our credit standards; personnel changes that cause instability within a department; delays in implementing new policies or procedures, or the failure to apply new policies or procedures; and, other events relating to the performance of our business. Acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances that could result in loss, or give assurances that our investigation or mitigation efforts will be sufficient to protect against any such loss.

Concentrated ownership of our common stock creates a risk of sudden changes in our share price.

        As of February 15, 2008, directors and members of our executive management team owned or controlled approximately 10.8% of our common stock, excluding shares that may be issued to executive officers upon vesting of restricted stock awards. Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock. The sale by any of our large shareholders of a significant portion of that shareholder's holdings could have a material adverse effect on the market price of our common stock. In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly.

Our largest shareholder is a registered bank holding company and the activities and regulation of such shareholder may affect the permissible activities of the Company.

        Castle Creek Capital, LLC, which we refer to as Castle Creek, is controlled by our chairman, John M. Eggemeyer, and beneficially owned approximately 6.7% of the Company as of February 15, 2008. Castle Creek is a registered bank holding company under the BHCA and is regulated by the FRB. Under FRB guidelines, holding companies must be a "source of strength" for their subsidiaries. See "Item 1. Business—Supervision and Regulation—Bank Holding Company Regulation" above for more

22



information. Regulation of Castle Creek by the FRB may adversely affect the activities and strategic plans of the Company should the FRB determine that Castle Creek or any other company in which Castle Creek has invested has engaged in any unsafe or unsound banking practices or activities. While we have no reason to believe that the FRB is proposing to take any action with respect to Castle Creek that would adversely affect the Company, we remain subject to such risk.

A natural disaster could harm the Company's business.

        Historically, California, in which a substantial portion of the Company's business is located, has been susceptible to natural disasters, such as earthquakes, floods and wild fires. These natural disasters could harm the Company's operations through interference with communications, including the interruption or loss of the Company's computer systems, which could prevent or impede the Company from gathering deposits, originating loans and processing and controlling its flow of business, as well as through the destruction of facilities and the Company's operational, financial and management information systems. Additionally, natural disasters could negatively impact the values of collateral securing the Company's loans and interrupt our borrowers' abilities to conduct their businesses in a manner to support their debt obligations, either of which could result in losses and increased provisions for credit losses.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        As of February 15, 2008, we had a total of 83 properties consisting of 60 operating branch offices, 1 annex office, 3 operations centers, 10 loan offices, and 9 other properties of which 4 are subleased. We own 6 locations and the remaining properties are leased. Almost all properties are located in Southern California. Pacific Western's principal office is located at 401 West A Street, San Diego, CA 92101-7917.

        For additional information regarding properties of the Company and Pacific Western, see "Item 8. Financial Statements and Supplementary Data."

ITEM 3.    LEGAL PROCEEDINGS

        On June 8, 2004, the Company was served with an amended complaint naming First Community and Pacific Western as defendants in a class action lawsuit filed in Los Angeles Superior Court pending as Gilbert et. al v. Cohn et al, Case No. BC310846 (the "Gilbert Litigation"). A former officer of First Charter Bank, N.A. ("First Charter"), which the Company acquired in October 2001, was also named as a defendant. That former officer left First Charter in May of 1997 and later became a principal of Four Star Financial Services, LLC ("Four Star"), an affiliate of 900 Capital Services, Inc. ("900 Capital").

        On April 18, 2005, the plaintiffs filed the second amended class action complaint. The second amended complaint alleged that the former officer of First Charter improperly induced several First Charter customers to invest in 900 Capital or affiliates of 900 Capital and further alleges that Four Star, 900 Capital and some of their affiliated entities perpetuated their fraud upon investors through various accounts at First Charter, First Community and Pacific Western with those banks' purported knowing participation in and/or willful ignorance of the scheme. The key allegations in the second amended complaint dated back to the mid-1990s and the second amended complaint alleged several counts for relief including aiding and abetting, conspiracy, fraud, breach of fiduciary duty, relief pursuant to the California Business and Professions Code, negligence and relief under the California Securities Act stemming from an alleged fraudulent scheme and sale of securities issued by 900 Capital

23



and Four Star. In disclosures provided to the parties, plaintiffs have asserted that the named plaintiffs have suffered losses well in excess of $3.85 million, and plaintiffs have asserted that "losses to the class total many tens of millions of dollars." On June 15, 2005, we filed a demurrer to the second amended complaint, and on August 22, 2005, the Court sustained our demurrer as to each of the counts therein, granting plaintiffs leave to amend on four of the six counts, and dismissing the other counts outright.

        On August 12, 2005, the Company was notified by Progressive Casualty Insurance Company ("Progressive"), its primary insurance carrier with respect to the Gilbert Litigation that Progressive had determined that, based upon the allegations in the second amended complaint filed in the Gilbert Litigation, there was no coverage with respect to the Gilbert Litigation under the Company's insurance policy with Progressive. Progressive also notified the Company that it was withdrawing its agreement to fund defense costs for the Gilbert Litigation and reserving its right to seek reimbursement from the Company for any defense costs advanced pursuant to the insurance policy. Through December 31, 2005, Progressive had advanced to the Company approximately $690,000 of defense costs with respect to the Gilbert Litigation.

        On August 12, 2005, Progressive filed an action in federal district court for declaratory relief, currently pending as Progressive Casualty Insurance Company, etc., v. First Community Bancorp, etc., et al., Case No. 05-5900 SVW (MAWx) (the "Progressive Litigation"), seeking a declaratory judgment with respect to the parties' rights and obligations under Progressive's policy with the Company. On October 11, 2005, the Company filed in federal court a motion to dismiss or stay the Progressive Litigation.

        In November 2005, along with certain other defendants, we reached an agreement in principle with respect to the Gilbert Litigation. That agreement is reflected in a written Stipulation of Settlement dated February 9, 2007, which has been executed by all the parties to that settlement. The settlement is subject to approval by the Los Angeles Superior Court and a certain level of participation in the settlement by class members. A hearing on the motion for final approval of the settlement is currently pending before the Superior Court. Assuming all conditions to final consummation of the settlement are met, First Community's contribution to the settlement will be $775,000, which was accrued in 2005.

        While we believe that this settlement, if finalized, will end our exposure to the underlying claims by participating class members, we cannot be certain that all conditions to the settlement will be satisfied or that we will not be subject to further claims by parties related to the same claims who did not participate in the settlement.

        In connection with the Gilbert Litigation settlement, we also reached a settlement with Progressive Casualty Insurance Co. in the Progressive Litigation. The settlement with Progressive, which includes an additional contribution by Progressive under First Community's policy toward the settlement of the Gilbert Litigation and a dismissal by Progressive of any claims against First Community for reimbursement, is contingent upon the consummation of the Gilbert Litigation settlement.

        In the ordinary course of our business, we are party to various other legal actions, which we believe are incidental to the operation of our business. Although the ultimate outcome and amount of liability, if any, with respect to these other legal actions to which we are currently a party cannot presently be ascertained with certainty, in the opinion of management, based upon information currently available to us, any resulting liability is not likely to have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to the shareholders of the Company, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 2007.

24



PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Marketplace Designation, Sales Price Information and Holders

        Our common stock is listed on The Nasdaq Stock Market LLC and trades under the symbol "FCBP." The following table summarizes the high and low sale prices for each quarterly period ended since January 1, 2006 for our common stock, as quoted and reported by The Nasdaq Stock Market:

 
  Sales Prices
 
  High
  Low
Quarter Ended            
2006:            
  First quarter   $ 61.65   $ 53.95
  Second quarter   $ 61.35   $ 55.02
  Third quarter   $ 59.52   $ 51.87
  Fourth quarter   $ 58.11   $ 51.30
2007:            
  First quarter   $ 58.50   $ 50.29
  Second quarter   $ 58.02   $ 53.94
  Third quarter   $ 58.96   $ 48.20
  Fourth quarter   $ 62.56   $ 39.25

        As of February 15, 2008, the closing price of our common stock on Nasdaq was $32.79 per share. As of that date, based on the records of our transfer agent, there were approximately 2,571 record holders of our common stock.

Dividends

        Our ability to pay dividends to our shareholders is subject to the restrictions set forth in the California General Corporation Law, or the CGCL. The CGCL provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal or exceed the amount of the proposed distribution. The CGCL further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if the sum of the assets of the corporation (exclusive of goodwill, capitalized research and development expenses and deferred charges) would be at least equal to 11/4 times its liabilities (not including deferred taxes, deferred income and other deferred credits). Our ability to pay dividends is also subject to certain other limitations. See "Item 1. Business—Supervision and Regulation" in Part I of this Annual Report on Form 10-K and Note 18 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        In addition, our ability to pay dividends is limited by certain provisions of our credit agreement with U.S. Bank, N.A. This agreement provides that we may not declare or pay any dividend on the Company's common stock in any quarter if an Event of Default (as defined in the agreement) has occurred or will occur as a result of such payment. In addition, the agreement prevents us from paying a dividend in the event we no longer own 100% of Pacific Western.

        Our ability to pay dividends to our shareholders is also limited by certain covenants contained in the indentures governing trust preferred securities issued by us or entities that we have acquired, and the debentures underlying the trust preferred securities. Generally the indentures provide that if an Event of Default (as defined in the indentures) has occurred and is continuing, or if we are in default

25



with respect to any obligations under our guarantee agreement which covers payments of the obligations on the trust preferred securities, or if we give notice of any intention to defer payments of interest on the debentures underlying the trust preferred securities, then we may not, among other restrictions, declare or pay any dividends (other than a dividend payable by the Bank to the holding company) with respect to our common stock.

        First Community's primary source of income is the receipt of dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the bank in question, and other factors, that the FRB, the FDIC or the DFI could assert that payment of dividends or other payments is an unsafe or unsound practice. Pacific Western is subject to restrictions under certain federal and state laws and regulations governing banks which limit its ability to transfer funds to the holding company through intercompany loans, advances or cash dividends. Dividends paid by state banks such as Pacific Western are regulated by the DFI under its general supervisory authority as it relates to a bank's capital requirements. A state bank may declare a dividend without the approval of the DFI as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net earnings for three previous fiscal years less any dividend paid during such period. During 2007, First Community received dividends of $140.5 million from the Bank. At December 31, 2007, the Bank's retained earnings totaled $99.2 million. Of this amount, $46.1 million may be dividended to the holding company without regulatory approval and the remaining amount of $53.1 million may be dividended to the holding company only with the approval of the DFI. In January 2008, the Bank paid a dividend to the holding company of $45.0 million. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity" and Note 18 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        Holders of Company common stock are entitled to receive dividends declared by the Board of Directors out of funds legally available under state law governing the Company and certain federal laws and regulations governing the banking and financial services business. During 2007, 2006 and 2005, the Company paid $37.5 million, $30.0 million and $16.0 million, respectively, in cash dividends on common stock. Since January 2006, we have declared the following quarterly dividends:

Record Date
  Pay Date
  Amount per Share
February 16, 2006   February 28, 2006   $0.25
May 16, 2006   May 31, 2006   $0.32
August 16, 2006   August 30, 2006   $0.32
November 16, 2006   November 30, 2006   $0.32
February 16, 2007   February 28, 2007   $0.32
May 16, 2007   May 31, 2007   $0.32
August 16, 2007   August 31, 2007   $0.32
November 16, 2007   November 30, 2007   $0.32
February 15, 2008   February 29, 2008   $0.32

        We can provide no assurance that we will continue to declare dividends on a quarterly basis or otherwise. The declaration of dividends by the Company is subject to the discretion of our Board of Directors. Our Board of Directors will take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by us to our shareholders or by our subsidiary to the holding company, and such other factors as our Board of Directors may deem relevant.

        Please see "Item 1. Business—Regulation and Supervision," in Part I of this Annual Report on Form 10-K for further discussion of potential regulatory limitations on the holding company's receipt of funds from the Bank, as well as "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity" and Note 18 of the Notes to Consolidated Financial Statements

26



contained in "Item 8. Financial Statements and Supplementary Data" for a discussion of other factors affecting the availability of dividends and limitations on the ability to declare dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

        The following table provides information as of December 31, 2007, regarding securities issued and to be issued under our equity compensation plans that were in effect during fiscal 2007:

Plan Category

  Plan Name
  Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
  Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
  Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
 
 
   
  (a)

  (b)

  (c)

 
Equity compensation plans approved by security holders   The First Community Bancorp 2003 Stock Incentive Plan(1)   2,312 (2) $ 18.91   647,895 (3)

Equity compensation plans not approved by security holders

 

None

 


 

 


 


 

(1)
The First Community Bancorp 2003 Stock Incentive Plan (the "Incentive Plan") was last approved by the shareholders of the Company at our 2004 Annual Meeting of Shareholders and amended at our 2006 Annual Meeting of Shareholders.

(2)
Amount represents outstanding options only and does not include the 861,269 shares of unvested time-based and performance-based restricted stock awarded since 2003 and outstanding as of December 31, 2007 with an exercise price of zero.

(3)
The total number of shares of common stock that have been approved for issuance pursuant to awards granted or which may be granted in the future under the Incentive Plan is 3,500,000 shares. In addition to options issued under the Incentive Plan, the number of securities remaining available for future issuance has been reduced by 1,402,423 shares which represents the sum of the number of unvested shares of time-based and performance-based restricted stock awards outstanding at December 31, 2007 and the number of vested shares of time-based and performance-based restricted stock as of December 31, 2007. In February 2008 the Company awarded to employees 179,765 shares of time-based restricted stock awards. Through February 15, 2008, 24,666 shares were forfeited. This combined activity reduced the shares available for issuance under the Incentive Plan to 492,796.

Recent Sales of Unregistered Securities and Use of Proceeds

        None.

Repurchases of Common Stock

        On August 2, 2007, our Board of Directors authorized the Company to repurchase shares of First Community Bancorp common stock worth up to $150.0 million over the next twelve months. The program may be modified, postponed or terminated at any time. Pursuant to this authorization we repurchased 1,206,100 shares at an average cost of $44.99 per share during the fourth quarter of 2007.

27



Pursuant to the existing and prior authorized stock repurchase programs we repurchased 2,491,538 shares of our common stock at an average cost of $49.48 per share during 2007.

        In addition to the Company's share repurchase program, through the Company's Directors Deferred Compensation Plan, or the DDCP, participants in the plan may invest amounts deferred 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 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 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) following the day on which deferred amounts are contributed to the DDCP, beginning March 15 of each year.

        The following table presents stock purchases made during the fourth quarter of 2007 under our publicly announced share repurchase programs and purchases made by the DDCP:

 
   
   
  Publicly Announced
Share Repurchase Programs

 
  Total Shares Purchased
  Average Price Per Share
  Total Shares Purchased
  Average Price Paid per Share
  Approximate Dollar Value of Shares that May Yet Be Purchased
October 1 - October 31, 2007   370,000   $ 48.70   370,000   $ 48.70      
November 1 - November 30, 2007   836,100   $ 43.34   836,100   $ 43.34      
December 1 - December 31, 2007(1)   4,941   $ 40.15     $      
   
       
           
Total   1,211,041   $ 44.97   1,206,100   $ 44.99   $ 36,247,000
   
       
       

(1)
Represents shares purchased by the DDCP.

28


Five-Year Stock Performance Graph

        The following chart compares the yearly percentage change in the cumulative shareholder return on our common stock based on the closing price during the five years ended December 31, 2007, with (1) the Total Return Index for The Nasdaq Stock Market LLC (U.S. Companies) (the "NASDAQ Composite") and (2) the Total Return Index for NASDAQ Bank Stocks (the "NASDAQ Bank Index"). This comparison assumes $100 was invested on December 31, 2002, in our common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. First Community's total cumulative return was 39.7% over the five year period ending December 31, 2007 compared to 105.22% and 25.8% for the NASDAQ Composite and NASDAQ Bank Index.

CHART

 
  Period Ending
Index

  12/31/02
  12/31/03
  12/31/04
  12/31/05
  12/31/06
  12/31/07
First Community Bancorp   $ 100   $ 112.05   $ 135.27   $ 175.86   $ 172.74   $ 139.70
NASDAQ Composite     100     149.75     164.64     168.60     187.83     205.22
NASDAQ Bank Index     100     130.51     144.96     141.92     159.42     125.80

29


ITEM 6.    SELECTED FINANCIAL DATA

        The following table sets forth certain of our financial and statistical information for each of the years in the five-year period ended December 31, 2007. This data should be read in conjunction with our audited consolidated financial statements as of December 31, 2007 and 2006, and for each of the years in the three-year period ended December 31, 2007, and related Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

 
  At or for the Years Ended December 31,
 
 
  2007
  2006
  2005
  2004
  2003
 
 
  (In thousands, except per share amounts and percentages)

 
Results of Operations(1):                                
  Interest income   $ 350,981   $ 301,597   $ 183,352   $ 140,147   $ 112,881  
  Interest expense     85,866     59,640     22,917     14,417     12,647  
   
 
 
 
 
 
NET INTEREST INCOME     265,115     241,957     160,435     125,730     100,234  
  Provision for credit losses     3,000     9,600     1,420     465     300  
   
 
 
 
 
 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES     262,115     232,357     159,015     125,265     99,934  
  Noninterest income     32,914     16,466     13,778     17,221     19,637  
  Noninterest expense     142,259     121,455     87,302     81,827     65,820  
   
 
 
 
 
 
EARNINGS BEFORE INCOME TAXES AND EFFECT OF ACCOUNTING CHANGE     152,770     127,368     85,491     60,659     53,751  
  Income taxes     62,444     51,512     35,125     24,296     21,696  
   
 
 
 
 
 
NET EARNINGS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE     90,326     75,856     50,366     36,363     32,055  
  Cumulative effect on prior years (to December 31, 2005) of changing the method of accounting for stock-based compensation forfeitures         142              
   
 
 
 
 
 
  NET EARNINGS   $ 90,326   $ 75,998   $ 50,366   $ 36,363   $ 32,055  
   
 
 
 
 
 
Share Data:                                
  Earnings per common share (EPS):                                
    Basic   $ 3.16   $ 3.23   $ 3.05   $ 2.34   $ 2.08  
    Diluted     3.15     3.21     2.98     2.27     2.02  
  Dividends declared per share     1.28     1.21     0.97     0.85     0.68  
  Book value per share(2)   $ 40.65   $ 39.42   $ 27.30   $ 22.98   $ 21.24  
  Shares outstanding at the end of the year(2)     28,002     29,636     18,347     16,268     15,893  
  Average shares outstanding for basic EPS     28,572     23,476     16,536     15,521     15,382  
  Average shares outstanding for diluted EPS     28,676     23,680     16,894     15,987     15,868  
Ending Balance Sheet Data:                                
    Assets   $ 5,179,040   $ 5,553,323   $ 3,226,411   $ 3,049,453   $ 2,429,981  
    Time deposits in financial institutions     420     501     90     702     311  
    Investments     133,537     120,128     239,354     269,507     432,318  
    Loans held for sale     63,565     173,319              
    Loans, net of unearned income     3,949,218     4,189,543     2,467,828     2,118,171     1,595,837  
    Allowance for credit losses     61,028     61,179     32,971     29,507     25,752  
    Intangible assets, including goodwill     805,775     788,510     323,188     256,955     221,956  
    Deposits(3)     3,245,146     3,685,733     2,405,361     2,432,390     1,949,669  
    Borrowings     612,000     499,000     160,300     90,000     53,700  
    Subordinated debentures     138,488     149,219     121,654     121,654     59,798  
    Common shareholders' equity     1,138,352     1,168,328     500,778     373,876     337,563  
Selected Financial Ratios:                                
  Dividend payout ratio     40.63 %   37.69 %   32.55 %   37.33 %   33.42 %
  Shareholders' equity to assets at period end     21.98     21.04     15.52     12.26     13.89  
  Return on average assets     1.73     1.72     1.68     1.35     1.41  
  Return on average equity     7.66     9.13     12.10     10.36     9.84  
  Average equity/average assets     22.55     18.88     13.90     13.04     14.29  
  Net interest margin     6.34     6.67     6.37     5.58     5.24  

(1)
Operating results of acquired companies are included from the respective acquisition dates. See Note 2 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

(2)
Includes 861,269 shares, 750,014 shares, 405,831 shares, 585,416 shares and 460,000 shares of unvested time-based and performance-based restricted stock outstanding at December 31, 2007, 2006, 2005, 2004 and 2003.

(3)
2004 includes a short-term $365 million interest-bearing deposit received on December 31, 2004.

30


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        This section should be read in conjunction with the disclosure regarding "Forward-Looking Statements" set forth in "Item 1. Business—Forward-Looking Statements", as well as the discussion set forth in "Item 1. Business—Certain Business Risks" and "Item 8. Financial Statements and Supplementary Data."

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 a holding company for our banking subsidiary. As of December 31, 2007, our sole banking subsidiary was Pacific Western Bank, which we refer to as Pacific Western or the Bank. When we say "we", "our" or the "Company", we mean the Company on a consolidated basis with the Bank. When we refer to "First Community" or to the holding company, we are referring to the parent company on a stand-alone basis.

        We have completed 19 acquisitions since the Company's inception, almost all of which have been accounted for under the purchase method of accounting. These acquisitions affect the comparability of our reported financial information as the operating results of the acquired entities are included in our operating results only from their respective acquisition dates. For further information on our acquisitions, see notes 2 and 3 in Notes to Financial Statements included in "Item 8. Financial Statement and Supplementary Data."

        Pacific Western is a full-service community bank offering a broad range of banking products and services. We accept time and demand deposits, fund loans including real estate, construction, SBA and commercial loans, and offer other business oriented banking products. Our operations are primarily located in Southern California and the Bank focuses on conducting business with small to medium size businesses and the owners and employees of those businesses in our marketplace. Through our asset-based lending and SBA loan production offices we also operate in Arizona, Northern California, the Pacific Northwest, and Texas. At December 31, 2007, our assets totaled $5.2 billion, of which gross loans, excluding loans held for sale, totaled $4.0 billion. At this date approximately 23% were commercial loans, 10% were commercial real estate loans, 53% were commercial real estate construction loans, 8% were residential real estate construction loans, 5% were residential real estate loans, and 1% were consumer and other loans. These percentages include some foreign loans, primarily to individuals or entities with business in Mexico, representing 1% of total loans.

        We compete actively for deposits, and we tend to solicit noninterest-bearing and low-cost 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 89% of our net revenues (net interest income plus noninterest income).

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 loan-to-deposit ratio and a high level of noninterest-bearing deposits. 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. At December 31, 2007, approximately 37% of our deposits were noninterest-bearing deposits.

31


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. However, recent disruptions in the credit markets have resulted in increased competition from financial institutions seeking to maintain adequate liquidity. This has placed upward pressure on the rates paid on certain deposit accounts at the same time market forces have placed downward pressure on the level of loan interest rates. In addition to deposits, we have borrowing capacity under various credit lines which we use for liquidity needs such as funding loan demand, managing deposit flows and interim acquisition financing. While this borrowing capacity tends to be more expensive than core deposits, it is relatively flexible and can be cost effective. In December 2007, we took advantage of an inversion in the yield curve and extended the maturity dates on some of our borrowings. We refinanced $200 million in FHLB advances costing 4.86%, paid a $1.4 million prepayment penalty, and replaced these borrowings with putable FHLB advances having a fixed rate of 3.16% for the first year. The recent decline in market interest rates and the further declines forecasted for 2008 are expected to negatively impact both our net interest income and net interest margin.

        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 to price lending products so as to preserve our interest spread and net interest margin. We sometimes encounter strong competition in pursuing lending opportunities such that potential borrowers obtain loans elsewhere at lower rates than those we offer. We have deemphasized new residential construction and foreign loans.

        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 for credit losses. Our allowance for credit losses is the sum of our allowance for loan losses and our reserve for unfunded loan commitments. Provisions for credit losses are charged to operations as and when needed for both on and off balance sheet credit exposure. Loans which are deemed uncollectible are charged off and deducted from the allowance for loan losses. Recoveries on loans previously charged off are added to the allowance for loan losses. During 2007, we made provisions for credit losses totaling $3.0 million in recognition of fourth quarter organic loan growth, net chargeoffs and our analysis of the inherent risks in our portfolio and the effects current market conditions may have on our borrowers.

        We actively review our loans periodically to determine whether there has been any deterioration in credit quality stemming from economic conditions or other factors which may affect collectibility of our loans. Changes in economic conditions, such as inflation, unemployment, increases in the general level of interest rates and negative conditions in borrowers' businesses, could negatively impact our customers and cause us to adversely classify loans and increase portfolio loss factors. Following the completion of acquisitions, we further review the acquired loans using our underwriting standards. These reviews could result in downgrades of acquired loans to adversely classified status. Because adversely classified loans require an allowance for credit losses, increases in classified loans generally result in increased provisions for credit losses. Because we have a concentration in real estate loans, any deterioration in the real estate markets may negatively impact our borrowers and could lead to increased provisions for credit losses.

        Our noninterest expense includes fixed and controllable overhead, the major components of which are compensation, occupancy, data processing, professional fees 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.

32


Accordingly, a lower percentage reflects lower expenses relative to income. The consolidated efficiency ratios have been as follows:

Quarterly Period in 2007

  Ratio
 
First   42.2 %
Second   48.7 %
Third   48.0 %
Fourth   53.2 %

        During the fourth quarter of 2007 we incurred $1.4 million in prepayment penalties, made a charitable contribution of $1.0 million and recognized $390,000 of reorganization charges; these items increased the fourth quarter efficiency ratio from 49.1% to 53.2%.

        Additionally, our operating results have been influenced significantly by acquisitions. The six acquisitions we completed from August 1, 2005 through December 31, 2007 added approximately $3.0 billion in assets. Our assets at December 31, 2007 totaled approximately $5.2 billion. Our noninterest expenses have increased for all periods presented because of our acquisitions. However, our expense control programs and merger integration routines enable us to maintain an efficiency ratio that is low relative to peer institutions.

Critical Accounting Policies

        The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and on our results of operations for the reporting periods.

        Our significant accounting policies and practices are described in Note 1 to the Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." The accounting policies that involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, are considered critical accounting policies. We have identified our policies for the allowance for credit losses, the fair value of financial instruments, the carrying values of goodwill and other intangible assets, and deferred tax assets as critical accounting policies.

        The allowance for loan losses and the reserve for unfunded loan commitments when combined are referred to as the allowance for credit losses. The allowance for loan losses is reported as a reduction of outstanding loan balances and the reserve for unfunded loan commitments is included within other liabilities. Generally, as loans are funded, the amount of the commitment reserve applicable to such funded loans will be transferred from the reserve for unfunded loan commitments to the allowance for loan losses based on our reserving methodology.

        We maintain an allowance for loan losses at an amount which we believe is sufficient to provide adequate protection against losses inherent in the loan portfolio at the balance sheet date. Our periodic evaluation of the adequacy of the allowance is based on such factors as our past loan loss experience, known and inherent risks in the portfolio, adverse situations that have occurred but are not yet known that may affect the borrowers' ability to repay, the estimated value of underlying collateral, and economic conditions. As we utilize information currently available to evaluate the allowance for loan

33



losses, the allowance for loan losses is subjective and may be adjusted in the future depending on changes in economic conditions or other factors.

        The methodology we use to estimate the amount of our allowance for credit losses is based on both objective and subjective criteria. While some criteria are formula driven, other criteria are subjective inputs intended to capture environmental and general economic risk elements which may trigger losses in the loan portfolio, and to account for the varying levels of credit quality in the loan portfolios of the entities we have acquired that have not yet been captured in our objective loss factors.

        Specifically, our allowance methodology contains four elements: (a) amounts based on specific evaluations of impaired loans; (b) amounts of estimated losses on several pools of loans categorized by type; (c) amounts of estimated losses for loans adversely classified based on our loan review process; and (d) amounts for environmental and general economic factors that indicate probable losses were incurred but were not captured through the other elements of our allowance process.

        Impaired loans are identified at each reporting date based on certain criteria and individually reviewed for impairment. Allowance amounts for these loans are based upon the fair value of the loan's collateral if the loan is collateral dependent or the present value of cash flows, discounted at the loan's effective interest rate, if the loan is not collateralized.

        Our loan portfolio, excluding impaired loans which are evaluated individually, is categorized into several pools for purposes of determining allowance amounts by loan pool. The loan pools we currently evaluate are: commercial real estate construction, residential real estate construction, SBA real estate, real estate other, commercial collateralized, commercial unsecured, SBA commercial, consumer, foreign, asset-based, and factoring. Within these loan pools, we then evaluate loans not adversely classified, which we refer to as "pass" credits, separately from adversely classified loans. The allowance amounts for loans rated pass and those loans adversely classified are determined using historical loss rates developed through migration analyses.

        Finally, in order to ensure our allowance methodology is incorporating recent trends and economic conditions, we apply environmental and general economic factors to our allowance methodology including: credit concentrations; delinquency trends; economic and business conditions; external factors such as fuel and building materials prices, the effects of adverse weather, and hostilities; the quality of lending management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the portfolio; nonaccrual loan trends; other adjustments for items not covered by other factors; problem loan trends; and quality of loan review.

        Based on our methodology and its components, management believes the resulting allowance for loan losses is adequate and appropriate for the risk identified in the Company's loan portfolio.

        We recognize the determination of the allowance for loan losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. Therefore, we perform a sensitivity analysis to provide insight regarding the impact of adverse changes in risk ratings may have on our allowance for loan losses. The sensitivity analysis does not imply any expectation of future deterioration in our loans' risk ratings and it does not necessarily reflect the nature and extent of future changes in the allowance for loan losses due to the numerous quantitative and qualitative factors considered in determining our allowance for loan losses. At December 31, 2007, in the event that 1 percent of our loans were downgraded from the "pass" category to the "substandard" category within our current allowance methodology, the allowance for loan losses would have increased by approximately $8.9 million. Given current processes employed by the Company, management believes the risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be material to the Company's financial statements. In addition, current risk ratings are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas.

34


        Although we have established an allowance for loan losses that we consider adequate, there can be no assurance that the established allowance for loan losses will be sufficient to offset losses on loans in the future. Management also believes that the reserve for unfunded loan commitments is adequate. In making this determination, we use the same methodology for the reserve for unfunded loan commitments as we do for the allowance for loan losses and consider the same quantitative and qualitative factors, as well as an estimate of the probability of drawdown of the commitments correlated to their credit risk rating. Please see "—Financial Condition—Allowance for Credit Losses" and Notes 1(h) and 5 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for more information.

        As a result of our acquisition activity, goodwill and core deposit and customer relationship intangible assets have been added to our balance sheet. Goodwill, a long-lived asset, is evaluated for impairment at least annually. We conduct an impairment analysis to evaluate the carrying value of goodwill as of June 30th each year. Core deposit and customer relationship intangibles arising from acquisitions are being amortized over their estimated useful lives of up to 10 years.

        The process of evaluating goodwill for impairment requires us to make several assumptions and estimates. We begin the valuation process by identifying the reporting units related to the goodwill. We identified one reporting unit, banking operations, in relation to our goodwill asset. If our impairment analysis indicates that the fair value of our reporting unit is less than its carrying amount, then we will have to writedown the amount of goodwill we carry on our balance sheet through a charge to our earnings.

        Our impairment analysis estimated the value of our reporting unit using two methods: an income approach which is a discounted cash flow model, and a market comparison approach, which includes a market transaction approach. Each of these valuation methods include several assumptions, including forecasts of future earnings of our reporting unit, discount rates, market trends and market multiples of companies engaged in similar lines of business. If any of the assumptions used in the valuation of our goodwill change over time, the estimated value assigned to our goodwill could differ significantly, including a decrease in the value of goodwill which may result in a charge to our earnings. The most significant element in the goodwill evaluation is the level of our earnings. If our earnings were to decline and cause our market capitalization to also decline, the market value of our Company may not support the carrying value of goodwill.

        At December 31, 2007, the Company's market capitalization (based on total shares outstanding excluding unvested restricted stock) was $19.1 million less than our total shareholders' equity, providing an indication that goodwill may be impaired at that date. In response, we updated our June 30, 2007 valuation and determined that there was no goodwill impairment at December 31, 2007. Through February 26, 2008, our market capitalization continues to be less than total shareholders' equity. Should this situation continue to exist at March 31, 2008, we will again update our valuation of the Company to determine whether goodwill is impaired. No assurance can be given that we will not charge earnings during 2008 for goodwill impairment.

        The calculation and subsequent amortization of core deposit and customer relationship intangible assets also requires several assumptions including, among other things, the estimated cost to service deposits acquired, discount rates, estimated attrition rates and useful lives. If the value of the core deposit intangible or the customer relationship intangible is determined to be less than the carrying value in future periods, a writedown would be taken through a charge to our earnings. The most significant element in either intangible evaluation is the attrition rate of the acquired deposits or loans. If such attrition rate were to accelerate from that which we expected, the intangible may have to be reduced by a charge to earnings. The attrition rate related to deposit flows or loan flows is influenced by many factors, the most significant of which are alternative yields for loans and deposits available to

35



customers and the level of competition from other financial institutions and financial services companies.

        Our deferred income tax assets arise from mainly two items: (1) differences in the dates that items of income and expense enter into our reported income and taxable income and (2) net operating loss carryforwards. Deferred tax assets are established for these items as they arise based on our judgments that they are realizable. From an accounting standpoint, we determine whether a deferred tax asset is realizable based on the historical level of our taxable income and estimates of our future taxable income. In most cases, the realization of the deferred tax asset is based on our future profitability. If we were to experience either reduced profitability or operating losses in a future period, the realization of our deferred tax assets would be questionable. In such an instance, we could be required to increase the valuation reserve on our deferred tax assets by charging earnings.

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 dates of acquisition. First American ($286 million in assets) was acquired in August 2005, Pacific Liberty ($183 million in assets) was acquired in October 2005, Cedars ($489 million in assets) was acquired in January 2006, Foothill ($892 million in assets) was acquired in May 2006, Community Bancorp ($1 billion in assets) was acquired in October of 2006 and BFI ($123 million in assets) was acquired in June of 2007. The following table presents net earnings and summarizes per share data and key financial ratios:

 
  For the Years Ended
December 31,

 
 
  2007
  2006
  2005
 
 
  (Dollars in thousands,
except share data)

 
Net earnings   $ 90,326   $ 75,998   $ 50,366  

Profitability measures:

 

 

 

 

 

 

 

 

 

 
Basic earnings per share   $ 3.16   $ 3.23   $ 3.05  
Diluted earnings per share   $ 3.15   $ 3.21   $ 2.98  
Return on average assets     1.73 %   1.72 %   1.68 %
Return on average equity     7.66 %   9.13 %   12.10 %
Dividend payout ratio     40.63 %   37.69 %   32.55 %

        The increase in net earnings during 2007 as compared to 2006 is due to higher net interest income from acquisitions and general business growth, gains recognized on loans sales, decreased credit loss provision and higher service charge income, offset by increased compensation and general expenses from our acquisitions. Our net interest income increased 10% during 2007 when compared to 2006 due largely to a $644.9 million increase in our average loans. Noninterest income was $16.4 million higher for 2007 compared to 2006 due mostly to gains recognized on loan sales and increased service charges and fees for deposits, which are attributed to increased deposit volumes from our acquisitions and the introduction of new deposit products. Noninterest income for 2006 also included a $2.3 million loss on sale of securities; there was no such item in 2007. The increase in noninterest expenses for 2007 when compared to 2006 was a result of acquisitions. The increase in net earnings during 2006 as compared to 2005 is due primarily to growth from acquisitions.

36


        Net interest income, which is our principal source 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 of average assets, liabilities and shareholders' equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities.


Analysis of Average Balances, Yields and Rates

 
  For the Years Ended December 31,
 
 
  2007
  2006
  2005
 
 
  Average
Balance

  Interest
Income/
Expense

  Yields
and
Rates

  Average
Balance

  Interest
Income/
Expense

  Yields
and
Rates

  Average
Balance

  Interest
Income/
Expense

  Yields
and
Rates

 
 
  (Dollars in thousands)
 
ASSETS                                                  
Loans, net of unearned income(1)(2)   $ 4,038,990   $ 343,617   8.51 % $ 3,394,123   $ 292,069   8.61 % $ 2,231,975   $ 174,202   7.80 %
Investment securities(2)     104,945     5,364   5.11 %   228,031     9,200   4.03 %   248,471     7,900   3.18 %
Federal funds sold     38,924     1,979   5.08 %   6,491     297   4.58 %   39,117     1,245   3.18 %
Other earning assets     461     21   4.56 %   826     31   3.75 %   198     5   2.53 %
   
 
     
 
     
 
     
Total interest-earning assets     4,183,320     350,981   8.39 %   3,629,471     301,597   8.31 %   2,519,761     183,352   7.28 %
Noninterest-earning assets     1,043,495               778,323               473,024            
   
           
           
           
Total assets   $ 5,226,815             $ 4,407,794             $ 2,992,785            
   
           
           
           
LIABILITIES AND SHAREHOLDERS' EQUITY                                                  
Interest checking   $ 328,207   $ 2,493   0.76 % $ 246,569   $ 423   0.17 % $ 190,846   $ 116   0.06 %
Money market     1,117,972     33,621   3.01 %   890,400     17,753   1.99 %   719,372     6,494   0.90 %
Savings     125,549     229   0.18 %   132,130     222   0.17 %   97,144     179   0.18 %
Time deposits     488,158     20,128   4.12 %   436,669     14,821   3.39 %   226,538     4,298   1.90 %
   
 
     
 
     
 
     
Total interest-bearing deposits     2,059,886     56,471   2.74 %   1,705,768     33,219   1.95 %   1,233,900     11,087   0.90 %
Borrowings and subordinated debentures     505,357     29,395   5.82 %   435,640     26,421   6.06 %   227,376     11,830   5.20 %
   
 
     
 
     
 
     
Total interest-bearing liabilities     2,565,243     85,866   3.35 %   2,141,408     59,640   2.79 %   1,461,276     22,917   1.57 %
         
           
           
     
Non interest-bearing liabilities                                                  
Demand deposits     1,426,904               1,387,919               1,072,071            
Other liabilities     55,801               46,444               43,352            
   
           
           
           
Total liabilities     4,047,948               3,575,771               2,576,699            
Shareholders' equity     1,178,867               832,023               416,086            
   
           
           
           
Total liabilities and shareholders' equity   $ 5,226,815             $ 4,407,794             $ 2,992,785            
   
           
           
           
Net interest income         $ 265,115             $ 241,957             $ 160,435      
         
           
           
     
Net interest spread               5.04 %             5.52 %             5.71 %
Net interest margin               6.34 %             6.67 %             6.37 %

(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.

        Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change," as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds, referred to as a "rate change." The change in interest income/expense attributable to volume reflects the change in volume multiplied by the prior year's rate and the change in interest income/expense attributable to rate reflects the change in rates multiplied by the prior year's volume. The changes in interest income and expense which are not attributable specifically to either volume or rate are allocated ratably between the two categories. The following table presents, for the years indicated, changes in interest income and expense and the amount of change attributable to changes in volume and rates.

37



Analysis of Net Interest Income Changes

 
  2007 Compared to 2006
  2006 Compared to 2005
 
 
   
  Increase (Decrease) Due to
   
  Increase (Decrease) Due to
 
 
  Total
Increase
(Decrease)

  Total
Increase
(Decrease)

 
 
  Volume
  Rate
  Volume
  Rate
 
 
  (Dollars in thousands)

 
Loans, net of unearned income   $ 51,548   $ 54,898   $ (3,350 ) $ 117,867   $ 98,474   $ 19,393  
Investment securities     (3,836 )   (5,853 )   2,017     1,300     (691 )   1,991  
Federal funds sold     1,682     1,645     37     (948 )   (1,336 )   388  
Other earning assets     (10 )   (16 )   6     26     23     3  
   
 
 
 
 
 
 
  Total interest income     49,384     50,674     (1,290 )   118,245     96,470     21,775  
   
 
 
 
 
 
 
Interest checking     2,070     182     1,888     307     42     265  
Money market     15,868     5,309     10,559     11,259     1,851     9,408  
Savings     7     (11 )   18     43     60     (17 )
Time deposits     5,307     1,881     3,426     10,523     5,686     4,837  
Borrowings and subordinated debentures     2,974     3,835     (861 )   14,591     9,819     4,772  
   
 
 
 
 
 
 
Total interest expense     26,226     11,196     15,030     36,723     17,458     19,265  
   
 
 
 
 
 
 
Net interest income   $ 23,158   $ 39,478   $ (16,320 ) $ 81,522   $ 79,012   $ 2,510  
   
 
 
 
 
 
 

        Our net interest income and net interest margin are driven by the combination of our loan volume, asset yield, high proportion of demand deposit balances to total deposits, and disciplined deposit pricing strategy. Our net interest margin trended down during 2007, reaching a peak of 6.47% in the second quarter and declining to 6.44% in the third quarter and to 6.11% in the fourth quarter. The decline was due mostly to the effect a 100 basis point reduction in our base lending rate from mid-September to December had on our loan portfolio (at December 31, 2007, the interest rates on 37% of our loans are subject to change every time our base rate changes), declining construction loan balances, competitive deposit pricing, lower average demand deposit balances, and greater reliance on borrowings to fund loan demand and deposit flows. The actions we took to stabilize the net interest margin during 2007 included the sale of a participation interest in commercial real estate mortgage loans, the acquisition of BFI and the refinancing of certain FHLB advances. The 125 basis point decline in market interest rates since December 31, 2007 and the expected further declines in market interest rates for 2008 are expected to negatively impact both our 2008 net interest income and net interest margin.

        Net interest income totaled $62.9 million for the fourth quarter of 2007 compared to $66.3 million for the third quarter of 2007. The $3.4 million decrease in net interest income compared to the third quarter of 2007 was due mainly to lower loan yields from reductions in our base lending rate and lower average construction loan balances. In mid-December 2007, we refinanced $200 million in FHLB advances costing 4.86%, paid a $1.4 million prepayment penalty, and replaced these borrowings with putable FHLB advances having a fixed rate of 3.16% for the first year. The interest expense savings for the next twelve months is $3.4 million. In January 2008, we replaced $150.0 million of overnight borrowings having an average cost of 4.40% with three putable FHLB advances having a weighted-average cost of 2.86%. The savings from these transactions along with the refinancing accomplished in December 2007 are expected to have a positive 14 basis point effect on our net interest margin based on year-end 2007 interest-earning assets and interest-bearing liabilities.

38


        The decrease in the net interest margin in the fourth quarter of 2007 compared to the prior quarter is due mostly to the decline in loan yields. The yield in average loans was 8.29% and 8.63% for the fourth quarter and third quarters of 2007. The yield on average earnings assets was 8.19% and 8.50% for the fourth and third quarters of 2007. The decrease in loan yield and overall earning asset yield is attributed to a general decline in market interest rates. The cost of interest-bearing liabilities decreased 12 basis points to 3.28% for the fourth quarter of 2007 compared to the previous quarter due to declines in the cost of both deposits and borrowings. The average cost of interest-bearing deposits decreased 13 basis points to 2.74% for the fourth quarter of 2007 compared to the third quarter of 2007 and is attributed to an 18 point basis point decrease in the cost of our money market accounts. In addition, the cost of borrowings decreased 38 basis points, which is attributed to the decline in market interest rates and our decision to refinance a portion of our FHLB advances. Demand deposit balances averaged 39% of average deposits during the fourth quarter of 2007 and 40% of average deposits during the third quarter of 2007.

        The increase in net interest income in 2007 over 2006 was due primarily to an increase in loan volume. Average loans were $644.9 million higher in 2007 compared to 2006 due to both acquired and organic loan growth. Maintaining a high concentration of average loans to average interest-earning assets is a key factor in generating interest income and maintaining our net interest margin since loans typically yield a higher return than investment securities. Average loans represented 97% of the total average interest-earning assets for 2007 compared to 94% for 2006. Interest expense increased in 2007 compared to 2006 due to a combination of increases in the cost of our interest-bearing deposits and in average interest-bearing deposits and borrowings required to fund loan growth.

        Our net interest margin of 6.34% for 2007 was 33 basis points lower than 2006 due mostly to the combined effects of lower average loan yields and higher average funding costs. Our loan yield declines in the latter half of 2007 were positively offset, to some extent, by the addition of the loans acquired with BFI mid-year. Our average loan yield decreased 10 basis points for 2007 compared to 2006 which is attributed to a general decline in market interest rates and lower construction loan balances. Our base lending rate decreased to 7.25% at December 31, 2007 from 8.25% at December 31, 2006 in response to the market interest rate changes made by the Federal Reserve Bank. At the end of 2007, approximately 37% of our loan portfolio is eligible to reprice immediately as our base lending rate declines compared to 50% at the end of 2006.

        The higher average funding costs were due to competitive pressures, increased reliance on FHLB advances to fund loan growth and deposit flows, and the effect of acquired deposit structures which tended to have a higher concentration of more costly time deposits. Due to competition, during 2007 we increased our interest rate on money market accounts, our largest source of interest-bearing funding. Interest-bearing deposit costs increased 79 basis points to 2.74% in 2007 compared to 2006. Our overall cost of deposits was 1.62% for 2007 compared to 1.07% for 2006; this increase was due to the increase in deposit costs and a lower percentage of noninterest-bearing demand deposit balances to total deposits. Demand deposits averaged $1.4 billion during 2007 and 2006, which represented 41% of total average deposits for 2007 and 45% of total average deposits for 2006. Average interest-bearing deposits and borrowings increased $412.6 million in 2007 compared to 2006 due to acquisitions, loan growth and deposit flows.

        The increase in net interest income in 2006 over 2005 was due primarily to an increase in both loan volume and loan yield. Average loans increased $1.2 billion for 2006 when compared to 2005 due to loan growth from both acquisitions and organic growth. Organic loan growth for 2006 was $259.3 million. The yield on average loans increased 81 basis points during 2006 compared to 2005 due

39


to higher market interest rates. Our base lending rate increased to 8.25% at December 31, 2006 from 7.25% at December 31, 2005 in response to the market interest rate changes made by the Federal Reserve Bank.

        Interest expense increased in 2006 compared to 2005 due largely to an increase in the cost and average balances of our interest-bearing liabilities. Interest-bearing deposit costs increased 105 basis points to 1.95% in 2006 compared to 2005 as a result of the higher-cost deposit bases of the banks we acquired and upward adjustments we made in rates offered on money market and certain time deposits in response to competition. The costs for borrowings and subordinated debentures also increased in 2006 as they repriced in the higher interest rate environment. Our acquisitions, selective deposit repricing and the upward repricings of our borrowings resulted in a 122 basis point increase in the cost of our interest-bearing liabilities for 2006 compared to 2005. Our overall cost of deposits were 0.48% for 2005. Average interest-bearing deposits and borrowings increased $680.1 million in 2006 compared to 2005.

        The amount of the provision for credit losses in each year is a charge against earnings in that year. The provisions for credit losses are based on our reserve methodology and reflect our judgments about the adequacy of the allowance for loan losses and the reserve for unfunded loan commitments. In determining the amount of the provision, we consider certain quantitative and qualitative factors including our historical loan loss experience, the volume and type of lending we conduct, the results of our credit review process, the amounts of classified, criticized and nonperforming assets, regulatory policies, general economic conditions, underlying collateral values, off-balance sheet exposures, and other factors regarding collectibility and impairment. To the extent we experience, for example, increased levels of documentation deficiencies, adverse changes in collateral values, or negative changes in economic and business conditions which adversely affect our borrowers, our classified loans may increase. Increases in our classified loans generally result in provisions for credit losses.

        We made provisions for credit losses totaling $3.0 million during 2007, $9.6 million during 2006 and $1.4 million during 2005. The 2007 provision for credit losses was composed of a $2.8 million addition to the allowance for loan losses and a $0.2 million addition to the reserve for unfunded loan commitments. The 2006 provision for credit losses was composed of an $8.0 million addition to the allowance for loan losses and a $1.6 million addition to the reserve for unfunded loan commitments. Net loans charged-off in 2007 increased by $1.4 million to $2.8 million when compared to 2006.

        We made our 2007 provision for credit losses during the fourth quarter in recognition of fourth quarter organic loan growth, net chargeoffs and our analysis of the inherent risks in our portfolio and the effects current market conditions may have on our borrowers. The 2006 provision for credit losses was made in response to an increase in nonaccrual loans, the credit quality of an acquired portfolio, our analysis of current market conditions related to real estate loans, and organic loan growth. The provision for 2005 was in response to loan growth and the level of nonaccrual loans. During 2005, foreign loans totaling $9.5 million were placed on nonaccrual; by the end of 2005, these loans were either repaid, charged off or returned to accrual status.

        The allowance for credit losses was $61.0 million, or 1.55% of loans, net of unearned income, at December 31, 2007, and $61.2 million, or 1.46% of loans, net of unearned income, at the end of 2006. The allowance for loan losses totaled $52.6 million at December 31, 2007 and $52.9 million at the end of 2006.

        Increased provisions for credit losses may be required in the future based on loan and unfunded commitment growth, the effect changes in economic conditions, such as inflation, unemployment, market interest rate levels, and real estate values may have on the ability of our borrowers to repay their loans, and other negative conditions specific to our borrowers' businesses. See "—Critical

40



Accounting Policies," "—Financial Condition—Allowance for Credit Losses," and Note 5 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        The following table sets forth the details of noninterest income for the years indicated. The columns titled "Increase (Decrease)" set forth the year-over-year changes between 2007 and 2006 and between 2006 and 2005.

 
  For the Years Ended December 31,
 
 
  2007
  Increase
(Decrease)

  2006
  Increase
(Decrease)

  2005
 
 
  (Dollars in thousands)

 
Noninterest income:                                
  Service charges on deposit accounts   $ 11,573   $ 2,738   $ 8,835   $ 2,468   $ 6,367  
  Other commissions and fees     7,019     599     6,420     2,240     4,180  
  Gain on sale of loans     8,438     8,438         (596 )   596  
  Loss on sale of securities         2,332     (2,332 )   (2,287 )   (45 )
  Increase in cash surrender value of life insurance     2,489     284     2,205     577     1,628  
  Other income     3,395     2,057     1,338     286     1,052  
   
 
 
 
 
 
Total noninterest income   $ 32,914   $ 16,448   $ 16,466   $ 2,688   $ 13,778  
   
 
 
 
 
 

        Noninterest income for the fourth quarter of 2007 totaled $5.4 million compared to $5.7 million for the third quarter of 2007. Noninterest income is lower in the fourth quarter of 2007 compared to the prior quarter due mostly to loss on sale of SBA loans and a decline in other income. The net loss on sale of loans was $543,000 for the fourth quarter of 2007 and $323,000 for the third quarter of 2007. Other noninterest income for the third quarter included a net gain of $396,000 on the sale and leaseback of two office facilities; there was no such item in the fourth quarter of 2007.

        Noninterest income increased $16.4 million to $32.9 million for 2007 compared to 2006. The increases in noninterest income categories result largely from (i) higher net gain on sale of loans, (ii) no loss on sale of securities in 2007 compared to the loss recognized in 2006, (iii) higher fee volume due to business growth, and (iv) higher other income. Other noninterest income includes the recognition of discounts related to the payoffs of acquired loans; such amounts were $2.1 million for 2007 and $642,000 for 2006. Other noninterest income also includes the net gain on the sale and leaseback of two office facilities; there was no such item in any of the other periods presented.

        The increase in service charges on deposit accounts is attributed to an increase in deposit volumes from our 2006 acquisitions and the introduction of certain business checking products during 2007. The new monies in these checking products totaled $70.9 million as of December 31, 2007. Other service fee income increased due to an increase in the volume of other services such as debit cards, foreign exchange and safe deposit box rental.

        The gain on sale of loans includes a $6.6 million gain on the sale of a $353.3 million participating interest in commercial real estate mortgage loans and net gains of $1.9 million on the sale of $98.3 million in SBA loans. The SBA loan sale function was obtained through the Community Bancorp acquisition and we expect such sales to continue, although loan sale income will vary depending on

41



production levels and changing market forces. The net gain on sale of SBA loans during 2007 was less than expected due to reduced sale volumes and lower selling prices during the latter part of 2007 caused by the disruption in the credit markets. In addition, the net gains were reduced by write-offs of premiums on acquired loans whose accounting basis was written up at the time of the Community Bancorp acquisition. Writing-off such premiums occured when certain acquired loans were either prepaid or transferred to our loans held-to-maturity portfolio. The effect of prepayments and transfers to our held-to-maturity loan portfolio of acquired loans was a reduction to the net gain on sale of loans of $2.1 million for 2007. As of December 31, 2007 the remaining premium on acquired SBA loans was $927,000.

        Income from the cash surrender value of life insurance policies increased for 2007 when compared to 2006. The income is recognized as an appreciation of the cash surrender value of life insurance policies. It is noncash income and not subject to income tax. The tax-equivalent yield for our life insurance policies was 6.33% during 2007 compared to 5.92% during 2006. Our crediting rate, or yield for our life insurance policies, changes quarterly and is determined by the performance of the underlying investments.

        Noninterest income increased $2.7 million to $16.5 million for 2006 compared to 2005. The increases in noninterest income categories resulted largely from increased service charges and fees for deposits, which are attributed to an increase in deposit volumes from our acquisitions, and increased fee income related to other services such as letters of credit and foreign exchange.

        During 2006 we sold approximately $103 million in securities yielding 3.52% at a loss of approximately $2.3 million in an effort to reduce our reliance on borrowed funds and to improve net interest income. The proceeds from the sale were used to reduce overnight borrowings that were costing 5.35%. The loss on sale of securities of $45,000 in 2005 related to the write-off of the remaining balance of an interest-only strip initially recorded at the time of a loan sale.

        The increase in the cash surrender value of life insurance policies for 2006 when compared to 2005 is in due to additions to our life insurance policy investments from our acquisition activity and the income from all of our life insurance policies. The tax-equivalent yield for our life insurance policies was 5.18% during 2005.

        Other income for 2006 included $642,000 in discounts related to the payoffs of acquired loans; there were none for 2005. Other income for 2005 included fees related to loan referral programs for SBA and single family mortgages totaling $480,000 compared to $32,000 for 2006; these fees decreased as the single family mortgage program was phased out at the beginning of 2006.

42


        The following table sets forth the details of noninterest expense for the years indicated. The columns titled "Increase (Decrease)" set forth the year-over-year changes between 2007 and 2006 and between 2006 and 2005.

 
  For the Years Ended December 31,
 
 
  2007
  Increase
(Decrease)

  2006
  Increase
(Decrease)

  2005
 
 
  (Dollars in thousands)

 
Noninterest expense:                                
  Compensation   $ 71,440   $ 5,935   $ 65,505   $ 16,882   $ 48,623  
  Occupancy     19,156     3,860     15,296     4,563     10,733  
  Furniture and equipment     4,929     895     4,034     1,304     2,730  
  Data processing     6,007     (310 )   6,317     1,448     4,869  
  Other professional services     6,301     1,229     5,072     524     4,548  
  Business development     4,045     2,454     1,591     403     1,188  
  Communications     3,277     174     3,103     1,110     1,993  
  Insurance and assessments     1,723     (398 )   2,121     406     1,715  
  Intangible asset amortization     9,674     2,986     6,688     3,081     3,607  
  Reorganization charges     1,731     (91 )   1,822     1,822      
  Other     13,976     4,070     9,906     2,610     7,296  
   
 
 
 
 
 
Total noninterest expense   $ 142,259   $ 20,804   $ 121,455   $ 34,153   $ 87,302  
   
 
 
 
 
 
Efficiency ratio     47.7 %(1)         47.0 %         50.1 %
   
       
       
 
Noninterest expense as a percentage of average assets     2.7 %         2.8 %         2.9 %
   
       
       
 

(1)
Prepayment penalties, the $1 million charitable contribution and reorganization costs increased the efficiency ratio from 46.4% to 47.7% for 2007. Reorganization cost increased the efficiency ratio from 46.3% to 47.0% for 2006. There were no similar expenses in 2005.

        Noninterest expense for the fourth quarter of 2007 totaled $36.3 million compared to $34.5 million for the third quarter of 2007. The increase compared to the third quarter of 2007 was due mostly to the $1.0 million charitable contribution, the $1.4 million of FHLB prepayment penalties and increased reorganization charges which are described more fully below; there were no such items in the third quarter of 2007. These increases were offset, in part, by a decline in compensation costs for the fourth quarter of 2007 compared to the previous quarter. The decrease in compensation expense was due partially to lower restricted stock amortization due to the suspension of amortization of certain performance-based restricted stock awards whose vesting is dependent on the attainment of specific long-term financial targets. During the fourth quarter of 2007 we concluded that attainment of these financial targets within the remaining 6 to 9 year vesting horizon of the performance-based restricted stock was less than probable.

        Noninterest expense for the year ended December 31, 2007, totaled $142.3 million compared to $121.5 million for the same period in 2006. The increase in most noninterest expense categories is due to a combination of acquisitions and business growth. The increase in compensation resulted from additional staff added through acquisitions, pay rate increases, and increased benefits costs, partially offset by the effect of staff reductions in the second quarter of 2007. In addition to general business growth, other professional services expense is higher due to consulting services related to the Company's reorganization efforts and marketing program. Business development costs increased for promotional costs associated with the introduction of the high performance business checking product

43


in March 2007 and a $1.0 million charitable contribution to a local foundation for those affected by the Southern California wildfires. Other expense includes $1.4 million in penalties for prepaying certain FHLB advances. In mid-December 2007, we refinanced $200 million in FHLB advances costing 4.86% and replaced these borrowings with putable FHLB advances having a fixed rate of 3.16% for the first year. The increases were offset by lower data processing and insurance and assessment costs. Data processing cost declined as a result of a contract renegotiation in October 2006. Insurance and assessments declined largely due to Pacific Western's conversion to a state banking charter from a national banking charter and the timing of such regulatory assessments.

        The reorganization costs for 2007 represent an accrual for severance costs associated with the elimination of staff positions in branch locations and lending units, the consolidation of branch offices, and system conversion costs associated with Pacific Western's merger with First National in September 2006. The reorganization costs for 2006 represent an accrual for severance costs associated with the Community Bancorp acquisition, the consolidation of branch offices, and other costs associated with the restructuring of Pacific Western. At December 31, 2007, the remaining liability for these accrued reorganization costs totaled $399,000 and related mostly to future rent for vacated facilities. There are no further branch consolidations currently planned.

        Noninterest expense includes noncash amounts for intangible asset amortization and stock-based compensation. Intangible asset amortization expense relates to the periods since each acquisition and, therefore, the annual amortization charge naturally increased due to the volume of acquisitions. We recorded a customer relationship intangible totaling $2.7 million for our BFI acquisition with an estimated life of 4 years and core deposit intangibles totaling $29.8 million for our 2006 acquisitions with an estimated life of up to 10 years. We estimate the amortization expense for core deposit and customer relationship intangibles to be approximately $9.1 million for 2008; this estimate is subject to change.

        Compensation expense includes $8.0 million for 2007 and $7.6 million for 2006 in amortization expense for shares of time-based and performance-based restricted stock awarded to employees beginning in July 2003. Time-based restricted stock vests either in increments over a three to five year period or at the end of such period. Performance-based restricted stock vests when the Company attains specific long-term financial targets. Beginning with the fourth quarter of 2007, the amortization of certain performance-based restricted stock awards has been suspended. If and when the attainment of such performance targets is deemed probable in future periods, a catch-up adjustment will be recorded and amortization of such performance-based restricted stock will continue. Amortization expense for all time-based and performance-based restricted stock awards is estimated to be $5.0 million for 2008. This estimate includes awards made in February 2008 and is subject to change based on additional awards which may be made, forfeitures which may occur, and progress towards meeting performance goals.

        Noninterest expense increased $34.2 million for 2006 when compared to $87.3 million for 2005. This increase is due to a combination of acquisitions, business growth, and reorganization charges. The increase in compensation resulted from additional staff added through acquisitions, pay rate increases, and increased benefits costs. Compensation expense for 2005 included $4.0 million in amortization expense for shares of time-based and performance-based restricted stock. Occupancy costs increased due to additional office locations added by acquisitions and all other expenses increased due to our acquisition activity. Our banking branch network expanded to 63 offices at the end of 2006 from 47 offices at the end of 2005.

        Effective income tax rates were 40.9%, 40.4%, and 41.1% for the years ended December 31, 2007, 2006 and 2005, respectively. The difference in the effective tax rates between the years relates mainly to

44


tax credits and the amount of tax exempt income recorded in each of the years. For further information on income taxes, see Note 13 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Financial Condition

        The following table presents the balance of each major category of loans at December 31:

 
  2007
  2006
  2005
  2004
  2003
 
 
  Amount
  % of
Loans

  Amount
  % of
Loans

  Amounts
  % of
Loans

  Amount
  % of
Loans

  Amount
  % of
Loans

 
 
  (Dollars in thousands)

 
Loan Category:                                                    
Domestic:                                                    
  Commercial   $ 852,279   22 % $ 752,817   18 % $ 639,393   26 % $ 604,995   28 % $ 426,796   26 %
  Real estate—construction     717,419   18     939,463   22     570,080   23     410,167   19     347,321   22  
  Real estate—mortgage     2,280,963   58     2,374,010   57     1,117,030   45     967,270   46     712,390   45  
  Consumer     49,943   1     45,984   1     47,221   2     42,723   2     31,383   2  
Foreign:                                                    
  Commercial     56,916   1     83,359   2     94,930   4     88,428   4     67,821   4  
  Other     1,206   *     6,778   *     8,320   *     11,731   1     14,895   1  
   
 
 
 
 
 
 
 
 
 
 
Total gross loans     3,958,726   100 %   4,202,411   100 %   2,476,974   100 %   2,125,314   100 %   1,600,606   100 %
Less unearned income     (9,508 )       (12,868 )       (9,146 )       (7,143 )       (4,769 )    
   
     
     
     
     
     
Loans, net of unearned income     3,949,218         4,189,543         2,467,828         2,118,171         1,595,837      
Less allowance for loan losses     (52,557 )       (52,908 )       (27,303 )       (24,083 )       (22,531 )    
   
     
     
     
     
     
Total net loans   $ 3,896,661       $ 4,136,635       $ 2,440,525       $ 2,094,088       $ 1,573,306      
   
     
     
     
     
     
Loans held for sale   $ 63,565       $ 173,319       $       $       $      
   
     
     
     
     
     

*
Amount is less than 1%.

        Loans, net of unearned income and excluding loans held for sale, decreased $240.3 million due mostly to loans sold of $365.9 million offset by loans acquired of $113.9 million. The majority of our loan portfolio is concentrated in real estate and commercial loans. Real estate mortgage loans represent commercial real estate loans secured by various commercial properties including office buildings, industrial and warehouse facilities, and retail facilities. Of the total real estate mortgage loans at December 31, 2007, approximately $436.7 million represent office buildings and industrial and warehouse facilities that are owner-occupied. At December 31, 2007, construction loans represented 18% of our total loans outstanding. Of the $717.4 million in construction loans, $214.5 million were for residential non-owner occupied single-family and land loans, $96.1 million were mixed use commercial and residential land loans, $84.5 million were multi-family residential loans and $22.7 million were owner occupied residential loans. The remaining construction loans, totaling $299.6 million, were related to commercial construction. The decrease in construction loan balances from December 31, 2006 was planned and reduced our exposure to residential construction. Our foreign loans are primarily to individuals and entities located in Mexico. All of our foreign loans are denominated in U.S. dollars and the majority are collateralized by assets located in the United States or guaranteed or insured by businesses located in the United States. In addition to our outstanding foreign loans, our foreign loan commitments totaled $18.8 million at December 31, 2007. We continued to allow our foreign loan portfolio to repay in the ordinary course of business without making any new privately-insured foreign loans other than those under existing commitments.

45


        Loans held for sale are composed primarily of SBA 7a and 504 loans. The decline in loans held for sale during 2007 was due to $98.3 million in loan sales, $10.4 million in loan repayments, and $56.6 million returned to our loan portfolio because of either credit quality issues or the lack of buyer interest, offset by loan originations. We recognized a lower-of-cost-or-market expense adjustment of $1.7 million during 2007 when loans were transferred from held for sale to our loan portfolio held to maturity. In 2006, we acquired approximately $128.1 million of loans held for sale with the Community Bancorp acquisition and we subsequently reclassified a portion of our SBA 7a portfolio to loans held for sale. We intend to continue to sell these loans as market conditions permit while originating additional loans.

        Loans, net of unearned income increased $1.9 billion, including organic growth of $259.3 million and acquired loans of $1.6 billion.

        The following table presents our interest rate sensitivity analysis at the date indicated with respect to certain individual categories of loans and provides separate analyses with respect to fixed rate loans and floating rate loans as of December 31, 2007:

 
  Repricing or Maturing In
 
  1 year or less
  Over 1 to 5 years
  Over 5 years
  Total
 
  (Dollars in thousands)

Loan Category:                        
Domestic:                        
  Commercial   $ 559,709   $ 172,046   $ 120,524   $ 852,279
  Real estate, construction     631,745     52,734     32,940     717,419
Foreign     49,841     8,275     6     58,122
   
 
 
 
Total   $ 1,241,295   $ 233,055   $ 153,470   $ 1,627,820
   
 
 
 
 
 
  Fixed Rate
  Floating Rate
  Total
 
  (Dollars in thousands)

Domestic:                  
  Commercial   $ 179,204   $ 673,075   $ 852,279
  Real estate, construction     136,185     581,234     717,419
Foreign     6,843     51,279     58,122
   
 
 
Total   $ 322,232   $ 1,305,588   $ 1,627,820
   
 
 

        Approximately $2.3 billion of real estate mortgage loans are not included in the above tables. Of the $2.3 billion, approximately $1.1 billion are fixed rate loans with a weighted average maturity of 6 years.

46


        The following table sets forth certain information with respect to our nonaccrual loans and other nonperforming assets:

 
  December 31,
 
 
  2007
  2006
  2005
  2004
  2003
 
 
  (Dollars in thousands)

 
Nonaccrual loans   $ 22,473   $ 22,095   $ 8,422   $ 8,911   $ 7,411  
Loans past due 90 days or more and still accruing                      
   
 
 
 
 
 
Nonperforming loans     22,473     22,095     8,422     8,911     7,411  
Other real estate owned     2,736                  
   
 
 
 
 
 
Total nonperforming assets   $ 25,209   $ 22,095   $ 8,422   $ 8,911   $ 7,411  
   
 
 
 
 
 
Nonperforming loans to loans, net of deferred fees and costs, including loans held for sale     0.56 %   0.51 %   0.34 %   0.42 %   0.46 %
Nonperforming assets to loans, including loans held for sale, and other real estate owned     0.63 %   0.51 %   0.34 %   0.42 %   0.46 %

        Nonaccrual loans totaled $22.5 million at December 31, 2007 and represent 0.56% of total loans, including loans held for sale. The year end nonaccrual loans include 25 SBA loans totaling $10.4 million, two residential construction loans for $3.5 million, a multi-family residential loan for $3.1 million and two residential land loans for $2.9 million. Approximately 26% of our nonaccrual loans at the end of 2007 are covered by SBA guarantees. Other real estate owned due to foreclosure was $2.7 million and represents four properties at year end. Of this amount $1.3 million is residential construction, $869,000 is commercial real estate, and $600,000 is residential real estate. The increase in nonperforming assets is due in part to the weakening of the residential housing market during 2007. A prolonged downturn in the real estate market, residential housing or otherwise, may cause higher levels of nonperforming assets. The increase in nonaccrual loans during 2006 was gradual and resulted largely from acquired portfolios.

        Loans are generally placed on nonaccrual status when the borrowers are past due 90 days and/or when payment in full of principal or interest is not expected. At the time a loan is placed on nonaccrual status, any interest income previously accrued but not collected is reversed and charged against current period income. Income on nonaccrual loans is subsequently recognized only to the extent cash is received and the loan's principal balance is deemed collectible. Loans are restored to accrual status only when the loans become both well secured and are in the process of collection.

        As of December 31, 2007, 2006 and 2005, there were no loans past due over 90 days and still accruing interest. Additional interest income of $2.3 million, $2.0 million and $788,000, would have been recorded for the years ended December 31, 2007, 2006 and 2005 if nonaccrual loans had been performing in accordance with their original terms. Interest income of $1.2 million, $944,000, and $107,000 was recorded prior to such loans being transferred to a nonaccrual status for the years ended December 31, 2007, 2006 and 2005.

        During the fourth quarter of 2007, loans past due between 30 days and 89 days, both on accrual and nonaccrual status, increased $10.6 million to $52.2 million. The subset of loans on accrual status but past due between 30 days and 89 days, which we refer to as "accruing and over 30 days past due," increased $8.4 million to $30.6 million. At December 31, 2007, the loans accruing and over 30 days past due included: three land loans totaling $12.5 million, two construction and land development loans totaling $3.7 million, 12 commercial real estate loans totaling $10.1 million, and 26 commercial and industrial loans totaling $3.9 million. Past due loans have the potential to become nonaccrual or adversely classified. Increases in nonaccrual and adversely classified loans generally results in increased provisions for loan losses.

47


        The allowance for credit losses is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of outstanding loan balances and the reserve for unfunded loan commitments is included within other liabilities. Generally, as loans are funded, the amount of the commitment reserve applicable to such funded loans will be transferred from the reserve for unfunded loan commitments to the allowance for loan losses based on our reserving methodology.

        An allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and inherent risks in the loan portfolio and other extensions of credit at the balance sheet date. The allowance is based upon a continuing review of the portfolio, past loan loss experience, current economic conditions which may affect the borrowers' ability to pay, and the underlying collateral value of the loans. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance.

        The methodology we use to estimate the amount of our allowance for credit losses is based on both objective and subjective criteria. While some criteria are formula driven, other criteria are subjective inputs included to capture environmental and general economic risk elements which may trigger losses in the loan portfolio, and to account for the varying levels of credit quality in the loan portfolios of the entities we have acquired that have not yet been captured in our objective loss factors.

        Specifically, our allowance methodology contains four elements: (a) amounts based on specific evaluations of impaired loans; (b) amounts of estimated losses on several pools of loans categorized by type; (c) amounts of estimated losses for loans adversely classified based on our loan review process; and (d) amounts for environmental and general economic factors that indicate probable losses were incurred but were not captured through the other elements of our allowance process.

        Impaired loans are identified at each reporting date based on certain criteria and individually reviewed for impairment. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the original contractual terms of the loan agreement. We measure impairment of a loan based upon the fair value of the loan's collateral if the loan is collateral dependent or the present value of cash flows, discounted at the loan's effective interest rate, if the loan is not collateralized. If the measurement of impairment for the loan is less than the recorded investment in the loan, a valuation allowance is established with a corresponding charge to operations to increase the allowance for loan losses.

        Our loan portfolio, excluding impaired loans which are evaluated individually, is categorized into several pools for purposes of determining allowance amounts by loan pool. The loan pools we currently evaluate are: commercial real estate construction, residential real estate construction, SBA real estate, real estate other, commercial collateralized, commercial unsecured, SBA commercial, consumer, foreign, asset-based, and factoring. Within these loan pools, we then evaluate loans not adversely classified, which we refer to as "pass" credits, separately from adversely classified loans. The allowance amounts for pass rated loans and those loans adversely classified are determined using historical loss rates developed through migration analyses.

        Finally, in order to ensure our allowance methodology is incorporating recent trends and economic conditions, we apply environmental and general economic factors to our allowance methodology including: credit concentrations; delinquency trends; economic and business conditions; external factors such as fuel and building materials prices, the effects of adverse weather, and hostilities; the quality of lending management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the portfolio; nonaccrual loan trends; other adjustments for items not covered by other factors; problem loan trends; and quality of loan review.

48


        We recognize the determination of the allowance for loan losses is sensitive to the assigned credit risk ratings and inherent loss rates at any given point in time. Therefore, we perform a sensitivity analysis to provide insight regarding the impact adverse changes in risk ratings may have on our allowance for loan losses. The sensitivity analysis does not imply any expectation of future deterioration in our loans' risk ratings and it does not necessarily reflect the nature and extent of future changes in the allowance for loan losses due to the numerous quantitative and qualitative factors considered in determining our allowance for loan losses. At December 31, 2007, in the event that 1 percent of our loans were downgraded from the "pass" category to the "substandard" category within our current allowance methodology, the allowance for loan losses would have increased by approximately $8.9 million. Given current processes employed by the Company, management believes the risk ratings and inherent loss rates currently assigned are appropriate. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions that could be material to the Company's financial statements. In addition, current risk ratings are subject to change as we continue to review loans within our portfolio and as our borrowers are impacted by economic trends within their market areas.

        Management believes that the allowance for loan losses is adequate and appropriate for the known and inherent risks in our loan portfolio. In making its evaluation, management considers certain quantitative and qualitative factors including the Company's historical loss experience, the volume and type of lending conducted by the Company, the results of our credit review process, the amounts of classified, criticized and nonperforming assets, regulatory policies, general economic conditions, underlying collateral values, and other factors regarding collectibility and impairment. To the extent we experience, for example, increased levels of documentation deficiencies, adverse changes in collateral values, or negative changes in economic and business conditions which adversely affect our borrowers, our classified loans may increase. Higher levels of classified loans generally result in higher allowances for loan losses.

        Management also believes that the reserve for unfunded loan commitments is adequate. In making this determination, we use the same methodology for the reserve for unfunded loan commitments as we do for the allowance for loan losses and consider the same quantitative and qualitative factors, as well as an estimate of the probability of advances of the commitments correlated to their credit risk rating.

49


        The following table presents the changes in our allowance for loan losses for the periods indicated:

 
  For the Years Ended December 31,
 
 
  2007
  2006
  2005
  2004
  2003
 
 
  (Dollars in thousands)

 
Balance at beginning of year   $ 52,908   $ 27,303   $ 24,083   $ 22,531   $ 21,392  
Loans charged off:                                
Domestic:                                
  Commercial     (2,091 )   (1,083 )   (1,646 )   (2,830 )   (3,331 )
  Real estate—construction     (660 )   (144 )            
  Real estate—mortgage     (454 )       (100 )   (128 )    
  Consumer     (166 )   (189 )   (180 )   (305 )   (1,145 )
Foreign     (1,414 )   (1,691 )   (1,592 )   (344 )    
   
 
 
 
 
 
  Total loans charged off     (4,785 )   (3,107 )   (3,518 )   (3,607 )   (4,476 )
Recoveries on loans charged off:                                
Domestic:                                
  Commercial     1,591     1,361     2,106     1,653     2,453  
  Real estate—mortgage     163         11     64     84  
  Consumer     122     171     241     311     468  
Foreign     73     187     2     50      
   
 
 
 
 
 
  Total recoveries on loans charged off     1,949     1,719     2,360     2,078     3,005  
   
 
 
 
 
 
Net loans charged off     (2,836 )   (1,388 )   (1,158 )   (1,529 )   (1,471 )
Provision for loan losses     2,800     7,977     1,345     (521 )   48  
Reduction for loans sold     (2,461 )                
Additions due to acquisitions     2,146     19,016     3,033     3,602     2,562  
   
 
 
 
 
 
Balance at end of year   $ 52,557   $ 52,908   $ 27,303   $ 24,083   $ 22,531  
   
 
 
 
 
 
Ratios:                                
Allowance for loan losses as a percentage of total loans, net of unearned income at year end     1.33 %   1.26 %   1.11 %   1.14 %   1.41 %
Net loans charged off as a percentage of average loans     0.07 %   0.04 %   0.05 %   0.08 %   0.10 %

        The following table presents the changes in our reserve for unfunded loan commitments for the periods indicated:

 
  For the Years Ended December 31,
 
  2007
  2006
  2005
  2004
  2003
 
  (Dollars in thousands)

Balance at beginning of year   $ 8,271   $ 5,668   $ 5,424   $ 3,221   $ 2,902
Provision     200     1,623     75     986     252
Additions due to acquisitions         980     169     1,217     67
   
 
 
 
 
Balance at end of year   $ 8,471   $ 8,271   $ 5,668   $ 5,424   $ 3,221
   
 
 
 
 

50


        The following table presents the balance of our allowance for credit losses, nonperforming assets and certain credit quality measures for the periods indicated:

 
  At December 31,
 
 
  2007
  2006
  2005
  2004
  2003
 
 
  (Dollars in thousands)

 
ALLOWANCE FOR CREDIT LOSSES:                                
Allowance for loan losses   $ 52,557   $ 52,908   $ 27,303   $ 24,083   $ 22,531  
Reserve for unfunded loan commitments     8,471     8,271     5,668     5,424     3,221  
   
 
 
 
 
 
Allowance for credit losses   $ 61,028   $ 61,179   $ 32,971   $ 29,507   $ 25,752  
   
 
 
 
 
 
NONPERFORMING ASSETS:                                
Nonaccrual loans   $ 22,473   $ 22,095   $ 8,422   $ 8,911   $ 7,411  
Other real estate owned     2,736                  
   
 
 
 
 
 
  Total nonperforming assets   $ 25,209   $ 22,095   $ 8,422   $ 8,911   $ 7,411  
   
 
 
 
 
 
Allowance for credit losses to loans, net of unearned income     1.55 %   1.46 %   1.34 %   1.39 %   1.61 %
Allowance for credit losses to nonaccrual loans     271.6 %   276.9 %   391.5 %   331.1 %   347.5 %
Allowance for credit losses to nonperforming assets     242.1 %   276.9 %   391.5 %   331.1 %   347.5 %

        Based on our experience, we believe that the allowance for loan losses of $52.6 million at December 31, 2007 is adequate to cover known and inherent risks in the loan portfolio. See "—Critical Accounting Policies" and Note 5 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

        The following table allocates the allowance for loan losses based on our judgment of inherent losses in the respective loan portfolio categories. At December 31, 2007, the portion of the allowance allocated to individual portfolio categories includes an amount for both imprecision and uncertainty to better reflect our view of risk. Nonetheless, the allowance for loan losses is available to absorb any credit losses without restriction.


Allocation of Allowance for Loan Losses

 
  Commercial
  Real
Estate

  Consumer
  Foreign
  Total
 
 
  (Dollars in thousands)

 
At December 31,                                
2007                                
Allowance for loan losses   $ 11,149   $ 39,455   $ 476   $ 1,477   $ 52,557  
% of loans to total loans     22 %   76 %   1 %   1 %   100 %
2006                                
Allowance for loan losses   $ 9,719   $ 39,235   $ 553   $ 3,401   $ 52,908  
% of loans to total loans     18 %   79 %   1 %   2 %   100 %
2005                                
Allowance for loan losses   $ 10,958   $ 14,843   $ 412   $ 1,090   $ 27,303  
% of loans to total loans     26 %   68 %   2 %   4 %   100 %
2004                                
Allowance for loan losses   $ 11,091   $ 12,392   $ 285   $ 315   $ 24,083  
% of loans to total loans     28 %   65 %   2 %   5 %   100 %
2003                                
Allowance for loan losses   $ 11,799   $ 10,134   $ 356   $ 242   $ 22,531  
% of loans to total loans     27 %   66 %   2 %   5 %   100 %

        The allowance amount allocated to commercial loans increased during 2007 in line with the growth in that portfolio. Although the amount of real estate loans declined during 2007, the allowance amount

51



allocated to real estate loans remained relatively the same in consideration of the elevated risk profile of real estate.

        Our investment activities are designed to assist in maximizing income consistent with quality and liquidity requirements, to supply collateral to secure public funds on deposit and lines of credit, and to provide a means for balancing market and credit risks through changing economic times.

        Our portfolio consists primarily of U.S. Treasury and U.S. government agency obligations, obligations of government-sponsored entities, obligations of states and political subdivisions, and Federal Home Loan Bank stock. Our investment portfolio contains no investments in any one issuer in excess of 10% of our total shareholders' equity.

        The following table presents the composition of our investment portfolio at the dates indicated:

 
  At December 31,
 
  2007
  2006
  2005
 
  (Dollars in thousands)

U.S. Treasury securities   $   $ 986   $
Government-sponsored entity securities     40,670     53,064     46,788
States and political subdivisions     8,645     9,446     9,054
Mortgage-backed and other securities     57,573     27,885     156,759
   
 
 
Subtotal     106,888     91,381     212,601
Federal Home Loan and Federal Reserve Bank stock     26,649     28,747     26,753
   
 
 
  Total investments   $ 133,537   $ 120,128   $ 239,354
   
 
 

        The following table presents a summary of yields and contractual maturities of debt securities at December 31, 2007:

 
  One Year
or Less

  One Year
Through
Five Years

  Five Years
Through
Ten Years

  Over Ten Years
  Total
 
 
  Amount
  Yield
  Amount
  Yield
  Amount
  Yield
  Amount
  Yield
  Amount
  Yield
 
 
  (Dollars in thousands)

 
Government-sponsored entity securities   $ 2,996   3.01 % $ 24,601   4.53 % $ 13,073   5.15 % $     $ 40,670   4.62 %
States and political subdivisions     925   3.92 %   2,913   5.05 %   3,760   5.09 %   1,047   5.76 %   8,645   5.03 %
Mortgage-backed and other securities     1,747   4.13 %         4,843   4.89 %   50,983   5.12 %   57,573   5.07 %
   
     
     
     
     
     
Total investments(1)   $ 5,668   3.50 % $ 27,514   4.58 % $ 21,676   5.09 % $ 52,030   5.13 % $ 106,888   4.89 %
   
     
     
     
     
     

(1)
Yields on securities have not been adjusted to a fully tax-equivalent basis because the impact is not material.

        At December 31, 2007, our investment portfolio included $8.9 million of investment securities that have been in a continuous unrealized loss position for 12 months or longer; such unrealized loss totaled $139,000. All of these securities have been issued by government-sponsored entities or municipalities and have AAA credit ratings as determined by various rating agencies. These securities have fluctuated in value since their purchase dates as a result of changes in market interest rates. We concluded that the continuous unrealized loss position for the past 12 months on these securities is a result of the level of market interest rates and not a result of the underlying issuers' ability to repay and are, therefore, temporarily impaired. In addition, we have the ability to hold these securities until their fair value recovers to their cost. Accordingly, we have not recognized the temporary impairment in our consolidated statement of earnings.

52


        The following table presents a summary of our average deposits as of the dates indicated and average rates paid:

 
  For the Years Ended December 31,
 
 
  2007
  2006
  2005
 
 
  Amount
  Rate
  Amount
  Rate
  Amount
  Rate
 
 
  (Dollars in thousands)

 
Non-interest bearing   $ 1,426,904     $ 1,387,919     $ 1,072,071    
Interest checking     328,207   0.76 %   246,569   0.17 %   190,846   0.06 %
Money market     1,117,972   3.01 %   890,400   1.99 %   719,372   0.90 %
Savings     125,549   0.18 %   132,130   0.17 %   97,144   0.18 %
Time     488,158   4.12 %   436,669   3.39 %   226,538   1.90 %
   
     
     
     
Total deposits   $ 3,486,790   1.62 % $ 3,093,687   1.07 % $ 2,305,971   0.48 %
   
     
     
     

        The increase in average deposits shown in the above table is due largely to acquisitions. At the end of the first quarter of 2007 we introduced new checking products to small business customers located around our branch offices. At December 31, 2007, balances in this new product are included in both the noninterest-bearing and interest checking categories above and totaled $247.8 million, of which approximately $70.9 million were new deposits. We believe that a good portion of the decline in our noninterest-bearing deposits during 2007 represents transfers into the new checking product. The introduction of our sweep product in August 2007 enabled us to return to the Bank approximately $100 million of customer deposits that were previously placed with an external fund manager. At December 31, 2007, the balances in the sweep product were approximately $163.4 million and are included in money market accounts. Deposits by foreign customers, primarily located in Mexico and Canada, totaled $109.6 million, or approximately 3.4% of total deposits, as of December 31, 2007 and $116.3 million at December 31, 2006.

        For time deposits of $100,000 or more, the following table presents a summary of maturities for the time periods indicated:

 
  3 Months or
Less

  Over 3 Months
Through
6 Months

  Over 6 Months
Through
12 Months

  Over
12 Months

  Total
 
  (Dollars in thousands)

December 31, 2007   $ 132,199   $ 69,926   $ 58,216   $ 24,388   $ 284,729
   
 
 
 
 

Borrowings

        The holding company and the Bank have various lines of credit available. These include the ability to borrow funds from time to time on a long-term, short-term or overnight basis from the Federal Home Loan Bank of San Francisco, which we refer to as the FHLB, or other financial institutions. The maximum amount that we could borrow under our credit lines with the FHLB at December 31, 2007 was $922.5 million, of which $355.5 million was available on that date. These lines are secured by a blanket lien on certain qualifying loans in our loan portfolio and the majority of our available-for-sale investment securities.

        At December 31, 2007, we had outstanding $567.0 million due to the FHLB, composed of $345.0 million of term advances and $222.0 million in overnight advances. In addition we had outstanding $45.0 million of credit line advances and $138.5 million of subordinated debentures due to various investors. In December 2007, we refinanced $200 million in FHLB term advances costing 4.86%, which were outstanding at the end of 2006, and replaced these borrowings with putable FHLB advances having a fixed rate of 3.16% for the first year. At December 31, 2006, we had outstanding $499.0 million due to the FHLB, composed of $265.0 million of term advances and $234.0 million in

53



overnight advances, and $149.2 million of subordinated debentures due to various investors. Average borrowings increased to $349.2 million in 2007 compared to $302.9 million in 2006 due mostly to a decrease in our deposits. See "—Liquidity" and Note 8 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for information on our borrowings.

Capital Resources

        On May 16, 2005, we filed a registration statement with the SEC regarding the sale of up to 3,400,000 shares of our common stock, no par value per share, which we may offer and sell, from time to time, in amounts, at prices and on terms that we will determine at the time of any particular offering. To date, we have issued 2,935,766 shares of common stock under this registration statement for net proceeds of $158.5 million. We used these proceeds to augment our capital in support of our acquisitions. We expect to use the net proceeds from any additional sales of our securities to fund future acquisitions of banks and other financial institutions, as well as for general corporate purposes.

        On May 3, 2006, our Board of Directors authorized the repurchase of up to one million shares of the Company's common stock over the next twelve months, subject to market conditions and corporate and regulatory requirements. During 2006 and 2007 we purchased 277,600 shares through this program at an aggregate cost of $14.9 million.

        On August 2, 2007, we announced a share repurchase program for up to $150 million of Company common stock over a twelve-month period, unless shortened or extended by the Board of Directors. The Company repurchased 1,206,100 shares of common stock during the fourth quarter of 2007 at a weighted average price of $44.99 per share. For fiscal year 2007, the Company repurchased 2,491,538 shares of common stock at a weighted-average price of $49.48 per share under the current and former authorized share repurchase programs. The approximate dollar value of shares that may yet be purchased under the current authorized program is $36.2 million. The stock repurchase program may be limited or terminated at any time without prior notice.

        Bank regulatory agencies measure capital adequacy through standardized risk-based capital guidelines which compare different levels of capital (as defined by such guidelines) to risk-weighted assets and off-balance sheet obligations. Bank holding companies considered to be "adequately capitalized" are required to maintain a minimum total risk-based capital ratio of 8% of which at least 4.0% must be Tier 1 capital. Bank holding companies considered to be "well capitalized" must maintain a minimum leverage ratio of 5% and a minimum risk-based capital ratio of 10% of which at least 6.0% must be Tier 1 capital.

        The following table presents regulatory capital requirements and our regulatory capital ratios at December 31, 2007:

 
  Regulatory Requirements
  Actual
 
 
  Adequately
Capitalized

  Well
Capitalized

  The Company
 
As of December 31, 2007:              
Total risk-based capital ratio   8.00 % 10.00 % 11.92 %
Tier 1 risk-based capital ratio   4.00 % 6.00 % 10.67 %
Tier 1 leverage capital ratio   4.00 % 5.00 % 11.06 %

        As of December 31, 2007, we exceeded each of the capital requirements of the FRB and were deemed to be "well capitalized." In addition, as of December 31, 2007 Pacific Western exceeded the capital requirements to be "well capitalized." For further information on regulatory capital, see Note 19 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

54


        The Company issued subordinated debentures to trusts that were established by either us or entities we have acquired, which, in turn, issued trust preferred securities, which totaled $131.0 million at December 31, 2007. Our trust preferred securities are currently included in our Tier I capital for purposes of determining the Company's Tier I and total risk-based capital ratios. The FRB, which is the holding company's banking regulator, has promulgated a modification of the capital regulations affecting trust preferred securities. Under this modification, effective March 31, 2009, the Company will be required to use a more restrictive formula to determine the amount of trust preferred securities that can be included in regulatory Tier I capital. At that time, the Company will be allowed to include in Tier I capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders' equity, less goodwill and any related deferred income tax liability. The regulations currently in effect through December 31, 2008, limit the amount of trust preferred securities that can be included in Tier I capital to 25% of the sum of core capital elements without a deduction for goodwill. We have determined that our Tier I capital ratios would remain above the well-capitalized level had the modification of the capital regulations been in effect at December 31, 2007. We expect that our Tier I capital ratios will be at or above the existing well-capitalized levels on March 31, 2009, the first date on which the modified capital regulations must be applied.

Liquidity

        The goals of our liquidity management are to ensure the ability of the Company to meet its 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 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 Executive 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 ALM Committee meets regularly to review funding capacities, current and forecasted loan demand, and investment opportunities.

        Historically, the Bank's primary liquidity source has been its core deposit base. Over the last several years the Bank's reliance on collateralized FHLB advances has increased as one of its sources of affordable and immediately available liquidity. The level of such wholesale funding is monitored based on the Bank's liquidity requirements, and we maintain what we believe to be an acceptable level of this collateralized borrowing capacity available at all times. The Bank's secured borrowing capacity was $922.5 million, of which $355.5 million was available as of December 31, 2007. In addition to the secured borrowing relationship with the FHLB, to meet short term liquidity needs the Bank maintains what we believe are adequate balances in liquid assets, which include Fed funds sold, interest-bearing deposits in other financial institutions, and investment securities available-for-sale. At December 31, 2007, liquid assets as a percent of total deposits were 6.4% and when available secured borrowings are included this ratio increases to 17.4%. Additionally, the Bank maintains unsecured lines of credit of $150.0 million with correspondent banks for purchase of overnight funds. These lines are subject to availability of funds. Another source of liquidity is the holding company's revolving line of credit for $70.0 million.

        The recent disruption in the credit markets has had the effect of decreasing the overall liquidity in the marketplace. Competition from financial institutions seeking to maintain adequate liquidity has placed upward pressure on the rates paid for customer deposits while at the same time the level of market interest rates has declined. We have lowered the rates paid on certain deposit accounts as market interest rates have declined, consistent with our disciplined deposit pricing strategy; this action, however, has resulted in deposit outflows. We have augmented our funding needs with our collateralized FHLB borrowings. In order to maintain sufficient levels of liquidity given the need to fund loan growth and manage deposit flows, the Bank may also use the secondary market for large

55



denomination time deposits, the availability of which is uncertain and subject to competitive market forces. The Bank did not have any of these large denomination time deposits at the end of 2007.

        The primary sources of liquidity for the Company, on a stand-alone basis, include the dividends from the Bank, and our ability to raise capital, issue subordinated debt and secure outside borrowings. See Note 8 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." 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 Bank's earnings. Pacific Western is subject to restrictions under certain federal and state laws and regulations which limit its ability to transfer funds to the Company through intercompany loans, advances or cash dividends. Dividends paid by state banks such as Pacific Western are regulated by the DFI under its general supervisory authority as it relates to a bank's capital requirements. A state bank may declare a dividend without the approval of the DFI as long as the total dividends declared in a calendar year do not exceed either the retained earnings or the total of net profits for three previous fiscal years less any dividends paid during such period. See "Item 5. Market For Registrant's Common Equity and Related Stockholders Matters—Dividends." During 2007, First Community received dividends of $140.5 million from the Bank. With approval from the DFI, the Bank may declare dividends up to the balance of its retained earnings which totaled $99.2 million at December 31, 2007. See Note 18 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Contractual Obligations

        The known contractual obligations of the Company at December 31, 2007 are as follows:

 
  At December 31, 2007
 
  Within
One Year

  One to
Three Years

  Three to
Five Years

  After
Five Years

  Total
 
  (Dollars in thousands)

Short-term debt obligations   $ 312,000   $   $   $   $ 312,000
Long-term debt obligations         100,000         338,488     438,488
Operating lease obligations     12,967     23,096     17,043     27,298     80,404
Other contractual obligations     3,609     8,387             11,996
   
 
 
 
 
Total   $ 328,576   $ 131,483   $ 17,043   $ 365,786   $ 842,888
   
 
 
 
 

        Debt obligations and operating lease obligations are discussed in Notes 8 and 12 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data." The other contractual obligations relate to our minimum liability associated with our data and item processing contract with a third-party provider.

        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 both short-term and long-term liquidity needs.

Off-Balance Sheet Arrangements

        Our obligations also include off-balance sheet arrangements consisting of loan-related commitments, of which only a portion are expected to be funded. At December 31, 2007, our loan-related commitments, including standby letters of credit and financial guarantees, totaled $1.3 billion. The commitments which result in a funded loan increase our profitability through net interest income. Therefore, during the year, we manage our overall liquidity taking into consideration funded and unfunded commitments as a percentage of our liquidity sources. Our liquidity sources, as described in "—Liquidity," have been and are expected to be sufficient to meet the cash requirements

56



of our lending activities. For further information on loan commitments see Note 10 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data."

Recent Accounting Pronouncements

        See Note 1 of the Notes to Consolidated Financial Statements contained in "Item 8. Financial Statements and Supplementary Data" for information on recent accounting pronouncements and their impact, if any, on our consolidated financial statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Our market risk arises primarily from credit risk and interest rate risk inherent in our lending and financing activities. To manage our credit risk, we rely on adherence to our underwriting standards and loan policies as well as our allowance for credit 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 Executive Asset/Liability Management Committee, which we refer to as our Executive ALM Committee, and approved by our Asset/Liability Management Committee of the Board of Directors, which we refer to as our Board ALCO. Our Executive 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 December 31, 2007 and 2006, we had not used any derivatives to alter our interest rate risk profile or for any other reason. However, both the repricing characteristics of our fixed rate loans and floating rate loans, as well as our significant percentage of noninterest-bearing deposits compared to interest-earning assets and callable features in certain borrowings, may influence our interest rate risk profile. Our financial instruments include loans receivable, Federal funds sold, interest-bearing deposits in financial institutions, Federal Home Loan Bank stock, investment securities, deposits, borrowings and subordinated debentures.

        We measure our interest rate risk position on a quarterly basis using three methods: (a) net interest income simulation analysis; (b) market value of equity modeling; and (c) traditional gap analysis. The results of these analyses are reviewed by the Executive ALM Committee monthly and the Board ALCO quarterly. If hypothetical changes to interest rates cause changes to our simulated net present value of 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 models prepared as of December 31, 2007. These simulation models suggest our balance sheet is asset sensitive over a 2 year time horizon and liability sensitive over a longer time horizon. This profile suggests that in a rising interest rate environment, our net interest margin would initially increase and then gradually decrease over time; and during a falling or sustained low interest rate environment, our net interest margin would decrease initially and then gradually increase over time. This fairly neutral profile is due to the assumed repricing characteristics of our loans, deposits and borrowings. Approximately 37% of our loan portfolio is eligible to reprice immediately, 26% is expected to reprice over the next 1 to 5 years, and the remaining 37% is fixed-rate with the majority of these loans having a weighted average remaining life of 6 years. We anticipate immediately changing the rates on approximately 26% of our total deposits and borrowings as interest rates change; and we anticipate fully repricing a majority of the remaining interest bearing deposits and borrowings within the 1 to 2 year time horizon. As more assets than liabilities are expected to reprice immediately as interest rates change, the Company is asset

57



sensitive in the near term. After the 2 year time horizon cumulatively more liabilities than assets are expected to have repriced which suggests a gradual shift to a liability sensitive profile thereafter.

        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 December 31, 2007. 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 both increasing and declining interest rate scenarios and net interest income forecasted using a base market interest rate derived from the treasury yield curve at December 31, 2007. In order to arrive at the base case, we extend our balance sheet at December 31, 2007 one year and reprice any assets and liabilities that would contractually reprice or mature during that period using the products' pricing as of December 31, 2007. Based on such repricings, we calculated an 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 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 these proceeds at current simulated yields. Our deposit products reprice at our discretion and are assumed to reprice more slowly in a rising or declining interest rate environment, usually repricing less than the change in market rates. Also, a callable option feature on certain borrowings will reprice differently in a rising interest rate environment than in a declining interest rate environment.

        The simulation analysis 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 cause changes in actual loan prepayment rates which will differ from the market estimates we used in this analysis. In addition, the simulation analysis does not make any assumptions regarding loan fee income, which is a component of our net interest income and tends to increase our net interest margin. Management reviews the model assumptions for reasonableness on a quarterly basis.

        The following table presents as of December 31, 2007, forecasted net interest income and net interest margin for the next 12 months using a base market interest 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.

58



Sensitivity of Net Interest Income for the next 12 months
as of December 31, 2007
(Dollars in thousands)

Interest Rate Scenario

  Estimated Net Interest Income
  Percentage Change from Base
  Estimated Net Interest Margin
  Estimated
Net Interest Margin change from Base

Up 300 basis points   $245,090   4.2%   5.89%   0.24%
Up 200 basis points   $241,808   2.8%   5.81%   0.16%
Up 100 basis points   $238,463   1.4%   5.73%   0.08%
BASE   $235,185       5.65%    
Down 100 basis points   $229,934   (2.2)%   5.53%   (0.13)%
Down 200 basis points   $223,824   (4.8)%   5.38%   (0.27)%
Down 300 basis points   $219,132   (6.8)%   5.27%   (0.38)%

        Our simulation results as of December 31, 2007 indicate our interest rate risk position was asset sensitive as the simulated impact of an immediate upward movement in interest rates would result 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. In comparing the December 31, 2007, simulation results to the end of 2006, our year-end 2007 model indicates we are less asset sensitive than the prior year-end period. The decline in our asset sensitivity is mostly a result of: (i) loan growth centered in commercial real estate mortgage loans that have an initial rate adjustment after 5 to 10 years; (ii) the decline in our variable rate construction lending portfolio; and (iii) net deposit outflows being replaced with short-term FHLB advances.

        As of December 31, 2006, our net interest income simulation forecasted the following net interest income and net interest margin using a base market interest rate at that time and the estimated change to the base scenario given the interest rate scenarios presented. These results were not necessarily based on the same set of assumptions used in our year-end 2007 simulation.


Sensitivity of Net Interest Income for the next 12 months
as of December 31, 2006
(Dollars in thousands)

Interest Rate Scenario

  Estimated Net Interest Income
  Percentage Change from Base
  Estimated Net Interest Margin
  Estimated
Net Interest Margin change from Base

 
Up 300 basis points   $ 302,043   8.5 % 6.65 % 0.51 %
Up 200 basis points   $ 294,302   5.7 % 6.48 % 0.35 %
Up 100 basis points   $ 286,451   2.9 % 6.31 % 0.18 %
BASE   $ 278,359       6.14 %    
Down 100 basis points   $ 271,341   (2.5 )% 5.99 % (0.15 )%
Down 200 basis points   $ 264,299   (5.1 )% 5.83 % (0.30 )%
Down 300 basis points   $ 260,279   (6.5 )% 5.75 % (0.39 )%

        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 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. 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. Loan prepayments and

59



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 December 31, 2007. The following table shows the projected change in the market value of equity for the set of rate shocks presented as of December 31, 2007.


Estimated Market Value of Equity as of December 31, 2007
(Dollars in thousands)

Interest Rate Scenario

  Estimated Market Value
  Percentage Change from Base
  Percentage of Total Assets
  Ratio of
Estimated
Market Value
to Book Value

 
Up 300 basis points   $ 1,322,739   (5.2 )% 25.5 % 116.1 %
Up 200 basis points   $ 1,346,968   (3.5 )% 26.0 % 118.3 %
Up 100 basis points   $ 1,371,842   (1.7 )% 26.5 % 120.4 %
BASE   $ 1,395,368       26.9 % 122.5 %
Down 100 basis points   $ 1,415,208   1.4 % 27.3 % 124.3 %
Down 200 basis points   $ 1,428,254   2.4 % 27.6 % 125.4 %
Down 300 basis points   $ 1,436,959   3.0 % 27.7 % 126.2 %

        The results of our market value of equity model indicate a fairly neutral interest rate risk profile demonstrated by the minimal change in the market value of equity in the up or down interest rate scenarios compared to the "base case". In comparing the December 31, 2007 simulation results to December 31, 2006, we have become slightly liability sensitive over a long term time horizon as the duration of our liabilities has decreased.

        The following table shows the projected change in the market value of equity for the set of rate shocks presented as of December 31, 2006. These results are not necessarily based on the same set of assumptions used in our 2006 simulation.


Estimated Market Value of Equity as of December 31, 2006
(Dollars in thousands)

Interest Rate Scenario

  Estimated Market Value
  Percentage Change from Base
  Percentage of Total Assets
  Ratio of
Estimated
Market Value to Book Value

 
Up 300 basis points   $ 1,503,396   0.9 % 27.1 % 128.7 %
Up 200 basis points   $ 1,499,686   0.6 % 27.0 % 128.4 %
Up 100 basis points   $ 1,495,656   0.3 % 26.9 % 128.0 %
BASE   $ 1,490,582       26.8 % 127.6 %
Down 100 basis points   $ 1,478,633   (0.8 )% 26.6 % 126.6 %
Down 200 basis points   $ 1,456,727   (2.3 )% 26.2 % 124.7 %
Down 300 basis points   $ 1,418,554   (4.8 )% 25.5 % 121.4 %

        Gap analysis.    As part of the interest rate risk 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.

60



Interest Rate Sensitivity
December 31, 2007
Amounts Maturing or Repricing In

 
  3 Months
Or Less

  Over 3
Months to
12 Months

  Over 1
Year to
5 Years

  Over
5 Years

  Not Interest
Rate
Sensitive

  Total
 
  (Dollars in thousands)

ASSETS                                    
Cash and due from banks   $ 420   $   $   $   $ 99,363   $ 99,783
Federal funds sold     2,000                     2,000
Investment securities     31,393     10,290     27,514     64,340         133,537
Loans     1,707,588     324,928     980,168     1,000,099         4,012,783
Other assets                     930,937     930,937
   
 
 
 
 
 
  Total assets   $ 1,741,401   $ 335,218   $ 1,007,682   $ 1,064,439   $ 1,030,300   $ 5,179,040
   
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY                                    
Non-interest bearing checking deposits   $   $   $   $   $ 1,211,946   $ 1,211,946
Interest-bearing demand, money market and savings deposits     1,609,721                     1,609,721
Time deposits     201,030     191,735     30,714             423,479
Borrowings     312,000         100,000     200,000         612,000
Subordinated debentures     95,879         20,619     18,558     3,432     138,488
Other liabilities                     45,054     45,054
Shareholders' equity                     1,138,352     1,138,352
   
 
 
 
 
 
  Total liabilities and shareholders' equity   $ 2,218,630   $ 191,735   $ 151,333   $ 218,558   $ 2,398,784   $ 5,179,040
   
 
 
 
 
 
Period gap   $ (477,229 ) $ 143,483   $ 856,349   $ 845,881   $ (1,368,484 )    
Cumulative interest earning assets     1,741,401     2,076,619     3,084,301     4,148,740            
Cumulative interest bearing liabilities   $ 2,218,630   $ 2,410,365   $ 2,561,698   $ 2,780,256            
Cumulative Gap   $ (477,229 ) $ (333,746 ) $ 522,603   $ 1,368,484            
Cumulative interest earning assets to cumulative interest bearing liabilities     78.5 %   86.2 %   120.4 %   149.2 %          
Cumulative gap as a percent of:                                    
Total assets     (9.2 )%   (6.4 )%   10.1 %   26.4 %          
Interest earning assets     (11.5 )%   (8.0 )%   12.6 %   33.0 %          

Note: All amounts are reported at their contractual maturity or repricing periods. This analysis makes certain assumptions as to interest rate sensitivity of savings and NOW accounts which have no stated maturity and have had very little price fluctuation in the past three years. Money market accounts are repriced at management's discretion and generally are more rate sensitive.

        The preceding table indicates that we had a negative one year cumulative gap of $333.7 million at December 31, 2007. This gap position suggests that we are liability-sensitive and if rates were to increase, our net interest margin would most likely decrease. Conversely, if rates were to decrease, our net interest margin would most likely increase. The ratio of interest-earning assets to interest-bearing liabilities maturing or repricing within one year at December 31, 2007 is 86.2%. This one year gap position indicates that interest expense is likely to be affected to a greater extent than interest income for any changes in interest rates within one year from December 31, 2007.

        The Bank entered into two fixed rate term advances with FHLB during the fourth quarter of 2007. The $100 million advance has a two year stated maturity and an option to be called by the FHLB on its one year anniversary date. The $200 million advance has a ten year stated maturity and options to be called by the FHLB on its one year anniversary date and quarterly thereafter. While the FHLB may call the advances to be repaid for any reason, they are likely to be called if market interest rates are

61



higher than the advances' stated rates on the call dates. We may repay the advances with a prepayment penalty at any time.

        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, as does 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 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 may actually occur. For example, interest-bearing checking, 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 interest 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 cannot factor in the flexibility we believe we have in repricing 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.

62


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Contents

   
Management's Report on Internal Control Over Financial Reporting   64
Report of Independent Registered Public Accounting Firm   65
Consolidated Balance Sheets as of December 31, 2007 and 2006   67
Consolidated Statements of Earnings for the Years Ended December 31, 2007, 2006 and 2005   68
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 2007, 2006 and 2005   69
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005   70
Notes to Consolidated Financial Statements   71

63



MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

        The management of First Community Bancorp, including its consolidated subsidiaries, is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

        Management maintains a comprehensive system of controls intended to ensure that transactions are executed in accordance with management's authorization, assets are safeguarded, and financial records are reliable. Management also takes steps to see that information and communication flows are effective and to monitor performance, including performance of internal control procedures.

        As of December 31, 2007, First Community Bancorp management assessed the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2007, is effective.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the control procedures may deteriorate.

        KPMG LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. The report, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2007, is included in this Item under the heading "Report of Independent Registered Public Accounting Firm."

/s/  MATTHEW P. WAGNER      
Matthew P. Wagner
Chief Executive Officer
      /s/  VICTOR R. SANTORO      
Victor R. Santoro
Executive Vice President and
Chief Financial Officer

February 28, 2008

 

 

 

 

64



Report of Independent Registered Public Accounting Firm

The Board of Directors
First Community Bancorp:

        We have audited the accompanying consolidated balance sheets of First Community Bancorp and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of earnings, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. We also have audited First Community Bancorp's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First Community Bancorp's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's report on internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

65


        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Community Bancorp and subsidiaries as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, First Community Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Los Angeles, CA
February 28, 2008

66



FIRST COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Balance Sheets as of December 31, 2007 and 2006

 
  2007
  2006
 
 
  (Dollars in thousands)

 
Assets              
Cash and due from banks (note 17)   $ 99,363   $ 128,910  
Federal funds sold     2,000     22,000  
   
 
 
    Total cash and cash equivalents     101,363     150,910  
Interest-bearing deposits in financial institutions     420     501  
Investments (notes 4 and 8):              
  Federal Home Loan Bank stock, at cost     26,649     28,747  
  Securities available-for-sale, at fair value     106,888     91,381  
   
 
 
    Total investments     133,537     120,128  
Loans, held for sale (note 5)     63,565     173,319  
Loans, net of unearned income (notes 5 and 8)     3,949,218     4,189,543  
  Less allowance for loan losses (note 5)     (52,557 )   (52,908 )
   
 
 
    Net loans     3,896,661     4,136,635  
Premises and equipment, net (note 6)     26,327     37,102  
Other real estate owned, net (note 5)     2,736      
Accrued interest receivable     18,555     21,388  
Goodwill (notes 2 and 3)     761,990     738,083  
Core deposit and customer relationship intangibles (note 3)     43,785     50,427  
Cash surrender value of life insurance     67,846     67,512  
Other assets (note 13)     62,255     57,318  
   
 
 
    Total assets   $ 5,179,040   $ 5,553,323  
   
 
 
Liabilities and Shareholders' Equity              
Deposits (note 7):              
  Noninterest-bearing   $ 1,211,946   $ 1,571,361  
  Interest-bearing     2,033,200     2,114,372  
   
 
 
    Total deposits     3,245,146     3,685,733  
Interest payable and other liabilities (notes 5 and 9)     45,054     51,043  
Borrowings (note 8)     612,000     499,000  
Subordinated debentures (note 8)     138,488     149,219  
   
 
 
    Total liabilities     4,040,688     4,384,995  
   
 
 
Shareholders' equity (notes 16, 18, 19 and 20):              
  Preferred stock, no par value. Authorized 5,000,000 shares; none issued and outstanding          
  Common stock, no par value. Authorized 50,000,000 shares; issued and outstanding, 28,002,382 (includes 861,269 shares of unvested restricted stock) and 29,635,957 (includes 750,014 shares of unvested restricted stock) shares as of December 31, 2007 and 2006, respectively     936,608     1,020,132  
  Retained earnings     201,220     148,367  
  Accumulated other comprehensive income (loss)—net unrealized gain (loss) on securities available-for-sale, net (notes 4 and 15)     524     (171 )
   
 
 
    Total shareholders' equity     1,138,352     1,168,328  
   
 
 
Commitments and contingencies (notes 10 and 12)              
   
Total liabilities and shareholders' equity

 

$

5,179,040

 

$

5,553,323

 
   
 
 

See accompanying Notes to Consolidated Financial Statements.

67



FIRST COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Earnings for the Years Ended December 31, 2007, 2006 and 2005

 
  2007
  2006
  2005
 
 
  (Dollars in thousands, except per share amounts)

 
Interest income:                    
  Interest and fees on loans   $ 343,617   $ 292,069   $ 174,202  
  Interest on federal funds sold     1,979     297     1,245  
  Interest on time deposits in financial institutions     21     31     5  
  Interest on investment securities     5,364     9,200     7,900  
   
 
 
 
  Total interest income     350,981     301,597     183,352  
   
 
 
 
Interest expense:                    
  Deposits (note 7)     56,471     33,219     11,087  
  Borrowings     18,034     15,168     3,350  
  Subordinated debentures     11,361     11,253     8,480  
   
 
 
 
  Total interest expense     85,866     59,640     22,917  
   
 
 
 
  Net interest income before provision for credit losses     265,115     241,957     160,435  
Provision for credit losses (note 5)     3,000     9,600     1,420  
   
 
 
 
  Net interest income after provision for credit losses     262,115     232,357     159,015  
   
 
 
 
Noninterest income:                    
  Service charges on deposit accounts     11,573     8,835     6,367  
  Other commissions and fees     7,019     6,420     4,180  
  Gain on sale of loans, net     8,438         596  
  Loss on sale of securities, net (note 4)         (2,332 )   (45 )
  Increase in cash surrender value of life insurance     2,489     2,205     1,628  
  Other     3,395     1,338     1,052  
   
 
 
 
  Total noninterest income     32,914     16,466     13,778  
   
 
 
 
Noninterest expense:                    
  Compensation     71,440     65,505     48,623  
  Occupancy (note 12)     19,156     15,296     10,733  
  Furniture and equipment     4,929     4,034     2,730  
  Data processing     6,007     6,317     4,869  
  Other professional services     6,301     5,072     4,548  
  Business development     4,045     1,591     1,188  
  Communications     3,277     3,103     1,993  
  Insurance and assessments     1,723     2,121     1,715  
  Intangible asset amortization (note 3)     9,674     6,688     3,607  
  Reorganization charges (note 9)     1,731     1,822      
  Other (note 10)     13,976     9,906     7,296  
   
 
 
 
  Total noninterest expense     142,259     121,455     87,302  
   
 
 
 
  Earnings before income taxes and cumulative effect of accounting change     152,770     127,368     85,491  
Income taxes (note 13)     62,444     51,512     35,125  
   
 
 
 
  Net earnings before cumulative effect of accounting change     90,326     75,856     50,366  
Cumulative effect on prior years (to December 31, 2005) of changing the method of accounting for stock-based compensation forfeitures         142      
   
 
 
 
  Net earnings   $ 90,326   $ 75,998   $ 50,366  
   
 
 
 
Basic earnings per share:                    
Net earnings before accounting change   $ 3.16   $ 3.23   $ 3.05  
Accounting change(1)              
   
 
 
 
Basic earnings per share   $ 3.16   $ 3.23   $ 3.05  
   
 
 
 
Diluted earnings per share:                    
Net earnings before accounting change   $ 3.15   $ 3.21   $ 2.98  
Accounting change(1)              
   
 
 
 
Diluted earnings per share   $ 3.15   $ 3.21   $ 2.98  
   
 
 
 

(1)
Less than $0.01 per share for the year ended December 31, 2006

See accompanying Notes to Consolidated Financial Statements.

68



FIRST COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity and Comprehensive Income

for the Years Ended December 31, 2007, 2006 and 2005

 
  Common Stock
   
  Accumulated
Other
Comprehensive
Income (Loss)

   
   
 
 
  Retained
Earnings

   
  Comprehensive
Income
(note 15)

 
 
  Shares
  Amount
  Total
 
 
  (Dollars in thousands, except per share data)

 
Balance at January 1, 2005   16,267,862   $ 307,435   $ 67,911   $ (1,470 ) $ 373,876        

Net earnings

 


 

 


 

 

50,366

 

 


 

$

50,366

 

$

50,366

 
Exercise of stock options   256,045     3,748             3,748      
Tax benefits from exercise of options and vesting of restricted stock       1,710             1,710      
Sale of common stock (note 2)   1,044,680     49,022             49,022      
Issuance of common stock (note 2)   783,625     36,627             36,627      
Restricted stock awarded and earned stock compensation, net of shares forfeited   40,195     4,038             4,038      
Restricted stock surrendered   (45,841 )   (1,712 )           (1,712 )    
Cash dividends paid ($0.97 per share)           (15,952 )       (15,952 )    
Other comprehensive income-net unrealized loss on securities available-for-sale, net of tax effect of $684 thousand (note 15)               (945 )   (945 )   (945 )
   
 
 
 
 
 
 
Balance at December 31, 2005   18,346,566   $ 400,868   $ 102,325   $ (2,415 ) $ 500,778   $ 49,421  
                               
 
Net earnings           75,998         75,998   $ 75,998  
Exercise of stock options   408,420     8,634             8,634      
Tax benefits from exercise of options and vesting of restricted stock       6,585             6,585      
Sale of common stock (note 2)   1,891,086     109,456             109,456      
Issuance of common stock (note 2)   8,624,773     494,765             494,765      
Repurchased and retired shares   (100,000 )   (5,326 )           (5,326 )    
Restricted stock awarded and earned stock compensation, net of shares forfeited   503,713     7,369             7,369      
Restricted stock surrendered   (38,601 )   (2,219 )           (2,219 )    
Cash dividends paid ($1.21 per share)           (29,956 )       (29,956 )    
Other comprehensive income-decrease in net unrealized loss on securities available-for-sale, net of tax effect of $1.6 million (note 15)               2,244     2,244     2,244  
   
 
 
 
 
 
 
Balance at December 31, 2006   29,635,957   $ 1,020,132   $ 148,367   $ (171 ) $ 1,168,328   $ 78,242  
                               
 
Net earnings           90,326         90,326     90,326  
Exercise of stock options (note 16)   133,061     2,769             2,769      
Tax benefits from exercise of options and vesting of restricted stock       3,347             3,347      
Issuance of common stock (note 2)   494,606     27,688             27,688      
Repurchased and retired shares   (2,491,538 )   (123,274 )           (123,274 )    
Restricted stock awarded and earned stock compensation, net of shares forfeited   268,301     7,977             7,977      
Restricted stock surrendered   (38,005 )   (2,031 )           (2,031 )    
Cash dividends paid ($1.28 per share)           (37,473 )       (37,473 )    
Other comprehensive income-decrease in net unrealized loss on securities available-for-sale, net of tax effect of $503 thousand (note 15)               695     695     695  
   
 
 
 
 
 
 
Balance at December 31, 2007   28,002,382   $ 936,608   $ 201,220   $ 524   $ 1,138,352   $ 91,021  
   
 
 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements.

69



FIRST COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005

 
  2007
  2006
  2005
 
 
  (Dollars in thousands)

 
Cash flows from operating activities: