UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended September 30, 2006

OR

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

For the transition period from                     to                    

Commission File Number: 00-30747


FIRST COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

CALIFORNIA

 

33-0885320

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification Number)

401 West “A” Street

 

 

San Diego, California

 

92101-7917

(Address of principal executive offices)

 

(Zip Code)

(619) 233-5588

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 x  No 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 x Accelerated Filer o Non-accelerated Filer o

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

As of November 3, 2006 there were 28,978,229 shares of the registrant’s common stock outstanding, excluding 674,514 shares of unvested restricted stock.

 




TABLE OF CONTENTS

 

Page

 

PART I—FINANCIAL INFORMATION

 

 

3

 

 

ITEM 1.

Unaudited Condensed Consolidated Financial Statements

 

 

3

 

 

 

Unaudited Condensed Consolidated Balance Sheets

 

 

3

 

 

 

Unaudited Condensed Consolidated Statements of Earnings

 

 

4

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income

 

 

5

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

6

 

 

 

Unaudited Condensed Consolidated Statement of Shareholders’ Equity

 

 

7

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

8

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

24

 

 

ITEM 3.

Quantitative and Qualitative Disclosure About Market Risk

 

 

45

 

 

ITEM 4.

Controls and Procedures

 

 

46

 

 

PART II—OTHER INFORMATION

 

 

47

 

 

ITEM 1.

Legal Proceedings

 

 

47

 

 

ITEM 1A.

Risk Factors

 

 

47

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

51

 

 

ITEM 4.

Submission of Matters to a Vote of Security Holders

 

 

52

 

 

ITEM 6.

Exhibits

 

 

52

 

 

SIGNATURES

 

 

53

 

 

 

2




PART I—FINANCIAL INFORMATION

ITEM 1.                Unaudited Condensed Consolidated Financial Statements

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

September 30,
2006

 

December 31,
2005

 

 

 

(Dollars in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

$

116,057

 

 

 

$

100,662

 

 

Federal funds sold

 

 

10,500

 

 

 

4,600

 

 

Total cash and cash equivalents

 

 

126,557

 

 

 

105,262

 

 

Interest-bearing deposits in financial institutions

 

 

287

 

 

 

90

 

 

Investments:

 

 

 

 

 

 

 

 

 

Federal Reserve Bank and Federal Home Loan Bank stock, at cost

 

 

31,646

 

 

 

26,753

 

 

Securities available-for-sale (amortized cost of $205,852 at September 30, 2006 and $216,765 at December 31, 2005)

 

 

203,306

 

 

 

212,601

 

 

Total investments

 

 

234,952

 

 

 

239,354

 

 

Loans, net of unearned income

 

 

3,542,595

 

 

 

2,467,828

 

 

Less: allowance for loan losses

 

 

(43,943

)

 

 

(27,303

)

 

Net loans

 

 

3,498,652

 

 

 

2,440,525

 

 

Premises and equipment, net

 

 

29,334

 

 

 

19,063

 

 

Accrued interest receivable

 

 

17,153

 

 

 

12,006

 

 

Goodwill

 

 

543,892

 

 

 

295,890

 

 

Core deposit and customer relationship intangibles

 

 

43,083

 

 

 

27,298

 

 

Cash surrender value of life insurance

 

 

68,083

 

 

 

56,207

 

 

Other assets

 

 

39,481

 

 

 

30,716

 

 

Total assets

 

 

$

4,601,474

 

 

 

$

3,226,411

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

 

$

1,354,726

 

 

 

$

1,179,808

 

 

Interest-bearing

 

 

1,667,128

 

 

 

1,225,553

 

 

Total deposits

 

 

3,021,854

 

 

 

2,405,361

 

 

Accrued interest payable and other liabilities

 

 

41,841

 

 

 

38,318

 

 

Borrowings

 

 

513,400

 

 

 

160,300

 

 

Subordinated debentures

 

 

129,902

 

 

 

121,654

 

 

Total liabilities

 

 

3,706,997

 

 

 

2,725,633

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

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 24,985,788 and 18,346,566 at September 30, 2006 and December 31, 2005 (includes 685,681 and 405,831 shares of unvested restricted stock, respectively)

 

 

760,870

 

 

 

400,868

 

 

Retained earnings

 

 

135,084

 

 

 

102,325

 

 

Accumulated other comprehensive loss—unrealized losses on securities available-for-sale, net

 

 

(1,477

)

 

 

(2,415

)

 

Total shareholders’ equity

 

 

894,477

 

 

 

500,778

 

 

Total liabilities and shareholders’ equity

 

 

$

4,601,474

 

 

 

$

3,226,411

 

 

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

3




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(Dollars in thousands, except per share data)

 

Interest income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

74,726

 

$

44,533

 

$

203,005

 

$

123,082

 

Interest on federal funds sold

 

62

 

564

 

192

 

866

 

Interest on deposits in financial institutions

 

4

 

2

 

24

 

5

 

Interest on investment securities

 

2,730

 

1,635

 

7,484

 

5,680

 

Total interest income

 

77,522

 

46,734

 

210,705

 

129,633

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

8,617

 

3,014

 

21,382

 

7,420

 

Borrowings

 

4,238

 

740

 

9,519

 

2,501

 

Subordinated debentures

 

2,922

 

2,200

 

8,069

 

6,135

 

Total interest expense

 

15,777

 

5,954

 

38,970

 

16,056

 

Net interest income

 

61,745

 

40,780

 

171,735

 

113,577

 

Provision for credit losses

 

 

 

9,600

 

1,420

 

Net interest income after provision for credit losses

 

61,745

 

40,780

 

162,135

 

112,157

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Service charges and fees on deposit accounts

 

2,412

 

1,594

 

5,957

 

4,856

 

Other commissions and fees

 

1,624

 

1,055

 

4,819

 

3,128

 

Gain on sale of loans, net

 

 

208

 

 

467

 

Increase in cash surrender value of life insurance

 

616

 

392

 

1,568

 

1,221

 

Other income

 

124

 

265

 

473

 

675

 

Total noninterest income

 

4,776

 

3,514

 

12,817

 

10,347

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Compensation

 

15,708

 

12,107

 

45,803

 

35,396

 

Occupancy

 

3,809

 

2,819

 

10,859

 

7,867

 

Furniture and equipment

 

1,073

 

679

 

2,815

 

1,990

 

Data processing

 

1,773

 

1,223

 

4,827

 

3,564

 

Other professional services

 

1,529

 

1,741

 

3,665

 

3,563

 

Business development

 

327

 

334

 

1,027

 

853

 

Communications

 

839

 

516

 

2,214

 

1,445

 

Insurance and assessments

 

716

 

411

 

1,680

 

1,289

 

Intangible asset amortization

 

1,791

 

915

 

4,517

 

2,541

 

Other

 

2,691

 

1,468

 

7,581

 

4,548

 

Total noninterest expense

 

30,256

 

22,213

 

84,988

 

63,056

 

Earnings before income taxes and cumulative effect of accounting change

 

36,265

 

22,081

 

89,964

 

59,448

 

Income taxes

 

14,890

 

9,087

 

36,877

 

24,374

 

Net earnings before cumulative effect of accounting change

 

$

21,375

 

$

12,994

 

$

53,087

 

$

35,074

 

Cumulative effect on prior years (to December 31, 2005) of changing the method of accounting for stock-based compensation forfeitures

 

 

 

142

 

 

Net earnings

 

$

21,375

 

$

12,994

 

$

53,229

 

$

35,074

 

Per share information

 

 

 

 

 

 

 

 

 

Number of shares (weighted average):

 

 

 

 

 

 

 

 

 

Basic

 

24,252.3

 

16,425.3

 

22,064.3

 

16,087.3

 

Diluted

 

24,407.6

 

16,747.6

 

22,289.4

 

16,449.9

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net earnings before accounting change

 

$

0.88

 

$

0.79

 

$

2.41

 

$

2.18

 

Accounting change(1)

 

 

 

 

 

Basic earnings per share

 

$

0.88

 

$

0.79

 

$

2.41

 

$

2.18

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net earnings before accounting change

 

$

0.88

 

$

0.78

 

$

2.39

 

$

2.13

 

Accounting change(1)

 

 

 

 

 

Diluted earnings per share

 

$

0.88

 

$

0.78

 

$

2.39

 

$

2.13

 

Dividends declared per share

 

$

0.32

 

$

0.25

 

$

0.89

 

$

0.72

 


(1)                Less than $0.01 per share for the nine months ended September 30, 2006.

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

4




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(Dollars in thousands)

 

Net earnings

 

$

21,375

 

$

12,994

 

$

53,229

 

$

35,074

 

Other comprehensive income, net of related income taxes:

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities arising during the period

 

1,309

 

(713

)

938

 

(572

)

Comprehensive income

 

$

22,684

 

$

12,281

 

$

54,167

 

$

34,502

 

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

5




UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

 

 

(Dollars in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

53,229

 

$

35,074

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

8,106

 

6,477

 

Provision for credit losses

 

9,600

 

1,420

 

Gain on sale of loans

 

 

(467

)

Gain on sale of premises and equipment

 

(6

)

(2

)

Restricted stock amortization

 

5,322

 

2,793

 

Excess tax benefits from stock option exercises and restricted and performance stock vesting

 

(6,593

)

(1,699

)

Increase (decrease) in accrued and deferred income taxes, net

 

4,529

 

823

 

Decrease (increase) in other assets

 

3,738

 

2,507

 

(Decrease) increase in accrued interest payable and other liabilities

 

(20,473

)

(1,365

)

Dividends on FHLB stock

 

(583

)

(362

)

Net cash provided by operating activities

 

56,869

 

45,199

 

Cash flows from investing activities:

 

 

 

 

 

Net cash and cash equivalents paid in acquisitions

 

(24,712

)

61,492

 

Net increase in net loans

 

(179,821

)

(84,932

)

Proceeds from sale of loans

 

4,859

 

7,520

 

Net decrease in deposits in financial institutions

 

1,698

 

650

 

Proceeds from sales of acquired securities

 

32,050

 

 

Maturities and repayments of investment securities

 

59,225

 

53,907

 

Purchases of investment securities

 

(2,039

)

 

Net redemption (purchases) of FRB and FHLB stock

 

2,773

 

(37,379

)

Purchases of premises and equipment, net

 

(5,268

)

(221

)

Proceeds from sale of other real estate owned

 

37

 

(2,103

)

Proceeds from sale of premises and equipment

 

8

 

64

 

Net cash used in investing activities

 

(111,190

)

(1,002

)

Cash flows from financing activities:

 

 

 

 

 

Net (decrease) increase in noninterest-bearing deposits

 

(182,667

)

86,428

 

Net decrease in interest-bearing deposits

 

(196,830

)

(325,956

)

Proceeds from issuance of common stock

 

109,456

 

49,046

 

Net proceeds from exercise of stock options and vesting of restricted stock

 

6,434

 

1,653

 

Excess tax benefits from stock option exercises and restricted and performance stock vesting

 

6,593

 

1,699

 

Net increase in borrowings

 

353,100

 

21,000

 

Cash dividends paid

 

(20,470

)

(11,474

)

Net cash provided by (used in) financing activities

 

75,616

 

(177,604

)

Net increase (decrease) in cash and cash equivalents

 

21,295

 

(133,407

)

Cash and cash equivalents at beginning of period

 

105,262

 

319,281

 

Cash and cash equivalents at end of period

 

$

126,557

 

$

185,874

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during period for interest

 

$

36,510

 

$

15,384

 

Cash paid during period for income taxes

 

32,431

 

24,077

 

Transfer from loans to loans held-for-sale

 

4,888

 

7,087

 

Transfer of loans to other real estate owned

 

 

43

 

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

6




UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

 

Common Stock

 

Retained

 

Accumulated
Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Earnings

 

Income (Loss)

 

Total

 

 

 

(Dollars in thousands, except  share data)

 

Balance at December 31, 2005

 

18,346,566

 

$

400,868

 

$

102,325

 

 

$

(2,415

)

 

$

500,778

 

Net earnings

 

 

 

53,229

 

 

 

 

53,229

 

Exercise of stock options

 

408,420

 

8,634

 

 

 

 

 

8,634

 

Tax benefits from exercise of options and vesting of restricted stock

 

 

6,593

 

 

 

 

 

6,593

 

Issuance of common stock

 

1,891,086

 

109,456

 

 

 

 

 

109,456

 

Issuance of common stock

 

3,946,912

 

232,197

 

 

 

 

 

232,197

 

Restricted stock awarded, net of shares surrendered and forfeited

 

392,804

 

(2,200

)

 

 

 

 

(2,200

)

Earned stock award compensation,
net

 

 

5,322

 

 

 

 

 

5,322

 

Cash dividends paid ($0.89 per share)

 

 

 

(20,470

)

 

 

 

(20,470

)

Other comprehensive income—net unrealized loss on securities available-for-sale, net of tax effect of $679 thousand

 

 

 

 

 

938

 

 

938

 

Balance at September 30, 2006

 

24,985,788

 

$

760,870

 

$

135,084

 

 

$

(1,477

)

 

$

894,477

 

 

See “Notes to Unaudited Condensed Consolidated Financial Statements.”

7

 




NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006

NOTE 1—BASIS OF PRESENTATION

We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Our principal business is to serve as a holding company for our banking subsidiaries. As of September 30, 2006, those subsidiaries were First National Bank, which we refer to as First National, and Pacific Western Bank, or Pacific Western. We refer to Pacific Western and First National herein as the “Banks” and when we say “we”, “our” or the “Company”, we mean the Company on a consolidated basis with the Banks. When we refer to “First Community” or to the holding company, we are referring to the parent company on a stand-alone basis.

As part of the previously announced plan of consolidation and conversion, Pacific Western National Bank, a former wholly-owned subsidiary of First Community, filed an application with the California Department of Financial Institutions, or DFI, to convert from a national banking charter to a state-chartered bank under the name of Pacific Western Bank. This application was approved and the conversion of Pacific Western to a state chartered bank occurred on September 13, 2006. Pacific Western also filed a notice with the Federal Reserve Bank of San Francisco to withdraw from membership in the Federal Reserve System and become a “nonmember” bank at the time of its conversion. Additionally, on October 26, 2006, following the completion of the acquisition of Community Bancorp Inc. and the subsequent merger of Community National Bank, a wholly-owned subsidiary of Community Bancorp Inc., with and into First National, the Company completed its 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.

We have completed 18 acquisitions since May 2000 including the Community Bancorp acquisition in October 2006. These include the merger whereby the former Rancho Santa Fe National Bank and First Community Bank of the Desert became wholly-owned subsidiaries of the Company in a pooling-of-interests transaction. The other acquisitions have been accounted for using the purchase method of accounting and, accordingly, their operating results have been included in the consolidated financial statements from their respective dates of acquisition.

(a)   Basis of Presentation

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

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

(b)   Use of Estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates. Material estimates subject to

8




NOTE 1—BASIS OF PRESENTATION (Continued)

change in the near term include, among other items, the allowance for credit losses, the carrying values of intangible assets and the realization of deferred tax assets.

(c)   Reclassifications

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

NOTE 2—ACQUISITIONS

From January 1, 2005, through September 30, 2006, we completed the following four acquisitions using the purchase method of accounting, and accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective dates of acquisition:

 

 

First
American
Bank

 

Pacific
Liberty
Bank

 

Cedars
Bank

 

Foothill
Independent
Bank

 

 

 

August
2005

 

October
2005

 

January
2006

 

May
2006

 

 

 

(Dollars in thousands)

 

Assets Acquired:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

121,229

 

$

30,765

 

$

34,474

 

 

$

60,844

 

 

Interest-bearing deposits in other banks

 

 

 

1,796

 

 

99

 

 

Investment securities

 

1,607

 

990

 

3,355

 

 

50,406

 

 

Loans

 

106,244

 

119,245

 

355,167

 

 

535,975

 

 

Premises and equipment

 

4,458

 

32

 

1,234

 

 

6,964

 

 

Goodwill

 

37,715

 

24,335

 

75,521

 

 

172,555

 

 

Core deposit intangible assets

 

6,529

 

1,781

 

2,992

 

 

17,311

 

 

Other assets

 

8,111

 

6,137

 

14,318

 

 

50,919

 

 

 

 

285,893

 

183,285

 

488,857

 

 

895,073

 

 

Liabilities Assumed:

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

(89,664

)

(45,894

)

(92,216

)

 

(265,369

)

 

Interest bearing deposits

 

(127,772

)

(96,285

)

(269,189

)

 

(369,216

)

 

Accrued interest payable and other liabilities

 

(8,771

)

(4,479

)

(7,452

)

 

(28,261

)

 

Total liabilities assumed

 

(226,207

)

(146,658

)

(368,857

)

 

(662,846

)

 

Total consideration paid by First Community

 

$

59,686

 

$

36,627

 

$

120,000

 

 

$

232,227

 

 

Deal value:

 

 

 

 

 

 

 

 

 

 

 

Cash paid for common stock and stock options by First Community

 

$

59,686

 

$

 

$

120,000

 

 

$

30

 

 

Fair value of common stock issued

 

 

36,627

 

 

 

232,197

 

 

Total consideration paid by First Community

 

$

59,686

 

$

36,627

 

$

120,000

 

 

$

232,227

 

 

Cash paid for stock options by acquiree

 

2,623

 

4,999

 

 

 

10,232

 

 

Total deal value

 

$

62,309

 

$

41,626

 

$

120,000

 

 

$

242,459

 

 

 

First American Bank

On August 12, 2005, we acquired First American Bank, or First American, based in Rosemead, California. We paid $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. In August and September 2005, we issued 1,044,680 shares of common stock for net proceeds of

9




NOTE 2—ACQUISITIONS (Continued)

$49.0 million. We used these proceeds to augment our regulatory capital in support of the First American acquisition.

Pacific Liberty

On October 7, 2005, we acquired Pacific Liberty Bank, or Pacific Liberty, based in Huntington Beach, California. We issued approximately 784,000 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. At the time of the acquisition, Pacific Liberty was merged into Pacific Western. We made this acquisition to expand our presence in Orange County, California.

Cedars Bank

On January 4, 2006, we acquired Cedars Bank, or Cedars, based in Los Angeles, California. We paid $120.0 million in cash for all of the outstanding shares of common stock and options of Cedars. At the time of the acquisition, Cedars was merged into Pacific Western. We made this acquisition to expand our presence in Los Angeles, California. On January 31, 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.

Foothill Independent Bancorp

On May 9, 2006, we acquired Foothill Independent Bancorp, or Foothill, based in Glendora, California. We issued approximately 3,947,000 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 into Pacific Western. We made this acquisition to expand our presence in Los Angeles, Riverside and San Bernardino Counties of California.

Community Bancorp Inc.

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 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.

Preliminary purchase price allocations for the Community Bancorp acquisition

An unaudited summary of First Community’s preliminary purchase price allocations for the Community Bancorp acquisition follows. These purchase price allocations are based on estimates and are subject to change as more information becomes available and after final analysis of the fair values of both tangible and intangible assets acquired and liabilities assumed are completed. Accordingly, the final fair value adjustments may be materially different from those presented in this report.

10




NOTE 2—ACQUISITIONS (Continued)

 

 

Community
Bancorp

 

 

 

(Unaudited)

 

 

 

(Dollars in
thousands)

 

Assets acquired or to be acquired:

 

 

 

 

 

Cash and investments

 

 

$

38,983

 

 

Loans, net

 

 

717,852

 

 

Intangible assets

 

 

204,216

 

 

Other assets

 

 

34,446

 

 

Total assets acquired

 

 

995,497

 

 

Liabilities assumed or to be assumed:

 

 

 

 

 

Deposits

 

 

656,773

 

 

Other liabilities

 

 

76,125

 

 

Total liabilities assumed

 

 

732,898

 

 

Total consideration excluding cash paid for options

 

 

$

262,599

 

 

 

Merger Related Liabilities

All of the acquisitions consummated after December 31, 2000 were completed using the purchase method of accounting. Accordingly, we recorded the estimated merger-related charges associated with each acquisition as a liability at closing when allocating the related purchase price.

For each acquisition, we developed an integration plan for the consolidated Company that addressed, among other things, requirements for staffing, systems platforms, branch locations and other facilities. The established plans are evaluated regularly during the integration process and modified as required. Merger and integration expenses are summarized in the following primary categories: (i) severance and employee-related charges; (ii) system conversion and integration costs, including contract termination charges; (iii) asset write-downs, lease termination costs for abandoned space and other facilities-related costs; and (iv) other charges. Other charges include, but are not limited to, investment banking fees, legal fees, other professional fees relating to due diligence activities and shareholder expenses associated with preparation of securities filings, as appropriate, and tax consequences for surrendering certain acquired bank owned life insurance policies. These costs were included in the allocation of the purchase price at the acquisition date based on our formal integration plans.

The following table presents the activity in the merger-related liability account for the nine months ended September 30, 2006. The reversals, which have reduced goodwill, relate mostly to the estimated tax consequences for the surrender of certain life insurance policies acquired with Foothill that we have subsequently determined to retain. The liability does not include any amounts related to the Community Bancorp acquisition.

 

 

Severance
and
Employee-
related

 

System
Conversion
and
Integration

 

Facilities-
related

 

Other

 

Total

 

 

 

(Dollars in thousands)

 

Balance at December 31, 2005

 

 

$

 

 

 

$

80

 

 

 

$

1,732

 

 

$

690

 

$

2,502

 

Additions

 

 

5,438

 

 

 

2,159

 

 

 

940

 

 

5,642

 

14,179

 

Non-cash write-downs and other

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Reversals

 

 

 

 

 

 

 

 

 

 

(1,237

)

(1,237

)

Cash outlays

 

 

(5,301

)

 

 

(2,158

)

 

 

(1,035

)

 

(4,197

)

(12,691

)

Balance at September 30, 2006

 

 

$

137

 

 

 

$

79

 

 

 

$

1,637

 

 

$

898

 

$

2,751

 

 

11




NOTE 2—ACQUISITIONS (Continued)

Unaudited Pro Forma Information for Purchase Acquisitions

The following table presents our unaudited pro forma results of operations for the quarters and nine months ended September 30, 2006 and 2005 as if the First American, Pacific Liberty, Cedars, Foothill and Community Bancorp acquisitions described above had been completed at the beginning of 2005. The unaudited pro forma results of operations include: (1) the historical accounts of the Company, First American, Pacific Liberty, Cedars, Foothill and Community Bancorp, and (2) pro forma adjustments, as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had these acquisitions been completed at the beginning of 2005. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions other than sales of investment securities.

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(Dollar in thousands, except per share data)

 

Revenues (net interest income plus noninterest income)

 

$

81,171

 

$

75,479

 

$242,208

 

$210,141

 

Net earnings

 

$

25,285

 

$

20,133

 

$

65,785

 

$

55,354

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.88

 

$

0.70

 

$

2.30

 

$

1.93

 

Diluted

 

$

0.87

 

$

0.69

 

$

2.27

 

$

1.90

 

 

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and intangible assets arise from purchase business combinations. Goodwill and other intangible assets deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually. Our annual impairment tests of goodwill have resulted in no impact on our results of operations and financial condition.

Intangible assets with definite lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment annually. The amortization expense represents the estimated decline in the value of the underlying deposits or loan customers acquired. The estimated aggregate amortization expense related to the intangible assets is expected to range from $5.2 million to $6.8 million for each of the next five years and is expected to total $29.9 million over this time horizon; these amounts exclude any amortization related to the recently completed Community Bancorp acquisition. We recorded $20.3 million of core deposit intangible assets related to the Cedars and Foothill acquisitions during 2006.

The goodwill recorded has been assigned to our one reporting unit, banking, and none of the goodwill is deductible for income tax purposes. The carrying amount of goodwill was $543.9 million at September 30, 2006 and $295.9 million at December 31, 2005. The increase relates to the Cedars and Foothill acquisitions.

12




NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

The following table presents the changes in goodwill for the nine months ended September 30, 2006:

 

 

Nine Months Ended

 

 

 

September 30, 2006

 

 

 

(Dollars in thousands)

 

Balance as of January 1, 2006

 

 

$

295,890

 

 

Acquisitions

 

 

248,076

 

 

Miscellaneous reductions

 

 

(74

)

 

Balance as of September 30, 2006

 

 

$

543,892

 

 

 

The following table presents the changes in the gross amounts of core deposit and customer relationship intangibles and the related accumulated amortization for the nine months ended September 30, 2006 and 2005:

 

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

 

 

(Dollars in thousands)

 

Gross amount:

 

 

 

 

 

Balance as of January 1,

 

$

37,956

 

$

29,646

 

Additions

 

20,302

 

6,528

 

Balance as of September 30,

 

58,258

 

36,174

 

Accumulated amortization:

 

 

 

 

 

Balance as of January 1,

 

(10,658

)

(7,051

)

Amortization

 

(4,517

)

(2,541

)

Balance as of September 30,

 

(15,175

)

(9,592

)

Net balance as of September 30,

 

$

43,083

 

$

26,582

 

 

NOTE 4—INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and fair value of securities available-for-sale as of September 30, 2006 are as follows:

 

 

September 30, 2006

 

 

 

Amortized
cost

 

Gross
unrealized
gains

 

Gross
unrealized
losses

 

Fair value

 

 

 

(Dollars in thousands)

 

U.S. Treasury securities

 

$

1,684

 

 

$

 

 

 

$

5

 

 

$

1,679

 

U.S. government agency securities

 

64,314

 

 

112

 

 

 

277

 

 

64,149

 

Municipal securities

 

9,924

 

 

92

 

 

 

38

 

 

9,978

 

Mortgage-backed and other securities

 

129,930

 

 

191

 

 

 

2,621

 

 

127,500

 

Total

 

$

205,852

 

 

$

395

 

 

 

$

2,941

 

 

$

203,306

 

 

13




NOTE 4—INVESTMENT SECURITIES (Continued)

The contractual maturity distribution based on amortized cost and fair value as of September 30, 2006, is shown below. Mortgage-backed securities have contractual terms to maturity, but require periodic payments to reduce principal. In addition, expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

Maturity distribution as of
September 30, 2006

 

 

 

Amortized cost

 

Fair value

 

 

 

(Dollars in thousands)

 

Due in one year or less

 

 

$

51,502

 

 

$

51,257

 

Due after one year through five years

 

 

36,399

 

 

36,185

 

Due after five years through ten years

 

 

13,884

 

 

13,639

 

Due after ten years

 

 

104,067

 

 

102,225

 

Total

 

 

$

205,852

 

 

$

203,306

 

 

The following table presents the fair value and unrealized losses on securities that were temporarily impaired as of September 30, 2006:

 

 

Impairment Period

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

Descriptions of securities

 

 

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

 

 

(Dollars in thousands)

 

U.S. Treasury securities

 

 

$

981

 

 

 

$

5

 

 

$

 

 

$

 

 

$

981

 

 

$

5

 

 

U.S. government agency securities

 

 

 

 

 

 

 

37,035

 

 

277

 

 

37,035

 

 

277

 

 

Municipal securities

 

 

1,006

 

 

 

1

 

 

1,942

 

 

37

 

 

2,948

 

 

38

 

 

Mortgage-backed and other securities

 

 

65

 

 

 

 

 

99,668

 

 

2,621

 

 

99,733

 

 

2,621

 

 

Total temporarily impaired securities

 

 

$

2,052

 

 

 

$

6

 

 

$

138,645

 

 

$

2,935

 

 

$

140,697

 

 

$

2,941

 

 

 

All individual securities that have been in a continuous unrealized loss position for 12 months or longer at September 30, 2006 were securities that have been issued by the U.S. government or U.S. agencies and have a AAA credit rating as determined by various rating agencies. These securities have fluctuated in value since their purchase dates because of changes in market interest rates. We concluded that the continuous unrealized loss position for the past 12 months on our 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. At September 30, 2006, we had the ability and intent to hold these securities until their fair value recovers to their cost. After reviewing the build-up in our outstanding borrowings and the effect such build-up has had on our net interest margin, we decided on October 19, 2006, to reduce our borrowings by selling a portion of our investment securities. As a result, on October 23, 2006, we sold $101.8 million of our mortgage-backed securities at an after tax loss of $1.3 million. We believe this sale of securities does not conflict with our assertion that we had the intent and ability to hold our securities at September 30, 2006, because the decision to sell such securities was made during the fourth quarter.

14




NOTE 5—NET EARNINGS PER SHARE

The following is a summary of the calculation of basic and diluted net earnings per share for the quarters ended September 30, 2006 and 2005:

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(Dollars in thousands, except per share data)

 

Net earnings before cumulative effect of accounting change

 

$

21,375

 

$

12,994

 

$

53,087

 

$

35,074

 

Accounting change

 

 

 

142

 

 

Net earnings

 

$

21,375

 

$

12,994

 

$

53,229

 

$

35,074

 

Weighted average shares outstanding used for basic net earnings per share

 

24,252.3

 

16,425.3

 

22,064.3

 

16,087.3

 

Effect of restricted stock and dilutive stock options

 

155.3

 

322.3

 

225.1

 

362.6

 

Diluted weighted average shares outstanding

 

24,407.6

 

16,747.6

 

22,289.4

 

16,449.9

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Net earnings before accounting change

 

$

0.88

 

$

0.79

 

$

2.41

 

$

2.18

 

Accounting change(1)

 

 

 

 

 

Basic earnings per share

 

$

0.88

 

$

0.79

 

$

2.41

 

$

2.18

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net earnings before accounting change

 

$

0.88

 

$

0.78

 

$

2.39

 

$

2.13

 

Accounting change(1)

 

 

 

 

 

Diluted earnings per share

 

$

0.88

 

$

0.78

 

$

2.39

 

$

2.13

 


(1)          Less than $0.01 per share for the nine months ended September 30, 2006.

In calculating the common stock equivalents for purposes of diluted earnings per share, we selected the alternative transition method provided by FASB Staff Position FAS123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. Diluted earnings per share does not include all potentially dilutive shares that may result from outstanding stock options and restricted and performance stock awards that may eventually vest. The number of common shares underlying stock options and shares of restricted and performance stock which were outstanding but not included in the calculation of diluted net earnings per share were 665,767 and 639,980 for the quarters ended September 30, 2006 and 2005 and 595,394 and 599,647 for the nine months ended September 30, 2006 and 2005.

NOTE 6—STOCK COMPENSATION

Accounting Change

We adopted SFAS No. 123 (revised 2004), Share Based Payment (“SFAS 123R”) on January 1, 2006. SFAS 123R applies to all stock-based compensation transactions in which an entity acquires employee or director services by either issuing stock or other equity instruments, such as stock options, restricted and performance stock, and/or stock appreciation rights, or incurring liabilities that are based on an entity’s stock price, and requires entities that engage in these transactions to recognize compensation expense based on the fair value of the stock or other equity instrument either issued, modified, or settled. We adopted SFAS 123R using the modified prospective approach. Under this approach, compensation expense is recognized for (1) new share-based payment awards (e.g., stock options, restricted stock, and performance stock), (2) awards that are modified, repurchased, or cancelled after December 31, 2005, and (3) the remaining portion of the requisite service under previously granted unvested stock awards as of

15




NOTE 6—STOCK COMPENSATION (Continued)

December 31, 2005. The Company has been recognizing compensation expense related to stock options awarded after January 1, 2003. All stock options had vested as of March 31, 2006; accordingly, there is no further effect on our financial statements for our outstanding stock options. We have recognized compensation expense for all restricted and performance stock awards since the dates on which they were awarded.

As permitted under formerly effective accounting rules, we did not consider estimated forfeitures of stock awards during the amortization period and recognized the effect of forfeitures as they occurred. As required by SFAS 123R we recognized the cumulative effect of estimated forfeitures for unvested restricted stock awards as of December 31, 2005, by increasing our first quarter 2006 earnings by $242,000. The after tax effect of this adjustment was to increase net earnings by $142,000, or less than $0.01 per share on a year-to-date basis. SFAS 123R also requires us to use estimated forfeitures in recognizing stock compensation expense beginning January 1, 2006, and to true-up such expense when forfeitures occur. Amortization expense for all restricted and performance stock awards is estimated to be $7.5 million for 2006 and includes an estimate for forfeitures. As of September 30, 2006, unrecognized stock-based compensation expense was $27.9 million. When we made restricted and performance stock awards prior to January 1, 2006, we established an unearned equity compensation contra account within our shareholders’ equity equal to the market value of our common stock underlying the award on the award date. SFAS 123R required us to eliminate the unearned equity compensation account on January 1, 2006, by reclassifying it to common stock. Such reclassification had no effect on the amount of the Company’s shareholders’ equity.

Restricted and Performance Stock.

At September 30, 2006, there were outstanding 343,181 shares of unvested restricted common stock, 57,500 shares of unvested performance common stock awarded in 2003, and 285,000 shares of unvested performance common stock awarded in 2006. The awarded shares of restricted common stock vest over a service period of three to four years from date of the grant. The awarded shares of performance common stock vest in full or in part on the date the Compensation, Nominating and Governance (“CNG”) Committee of the Board of Directors, as Administrator of the Company’s 2003 Stock Incentive Plan, as amended and restated (the 2003 “Plan”), determines that the Company achieved certain financial goals established by the CNG Committee as set forth in the grant documents. During the first quarter of 2006, the CNG Committee determined that certain financial goals were met and vested 57,500 shares of the performance common stock awarded in 2003. We expect the remaining shares of unvested performance stock awarded in 2003 to vest during the first quarter of 2007. The unvested performance stock awarded in 2006 expires in 7 years and is currently expected to vest during the first quarter of 2013. Both restricted common stock and performance common stock vest immediately upon a change in control of the Company as defined in the 2003 Plan.

A summary of the status of our restricted and performance stock outstanding and the change during the year is presented in the table below:

 

 

Shares

 

Weighted
average fair value
on award date

 

Outstanding at December 31, 2005

 

405,831

 

 

$

36.27

 

 

Awarded

 

447,250

 

 

55.24

 

 

Vested

 

(151,196

)

 

33.24

 

 

Forfeited

 

(16,204

)

 

43.87

 

 

Outstanding at September 30, 2006

 

685,681

 

 

$

49.13

 

 

 

16




NOTE 6—STOCK COMPENSATION (Continued)

The following table summarizes information about outstanding restricted and performance stock awards at September 30, 2006:

 

At award date

 

Vesting

 

Forfeited

 

Outstanding at September 30, 2006

 

 

 

Number
of shares
awarded

 

Weighted
average
fair value

 

Number
of shares
vested

 

Weighted
average
fair value
on award
date

 

Number
of shares

 

Weighted
average
fair value
on award
date

 

Number
of
shares

 

Weighted
average
fair value
on award
date

 

Weighted
average fair
value at
9/30/06(1)

 

Weighted
average
remaining
contractual
life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in
thousands)

 

 

 

2003

 

205,000

 

 

$

32.41

 

 

 

125,017

 

 

 

$

32.62

 

 

 

41,665

 

 

 

$

32.27

 

 

 

38,318

 

 

 

$

31.90

 

 

 

$

2,144

 

 

 

0.8

 

 

Restricted stock awarded in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

205,000

 

 

$

32.41

 

 

 

125,017

 

 

 

$

32.62

 

 

 

41,665

 

 

 

$

32.27

 

 

 

38,318

 

 

 

$

31.90

 

 

 

$

2,144

 

 

 

0.8

 

 

2004

 

155,980

 

 

$

36.82

 

 

 

64,757

 

 

 

$

36.60

 

 

 

11,210

 

 

 

$

36.28

 

 

 

80,013

 

 

 

$

37.07

 

 

 

4,477

 

 

 

0.9

 

 

2005

 

77,500

 

 

$

47.48

 

 

 

1,000

 

 

 

$

42.95

 

 

 

9,900

 

 

 

$

45.49

 

 

 

66,600

 

 

 

$

47.84

 

 

 

3,726

 

 

 

1.8

 

 

2006

 

162,250

 

 

$

57.07

 

 

 

 

 

 

$

 

 

 

4,000

 

 

 

$

59.40

 

 

 

158,250

 

 

 

$

57.01

 

 

 

8,854

 

 

 

2.8

 

 

Total restricted stock awards

 

600,730

 

 

 

 

 

 

190,774

 

 

 

 

 

 

 

66,775

 

 

 

 

 

 

 

343,181

 

 

 

 

 

 

 

19,201

 

 

 

2.0

 

 

Performance stock awarded
in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

255,000

 

 

$

32.05

 

 

 

185,000

 

 

 

$

32.05

 

 

 

12,500

 

 

 

$

31.90

 

 

 

57,500

 

 

 

$

32.06

 

 

 

3,217

 

 

 

0.4

 

 

2006

 

285,000

 

 

$

54.21

 

 

 

 

 

 

$

 

 

 

 

 

 

$

 

 

 

285,000

 

 

 

$

54.21

 

 

 

15,946

 

 

 

6.4

 

 

Total performance stock awards

 

540,000

 

 

 

 

 

 

185,000

 

 

 

 

 

 

 

12,500

 

 

 

 

 

 

 

342,500

 

 

 

 

 

 

 

19,163

 

 

 

5.4

 

 

Total awards

 

1,140,730

 

 

 

 

 

 

375,774

 

 

 

 

 

 

 

79,275

 

 

 

 

 

 

 

685,681

 

 

 

 

 

 

 

$

38,364

 

 

 

3.7

 

 


(1)                Determined using the $55.95 closing price of First Community common stock on September 30, 2006.

Compensation expense related to awards of restricted and performance stock is based on the fair value of the underlying stock on the award date and is recognized over the vesting period using the straight-line method. The vesting of performance stock awards and recognition of related compensation expense may occur over a shorter vesting period if financial performance targets are achieved earlier than anticipated. Restricted and performance stock amortization totaled $2.1 million and $1.1 million for the quarter ended September 30, 2006 and 2005, and $5.6 million and $2.8 million for the nine months ended September 30, 2006 and 2005 and is included in compensation expense in the accompanying consolidated statements of earnings.

Stock Options.

We adopted the fair value method of accounting for stock options effective January 1, 2003, using the prospective method of transition specified in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123. The cost of all stock options granted on or after January 1, 2003 is based on their fair value and is included as a component of compensation expense over the vesting period for such options. For stock options granted prior to January 1, 2003, the Company applied the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost was recognized for fixed stock option awards granted prior to January 1, 2003, with an exercise price equal to or greater than the fair market value of the underlying stock on the date of grant. The Company has not granted stock options since the first quarter of 2003 and all stock options vested as of March 31, 2006. Had we determined compensation expense for our stock-based compensation plan consistent with SFAS No. 123, Accounting for Stock-Based Compensation, our net earnings and earnings per share for the quarter and nine months

17




NOTE 6—STOCK COMPENSATION (Continued)

ended September 30, 2005 would have been reduced to the pro forma amounts indicated in the table below:

 

 

Quarter Ended

 

Nine Months
Ended

 

 

 

September 30, 2005

 

 

 

(Dollars in thousands,
except per share data

 

Reported net earnings

 

 

$

12,994

 

 

 

$

35,074

 

 

Add: Stock based compensation expense included in net earnings, net of tax

 

 

666

 

 

 

1,620

 

 

Deduct: All stock based compensation expense, net of tax

 

 

(734

)

 

 

(1,823

)

 

Pro forma net earnings

 

 

$

12,926

 

 

 

$

34,871

 

 

Basic net earnings per share as reported

 

 

$

0.79

 

 

 

$

2.18

 

 

Pro forma basic net earnings per share

 

 

$

0.79

 

 

 

$

2.17

 

 

Diluted net earnings per share as reported

 

 

$

0.78

 

 

 

$

2.13

 

 

Pro forma diluted net earnings per share

 

 

$

0.77

 

 

 

$

2.12

 

 

 

A summary of the status of our stock options outstanding and the changes during the nine months ended September 30, 2006 is presented in the table below:

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Aggregate
Intrinsic
Value(1)

 

 

 

 

 

 

 

(Dollars in
thousands)

 

Outstanding at December 31, 2005

 

543,793

 

 

$

21.05

 

 

 

 

 

 

Exercised

 

(408,420

)

 

21.14

 

 

 

 

 

 

Outstanding and exercisable at September 30, 2006

 

135,373

 

 

$

20.78

 

 

 

$

4,761

 

 


(1)          Calculated as the difference between the $55.95 closing price of First Community common stock on September 30, 2006 and the weighted average exercise price.

Both restricted and performance stock and stock options are permitted to be awarded to officers, directors, key employees and consultants under the terms described in the 2003 Plan. The 2003 Plan authorizes grants of stock-based compensation instruments to purchase or issue up to 3,500,000 shares of authorized but unissued Company common stock, subject to adjustments provided by the 2003 Plan. As of November 1, 2006, there were 999,696 shares available for grant under the 2003 Plan.

NOTE 7—BORROWINGS AND SUBORDINATED DEBENTURES

Borrowings.

At September 30, 2006, we had $513.4 million of borrowings outstanding. Borrowings included $428.4 million of overnight advances and $85.0 million of term advances from the Federal Home Loan Bank of San Francisco (the “FHLB”). The weighted average cost of these borrowings was 5.31% at September 30, 2006. The term advances begin to mature in December 2006. Our aggregate remaining secured borrowing capacity from the FHLB was $473.0 million as of September 30, 2006.

The Company renewed its revolving credit line with U.S. Bank for $70 million. The revolving credit line matures on August 2, 2007 and is secured by a pledge of all of the outstanding capital stock of Pacific Western. The credit agreement requires the Company to maintain certain financial and capital ratios, among other covenants and conditions. This revolving credit line replaces the previous revolving credit line

18




NOTE 7—BORROWINGS AND SUBORDINATED DEBENTURES (Continued)

arrangements with U.S. Bank for $50 million and The Northern Trust Company for $20 million which matured on August 3, 2006.

Subordinated Debentures.

The Company had an aggregate of $129.9 million of subordinated debentures outstanding with a weighted average cost of 8.86% at September 30, 2006. The subordinated debentures were issued in eight separate series. Each issuance has a maturity of thirty years from its date of issue. The subordinated debentures were issued to trusts established by us and Foothill, which in turn issued trust preferred securities. The proceeds from the issuance of the securities were used primarily to fund several of our acquisitions.

Generally and with certain limitations, we are permitted to call the debentures in the first five years upon the occurrence of any of the following three events: (i) a change in the tax treatment of the debentures stemming from a change in the IRS laws; (ii) a change in the regulatory treatment of the underlying trust preferred securities as Tier 1 capital; and (iii) a requirement to register the underlying trust as a registered investment company. Under certain of our series of issuances, redemption in the first five years may be subject to a prepayment penalty. Trust I may not be called for 10 years from the date of issuance unless one of the three events described above has occurred and then a prepayment penalty applies. In addition, there is a prepayment penalty if the Trust I debentures are called 10 to 20 years from the date of its issuance, although they may be called at par after 20 years.

The following table summarizes the terms of each issuance:

Series

 

 

 

Date Issued

 

Amount

 

Earliest
Call Date
By
Company
Without
Penalty(1)

 

Fixed or
Variable
Rate

 

Rate Adjuster

 

Current
Rate(2)

 

Next
Reset Date

 

 

 

(Dollars in thousands)

 

Trust I

 

 

9/7/2000

 

 

$

8,248

 

9/7/2020

 

Fixed

 

N/A

 

 

10.60

%

 

 

N/A

 

 

Trust II

 

 

12/18/2001

 

 

10,310

 

12/18/2006

 

Variable

 

3-month LIBOR +3.60%

 

 

8.99

%

 

 

12/14/2006

 

 

Trust III

 

 

11/28/2001

 

 

10,310

 

12/8/2006

 

Variable

 

6-month LIBOR +3.75%

 

 

9.17

%