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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2002
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 (State or other jurisdiction of incorporation or organization) | 33-0885320 (I.R.S. Employer Identification Number) | |
6110 El Tordo Rancho Santa Fe, California 92067 (Address of principal executive offices) |
Registrant's telephone number:(858) 756-3023
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 12, 2002: 11,462,165 shares of common stock, no par value.
| | Page | |||
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PART I—FINANCIAL INFORMATION | |||||
ITEM 1. | Consolidated Financial Statements (unaudited) | 2 | |||
Unaudited Condensed Consolidated Balance Sheets | 2 | ||||
Unaudited Condensed Consolidated Statements of Income | 3 | ||||
Unaudited Condensed Consolidated Statements of Comprehensive Income | 4 | ||||
Unaudited Condensed Consolidated Statements of Cash Flows | 5 | ||||
Notes to Unaudited Condensed Consolidated Financial Statements | 7 | ||||
ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 14 | |||
ITEM 3. | Quantitative and Qualitative Disclosure About Market Risk | 27 | |||
PART II—OTHER INFORMATION | |||||
ITEM 1 | Legal Proceedings | 28 | |||
ITEM 2. | Changes in Securities and Use of Proceeds | 28 | |||
ITEM 3. | Defaults Upon Senior Securities | 28 | |||
ITEM 4. | Submission of Matters to a Vote of Security Holders | 28 | |||
ITEM 5. | Other Information | 29 | |||
ITEM 6. | Exhibits and Reports on Form 8-K | 29 | |||
SIGNATURES | 30 |
ITEM 1. Consolidated Financial Statements (unaudited)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| June 30, 2002 | December 31, 2001 | |||||||
---|---|---|---|---|---|---|---|---|---|
Assets: | |||||||||
Cash and due from banks | $ | 77,615 | $ | 68,513 | |||||
Federal funds sold | 7,500 | 36,190 | |||||||
Total cash and cash equivalents | 85,115 | 104,703 | |||||||
Interest-bearing deposits in financial institutions | 290 | 190 | |||||||
Federal Reserve Bank and Federal Home Loan Bank stock, at cost | 2,165 | 2,137 | |||||||
Securities held to maturity (fair value of $11,114 at 6/30/02 and $9,982 at 12/31/01) | 10,484 | 9,681 | |||||||
Securities available-for-sale (amortized cost of $144,974 at 6/30/02 and $116,246 at 12/31/01) | 147,652 | 116,775 | |||||||
Total securities | 160,301 | 128,593 | |||||||
Gross loans | 883,818 | 502,090 | |||||||
Deferred fees and costs | (2,052 | ) | (350 | ) | |||||
Loans, net of deferred fees and costs | 881,766 | 501,740 | |||||||
Allowance for loan losses | (13,136 | ) | (11,209 | ) | |||||
Net loans | 868,630 | 490,531 | |||||||
Premises and equipment | 10,494 | 5,914 | |||||||
Other real estate owned, net | 2,797 | 3,075 | |||||||
Goodwill and other intangibles | 49,146 | 9,793 | |||||||
Other assets | 34,735 | 27,418 | |||||||
Total assets | $ | 1,211,508 | $ | 770,217 | |||||
Liabilities and Shareholders' Equity: | |||||||||
Liabilities: | |||||||||
Noninterest-bearing deposits | $ | 420,540 | $ | 275,616 | |||||
Interest-bearing deposits | 629,717 | 401,551 | |||||||
Total deposits | 1,050,257 | 677,167 | |||||||
Accrued interest payable and other liabilities | 12,314 | 8,651 | |||||||
Short-term borrowings | 1,534 | 431 | |||||||
Convertible debt | 654 | 671 | |||||||
Trust preferred securities | 38,000 | 28,000 | |||||||
Total liabilities | 1,102,759 | 714,920 | |||||||
Shareholders' equity: | |||||||||
Preferred stock; authorized 5,000,000 shares, no shares issued and outstanding | — | — | |||||||
Common stock, no par value; authorized 15,000,000 shares, issued and outstanding 7,546,831 and 5,277,360 at June 30, 2002 and December 31, 2001, respectively | 91,036 | 43,137 | |||||||
Retained earnings | 16,161 | 11,852 | |||||||
Accumulated other comprehensive income: | |||||||||
Unrealized gains on securities available-for-sale, net | 1,552 | 308 | |||||||
Total shareholders' equity | 108,749 | 55,297 | |||||||
Total liabilities and shareholders' equity | $ | 1,211,508 | $ | 770,217 | |||||
Book value per share | $ | 14.41 | $ | 10.48 |
See "Notes to Unaudited Condensed Consolidated Financial Statements."
2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |||||||||||
Interest income: | |||||||||||||||
Interest and fees on loans | $ | 15,507 | $ | 7,986 | $ | 27,317 | $ | 16,648 | |||||||
Interest on interest-bearing deposits in financial institutions | 3 | 7 | 6 | 17 | |||||||||||
Interest on investment securities | 1,946 | 1,396 | 3,800 | 2,974 | |||||||||||
Interest on federal funds sold | 205 | 1,138 | 444 | 2,393 | |||||||||||
Total interest income | 17,661 | 10,527 | 31,567 | 22,032 | |||||||||||
Interest expense: | |||||||||||||||
Interest expense on deposits | 2,529 | 2,511 | 4,979 | 5,212 | |||||||||||
Interest expense on short-term borrowings | 32 | 112 | 38 | 201 | |||||||||||
Interest expense on convertible debt | 10 | 13 | 14 | 24 | |||||||||||
Interest expense on trust preferred securities | 572 | 218 | 1,100 | 433 | |||||||||||
Total interest expense | 3,143 | 2,854 | 6,131 | 5,870 | |||||||||||
Net interest income | 14,518 | 7,673 | 25,436 | 16,162 | |||||||||||
Provision for loan losses | — | 325 | — | 639 | |||||||||||
Net interest income after provision for loan losses | 14,518 | 7,348 | 25,436 | 15,523 | |||||||||||
Noninterest income: | |||||||||||||||
Service charges and fees on deposit accounts | 1,229 | 567 | 2,344 | 1,118 | |||||||||||
Merchant discount fees | 146 | 94 | 230 | 163 | |||||||||||
Other commissions and fees | 349 | 285 | 752 | 569 | |||||||||||
Gain on sale of loans | 145 | 64 | 209 | 169 | |||||||||||
Other income | 1,195 | 90 | 1,538 | 199 | |||||||||||
Total noninterest income | 3,064 | 1,100 | 5,073 | 2,218 | |||||||||||
Noninterest expense: | |||||||||||||||
Salaries and employee benefits | 5,362 | 2,967 | 10,059 | 6,419 | |||||||||||
Occupancy | 1,225 | 719 | 2,305 | 1,449 | |||||||||||
Furniture and equipment | 742 | 329 | 1,382 | 673 | |||||||||||
Data processing | 736 | 390 | 1,480 | 834 | |||||||||||
Other professional services | 726 | 438 | 1,280 | 796 | |||||||||||
Business development | 270 | 151 | 487 | 346 | |||||||||||
Communications | 387 | 184 | 726 | 414 | |||||||||||
Stationary and supplies | 199 | 59 | 320 | 107 | |||||||||||
Insurance and assessments | 309 | 264 | 509 | 523 | |||||||||||
Cost of real estate owned | 8 | 2 | 71 | 32 | |||||||||||
Goodwill amortization | — | 76 | — | 134 | |||||||||||
Core deposit intangible amortization | 339 | — | 339 | — | |||||||||||
Other | 888 | 343 | 1,524 | 796 | |||||||||||
Total noninterest expense | 11,191 | 5,922 | 20,482 | 12,523 | |||||||||||
Income before income taxes | 6,391 | 2,526 | 10,027 | 5,218 | |||||||||||
Income taxes | 2,531 | 1,039 | 4,005 | 2,154 | |||||||||||
Net income | $ | 3,860 | $ | 1,487 | $ | 6,022 | $ | 3,064 | |||||||
Per share information: | |||||||||||||||
Number of shares (weighted average) | |||||||||||||||
Basic | 7,542.3 | 4,546.7 | 7,019.6 | 4,474.1 | |||||||||||
Diluted | 7,952.6 | 4,823.4 | 7,368.5 | 4,734.7 | |||||||||||
Income per share | |||||||||||||||
Basic | $ | 0.51 | $ | 0.33 | $ | 0.86 | $ | 0.68 | |||||||
Diluted | $ | 0.49 | $ | 0.31 | $ | 0.82 | $ | 0.65 |
See "Notes to Unaudited Condensed Consolidated Financial Statements."
3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net income | $ | 3,860 | $ | 1,487 | $ | 6,022 | $ | 3,064 | ||||||
Other comprehensive income, net of related income taxes: | ||||||||||||||
Unrealized gains on securities: | ||||||||||||||
Unrealized holding gains arising during the period | 1,591 | 58 | 1,244 | 421 | ||||||||||
Less reclassifications of realized losses included in income | — | — | — | — | ||||||||||
1,591 | 58 | 1,244 | 421 | |||||||||||
Comprehensive income | $ | 5,451 | $ | 1,545 | $ | 7,266 | $ | 3,485 | ||||||
See "Notes to Unaudited Condensed Consolidated Financial Statements."
4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Six Months Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 6,022 | $ | 3,064 | |||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | 1,851 | 952 | |||||||||
Provision for loan losses | — | 639 | |||||||||
(Gain) loss on sale of OREO | (145 | ) | 13 | ||||||||
Gain on sale of loans | (209 | ) | (169 | ) | |||||||
Proceeds from loans held for sale | 2,090 | 1,500 | |||||||||
Loss (gain) on sale of premises and equipment | 16 | (19 | ) | ||||||||
Gain on sale or calls of securities available-for-sale | — | (17 | ) | ||||||||
Decrease in other assets | 381 | 977 | |||||||||
Decrease in accrued interest payable and other liabilities | (9,055 | ) | (1,152 | ) | |||||||
Dividend on FHLB stock | (24 | ) | (8 | ) | |||||||
Net cash (used in) provided by operating activities | 927 | 5,780 | |||||||||
Cash flows from investing activities: | |||||||||||
Net cash and cash equivalents acquired in acquisition of Professional Bancorp | — | 84,017 | |||||||||
Net cash and cash equivalents acquired in acquisition of Pacific Western Bank | 1,401 | — | |||||||||
Net cash and cash equivalents acquired in acquisition of WHEC | 24,853 | — | |||||||||
Net increase in loans outstanding | (94,778 | ) | (22,867 | ) | |||||||
Net decrease in interest-bearing deposits in financial institutions | 350 | 535 | |||||||||
Securities held-to-maturity: | |||||||||||
Maturities | 1,686 | 6,144 | |||||||||
Purchases | (2,536 | ) | — | ||||||||
Securities available-for-sale: | |||||||||||
Maturities | 25,410 | 31,968 | |||||||||
Purchases | (10,000 | ) | (30,291 | ) | |||||||
Net sales (purchases) in FRB and FHLB stock | 465 | (208 | ) | ||||||||
Proceeds from sale of OREO | 1,866 | 518 | |||||||||
Purchases of premises and equipment, net | (1,424 | ) | (636 | ) | |||||||
Proceeds from sale of premises and equipment | 16 | 147 | |||||||||
Net cash (used in) provided by investing activities | (52,691 | ) | 69,327 | ||||||||
Cash flows from financing activities: | |||||||||||
Net increase (decrease) in deposits: | |||||||||||
Non-interest bearing | 55,232 | (34,686 | ) | ||||||||
Interest bearing | (55,806 | ) | 31,562 | ||||||||
Proceeds from trust preferred securities | 10,000 | — | |||||||||
Proceeds from rights offering | 23,000 | — | |||||||||
Proceeds from exercise of stock options | 359 | 807 | |||||||||
Net increase in short-term borrowings | 1,104 | 5,320 | |||||||||
Cash dividends paid | (1,713 | ) | (814 | ) | |||||||
Net cash provided by financing activities | 32,176 | 2,189 | |||||||||
Net (decrease) increase in cash and cash equivalents | (19,588 | ) | 77,296 | ||||||||
Cash and cash equivalents at beginning of period | 104,703 | 52,655 | |||||||||
Cash and cash equivalents at end of period | $ | 85,115 | $ | 129,951 | |||||||
Supplemental disclosure of cash flow information: | |||||||||||
Cash paid during period for interest | $ | 6,724 | $ | 4,108 | |||||||
Cash paid during period for income taxes | 995 | 1,145 | |||||||||
Transfer from loans to other real estate owned | 1,443 | — | |||||||||
Conversion of convertible debt | 17 | 6 |
5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(In Thousands)
Supplemental Disclosure of Acquisitions:
| 2002 | 2001 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Pacific Western | WHEC | Professional Bancorp | ||||||||
Assets acquired: | |||||||||||
Cash & cash equivalent | $ | 31,426 | $ | 24,853 | $ | 92,447 | |||||
Interest-bearing deposits in other banks | — | 450 | 325 | ||||||||
Investment securities | 20,644 | 24,393 | 61,447 | ||||||||
Loans | 194,119 | 92,526 | 98,713 | ||||||||
Premises and equipment | 3,042 | 1,185 | 673 | ||||||||
Goodwill | 18,089 | 13,627 | 4,358 | ||||||||
Core deposit intangible | 3,646 | 4,182 | — | ||||||||
Other assets | 3,922 | 4,320 | 7,753 | ||||||||
274,888 | 165,536 | 265,716 | |||||||||
Liabilities assumed: | |||||||||||
Non-interest bearing deposits | (42,662 | ) | (47,030 | ) | (134,792 | ) | |||||
Interest bearing deposits | (196,204 | ) | (87,768 | ) | (109,691 | ) | |||||
Accrued interest payable and other liabilities | (5,997 | ) | (6,215 | ) | (4,224 | ) | |||||
Convertible debt | — | — | (679 | ) | |||||||
(244,863 | ) | (141,013 | ) | (249,386 | ) | ||||||
Cash paid for common stock | 30,025 | — | 8,430 | ||||||||
Fair value of common stock issued for common stock | — | 24,523 | 7,900 | ||||||||
Total consideration paid | $ | 30,025 | $ | 24,523 | $ | 16,330 | |||||
See "Notes to Unaudited Condensed Consolidated Financial Statements."
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—BASIS OF PRESENTATION
First Community Bancorp (the "Company") is the holding company for Rancho Santa Fe National Bank ("Rancho") and Pacific Western National Bank ("Pacific Western" and together with Rancho, the "Banks"). The unaudited condensed consolidated financial statements of the Company included herein reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods indicated. Certain reclassifications have been made to the unaudited condensed consolidated financial statements for 2001 to conform to the 2002 presentation. Certain information and note disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results of operations to be expected for the remainder of the year.
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates subject to change include the allowance for loan losses, the carrying value of other real estate owned and the deferred tax asset.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report filed on Form 10-K on March 29, 2002 for the year ended December 31, 2001.
NOTE 2—ACQUISITIONS
First Community Bank of the Desert Acquisition
On May 31, 2000, the Company completed its formation whereby Rancho and First Community Bank of the Desert became its wholly-owned subsidiaries. Shareholders for both banks approved the transaction at their respective shareholder meetings held on May 31, 2000. Under the terms of the merger agreement, each shareholder of First Community Bank of the Desert received 0.30 shares of Company common stock for each share of First Community Bank of the Desert common stock. Each Rancho share was exchanged for one share of Company common stock. At the same time as completion of the merger, the Company's common stock was listed on NASDAQ under the symbol FCBP. The Company accounted for the merger as a "pooling-of-interests."
Professional Bancorp Acquisition
On January 16, 2001, the Company acquired Professional Bancorp, Inc. ("Professional") and its wholly-owned subsidiary, First Professional Bank, N.A. ("First Professional"). Shareholders of Professional received either $8.00 in cash or 0.55 shares of Company common stock for each share of Professional common stock. Professional shareholders had the option to choose either cash or stock consideration. The purchase price received by shareholders of Professional totaled approximately 504,747 shares of Company common stock and approximately $8.4 million in cash, resulting in a total purchase price of approximately $16.3 million. This acquisition was accounted for using the purchase method of accounting.
7
First Charter Acquisition
On October 8, 2001, the Company acquired First Charter Bank, N.A. ("First Charter"). Shareholders of First Charter received 0.008635 of a share of Company common stock for each share of First Charter common stock. Approximately 661,609 shares were issued in this acquisition, resulting in a total purchase price of approximately $14.2 million. First Charter was merged into First Professional with First Professional as the surviving entity. This acquisition was accounted for using the purchase method of accounting.
Pacific Western Acquisition
On January 31, 2002, the Company acquired Pacific Western National Bank. The shareholders and option holders of Pacific Western National Bank were paid approximately $30.0 million in cash. Upon completion of the acquisition, Pacific Western National Bank and First Community Bank of the Desert were merged with First Professional Bank, N.A. The resulting bank operates as Pacific Western and is headquartered in Santa Monica, California. References to Pacific Western National Bank refer to the bank acquired on January 31, 2002. When we refer to Pacific Western, we are referring to the surviving bank formed through the merger of Pacific Western National Bank, First Community Bank of the Desert and First Professional Bank, N.A.
W.H.E.C., Inc. Acquisition
On March 7, 2002, the Company acquired W.H.E.C., Inc. ("WHEC"), the holding company of Capital Bank of North County ("Capital Bank"). The Company issued 1.1 million shares of its common stock in exchange for all of the outstanding common shares and options of WHEC. At the time of the merger, Capital Bank was merged into Rancho.
Upland Bank Acquisition
The Company has a pending merger based upon an agreement (the "Upland Bank Agreement") to acquire all of the outstanding common stock of Upland Bank ("Upland").
The Upland Bank Agreement provides that the shareholders of the outstanding common shares and options of Upland will have the right to elect to receive for each share either $11.73 in cash or 0.5034 of a share of Company common stock. The pending merger is subject to standard conditions, including the approval of the shareholders of Upland and bank regulatory agencies. The pending merger received regulatory approval on June 25, 2002 and the Upland shareholder meeting will be held on August 19, 2002. Upon receipt of the approvals and satisfaction or waiver of other conditions, the transaction is expected to close in the latter half of August 2002, at which time Upland will be merged into Pacific Western, with Pacific Western remaining as the surviving bank.
Marathon Bancorp Acquisition
The Company has a pending merger based upon an agreement (the "Marathon Agreement") to acquire all of the outstanding common stock of Marathon Bancorp, the holding company of Marathon Bank ("Marathon").
The Marathon Agreement provides that each Marathon Bancorp shareholder shall have the right to elect to receive for each share of Marathon common stock either cash or common stock of the Company with a value that depends on the average price of the Company's common stock over a fifteen-day averaging period ending on the third business day prior to the Marathon shareholders' meeting. If the price of the Company's common stock is greater than or equal to $19.50 and less than or equal to $23.30 over the fifteen-day averaging period, Marathon shareholders will have the right to elect to receive, for each share of Marathon common stock, either cash or Company common stock with a value of $4.80. If the price of the Company's common stock over the fifteen-day averaging period is greater that $23.30 or less that $19.50, Marathon shareholders will have the right to elect to
8
receive an amount in cash or Company common stock that will be greater than or less than $4.80 per share, respectively.
The Marathon Agreement provides that at least 50% of the consideration shall be in the form of Company common stock. The pending merger is subject to standard conditions, including the approval of the shareholders of Marathon and bank regulatory agencies. The pending merger received regulatory approval of the Office of the Comptroller of the Currency (the "OCC") on July 3, 2002 and the Marathon shareholder meeting will be held on August 19, 2002. Upon receipt of the approvals and satisfaction or waiver of other conditions, including non-objection of the Board of Governors of the Federal Reserve System, the transaction is expected to close in the latter half of August 2002, at which time Marathon will be merged into Pacific Western, with Pacific Western remaining as the surviving bank.
First National Bank Acquisition
The Company has a pending merger based upon an agreement (the "First National Agreement") to acquire all of the outstanding common and preferred stock of First National Bank ("First National").
The First National Agreement provides that each First National shareholder will have the right to elect to receive for each share of First National common stock or First National preferred stock either $10.00 in cash or 0.5008 of a share of Company common stock. The First National Agreement provides that 2,762,662 shares of Company common stock are to be issued to First National shareholders. In the event that the closing price of the Company's common stock is less that $19.97 per share as of the closing date of the merger, the First National Agreement contains provisions that require the Company to issue stock to ensure that the value of the consideration First National shareholders receive is at least equal to the consideration they would have received had the closing price of the Company's stock on the closing date of the merger been $19.97 per share and to ensure that at least 45% of the total consideration shall be in the form of the Company's common stock. The pending merger is subject to standard conditions, including the approval of the shareholders of First National, the shareholders of the Company and the OCC. The First National shareholder meeting is scheduled for September 5, 2002 and the Company's shareholder meeting is scheduled of September 6, 2002. Upon receipt of the approvals and satisfaction or waiver of other conditions, the transaction is expected to close in the third quarter of 2002, at which time First National will merge into Rancho. The surviving bank will operate under the name First National Bank.
Pro Forma Information for Purchase Acquisitions
The following table presents unaudited pro forma results of operations of the Company for the three and six months ended June 30, 2002 and 2001 as if the acquisitions of First Charter Bank, Pacific Western National Bank and WHEC had been effective on January 1, 2001. The impact of the Professional acquisition is not included in the pro formas as it is immaterial. The unaudited pro forma combined summary of operations is intended for informational purposes only and is not necessarily
9
indicative of the future operating results of the Company or operating results that would have occurred had these acquisitions been in effect for all the periods presented.
| Three Months Ended June 30, | Six months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Pro Forma 2002 | Pro Forma 2001 | Pro Forma 2002 | Pro Forma 2001 | |||||||||
| (In thousands, except per share information) | ||||||||||||
Interest income | $ | 17,661 | $ | 19,815 | $ | 34,749 | $ | 40,782 | |||||
Interest expense | 3,143 | 6,635 | 6,934 | 13,301 | |||||||||
Net interest income | 14,518 | 13,180 | 27,815 | 27,481 | |||||||||
Provision for loan losses | — | 655 | 115 | 1,239 | |||||||||
Net interest income after provision for loan losses | 14,518 | 12,525 | 27,700 | 26,242 | |||||||||
Noninterest income | 3,064 | 2,057 | 5,502 | 4,065 | |||||||||
Noninterest expense | 11,191 | 11,164 | 22,322 | 22,905 | |||||||||
Income before income taxes | 6,391 | 3,418 | 10,880 | 7,402 | |||||||||
Income taxes | 2,531 | 1,581 | 4,294 | 3,252 | |||||||||
Net income from continuing operations | $ | 3,860 | $ | 1,837 | $ | 6,586 | $ | 4,150 | |||||
Net income per share from continuing operations: | |||||||||||||
Basic | $ | 0.51 | $ | 0.25 | $ | 0.87 | $ | 0.56 | |||||
Diluted | $ | 0.49 | $ | 0.24 | $ | 0.84 | $ | 0.54 | |||||
Weighted average shares outstanding: | |||||||||||||
Basic | 7,540.0 | 7,446.9 | 7,531.9 | 7,374.3 | |||||||||
Diluted | 7,950.3 | 7,723.6 | 7,880.8 | 7,634.9 |
NOTE 3—NET INCOME PER SHARE
The following is a summary of the calculation of basic and diluted net income per share for the three and six month periods ended June 30, 2002 and 2001:
| Three Months Ended June 30, | Six months Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | ||||||||||
| (In thousands, except per share data) | |||||||||||
Net income used for basic net income per share | $ | 3,860 | $ | 1,487 | $ | 6,022 | $ | 3,064 | ||||
Convertible debt interest expense, net of taxes | 6 | 8 | 8 | 14 | ||||||||
Adjusted net income used for diluted net income per share | $ | 3,866 | $ | 1,495 | $ | 6,030 | $ | 3,078 | ||||
Weighted average shares outstanding used for basic net income per share | 7,542.3 | 4,546.7 | 7,019.6 | 4,474.1 | ||||||||
Effect of dilutive stock options and warrants | 382.0 | 247.6 | 320.6 | 231.5 | ||||||||
Effect of convertible debt | 28.3 | 29.1 | 28.3 | 29.1 | ||||||||
Diluted weighted average shares outstanding | 7,952.6 | 4,823.4 | 7,368.5 | 4,734.7 | ||||||||
Basic net income per share | $ | 0.51 | $ | 0.33 | $ | 0.86 | $ | 0.68 | ||||
Diluted net income per share | $ | 0.49 | $ | 0.31 | $ | 0.82 | $ | 0.65 | ||||
10
NOTE 4—LONG-TERM DEBT
Trust Preferred Securities
The Company had $38.0 million in trust preferred securities outstanding at June 30, 2002. The majority of these securities are considered Tier 1 capital for regulatory purposes as of June 30, 2002. In September 2000, the Company issued $8.0 million of trust preferred securities bearing a fixed interest rate of 10.60% and maturing in thirty years. This instrument was issued to fund part of the Professional acquisition.
In November 2001, the Company issued $10.0 million of trust preferred securities bearing a variable interest rate, which is reset semi-annually, at the 6-Month LIBOR plus 3.75%, provided the rate will not exceed 11.00% through December 2006, and maturing in thirty years. The current rate is 5.78% and the next interest rate reset date is December 8, 2002. In December 2001, the Company issued another $10.0 million of trust preferred securities bearing a variable interest rate, which is reset quarterly, at the 3-Month LIBOR plus 3.60%, provided the rate will not exceed 12.50% through December 2006, and maturing in thirty years. The current interest rate is 5.48% and the next interest rate reset date is September 18, 2002. These instruments were issued to fund part of the Pacific Western National Bank acquisition.
In June 2002, the Company issued $10.0 million of trust preferred securities bearing a variable interest rate, which is reset quarterly, at the 3-Month LIBOR plus 3.55%, provided the rate will not exceed 11.95% through June 2007, and maturing in thirty years. The interest rate was initially set at 5.44% and the next interest rate reset date is September 26, 2002.
Convertible Debt
The Company acquired $679,000 of convertible debt in the Professional acquisition. Approximately $8,000 was converted during the year ended December 31, 2001 and another $17,000 during the first half of 2002. The interest rate on this debt is 6.26%. Each $23.088 of principal is convertible into one share of Company common stock. The Company has elected to redeem this convertible debt on September 1, 2002 for either cash or stock at the stated conversion rate based on the election by each bondholder.
11
NOTE 5—IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141,Business Combinations, and Statement No. 142,Goodwill and Other Intangible Assets, which supersedes APB Opinion 17,Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet in order to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. As permitted by Statement 142, the Company adopted the new standard in the first quarter of the fiscal year 2002. The Company is required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments and/or impairment adjustments. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle. Beginning on January 1, 2002, amortization of goodwill and intangibles with indefinite lives ceased.
We determined the value of a core deposit intangible related to the Pacific Western National Bank acquisition and the WHEC acquisition. We recorded the value of the core deposit intangible separate from goodwill and we are amortizing it over its estimated useful life of 10 years. The amortization expense for any period is based upon and is the higher of either (1) an estimated decline in the value of the underlying deposits acquired or (2) application of a straight-line method, and is approximately $766,000 on an annual basis. We are currently evaluating the impact that adopting the remaining provisions of Statement 142 will have on our results of operations and financial position.
In July of 2002, the FASB issued Statement No. 146,Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of Statement 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Management has not yet determined the impact, if any, of adoption of this statement.
NOTE 6—STATEMENT 142 TRANSITIONAL DISCLOSURE
The following is a reconciliation of reported net income and basic and diluted earnings per share to adjusted net income and per share amounts for the three and six months ended June 30, 2002 and
12
2001, in accordance with Statement 142. The three months ended June 30, 2002 adjusted net income includes a cumulative core deposit intangible amortization adjustment:
| Three Months Ended June 30, | Six months Ended June 30, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2001 | 2001 | ||||||||
| (In thousands, except per share information) | |||||||||||
Net income | $ | 3,860 | $ | 1,487 | $ | 6,022 | $ | 3,064 | ||||
Add back: Goodwill amortization | — | 76 | — | 134 | ||||||||
Add back: Core deposit intangible, net of tax | 197 | — | 197 | — | ||||||||
Adjusted net income | $ | 4,057 | $ | 1,563 | $ | 6,219 | $ | 3,198 | ||||
Basic earnings per share: | ||||||||||||
Net income | $ | 0.51 | $ | 0.33 | $ | 0.86 | $ | 0.68 | ||||
Goodwill amortization | — | 0.02 | — | 0.03 | ||||||||
Core deposit intangible, net of tax | 0.03 | — | 0.03 | — | ||||||||
Adjusted net income | $ | 0.54 | $ | 0.35 | $ | 0.89 | $ | 0.71 | ||||
Diluted earnings per share: | ||||||||||||
Net income | $ | 0.49 | $ | 0.31 | $ | 0.82 | $ | 0.65 | ||||
Goodwill amortization | — | 0.02 | — | 0.03 | ||||||||
Core deposit intangible, net of tax | 0.02 | — | 0.03 | — | ||||||||
Adjusted net income | $ | 0.51 | $ | 0.33 | $ | 0.85 | $ | 0.68 | ||||
The changes in the carrying amount of goodwill and other intangibles for the six months ended June 30, 2002 are as follows:
| Goodwill and Other Intangibles | |||
---|---|---|---|---|
| (In thousands) | |||
Balance as December 31, 2001 | $ | 9,793 | ||
Goodwill acquired during 2002 | 31,716 | |||
Core deposit intangible acquired during 2002 | 7,828 | |||
Core deposit intangible amortization | (339 | ) | ||
Adjustment to goodwill acquired in 2001 | 148 | |||
Balance as of June 30, 2002 | $ | 49,146 | ||
NOTE 7—SUBSEQUENT EVENTS
In July 2002, the Company, through a public offering, received net proceeds, before expenses and after payment of underwriting discounts and commissions, of $89.9 million through the issuance of 3.91 million shares of Company stock. The shares were issued primarily to fund the proposed acquisitions of Upland, Marathon and First National which are expected to close in the third quarter of 2002.
13
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statement
This Quarterly Report on Form 10-Q includes forward-looking information, which is subject to the "safe harbor" created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When the Company uses or incorporates by reference in this Quarterly Report on Form 10-Q (the "Quarterly Report") the words "anticipate," "estimate," "expect," "project," "intend," "commit," "believe" and similar expressions, the Company intends to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. Such risks and uncertainties include, but are not limited to, the following factors:
- •
- Expected cost savings or revenue enhancements from the completed or pending acquisitions may not be fully realized or realized within the expected time frame.
- •
- Successful completion and then integration of the proposed acquisitions of First National, Upland and Marathon.
- •
- Competitive pressure in the banking industry and changes in the regulatory environment.
- •
- Changes in the interest rate environment and volatility of rate sensitive loans and deposits.
- •
- A decline in the health of the economy nationally or regionally which could reduce the demand for loans or reduce the value of real estate collateral securing most of the Company's loans.
- •
- Credit quality deterioration which could cause an increase in the provision for loan losses.
- •
- Dividend restrictions.
- •
- Regulatory discretion.
- •
- Changes in the securities markets.
- •
- Asset/liability repricing risks and liquidity risks.
The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements.
Overview
The following tables and data set forth certain statistical information relating to the Company as of June 30, 2002, and for the three and six months ended June 30, 2002 and June 30, 2001. This discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto as of June 30, 2002 included herein, and the consolidated financial statements and notes thereto included in the Company's consolidated financial statements filed on Form 10-K for the year ended December 31, 2001.
Since December 31, 2001, the Company's total assets have increased by approximately $441.3 million, or 57.3%, which relates mostly to the increase in assets due to the acquisitions of Pacific Western National Bank and WHEC. Loans, net of deferred fees and costs, increased $380.0 million since year end with $289.6 million acquired from Pacific Western National Bank and WHEC and $90.4 million representing organic growth. The Company shifted earning assets to loans from cash and cash equivalents, which decreased $75.5 million, and securities, which decreased $13.3 million.
Since December 31, 2001, the Company's total deposits increased by approximately $373.1 million, and the Company acquired approximately $373.7 million in deposits through the Pacific Western
14
National Bank and WHEC acquisitions. Since December 31, 2001 the Company increased noninterest bearing deposits by $55.2 million while interest bearing deposits decreased by approximately the same amount. The Company's loan-to-deposit ratio at June 30, 2002 was 84.0% compared to 74.1% as of December 31, 2001.
The Company issued $10.0 million of trust preferred securities in June 2002 in addition to the $20.0 million the Company issued in the fourth quarter of 2001.
On July 24, 2002 the Company's Board of Directors approved a quarterly dividend of $0.15 per common share which is payable on August 30, 2002 to shareholders of record on August 15, 2002.
Results of Operations
The following table summarizes key performance indicators for the Company for the three and six months ended June 30, 2002 and 2001 and the basis for calculating these indicators:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | ||||||||||
Net income per share information: | ||||||||||||||
Number of shares (weighted average, in thousands) | 7,542.3 | 4,546.7 | 7,019.6 | 4,474.1 | ||||||||||
Diluted shares (weighted average, in thousands) | 7,952.6 | 4,823.4 | 7,368.5 | 4,734.7 | ||||||||||
Basic income per share | $ | 0.51 | $ | 0.33 | $ | 0.86 | $ | 0.68 | ||||||
Diluted income per share | $ | 0.49 | $ | 0.31 | $ | 0.82 | $ | 0.65 | ||||||
Operating income per share information: | ||||||||||||||
Basic income per share | $ | 0.47 | $ | 0.34 | $ | 0.81 | $ | 0.71 | ||||||
Diluted income per share | $ | 0.44 | $ | 0.32 | $ | 0.77 | $ | 0.68 | ||||||
Profitability measures based on net income | ||||||||||||||
Return on average assets | 1.27 | % | 0.94 | % | 1.10 | % | 0.99 | % | ||||||
Return on average equity | 14.7 | % | 15.8 | % | 14.0 | % | 17.0 | % | ||||||
Efficiency ratio | 67.2 | % | 67.5 | % | 69.3 | % | 68.1 | % | ||||||
Profitability measures based on operating income | ||||||||||||||
Return on average tangible assets | 1.16 | % | 0.99 | % | 1.04 | % | 1.06 | % | ||||||
Return on average tangible equity | 13.4 | % | 16.6 | % | 13.2 | % | 17.7 | % | ||||||
Efficiency ratio | 65.2 | % | 66.6 | % | 68.1 | % | 67.4 | % | ||||||
Adjustments to net income (in thousands): | ||||||||||||||
Net income | $ | 3,860 | $ | 1,487 | $ | 6,022 | $ | 3,064 | ||||||
Merchant card portfolio gain, net of tax | (542 | ) | — | (542 | ) | — | ||||||||
Goodwill amortization | — | 76 | — | 134 | ||||||||||
Core deposit intangible amortization, net of tax | 197 | — | 197 | — | ||||||||||
Operating income | $ | 3,515 | $ | 1,563 | $ | 5,677 | $ | 3,198 | ||||||
Operating revenues (in thousands): | ||||||||||||||
Net interest income | $ | 14,518 | $ | 7,673 | $ | 25,436 | $ | 16,162 | ||||||
Noninterest income | 3,064 | 1,100 | 5,073 | 2,218 | ||||||||||
Merchant card portfolio gain | (934 | ) | — | (934 | ) | — | ||||||||
Operating revenues | $ | 16,648 | $ | 8,773 | $ | 29,575 | $ | 18,380 | ||||||
Adjustments to expenses (in thousands): | ||||||||||||||
Noninterest expense | $ | 11,191 | $ | 5,922 | $ | 20,482 | $ | 12,523 | ||||||
Goodwill amortization | — | (76 | ) | — | (134 | ) | ||||||||
Core deposit intangible amortization | (339 | ) | — | (339 | ) | — | ||||||||
Operating expenses | $ | 10,852 | $ | 5,846 | $ | 20,143 | $ | 12,389 | ||||||
15
Quarter analysis. Consolidated operating income (net income before intangible amortization expense and a one-time gain on sale of the merchant card portfolio, net of applicable taxes) for the three months ended June 30, 2002 was $3.5 million or $0.44 per diluted share. This compares with consolidated operating income of $1.6 million or $0.32 per diluted share for the three months ended June 30, 2001, an increase of approximately 37.5%. The Company's return on average tangible assets based on operating income for the second quarter of 2002 was 1.16% compared to 0.99% for the same period in 2001. The increase in diluted operating income per share and return on average tangible assets for the second quarter of 2002 compared to the same quarter of 2001 relates primarily to the accretive nature of the Company's acquisition activity which includes: (i) an increase in the Company's net interest margin despite a lower interest rate environment in 2002; (ii) the absence of an allowance for loan loss provision in the current period based on credit quality indicators in the Company's loan portfolio; and (iii) cost consolidation as acquired banks are converted to the Company's operating platform and other operating efficiencies are accomplished.
The efficiency ratio (operating expense divided by net interest income plus noninterest income) is a measure of how effective the Company is at using its expense dollars. A lower or declining ratio indicates improving efficiency. The operating efficiency ratio improved to 65.2% during the second quarter of 2002 compared to 66.6% for the same period in 2001. The improvement results from operating revenues increasing 89.8% while operating expense grew only 85.6% for the second quarter of 2002 when compared to the second quarter of 2001 as the net interest margin improved and operation consolidations related to the bank combinations are completed.
Consolidated net income for the three months ended June 30, 2002 was $3.9 million or $0.49 per diluted share. This compares with net income of $1.5 million or $0.31 per diluted share for the three months ended June 30, 2001. The Company's return on average assets was 1.27% for the second quarter of 2002 versus 0.94% for the second quarter of 2001. The Company recognized a one-time after-tax gain on the sale of its merchant card portfolio of $542 thousand during the second quarter of 2002.
Six month analysis. Consolidated operating income (net income before intangible amortization expense and a one-time gain on sale of the merchant card portfolio business, net of applicable taxes) for the six months ended June 30, 2002 was $5.7 million or $0.77 per diluted share. This compares with consolidated operating income of $3.2 million, or $0.68 per diluted share, for the six months ended June 30, 2001, an increase of approximately 13.2%. The increase for the six month period is due primarily to the accretion achieved from the three bank acquisitions completed since the end of the third quarter of 2001, as operating income improved 77.5% while diluted shares increased by just 55.6%. The Company's return on average tangible assets based on operating income for the first half of 2002 was 1.04% compared to 1.06% for the same period in 2001. This ratio was approximately the same period over period as the Company's net interest margin was lower for the six months ended June 30, 2002 compared to the same period for 2001, which was offset by the absence of an allowance for loan loss provision during the current six month period.
The Company's operating efficiency ratio for the first half of 2002 was 68.1% compared to 67.4% for the same period in 2001. The increase in the operating efficiency ratio is due primarily to revenues growing 60.9% while operating expense grew 62.6% as current year revenues are adversely affected by a compression of the Company's net interest margin when compared to 2001 due to the general decline in market interest rates. In addition, the Company completed three system conversions during the second quarter to reflect the combination of the Company's former subsidiaries First Professional and First Community Bank of the Desert with Pacific Western National Bank and the combination of Capital Bank with Rancho. As a result, the efficiencies achieved are more apparent in the second quarter results.
16
Consolidated net income for the six months ended June 30, 2002 was $6.0 million, or $0.82 per diluted share. This compares with net income of $3.1 million, or $0.65 per diluted share for the six months ended June 30, 2001. The Company's return on average assets was 1.10% for the six months ended June 30, 2002 versus 0.99% for the same period in 2001. The increase in the return on average assets was primarily influenced by the one-time gain on sale of the merchant card portfolio.
Net Interest Income. Net interest income is 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. The following tables provide information concerning average interest-earning assets and interest-bearing liabilities and yields and rates thereon for the three and six months ended June 30, 2002 and June 30, 2001. Nonaccrual loans are included in the average earning assets amounts.
| Three Months ended June 30, 2002 | Three Months ended June 30, 2001 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest Income or Expense | Average Yield or Cost | Average Balance | Interest Income or Expense | Average Yield or Cost | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||
ASSETS | |||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||
Loans and leases | $ | 853,711 | $ | 15,507 | 7.29 | % | $ | 367,149 | $ | 7,986 | 8.72 | % | |||||||
Investment securities | 140,701 | 1,946 | 5.54 | % | 92,023 | 1,401 | 6.11 | % | |||||||||||
Federal funds sold | 64,052 | 205 | 1.28 | % | 106,829 | 1,138 | 4.27 | % | |||||||||||
Other earning assets | 512 | 3 | 3.13 | % | 176 | 2 | 4.55 | % | |||||||||||
Total interest-earning assets | 1,058,976 | 17,661 | 6.69 | % | 566,177 | 10,527 | 7.46 | % | |||||||||||
Noninterest-earning assets: | |||||||||||||||||||
Other assets | 157,647 | 66,531 | |||||||||||||||||
Total assets | $ | 1,216,623 | $ | 632,708 | |||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Deposits | |||||||||||||||||||
Interest-bearing demand | $ | 97,512 | 76 | 0.31 | % | $ | 55,815 | 142 | 1.02 | % | |||||||||
Money market | 313,324 | 1,080 | 1.38 | % | 163,869 | 1,140 | 2.79 | % | |||||||||||
Savings | 48,548 | 65 | 0.54 | % | 28,617 | 119 | 1.66 | % | |||||||||||
Time | 187,704 | 1,308 | 2.79 | % | 91,127 | 1,110 | 4.88 | % | |||||||||||
Total interest-bearing deposits | 647,088 | 2,529 | 1.57 | % | 339,428 | 2,511 | 2.97 | % | |||||||||||
Other interest-bearing liabilities | 33,926 | 614 | 7.25 | % | 14,953 | 343 | 9.20 | % | |||||||||||
Total interest-bearing liabilities | 681,014 | 3,143 | 1.85 | % | 354,381 | 2,854 | 3.23 | % | |||||||||||
Noninterest-bearing liabilities: | |||||||||||||||||||
Demand deposits | 407,688 | 223,844 | |||||||||||||||||
Other liabilities | 22,693 | 16,729 | |||||||||||||||||
Total liabilities | 1,111,395 | 594,954 | |||||||||||||||||
Shareholders' equity | 105,228 | 37,754 | |||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,216,623 | $ | 632,708 | |||||||||||||||
Net interest income | $ | 14,518 | $ | 7,673 | |||||||||||||||
Net interest spread | 4.84 | % | 4.23 | % | |||||||||||||||
Net interest margin | 5.50 | % | 5.44 | % | |||||||||||||||
17
Second quarter analysis. Interest income increased by approximately $7.1 million to $17.7 million for the second quarter of 2002 from $10.5 million for the second quarter of 2001 due largely to the increase of approximately $492.8 million in average earning assets. This increase in average earnings assets was mostly a result of the earning assets acquired in the Pacific Western National Bank and WHEC acquisitions.
The net interest spread increased to 4.84% for the second quarter of 2002 from 4.23% for second quarter of 2001 and the net interest margin increased to 5.50% from 5.44% over the same time periods. The increase in the net interest margin is attributed primarily to the Company successfully replacing higher cost deposits with low cost deposits while shifting earning assets from Fed funds and investment to loans which typically yield a higher return. The proportion of average loans and leases to total interest-earning assets increased to 81% for the current quarter from 65% for the second quarter of 2001. Despite the shift in the composition of earning assets, the yield on interest-earning assets decreased 77 basis points to 6.69% in the second quarter of 2002 from 7.46% for the second quarter of 2001 due primarily to the decline in the interest rate environment. The Federal Reserve lowered interest rates several times during this period and since a substantial portion of the Company's earning assets reprice with the general level of interest rates, the yield on the Company's earning assets declined significantly.
At the same time, the Company focused on decreasing the overall cost of average deposits to 0.96% for the second quarter of 2002 compared to 1.79% for the same period of 2001. The cost of interest-bearing liabilities decreased to 1.85% from 3.23% over the same periods as a result of a deposits generally repricing in the lower interest rate environment. Interest expense increased by approximately $289,000 to $3.1 million for the second quarter of 2002 from $2.9 million for the same period of 2001. The interest-bearing liabilities acquired in the Pacific Western National Bank and
18
WHEC acquisitions led to the increase in average interest-bearing liabilities of $326.6 million which resulted in the increase in interest expense.
| Six Months ended June 30, 2002 | Six Months ended June 30, 2001 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest Income or Expense | Average Yield or Cost | Average Balance | Interest Income or Expense | Average Yield or Cost | |||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||
ASSETS | |||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||
Loans and leases | $ | 755,002 | $ | 27,317 | 7.30 | % | $ | 362,920 | $ | 16,648 | 9.25 | % | |||||||
Investment securities | 142,198 | 3,800 | 5.39 | % | 96,503 | 2,985 | 6.24 | % | |||||||||||
Federal funds sold | 54,465 | 444 | 1.64 | % | 98,865 | 2,393 | 4.88 | % | |||||||||||
Other earning assets | 352 | 6 | 3.44 | % | 308 | 6 | 3.93 | % | |||||||||||
Total interest-earning assets | 952,017 | 31,567 | 6.69 | % | 558,596 | 22,032 | 7.95 | % | |||||||||||
Noninterest-earning assets: | |||||||||||||||||||
Other assets | 151,098 | 64,515 | |||||||||||||||||
Total assets | $ | 1,103,115 | $ | 623,111 | |||||||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Deposits | |||||||||||||||||||
Interest-bearing demand | $ | 93,735 | $ | 157 | 0.34 | % | $ | 54,893 | $ | 306 | 1.13 | % | |||||||
Money market | 282,812 | 1,844 | 1.31 | % | 161,316 | 2,451 | 3.06 | % | |||||||||||
Savings | 43,225 | 108 | 0.50 | % | 28,648 | 244 | 1.72 | % | |||||||||||
Time | 179,929 | 2,870 | 3.22 | % | 87,839 | 2,211 | 5.08 | % | |||||||||||
Total interest-bearing deposits | 599,701 | 4,979 | 1.67 | % | 332,696 | 5,212 | 3.16 | % | |||||||||||
Other interest-bearing liabilities | 32,355 | 1,152 | 7.18 | % | 14,369 | 658 | 9.23 | % | |||||||||||
Total interest-bearing liabilities | 632,056 | 6,131 | 1.96 | % | 347,065 | 5,870 | 3.41 | % | |||||||||||
Noninterest-bearing liabilities: | |||||||||||||||||||
Demand deposits | 366,322 | 227,246 | |||||||||||||||||
Other liabilities | 17,918 | 12,434 | |||||||||||||||||
Total liabilities | 1,016,296 | 586,745 | |||||||||||||||||
Shareholders' equity | 86,819 | 36,366 | |||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,103,115 | $ | 623,111 | |||||||||||||||
Net interest income | $ | 25,436 | $ | 16,162 | |||||||||||||||
Net interest spread | 4.73 | % | 4.54 | % | |||||||||||||||
Net interest margin | 5.39 | % | 5.83 | % | |||||||||||||||
Six month analysis. Interest income increased by approximately $9.5 million to $31.6 million for the six months ended June 30, 2002 from $22.0 million for the same period of 2001. The increase in interest income was due largely to the increase of approximately $393.4 million in average earning assets due primarily to the acquisitions completed since the end of the third quarter of 2001.
The net interest spread increased to 4.73% from 4.54% for the six months ended June 30, 2002 compared to the same period of 2001. However, the net interest margin decreased to 5.39% for the six months ended June 30, 2002 from 5.83% for the same period in 2001. The 44 basis point decline in the net interest margin is attributed mainly the overall decline in the interest rate environment and occurred despite the proportion of average loans to total interest earning assets increasing to 79% for the 2002 period compared to 65% for the same period of 2001. The Company aggressively lowered its
19
cost of funds as general market interest rates fell in order to maintain the Company's net interest margin. However, due to the Company's high percentage of average noninterest-bearing deposits to total average deposits (37% of total average deposits in 2002 compared to 40% of total average deposits in 2001), the rate paid on the Company's deposits will not decrease at the same pace as the market rate reductions experienced over the last year.
Noninterest Income.
Second quarter analysis. The following table sets forth the details of noninterest income for the three months ended June 30, 2002 and 2001 and pro forma details for the three months ended June 30, 2002 and 2001 as if the acquisitions of First Charter, Pacific Western National Bank, and WHEC had been effective on January 1, 2001. The second quarter of 2002 is the first full quarter that includes the results of Pacific Western National Bank and WHEC.
| Three Months Ended June 30, | Actual | Three Months Ended June 30, | Pro Forma | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 Actual | 2001 Actual | Increase (Decrease) | 2002 Pro Forma | 2001 Pro Forma | Increase (Decrease) | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
Noninterest income: | |||||||||||||||||||||
Service charges and fees on deposit accounts | $ | 1,229 | $ | 567 | $ | 662 | $ | 1,229 | $ | 1,097 | $ | 132 | |||||||||
Merchant discount fees | 146 | 94 | 52 | 146 | 125 | 21 | |||||||||||||||
Other commissions and fees | 349 | 285 | 64 | 349 | 497 | (148 | ) | ||||||||||||||
Gain on sale of loans | 145 | 64 | 81 | 145 | 163 | (18 | ) | ||||||||||||||
Gain on sale of merchant card portfolio | 934 | — | 934 | 934 | — | 934 | |||||||||||||||
Other income | 261 | 90 | 171 | 261 | 175 | 86 | |||||||||||||||
Total noninterest income | $ | 3,064 | $ | 1,100 | $ | 1,964 | $ | 3,064 | $ | 2,057 | $ | 1,007 | |||||||||
Service charges and fees on deposit accounts increased $662,000 for the three months ended June 30, 2002 when compared to the same period of 2001. The actual results for the three month period ended June 30, 2002 include First Charter, Pacific Western National Bank and WHEC, all of which were acquired subsequent to June 30, 2001, and as such, are not included in the three month period ended June 30, 2001 results. As a percentage of average noninterest-bearing deposits, service charges and fees increased to 120 basis points for the three months period ended June 30, 2002 from 100 basis points for the same period of 2001. Merchants discount fee income increased for the three months ended June 30, 2002 from the same period in 2001 primarily as a result of the First Charter, Pacific Western National Bank, and WHEC acquisitions which increased the Company's merchant base. Included in the three months ended June 30, 2002 results is a $934,000 gain from the sale of the merchant card processing portfolio. Because of the sale, it is anticipated that merchant discount fee income in future periods will decrease from current levels. Other income for the three months ended June 30, 2002 increased $171,000 from the same period of 2001. Included in other income is appreciation of the cash surrender value of bank owned life insurance of $183,000 for the three months ended June 30, 2002.
On a pro forma basis, total noninterest income increased by approximately $1.0 million to $3.1 million for three months ended June 30, 2002, from $2.1 million for three months ended June 30, 2001, due primarily to the gain on sale of the merchant card portfolio.
Six month analysis. The following table sets forth the details of noninterest income for the six months ended June 30, 2002 and 2001 and pro forma details for the six months ended June 30, 2002
20
and 2001 as if the acquisitions of First Charter, Pacific Western National Bank and WHEC had been effective at the beginning of 2001.
| Six Months Ended June 30, | Actual | Six Months Ended June 30, | Pro Forma | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 Actual | 2001 Actual | Increase (Decrease) | 2002 Pro Forma | 2001 Pro Forma | Increase (Decrease) | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
Noninterest income: | |||||||||||||||||||||
Service charges and fees on deposit accounts | $ | 2,344 | $ | 1,118 | $ | 1,226 | $ | 2,608 | $ | 2,148 | $ | 460 | |||||||||
Merchant discount fees | 230 | 163 | 67 | 253 | 217 | 36 | |||||||||||||||
Other commissions and fees | 752 | 569 | 183 | 795 | 1,000 | (205 | ) | ||||||||||||||
Gain on sale of loans | 209 | 169 | 40 | 220 | 316 | (96 | ) | ||||||||||||||
Gain on sale of merchant card portfolio | 934 | — | 934 | 934 | — | 934 | |||||||||||||||
Other income | 604 | 199 | 405 | 692 | 384 | 308 | |||||||||||||||
Total noninterest income | $ | 5,073 | $ | 2,218 | $ | 2,855 | $ | 5,502 | $ | 4,065 | $ | 1,437 | |||||||||
Service charges and fees on deposit accounts increased $1.2 million for the six months ended June 30, 2002 when compared to the same period of 2001. As a percentage of average noninterest-bearing deposits, service charges and fees increased to 129 basis points for the six months ended June 30, 2002 from 99 basis points for the same period of 2001. The increase in merchant discount fee income for the six months ended June 30, 2002 when compared to the same period of 2001 is as noted in the second quarter analysis. Other income for the six months ended June 30, 2002 includes a gain on sale of other real estate owned of $145,000 and appreciation of cash surrender value of bank owned life insurance of $315,000.
On a pro forma basis, total noninterest income increased by approximately $1.4 million to $5.5 million for six months ended June 30, 2002, from $4.1 million for six months ended June 30, 2001 due primarily to service charges on deposit accounts as well as the one-time gain on the sale of the merchant card portfolio.
Noninterest Expense.
Second quarter analysis. The following table sets forth the details of noninterest expense for the three months ended June 30, 2002 and 2001 and pro forma details for the three months ended June 30, 2002 and 2001 as if the acquisitions of First Charter, Pacific Western National Bank and WHEC had
21
been effective on January 1, 2001. The second quarter of 2002 is the first full quarter that includes the results of Pacific Western National Bank and WHEC.
| Three Months Ended June 30, | Actual | Three Months Ended June 30, | Pro Forma | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 Actual | 2001 Actual | Increase (Decrease) | 2002 Pro Forma | 2001 Pro Forma | Increase (Decrease) | ||||||||||||||
| (In thousands) | |||||||||||||||||||
Noninterest expense: | ||||||||||||||||||||
Salaries and employee benefits | $ | 5,362 | $ | 2,967 | $ | 2,395 | $ | 5,362 | $ | 5,465 | $ | (103 | ) | |||||||
Occupancy | 1,225 | 719 | 506 | 1,225 | 1,279 | (54 | ) | |||||||||||||
Furniture and equipment | 742 | 329 | 413 | 742 | 672 | 70 | ||||||||||||||
Data processing | 736 | 390 | 346 | 736 | 758 | (22 | ) | |||||||||||||
Other professional services | 726 | 438 | 288 | 726 | 1,066 | (340 | ) | |||||||||||||
Business development | 270 | 151 | 119 | 270 | 346 | (76 | ) | |||||||||||||
Communications | 387 | 184 | 203 | 387 | 322 | 65 | ||||||||||||||
Stationery and supplies | 199 | 59 | 140 | 199 | 104 | 95 | ||||||||||||||
Insurance and assessments | 309 | 264 | 45 | 309 | 375 | (66 | ) | |||||||||||||
Cost of other real estate owned | 8 | 2 | 6 | 8 | 8 | — | ||||||||||||||
Other | 888 | 343 | 545 | 888 | 693 | 195 | ||||||||||||||
Operating expense | 10,852 | 5,846 | 5,006 | 10,852 | 11,088 | (236 | ) | |||||||||||||
Goodwill amortization | — | 76 | (76 | ) | — | 76 | (76 | ) | ||||||||||||
Core deposit intangible amortization | 339 | — | 339 | 339 | — | 339 | ||||||||||||||
Total noninterest expense | $ | 11,191 | $ | 5,922 | $ | 5,269 | $ | 11,191 | $ | 11,164 | $ | 27 | ||||||||
Total operating expenses (noninterest expenses before the amortization of intangibles) increased by $5.0 million for the three months ended June 30, 2002 from the same period of 2001. The actual results for the three months ended June 30, 2002 include First Charter, Pacific Western National Bank and WHEC, all of which were acquired subsequent to June 30, 2001. Total noninterest expense for the three months ended June 30, 2002 includes core deposit intangible amortization of $339,000. The underlying asset relates to the Pacific Western National Bank and WHEC acquisitions, and was quantified during the second quarter of 2002. The resulting amortization expense is a cumulative adjustment, and not indicative of a normal quarterly run rate.
Total operating expense, on a pro forma basis, approximated $10.9 million for the three months ended June 30, 2002 and $11.1 million for the same period of 2001. A decline in salaries and employee benefits expense of $103,000 and other professional services expense of $340,000 were offset partially by an increase in other expenses of $195,000. The expected operating expense benefits, as a result of the acquisitions, are typically achieved after data systems conversion. The Company performed three data systems conversions during the second quarter of 2002 to reflect the current company structure of two bank subsidiaries.
Six month analysis. The following table sets forth the details of noninterest expense for the six months ended June 30, 2002 and 2001 and pro forma details for the six months ended June 30, 2002
22
and 2001 as if the acquisitions of First Charter, Pacific Western National Bank and WHEC had been effective on January 1, 2001.
| Six Months Ended June 30, | Actual | Six Months Ended June 30, | Pro Forma | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2002 Actual | 2001 Actual | Increase (Decrease) | 2002 Pro Forma | 2001 Pro Forma | Increase (Decrease) | ||||||||||||||
| (In thousands) | |||||||||||||||||||
Noninterest expense: | ||||||||||||||||||||
Salaries and employee benefits | $ | 10,059 | $ | 6,419 | $ | 3,640 | $ | 11,000 | $ | 11,487 | $ | (487 | ) | |||||||
Occupancy | 2,305 | 1,449 | 856 | 2,554 | 2,552 | 2 | ||||||||||||||
Furniture and equipment | 1,382 | 673 | 709 | 1,500 | 1,392 | 108 | ||||||||||||||
Data processing | 1,480 | 834 | 646 | 1,601 | 1,516 | 85 | ||||||||||||||
Other professional services | 1,280 | 796 | 484 | 1,378 | 1,887 | (509 | ) | |||||||||||||
Business development | 487 | 346 | 141 | 559 | 730 | (171 | ) | |||||||||||||
Communications | 726 | 414 | 312 | 779 | 694 | 85 | ||||||||||||||
Stationery and supplies | 320 | 107 | 213 | 381 | 282 | 99 | ||||||||||||||
Insurance and assessments | 509 | 523 | (14 | ) | 546 | 743 | (197 | ) | ||||||||||||
Cost of other real estate owned | 71 | 32 | 39 | 71 | 42 | 29 | ||||||||||||||
Other | 1,524 | 796 | 728 | 1,614 | 1,446 | 168 | ||||||||||||||
Operating expense | 20,143 | 12,389 | 7,754 | 21,983 | 22,771 | (788 | ) | |||||||||||||
Goodwill amortization | — | 134 | (134 | ) | — | 134 | (134 | ) | ||||||||||||
Core deposit intangible amortization | 339 | — | 339 | 339 | — | 339 | ||||||||||||||
Total noninterest expense | $ | 20,482 | $ | 12,523 | $ | 7,959 | $ | 22,322 | $ | 22,905 | $ | (583 | ) | |||||||
Total operating expenses (noninterest expenses before the amortization of intangibles) increased by $7.8 million for the six months ended June 30, 2002 when compared to the same period of 2001. Total noninterest expense for the six months ended June 30, 2002 includes core deposit intangible amortization of $339,000 which relates to the acquisitions completed during 2002. Total operating expense decreased, on a pro forma basis, approximately $788,000 to $22.0 million for the six months ended June 30, 2002 from $22.8 million for the six months ended June 30, 2001. The decrease, on a pro forma basis, is primarily due to a decline in salaries expense, other professional services expense, insurance and assessments and business development. Additional operating efficiencies are expected as the Company consolidates the operations of the banks that have been acquired.
Income Taxes. The Company's normal effective income tax rate is approximately 42.0%, representing a blend of the statutory Federal income tax rate of 35.0% and the California income tax rate of 10.84%. Due to the deductibility of income on certain investment vehicles and the nondeductibility of goodwill amortization, the Company's actual effective income tax rates were 39.6% and 41.1% for the three months ended June 30, 2002 and 2001, respectively, and 39.9% and 41.3% for the six months ended June 30, 2002 and 2001, respectively.
Balance Sheet Analysis
Loans. Income for the Company is dependent on loan growth and continual efforts to prevent any unexpected loan losses that would require additions to the allowance for loan losses in addition to controlling costs. The Company believes that the demand for loans has increased in the Company's primary market areas due to the growth in the southern California economy along with the ability of the Company's customers to participate in that growth. However, the perceived increase in the demand for loans is tempered by the highly competitive banking marketplace and the Company's desire to maintain strong credit quality standards. In spite of these factors, the Company's business development efforts resulted in an increase in loans. Since March 31, 2002, loans, net of deferred fees and costs, have grown $83.1 million to $881.8 million from $798.7 million, a growth of approximately 10.4%.
23
The Company defines nonperforming assets to include (i) loans past due 90 days or more and still accruing; (ii) loans on which it has ceased to accrue interest ("Nonaccrual Loans"); and (iii) assets acquired through foreclosure including other real estate owned. "Impaired loans" are commercial, commercial real estate, and individually significant mortgage loans for which it is probable that the Company will not be able to collect all amounts due according to the original contractual terms of the loan agreement. The category of "impaired loans" is not coextensive with the category of "nonaccrual loans," although the two categories overlap. Nonaccrual Loans include impaired loans and are those on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or payments of principal or interest have become contractually past due 90 days. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the original contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan.
Planned workout arrangements are currently in place or in negotiation for all nonperforming assets. Management is not aware of any additional significant loss potential that has not already been included in the estimation of the allowance for loan losses.
Credit Quality. The following table shows the historical trends in the Company's loans, allowance for loan losses, nonperforming assets and key credit quality statistics as of and for the periods indicated:
| As of or for the Periods Ended | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Six Months 6/30/02 | Three Months 3/31/02 | Year 12/31/01 | Nine Months 9/30/01 | Six Months 6/30/01 | Three Months 3/31/01 | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
Loans, net of deferred fees and costs | $ | 881,766 | $ | 798,714 | $ | 501,740 | $ | 389,244 | $ | 376,502 | $ | 359,393 | ||||||||
Allowance for loan loss | 13,136 | 13,563 | 11,209 | 10,248 | 10,424 | 11,215 | ||||||||||||||
Average loans | 755,002 | 655,196 | 395,337 | 381,531 | 362,920 | 358,644 | ||||||||||||||
Loans past due 90 days or more and still accruing | $ | — | $ | 112 | $ | — | $ | — | $ | — | $ | 250 | ||||||||
Nonaccrual loans and leases | 6,237 | 6,205 | 4,672 | 6,103 | 11,225 | 11,340 | ||||||||||||||
Other real estate owned | 2,797 | 2,747 | 3,075 | 309 | 654 | 654 | ||||||||||||||
Nonperforming assets | 9,034 | 9,064 | 7,747 | 6,412 | 11,879 | 12,244 | ||||||||||||||
Impaired loans, gross | 6,237 | 6,205 | 4,672 | 6,103 | 11,225 | 11,340 | ||||||||||||||
Allocated allowance for loan losses | (910 | ) | (783 | ) | (1,256 | ) | (1,861 | ) | (3,026 | ) | (3,161 | ) | ||||||||
Net investment in impaired loans | 5,327 | 5,422 | 3,416 | 4,242 | 8,199 | 8,179 | ||||||||||||||
Charged-off loans year-to-date | 2,220 | 1,039 | 2,666 | 2,065 | 1,798 | 119 | ||||||||||||||
Recoveries year-to-date | (1,181 | ) | (429 | ) | (1,203 | ) | (710 | ) | (618 | ) | (182 | ) | ||||||||
Net charge-offs (recoveries) (normalized) * | $ | 1,039 | $ | 610 | $ | 1,463 | $ | 1,355 | $ | 1,180 | $ | (63 | ) | |||||||
Allowance for loan losses to loans, net of deferred fees and costs | 1.49 | % | 1.70 | % | 2.23 | % | 2.63 | % | 2.77 | % | 3.15 | % | ||||||||
Allowance for loan losses to nonaccrual loans and Leases | 210.1 | % | 218.6 | % | 239.9 | % | 167.9 | % | 92.9 | % | 98.9 | % | ||||||||
Allowance for loan losses to nonperforming assets | 145.4 | % | 149.6 | % | 144.7 | % | 159.8 | % | 87.8 | % | 91.6 | % | ||||||||
Nonperforming assets to loans and OREO | 1.02 | % | 1.13 | % | 1.53 | % | 1.65 | % | 3.15 | % | 3.43 | % | ||||||||
Annualized net charge offs to average loans | 0.28 | % | 0.38 | % | 0.37 | % | 0.50 | % | 0.65 | % | (0.07 | )% | ||||||||
Nonaccrual loans to loans, net of deferred fees and costs | 0.71 | % | 0.78 | % | 0.93 | % | 1.57 | % | 2.98 | % | 3.18 | % |
- *
- Normalized net charge-offs (recoveries) excludes $4,905,000 of First Professional loans charged-off in a one-time charge associated with the First Professional acquisition in the first quarter of 2001.
24
Nonaccrual loans increased slightly during the quarter ended June 30, 2002 to $6.24 million from $6.20 million at March 31, 2002. However, the percentage of nonaccrual loans to loans, net of deferred fees and costs, declined to 0.71% from 0.78% as a result of the significant loan growth experienced during the second quarter.
As of June 30, 2002, the Company had approximately $6.2 million of loans which were considered impaired, all of which were on nonaccrual status, compared to $4.7 million at December 31, 2001. The allowance for loan losses at June 30, 2002 includes allocated allowances of approximately $910,000 established for certain impaired loans. Nonperforming assets increased approximately $1.3 million to $9.0 million at June 30, 2002 from $7.7 million at December 31, 2001. This increase is mostly a result of an increase in nonaccrual loans of $1.6 million, of which $1.4 million was acquired as these loans were classified as nonaccrual at Pacific Western National Bank and WHEC at time of acquisition. During the first half of 2002, the Company acquired approximately $1.4 million of other real estate and sold approximately $1.7 million of other real estate.
Loans past due 90 days and still accruing represent loans which are past due 90 days or more as to interest or principal, but not included in the nonaccrual or restructured categories. All loans in this category are well-secured and in the process of collection or renewal.
Allowance for Loan Losses. The Company has established a monitoring system for its loans in order to identify impaired loans and potential problem loans and to permit periodic evaluation of impairment and the adequacy of the allowance for loan losses in a timely manner. The monitoring system and allowance for loan losses methodology have evolved over a period of years, and loan classifications have been incorporated into the determination of the allowance for loan losses. This monitoring system and allowance methodology include a loan-by-loan analysis for all classified loans as well as loss factors for the balance of the portfolio that are based on migration analysis relative to the Company's unclassified portfolio. This analysis includes such factors as historical loss experience, current portfolio delinquency and trends and other inherent risk factors such as acquisition risk, economic conditions, concentrations in the portfolio risk levels of particular loan categories, internal loan review and management oversight.
The percentage of allowance for loan losses to loans, net of deferred fees and costs, was 1.49% at June 30, 2002, down from 2.23% at December 31, 2001. The decrease in the percentage during 2002 is due mostly to loans and allowance for loan losses acquired in the acquisitions of Pacific Western National Bank and WHEC and the growth of loans in the second quarter. Net OREO decreased $278,000 to $2.8 million as of June 30, 2002 from December 31, 2001. Total nonperforming assets decreased by $30,000 during the second quarter of 2002 with nonaccrual loans and loans past due 90 days and still accruing decreasing $80,000 and OREO increasing $50,000. The ratio of nonperforming assets to gross loans and OREO decreased to 1.02% as of June 30, 2002 from 1.53% at December 31, 2001.
The Company had net charge offs of $1.0 million during the six months ended June 30, 2002 represented by charge offs of $2.2 million and recoveries of $1.2 million during the period. The allowance for loan losses increased by $1.9 million to $13.1 million at June 30, 2002 from $11.2 million at December 31, 2001. The ratio of the allowance for loan losses to nonperforming assets stood at 145.4% as of June 30, 2002 compared to 144.7% as of December 31, 2001. Further, the allowance for loan losses as a percentage of nonaccrual loans was 210.1% at June 30, 2002 compared to 239.9% at December 31, 2001. Management believes that the allowance for loan losses at June 30, 2002 is adequate to cover any shortfall that may occur upon disposition of the collateral along with the remaining nonaccrual loans based on the Company's quarterly migration analysis of loan losses, continued adherence to established credit policies and other key credit quality indicators.
25
Regulatory Matters. The regulatory capital guidelines as well as the actual regulatory capital ratios for Rancho, Pacific Western, and the Company on a consolidated basis as of June 30, 2002, are as follows:
| Regulatory Requirements (Greater than or equal to stated percentage) | Actual | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| Adequately Capitalized | Well Capitalized | Rancho | Pacific Western | Consolidated | ||||||
Tier 1 leverage capital ratio | 4.00 | % | 5.00 | % | 7.78 | % | 7.64 | % | 8.28 | % | |
Tier 1 risk-based capital ratio | 4.00 | % | 6.00 | % | 9.17 | % | 9.42 | % | 10.04 | % | |
Total risk-based capital | 8.00 | % | 10.00 | % | 10.16 | % | 10.67 | % | 11.54 | % |
Liquidity, Interest Rate Sensitivity and Market Risk. On a stand-alone basis, the Company's sources of liquidity include dividends from the Banks and outside borrowings. The amount of dividends that the Banks can pay to the Company is restricted by regulatory guidelines.
The primary function of asset/liability management is to ensure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities at the Banks. Liquidity management involves 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. Interest rate sensitivity management seeks to avoid fluctuating interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.
Historically, the overall liquidity of the Banks is based on the core deposit base of the Banks. The Banks have not relied on large denomination time deposits. To meet short-term liquidity needs, the Company has maintained at the Banks what it believes are adequate balances in federal funds sold, interest-bearing deposits in financial institutions and investment securities having maturities of five years or less. On a consolidated basis, liquid assets (cash, federal funds sold and investment securities available-for-sale) as a percent of total deposits were 22.2% and 32.7% as of June 30, 2002 and December 31, 2001, respectively.
Market risk sensitive instruments are generally defined as derivatives and other financial instruments. At December 31, 2001 and June 30, 2002, the Company had no derivatives. The Company's financial instruments include loans receivable, federal funds sold, interest-bearing deposits in financial institutions, FRB and FHLB stock, investment securities, deposits, short-term borrowings, convertible debt and trust preferred securities. At December 31, 2001, the Company had approximately $667 million in interest sensitive assets and approximately $706 million in interest sensitive liabilities. At June 30, 2002, the Company's interest sensitive assets and interest sensitive liabilities each totaled approximately $1.1 billion. The increase in interest sensitive assets and interest sensitive liabilities was a result mostly of assets and liabilities acquired in the Pacific Western National Bank and WHEC acquisitions.
The yield on interest sensitive assets and the cost of interest sensitive liabilities for the three month period ended June 30, 2002 was 6.69% and 1.16%, respectively, compared to 5.93% and 1.50%, respectively, for the three month period ended December 31, 2001. The increase in the yield on interest sensitive assets during the quarter is primarily a result of acquiring higher yielding assets in the acquisitions of Pacific Western National Bank and WHEC during the first quarter of 2002 and then shifting earning assets to loans from Fed funds and investments during the second quarter. The decrease in the cost of interest sensitive liabilities during the first half of 2002 is primarily a result of a shift in the composition of interest bearing deposits from higher costing certificates of deposit to lower costing products, such as money market accounts, in addition to certificate of deposits continuing to mature and reprice in the current lower interest rate environment.
26
The Company's interest sensitive assets and interest sensitive liabilities were reported to have estimated fair values of $660.1 million and $708.3 million, respectively, at December 31, 2001. Because of the floating and short-term nature of its interest sensitive assets and liabilities and the use of purchase accounting for the acquisitions completed in 2002, management believes that there has been no material change in the difference between the book value of the interest sensitive assets and liabilities and their estimated fair values.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Information concerning our exposure to market risk, which has remained relatively unchanged from December 31, 2001, is incorporated by reference from the text under the caption "Qualitative and Quantitative Disclosure About Market Risk" in the Form 10-K for the year ended December 31, 2001. In addition, see the section titled "Liquidity, Interest Rate Sensitivity and Market Risk" in the Management's Discussion and Analysis of Financial Condition and Results of Operations.
27
ITEM 1. Legal Proceedings
None
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
- (a)
- The Company held its annual shareholder meeting on May 22, 2002.
- (b)
- The following directors were elected at the annual meeting to serve until the next annual meeting of shareholders and thereafter until their successors are duly elected and qualified:
- (c)
- At the annual meeting, shareholders voted on (1) the election of the Company's directors; and (2) an amendment to the Company's Stock Incentive Plan to increase the number of shares subject to the Plan from 1,075,079 to 1,600,000. The results of the voting were as follows:
Timothy L. Blixseth
Harold W. Clark
Stephen M. Dunn
John M. Eggemeyer
Barry C. Fitzpatrick
Robert E. Herrmann
Timothy B. Matz
Robert A. Schoellhorn*
Robert A. Stine
Matthew P. Wagner
David S. Williams
Matter | Votes For | Votes Against | Withheld | Abstentions | Broker Non-votes | |||||
---|---|---|---|---|---|---|---|---|---|---|
Election of Directors: | ||||||||||
Timothy L. Blixseth | 4,948,191 | — | — | 42,191 | — | |||||
Harold W. Clark | 4,973,389 | — | — | 16,993 | — | |||||
Stephen M. Dunn | 4,974,039 | — | — | 16,343 | — | |||||
John M. Eggemeyer | 4,974,039 | — | — | 16,343 | — | |||||
Barry C. Fitzpatrick | 4,970,500 | — | — | 19,882 | — | |||||
Robert E. Herrmann | 4,973,170 | — | — | 17,212 | — | |||||
Timothy B. Matz | 4,972,865 | — | — | 17,517 | — | |||||
Robert A. Schoellhorn* | 4,973,170 | — | — | 17,212 | — | |||||
Robert A. Stine | 4,974,039 | — | — | 16,343 | — | |||||
Matthew P. Wagner | 4,929,812 | — | — | 60,570 | — | |||||
David S. Williams | 4,974,039 | — | — | 16,343 | — | |||||
Approve 2000 Stock Incentive Plan Amendment | 3,691,477 | 93,681 | — | 89,470 | 1,115,753 |
- *
- On July 24, 2002, Mr. Schoellhorn resigned from the Board of Directors.
28
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit Number | Description | |
---|---|---|
2.1 | Agreement and Plan of Merger, dated as of April 18, 2002, by and among First Community Bancorp, Pacific Western National Bank and Upland Bank (Exhibit 2.1 to Registration Statement No. 333-91152 filed on Form S-4 on June 25, 2002 and incorporated herein by this reference). | |
2.2 | Agreement and Plan of Merger, dated as of May 13, 2002, by and between First Community Bancorp and Marathon Bancorp (Exhibit 2.4 to Registration Statement No. 333-91586 filed on Form S-4 on June 28, 2002 and incorporated herein by this reference). | |
2.3 | Agreement and Plan of Merger, by and among First Community Bancorp, Rancho Santa Fe National Bank and First National Bank, dated as of April 25, 2002 (Exhibit 2.3 to Registration Statement No. 333-90198 filed on Form S-3 on June 11, 2002 and incorporated herein by this reference). | |
3.1 | Articles of Incorporation of First Community Bancorp (Exhibit 3.1 to a Form 8-A filed on June 2, 2000 and incorporated herein by this reference). | |
3.2 | Bylaws of First Community Bancorp (Exhibit 4.2 to a Form S-3 filed on June 11, 2002 and incorporated herein by this reference). | |
10. | Guarantee Agreement By and Between First Community Bancorp and State Street Bank and Trust Company of Connecticut, National Association Dated as of June 26, 2002. | |
10.1 | Amended and Restated Declaration of Trust By and Among State Street Bank and Trust Company of Connecticut, National Association as Institutional Trustee, First Community Bancorp, as Sponsor, and Matthew P. Wagner, Lynn M. Hopkins and Robert Borgman, as Administrators dated June 26, 2002. | |
10.2 | Indenture between State Street Bank and Trust Company of Connecticut, National Association, as Trustee, and First Community Bancorp, as Issuer, dated as of June 26, 2002. |
B. Reports on Form 8-K
On May 14, 2002 the Company filed a current report on Form 8-K/A disclosing information related to the acquisition of W.H.E.C., Inc and Pacific Western National Bank amending a current report on Form 8-K filed March 21, 2002.
On June 10, 2002 the Company filed a current report on Form 8-K disclosing information related to the acquisition of First National Bank. An amendment to such report was filed on Form 8-K/A on July 3, 2002.
29
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST COMMUNITY BANCORP | |||
Date: August 14, 2002 | By: | /s/ LYNN M. HOPKINS | |
Lynn M. Hopkins Executive Vice President and Chief Financial Officer |
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TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED (In Thousands)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
PART II—OTHER INFORMATION
SIGNATURES