Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
¨ | 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: 333-126401
FCB BANCORP
(Exact Name of Registrant as Specified in its Charter)
California | 20-3074387 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
1100 Paseo Camarillo Camarillo, California | 93010 | |
(Address of Principal Executive Offices) | (Zip Code) |
(805) 484-0534
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.¨ Yesþ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ¨ Yesþ No
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.þ Yes¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ
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¨ Accelerated filer ¨ Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).¨ Yesþ No
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2006 was $42,508,838 based on a closing price of $22.40 for the common stock, as reported on the Over-The-Counter Bulletin Board. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant.
Common Stock — As of March 13, 2007, there were no shares of the issuer’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Table of Contents
Table of Contents
Explanatory Note
On March 12, 2007, FCB Bancorp and First California Financial Group, Inc., a Delaware corporation, or First California, completed the previously announced merger of FCB Bancorp with and into First California. We refer to that merger in this document as the FCB Merger As a result of the FCB Merger, the separate corporate existence of FCB Bancorp ceased, and First California succeeded, and assumed all the rights and obligations of, FCB Bancorp. The FCB Merger immediately followed the completion of the previously announced reincorporation merger of National Mercantile Bancorp, a California corporation, or National Mercantile, with and into First California, National Mercantile’s wholly-owned subsidiary. We refer to the reincorporation merger in this document as the Reincorporation Merger and, together with the FCB Merger, the Mergers. As a result of the Reincorporation Merger, the separate corporate existence of National Mercantile ceased, and First California succeeded, and assumed all the rights and obligations of, its former parent, National Mercantile.
Because the FCB Merger was not completed prior to December 31, 2006 and pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended, or Exchange Act, and related regulations of the Securities and Exchange Commission, or SEC, First California is filing this Annual Report on Form 10-K on behalf of FCB Bancorp for the fiscal year ended December 31, 2006. In connection with the completion of the Reincorporation Merger and because National Mercantile’s common stock was prior thereto registered under Section 12(b) of the Exchange Act, First California’s common stock was deemed registered under Section 12(b) of the Exchange Act by operation of paragraph (a) of Rule 12g-3 under the Exchange Act. Pursuant to Sections 12 and 13 of the Exchange Act and related regulations of the SEC, including Rule 12g-3, First California is also filing (1) an Annual Report on Form 10-KSB on behalf of National Mercantile for the fiscal year ended December 31, 2006 and (2) an Annual Report on Form 10-K with respect to First California (as the then wholly-owned subsidiary of National Mercantile) for its partial fiscal year ended December 31, 2006. Future periodic and other reports with respect to First California, including as successor to the businesses of each of FCB Bancorp and National Mercantile, will be filed by First California (Commission File No. 000-52498).
1
Table of Contents
Item 1. | Business |
Our Business
As used herein, the term “FCB Bancorp,” “the Company,” “our,” “us,” “we” or similar expression includes FCB Bancorp and its wholly-owned subsidiaries, First California Bank, FCB Statutory Trust I and SC Financial, unless the context indicates otherwise.
Business of FCB Bancorp
Historically, FCB Bancorp, was a one-bank holding company with First California Bank, or the Bank, as its principal subsidiary. FCB Bancorp’s common stock was publicly traded on the OTC Bulletin Board under the symbol “FCBA.” FCB Bancorp was incorporated on January 25, 2005 under the laws of the State of California to serve as the holding company for the Bank.
A reorganization of the Bank was accomplished on September 30, 2005, under the terms of a Plan of Reorganization and Merger Agreement that provided for the merger of the Bank with a wholly-owned merger subsidiary of FCB Bancorp. As a result of the reorganization, FCB Bancorp became the Bank’s sole shareholder with the stock of the Bank being its principal asset. Prior to the Mergers, FCB Bancorp’s primary function was to coordinate the general policies and activities of the Bank, as well as to consider from time to time, other legally available investment opportunities.
Business of First California Bank
Following the Mergers, First California Bank, or the Bank, became one of three wholly-owned bank subsidiaries of First California, along with Mercantile National Bank and South Bay Bank, N.A. The Bank is chartered under the laws of the State of California and is subject to supervision by the California Commissioner of Financial Institutions. The Federal Deposit Insurance Corporation, or the “FDIC”, insures the Bank’s deposits up to the maximum legal limit.
The Bank opened for business in 1979 under the name “Camarillo Community Bank” with one branch office located in Camarillo, California. In October 2001, the Bank changed its name to “First California Bank” in order to reflect the Bank’s growth beyond its initial primary market of Camarillo. The Bank remains today a full-service commercial bank headquartered in Camarillo, currently providing a broad range of banking products and services, including credit, cash management and deposit services through eight full service banking offices located in Anaheim Hills, Camarillo, Irvine, Oxnard, Simi Valley, Thousand Oaks, Ventura and Westlake Village.
On December 5, 2005, the Bank acquired essentially all of the assets and liabilities of South Coast Commercial Bank, including all current loan and deposit accounts. The business combination transaction closed immediately prior to the sale of South Coast Commercial Bank to Woori America Bank, a New York banking corporation.
Prior to the Mergers, FCB Bancorp had one reportable business segment—banking. The Bank concentrates its lending activities in two principal areas:
(1)Business Loans. Business loans, represented by commercial real estate loans, commercial loans and construction loans, comprise the largest portion of the Bank’s loan portfolio.
Commercial real estate loans rely upon the cash flow originating from the underlying real property. Commercial real estate is a cyclical industry that is affected not only by general economic conditions but also by local supply and demand. In the office sector, the demand for office space is highly dependent on employment
2
Table of Contents
levels. In the retail sector, the demand for retail space and the levels of retail rents are affected by consumer spending and confidence. The industrial sector has exposure to the level of exports, defense spending and inventory levels. Vacancy rates, location, and other factors affect the amount of rental income for commercial property. Tenants may relocate, fail to honor their lease or go out of business. In the multifamily residential sector, the demand for apartments is heavily influenced by the affordability of ownership housing, employment conditions and the vacancy of existing inventory. Population growth or decline and changing demographics, such as increases in the level of immigrants or retirees, are also factors influencing the multifamily residential sector.
Construction loans provide developers or owners with funds to build or improve properties that will ultimately be sold or leased. Construction loans are generally considered to involve a higher degree of risk than other loan categories because they rely upon the developer’s or owner’s ability to complete the project within specified cost and time limits. Cost overruns can cause the project cost to exceed the project sales price or exceed the amount of the committed permanent funding. Construction projects also can be delayed for a number of reasons such as poor weather, material or labor shortages, labor difficulties, or substandard work that must be redone to pass inspection.
Commercial loans rely upon the cash flow originating from the underlying business activity of the enterprise. The manufacture, distribution or sale of goods or sale of services are not only affected by general economic conditions but also by the ability of the enterprise’s management to adjust to local supply and demand conditions, maintain good labor, vendor and customer relationships, as well as market price and sell their goods or services for a profit. Customer demand for goods and services of the enterprise may change because of competition or obsolescence.
(2) Consumer Loans. Home mortgages and home equity loans and lines of credit are secured by first or second trust deeds on a borrower’s real estate property, typically their principal residence. These loans are dependant on a person’s ability to regularly pay the principal and interest due on the loan and, secondarily, on the value of real estate property that serves as collateral for the loan. Home mortgages are generally considered to involve a lower degree of risk than other loan categories because of the relationship of the loan amount to the value of the residential real estate and a person’s reluctance to forego their principal place of residence. Home real estate values, however, are not only affected by general economic conditions but also on local supply and demand. Installment loans and credit card lines are also dependant on a person’s ability to regularly pay principal and interest on a loan; however, these loans generally are not secured by collateral or, if they are secured, the collateral value can rapidly decline as is the case for automobiles. A person’s ability to service debt is highly dependant upon their continued employment or financial stability. Job loss, divorce, illness, and bankruptcy are just a few of the risks that may affect a person’s ability to service their debt.
The Bank’s goal is to offer its customers a consistently high level of individualized personal service. The Bank’s strategy in attaining its goals has been to implement and maintain risk management and controls to achieve a safe and sound business policy, employing an aggressive marketing plan which emphasizes relationship banking and the “personal touch,” offering competitive products and managing growth. The Bank provides convenience through eight banking offices with ATM access, 24 hour telephone access to account information, on-line banking and courier service. The diversity of our delivery systems enables customers to choose the method of banking, which is most convenient for them. The Bank trains its staff to recognize each customer, greet them, and be able to address them by name so that they feel as if they have a “private banker.”
Financial and Statistical Disclosure
Certain of our financial and statistical information is presented within “Item 6. Selected Financial Data,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” This information should be read in conjunction with the consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data.”
3
Table of Contents
Market Area
The Bank offers a wide range of business and consumer banking services primarily within the general area commonly known as the “101” corridor stretching from the City of Ventura to Calabasas, California. The Bank’s other markets include the Moorpark-Simi Valley corridor, the western San Fernando Valley, and other parts of Orange and Los Angeles Counties. The Bank’s officers have many years of experience in dealing with the businesses and professional service providers in our market area. This area has significant diversification and geographic concentration of the desired businesses and real estate development companies with annual sales of up to $20 million that we target.
Competition
The banking business in California, generally, and in the Bank’s service areas, specifically, is highly competitive with respect to both loans and deposits and is dominated by a number of major banks that have many offices operating over wide geographic areas. The Bank competes for deposits and loans principally with these major banks, savings and loan associations, finance companies, credit unions and other financial institutions located in our market areas. Among the advantages that the major banks have over the Bank are their ability to finance extensive advertising campaigns and to allocate their investment assets to regions of highest yield and demand. Many of the major commercial banks operating in the Bank’s service areas offer certain services (such as trust and international banking services) that are not offered directly by the Bank and, by virtue of their greater total capitalization, such banks have substantially higher lending limits. Moreover, all banks face increasing competition for loans and deposits from non-bank financial intermediaries such as mortgage companies, insurance companies, credit unions and securities firms.
As of June 30, 2006, the most recent period for which figures are available, data reported by state and federal agencies indicated that the 166 banks and savings and loan offices then open in the Bank’s primary market area, Ventura County, held approximately $12.2 billion in total deposits averaging approximately $73.8 million per banking office. The Bank’s total deposits ($304.1 million) in the Ventura market area at that time constituted 2.48% of the total deposits in that market.
In November 1999, the President signed the Gramm-Leach-Bliley Act, or the GLB Act, into law, which significantly changed the regulatory structure and oversight of the financial services industry. The GLB Act revised the Bank Holding Company Act of 1956 and repealed the affiliation prohibitions of the Glass-Steagall Act of 1933. Consequently, a qualifying holding company, called a financial holding company, can engage in a full range of financial activities, including banking, insurance, and securities activities, as well as merchant banking and additional activities that are “financial in nature” or “incidental” to those financial activities. Expanded financial affiliation opportunities for existing bank holding companies are now permitted. Moreover, various non-bank financial services providers can acquire banks while also offering services like securities underwriting and underwriting and brokering insurance products. The GLB Act also expanded passive investment activities by financial holding companies, permitting investments in any type of company, financial or non-financial, through acquisitions of merchant banking firms and insurance companies.
Given that the traditional distinctions between banks and other providers of financial services have been effectively eliminated, the Bank will face additional competition from thrift institutions, credit unions, insurance companies and securities firms. Additionally, their ability to cross-market banking products to their existing customers or the customers of affiliated companies may make it more difficult to compete. The Bank and many similarly situated institutions have not yet experienced the full impact of the GLB Act and, therefore, it is not possible to determine the potential effects, if any, that the GLB Act will have on community banks in general, or on the Bank’s operations specifically.
In order to compete, the Bank uses to the fullest extent possible the familiarity of its directors and officers with the market area and its residents and businesses and the flexibility that the Bank’s independent status will permit. This includes an emphasis on specialized services, local promotional activity, and personal contacts by
4
Table of Contents
directors, officers and other employees. The Bank uses advertising, including radio and newspaper ads and direct mail pieces, to inform the community of the services it offers. The Bank also utilizes emerging marketing techniques, such as the Internet, to reach target markets. The Bank also has an active calling program where officers, including commissioned business development officers, contact targeted prospects to solicit both deposit and loan business.
The Bank has developed programs that are specifically addressed to the needs of consumers, professionals and small-to medium-sized businesses. In the event there are customers whose loan demands exceed the Bank’s lending limits, it arranges for such loans on a participation basis with other financial institutions and intermediaries. The Bank also assists those customers requiring other services not offered by the Bank to obtain those services from correspondent banks. In addition, the Bank offers ATM services, a night depository, courier services, bank-by-mail services, merchant windows and direct deposit services.
The Bank’s management believes that the Bank’s reputation in the communities served and personal service philosophy enhance the ability to compete favorably in attracting and retaining individual and business clients. The Bank also believes that it has an advantage over the larger national and “super regional” institutions because it is managed by well respected and experienced bankers. Mergers, acquisitions and downsizing have and will continue to foster impersonal banking relationships which, in turn, may cause dissatisfaction among the Bank’s targeted customer population. Moreover, larger competitors may not offer adequate personalized banking services, since their emphasis is on large volume and standardized retail products.
The Bank faces growing competition from other community banks. These institutions have similar marketing strategies, have also been successful and are strong evidence regarding the potential success of the community banking sector.
No assurance can be given that ongoing efforts to compete will continue to be successful.
Dependence on One or a Few Major Customers; Business Concentrations
No individual or single group of related accounts is considered material in relation to our total assets or to the assets or deposits of the Bank, or in relation to our overall business. However, approximately 81% of our loan portfolio at December 31, 2006 consisted of real estate-related loans, including commercial real estate loans, construction loans, commercial loans, home mortgage loans, home equity loans and lines of credit. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Position — December 31, 2006 compared with December 31, 2005.” Moreover, our business activities are currently focused primarily in Southern California, with the majority of our business concentrated in Ventura, Orange and Los Angeles Counties. Consequently, our results of operations and financial condition are dependent upon the general trends in the Southern California economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of our operations in Southern California exposes us to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in this region.
Internet Banking Services
The Bank has its own “home page” address on the world wide web which serves as an additional means of providing customer access to a variety of banking services. The Bank’s website address is:www.fcbank.com.No information contained on the website is incorporated herein by reference.
Employees
At December 31, 2006, the Bank had 129 full-time equivalent employees. The Bank’s employees are not represented by any union or other collective bargaining agreement and the Bank considers its relations with employees to be excellent.
5
Table of Contents
Supervision and Regulation
Introduction
Banking is a complex, highly regulated industry. The primary goals of the regulatory scheme are to maintain a safe and sound banking system, protect depositors and the Federal Deposition Insurance Corporation’s, or the FDIC, insurance fund, and facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the states have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the financial services industry. Consequently, the growth and earnings performance of the Company or its successors and the Bank can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statues, regulations and the policies of various governmental regulatory authorities, including the Board of Governors of the Federal Reserve System, or the FRB, the Federal Deposit Insurance Corporation, and the California Department of Financial Institutions, or the DFI.
The system of supervision and regulation applicable to financial services businesses governs most aspects of the business of the Company and the Bank, including: (i) the scope of permissible business; (ii) investments; (iii) reserves that must be maintained against deposits; (iv) capital levels that must be maintained; (v) the nature and amount of collateral that may be taken to secure loans; (vi) the establishment of new branches; (vii) mergers and consolidations with other financial institutions; and (viii) the payment of dividends.
From time to time laws or regulations are enacted which have the effect of increasing the cost of doing business, limiting or expanding the scope of permissible activities, or changing the competitive balance between banks and other financial and non-financial institutions. Proposals to change the laws and regulations governing the operations of banks and bank holding companies are frequently made in Congress, in the California legislature and by various bank and other regulatory agencies. Future changes in the laws, regulations or polices that impact the Company or its successors and the Bank cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company and the Bank.
First California Bank
The Bank is extensively regulated under both federal and state law. The Bank, as a California state chartered bank which is not a member of the Federal Reserve System, is subject to regulation, supervision, and regular examination by the DFI and the FDIC. The Bank’s deposits are insured by the FDIC up to the maximum extent provided by law. The regulations of these agencies govern most aspects of the Bank’s business. California law exempts all banks from usury limitations on interest rates.
Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank’s operations, including standards for safety and soundness, reserves against deposits, interest rates payable on deposits and loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, fair lending requirements, Community Reinvestment Act activities and loans to affiliates. Further, the Bank is required to maintain certain levels of capital.
Regulatory Capital Guidelines.The federal banking agencies have established minimum capital standards known as risk-based capital guidelines. These guidelines are intended to provide a measure of capital that reflects the degree of risk associated with a bank’s operations. The risk-based capital guidelines include both a definition of capital and a framework for calculating the amount of capital that must be maintained against a bank’s assets and off-balance sheet items. The amount of capital required to be maintained is based upon the credit risks associated with the various types of a bank’s assets and off-balance sheet items. A bank’s assets and off-balance sheet items are classified under several risk categories, with each category assigned a particular risk weighting
6
Table of Contents
from 0% to 100%. The following table sets forth the regulatory capital guidelines and the actual capitalization levels for the Bank and the Company as of December 31, 2006:
Adequately Capitalized | Well Capitalized | First California Bank | FCB Bancorp | |||||||||
(greater than or equal to) | ||||||||||||
Total risk-based capital | 8.00 | % | 10.00 | % | 11.38 | % | 12.01 | % | ||||
Tier 1 risk-based capital ratio | 4.00 | % | 6.00 | % | 10.44 | % | 11.07 | % | ||||
Tier 1 leverage capital ratio | 4.00 | % | 5.00 | % | 8.87 | % | 9.07 | % |
As of December 31, 2006, management believes that the Company’s capital levels met all minimum regulatory requirements and that the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.
To enhance regulatory capital and to provide liquidity, the Company, through an unconsolidated subsidiary grantor trust, issued $10.3 million of trust preferred securities. These securities are currently included in First California’s, as the Company’s successor, Tier I capital for purposes of determining Tier I and total risk-based capital ratios. The FRB has promulgated a modification of the capital regulations affecting trust preferred securities. Under this modification, effective March 31, 2009, First California will be required to use a more restrictive formula to determine the amount of trust preferred securities that can be included in regulatory Tier I capital. At that time, First California will be allowed to include in Tier I capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as shareholders’ equity, less goodwill and any related deferred income tax liability. The regulations currently in effect through December 31, 2008, limit the amount of trust preferred securities that can be included in Tier I capital to 25% of the sum of core capital elements without a deduction for goodwill. Management has determined that the Company’s and its successor’s Tier I capital ratios would remain above the “well-capitalized” level had the modification of the capital regulations been in effect at December 31, 2006. First California expects that its Tier I capital ratios will be at or above the existing well capitalized levels on March 31, 2009, the first date on which the modified capital regulations must be applied.
Prompt Corrective Action. The federal banking agencies possess broad powers to take prompt corrective action to resolve the problems of insured banks. Each federal banking agency has issued regulations defining five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” Under the regulations, a bank shall be deemed to be:
• | “well capitalized” if it has a total risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a leverage capital ratio of 5.0% or more, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure; |
• | “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more, and a leverage capital ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”; |
• | “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage capital ratio that is less than 4.0% (3.0% under certain circumstances); |
• | “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%; and |
• | “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. |
Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment the bank would be “undercapitalized,” that is, the bank fails to meet the required minimum
7
Table of Contents
level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by its holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes, and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks, those with capital at or less than 2%. Restrictions for these banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.
In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties. The enforcement of such actions through injunctions or restraining orders may be based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.
The DFI, as the primary regulator for state-chartered banks, also has a broad range of enforcement measures, from cease and desist powers and the imposition of monetary penalties to the ability to take possession of a bank, including causing its liquidation.
Transactions With Affiliates. Under Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W, loans by the Bank to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of the Bank’s capital, in the case of any one affiliate, and is limited to 20% of the Bank’s capital, in the case of all affiliates. The Bank’s holding company and any subsidiaries it may purchase or organize are deemed to be affiliates of the Bank within the meaning of Section 23A and 23B and Regulation W. In addition, transactions between the Bank and other affiliates must be on terms and conditions that are consistent with safe and sound banking practices; in particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. The Company or its successors and the Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
Federal Deposit Insurance. The FDIC has implemented a risk-based assessment system in which the deposit insurance premium relates to the probability that the deposit insurance fund will incur a loss. Under the risk-based assessment system adopted by the FDIC, banks are categorized into one of three capital categories (“well capitalized,” “adequately capitalized,” and “undercapitalized”). Assignment of a bank into a particular capital category is based on supervisory evaluations by its primary federal regulator. Because of the FDIC’s favorable loss experience and a healthy reserve ratio in the Bank Insurance Fund (the “BIF”), well-capitalized and
8
Table of Contents
well-managed banks have in recent years paid minimal premiums for FDIC Insurance. The current deposit insurance system will remain in effect until the effective date of final regulations implementing the FDI Reform Act (discussed below).
On February 8, 2006, President Bush signed into law The Federal Deposit Insurance Reform Act of 2005 (the “FDI Reform Act”). The FDI Reform Act represents the most significant reform in the deposit insurance system in decades. The FDI Reform Act (i) merged the BIF and the Association Insurance Fund (or SAIF) (now the Deposit Insurance Fund or DIF), (ii) indexed the $100,000 insurance level to reflect inflation (the first adjustment for inflation will be effective January 1, 2011 and thereafter adjustments will occur every 5 years), (iii) increased deposit insurance coverage for retirement accounts to $250,000, which will also be subject to the every five years adjustment process, (iv) offered credits to banks that historically have capitalized the FDIC which can be used to offset premiums otherwise due (this addresses the fact that institutions that have grown rapidly have not had to pay deposit premiums), (v) imposed a cap on the level of the deposit insurance fund and provide for dividends when the fund grows beyond a specified threshold, (vi) adopted the historical basis concept for distributing the aforementioned one-time credit and dividends (each bank’s historical basis will be determined by a formula that involves looking back to the institution’s assessment base in 1996 and adding premiums paid since that time) and (vii) authorized revisions to the current risk-based system for assessing premiums. Management currently believes that the implementation of the FDI Reform Act will not have a material effect on the business and earnings of the Company or its successor and the Bank.
Money Laundering and Currency Controls.Various federal statutory and regulatory provisions are designed to enhance record-keeping and reporting of currency and foreign transactions. Pursuant to the Bank Secrecy Act, financial institutions must report high levels of currency transactions or face the imposition of civil monetary penalties for reporting violations. The Money Laundering Control Act imposes sanctions, including revocation of federal deposit insurance, for institutions convicted of money laundering.
The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”), a part of the Patriot Act, authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks and other financial institutions to enhance record-keeping and reporting requirements for certain financial transactions that are of primary money laundering concern. Among its other provisions, IMLAFATA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the Untied States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLAFATA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.
The Treasury Department’s regulations implementing IMLAFATA mandate that federally-insured banks and other financial institutions establish customer identification programs designed to verify the identity of persons opening new accounts, maintain the records used for verification, and determine whether the person appears on any list of known or suspected terrorists or terrorist organizations.
Community Reinvestment Act. The CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit needs of their entire community, including low-and moderate-income neighborhoods, consistent with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or acquisitions, or holding company formations.
9
Table of Contents
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. The ratings range from “outstanding” to a low of “substantial noncompliance.”
The Bank had a CRA rating of “Satisfactory” as of its most recent regulatory examination.
Environmental Regulation.Federal, state and local laws and regulations regarding the discharge of harmful materials into the environment may have an impact on the Bank. Since the Bank is not involved in any business that manufactures, uses or transports chemicals, waste, pollutants or toxins that might have a material adverse effect on the environment, the Bank’s primary exposure to environmental laws is through its lending activities and through properties or businesses the Bank may own, lease or acquire. Based on a general survey of the Bank’s loan portfolio, conversations with local appraisers and the type of lending currently and historically done by the Bank, management is not aware of any potential liability for hazardous waste contamination that would be reasonably likely to have a material adverse effect on the Company or its successors as of December 31, 2006.
Safeguarding of Customer Information and Privacy.The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require financial institutions to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank has adopted a customer information security program to comply with such requirements.
Financial institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the Bank’s policies and procedures. The Bank has implemented privacy policies addressing these restrictions which are distributed regularly to all existing and new customers of the Bank.
Patriot Act. On October 26, 2001, the President signed into law comprehensive anti-terrorism legislation, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, known as the Patriot Act. The Patriot Act was designed to deny terrorists and others the ability to obtain access to the United States financial system, and has significant implications for depository institutions and other businesses involved in the transfer of money. The Patriot Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Bank, to implement new policies and procedures or amend existing policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers. The Patriot Act and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB and other federal banking agencies to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act. The Bank has augmented its systems and procedures to accomplish this. The Bank believes that the ongoing cost of compliance with the Patriot Act is not likely to be material to the Bank.
Other Aspects of Banking Law. The Bank is also subject to federal statutory and regulatory provisions covering, among other things, security procedures, insider and affiliated party transactions, management interlocks, electronic funds transfers, funds availability, and truth-in-savings. There are also a variety of federal statutes which regulate acquisitions of control and the formation of bank holding companies.
10
Table of Contents
Impact Of Monetary Policies
Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by a bank on its deposits and its other borrowings and the interest rate earned on its loans, securities and other interest-earning assets comprises the major source of the Bank’s earnings. These rates are highly sensitive to many factors which are beyond the Bank’s control and, accordingly, the earnings and growth of the Bank are subject to the influence of economic conditions generally, both domestic and foreign, including inflation, recession, and unemployment; and also to the influence of monetary and fiscal policies of the United States and its agencies, particularly the FRB. The FRB implements national monetary policy, such as seeking to curb inflation and combat recession, by:
• | Open-market dealings in United States government securities; |
• | Adjusting the required level of reserves for financial institutions subject to reserve requirements; and |
• | Adjusting the discount rate applicable to borrowings by banks which are members of the Federal Reserve System. |
The actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates. Beginning January 2001, the FRB had significantly decreased interest rates. More recently, however, the FRB has gradually increased rates. The nature and timing of any future changes in the FRB’s policies and their impact on the Company and its successors and the Bank cannot be predicted; however, depending on the degree to which our interest-earning assets and interest-bearing liabilities are rate sensitive, increases in rates would have a temporary effect of increasing our net interest margin, while decreases in interest rates would have the opposite effect. In addition, adverse economic conditions could make a higher provision for loan losses a prudent course and could cause higher loan charge-offs, thus adversely affecting our net income or other operating costs.
Item 1A. | Risk Factors |
In light of the completion of the Mergers, summarized below are the material risks related to an investment in the common stock of FCB Bancorp’s successor, First California. You should carefully consider the risks described below in addition to the other information set forth herein. Unless otherwise specified, references to “we,” “our” and “us” in this subsection mean First California and its consolidated subsidiaries after the Mergers and FCB Bancorp and its subsidiary before the Mergers.
Risks Related to Our Business
Our growth presents certain risks, including a decline in credit quality or capital adequacy.
The asset growth of recent years experienced by FCB Bancorp may continue at First California following the Mergers, even if not at the same percentage rate experienced in recent years. Such growth presents certain risks. While we believe we have maintained good credit quality notwithstanding such growth, rapid growth is frequently associated with a decline in credit quality. Accordingly, continued asset growth could lead to a decline in credit quality in the future. In addition, continued asset growth could cause a decline in capital adequacy for regulatory purposes, which could in turn cause us to have to raise additional capital in the future to maintain or regain “well capitalized” status as defined under applicable banking regulations.
Our performance and growth are dependent on maintaining a high quality of service for our customers, and will be impaired by a decline in our quality of service.
Our growth will be dependent on maintaining a high quality of service for customers of First California following the Mergers. As a result of the Mergers and the corresponding growth, it may become increasingly difficult to maintain high service quality for our customers. This could cause a decline in our performance and growth with respect to net income, deposits, assets and other benchmarks.
11
Table of Contents
If borrowers and guarantors fail to perform as required by the terms of their loans, we will sustain losses.
A significant source of risk for First California arises from the possibility that losses will be sustained if our borrowers and guarantors fail to perform in accordance with the terms of their loans and guaranties. This risk increases when the economy is weak. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for loan losses, that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could materially adversely affect our results of operations.
Our allowance for loan losses may not be adequate to cover actual losses.
In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for actual loan losses. Our allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our operating results. Our allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. While we believe that our allowance for loan losses is adequate to cover current losses, it is possible that we will further increase the allowance for loan losses or that regulators will require increases. Either of these occurrences could materially and negatively affect our earnings.
The banking business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.
Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. We may not be able to minimize our interest rate risk. In addition, while an increase in the general level of interest rates may increase our net interest margin and loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume and overall profitability.
We face strong competition from financial services companies and other companies that offer banking services which could negatively affect our business.
We conduct our combined banking operations primarily in Ventura, Los Angeles and Orange Counties, California. Increased competition in these markets may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that we offer in our service areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger capitalizations and financial intermediaries not subject to bank regulatory restrictions have larger lending limits than we have and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to
12
Table of Contents
obtain deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened low-end production offices or that solicit deposits in their market areas. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios and our results of operations and financial condition may otherwise be adversely affected.
Changes in economic conditions, in particular an economic slowdown in Southern California, could materially and negatively affect our business.
Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control. A deterioration in economic conditions, whether caused by national or local concerns, in particular an economic slowdown in Southern California, could result in the following consequences, any of which could hurt our business materially: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decrease; low cost or noninterest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans. The State of California and certain local governments in our market area continue to face fiscal challenges upon which the long-term impact on the State’s or the local economy cannot be predicted.
A significant portion of the combined company’s loan portfolio consists of construction loans, which have greater risks than loans secured by completed real properties.
At December 31, 2006, FCB Bancorp had outstanding construction and land development loans in the amount of $48.3 million, representing 14% of its loan portfolio. These types of loans generally have greater risks than loans on completed homes, multifamily properties and commercial properties. A construction loan generally does not cover the full amount of the construction costs, so the borrower must have adequate funds to pay for the balance of the project. Price increases, delays and unanticipated difficulties can materially increase these costs. Further, even if completed, there is no assurance that the borrower will be able to sell the project on a timely or profitable basis, as these are closely related to real estate market conditions, which can fluctuate substantially between the start and completion of the project. If the borrower defaults prior to completion of the project, the value of the project will likely be less than the outstanding loan, and we could be required to complete construction with our own funds to minimize losses on the project.
A downturn in the real estate market could negatively affect our business.
A downturn in the real estate market could negatively affect our business because a significant portion (approximately 83% for the Company as of December 31, 2006) of our loans are secured by real estate. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.
Substantially all real property collateral for the Company is located in Southern California. If there is a significant decline in real estate values, especially in Southern California, the collateral for our loans would provide less security. Real estate values could be affected by, among other things, an economic slowdown, an increase in interest rates, earthquakes and other natural disasters particular to California.
We are subject to extensive regulation which could adversely affect our business.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on
13
Table of Contents
part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact our operations. These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted in the future, which could (1) make compliance much more difficult or expensive, (2) restrict our ability to originate, broker or sell loans or accept certain deposits, (3) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (4) otherwise adversely affect our business or prospects for business.
We are exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.
Our internal operations are subject to a number of risks.
We are subject to certain operations risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls and uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.
Risks Related to Our Common Stock
If First California is unable to integrate the operations of National Mercantile and FCB Bancorp successfully, its business and earnings may be negatively affected.
The Mergers involve the integration of companies that have previously operated independently. Successful integration of FCB Bancorp’s and National Mercantile’s operations will depend primarily on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. No assurance can be given that we will be able to integrate the operations of the two companies without encountering difficulties including, without limitation, the loss of key employees and customers, the disruption of the respective ongoing businesses or possible inconsistencies in standards, controls, procedures and policies. Estimated cost savings and revenue enhancements are projected to come from various areas identified through the due diligence and integration planning process. The elimination and consolidation of duplicate tasks are projected to result in annual cost savings. If there are difficulties with the integration process, we might not achieve the economic benefits we expect to result from the Mergers, and this may hurt our future business and earnings. In addition, First California may experience greater than expected costs or difficulties relating to the integration of the businesses of the two companies, and/or may not realize expected cost savings from the Mergers within the expected time frame.
Certain preferences and rights of preferred stockholders of First California may negatively affect the rights of holders of First California common stock.
First California’s certificate of incorporation authorizes its Board of Directors to issue up to 2,500,000 shares of preferred stock and to determine the rights, preferences, powers and restrictions granted or imposed upon any series of preferred stock without prior shareholder approval. The preferred stock that may be authorized
14
Table of Contents
could have preference over holders of First California common stock with respect to dividends and other distributions upon the liquidation or dissolution of First California. If First California’s Board of Directors authorizes the issuance of additional series of preferred shares having a voting preference over common stock, such issuances may inhibit or delay the approval of measures supported by holders of common stock that require shareholder approval and consequently may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and Board of Directors. Accordingly, such issuance could substantially impede the ability of public stockholders to benefit from a change in control or change of our management and Board of Directors and, as a result, may adversely affect the market price of our common stock and the stockholders’ ability to realize any potential change of control premium.
Currently, in the event of a voluntary or involuntary liquidation or dissolution, holders of series A convertible perpetual preferred stock of First California are entitled to receive a liquidation preference of $1,000 plus an amount equal to 8.5% per annum of the $1,000, which is deemed to have commenced accrual on December 10, 2001. This amount is payable out of the assets of First California before any distribution to holders of common stock. If the number of preferred shares having a similar liquidation preference increases, the chance that holders of common stock may receive a smaller distribution upon liquidation or dissolution may be higher.
We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.
We depend heavily on the services of our President and Chief Executive Officer, C. G. Kum, our Executive Vice President and Chief Financial Officer, Romolo C. Santarosa, our Executive Vice President and Head of Commercial Banking, Thomas Anthony, our Executive Vice President and Chief Credit Officer, Robert W. Bartlett, and our Executive Vice President and Chief Strategy Officer, David R. Brown and a number of other key management personnel. The loss of any of their services or that of other key personnel could materially and adversely affect our future results of operations and financial condition. Our success also depends in part on our ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the banking industry and we may not be successful in attracting or retaining the personnel we require.
We expect only a limited trading market for our common stock, which could lead to significant price volatility.
We expect the trading volumes of the common stock of First California to be modest. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to significant price volatility in excess of that which would occur in a more active trading market of our common stock. In addition, even if a more active market in our common stock develops, it is possible that such a market may not continue or that stockholders may not be able to sell their shares.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
The Bank owns its executive offices located at 1100 Paseo Camarillo, Camarillo, California. The building has approximately 5,100 square feet of space and adequate parking facilities.
The Bank also leases approximately 5,931 square feet of space for its administrative functions located at 730 Paseo Camarillo, Camarillo, California. The lease is with an unaffiliated third party. The lease term is for 5 years and commenced on August 1, 2004. The monthly base rent for the premises is $7,689 for 2007.
15
Table of Contents
The Bank owns its main branch located at 1150 Paseo Camarillo, Camarillo, California. The building has approximately 9,032 square feet of space and adequate parking facilities.
The Bank also leases approximately 4,000 square feet of space for its Westlake Village Branch Office located at 32111 Agoura Road, Westlake Village, California. The lease term is for 5 years and commenced on September 1, 2004, with one 5-year renewal option. The lease is with an unaffiliated third party. The monthly base rent for the premises is $6,800 for 2007.
The Bank also leases approximately 1,672 usable square feet of space for its Oxnard Branch Office located at 300 Esplanade Drive, Suite 102, Oxnard, California. The premises is located on the first floor. The lease term is for 5 years and commenced on April 1, 2000, with one 5-year renewal option. The lease is with an unaffiliated third party. The Bank exercised its option and the monthly base rent for the premises is $3,496 for 2007.
The Bank also leases approximately 2,373 square feet of space for its Ventura Branch Office located at 1794 S. Victoria, Suite B, Ventura, California. The premises is located on the first floor. The lease term is for 10 years and commenced on August 26, 2002, with two 5-year renewal options. The lease is with an unaffiliated third party. The monthly base rent for the premises is $7,473 for 2007.
The Bank also leases approximately 3,850 square feet of space for its Thousand Oaks Branch Office located at 11 E. Hillcrest Drive, Suite A, Thousand Oaks, California. The lease term is for 10 years and commenced on October 15, 2003, with two 5-year renewal options. The lease is with an unaffiliated third party. The monthly base rent for the premises is $14,236 for 2007.
The Bank also leases approximately 5,000 square feet of space for its ground lease located at Simi Valley Towne Center, Simi Valley, California. The lease term is for 20 years. Estimated occupancy will commence on January 2006, with six 5-year renewal options. The lease is with an unaffiliated third party. The monthly base rent for the premises is $10,417 for 2007.
The Bank also leases approximately 3,478 square feet of space for its Sherman Oaks Loan Production Office located at 13245 Riverside Dr. Suite 540, Sherman Oaks, California. The lease term is for five years and commenced on March 1, 2006. The lease is with an unaffiliated third party. The monthly base rent for the premises was $7,304 for 2007.
The Bank owns its Irvine Branch Office located at 19752 MacArthur Blvd., Irvine, California 92612. The building has approximately 21,000 square feet of space and adequate parking facilities.
The Bank also leases approximately 1,585 square feet of space for its Torrance Loan Production Office located at Park Del Amo, 2377 Crenshaw Boulevard, Suite 130, Torrance, California. The lease term is for five years and commenced on April 1, 2003, with one 3-year renewal option. The lease is with an unaffiliated third party. The monthly base rent for the premises was $2,695 for 2007.
The Bank also leases approximately 1,491 square feet of space for its Anaheim Hills Branch Office located at 168 S. Fairmont Boulevard, Suite O, Anaheim Hills, California. The lease term commenced on March 7, 1995, and the Bank exercised its option to renew for two year, commencing on July 16, 2006 through July 15, 2008. The monthly base rent for the premises is $3,223 during the one-year lease option to renew period.
The Bank believes that its premises will be adequate for present and anticipated needs. The Bank also believes that it has adequate insurance to cover its premises.
Item 3. | Legal Proceedings |
As a result of the Mergers, FCB Bancorp ceased to exist as of March 12, 2007. With respect to First California, its successor, the nature of its business as successor to FCB Bancorp and National Mercantile causes
16
Table of Contents
it to be involved in routine legal proceedings from time to time. First California is not aware of any pending or threatened legal proceedings expected to have a material adverse effect on its business, financial condition, results of operations or cash flow.
Item 4. | Submission of Matters to a Vote of Security Holders |
There was no submission of matters to a vote of shareholders during the quarter ended December 31, 2006.
17
Table of Contents
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
As a result of the Mergers, FCB Bancorp has ceased to exist. Accordingly, there are no longer any outstanding securities of FCB Bancorp. Information required by Item 201 of Regulation S-K regarding the market for FCB Bancorp’s common equity prior to the Mergers is included below.
The common stock of FCB Bancorp’s successor, First California, began trading on the Nasdaq Global Market under the symbol “FCAL” on March 13, 2007. Prior to the Mergers, the common stock of FCB Bancorp was quoted on the OTC Bulletin Board, or the OTCBB, under the symbol “FCBA”. FCB Bancorp’s common stock commenced trading under the symbol “FCBA” in October 2005. Prior to that date, FCB Bancorp’s common stock traded under the symbol “FCAA.” The information in the following table indicates the high and low sales prices and volume of trading for FCB Bancorp’s common stock for each quarterly period since January 1, 2005, and is based upon information provided by the OTC Bulletin Board. Because of the limited market for FCB Bancorp’s common stock, these prices may not be indicative of the fair market value of the common stock. The information does not include transactions for which no public records are available. The trading prices in such transactions may be higher or lower than the prices reported below.
High | Low | Approximate Number of Shares Traded | ||||||
2005 | ||||||||
First Quarter | $ | 23.00 | $ | 22.50 | 190,970 | |||
Second Quarter | 22.33 | 19.25 | 10,660 | |||||
Third Quarter | 20.95 | 19.80 | 12,674 | |||||
Fourth Quarter | 21.00 | 19.50 | 67,028 | |||||
2006 | ||||||||
First Quarter | $ | 22.00 | $ | 20.00 | 19,980 | |||
Second Quarter | 24.00 | 20.00 | 146,894 | |||||
Third Quarter | 22.95 | 20.80 | 99,460 | |||||
Fourth Quarter | 23.95 | 21.92 | 95,312 |
At March 13, 2007, FCB Bancorp had no shareholders of record for its common stock.
Dividends
FCB Bancorp has not paid a cash dividend on its common stock within the past two fiscal years. Prior to the Mergers, FCB Bancorp’s Articles of Incorporation provided that after the preferential dividends upon all other classes and series of stock entitled thereto have been paid or declared and set apart for payment and after FCB Bancorp had complied with all requirements, if any, with respect to the setting aside of sums as a sinking fund or for a redemption account on any class of stock, then the holders of FCB Bancorp common stock were entitled to receive any dividends declared by the Board of Directors out of funds legally available therefor under the laws of the State of California. As a California corporation, under the California General Corporation Law, generally FCB Bancorp could not pay dividends in cash or property except (i) out of positive retained earnings or (ii) if, after giving effect to the distribution, FCB Bancorp’s assets would be at least 1.25 times its liabilities and its current assets would exceed its current liabilities (determined on a consolidated basis under generally accepted accounting principles).
18
Table of Contents
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth as of December 31, 2006 information regarding outstanding options under all of our equity compensation plans and the number of shares available for future option grants under equity compensation plans currently in effect. All equity plans of FCB Bancorp, in addition to those of National Mercantile, and all outstanding option awards were assumed by First California in the Mergers.
Plan Category | Number of securities to be warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity | |||
(a) | (b) | (c) | ||||
Plans approved by shareholders: | ||||||
2005 Stock Option Plan | 153,900 | $18.51 | 46,100 | |||
Plans not approved by shareholders: | ||||||
None | N/A | N/A | N/A | |||
Total | 153,900 | $18.51 | 46,100 | |||
See “Item 11. Executive Compensation — Employment Arrangements and Other Factors Affecting 2006 Compensation — FCB Bancorp Stock Options” contained herein for a summary of the provisions of our 2005 Stock Option Plan.
Recent Sales of Unregistered Securities
We did not sell any of our equity securities during the quarter ended December 31, 2006 which were not registered under the Securities Act.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the quarter ended December 31, 2006.
19
Table of Contents
Item 6. | Selected Financial Data |
The following table compares selected financial data for 2006 with the same data for the four prior years. The following data has been derived from the consolidated financial statements of the Company and should be read in conjunction with those statements, which are included in this report.
As of or for the years ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Results of Operations | ||||||||||||||||||||
Net interest income | $ | 20,835 | $ | 15,237 | $ | 11,656 | $ | 10,898 | $ | 9,141 | ||||||||||
Provision (credit) for loan losses | (297 | ) | 488 | 418 | 510 | 510 | ||||||||||||||
Noninterest income | 3,137 | 1,995 | 1,925 | 1,899 | 1,240 | |||||||||||||||
Noninterest expense | 16,541 | 11,553 | 9,409 | 8,836 | 7,222 | |||||||||||||||
Net income | $ | 4,830 | $ | 3,224 | $ | 2,435 | $ | 2,207 | $ | 1,614 | ||||||||||
Financial Position | ||||||||||||||||||||
Assets | $ | 510,016 | $ | 467,111 | $ | 283,745 | $ | 256,285 | $ | 203,907 | ||||||||||
Loans held for sale | 8,419 | 8,502 | 870 | 342 | 352 | |||||||||||||||
Loans | 356,933 | 334,381 | 182,003 | 157,610 | 142,027 | |||||||||||||||
Allowance for loan losses | 3,527 | 4,105 | 2,346 | 2,325 | 1,970 | |||||||||||||||
Goodwill and other intangibles | 17,376 | 16,951 | — | — | — | |||||||||||||||
Deposits | 390,846 | 372,348 | 227,190 | 211,929 | 186,661 | |||||||||||||||
Junior subordinated debentures | 10,310 | 10,310 | — | — | — | |||||||||||||||
Shareholders’ equity | $ | 51,067 | $ | 45,779 | $ | 22,545 | $ | 18,365 | $ | 16,448 | ||||||||||
Per Share Data: | ||||||||||||||||||||
Earnings per share: | ||||||||||||||||||||
Basic | $ | 1.47 | $ | 1.31 | $ | 1.17 | $ | 1.12 | $ | 0.91 | ||||||||||
Diluted | $ | 1.47 | $ | 1.30 | $ | 1.14 | $ | 1.10 | $ | 0.86 | ||||||||||
Book value per share | $ | 15.58 | $ | 13.97 | $ | 10.42 | $ | 9.26 | $ | 8.38 | ||||||||||
Tangible book value per share | $ | 10.28 | $ | 8.79 | $ | 10.42 | $ | 9.26 | $ | 8.38 | ||||||||||
Selected Ratios | ||||||||||||||||||||
Return on average equity | 10.03 | % | 11.04 | % | 11.97 | % | 12.67 | % | 11.24 | % | ||||||||||
Return on average assets | 0.98 | % | 0.96 | % | 0.91 | % | 0.99 | % | 0.88 | % | ||||||||||
Efficiency ratio (1) | 68.65 | % | 66.96 | % | 69.76 | % | 68.92 | % | 69.78 | % | ||||||||||
Net interest margin (tax equivalent) (2) | 4.84 | % | 5.00 | % | 4.78 | % | 5.45 | % | 5.47 | % | ||||||||||
Nonaccrual loans to loans | — | — | 1.19 | % | 1.55 | % | 0.27 | % | ||||||||||||
Net charges-offs to average loans | 0.04 | % | 0.04 | % | 0.21 | % | 0.04 | % | 0.17 | % | ||||||||||
Allowances for loan losses to loans | 0.99 | % | 1.20 | % | 1.28 | % | 1.47 | % | 1.38 | % | ||||||||||
Equity to assets | 10.01 | % | 9.80 | % | 7.95 | % | 7.17 | % | 8.07 | % | ||||||||||
Tangible equity to tangible assets | 6.84 | % | 6.40 | % | 7.95 | % | 7.17 | % | 8.07 | % | ||||||||||
Total capital ratio (3) | 12.01 | % | 11.74 | % | 12.25 | % | 11.57 | % | 11.51 | % | ||||||||||
Tier 1 capital ratio (3) | 11.07 | % | 10.60 | % | 11.04 | % | 10.32 | % | 10.26 | % | ||||||||||
Tier 1 leverage ratio (3) | 9.07 | % | 8.69 | % | 8.61 | % | 7.54 | % | 8.14 | % |
(1) | Computed by dividing noninterest expense by net interest income and noninterest income. |
The ratio is a measurement of the amount of revenue that is utilized to meet overhead expenses. |
(2) | Computed by dividing net income on a tax equivalent basis by average earning assets. |
(3) | Bank only data for 2002-2004. |
20
Table of Contents
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is designed to provide a better understanding of significant trends related to the consolidated results of operations and financial condition of FCB Bancorp and its wholly-owned subsidiaries. To the extent such discussion is forward-looking, references to “we,” “our” and “us” mean First California and its consolidated subsidiaries after the Mergers. This discussion and information is derived from our audited consolidated financial statements and related notes for the three years ended December 31, 2006, 2005, and 2004. You should read this discussion in conjunction with those consolidated financial statements.
This discussion contains certain forward-looking information about us, which statements are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond our control. We caution readers that a number of important factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Risks and uncertainties include, but are not limited to:
• | revenues are lower than expected; |
• | credit quality deterioration which could cause an increase in the provision for credit losses; |
• | competitive pressure among depository institutions increases significantly; |
• | our ability to complete planned acquisitions, to successfully integrate acquired entities, or to achieve expected synergies and operating efficiencies within expected time-frames or at all; |
• | the integration of acquired businesses costs more, takes longer or is less successful than expected; |
• | the cost of additional capital is more than expected; |
• | a change in the interest rate environment reduces interest margins; |
• | asset/liability repricing risks and liquidity risks; |
• | general economic conditions, either nationally or in the market areas in which we do or anticipate doing business, are less favorable than expected; |
• | the economic and regulatory effects of the continuing war on terrorism and other events of war, including the war in Iraq; |
• | legislative or regulatory requirements or changes adversely affecting our business; |
• | changes in the securities markets; and |
• | regulatory approvals for announced or future acquisitions cannot be obtained on the terms expected or on the anticipated schedule. |
If any of these risks or uncertainties materializes, or if any of the assumptions underlying such forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. We assume no obligation to update such forward-looking statements.
Critical Accounting Policies
The discussion and analysis of our consolidated results of operations and financial condition are based upon our audited consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, income and
21
Table of Contents
expense, and the related disclosures of contingent assets and liabilities at the date of these consolidated financial statements. We believe these estimates and assumptions to be reasonably accurate; however, actual results may differ from these estimates under different assumptions or circumstances. The following are our critical accounting policies.
Allowance for loan losses
An estimate of probable losses incurred in the loan portfolio is necessary in determining the amount of the allowance for loan losses which is presented as a reduction of our loan balances. The provision for loan losses, charged to operations, is the amount that is necessary to establish the allowance. The information used by us to make this estimate is described later in this section and in the notes to the consolidated financial statements. The allowance for loan losses was $3,527,000 at December 31, 2006 and was $4,105,000 at December 31, 2005.
Income taxes
An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance for deferred tax assets. The information used by us to make this estimate is described later in this section and in the notes to the consolidated financial statements. Net deferred tax assets were $249,000 at December 31, 2006 and were $730,000 at December 31, 2005; there was no valuation allowance at either period end.
Goodwill
An estimate of probable impairment loss is required in determining the carrying value of goodwill. An impairment loss is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The information used by us to make this estimate is described later in this section and in the notes to the consolidated financial statements. Goodwill was $16,835,000 at December 31, 2006; there was no impairment loss at year end.
Overview
FCB Bancorp was a bank holding company arising from a transaction in which the shareholders of First California Bank exchanged their common shares for that of FCB Bancorp on a share-for-share basis. As a result of this transaction, First California Bank became a wholly-owned subsidiary of FCB Bancorp on September 30, 2005. Prior to the Mergers as a result of which FCB Bancorp ceased to exist, FCB Bancorp and First California Bank were related entities; accordingly, the consolidated financial position and results of operations for the year ended December 31, 2006 and all other prior periods have been restated to reflect the combined entities.
Also on September 30, 2005, FCB Bancorp completed its acquisition of South Coast Bancorp, Inc. and its wholly-owned subsidiaries, South Coast Commercial Bank and SC Financial. SC Financial is an inactive subsidiary. Shareholders of South Coast Bancorp, Inc. received cash of $36.0 million in exchange for their common shares; South Coast Bancorp, Inc. was then merged with and into FCB Bancorp.
In connection with this acquisition, FCB Bancorp issued 1,115,000 shares of common stock to accredited investors at $19.75 per share on September 30, 2005. Net proceeds from this offering were $20.7 million. In addition, FCB Bancorp issued $10.3 million of junior subordinated debentures (commonly referred to as trust preferred securities) on September 30, 2005. Substantially all the proceeds from these offerings were used to fund the acquisition.
The acquisition was accounted for using the purchase method of accounting; accordingly, the December 31, 2006 and 2005 consolidated statements of financial position of the Company include the fair value of the assets acquired and the liabilities assumed of South Coast Bancorp, Inc. The consolidated results of operations, however, reflects only the consolidated activities after the merger was consummated on September 30, 2005.
22
Table of Contents
On December 5, 2005, FCB Bancorp sold South Coast Commercial Bank to Woori America Bank pursuant to a merger transaction for a premium of $1.0 million before taxes and expenses (the “Woori Merger”). The net premium reduced previously recognized goodwill that arose from our purchase of South Coast Commercial Bank on September 30, 2005. Also on December 5, 2005, in a separate but related transaction, First California Bank, acquired essentially all of the assets and liabilities of South Coast Commercial Bank, including substantially all current loan and deposit accounts. The purchase and assumption transaction closed immediately prior to the Woori Merger.
Net income for 2006 increased 50 percent to $4,830,000, or $1.47 per diluted share, compared with $3,224,000, or $1.30 per diluted share, for 2005. For 2004, net income was $2,435,000 or $1.14 per diluted share. The earnings per share data for 2006 reflect the increase in outstanding weighted average shares that resulted from the issuance of 1,115,000 new shares at the end of the third quarter of 2005.
The following table presents a summary of net income:
(in thousands, except per share) | For the years ended December 31, | ||||||||
2006 | 2005 | 2004 | |||||||
Net income | $ | 4,830 | $ | 3,224 | $ | 2,435 | |||
Basic earnings per share | $ | 1.47 | $ | 1.31 | $ | 1.17 | |||
Diluted earnings per share | $ | 1.47 | $ | 1.30 | $ | 1.14 | |||
Basic weighted average shares | 3,278 | 2,467 | 2,080 | ||||||
Diluted weighted average shares | 3,295 | 2,488 | 2,136 |
23
Table of Contents
Results of Operations — for the three years ended December 31, 2006
Net interest income
Net interest income for 2006 was $20,835,000, up 37 percent from $15,237,000 for 2005. Net interest income was $11,656,000 for 2004. The increase in net interest income reflects the increase in earning assets stemming from an increase in our business lending and from the acquisition completed at the end of the third quarter of 2005. Average earning assets increased 42 percent to $435,321,000 for 2006 from $307,376,000 for 2005. Average earning assets for 2004 were $247,283,000.
The net interest margin (on a tax equivalent basis) for 2006 was 4.84% compared with 5.00% for 2005. Net interest margin was 4.78% for 2004. The decrease in the net interest margin in 2006 reflects the higher cost of interest bearing deposits and borrowings and the higher proportion of interest bearing funds to interest earning assets. The increase in the net interest margin in 2005 reflects the general increase in interest rates.
Average loans were $361,979,000 for 2006 and represented 83 percent of average earning assets, compared with $226,216,000 and 74 percent for 2005. For 2004, average loans were $168,614,000 or 68 percent of average earning assets. Average loans increased 60 percent for 2006 and 34 percent for 2005. The increase in loans reflects the 2005 acquisition, the expansion of our branch network over these periods and the success of our business strategy.
Average securities were $69,318,000 for 2006 and represented 16 percent of average earning assets, compared with $75,718,000 and 25 percent for 2005. For 2004, average securities were $72,892,000 or 29 percent of average earning assets. Average securities decreased 8 percent for 2006 after having increased 4 percent for 2005. The proceeds from maturing securities and principal repayment were used to fund, in part, the increase in average loans.
Average deposits were $386,606,000 for 2006 and represented 89 percent of average earning assets, compared with $266,553,000 and 87 percent of average earning assets for 2005. Average deposits were $215,066,000 or 87 percent of average earning assets for 2004. Average deposits increased 45 percent for 2006 and 24 percent for 2005. Average certificates of deposit increased substantially in 2006 reflecting both the acquisition completed at the end of the third quarter of 2005 and the more favored deposit choice of our customers in 2006. Noninterest bearing demand deposits for the same periods increased 7 percent and 17 percent, respectively. We do not accept broker certificates of deposits.
Average borrowed funds for 2006 were $48.1 million compared with $37.8 million for 2005 and $29.8 million for 2004. The increase in borrowings reflects the issuance of $10.3 million of junior subordinated debentures at the end of the 2005 third quarter and higher levels of FHLB advances in support of earning asset growth.
24
Table of Contents
The following table presents average balances and interest income or interest expense, with resulting average yield or rates on a tax equivalent basis, by earning asset or interest bearing liability category:
For the years ended December 31, | |||||||||||||||||||||||||||
2006 | 2005 | 2004 | |||||||||||||||||||||||||
(in thousands) | Average Balance | Income/ Expense | Average Rate | Average Balance | Income/ Expense | Average Rate | Average Balance | Income/ Expense | Average Rate | ||||||||||||||||||
Commercial | $ | 107,653 | $ | 9,880 | 9.18 | % | $ | 87,372 | $ | 7,049 | 8.07 | % | $ | 69,317 | $ | 5,046 | 7.28 | % | |||||||||
Real estate | 246,574 | 19,376 | 7.86 | % | 131,252 | 9,342 | 7.12 | % | 94,089 | 5,758 | 6.12 | % | |||||||||||||||
Consumer | 7,752 | 626 | 8.08 | % | 7,592 | 518 | 6.82 | % | 5,208 | 405 | 7.77 | % | |||||||||||||||
Total loans | 361,979 | 29,882 | 8.26 | % | 226,216 | 16,909 | 7.47 | % | 168,614 | 11,209 | 6.65 | % | |||||||||||||||
Taxable | 57,792 | 2,302 | 3.98 | % | 67,399 | 2,306 | 3.42 | % | 65,583 | 1,970 | 3.00 | % | |||||||||||||||
Nontaxable | 11,526 | 444 | 5.84 | % | 8,319 | 321 | 5.85 | % | 7,309 | 299 | 6.20 | % | |||||||||||||||
Total securities | 69,318 | 2,746 | 4.29 | % | 75,718 | 2,627 | 3.69 | % | 72,892 | 2,269 | 3.32 | % | |||||||||||||||
Federal funds sold | 3,977 | 190 | 4.77 | % | 4,626 | 152 | 3.29 | % | 5,640 | 72 | 1.31 | % | |||||||||||||||
Deposits with banks | 47 | 1 | 2.87 | % | 816 | 26 | 3.18 | % | 137 | 2 | 0.66 | % | |||||||||||||||
Total earning assets | 435,321 | 32,819 | 7.59 | % | 307,376 | 19,714 | 6.47 | % | 247,283 | 13,552 | 5.54 | % | |||||||||||||||
Non-earning assets | 49,848 | 27,753 | 19,220 | ||||||||||||||||||||||||
Total assets | $ | 485,169 | $ | 335,129 | $ | 266,503 | |||||||||||||||||||||
Interest bearing demand deposits | $ | 20,494 | $ | 86 | 0.42 | % | $ | 20,694 | $ | 39 | 0.19 | % | $ | 19,775 | $ | 21 | 0.11 | % | |||||||||
Savings | 82,794 | 1,776 | 2.15 | % | 68,568 | 717 | 1.05 | % | 61,697 | 487 | 0.79 | % | |||||||||||||||
Certificates of deposit | 181,296 | 7,811 | 4.31 | % | 81,985 | 2,522 | 3.08 | % | 52,139 | 809 | 1.55 | % | |||||||||||||||
Total interest bearing deposits | 284,584 | 9,673 | 3.40 | % | 171,247 | 3,278 | 1.91 | % | 133,611 | 1,315 | 0.98 | % | |||||||||||||||
Federal funds purchased | 198 | 12 | 6.04 | % | 92 | 4 | 4.08 | % | 70 | 2 | 2.51 | % | |||||||||||||||
FHLB advances | 37,639 | 1,665 | 4.42 | % | 35,139 | 1,041 | 2.96 | % | 29,706 | 579 | 1.95 | % | |||||||||||||||
Junior subordinated debentures | 10,310 | 634 | 6.15 | % | 2,519 | 154 | 6.15 | % | — | — | — | ||||||||||||||||
Total borrowed funds | 48,147 | 2,311 | 4.80 | % | 37,750 | 1,199 | 3.18 | % | 29,776 | 581 | 1.95 | % | |||||||||||||||
Total interest bearing funds | 332,731 | 11,984 | 3.60 | % | 208,997 | 4,477 | 2.14 | % | 163,387 | 1,896 | 1.16 | % | |||||||||||||||
Noninterest bearing demand deposits | 102,022 | 95,306 | 81,455 | ||||||||||||||||||||||||
Other liabilities | 2,093 | 1,611 | 1,315 | ||||||||||||||||||||||||
Shareholders’ equity | 48,323 | 29,215 | 20,346 | ||||||||||||||||||||||||
Total liabilities and shareholder’s equity | $ | 485,169 | $ | 335,129 | $ | 266,503 | |||||||||||||||||||||
Net interest income | $ | 20,835 | $ | 15,237 | $ | 11,656 | |||||||||||||||||||||
Net interest margin (tax equivalent) | 4.84 | % | 5.00 | % | 4.78 | % |
Net interest income is affected by changes in the level and mix of average earning assets and average interest-bearing funds. The changes between periods in these balances are referred to as balance changes. The effect on net interest income from changes in average balances is measured by multiplying the change in the average balance between the current period and the prior period by the prior period average rate. Net interest income is also affected by changes in the average rate earned or paid on earning assets and interest-bearing funds and these are referred to as rate changes. The effect on net interest income from changes in average rates is measured by multiplying the change in the average rate between the current period and the prior period by the prior period average balance. Changes attributable to both rate and volume are allocated on a pro rata basis to the change in average volume and the change in average rate.
25
Table of Contents
The following tables present changes in net interest income attributable to volume and rate for the periods indicated:
2006 to 2005 Change in Interest Income/Expense due to: | 2005 to 2004 Change in Interest Income/Expense due to: | |||||||||||||||||||||
(in thousands) | Rate | Volume | Total | Rate | Volume | Total | ||||||||||||||||
Interest income | ||||||||||||||||||||||
Interest on loans | $ | 261 | $ | 12,712 | $ | 12,973 | $ | 1,870 | $ | 3,829 | $ | 5,699 | ||||||||||
Interest on securities | 341 | (222 | ) | 119 | 270 | 88 | 358 | |||||||||||||||
Interest on federal funds sold | 59 | (21 | ) | 38 | 91 | (13 | ) | 78 | ||||||||||||||
Interest on deposits with banks | — | (25 | ) | (25 | ) | 23 | 4 | 27 | ||||||||||||||
Total interest income | 661 | 12,444 | 13,105 | 2,254 | 3,908 | 6,162 | ||||||||||||||||
Interest expense | ||||||||||||||||||||||
Interest bearing demand deposits | 48 | (1 | ) | 47 | 17 | 1 | 18 | |||||||||||||||
Savings | 910 | 149 | 1,059 | 175 | 54 | 229 | ||||||||||||||||
Certificates of deposit | 2,234 | 3,054 | 5,288 | 1,254 | 462 | 1,716 | ||||||||||||||||
Total interest on deposits | 3,192 | 3,202 | 6,394 | 1,446 | 517 | 1,963 | ||||||||||||||||
Interest on borrowings | 781 | 331 | 1,112 | 462 | 156 | 618 | ||||||||||||||||
Total interest expense | 3,973 | 3,534 | 7,507 | 1,908 | 673 | 2,581 | ||||||||||||||||
Net interest income | $ | (3,312 | ) | $ | 8,910 | $ | 5,598 | $ | 346 | $ | 3,235 | $ | 3,581 | |||||||||
Provision for loan losses
We have experienced positive asset quality measures — low levels of delinquencies, low levels of nonaccrual loans, and low levels of net charge-offs — for an extended period of time. In light of this, as well as our continued critical evaluation of other relevant data, we reduced the allowance for loan losses with a credit to operations of $450,000 for the third quarter of 2006. For the year of 2006, the credit to operations totaled $297,000. The provision for loan losses for 2005 was $488,000. For 2004 the provision for loan losses was $418,000.
Noninterest income
Noninterest income was $3,137,000 for 2006 compared with $1,995,000 for 2005. Noninterest income was $1,925,000 for 2004.
Service charges on deposit accounts were $1,081,000 for 2006, little changed from $1,083,000 and $1,056,000 for 2005 and 2004, respectively. The increase in deposit activity fees was offset by an increase in the available earnings credit applied to commercial deposit accounts. Service charges on deposit accounts increased 3 percent in 2005 from 2004 reflecting the higher level of deposit accounts as well as a general increase in scheduled service fees.
Earnings on cash surrender value of life insurance were $420,000 for 2006 compared with $226,000 for 2005. Earnings for 2004 were $224,000. The increase in earnings reflects the purchase of life insurance policies in the first quarter of 2006 to support life insurance benefits for several key employees and salary continuation benefits for certain executives.
Loan commissions and sales totaled $1,053,000 for 2006, up from $344,000 for 2005. For 2004, loan commissions and sales totaled $219,000. We originate and sell commercial and multifamily mortgages. We also originate SBA 7(a) loans and sell the guaranteed portion of the loan into the secondary market for a gain. We also receive commissions by arranging SBA 504 loans, and commercial and multifamily mortgages for customers that
26
Table of Contents
are ultimately funded by others. The change in income reflects the change in the number and amount of loans sold or brokered in each period.
Commercial and multifamily mortgages originated and sold in 2006 totaled approximately $40.9 million. Gains from these sales were $688,000. Loan commissions on brokered commercial and multifamily mortgages were $139,000. SBA 7(a) loans originated and sold were approximately $2.5 million for a gain of $183,000. We also sold our credit card portfolio that had an average balance of $300,000 for 2006 for a gain of $22,000.
Other income includes dividends on FHLB stock which were higher in 2006 than in 2005 as a result of higher FHLB stock investment. Other income also includes rental income from the Irvine property that was part of the acquisition at the end of the 2005 third quarter.
The following table presents a summary of noninterest income:
For the years ended December 31, | ||||||||||
(in thousands) | 2006 | 2005 | 2004 | |||||||
Service charges on deposit accounts | $ | 1,081 | $ | 1,083 | $ | 1,056 | ||||
Earnings on cash surrender value of life insurance | 420 | 226 | 224 | |||||||
Commissions on brokered loans | 160 | 226 | 132 | |||||||
Net gain on sales of loans | 893 | 118 | 87 | |||||||
Net servicing fees | 53 | 47 | 42 | |||||||
Net gain (loss) on sales of securities | (20 | ) | 2 | 94 | ||||||
Other income | 550 | 293 | 290 | |||||||
Total noninterest income | $ | 3,137 | $ | 1,995 | $ | 1,925 | ||||
Noninterest expense
Noninterest expense for 2006 was $16,541,000 up 43 percent from $11,553,000 for 2005. Noninterest expense for 2004 was $9,409,000. The efficiency ratio was 68.65 percent for 2006 compared with 66.96 percent for 2005 and 69.76 percent for 2004.
We have pursued a growth strategy through de novo branching. This requires us to recruit and hire personnel and lease or build facilities to operate and house the new branch. These expenses are incurred prior to the opening of the branch and generally are in excess of the income from the branch when it commences operations. The increase in salaries and benefits expense and premises and equipment expense reflects this growth strategy. We opened a new loan production office in Sherman Oaks in the first quarter of 2006 and have since added lending, business development, and credit administration personnel. The Simi Valley office was opened in January of 2005 and then moved into a newly built and owned branch building in December 2005. We also expanded into a new operations center in the summer of 2004 consolidating into one facility loan, deposit and technology operations.
27
Table of Contents
The following table presents a summary of noninterest expense:
For the years ended December 31, | |||||||||
(in thousands) | 2006 | 2005 | 2004 | ||||||
Salaries and employee benefits | $ | 9,357 | $ | 6,693 | $ | 5,373 | |||
Premises and equipment | 2,579 | 1,832 | 1,301 | ||||||
Data processing | 757 | 589 | 758 | ||||||
Legal, audit, and other professional services | 918 | 485 | 418 | ||||||
Printing, stationary, and supplies | 276 | 195 | 141 | ||||||
Telephone | 261 | 175 | 163 | ||||||
Directors’ fees | 132 | 132 | 128 | ||||||
Advertising and marketing | 742 | 412 | 299 | ||||||
Postage | 116 | 77 | 81 | ||||||
Other expenses | 1,403 | 963 | 747 | ||||||
Total noninterest expense | $ | 16,541 | $ | 11,553 | $ | 9,409 | |||
Income taxes
The provision for income taxes was $2,898,000 for 2006 compared with $1,967,000 for 2005. The provision for income taxes was $1,319,000 for 2004. The effective tax rate was 37.5 percent for 2006 compared with 37.9 percent for 2005 and 35.1 percent for 2004.
The combined federal and state statutory rate for all periods was 41.1 percent. The effective tax rate was less than the combined statutory tax rate as a result of excluding from taxable income interest income on municipal securities and the earnings on the cash surrender value of life insurance.
Financial Position — December 31, 2006 compared with December 31, 2005
Lending and credit risk
We provide a variety of loan and credit-related products and services to meet the needs of borrowers primarily located in the California counties of Ventura, Los Angeles, and Orange. Business loans, represented by commercial real estate loans, commercial loans and construction loans comprise the largest portion of the loan portfolio. Consumer or personal loans, represented by home mortgage, home equity and installment loans comprise a smaller portion of the loan portfolio.
Credit risk is the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with us or otherwise to perform as agreed. Credit risk is found in all activities in which success depends on counterparty, issuer, or borrower performance. Credit risk is present any time funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet.
All categories of loans present credit risk. Major risk factors applicable to all loan categories include changes in international, national and local economic conditions such as interest rates, inflation, unemployment levels, consumer and business confidence and the supply and demand for goods and services.
Commercial real estate loans rely upon the cash flow originating from the underlying real property. Commercial real estate is a cyclical industry that is affected not only by general economic conditions but also by local supply and demand. In the office sector, the demand for office space is highly dependent on employment levels. In the retail sector, the demand for retail space and the levels of retail rents are affected by consumer spending and confidence. The industrial sector has exposure to the level of exports, defense spending and inventory levels. Vacancy rates, location, and other factors affect the amount rental income for commercial property. Tenants may relocate, fail to honor their lease or go out of business. In the multifamily residential
28
Table of Contents
sector the demand for apartments is heavily influenced by the affordability of ownership housing, employment conditions and the vacancy of existing inventory. Population growth or decline and changing demographics, such as increases in the level of immigrants or retirees, are also factors influencing the multifamily residential sector.
Construction loans provide developers or owners with funds to build or improve properties that will ultimately be sold or leased. Construction loans are generally considered to involve a higher degree of risk than other loan categories because they rely upon the developer’s or owner’s ability to complete the project within specified cost and time limits. Cost overruns can cause the project cost to exceed the project sales price or exceed the amount of the committed permanent funding. Construction projects also can be delayed for a number of reasons such as poor weather, material or labor shortages, labor difficulties, or substandard work that must be redone to pass inspection.
Commercial loans rely upon the cash flow originating from the underlying business activity of the enterprise. The manufacture, distribution or sale of goods or sale of services are not only affected by general economic conditions but also by the ability of the enterprise’s management to adjust to local supply and demand conditions, maintain good labor, vendor and customer relationships, as well as market, price and sell their goods or services for a profit. Customer demand for goods and services of the enterprise may change because of competition or obsolescence.
Home mortgages and home equity loans and lines of credit are secured by first or second trust deeds on a borrower’s real estate property, typically their principal residence. These loans are dependant on a person’s ability to regularly pay the principal and interest due on the loan and, secondarily, on the value of real estate property that serves as collateral for the loan. Home mortgages are generally considered to involve a lower degree of risk than other loan categories because of the relationship of the loan amount to the value of the residential real estate and a person’s reluctance to forego their principal place of residence. Home real estate values however are not only affected by general economic conditions but also on local supply and demand. Installment loans and credit card lines are also dependant on a person’s ability to regularly pay principal and interest on a loan; however, these loans generally are not secured by collateral or, if they are secured, the collateral value can rapidly decline as is the case for automobiles. A person’s ability to service debt is highly dependant upon their continued employment or financial stability. Job loss, divorce, illness, bankruptcy are just a few of the risks that may affect a person’s ability to service their debt.
Since the risks in each category of loan changes based on a number of factors, it is not possible to state whether a particular type of lending carries with it a greater or lesser degree of risk at any specific time in the economic cycle. In a stabilized economic environment it is generally considered that home mortgage loans have the least risk, followed by home equity loans, multifamily property loans, commercial property loans, commercial loans and lines and finally construction loans. However, this ordering may vary from time to time and the degree of risk from the credits with the least risk to those with the highest risk profile may expand or contract with the general economy.
We manage credit risk through Board approved policies and procedures. These policies are reviewed and approved at least annually by the Directors. Lending policies provide us with a framework for consistent loan underwriting and a basis for sound credit decisions. Lending policies specify, among other things, the parameters for the type or purpose of the loan, the required debt service coverage and the required collateral requirements. Credit limits are also established and certain loans require approval by the Directors’ Loan Committee. The Directors’ Audit Committee also engages a third party to perform a credit review of the loan portfolio to ensure compliance with policies and assist in the evaluation of the credit risk inherent in the loan portfolio.
Loans
Total loans increased 7 percent to $365,352,000 at December 31, 2006 from $342,883,000 at December 31, 2005. Total loans were $182,873,000 at December 31, 2004. Loan growth is the result of our acquisition, increased lending in our immediate market area and the opening of four additional banking offices since September 1999.
29
Table of Contents
The following table presents the portfolio of loans:
For the years ended December 31, | ||||||||||||||||||||
(in thousands) | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Commercial mortgage | $ | 163,851 | $ | 183,761 | $ | 77,445 | $ | 81,073 | $ | 79,668 | ||||||||||
Multifamily mortgage | 28,088 | 31,708 | 5,142 | 6,223 | — | |||||||||||||||
Commercial loans and lines | 64,393 | 64,271 | 68,996 | 42,076 | 31,876 | |||||||||||||||
Construction | 48,291 | 28,157 | 12,330 | 16,540 | 16,842 | |||||||||||||||
Home equity loans and lines | 7,664 | 8,689 | 2,114 | 5,808 | 7,036 | |||||||||||||||
Home mortgage | 42,237 | 13,443 | 11,558 | 2,898 | 2,756 | |||||||||||||||
Installment & credit card | 2,409 | 4,352 | 4,418 | 2,992 | 3,849 | |||||||||||||||
Total loans | 356,933 | 334,381 | 182,003 | 157,610 | 142,027 | |||||||||||||||
Allowance for loan losses | (3,527 | ) | (4,105 | ) | (2,346 | ) | (2,325 | ) | (1,970 | ) | ||||||||||
Loans, net | $ | 353,406 | $ | 330,276 | $ | 179,657 | $ | 155,285 | $ | 140,057 | ||||||||||
Loans held for sale | $ | 8,419 | $ | 8,502 | $ | 870 | $ | 342 | $ | 352 |
The loan categories above are derived from bank regulatory reporting standards for loans secured by real estate; however, a portion of the mortgage loans above are loans that we consider to be a commercial loan for which we have taken real estate collateral as additional support or from an abundance of caution. In these instances we are not looking to the real property as its primary source of repayment, but rather as a secondary or tertiary source of repayment.
Commercial mortgage loans, the largest segment of our portfolio, were 46 percent of total loans at December 31, 2006 compared with 55 percent and 43 percent at December 31, 2005 and 2004. Commercial mortgage loans are collateralized by many different commercial property types. Our top three categories have been office, industrial, and retail, representing approximately 80 percent of commercial mortgage loans. In addition, most of our commercial property lending is in Ventura, Orange and Los Angeles Counties.
Commercial mortgage loans are underwritten with a maximum loan-to-value of 70 percent and a minimum debt service coverage ratio of 1.25. These criteria may become more stringent depending on the type of property. We focus on cash flow; consequently, regardless the value of the collateral, the commercial real estate project must provide sufficient cash flow, or alternatively the principals must supplement the project with other cash flow, to service the debt. We generally require the principals to guarantee the loan. We also “stress-test” commercial mortgage loans to determine the potential affect changes in interest rates, vacancy rates, and lease or rent rates would have on the cash flow of the project. Additionally, at least on an annual basis, we require updates on the cash flow of the project and, where practicable, we visit the properties.
Multifamily residential mortgage loans were 8 percent of total loans at December 31, 2006 compared with 9 percent and 3 percent at December 31, 2005 and 2004. Multifamily mortgage loans are collateralized by apartments mostly located in our tri-county market area. Multifamily mortgage loans are underwritten in a fashion similar to commercial mortgage loans described above.
Commercial loans represent the next largest category of loans and were 18 percent of total loans at December 31, 2006, down from 19 percent at December 31, 2005 and 38 percent at December 31, 2004. Commercial loans are made for the purpose of providing working capital, equipment purchases and business expansion. Commercial loans may be unsecured or secured by assets such as equipment, inventory, accounts receivables, and real property. Personal guarantees of the business owner may also be present. Additionally, these loans may also have partial guarantees from the U.S. Small Business Administration (“SBA”) or other federal or state agencies. The commercial loan portfolio is made up of broadly diversified business sectors with the largest sectors in real estate/construction, finance and insurance, healthcare, manufacturing and professional services.
30
Table of Contents
Commercial loans are underwritten with maturities not to exceed seven years and we generally require the loan to be fully amortized within the term of the loan. Traditional working capital lines are underwritten for a 12 month period and have a 30-day out-of-debt requirement. Accounts receivable and inventory financing revolving lines of credit have an annual maturity date, a maximum advance rate, and an annual field audit for lines of $200,000 or more. Field audits are performed by third-party vendors. The maximum advance rate for accounts receivable is 75 percent and the maximum advance rate for eligible inventory is 25 percent.
We also have a portfolio of higher-yielding, asset-based loans that involves us purchasing customer invoices on a recourse basis. This product is called “Cash Flow Maximizer” (“CFM”). Using software, technical and marketing support provided by a third-party vendor, we are able to purchase customer invoices, with full recourse, at a discount and pay the customer 98.5 to 95.0 percent of the face value of the invoice. The amount is repaid, generally in 30 to 45 days, by the merchant remitting payment of the invoice directly to us. The discount is recognized in income at the time of purchase. We further reduce the purchase amount to the customer by an average of 10 percent of the face value of the invoice; setting aside this reserve amount in a restricted interest-bearing savings account held by us to cover any losses on any purchase. Additionally, as part of our normal analysis of the adequacy of our allowance for loan losses, we allocate approximately one percent to outstanding CFM balances. As of December 31, 2006, there were 10 active accounts with outstanding balances of $4.8 million. A year ago, there were 20 active accounts with outstanding balances of $9.1 million. The decline reflects our decision to de-emphasize this activity. CFM is included in the commercial loan category in the loan distribution table.
Construction loans represent 14 percent of total loans at December 31, 2006 compared with 8 percent at December 31, 2005 and 7 percent at December 31, 2004. Construction loans represent single-family and commercial building projects and are approximately evenly divided between the two types. Construction loans are typically short term, with maturities ranging from 12 to 18 months. For commercial projects, we have a maximum loan-to-value requirement of 70 percent of the FIRREA conforming appraised value. For residential projects, the maximum loan-to-value ranges from 80 percent on loans under $500,000 to 70 percent on loans of $1,000,000 or more. We require the borrower to provide in cash at least 20 percent of the cost of the project. At the borrower’s expense, we use a third party vendor for funds control, lien releases and inspections. In addition, we regularly monitor the marketplace and the economy for evidence of deterioration in real estate values.
31
Table of Contents
The following table presents the scheduled maturities of fixed and adjustable rate loans:
December 31, 2006 | |||||||||||||
(in thousands) | One year or less | After one year to five years | After five years | Total | |||||||||
Fixed rate loan | |||||||||||||
Commercial mortgage | $ | 366 | $ | 5,419 | $ | 84 | $ | 5,869 | |||||
Multifamily mortgage | — | — | 1,562 | 1,562 | |||||||||
Commercial loans and lines | 5,015 | 3,832 | (1 | ) | 8,846 | ||||||||
Construction | — | 2,056 | — | 2,056 | |||||||||
Home mortgage | 537 | — | 999 | 1,536 | |||||||||
Installment & credit card | 285 | 243 | — | 528 | |||||||||
Total fixed rate loan maturities | 6,203 | 11,550 | 2,644 | 20,397 | |||||||||
Adjustable rate loan | |||||||||||||
Commercial mortgage | 2,272 | 31,278 | 124,432 | 157,982 | |||||||||
Multifamily mortgage | 2,775 | 2,449 | 21,302 | 26,526 | |||||||||
Commercial loans and lines | 29,438 | 15,333 | 10,776 | 55,547 | |||||||||
Construction | 39,183 | 7,052 | — | 46,235 | |||||||||
Home equity loans | 159 | 930 | 6,575 | 7,664 | |||||||||
Home mortgage | 1,437 | 3,086 | 36,178 | 40,701 | |||||||||
Installment & credit card | 1,128 | 39 | 714 | 1,881 | |||||||||
Total adjustable rate loan maturities | 77,112 | 60,167 | 199,977 | 336,536 | |||||||||
Total maturities | $ | 83,315 | $ | 71,717 | $ | 202,621 | $ | 356,933 | |||||
Allowance for Loan Losses
We maintain an allowance for loan losses to provide for inherent losses in the loan portfolio. Additions to the allowance are established through a provision charged to expense. All loans which are judged to be uncollectible are charged against the allowance while any recoveries are credited to the allowance. It is our policy to charge off any known losses at the time of determination. Any unsecured loan more than 90 days delinquent in payment of principal or interest and not in the process of collection is charged off in total. Secured loans are evaluated on a case by case basis to determine the ultimate loss potential to us subsequent to the liquidation of collateral. In those cases where we are inadequately protected, a charge off will be made to reduce the loan balance to a level equal to the liquidation value of the collateral.
Our loan policy provides procedures designed to evaluate and assess the risk factors associated with our loan portfolio, to enable us to assess such risk factors prior to granting new loans and to evaluate the sufficiency of the allowance for loan losses. We conduct an assessment of the allowance on a monthly basis and undertake a more critical evaluation quarterly. At the time of the monthly review, the Board of Directors will examine and formally approve the adequacy of the allowance. The quarterly evaluation includes an assessment of the following factors: any external loan review and any regulatory examination, estimated probable loss exposure on each pool of loans, concentrations of credit, value of collateral, the level of delinquency and non-accruals, trends in the portfolio volume, effects of any changes in the lending policies and procedures, changes in lending personnel, present economic conditions at the local, state and national level, the amount of undisbursed off-balance sheet commitments, and a migration analysis of historical losses and recoveries for the prior eight quarters.
Our evaluation of the adequacy of the allowance for loan losses includes a review of individual loans to identify specific probable losses and also assigns estimated loss factors to specific groups or types of loans to
32
Table of Contents
calculate possible losses. The allocated allowance is a result of these quantitative considerations. Our evaluation also considers subjective factors such as changes in local and regional economic and business conditions, financial improvement or deterioration in business sectors and industries, changes in lending practices, changes in personnel, changes in the volume and level of past due and nonaccrual loans and concentrations of credit. The unallocated allowance is a result of these qualitative considerations.
In the third quarter of 2006, we considered, among other things, the decline in the amount of loans outstanding from the second quarter; our positive asset quality measures; our experience in originating, underwriting and servicing real estate loans in a larger three county area over the past year; the depth and competency of our personnel; and the economic outlook and uncertainties of the real estate market.
The decline in the amount of loans outstanding in the third quarter from the second quarter reflects a slowing in business activity, borrower per-payments and our decision to de-emphasize a particular lending activity. We believe the decline we experienced is generally consistent with industry trends. We have also experienced low levels of nonaccrual loans and loans past due 90 days or more and still accruing. Further, we have experienced low levels of loans charged-off as well as favorable levels in the recovery of loans previously charged-off. We believe these are consistent with, if not more favorable, with industry trends. Following our September 2005 acquisition of South Coast Commercial Bank, which operated primarily in Los Angeles and Orange Counties and focused on commercial real estate lending, we successfully integrated origination, underwriting and servicing practices. As a result, the initial uncertainties with the change in our business markets and with our concentration in loans secured by real estate diminished.
We believe the risks associated with these quantitative and qualitative measures had clearly declined in the third quarter of 2006. As a result, we reduced the unallocated portion of the allowance for loan losses in the third quarter. The reduction in the allowance resulted in a credit to operations for the nine months ended September 30, 2006 of $297,000 (approximately $186,000 after tax) or $0.06 per basic share. Loans outstanding changed little from the third quarter to the end of the year. Positive asset quality measures continued to improve. As a result, there was no provision in the fourth quarter of 2006.
The ratio of the allowance for loan losses to loans was 0.99 percent at December 31, 2006 compared with 1.20 percent at December 31, 2005. While we believe that our allowance for loan losses was adequate at December 31, 2006 and December 31, 2005, the determination of the allowance is a highly judgmental process and we cannot assure you that we will not further increase or decrease the allowance or that bank regulators will not require us to increase or decrease the allowance in the future.
The following table presents the allowance for loan losses:
For the years ended December 31, | ||||||||||||||||||||
(in thousands) | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Beginning balance | $ | 4,105 | $ | 2,346 | $ | 2,325 | $ | 1,970 | $ | 1,680 | ||||||||||
Balance acquired in purchase | — | 1,184 | — | — | — | |||||||||||||||
Provision (credit) for loan losses | (297 | ) | 488 | 418 | 510 | 510 | ||||||||||||||
Loans charged-off | (213 | ) | (74 | ) | (359 | ) | (124 | ) | (336 | ) | ||||||||||
Transfer to undisbursed commitment | (125 | ) | (50 | ) | (50 | ) | (100 | ) | — | |||||||||||
Recoveries on loans charged-off | 57 | 211 | 12 | 69 | 116 | |||||||||||||||
Ending balance | $ | 3,527 | $ | 4,105 | $ | 2,346 | $ | 2,325 | $ | 1,970 | ||||||||||
Allowance to loans | 0.99 | % | 1.20 | % | 1.28 | % | 1.47 | % | 1.38 | % |
The allowance for loan losses on undisbursed commitments was $275,000 at December 31, 2006 compared with $200,000 at December 31, 2005. There have been no charges to the allowance since its inception. The allowance for losses on undisbursed commitments is included among “other liabilities” on the balance sheet.
33
Table of Contents
The following table presents the allocation of the allowance to each loan category and the percentage relationship of loans in each category to total loans:
For the years ended December 31, | ||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||
(in thousands) | Amount | Percent of Loans in Category to Total Loans | Amount | Percent of Loans in Category to Total loans | Amount | Percent of Loans in Category to Total loans | Amount | Percent of Loans in Category to Total loans | Amount | Percent of Loans in Category to Total loans | ||||||||||||||||||||
Commercial mortgage | $ | 1,109 | 46 | % | $ | 1,273 | 39 | % | $ | 821 | 44 | % | $ | 899 | 55 | % | $ | 470 | 56 | % | ||||||||||
Mulitfamily mortgage | 155 | 7 | % | 159 | 5 | % | 26 | 1 | % | — | — | — | — | |||||||||||||||||
Commercial loans | 590 | 14 | % | 1,062 | 32 | % | 856 | 46 | % | 421 | 27 | % | 570 | 23 | % | |||||||||||||||
Construction loans | 851 | 18 | % | 620 | 19 | % | 62 | 3 | % | 83 | 10 | % | 84 | 12 | % | |||||||||||||||
Home equity loans | 46 | 2 | % | 43 | 1 | % | 13 | 1 | % | 39 | 4 | % | 35 | 5 | % | |||||||||||||||
Home mortgage | 253 | 12 | % | 67 | 2 | % | 58 | 3 | % | 14 | 2 | % | 14 | 2 | % | |||||||||||||||
Installment and credit card | 14 | 1 | % | 60 | 2 | % | 45 | 2 | % | 26 | 2 | % | 31 | 3 | % | |||||||||||||||
Subtotal | 3,018 | 3,284 | 1,881 | 1,482 | 1,204 | |||||||||||||||||||||||||
Unallocated | 509 | 821 | 465 | 843 | 766 | |||||||||||||||||||||||||
Total | $ | 3,527 | 100 | % | $ | 4,105 | 100 | % | $ | 2,346 | 100 | % | $ | 2,325 | 100 | % | $ | 1,970 | 100 | % | ||||||||||
The allocation presented above should not be interpreted as an indication that charges to the allowance will be incurred in these amounts or proportions. The amounts attributed to each loan category are based on the analysis described above.
The following table presents past due and nonaccrual loans. We had no restructured loans for the periods presented.
For the years ended December 31, | |||||||||||||||||||
(in thousands) | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||
Accruing loans past due 90 days or more | $ | — | $ | 137 | $ | — | $ | 132 | $ | 18 | |||||||||
Nonaccrual loans | $ | — | $ | — | $ | 2,180 | $ | 2,443 | $ | 333 | |||||||||
Ratios: | |||||||||||||||||||
Accruing loans past due 90 days or more to average loans | — | 0.06 | % | — | 0.09 | % | 0.01 | % | |||||||||||
Nonaccrual loans to average loans | — | — | 1.29 | % | 1.45 | % | 0.25 | % | |||||||||||
Interest income on nonaccrual loans: | |||||||||||||||||||
Contractually due | $ | — | $ | — | $ | 197 | $ | 254 | $ | 47 | |||||||||
Collected | $ | — | $ | 64 | $ | 69 | $ | 14 | $ | 52 |
Nonaccrual loans for 2004 and 2003 chiefly represents a participation in a construction loan with several other banks to a borrower who defaulted on the payment terms in 2003 and filed for bankruptcy. In December 2004, the bankruptcy court approved a settlement and the borrower has, in 2005, resumed payments under the approved settlement. The loan was returned to accruing status in the third quarter of 2005. There have been no charge-offs on this loan.
Investing, funding and liquidity risk
Liquidity risk is the risk to earnings or capital arising from the inability to meet obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources as well as the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.
We manage liquidity risk through Board approved policies and procedures. These policies are reviewed and approved at least annually by the Directors. Liquidity risk policies provide us with a framework for consistent evaluation of risk and establish risk tolerance parameters. Management’s Asset and Liability Committee meets
34
Table of Contents
regularly to evaluate liquidity risk, review and establish deposit interest rates, review loan and deposit in-flows and out-flows and reports quarterly to the Directors’ Funds Management Committee on compliance with policies. The Directors’ Audit Committee also engages a third party to perform a review of management’s asset and liability practices to ensure compliance with policies.
We enjoy a large base of core deposits (representing checking, savings and small balance certificates of deposit). At December 31, 2006 core deposits totaled $291.7 million. Core deposits represent a significant low-cost source of funds that support our lending activities and represent a key part of our funding strategy. We seek and stress the importance of both loan and deposit relationships with customers in our business plans.
Alternative funding sources include large balance certificates of deposits, federal funds purchased from other institutions, and borrowings.
Large balance certificates of deposits are not central to our funding strategy; however, we have participated in the State of California time deposit program, which began in 1977, for several years. The time deposit program is one element of a pooled investment account managed by the State Treasurer for the benefit of the State of California and all participating local agencies. The pooled investment account had approximately $60 billion in investments of which approximately $7 billion represented time deposits placed at various financial institutions. At December 31, 2006, State of California time deposits placed with us, with original maturities of three and six months, were $30.0 million. We believe that the State Treasurer will continue this program; we also believe that we have the ability to establish large balance certificates of deposit rates that will enable us to attract, replace, or retain those deposits accepted in our local market area if it becomes necessary under a modified funding strategy.
We, as a member of the FHLB, have access to borrowing arrangements with a maximum available borrowing of approximately $153.9 million. Borrowings under these arrangements are collateralized with our FHLB stock as well as with our loans and securities. As of December 31, 2006, we had borrowings outstanding with the FHLB of $54.7 million.
In addition, we have lines of credit with three other financial institutions providing for federal funds facilities up to a maximum of $14.0 million. The lines of credit support short-term liquidity needs and cannot be used for more than 30 consecutive days. These lines are unsecured, have no formal maturity date and can be revoked at any time by the granting institutions. There were no borrowings under these lines of credit at December 31, 2006.
We also maintain a secured borrowing facility of $800,000 with the Federal Reserve Bank of San Francisco. There were no borrowings under this facility at December 31, 2006.
Federal funds sold to other institutions provide an immediate source of liquidity. The securities portfolio also provides a source of liquidity through the periodic remittance of interest and principal. We purchase securities to generate interest income and to assist in the management of liquidity risk. Federal funds sold were $100,000 and securities were $86.0 million at December 31, 2006.
Securities
Securities are classified as ‘available-for-sale’ for accounting purposes and, as such, are recorded at their fair or market values in the balance sheet. Fair values are based on quoted market prices. Changes in the fair value of securities (that is, unrealized holding gains or losses) are reported as ‘other comprehensive income,’ net of tax and carried as accumulated comprehensive income or loss within shareholders’ equity until realized.
35
Table of Contents
The following table presents securities, at amortized cost, by maturity distribution and weighted average yield (tax equivalent):
For the year ended December 31, 2006 | ||||||||||||||||||||
(in thousands) | One year or less | After one year to five years | After five years to ten years | Over ten years | Total | |||||||||||||||
Maturity distribution | ||||||||||||||||||||
U.S. Treasury notes | $ | 1,999 | $ | 505 | $ | — | $ | — | $ | 2,504 | ||||||||||
U.S. government agency notes | 1,957 | 7,955 | — | — | 9,912 | |||||||||||||||
U.S. government agency mortgage-backed securities | 1,378 | 25,305 | 8,810 | 16,210 | 51,703 | |||||||||||||||
Collateralized mortgage obligations | — | 897 | 4,385 | — | 5,282 | |||||||||||||||
Municipal securities | — | 1,040 | 7,484 | 9,082 | 17,606 | |||||||||||||||
Total | $ | 5,334 | $ | 35,702 | $ | 20,679 | $ | 25,292 | $ | 87,007 | ||||||||||
Weighted average yield | ||||||||||||||||||||
U.S. Treasury notes | 3.02 | % | 3.36 | % | — | — | 3.10 | % | ||||||||||||
U.S. government agency notes | 4.72 | % | 0.00 | % | — | — | 0.94 | % | ||||||||||||
U.S. government agency mortgage-backed securities | 4.07 | % | 4.01 | % | 4.43 | % | 5.89 | % | 4.67 | % | ||||||||||
Collateralized mortgage obligations | — | 4.93 | % | 4.58 | % | — | 4.64 | % | ||||||||||||
Municipal securities | — | 5.51 | % | 5.58 | % | 6.04 | % | 5.81 | % | |||||||||||
Total | 3.92 | % | 4.15 | % | 4.88 | % | 5.92 | % | 4.23 | % | ||||||||||
Securities, at amortized cost, increased to $87,007,000, or 15.4 percent, at December 31, 2006 from $75,034,000 at December 31, 2005. Securities, at amortized cost, were $77,785,000 at December 31, 2004.
Net unrealized holding losses at December 31, 2006 and 2005 were $989,000 and $1,615,000, respectively. Net unrealized holding losses at December 31, 2004 were $440,000. As a percentage of securities, at amortized cost, unrealized holding losses were 1.14 percent, 2.15 percent and 0.57 percent at the end of each respective period. Securities are comprised largely of U.S. Government Agency obligations, mortgage-backed securities and California municipal general obligation bonds. We have evaluated the unrealized losses of these securities and determined, as of December 31, 2006, that they were temporary and were related to the fluctuation in market interest rates since purchase.
Deposits
We primarily accept deposits of small businesses located principally in Ventura, Los Angeles and Orange Counties. Average core deposits (representing checking, savings and small balance certificates of deposit (that is, balances under $100,000) were $290,331,000 for 2006, up 23% from 2005. For December 31, 2005 and 2004, core deposits averaged $236,908,000 and $190,283,000, respectively. Core deposits represent a significant low-cost source of funds that support our lending activities.
36
Table of Contents
The following tables present the average balance and the average rate paid on each deposit category for the periods indicated:
For the years ended December 31, | ||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||
(in thousands) | Balance | Rate | Balance | Rate | Balance | Rate | ||||||||||||
Core deposits | ||||||||||||||||||
Noninterest bearing demand deposits | $ | 102,022 | $ | 95,306 | $ | 81,455 | ||||||||||||
Interest checking | 20,494 | 0.42 | % | 20,694 | 0.19 | % | 19,775 | 0.11 | % | |||||||||
Savings accounts | 82,794 | 2.15 | % | 68,568 | 1.05 | % | 61,697 | 0.79 | % | |||||||||
Time deposits less than $100,000 | 85,021 | 4.12 | % | 52,340 | 3.06 | % | 27,356 | 1.33 | % | |||||||||
Total core deposits | 290,331 | 2.85 | % | 236,908 | 1.67 | % | 190,283 | 0.80 | % | |||||||||
Noncore deposits | ||||||||||||||||||
Time deposits of $100,000 or more | 96,275 | 4.76 | % | 29,645 | 3.10 | % | 24,783 | 1.79 | % | |||||||||
Total core and noncore deposits | $ | 386,606 | $ | 266,553 | $ | 215,066 | ||||||||||||
Large balance certificates of deposits (that is, balances of $100,000 or more) totaled $99,186,000 at December 31, 2006. Large balance certificates of deposits were $74,018,000 at December 31, 2005 and $32,791,000 at December 31, 2004. A portion of these large balance time deposits represent deposits placed by the State Treasurer of California with the Bank. The remainder represent time deposits accepted from customers in our market area. There were no broker deposits during or as of any period presented.
The following table presents the maturity of large balance certificates of deposits for the periods indicated:
For the Years Ending December 31, | ||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||
(in thousands) | Amount | Percentage | Amount | Percentage | Amount | Percentage | ||||||||||||
Three months or less | $ | 53,348 | 54 | % | $ | 28,960 | 39 | % | $ | 17,934 | 55 | % | ||||||
Over three months through six months | 18,511 | 19 | % | 19,947 | 27 | % | 7,571 | 23 | % | |||||||||
Over six months through one year | 20,171 | 20 | % | 9,358 | 13 | % | 2,086 | 6 | % | |||||||||
Over one year | 7,156 | 7 | % | 15,753 | 21 | % | 5,200 | 16 | % | |||||||||
Total | $ | 99,186 | 100 | % | $ | 74,018 | 100 | % | $ | 32,791 | 100 | % | ||||||
Borrowings
First California Bank is a member of the FHLB. Membership allows us to borrow, approximately $124.8 million at December 31, 2006, to meet funding needs and otherwise assist in the management of liquidity risk. Borrowings with the FHLB are collateralized with our investment in FHLB stock as well as with loans or securities from time to time. At December 31, 2006 our investment in FHLB stock totaled $2,679,000.
37
Table of Contents
The following table presents the amounts and weighted average interest rate of FHLB advances.
For the years ended December 31, | ||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||
(in thousands) | Federal Home Loan Bank Advances | Weighted Average Interest rate | Federal Home Loan Bank Advances | Weighted Average Interest rate | Federal Home Loan Bank Advances | Weighted Average Interest rate | ||||||||||||
Amount outstanding at end of period | $ | 54,695 | 5.03 | % | $ | 36,319 | 3.70 | % | $ | 32,850 | 2.39 | % | ||||||
Maximum amount outstanding atany month-end during the period | $ | 57,001 | 5.08 | % | $ | 47,566 | 3.39 | % | $ | 32,850 | 2.39 | % | ||||||
Average amount outstanding during the period | $ | 37,639 | 4.42 | % | $ | 35,139 | 2.96 | % | $ | 29,706 | 1.95 | % |
The following table presents the maturities for FHLB advances:
(in thousands) | Amount | Maturity Year | |||
Overnight advances | $ | 26,695 | 2007 | ||
Term advances | 14,500 | 2007 | |||
Term advances | 9,000 | 2008 | |||
Term advances | 4,500 | 2009 | |||
$ | 54,695 | ||||
Capital resources
The Board of Directors recognizes that a strong capital position is vital to growth, continued profitability, and depositor and investor confidence. The policy of the Board of Directors is to maintain sufficient capital at not less than the well-capitalized thresholds established by banking regulators. We have not paid cash or stock dividends since 2001. See “Market for Common Stock and Dividends — Dividends” on page 10.
The following tables present the capital amounts and ratios of FCB Bancorp with a comparison to the minimum ratios for the periods indicated:
Actual | For Capital Adequacy Purposes | ||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | |||||||||
December 31, 2006 | |||||||||||||
Total capital | $ | 48,533 | 12.01 | % | $ | 32,336 | ³ | 8.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 44,731 | 11.07 | % | $ | 16,168 | ³ | 4.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 44,731 | 9.07 | % | $ | 14,789 | ³ | 3.00 | % | ||||
(to average assets) |
38
Table of Contents
Actual | For Capital Adequacy Purposes | ||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | |||||||||
December 31, 2005 | |||||||||||||
Total capital | $ | 44,545 | 11.74 | % | $ | 30,352 | ³ | 8.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 40,239 | 10.60 | % | $ | 15,181 | ³ | 4.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 40,239 | 8.69 | % | $ | 13,889 | ³ | 3.00 | % | ||||
(to average assets) |
The following tables present the capital amounts and ratios of First California Bank with a comparison to the minimum ratios for the periods indicated:
Actual | For Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Provision | |||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
December 31, 2006 | |||||||||||||||||||
Total capital | $ | 45,938 | 11.38 | % | 32,287 | ³ | 8.00 | % | $ | 40,359 | ³ | 10.00 | % | ||||||
(to risk weighted assets) | |||||||||||||||||||
Tier I capital | $ | 42,136 | 10.44 | % | 16,144 | ³ | 4.00 | % | $ | 24,215 | ³ | 6.00 | % | ||||||
(to risk weighted assets) | |||||||||||||||||||
Tier I capital | $ | 42,136 | 8.87 | % | 19,001 | ³ | 4.00 | % | $ | 23,752 | ³ | 5.00 | % | ||||||
(to average assets) | |||||||||||||||||||
Actual | For Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Provision | |||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
December 31, 2005 | |||||||||||||||||||
Total capital | $ | 43,900 | 11.62 | % | 30,224 | ³ | 8.00 | % | $ | 37,780 | ³ | 10.00 | % | ||||||
(to risk weighted assets) | |||||||||||||||||||
Tier I capital | $ | 39,595 | 10.48 | % | 15,113 | ³ | 4.00 | % | $ | 22,669 | ³ | 6.00 | % | ||||||
(to risk weighted assets) | |||||||||||||||||||
Tier I capital | $ | 39,595 | 8.88 | % | 17,836 | ³ | 4.00 | % | $ | 22,294 | ³ | 5.00 | % | ||||||
(to average assets) |
Dividends declared by the Bank to FCB in any calendar year may not, without the approval of state banking regulators, exceed the lesser of the Bank’s retained earnings or the sum of net income for the three previous years less dividend paid. At December 31, 2006, the Bank had approximately $3.5 million available for dividends under these restrictions.
Commitments, Contingent Liabilities, Contractual Obligations and Off-Balance Sheet Arrangements
In the normal course of business, we make commitments to extend credit or issue letters of credit to customers. These commitments generally are not recognized in the balance sheet. These commitments do involve, to varying degrees, elements of credit risk; however, we use the same credit policies and procedures as we do for on-balance sheet credit facilities. Commitments to extend credit totaled $94,370,000 at December 31,
39
Table of Contents
2006, compared with $79,056,000 at December 31, 2005, and $63,604,000 at December 31, 2004. Commercial and standby letters of credit were $1,239,000, $427,000, and $914,000 at December 31, 2006, 2005, and 2004, respectively.
The following is a schedule of our current contractual obligations by maturity or payment due date:
(in thousands) | For the year ended December 31, 2006 | ||||||||||||||
Less Than One Year | One to Three Years | Three to Five Years | Greater Than Five Years | Total | |||||||||||
FHLB overnight advances | $ | 26,695 | $ | — | $ | — | $ | — | $ | 26,695 | |||||
FHLB term advances | 14,500 | 13,500 | — | — | 28,000 | ||||||||||
Salary continuation benefits | — | — | — | 411 | 411 | ||||||||||
Director post-service award | — | 82 | — | — | 82 | ||||||||||
Junior subordinated debentures | — | — | — | 10,310 | 10,310 | ||||||||||
Operating lease obligations | 752 | 1,387 | 1,090 | 2,773 | 6,002 | ||||||||||
Total | $ | 41,947 | $ | 14,969 | $ | 1,090 | $ | 13,494 | $ | 71,500 | |||||
40
Table of Contents
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Interest rate risk
Interest rate risk is the risk to earnings or capital arising from movements in interest rates. Interest rate risk arises from differences between the timing of rate changes and the timing of cash flows (re-pricing risk), from changing the rate relationships among different yield curves affecting bank activities (basis risk), from changing rate relationships across the spectrum of maturities (yield curve risk), and from interest-related options embedded in loans and products (options risk).
We manage interest risk through Board approved policies and procedures. These policies are reviewed and approved at least annually by the Directors. Interest rate risk policies provide management with a framework for consistent evaluation of risk (a modified-gap analysis, an earnings-at-risk analysis and an economic value of equity analysis) and establish risk tolerance parameters. Management’s Asset and Liability Committee meets regularly to evaluate interest rate risk, engages a third party to assist in the measurement and evaluation of risk and reports quarterly to the Directors’ Funds Management Committee on compliance with policies. The Directors’ Audit Committee also engages a third party to perform a review of management’s asset and liability practices to ensure compliance with policies.
Our funding sources are dominated by checking and savings accounts, which either have no interest rate or are re-priced infrequently. Our loan portfolio is dominated by loans that use the Wall Street Journal prime rate as an index. Our securities portfolio is comprised chiefly of U.S. Agency mortgage-backed securities that are either fixed rate, adjustable or a hybrid. This composition produces a balance sheet that is generally asset-sensitive, that is as the general level of interest rates rise, net interest income generally increases and as the general level of interest rates fall, net interest income generally decreases.
We focus on the net re-pricing imbalances in the cumulative 1 year gap and the Board has established a policy of plus or minus 15 percent. The Board also has established a policy of plus or minus 30 percent for the cumulative 5 year gap. No policies have been established for the cumulative 3 month gap or the gap beyond 5 years. The 1 year gap ratio was within policy at December 31, 2006. The 5 year gap was also within policy at December 31, 2006.
The following table presents earning assets and interest bearing funds by re-pricing intervals:
For the year ended December 31, 2006 By repricing interval | |||||||||||||||||||
(in thousands) | 0-3 Months | 4 - 12 Months | 1-5 Years | > 5 Years | Total | ||||||||||||||
Loans | $ | 205,354 | $ | 39,954 | $ | 115,656 | $ | 4,388 | $ | 365,352 | |||||||||
Securities | 4,298 | 10,131 | 34,873 | 36,716 | 86,018 | ||||||||||||||
Federal funds sold | 100 | — | — | — | 100 | ||||||||||||||
Total earning assets | 209,752 | 50,085 | 150,529 | 41,104 | 451,470 | ||||||||||||||
Deposits | 121,756 | 130,543 | 32,950 | — | 285,249 | ||||||||||||||
Borrowings | 29,695 | 11,500 | 13,500 | — | 54,695 | ||||||||||||||
Total deposits and borrowings | 151,451 | 142,043 | 46,450 | — | 339,944 | ||||||||||||||
Interest rate sensitivity gap | $ | 58,301 | $ | (91,958 | ) | $ | 104,078 | $ | 41,104 | $ | 111,526 | ||||||||
Cumulative gap | $ | 58,301 | $ | (33,656 | ) | $ | 70,422 | $ | 111,526 | ||||||||||
Cumulative gap as a percentage of earning assets | 12.91 | % | -7.45 | % | 15.60 | % | 24.70 | % | |||||||||||
41
Table of Contents
Item 8. | Financial Statements and Supplementary Data |
42
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of FCB Bancorp and Subsidiaries:
We have audited the accompanying consolidated balance sheets of FCB Bancorp and Subsidiaries (the Company) as of December 31, 2006 and 2005 and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FCB Bancorp and Subsidiaries as of December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.
/s/ MOSS ADAMS LLP
Portland, Oregon
April 2, 2007
43
Table of Contents
Consolidated balance sheets
December 31, 2006 | December 31, 2005 | |||||||
(in thousands, except share data) | ||||||||
Cash and due from banks | $ | 14,058 | $ | 14,435 | ||||
Federal funds sold | 100 | 306 | ||||||
Securities available-for-sale, at fair value | 86,018 | 73,419 | ||||||
Loans held for sale | 8,419 | 8,502 | ||||||
Loans, net | 353,406 | 330,276 | ||||||
Premises and equipment, net | 10,169 | 10,315 | ||||||
Goodwill and other intangibles, net | 17,376 | 16,951 | ||||||
Federal Home Loan Bank stock | 2,679 | 2,395 | ||||||
Cash surrender value of life insurance | 10,518 | 5,171 | ||||||
Accrued interest receivable and other assets | 7,273 | 5,341 | ||||||
Total assets | $ | 510,016 | $ | 467,111 | ||||
Checking | $ | 105,597 | $ | 112,596 | ||||
Interest checking | 18,571 | 23,691 | ||||||
Savings | 83,831 | 79,273 | ||||||
Certificates of deposit, under $100,000 | 83,661 | 82,770 | ||||||
Certificates of deposit, $100,000 and over | 99,186 | 74,018 | ||||||
Total deposits | 390,846 | 372,348 | ||||||
Federal Home Loan Bank advances | 54,695 | 36,319 | ||||||
Junior subordinated debentures | 10,310 | 10,310 | ||||||
Accrued interest payable and other liabilities | 3,098 | 2,355 | ||||||
Total liabilities | 458,949 | 421,332 | ||||||
Commitments and Contingencies (Note 17) | ||||||||
Common stock, no par value, 10,000,000 authorized; shares issued and outstanding: 3,277,807 at December 31, 2006 and December 31, 2005 | 32,756 | 32,666 | ||||||
Retained earnings | 18,893 | 14,063 | ||||||
Accumulated other comprehensive loss | (582 | ) | (950 | ) | ||||
Total shareholders’ equity | 51,067 | 45,779 | ||||||
Total liabilities and shareholders’ equity | $ | 510,016 | $ | 467,111 | ||||
See accompanying notes.
44
Table of Contents
Consolidated statements of operations
Year ended December 31, | ||||||||||
2006 | 2005 | 2004 | ||||||||
(in thousands, except per share data) | ||||||||||
Interest and fees on loans | $ | 29,882 | $ | 16,909 | $ | 11,209 | ||||
Taxable interest on securities | 2,302 | 2,306 | 1,970 | |||||||
Nontaxable interest on securities | 444 | 321 | 299 | |||||||
Interest on federal funds sold | 191 | 178 | 74 | |||||||
Total interest income | 32,819 | 19,714 | 13,552 | |||||||
Interest on deposits | 9,673 | 3,278 | 1,315 | |||||||
Interest on borrowings | 2,311 | 1,199 | 581 | |||||||
Total interest expense | 11,984 | 4,477 | 1,896 | |||||||
Net interest income | 20,835 | 15,237 | 11,656 | |||||||
(Credit) provision for loan losses | (297 | ) | 488 | 418 | ||||||
Net interest income after (credit) provision for loan losses | 21,132 | 14,749 | 11,238 | |||||||
Service charges on deposit accounts | 1,081 | 1,083 | 1,056 | |||||||
Earnings on cash surrender value of life insurance | 420 | 226 | 224 | |||||||
Commissions on brokered loans | 160 | 226 | 132 | |||||||
Net gain on sales of loans | 893 | 118 | 87 | |||||||
Net servicing fees | 53 | 47 | 42 | |||||||
Net gain (loss) on sales of securities | (20 | ) | 2 | 94 | ||||||
Other income | 550 | 293 | 290 | |||||||
Total noninterest income | 3,137 | 1,995 | 1,925 | |||||||
Salaries and employee benefits | 9,357 | 6,693 | 5,373 | |||||||
Premises and equipment | 2,579 | 1,832 | 1,301 | |||||||
Data processing | 757 | 589 | 758 | |||||||
Legal, audit, and other professional services | 918 | 485 | 418 | |||||||
Printing, stationary, and supplies | 276 | 195 | 141 | |||||||
Telephone | 261 | 175 | 163 | |||||||
Directors’ fees | 132 | 132 | 128 | |||||||
Advertising and marketing | 742 | 412 | 299 | |||||||
Postage | 116 | 77 | 81 | |||||||
Other expenses | 1,403 | 963 | 747 | |||||||
Total noninterest expense | 16,541 | 11,553 | 9,409 | |||||||
Income before provision for income taxes | 7,728 | 5,191 | 3,754 | |||||||
Provision for income taxes | 2,898 | 1,967 | 1,319 | |||||||
Net income | $ | 4,830 | $ | 3,224 | $ | 2,435 | ||||
Earnings per share | ||||||||||
Basic | $ | 1.47 | $ | 1.31 | $ | 1.17 | ||||
Diluted | $ | 1.47 | $ | 1.30 | $ | 1.14 |
See accompanying notes.
45
Table of Contents
Consolidated statements of comprehensive income
Year Ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
(in thousands) | ||||||||||||
Unrealized holding gains (losses) on securities available-for-sale arising during the period | $ | 605 | $ | (1,171 | ) | $ | 165 | |||||
Reclassification adjustments for losses (gains) included in net income | 20 | (2 | ) | (94 | ) | |||||||
Other comprehensive income (loss), before taxes | 625 | (1,173 | ) | 71 | ||||||||
Income tax (expense) benefit related to items of other comprehensive income | (257 | ) | 481 | (29 | ) | |||||||
Other comprehensive income (loss), net of tax | 368 | (692 | ) | 42 | ||||||||
Net income | 4,830 | 3,224 | 2,435 | |||||||||
Comprehensive income | $ | 5,198 | $ | 2,532 | $ | 2,477 | ||||||
Consolidated statements of changes in shareholders’ equity
(in thousands) | Year Ended December 31, | |||||||||||
2006 | 2005 | 2004 | ||||||||||
Common stock | ||||||||||||
Issuance of common stock | $ | — | $ | 20,701 | $ | 1,703 | ||||||
Share-based compensation | 90 | — | — | |||||||||
Common stock, beginning of year | 32,666 | 11,965 | 10,262 | |||||||||
Common stock, end of year | $ | 32,756 | $ | 32,666 | $ | 11,965 | ||||||
Retained earnings | ||||||||||||
Net income | $ | 4,830 | $ | 3,224 | $ | 2,435 | ||||||
Retained earnings, beginning of year | 14,063 | 10,839 | 8,404 | |||||||||
Retained earnings, end of year | $ | 18,893 | $ | 14,063 | $ | 10,839 | ||||||
Accumulated other comprehensive income (loss), net of tax | ||||||||||||
Accumulated other comprehensive income (loss), net of tax | $ | 368 | $ | (692 | ) | $ | 42 | |||||
Accumulated other comprehensive loss, beginning of year | (950 | ) | (258 | ) | (300 | ) | ||||||
Accumulated other comprehensive loss, end of year | $ | (582 | ) | $ | (950 | ) | $ | (258 | ) | |||
See accompanying notes.
46
Table of Contents
FCB BANCORP and subsidiaries
Consolidated statements of cash flows
Year Ended December 31, | ||||||||||||
(in thousands) | 2006 | 2005 | 2004 | |||||||||
Net income | $ | 4,830 | $ | 3,224 | $ | 2,435 | ||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||
Realized net gains on sale of securities and loans | (873 | ) | (120 | ) | (181 | ) | ||||||
Net amortization of premiums and discounts on securities available-for-sale | 128 | 339 | 567 | |||||||||
Federal Home Loan Bank stock dividends | (124 | ) | (63 | ) | (82 | ) | ||||||
(Credit) provision for loan losses | (297 | ) | 488 | 418 | ||||||||
Share-based compensation | 90 | — | — | |||||||||
Origination of loans held for sale | (43,733 | ) | (10,556 | ) | (1,442 | ) | ||||||
Proceeds from sale of loans | 43,816 | 2,574 | 918 | |||||||||
Deferred income taxes | 226 | 277 | 188 | |||||||||
Depreciation and amortization | 1,121 | 770 | 460 | |||||||||
Net appreciation in cash surrender value of life insurance | (384 | ) | (189 | ) | (190 | ) | ||||||
Change in accrued interest receivable and other assets | (2,910 | ) | (835 | ) | (889 | ) | ||||||
Change in accrued interest payable and other liabilities | 743 | 145 | 169 | |||||||||
Net cash (used for) from operating activities | 2,633 | (3,946 | ) | 2,371 | ||||||||
Net change in federal funds sold | 206 | 15,149 | 11,725 | |||||||||
Proceeds from maturities, calls, and paydowns of securities available-for-sale | 17,100 | 14,594 | 16,830 | |||||||||
Proceeds from sales of securities available-for-sale | 2,978 | 776 | 6,098 | |||||||||
Purchases of securities available-for-sale | (32,199 | ) | (6,051 | ) | (35,901 | ) | ||||||
Purchases of Federal Home Loan Bank stock | (160 | ) | (340 | ) | (398 | ) | ||||||
Net increase in loans | (21,940 | ) | (32,664 | ) | (24,707 | ) | ||||||
Cash paid for purchase of nonbank subsidiary common stock | — | (310 | ) | — | ||||||||
Cash paid, net of cash received, for net assets of bank subsidiary | — | (29,585 | ) | — | ||||||||
Purchases of premises and equipment | (906 | ) | (2,373 | ) | (1,408 | ) | ||||||
Purchases of life insurance | (4,963 | ) | — | — | ||||||||
Net cash used for investing activities | (39,884 | ) | (40,804 | ) | (27,761 | ) | ||||||
Net increase in deposits | 18,498 | 17,511 | 15,261 | |||||||||
Net change in FHLB overnight advances | 16,676 | 10,019 | — | |||||||||
Proceeds from FHLB term advances | 20,500 | 10,000 | — | |||||||||
Payments on FHLB term advances | (18,800 | ) | (16,550 | ) | 7,850 | |||||||
Proceeds from issuance of junior subordinated debentures | — | 10,310 | — | |||||||||
Proceeds from issuance of common stock | — | 20,701 | — | |||||||||
Proceeds from exercise of warrants | — | — | 1,703 | |||||||||
Net cash from financing activities | 36,874 | 51,991 | 24,814 | |||||||||
Change in cash and due from banks | (377 | ) | 7,241 | (576 | ) | |||||||
Cash and due from banks, beginning of period | 14,435 | 7,194 | 7,770 | |||||||||
Cash and due from banks, end of period | $ | 14,058 | $ | 14,435 | $ | 7,194 | ||||||
Supplemental cash flow information: | ||||||||||||
Cash paid for interest | $ | 11,619 | $ | 4,075 | $ | 1,519 | ||||||
Cash paid for income taxes | $ | 2,725 | $ | 1,848 | $ | 1,154 | ||||||
Supplemental disclosure of noncash investing activities | ||||||||||||
Change in fair value of securities available-for-sale, net of taxes | $ | 368 | $ | (692 | ) | $ | 42 | |||||
Non-cash increase of goodwill | $ | 494 | $ | 16,341 | $ | — |
See accompanying notes.
47
Table of Contents
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and nature of operations — FCB Bancorp is a bank holding company arising from a transaction in which the shareholders of First California Bank exchanged their common stock for that of FCB Bancorp on a share-for-share basis. As a result of that transaction First California Bank became a wholly-owned subsidiary of FCB Bancorp on September 30, 2005. FCB Bancorp and First California Bank are related entities; accordingly, the consolidated financial position and results of operations as of and for the year ended December 31, 2006 and all other prior periods have been restated to reflect the combined entities. As of March 12, 2007, FCB Bancorp ceased to exist as a result of the completion of its previously announced merger with First California Financial Group, Inc. See “Note 21 — Subsequent Events” contained herein.
The accompanying consolidated financial statements for FCB Bancorp and subsidiaries include the parent company, FCB Bancorp (“FCB”), and its wholly-owned subsidiaries, First California Bank (“the Bank”), FCB Statutory Trust I, and SC Financial (all collectively referred to as the “Company”). SC Financial is an inactive subsidiary and FCB Statutory Trust I is special purpose entity formed to issue trust preferred securities and related junior subordinated debentures. First California Bank is a commercial bank doing business primarily in Ventura, Orange and Los Angeles County, California.
Consolidation— The consolidated financial statements include, in conformity with generally accepted accounting principles, the accounts of FCB and the Bank and exclude the accounts of FCB Statutory Trust I. All material intercompany transactions and balances of FCB and the Bank have been eliminated.
Management’s estimates and assumptions — The preparation of the consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets, and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Significant estimations made by management primarily involve the calculation of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and deferred tax assets or liabilities.
Reclassifications— Certain reclassifications have been made to the 2005 and 2004 consolidated financial statements to conform with current year presentation. These reclassifications have no effect on previously reported net income.
Cash and due from banks— Cash and due from banks include amounts the Bank is required to maintain to meet certain average reserve and compensating balance requirements of the Federal Reserve Bank of San Francisco. As of December 31, 2006 and 2005, the Bank had reserve requirements of $275,000. At December 31, 2006, the Bank had cash deposits at other financial institutions in excess of FDIC insured limits. However, as the Bank places these deposits with large, well-capitalized financial institutions, management believes the risk of loss to be minimal.
Securities available-for-sale, at fair value— Securities are generally classified as available-for-sale if the instrument may be sold in response to such factors as (1) changes in market interest rates and related changes in the prepayment risk, (2) need for liquidity, (3) changes in the availability of and the yield on alternative instruments, and (4) changes in funding sources and terms. Unrealized holding gains and losses, net of taxes, on securities available-for-sale are reported as other comprehensive income and carried as accumulated comprehensive income or loss within shareholders’ equity until realized. Fair values for securities are based on quoted market prices. Realized gains and losses on the sale of securities available-for-sale are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the effective interest method over the period to maturity.
Declines in the fair value of individual securities available-for-sale below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are
48
Table of Contents
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued)
included in earnings as realized losses. At each financial statement date, management assesses each investment to determine if investments are temporarily impaired or if the impairment is other-than-temporary based upon the positive and negative evidence available. Evidence evaluated includes, but is not limited to, industry analyst reports, credit market conditions, and interest rate trends.
Loans, net of allowance for loan losses and unearned loan fee income— Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and unearned loan fee income. Interest on loans is calculated by the simple-interest method on daily balances of the principal amount outstanding. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield over the life of the related loan.
The Company does not accrue interest on loans for which payment in full of principal and interest is not expected, or which payment of principal or interest has been in default 90 days or more, unless the loan is well-secured and in the process of collection. Nonaccrual loans are considered impaired loans. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price, or the fair value of collateral if the loan is collateral dependent. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received or when the loan is removed from nonaccrual status. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for evaluation of impairment.
The allowance for loan losses is established through a provision charged to expense. Loans are charged against the allowance when management believes that the collectibility of principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. Various regulatory agencies, as a regular part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations.
Premises and equipment — Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed by the straight-line and accelerated methods over the estimated useful lives of the assets, which range from 3 to 7 years for furniture and equipment, and 25 to 39 years for building premises. Leasehold improvements are amortized over the estimated life of the lease. Maintenance and repairs are expensed as incurred, while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Federal Home Loan Bank stock— Federal Home Loan Bank stock represents the Company’s investment in the Federal Home Loan Bank San Francisco (“FHLB”) stock and is carried at par value, which reasonably approximates its fair value. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets or FHLB advances. At December 31, 2006, the Company’s minimum required investment was approximately $2.7 million. The Company may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.
Goodwill and other intangible assets — Goodwill is not amortized; however, it is tested for impairment annually and between annual tests in certain circumstances. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. There was no impairment loss at December 31, 2006.
49
Table of Contents
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued)
Core deposit intangibles, intangible assets arising from the business combination, are amortized over their estimated useful lives of 8.4 years. In addition, a review for impairment occurs whenever circumstances indicate that the carrying amount may not be recoverable. There was no impairment loss at December 31, 2006.
Other real estate owned — Other real estate owned, acquired through foreclosure or deeds in lieu of foreclosure, is carried at the lower of cost or estimated net realizable value. When property is acquired, any excess of the loan balance over its estimated net realizable value is charged to the allowance for loan losses. Subsequent write-downs to net realizable value, if any, or any disposition gains or losses are included in noninterest income and expense in the statements of income. The Company did not possess any other real estate owned as of December 31, 2006 or 2005.
Income taxes — Deferred income tax assets and liabilities are determined based on the tax effects of the differences between the book and tax bases of the various balance sheet assets and liabilities. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. An estimate of probable income tax benefits that will not be realized in future years is required in determining the necessity for a valuation allowance for deferred tax assets. There was no valuation allowance at December 31, 2006 and 2005.
Advertising — Advertising costs are charged to expense during the year in which they are incurred. Advertising expenses were $141,000, $69,000, and $92,000 for the years ended December 31, 2006, 2005, and 2004, respectively.
Earnings per share — Basic earnings per share is computed by dividing net income available to shareholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock dividends and splits. Diluted earnings per share is computed similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued.
Off-balance sheet financial instruments — In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. These financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. The Company maintains an allowance for off-balance sheet items, established as an accrued liability. The allowance is an amount that management believes will be adequate to absorb possible losses associated with off-balance sheet credit risk. The evaluations take into consideration such factors as changes in the nature and volume of the commitments to extend credit and undisbursed balances of existing lines of credit and letters of credit.
Fair value of financial instruments — The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
Cash and cash equivalents — The carrying amounts of cash and federal funds sold approximate their fair value.
Available-for-sale and restricted equity securities — Fair values for securities, excluding restricted equity securities, are based on quoted market prices. The carrying values of restricted equity securities, including Federal Home Loan Bank stock, approximate fair values.
Loans— For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar
50
Table of Contents
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued)
loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using a discounted cash flow analysis or underlying collateral values, where applicable.
Deposits— The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate money market accounts and fixed-term certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances — The fair value of the FHLB advances is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Junior subordinated debentures — The fair value of the debentures is estimated using a discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements.
Off-balance sheet instruments — Off-balance sheet instruments include unfunded commitments to extend credit and standby letters of credit. The fair value of these instruments is not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.
Stock-based compensation — The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, “Share Based Payment” on January 1, 2006. This statement requires issuers to record compensation expense over the service period of the share-based award, unless such awards contain performance or market condition. In the case of stock options, the amount of compensation expense to be recognized over this term is based on the calculated fair value of the options, the length of their term, the volatility of the stock price in past periods, and other factors. Under this method, the Company recognizes compensation expense regardless of whether the officer or director eventually exercises the options.
Recently Issued Accounting Pronouncements— In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 157.
In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB SFAS No. 109,Accounting for Income Taxes. This Interpretation defines the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. For the Company, this standard became effective on January 1, 2007. The Company does not expect the impact of initial adoption of FIN 48 will be material to its consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156,Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities(“SFAS No. 156”). SFAS No. 156 requires all separately recognized servicing
51
Table of Contents
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued)
assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. The effect of remeasuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. For the Company, this standard became effective on January 1, 2007. The Company does not expect the impact of initial adoption of SFAS No. 156 will be material to its consolidated financial statements.
NOTE 2 — ACQUISITION OF SOUTH COAST BANCORP, INC.
On September 30, 2005, FCB completed its acquisition of South Coast Bancorp, Inc. and its wholly-owned subsidiaries, South Coast Commercial Bank and SC Financial. SC Financial is an inactive subsidiary. Shareholders of South Coast Bancorp, Inc. received cash of $36.0 million in exchange for their common shares; South Coast Bancorp Inc. was then merged with and into FCB.
The acquisition was accounted for using the purchase method of accounting; accordingly, the assets acquired and liabilities assumed of South Coast Bancorp, Inc. were recorded at their respective fair values as of the date of the acquisition. Goodwill, which is the excess of the purchase price over the fair value of the net assets acquired, was initially recorded at $17.2 million. At the time of acquisition, South Coast Bancorp, Inc. had the following assets and liabilities:
As of September 30, 2005 | ||||||||||||
(in thousands) | At Cost | Adjustments | At Fair Value | |||||||||
Assets | ||||||||||||
Cash and due from banks | $ | 6,484 | $ | (69 | ) | $ | 6,415 | |||||
Federal funds sold | 11,400 | — | 11,400 | |||||||||
Securities | 6,972 | (68 | ) | 6,904 | ||||||||
Loans | 119,050 | 109 | 119,159 | |||||||||
Allowance for loan losses | (1,184 | ) | — | (1,184 | ) | |||||||
Premises and equipment, net | 1,612 | 2,404 | 4,016 | |||||||||
Core deposit intangible | — | 627 | 627 | |||||||||
Other assets | 622 | 96 | 718 | |||||||||
Total assets | $ | 144,956 | $ | 3,099 | $ | 148,055 | ||||||
Liabilities | ||||||||||||
Deposits | $ | 127,178 | $ | 469 | $ | 127,647 | ||||||
Other liabilities | 1,051 | (1 | ) | 1,050 | ||||||||
Total liabilities | $ | 128,229 | $ | 468 | $ | 128,697 | ||||||
Net assets acquired | $ | 16,727 | $ | 19,358 | ||||||||
Cash paid to common shareholders of South Coast Bancorp, Inc. | 36,000 | |||||||||||
Transaction costs — investment banking, legal and accounting fees | 400 | |||||||||||
Estimated restructuring charges | 200 | |||||||||||
Total | $ | 36,600 | ||||||||||
Goodwill | $ | 17,242 | ||||||||||
52
Table of Contents
NOTE 2 — ACQUISITION OF SOUTH COAST BANCORP, INC. (continued)
All transaction costs and restructuring charges have been paid at December 31, 2005.
On December 5, 2005, FCB sold South Coast Commercial Bank to Woori America Bank pursuant to a merger transaction for a premium of $1 million before taxes and expenses (the “Woori Merger”). The net premium reduced previously recognized goodwill that arose from the purchase of South Coast Commercial Bank on September 30, 2005. Also on December 5, 2005, in a separate but related transaction First California Bank, acquired essentially all of the assets and liabilities of South Coast Commercial Bank, including all current loan and deposit accounts. The purchase and assumption transaction closed immediately prior to the Woori Merger.
The following information presents the pro forma results of operations for the years ended December 31, 2005 and the year ended December 31, 2004, as though the acquisition had occurred on January 1, 2004. The pro forma data was derived by combining the historical consolidated financial information of the Company and South Coast Bancorp, Inc. using the purchase method of accounting for business combinations. In addition, the effect of severance and other merger related charges have been excluded, the effects of the stock and debt offerings have been included, and the income tax effects for all adjustments as well as the income tax effects on the pre-tax earnings of South Coast Bancorp, Inc. (which was an S Corporation for the periods presented) have been provided using a combined statutory tax rate of 41.15 percent. The pro forma results do not necessarily indicate results that would have been obtained had the acquisition actually occurred on January 1, 2004 or the results that may be achieved in the future.
Pro Forma Results of Operations | ||||||
(in thousands, except per share data) | Year Ended December 31, 2005 | Year Ended December 31, 2004 | ||||
Net inerest income | $ | 19,726 | $ | 17,092 | ||
Noninterest income | 2,177 | 2,640 | ||||
Noninterest expense | 14,196 | 13,101 | ||||
Provision for loan loss | 517 | 363 | ||||
Income before tax | 7,190 | 6,268 | ||||
Income taxes | 2,837 | 2,374 | ||||
Net income | $ | 4,353 | $ | 3,894 | ||
Earnings per share: | ||||||
Basic | $ | 1.33 | $ | 1.22 | ||
Diluted | $ | 1.33 | $ | 1.20 | ||
Weighted average shares: | ||||||
Basic | 3,278 | 3,195 | ||||
Diluted | 3,278 | 3,251 |
53
Table of Contents
NOTE 2 — ACQUISITION OF SOUTH COAST BANCORP, INC. (continued)
The following table shows the pro forma adjustments to the combined historical consolidated financial information necessary to reflect the merger based on the purchase method of accounting.
(in thousands) | Year ended December 31, | Year ended December 31, | ||||||
Increase (decrease) | ||||||||
Net interest income | ||||||||
Securities discount | $ | 18 | $ | 44 | ||||
Loan premium | (10 | ) | (13 | ) | ||||
Deposit discount | (141 | ) | (211 | ) | ||||
Junior subordinated debt interest | 459 | 615 | ||||||
Noninterest expense | ||||||||
Premises & equipment | 11 | 14 | ||||||
Intangible amortization | 52 | 69 | ||||||
Organization expenses | (50 | ) | 50 | |||||
Severance and related merger charges | (1,733 | ) | — | |||||
Income taxes | ||||||||
Income taxes | 802 | 950 |
NOTE 3 — STOCK-BASED COMPENSATION
On January 1, 2006, using the modified-prospective method in adoption, the Company began determining compensation costs using the fair-value method as provided for under SFAS No. 123R. The modified-prospective method of adoption requires the recognition of compensation cost using the fair-value method for all new grants issued or vesting after 2005 or for any grants modified, repurchased or cancelled after 2005. For grants prior to 2006, the modified-prospective method of adoption requires the recognition of compensation cost for the portion of grants not yet vested based on the fair-value of the grant as was disclosed in our prior year consolidated financial statements.
SFAS No. 123R eliminated the ability to account for grants under stock option plans using the intrinsic value-based method. The intrinsic value-based method recognized compensation cost as the difference between the exercise price of each option and the market price of our stock at the date of each grant. The exercise price of options was equal to the market price of the Company’s stock at each date of grant. Before 2006, no compensation expense was recognized.
The Company uses the Black-Scholes-Merton formula to determine the fair value of our stock options using the following estimates and assumptions. The fair value of the option at the grant date also follows.
2004 Grant | 2005 Grant | 2006 Grant | ||||||||||
Expected option term | 6.0 years | 6.0 years | 5.2 years | |||||||||
Expected volatility | Nil | Nil | 5.71 | % | ||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Risk-free interest rate | 3.95 | % | 4.50 | % | 4.59 | % | ||||||
Stock option fair value | $ | 4.24 | $ | 4.92 | $ | 4.49 |
The stock option plan was approved by Shareholders in 2003 and we consider options to be “plain vanilla”. The Company used the “simplified” method to determine the expected term of the 2006 stock option grant which is the average of the sum of the contractual period and the average vesting period. The Company looked to it’s 5-year historical volatility for expected volatility as the historical period reflects our business strategy of de novo branch expansion and acquisition and the Company does not anticipate at this time that our strategy or business
54
Table of Contents
NOTE 3 — STOCK-BASED COMPENSATION — (continued)
model will differ in the future. The Company used the “minimum value method” for options granted before 2006. The Company has not paid dividends for the past several years and our business strategy does not anticipate that we will do so in the future. The risk-free rate for the contractual term of the options was based on the prevailing U.S. treasury strip rate in effect at the date of grant.
The shareholder approved stock option plan permits the grant of up to 200,000 shares of common stock to directors, officers and key employees of FCB or the Bank. Option awards are granted with an exercise price equal to the market price of the Company’s stock at the grant date. Option awards vest based on 3 to 5 years of continuous service and have contractual terms from 6 to 8 years.
No options vested or were exercisable as of or for the year ended December 31, 2006. The following table is a summary of option activity:
Shares | Weighted average exercise price | |||||
Options | ||||||
Balance, beginning of year | 119,500 | $ | 17.64 | |||
Issued | 40,600 | 21.00 | ||||
Exercised | — | — | ||||
Cancelled, forfeited, expired | (6,200 | ) | 17.64 | |||
Balance, end of period | 153,900 | $ | 18.51 | |||
Exercisable, end of period | — | — | ||||
55
Table of Contents
NOTE 3 — STOCK-BASED COMPENSATION — (continued)
The weighted average grant date fair value of options outstanding was $3.70 at December 31, 2005 and $3.91 at December 31, 2006. The intrinsic value of outstanding options was $837,000 at December 31, 2006. Compensation cost for the year ended December 31, 2006 was $90,000. Unrecognized compensation cost at December 31, 2006 was $246,000 and the weighted average period of unamortized cost recognition was 2.91 years. No shares have vested at December 31, 2006.
Options granted in 2006 vest at a rate of one third each year commencing after the third anniversary of the date of grant and expire eight years after the date of grant. Options granted in 2005 vest at a rate of one third each year commencing after the third anniversary of the date of grant and expire six years after the date of grant. Options granted in 2004 and 2003 vest fully five years after the date of grant and expire eight years after the date of grant. The following table summarizes information regarding stock options outstanding at December 31, 2006:
Incentive Stock Options | Nonstatutory Stock Options | |||||||||
Exercise Price | Number | Remaining (in years) | Exercise Price | Number | Remaining | |||||
$11.25 | 26,250 | 4.47 | $11.25 | 10,000 | 4.47 | |||||
$20.25 | 25,700 | 5.32 | $20.25 | 10,000 | 5.32 | |||||
$21.00 | 31,750 | 4.29 | $21.00 | 10,000 | 4.29 | |||||
$21.00 | 30,200 | 7.17 | $21.00 | 10,000 | 7.17 | |||||
113,900 | 40,000 | |||||||||
Under the plan, an aggregate of no more than 200,000 shares of the Company’s common stock are available for grant.
Prior to January 1, 2006 the Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plan using the intrinsic value-based method. Accordingly, compensation costs were recognized as the difference between the exercise price of each option and the market price of the Company’s stock at the date of each grant. Had compensation cost for the grants under the stock option plan been determined consistent with the fair value-based method defined in Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” net income and earnings per common share for the two years ended December 31, 2005 would approximate the pro forma amounts shown below (in thousands, except per share data).
(dollars in thousands, except per share data) | ||||||||
2005 | 2004 | |||||||
Net income, as reported | $ | 3,224 | $ | 2,435 | ||||
Total stock-based employee compensation expense determined under fair value-based methods for all awards, net of related tax effects | (30 | ) | (14 | ) | ||||
$ | 3,194 | $ | 2,421 | |||||
Pro forma net income | ||||||||
Earnings per share: | ||||||||
Diluted — as reported | $ | 1.30 | $ | 1.14 | ||||
Diluted — pro forma | $ | 1.28 | $ | 1.13 | ||||
Basic — as reported | $ | 1.31 | $ | 1.17 | ||||
Basic — pro forma | $ | 1.29 | $ | 1.16 |
56
Table of Contents
NOTE 4 — SECURITIES
The amortized cost and estimated fair values of securities available-for-sale at December 31, 2006 and 2005, are summarized as follows:
For the year ended December 31, 2006 | |||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
U.S. Treasury notes | $ | 2,504 | $ | — | $ | (30 | ) | $ | 2,474 | ||||
U.S. government agency notes | 9,912 | 7 | (66 | ) | 9,853 | ||||||||
U.S. government agency mortgage-backed securities | 51,703 | 8 | (921 | ) | 50,790 | ||||||||
Collateralized mortgage obligations | 5,282 | — | (70 | ) | 5,212 | ||||||||
Municipal securities | 17,606 | 123 | (40 | ) | 17,689 | ||||||||
Securities available-for-sale | $ | 87,007 | $ | 138 | $ | (1,127 | ) | $ | 86,018 | ||||
For the year ended December 31, 2005 | |||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||
U.S. Treasury notes | $ | 6,976 | $ | — | $ | (33 | ) | $ | 6,943 | ||||
U.S. government agency notes | 10,376 | — | (156 | ) | 10,220 | ||||||||
U.S. government agency mortgage-backed securities | 45,089 | 1 | (1,274 | ) | 43,816 | ||||||||
Collateralized mortgage obligations | 3,414 | 1 | (89 | ) | 3,326 | ||||||||
Municipal securities | 9,179 | 36 | (101 | ) | 9,114 | ||||||||
Securities available-for-sale | $ | 75,034 | $ | 38 | $ | (1,653 | ) | $ | 73,419 | ||||
57
Table of Contents
NOTE 4 — SECURITIES — (continued)
The securities in the tables below had gross unrealized losses at December 31, 2006. Seventeen securities have had gross unrealized losses for 12 months or more. The Company has evaluated the unrealized losses for these U. S. Treasury and agency notes, U.S. agency mortgage-backed securities, collateralized mortgage obligations and municipal securities and determined that the decline in value at December 31, 2006, is temporary and is related to the fluctuation in market interest rates since purchase.
Less Than 12 Months | Greater Than 12 Months | |||||||||||||
(in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||
U.S. Treasury notes | $ | 1,969 | $ | — | $ | 505 | $ | (30 | ) | |||||
U.S. agency notes | 1,898 | (2 | ) | 7,955 | (64 | ) | ||||||||
U.S. agency mortgage-backed securities | 465 | (4 | ) | 50,325 | (917 | ) | ||||||||
Collateralized mortgage obligations | — | (6 | ) | 5,212 | (64 | ) | ||||||||
Municipal securities | 83 | (7 | ) | 17,606 | (33 | ) | ||||||||
$ | 4,415 | $ | (19 | ) | $ | 81,603 | $ | (1,108 | ) | |||||
Proceeds from sale of securities for December 31, 2006 and 2005 amounted to $2,978,000 and $776,000. Book value of securities sold were $2,998,000 and $778,000 for a realized loss of $20,000 and $2,000.
The amortized cost and estimated fair value of securities by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
For the year ended December 31, 2006 | ||||||
(in thousands) | Amortized Cost | Fair Value | ||||
Due in one year or less | $ | 5,334 | $ | 5,283 | ||
Due after one year through five years | 35,702 | 34,682 | ||||
Due after five years through ten years | 20,679 | 20,678 | ||||
Due after ten years | 25,292 | 25,375 | ||||
$ | 87,007 | $ | 86,018 | |||
For the purpose of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted average contractual maturities of underlying collateral. Mortgage-backed securities may mature earlier than their weighted average contractual maturities because of principal prepayments.
As of December 31, 2006 and 2005, securities with an amortized cost of $10.0 million and $51.2 million, respectively, have been pledged to secure public and other deposits, as required by law, and to secure borrowing facilities with the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank of San Francisco.
58
Table of Contents
NOTE 5 — LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio consists of the following:
For the years ended December 31, | ||||||||
(in thousands) | 2006 | 2005 | ||||||
Commercial mortgage | $ | 163,851 | $ | 183,761 | ||||
Multifamily mortgage | 28,088 | 31,708 | ||||||
Commercial loans and lines | 64,393 | 64,271 | ||||||
Construction | 48,291 | 28,157 | ||||||
Home equity loans and lines | 7,664 | 8,689 | ||||||
Home mortgage | 42,237 | 13,443 | ||||||
Installment & credit card | 2,409 | 4,352 | ||||||
Total loans | 356,933 | 334,381 | ||||||
Allowance for loan losses | (3,527 | ) | (4,105 | ) | ||||
Loans, net | $ | 353,406 | $ | 330,276 | ||||
Loans held for sale | $ | 8,419 | $ | 8,502 |
As of December 31, 2006, loans with a carrying value of $307.5 million were included as blanket pledges of security for FHLB advances.
Most of the Company’s lending activity is with customers located in Ventura, Orange and Los Angeles Counties. The Company has no significant exposure to any individual customer; however, the economic condition in Southern California could adversely affect customers. Most loans are dependent on real estate; the economic condition in Southern California could adversely affect the value of real estate.
There were no nonaccrual loans at December 31, 2006 or December 31, 2005. The Company’s average investment in impaired loans was $1.1 million for 2005; there was no average investment in impaired loans in 2006. No allowance for loan losses was maintained for nonaccrual loans at December 31, 2006 and 2005. Had the impaired loans performed according to their original terms, additional interest income of $197,000 and $392,000 would have been recognized in 2005 and 2004. No additional interest income would have been recognized in 2006.
Changes in the allowance for loan losses were as follows:
For the years ended December 31, | ||||||||||||
(in thousands) | 2005 | 2005 | 2004 | |||||||||
Beginning balance | $ | 4,105 | $ | 2,346 | $ | 2,325 | ||||||
Balance acquired in purchase | — | 1,185 | — | |||||||||
(Credit) provision for loan losses | (297 | ) | 488 | 418 | ||||||||
Loans charged-off | (213 | ) | (74 | ) | (359 | ) | ||||||
Transfers to undisbursed commitment liability | (125 | ) | (50 | ) | (50 | ) | ||||||
Recoveries on loans charged-off | 57 | 210 | 12 | |||||||||
Ending balance | $ | 3,527 | $ | 4,105 | $ | 2,346 | ||||||
Allowance to loans | 0.99 | % | 1.20 | % | 1.28 | % |
59
Table of Contents
NOTE 6 — PREMISES AND EQUIPMENT
The major classifications of premises and equipment are summarized as follows:
For the years ended December 31, | ||||||||
(in thousands) | 2006 | 2005 | ||||||
Land | $ | 2,894 | $ | 2,894 | ||||
Building | 5,314 | 5,227 | ||||||
Furniture and equipment | 5,811 | 5,128 | ||||||
Leashold improvements | 2,137 | 2,120 | ||||||
Construction in progress | 209 | 113 | ||||||
Total premises and equipment | 16,365 | 15,482 | ||||||
Less accumulated depreciation and amortization | (6,196 | ) | (5,167 | ) | ||||
Premises and equipment, net | $ | 10,169 | $ | 10,315 | ||||
Depreciation and amortization expense for 2006 and 2005 were $1,121,000 and $770,000, respectively. Depreciation and amortization expense for 2004 was $460,000.
NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS
Core deposit intangible and related accumulated amortization is as follows:
For the year ended December 31, | ||||||||
(in thousands) | 2006 | 2005 | ||||||
Beginning Balance | $ | 610 | $ | 627 | ||||
Accumulated amortization | (69 | ) | (17 | ) | ||||
Ending Balance | $ | 541 | $ | 610 | ||||
Amortization expense for 2006 and 2005 were $69,000 and $17,000, respectively. Estimated amortization expense for the for the next 5 years and thereafter is expected to be as follows:
(in thousands) | |||
Year | Amount | ||
2007 | $ | 69 | |
2008 | 69 | ||
2009 | 69 | ||
2010 | 69 | ||
2011 | 69 | ||
Thereafter | 196 | ||
$ | 541 | ||
Goodwill at December 31, 2006 and 2005 was $16.8 million and $16.3 million, respectively, and relates to the acquisition of South Coast Bancorp as discussed in Note 2. No impairment loss was recognized at December 31, 2006 and 2005.
60
Table of Contents
NOTE 8 — CERTIFICATES OF DEPOSIT
At December 31, 2006, the scheduled maturities for all certificates of deposit are as follows:
Year | Under $100,000 | $100,000 and Over | Total | ||||||
(in thousands) | |||||||||
2007 | $ | 74,033 | $ | 92,030 | $ | 166,063 | |||
2008 | 4,790 | 2,789 | 7,579 | ||||||
2009 | 4,226 | 3,786 | 8,012 | ||||||
2010 | 597 | 581 | 1,178 | ||||||
2011 | 15 | — | 15 | ||||||
$ | 83,661 | $ | 99,186 | $ | 182,847 | ||||
NOTE 9 — LINES OF CREDIT AND BORROWED FUNDS
The Bank has lines of credit with three financial institutions providing for federal funds facilities up to a maximum of $14.0 million. The lines of credit support short-term liquidity and cannot be used for more than 30 consecutive business days, depending on the lending institution. These lines are unsecured, have no formal maturity date, and can be revoked at any time by the granting institution. As a state nonmember bank, the Bank also has a secured borrowing facility of $800,000 with the Federal Reserve Bank of San Francisco. At December 31, 2006 and 2005, there were no borrowings outstanding under these agreements.
The Bank, as a member of the Federal Home Loan Bank of San Francisco (FHLB), has entered into credit arrangements with the FHLB, with maximum available borrowings of approximately $153.9 million at December 31, 2006. Borrowings under the credit arrangements are collateralized by FHLB stock as well as loans or other instruments which may be pledged. As of December 31, 2006, borrowings outstanding with the FHLB were as follows:
(in thousands) | Amount | Maturity Year | Weighted Average Interest Rate | |||||
Overnight advances | $ | 26,695 | 2007 | 5.34 | % | |||
Term advances | 14,500 | 2007 | 4.48 | % | ||||
Term advances | 9,000 | 2008 | 4.95 | % | ||||
Term advances | 4,500 | 2009 | 5.09 | % | ||||
$ | 54,695 | |||||||
The $10.3 million Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due December 15, 2035 were issued by FCB to the FCB Statutory Trust I and are related to its issuance of $10.0 million Fixed/Floating Rate Capital Securities (trust preferred securities) and $310,000 of common securities. FCB owns the $310,000 Common Securities and they are reported as other assets in the consolidated financial statements.
The interest rate on the trust preferred securities is fixed at 6.145% to December, 2010 at which time the interest rate will float at the three-month LIBOR rate plus 1.55%. Quarterly payments of interest due on the trust preferred securities may, so long as no accelerated event of default has occurred or is continuing as specified in the indenture, be deferred for up to 20 consecutive quarterly periods. FCB has the right to redeem the trust preferred securities, in whole or in part, beginning December, 2010. FCB has guaranteed the Capital and Common Securities of FCB Statutory Trust I. The terms of FCB’s trust preferred securities are identical to those of FCB Statutory Trust I’s Capital and Common Securities.
61
Table of Contents
NOTE 10 — INCOME TAXES
The provision for income taxes consists of the following:
(in thousands) | 2006 | 2005 | 2004 | ||||||
Current: | |||||||||
Federal | $ | 2,187 | $ | 1,220 | $ | 796 | |||
State | 485 | 470 | 335 | ||||||
2,672 | 1,690 | 1,131 | |||||||
Deferred: | |||||||||
Federal | 187 | 179 | 143 | ||||||
State | 39 | 98 | 45 | ||||||
226 | 277 | 188 | |||||||
Provision for income taxes | $ | 2,898 | $ | 1,967 | $ | 1,319 | |||
The net deferred tax assets, included in accrued interest receivable and other assets in the accompanying balance sheets, consists of the following:
(in thousands) | 2006 | 2005 | ||||||
Deferred tax assets: | ||||||||
Allowance for loan losses | $ | 1,432 | $ | 1,825 | ||||
Accruals and other reserves | 203 | 106 | ||||||
Unrealized depreciation on securities | 407 | 439 | ||||||
Net benefit for state taxes | 263 | 163 | ||||||
2,305 | 2,533 | |||||||
Deferred tax liabilities: | ||||||||
Depreciation and amortization | (1,004 | ) | (999 | ) | ||||
Certain prepaid assets | (190 | ) | (285 | ) | ||||
Deferred loan costs | (569 | ) | (445 | ) | ||||
Other | (293 | ) | (74 | ) | ||||
(2,056 | ) | (1,803 | ) | |||||
Net deferred tax assets | $ | 249 | $ | 730 | ||||
Management believes, based upon the Company’s historical performance, that the deferred tax assets will be realized in the normal course of operations and, accordingly, management has not reduced deferred tax assets by a valuation allowance.
A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
2006 | 2005 | 2004 | |||||||
Tax provision at federal statuatory rate | 34.0 | % | 34.0 | % | 34.0 | % | |||
State franchise tax, net of federal income tax benefit | 6.8 | 7.1 | 6.9 | ||||||
Tax-exempt interest | (2.0 | ) | (2.6 | ) | (3.3 | ) | |||
Increase in cash surrender value of life insurance | (2.0 | ) | (1.2 | ) | (1.7 | ) | |||
Other | 0.7 | 0.6 | (0.8 | ) | |||||
Effective tax rate | 37.5 | % | 37.9 | % | 35.1 | % | |||
62
Table of Contents
NOTE 11 — SHAREHOLDER TRANSACTIONS
On September 30, 2005, FCB issued 1,115,000 of common stock to investors and directors and executive officers of the Company at $19.75 per share. The net proceeds from this offering were $20.7 million and were used to fund the acquisition of South Coast Bancorp.
On June 30, 2002, the Company issued 400,000 shares of common stock, at an offering price of $9.00 per share, for cash consideration of $3.6 million, net of issuance costs of $30,000. For every two shares of common stock acquired, the purchaser received one warrant to purchase one additional share of common stock. Each warrant entitled the purchaser to acquire one share of common stock, either at a price of $9.25 per share from April 1, 2003, to June 30, 2003, or at a price of $9.50 per share from April 1, 2004, to June 30, 2004. In June 2003, warrants for 20,700 shares of common stock were exercised. From April 2004 to June 2004, the remaining 179,299 warrants were exercised. The shares in this private placement offering were sold primarily to directors and executive officers of the Company, who represented a controlling interest in the Company prior to the offering.
NOTE 12 — EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the year. Diluted earnings per share reflect the potential dilution that could occur if common shares were issued pursuant to the exercise of common stock options under the stock option plan, or exercise of warrants under the June 30, 2002, private placement offering. The following table illustrates the computations of basic and diluted earnings per share for the years indicated:
For the years ended December 31, | ||||||||||||||||||
2006 | 2005 | 2004 | ||||||||||||||||
(in thousands, except per share data) | Diluted | Basic | Diluted | Basic | Diluted | Basic | ||||||||||||
Income available to common shareholders | $ | 4,830 | $ | 4,830 | $ | 3,224 | $ | 3,224 | $ | 2,435 | $ | 2,435 | ||||||
Weighted average common shares outstanding | 3,277,807 | 3,277,807 | 2,467,000 | 2,467,000 | 2,080,140 | 2,080,140 | ||||||||||||
Net effect of dilutive warrants and stock options based on the treasury stock method weighted using average market price | 17,512 | — | 21,447 | — | 55,492 | — | ||||||||||||
3,295,319 | 3,277,807 | 2,488,447 | 2,467,000 | 2,135,632 | 2,080,140 | |||||||||||||
Earnings per share | $ | 1.47 | $ | 1.47 | $ | 1.30 | $ | 1.31 | $ | 1.14 | $ | 1.17 | ||||||
NOTE 13 — EMPLOYEE BENEFITS
The Company has adopted a 401(k) savings investment plan which allows employees to defer certain amounts of compensation for income tax purposes under Section 401(k) of the Internal Revenue Code. Essentially all eligible employees may elect to defer and contribute up to statutory limits. The Company may, at its discretion, make matching contributions, the total of which may not exceed 15% of eligible compensation. For the years ending December 31, 2006, 2005, and 2004, the Company made matching contributions of approximately $140,000, $77,000, and $89,000, respectively, to the plan.
63
Table of Contents
The Company has established an employee incentive compensation program which provides eligible participants additional compensation based upon the achievement of certain Company goals. For the years ending December 31, 2006, 2005 and 2004, additional compensation expense of approximately $574,000, $520,000, and $270,000, respectively, was recognized and paid subsequent to each year-end to eligible employees, pursuant to this program.
On December 30, 2002, the Company purchased life insurance to support life insurance benefits for several key employees and salary continuation benefits for certain executives. On January 31, 2006, the Company purchased an additional $5.0 million of life insurance to support benefits for additional key employees and salary continuation benefits. As of December 31, 2006 and 2005, the cash surrender value of the life insurance was $10.5 million and $5.2 million, respectively. As of December 31, 2006 and 2005, the Company recognized a liability for salary continuation benefits of $411,000 and $281,000, respectively. Payments under the salary continuation plan commence when the respective executive reaches the age of 65 and continue for a period up to 20 years. For the years ending December 31, 2006, 2005 and 2004, salary continuation expense was approximately $130,000, $102,000, and $93,000, respectively.
NOTE 14 — TRANSACTIONS WITH RELATED PARTIES
Certain directors, executive officers, and principal shareholders are customers of and have had banking transactions with the Company, and the Company expects to have such transactions in the future. All loans and commitments to loan included in such transactions were made in compliance with applicable laws on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present any other unfavorable features. The Company had one loan outstanding to a director. The balance of the loan at December 31, 2006 was $61,000.
Deposits of related parties held by the Company at December 31, 2006 and 2005, amounted to approximately $132,000 and $38,000, respectively.
NOTE 15 — CONCENTRATIONS OF CREDIT RISK
The Company maintains balances in correspondent bank accounts which may at times exceed federally insured limits. Management believes that its risk of loss associated with such balances is minimal due to financial strength of correspondent banks. The Company has not experienced any losses in such accounts.
Substantially all of the Company’s loans, commitments, and commercial and standby letters of credit have been granted to customers in the Company’s market areas, primarily Ventura, Orange and Los Angeles County, California. The majority of such customers are also depositors of the Company. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers as of December 31, 2006. The Company’s loan policies do not allow the extension of credit to any single borrower or group of related borrowers in excess of $400,000 without approval from the Company’s loan committee.
The Bank’s investment in municipal securities represent general obligations and revenue bonds of local agencies within the state of California.
NOTE 16 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
64
Table of Contents
The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and letters of credit written, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may or may not require collateral or other security to support financial instruments with credit risk, depending on its loan underwriting guidelines.
The following summarizes the Company’s outstanding commitments:
(in thousands) | For the years ended December 31, | ||||||||
2006 | 2005 | 2004 | |||||||
Financial instruments whose contractamounts contain credit risk: | |||||||||
Commitments to extend credit | $ | 94,370 | $ | 79,056 | $ | 63,604 | |||
Commercial and standby letters of credit | 1,239 | 427 | 914 | ||||||
$ | 95,609 | $ | 79,483 | $ | 64,518 | ||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon an extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing properties.
Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary.
As of December 31, 2006 and 2005, the Company maintained a reserve for undisbursed commitments of $275,000 and $200,000, respectively. The reserve is included in accrued interest payable and other liabilities on the balance sheet.
NOTE 17 — COMMITMENTS AND CONTINGENCIES
The following is a schedule of our current contractual obligations by maturity and/or payment due date:
For the year ended December 31, 2006 | |||||||||||||||
(in thousands) | Less Than One Year | One to Three Years | Three to Five Years | Greater Than Five Years | Total | ||||||||||
FHLB overnight advances | $ | 26,695 | $ | — | $ | — | $ | — | $ | 26,695 | |||||
FHLB term advances | 14,500 | 13,500 | — | — | 28,000 | ||||||||||
Salary continuation benefits | — | — | — | 411 | 411 | ||||||||||
Director post-service award | — | 82 | — | — | 82 | ||||||||||
Junior subordinated debentures | — | — | — | 10,310 | 10,310 | ||||||||||
Operating lease obligations | 752 | 1,387 | 1,090 | 2,773 | 6,002 | ||||||||||
Total | $ | 41,947 | $ | 14,969 | $ | 1,090 | $ | 13,494 | $ | 71,500 | |||||
65
Table of Contents
Rental expense for operating leases was $750,000, $520,000 and $416,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
The Company may become a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, there are no matters presently known to the Company that are expected to have a material adverse effect on the financial condition of the Company.
NOTE 18 — REGULATORY MATTERS
FCB and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on a company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The following tables present the capital amounts and ratios of FCB with a comparison to the minimum ratios for the periods indicated:
Actual | For Capital Adequacy Purposes | ||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | |||||||||
December 31, 2006 | |||||||||||||
Total capital | $ | 48,533 | 12.01 | % | $ | 32,336 | ³ | 8.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 44,731 | 11.07 | % | $ | 16,168 | ³ | 4.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 44,731 | 9.07 | % | $ | 14,789 | ³ | 3.00 | % | ||||
(to average assets) | |||||||||||||
Actual | For Capital Adequacy Purposes | ||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | |||||||||
December 31, 2005 | |||||||||||||
Total capital | $ | 44,545 | 11.74 | % | $ | 30,352 | ³ | 8.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 40,239 | 10.60 | % | $ | 15,181 | ³ | 4.00 | % | ||||
(to risk weighted assets) | |||||||||||||
Tier I capital | $ | 40,239 | 8.69 | % | $ | 13,889 | ³ | 3.00 | % | ||||
(to average assets) |
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2006, that the Bank meets all capital adequacy requirements to which it is subject.
As of the most recent notification from its regulatory agencies, the Bank was categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum Total risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage capital ratios as set forth in the table below. There are no conditions or events since that notification that management believes may have changed the Bank’s category.
66
Table of Contents
NOTE 18 – REGULATORY MATTERS – (continued)
The following tables present the capital amounts and ratios of First California Bank with a comparison to the minimum ratios for the periods indicated:
Actual | For Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
December 31, 2006 | ||||||||||||||||||||
Total capital | $ | 45,938 | 11.38 | % | $ | 32,287 | ³ | 8.00 | % | $ | 40,359 | ³ | 10.00 | % | ||||||
(to risk weighted assets) | ||||||||||||||||||||
Tier I capital | $ | 42,136 | 10.44 | % | $ | 16,144 | ³ | 4.00 | % | $ | 24,215 | ³ | 6.00 | % | ||||||
(to risk weighted assets) | ||||||||||||||||||||
Tier I capital | $ | 42,136 | 8.87 | % | $ | 19,001 | ³ | 4.00 | % | $ | 23,752 | ³ | 5.00 | % | ||||||
(to average assets) | ||||||||||||||||||||
Actual | For Capital Adequacy Purposes | To be Well Capitalized Under Prompt Corrective Action Provision | ||||||||||||||||||
(in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
December 31, 2005 | ||||||||||||||||||||
Total capital | $ | 43,900 | 11.62 | % | $ | 30,224 | ³ | 8.00 | % | $ | 37,780 | ³ | 10.00 | % | ||||||
(to risk weighted assets) | ||||||||||||||||||||
Tier I capital | $ | 39,595 | 10.48 | % | $ | 15,113 | �� | ³ | 4.00 | % | $ | 22,669 | ³ | 6.00 | % | |||||
(to risk weighted assets) | ||||||||||||||||||||
Tier I capital | $ | 39,595 | 8.88 | % | $ | 17,836 | ³ | 4.00 | % | $ | 22,294 | ³ | 5.00 | % | ||||||
(to average assets) |
Dividends declared by the Bank to FCB in any calendar year may not, without the approval of state banking commissioner, exceed the lesser of the Bank’s retained earnings or the sum of net income for the three previous years less dividend paid. At December 31, 2006, the Bank had approximately $3.5 million available for dividends under these restrictions.
NOTE 19 — FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table estimates fair values and the related carrying amounts of the Company’s financial instruments:
For the years ended December 31, | ||||||||||||
2006 | 2005 | |||||||||||
(in thousands) | Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||
Financial Assets: | ||||||||||||
Cash and due from banks | $ | 14,058 | $ | 14,058 | $ | 14,435 | $ | 14,435 | ||||
Federal funds sold | 100 | 100 | 306 | 306 | ||||||||
Securities available for sale | 86,018 | 86,018 | 73,419 | 73,419 | ||||||||
Loans, net | 361,825 | 361,160 | 338,777 | 342,318 | ||||||||
FHLB stock | 2,679 | 2,679 | 2,395 | 2,395 | ||||||||
Financial Liabilities: | ||||||||||||
Deposits | 390,846 | 379,466 | 372,348 | 368,365 | ||||||||
FHLB advances | 54,695 | 54,567 | 36,319 | 36,094 | ||||||||
Junior subordinated debentures | 10,310 | 10,468 | 10,310 | 10,468 |
67
Table of Contents
While estimates of fair value are based on management’s judgment of the most appropriate factors, there is no assurance that, were the Company to dispose of such items at December 31, 2006, the estimated fair values would necessarily be achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2006, should not necessarily be relied upon at subsequent dates.
In addition, other assets and liabilities of the Company, such as property and equipment, are not defined as financial instruments and are not included in the above disclosures. Also, nonfinancial instruments typically not recognized in the financial statements, nevertheless, may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of loan servicing rights, the trained work force, customer goodwill, and similar items.
NOTE 20 — PARENT COMPANY ONLY FINANCIAL INFORMATION
The condensed financials of FCB only are as follows:
FCB BANCORP
Parent Company Only
Condensed balance sheets
December 31, 2006 | December 31, 2005 | |||||||
(in thousands) | ||||||||
Cash | $ | 2,015 | $ | 637 | ||||
Investment in and advances to Bank subsidiary | 58,781 | 55,444 | ||||||
Investment in nonbank subsidiary | 310 | 310 | ||||||
Other assets | 298 | 104 | ||||||
Total assets | $ | 61,404 | $ | 56,495 | ||||
Junior subordinated debentures | $ | 10,310 | $ | 10,310 | ||||
Other liabilities | 27 | 406 | ||||||
Total liabilities | 10,337 | 10,716 | ||||||
Common stock | 32,756 | 32,666 | ||||||
Retained earnings | 18,893 | 14,063 | ||||||
Accumulated other comprehensive loss | (582 | ) | (950 | ) | ||||
Total shareholders’ equity | 51,067 | 45,779 | ||||||
Total liabilities and shareholders’ equity | $ | 61,404 | $ | 56,495 | ||||
FCB BANCORP
Parent Company Only
Condensed statements of operations
Year ended December 31, | ||||||||
(in thousands) | 2006 | 2005 | ||||||
Equity in earnings of subsidiaries: | ||||||||
Dividends | $ | 2,172 | $ | 5,216 | ||||
Undistributed | 2,969 | (1,870 | ) | |||||
Interest income | 19 | — | ||||||
Interest expense | (634 | ) | (155 | ) | ||||
Other expenses | (99 | ) | (53 | ) | ||||
Income tax benefit | 403 | 86 | ||||||
Net income | $ | 4,830 | $ | 3,224 | ||||
68
Table of Contents
FCB BANCORP
Parent Company Only
Condensed statements of cash flows
Year ended December 31, | ||||||||
(in thousands) | 2006 | 2005 | ||||||
Net income | $ | 4,830 | $ | 3,224 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Equity in undistributed net income of subsidiary | (2,969 | ) | 1,870 | |||||
Share-based compensation | 90 | — | ||||||
Change in accrued interest receivable and other assets | (952 | ) | (5,979 | ) | ||||
Change in accrued interest payable and other liabilities | 379 | 406 | ||||||
Net cash from operating activities | 1,378 | (479 | ) | |||||
Cash paid for purchase of nonbank subsidiary common stock | — | (310 | ) | |||||
Cash paid, net of cash received for net assets of bank subsidiary | — | (29,585 | ) | |||||
Net cash from investing activities | — | (29,895 | ) | |||||
Proceeds from issuance of junior subordinated debentures | — | 10,310 | ||||||
Proceeds from issuance of common stock, net | — | 20,701 | ||||||
Net cash from financing activities | — | 31,011 | ||||||
Change in cash and due from banks | 1,378 | 637 | ||||||
Cash and due from banks, beginning of year | 637 | — | ||||||
Cash and due from banks, end of year | $ | 2,015 | $ | 637 | ||||
Supplemental disclosures: none
69
Table of Contents
NOTE 21 — QUARTERLY FINANCIAL DATA (Unaudited)
The following tables present the summary results for the twelve quarters ended December 31, 2006:
(in thousands, except per share data) | 2006 Quarters | 2005 Quarters | ||||||||||||||||||||||||
4th | 3rd | 2nd | 1st | 4th | 3rd | 2nd | 1st | |||||||||||||||||||
Net interest income | $ | 5,055 | $ | 5,295 | $ | 5,248 | $ | 5,237 | $ | 5,209 | $ | 3,567 | $ | 3,359 | $ | 3,102 | ||||||||||
Service charges, fees & other income | 564 | 544 | 522 | 473 | 437 | 439 | 359 | 414 | ||||||||||||||||||
Loan commissions & sales | 885 | 89 | 28 | 52 | 107 | 69 | 66 | 102 | ||||||||||||||||||
Gains (loss) on sales of securities | — | — | — | (20 | ) | — | — | 2 | — | |||||||||||||||||
Operating expenses | 4,150 | 4,344 | 4,124 | 3,923 | 3,611 | 2,727 | 2,650 | 2,565 | ||||||||||||||||||
(Credit) provision for loan losses | — | (450 | ) | — | 153 | 122 | 122 | 122 | 122 | |||||||||||||||||
Income before income tax | 2,354 | 2,034 | 1,674 | 1,666 | 2,020 | 1,226 | 1,014 | 931 | ||||||||||||||||||
Income tax | 909 | 732 | 601 | 656 | 764 | 464 | 385 | 354 | ||||||||||||||||||
Net income | $ | 1,445 | $ | 1,302 | $ | 1,073 | $ | 1,010 | $ | 1,256 | $ | 762 | $ | 629 | $ | 577 | ||||||||||
Net earnings per share: | ||||||||||||||||||||||||||
Basic weighted average shares | $ | 0.44 | $ | 0.40 | $ | 0.33 | $ | 0.31 | $ | 0.38 | $ | 0.35 | $ | 0.30 | $ | 0.28 | ||||||||||
Diluted weighted average shares | $ | 0.44 | $ | 0.39 | $ | 0.33 | $ | 0.31 | $ | 0.38 | $ | 0.35 | $ | 0.30 | $ | 0.27 |
NOTE 22 — SUBSEQUENT EVENTS
On June 15, 2006, the Company entered into an Agreement of Merger with National Mercantile Bancorp (NMB), pursuant to which FCB Bancorp agreed to pursue approval to merge with and into a newly formed holding company First California Financial Group, Inc. The merger has been approved by both parties’ shareholders and regulators. FCB Bancorp shareholders will receive 1.7904 shares of NMB stock. The Bank will be a wholly-owned subsidiary of the newly formed holding company First California Financial Group, Inc. The transaction will be accounted for as a purchase; accordingly, the results of operations from the acquisition will be included in the consolidated financial statements of the newly formed holding company from the date of acquisition forward.
On March 12, 2007, First California Financial Group, Inc., a Delaware corporation (“First California”), completed the previously announced merger (the “FCB Merger”) of FCB Bancorp, a California corporation (“FCB”), with and into First California pursuant to the Agreement and Plan of Merger, dated as of June 15, 2006 (the “Merger Agreement”), among First California, FCB and National Mercantile Bancorp, a California corporation (“National Mercantile”).The Merger immediately followed the previously announced reincorporation merger of National Mercantile (the “Reincorporation Merger” and, together with the FCB Merger, the “Mergers”) pursuant to which National Mercantile merged with into its wholly owned subsidiary, First California. As a result of the FCB Merger, FCB Bancorp ceased to exist as of March 12, 2007.
Pursuant to the Merger Agreement, each share of National Mercantile common stock, no par value per share (“NMB Common Stock”), was converted into the right to receive one share of First California common stock, $0.01 par value per share (“First California Common Stock”), and each share of FCB common stock, no par value per share, was converted into the right to receive 1.7904 shares of First California Common Stock valued at $86.6 million or $14.14 per share. In addition, each share of National Mercantile series B convertible perpetual preferred stock was converted into the right to receive one share of series A convertible perpetual preferred stock, $0.01 par value per share (“First California Preferred Stock”), of First California. First California will issue an aggregate of approximately 12,301,080 shares of First California Common Stock to former National Mercantile and FCB Bancorp shareholders and 1,000 shares of First California Preferred Stock to former shareholders of National Mercantile. First California will pay cash in lieu of fractional shares of First California common stock issued in connection with the merger of FCB with and into First California.
70
Table of Contents
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
None.
Item 9A. | Controls and Procedures |
(a) | Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. |
(b) | Changes in Internal Controls: There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. |
Item 9B. | Other Information |
None.
Item 10. | Directors, Executive Officers and Corporate Governance |
Executive Officers and Directors
As a result of the Mergers, FCB Bancorp has ceased to exist. Accordingly, there are no longer any directors or executive officers of FCB Bancorp, nor is there a code of ethics or Board committee charters. However, we have included below information responsive to Item 401 of Regulation S-K with respect to the former executive officers and directors of FCB Bancorp, as well as its former code of ethics and committee charters, as of immediately prior to the completion of the Mergers.
Name | Age | Former Position | ||
Richard D. Aldridge | 59 | Vice Chairman | ||
John W. Birchfield | 55 | Chairman of the Board | ||
Tenisha M. Fitzgerald | 32 | Director | ||
C. G. Kum | 52 | Director, President and Chief Executive Officer | ||
Syble R. Roberts | 70 | Director | ||
Thomas Tignino | 59 | Director | ||
Thomas E. Anthony | 58 | Executive Vice President and Chief Credit Officer | ||
Romolo Santarosa | 50 | Executive Vice President and Chief Financial Officer |
As used throughout this report, the term “executive officer” means FCB Bancorp’s President and Chief Executive Officer, Executive Vice President and Chief Credit Officer, and Executive Vice President and Chief Financial Officer as of prior to the completion of the Mergers. FCB Bancorp’s Chairman of the Board, Corporate Secretary, and other vice presidents are not deemed to be executive officers. The FCB Bancorp Board determined that Thomas Tignino qualified as an “audit committee financial expert” within the meaning of the SEC’s rules and regulations.
71
Table of Contents
Biographical Information Regarding FCB Bancorp’s Executive Officers
C. G. Kum, President and Chief Executive Officer. Mr. Kum began his banking career in 1977 as a corporate banking trainee with Bank of California in San Francisco, California. He served as Regional Vice President and Manager of Asset Quality Administration for United Banks of Colorado from 1984 until 1987. Mr. Kum then served as Vice President and Division Manager of Special Projects Division for Colorado National Bank from 1987 until 1993. Mr. Kum moved to California in 1993 and served as Executive Vice President and Chief Credit Officer of City Commerce Bank, from 1993 until 1999. Mr. Kum now serves as the Chief Executive Officer and President of First California.
Mr. Kum was appointed to his position as the President and the Chief Executive Officer of First California Bank (formerly known as Camarillo Community Bank) on September 1, 1999. Under his leadership, the Bank grew from total assets of $100 million and two branches in 1999, to total assets as of September 30, 2006 of $502.6 million and eight branches. He is a graduate of University of California at Berkeley and received his Masters Degree in Business Administration from Pepperdine University. Mr. Kum also is a graduate of Stonier Graduate School of Banking. He was elected to the position of the President of the board of directors of Community Bankers of California, an association of California community bank presidents, for the fiscal year of 2005-06.
Thomas E. Anthony, Executive Vice President and Chief Credit Officer. Mr. Anthony moved from Illinois and began his banking career in 1970 as a commercial loan trainee with the then United California Bank in Los Angeles. He served as Vice President — Commercial Lender at Independence Bank from 1988 to 1992. He then served as Executive Vice President and Chief Credit Officer at Channel Islands National Bank from 1992 until 1998 when it was merged with American Commercial Bank, where he served in the same capacity from 1998 until 1999. Mr. Anthony joined First California Bank in 1999 as Executive Vice President and Chief Credit Officer. Mr. Anthony now serves as Executive Vice President and Head of Commercial Banking of First California.
Mr. Anthony graduated from Northern Illinois University with a degree in Management.
Romolo Santarosa, Executive Vice President and Chief Financial Officer. Mr. Santarosa began his banking career in 1991 with Shawmut National Corporation as its Controller. In 1995, Mr. Santarosa joined Sanwa Bank California and served as Controller until 1997. He then served as Chief Financial Officer of Southern Pacific Bank from 1997 until 2000, of Eldorado Bancshares, Inc. from 2000 to 2001, and of Treasury Bank, N.A. from 2001 to 2002. Mr. Santarosa joined First California Bank in November 2002 as Executive Vice President and Chief Financial Officer. Mr. Santarosa now serves as Executive Vice President and Chief Financial Officer of First California.
Mr. Santarosa is a graduate (1978) of Ithaca College, Ithaca, New York. He began his career in public accounting with Price Waterhouse, an international public accounting firm. He also is a certified public accountant in New York and Connecticut.
Biographical Information Regarding FCB Bancorp’s Directors
Richard D. Aldridgeserved as the Vice Chairman of the Board of FCB Bancorp from October 2005 until the Mergers and was a director of FCB Bancorp from 1993 until the completion of the Mergers. He is currently a director of First California. He was employed for 19 years by Weyerhaeuser Company in Longview, Washington. He served on the company’s Top Safety Committee, and represented Weyerhaeuser nationally serving on the board of directors of Forest Industries Telecommunications, an F.C.C. certified trade association. Mr. Aldridge began investing in real estate in 1988 and community banking in 1990, acquiring his first shares in First California Bank (formerly Camarillo Community Bank). Since 1990, he has held investments in Channel Islands Bank, City Commerce Bank, American Commercial Bank, Mid-State Bank and Trust, and First California Bank. Since his appointment as a director, Mr. Aldridge has served on several committees including CRA, Audit, Loan, funds management, and executive committees. Mr. Aldridge also served as interim Chairman of the Board of FCB Bancorp from 1998 to 1999. Prior to the Mergers, First California Bank represented the largest single investment in his portfolio.
72
Table of Contents
John W. Birchfieldhas served as the Chairman of the Board of FCB Bancorp from October 2005 until the Mergers and was a director of FCB Bancorp from 1993 until the completion of the Mergers. Mr. Birchfield is currently the Vice Chairman of the Board of Directors of First California. Since 1995, Mr. Birchfield has served as the Chairman of the Board at B & R Supply Inc. He is also the managing partner of Ralston Properties LP, a privately held real estate management company.
Tenisha M. Fitzgeraldwas a director from 1997 until the completion of the Mergers. Ms. Fitzgerald graduated in 1997 from California Lutheran University with a degree in music education and a teaching certificate. Ms. Fitzgerald then taught at several elementary schools for approximately 6 years in the Port Hueneme, California school district. For the last two years, Ms. Fitzgerald has been serving as the accounts receivable manager for B & R Supply, Inc. Since her appointment to the Board of Directors in 1997, she served on the Bank’s Loan and CRA Committees.
Ms. Fitzgerald is the daughter of Richard D. Aldridge, the former Vice Chairman of the Board and a director of First California Bank since 1993.
Syble R. Robertswas a director of First California Bank from 1989 until the completion of the Mergers and was the personnel committee chairman. Ms. Roberts is currently a director of First California. Ms. Roberts was also a Founding Director of City Commerce Bank, Santa Barbara, opened in 1978 and now owned by Mid-State Bank. Ms. Roberts’ background is in the legal, title insurance and escrow, and real estate investment fields. Ms. Roberts became a specialist in the escrow field of multiple tax-deferred exchanges and long order leasehold estates and was involved in the start-ups of a title insurance company and several escrow and mortgage banking companies.
Thomas Tigninobecame a director of FCB Bancorp in January 2006. Mr. Tignino is currently a director of First California. Mr. Tignino is the founder and President of Thomas Tignino & Associates, a multi-service accountancy firm established in 1980. His firm specializes in tax planning and compliance, estate planning and investment review.
Compliance With Section 16(a) of the Exchange Act
FCB Bancorp had no class of securities registered under the Securities Exchange Act of 1934, as amended, at any point during the fiscal year ended December 31, 2006. Accordingly, none of our executive officers were required to file reports under Section 16(a) of the Exchange Act with respect to such fiscal year.
Code of Ethics
As a result of the Mergers, FCB Bancorp has ceased to exist. Accordingly, there is no longer a code of ethics or Board committee charters with respect to FCB Bancorp. Prior to the Mergers, FCB Bancorp adopted a written code of ethics that applied to all of its directors, officers and employees, including the chief executive officer and the chief financial officer of the company, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission promulgated thereunder. First California, the successor to FCB Bancorp, has adopted a Code of Ethics that is available on the company’s website atwww.fcalgroup.com.
Corporate Governance
As a result of the Mergers, FCB Bancorp has ceased to exist. Accordingly, there are no longer any directors, committees or procedures for the election of directors. Information responsive to Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K relating to certain corporate governance matters of FCB Bancorp prior to the completion of the Mergers is included below.
There were no material changes to the procedures by which security holders were able to recommend nominees to FCB Bancorp’s board of directors prior to the completion of the Mergers.
Prior to the completion of the Mergers, FCB Bancorp’s audit committee consisted of the following directors: John W. Birchfield (Chair), Richard D. Aldridge, Syble R. Roberts and Thomas Tignino. The audit committee was responsible for providing assistance to the FCB Bancorp board of directors in fulfilling its legal
73
Table of Contents
and fiduciary obligations with respect to matters involving the accounting, auditing, financial reporting, internal control and legal compliance function, as well as those of FCB Bancorp’s subsidiaries. The FCB Bancorp board of directors determined that Thomas Tignino qualified as an “audit committee financial expert” within the meaning of the SEC’s rules and regulations while serving on the FCB Bancorp audit committee.
Item 11. | Executive Compensation |
As a result of the Mergers, the separate corporate existence of National Mercantile and FCB Bancorp ceased, and First California succeeded, and assumed all the rights and obligations of, National Mercantile and FCB Bancorp. Because the Mergers were not completed prior to December 31, 2006, First California is filing this Annual Report on Form 10-K on behalf of FCB Bancorp for the fiscal year ended December 31, 2006. Information required by Item 402 of Regulation S-K with respect to executive compensation matters of FCB Bancorp prior to the completion of the Mergers is included below. Information with respect to executive compensation matters of First California and National Mercantile will appear in the proxy statement First California will distribute to its stockholders in connection with the 2007 Annual Meeting of Stockholders.
Compensation Discussion and Analysis
Overview
Historically, FCB Bancorp’s compensation programs have been designed to recruit, retain and motivate highly qualified and competent executive and senior officers and to ultimately reward them for outstanding performance. An additional objective of the compensation programs has been to align interests of the executive and senior officers with shareholders’ interests generally by providing that a portion of the executive’s compensation is tied to the financial performance of FCB Bancorp, specifically FCB Bancorp’s net profit.
Prior to the Mergers, the personnel committee of FCB Bancorp’s board of directors was responsible for reviewing and approving FCB Bancorp’s overall compensation and benefit programs in consultation with Mr. C. G. Kum, FCB Bancorp’s former chief executive officer, or CEO, and for administering the compensation of the CEO. In addition, the personnel committee was responsible for administering FCB Bancorp’s stock option plans. The CEO was a member of the personnel committee and made recommendations to the committee concerning his own compensation, but the CEO did not participate in the deliberations or decisions of the personnel committee concerning his compensation. The CEO determined the compensation, including salary, bonus and other awards, for other executive and senior officers, subject to the approval of the board of directors with respect to equity compensation.
Executive Compensation Policy
FCB Bancorp’s compensation policy primarily consisted of the following components:
• | base salary; |
• | annual cash bonus; and |
• | long-term award(s) — including stock option grants, salary continuation agreements and split-dollar life insurance benefits. |
Historically, FCB Bancorp considered market practices to achieve an overall compensation program that aimed to provide a total compensation package for its executive and senior officers that was generally competitive within and around the 75th percentile of compensation paid to similarly situated executive and senior officers of a peer group of companies. FCB Bancorp reviewed the market practices by speaking to recruitment agencies and reviewing the data on peer companies of similar size, growth potential and market area as reported in the results of an annual compensation and benefits survey conducted by the California Bankers Association. In
74
Table of Contents
determining the compensation for the CEO, FCB Bancorp also utilized the SNL Executive Compensation Review of banks and thrifts with assets greater than $400 million in order to set his compensation at levels competitive with FCB Bancorp’s peer institutions. FCB Bancorp did not employ formulas to determine the relationship of one element of compensation to another nor did it determine the amount of one form of compensation based solely on the amount of another form of compensation; however, FCB Bancorp strove to allocate a significant portion of overall compensation to elements that focus on performance and incentives. FCB Bancorp did not have a policy to cover recapturing bonuses or other compensation in the event that the metrics used to determine the compensation are later restated.
Base Salary. Other than with respect to the CEO, base salary was determined based on the experience, skills, knowledge and responsibilities required of the executive and senior officers in their roles, and FCB Bancorp’s performance, taking into account competitive market compensation paid by other companies as described above. FCB Bancorp sought to maintain base salaries that are competitive with the marketplace, to allow it to attract and retain executive talent.
Salaries for executive and senior officers were reviewed on an annual basis as well as at the time of a promotion or other change in level of responsibilities. Increases in base salary were based on the evaluation of factors such as the individual’s level of responsibility, performance and level of compensation.
The salaries paid during fiscal year 2006 to the executive officers of FCB Bancorp, referred to in this document as the FCB Bancorp named executive officers, are shown on the Summary Compensation Table below. In connection with the Merger Agreement, First California entered into an employment agreement with Mr. Kum, who previously served as president and the CEO of FCB Bancorp and is currently the president and CEO of First California. That agreement sets Mr. Kum’s salary at $375,000 (subject to review and increase commencing in 2008). In determining his initial base salary under the employment agreement, the parties used as a benchmark market information obtained from the SNL Executive Compensation Review.
Short-Term Annual Cash Bonuses. FCB Bancorp historically awarded annual cash incentive bonuses to substantially all of its employees, including the FCB Bancorp named executive officers, under the FCB Bancorp incentive compensation program. In paying annual cash bonuses, FCB Bancorp sought to align the compensation of the named executive officers and other employees with performance. Accordingly, the payment of the annual cash bonus would depend on the achievement of FCB Bancorp’s net profit target, as approved by the board of directors for a given year. The board of directors set the net profit target after taking into account, among other things, expected growth in loans, deposits and total assets. Under the incentive compensation program, an employee in good standing would have been eligible to receive a bonus calculated as a percentage of salary for all non-executive employees and as a percentage of net profit for the executive officers. A threshold cash bonus amount would occur when FCB Bancorp achieved 80% of the net profit goal with an upper limit of 120%. The board of directors, under the incentive compensation program, had the discretion to award a lower cash bonus than may have been received in respect of any particular year. The payment of annual cash bonuses would generally occur in February of each year in respect of achievements of the prior fiscal year.
For 2006, the CEO, Romolo Santarosa, FCB Bancorp’s chief financial officer, or the CFO, and Thomas E. Anthony, FCB Bancorp’s chief credit officer, or the CCO, were eligible for a bonus of $135,266, $67,633 and $33,817, respectively. The payment of these cash bonuses occurred in the first quarter of 2007 and is described in the footnotes to the FCB Bancorp Summary Compensation Table below. The net profit goal for 2006 was $5,175,000. During the term of his employment agreement with First California, Mr. Kum will be eligible for a bonus amount equal to up to 150% of his base salary.
Long Term Incentive Awards. Historically, executive and senior officers received equity compensation awards in the form of incentive stock options under FCB Bancorp’s 2005 Stock Option Plan. The stock options were designed to align the interests of the executive and senior officers with the shareholders’ long-term interests by providing them with equity awards that vest over a period of time, generally over three to five years, and
75
Table of Contents
become exercisable upon the occurrence of certain events, as well as to reward the senior and executive officers for performance. Historically, FCB Bancorp did not grant equity awards to the same degree as its peers out of concern of the dilutive effect of option grants on existing shareholders. The first stock option plan was adopted by the board of directors in 1979 and was cancelled in 1992. The subsequent stock option plan, approved by shareholders in 2003, was adopted by the board of directors to encourage directors, officers and key employees to remain with the company and to attract new, qualified personnel in today’s competitive environment. Prior to the Mergers, FCB Bancorp did not have stock ownership guidelines for its directors or executive officers. In order to remain competitive, FCB Bancorp used other retention tools such as the salary continuation agreements and split-dollar life insurance policies discussed below.
The FCB Bancorp personnel committee determined the number of stock options to be granted to the FCB Bancorp named executive officers, taking into account FCB Bancorp’s growth and achievement of goals and the recommendations of the CEO, and the board of directors approved the total stock options granted. The amounts granted to the FCB Bancorp named executive officers varied each year and are based on individual performance. All stock options granted under FCB Bancorp’s 2005 Stock Option Plan were made at the market price at the time of the award. FCB Bancorp never granted stock options with an exercise price that was less than the closing price of FCB Bancorp’s common stock as reported by the OTC Bulletin Board on the grant date, nor did it granted stock options which were priced on a date other than the grant date. Annual awards of stock options were generally made during March or April. The long-term incentive award information for the FCB Bancorp named executive officers during fiscal year 2006 is included in “— Executive and Director Compensation for FCB Bancorp — 2006 Grants of Plan-Based Awards” and additional information on the option awards is shown in “— Executive and Director Compensation for FCB Bancorp — Holdings of Previously Awarded Equity.”
Employment Arrangements. FCB Bancorp has not historically had employment arrangements other than the salary continuation agreements described below with the FCB Bancorp named executive officers. As part of the Mergers, First California entered into an employment agreement with Mr. Kum. FCB Bancorp believed that this agreement was desirable as part of the merger arrangements in order to retain the continued services of Mr. Kum as CEO of the combined company following the mergers, including for purposes of leading the integration of the companies and their subsidiary banks. In approving the employment agreement as part of the merger arrangements, the board took into account Mr. Kum’s successful leadership of FCB Bancorp to date including through its integration of South Coast Bancorp, Inc. For details regarding the terms of the employment agreement, see “— Executive and Director Compensation for FCB Bancorp — Potential Payments on Termination or Change-in-Control” below.
Salary Continuation Agreements. FCB Bancorp had salary continuation agreements with the FCB Bancorp named executive officers which were unfunded arrangements and which have been assumed by First California in connection with the Mergers. These agreements seek to encourage the executive and senior officers to remain employed at FCB Bancorp, and since the completion of the Mergers, at First California. Under the terms of the agreements, each FCB Bancorp named executive officer will receive a specified annual benefit paid in monthly installments for a specified number of years, ranging from 11 to 17 years, after retirement at age 65. If an FCB Bancorp named executive officer’s employment is terminated by FCB Bancorp or First California for cause or by reason of voluntary early retirement, the executive officer will not receive any benefits under the agreement. The agreements also provide for specified benefits in the event of a change-in-control, termination as a result of disability or involuntary early retirement. For details regarding the terms and payments under the salary continuation agreement for each FCB Bancorp named executive officer, see “— Executive and Director Compensation for FCB Bancorp — Potential Payments on Termination or Change-in-Control.”
Split-Dollar Life Insurance.FCB Bancorp had split-dollar life insurance agreements with the FCB Bancorp executive and senior officers and directors, which have been assumed by First California in connection with the Mergers. In connection with these agreements, FCB Bancorp purchased life insurance policies with respect to the relevant individuals. Under these agreements, First California owns the insurance policies, is entitled to the cash value of the policies and is responsible for paying the associated premiums. Upon the FCB
76
Table of Contents
Bancorp named executive officer’s death while still employed with First California, or death after age 65, disability or a change-in-control, a beneficiary selected by the FCB Bancorp named executive officer is entitled to a specified amount of the death benefit under the policy. The split-dollar life insurance agreement and any benefit from it terminate upon the executive officer’s termination for cause, early involuntary termination by First California or early voluntary termination by the FCB Bancorp named executive officer. For details on the particular benefits of the split-dollar life insurance agreements for each FCB Bancorp named executive officer, see “— Executive and Director Compensation for FCB Bancorp — Potential Payments on Termination or Change-in-Control.”
In addition to the split-dollar life insurance plan, Mr. Santarosa, the CFO, is covered under a group split-dollar life insurance program that FCB Bancorp offered to him and certain other non-executive officers of FCB Bancorp. The program functions in the same manner as the split-dollar life insurance agreements described above, with decreased death benefits if Mr. Santarosa’s death takes place while not employed with First California by any reason other than for disability (including a change-in-control).
Other Programs.FCB Bancorp also provided the FCB Bancorp named executive officers and other senior officers (and other employees) with perquisites and other personal benefits that it believed were reasonable and consistent with its overall compensation program to attract and retain qualified executive and senior officers and to facilitate the performance of executives’ management responsibilities. FCB Bancorp maintained a section 401(k) employee savings and retirement plan for substantially all employees of the bank who have at least 90 days of service. FCB Bancorp’s matching contribution to the plan equaled 50% of the first 6% of pay that is contributed to the 401(k) savings and retirement plan. FCB Bancorp offered additional life insurance coverage to the FCB Bancorp named executive officers under its group term life program. This program was also offered to all employees. The death benefit under the group term life was based on the annual salary of the employee and premiums paid are imputed to each employee’s income each fiscal year.
Prior to the Mergers, the FCB Bancorp named executive officers were also provided with one or more of the following: club memberships, an automobile allowance, a fuel allowance, cell phone allowance, internet service and overnight lodging, as well as benefits available to all employees such as medical, dental and vision insurance. Certain other senior officers and employees also received one or more of the items mentioned in the preceding sentence. Information on the other programs for the named executive officers is included in “— Executive and Director Compensation for FCB Bancorp — Summary Compensation Table.”
Tax and Accounting Information
Deductibility of Executive Compensation.The qualifying compensation regulations issued by the Internal Revenue Service under Internal Revenue Code section 162(m) provide that no deduction is allowed for applicable employee remuneration paid by a publicly held corporation to a covered employee to the extent that the remuneration exceeds $1.0 million for the applicable taxable year, unless specified conditions are satisfied. Prior to the Mergers, FCB Bancorp had no expectation that compensation would be affected by the qualifying compensation regulations.
Executive and Director Compensation For FCB Bancorp
Summary Compensation Table
The following table contains summary compensation information for the fiscal year ended December 31, 2006 with respect to the named executive officers of FCB Bancorp immediately prior to the completion of the Mergers. There are no other individuals who were named executive officers employed by FCB Bancorp during 2006 other than those listed in the table below. Such executive officers are referred to in this document as the FCB Bancorp named executive officers.
77
Table of Contents
Summary Compensation Table
Name and Principal | Year | Salary ($) | Bonus ($) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($)(3) | Change in ($)(4) | All Other Compensation ($)(5) | Total ($) | |||||||||||||||
C. G. Kum President and Chief Executive Officer | 2006 | $ | 275,000 | $ | 0 | $ | 33,783 | $ | 135,266 | $ | 41,040 | $ | 48,625 | $ | 535,072 | ||||||||
Romolo Santarosa Executive Vice President and Chief Financial Officer | 2006 | $ | 172,500 | $ | 0 | $ | 15,473 | $ | 67,633 | $ | 19,742 | $ | 25,267 | $ | 300,615 | ||||||||
Thomas E. Anthony Executive Vice President and Chief Credit Officer | 2006 | $ | 172,500 | $ | 0 | $ | 16,889 | $ | 33,817 | $ | 44,976 | $ | 24,067 | $ | 292,249 |
(1) | Positions shown are those held with FCB Bancorp immediately prior to the completion of the Mergers. |
(2) | The amounts in this column represent the 2006 compensation cost of option awards granted in and prior to 2006, except that these amount do not include any estimate of forfeitures. The grant date fair value of option awards granted was determined in accordance with Statement of Financial Accounting Standards No. 123R (SFAS 123R) and is recognized as compensation cost over the requisite service period. The FCB Bancorp’s 2005 Stock Option Plan is described in “— Employment Arrangements and Other Factors Affecting 2006 Compensation — 2005 Stock Option Plan.” Furthermore, the amount recognized for these awards was calculated based on the Black-Scholes-Merton formula using the assumptions described in Note 1 to FCB Bancorp’s audited consolidated financial statements for the years ended December 31, 2003 through 2005 and Note 2 of FCB Bancorp’s unaudited financial statements for the three and nine months ended on September 30, 2006 included in this document. These notes also describe the determination of fair value and compensation cost recognized for these option awards. In particular, an estimate of the number of awards that ultimately will be earned is made at the grant date. Those estimates may be revised each period. |
(3) | This column represents short-term annual performance cash bonuses paid under FCB Bancorp’s incentive compensation program. For the FCB Bancorp named executive officers, these non-equity incentive plan awards are determined as a percentage of FCB Bancorp’s net profit for the fiscal year and the achievement of certain predetermined performance targets approved by the FCB Bancorp board of directors for the fiscal year. See “— FCB Bancorp Compensation Discussion and Analysis — Executive Compensation Policy —Short-Term Annual Cash Bonuses” for information on FCB Bancorp’s bonus policies. |
(4) | This column represents the total change from December 31, 2005 through December 31, 2006, in the accrued liability balance established with respect to the benefit obligation associated with the post-retirement salary continuation agreement of each FCB Bancorp named executive officer and accrued for in accordance with Accounting Principles Board Opinion No. 12. See “— Potential Payments on Termination or Change-in-Control” for more information on the salary continuation agreements. FCB Bancorp does not participate in nonqualified deferred compensation plans, but the salary continuation agreements may be considered as a nonqualified deferred compensation program for purposes of section 409(A) of the Internal Revenue Code. |
78
Table of Contents
(5) | The amounts in this column reflect for each FCB Bancorp named executive officer (1) matching contributions made by FCB Bancorp pursuant to the First California Bank 401(k) Plan, (2) the economic benefit to the FCB Bancorp named executive officer attributable to the split-dollar life insurance policies owned by FCB Bancorp with respect to such named executive officer, (3) premiums associated with group term life insurance policies and (4) the incremental cost of perquisites including the value of the monthly amounts paid to the FCB Bancorp named executive officers for the use of personally owned automobiles and cellular phones and the amounts paid by FCB Bancorp on behalf of the FCB Bancorp named executive officers with respect to club memberships. See the “All Other Compensation” table that follows for additional information. |
The amounts disclosed in the “All Other Compensation” column of the Summary Compensation Table above consist of:
All Other Compensation
Name | Automobile ($) (1) | Club Memberships ($) | Cell Phone Stipend & Overnight Lodging ($) (2) | Group Term Life Insurance Premiums ($) | Bank Owned Life Insurance ($) (3) | 401(k) Employer Contribution ($) | ||||||||||||
C.G. Kum | $ | 25,347 | $ | 9,105 | $ | 3,156 | $ | 1,728 | $ | 2,689 | $ | 6,600 | ||||||
Romolo Santarosa | $ | 9,970 | $ | 2,690 | $ | 3,215 | $ | 1,296 | $ | 2,173 | $ | 5,923 | ||||||
Thomas E. Anthony | $ | 11,729 | $ | 743 | $ | 522 | $ | 1,296 | $ | 4,179 | $ | 5,598 |
(1) | The value in this column is an aggregate of the monthly amounts paid to the FCB Bancorp named executive officers for the use of personally owned automobiles, including the costs associated with maintenance, gas, repairs, insurance and warranties. |
(2) | The value in this column includes the monthly amounts paid to Messrs. Kum and Anthony for the use of personally owned cellular phones and $3,215 for Mr. Santarosa’s overnight lodging related expenses. Messrs. Kum and Anthony did not receive any amounts for overnight lodging and Mr. Santarosa did not receive any amounts for use of personally owned cellular phone. |
(3) | The values in this column represent the economic value attributed to the FCB Bancorp named executive officer of the life insurance benefit to such named executive in 2006 with respect to life insurance owned by FCB Bancorp. The premiums paid by FCB Bancorp with respect to single premium split-dollar life insurance policies for the benefit of FCB Bancorp and the named executive officers in 2006 are not included in this column because FCB Bancorp owns such insurance policies and is therefore entitled to the cash value of the policies. FCB Bancorp paid $479,000 in premium for Mr. Santarosa’s split-dollar life insurance policy in 2006. Pursuant to the terms of Mr. Santarosa’s insurance policy, upon his death, a beneficiary designated by Mr. Santarosa is entitled to receive $850,000 of the total proceeds with FCB Bancorp entitled to the balance. For more information on split-dollar life insurance policies, see “— Potential Payments on Termination or Change-in-Control.” |
2006 Grants of Plan-Based Awards
In 2006, FCB Bancorp awarded non-equity incentive grants under its incentive compensation program and also awarded options under its 2005 Stock Option Plan to the FCB Bancorp named executive officers. There are no other named executive officers of FCB Bancorp who were employed by FCB Bancorp during 2006 other than those listed in the table below.
79
Table of Contents
2006 Grants of Plan-Based Awards
Estimated Future Payouts Under Non- Equity Incentive Plan Awards (1) | All Other Option Awards (# of FCB Bancorp Shares) | Exercise Price ($/Sh) | Grant Date ($) | ||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | |||||||||||||||
C. G. Kum Incentive Compensation Program | 12/7/05 | $ | 124,199 | $ | 155,249 | $ | 186,298 | ||||||||||||
2005 Stock Option Plan | 3/1/06 | 10,000 | $ | 21.00 | $ | 44,900 | |||||||||||||
Romolo Santarosa Incentive Compensation Program | 12/7/05 | $ | 62,099 | $ | 77,624 | $ | 93,149 | ||||||||||||
2005 Stock Option Plan | 3/1/06 | 5,000 | $ | 21.00 | $ | 22,450 | |||||||||||||
Thomas E. Anthony Incentive Compensation Program | 12/7/05 | $ | 62,099 | $ | 77,624 | $ | 93,149 | ||||||||||||
2005 Stock Option Plan | 3/1/06 | 5,000 | $ | 21.00 | $ | 22,450 |
(1) | These represent cash incentive payments under FCB Bancorp’s incentive compensation program based on the achievement of FCB Bancorp’s net profit goals for 2006. Such amounts were paid to the FCB Bancorp executive officers in March 2007 for performance in fiscal year 2006. |
Employment Arrangements and Other Factors Affecting 2006 Compensation
Employment Arrangements.
For a description of employment arrangements for Messrs. Kum, Santarosa and Anthony, see “— Potential Payments on Termination or Change-in-Control.”
Incentive Compensation Program.
FCB Bancorp’s incentive compensation program established an overall formula based on FCB Bancorp’s budgeted net profit approved by the board of directors for a given fiscal year. For fiscal year 2006, the figure was $5,175,000. Under the incentive compensation program, the FCB Bancorp named executives became eligible for a bonus when FCB Bancorp achieved 80% of the net profit goal, but the bonus was pro-rated to reflect less than 100% achievement. Furthermore, to reward the FCB Bancorp named executive officers for exceeding the net profit goal, FCB Bancorp set an upper limit of 120% achievement and pro-rates the bonus accordingly. Each executive officer became eligible for the incentive compensation program so long as he or she is in good standing and he or she has met expectations of his or her supervisors. Under the program, each of Messrs. Kum, Santarosa and Anthony received $135,266, $67,633 and $33,817, respectively, for the 2006 fiscal year. See “— FCB Bancorp Compensation Discussion and Analysis — Executive Compensation Policy — Short-Term Annual Cash Bonuses.”
FCB Bancorp Stock Options
FCB Bancorp’s 2005 Stock Option Plan, or the FCB Bancorp 2005 Plan, allows for the granting of both incentive and nonstatutory stock options.
On May 19, 2005, the board of directors of FCB Bancorp adopted the FCB Bancorp 2005 Plan. On September 8, 2005, the FCB Bancorp 2005 Plan was approved by the shareholders of First California Bank and the FCB Bancorp 2005 Plan replaced First California Bank’s 2003 Stock Option Plan. The FCB Bancorp 2005
80
Table of Contents
Plan became effective upon consummation of FCB Bancorp’s formation on September 30, 2005. All stock options previously issued by First California Bank under its 2003 Stock Option Plan were exchanged for options in FCB Bancorp’s common stock pursuant to the merger of First California Bank with a wholly owned subsidiary of FCB Bancorp. The FCB Bancorp 2005 Plan provided for the grant of “incentive stock options” as permitted under Section 422 of the Code, as well as for the grant of non-qualified stock options. The FCB Bancorp 2005 Plan was not subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended.
The FCB Bancorp 2005 Plan provided for the issuance of up to 200,000 shares of FCB Bancorp common stock to directors, officers, and key employees of FCB Bancorp or any subsidiary, subject to adjustment in the event of certain changes in our capital structure. The option price for incentive stock options was not permitted to be less than 100% of the fair market value of the shares on the date of grant. The option price, number of shares granted to recipients, and duration for the plan stock options were determined and approved by the board of directors.
At December 31, 2006, there were 46,100 shares reserved and available for grant.
The FCB Bancorp 2005 Plan was assumed by First California in connection with the Mergers. At the effective time of the Mergers, each outstanding option to purchase shares of FCB Bancorp common stock, vested or unvested, was converted into an option to acquire a number of shares of First California common stock equal to the product (rounded up to the nearest whole number except to the extent Section 409A of the Internal Revenue Code, or the Code, requires otherwise) of (x) the number of shares of FCB Bancorp common stock subject to the FCB Bancorp option and (y) 1.7904, at an exercise price per share (rounded up to the nearest whole cent) equal to the exercise price per share of such FCB Bancorp option divided by 1.7904.
2005 Stock Option Plan
The following description of the FCB Bancorp 2005 Plan is intended to highlight and summarize the principal terms of the FCB Bancorp 2005 Plan. Subsequent to the completion of the Mergers, any reference to the FCB Bancorp 2005 Plan was changed to the First California Financial Group, Inc. FCB Bancorp 2005 Stock Option Plan, and any references to FCB Bancorp in the FCB Bancorp 2005 Plan was changed to First California. All other terms of the plan remain in full force and effect will be administered by First California.
Administration. The FCB Bancorp 2005 Plan was administered by our board of directors, one or more of whom could also be executive officers and therefore would not be deemed to be “independent,” as that term is defined in the listing standards of the Nasdaq Stock Market, Inc. Each director abstained from approving the grant of any options to himself or herself. Options could be granted only to directors, officers and key employees of FCB Bancorp and any of its subsidiaries. Subject to the express provisions of the FCB Bancorp 2005 Plan, the board was authorized to construe and interpret the FCB Bancorp 2005 Plan, and make all the determinations necessary or advisable for administration of the FCB Bancorp 2005 Plan.
Eligible Participants. The FCB Bancorp 2005 Plan provided that all directors, officers and key employees of FCB Bancorp and any of its subsidiaries were eligible to receive grants of stock options. The FCB Bancorp 2005 Plan provided that if options were granted to officers or key employees who own, directly or indirectly, 10% or more of FCB Bancorp’s outstanding shares, and the options are intended to qualify as “incentive stock options,” then the minimum option price must be at least 110% of the stock’s fair market value on the date of grant, and the term of the option grant could not exceed five years. Subject to the foregoing limitations, the board was empowered to determine which eligible participants, if any, should receive options, the number of shares subject to each option, and the terms and provisions of the option agreements.
Shares Subject to the Plan. 200,000 shares were covered by the FCB Bancorp 2005 Plan, which constituted approximately 6.1% of the shares of FCB Bancorp common stock outstanding as of December 31, 2006. Options were granted at no less than the fair market value of FCB Bancorp common stock as of the date of grant.
81
Table of Contents
Incentive and Non-Qualified Stock Options. The FCB Bancorp 2005 Plan provided for the grant of both incentive stock options and non-qualified options. Incentive stock options were available only to persons who were employees of FCB Bancorp or any of its subsidiaries, and were subject to limitations imposed by applicable sections of the Internal Revenue Code of 1986, as amended, including a $100,000 limit on the aggregate fair market value (determined on the date the options are granted) of shares of FCB Bancorp common stock with respect to which incentive stock options were exercisable for the first time by an optionee during any calendar year. Any options granted under the FCB Bancorp 2005 Plan which did not meet the limitations for incentive stock options, or which were otherwise not deemed to be incentive stock options, would be deemed “non- qualified.” Subject to the foregoing and other limitations set forth in the FCB Bancorp 2005 Plan, the exercise price, permissible time or times of exercise and the remaining terms pertaining to any option were determined by the board; however, the per share exercise price under any option could not be less than 100% of the fair market value of FCB Bancorp common stock on the date of grant of the option.
Terms and Conditions of Options. Subject to the limitations set forth in the FCB Bancorp 2005 Plan, options granted thereunder could be exercised in such increments, which need not be equal, and upon such contingencies as the board may determine. If an optionee did not exercise an increment of an option in any period during which such increment becomes exercisable, the unexercised increment could be exercised at any time prior to expiration of the option unless the respective stock option agreement provided otherwise.
Subject to earlier termination as may be provided in any optionee’s stock option agreement, options granted under the FCB Bancorp 2005 Plan expire not later than ten years from the date of grant. Under the terms of the FCB Bancorp 2005 Plan, the date of grant was deemed to be either: (1) the date fixed by the board to be the date of grant; or (2) if no such date is fixed, the date on which the board made its final determination to grant a stock option.
Options granted under the FCB Bancorp 2005 Plan could not be transferred otherwise than by will or by the laws of descent and distribution, and during his or her lifetime, only the optionee or, in the event of the disability of the optionee, his or her guardian or the conservator of his or her estate may exercise the option.
Exercise of Options. Subject to the restrictions set forth in the FCB Bancorp 2005 Plan, an option could be exercised in accordance with the terms of the individual stock option agreement. Full payment by the optionee for all shares as to which the option was being exercised was due and payable at the time of exercise of the option. Payment must have been in cash.
An option could be exercised with respect to whole shares only, although fractional share interests could be accumulated and exercised from time to time as whole shares during the term of the option. Options could only be exercised with respect to a minimum of ten whole shares, unless the option agreement required that a larger number of shares be exercised at any one time and unless fewer than ten shares remain subject to the option at the time of exercise. Any shares subject to an option which expired or terminated without being exercised became available again for issuance under the FCB Bancorp 2005 Plan.
Neither an eligible participant nor an optionee had any rights as a shareholder with respect to the shares of FCB Bancorp common stock covered by any option which could be or had been granted to such person, and which was thereafter exercised, until date of issuance of the stock certificate by FCB Bancorp to such person.
Stock Option Agreement. Every grant of an option was evidenced by a written stock option agreement executed by FCB Bancorp and the optionee. Subject to the terms and conditions of the FCB Bancorp 2005 Plan, the stock option agreement contained the terms and provisions pertaining to each option so granted, such as exercise price, permissible date or dates of exercise, termination date and such other terms and conditions as the board deemed desirable and not inconsistent with the FCB Bancorp 2005 Plan.
Termination of Employment or Affiliation. In the event an optionee ceased to be affiliated with FCB Bancorp or a subsidiary for any reason other than disability, death or termination for cause, the stock options
82
Table of Contents
granted to such optionee expired at the earlier of the expiration dates specified for the options, or ninety days after the optionee ceased to be so affiliated. During such period after cessation of affiliation, the optionee could exercise the option to the extent that it was exercisable as of the date of such termination, and thereafter the option expired in its entirety.
If an optionee’s stock option agreement so provided, and if an optionee’s status as an eligible participant was terminated for cause, the option held by such person would expire thirty days after termination, although the board could, in its sole discretion, within thirty days of such termination, reinstate the option. If the option was reinstated, the optionee would be permitted to exercise the option only to the extent, for such time, and upon such terms and conditions as if the optionee’s status as an eligible participant had been terminated for a reason other than cause, disability or death, as described above.
The FCB Bancorp 2005 Plan, and all stock options previously granted under the FCB Bancorp 2005 Plan, would terminate upon the dissolution or liquidation of FCB Bancorp, upon a consolidation, reorganization, or merger as a result of which FCB Bancorp is not the surviving corporation, or upon a sale of all or substantially all of the assets of FCB Bancorp. However, all options theretofore granted would become immediately exercisable in their entirety upon the occurrence of any of the foregoing, and any options not exercised immediately upon the occurrence of any of the foregoing events would terminate unless provision is made for the assumption or substitution thereof. As a result of this acceleration provisions, even if an outstanding option were not fully vested as to all increments at the time of the event, that option will become fully vested and exercisable.
Amendment and Termination of the FCB Bancorp 2005 Plan. The board could at any time suspend, amend or terminate the FCB Bancorp 2005 Plan, and could, with the consent of the respective optionee, make such modifications to the terms and conditions of outstanding options as it deemed advisable. Certain amendments to the FCB Bancorp 2005 Plan may have required shareholder approval to maintain incentive stock option qualifications. The amendment, suspension or termination of the FCB Bancorp 2005 Plan would not, without the consent of the optionee, alter or impair any rights or obligations under any outstanding option under the FCB Bancorp 2005 Plan.
Adjustments Upon Changes in Capitalization. The total number of shares covered by the FCB Bancorp 2005 Plan and the price, kind and number of shares subject to outstanding options thereunder, would be appropriately and proportionately adjusted if the outstanding shares of FCB Bancorp common stock were increased, decreased, changed into or exchanged for a different number or kind of shares or securities of FCB Bancorp through reorganization, merger, recapitalization, reclassification, stock split, stock dividend, stock consolidation or otherwise, without consideration to FCB Bancorp as provided in the FCB Bancorp 2005 Plan. Fractional share interests of such adjustments could be accumulated, although no fractional shares of stock will be issued under the FCB Bancorp 2005 Plan.
Holdings of Previously Awarded Equity
Outstanding Equity Awards at Fiscal Year-End
Equity awards held as of December 31, 2006 by each of the FCB Bancorp named executive officers were issued under FCB Bancorp’s 2005 Stock Option Plan (which plan assumed FCB Bancorp’s prior 2003 Stock Option Plan and all awards thereunder). See “— Employment Arrangements and Other Factors Affecting 2006 Compensation.”
The following table sets forth outstanding equity awards held by each of the FCB Bancorp named executive officers as of December 31, 2006.
83
Table of Contents
2006 Outstanding Equity Awards at Fiscal Year-End
Option Awards(1) | |||||||
Name | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | ||||
C. G. Kum | 10,000 10,000 9,000 10,000 | $ $ $ $ | 21.00 21.00 20.25 11.25 | 03/01/2014 04/14/2011 04/23/2012 06/19/2011 | |||
Romolo Santarosa | 5,000 5,000 4,500 1,000 | $ $ $ $ | 21.00 21.00 20.25 11.25 | 03/01/2014 04/14/2011 04/23/2012 06/19/2011 | |||
Thomas E. Anthony | 5,000 5,000 4,500 5,000 | $ $ $ $ | 21.00 21.00 20.25 11.25 | 03/01/2014 04/14/2011 04/23/2012 06/19/2011 |
(1) | All options granted in 2003 and 2004 vest on their fifth anniversary of the grant date and all options granted in 2005 and 2006 have a five year vesting schedule where one-third of the options vest on each of the third, fourth and fifth anniversaries of the grant date. At December 31, 2006, there were no options exercisable. |
Option Exercises During 2006
No options were exercisable as of December 31, 2006 and no options became vested or were exercised during the year then ended.
Post-Employment Compensation
The table below shows the cumulative amount accrued with respect to the salary continuation agreement for each of the FCB Bancorp named executive officers, including the number of years of service credited to each such named executive officer. For further details on these agreements, see “— Potential Payments on Termination or Change-in-Control.”
FCB Bancorp 2006 Pension Benefits
Name | Plan Name | Number of (#) (1) | Present ($) (2) | Payments During ($) | ||||||
C. G. Kum | Salary Continuation Agreement | 4 | $ | 186,497 | $ | 0 | ||||
Thomas E. Anthony | Salary Continuation Agreement | 4 | $ | 173,333 | $ | 0 | ||||
Romolo Santarosa | Salary Continuation Agreement | 1 | $ | 19,742 | $ | 0 |
(1) | Years of credited service for each executive officer vary from the actual years each executive officer has been employed. Under the relevant salary continuation agreement, calculations of retirement benefits are based on the first plan year beginning with the year in which the agreement was executed, rather than the year each executive officer began his employment with FCB Bancorp. Each of Messrs. Kum, Anthony and Santarosa has been a named executive officer of FCB Bancorp for 8 years, 8 years and 5 years, respectively. The differences between the named executive officer’s number of years of credited service and actual years of service do not result in benefit augmentation for any of the named executive officers. |
84
Table of Contents
(2) | This column represents the cumulative amount accrued with respect to the salary continuation agreements for each of the FCB Bancorp named executive officers. Annual accruals are made in accordance with the requirements of Accounting Principles Board Opinion No. 12 to accrue for these post-retirement benefit obligations in a systematic and orderly way using an appropriate discount rate. Accruals are made using a 6.5% discount rate and reflect the percentage of required service completed by the participant. The accrued liability balance at the participant’s retirement date will be equal to the present value of the benefits promised under the salary continuation agreements. The details of the salary continuation agreements for each FCB Bancorp named executive officer are described below in “— Potential Payments on Termination or Change-in-Control.” |
Nonqualified Deferred Compensation
Prior to the Mergers, FCB Bancorp did not participate in nonqualified deferred compensation plans other than the salary continuation agreements which may be considered a nonqualified deferred compensation program for the purposes of section 409(A) of the Internal Revenue Code. For information on salary continuation agreements, see “— Potential Payments on Termination or Change-in-Control.”
Potential Payments on Termination or Change-in-Control
In connection with the Mergers, Messrs. Kum, Santorosa and Anthony waived the change-in-control provisions of the employment arrangements described below. In addition, as successor to FCB Bancorp, First California assumed the rights and obligations of FCB Bancorp under the employment arrangements described below.
Employment Arrangements for C. G. Kum.
In March 2003, First California Bank entered into a salary continuation agreement with C. G. Kum. Upon retirement at or after age 65 for reasons other than death, the agreement provides for a maximum annual benefit of $160,471 paid in equal monthly installments, which will be paid over the lesser of 17 years or such shorter period of time based upon the number of years that Mr. Kum is employed by the bank prior to normal retirement. If Mr. Kum leaves FCB Bancorp’s employ by virtue of early voluntary retirement (prior to attaining age 65) or is terminated “for cause” (as defined in the agreement), he will not be eligible for a benefit under the agreement. In the event Mr. Kum leaves FCB Bancorp’s employ by virtue of death (either prior or subsequent to retirement), involuntary termination (without cause), disability or, under certain circumstances, a change in control, he will receive partial benefits under the agreement. The amount to be paid under the agreement to Mr. Kum in the event of early involuntary termination is determined based on the year in which termination occurs, and is to be paid in one lump sum by FCB Bancorp within 30 days following the termination of employment. Upon Mr. Kum’s termination of employment due to disability, Mr. Kum will receive a specified amount determined based on the year in which the disability occurs, which is to be paid as an annual benefit for a period of 17 years. Upon a change in control, followed within 12 months by Mr. Kum’s termination of employment for reasons other than death, disability or retirement, FCB Bancorp will pay Mr. Kum a lump sum amount of $1,488,723, which is to be paid within 30 days following the termination of employment.
The salary continuation agreement is an unfunded arrangement, which means that Mr. Kum has no rights under the agreement beyond those of a general creditor of the FCB Bancorp, and there are no specific assets set aside by FCB Bancorp in connection with the establishment of the agreement. The salary continuation agreement is not an employment contract. While receiving benefits under the agreement, Mr. Kum may not serve as an employee, officer or director of, or serve as a consultant or advisor to, any financial institution which has its headquarters or any branch office within the County of Ventura or the County of Santa Barbara, California.
First California Bank also entered into a split-dollar life insurance agreement with Mr. Kum in March 2003. In connection with that agreement, First California Bank acquired a life insurance policy with respect to
85
Table of Contents
Mr. Kum. Pursuant to the terms of that agreement, FCB Bancorp owns the insurance policy, is entitled to the cash value of the policy and is responsible for paying the associated premiums. Upon Mr. Kum’s death while employed by FCB Bancorp, or after termination of employment by reason of retirement at age 65 or subsequent to a change-in-control, a beneficiary designated by Mr. Kum is entitled to receive $1.5 million of the total proceeds, with FCB Bancorp entitled to the balance. The bank paid an aggregate premium in 2002 amounting to $1.4 million for this policy.
Concurrently with execution of the merger agreement, First California and Mr. Kum entered into an employment agreement that provides that Mr. Kum will serve First California as Chief Executive Officer commencing with the closing. Pursuant to the employment agreement, Mr. Kum will receive an annual base salary of $375,000 (subject to review and increase commencing in 2008) and a bonus based on First California’s net earnings, with the total bonus not to exceed 150% of base salary. Additionally, Mr. Kum was granted an option to purchase 100,000 shares of First California common stock on Mr. Kum’s start date with an exercise price equal to the fair market value on the date of grant. Either First California or Mr. Kum may terminate his employment at any time with or without “cause” (as defined in the employment agreement). If First California terminates his employment without cause, Mr. Kum will be entitled to 18 months of health insurance coverage and severance, as follows: (1) if the termination is on or before March 1, 2009, the severance will be twice his then current salary: (2) if the termination is after March 1, 2009, the severance will be 50% of his then current salary if at least 70% of the board members vote for such termination; if less than 70% of the board members vote for termination, the severance will be 150% of his then current salary plus 150% of the average of his bonuses for the two preceding years. If within 18 months following a change in control, Mr. Kum’s employment is terminated without cause or he terminates his employment for “good reason” (as defined in the employment agreement), Mr. Kum will receive the greater of two times his then current salary or 2.99 times his average salary and bonus over the prior five years, provided that in no event can the payment exceed the golden parachute limitation under Section 280G of the Internal Revenue Code.
Employment Arrangements for Romolo Santarosa.
In May 2006, First California Bank entered into a salary continuation agreement with Romolo Santarosa. Upon retirement at or after age 65 for reasons other than death, the agreement provides for an annual benefit of $85,000, which will be paid over the lesser of 15 years or such shorter period of time based upon the number of years that Mr. Santarosa is employed by the bank prior to normal retirement. If Mr. Santarosa leaves FCB Bancorp’s employ by virtue of early voluntary retirement (prior to attaining age 65) or is terminated “for cause” (as defined in the agreement), he will not be eligible for a benefit under the agreement. In the event Mr. Santarosa leaves FCB Bancorp’s employ by virtue of death (either prior or subsequent to retirement), involuntary termination (without cause), disability or, under certain circumstances, a change in control, he will receive partial benefits under the agreement. The amount to be paid under the agreement to Mr. Santarosa in the event of early involuntary termination is determined based on the year in which termination occurs, and is to be paid in one lump sum by FCB Bancorp within 30 days following the termination of employment. Upon Mr. Santarosa’s termination of employment due to disability, Mr. Santarosa will receive a specified amount determined based on the year in which the disability occurs, which is to be paid as an annual benefit for a period of 15 years. Upon a change in control, followed within 12 months by Mr. Santarosa’s termination of employment for reasons other than death, disability or retirement, Mr. Santarosa will receive a lump sum amount of $792,660 within 30 days following the termination of employment.
The salary continuation agreement is an unfunded arrangement, which means that Mr. Santarosa has no rights under the agreement beyond those of a general creditor of FCB Bancorp, and there are no specific assets set aside by FCB Bancorp in connection with the establishment of the agreement. The salary continuation agreement is not an employment contract. While receiving benefits under the agreement, Mr. Santarosa may not serve as an employee, officer or director of, or serve as a consultant or advisor to, any financial institution which has its headquarters or any branch office within the County of Ventura or the County of Santa Barbara, California.
86
Table of Contents
First California Bank also entered into split-dollar life insurance agreements with Mr. Santarosa in July 2003 and May 2006. In connection with these agreements, First California Bank acquired life insurance policies with respect to Mr. Santarosa. Pursuant to the terms of those agreements, FCB Bancorp owns the insurance policies, is entitled to the cash value of the policies and is responsible for paying the associated premiums. Pursuant to the terms of one of the split-dollar life insurance agreements, upon Mr. Santarosa’s death while employed by FCB Bancorp, or after termination of employment by reason of retirement at age 65 or subsequent to a change-in-control, a beneficiary designated by Mr. Santarosa is entitled to receive $850,000 of the total proceeds, with FCB Bancorp entitled to the balance. Under the other split-dollar life insurance agreement, a beneficiary designated by Mr. Santarosa will receive $400,000 upon Mr. Santarosa’s death while employed by FCB Bancorp, with a reduced death benefit upon termination of Mr. Santarosa’s employment with FCB Bancorp by any reason other than disability. The bank paid aggregate premiums in 2002 and 2006 amounting to $673,000 for these policies.
Employment Arrangements for Thomas Anthony.
In March 2003, First California Bank entered into a salary continuation agreement with Thomas E. Anthony. The agreement provides for a maximum annual benefit of $84,667, which will be paid over the lesser of 11 years or such shorter period of time based upon the number of years that Mr. Anthony is employed by the bank prior to normal retirement. If FCB Bancorp agrees to extend Mr. Anthony’s employment beyond normal retirement (age 65 for purposes of the agreement), the annual benefit payment will be extended for one additional year for each full year of service beyond normal retirement to a maximum aggregate of 15 years. If Mr. Anthony leaves the bank’s employ by virtue of early voluntary retirement (prior to attaining age 65) or is terminated “for cause” (as defined in the agreement), he will not be eligible for a benefit under the agreement. In the event Mr. Anthony leaves FCB Bancorp’s employ by virtue of death (either prior or subsequent to retirement), involuntary termination (without cause), disability or, under certain circumstances, a change in control, he will receive partial benefits under the agreement. The amount to be paid under the agreement to Mr. Anthony in the event of early involuntary termination is determined based on the year in which termination occurs, and is to be paid in one lump sum by FCB Bancorp within 30 days following the termination of employment. Upon Mr. Anthony’s termination of employment due to disability, Mr. Anthony will receive a specified amount determined based on the year in which the disability occurs, which is to be paid as an annual benefit for a period of 11 years. Upon a change in control, followed within 12 months by Mr. Anthony’s termination of employment for reasons other than death, disability or retirement, Mr. Anthony will receive a lump sum amount of $618,071 within 30 days following the termination of employment.
The salary continuation agreement is an unfunded arrangement, which means that Mr. Anthony has no rights under the agreement beyond those of a general creditor of FCB Bancorp, and there are no specific assets set aside by FCB Bancorp in connection with the establishment of the agreement. The salary continuation agreement is not an employment contract. While receiving benefits under the agreement, Mr. Anthony may not serve as an employee, officer or director of, or serve as a consultant or advisor to, any financial institution which has its headquarters or any branch office within the County of Ventura or the County of Santa Barbara, California.
First California Bank also entered into a split-dollar life insurance agreement with Mr. Anthony in March 2003. In connection with that agreement, First California Bank acquired a life insurance policy with respect to Mr. Anthony. Pursuant to the terms of that agreement, FCB Bancorp owns the insurance policy, is entitled to the cash value of the policy and is responsible for paying the associated premiums. Upon Mr. Anthony’s death while employed by FCB Bancorp, or after termination of employment by reason of retirement at age 65 or subsequent to a change-in-control, a beneficiary designated by Mr. Anthony is entitled to receive $1.05 million of the total proceeds, with FCB Bancorp entitled to the balance. The bank paid an aggregate premium in 2002 amounting to $1.0 million for this policy.
87
Table of Contents
Treatment of Outstanding Stock Options upon Termination or Change-in-Control.
Termination of Employment or Affiliation. Under the terms of the FCB Bancorp 2005 Stock Option Plan, in the event an optionee ceases to be affiliated with FCB Bancorp or a subsidiary for any reason other than disability, death or termination for cause, the stock options granted to such optionee shall expire at the earlier of the expiration dates specified for the options, or ninety days after the optionee ceases to be so affiliated. During such period after cessation of affiliation, the optionee may exercise the option to the extent that it was exercisable as of the date of such termination, and thereafter the option expires in its entirety. If an optionee’s stock option agreement so provides, and if an optionee’s status as an eligible participant is terminated for cause, the options held by such person will expire thirty days after termination, although the board may, in its sole discretion, within thirty days of such termination, reinstate the option. If the option is reinstated, the optionee will be permitted to exercise the option only to the extent, for such time, and upon such terms and conditions as if the optionee’s status as an eligible participant had been terminated for a reason other than cause, disability or death, as described above.
Liquidation or Change in Control. The FCB Bancorp 2005 Stock Option Plan, and all stock options previously granted under the FCB Bancorp 2005 Stock Option Plan, terminate upon the dissolution or liquidation of FCB Bancorp, upon a consolidation, reorganization, or merger as a result of which FCB Bancorp is not the surviving corporation, or upon a sale of all or substantially all of the assets of FCB Bancorp. However, all options theretofore granted become immediately exercisable in their entirety upon the occurrence of any of the foregoing, and any options not exercised immediately upon the occurrence of any of the foregoing events will terminate unless provision is made for the assumption or substitution thereof. As a result of the acceleration provisions, even if an outstanding option were not fully vested as to all increments at the time of the event, that option will become fully vested and exercisable. All options outstanding at the time of the completion of the mergers will survive and not become immediately exercisable.
Quantification of Termination Payments and Benefits.
The table below reflects the amount of compensation to each of the FCB Bancorp named executive officers in the event of termination of such executive’s employment. The amount of compensation payable to each FCB Bancorp named executive officer upon voluntary termination, early retirement, involuntary not-for-cause termination, termination following a change of control and in the event of disability or death of the executive is shown below. The amounts shown assume that such termination was effective as of December 31, 2006, and thus includes amounts earned through such time and are estimates of the amounts which would be paid out to the executives upon their termination. The actual amounts to be paid out can only be determined at the time of such executive’s separation from FCB Bancorp.
88
Table of Contents
Termination Payments & Benefits
Name | Salary Continuation Agreement ($) (1) | Life Insurance ($) (2) | Unvested Options ($) (3) | Total ($) | ||||||||
C. G. Kum | ||||||||||||
By FCB Bancorp for “Cause” or early voluntary retirement | $ | 0 | N/A | $ | 0 | $ | 0 | |||||
Retirement upon normal retirement age (annual benefit) | $ | 160,471 | N/A | $ | 0 | $ | 160,471 | |||||
Early Involuntary Termination (lump sum) | $ | 206,952 | N/A | $ | 0 | $ | 206,952 | |||||
Change in Control (lump sum) (4) | $ | 1,488,723 | N/A | $ | 219,300 | $ | 1,708,023 | |||||
Death | N/A | $ | 1,500,000 | $ | 0 | $ | 1,500,000 | |||||
Disability (annual benefit) | $ | 109,273 | $ | 0 | $ | 109,273 | ||||||
Thomas E. Anthony | ||||||||||||
By FCB Bancorp for “Cause” or early voluntary retirement | $ | 0 | N/A | $ | 0 | $ | 0 | |||||
Retirement upon normal retirement age (annual benefit) | $ | 84,667 | N/A | $ | 0 | $ | 84,667 | |||||
Early Involuntary Termination (lump sum) | $ | 183,646 | N/A | $ | 0 | $ | 183,646 | |||||
Change in Control (lump sum) (4) | $ | 618,071 | N/A | $ | 109,650 | $ | 727,721 | |||||
Death | N/A | $ | 1,050,000 | $ | 0 | $ | 1,050,000 | |||||
Disability (annual benefit) | $ | 68,842 | $ | 0 | $ | 68,842 | ||||||
Romolo Santarosa | ||||||||||||
By FCB Bancorp for “Cause” or early voluntary retirement | $ | 0 | N/A | $ | 0 | $ | 0 | |||||
Retirement upon normal retirement age (annual benefit) | $ | 85,000 | N/A | $ | 0 | $ | 85,000 | |||||
Early Involuntary Termination (lump sum) | $ | 17,778 | N/A | $ | 0 | $ | 17,778 | |||||
Change in Control (lump sum) (4) | $ | 792,660 | N/A | $ | 58,850 | $ | 851,510 | |||||
Death (lump sum) | N/A | $ | 1,250,000 | $ | 0 | $ | 1,250,000 | |||||
Disability (annual benefit) | $ | 85,000 | N/A | $ | 0 | $ | 85,000 |
(1) | Annual normal retirement benefits are paid to the executive in 12 equal monthly installments commencing with the month following the executive’s normal retirement date, paying the annual benefit to the executive for a period of years equal to the number of years that the executive is employed by FCB Bancorp between January 1, 2003 and the executive’s normal retirement date, not to exceed a maximum of 17 years (C. G. Kum), 15 years (Romolo Santarosa) or 11 years (Thomas Anthony). |
(2) | Consists of aggregate benefit amounts under split-dollar life insurance plans. |
(3) | Represents the aggregate value of stock options that vest and become exercisable immediately upon each of the triggering events listed as if such events took place on December 31, 2006, determined by the aggregate difference between the stock price as of December 31, 2006 and the strike prices of the underlying options. |
(4) | A “change of control” is defined under the salary continuation agreements as the transfer of shares of FCB Bancorp’s voting common stock such that one entity or one person acquires (or is deemed to acquire under Section 318 of the Internal Revenue Code of 1986) more than 75% of FCB Bancorp’s outstanding voting common stock. Note that these change-in-control provisions were waived by the FCB Bancorp named executive officers with respect to the proposed mergers. |
89
Table of Contents
Compensation of Directors
The following table sets forth information concerning the compensation paid by FCB Bancorp during the 2006 fiscal year to each of its directors:
Director Compensation for 2006
Name(1) | Fees Earned or ($) | Option Awards ($) (2) | All Other Compensation ($) (3) | Total ($) | ||||||||
Richard D. Aldridge | $ | 24,000 | $ | 8,166 | $ | 14,934 | $ | 47,100 | ||||
John W. Birchfield | $ | 36,000 | $ | 8,166 | $ | 4,175 | $ | 48,341 | ||||
Tenisha M. Fitzgerald | $ | 24,000 | $ | 8,166 | $ | 10,740 | $ | 42,906 | ||||
Syble R. Roberts | $ | 24,000 | $ | 8,166 | $ | 3,648 | $ | 35,814 | ||||
Thomas Tignino | $ | 24,000 | $ | 0 | $ | 7,862 | $ | 31,862 |
(1) | C. G. Kum did not receive additional compensation for his role as a director. For information relating to Mr. Kum’s compensation as an executive officer, see the FCB Bancorp Summary Compensation Table above. |
(2) | The amounts in this column represent the 2006 compensation cost of option awards granted in and prior to 2006, except that these amount do not include any estimate of forfeitures. The grant date fair value of option awards granted was determined in accordance with SFAS 123R and is recognized as compensation cost over the requisite service period. The FCB Bancorp’s 2005 Stock Option Plan is described in “— Employment Arrangements and Other Factors Affecting 2006 Compensation — 2005 Stock Option Plan.” Furthermore, the amount recognized for these awards was calculated based on the Black-Scholes-Merton formula using the assumptions described in Note 1 to FCB Bancorp’s audited consolidated financial statements for the years ended December 31, 2003 through 2005 and Note 2 of FCB Bancorp’s unaudited financial statements for the three and nine months ended on September 30, 2006 included in this document. These notes also describe the determination of fair value and compensation cost recognized for these option awards. In particular, an estimate of the number of awards that ultimately will be earned is made at the grant date. Those estimates may be revised each period. Each of Richard Aldridge, John Birchfield, Syble Roberts and Tenisha Fitzgerald received the following number of options at the following grant date fair values, calculated in accordance with SFAS 123R: 2003: 2,500 options at grant date fair value of $1.77; 2004: 2,500 options at grant date fair value of $4.24; 2005: 2,500 options at grant date fair value of $4.92; and 2006: 2,000 options at grant date fair value of $4.49. At the end of the last fiscal year, each of directors Aldridge, Birchfield, Roberts and Fitzgerald had 9,500 options outstanding. |
(3) | The amounts in this column reflect 2006 director medical reimbursements and the economic value attributed to directors Aldridge, Birchfield and Fitzgerald of the life insurance benefit to such directors in 2006 with respect to life insurance policies owned by FCB Bancorp. The premiums paid by FCB Bancorp with respect to single premium split-dollar life insurance policies for the benefit of FCB Bancorp and Richard Aldridge, John Birchfield and Tenisha Fitzgerald in 2006 are not included in this column because FCB Bancorp owns such insurance policies and is therefore entitled to the cash value of the policies. In 2006, FCB Bancorp paid aggregate premiums amounting to $990,000 for these policies. The details of the arrangements with respect to these insurance policies are described below. |
Directors of FCB Bancorp were paid for attendance at board and committee meetings at the rate of $2,000 per month. In addition, the Chairman of the Board received an additional $1,000 each month. Additionally, directors were reimbursed for up to $15,000 in eligible medical expenses. C. G. Kum did not receive any additional compensation for his role as a director.
In March 2006, directors Richard Aldridge, John W. Birchfield, Syble R. Roberts and Tenisha Fitzgerald each received 2,000 stock options at an exercise price of $21.00 per share. The options vest in one-third annual increments commencing after the third anniversary of the grant date and expire in March 2014. Additionally, in
90
Table of Contents
July 2006, FCB Bancorp entered into split-dollar life insurance policies with Richard Aldridge, John Birchfield and Tenisha Fitzgerald in connection with which FCB Bancorp purchased life insurance policies for such directors. Pursuant to the terms of those agreements, FCB Bancorp owns the life insurance policies, is entitled to the cash value of the policies and is responsible for paying the associated premiums. Under the plan, a beneficiary designated by the director is entitled to receive $250,000 of the total proceeds upon the director’s death, with FCB Bancorp entitled to the balance. In 2006, FCB Bancorp paid aggregate premiums amounting to $990,000 for these policies.
Compensation Committee Interlocks and Insider Participation
Prior to the Mergers, the personnel committee of the FCB Bancorp board of directors was responsible for reviewing and approving FCB Bancorp’s overall compensation and benefit programs, and for administering the compensation of FCB Bancorp’s executive and senior officers. The members of FCB Bancorp’s personnel committee prior to the Mergers were: Richard D. Aldridge, Tenisha M. Fitzgerald and C. G. Kum. Mr. Kum served as FCB Bancorp’s president, chief executive officer and a member of FCB Bancorp’s board of directors. Mr. Kum did not participate in committee deliberations or voting regarding his compensation.
During the last fiscal year, none of FCB Bancorp’s executive officers served on the board of directors or compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on FCB Bancorp’s personnel committee or FCB Bancorp’s board of directors.
Compensation Committee Report
As a result of the Mergers, the personnel committee of the FCB Bancorp board of directors no longer exists. As successor to FCB Bancorp, the compensation committee of First California has reviewed and discussed with former officers and management of FCB Bancorp who are now officers and management of First California the Compensation Discussion and Analysis set forth above. In reliance on this review and discussion, the compensation committee of First California has recommended to the board of directors of First California (which is filing this Annual Report on Form 10-K on behalf of FCB Bancorp) that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
This report of the compensation committee of the First California board of directors is included herein at the direction of its members:
Donald E. Benson
Richard D. Aldridge
John W. Birchfield
W. Douglas Hile
Antoinette Hubenette
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
As a result of the Mergers, FCB has ceased to exist. Accordingly, there are no longer any voting securities of FCB Bancorp.
91
Table of Contents
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth as of December 31, 2006 information regarding outstanding options under all of FCB Bancorp’s equity compensation plans and the number of shares available for future option grants under equity compensation plans currently in effect. All equity plans of FCB Bancorp, in addition to those of National Mercantile, and all outstanding option awards were assumed by First California in the Mergers.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||
(a) | (b) | (c) | |||||
Plans approved by shareholders: 2005 Stock Option Plan | 153,900 | $ | 18.51 | 46,100 | |||
Plans not approved by shareholders: None | N/A | N/A | N/A | ||||
Total | 153,900 | $ | 18.51 | 46,100 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
There are no existing or proposed material transactions between us and any of our directors, executive officers or beneficial owners of 5% or more of our common stock, or the immediate family or associates of any of the foregoing persons, except as indicated below.
Some of our directors and executive officers and their immediate families, as well as the companies with which they are associated, are customers of, and have had banking transactions with, us in the ordinary course of our business, and we expect to have banking transactions with such persons in the future. In our opinion, all loans and commitments to lend made in 2005 included in such transactions were made in compliance with applicable laws, on substantially the same terms, including interest rates and collateral, as those prevailing for comparable contemporaneous transactions with other persons of similar creditworthiness, and did not involve more than a normal risk of collectability or present other unfavorable features. As of December 31, 2006, there were no outstanding loans or commitments to lend to any of our directors, officers or principal shareholders, or their associates.
Tenisha M. Fitzgerald, who serves as a director of First California Bank and FCB Bancorp, is the daughter of Richard D. Aldridge. For her service as a director of First California Bank, Ms. Fitzgerald received aggregate fees of $24,000 during 2006.
Richard D. Aldridge, who serves as the Vice Chairman of First California Bank and FCB Bancorp, is the father of Tenisha M. Fitzgerald. For his service as a director of First California Bank, Mr. Aldridge received aggregate fees of $24,000 during 2006.
John W. Birchfield, who serves as the Chairman of First California Bank and FCB Bancorp, is the son of James O. Birchfield. For his service as a director of First California Bank, John W. Birchfield received aggregate fees of $36,000 during 2006.
Diane Tignino, Vice President — Loan Officer of First California Bank, is the spouse of Thomas Tignino. For her service as a non-executive officer of First California Bank, Diane Tignino received total compensation of $84,000 during 2006.
92
Table of Contents
Our Articles of Incorporation and Bylaws provide, among other things, for the indemnification of our directors, officers and agents, and authorize us to pay expenses incurred by, or to satisfy a judgment or fine rendered or levied against, such agents in connection with any personal legal liability incurred by that individual while acting for us within the scope of his or her employment. The provisions of our Articles of Incorporation and Bylaws are subject to certain limitations imposed under California and federal law. For example, under California law, directors remain personally liable for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law or for any transaction from which the director derived an improper personal benefit. Under the Federal Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, indemnification payments may be prohibited by the regulatory authorities if FCB Bancorp is insolvent, is in conservatorship or receivership, is in troubled condition, or has a CAMELS rating of 4 or 5, and if the regulatory authority believes that the party who is to receive the indemnification payment has violated banking laws or regulations, breached a fiduciary duty, or is otherwise responsible for substantial loss to FCB Bancorp. It is FCB Bancorp’s policy that our directors and executive officers shall be indemnified to the maximum extent permitted under applicable law and FCB Bancorp’s Articles of Incorporation and Bylaws. FCB Bancorp has purchased liability insurance covering all of its directors and officers; however, no assurance can be given that the proceeds of the policy would be adequate to protect FCB Bancorp in all circumstances.
Item 14. | Principal Accounting Fees and Services |
Audit Fees
Audit fees include fees for the annual audit of the Company’s consolidated financial statements, review of interim financial statements included in the Company’s quarterly reports on Form 10-Q. The aggregate audit fees billed to the Company by Moss Adams, or Moss, for the years ended December 31, 2006 and 2005 totaled approximately $126,000 and $113,00, respectively.
Audit-Related Fees
Audit-related fees billed to the Company by Moss consisted primarily of certain due diligence services related to acquisition and analysis conducted by Moss in connection with such due diligence, review of registration statements filed with the Securities and Exchange Commission, and the issuance of consents and comfort letters. The aggregate audit-related fees billed to the Company by Moss for the years ended December 31, 2006 and 2005 totaled approximately $80,000 and $121,118, respectively.
Tax Fees
Tax fees include corporate tax compliance, planning and advisory services. The aggregate tax fees billed to the Company by Moss for the years ended December 31, 2006 and 2005 totaled approximately $18,250 and $18,600, respectively. Also, in 2005, in addition to the fees paid to Moss, the Company paid fees to Grant Thornton LLP (“Grant”) for tax services related to corporate tax compliance. The aggregate tax fees billed to the Company by Grant for the year ended December 31, 2005 totaled approximately $19,710.
All Other Fees
In addition to the fees described above, we paid to Moss Adams LLP fees of $1,400 and $22,535 during 2006 and 2005, respectively. The fees paid in 2006 related primarily to work performed in connection with SFAS 123R consulting and the fees paid in 2005 related primarily to work performed in connection with customer profitability and customer data analysis.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor
Our audit committee’s policy is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally effective for up to one year and any pre-approval is detailed as to particular service or
93
Table of Contents
category of services and is generally subject to a specific budget. Our audit committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. Any exercise of such pre-approval authority by the Chairman is required to be reported to the audit committee at the committee’s next scheduled meeting. The independent auditors and management are required to periodically report to the full audit committee regarding the extent of services provided by the independent auditors, and the fees for the services performed to date. All services performed by Moss Adams LLP, including audit, audit-related, tax and other services, were approved in advance in accordance with the audit committee’s policy.
94
Table of Contents
Item 15. | Exhibits, Financial Statement Schedules |
(a)(1) The following consolidated financial statements of FCB Bancorp are filed as part of this Annual Report.
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets as of December 31, 2006 and 2005 | ||
Consolidated Income Statements for each of the three years in the period ended December 31, 2006 | ||
Consolidated Statements of Stockholders’ Equity for each of the three years ended in the period ended December 31, 2006 | ||
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2006 | ||
Notes to Consolidated Financial Statements |
(a)(2) Financial Statement Schedules
Financial statement schedules other than those listed above have been omitted because they are either not applicable or the information is otherwise included.
(a)(3) Exhibits. The following is a list of exhibits filed as a part of this Annual Report.
Exhibit Number | Exhibit Title | |
2.1 | Plan of Reorganization and Merger Agreement, dated May 19, 2005, by and between First California Bank, FCB Merger Corp. and FCB Bancorp. (3) | |
2.2 | Agreement and Plan of Merger, dated as of June 15, 2006, by and among National Mercantile Bancorp, FCB Bancorp and First California Financial Group, Inc. (5) | |
3.1 | Articles of Incorporation, as amended, of FCB Bancorp (2) | |
3.2 | Bylaws of FCB Bancorp (2) | |
4.1 | Indenture governing FCB Bancorp’s Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due September 2035, dated September 30, 2005, between FCB Bancorp, as Issuer, and Wilmington Trust Company, as Trustee (4) | |
4.2 | Amended and Restated Declaration of Trust, dated September 30, 2005, by and among Wilmington Trust Company, as Delaware Trustee and as Institutional Trustee, FCB Bancorp, as Sponsor, and C. G. Kum and Romolo Santarosa, as Administrators (4) | |
10.1 | FCB Bancorp 2005 Stock Option Plan (2) | |
10.2 | Form of FCB Bancorp Stock Option Agreement (2) | |
10.3 | Form of FCB Bancorp Indemnifcation Agreement (2) | |
10.4 | Salary Continuation Agreement, dated March 27, 2003, with C. G. Kum (2) | |
10.5 | Split Dollar Agreement, dated March 27, 2003, with C. G. Kum (2) | |
10.6 | Salary Continuation Agreement, dated March 27, 2003, with Thomas E. Anthony (2) | |
10.7 | Split Dollar Agreement, dated March 27, 2003, with Thomas E. Anthony (2) | |
10.8 | Agreement and Plan of Reorganization, by and among First California Bancorp, SCB Merger Corp., First California Bank, South Coast Bancorp, Inc. and South Coast Commercial Bank, dated February 2, 2005 (2) |
95
Table of Contents
Exhibit Number | Exhibit Title | |
10.9 | Form of Common Stock Subscription Agreement (2) | |
10.10 | Private Placement Agency Agreement, dated May 26, 2005, among FCB Bancorp, First California Bank and Keefe, Bruyette & Woods, Inc. (2) | |
10.11 | Form of Registration Rights Agreement (2) | |
10.12 | Guarantee Agreement, dated September 30, 2005, by and between FCB Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee (4) | |
21.1 | List of Subsidiaries of Registrant (1) | |
23.1 | Consent of Independent Registered Public Accounting Firm (1) | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1) | |
32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1) |
(1) | Filed herewith. |
(2) | Incorporated herein by reference to the Registrant’s Pre-Effective Amendment No. 2 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on September 1, 2005. |
(3) | Filed as an exhibit to the Proxy Statement/Prospectus included in the Registrant’s Pre-Effective Amendment No. 3 to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on September 8, 2005 and herein incorporated by this reference. |
(4) | Filed as an exhibit to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 27, 2005 and herein incorporated herein by this reference. |
(5) | Filed as Appendix A to the Joint Proxy Statement-Prospectus filed with the Securities and Exchange Commission on February 21, 2007 by First California Financial Group, Inc. and herein incorporated herein by this reference. |
96
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST CALIFORNIA FINANCIAL GROUP, INC. | ||||
(as successor by merger to FCB Bancorp) | ||||
Date: April 2, 2007 | By: | /S/ C. G. KUM | ||
C. G. Kum | ||||
Director, President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints C. G. Kum and Romolo Santarosa, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated:
Signature | Title | Date | ||
/S/ C. G. KUM C. G. Kum | Director, President and Chief Executive Officer (Principal Executive Officer) | April 2, 2007 | ||
/S/ ROMOLO SANTAROSA Romolo Santarosa | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | April 2, 2007 | ||
/S/ RICHARD D. ALDRIDGE Richard D. Aldridge | Director | April 2, 2007 | ||
/S/ DONALD E. BENSON Donald E. Benson | Director | April 2, 2007 | ||
/S/ JOHN W. BIRCHFIELD John W. Birchfield | Director | April 2, 2007 | ||
/S/ JOSEPH N. COHEN Joseph N. Cohen | Director | April 2, 2007 | ||
/S/ ROBERT E. GIPSON Robert E. Gipson | Chairman of the Board of Directors | April 2, 2007 |
97
Table of Contents
Signature | Title | Date | ||
/S/ W. DOUGLAS HILE W. Douglas Hile | Director | April 2, 2007 | ||
/S/ ANTOINETTE HUBENETTE, M.D. Antoinette Hubenette, M.D. | Director | April 2, 2007 | ||
/S/ SYBLE R. ROBERTS Syble R. Roberts | Director | April 2, 2007 | ||
/S/ THOMAS TIGNINO Thomas Tignino | Director | April 2, 2007 |
98