<PAGE> 1
As filed pursuant to Rule 424(b)(1)
under the Securities Act of 1933
Registration No. 333-68207
PROSPECTUS DATED FEBRUARY 26, 1999
[FIRST COASTAL LOGO] 300,000 units, each consisting
of:
<TABLE>
<S> <C>
one share of and one
FIRST COASTAL BANCSHARES FIRST COASTAL CAPITAL TRUST
Common Stock 11 7/8 % Cumulative Preferred Security
</TABLE>
CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING
ON PAGE 11 IN THE
PROSPECTUS.
THESE SECURITIES ARE NOT
SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL
DEPOSIT INSURANCE
CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES
AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED
OR DISAPPROVED THESE
SECURITIES OR PASSED
UPON THE ADEQUACY OR
ACCURACY OF THIS
PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL
OFFENSE.
THESE ARE SPECULATIVE
SECURITIES
WE ARE --
- - FIRST COASTAL BANCSHARES, a bank holding company servicing communities in
western Los Angeles County from the South Bay to the San Fernando Valley.
FIRST COASTAL CAPITAL TRUST --
- - was formed as our subsidiary for the sole purpose of issuing the preferred
securities and will hold our junior subordinated debentures as its only
asset.
THE PREFERRED SECURITIES --
- - pay quarterly distributions at the annual rate of $2.375 per security, which
may be deferred by us for up to 20 consecutive quarters, and
- - may be redeemed by us after December 31, 2001 for any reason, and before then
for the reasons described in this prospectus.
The common stock and the preferred securities must be purchased together
as a unit in this offering. Our common stock trades on the OTC Bulletin Board
under the symbol "FCLA". There is currently no public market for either the
units or the preferred securities. We intend to apply to have the units included
on the OTC Bulletin Board under the symbol "FCLAU".
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
UNDERWRITING NET PROCEEDS TO NET PROCEEDS TO
COMMISSION FOR FIRST COASTAL FIRST COASTAL
PRICE TO PUBLIC THE COMMON STOCK BANCSHARES CAPITAL TRUST
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per unit...................... $26.50 $.325 $6.175 $20.00
- -------------------------------------------------------------------------------------------------------------------
Total......................... $7,950,000 $97,500 $1,852,500 $6,000,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Since the trust will use the proceeds from the sale of the preferred
securities to purchase our junior subordinated debentures, we have also agreed
to pay an underwriting commission of $1.3975 per preferred security, or a total
of $419,250 for the sale of the preferred securities. The underwriters may
purchase an additional 30,000 units at the public offering price within 45 days
from the date of this prospectus to cover over-allotments.
PEACOCK, HISLOP, STALEY & GIVEN, INC.
WEDBUSH MORGAN SECURITIES
<PAGE> 2
LOS ANGELES COUNTY
LOGO
YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE
ONLY AS OF THE DATE OF THIS PROSPECTUS. AFTER THE DATE OF THIS PROSPECTUS, OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY CHANGE
AND THE INFORMATION CONTAINED IN THIS PROSPECTUS MAY NO LONGER BE ACCURATE.
NEITHER WE NOR THE UNDERWRITERS ARE OFFERING TO SELL OR SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION OR TO ANY PERSON WHERE THE OFFER OR
SOLICITATION IS PROHIBITED.
THE UNDERWRITERS REQUIRE EACH PURCHASER OF UNITS TO MEET ONE OF THE FOLLOWING
MINIMUM SUITABILITY STANDARDS: EITHER (1) THE PURCHASER MUST HAVE A NET WORTH OF
AT LEAST $100,000, EXCLUDING HOME, FURNISHINGS AND AUTOMOBILES; OR (2) THE
PURCHASER MUST HAVE A MINIMUM GROSS INCOME FOR THE LATEST TAX YEAR OF $50,000 OR
MORE, OR JOINT INCOME WITH THE PURCHASER'S SPOUSE OF $100,000 OR MORE.
2
<PAGE> 3
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS
SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE
INVESTING IN THE SECURITIES. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
ESPECIALLY THE RISKS OF INVESTING IN THE SECURITIES DISCUSSED UNDER "RISK
FACTORS".
FIRST COASTAL BANCSHARES
We are First Coastal Bancshares, a growing bank holding company incorporated
under the laws of the State of California. We are the parent of First Coastal
Bank, National Association, and we conduct substantially all of our business
through the bank. Since August 1996, the new management team led by Don M.
Griffith has turned a net loss of $124,000 for the year ended December 31, 1996
to a net income of $241,000 for the first nine months of 1998. In addition, we
have more than tripled our total assets from $25.9 million at December 31, 1996
to $81.1 million at September 30, 1998, with only about 40% of the increase
attributable to our acquisition of Marina Bank in June 1997.
On August 3, 1998, we entered into an agreement to acquire American Independent
Bank, N.A., for cash. AIB is a community bank with two branches, one in Gardena,
California, and one in Burbank, California. At September 30, 1998, AIB had total
assets of $37.6 million. We will use part of the proceeds from this offering to
fund this acquisition, which we believe will help fuel our growth by increasing
our branch offices to four and our assets on a pro forma combined basis to
$124.4 million.
THE BANK
Our subsidiary, First Coastal Bank, National Association, is a national bank
with branches in the communities of El Segundo and Marina Del Rey, California.
The mission of the bank is to offer customized, pragmatic and flexible financial
services to our customers and to be a financial institution known for its
quality, soundness and integrity.
OUR STRATEGY. Our business strategy is to:
- Cater to small businesses, executives and professionals by offering quality,
personalized financial services which have become less available due to
consolidation in the banking industry.
- Build our deposit base and loan portfolio through relationship banking that
is attentive to the service needs of our customers.
- Selectively acquire or merge with other banks to decrease costs as a
percentage of revenues and expand our geographic presence, initially in the
South Bay, West Los Angeles and San Fernando Valley areas of Southern
California.
INTERNAL GROWTH. Our internal growth strategy is primarily focused on "total
relationship banking", which means developing a personalized package of
financial services and providing superior service to customers with high
transactional needs. We operate in the large, growing and diverse Los Angeles
County market, which in 1998 had over $130 billion in total banking deposits and
a population of over 9.5 million. According to the FDIC, the four largest
financial institutions in Los Angeles County hold more than
3
<PAGE> 4
half of all deposits in the region. Although our current market share is less
than 0.1%, a very small shift in market share represents large potential growth.
Our objective is to retain the most effective business development team of any
community bank in Southern California and to support them with quality financial
products and exceptional customer service. We believe that our internal growth
strategy sets us apart from other community banks in the region and, if
successfully executed, will allow us to grow faster than the overall market.
OUR EXPERIENCED MANAGEMENT TEAM. Our management team, particularly our Chairman
and Chief Executive Officer, Don M. Griffith, has extensive banking experience
in the Southern California banking market. Mr. Griffith is a third generation
resident of Southern California and was formerly Executive Vice President and
Chief Financial Officer of First Interstate Bancorp. Mr. Griffith has focused on
community banking in our market area since 1993 when he founded Peninsula
National Bank to purchase a failed bank in the Palos Verdes area of Southern
California. Mr. Griffith subsequently sold his interest in Peninsula National
Bank and formed California Community LLC for the purpose of acquiring a
controlling interest in First Coastal. Our three executive officers, Mr.
Griffith, Deborah A. Marsten and James F. Gardunio, have a combined 67 years of
banking and other relevant experience in the Southern California market.
OUR STRONG RECENT DEPOSIT GROWTH AND OUR FINANCIAL SOUNDNESS. We are focused on
building core deposits and have achieved strong internal growth in the last
twelve months. Our demand deposits increased approximately 64% from $13.1
million at September 30, 1997 to $21.4 million at September 30, 1998, and our
money market accounts grew 93%, from $4.1 million to $7.9 million, over the same
period. Our bank is currently considered "well capitalized" under applicable
regulatory standards.
THE TRUST AND THE PREFERRED SECURITIES
First Coastal Capital Trust is a statutory business trust created under the laws
of the state of Delaware. The trust is our subsidiary because we hold all of its
common securities. Investors in this offering will hold all of the trust's
preferred securities.
By creating the trust to issue the preferred securities, we realize two main
benefits: (1) we can, within limits, deduct from our taxable income the payments
made to you and (2) we can increase our "Tier 1" capital, which is a key
indicator of financial strength used by banking regulators. These benefits
provide us with a cost-effective means of raising capital for regulatory
purposes.
We will issue approximately $6.2 million of our junior subordinated debentures,
which mature on December 31, 2028, to the trust in exchange for the cash
proceeds of the sale of the preferred securities and the common securities. The
junior subordinated debentures will be the sole asset of the trust, and the
interest rate on the junior subordinated debentures will be the same as the rate
of distributions paid to investors on the preferred securities. As a result, the
payment of distributions to the holders of the preferred securities are
dependent on our payments on the junior subordinated debentures.
We guarantee the payments of distributions on the preferred securities as
follows. Under the guarantee agreement, we are required to pay accrued and
unpaid distributions on the preferred securities, but only to the extent that
the trust has the funds to pay them. If the trust does not have sufficient funds
because we have not paid interest or principal on the
4
<PAGE> 5
junior subordinated debentures, the guarantee agreement does not apply. Instead,
holders of preferred securities may begin a legal proceeding directly against us
to enforce our obligations on the junior subordinated debentures. If we then
make payments on our junior subordinated debentures and the trust has funds to
pay distributions but fails to do so, the guarantee agreement obligates us to
make the trust pay the distributions.
5
<PAGE> 6
THE OFFERING
SECURITIES OFFERED
Units........................ 300,000 units, each consisting of one share of
common stock and one preferred security. The
units will be represented by two separate
certificates, one representing shares of common
stock and one representing preferred securities.
Separation of Units.......... The common stock and the preferred securities
will trade together as a unit and cannot be
separately traded until one year after the
closing of this offering or the earlier
occurrence of other events. See "Description of
the Units."
Rights of Holders............ Holders of units will be holders of both the
common stock and the preferred securities and
will have the same rights, preferences and
privileges as a holder of each security.
Allocation of Offering
Price........................ The public offering price of each unit will be
allocated to the components of each unit as
follows: $20.00 for the preferred security and
$6.50 to the share of common stock.
COMMON STOCK
Voting Rights................ Holders of common stock will have one vote per
share.
No Planned Common Stock
Dividends.................. The holders of common stock will share ratably
on a per share basis in all dividends and other
distributions declared by our board of
directors, but we do not anticipate paying
dividends on the common stock in the foreseeable
future.
Ownership Restrictions....... You may not acquire more than 9.9% of our common
stock without receiving the prior approval of
the Federal Reserve. See "Supervision and
Regulation."
PREFERRED SECURITIES
Quarterly Distributions...... Each preferred security will pay distributions
of $2.375 per year, or 11 7/8% of the initial
offering price of the preferred security.
Distributions will accrue from the date of
issuance of the preferred securities and will be
cumulative, which means that any unpaid
distributions will carry over into subsequent
quarters. Distributions will be payable
quarterly on the last day of March, June,
September and December of each year, beginning
March 31, 1999. See "Description of the
Preferred Securities -- Distributions."
6
<PAGE> 7
Deferral periods............. We may defer payments of interest on the junior
subordinated debentures to the trust for up to
20 consecutive quarters. If we defer interest
payments, the trust will not have funds to pay
distributions and, as a result, the trust will
defer distributions to holders of the preferred
securities.
For more information, see "Description of
Preferred
Securities -- Distributions -- Deferral
periods."
Maturity..................... The junior subordinated debentures will mature
on December 31, 2028, at which date the trust
must redeem the preferred securities at a price
equal to $20.00 per preferred security plus all
accrued and unpaid distributions.
Redemption................... Subject to Federal Reserve approval, we may
cause the trust to redeem the preferred
securities:
(1) On or after December 31, 2001, in whole or
in part, at the following redemption prices
expressed as a percentage of the initial
offering price of $20.00 per preferred
security, plus accrued and unpaid dividends:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
December 31, 2001 through 108%
December 30, 2002
December 31, 2002 through 105%
December 30, 2003
December 31, 2003 through 102%
December 30, 2004
December 31, 2004 and 100%
thereafter
</TABLE>
and,
(2) At any time, in whole but not in part, upon
the occurrence of certain events described
under "Risk Factors -- Risk Factors Relating
to the Preferred Securities -- We May Redeem
the Preferred Securities Upon the Occurrence
of Certain Events." In this case, the
redemption price will equal $20.00 per
preferred security plus all accrued and
unpaid dividends to the redemption date.
For more information, see "Description of the
Preferred Securities -- Redemption."
Distribution of Junior
Subordinated Debentures.... With the prior approval of the Federal Reserve,
if then required, we can dissolve the trust at
any time. If we do this, the trust will redeem
the preferred securities by distributing the
junior subordinated debentures to you.
7
<PAGE> 8
See "Description of the Preferred Securities --
Exchange of Preferred Securities for Junior
Subordinated Debentures."
Ranking...................... Our obligations under the guarantee, the junior
subordinated debentures and other documents
described in this prospectus are unsecured and
rank subordinate and junior in right of payment
to all current and future senior and
subordinated debt, the amount of which is not
limited. See "Description of Junior Subordinated
Debentures -- Subordination" and "Description of
Guarantee and Expense Agreement -- General."
The preferred securities will rank on a parity
with the common securities of the trust held by
us. Except in cases of default, distributions
will be made simultaneously and pro rata on the
preferred securities and common securities. See
"Description of the Preferred
Securities -- Priority Over Common Securities."
Generally No Voting Rights... The holders of the preferred securities will
generally have no voting rights, with limited
exceptions. See "Description of the Preferred
Securities -- Voting Rights; Amendment of the
Trust Agreement."
Guarantee.................... Through the combined operation of the trust
agreement, the indenture, the guarantee
agreement and the expense agreement, we
guarantee the trust's obligations under the
preferred securities on a junior basis. See
"Relationship Among Preferred Securities, Junior
Subordinated Debentures, Guarantee and Expense
Agreement."
GENERAL
Use of proceeds.............. We intend to use the net proceeds from this
offering primarily to help finance the
acquisition of American Independent Bank. See
"Use of Proceeds." We expect the acquisition to
close immediately following this offering. See
"The Proposed Acquisition of American
Independent Bank."
8
<PAGE> 9
SUMMARY HISTORICAL FINANCIAL INFORMATION OF
FIRST COASTAL BANCSHARES AND SUBSIDIARY
The selected financial information below for the nine months ended September 30,
1998 and 1997 is derived from our unaudited financial statements which we
believe reflect all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation. The selected financial information below for
the years ended December 31, 1997, 1996 and 1995 is derived from our audited
financial statements. This information is only a summary and should be read in
conjunction with our financial statements and related notes presented elsewhere
in this prospectus.
For purposes of calculating the ratio of earnings to fixed charges and preferred
stock dividends, earnings consist of income before income taxes, fixed charges
and preferred stock dividends. Fixed charges consist of interest expense and
one-third of rentals. In addition, tangible book value is equal to shareholders'
equity reduced by the liquidation preference of the preferred stock and
goodwill, tangible earnings is equal to net income plus goodwill amortization
and tangible earnings per share is equal to tangible earnings less the preferred
stock dividends divided by the average common shares outstanding.
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS AT OR FOR THE YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income........................................... $ 3,954 $ 2,159 $ 3,172 $ 2,021 $ 1,806
Interest Expense.......................................... 1,651 584 887 476 412
-------- -------- -------- -------- --------
Net Interest Income....................................... 2,303 1,575 2,285 1,545 1,394
Provision for Loan Losses................................. 10 25 25 39 8
-------- -------- -------- -------- --------
Net Interest Income after Provision for Loan Losses....... 2,293 1,550 2,260 1,506 1,386
Noninterest Income........................................ 416 131 245 264 283
Noninterest Expense....................................... 2,223 1,648 2,350 1,893 1,865
-------- -------- -------- -------- --------
Income before Income Taxes................................ 486 33 155 (123) (196)
Income Taxes.............................................. 245 27 95 1 1
-------- -------- -------- -------- --------
Net Income................................................ $ 241 $ 6 $ 60 $ (124) $ (197)
======== ======== ======== ======== ========
PER SHARE DATA
Net Income -- Basic....................................... $ 0.04 $ (0.12) $ (0.15) $ (0.31) $ (0.90)
Book Value................................................ 4.79 4.40 4.65 4.84 5.41
Cash Dividends -- Preferred Stock......................... 214 84 155 N/A N/A
Actual Number of Shares Outstanding....................... 664,551 685,196 677,052 585,196 301,196
Weighted Average Number of Shares Outstanding............. 671,284 620,361 638,990 399,383 218,969
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
Including Interest on Deposits............................ 1.14x 0.93x 1.00x 0.78x 0.55x
Excluding Interest on Deposits............................ 1.76x 0.64x 1.00x (0.66x) (6.00x)
BALANCE SHEET DATA -- AT PERIOD END
Total Assets.............................................. $ 81,120 $ 48,543 $ 56,129 $ 25,947 $ 24,230
Total Loans............................................... 56,268 35,605 39,992 16,321 14,997
Allowance for Loan Losses (ALLL).......................... 562 721 615 382 333
Investment Securities..................................... 6,077 6,184 10,183 6,934 3,031
Other Real Estate Owned................................... 218 -- 200 51 465
Total Deposits............................................ 72,921 42,287 45,265 22,948 22,486
Total Shareholders' Equity................................ 6,045 5,873 6,010 2,838 1,629
OPERATING RATIOS AND OTHER SELECTED DATA
Return on Average Assets.................................. 0.45% 0.02% 0.15% (0.49)% (0.83)%
Return on Average Equity.................................. 5.42% 0.20% 1.33% (6.20)% (15.63)%
Operating Efficiency Ratio................................ 82.06% 96.60% 92.89% 104.64% 111.21%
Net Interest Yield........................................ 4.75% 6.49% 6.44% 6.75% 6.62%
Dividend Payout Ratio:.................................... 88.80% 140.00% 163.16% 0 0
Average Equity to Average Assets:......................... 8.28% 11.02% 11.28% 7.87% 5.32%
SELECTED ASSET QUALITY RATIOS -- AT PERIOD END
Nonperforming Loans to Total Loans........................ 2.60% 4.26% 3.13% 6.55% 6.95%
Nonperforming Assets to Total Assets...................... 2.07% 3.12% 2.58% 4.32% 6.22%
ALLL as a Percentage of Nonperforming Loans............... 38.55% 47.56% 49.24% 35.73% 31.93%
ALLL as a Percentage of Total Loans....................... 1.00% 2.02% 1.54% 2.34% 2.22%
TANGIBLE BOOK VALUE AND EARNINGS
Tangible Book Value....................................... $ 1,383 $ 930 $ 1,195 $ 2,838 $ 1,629
Tangible Book Value Per Share............................. 2.08 1.36 1.77 4.85 5.41
Tangible Earnings......................................... 341 41 130 (124) (197)
Tangible Earnings Per Share............................... 0.19 (0.07) (0.04) (0.31) (0.90)
</TABLE>
9
<PAGE> 10
UNAUDITED SUMMARY PRO FORMA FINANCIAL INFORMATION
The following summary unaudited pro forma financial information as of September
30, 1998 combines our historical balance sheets with AIB's as if the acquisition
and offering had been effective on September 30, 1998 and our historical results
of operation with AIB's as if the acquisition and offering had been effective on
January 1, 1997, after giving effect to the purchase accounting adjustments. For
our complete pro forma financial information, see "Unaudited Pro Forma Financial
Information."
The unaudited pro forma combined financial information is intended for
informational purposes and is not necessarily indicative of either (1) the
future financial position or future results of operations of the combined
company, or (2) of the financial position or the results of operations of the
combined company that would have actually occurred had the acquisition been in
effect as of the date or for the periods presented. PLEASE BE ADVISED THAT THIS
INFORMATION DOES NOT TAKE INTO ACCOUNT ANTICIPATED COST SAVINGS RESULTING FROM
THE ACQUISITION OF AIB OR ADDITIONAL INTEREST EXPENSE RESULTING FROM THE
ISSUANCE OF THE PREFERRED SECURITIES. SEE "THE PROPOSED ACQUISITION OF AMERICAN
INDEPENDENT BANK." All dollar amounts, except per share amounts, are presented
in thousands.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------
<S> <C>
SUMMARY OF OPERATIONS
Net Interest Income....................................... $ 4,091
Provision for Loan Losses................................. 102
----------
Net Interest Income after Provision for Loan Losses....... 3,989
Noninterest Income........................................ 919
Noninterest Expense....................................... 4,359
----------
Income Before Income Taxes................................ 549
Income Taxes.............................................. 349
----------
Net Income................................................ $ 200
==========
Tangible Net Income....................................... $ 493
PER SHARE DATA
Net Income -- Basic and Diluted........................... $ 0.03
Book Value................................................ $ 5.11
Tangible Net Income....................................... $ 0.27
Tangible Book Value....................................... $ 0.45
Shares Outstanding........................................ 1,200,669
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
Including Interest on Deposits............................ 1.25x
Excluding Interest on Deposits............................ 3.73x
BALANCE SHEET DATA -- AT PERIOD END
Total Assets.............................................. $ 124,288
Total Loans............................................... 77,238
Allowance for Loan Losses................................. 759
Investment Securities..................................... 10,077
Goodwill.................................................. 5,593
Other Real Estate Owned................................... 299
Total Deposits............................................ 106,516
Total Shareholders' Equity................................ $ 8,244
</TABLE>
10
<PAGE> 11
RISK FACTORS
AN INVESTMENT IN THE UNITS INVOLVES A NUMBER OF RISKS, INCLUDING GENERAL MARKET
RISKS, FLUCTUATIONS IN INTEREST RATES, OPERATIONAL RISKS, LEGAL RISKS AND
REGULATORY RISKS. MANY OF THESE RISKS COULD BE SUBSTANTIAL AND ARE INHERENT IN
OUR BUSINESS. SET FORTH BELOW ARE THE RISKS WE BELIEVE ARE MATERIAL TO OUR
BUSINESS AND TO THE OFFERED SECURITIES. CAREFULLY CONSIDER THE FOLLOWING
INFORMATION, TOGETHER WITH THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE
DECIDING WHETHER A PURCHASE OF THE UNITS IS SUITABLE FOR YOU.
RISK FACTORS RELATING TO FIRST COASTAL
WE DO NOT HAVE A HISTORY OF SUSTAINED PROFITABILITY AND WE MAY NEVER ACHIEVE
SUSTAINED PROFITABILITY
We recorded net income of $18,000 for the fourth quarter of 1998 and $57,000 for
the corresponding quarter of 1997. For the year ended December 31, 1998, our net
income was $259,00 and for the year ended December 31, 1997, our net income was
$60,000. However, we experienced losses of $124,000 for the year ended December
31, 1996 and $197,000 for the year ended December 31, 1995. We believe these
losses were primarily due to unsatisfactory loan underwriting standards and high
overhead expenses under previous management. We have not yet reached the level
of profitability we think is appropriate, and we have not yet achieved sustained
profitability.
Our ability to achieve sustained profitability depends greatly on general market
conditions and our ability to continue to:
- control our level of problem loans,
- maintain the adequacy of our loan loss reserve,
- reduce our ratio of noninterest expenses to average earning assets and
- successfully execute our strategic plan, which focuses on internal loan
and deposit growth and making selective acquisitions.
We are working to achieve these goals, but we cannot guarantee that we will be
able to meet them. If we do not, we will be unlikely to achieve sustained
profitability.
THE BANK IS OUR ONLY OPERATING SUBSIDIARY, AND ITS ABILITY TO PAY DIVIDENDS TO
US IS LIMITED BY FEDERAL LAW
Substantially all of our assets and operations are held by or conducted through
the Bank. Therefore, our financial performance and ability to obtain funds for
cash requirements, including the payment of interest on the junior subordinated
debentures, depends largely on the amount of dividends which may be declared by
the bank. If we have insufficient funds to pay interest on the junior
subordinated debentures, we may declare a deferral period, and the trust will
not be able to pay distributions on the preferred securities.
The ability of the bank to pay dividends to us is governed by Federal law. Under
the relevant statute, the bank may only pay dividends from its net income, after
deducting losses and bad debts. Because the bank does not have positive retained
earnings, it may only pay dividends out of its current income each year. See
"Supervision and Regulation -- Dividend Regulation."
11
<PAGE> 12
THE BANK'S PROFITABILITY DEPENDS ON ACHIEVING ANTICIPATED OPERATING RESULTS, AND
A FAILURE TO ACHIEVE THESE RESULTS MAY LEAD TO NON-PAYMENT OF INTEREST AND
DISTRIBUTIONS
The bank has not historically earned sufficient income to enable it to pay
dividends to us in amounts that will be necessary, after completion of this
offering, to cover interest and dividend payments on the junior subordinated
debentures, our $1.0 million note payable and our existing series A preferred
stock.
In the future, our ability to make these payments, and the trust's ability to
pay distributions on the preferred securities, will depend on achieving cost
savings following our acquisition of AIB and successfully integrating AIB's
operations and customers with ours. We cannot guarantee that such cost savings
will materialize or that we will retain significantly all of AIB's customers.
See "The Proposed Acquisition of American Independent Bank."
OUR FUTURE GROWTH MAY BE HINDERED IF WE DO NOT RAISE ADDITIONAL CAPITAL
Banks and bank holding companies are required to meet capital adequacy
guidelines and maintain their capital to specified percentages of their assets.
A failure to meet these guidelines will limit our ability to grow and could
result in banking regulators requiring us to increase our capital or reduce our
loans. Therefore, in order for us to continue to increase our assets and net
income, we will be required from time to time to raise additional capital. We
cannot assure that such capital will be available or, if it is, that it will be
available on reasonable terms. See "Supervision and Regulation -- Capital
Adequacy."
Tier 1 capital is an important component of the capital adequacy guidelines. We
believe that a portion of the preferred securities will qualify as Tier 1
capital. However, the Federal Reserve may at any time revise its guidelines in a
manner which would reduce or eliminate the amount of preferred securities that
qualify as Tier 1 capital. If all or a portion of the preferred securities lose
their qualification as Tier 1 capital, we may be required to seek additional
capital to meet the Federal Reserve's capital adequacy guidelines.
AN INCREASE IN OUR PROBLEM LOANS MAY HURT OUR PERFORMANCE
Problem loans reduce the amount of cash available for our activities, which in
turn hurts our liquidity, earnings and ultimately our capitalization and our
financial performance. We have had a higher level of problem loans than we like.
We believe this was caused by a weak local economy in the past and
unsatisfactory underwriting standards under previous management. Our percentages
of problem loans and other real estate owned to total assets are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Percentage of problem loans
and other real estate
owned to total assets.... 2.07% 2.58% 4.32% 6.22%
</TABLE>
We continually evaluate the credit risks of our problem loans and believe we
have provided adequately for the credit risks associated with these assets.
However, our loan portfolio is vulnerable to adverse changes in the economy and
other factors, and we therefore cannot guarantee that the level of problem loans
will not rise in the future. See "Management's
12
<PAGE> 13
Discussion and Analysis of Results of Operations and Financial Condition of
First Coastal -- Asset Quality".
CHANGES IN INTEREST RATES MAY AFFECT OUR PROFITABILITY
An increase in the general level of interest rates may make it harder for our
borrowers to pay the interest on and principal of their loans. On the other
hand, decreasing interest rates often cause borrowers to refinance their
higher-rate loans, and any new loans we originate to replace them would probably
pay us a lower interest rate. Therefore, changes in levels of market interest
rates could materially adversely affect our asset quality, loan origination
volume and overall results of operation. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition of First
Coastal -- Net Interest Income."
NEW BANKING REGULATIONS MAY LIMIT OUR ACTIVITIES AND INCREASE OUR COSTS
The banking industry is subject to extensive regulation and supervision, which
is intended primarily for the protection of the deposit insurance fund and the
depositors of the bank and not our shareholders. Consequently, these regulations
often serve to limit our activities in ways that could be adverse to the
interests of our shareholders. In addition, these regulations could require us
to take other actions which would increase our costs. In the past, our business
has been materially affected by these regulations, and this trend is likely to
continue in the future. Any future changes in laws, regulations or
interpretations could adversely affect us. See "Supervision and Regulation."
WE COMPETE AGAINST LARGER BANKS AND INSTITUTIONS WHICH OPERATE WITH FEWER
REGULATORY CONSTRAINTS
Banking is a highly competitive business, and the western Los Angeles County
market is no exception. We compete not only with other commercial banks, but
also with many other financial competitors, including savings and loans, finance
companies, brokerage firms, insurance companies, credit unions, mortgage banks
and other financial intermediaries.
Most of our significant competitors have substantially greater resources and
capital than we do. Our non-bank competitors also generally operate under fewer
regulatory constraints. As a result, we generally cannot offer our customers
different products or significantly better priced products than our competitors
and we typically have to work harder to compete. See "Business of First
Coastal -- Competition".
DECLINES IN REAL ESTATE VALUE COULD ADVERSELY AFFECT OUR PERFORMANCE
Eighty percent of our loans as of September 30, 1998 are secured by real estate.
The properties securing these loans are located in California, Arizona, Iowa and
Maine. Real estate values are generally affected by general economic and other
conditions in the area where the real estate is located, fluctuations in
interest rates and changes in tax and other laws. Any decline in real estate
values could significantly reduce the value of the real estate collateral
securing our real estate loans and could increase the likelihood of defaults
under our real estate loans. This, in turn, would adversely affect our results
of operations and our financial position. See "Business of First
Coastal -- Lending Activities."
13
<PAGE> 14
ONE STOCKHOLDER CURRENTLY OWNS A MAJORITY OF OUR COMMON STOCK AND MAY VOTE ITS
SHARES TO CONTROL OUR MANAGEMENT AND POLICIES
California Community LLC beneficially owns approximately 77% of our common stock
as of December 31, 1998. As a result, California Community LLC can elect all of
our directors and can control our management and policies, including the
appointment of officers, the approval of mergers, the issuance of additional
equity securities and the distribution of any dividends. Mr. Griffith and Ms.
Marsten, both of whom are executive officers of First Coastal, control
California Community LLC. Mr. Griffith is also Chief Executive Officer of
California Community LLC and has the power to vote all of the shares of our
common stock held by it. Even after the planned distribution by California
Community LLC to its members of its common stock, a relatively small number of
shareholders will still hold a majority of our common stock. See "Beneficial
Ownership of Common Stock -- California Community LLC."
OUR EXPANSION STRATEGY PRESENTS SPECIAL RISKS WHICH MAY ADVERSELY AFFECT OUR
PERFORMANCE
We intend to grow in part by acquiring entire banks and branches of other banks.
For example, in June 1997, we acquired Marina Bank, and we intend to use a
portion of the proceeds from this offering to acquire American Independent Bank,
N.A. In the last few years, many other banks have also sought to grow by
acquiring banking assets. This competition for banking assets has increased the
prices we must pay and has reduced the number of attractive acquisition
opportunities. This in turn reduces our return on investment and our margin for
error.
A bank acquisition strategy can be risky. Special acquisition risks include:
- the diversion of management time to integrating the new business,
- unanticipated problems with loans or legal liabilities, and
- difficulties in retaining customers and employees of the acquired banks.
The occurrence of any one of these risks in any acquisition could have a
material adverse effect on our results of operations and our financial
condition, especially given our reduced margin for error.
OUR BUSINESS MAY BE DISRUPTED BY THE YEAR 2000 PROBLEM
Because of our reliance on electronic fund transfers and use of computerized
account information, we and the banking industry as a whole are especially
susceptible to any inability of computer programs to accurately distinguish
dates beyond December 31, 1999. The Year 2000 problem is a broad business issue
that extends beyond our own systems to the possible failures of the information
systems of our customers, third-party vendors and the entire telecommunications
and data networks infrastructure.
We have taken steps to ensure that our own information and environmental systems
will be Year 2000 compliant by the end of 1999 and have developed contingency
plans to reduce the impact of any failures which occur. However, we cannot
guarantee that the systems of the third parties with which we do business will
be completed on a timely basis, that our contingency plans will work, or that
our own remediation efforts will be successful. These potential failures could
materially impact our ability to conduct our business, damage our reputation and
increase our costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of First Coastal -- Year 2000 Compliance."
14
<PAGE> 15
AIB HAS HAD PROBLEMS WITH YEAR 2000 COMPLIANCE WHICH MAY AFFECT US AFTER THE
PLANNED ACQUISITION
Because of delinquency in its Year 2000 compliance efforts, AIB entered into a
Formal Agreement with the Office of the Comptroller of the Currency in July
1998, which required AIB to develop a comprehensive Year 2000 project plan.
Since that time, AIB has submitted the plan to the Office of the Comptroller of
the Currency, which lifted the Formal Agreement in October 1998.
AIB is in the process of renovating and validating its information and
environmental systems and assessing the risks caused by potential Year 2000
failures of its customers and vendors. Following our acquisition, we expect to
convert AIB's information processing system to ours. However, unforeseen
problems may arise during the conversion, AIB's remediation efforts may be
unsuccessful and their customer awareness program may not successfully manage
the risks caused by their customers. The occurrence of any of the foregoing
could adversely impact our business and results of operation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
American Independent Bank -- Year 2000 Issues."
YOU MAY NOT BE ABLE TO EASILY SELL THE COMMON STOCK, THE UNITS AND THE PREFERRED
SECURITIES
The units and preferred securities are new issues, and prior to this offering,
there has been only a limited public market for our common stock. Although we
intend to file an application to include the units and, after separation, the
preferred securities for quotation on the OTC Bulletin Board, we cannot be sure
that an active public market for the units, common stock or preferred securities
will develop or be sustained after the offering. Although the underwriters have
indicated to us that they intend to make a market in the common stock and the
units and, after separation, the preferred securities, they will not be
obligated to do so and may discontinue market making at any time. Any reduction
in the number of market makers could adversely affect your ability to sell your
units, common stock or preferred securities.
THE PRICE OF OUR COMMON STOCK, THE UNITS AND THE PREFERRED SECURITIES MAY
FLUCTUATE WIDELY
The initial public offering price of the units has been determined in part by
reference to the trading prices for the few recent reported trades of the common
stock and in part by negotiations between us and the underwriters. With the
limited trading history of the common stock and our inability to predict where
the units, common stock and preferred securities should trade in the future, we
cannot be sure that the initial public offering price of the units will, in
fact, be indicative of the trading price of the units after the offering.
Because the units, common stock and preferred securities are expected to trade
on the OTC Bulletin Board with little volume, their prices may fluctuate widely,
depending upon many factors, some of which have nothing to do with the operating
results of First Coastal or its intrinsic worth.
WE CAN ISSUE ADDITIONAL SECURITIES WITHOUT YOUR APPROVAL WHICH WOULD DILUTE YOUR
OWNERSHIP INTEREST
We are currently authorized under our articles of incorporation to issue nearly
9,000,000 shares of common stock and 4,600,000 shares of preferred stock without
further shareholder approval. Any securities we issue in the future may dilute
your ownership
15
<PAGE> 16
interest in First Coastal and adversely affect our ability to pay interest and
dividends on our existing securities. See "Description of Capital Stock."
RISK FACTORS RELATING TO THE COMMON STOCK
WE DO NOT INTEND TO PAY DIVIDENDS ON THE COMMON STOCK
We have no intention of paying dividends on our common stock for the foreseeable
future. Instead, we intend to reinvest our earnings in our business. Even if we
intended to pay dividends, our ability to do so would be substantially
restricted. See the second paragraph of "-- We Depend On the Bank's Profits to
Pay Distributions."
OUR SHARE PRICE MAY DECLINE DUE TO SHARES ELIGIBLE FOR FUTURE SALE
At the completion of this offering, we will have 1,014,551 shares of common
stock outstanding. Up to an additional 658,500 shares may be issued if all of
the shares of our series A preferred stock convert into common stock and all
outstanding warrants and stock options are exercised. Although a total of
805,917 shares of common stock are subject to a lock-up for 15 months following
this offering, sales of substantial amounts of common stock, or the possibility
of such sales, may "flood the market" or otherwise adversely affect the price of
our common stock and impede our ability to raise capital through the issuance of
equity securities.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
OUR OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES AND GUARANTEE AGREEMENT
ARE DEEPLY SUBORDINATED AND WE WILL PAY OUR OTHER DEBT OBLIGATIONS BEFORE WE PAY
YOU
The trust cannot pay distributions to holders of the preferred securities unless
we make interest payments on the junior subordinated debentures as and when
required. We may make payments on the junior subordinated debentures, as well as
guarantee payments, only with money remaining after we make payments on our
other debt because our obligations under the junior subordinated debentures and
guarantee agreement are unsecured and rank subordinate and junior in right of
payment to all current and future senior and subordinated debt, the amount of
which is not limited. As of September 30, 1998, we have $1.0 million of
indebtedness which is senior to the junior subordinated debentures.
YOU WILL NOT RECEIVE TIMELY DISTRIBUTIONS IF WE ELECT TO DEFER INTEREST PAYMENTS
We may defer the payment of interest on the junior subordinated debentures at
any time up to 20 consecutive quarters, provided that no deferral period may
extend beyond the maturity date and provided that we are not in default under
the indenture governing the junior subordinated debentures. As a consequence of
any such deferral, the trust will defer distributions on the preferred
securities. Our guarantee does not apply during a deferral period.
Upon the termination of any deferral period and the payment of all interest then
accrued and unpaid, we may elect to begin a new deferral period. There is no
limitation on the number of times that we may elect to begin a deferral period.
See "Description of Preferred Securities -- Distributions -- Deferral periods."
IF WE ELECT TO DEFER INTEREST PAYMENTS, YOU MAY HAVE TO INCLUDE INTEREST IN YOUR
TAXABLE INCOME BEFORE YOU RECEIVE THE MONEY
During a deferral period, your distributions will continue to accrue, and
interest on the unpaid distributions will compound quarterly. Because of this,
you would be required to
16
<PAGE> 17
include the unpaid distributions and interest in your gross income for United
States federal income tax purposes and state income tax purposes but you would
not receive any cash to pay tax on this income. See "Federal Income Tax
Considerations -- Original Issue Discount."
THE MARKET PRICE OF THE PREFERRED SECURITIES MAY NOT REFLECT UNPAID INTEREST AND
YOU MAY SUFFER A LOSS IF YOU SELL THEM WHILE INTEREST REMAINS UNPAID
A holder who sells preferred securities will recognize income on the unpaid
distributions up to the date of sale. Such income will increase a holder's tax
basis in the preferred securities, offset by any paid distributions. If we elect
to exercise our deferral right, the market price of the preferred securities is
likely to be adversely affected. In the event the sale price does not accurately
reflect the accrual of unpaid distributions, the holder may recognize a capital
loss on the sale but would accrue regular income on the unpaid distributions. In
general, an individual taxpayer may only offset $3,000 of capital losses against
regular income during any year. See "Certain Federal Income Tax
Considerations -- Sales and Redemption of Preferred Securities."
WE MAY REDEEM THE PREFERRED SECURITIES WITHOUT PAYING A PREMIUM UPON THE
OCCURRENCE OF SPECIFIED EVENTS
Upon the occurrence and during the continuation of the events described below,
we have the right to redeem at par the junior subordinated debentures in whole
and therefore cause the trust to redeem the preferred securities. If then
required under applicable guidelines or policies of the Federal Reserve, we will
need the Federal Reserve's approval to do this. See "Description of the
Preferred Securities -- Redemption."
Events which would permit us to redeem the preferred securities include:
- any change in the laws or regulations which poses a substantial risk that
the preferred securities might lose their special tax treatment,
- any change in laws or regulations which require the trust to be
registered under the Investment Company Act and
- any change in laws or regulations which poses a substantial risk that we
will not be able to treat the preferred securities as Tier 1 capital for
purposes of the capital adequacy guidelines of the Federal Reserve.
For a more precise definition of these events, see "Description of Junior
Subordinated Debentures -- Optional Redemption."
IF THE GOVERNMENT AGAIN CHALLENGES THE SPECIAL TAX TREATMENT OF THE PREFERRED
SECURITIES, WE MAY BE ABLE TO REDEEM THEM
Legislative proposals were made in 1996 and 1997 which, if enacted, would have
retroactively affected the ability of issuers to deduct interest paid on
securities similar to the junior subordinated debentures. These proposals were
not, however, incorporated into the legislation enacted on August 5, 1997 as the
Taxpayer Relief Act of 1997. Nevertheless, there can be no assurance that other
legislation enacted after the date of this prospectus will not otherwise
adversely affect our ability to deduct the interest payable on the junior
subordinated debentures and thereby allow us to redeem the preferred securities.
See "Certain Federal Income Tax Considerations -- Possible Tax Law Changes."
17
<PAGE> 18
INVESTORS WILL NOT CONTROL THE ADMINISTRATION OF THE TRUST AND WILL HAVE VERY
LIMITED VOTING RIGHTS
As the holder of the common securities of the trust, we have the right to
control nearly all aspects of the administration, operation or management of the
trust, including selection and removal of the administrators of the trust. The
preferred securities, on the other hand, will generally have no voting rights.
As a holder of the preferred securities you will be able to vote only on matters
relating to the modification of the terms of the preferred securities or junior
subordinated debentures, the acceleration of payments and other matters
described in this prospectus. See "Description of Preferred
Securities -- Regarding the Trustees of the Trust -- Removal and Appointment of
Successors" and " -- Voting Rights; Amendment of the Trust Agreement."
USE OF PROCEEDS
The trust will use all of the proceeds from the sale of preferred securities to
purchase our junior subordinated debentures. At an offering price of $26.50 per
unit, we estimate that we will have net proceeds from the sale of our common
stock and junior subordinated debentures, after paying expenses related to this
offering, of approximately $7.0 million. In addition, we expect to receive
$875,000 from the exercise of warrants held by California Community LLC. Of this
total, we intend to use approximately $6.2 million to help the bank finance the
acquisition of AIB, approximately $653,000 to redeem 94,757 shares of our series
A preferred stock and approximately $1.0 million for general working capital
purposes, which may also be used for the payment of interest on the junior
subordinated debentures.
ACCOUNTING TREATMENT
The trust will be treated as our subsidiary and, accordingly, the accounts of
the trust will be included in our consolidated financial statements. The
preferred securities will be presented as a separate line item in our
consolidated balance sheet under the caption "Company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely junior
subordinated debentures," and appropriate disclosures about the preferred
securities, the guarantee and the junior subordinated debentures will be
included in the notes to our consolidated financial statements. For financial
reporting purposes, we will record distributions payable on the preferred
securities and amortization of the capitalized offering costs as expense in our
consolidated statement of income.
18
<PAGE> 19
CAPITALIZATION
We have adjusted all share and per share amounts in this prospectus to give
effect to a one-for-five reverse split of the common stock, which occurred on
November 24, 1998. Unless otherwise indicated, share amounts in this prospectus
assume that the underwriters will not exercise their overallotment option to
purchase additional units.
The following table sets forth our capitalization as of September 30, 1998 and
as adjusted to give effect to:
1. The issuance and sale of 300,000 shares of common stock at an
offering price of $6.50 per share, less underwriting discounts and
expenses,
2. The issuance and sale of $6.0 million aggregate principal amount of
junior subordinated debentures by us to the trust less underwriting
discounts and expenses,
3. The payment of $6.5 million to the bank to help it purchase AIB for
approximately $7.3 million, including expenses and adjustments, $250,000 of
which was paid in December 1998,
4. The assumed conversion of 11,118 shares of our series A preferred
stock into 11,118 shares of our common stock, and the redemption of 94,757
shares of our series A preferred stock for an aggregate of $653,000, and
5. The exercise by California Community LLC of 225,000 warrants to
purchase common stock at $5.00 per share, 50,000 of which were exercised in
December 1998.
For additional information regarding these adjustments, see "Unaudited Pro Forma
Financial Information," "Description of Capital Stock -- Preferred Stock" and
"Beneficial Ownership of Common Stock -- California Community LLC."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------
ACTUAL AS ADJUSTED
------ -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
NOTE PAYABLE................................................ $1,000 $ 1,000
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY JUNIOR
SUBORDINATED DEBENTURES................................... -- 6,000
SHAREHOLDERS' EQUITY:
Preferred Stock; no par value, $6.75 liquidation preference;
5,000,000 shares authorized; 423,500 shares outstanding
(actual); 317,625 shares outstanding (as adjusted)........ 2,658 1,993
Common Stock; 10,000,000 shares authorized and 664,551
shares outstanding (actual); 1,200,669 shares outstanding
(as adjusted)............................................. 3,424 6,346
Retained Earnings........................................... 14 (44)
Accumulated Other Comprehensive Income -- Net Unrealized
Depreciation in Investment Securities Available for
Sale...................................................... (51) (51)
------ -------
TOTAL SHAREHOLDERS' EQUITY........................ 6,045 8,244
------ -------
TOTAL CAPITALIZATION (EXCLUDING DEPOSITS)......... $7,045 $15,244
====== =======
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
MINIMUM WELL-CAPITALIZED ACTUAL AS ADJUSTED
------- ---------------- ------ -----------
<S> <C> <C> <C> <C>
BANK-ONLY REGULATORY CAPITAL RATIOS:
Total capital to risk-weighted
assets.......................... 8% 10% 10.68% 11.46%
Tier 1 capital to risk-weighted
assets.......................... 4% 6% 7.73% 9.20%
Tier 1 capital to average total
assets.......................... 4% 5% 5.33% 6.23%
</TABLE>
We are not currently required to meet minimum regulatory capital ratios on a
consolidated basis. However, if and when our total assets exceed $150 million,
we will be required to meet these requirements. See "Supervision and
Regulation."
<TABLE>
<CAPTION>
MINIMUM ACTUAL AS ADJUSTED
-------- ------ -----------
<S> <C> <C> <C>
CONSOLIDATED REGULATORY CAPITAL RATIOS:
Total capital to risk-weighted assets........... 8% 9.45% 12.55%
Tier 1 capital to risk-weighted assets.......... 4% 5.38% 6.37%
Tier 1 capital to average assets................ 4% 3.74% 4.33%
</TABLE>
20
<PAGE> 21
MARKET PRICE OF COMMON STOCK
AND DIVIDEND POLICY
Since June 1997, our common stock has been traded in unreported private
transactions and on the OTC Bulletin Board under the symbol "FCLA." Although we
are aware of very little trading in our common stock, we believe our common
stock has traded in 1998 at prices ranging from $5.63 to $8.13 and in 1997 at
prices ranging from $5.40 to $6.00 per share. These prices reflect only
transactions reported to us by market makers in our common stock and may not be
representative of all trades during the past year. We have not attempted to
verify the accuracy of sales information reported to us by third parties.
The underwriting agreement requires us to apply to have our units, common stock
and preferred securities quoted on the Nasdaq SmallCap Market if in the future
we meet its requirements. Even after the offering and the proposed distribution
by California Community LLC of its common stock to its members, we will not meet
the requirements for listing on the Nasdaq SmallCap Market, primarily because
our non-affiliates will not hold at least one million shares of our common
stock. There can be no assurance that we will ever meet this, or some of the
other requirements of the Nasdaq SmallCap Market.
To date, we have not paid any cash dividends on our common stock and it is
unlikely that we will do so in the foreseeable future. In addition, the ability
of the bank to pay dividends to us is limited by law. See "Supervision and
Regulation -- Dividend Regulation".
We pay regular dividends on our 423,500 outstanding shares of series A preferred
stock but we intend to call up to 94,757 shares for redemption using a portion
of the proceeds of this offering. Each share of series A preferred stock
currently pays dividends at an annual rate per share of $0.675, or 10% of its
stated liquidation preference. See "Description of Capital Stock -- Preferred
Stock."
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF FIRST COASTAL
SOME MATTERS DISCUSSED IN THIS PROSPECTUS MAY BE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE LITIGATION REFORM ACT OF 1995 AND THEREFORE
MAY INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE OUR ACTUAL
RESULTS TO BE MATERIALLY DIFFERENT FROM THE RESULTS EXPRESSED OR IMPLIED BY OUR
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS GENERALLY APPEAR WITH WORDS SUCH AS
"ANTICIPATE," "BELIEVE," "ESTIMATE," "MAY," "INTEND" AND "EXPECT."
HISTORY
We specialize in developing personalized banking relationships with small
businesses, executives and professionals in the local community. Over the past
two years, with the arrival of a new management group headed by Don M. Griffith,
we have returned to profitability, turning a net loss of $124,000 for the year
ended December 31, 1996 to net income of $60,000 for the year ended December 31,
1997 and $241,000 for the nine months ended September 30, 1998. In addition, we
have grown our assets from $25.9 million as of December 31, 1996 to $81.1
million as of September 30, 1998, approximately 60% of which was accounted for
by internal growth and 40% by a bank acquisition. We have also agreed to
purchase American Independent Bank, N.A., which would add approximately $37.6
million to our total assets with significant opportunities for cost savings and
growth.
During 1997, we reorganized into a holding company ownership structure by
exchanging the shares of the bank's capital stock for the capital stock of First
Coastal, and the shareholders of the bank became shareholders of First Coastal.
There was no cash involved in this transaction, which was accounted for as a
pooling of interest, and our consolidated financial statements contained in this
prospectus have been restated to give full effect to this transaction.
In June 1997, we acquired Marina Bank for approximately $4.1 million in cash
(including transaction costs). Marina Bank had total assets of approximately
$20.9 million when we acquired it. The acquisition was accounted for using the
purchase method of accounting. Goodwill arising from the transaction totaled
approximately $2.1 million and is being amortized over fifteen years on a
straight-line basis. This acquisition was funded in part by a public offering of
common stock and series A preferred stock totaling $3.1 million, net of all
costs.
As of July 1, 1997, we adjusted our capital accounts through a
quasi-reorganization and thereby eliminated our accumulated deficit and
unrecognized loss on available for sale securities through a reduction of our
capital account by the same amount.
RECENT DEVELOPMENTS -- CAPSULE 1998 FOURTH QUARTER RESULTS
Our 1998 fourth quarter earnings were $18,000 compared to $79,000 for the third
quarter of 1998 and $57,000 for the fourth quarter of 1997. Net interest income
for the fourth quarter of 1998 was $800,000 compared to $790,000 for the third
quarter of 1998 and $710,000 for the fourth quarter of 1997. Our decrease in
earnings in the fourth quarter of 1998 compared to the third quarter of 1998 was
caused by an increase in non-interest expense, which was $860,000 for the fourth
quarter of 1998 compared to $751,000 for the
22
<PAGE> 23
third quarter of 1998 and $668,000 for the fourth quarter of 1997. This increase
in non-interest expense from the third to fourth quarters in 1998 was primarily
attributable to non-recurring items including professional expenses relating to
a failed acquisition proposal ($12,000), OREO foreclosure costs write-down
($48,000), credit card portfolio transfer costs ($10,000) and Year 2000
consulting expenses ($30,000).
Total earnings for 1998 were $259,000 compared to $60,000 for the year ended
1997. Total assets were $76,735,000 at December 31, 1998 compared to $81,120,000
at September 30, 1998 and $56,129,000 at December 31, 1997. In December 1998,
California Community LLC exercised warrants to purchase 50,000 shares of our
common stock for a total of $250,000.
BASIS OF PRESENTATION
The following discussion and analysis is intended to assist in an understanding
of the significant factors that influenced our financial condition at September
30, 1998 as compared to December 31, 1997 and at December 31, 1997 as compared
to December 31, 1996. The following discussion will also analyze our results of
operations for the nine months ended September 30, 1998 as compared to September
30, 1997 and for the year ended December 31, 1997 as compared to December 31,
1996. The discussion and analysis should be read in conjunction with our
financial statements and corresponding notes included in the back part of this
prospectus.
OVERVIEW OF FIRST NINE MONTHS OF 1998
We earned $241,000 in the first nine months of 1998 compared to $6,000 for the
same period in 1997 and $60,000 for the entire year of 1997. This significant
increase was a combination of the acquisition of Marina Bank in late June of
1997 as well as aggressive cost and balance sheet management.
During 1998 we also experienced significant asset growth. Total assets increased
$25.0 million from $56.1 million at December 31, 1997 to $81.1 million at
September 30, 1998. This increase was funded by service area deposit growth of
$12.8 million and the acceptance of an additional $14.8 million in brokered
deposits. The increase in assets was primarily due to an increase in loans of
$16.3 million (including $10.5 million in residential loans purchased from other
institutions) and a $11.2 million increase in federal funds, offset by a
reduction of $4.1 million in investment securities.
ASSETS
During the first nine months of 1998 we grew our total assets $25.0 million to
$81.1 million. We supplemented loan demand in our market area by purchasing
loans from other institutions and investing in federal funds.
From December 31, 1996 to December 31, 1997, we increased our total assets by
$30.2 million from $25.9 million to $56.1 million. This increase was due
primarily to the $20.9 million in assets obtained from the acquisition of Marina
Bank as well as by strong economic growth in the communities we serve. This
asset growth was primarily funded by an increase in deposits of $22.4 million,
comprised of $18.6 million from the acquisition of Marina Bank and $1.3 million
in brokered deposits, as well as the addition of $4.6 million in repurchase
agreements.
23
<PAGE> 24
The following tables present, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-earning assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual
loans are included in the calculation of the average balances of loans, and
interest not accrued is excluded.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
AVERAGE AVERAGE
INTEREST YIELD OR INTEREST YIELD OR
AVERAGE EARNED RATE AVERAGE EARNED RATE
BALANCE OR PAID PAID BALANCE OR PAID PAID
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities....... $ 9,894 $ 480 6.47% $ 7,122 $ 336 6.29%
Federal Funds Sold.......... 6,169 250 5.40% 1,732 71 5.47%
Other Earning Assets........ -- -- -- 37 -- --
Loans....................... 48,599 3,224 8.85% 23,478 1,752 9.95%
------- ------ ------- ------
Total
Interest-Earning
Assets........... 64,662 3,954 8.15% 32,369 2,159 8.89%
Cash and Due From Bank........ 3,384 2,825
Premises and Equipment........ 442 269
OREO.......................... 286 15
Other Assets.................. 3,358 1,379
Allowance for Loan Losses..... (574) (516)
------- -------
Total Assets........ $71,558 $36,341
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW and Money Market........ $12,954 $ 254 2.61% $ 8,953 $ 143 2.13%
Savings..................... 4,032 70 2.31% 3,927 68 2.31%
Time Deposits under
$100,000................. 9,066 360 5.29% 6,644 271 5.44%
Time Deposits of $100,000 or
More..................... 20,254 866 5.70% 2,561 100 5.21%
Borrowed Funds.............. 2,152 101 6.26% 15 2 17.78%
------- ------ ------- ------
Total
Interest-Bearing
Liabilities...... 48,458 1,651 4.54% 22,100 584 3.52%
------ ------
Demand Deposits............... 16,638 9,835
Other Liabilities............. 536 403
Shareholders' Equity.......... 5,926 4,003
------- -------
Total Liabilities
and Shareholders'
Equity........... $71,558 $36,341
======= =======
Net Interest Income........... $2,303 $1,575
====== ======
Net Yield on Interest-Earning
Assets...................... 4.75% 6.49%
==== =====
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
AVERAGE AVERAGE
INTEREST YIELD OR INTEREST YIELD OR
AVERAGE EARNED RATE AVERAGE EARNED RATE
BALANCE OR PAID PAID BALANCE OR PAID PAID
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities........... $ 6,854 $ 428 6.24% $ 2,639 $ 147 5.57%
Federal Funds Sold.............. 2,066 114 5.52% 4,514 233 5.16%
Other Earning Assets............ 28 3 10.71% 105 5 4.76%
Loans........................... 26,554 2,627 9.89% 15,639 1,636 10.46%
------- ------ ------- ------
Total Interest-Earning
Assets..................... 35,502 3,172 8.93% 22,897 2,021 8.83%
Cash and Due From Bank............ 2,829 2,194
Premises and Equipment............ 309 131
OREO.............................. 30 249
Other Assets...................... 1,781 278
Allowance for Loan Losses......... (563) (332)
------- -------
Total Assets................. $39,888 $25,417
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW and Money Market............ $ 9,551 $ 212 2.22% $ 8,086 $ 181 2.24%
Savings......................... 4,045 94 2.32% 3,710 87 2.35%
Time Deposits under $100,000.... 6,297 332 5.27% 3,179 169 5.32%
Time Deposits of $100,000 or
More......................... 4,363 243 5.57% 748 39 5.21%
Borrowed Funds.................. 23 6 26.09% -- --
------- ------ ------- ------
Total Interest-Bearing
Liabilities................ 24,279 887 3.65% 15,723 476 3.03%
------ ------
Demand Deposits................... 10,822 7,443
Other Liabilities................. 289 250
Shareholders' Equity.............. 4,498 2,001
------- -------
Total Liabilities and
Shareholders' Equity....... $39,888 $25,417
======= =======
Net Interest Income............... $2,285 $1,545
====== ======
Net Yield on Interest-Earning
Assets.......................... 6.44% 6.75%
===== =====
</TABLE>
25
<PAGE> 26
NET INTEREST INCOME
The principal component of our earnings is net interest income. Net interest
income is the difference between the interest we earn on our loans and
investments and the interest we pay on deposits and other interest-bearing
liabilities.
Our net interest income is affected by changes in the amount and mix of our
interest-earning assets and interest-bearing liabilities, referred to as a
"volume change". It is also affected by changes in the yields we earn on
interest-earning assets and rates we pay on interest-bearing deposits and other
borrowed funds, referred to as a "rate change".
The following table sets forth changes in interest income and interest expense
for the major categories of our interest-earning assets and interest-bearing
liabilities, and the amount of change attributable to volume and rate changes
for the years indicated. Changes not solely attributable to rate or volume have
been allocated to volume and rate changes in proportion to the relationship of
the absolute dollar amounts of the changes in each.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
OVER YEAR ENDED DECEMBER 31, 1997
NINE MONTHS ENDED OVER
SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------- ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE DUE TO CHANGE
------------------------- ------------------------------
VOLUME RATE CHANGE VOLUME RATE CHANGE
------ ----- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment Securities... $ 134 $ 10 $ 144 $ 261 $ 20 $ 281
Federal Funds Sold...... 180 (1) 179 (134) 15 (119)
Other Earning Assets.... -- -- -- (6) 4 (2)
Loans................... 1,802 (330) 1,472 1,084 (93) 991
------ ----- ------ ------ ---- ------
Total Interest
Income....... 2,116 (321) 1,795 1,205 (54) 1,151
INTEREST-BEARING
LIABILITIES:
Interest-Bearing
Demand............... 74 37 111 33 (2) 31
Savings................. 2 -- 2 8 (1) 7
Time Deposits under
$100,000............. 88 1 89 164 (1) 163
Time Deposits $100,000
or More.............. 755 11 766 201 3 204
Borrowed Funds.......... 102 (3) 99 6 -- 6
------ ----- ------ ------ ---- ------
Total Interest
Expense...... 1,021 46 1,067 412 (1) 411
------ ----- ------ ------ ---- ------
Interest Differential or
Net Interest Income..... $1,095 $(367) $ 728 $ 793 $(53) $ 740
====== ===== ====== ====== ==== ======
</TABLE>
26
<PAGE> 27
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
During the first nine months of 1998, our net interest income was $2.3 million
compared to $1.6 million for the same period of 1997. This increase was
primarily due to a significant increase in our average interest-earning assets
partially offset by a decline in the net interest yield on these assets. Our
strategy of maximizing our earning assets required us to increase our funding
through readily available but higher cost sources, such as brokered time
deposits. This narrowed the net yield on our earning assets from 6.49% as of
September 30, 1997 to 4.75% as of September 30, 1998.
We believe this decline in the net yield on interest-earning assets is temporary
and should reverse in future periods. We plan to accomplish this by replacing
our higher-cost brokered deposits and low yielding real estate loans with core
deposits and commercial loans generated from our relationship banking strategy.
Interest income increased $1.8 million from $2.2 million for the first nine
months of 1997 to $4.0 million for the same period in 1998 primarily due to the
increase in earning assets noted above. However, the yield on these assets
declined 74 basis points from 8.89% as of September 30, 1997 to 8.15% as of
September 30, 1998. This decline was caused by a significant shift in the mix of
interest-earning assets at the bank to real estate secured loans. These real
estate loans accounted for a majority of the growth ($25.1 million) in our
average loans. Real estate secured loans generally have lower rates than other
types of lending. This shift contributed to the 110 basis point decrease in
yields on our loan portfolio.
Interest expense increased $1.1 million for the first nine months of 1998 over
the corresponding period of 1997 to $1.7 million. This increase was
significantly impacted by the $23.4 million increase in interest-bearing
liabilities required to fund our asset growth, as discussed above. Of this
increase in interest-bearing liabilities, $16.0 million was from brokered
deposits and other borrowings. The higher rates associated with these funding
sources was the primary reason the overall rates we paid on interest-bearing
liabilities increased by 102 basis points from 3.52% in 1997 to 4.54% as of
September 30, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
For the year ended 1997, our net interest income was $2.3 million, an increase
of $740,000 or 47.9% compared to $1.5 million for the year ended 1996. This
increase was comprised of an increase in interest income of $1.2 million reduced
by increased interest expense of $411,000. These increases were primarily the
result of the Marina Bank acquisition.
The increase in our interest income was generated primarily by the increased
volume of average interest-earning assets which were $35.5 million as of
December 31, 1997 compared to $22.9 million as of December 31, 1996. We also
experienced a slight increase in the overall yield on these assets as the yields
increased from 8.83% as of December 31, 1996 to 8.93% as of December 31, 1997.
27
<PAGE> 28
Our interest expense was also impacted significantly by the acquisition of
Marina Bank and the resulting increase in the volume of average interest-bearing
liabilities which increased from $15.7 million as of December 31, 1996 to $24.3
million as of December 31, 1997. We also experienced a significant increase in
the rate paid on these liabilities to 3.65% as of December 31, 1997 compared to
3.03% as of December 31, 1996. In connection with our strategy to maximize
earning assets, we increased our reliance on higher-cost time deposits over
$100,000, which equaled 4.8% of total interest-bearing liabilities as of
December 31, 1996 and 18.0% as of December 31, 1997. The rate paid on these
deposits also increased 36 basis points from 5.21% as of December 31, 1996 to
5.57% as of December 31, 1997.
PROVISION FOR LOAN LOSSES
We make provisions for loan losses to bring our total allowance for loan losses
to a level we deem appropriate. We base our determination on such factors as our
historical experience, the volume and type of lending we conduct, the amount of
our nonperforming loans, regulatory policies, general economic conditions, and
other factors related to the collectibility of loans in our portfolio. The
amount we provide for loan losses is charged to earnings. See "Business of First
Coastal -- Asset Quality" and "-- Allowance for Loan Losses". For the nine
months ended September 30, 1998, our provision for loan losses was $10,000
compared to $25,000 for the same period in 1997. For the year ended 1997, our
provision was $25,000 compared to $39,000 for 1996.
NONINTEREST INCOME
For the nine months ended September 30, 1998, our noninterest income was
$416,000 compared to $131,000 for the same period in 1997. This increase was
primarily the result of giving full effect during the entire period to the
acquisition of Marina Bank as well as $121,000 of gains recognized in 1998 from
the sale of loans and investments.
Noninterest income remained fairly stable for the year ended 1997 at $245,000
compared to $264,000 in 1996. The $19,000 decrease was comprised of a drop in
the gain from the sale of loans offset by an increase in service charges and
fees resulting from the Marina Bank acquisition.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30, 1998 was $2.2
million, an increase of $600,000 from the $1.6 million for the same period in
1997. This change was comprised of increases in operating costs associated with
the branch acquired in the Marina Bank acquisition and $65,000 in additional
goodwill amortization, also from the Marina Bank acquisition.
For the year ended 1997, noninterest expense was $2.4 million, a $457,000 or 24%
increase from the 1996 amount of $1.9 million. This change was comprised of
increases in operating costs associated with the branch acquired in the Marina
Bank acquisition and $70,000 in goodwill amortization, also from the Marina Bank
acquisition.
28
<PAGE> 29
INCOME TAXES
During 1996 and the first half of 1997, we recorded income tax expense equal
only to the minimum California franchise tax. Subsequent to the
quasi-reorganization on July 1, 1997, we recorded a $94,000 provision for income
taxes. This resulted in an effective tax rate of approximately 30% on income
before income taxes and non-deductible goodwill. During the nine months ended
September 30, 1998, we recorded a $245,000 provision for income taxes. This
resulted in an effective tax rate of approximately 42% on income before income
taxes and non-deductible goodwill. See also Notes F and M to our consolidated
financial statements included in this prospectus for more information on income
taxes.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The objective of our asset/liability strategy is to manage liquidity and
interest rate risks to ensure the safety and soundness of our capital base,
while maintaining adequate net interest margins and spreads to provide an
appropriate return to our shareholders.
The bank's liquidity, which primarily represents our ability to meet
fluctuations in deposit levels and provide for customers' credit needs, is
managed through various funding strategies that reflect the maturity structures
of the sources of funds being gathered and the assets being funded. The bank's
liquidity is further augmented by payments of principal and interest on loans
and increases in short-term liabilities such as demand deposits, short-term
certificates of deposit, and overnight purchases of federal funds. Short-term
investments, primarily federal funds sold and reverse repurchase lines of credit
provided by our correspondent banks, are the primary means for providing
immediate liquidity. In order to meet the bank's liquidity requirements, we
endeavor to maintain an appropriate liquidity ratio. The liquidity ratio is
equivalent to the sum of cash and noninterest-earning deposits, interest-earning
deposits, federal funds sold, and investment securities, divided by deposits. As
of September 30, 1998, December 31, 1997 and December 31, 1996, the bank's
liquidity ratio was 29.3%, 29.0% and 41.6%, respectively.
We depend on dividends from the bank for liquidity to pay interest on our debt,
including the junior subordinated debentures, and to pay any dividends. We
currently have outstanding a $1.0 million seven-year note, which accrues
interest at prime plus 1 1/2% (10% at September 30, 1998). We have pledged all
of the bank's common stock as collateral for this note. The proceeds from this
note were loaned to the bank, which invested it in available-for-sale
securities. We currently do not have any lines of credit. The ability of the
bank to pay dividends to us is limited by federal law. See "Supervision and
Regulation -- Dividend Regulation".
The objectives of interest rate risk management are to control exposure of net
interest income to risks associated with interest rate movements in the market,
to achieve consistent growth in net interest income and to profit from favorable
market opportunities. Even with perfectly matched repricing of assets and
liabilities, risks remain in the form of prepayment of assets, timing lags in
adjusting assets and liabilities that have varying sensitivities to market
interest rates and basis risk.
29
<PAGE> 30
The table below sets forth the interest rate sensitivity of our interest-earning
assets and interest-bearing liabilities as of September 30, 1998, using the
interest rate sensitivity gap ratio. For purposes of the following table, an
asset or liability is considered rate-sensitive within a specified period when
it can be repriced or matures within its contractual terms.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING
--------------------------------------------------
OVER THREE
MONTHS OVER
UP TO TO LESS ONE TO OVER
THREE THAN ONE FIVE FIVE
MONTHS YEAR YEAR YEARS TOTAL
------- ---------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment Securities....... $ 345 $ -- $ 3,385 $ 2,347 $ 6,077
Federal Funds Sold.......... 11,550 -- -- -- 11,550
Loans....................... 14,292 7,176 12,834 21,966 56,268
------- -------- ------- ------- -------
$26,187 $ 7,176 $16,219 $24,313 $73,895
======= ======== ======= ======= =======
INTEREST-BEARING LIABILITIES:
Money Market and NOW
Deposits................. $13,869 $ -- $ -- $ -- $13,869
Savings..................... 4,083 -- -- -- 4,083
Time Deposits............... 13,879 19,006 636 -- 33,521
Note Payable................ 1,000 -- -- -- 1,000
------- -------- ------- ------- -------
$32,831 $ 19,006 $ 636 $ -- $52,473
======= ======== ======= ======= =======
Interest Rate Sensitivity
Gap......................... $(6,644) $(11,836) $15,583 $24,313 $21,422
Cumulative Interest Rate
Sensitivity Gap............. $(6,644) $(18,474) $(2,891) $21,422 $21,422
Cumulative Interest Rate
Sensitivity Gap Ratio Based
on Total Assets............. (8.19)% (22.77)% (3.56)% 26.41% 26.41%
</TABLE>
Gap analysis attempts to capture interest rate risk, which is attributable to
the mismatching of interest rate sensitive assets and liabilities. The actual
impact of interest rate movements on our net interest income may differ from
that implied by any gap measurement, depending on the direction and magnitude of
the interest rate movements, the repricing characteristics of various on and
off-balance sheet instruments, as well as competitive pressures. These factors
are not fully reflected in the foregoing gap analysis and, as a result, the gap
report may not provide a complete assessment of our interest rate risk.
A generally negative cumulative gap value means that over the periods indicated
our liabilities will reprice slightly faster than our assets. This means
generally that, in a rising interest rate environment, net interest income can
be expected to decrease and that, in a declining interest rate environment, net
interest income can be expected to increase.
EFFECTS OF INFLATION
The impact of inflation on a financial institution can differ significantly from
that exerted on other companies. Banks, as financial intermediaries, have many
assets and liabilities
30
<PAGE> 31
which may move in concert with inflation both as to interest rates and value.
This is especially true for banks, such as us, with a high percentage of
interest rate-sensitive assets and liabilities. A bank can reduce the impact of
inflation if it can manage its interest rate sensitivity gap. We attempt to
structure our mix of financial instruments and manage our interest rate
sensitivity gap in order to minimize the potential adverse effects of inflation
or other market forces on its net interest income and, therefore, our earnings
and capital.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June of 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
establishing accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on the consistent
application of the financial-components approach. The implementation of this
statement did not have a material effect on our financial condition and results
of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share". This
Statement established new standards for computing and presenting earnings per
share and requires all prior period earnings per share data be restated to
conform with the provisions of the statement. The implementation of this
statement did not have a material effect on our financial condition and results
of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement provides that all enterprises report comprehensive income as a
measure of overall performance. This new standard is effective for 1998 and is
not expected to have a material impact on our financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement changes the way public
companies report selected information about segments of their business in their
annual financial statements and require them to report selected segment
information in their quarterly reports issued to shareholders. This new standard
is effective for 1998 and is not expected to have a material impact on our
financial statements.
In February 1998, the FASB issued SFAS 132, "Employer's Disclosures about
Pensions and other Post-Retirement Benefits". This Statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable. This new standard is effective for 1998 and is not expected
to have a material impact on our financial reporting.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. This new
standard is effective for 2000 and is not expected to have a material impact on
our financial statements.
YEAR 2000 COMPLIANCE
OVERVIEW
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result,
date-sensitive software and/or hardware may recognize a date using "00" as the
year 1900 rather than the year 2000.
31
<PAGE> 32
This could result in a system failure or other disruption of operations and
impede normal business activities. In June 1996, the Federal Financial
Institutions Examination Council ("FFIEC") alerted the banking industry of the
serious challenges that would be encountered with Year 2000 issues. The Office
of the Comptroller of the Currency (the "OCC") has also implemented a plan to
require compliance with Year 2000 issues and regularly examines our progress.
OUR STATE OF READINESS
In accordance with OCC guidelines, we have developed a comprehensive plan which
we believe will result in timely and adequate modifications of our systems and
technology to address our Year 2000 issues, which contemplates all system
conversions and testing to be substantially completed by December 31, 1999. We
have completed a top-down assessment of our mission-critical and other systems
for Year 2000 compliance and are currently in the third and fourth of five
phases for compliance, "renovation and validation", as defined by the FFIEC. We
have tested our non-information technology systems, such as microprocessors
controlling our environmental and alarm systems, and found them to be Year 2000
compliant.
To determine the readiness of our customers, we have sent a questionnaire to,
and received responses from, each of our significant borrowers and depositors to
determine the extent of risk created by any failure by them to remediate their
own Year 2000 issues. Each borrower and depositor is categorized according to
their state of readiness based on their response to the questionnaire and our
review of the customer. We have also taken steps to ensure liquidity for
depositors with high Year 2000 risks. We will make a re-assessment on each
customer's risk on a regular basis.
To determine the readiness of our vendors, we have sent out a letter to each
vendor inquiring about their compliance with Year 2000. For those vendors that
have responded that they are Year 2000 compliant and that we have determined to
not have a material impact on the bank's operations, no further work is
performed. For those vendors that have responded they are working towards Year
2000 compliance and that we have determined to be significant, including mission
critical vendors, we will follow up on a regular basis through 1999. These
vendors have advised us that they expect to be Year 2000 compliant prior to
December 31, 1999. If those vendors do not demonstrate compliance by a certain
date, we will seek other alternatives in accordance with our contingency plan,
which may include seeking replacement vendors.
OUR COSTS AND RISKS
A few of our computer hardware and software applications were modified or
replaced in order to maintain their functionality as the year 2000 approaches.
We have spent approximately $80,000 as of September 30, 1998 to address our Year
2000 issues and estimate our total costs over the three year period 1998 - 2000
to be approximately $125,000, which will come from our general funds. None of
these costs, however, are expected to materially impact our results of
operations in any one reporting period.
Ultimately, the potential impact of the year 2000 issue will depend not only on
the corrective measures we undertake, but also on the way in which the year 2000
issue is addressed by governmental agencies, businesses, and other entities who
provide data to us, receive data from us, or whose financial condition or
operational capability is important to
32
<PAGE> 33
us, such as suppliers or customers. At worst, our customers and vendors will
face severe Year 2000 issues, which may cause borrowers to become unable to
service their loans. We may also be required to replace non-compliant vendors
with more expensive Year 2000-compliant vendors. At this time we cannot
determine the financial effect on us if significant customer and/or vendor
remediation efforts are not resolved in a timely manner.
OUR CONTINGENCY PLANS
We have created a contingency plan which would take effect should there be
circumstances preventing timely implementation. We intend to hire an independent
consultant to review our mission critical systems by the end of the first
quarter of 1999, and if such systems have not become Year 2000 compliant, we
will retain a new vendor to resolve these issues. In addition, for each mission
critical system, we have identified alternate procedures to achieve a successful
resumption of business in case our computer systems, or those of our mission
critical vendors, fail, including developing a manual process for implementing
the system and identifying alternative vendors.
33
<PAGE> 34
BUSINESS OF FIRST COASTAL
GENERAL
We are the parent of First Coastal Bank, National Association, a national bank
headquartered at 275 Main Street, El Segundo, California, which commenced
operations as a nationally chartered bank on November 29, 1984. We were
incorporated under the laws of the State of California on October 17, 1996, and
we conduct all of our business activities through the bank. We currently have no
other subsidiaries. The bank is a member of the Federal Reserve System and its
deposits are insured by the FDIC up to the maximum limits prescribed by law.
In this section, the terms "we" and "our" refer to both First Coastal and the
bank.
OUR BUSINESS STRATEGY
Our business strategy is to:
- Cater to small businesses, executives and professionals by offering quality,
personalized financial services which have become less available due to
consolidation in the banking industry.
- Build our deposit base and loan portfolio through relationship banking that
is attentive to the needs of our customers.
- Selectively acquire or merge with other banks to decrease costs as a
percentage of revenues and expand our geographic presence, initially in the
South Bay, West Los Angeles and San Fernando Valley areas of Southern
California.
WE SEE OPPORTUNITIES CREATED BY MERGERS IN THE BANKING INDUSTRY. We believe that
the rapid consolidation of banks and the formation of large, impersonal
financial institutions has caused, and will continue to cause, small business,
executive and professional customers to seek the service-oriented, customized
and quality services which we offer. According to the FDIC, the four largest
financial institutions in Los Angeles County hold more than half of all deposits
in the region. We have a market share of less than 0.1% of the large, growing
and diverse Los Angeles County market, which in 1998 had over $130 billion in
total banking deposits, a population of over 9.5 million and a per capita income
of over $25,000. We believe our strategy, if successfully executed, will allow
us to grow faster than the overall market. In addition, a very small shift in
our market share represents large potential growth from our small base.
INTERNAL GROWTH. Our internal growth strategy is primarily focused on "total
relationship banking", which means developing a personalized package of
financial services and providing superior service to customers with high
transactional needs. By focusing on customer relationships, we believe that we
fill a niche neglected by the larger banks.
Our target market consists of small businesses, executives and professionals in
the South Bay, West Los Angeles and San Fernando Valley areas of Southern
California. We have hired, and will continue to hire, highly motivated and
well-compensated business development officers to generate significant deposit
relationships. Our objective is to retain the most effective business
development team of any community bank in Southern California and to support
them with quality financial products and exceptional customer service. In
addition, we have focused on selling financial products that bear a logical
34
<PAGE> 35
relationship to each other, such as money market and time deposits, to our
relationship customers, and we intend to introduce investment management
services in the future. We believe that our internal growth strategy sets us
apart from other community banks in the region.
We recognize that relationship banking may result in slower loan growth than
"loan production" banking, which places a premium on maximizing the number of
outstanding loans. Therefore, we supplement local relationship lending with
loans, generally consisting of well-secured commercial and real estate loans,
originated by a select group of loan production agents. We seek to maximize the
quality of these loans and will accept a lower fixed-rate nominal loan yield for
higher credit worthiness and security. In addition, we occasionally purchase
out-of-state loan pools consisting of well-seasoned single family residential
loans in order to create geographical diversification and to generate a higher
yield than our securities portfolio. We do not lend to hedge funds or invest in
foreign securities, which we believe minimizes our exposure to international
economic problems.
GROWTH THROUGH ACQUISITIONS. Acquisitions will continue to play a key role in
augmenting internal growth and lowering our unit costs. Due to our small size
and focus, we believe that we have the opportunity to significantly improve our
customer service as well as our operating efficiencies through the consolidation
of administrative and routine operations. Our acquisition objectives are to:
- Increase our return on capital by trimming redundant operations and thereby
lower operating expenses as a percentage of revenues.
- Increase our low-cost deposit base and geographic coverage.
- Leverage opportunities to sell related products and offer improved services
to the customers of the banks we acquire.
In accordance with this strategy, we are using part of the proceeds from this
offering to acquire American Independent Bank, N.A. See "The Proposed
Acquisition of American Independent Bank."
THE LOS ANGELES COUNTY ECONOMY
We operate primarily in Los Angeles County in the state of California. The
county covers 4,752 square miles and had a 1998 population of 9,680,000,
according to the Los Angeles Economic Development Corporation ("LAEDC"). The
county's 1998 population represented 28.9% of California's 1998's population of
33,537,000. The county's population would make it equivalent to the ninth
largest state in the nation, according to LAEDC. The county's population in 2005
is projected to grow to 10,528,000, an increase of 848,000 or 8.8% from 1998 to
2005, according to the Center for Continuing Study of the California Economy
("CCSCE").
In 1998, the county's per capita income of $26,109 remained above 1990's per
capita income level of $25,514. CCSCE projects the county's per capita income to
rise to between $27,075 to $29,753 in 2005, with a moderate growth estimated at
$28,164.
LENDING ACTIVITIES
We originate, purchase and sell loans, or participating interests in loans for
our own portfolio and for possible sale in the secondary market. Our loans
include single family
35
<PAGE> 36
residential loans, commercial business, commercial real estate loans, Small
Business Administration loans, and consumer loans.
The following table sets forth the composition of our loan portfolio by type of
loan at the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1998 1997 1996
------------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LOANS:
Commercial................................ $ 4,303 $ 4,574 $ 2,150
Consumer.................................. 3,569 5,210 2,345
Construction Financing.................... 50 67 510
Real Estate -- Residential, 1 to 4
units.................................. 26,853 13,778 2,460
Real Estate -- Other...................... 21,493 16,363 8,856
------- ------- --------
Total Loans....................... 56,268 39,992 16,321
Net Deferred Loan Costs (Fees).............. 57 (147) (61)
Allowance for Loan Losses................... (562) (615) (382)
------- ------- --------
Net Loans................................... $55,763 $39,230 $ 15,878
======= ======= ========
Commitments:
Standby Letters of Credit................. $ -- $ -- $ 25
Undisbursed Loans and Commitments to Grant
Loans.................................. 1,892 3,009 1,866
------- ------- --------
Total Commitments................. 1,892 3,009 1,866
======= ======= ========
</TABLE>
We make commercial loans to provide working capital, finance the purchase of
equipment and for other business purposes. These loans can be "short-term", with
maturities ranging from thirty days to one year, or "term loans" with maturities
normally ranging from one to twenty-five years. Short-term loans are generally
intended to finance current transactions and typically provide for periodic
principal payments, with interest payable monthly. Term loans normally provide
for floating interest rates, with monthly payments of both principal and
interest.
We make consumer loans to finance automobiles, various types of consumer goods,
and other personal purposes. Consumer loans generally provide for the monthly
payment of principal and interest. Most consumer loans are secured by the
personal property being purchased. At September 30, 1998, 53% of our consumer
loans were secured by automobiles, calculated by principal amount.
We make construction financing loans primarily as interim loans to finance the
construction of commercial and single family residential property. These loans
are typically short term. We do not make loans for speculative or tract housing
construction or for the acquisition of raw land and have made very few
construction loans in general.
Our 1 - 4 unit residential real estate loans consists primarily of single family
residential loans. We make these loans based on the borrower's cash flow and
secure the loan by a first or second deed of trust on the property. Our general
policy is to restrict our residential loans to no more than 80% of the appraised
value of the property. We offer both fixed and variable rate residential loans
with maturities extending up to 30 years. Additionally, in
36
<PAGE> 37
order to supplement our loan portfolio and to enhance geographical diversity, we
purchase single family residential loans from other financial institutions. In
order to minimize prepayment risk, we have paid little or no premium for loan
pools with the following criteria:
- well-seasoned and well-collateralized conforming mortgages,
- borrowers with sound credit who demonstrate the ability to service the debt,
and
- a stable and consistent cash flow.
We review each loan within the pool and eliminate those individual loans which
do not meet our underwriting standards. As of December 31, 1997, these pool
loans totaled $8.8 million and were secured by residential properties in
Arizona. As of September 30, 1998, these loans increased to $19.4 million and
were secured by residential properties in Arizona ($9.0 million in loans), Maine
($6.9 million in loans) and Iowa ($3.5 million in loans). We do not service
these loans.
Our other real estate loans consists primarily of commercial and industrial real
estate loans. We make these loans based on the income generating capacity of the
property or the cash flow of the borrower. These loans are secured by the
property. Our general policy is to restrict these loans to no more than 75% of
the lower of the appraised value or the purchase price of the property. We offer
both fixed and variable rate loans with maturities which generally do not exceed
15 years, unless the loans are SBA loans secured by real estate or other
commercial real estate loans easily sold in the secondary market.
We also make SBA-guaranteed loans, the guaranteed portion of which may be resold
in the secondary market. We have in the past sold the guaranteed portion of our
SBA loans in the secondary market but retained the servicing rights for such SBA
loans. At December 31, 1997 and 1996, we serviced approximately $6.1 million and
$5.4 million, respectively, in SBA loans. We categorize SBA loans as Commercial
or Real Estate depending on the underlying collateral.
Many of our loans have floating rates tied to our base rate or other market rate
indicators, the majority of which are adjusted at least quarterly. The following
table shows the maturity of our loan categories outstanding as of December 31,
1997:
<TABLE>
<CAPTION>
DUE IN DUE AFTER
ONE YEAR ONE YEAR TO DUE AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................ $1,740 $ 1,753 $ 1,081 $ 4,574
Consumer.......................... 80 3,959 1,171 5,210
Construction Financing............ 67 -- -- 67
Real Estate....................... 2.189 8,977 18,975 30,141
------ ------- ------- -------
Total................... $4,076 $14,689 $21,227 $39,992
====== ======= ======= =======
Floating Rate..................... $12,867
Fixed Rate........................ 27,125
-------
Total................... $39,992
=======
</TABLE>
37
<PAGE> 38
ASSET QUALITY
The risk of nonpayment of loans is an inherent feature of the banking business.
That risk varies with the type and purpose of the loan, the collateral which is
utilized to secure payment, and ultimately, the credit worthiness of the
borrower. In order to minimize this credit risk, virtually all loans are
approved by the loan committee of the board of directors. Our loan committee is
comprised of directors and members of our senior management.
We grade our loans from "acceptable" to "loss", depending on credit quality,
with "acceptable" representing loans with an acceptable degree of risk given the
favorable aspects of the credit and with both primary and secondary sources of
repayment. Classified loans or substandard loans are ranked below "acceptable"
loans. As these loans are identified in our review process, we add them to our
internal watchlist and establish loss allowances for them. Additionally, our
loans are examined regularly by the OCC. We do not return a loan to accrual
status until it is brought current with respect to both principal and interest
payments, the loan is performing to current terms and conditions, the interest
rate is commensurate with market interest rates and future principal and
interest payments are no longer in doubt.
The following table provides information with respect to the components of our
nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
AT
DECEMBER 31,
AT ---------------
SEPTEMBER 30, 1998 1997 1996
------------------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-Accrual Loans................................. $ 403 $ 137 $ 213
Loans 90 Days Past Due and Still Accruing......... 54 10 --
Restructured Loans................................ 1,001 1,102 856
------ ------ ------
Total Nonperforming Loans............... 1,458 1,249 1,069
Other Real Estate Owned........................... 218 200 51
------ ------ ------
Total Nonperforming Assets.............. $1,676 $1,449 $1,120
====== ====== ======
Non-Accrual Loans as a Percentage of Total
Loans........................................... 0.72% 0.34% 1.31%
Accruing Loans 90 Days Past Due as a Percentage of
Total Loans..................................... 0.10% 0.03% --
Restructured Loans as a Percentage of Total
Loans........................................... 1.78% 2.76% 5.24%
------ ------ ------
Nonperforming Loans as a Percentage of Total
Loans........................................... 2.60% 3.13% 6.55%
====== ====== ======
Allowance for Loan Losses as a Percentage of
Nonperforming Loans............................. 38.55% 49.24% 35.73%
Nonperforming Assets as a Percentage of Total
Assets.......................................... 2.07% 2.58% 4.32%
</TABLE>
Restructured loans are those loans where we have made concessions in interest
rates or repayment terms to assist the borrower. Non-accrual loans are generally
loans which are past due 90 days or are loans that we believe the interest upon
which may not be collectible. At September 30, 1998 and December 31, 1997, the
majority of our non-accrual loans were secured by real estate. We recognized
income of $75,000 for the first nine months of 1998, $130,000 for the year ended
1997 and $76,000 for the year ended 1996 for cash interest payments on
restructured loans. Our interest income would have increased approximately
$23,800 for the first nine months of 1998, $29,000 for the year
38
<PAGE> 39
ended 1997 and $53,000 for the year ended 1996 had all of these nonperforming
loans performed in accordance with their original terms and conditions.
Other real estate owned is acquired in satisfaction of loan receivables through
foreclosure or other means. We record these properties on an individual asset
basis at the estimated fair value less selling expenses.
ALLOWANCE FOR LOAN LOSSES
The following table summarizes, for the periods indicated, changes in our
allowance for loan losses arising from loans charged off, recoveries on loans
previously charged off, additions to the allowance which have been charged to
operating expenses and ratios relating to the allowance for loan losses:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE NINE MONTHS DECEMBER 31,
ENDED SEPTEMBER 30, ------------------
1998 1997 1996
-------------------- ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Period........... $615 $382 $ 333
Actual Charge-offs:
Commercial............................. 42 192 108
Consumer............................... 93 14 45
Real Estate............................ 1 -- --
---- ---- ------
Total Charge-Offs.............. 136 206 153
---- ---- ------
LESS RECOVERIES:
Commercial............................. 70 3 162
Consumer............................... 3 35 1
Real Estate............................ -- -- --
---- ---- ------
Total Recoveries............... 73 38 163
---- ---- ------
Net Loans Charged Off (Recovered)........ 63 168 (10)
Provision for Loan Losses................ 10 25 39
Allowance on Loans Purchased from Marina
Bank................................... -- 376 --
---- ---- ------
Balance at End of Period................. $562 $615 $ 382
==== ==== ======
RATIOS:
Net Loans Charged Off (Recovered) to
Average Loans.......................... 0.17% 0.63% (0.06%)
Allowance for Loan Losses to Total
Loans.................................. 1.00% 1.54% 2.34%
</TABLE>
We perform quarterly detailed reviews to identify the risks inherent in our loan
portfolio, assess the overall quality of our loan portfolio and to determine the
adequacy of our allowance for loan losses and the related provision for loan
losses to be charged to expense. Our systematic reviews follow the methodology
set forth by the OCC in its 1993 policy statement on the allowance for loan
losses.
39
<PAGE> 40
A key element of our methodology is our previously discussed credit
classification process. Loans identified as less than "acceptable" are reviewed
individually to estimate the amount of probable losses that need to be included
in the allowance. These reviews include analysis of financial information as
well as evaluation of collateral securing the credit. Additionally, we consider
the inherent risk present in the "acceptable" portion of our loan portfolio
taking into consideration historical losses on pools of similar loans, adjusted
for trends, conditions and other relevant factors that may affect repayment of
the loans in these pools. Upon completion, the written analysis is present to
the board of directors for discussion, review, and approval.
We consider our allowance for loan losses to be adequate to provide for losses
inherent in our loans. While we use available information to recognize losses on
loans and leases, future additions to our allowance may be necessary based on
changes in economic conditions. In addition, federal regulators, as an integral
part of their examination process, periodically review our allowance for loan
losses and may recommend additions based upon their evaluation of the portfolio
at the time of their examination. Accordingly, there can be no assurance that
our allowance for loan losses will be adequate to cover future loan losses or
that significant additions to the allowance for loan losses will not be required
in the future. Material additions to the allowance for loan losses would
decrease our earnings and capital and would thereby reduce our ability to pay
distributions on the preferred securities and dividends on the common stock,
among other adverse consequences.
Our ratio of allowance for loan losses to total loans has declined significantly
from 2.34% in 1996, to 1.54% in 1997 to 1.00% in 1998. This decline is primarily
the result of our significant increase in lower-risk residential loans. These
loans accounted for 15% of our loans at December 31, 1996, 35% at December 31,
1997 and 48% of our loans at September 30, 1998.
The following table summarizes the allocation of the allowance for loan losses
by loan type for the periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial............ $103 7.6% $127 11.4% $ 16 13.2%
Consumer.............. 43 6.3% 33 13.0% 18 14.4%
Construction
Financing........... -- 0.1% -- 0.2% 4 3.1%
Real Estate --
Residential, 1 to 4
Units............... 104 47.7% 17 34.5% 15 15.1%
Real
Estate -- Other..... 177 38.3% 411 40.9% 186 54.3%
Unallocated........... 135 N/A 27 N/A 143 N/A
---- ----- ---- ----- ---- -----
$562 100.0% $615 100.0% $382 100.0%
==== ===== ==== ===== ==== =====
</TABLE>
40
<PAGE> 41
INVESTMENT ACTIVITY
We are required under federal regulations to maintain a minimum amount of liquid
assets and are also permitted to make other investments in securities. We intend
to hold securities in our investment portfolio to balance the overall
interest-rate sensitivities of our assets and liabilities.
Our investment decisions are primarily made by Don M. Griffith, our Chief
Executive Officer. Mr. Griffith acts within policies established by the board of
directors and reports monthly to the Board. Our investments can include
investment grade corporate securities, AAA-rated mortgage-backed securities,
federally insured certificates of deposit, U.S. treasury obligations and U.S.
Government agency-backed securities.
Our goals are to obtain the highest yield consistent with maintaining a stable
overall asset and liability position while limiting economic risks. In
accordance with this policy we actively manage our investment portfolio, the
composition of which may shift substantially over time. By September 30, 1998,
for instance, we had shifted our investment focus from government-backed
securities almost entirely to privately-issued AAA-rated mortgage-backed
securities. Recently we have shifted our investing to investment-grade corporate
securities yielding a higher rate of return. For further information concerning
our investment securities portfolio, see Note B of the notes to our consolidated
financial statements included in this prospectus.
The following table summarizes the amounts and distribution of our investment
securities held as of the dates indicated, and the weighted average yield as of
September 30, 1998. During 1996, we converted our entire investment portfolio
into the Available-for-Sale category to increase the portfolio's liquidity and
our planning opportunities.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31, DECEMBER 31,
-------------------------- 1997 1996
WEIGHTED ----------------- ---------------
BOOK MARKET AVERAGE BOOK MARKET BOOK MARKET
VALUE VALUE YIELD VALUE VALUE VALUE VALUE
------ ------ -------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Agencies:
One to Five Years......... $ -- $ -- -- $ 2,000 $ 2,000 $5,386 $5,363
Over Five to Ten Years.... -- -- -- 2,139 2,139 -- --
------ ------ ------- ------- ------ ------
Total U.S.
Agency......... -- -- -- 4,139 4,139 5,386 5,363
Mortgage-Backed
Securities................ 5,818 5,732 7.1% 5,870 5,875 1,488 1,483
Federal Home Loan Bank
Stock..................... 169 169 5.9%
Federal Reserve Stock....... 176 176 6.0% 169 169 88 88
------ ------ ------- ------- ------ ------
Total............. $6,163 $6,077 7.1% $10,178 $10,183 $6,962 $6,934
====== ====== ======= ======= ====== ======
</TABLE>
DEPOSITS
Deposits are the primary source of funding for our lending and investing needs.
Total deposits were $22.9 million at December 31, 1996, increased to $45.3
million at December 31, 1997 and reached $72.9 million at September 30, 1998.
Our total deposits increased in 1997 primarily from the acquisition of Marina
Bank.
41
<PAGE> 42
The following table summarizes the distribution of our average deposits and the
average rates we paid for the periods indicated:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED -------------------------------------
SEPTEMBER 30, 1998 1997 1996
------------------- ----------------- -----------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NOW......................... $ 6,774 1.83% $ 5,874 1.82% $ 5,742 2.04%
Savings Deposits............ 4,032 2.31% 4,045 2.32% 3,710 2.35%
Money Market Accounts....... 6,180 3.47% 3,677 2.85% 2,344 2.73%
TCD Less than $100,000...... 9,066 5.29% 6,297 5.27% 3,179 5.32%
TCD $100,000 or More........ 20,254 5.70% 4,363 5.57% 748 5.21%
------- ------- -------
Total
Interest-Bearing
Deposits....... 46,306 4.46% 24,256 3.64% 15,723 3.03%
Non Interest-Bearing Demand
Deposits.................. 16,638 10,822 7,443
------- ------- -------
Total Deposits.... $62,944 3.28% $35,078 2.51% $23,166 2.05%
======= ======= =======
</TABLE>
Included in our time deposits of $100,000 or more are $14.8 million in brokered
deposits at September 30, 1998, which we have used to leverage our capital in
the short term as we generate a more stable relationship-based deposit base.
Brokered deposits can be a useful source of funds to quickly increase a bank's
funding. However, brokered deposits generally require us to pay higher rates
than we do for other deposits. Brokered deposits are also less stable, because
they are less likely to renew when they mature than other time deposits. For
these reasons, as the brokered deposits mature through March 31, 1999, we intend
to replace them with lower rate and more stable internally generated deposits,
which have grown significantly over the past nine months. Nevertheless, there
can be no assurance that we will be able to do so or that we will not accept
brokered deposits in the future.
The scheduled maturity distribution of our time deposits of $100,000 or greater,
as of September 30, 1998, was as follows (dollar amounts in thousands):
<TABLE>
<S> <C>
Three Months or Less.................. $ 9,638
Over Three Months to One Year......... 11,169
Over One Year to Three Years.......... 100
-------
Total....................... $20,907
=======
</TABLE>
At September 30, 1998, one customer relationship accounted for approximately 8%
of our demand deposits in the aggregate through numerous title and escrow
accounts. Subsequent to September 30, 1998, we made a business decision to
terminate this customer relationship in order to further diversify our deposits,
reduce our reliance on any one particular customer and more efficiently deploy
our human resources. We do not believe that the loss of this customer
relationship will significantly increase our overall funding costs or materially
adversely affect our financial position or results of operations.
42
<PAGE> 43
SHORT-TERM AND OTHER BORROWINGS
The following table summarizes short-term borrowings and weighted average rates
(dollar amounts in thousands).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------
MAXIMUM
ENDING MONTH-END AVERAGE AVERAGE
BALANCE BALANCE BALANCE RATE
------- --------- ------- -------
<S> <C> <C> <C> <C>
Repurchase Agreements.................. $ -- $4,550 $1,797 5.62%
Other Borrowings....................... 1,000 1,000 355 9.51%
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
MAXIMUM
ENDING MONTH-END AVERAGE AVERAGE
BALANCE BALANCE BALANCE RATE
------- --------- ------- -------
<S> <C> <C> <C> <C>
Repurchase Agreements.................. $4,550 $4,550 $ 23 6.09%
Other Borrowings....................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------
MAXIMUM
ENDING MONTH-END AVERAGE AVERAGE
BALANCE BALANCE BALANCE RATE
------- --------- ------- -------
<S> <C> <C> <C> <C>
Repurchase Agreements.................. $ -- $ -- $ -- --
Other Borrowings....................... -- -- -- --
</TABLE>
Repurchase agreements represent short-term borrowings, generally for 90 days or
less, entered into with various corespondent banks. Other borrowings is a term
loan entered into on June 25, 1998 that matures on July 15, 2005. This loan
requires monthly payment of interest at prime plus 1.5% and $100,000 principal
payments in 2001, 2002, 2003 and 2004 and the balance of $600,000 is due on July
15, 2005. We have pledged as collateral the common stock of the bank.
EMPLOYEES
As of September 30, 1998, we employed 23 full-time equivalent employees.
Part-time employees are converted to full-time equivalent employees based on the
percentage of their weekly hours worked compared to 40 hours. We believe that we
enjoy satisfactory relations with our employees.
As a method to control costs, we have reduced the number of people we directly
employ by outsourcing functions such as data processing, computer maintenance,
credit review, loan documentation and some loan origination functions to outside
vendors, including a company controlled by some of our executives. See "Related
Transactions".
FACILITIES
We lease our El Segundo headquarters and branch office, consisting of
approximately 5,620 square feet of space, through 2013 for $8,149 per month. One
of our directors is a partner in the lessor. See "Related Transactions".
43
<PAGE> 44
We own the 2,400 square feet building and lease the land that our Marina del Rey
branch is located upon under a lease that expires in 2000. The current monthly
rent is $5,734 plus property taxes and subject to annual increases equivalent to
the increase in the Consumer Price Index. Upon expiration of the lease, we
expect to move to an upgraded location in the vicinity.
COMPETITION
The banking business in California generally, and our market area specifically,
is highly competitive. A number of major banks have offices in our market area
and currently dominate loan and deposit origination. We compete for deposits and
loans principally with these major banks, as well as with savings and loan
associations, finance companies, credit unions and numerous other financial
institutions located in our market area.
We consider our primary service area to range from the South Bay to the San
Fernando Valley in western Los Angeles County. Our service area includes
numerous branches of larger banks and savings institutions.
Among the advantages which the major banks have over us are their ability to
finance extensive advertising campaigns and to offer the convenience of many
retail outlets. Many of the major banks operating in our service area offer
services, such as trust and international banking services, which we do not
offer directly. In addition, these larger banks usually have substantially
higher lending limits than we do.
LEGAL PROCEEDINGS
To the best of our knowledge, there are no pending or threatened legal
proceedings to which we are a defendant which may have a materially adverse
effect upon our business or property. However, the bank is a plaintiff in
lawsuits to collect delinquent loans. These lawsuits are routine and incidental
to our business.
44
<PAGE> 45
DIRECTORS, OFFICERS AND SIGNIFICANT EMPLOYEES
OFFICERS AND DIRECTORS
The following is a list of the directors of First Coastal and the executive
officers and significant employees of First Coastal and the bank. The year first
elected or appointed indicates the year such person was elected or appointed as
director of First Coastal or, if earlier, the bank.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED OR
NAME AGE TITLE APPOINTED
---- --- ----- ----------
<S> <C> <C> <C>
Don M. Griffith............. 55 Chairman, President and Chief Executive 1996
Officer of First Coastal and the bank
Deborah A. Marsten.......... 45 Director, Secretary and Chief Financial 1996
Officer of First Coastal; Director of
the bank
James F. Gardunio........... 48 Director of First Coastal; Director, 1996
Executive Vice President and Chief
Credit Officer of the bank
Paul M. Deters.............. 58 Director of First Coastal and the bank 1983
Clifford J. Einstein........ 59 Director of First Coastal 1983/1992
Charles R. Fullerton........ 56 Director of First Coastal and the bank 1996
Carole J. LaCaze............ 55 Director of First Coastal and the bank 1996
Joseph H. Wender............ 54 Director of First Coastal 1997
Gordon Fong................. 31 Senior Vice President and Chief N/A
Financial Officer of the bank
C. Edward Myska............. 53 Senior Vice President of the bank N/A
Charles E. Brooks........... 62 (see below)
</TABLE>
Don M. Griffith is Chairman, President and Chief Executive Officer of First
Coastal and the bank. Mr. Griffith is also Chief Executive Officer and Manager
of California Community LLC, which bought a majority interest in the bank in
August, 1996. Mr. Griffith is also the Chairman of DataTech Management, Inc. and
the founder of D.M. Griffith & Co., Inc., an investment firm started with the
financial backing of Kohlberg, Kravis, Roberts & Co. in 1989 to invest in banks
and thrifts. Mr. Griffith was Chairman and Founder of Peninsula National Bank
from 1993 until the sale of his interest in Peninsula in 1995. Mr. Griffith was
previously a director of Palos Verdes National Bank, the predecessor to
Peninsula, which failed in 1993. Mr. Griffith's previous banking experience also
includes work at First Interstate Bancorp from 1979 to 1989, where he was
Executive Vice President and Chief Financial Officer, and Bank of America from
1974 to 1979, where he was in charge of the energy lending unit in Los Angeles.
A Los Angeles native, Mr. Griffith earned an MBA from the Harvard Graduate
School of Business Administration, a MA in Political Science from the University
of California, Berkeley and a BA in Political Science from Stanford.
Deborah A. Marsten is Director, Secretary and Chief Financial Officer of First
Coastal, and Director of the bank. Ms. Marsten has over 27 years of experience
in banking and related businesses. Ms. Marsten is also a Manager of California
Community LLC and the President and Chief Executive Officer of DataTech
Management, Inc. From 1993 to 1996,
45
<PAGE> 46
Ms. Marsten was a consultant specializing in bank operations. She was formerly
both the Senior Vice President and Chief Financial Officer of Western United
National Bank from 1988 to 1993 and Brentwood Square Savings and Loan
Association from 1985 to 1988, and Vice President and Cashier of both Mercantile
National Bank and First Beverly Bank.
James F. Gardunio is a Director of First Coastal, and Director, Executive Vice
President and Chief Credit Officer of the bank. From 1996 to 1997 he was Senior
Vice President and Chief Credit Officer of Aames Financial Corporation, a
company that originates, purchases and sells residential home loans. Previously,
Mr. Gardunio was Executive Vice President and Chief Credit Officer of Mercantile
National Bank from 1994 to 1996, Senior Vice President and Chief Credit Officer
of California Federal Bank from 1989 to 1994, as well as Vice President and
Senior Credit Officer of Wells Fargo Bank from 1982 to 1989. Mr. Gardunio is a
graduate of the Stanford University Graduate School of Business.
Paul M. Deters, Director of First Coastal and the bank, is the Chairman of the
Board of Bussco, Inc. in Torrance, which manufactures electronic components for
the aerospace and computer industries. He is also Chairman and CEO of PDP
International, a manufacturer of electrical products used in the
telecommunications industry. Mr. Deters served as the founding Chairman of the
bank for ten years.
Clifford J. Einstein, Director of First Coastal, is the Chairman, CEO, Managing
Partner, and Creative Director of Dailey & Associates, a division of Interpublic
Group of Companies, one of the world's largest advertising companies. He has
held these positions since 1994. Mr. Einstein is on the Advisory Board of the
Rape Treatment Center of Santa Monica. He is a member of the Screen Actors
Guild, the Directors Guild of America and of ASCAP, and is a trustee of the
Museum of Contemporary Art.
Charles R. Fullerton, Director of First Coastal and the bank, is Co-owner and
Chief Financial Officer of Parsec Automation Corp., a software and engineering
service company located in Brea, California. In addition, he is the owner of
Fullerton & Co., a financial advisory firm in Long Beach, California, which
places debt and equity for small and medium sized companies. From 1986 to 1990,
Mr. Fullerton was Managing Director of First Interstate Venture Capital
Corporation, a capital fund that invested in small businesses. He earned his BA
in economics from Stanford University and his MBA from the University of
Southern California.
Carole J. LaCaze, Director of First Coastal and the bank, is a Partner of LaCaze
Development Company, where she and her husband develop, hold and manage over two
million square feet of retail space in California and Nevada. Mrs. LaCaze
graduated with a BA from UCLA and completed graduate studies in education at
USC. She also serves on the boards of the Little Company of Mary Hospital
Foundation and the Hospice Foundation.
Joseph H. Wender, Director of First Coastal, is a Limited Partner of Goldman,
Sachs & Co., a full-service investment banking and financial services firm, and
works in its Financial Institutions Group. Mr. Wender joined Goldman, Sachs &
Co. in 1971 and rose to the position of Vice-President of the Investment Banking
Division in 1975 and Partner in 1982. Mr. Wender is also a director of ISIS
Pharmaceuticals Inc. Mr. Wender is a graduate of Yale Law School and the Harvard
Graduate School of Business.
Gordon Fong is Senior Vice President and Chief Financial Officer of the bank.
Prior to joining the bank in September 1997, Mr. Fong was a Manager at Deloitte
& Touche, LLP
46
<PAGE> 47
where he specialized in the audits of community banks in the Southern California
area. Mr. Fong is a Certified Public Accountant and received his BA from UCLA in
Economics/Business.
C. Edward Myska is Senior Vice President of Business Development/Marketing of
the bank. Mr. Myska has over 25 years of experience in the banking industry.
From 1987 to 1997, Mr. Myska was employed by Marathon National Bank as Senior
Vice President of Business Development. From 1979 to 1987, Mr. Myska was Vice
President of Banking Operations with First Federal Bank. Mr. Myska is a graduate
of California State University, Northridge where he received a BA degree in
Business Management and Sociology.
Charles E. Brooks will become the Vice-Chairman of the Board of First Coastal
and the bank and Executive Vice President of the bank upon the consummation of
the acquisition of AIB. Since 1987, Mr. Brooks has been the President and Chief
Executive Officer of AIB. Mr. Brooks has over 40 years of experience in banking,
finance and credit management and was previously Executive Vice President and
Loan Administrator of California Overseas Bank from 1985 to 1987. From 1964 to
1985, Mr. Brooks held various positions at Security Pacific National Bank,
eventually rising to the position of Vice President of the Correspondent Banking
Department. Mr. Brooks is a Director of Community Bankers of Southern
California.
ADMINISTRATORS OF THE TRUST
Gordon Fong and James F. Gardunio will serve as administrators of the trust. As
the holder of the common securities of the trust, we have the right to appoint
the administrators. The rights and duties of the administrators are set forth in
the trust Agreement, which is included as an exhibit to the registration
statement of which this prospectus is a part, and generally consist of
administrative and ministerial duties associated with the operation of the
trust. The administrators shall not be trustees or, to the fullest extent
permitted by law, fiduciaries with respect to the trust or the holders of the
preferred securities. The administrators will not receive any additional
compensation for serving as administrators.
EMPLOYMENT AGREEMENTS
We have entered into a three-year employment agreement with Mr. Gardunio
commencing on July 1, 1997. The agreement entitles Mr. Gardunio to annual
compensation of $100,000 and a signing bonus of $45,000 paid in installments
over the three-year term.
We have also entered into a three-year employment agreement with Mr. Myska
commencing on August 1, 1997. The agreement entitles Mr. Myska to annual
compensation of $80,000 and quarterly commissions based on a percentage of new
deposits Mr. Myska generates for us.
Mr. Brooks will be subject to a three-year employment agreement effective upon
the consummation of our acquisition of AIB. Mr. Brooks will be entitled to an
annual base salary of $110,000, the use of an automobile and salary continuation
benefits upon his retirement.
47
<PAGE> 48
REMUNERATION OF DIRECTORS AND OFFICERS
Our directors and officers receive no additional compensation for serving as
directors and officers of First Coastal. The bank pays all salary and
compensation. The following table sets forth the aggregate annual remuneration
of our three highest paid officers for the 1998 fiscal year, and for fiscal
years 1997 and 1996. No other officer had annual salary and bonuses totaling
more than $100,000, and none of these officers were employed by us in fiscal
year 1995.
<TABLE>
<CAPTION>
NAME AND ANNUAL
PRINCIPAL POSITION FISCAL YEAR SALARY BONUS
------------------ ----------- -------- -------
<S> <C> <C> <C>
Don M. Griffith, Chairman and Chief 1998 $112,920 --
Executive Officer of the bank 1997 $112,920 --
1996(1) $ 47,050 --
James F. Gardunio, Executive Vice President 1998 $100,000 $15,000
and Chief Credit Officer of the bank 1997(2) $ 50,000 $15,000
1996 N/A N/A
C. Edward Myska, Senior Vice President 1998 $ 80,000 $72,632
and Business Development Officer of the bank 1997(3) $ 33,333 $ 4,450
1996 N/A N/A
</TABLE>
- -------------------------
(1) Mr. Griffith's employment began on August 1, 1996.
(2) Mr. Gardunio's employment began on July 1, 1997.
(3) Mr. Myska's employment began on August 1, 1997.
DIRECTOR COMPENSATION
The members of our board of directors do not receive any fees for being a
director or attending meetings.
STOCK OPTION PLAN
Our shareholders approved an employee stock option plan in 1996, which provides
for the issuance of up to 85,000 options to directors, officers and key
employees. The exercise price of options issued under our stock option plan must
be at least 100% of the fair market value of the common stock on the date the
options are granted. As of December 31, 1998, options to purchase 60,000 shares
of common stock were outstanding, of which 12,000 are currently exercisable.
We believe that stock options serve as effective performance-based incentives
and expect to have a number of stock options equal to 10 - 15% of our common
stock outstanding at any time. Prior to the completion of this offering, we
intend to amend the stock option plan to increase the number of options eligible
to be issued.
48
<PAGE> 49
Except for our employee stock option plan, we do not have any other long-term
incentive plan. In fiscal year 1997, we granted options to purchase 5,000 shares
of common stock to James F. Gardunio at an exercise price of $5.75 per share.
These options expire November 20, 2007 and were the only options we granted in
fiscal year 1997. The following table sets forth information concerning stock
options granted during fiscal year 1998. No stock options were exercised during
fiscal years 1997 or 1996.
<TABLE>
<CAPTION>
PERCENT OF
OPTIONS TOTAL OPTIONS
GRANTED IN GRANTED IN
NAME OF HOLDER 1998 1998 EXERCISE PRICE EXPIRATION DATE
-------------- ---------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Don M. Griffith...... 25,000 42% $6.25 Feb. 20, 2008
James F. Gardunio.... 5,000 8% $6.25 Feb. 20, 2008
Deborah A. Marsten... 25,000 42% $6.25 Feb. 20, 2008
C. Edward Myska...... 0 0% N/A N/A
</TABLE>
The following table sets forth the total number of exercisable and unexercisable
options at December 31, 1998, and the value of such options.
<TABLE>
<CAPTION>
VALUE OF IN-THE-MONEY
TOTAL EXERCISABLE/ EXERCISABLE/UNEXERCISABLE
UNEXERCISABLE OPTIONS AT OPTIONS AT DECEMBER 31,
NAME OF HOLDER DECEMBER 31, 1998 1998*
-------------- ------------------------ -------------------------
<S> <C> <C>
Don M. Griffith................ 5,000/20,000 $3,750/$15,000
James F. Gardunio.............. 2,000/8,000 $2,000/$ 8,000
Deborah A. Marsten............. 5,000/20,000 $3,750/$15,000
C. Edward Myska................ 0/0 N/A
</TABLE>
- -------------------------
* Assumes a value of $7.00 per share of common stock.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Section 317 of the California Corporations Code authorizes a court to award, or
a corporation's board of directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933. Article FIFTH of our Articles of
Incorporation and Section 7.5 of our Bylaws provide for indemnification of our
directors, officers, employees and other agents to the fullest extent permitted
by the California Corporations Code. These documents have been filed as exhibits
to the registration statement of which this prospectus is a part. In addition,
we maintain a directors and officer's liability insurance policy.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
49
<PAGE> 50
BENEFICIAL OWNERSHIP OF COMMON STOCK
SECURITY OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth the shares of series A preferred stock and common
stock beneficially owned as of December 31, 1998 by each of our executive
officers, each of our directors, each person known to us to be the beneficial
owner of more than 5% of the outstanding series A preferred stock or common
stock, and all of our directors and executive officers as a group. Percentage
amounts for the common stock assume the exercise of all stock options and
warrants exercisable by such person within 60 days, the conversion of all shares
of series A preferred stock held by said person, the distribution by California
Community LLC of its shares of our common stock to its members and no exercise
of options or warrants, and no conversion of series A preferred stock, by any
other person.
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK COMMON STOCK
-------------------------- -----------------------------------
AMOUNT AND PERCENT OF AMOUNT AND PERCENT
NATURE OF CLASS BEFORE NATURE OF OF CLASS PERCENT
NAME AND ADDRESS BENEFICIAL AND AFTER THE BENEFICIAL BEFORE THE AFTER THE
OF BENEFICIAL OWNER OWNERSHIP OFFERING OWNERSHIP OFFERING OFFERING
------------------- ---------- ------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Don M. Griffith(1)........... 3,940(2) *% 697,640(2) 77.6% 56.9%
Paul M. Deters(1)............ 0 0 5,317 * *
Clifford J. Einstein(1)...... 0 0 5,560 * *
Charles R. Fullerton(1)...... 0 0 13,429(3) 1.5 1.1
James F. Gardunio(1)......... 0 0 2,200(4) * *
Carole J. LaCaze(1).......... 0 0 13,429(3) 1.5 1.1
Deborah A. Marsten(1)........ 0 0 18,629(5) 2.1 1.5
Joseph H. Wender(1).......... 4,741 1.1 79,659(6) 8.9 6.5
California Community LLC(7).. 0 0 688,700(9) 77.4 56.5
355 South Grand Ave.,
Suite 4295
Los Angeles, CA 90071
Charles A. Davis(8).......... 13,333 3.1 74,821(10) 8.3 6.1
Stephen Friedman(8).......... 13,333 3.1 74,821(10) 8.3 6.1
John Markham Green(8)........ 13,333 3.1 74,821(10) 8.3 6.1
Charles E. Brooks(11)........ 0 0 0 0 0
All directors and executive
officers as a group........ 8,681 2.1 730,981(12) 80.7 59.1
</TABLE>
- -------------------------
* Less than 1%.
(1) The address for each person is c/o First Coastal Bancshares, 275 Main
Street, El Segundo, California 90245.
(2) Mr. Griffith is the Chief Executive Officer of California Community LLC,
which holds 513,700 shares of common stock and warrants to purchase an
additional 175,000 shares of common stock. Mr. Griffith beneficially owns
13.43% of California Community LLC's capital units. As the CEO of
California Community LLC, Mr. Griffith has the power to vote all of the
common stock held by California Community LLC and is therefore deemed to be
a beneficial owner of all of such shares. Mr. Griffith also beneficially
owns 5,000 shares of common stock pursuant to stock options exercisable
within 60 days and 3,940 shares of series A preferred stock held by his
wife.
50
<PAGE> 51
Mr. Griffith does not directly hold any shares of common stock. Mr.
Griffith disclaims ownership of all but 97,492 shares.
(3) These individuals do not directly hold any shares of common stock, but
instead each beneficially own 1.95% of the capital units of California
Community LLC, which represents approximately 13,429 shares of common
stock.
(4) Includes 200 shares held directly and 2,000 options to purchase common
stock exercisable within 60 days.
(5) Ms. Marsten beneficially owns of 1.95% of the capital units of California
Community LLC, which represents approximately 13,429 shares of common
stock, and 200 shares of common stock directly. Ms. Marsten also
beneficially owns 5,000 shares of common stock pursuant to stock options
exercisable within 60 days.
(6) Mr. Wender beneficially owns 7.80% of the capital units of California
Community LLC, which represents approximately 53,718 shares of common
stock, 21,200 shares of common stock held directly and 4,741 shares of
series A preferred stock, which are convertible into 4,741 shares of common
stock.
(7) Controlled by Mr. Griffith and Ms. Marsten.
(8) The address for each is c/o California Community LLC, 355 South Grand Ave.,
Suite 4295, Los Angeles, CA 90071.
(9) Includes warrants to purchase 175,000 shares of common stock at $5.00 per
share which are exercisable until May 31, 1999.
(10) Each of these individuals beneficially owns 5.85% of the capital units of
California Community LLC, which represents approximately 40,288 shares of
common stock, 21,200 shares of common stock held directly and 13,333 shares
of series A preferred stock, which are convertible into 13,333 shares of
common stock.
(11) Mr. Brooks did not hold any shares of First Coastal capital stock as of
September 30, 1998. However, upon the commencement of Mr. Brook's
employment with us following the AIB acquisition, he will receive options
to purchase 8,000 shares of common stock at the then-market price per
share, which expire ten years from their date of issue and of which
one-fifth will be immediately exerciseable.
(12) Includes all shares beneficially owned by California Community LLC, all
shares directly owned, all shares obtainable upon conversion of shares of
series A preferred stock and all shares which may be purchased upon
exercise of stock options.
CALIFORNIA COMMUNITY LLC
California Community LLC is a California limited liability company controlled by
Don M. Griffith and Deborah A. Marsten, who are directors and executive officers
of First Coastal. No other investor in California Community LLC is permitted to
own more than 9.9% of the membership units of California Community LLC. In
August 1996, California Community LLC was approved by the Federal Reserve to
become a bank holding company and acquired a majority interest in the bank. In
addition to its ownership of 513,700 shares of our common stock, California
Community LLC holds a total of 175,000 warrants to purchase our common stock at
an exercise price of $5.00 per share, which expire May 31, 1999. In December
1998, it exercised warrants to purchase 50,000 shares of common stock for an
aggregate of $250,000.
California Community LLC has agreed to exercise all of the warrants held by it
prior to the consummation of the acquisition of AIB. California Community LLC
has informed us that prior to the consummation of the acquisition of AIB, it
intends, but is not obligated,
51
<PAGE> 52
to distribute a significant portion of the common stock then held by it to its
members on a pro rata basis so that California Community LLC would no longer
need to be registered as a bank holding company. As a result of this planned
distribution, no shareholder of First Coastal would hold a majority of the
voting power of our common stock, although the members of California Community
LLC would individually control significant blocks of shares.
52
<PAGE> 53
RELATED TRANSACTIONS
DataTech Management, Inc. provides us with loan servicing and computer hardware
and software maintenance services. Two of our executive officers and directors,
Don M. Griffith and Deborah A. Marsten, own DataTech. We have entered into our
agreements with DataTech after arms'-length negotiations, approval by our
disinterested directors and our verification that the prices we pay are similar
to those DataTech charges its other community bank clients. For the nine months
ended September 30, 1998, we have paid fees to DataTech of approximately
$108,000.
One of our directors, Clifford J. Einstein, owns a 25% interest in the lessor of
our headquarters and main branch in El Segundo, California. Mr. Einstein was not
involved in the negotiations on behalf of either party concerning the lease. Our
Board employed an independent real estate appraiser as well as real estate
counsel to evaluate the lease and determined that this office space was obtained
at rates or terms no less favorable to us than would have been obtained from a
non-affiliated person. Rent on this property is $8,149 per month.
All ongoing and future affiliated transactions will be made or entered into on
terms that are no less favorable to First Coastal than those that can be
obtained from unaffiliated third parties. All such affiliated transactions, and
the forgiveness of any loans, must be approved by a majority of the independent,
disinterested members of First Coastal's board of directors.
53
<PAGE> 54
THE PROPOSED ACQUISITION OF
AMERICAN INDEPENDENT BANK
We have entered into an agreement to acquire American Independent Bank, N.A.,
pursuant to which we will acquire all of the outstanding shares of AIB for
approximately $7.3 million, including expenses and adjustments. The proceeds
from this offering will provide all of such funds. Assuming all conditions are
met or waived, including receipt of all required banking regulatory approvals,
we intend to complete the acquisition immediately following consummation of this
offering, and in no event later than February 28, 1999. We filed an application
with the Office of the Comptroller of the Currency on October 13, 1998 for
approval under the Bank Merger Act. In addition, on October 27, 1998, we
obtained a waiver from the Board of Governors of the Federal Reserve System for
approval under the Bank Holding Company Act. The acquisition of AIB has been
approved by our board of directors and AIB's board of directors. AIB's
shareholders approved the acquisition on October 22, 1998. Pursuant to the
underwriting agreement, the underwriters will not be obligated to consummate the
offering until we have received all necessary regulatory approvals for the
acquisition.
AIB is a community bank conducting a general commercial banking business that
serves professionals, individuals and small to medium-sized businesses. As of
September 30, 1998, AIB had total assets of $37.6 million, shareholders' equity
of $3.5 million and deposits of $33.6 million. See the financial statements of
AIB included in the back part of this prospectus for more information. AIB's two
branches are located at 1644 W. Redondo Beach Boulevard, Gardena, California
90247 and 333 North Glenoaks Boulevard, Burbank, California 91502.
We believe that this acquisition will enable us to better compete in the
marketplace for deposits and loans and provide our existing customers with
better service. For example, our existing customers in the San Fernando Valley
can use the AIB branch in Burbank, California for more convenient services, and
we can lower our courier costs for such customers due to the closer proximity of
the Burbank office.
In addition, we believe that by combining certain operations of the Bank and
AIB, we can achieve cost savings by eliminating duplicative administrative costs
and consolidating routine operations with low marginal costs. For example, we
can eliminate duplicative controller functions and other management and staff
positions, we can combine our data processing systems, and we can offer our
current cash management products to AIB's customers to achieve lower average
costs through a greater client base. Our belief that we can achieve these cost
savings is based in part on our recent acquisition of Marina Bank, where we
reduced Marina's non-interest expense by over 50%. We also believe that AIB's
customer base and operating philosophy are similar to ours, which should help
facilitate the integration of our operations.
54
<PAGE> 55
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet as of September 30,
1998 combines our historical balance sheet with AIB's as if the acquisition and
offering had been effective on that date after giving effect to the purchase
accounting adjustments described in the accompanying notes. The unaudited pro
forma combined statements of income combines our results of operations with
AIB's for the nine months ended September 30, 1998 and the year ended December
31, 1997 as if the acquisition and offering had been effective on January 1,
1997 after giving effect to purchase accounting adjustments described in the
notes.
The unaudited pro forma combined financial statements and accompanying notes
reflect the application of the purchase method of accounting. Under this method
of accounting, the purchase price will be allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the effective time
of the acquisition. Deferred tax assets and liabilities will be adjusted for the
difference between the tax basis of the assets and liabilities and their
estimated fair values. The excess, if any, of the total acquisition cost over
the sum of the assigned fair values of the tangible assets acquired less
liabilities assumed is recorded as goodwill. As described in the accompanying
notes, estimates of the fair values of AIB's assets and liabilities have been
combined with the recorded values of our assets and liabilities.
The unaudited pro forma combined balance sheet shows the effect the acquisition
would have had on our asset and liability balances if the transaction had been
consummated as of September 30, 1998. The total acquisition cost of $7.3 million
(including transaction costs, adjustments and fees) is allocated to the various
assets of AIB based upon estimates of fair market values. Goodwill of $3.8
million is shown, representing the excess of acquisition cost over the fair
value of the assets acquired less liabilities assumed.
The unaudited pro forma combined income statements for the nine months ended
September 30, 1998 and the year ended December 31, 1997 show the effect the
acquisition might have had on our historical operations. The pro forma
adjustments include only items that are directly attributable to the
transaction. PLEASE BE ADVISED THAT THIS INFORMATION DOES NOT TAKE INTO ACCOUNT
ANTICIPATED COST SAVINGS RESULTING FROM THE ACQUISITION OF AIB OR ADDITIONAL
INTEREST EXPENSE RESULTING FROM THE ISSUANCE OF THE PREFERRED SECURITIES. SEE
"THE PROPOSED ACQUISITION OF AMERICAN INDEPENDENT BANK."
The unaudited pro forma combined financial statements are intended for
informational purposes and are not necessarily indicative of the future
financial position or future results of operations of the combined company, or
of the financial position or the results of operations of the combined company
that would have actually occurred had the Acquisition been in effect as of the
date or for the periods presented.
These unaudited pro forma combined financial statements should be read in
conjunction with, and are qualified in their entirety by, our financial
statements and those of AIB, in each case appearing elsewhere in this
prospectus.
55
<PAGE> 56
ACQUISITION OF AIB BY FIRST COASTAL
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
FIRST COASTAL BANCSHARES AND SUBSIDIARY
----------------------------------------------------
FIRST AMERICAN
COASTAL INDEPENDENT COMBINED
BANCSHARES BANK ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and Due from Banks................... $ 3,710 $ 4,875 $ 8,585
Federal Funds Sold........................ 11,550 7,005 $ (653)(A) 19,609
8,083(B)
(6,376)(C)
-------- ------- ------- ----------
TOTAL CASH AND CASH
EQUIVALENTS.................. 15,260 11,880 1,054 28,194
Investment Securities..................... 6,077 4,000 10,077
Investment in Subsidiary Bank............. --
Note Receivable........................... --
Loans and Leases.......................... 56,325 20,913 77,238
Allowance for Loan and Lease Losses....... (562) (197) (759)
-------- ------- ------- ----------
NET LOANS AND LEASES............ 55,763 20,716 -- 76,479
Premises and Equipment.................... 413 377 790
Other Real Estate Owned................... 218 81 299
Goodwill.................................. 1,803 39 3,751(C) 5,593
Accrued Interest and Other Assets......... 1,586 501 769(B) 2,856
-------- ------- ------- ----------
TOTAL ASSETS.................... $ 81,120 $37,594 $ 5,574 $ 124,288
======== ======= ======= ==========
Demand Deposits........................... $ 21,448 $13,909 $ $ 35,357
Money Market, Savings and NOW Accounts.... 17,952 12,309 30,261
Certificates of Deposit................... 33,521 7,377 40,898
-------- ------- ------- ----------
TOTAL DEPOSITS.................. 72,921 33,595 -- 106,516
Accrued Interest and other Liabilities.... 1,154 488 886(D) 2,528
Long Term Debt............................ 1,000 -- 1,000
Preferred Securities of Subsidiary
Trust................................... -- -- 6,000(B) 6,000
Shareholders' Equity:
Preferred Stock......................... 2,658 -- (665)(A) 1,993
Common Stock............................ 3,424 4,059 70(A) 6,346
2,852(B)
(4,059)(C)
Retained Earnings....................... 14 (548) (58)(A) (44)
548(C)
Net unrealized gain (loss) on
securities........................... (51) (51)
-------- ------- ------- ----------
TOTAL SHAREHOLDERS' EQUITY...... 6,045 3,511 (1,312) 8,244
-------- ------- ------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY......... $ 81,120 $37,594 $ 5,574 $ 124,288
======== ======= ======= ==========
Common Shares Outstanding................. 664,551 1,200,669
</TABLE>
56
<PAGE> 57
ACQUISITION OF AIB BY FIRST COASTAL
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT AMOUNTS)
(A) We believe that approximately 11,118 shares of the series A preferred stock
will convert to common stock. This will result in an increase to common
stock of $70 and the issuance of 11,118 shares of common stock. We will
redeem up to 94,757 shares of series A preferred stock not electing to
convert at $6.89 per share ($653). Retained earnings will be charged for the
excess of the redemption price over the carrying amount of the series A
preferred stock ($58).
(B) We intend to fund the purchase of AIB and redeem our series A preferred
stock through the proceeds from this offering. The following underwriting
commissions and offering expenses are estimates.
<TABLE>
<S> <C>
Proceeds from Sale of Trust Preferred Securities -- 300,000
securities @ $20.00 per security.......................... $6,000
Underwriting Commissions.................................... (419)
Offering Expenses........................................... (350)
Proceeds from Sale of Common Stock -- 300,000 shares @ $6.50
per share................................................. 1,950
Underwriting Commissions.................................... (98)
Offering Expenses........................................... (125)
Exercise of outstanding warrants............................ 1,125
------
Net increase in Common Stock...................... 2,852
------
$8,083
======
</TABLE>
The costs and commissions related to the preferred securities will be
capitalized and amortized over the life of the securities. The costs
related to the common stock will be deducted from the proceeds and the net
amount added to common stock.
(C) Goodwill resulting from the acquisition of AIB is computed as follows:
<TABLE>
<S> <C>
Purchase price -- American Independent Bank................. $ 6,376
Net book value -- American Independent Bank................. (3,511)
Legal and Professional Fees................................. 152
Contract cancellation fees, net of taxes.................... 100
Change in control payments, net of taxes.................... 634
-------
Goodwill.................................................... $ 3,751
=======
</TABLE>
(D) The increase in other liabilities is comprised of the following costs that
will be incurred by AIB at or prior to the close:
<TABLE>
<S> <C>
Legal and Professional Fees................................. $152
Contract cancellation fees, net of taxes.................... 100
Change in control payments and severance costs, net of
taxes..................................................... 634
----
$886
====
</TABLE>
57
<PAGE> 58
ACQUISITION OF AIB BY FIRST COASTAL
UNAUDITED PRO FORMA CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT EPS)
<TABLE>
<CAPTION>
FIRST AMERICAN
COASTAL INDEPENDENT COMBINED
BANCSHARES BANK ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Interest and fees on loans............... $ 3,224 $1,832 $ 5,056
Interest on investment securities........ 480 216 696
Other interest income.................... 250 186 436
-------- ------ ----- ----------
Total interest income............... 3,954 2,234 6,188
Interest on deposits and other
borrowings............................. 1,651 446 2,097
-------- ------ ----- ----------
Net interest income................. 2,303 1,788 4,091
Provision for credit losses.............. 10 92 102
-------- ------ ----- ----------
Net interest income after provision
for credit losses................. 2,293 1,696 3,989
Noninterest income....................... 416 503 919
Noninterest expenses:
Salaries and employee benefits......... 954 792 1,746
Premises and equipment................. 317 220 537
Goodwill amortization.................. 100 5 188(A) 293
Other expenses......................... 852 931 1,783
-------- ------ ----- ----------
Total noninterest expenses.......... 2,223 1,948 188 4,359
-------- ------ ----- ----------
Income before income taxes.......... 486 251 (188) 549
Income taxes............................. 245 104 -- 349
-------- ------ ----- ----------
NET INCOME..................... $ 241 $ 147 $(188) $ 200
======== ====== ===== ==========
Earnings per share (EPS) data:
Basic earnings per share............... $ 0.04 $ 0.03
Weighted average shares used in
computation......................... 671,284 1,207,402
</TABLE>
- -------------------------
(A) Reflects 15 year amortization of $3,751 in Goodwill for nine months
58
<PAGE> 59
ACQUISITION OF AIB BY FIRST COASTAL
UNAUDITED PRO FORMA CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT EPS)
<TABLE>
<CAPTION>
FIRST AMERICAN
COASTAL INDEPENDENT COMBINED
BANCSHARES BANK ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Interest and fees on loans............. $ 2,627 $2,299 $ 4,926
Interest on investment securities...... 428 307 735
Other interest income.................. 117 162 279
-------- ------ ----- ----------
Total interest income................ 3,172 2,768 5,940
Interest on deposits and other
borrowings........................... 887 480 1,367
-------- ------ ----- ----------
Net interest income.................. 2,285 2,288 4,573
Provision for credit losses............ 25 -- 25
-------- ------ ----- ----------
Net interest income after provision
for credit losses................. 2,260 2,288 4,548
Noninterest income..................... 245 650 895
Noninterest expenses:
Salaries and employee benefits....... 1,144 1,068 2,212
Premises and equipment............... 310 431 741
Goodwill amortization................ 70 -- 250(A) 320
Other expenses....................... 826 949 1,775
-------- ------ ----- ----------
Total noninterest expenses........ 2,350 2,448 250 5,048
-------- ------ ----- ----------
Income before income taxes........ 155 490 (250) 395
Income taxes........................... 95 188 283
-------- ------ ----- ----------
NET INCOME................... $ 60 $ 302 $(250) $ 112
======== ====== ===== ==========
Earnings per share (EPS) data:
Basic earnings (loss) per share(B)... $ (0.15) $ (0.05)
Shares used in computation........... 638,990 1,175,108
</TABLE>
- -------------------------
(A) Anticipates 15 year amortization of $3,751 in Goodwill.
(B) In computing earnings per share, earnings are reduced by the $58 excess of
the redemption price of the series A preferred stock over the carrying
amount of the series A preferred stock. Had this charge not been included,
basic and diluted earnings per share would have been approximately $0.10 per
share.
59
<PAGE> 60
SUMMARY HISTORICAL FINANCIAL INFORMATION OF
AMERICAN INDEPENDENT BANK, N.A.
The following table presents a summary of selected financial information. This
information is only a summary and should be read in conjunction with AIB's
financial statements and related notes presented elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- --------------------------
1998 1997 1997 1996 1995
------- ------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income............................. $ 2,234 $ 2,051 $2,768 $ 2,385 $ 2,303
Interest Expense............................ 446 351 480 440 405
------- ------- ------ ------- -------
Net Interest Income......................... 1,788 1,700 2,288 1,945 1,898
Provision for Loan Losses................... 92 -- -- 35 190
------- ------- ------ ------- -------
Net Interest Income after Provision for Loan
Losses................................... 1,696 1,700 2,288 1,910 1,708
Noninterest Income.......................... 503 43 650 718 752
Noninterest Expense......................... 1,948 1,834 2,448 2,217 2,209
------- ------- ------ ------- -------
Income before Income taxes.................. 251 359 490 411 251
Income Taxes................................ 104 131 188 1 1
------- ------- ------ ------- -------
Net Income.................................. $ 147 $ 228 $ 302 $ 410 $ 250
======= ======= ====== ======= =======
BALANCE SHEET DATA -- AT PERIOD END
Total Assets................................ $37,594 $35,135 33,699 30,120 27,429
Total Loans................................. 20,913 19,695 21,130 19,241 17,185
Allowance for Loan Losses (ALLL)............ 197 267 216 260 319
Investment Securities....................... 4,000 4,590 3,500 4,200 1,700
Federal Funds Sold.......................... 7,005 4,680 3,920 2,000 2,335
Other Real Estate Owned..................... 81 130 130 49 169
Total Deposits.............................. 33,595 31,612 30,206 26,970 24,773
Total Shareholders' Equity.................. 3,511 3,235 3,310 2,996 2,517
OPERATING RATIOS AND OTHER SELECTED DATA
Return on Average Assets.................... 0.54% 0.94% 0.90% 1.36% 0.88%
Return on Average Equity.................... 5.76% 9.68% 9.56% 14.67% 10.63%
Operating Efficiency Ratio.................. 84.96% 83.63% 83.32% 83.25% 83.36%
Net Interest Yield.......................... 7.65% 8.27% 8.17% 7.72% 7.22%
Average Equity to Average Assets............ 9.31% 9.36% 9.43% 9.28% 8.25%
SELECTED ASSET QUALITY RATIOS -- AT PERIOD END
Nonperforming Loans to Total Loans.......... 3.19% 3.70% 2.88% 3.29% 7.60%
Nonperforming Assets to Total Assets........ 1.98% 2.44% 2.20% 2.27% 5.36%
ALLL as a Percentage of Nonperforming
Loans.................................... 29.66% 36.63% 35.35% 40.94% 24.50%
ALLL as a Percentage of Total Loans......... 0.95% 1.36% 1.02% 1.35% 1.85%
</TABLE>
60
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF AMERICAN INDEPENDENT BANK, N.A.
HISTORY
AIB commenced operations on February 1, 1984 as a national banking association
regulated by the OCC. AIB's deposits are insured up to the maximum legal limits
by the FDIC. AIB is a member of the Federal Reserve System and as such is also
subject to supervision by the Federal Reserve Bank of San Francisco. As of
September 30, 1998, AIB had total assets of approximately $37.6 million, total
deposits of approximately $33.6 million, and shareholders' equity of
approximately $3.5 million.
RECENT DEVELOPMENTS -- CAPSULE 1998 FOURTH QUARTER RESULTS
1998 fourth quarter earnings for AIB were $33,000 compared to $74,000 for the
same period in 1997. Total earnings for 1998 were $180,000 compared to 1997
earnings of $302,000. Although asset growth increased net interest income
slightly in 1998 over 1997, increases in the provision for loan losses, which
was $118,000 in 1998 compared to none in 1997 and other noninterest expenses
contributed to the overall decline in net income. The provision for loan losses
increased in 1998 as a result of increased charge-offs for problem loans. The
increase in charge-offs was primarily attributable to two problem loans, and
management does not believe that these loans are indicative of the overall
quality of its loan portfolio. Total assets were $38.2 million at December 31,
1998 compared to $37.6 million at September 30, 1998 and $33.7 million at
December 31, 1997.
DISCUSSION OF RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Total assets at September 30, 1998 were $37.6 million, an increase of $3.9
million from the $33.7 million in total assets at December 31, 1997. The
increase in assets was centered in short-term investments as total loans did not
materially change during 1998. The increase in total assets was funded by a $3.4
million increase in deposits which were $33.6 million at September 30, 1998
compared to $30.2 million at December 31, 1997. Management believes this growth
is representative of the improving economy in its primary market area.
Net income was $147,000 for the first nine months of 1998 compared to $228,000
for the same period in 1997. This decrease is comprised of several components.
Net interest income increased $88,000 as a result of the asset growth noted
above, although the net interest yield declined slightly as the majority of the
deposit growth occurred in the interest-bearing categories of deposits and the
asset growth was centered in the lower yielding investment category of assets.
The most significant component of the decline in net income was the provision
for loan losses which was $92,000 for 1998 compared to no provision in 1997.
Noninterest expense also increased primarily from increased equipment
depreciation and maintenance related to the computer conversion in late 1997,
and to a slight degree, costs associated with the Year 2000 compliance issues.
FISCAL YEAR 1997 VERSUS 1996 -- BASIS OF PRESENTATION
The following discussion and analysis is intended to assist in an understanding
of the significant factors that influenced AIB's financial condition at December
31, 1997 as
61
<PAGE> 62
compared to December 31, 1996 as well as the results of operations for the year
ended December 31, 1997 as compared to December 31, 1996. The discussion and
analysis should be read in conjunction with AIB's financial statements and
corresponding notes included elsewhere in this prospectus.
ASSETS
AIB's total assets increased $3.9 million, or 11.6%, to $37.6 million from
December 31, 1997 to September 30, 1998. AIB had total assets of $33.7 million
as of December 31, 1997, compared to $30.1 million as of December 31, 1996,
representing an increase in total assets of approximately $3.6 million, or
11.9%. This increase in total assets from December 31, 1996 to December 31, 1997
included an increase in net loans of approximately $2 million, or 10.2%. Total
deposits were approximately $30.2 million as of December 31, 1997, compared to
$27.0 million as of December 31, 1996, representing an increase in total
deposits of approximately $3.2 million, or 12.0%.
62
<PAGE> 63
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-earning assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed both in dollars and in rates. Nonaccrual
loans are included in the calculation of the average balances of loans, and
interest not accrued is excluded.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
-------------------------------
AVERAGE
INTEREST YIELD OR
AVERAGE EARNED RATE
BALANCE OR PAID PAID
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities........................... $ 4,325 $ 192 5.92%
Federal Funds Sold.............................. 4,864 186 5.10%
Other Earning Assets............................ 601 24 5.32%
Loans........................................... 21,372 1,832 11.43%
------- ------
Total Interest-Earning Assets........... 31,162 2,234 9.56%
Cash and Due From Bank............................ 4,466
Premises and Equipment............................ 398
OREO.............................................. 85
Other Assets...................................... 437
-------
Total Assets............................ $36,548
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW............................................. $ 3,049 $ 30 1.31%
Money Market.................................... 4,815 94 2.60%
Savings......................................... 3,219 53 2.20%
Time Deposits under $100,000.................... 3,916 147 5.00%
Time Deposits of $100,000 or More............... 3,063 122 5.31%
------- ------
Total Interest-Bearing Liabilities...... 18,062 $ 446 3.29%
------
Demand Deposits................................... 14,819
Other Liabilities................................. 265
Shareholders' Equity.............................. 3,402
-------
Total Liabilities and Shareholders'
Equity............................... $36,548
=======
Net Interest Income............................... $1,788
======
Net Yield on Interest-Earning Assets.............. 7.65%
=====
</TABLE>
63
<PAGE> 64
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
AVERAGE AVERAGE
INTEREST YIELD OR INTEREST YIELD OR
AVERAGE EARNED RATE AVERAGE EARNED RATE
BALANCE OR PAID PAID BALANCE OR PAID PAID
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities.......... $ 4,370 $ 281 6.43% $ 2,552 $ 166 6.50%
Federal Funds Sold............. 3,167 162 5.12% 4,391 229 5.22%
Other Earning Assets........... 437 26 5.95% 625 37 5.92%
Loans.......................... 20,030 2,299 11.48% 17,638 1,953 11.07%
------- ------ ------- ------
Total Interest-Earning
Assets.............. 28,004 2,768 9.88% 25,206 2,385 9.46%
Cash and Due From Bank........... 4,417 4,011
Premises and Equipment........... 341 163
OREO............................. 89 129
Other Assets..................... 637 559
------- -------
Total Assets........... $33,488 $30,068
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Liabilities:
NOW............................ $ 3,101 $ 40 1.29% $ 2,868 $ 40 1.39%
Money Market................... 4,441 106 2.39% 4,388 104 2.37%
Savings........................ 3,196 71 2.22% 2,810 62 2.21%
Time Deposits under $100,000... 3,265 158 4.84% 3,035 152 5.01%
Time Deposits of $100,000 or
More........................ 2,075 105 5.06% 1,659 82 4.94%
------- ------ ------- ------
Total Interest-Bearing
Liabilities......... 16,078 480 2.99% 14,760 440 2.98%
------ ------
Demand Deposits.................. 13,988 12,344
Other Liabilities................ 264 174
Shareholders' Equity............. 3,158 2,790
------- -------
Total Liabilities and
Shareholders'
Equity.............. $33,488 $30,068
======= =======
Net Interest Income.............. $2,288 $1,945
====== ======
Net Yield on Interest-Earning
Assets......................... 8.17% 7.72%
===== =====
</TABLE>
NET INTEREST INCOME
AIB's earnings depend primarily upon the difference between total interest
income, consisting of interest earned on its loans, securities and other earning
assets, and total interest expense, consisting of interest accrued on deposits
and other interest bearing
64
<PAGE> 65
liabilities. Net interest income was $2.3 million in 1997, compared to $1.9
million in 1996, reflecting an increase of approximately $343,000, or 18%.
The following table sets forth changes in interest income and interest expense
for each major category of interest-earning asset and interest-bearing
liability, and the amount of change attributable to volume and rate changes for
the years indicated. Changes not solely attributable to rate or volume have been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the changes in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
OVER
YEAR ENDED DECEMBER 31, 1996
----------------------------
INCREASE (DECREASE)
DUE TO CHANGE
(DOLLARS IN THOUSANDS)
----------------------------
VOLUME RATE CHANGE
------ ---- ------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment Securities........................... $117 $(2) $115
Federal Funds Sold.............................. (63) (4) (67)
Other Earning Assets............................ (11) -- (11)
Loans........................................... 273 73 346
---- --- ----
Total Interest Income................... 316 67 383
INTEREST-BEARING LIABILITIES:
Interest-Bearing Demand......................... 4 (2) 2
Savings......................................... 9 -- 9
Time Deposits under $100,000.................... 11 (5) 6
Time Deposits $100,000 or More.................. 21 2 23
---- --- ----
Total Interest Expense.................. 45 (5) 40
---- --- ----
Interest Differential or Net Interest Income...... $271 $72 $343
==== === ====
</TABLE>
PROVISION FOR LOAN LOSSES
During 1997, there was no provision for loan losses compared to $35,000 for
1996.
NONINTEREST INCOME
The major component of noninterest income (92% in 1997) consists of service
charges on deposit accounts and fees for other banking transactions. Noninterest
income decreased from approximately $718,000 as of December 31, 1996 to
$650,000, or 9.34%. The primary component of this decrease in noninterest income
was a decrease of approximately $42,000 in the gain on the sale of OREO.
NONINTEREST EXPENSE
AIB's noninterest expense increased from $2.2 million as of December 31, 1996 to
$2.4 million as of December 31, 1997, or 10%. Salary, wages and employee
benefits increased by approximately $75,000, which resulted primarily from an
increase in officers' salary expense due to a slight increase in staff as well
as other moderate increases. Professional fees also increased by approximately
$75,000.
65
<PAGE> 66
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
In the normal course of business, AIB must ensure that sufficient funds are
available to meet customer needs for borrowing and deposit withdrawals. As of
December 31, 1997, AIB had a ratio of total loans to total deposits of 70.0%,
compared to 71.3% the previous year. Liquid assets including securities held to
maturity represented 38.3%, compared to 38.1% of total deposits the previous
year.
The table below sets forth the interest rate sensitivity of AIB's
interest-earning assets and interest-bearing liabilities as of September 30,
1998, using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPORTING
--------------------------------------------------
THREE
MONTHS
LESS THAN TO LESS ONE TO OVER
THREE THAN ONE FIVE FIVE
MONTHS YEAR YEARS YEARS TOTAL
--------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-Bearing Deposits... $ 396 $ 297 $ -- $ -- $ 693
Investment Securities....... -- -- 4,000 -- 4,000
Federal Funds Sold.......... 7,005 -- -- -- 7,005
Loans....................... 15,385 1,275 3,750 576 20,986
------- ------- ------- ------- -------
22,786 1,572 7,750 576 32,684
INTEREST-BEARING LIABILITIES:
Money Market and NOW........ 9,191 -- -- -- 9,191
Savings..................... 3,118 -- -- -- 3,118
Time Deposits............... 2,834 4,231 312 -- 7,377
------- ------- ------- ------- -------
15,143 4,231 312 -- 19,686
------- ------- ------- ------- -------
INTEREST RATE SENSITIVITY
GAP...................... $ 7,643 $(2,659) $ 7,438 $ 576 $12,998
======= ======= ======= ======= =======
Cumulative Interest Rate
Sensitivity Gap............. $ 7,643 $ 4,984 $12,422 $12,998 $12,998
Cumulative Interest Rate
Sensitivity Gap Ratio Based
on Total Assets............. 20.33% 13.26% 33.04% 34.57% 34.57%
</TABLE>
YEAR 2000 ISSUES
FORMAL AGREEMENT
On July 28, 1998 AIB entered into a Formal Agreement with the OCC relating to
AIB's compliance with the OCC's and FFIEC's rules and regulations pertaining to
Year 2000 compliance. The Agreement required that AIB take various actions to
confirm Year 2000 compliance.
In accordance with the Formal Agreement, AIB submitted to the OCC a written
project plan with applicable deadlines, describing the specific objectives and
actions that will be taken by AIB's board or directors and management to ensure
that each of AIB's
66
<PAGE> 67
information and environmental systems are Year 2000 compliant. The plan includes
a formalized reporting process on a monthly basis to update the AIB's board of
directors on its overall Year 2000 project plan, which has already been
implemented. AIB submitted a testing plan, which includes provisions for the
development of a testing strategy for all mission critical systems that are to
be remediated. Additionally, the plan establishes a process to manage the Year
2000 risk posed by AIB's customers. AIB has also developed and implemented a
Year 2000 customer awareness program.
On October 1, 1998 AIB's formal agreement was terminated by the OCC.
AIB'S STATE OF READINESS
AIB has informed us that it has already completed and has begun to implement its
Year 2000 project plan and is currently in the fourth phase, renovation and
validation. Testing of AIB's mission critical software providers and vendors is
scheduled to be completed within the timeframes dictated by FFIEC regulation.
Additionally, we have been informed that testing has already been completed on
all of AIB's in-house computers and software, and noncompliant computers have
been replaced.
To date, AIB estimates that the total cost to evaluate, assess and remedy its
Year 2000 issues has been less than $70,000. AIB's future costs to complete
evaluation, assessment and remediation of Year 2000 issues, including
replacement if necessary, is expected to be less than $64,000.
Due to our proposed acquisition of AIB, we expect to convert AIB's computer
systems to our computer system. This conversion is likely to occur during the
first or second quarter of 1999. However, we will still have to monitor the Year
2000 preparedness of AIB's customers and vendors if we consummate our
acquisition. AIB has informed us that it has assessed the potential Year 2000
risks relating to its loan customers and depositors and has been promoting
customer awareness of the Year 2000 issue.
67
<PAGE> 68
LENDING ACTIVITIES
The following table sets forth the composition of AIB's loan portfolio by type
of loan at the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1998 1997 1996
------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans:
Commercial............................... $ 7,297 $ 7,934 $ 4,881
Consumer................................. 481 2,321 2,196
Construction Financing................... 3,297 2,020 153
Real Estate -- Other..................... 9,911 8,918 12,085
------- ------- -------
Total Loans...................... 20,986 21,193 19,315
Net Deferred Loan Fees and Discounts....... (73) (63) (74)
Allowance for Loan Losses.................. (197) (216) (260)
------- ------- -------
Net Loans.................................. $20,716 $20,914 $ 8,981
======= ======= =======
COMMITMENTS:
Standby Letters of Credit................ $ 20 $ 349 $ --
Undisbursed Loans and Commitments to
Grant Loans........................... 1,689 2,909 3,020
------- ------- -------
Total Commitments................ $ 1,709 $ 3,258 $ 3,020
======= ======= =======
</TABLE>
Many of the loans have floating rates tied to AIB's base rate or other market
rate indicator, the majority of which are adjusted at least quarterly. The
majority of AIB's fixed rate loans mature within five years. This serves to
lessen the risk to AIB from movements in interest rates, particularly rate
increases. The following table shows the maturity of AIB's loan categories
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
DUE IN DUE AFTER
ONE YEAR ONE YEAR TO DUE AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................ $5,163 $ 2,416 $ 355 $ 7,934
Consumer.......................... 890 1,395 36 2,321
Construction Financing............ 1,676 344 -- 2,020
Real Estate -- Other.............. 1,227 6,595 1,096 8,918
------ ------- ------ -------
$8,956 $10,750 $1,487 $21,193
====== ======= ====== =======
Floating Rate..................... $15,242
Fixed Rate........................ 5951
-------
$21,193
=======
</TABLE>
68
<PAGE> 69
ASSET QUALITY
The following table provides information with respect to the components of AIB's
nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
AT
DECEMBER 31,
AT ------------------
SEPTEMBER 30, 1998 1997 1996
------------------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-Accrual Loans.................... $ 596 $ 545 $ 525
Accruing Loans 90 Days Past Due and
Still Accruing..................... 4 -- 43
Restructured Loans................... 64 66 67
------ ------ ------
Total Nonperforming
Loans................... 664 611 635
Other Real Estate Owned.............. 81 130 49
------ ------ ------
Total Nonperforming
Assets.................. $ 745 $ 741 $ 684
====== ====== ======
Nonperforming Loans as a Percentage
of Total Loans..................... 3.19% 2.88% 3.29%
Allowance for Loan Losses as a
Percentage of Nonperforming
Loans.............................. 29.66% 35.35% 40.94%
Nonperforming Assets as a Percentage
of Total Assets.................... 1.98% 2.20% 2.27%
</TABLE>
Restructured loans are those loans where concessions in interest rates or
repayment terms have been made to assist the borrower. Non-accrual loans are
generally loans which are past due 90 days or are loans that management believes
the interest upon which may not be collectible. At September 30, 1998, all
non-accrual loans were secured by real estate. AIB recognized income of $0 in
1997 and $79,000 in 1996 for cash interest payments on restructured loans.
Interest income would have increased approximately $48,000 in 1997 and $2,000 in
1996 had all of these nonperforming loans performed in accordance with their
original terms and conditions.
69
<PAGE> 70
ALLOWANCE FOR LOAN LOSSES
The following table summarizes, for the periods indicated, changes in the
allowance for loan losses arising from loans charged off, recoveries on loans
previously charged off, additions to the allowance which have been charged to
operating expenses and ratios relating to the allowance for loan losses:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE NINE DECEMBER 31,
MONTHS ENDED ----------------------
SEPTEMBER 30, 1998 1997 1996
------------------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES:
Balance at Beginning of Period.......... $216 $260 $319
Actual Charge-offs:
Commercial............................ 80 44 81
Credit Cards.......................... 16 9 6
Consumer.............................. 37 6 2
Real Estate........................... -- -- 37
---- ---- ----
Total Charge-Offs............. 133 59 126
---- ---- ----
LESS RECOVERIES:
Commercial............................ 18 10 23
Credit Cards.......................... -- -- 1
Consumer.............................. 1 -- 3
Real Estate........................... 3 5 5
---- ---- ----
Total Recoveries.............. 22 15 32
---- ---- ----
Net Loans Charged Off (Recovered)....... 111 44 94
Provision for Loan Losses............... 92 -- 35
---- ---- ----
Balance at End of Period................ $197 $216 $260
==== ==== ====
RATIOS:
Net Loans Charged Off to Average
Loans................................. 0.69% 0.22% 0.53%
Allowance for Loan Losses to Total
Loans................................. 0.95% 1.02% 1.35%
</TABLE>
70
<PAGE> 71
The following table summarizes the allocation of the allowance for loan losses
by loan type for the periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
---------------------- ----------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Construction Financing.................. $ -- 9.5% $ -- 0.8%
Real Estate -- Other.................... 74 42.1 60 62.6
Commercial.............................. 5 37.4 20 25.3
Consumer................................ -- 11.0 -- 11.3
Unallocated............................. 137 N/A 180 N/A
---- ------ ---- ------
$216 100.00% $260 100.00%
==== ====== ==== ======
</TABLE>
INVESTMENT ACTIVITY
The following table summarizes the amounts and distribution of the AIB's
investment securities held as of the dates indicated, and the weighted average
yield as of September 30, 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------
WEIGHTED
BOOK MARKET AVERAGE
VALUE VALUE YIELD
----- ------ --------
<S> <C> <C> <C>
HELD-TO MATURITY SECURITIES U.S. AGENCIES:
One to Five Years............................. 4,000 4,026 6.0%
----- -----
Total U.S. Agencies...................... 4,000 4,026 6.0
----- -----
Total Held-to-Maturity Securities........ 4,000 4,026 6.0
===== =====
</TABLE>
71
<PAGE> 72
DEPOSITS
The following table summarizes the distribution of average deposits and the
average rates paid for the period indicated:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1998
----------------------
AVERAGE AVERAGE
BALANCE RATE
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NOW....................................................... $ 3,049 1.31%
Savings Deposits.......................................... 3,219 2.20
Money Market Accounts..................................... 4,815 2.60
TCD Less than $100,000.................................... 3,916 5.00
TCD $100,000 or More...................................... 3,063 5.31
-------
Total Interest-Bearing Deposits................. $18,062 3.29
Non Interest-Bearing Demand Deposits...................... 14,819 --
-------
Total Deposits.................................. $32,881 1.81
=======
</TABLE>
The scheduled maturity distribution of AIB's time deposits of $100,000 or
greater, as of September 30, 1998, were as follows (dollar amounts in
thousands):
<TABLE>
<S> <C>
Three Months or Less................... $1,454
Over Three Months to One Year.......... 1,861
------
Total........................ $3,315
======
</TABLE>
72
<PAGE> 73
SUPERVISION AND REGULATION
The following summarizes the significant statutes and regulations affecting us.
This is only a summary, and we do not intend it to replace a review of the
actual statutes and regulations.
THE BANK -- GENERAL
The bank is regulated by the OCC as a national banking association. The bank is
also subject to FDIC rules and regulations because its deposits are insured by
the FDIC. These regulatory agencies regularly examine the bank to ensure its
compliance with their rules and regulations.
FIRST COASTAL -- GENERAL
First Coastal is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, and as such is subject to regulation by the
Board of Governors of the Federal Reserve System (the "FRB"). The FRB regularly
examines First Coastal and the bank to ensure compliance with all applicable
laws and regulations.
The Bank Holding Company Act requires us to obtain the FRB's prior approval
before we acquire other banks or bank holding companies. In addition, any entity
that acquires more than 9.9% of our voting securities is generally presumed to
be a bank holding company, and such acquisition would require the prior approval
of the FRB.
CAPITAL ADEQUACY
The OCC has established minimum capital adequacy guidelines for national banks,
and the FRB has established minimum capital adequacy guidelines for bank holding
companies. The FRB's capital adequacy guidelines apply on a consolidated basis
if a bank holding company's consolidated assets are $150 million or more and
apply on a bank-only basis if consolidated assets are under $150 million. Our
consolidated assets on a pro forma basis as of September 30, 1998, after taking
into account the offering and the acquisition of AIB, would have been
approximately $124 million. See "Risk Factors -- Risk Factors Relating to First
Coastal -- We Face Certain Capital Requirements."
Under the capital adequacy guidelines, different categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. Tier 1 capital generally includes common shareholders' equity,
perpetual preferred stock and minority interests in consolidated subsidiaries.
The FRB has announced that securities having the characteristics of the
preferred securities qualify as Tier 1 capital, but only 25% of an institution's
Tier 1 capital may be in the form of such securities. Total capital generally
consists of, in addition to Tier 1 capital, preferred stock not qualifying as
Tier 1 capital, subordinated and other qualifying debt and a portion of the
allowance for loan losses. The Tier 1 component must comprise at least 50% of
qualifying total capital.
Risk-based capital ratios are calculated with reference to risk-weighted assets
which include both on and off-balance sheet exposures. The FRB requires a total
capital to risk-weighted assets ratio of at least 8% and a Tier 1 capital to
risk-weighted assets ratio of at least 4%. The FRB has also adopted a "minimum
leverage ratio," which requires a Tier 1 capital to average total assets ratio
of at least 4%. These minimum ratios currently apply to
73
<PAGE> 74
the bank and would apply on a consolidated basis to First Coastal only when our
consolidated assets exceed $150 million.
In addition to the FRB's risk-based capital guidelines, the OCC has adopted five
levels of capital for national banks; any national bank with a total capital to
risk-weighted assets ratio of at least 10%, Tier 1 capital to risk-weighted
assets ratio of at least 6% and a Tier 1 capital to average total assets ratio
of at least 5% is considered to be "well capitalized." The bank is currently
well capitalized, and after consummation of this offering and the acquisition of
AIB, would remain well-capitalized on a pro-forma basis.
See "Capitalization" on page 19 for our bank-only and consolidated capital
ratios as of September 30, 1998 and on a pro forma basis.
ADDITIONAL REGULATION
We are also subject to federal regulation as to such matters as required
reserves, limitation as to the nature and amount of our loans and investments,
regulatory approval of any consolidation, issuance or retirement by the bank of
its own securities, limitations upon the payment of dividends and other aspects
of banking operations. In addition, the activities and operations of the bank
are subject to a number of additional detailed, complex and sometimes
overlapping laws and regulations. These include state usury and consumer credit
laws, laws relating to fiduciaries, the Federal Truth-in-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Truth in Savings Act, the Community Reinvestment
Act, antiredlining legislation and antitrust laws.
DIVIDEND REGULATION
Our ability to obtain funds for the payment of dividends and for other cash
requirements is largely dependent on the amount of dividends which may be
declared by our subsidiary, the bank. National banks may not pay dividends from
their capital. All dividends must be paid out of net income, after deducting
losses and bad debts. In addition, the bank is prohibited from declaring a
dividend on its shares of common stock until:
(1) The surplus fund equals the amount of capital stock or
(2) If the surplus fund does not equal the amount of capital stock,
until an amount equal to one-tenth of the bank's net income for the
preceding half year is transferred into the surplus fund.
Under this formula, the bank would be eligible to pay up to approximately
$241,000 in dividends for the nine months ended September 30, 1998.
The approval of the OCC is required prior to the payment of dividends if the
total of all dividends declared by a national bank in any calendar year exceeds
the total of its retained net income for that year combined with its net income
for the two preceding years, less any required transfers to surplus or a fund
for the retirement of any preferred stock. Further, the OCC also has authority
to prohibit the payment of dividends by a national bank when it determines such
payment to be an unsafe and unsound banking practice. A bank may, upon approval
by OCC, be able to undergo a "quasi-reorganization," which would allow the bank
to ignore accumulated losses before the quasi-reorganization. The bank underwent
a quasi-reorganization in 1997.
74
<PAGE> 75
GOVERNMENT POLICIES AND LEGISLATION
The policies of regulatory authorities, including the OCC, FRB and FDIC, have
had a significant effect on the operating results of commercial banks in the
past and are expected to do so in the future. An important function of the
Federal Reserve System is to regulate aggregate national credit and money supply
through such means as open market dealings in securities, establishment of the
discount rate on member bank borrowings, and changes in reserve requirements
against member bank deposits. Policies of these agencies may be influenced by
many factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance and fiscal policies of the United
States government.
The United States Congress has periodically considered and adopted legislation
which has resulted in further regulation and/or deregulation of both banks and
other financial institutions, including mutual funds, securities brokerage firms
and investment banking firms. No assurance can be given as to whether any
additional legislation will be adopted or as to the effect such legislation
would have on the business of First Coastal or the bank.
In accordance with Florida law, we disclose that we do not do any business with
Cuba.
75
<PAGE> 76
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 10,000,000 shares of common stock, no
par value, and 5,000,000 shares of preferred stock, no par value. The following
summary descriptions disclose all material terms of our capital stock and is
qualified in its entirety by reference to our articles of incorporation and
by-laws, copies of which are filed as exhibits to the registration statement of
which this prospectus forms a part.
COMMON STOCK
As of September 30, 1998, there were 664,551 shares of common stock outstanding,
held of record by 337 stockholders (approximately 365 beneficial owners). The
holders of common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. Holders of common stock are entitled to
receive ratably such dividends as we may legally declare, subject to dividends
payable on any preferred stock that we issue. We currently do not intend to pay
any dividends on our common stock. In the event of our liquidation, dissolution
or winding up, holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference of
any outstanding preferred stock. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. All the outstanding shares of
common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
At September 30, 1998, we had 423,500 shares of series A preferred stock
outstanding, held of record by 5 stockholders (approximately 65 beneficial
owners). Without further shareholder approval, we can issue 4,576,500 additional
shares of preferred stock in one or more series and fix the powers,
designations, preferences and rights, and qualifications, limitations or
restrictions thereof.
The series A preferred stock is currently our only outstanding series of
preferred stock. The holders of series A preferred stock are entitled to receive
cumulative preferential cash dividends, when and as declared by the board of
directors, of 10% of the stated liquidation preference of $6.75 per share per
annum. We currently pay regular dividends to holders of series A preferred
stock.
Under the General Corporation Law of the State of California, we may pay
dividends on the series A preferred stock if (1) our retained earnings equal or
exceed the proposed dividend or (2) the sum of our assets would be at least 125%
of our liabilities. In the event we do not pay four quarterly dividends on the
series A preferred stock, the holders of the series A preferred stock would be
able to elect two additional directors to our board until such dividends have
been paid.
In the event of our liquidation, dissolution or winding up, the holders of
series A preferred stock are entitled to receive, in preference to any
distribution to the holders of our common stock, the sum of $6.75 per share and
any accrued but unpaid dividends with respect thereto.
Each share of our series A preferred stock is convertible into one share of our
common stock any time at the option of the holder.
76
<PAGE> 77
We may redeem our series A preferred stock at any time after receiving the prior
approval of the Federal Reserve. Assuming we receive this approval, we intend to
call up to 94,757 shares of our series A preferred stock for redemption on or
soon after the completion of this offering. Holders of 11,118 shares of our
series A preferred stock have signed conversion agreements obligating them to
convert their shares of series A preferred stock into shares of our common stock
on or prior to the redemption date. We cannot presently predict whether other
holders of our series A preferred stock will also convert their shares rather
than redeem them.
WARRANTS
California Community LLC currently holds 175,000 warrants to purchase our common
stock at $5.00 per share, which expire on May 31, 1999. California Community LLC
has agreed with us that it will exercise all warrants held by it on or prior to
the consummation of the AIB acquisition. In connection with this agreement, we
have amended the terms of California Community LLC's warrants to permit them to
be exercised earlier than their stated terms. In December 1998, California
Community LLC exercised 50,000 of its warrants. See "Beneficial Ownership of the
Common Stock -- California Community LLC."
In connection with this offering, we have granted the underwriters a number of
warrants to purchase our common stock. See "Underwriting -- Underwriters'
Warrants."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock and series A preferred
stock is U.S. Stock Transfer Corporation, Glendale, California.
U.S. Stock Transfer Corporation will also serve as transfer agent, registrar and
payment agent for the units and preferred securities.
77
<PAGE> 78
DESCRIPTION OF UNITS
Each unit is comprised of one preferred security and one share of common stock.
The preferred securities and common stock purchased in this offering must trade
together and cannot trade separately until the earliest to occur of the
following:
(1) One year after the closing of this offering.
(2) The decision by the underwriters, in their sole discretion, to
permit separation earlier than one year after the closing of this offering.
(3) A call of redemption of the preferred securities after the
occurrence of certain events.
(4) The occurrence of an event of default under the indenture
governing the junior subordinated debentures.
(5) The dissolution of the trust or a distribution of the junior
subordinated debentures.
Purchasers in this offering will receive two certificates: one representing
shares of common stock and one representing preferred securities. Each
certificate will contain restrictive legends describing to the foregoing
transfer restrictions. Purchasers will not receive a separate certificate
representing the units. Except for the requirement that the common stock and
preferred securities purchased in this offering be traded as a unit for a period
of time, holders of units will be treated as holders of both the common stock
and the preferred securities for all purposes. Upon termination of the transfer
restriction period for one of the reasons discussed above, purchasers may
exchange legended certificates for non-legended certificates by presenting them
to the transfer agent and registrar of the preferred securities.
78
<PAGE> 79
DESCRIPTION OF PREFERRED SECURITIES
This section summarizes all material terms of the preferred securities and the
trust Agreement governing the trust, but it does not describe all the
provisions. We have filed with the Securities and Exchange Commission a form of
the trust agreement as an exhibit to the registration statement of which this
prospectus is a part.
GENERAL
The trust will issue the preferred securities and the common securities under
the trust agreement. The common securities will be issued to us concurrently
with the issuance of preferred securities to purchasers in this offering. The
preferred securities and the common securities, jointly referred to as the trust
securities, will rank on parity with one another, and all payments in respect of
the capital interests of the trust will be made on the preferred securities and
the common securities pro rata, except under certain cases of default under the
trust agreement.
We will issue the junior subordinated debentures under an indenture between us
and Wilmington Trust Company as described in "Description of Junior Subordinated
Debentures". Wilmington Trust Company will also act as property trustee and will
hold legal title to the junior subordinated debentures in trust for the benefit
of the holders of the trust securities. In addition, under the guarantee as
described in "Description of Guarantee and Expense Agreement", we will
guarantee, on a subordinated basis, the payment of distributions and other
amounts payable on the preferred securities, but only to the extent that the
trust has funds on hand legally and immediately available to make those
payments. See "Description of Guarantee and Expense Agreement".
DISTRIBUTIONS
Distributions will accumulate on the preferred securities from their original
issue date, at the annual rate of 11 7/8% of the initial offering price of
$20.00 per security, or $2.375 per preferred security. Unless deferred as
described below, distributions will be payable quarterly on the last day of
March, June, September and December of each year, to the holders of the
preferred securities. The amount of distributions payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months.
The trust will have no funds to distribute in respect of the preferred
securities other than the payments it receives from us in respect of the junior
subordinated debentures. Consequently, if we defer or for any other reason fail
to make interest payments on the junior subordinated debentures, the trust will
not have funds available to pay distributions on the preferred securities. We
have no current intention to exercise our right to defer interest payments on
the junior subordinated debentures.
DEFERRAL PERIODS. As long as no event of default under the indenture, as
described under "Description of Junior Subordinated Debentures -- Indenture
Events of Default" has occurred and is continuing, we have the right under the
indenture to defer the payment of interest on the junior subordinated debentures
at any time. We may do so in each case for a period not exceeding 20 consecutive
quarters, provided that no deferral period may extend beyond the stated maturity
of the junior subordinated debentures. Before a deferral period ends, we may
extend it further, subject to the limit described above. When a deferral period
ends and we have paid all interest then accrued and unpaid on the junior
subordinated debentures, we may begin a new deferral period, so long as no
indenture
79
<PAGE> 80
event of default has occurred and is continuing. There is no particular limit on
the number of deferral periods that we may begin.
If we elect to defer interest payments on the junior subordinated debentures,
the trust will defer the payment of distributions on the preferred securities
during the related deferral period. However, during a deferral period,
distributions will continue to accumulate on the preferred securities and
additional distributions will accumulate on each deferred distribution payment
at the annual rate of 11 7/8%, compounded quarterly from the corresponding
distribution date. The term "distribution", wherever we use it in this
prospectus, includes any of these additional distributions. During a deferral
period, holders of preferred securities will continue to be required to accrue
interest income for United States federal income tax purposes. See "Federal
Income Tax Consequences -- Original Issue Discount".
Any distributions that would otherwise become due and payable during a deferral
period will not become due and payable until the day after the period ends. If
any preferred securities become subject to redemption during a deferral period,
that deferral period will end automatically on the day before the redemption
date.
We must give the property trustee and the holders of preferred securities notice
of our election to begin a deferral period. In general, each notice must be
given at least one business day before the record date for the distributions
which would have been payable but for the election.
We must notify the holders in the manner described below in "-- Notices".
DEFERRAL PERIOD RESTRICTIONS. The indenture provides that, during any deferral
period, neither we nor any of our subsidiaries may take any of the following
actions:
- - declare or pay any dividend or other distribution on, or redeem, purchase or
otherwise acquire, any of our capital stock, except as described below, or
- - pay any principal, interest or other amount in respect of, or redeem, purchase
or otherwise acquire, any of our debt securities that rank, in right of
payment in all respects, on parity with or junior to the junior subordinated
debentures, except as described below.
The indenture restrictions described above provides for significant exceptions.
Any of the following that would otherwise be covered by these restrictions will
nevertheless be permitted:
- - any transaction in which the only consideration given or to be given by us or
any of our subsidiaries is junior securities, as defined below,
- - any transaction in connection with or arising from:
-- any employment contract, benefit plan or other similar arrangement with, or
for the benefit of, one or more employees, officers, directors or
consultants of ours,
-- any stockholders' rights plans, and
-- any issuance of junior securities as consideration in an acquisition
transaction entered into before the applicable deferral period,
- - any exchange or conversion of capital stock or indebtedness into or for any of
our junior securities, and
80
<PAGE> 81
- - any purchase of fractional interests in capital stock pursuant to the
provisions of a security being converted into or exchanged for capital stock.
"Junior securities" means (1) our capital stock, (2) debt securities that rank,
in right of payment in all respects, on parity with or junior to the junior
subordinated debentures and (3) warrants, options and other rights to acquire
capital stock or debt securities of the kind described in clauses (1) and (2).
REDEMPTION
The preferred securities will remain outstanding until the trust redeems them or
distributes the junior subordinated debentures in exchange for the preferred
securities. Any redemption of preferred securities must occur as described
below.
REDEMPTION OF PREFERRED SECURITIES. If we repay or redeem the junior
subordinated debentures at any time, the trust will be obligated to redeem a
like amount of trust securities at the same redemption price paid on the junior
subordinated debentures. The redemption of the preferred securities will occur
on the redemption date, which mean the date on which payment of the principal of
those junior subordinated debentures becomes due under the indenture.
REPAYMENT AND REDEMPTION OF JUNIOR SUBORDINATED DEBENTURES. The junior
subordinated debentures will initially have a stated maturity of December 31,
2028, which we may shorten to a date not earlier than December 31, 2001 subject
to any regulatory approval. See "Description of Junior Subordinated
Debentures -- Stated Maturity". If we receive prior approval from the Federal
Reserve, if then required under relevant capital guidelines or policies, we will
also be entitled to redeem the junior subordinated debentures before their
stated maturity, as follows:
(1) On or after December 31, 2001, in whole at any time or in part
from time to time, provided that no partial redemption may occur during a
deferral period.
(2) In whole at any time within 90 days after the occurrence of a Tax
Event, an Investment Company Act Event or a Capital Treatment Event.
See "Description of Junior Subordinated Debentures -- Optional Redemption" for
the definitions of "Tax Event," "Investment Company Act Event" and "Capital
Treatment Event."
If we elect to redeem the junior subordinated debentures, we will do so at the
redemption price, which means:
(a) In the case of redemption pursuant to clause (1) above,
accumulated and unpaid distributions on the junior subordinated debentures
to be redeemed to the redemption date, plus an amount per debenture as set
forth below, expressed as a percentage of the principal amount:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
--------------- ----------------
<S> <C>
December 31, 2001 through December 30, 2002.... 108%
December 31, 2002 through December 30, 2003.... 105%
December 31, 2003 through December 30, 2004.... 102%
December 31, 2004 and thereafter............... 100%
</TABLE>
81
<PAGE> 82
(b) In the case of redemption pursuant to clause (2) above, the
principal amount of the junior subordinated debentures, plus accumulated
and unpaid distributions on those debentures to the redemption date.
The indenture provides that, if a Tax Event has occurred and is continuing and
we do not elect to redeem the junior subordinated debentures, we may be required
to pay certain additional sums on the junior subordinated debentures. The
indenture provisions regarding repayment and redemption of the junior
subordinated debentures are addressed in "Description of Junior Subordinated
Debentures--Stated Maturity."
REDEMPTION PROCEDURES. The property trustee will give notice of any redemption
of preferred securities to the holders of preferred securities not less than 30
nor more than 90 days before the redemption date, unless the redemption results
from acceleration of the maturity of the junior subordinated debentures and the
property trustee cannot reasonably give this notice during this period. In that
case, the property trustee will give the notice as soon as practicable. In all
cases, the property trustee will give the notice of redemption in the manner
described below under "-- Notices".
Payment of the redemption price for any preferred securities will be made
against surrender of the certificates representing those preferred securities.
Any distribution that is payable on or before the redemption date will be
payable to the persons who are the holders of those preferred securities on the
record date for the distribution.
If the property trustee gives a notice of redemption, it will irrevocably
deposit by 12:00 noon, New York City time, on the redemption date, funds
sufficient to pay the redemption price for all preferred securities to be
redeemed on that date to the extent the funds are available to the property
trustee. If the property trustee gives notice of redemption and deposits funds
as required under the trust agreement, then upon the date of deposit, all rights
of the holders of the preferred securities called for redemption will cease,
except the right of those holders to receive the redemption price, without
interest, and those preferred securities will cease to be outstanding. If
payment of the redemption price for any preferred securities called for
redemption is improperly withheld or refused and not paid either by the trust or
by us under the guarantee, distributions on those preferred securities will
continue to accumulate to the date the redemption price is actually paid.
If less than all the preferred securities are to be redeemed on a redemption
date, the aggregate amount of preferred securities to be redeemed will be
allocated pro rata between the holders of the preferred securities. Not more
than 60 days prior to the redemption date, the property trustee will select the
preferred securities to be redeemed from among the outstanding preferred
securities not previously called for redemption. The property trustee may use
any method of selection that it deems to be fair and appropriate, including any
method that involves the redemption of a portion of any particular holder's
preferred securities.
OTHER PURCHASES OF PREFERRED SECURITIES. Subject to applicable law, we and our
subsidiaries may purchase outstanding preferred securities by tender, in the
open market or by private agreement. These purchases may occur at any time and
from time to time other than during a deferral period.
82
<PAGE> 83
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES
As the holder of the common securities, we will have the right at any time, in
our sole discretion, to elect to dissolve the trust, subject to the prior
approval of the Federal Reserve if then required. Upon such an election, and if
the liabilities of creditors of the trust have been satisfied as provided by
applicable law, the property trustee will cause a like amount of junior
subordinated debentures to be distributed in exchange for all the outstanding
preferred securities and common securities, in liquidation of the trust. In this
context, "like amount" means junior subordinated debentures having an aggregate
principal amount equal to the aggregate initial offering price of all
outstanding trust securities. See "-- Liquidation Distribution Upon
Dissolution".
EXCHANGE PROCEDURES. The property trustee will notify holders of preferred
securities of any exchange not less than 30 nor more than 90 days before the
exchange date, in the manner described below under "-- Notices". On the exchange
date, the following shall occur:
- the preferred securities will cease to be outstanding,
- any certificate representing preferred securities will be deemed to
represent a like amount of junior subordinated debentures, bearing
accrued and unpaid interest in an amount equal to the accumulated and
unpaid distributions on those preferred securities, until those
certificates are presented to the paying agent for exchange or transfer,
and
- all rights of the holders of preferred securities will cease upon
surrender of the certificates representing their preferred securities, as
described above.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Under the trust agreement, the trust will automatically dissolve upon the
occurrence of any of the following events, whichever occurs first:
- the expiration of its term of 30 years,
- certain events of bankruptcy, dissolution or liquidation of a holder of
common securities,
- distribution of the junior subordinated debentures in exchange for the
preferred securities, after the holders of common securities have elected
to dissolve the trust, provided that we receive prior approval from the
Federal Reserve, if then required,
- redemption of all the preferred securities, or
- the entry of an order for the dissolution of the trust by a court of
competent jurisdiction.
If the trust dissolves while the preferred securities are outstanding, the
property trustee will liquidate the trust as expeditiously as the property
trustee determines to be possible. The property trustee will do so by
distributing to the holders of the preferred securities in exchange for their
securities, a like amount of the junior subordinated debentures. However, the
property trustee will do so only after satisfying liabilities to creditors of
the trust as provided by applicable law and only if the property trustee
determines that an exchange distribution of this kind is practical.
83
<PAGE> 84
If the property trustee determines that an exchange distribution is not
practical, each holder of outstanding preferred securities will be entitled to
receive out of the assets of the trust available for distribution to holders,
after satisfaction of liabilities to creditors of the trust as provided by
applicable law, an amount equal to the liquidation distribution. The
"liquidation distribution" for any preferred securities will equal $20.00 per
preferred security plus all accrued and unpaid distributions to the date of
payment. If the liquidation distribution for all outstanding preferred
securities can be paid only in part because the trust has insufficient assets
available to pay it in full, the amounts payable by the trust on the preferred
securities will be paid pro rata.
On any liquidation of the trust, the holders of the common securities will be
entitled to receive distributions pro rata with the holders of the preferred
securities, unless an event of default under the trust agreement, a "trust event
of default," has occurred and is continuing. In that case, the preferred
securities will have priority in right of payment over the common securities, as
described below under "-- Priority Over Common Securities".
PRIORITY OVER COMMON SECURITIES
Payment of distributions and the redemption price will be made simultaneously on
the preferred securities and the common securities, except as follows. If a
trust event of default has occurred and is continuing, the trust will not pay
any distribution or redemption price, or make any liquidation distribution, in
respect of the common securities on any day unless the following have occurred:
- in the case of any distribution to be paid, all accumulated and unpaid
distributions on all outstanding preferred securities for all
distribution periods ending on or before the payment day have been paid
or duly provided for in cash,
- in the case of any redemption price to be paid, the redemption price on
all outstanding preferred securities called on or before the payment day
for redemption has been paid or duly provided for in cash, and
- in the case of a liquidation distribution to be made, the liquidation
distribution on all outstanding preferred securities has been made or
duly provided for.
Whenever any distribution or redemption price is due and payable in respect of
the preferred securities, the property trustee will apply all available funds to
the payment of those amounts in full in cash before making any payment in
respect of the common securities. The trust will not make any payment or other
distribution in respect of the common securities, including on account of any
purchase or other acquisition, while the preferred securities are outstanding,
other than distributions, the redemption price and the liquidation distribution
on the terms set forth in the trust agreement.
If a trust event of default occurs, the holders of the common securities will be
deemed to have waived all rights to act with respect to the trust event of
default until all trust events of default have been cured, waived or otherwise
eliminated. Until that time, the property trustee will act solely on behalf of
the holders of the preferred securities and not on behalf of the holders of the
common securities, and only the holders of the preferred securities will have
the right to direct the property trustee to act on their behalf.
84
<PAGE> 85
TRUST EVENTS OF DEFAULT
Any one of the following events will be a "trust event of default" under the
trust agreement. This will be the case regardless of the reason why the event
occurs, whether it is voluntary or involuntary and whether or not it results
from operation of law, from any judgment, decree or order of any court or from
any order, rule or regulation of any administrative or governmental body:
- the occurrence of an indenture event of default under the indenture (see
"Description of Junior Subordinated Debentures -- Indenture Events of
Default"),
- default by the trust in the payment of any distribution when it becomes
due and payable and continuation of the default for 30 days,
- default by the trust in the payment of any redemption price when it
becomes due and payable,
- material default or breach in the performance or under any covenant or
warranty of the property trustee or Delaware trustee under the trust
agreement, and continuation of the default or breach for 60 days after a
notice of default has been given; a notice of default may be given only
by the holders of at least 25% of the outstanding preferred securities,
as provided under the trust agreement, and
- the occurrence of certain events of bankruptcy or insolvency with respect
to the property trustee if a successor property trustee has not been
appointed within 90 days.
Within five business days after learning about a trust event of default, the
property trustee will notify the holders of the outstanding trust securities,
unless the trust event of default has been cured or waived. We, as depositor,
and the administrators are obligated to file annually with the property trustee
a certificate as to whether or not we and they are in compliance with all the
conditions and covenants applicable to us and them under the trust agreement.
ENFORCEMENT RIGHTS
If an indenture event of default occurs, the holders of preferred securities
must rely on the property trustee, as the holder of the junior subordinated
debentures, to enforce on their behalf its rights under the junior subordinated
debentures and the indenture against us, subject to the following.
RIGHT TO DIRECT PROPERTY TRUSTEE'S ACTIONS. The holders of a majority of
outstanding preferred securities will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to, or
exercising any trust or power conferred on, the property trustee under the trust
agreement, including the right to direct the property trustee to exercise the
remedies available to it as the holder of the junior subordinated debentures.
Accordingly, the property trustee will not take any of the following actions
without obtaining the prior approval of the holders of a majority of the
outstanding preferred securities (or, in the case of any action that under the
indenture may be taken only with the prior consent of each affected
85
<PAGE> 86
holder of junior subordinated debentures, without the prior consent of each
holder of outstanding preferred securities):
- direct the time, method or place of conducting any proceeding for any remedy
available to, or executing any trust or power conferred on, the trustee
under the indenture with respect to the junior subordinated debentures,
- waive any past default that may be waived under the indenture,
- exercise any right to rescind or annul a declaration that the principal of
all the junior subordinated debentures be due and payable,
- consent to any amendment, modification or termination of the indenture or
the junior subordinated debentures, if the consent of any holder of junior
subordinated debentures is required under the indenture, or
- revoke any action previously authorized or approved by the holders of the
preferred securities except by or with the subsequent authorization or
approval of the holders of the preferred securities.
Before taking any of the actions described above, the property trustee must also
obtain an opinion of counsel, experienced in the following matters, to the
effect that the action will not cause the trust to be classified as an
association taxable as a corporation, or as other than a grantor trust, for U.S.
federal income tax purposes. The property trustee will notify the holders of
preferred securities of any notice of default with respect to the junior
subordinated debentures, in the manner described below under "-- Notices".
Any required approval of holders of preferred securities may be given by written
consent or at a meeting convened for that purpose. The property trustee must
cause a notice of any matter upon which holders of preferred securities are to
act by written consent, or of any meeting at which holders of preferred
securities are entitled to vote, to be given to the holders of preferred
securities in the manner described below under "-- Notices". See "-- Voting
Rights; Amendment of Trust Agreement".
RIGHT OF DIRECT ACTION. If an indenture event of default has occurred and is
continuing and is attributable to our failure to pay any interest or principal
on the junior subordinated debentures when due and payable, a holder of
preferred securities may begin a legal proceeding directly against us for
enforcement of payment, to that holder, of the interest or principal due and
payable on a like amount of junior subordinated debentures. We may not amend the
indenture to remove the right of any holder of outstanding preferred securities
to bring a direct action without the prior written consent of that holder. We
will have the right under the indenture to set off any payment made to a holder
of preferred securities in connection with a direct action. Except for the right
to bring a direct action, holders of preferred securities will not have the
right to exercise directly against us any remedy available to a holder of junior
subordinated debentures.
RIGHT TO ACCELERATE JUNIOR SUBORDINATED DEBENTURES. The holders of the
outstanding preferred securities will be entitled to exercise specified rights
of the holders of the junior subordinated debentures under the indenture, if the
holders of junior subordinated debentures do not do so. These rights include the
right to accelerate the maturity of the junior subordinated debentures when an
indenture event of default has occurred and is continuing, to annul a
declaration of acceleration of the junior
86
<PAGE> 87
subordinated debentures and to waive specific defaults under the indenture. See
"Description of Junior Subordinated Debentures -- Indenture Events of Default".
MERGERS, CONSOLIDATIONS AND REPLACEMENTS OF THE TRUST
At our request and with the consent of the administrators, but without the
consent of any holder of preferred securities or any trustee of the trust, the
trust may merge with or into, or consolidate or amalgamate with, convert into,
or be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, another entity. Each of the above-mentioned
transactions, hereafter referred to as a "trust successor transaction," may be
consummated only if that other entity is a trust organized as such under the
laws of any state in the United States and only if all the following
requirements are met:
- the successor entity, if not the trust, either (1) expressly assumes all the
obligations of the trust with respect to the preferred securities or (2)
substitutes for the preferred securities other securities having
substantially the same terms as the preferred securities ("successor
securities"), provided that the successor securities rank at least as high
as the preferred securities rank with regard to the priority in right of
payment of all distributions and other amounts payable upon liquidation,
redemption and otherwise,
- the successor entity, if not the trust, has a purpose substantially
identical to that of the trust,
- a trustee of the successor entity, if not the trust, possessing the same
powers and duties as the property trustee is appointed to hold the junior
subordinated debentures,
- the successor securities are listed or included for quotation, or will be
listed or included for quotation upon notification of issuance, on any
national securities exchange or other organization on which the preferred
securities are then listed or quoted, if any,
- the trust successor transaction does not cause the preferred securities or
any successor securities to be downgraded by any nationally recognized
statistical rating organization that assigns ratings to the preferred
securities,
- the trust successor transaction does not adversely affect the rights,
preferences and privileges of the holders of the preferred securities or any
successor securities in any material respect,
- prior to the trust successor transaction, we and the trust have received an
opinion from independent counsel to us and the trust, experienced in the
following matters, to the effect that (1) the trust successor transaction
will not adversely affect the rights, preferences and privileges of the
holders of the preferred securities or any successor securities in any
material respect and (2) upon completion of the trust successor transaction,
the trust or the successor entity, as applicable, will not be required to
register as an investment company under the Investment Company Act, and
- we, or any permitted successor, together with our permitted assignees, hold
all the common securities of the trust or all comparable securities of the
successor entity, as applicable, and guarantee the obligations of the
successor entity, if not the trust, in respect of the preferred securities
or any successor securities at least to the extent provided by the
guarantee.
87
<PAGE> 88
Notwithstanding the foregoing, the trust may not engage in a trust successor
transaction that would cause the trust or the successor entity, as applicable,
to be classified as an association taxable as a corporation or as other than a
grantor trust, or would cause the junior subordinated debentures or any
successor securities to be treated as other than our indebtedness, for U.S.
federal income tax purposes, unless it first obtains the consent of all holders
of outstanding preferred securities. Except as permitted under the provisions
described above, the trust may not engage in any trust successor transaction.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Guarantee and Expense
Agreement -- Amendments, Assignment and Succession", and as otherwise required
by law and the trust agreement, the holders of the preferred securities will
have no voting rights.
We and the property trustee, without the consent of the holders of the preferred
securities, may amend the trust agreement from time to time to do any of the
following:
- cure any ambiguity, or correct or supplement any provision that may be
inconsistent with any other provision, in the trust agreement,
- make any provision with respect to matters or questions arising under the
trust Agreement that is not inconsistent with the other provisions of the
trust agreement, and
- modify, eliminate or add to any provisions of the trust agreement to any
extent that may be necessary to ensure that the trust will not be taxable as
a corporation or be classified as other than a grantor trust, or to ensure
that the junior subordinated debentures are treated as our indebtedness for
U.S. federal income tax purposes, or to ensure that the trust will not be
required to register as an "investment company" under the Investment Company
Act,
but only if the amendment does not adversely affect the interests of any holder
of preferred securities in any material respect and does not become effective
until notice of the amendment is given to the holders of preferred securities.
We and the property trustee may also amend the trust agreement if (1) the
holders of not less than a majority of the outstanding preferred securities
consent and (2) the property trustee and Delaware trustee of the trust receive
an opinion of counsel to the effect that the amendment or the exercise of any
power granted to the property trustee and Delaware trustee in accordance with
the amendment will not result in the trust being taxable as a corporation or
being classified as other than a grantor trust, or the junior subordinated
debentures being treated as other than our indebtedness for U.S. federal income
tax purposes or being required to register as an "investment company" under the
Investment Company Act. Notwithstanding the foregoing, each holder of preferred
securities must consent to any amendment of the trust agreement that (1) changes
the amount or timing of any distribution or other payment, or otherwise
adversely affects the amount of any distribution or other payment required to be
made as of a specified date, in respect of that holder's preferred securities or
(2) restricts the right of that holder to institute suit for the enforcement of
any payment on those preferred securities on or after the date on which it
becomes due and payable.
88
<PAGE> 89
Any required approval of holders of preferred securities may be given at a
meeting of holders of preferred securities convened for such purpose or pursuant
to written consent. The property trustee will cause a notice of any meeting at
which holders of preferred securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of preferred securities in the manner set forth in the
trust agreement.
For the purpose of any vote or consent of holders of preferred securities, any
preferred securities owned by us, the property trustee, the Delaware trustee or
any affiliate of the foregoing will be treated as if they were not outstanding.
NOTICES
Notices to be given to holders of preferred securities may be given by mail to
the respective addresses of the holders as they appear in the security register
and will be deemed duly given when mailed to those addresses. Neither the
failure to give any notice to a particular holder, nor any defect in a notice
given to a particular holder, will affect the sufficiency of any notice given to
another holder.
PAYMENT AND PAYING AGENCY
Payments in respect of any preferred securities will be paid by check mailed to
the persons entitled to receive them, at their addresses appearing on the
security register on the relevant record date.
U.S. Stock Transfer Corporation, located in Glendale, California, will serve as
the paying agent. From time to time, the property trustee may select one or more
firms to act as the paying agent or as co-paying agents. Each paying agent must
be a bank or trust company acceptable to the administrators. A paying agent will
be permitted to resign as paying agent upon 30 days' written notice to the
property trustee and us. In the event there is no paying agent, the property
trustee will appoint a firm to act as paying agent.
If any distribution, redemption price or other amount is payable in respect of
the preferred securities on a day that is not a business day, the payment may be
made on the next succeeding business day.
Any moneys deposited with the property trustee or any paying agent, or then held
in trust by us or the trust, for the payment of any amount due and payable on
any preferred securities, and remaining unclaimed for two years after the amount
has become due and payable, will, at our request, be repaid to us. Thereafter,
the holders of those preferred securities will look, as a general unsecured
creditor, only to us for payment thereof.
REGISTRAR AND TRANSFER AGENT
U.S. Stock Transfer Corporation will serve as registrar and transfer agent for
the preferred securities. The registrar and transfer agent will exchange and
register transfers of preferred securities without charge by or on behalf of the
trust, but will require payment of any tax or other governmental charge that may
be imposed in connection with the exchange or transfer. If any preferred
securities have been called for redemption, the registrar and transfer agent may
refuse to register any transfer of those preferred securities.
89
<PAGE> 90
REGARDING THE TRUSTEES OF THE TRUST
REMOVAL AND APPOINTMENT OF SUCCESSORS. The holders of at least a majority of the
outstanding preferred securities may remove either the property trustee or the
Delaware trustee, or both of them, if an indenture event of default has occurred
and is continuing, with or without cause. In no event will the holders of the
preferred securities have the right to vote to appoint, remove or replace the
administrators; we have this exclusive right as the holder of the common
securities. No resignation or removal of any trustee of the trust, and no
appointment of a successor trustee, will be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
trust agreement.
MERGER, CONSOLIDATION, ETC. If the property trustee or the Delaware trustee
merges, consolidates with or converts into, another entity or another entity
succeeds to all or substantially all the corporate trust business of that
trustee, the other entity will be the successor of that trustee under the trust
agreement, but only if that other entity is qualified and eligible to be a
property trustee or Delaware trustee.
DUTIES OF PROPERTY TRUSTEE. The property trustee undertakes to perform only
those duties that are specifically set forth in the trust agreement, unless a
trust event of default is continuing. In that event, the property trustee must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
property trustee will have no obligation to exercise any of the powers vested in
it by the trust agreement at the request of any holder of preferred securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that it might incur as a result. If no trust event of default is
continuing and the property trustee must decide between alternative causes of
action or construe ambiguous provisions in the trust agreement, or is unsure of
the application of any provision of the trust agreement, and the matter is not
one on which the holders of trust securities are entitled under the trust
agreement to vote, then the property trustee may take any action that it deems
to be advisable and in the best interests of the holders of the trust securities
and will have no liability except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The trust agreement authorizes and directs the administrators and the property
trustee to conduct the affairs of and to operate the trust so that the trust
will not be required to register as an "investment company" under the Investment
Company Act or be classified as an association taxable as a corporation or as
other than a grantor trust for U.S. federal income tax purposes and so that the
junior subordinated debentures will be treated as our indebtedness for U.S.
federal income tax purposes. The trust agreement authorizes the property trustee
and the holders of common securities to take any action, not inconsistent with
applicable law, the certificate of trust of the trust or the trust agreement,
that they determine in their discretion to be necessary or desirable for these
purposes, as long as the action does not adversely affect the interests of the
holders of the preferred securities in any material respect. Holders of the
preferred securities will have no preemptive or similar rights.
GOVERNING LAW
The trust agreement and the trust securities provide that they are to be
governed by and construed in accordance with the laws of Delaware.
90
<PAGE> 91
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
This section summarizes all material terms of the junior subordinated debentures
and the indenture, but it does not describe all the provisions. We have filed a
form of the indenture as an exhibit to the registration statement of which this
prospectus is a part.
GENERAL
Concurrently with the issuance of the preferred securities, we will issue the
junior subordinated debentures under the indenture, and the trust will use the
proceeds from the sale of the preferred securities, together with the
consideration paid by us for the common securities, to purchase the junior
subordinated debentures. The junior subordinated debentures will initially have
an aggregate principal amount equal to the aggregate initial offering price of
preferred securities and common securities. Unless the trust distributes the
junior subordinated debentures in exchange for the preferred securities as
described below, the junior subordinated debentures will be held in the name of
the property trustee in trust for the benefit of the holders of preferred
securities and common securities. Wilmington Trust Company will be the trustee
under the indenture.
The junior subordinated debentures will be our general, unsecured obligations
and will be subordinated in right of payment, to the extent and in the manner
set forth in the indenture, to all of our senior indebtedness (see
"-- Subordination"). Because we are a holding company, the junior subordinated
debentures will also effectively be subordinated to all existing and future
liabilities of the bank and any other subsidiaries we may have.
INTEREST
Interest will accrue on the principal of the junior subordinated debentures from
their original issue date at the annual rate of 11 7/8%. Unless deferred as
described below, interest will be payable quarterly in arrears on the last day
of March, June, September and December of each year, to the persons who are the
record holders of the junior subordinated debentures at the close of business on
the 15th day next preceding the relevant interest payment date. The amount of
interest payable for any period will be computed on the basis of a 360-day year
of twelve 30-day months.
As long as no indenture event of default has occurred and is continuing, we will
have the right to defer the payment of interest on the junior subordinated
debentures as described in "Description of Preferred
Securities -- Distributions -- Deferral Periods". However, during a deferral
period, interest will continue to accrue on the junior subordinated debentures
and additional interest will accrue on each deferred interest payment at the
annual rate of 11 7/8%, compounded quarterly from the corresponding interest
payment date. The term "interest", wherever we use it in this prospectus with
respect to the junior subordinated debentures, includes any of this additional
interest. In addition, during any deferral period, the indenture will prohibit
us and our subsidiaries from taking the actions described in "Description of
Preferred Securities -- Distributions -- Deferral Period Restrictions".
Any interest that would otherwise become due and payable in respect of any
junior subordinated debentures during a deferral period will not become due and
payable until the day after the period ends.
91
<PAGE> 92
If the principal of any junior subordinated debentures becomes due and payable
on a day that would otherwise occur during a deferral period, that period will
end automatically on the next preceding day.
STATED MATURITY
The junior subordinated debentures will initially have a stated maturity of
December 31, 2028. However, we will have the option at any time to shorten the
stated maturity of the junior subordinated debentures to a date not earlier than
December 31, 2001, provided that we would pay any required premium so that the
principal and premium so paid would equal the redemption price if the junior
subordinated debentures were redeemed on such date. We would expect to exercise
this option if, for example, a tax development occurred that could adversely
affect our ability to deduct interest payments on the junior subordinated
debentures we determined that shortening the maturity of the junior subordinated
debentures would preserve our tax deduction.
To exercise our option to shorten the stated maturity, we must select a date
when the change is to become effective and must notify the indenture trustee,
and the indenture Trustee must notify the holders of the junior subordinated
debentures in the manner described below under "-- Notices", of the new stated
maturity and the effective date of the change. The notice must be given not less
than 30 days nor more than 90 days before the effective date. Any notice of this
kind will be irrevocable when given.
OPTIONAL REDEMPTION
If we receive prior approval from the Federal Reserve, if then required under
relevant capital guidelines or policies, we will have the option to redeem the
junior subordinated debentures before the stated maturity as follows:
- on or after December 31, 2001, in whole at any time or in part from time
to time, provided that no partial redemption may occur during a deferral
period
- in whole, but not in part, at any time within 90 days after the
occurrence of a Tax Event, an Investment Company Act Event or a Capital
Treatment Event (as defined below).
The redemption prices of the junior subordinated debentures are set forth in
"Description of Preferred Securities -- Redemption -- Repayment and Redemption
of Junior Subordinated Debentures". Unless we default in payment of the
redemption price, on and after the redemption date interest will cease to accrue
on the junior subordinated debentures called for redemption. We may not elect to
redeem any junior subordinated debentures on a redemption date that would occur
during a deferral period unless we elect to redeem all outstanding junior
subordinated debentures on that date.
We must give notice of any redemption to the holders of the junior subordinated
debentures not less than 30 days nor more than 90 days before the redemption
date, in the manner described below under "-- Notices". In all other respects,
the procedures for redeeming the junior subordinated debentures will be similar
to those for redeeming the preferred securities. See "Description of Preferred
Securities -- Redemption -- Redemption Procedures".
92
<PAGE> 93
DEFINITION OF TAX EVENT. "Tax Event" means the receipt by us and, if the
preferred securities are outstanding, the trust, of an opinion of independent
counsel, experienced in the following matters, to the following effect:
As a result of any tax change, there is more than an insubstantial risk that any
of the following will occur:
- the trust is, or will be within 90 days after the date of the opinion of
counsel, subject to U.S. federal income tax with respect to income
received or accrued on the junior subordinated debentures,
- interest payable by us on the junior subordinated debentures is not, or
within 90 days after the opinion of counsel will not be, deductible by
us, in whole or in part, for U.S. federal income tax purposes, or
- the trust is, or will be within 90 days after the date of the opinion of
counsel, subject to more than a de minimis amount of other taxes, duties
or other governmental charges.
As used above, "tax change" means any of the following:
- any amendment to or change, including any announced prospective change,
in the laws, or any regulations under the laws, of the United States or
of any political subdivision or taxing authority of or in the United
States, if the amendment or change is enacted, promulgated or announced
on or after the date of this prospectus, or
- any official administrative pronouncement or any judicial decision,
whether or not the pronouncement or decision is issued to or in
connection with a proceeding involving us or the trust or is subject to
review or appeal, if the pronouncement or decision is enacted,
promulgated or announced on or after the date of this prospectus.
For a description of tax law developments that could result in a Tax Event and
thus early redemption of the junior subordinated debentures and the preferred
securities, see "Federal Income Tax Consequences -- Possible Tax Law Changes"
and "Risk Factors -- Risk Factors Relating to the Preferred Securities -- The
Government May Challenge the Special Tax Treatment of the Preferred Securities".
DEFINITION OF "INVESTMENT COMPANY ACT EVENT". "Investment Company Act Event"
means the receipt by us and the trust of an opinion of counsel, experienced in
the following matters, to the following effect: As a result of the occurrence of
a change, including any announced prospective change, in law or regulation, or a
change, including any announced prospective change, in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulative authority, there is more than an insubstantial risk that
the trust is or will be considered an "investment company" that is required to
be registered under the Investment Company Act. To be effective for this
purpose, the change, prospective change, pronouncement or decision must become
effective on or after the date of this prospectus.
DEFINITION OF "CAPITAL TREATMENT EVENT". "Capital Treatment Event" means the
receipt by us and the trust of an opinion of counsel, experienced in the
following matters, to the following effect: As a result of the occurrence of a
change, including any announced prospective change, in law or regulation, or a
change, including any announced prospective
93
<PAGE> 94
change, in interpretation or application of law or regulation by any legislative
body, court, governmental agency or regulative authority, there is more than an
insubstantial risk that we will not be entitled to treat an amount of preferred
securities as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then in effect and
applicable to us, equal to the lesser of (1) the aggregate Liquidation Amount or
(2) 25% of our total Tier 1 Capital, including such preferred securities
qualifying as Tier 1 Capital. To be effective for this purpose, the change,
prospective change, pronouncement or decision must become effective on or after
the date of this prospectus.
PAYMENT OF ADDITIONAL SUMS. If a Tax Event has occurred and is continuing and we
do not elect to (1) redeem the junior subordinated debentures and thereby cause
a mandatory redemption of the preferred securities and (2) liquidate the trust
and cause the junior subordinated debentures to be distributed, the preferred
securities will remain outstanding and we will be obligated to pay additional
sums on the junior subordinated debentures. "Additional sums" means such
additional amounts as may be necessary so that the amount of distributions that
are due and payable by the trust on the outstanding preferred securities and
common securities at any time will not be reduced as a result of any additional
taxes, duties and other governmental charges to which the trust has become
subject as a result of the Tax Event.
EXCHANGE OF PREFERRED SECURITIES FOR JUNIOR SUBORDINATED DEBENTURES
As described under "Description of Preferred Securities -- Exchange of Preferred
Securities for Junior Subordinated Debentures", we, as the holder of the trust's
common securities, may elect to terminate the trust and cause the trust to
distribute the junior subordinated debentures to the holders of the preferred
securities and common securities. If we do this, we will be obligated to use our
best efforts to list or include for quotation the junior subordinated debentures
on any stock exchange or organization on which the preferred securities are then
listed or quoted, if any. We can give no assurance as to the market price of any
junior subordinated debentures that may be distributed to the holders of the
preferred securities.
MODIFICATION OF INDENTURE
From time to time we and the indenture trustee may, without the consent of the
holders of the junior subordinated debentures, amend, waive or supplement the
indenture for specified purposes. These include curing ambiguities, defects or
inconsistencies, provided that doing so does not adversely affect the interests
of the holders of the junior subordinated debentures or the preferred securities
in any material respect, and qualifying, or maintaining the qualification of,
the indenture under the Trust Indenture Act.
The Indenture also permits us and the indenture trustee, with the consent of the
holders of a majority in principal amount of the outstanding junior subordinated
debentures, to modify the indenture in any manner whatsoever, provided that no
modification may do any of the following, without the consent of the holder of
each outstanding junior subordinated debentures that would be affected by the
modification:
- change the stated maturity of the junior subordinated debentures, except
to shorten it as permitted by the indenture,
- reduce the principal amount of the junior subordinated debentures,
94
<PAGE> 95
- reduce the rate or extend the time of payment of interest on the junior
subordinated debentures, except for any permitted deferral in connection
with a deferral period, and
- reduce the percentage of principal amount of the outstanding junior
subordinated debentures, the holders of which are required to consent to
any modification of the indenture.
As long as the preferred securities are outstanding, the property trustee, as
the holder of the preferred securities, will not be permitted to consent to any
modification, waiver or termination of the indenture without obtaining the
consent of the holders of preferred securities as required under the trust
agreement. See "Description of Preferred Securities -- Enforcement Rights".
INDENTURE EVENTS OF DEFAULT
Each of the following events will be an "indenture event of default". This will
be the case regardless of the reason why the event occurs, whether it is
voluntary or involuntary and whether or not it results from operation of law,
from any judgment, decree or order of any court, from any order, rule or
regulation of any administrative or governmental body or by reason of the
subordination provisions:
- failure to pay any interest or additional sum on the junior subordinated
debentures when due and continuation of the default for 30 days, provided
that a permitted deferral during a deferral period will not be a default,
- failure to pay any principal of the junior subordinated debentures when
due, whether at maturity or upon redemption,
- failure to observe or perform any other covenant in the indenture in any
material respect for 90 days after written notice has been given to us by
the indenture Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding junior subordinated debentures, and
- certain events in bankruptcy, insolvency or reorganization affecting us.
If an indenture event of default has occurred and is continuing, either the
indenture Trustee or the holders of not less than 25% in aggregate principal
amount of the outstanding junior subordinated debentures may declare the
principal of all junior subordinated debentures to be due and payable
immediately. If the preferred securities are outstanding and the indenture
trustee or those holders of junior subordinated debentures fail to exercise this
right, the holders of at least 25% of the outstanding preferred securities may
do so. The holders of a majority in aggregate principal amount of the
outstanding junior subordinated debentures may annul any declaration of
acceleration if (a) we have paid or deposited with the indenture trustee a sum
sufficient to pay all overdue installments of interest, principal which has
become due other than by declaration of acceleration, and all sums owed to the
indenture trustee, and (b) all events of default, other than the non-payment of
principal that has become due solely by such acceleration, have been cured or
waived as provided below. If the holders of junior subordinated debentures do
not exercise this right, the holders of a majority of the outstanding preferred
securities may do so.
95
<PAGE> 96
The holders of a majority in aggregate principal amount of the outstanding
junior subordinated debentures or preferred securities may waive any default
under the indenture other than:
- a default in the payment of principal or interest, unless the default has
been cured and a sum sufficient to pay all matured installments of
interest and principal due otherwise than by acceleration has been
deposited with the indenture trustee, and
- a default in respect of a covenant that under the indenture cannot be
modified or amended without the consent of the holder of each affected
junior subordinated debentures.
The holders of a majority in aggregate principal amount of outstanding junior
subordinated debentures will have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the indenture trustee.
This right, as well as the rights of the holders of junior subordinated
debentures with regard to acceleration, annulment and waiver described above,
will be subject to the enforcement rights of the holders of preferred securities
when the preferred securities are outstanding. See "Description of Preferred
Securities -- Enforcement Rights". We will be obligated to provide the indenture
trustee and, if the preferred securities are outstanding, the property trustee,
annually a certificate as to whether or not we are in compliance with the
provisions of the indenture applicable to us.
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The indenture provides that we may not consolidate with, or merge with or into,
or convey, transfer or lease its properties and assets substantially as an
entirety to, any other entity (a "Successor Transaction"), unless the following
conditions are satisfied, among others:
- the successor entity, if not us, must be organized under the laws of the
United States or any state or the District of Columbia, and must
expressly assume our obligations to pay the interest and principal in
respect of the junior subordinated debentures and to perform every
covenant provided for in the indenture, and
- immediately after giving effect to the transaction, no indenture event of
default and no event that, after notice or lapse of time or both, would
become an indenture event of default, shall have occurred and be
continuing.
If the conditions referred to above are satisfied, no consent of the holders of
junior subordinated debentures or preferred securities will be required in
connection with a successor transaction. Also, the conditions referred to above
will apply only with respect to mergers, consolidations and sales of assets.
Other transactions, including transactions that involve our change of control or
an acquisition by us of the stock or assets of another entity, would not be
subject to these conditions.
The general provisions of the indenture do not afford holders of the junior
subordinated debentures or preferred securities protection in the event of a
highly leveraged or other transaction involving us that may adversely affect the
interests of those holders.
96
<PAGE> 97
SATISFACTION AND DISCHARGE
The indenture provides that, except as noted below, the indenture will cease to
be of further effect, and we will be deemed to have satisfied and discharged the
indenture, when the following conditions have been satisfied, among others:
(1) all junior subordinated debentures have been delivered to the
indenture trustee for cancellation, or
(2) (a) all junior subordinated debentures not previously delivered to
the indenture trustee for cancellation have become due and payable or will
become due and payable at their stated maturity or on a redemption date
within one year, and
(b) we deposit with the indenture trustee, in trust funds
sufficient to pay the entire indebtedness on those junior subordinated
debentures not previously delivered for cancellation, for the principal
and interest to the date of the deposit for junior subordinated
debentures that have become due and payable or to the stated maturity or
the redemption date for junior subordinated debentures that have become
due and payable.
We will remain obligated to provide for registration of transfer and exchange
and notices of redemption and in other ministerial respects.
SUBORDINATION
To the extent set forth in the indenture, the junior subordinated debentures
will be subordinated in right of payment to all of our senior indebtedness
(defined below). The subordination provisions will have the following
significant effects.
If we default in the payment of any principal, interest or other amount payable
in respect of any senior indebtedness when the same becomes due and payable,
whether at maturity, on redemption, by declaration of acceleration or otherwise,
then, unless and until that default has been cured or waived or has otherwise
ceased to exist, or all senior indebtedness has been paid, we may not make or
agree to make any payment in respect of the junior subordinated debentures, or
in respect of any redemption, repayment, retirement, purchase or other
acquisition of the junior subordinated debentures. This prohibition would apply
to payments of principal, interest and additional sums in respect of any junior
subordinated debentures, as well as to payments in respect of any acquisition or
retirement of junior subordinated debentures, whether the payments are made
directly or indirectly and whether they are made in cash, property, securities,
by set-off or otherwise.
In addition, if any of the following events occurs, all senior indebtedness must
be paid in full before any payment or distribution may be made, directly or
indirectly and whether in cash, securities or other property, on account of the
junior subordinated debentures:
- the commencement of any insolvency, bankruptcy, receivership,
liquidation, reorganization, readjustment, composition or other similar
proceeding relating to us, our creditors or our property,
- the commencement of any proceeding for the liquidation, dissolution or
other winding up of us, voluntary or involuntary, whether or not
involving insolvency or bankruptcy proceedings,
- any assignment by us for the benefit of creditors, or
- any other marshalling of our assets.
97
<PAGE> 98
In any such event, any payment or distribution on account of the junior
subordinated debentures, whether in cash, securities or other property, that
would otherwise be payable or deliverable in respect of the junior subordinated
debentures will be paid or delivered directly to the holders of senior
indebtedness in accordance with the priorities then existing among those
holders, until all senior indebtedness has been paid in full.
In the event of any proceeding described above, after payment in full of all
sums owing with respect to senior indebtedness, the holders of junior
subordinated debentures, together with the holders of any of our obligations
ranking on a parity with the junior subordinated debentures, will be entitled to
be paid from our remaining assets the amounts at the time due and owing on the
junior subordinated debentures and those other obligations before any payment or
other distribution, whether in cash, securities or other property, will be made
on account of any of our capital stock or any of our obligations ranking junior
in right of payment to the junior subordinated debentures.
If any holder of junior subordinated debentures receives any payment or
distribution on account of the junior subordinated debentures, whether in cash,
securities or other property, before all the senior indebtedness has been paid
in full, or otherwise in contravention of any of the subordination provisions,
the holder must pay over or deliver the payment or distribution to the holders
of the senior indebtedness at the time outstanding in accordance with the
priorities then existing among them for application to the payment of all senior
indebtedness remaining unpaid, to the extent necessary to pay all the senior
indebtedness in full.
If we become insolvent, then by reason of the subordination provisions, holders
of senior indebtedness may receive more, ratably, and holders of the junior
subordinated debentures may receive less, ratably, than our other creditors.
The term "senior indebtedness" means any of our obligations to our creditors,
whether existing now or incurred in the future, as well as any other obligation,
unless in the instrument creating or evidencing the obligation or pursuant to
which the obligation is outstanding, it is provided that the obligations are not
superior in right of payment to the junior subordinated debentures or to other
debt that is ranked on a parity with, or subordinated to, the junior
subordinated debentures.
However, senior indebtedness shall not include:
- any debt that, when incurred and without respect to any election under
Section 1111(b) of the Bankruptcy Reform Act of 1978, was without
recourse to us,
- our debt to any of our subsidiaries,
- debt to any of our employees,
- trade accounts payable by us, and
- accrued liabilities arising out of our ordinary course of business.
The indenture places no limitation on the amount of additional senior
indebtedness that we may incur in the future.
98
<PAGE> 99
PAYMENT AND PAYING AGENTS
Unless the junior subordinated debentures have been distributed in exchange for
the preferred securities, payments in respect of the junior subordinated
debentures will be made to or upon the order of the property trustee. If in the
future the junior subordinated debentures have been distributed in exchange for
the preferred securities, payments in respect of the junior subordinated
debentures will be made in accordance with provisions similar to those
applicable to payments in respect of the preferred securities. See "Description
of Preferred Securities -- Payment and Paying Agents".
NOTICES
Notices to holders of junior subordinated debentures under the indenture will
also be given to the holders of the preferred securities in accordance with
provisions similar to those described in "Description of Preferred
Securities -- Notices" and to the property trustee. If in the future the junior
subordinated debentures have been distributed in exchange for the preferred
securities, notices to holders of junior subordinated debentures will be given
to those holders in accordance with the provisions for notices to preferred
securities holders referred to above.
REGARDING THE INDENTURE TRUSTEE
The indenture trustee will have all the duties and responsibilities specified
with respect to an indenture trustee under the Trust Indenture Act. Subject to
those provisions, the indenture trustee will have no obligation to exercise any
of the powers vested in it by the indenture at the request of any holder of
junior subordinated debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities that might be incurred. The
indenture trustee will not be required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties if
it reasonably believes that repayment or adequate indemnity is not reasonably
assured to it.
GOVERNING LAW
The indenture provides that the indenture and the junior subordinated debentures
are to be governed by and construed in accordance with New York law.
99
<PAGE> 100
DESCRIPTION OF GUARANTEE AND EXPENSE AGREEMENTS
This section summarizes all material terms of the guarantee agreement and the
agreement as to expenses and liabilities agreement, but it does not describe all
the provisions. We have filed forms of the guarantee agreement and the expense
agreement as exhibits to the registration statement of which this prospectus is
a part.
GENERAL
We will execute the guarantee agreement when the preferred securities are
issued. Wilmington Trust Company will act as trustee under the guarantee
agreement for the purpose of compliance with the Trust Indenture Act, and the
guarantee agreement will be qualified as an indenture under the Trust Indenture
Act. The guarantee trustee will hold the guarantee for the benefit of the
holders of the preferred securities.
Under the guarantee agreement, we will irrevocably agree to pay in full, on a
subordinated basis and to the extent described below, to the holders of the
preferred securities, the guarantee payments as and when due, regardless of any
defense, right of set-off or counterclaim that the trust may have or assert
other than the defense of payment. The following payments in respect of the
preferred securities, to the extent not paid by or on behalf of the trust, are
"guarantee payments":
- - any accumulated and unpaid distributions required to be paid on the preferred
securities, to the extent that the trust has funds legally and immediately
available to pay them,
- - any redemption price required to be paid on the preferred securities, to the
extent that the trust has funds legally and immediately available to pay it,
and
- - upon a voluntary or involuntary termination, winding-up or liquidation of the
trust, unless the junior subordinated debentures are distributed to holders of
the preferred securities in exchange for these securities, the lesser of (1)
the liquidation distribution of the preferred securities and (2) the amount of
assets of the trust remaining available for distribution to holders of
preferred securities after satisfaction of liabilities to creditors of the
trust as required by applicable law.
We may satisfy our obligation to make a guarantee payment by paying the required
amounts directly to the holders of the preferred securities, or by causing the
trust to pay them to the holders.
We will be required to make payments under the guarantee agreement only to the
extent that the trust has funds sufficient to make payments in respect of its
obligations under the preferred securities. If and to the extent we do not make
payments on the junior subordinated debentures, the trust will not be able to
make payments on the preferred securities and will not have funds available to
do so. However, through the guarantee agreement, the trust agreement, the junior
subordinated debentures, the indenture and the expense agreement, taken
together, we have fully, irrevocably and unconditionally guaranteed all the
trust's obligations under the preferred securities on a subordinated basis. See
"Relationship Among Preferred Securities, Junior Subordinated Debentures,
Guarantee and Expense Agreement".
100
<PAGE> 101
STATUS OF THE GUARANTEE
Our obligations under the guarantee agreement will be a general unsecured
obligation of ours and will be subordinated in right of payment to all senior
indebtedness in the same manner as the junior subordinated debentures. Because
we are a holding company, our obligations under the guarantee agreement, like
our obligations under the junior subordinated debentures, will also be
effectively subordinated to all our existing and future liabilities of the Bank
and any other subsidiaries we may have. See "Risk Factors -- Risks Relating to
Preferred Securities -- Our Obligation to Pay Interest on the Junior
Subordinated Debentures and the Guarantee are Junior to our Other Obligations",
and "Description of Junior Subordinated Debentures -- Subordination".
AMENDMENTS, ASSIGNMENT AND SUCCESSION
The guarantee agreement may not be amended without the prior approval of the
holders of a majority of the outstanding preferred securities, other than in
ways that do not adversely affect the rights of holders of the preferred
securities in any material respect. The manner of obtaining any such approval
will be similar to the manner in which any approval to amend the trust agreement
may be obtained. See "Description of Preferred Securities -- Voting Rights;
Amendment of the Trust Agreement".
Any permitted successor to our obligations under the indenture will also succeed
to our obligations under the guarantee agreement. See "Description of Junior
Subordinated Debentures -- Consolidation, Merger and Sale of Assets". The
guarantee agreement will bind our successors, assigns, receivers, trustees and
representatives and will inure to the benefit of the holders of the outstanding
preferred securities.
EVENTS OF DEFAULT
An event of default under the guarantee agreement will occur if we fail to make
any guarantee payment when obligated to do so, or if we fail to perform any
other obligation and the default remains unremedied for 30 days. The holders of
a majority of the outstanding preferred securities will have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the guarantee trustee or to direct the exercise of any trust or power
conferred upon the guarantee trustee under the guarantee agreement.
The guarantee agreement will guarantee payment and not collection. This means
that any holder of outstanding preferred securities may begin a legal proceeding
directly against us to enforce its rights under the guarantee agreement without
first beginning a legal proceeding against the trust, the guarantee trustee or
any other party.
We, as guarantor, will be obligated to file annually with the guarantee trustee
a certificate as to our compliance with all the conditions and covenants
applicable to us under the guarantee.
REGARDING THE GUARANTEE TRUSTEE
The guarantee trustee undertakes to perform only those duties that are
specifically set forth in the guarantee, except that, after a default by us
under the guarantee agreement, it must exercise the same degree of care and
skill as a prudent person would exercise or use in the
101
<PAGE> 102
conduct of his or her own affairs. Subject to this provision, the guarantee
trustee is under no obligation to exercise any of the powers vested in it by the
guarantee agreement at the request of any holder of preferred securities unless
it is offered reasonable indemnity against the costs, expenses and liabilities
that it might incur as a result.
TERMINATION OF THE GUARANTEE AGREEMENT
The guarantee agreement will terminate and be of no further force or effect (1)
when the guarantee payments have been paid in full by us, the trust or both or
(2) when the junior subordinated debentures are distributed to the holders of
the preferred securities in exchange for their securities. Until that time, the
guarantee agreement will remain in full force and effect. In addition, the
guarantee agreement will continue to be effective or will be reinstated, as the
case may be, if at any time any holder of the preferred securities must restore
payment of any sums paid to it under the preferred securities or the guarantee
agreement.
GOVERNING LAW
The guarantee agreement provides that it is to be governed by and construed in
accordance with New York law.
THE EXPENSE AGREEMENT
We will execute the expense agreement when the preferred securities are issued.
In the expense agreement, we will irrevocably and unconditionally guarantee to
each entity to whom the trust becomes indebted or liable, the full payment of
all the trust's costs, expenses and liabilities, other than the obligations of
the trust to pay amounts due to the holders of the common securities or
preferred securities pursuant to the terms of those securities. The expense
agreement will be enforceable by third parties.
Our obligations under the expense agreement will be subordinated in right of
payment to the same extent as the guarantee. Our obligations under the expense
agreement will be subject to provisions regarding amendment, termination,
assignment, succession and governing law similar to those applicable to the
guarantee agreement.
102
<PAGE> 103
RELATIONSHIP AMONG PREFERRED SECURITIES,
JUNIOR SUBORDINATED DEBENTURES, GUARANTEE AGREEMENT
AND EXPENSE AGREEMENT
FULL AND UNCONDITIONAL GUARANTEE
Taken together, our obligations under the trust agreement, the junior
subordinated debentures, the indenture, the guarantee agreement and expense
agreement provide a full, irrevocable and unconditional guarantee of the trust's
obligations under the preferred securities on a subordinated basis. No single
document standing alone or operating in conjunction with fewer than all the
other documents provides this guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the trust's obligations under the preferred
securities. However, it must be emphasized that this guarantee does not apply
during a interest deferral period.
If and to the extent that we do not make payments on the junior subordinated
debentures, the trust will not have funds available for payments on the
preferred securities. Our obligations under the guarantee agreement will not
apply to payment of any amounts due on the preferred securities when the trust
does not have available funds to pay those amounts. In that event, the remedy of
a holder of preferred securities is to exercise its right of direct
action -- that is, to begin a legal proceeding directly against us for
enforcement of our obligations under junior subordinated debentures.
If we make payment on the junior subordinated debentures and the trust has funds
available to make payments on the preferred securities but fails to do so, a
holder of preferred securities may begin a legal proceeding against us to
enforce our obligations under the guarantee to make these payments. In the event
that the trust receives payments on the junior subordinated debentures, but
these funds are unavailable for payment on the preferred securities because of
claims made by creditors of the trust, we would be obligated under the expense
agreement to pay those claims.
Our obligations under the junior subordinated debentures are subordinated in
right of payment to all of our senior indebtedness in the manner described in
"Description of Junior Subordinated Debentures -- Subordination". Our
obligations under the guarantee agreement and the expense agreement are
subordinated in right of payment to all senior indebtedness in the same manner
as the junior subordinated debentures.
SUFFICIENCY OF PAYMENTS
As long as payments are made when due on the junior subordinated debentures,
those payments should be sufficient to fund distributions and other amounts
payable on the preferred securities, primarily because:
- the aggregate principal amount of the junior subordinated debentures will
equal the aggregate initial offering price of the preferred securities
and the common securities,
- the interest rate, interest payment dates and other payment dates for the
junior subordinated debentures will match the distribution rate,
distribution dates and other payment dates for the preferred securities,
103
<PAGE> 104
- the expense agreement provides that we will pay any and all costs,
expenses and liabilities of the trust, other than the trust's obligations
under the trust securities, and
- the trust agreement provides that the trust will not engage in any
activity that is not consistent with the limited purposes of the trust.
Notwithstanding anything to the contrary in the indenture, we have the right to
set off any payment we make under the guarantee in respect of the preferred
securities against any payment we are otherwise required to make under the
indenture in respect of the junior subordinated debentures.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of preferred securities may begin a legal proceeding directly against
us to enforce its right of direct action under the indenture without first
beginning a legal proceeding against the trust, the property trustee or any
other party. A holder of preferred securities may also begin a legal proceeding
directly against us to enforce its rights under the guarantee agreement without
first instituting a legal proceeding against the guarantee trustee, the trust or
any other party.
A default or event of default under any of our senior indebtedness would not be
a default with respect to the preferred securities or the junior subordinated
debentures. However, in the event of a payment default under, or acceleration
of, any of our senior indebtedness, the subordination provisions of the
indenture, the guarantee agreement and the expense agreement provide that no
payments may be made in respect of the junior subordinated debentures, the
guarantee agreement or the expense agreement until the senior indebtedness has
been paid in full or any payment default under that debt has been cured or
waived. This in turn may trigger a default under the indenture. See "Description
of Junior Subordinated Debentures -- Subordination".
LIMITED PURPOSE OF TRUST
The preferred securities evidence a preferred undivided beneficial interest in
the assets of the trust, and the trust exists solely to issue and sell the
preferred securities and common securities, invest the sale proceeds in the
junior subordinated debentures and engage only in such other activities as may
be necessary or incidental to those activities. A principal difference between
the rights of a holder of preferred securities against the trust and those of a
holder of junior subordinated debentures against us is that a holder of junior
subordinated debentures is entitled to receive all amounts payable on the
preferred securities from us, while a holder of preferred securities is entitled
to receive these amounts from the trust.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of the
trust, the holders of preferred securities will be entitled to receive a like
amount of junior subordinated debentures in exchange for their preferred
securities, subject to prior satisfaction of liabilities to creditors of the
trust as required by applicable law. If the property trustee determines that a
distribution of junior subordinated debentures is not practical, the holders of
preferred securities will be entitled to receive a liquidation
104
<PAGE> 105
distribution out of the assets held by the trust after satisfaction of those
liabilities. See "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution".
Upon any voluntary or involuntary liquidation or bankruptcy affecting us, the
property trustee, as registered holder of the junior subordinated debentures,
would be our creditor subordinated in right of payment to all senior
indebtedness as set forth in the indenture. However, the property trustee would
be entitled to receive payment in full of all amounts payable with respect to
the junior subordinated debentures before any holders of our capital stock
receive payments or distributions.
In light of the effective guarantee provided by the combined operation of the
documents described above and the subordinated status of the obligations they
evidence, the positions of a holder of preferred securities and a holder of
junior subordinated debentures, relative to other creditors and to our
stockholders, in the event of our liquidation or bankruptcy, should be
substantially the same.
105
<PAGE> 106
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material U.S. federal income tax
consequences of the purchase, ownership and disposition of preferred securities
and common stock. This discussion only addresses the tax consequences to a
person that acquires units at their original offering price and that is (1) an
individual citizen or resident of the United States, (2) a corporation organized
in or under the laws of the United States or any state thereof or the District
of Columbia, (3) an estate the income of which is subject to U.S. federal income
tax without regard to its source or (4) a trust if a United States court is able
to exercise primary supervision over administration of the trust and one or more
United States persons have authority to control all substantial decisions of the
trust. Entities or persons referred to in items one through four above are each
referred to as a "U.S. Holder."
This discussion does not address the tax consequences to (1) persons that are
not U.S. Holders, (2) persons that may be subject to special treatment under
U.S. federal income tax law, such as banks, insurance companies, thrift
institutions, regulated investment companies, real estate investment trusts,
tax-exempt organizations, traders in securities that elect to mark to market and
dealers in securities or currencies, (3) persons that will hold preferred
securities or common stock as part of a position in a "straddle" or as part of a
"hedging", "conversion" or other integrated investment transaction for United
States federal income tax purposes, (4) persons whose functional currency is not
the U.S. dollar or (5) persons that do not hold preferred securities or common
stock as capital assets.
The statements of law or legal conclusion set forth in this discussion
constitute the opinion of Sullivan & Cromwell, special counsel to First Coastal
and the trust. This discussion is based upon the U.S. Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations, Internal Revenue Service
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change at any time. Such changes may be applied retroactively in
a manner that could cause the tax consequences to vary substantially from the
consequences described below. See "-- Possible Tax Law Changes." The authorities
on which this discussion is based are subject to various interpretations, and it
is therefore possible that the federal income tax treatment of the purchase,
ownership and disposition of preferred securities and common stock may differ
from the treatment described below.
YOU ARE ADVISED TO CONSULT WITH YOUR OWN TAX ADVISORS IN LIGHT OF YOUR OWN
PARTICULAR CIRCUMSTANCES AS TO THE U.S. FEDERAL TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF PREFERRED SECURITIES AND COMMON STOCK, AS
WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
CLASSIFICATION OF THE UNITS
Each unit will be treated for federal income tax purposes as having been issued
as part of an "investment unit" consisting of a preferred security and a share
of common stock. The purchase price for a unit will be allocated between the
preferred security and common stock based upon their relative fair market
values.
Based on our determination of the relative fair market values of the common
stock and preferred securities at the time of issuance, we plan to treat each
preferred security as issued for $20.00 and each share of common stock as issued
for an amount equal to the excess of the purchase price for the unit over
$20.00. Under the applicable Regulations,
106
<PAGE> 107
our allocation of the issue price of the unit will be binding on all holders of
the units, unless a holder of a unit explicitly discloses, on a form prescribed
by the Internal Revenue Service and attached to the holder's timely filed
federal income tax return for the tax year that includes that acquisition date
of the unit, that the holder's allocation of the issue price of the unit is
different from the our allocation. The allocation made by us is not, however,
binding on the IRS.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES AND THE TRUST
We will treat the junior subordinated debentures as indebtedness, and the
balance of this discussion is based on the assumption that such treatment will
be respected for federal income tax purposes.
Under current law and assuming full compliance with the terms of the trust
agreement, the indenture and certain other documents, the trust will not be
taxable as a corporation for U.S. federal income tax purposes. As a result, each
beneficial owner of preferred securities (a "Securityholder") will be required
to include in its gross income its pro rata share of the original issue discount
("OID") accrued with respect to the junior subordinated debentures, whether or
not cash is actually distributed to the Securityholders. See "-- Original Issue
Discount".
ORIGINAL ISSUE DISCOUNT
Under the indenture, we have the right to defer the payment of interest on the
junior subordinated debentures at any time or from time to time for a period not
exceeding 20 consecutive quarterly periods with respect to each deferral period,
provided that no deferral period may extend beyond the stated maturity of the
junior subordinated debentures.
Under federal income tax regulations, all interest payable on the junior
subordinated debentures will be treated as OID, unless the indenture or the
junior subordinated debentures contain terms or conditions that make the
exercise of the deferral option remote. Because we do not have a policy of
paying dividends on our common stock, the covenant in the indenture prohibiting
us from paying dividends during a deferral period does not, by itself, provide
an effective deterrent to our exercise of the deferral option. Although we do
not intend to defer interest payments and believe that any deferral would
significantly harm our ability to raise capital in the future, Sullivan &
Cromwell, special counsel to First Coastal and the trust, is unable to conclude
as a matter of law that the indenture or the junior subordinated debentures
contain terms or conditions that make the exercise of the deferral option
remote. Accordingly, all interest payable on the junior subordinated debentures
will be treated as OID for federal income tax purposes.
A Securityholder will recognize income in the form of OID on a daily basis under
a constant yield method over the term of the junior subordinated debentures,
including during any deferral period, regardless of the receipt of cash with
respect to the period to which such income is attributable. Subsequent uses of
the term "interest" in this summary shall include income in the form of OID.
Assuming that our allocation of the issue price for the units as described above
is respected, the amount of OID that accrues in any quarterly period will
approximately equal the amount of the interest that accrues on the junior
subordinated debentures in that quarterly period at the stated interest rate. A
U.S. Holder would generally be required to accrue an amount of OID in excess of
the stated
107
<PAGE> 108
interest rate on the junior subordinated debentures if the IRS treats the
preferred securities as issued for an amount less than $20.00 and would
generally be required to accrue an amount of OID that is below the stated
interest rate on the junior subordinated debentures if the IRS treats the
preferred securities as issued for an amount in excess of $20.00.
In the event that we exercise our option to defer interest payments on the
junior subordinated debentures, each Securityholder will include interest in
gross income in advance of the receipt of cash, and any Securityholder who
disposes of the preferred securities prior to the record date for the payment of
distributions following such deferral period will include interest in gross
income but will not receive any cash related thereto from the trust. Any amount
of OID included in a Securityholder's gross income, whether or not during the
deferral period will increase such Securityholder's tax basis in its preferred
securities, and the amount of distributions received by a Securityholder will
reduce such Securityholder's tax basis in its preferred securities.
Because income on the preferred securities will constitute interest, corporate
U.S. Holders of the preferred securities will not be entitled to a
dividends-received deduction with respect to any income taken into account with
respect to the preferred securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF PREFERRED
SECURITIES UPON LIQUIDATION OF THE TRUST
Under current law, a distribution by the trust of the junior subordinated
debentures as described under the caption "Description of Preferred
Securities -- Exchange of Preferred Securities for Junior Subordinated
Debentures" will be non-taxable and will result in the Securityholder receiving
directly its pro rata share of the junior subordinated debentures previously
held indirectly through the trust, with a holding period and aggregate tax basis
equal to the holding period and aggregate tax basis such Securityholder had in
its preferred securities before such distribution. If, however, the liquidation
of the trust were to occur because the trust is subject to U.S. federal income
tax with respect to income accrued or received on the junior subordinated
debentures, the distribution of junior subordinated debentures to a
Securityholder by the trust would be a taxable event to the trust and each
Securityholder, and each Securityholder would recognize gain or loss as if the
Securityholder had exchanged its preferred securities for the junior
subordinated debentures it received upon the liquidation of the trust. A
Securityholder will include original issue discount in income in respect of
junior subordinated debentures received from the trust in the manner described
above under "-- Original Issue Discount".
SALE OR REDEMPTION OF PREFERRED SECURITIES
A Securityholder that sells preferred securities, including through a complete
redemption for cash, will recognize gain or loss equal to the difference between
its adjusted tax basis in the preferred securities and the amount realized on
the sale or redemption of such preferred securities. A Securityholder's adjusted
tax basis in the preferred securities generally will be the portion of the
purchase price for the units that is allocated to the preferred securities,
determined in the manner described above, increased by OID previously includible
in such Securityholder's gross income to the date of disposition and decreased
by payments received on the preferred securities. Such gain or loss generally
will be a capital gain or loss and generally will be long-term capital gain or
loss if the preferred securities have been held for more than one year.
Long-term capital gain of a non-corporate Securityholder is generally subject to
a maximum tax rate of 20%.
108
<PAGE> 109
If we exercise our option to defer any payment of interest on the junior
subordinated debentures, the preferred securities may trade at a price that does
not accurately reflect the value of accrued but unpaid interest with respect to
the underlying junior subordinated debentures. A Securityholder who disposes of
its preferred securities between record dates for payments of distributions
thereon will be required to include accrued but unpaid interest on the junior
subordinated debentures through the date of disposition in income as ordinary
income, but may not receive the cash related thereto. However, such
Securityholder will add such amount to its adjusted tax basis in the preferred
securities. To the extent the selling price is less than the Securityholder's
adjusted tax basis, such Securityholder will recognize a capital loss. Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for U.S. federal income tax purposes.
If a Tax Event caused the junior subordinated debentures to be treated as
equity, it is possible that an exercise of our right to shorten the maturity of
the junior subordinated debentures following such Tax Event would be a taxable
disposition to Securityholders if such shortening caused the junior subordinated
debentures to be re-classified as debt.
FIRST COASTAL COMMON STOCK
A U.S. Holder will include in ordinary income, except as discussed below with
respect to corporations, the gross amount of any distribution made with respect
to its common stock to the extent such distribution is made out of our current
or accumulated earnings and profits as determined for United States federal
income tax purposes. Distributions in excess of current and accumulated earnings
and profits will be treated as a return of capital to the extent of the U.S.
Holder's basis in its common stock and thereafter as capital gain.
A U.S. Holder that is a corporation will, subject to generally applicable
limitations, be entitled to a dividends-received deduction in an amount equal to
70% of the amount of any dividend received with respect to its common stock. If
a dividend is deemed to be "extraordinary" under Section 1059 of the Code, a
corporate stockholder may be required to reduce its basis in the stock by the
nontaxed portion of the dividend.
A U.S. Holder that sells common stock will recognize gain or loss equal to the
difference between its tax basis in the stock and the amount realized on the
sale of the stock. A U.S. Holder's tax basis in its common stock generally will
be the portion of the purchase price for the units that is allocated to the
stock determined in the manner described above. Such gain or loss generally will
be a capital gain or loss and generally will be long-term capital gain or loss
if the common stock has been held for more than one year. Long-term capital gain
of a non-corporate U.S. Holder is generally subject to a maximum tax rate of
20%.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of OID accrued on the preferred securities, or dividends paid on the
common stock, held by U.S. Holders, other than corporations and other exempt
U.S. Holders, will be reported to the IRS. "Backup" withholding at a rate of 31%
will apply to payments of dividends and interest to a non-exempt U.S. Holder
unless the U.S. Holder furnishes its taxpayer identification number in the
manner prescribed in applicable Treasury regulations, certifies that such number
is correct, certifies as to no loss of exemption from backup withholding and
meets certain other conditions.
Payment of the proceeds from the disposition of preferred securities or common
stock to or through the United States office of a broker is subject to
information reporting and backup
109
<PAGE> 110
withholding unless the U.S. Holder establishes an exemption from information
reporting and backup withholding.
Any amounts withheld from a U.S. Holder under the backup withholding rules will
be allowed as a refund or a credit against such U.S. Holder's U.S. federal
income tax liability, provided the required information is furnished to the IRS.
POSSIBLE TAX LAW CHANGES
You should be aware that legislation has been proposed by the Clinton
Administration in the past that, if enacted, would have denied an interest
expense deduction to issuers of instruments such as the junior subordinated
debentures. No such legislation is currently pending. There can be no assurance,
however, that similar legislation will not ultimately be enacted into law, or
that other developments will not occur on or after the date hereof that would
adversely affect the tax treatment of the junior subordinated debentures or the
trust. Changes of that kind could give rise to a Tax Event.
110
<PAGE> 111
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing or other employee benefit plan
(together, "benefit plans") subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consider the fiduciary standards of
ERISA in the context of the plan's particular circumstances before authorizing
an investment in the units. Among other factors, the fiduciary should consider
whether the investment would satisfy the prudence and diversification
requirements of ERISA and would be in accordance with the documents governing
the benefit plan.
In addition, a fiduciary of a benefit plan and individuals purchasing units for
their individual retirement accounts or Keogh plans (also "benefit plans")
should consider whether an investment in the units might constitute or give rise
to a prohibited transaction under ERISA and the Code. Section 406 of ERISA and
Section 4975 of the Code prohibit benefit plans from engaging in certain
transactions involving "plan assets" with persons who are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the benefit
plan. A violation of these rules may result in an substantial excise tax or
other liabilities, unless exemptive relief is available under an applicable
statutory or administrative exemption. Employee benefit plans which are
governmental plans, as defined in Section 3(32) of ERISA, and certain church
plans, as defined in Section 3(33) of ERISA, generally are not subject to ERISA
requirements.
Under a regulation issued by the U.S. Department of Labor, the units would not
be deemed to be "plan assets" if, immediately after this offering, either (1)
less than 25% of the preferred securities were held by benefit plans and
entities holding assets deemed to be "plan assets" of any benefit plan
(together, "Benefit Plan Investors"), or (2) if the units were "publicly offered
securities" for purposes of the regulation. No assurance can be given by the
underwriters that the value of the units held by Benefit Plan Investors will be
less than 25% of the total value of the units at the completion of this
offering. The underwriters will not monitor or take any other measures with
respect to the satisfaction of this exception. Furthermore, we do not anticipate
that the units would qualify as "publicly offered securities" for purposes of
the regulation.
First Coastal or the bank could be considered as a "party in interest" or
"disqualified person" with respect to benefit plans which we directly or
indirectly service or act as a custodian or fiduciary. Because the units may be
deemed as "plan assets," as described above, benefit plans which we service or
act as a custodian or fiduciary should not purchase units unless the purchaser
is eligible for exemption under Prohibited Transaction Class Exemption ("PTCE")
84-14, for certain transactions determined by independent qualified professional
asset managers, PTCE 90-1, for certain transactions involving insurance company
pooled separate accounts, PTCE 91-38, for certain transactions involving bank
collective investment funds, PTCE 95-60 for certain transactions involving
insurance company general accounts, and PTCE 96-23, for certain transactions
determined by in-house asset managers.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is important that benefit plans
considering the purchase of units consult with their counsel regarding the
consequences under ERISA of the acquisition of units.
111
<PAGE> 112
UNDERWRITING
GENERAL
Based on the terms and conditions of an underwriting agreement, we and the trust
have agreed to sell to each of the underwriters named below, and each of the
underwriters has severally agreed to purchase from us and the trust, the number
of units set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
----------- ---------
<S> <C>
Peacock, Hislop, Staley & Given, Inc. .............. 150,000
Wedbush Morgan Securities Inc. ..................... 150,000
-------
Total..................................... 300,000
=======
</TABLE>
The underwriters must purchase all of the units, if any units are purchased.
We and the trust have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to any payments the underwriters may be required to make.
We will pay all expenses, estimated to be $315,000, associated with the offer
and sale of the units, including the trust's expenses. In addition, we have paid
a $25,000 non-accountable expense allowance to the underwriters and, at the
closing of this offering, will pay an additional $135,000 non-accountable
expense allowance to the underwriters.
In connection with the offer and sale of the preferred securities, the
underwriters have advised us that they will comply with Rule 2810 under the NASD
Conduct Rules. As a result, purchasers in this offering must meet the minimum
suitability standards set forth on the inside front cover of this prospectus.
COMMISSIONS AND DISCOUNTS
The underwriters will offer the units directly to the public at $26.50 per unit.
The underwriters may also offer the units to securities dealers at the public
offering price less a concession of $.95 per unit. The underwriters may allow,
and such dealers may reallow, a discount not in excess of $.47 per unit to
brokers and dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
We have agreed to pay the underwriters an underwriting commission of $.325 per
share of common stock, or a total of $97,500. In addition, since the trust will
use the proceeds from the sale of the preferred securities to purchase our
junior subordinated debentures, we have agreed to pay the underwriters an
underwriting commission of $1.3975 per preferred security, or a total of
$419,250.
OVER-ALLOTMENT OPTION
The underwriters have an option to purchase up to 30,000 additional units at the
public offering price to cover over-allotments. The underwriters can exercise
this option during the 45 day period following the date of this prospectus. If
the underwriters exercise this option, each underwriter will have a firm
commitment, subject to some conditions, to purchase approximately the same
percentage of any additional units as the percentage of units initially offered
that the underwriter has agreed to purchase.
112
<PAGE> 113
DETERMINATION OF OFFERING PRICE
Prior to this offering, our common stock has been traded from time to time in
unreported private transactions and on the OTC Bulletin Board and there has been
no market for the units or the preferred securities. The public offering price
of the units has therefore been determined through negotiations between us and
the underwriters. Among the factors considered in determining such prices were
the historical trading prices of the our common stock, prevailing market and
economic conditions, our revenues and earnings, estimates of our business
potential and prospects, the present state of our business operations, an
assessment of our management, and consideration of the above factors in relation
to market valuation of companies in related businesses and other factors deemed
relevant. The public offering price of the units does not necessarily bear any
direct relation to the current market price of the our common stock or our asset
value or net book value per share. There can be no assurance that the price at
which the units will sell in the public market after this offering will not be
lower than the initial public offering price. See "Risk Factors -- Risk Factors
Relating to First Coastal -- The Price of Our Common Stock, the Units and the
Preferred Securities May Fluctuate Widely".
UNDERWRITERS' WARRANTS
At the closing of this offering, we will issue to the underwriters, for a price
of $16.50, warrants to purchase 16,500 shares of our common stock. These
warrants will not be exercisable for one year after the closing of this
offering, and then may be exercised for a period of four years. The exercise
price of the warrants will be the greater of $9.00 per share or 120% of the
initial offering price of the common stock. The warrants will contain
anti-dilution provisions designed to adjust the number of shares issuable upon
exercise upon the occurrence of certain events, such as a recapitalization of
First Coastal or a split of our common stock.
Under certain circumstances, including a demand by the underwriters, we will be
required to register with the SEC the shares of common stock issuable upon
exercise of the warrants. This would permit the underwriters to sell these
shares publicly. We must also bear the costs of registration.
For the period during which the warrants are exercisable, the underwriters or
their transferees will have the opportunity to profit from an increase in the
market value of our common stock, with a resulting dilution in the interests of
our other shareholders. The holders of the warrants can be expected to exercise
their warrants at a time when we would, in all likelihood, either not need the
additional capital or be able to obtain any needed capital by issuing our common
stock or other securities on terms more favorable to us than those provided for
in the warrants. These circumstances may adversely affect the terms on which we
can obtain additional financing.
NO SALES OF SIMILAR SECURITIES
First Coastal, the trust and the bank have agreed not to issue or sell any
shares of their common or preferred stock for a period of 15 months following
the date of this prospectus, except (1) if the underwriters consent in writing,
(2) for shares of common stock issued on conversion of our outstanding series A
preferred stock, (3) for shares of common stock issued pursuant to the exercise
of currently outstanding First Coastal options or warrants and (4) as may be
necessary or reasonably desirable in order to comply with the
113
<PAGE> 114
requirements of appropriate banking regulators. In addition, each executive
officer, director and significant shareholder of First Coastal, the trust and
the bank (including California Community LLC) has agreed not to sell or
otherwise dispose of any shares of First Coastal common stock or preferred stock
held by him or her for a period of 15 months following the date of this
prospectus, except if the underwriters consent in writing. The members of
California Community LLC will be bound by a similar agreement upon any
distribution of the First Coastal common stock held by it to its members.
PRICE STABILIZATION AND SHORT POSITIONS
In connection with the sale of the units, SEC rules permit the underwriters to
engage in transactions that stabilize the price of the units. These transactions
may include purchases for the purpose of fixing or maintaining the price of the
units.
The underwriters may create a short position in connection with the offering.
This means that they may sell a larger number of the units than is shown on the
cover page of this prospectus. If they create a short position, the underwriters
may purchase units in the open market to reduce the short position.
If the underwriters purchase units to stabilize the price or to reduce their
short position, the price of the units could be higher than it might be if they
had not made such purchases. The underwriters make no representation or
prediction about any effect that the purchases may have on the price of the
units.
The underwriters may suspend any of these activities at any time.
PENALTY BIDS
The underwriters may also impose a penalty bid on underwriters and selling group
members. This means that, if the underwriters purchase units in the open market
to reduce their short position or to stabilize the price of the units, they may
reclaim the amount of the selling concession from the underwriters and selling
group members who sold those units as part of this offering. Any imposition of a
penalty bid may have the effect of reducing sales of the units, which may cause
the price of the units to be higher that it might be if the underwriters had not
imposed any penalty bids.
INTERESTS OF THE UNDERWRITERS
E*Capital Corporation, the parent company of Wedbush Morgan Securities, one of
our underwriters, is an investor in California Community LLC, our controlling
stockholder. E*Capital owns about 4.835% of the economic interests of the LLC,
which would in turn represent approximately 3.5% of our total voting power if
the LLC distributed to its members on a pro rata basis the shares of our common
stock (including shares received upon the exercise of its warrants) held by it.
See "Beneficial Ownership of Common Stock -- California Community LLC."
114
<PAGE> 115
VALIDITY OF THE SECURITIES
The validity of the shares of common stock, the junior subordinated debentures
and the guarantee, as well as matters relating to United States federal income
tax consequences, will be passed upon for us by Sullivan & Cromwell, 1888
Century Park East, Los Angeles, California 90067. Sullivan & Cromwell
represented California Community LLC in connection with its investment in First
Coastal. Certain legal matters in connection with this offering will be passed
upon for the underwriters by Munger, Tolles & Olson LLP, 355 South Grand Avenue,
35th Floor, Los Angeles, California 90071. Matters of Delaware law relating to
the validity of the preferred securities and the formation of the trust will be
passed upon by Richards, Layton & Finger, P.A., special Delaware counsel to us
and the trust. Sullivan & Cromwell and Munger, Tolles & Olson LLP may rely on
the opinions of Richards, Layton & Finger, P.A. as to matters of Delaware law.
EXPERTS
Our financial statements for the years ended December 31, 1997 and December 31,
1996, as well as AIB's financial statements for the year ended December 31,
1997, have been audited by Vavrinek, Trine, Day & Co., LLP, independent
certified public accountants, to the extent set forth in their reports included
elsewhere in this prospectus, and have been included in reliance upon their
authority as experts in accounting and auditing. The financial statements of AIB
for the year ended December 31, 1996 have been audited by McGladrey & Pullen,
LLP, independent certified public accountants, to the extent set forth in their
report included elsewhere in this prospectus, and have been included in reliance
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Upon consummation of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and we will be
required to file reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). You may read and copy any
documents filed by us at the public reference facilities of the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Our filings with the SEC
are also available to the public at prescribed rates by writing to the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
or may be accessed electronically without fees by means of the SEC's web site on
the Internet at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for
more information on the public reference rooms and their copy charges.
Regardless of whether we are subject to the informational requirements of the
Exchange Act, we intend to furnish our stockholders with annual reports
containing audited financial statements for each fiscal year and to distribute
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.
We have filed with the SEC a registration statement on Form SB-2. This
prospectus is a part of the registration statement and does not contain all of
the information in the registration statement. Wherever a reference is made in
this prospectus to a contract or other document of us or the trust, please be
aware that such reference is not necessarily complete and that you should refer
to the exhibits that are a part of the registration
115
<PAGE> 116
statement for a copy of the contract or other document. You may review a copy of
the registration statement at the SEC's public reference room in Washington,
D.C., as well as through the SEC's Internet site.
Our bank and AIB submit quarterly to the FDIC, on behalf of the OCC, certain
unaudited reports called "Consolidated Reports of Condition and Income" (each, a
"Call Report"). The publicly available portions of the Call Reports are on file
with, and publicly available at, the FDIC, 550 17th Street, N.W., Washington,
D.C. 20429, and at the FDIC's website at www.FDIC.gov. The Call Reports are
prepared in accordance with regulatory instructions issued by the Federal
Financial Institutions Examination Council. Because of the special supervisory,
regulatory and economic policy needs served by the Call Reports, such regulatory
instructions do not in all cases follow generally accepted accounting principles
or the opinions and statements of the Accounting Principles Board of the
American Institute of Certified Public Accountants or the Financial Accounting
Standards Board. While the Call Reports are supervisory and regulatory
documents, not primarily accounting documents, and do not provide a complete
range of financial disclosure about the bank or AIB, the Call Reports
nevertheless provide important information concerning the financial condition
and results of operations of the bank and AIB.
AIB also voluntarily files Exchange Act reports with the OCC, including annual
reports, quarterly reports and proxy statements. You may obtain copies of these
reports and other information by contacting the Disclosure Officer,
Communications Division, of the OCC at 250 E Street, S.W., Washington, D.C.
20219.
116
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FIRST COASTAL BANCSHARES AND
SUBSIDIARY
Independent Auditors' Report... F-2
Consolidated Balance Sheets as
of September 30, 1998
(Unaudited), December 31,
1997 and 1996................ F-3
Consolidated Statements of
Operations for the nine
months ended September 30,
1998 and 1997 (unaudited) and
the years ended December 31,
1997 and 1996................ F-4
Statements of Changes in
Shareholders' Equity for the
nine months ended September
30, 1998 (unaudited) and the
years ended December 31, 1997
and 1996..................... F-5
Statements of Cash Flows for
the nine months ended
September 30, 1998 and 1997
(unaudited) and the years
ended December 31, 1997 and
1996......................... F-6
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Notes to Financial
Statements................... F-7
AMERICAN INDEPENDENT BANK, N.A.
Independent Auditors'
Reports...................... F-24
Balance Sheets as of September
30, 1998 (Unaudited),
December 31, 1997 and 1996... F-26
Statements of Income for the
nine months ended September
30, 1998 and 1997 (unaudited)
and the years ended December
31, 1997 and 1996............ F-27
Statements of Changes in
Stockholders' Equity for the
nine months ended September
30, 1998 (unaudited) and the
years ended December 31, 1997
and 1996..................... F-28
Statements of Cash Flows for
the nine months ended
September 30, 1998 and 1997
(unaudited) and the years
ended December 31, 1997 and
1996......................... F-29
Notes to Financial
Statements................... F-30
</TABLE>
F-1
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of First Coastal Bancshares
We have audited the accompanying consolidated balance sheets of First Coastal
Bancshares and Subsidiary (the "Company") as of December 31, 1997 and 1996 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial position of First Coastal
Bancshares and Subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
January 23, 1998, except for Note Q
which is dated November 24, 1998
Laguna Hills, California
F-2
<PAGE> 119
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997 1996
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks..................................... $ 3,710 $ 2,629 $ 1,836
Federal Funds Sold.......................................... 11,550 325 675
------- ------- -------
CASH AND CASH EQUIVALENTS.......................... 15,260 2,954 2,511
Interest-Bearing Deposits................................... -- -- 99
Investment Securities Available for Sale -- Note B:......... 6,077 10,183 6,934
Loans -- Note C:
Commercial................................................ 4,303 4,574 2,150
Real Estate -- Construction............................... 50 67 510
Real Estate -- Residential, 1 to 4 Units.................. 26,853 13,778 2,460
Real Estate -- Other...................................... 21,493 16,363 8,856
Consumer.................................................. 3,569 5,210 2,345
------- ------- -------
TOTAL LOANS........................................ 56,268 39,992 16,321
Net Deferred Loan Costs (Fees)............................ 57 (147) (61)
Allowance for Loan Losses................................. (562) (615) (382)
------- ------- -------
NET LOANS.......................................... 55,763 39,230 15,878
Premises and Equipment, Net -- Note D....................... 413 455 160
Other Real Estate Owned, Net................................ 218 200 51
Goodwill, Net -- Note L..................................... 1,803 1,956 --
Net Deferred Tax Asset -- Note F............................ 635 400 --
Accrued Interest and Other Assets........................... 951 751 314
------- ------- -------
$81,120 $56,129 $25,947
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits -- Note E:
Noninterest-Bearing Demand................................ $21,448 $13,598 $ 6,887
Money Market and NOW...................................... 13,869 11,034 7,426
Savings................................................... 4,083 4,120 3,628
Time Deposits Under $100,000.............................. 12,614 10,970 3,609
Time Deposits $100,000 and Over........................... 20,907 5,543 1,398
------- ------- -------
TOTAL DEPOSITS..................................... 72,921 45,265 22,948
Repurchase Agreements....................................... -- 4,550 --
Long-Term Debt.............................................. 1,000
Accrued Interest and Other Liabilities...................... 1,154 304 161
------- ------- -------
TOTAL LIABILITIES.................................. 75,075 50,119 23,109
Commitments and Contingencies -- Note G
Shareholders' Equity -- Notes H and J:
Preferred Stock -- Series A, Authorized 5,000,000 Shares;
Issued and Outstanding 423,500 Shares at December 31,
1997. Liquidation Value of $2,859
Plus Accumulated Dividends -- Note I.................... 2,658 2,658 --
Common Stock -- Authorized 10,000,000 Shares; Issued and
Outstanding 677,052 at December 31, 1997 and 585,196 at
December 31, 1996....................................... 3,424 3,360 2,926
Surplus................................................... -- -- 2,702
Accumulated Deficit, eliminated by transfer of $2,850 from
Common Stock and Surplus on June 30, 1997............... -- -- (2,762)
Retained Earnings (Accumulated Deficit) Since July 1,
1997.................................................... 14 (13) --
Accumulated Other Comprehensive Income --
Net Unrealized Appreciation (Depreciation) on Investment
Securities Available for Sale......................... (51) 5 (28)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY......................... 6,045 6,010 2,838
------- ------- -------
$81,120 $56,129 $25,947
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 120
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------- ---------------
1998 1997 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................ $3,224 $1,752 $2,627 $1,636
Interest on Investment Securities......................... 480 336 428 147
Other Interest Income..................................... 250 71 117 238
------ ------ ------ ------
TOTAL INTEREST INCOME............................. 3,954 2,159 3,172 2,021
INTEREST EXPENSE
Interest on Money Market and NOW.......................... 254 143 212 181
Interest on Savings....................................... 70 68 94 87
Interest on Time Deposits................................. 1,226 371 575 208
Other Interest Expense.................................... 101 2 6 --
------ ------ ------ ------
TOTAL INTEREST EXPENSE............................ 1,651 584 887 476
------ ------ ------ ------
NET INTEREST INCOME............................... 2,303 1,575 2,285 1,545
PROVISION FOR LOAN LOSSES......................... 10 25 25 39
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES......................................... 2,293 1,550 2,260 1,506
NONINTEREST INCOME
Service Charges and Fees.................................. 295 131 209 147
Gain on Sale of Loans..................................... 95 -- 27 105
Gain on Sale of Investment Securities..................... 26
Available for Sale..................................... -- -- 5 --
Other Income.............................................. -- -- 4 12
------ ------ ------ ------
416 131 245 264
NONINTEREST EXPENSE
Salaries and Employee Benefits............................ 954 771 1,144 924
Occupancy -- Note G....................................... 225 157 233 168
Furniture and Equipment................................... 92 49 77 50
Data Processing........................................... 193 165 237 198
Promotional............................................... 45 51 64 84
Professional.............................................. 152 84 91 111
Office.................................................... 124 105 149 99
Other Real Estate Owned................................... 2 -- 1 38
Goodwill Amortization..................................... 100 35 70 --
Other Expenses............................................ 336 231 284 221
------ ------ ------ ------
2,223 1,648 2,350 1,893
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES................. 486 33 155 (123)
Income Taxes -- Note F............................ 245 27 95 1
------ ------ ------ ------
NET INCOME (LOSS)................................. $ 241 $ 6 $ 60 $ (124)
====== ====== ====== ======
Per Share Data -- Note K:
Net Income (Loss) -- Basic................................ $ 0.04 $(0.12) $(0.15) $(0.31)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 121
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT ACCUMULATED
SINCE OTHER
PREFERRED COMMON ACCUMULATED JULY 1, COMPREHENSIVE
STOCK STOCK DEFICIT 1997 INCOME TOTAL
--------- ------- ----------- ------------ ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996.............. $ -- $ 4,266 $(2,638) $ -- $ -- $1,628
Issuance of Common Stock -- Note J...... 1,420 1,420
Cost of Issuance of Common Stock........ (58) (58)
COMPREHENSIVE INCOME:
Net Loss.............................. (124) (124)
Net Unrealized Depreciation on
Investment Securities Available for
Sale............................... (28) (28)
------ ------- ------- ----- ---- ------
TOTAL COMPREHENSIVE INCOME.... (152)
------ ------- ------- ----- ---- ------
Balance at December 31, 1996............ -- 5,628 (2,762) -- (28) 2,838
Proceeds From Stock Offering............ 2,699 535 3,234
Cost of Stock Offering.................. (141) (141)
Quasi-Reorganization -- Note M.......... (2,861) 2,850 11 --
Dividends Paid on Preferred Stock....... (155) (155)
Repurchase of Common Stock.............. (51) (51)
Redemption of Preferred Stock........... (41) (6) (47)
Recognition of Deferred Tax Assets
Generated Prior to
Quasi-Reorganization.................. 250 250
COMPREHENSIVE INCOME:
Net Income (Loss)..................... (88) 148 60
Net Unrealized Appreciation on
Investment Securities Available for
Sale............................... 22 22
------ ------- ------- ----- ---- ------
TOTAL COMPREHENSIVE INCOME.... 82
------ ------- ------- ----- ---- ------
Balance at December 31, 1997............ 2,658 3,360 -- (13) 5 6,010
Repurchase of Common Stock.............. (80) (80)
Dividends Paid on Preferred Stock....... (214) (214)
Recognition of Deferred Tax Assets
Generated Prior to
Quasi-Reorganization.................. 144 144
COMPREHENSIVE INCOME:
Net Income............................ 241 241
Net Unrealized Depreciation on
Investment Securities Available for
Sale............................... (56) (56)
------ ------- ------- ----- ---- ------
TOTAL COMPREHENSIVE INCOME.... 185
------ ------- ------- ----- ---- ------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)........................... $2,658 $ 3,424 $ -- $ 14 $(51) $6,045
====== ======= ======= ===== ==== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 122
FIRST COASTAL BANCSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss)..................................... $ 241 $ 6 $ 60 $ (124)
Adjustments to Reconcile Net Income (Loss) to Net Cash
Used by Operating Activities:
Depreciation and Amortization...................... 194 66 153 43
Provision for Loan Losses.......................... 10 25 25 39
Net Losses on Other Real Estate Owned.............. -- -- -- (2)
Discount and Premium on Investment Securities...... 36 18 22 (4)
Gain on Sale of Investment Securities.............. (26) -- (5) --
Gain on Loan Sales................................. -- -- (27) (105)
Loans Originated for Sale.......................... -- -- (354) (1,536)
Proceeds from Loan Sales........................... -- -- 381 1,641
Deferred Income Taxes.............................. (235) 147 95 --
Other Items -- Net................................. 597 210 (376) --
-------- ------- -------- -------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES.................................. 817 472 (26) (48)
INVESTING ACTIVITIES
Net Change in Interest-Bearing Deposits............... -- 396 396 99
Purchases of Available-for-Sale Securities............ (10,134) (797) (7,180) (7,919)
Proceeds from Sale and Maturities of
Available-for-Sale Securities...................... 14,139 2,448 4,913 1,004
Purchases of Held-to-Maturity Securities.............. -- -- -- (2,011)
Proceeds from Maturities of Held-to-Maturity
Securities......................................... -- -- -- 5,000
Net Increase in Loans................................. (16,317) (3,043) (7,151) (1,416)
Proceeds from Sale of Other Real Estate Owned......... 41 -- -- 531
Investment in Other Real Estate Owned................. -- -- -- (25)
Net Cash Used in Purchase of Marina Bank.............. -- (1,325) (1,325) --
Purchases of Premises and Equipment................... (52) (138) (255) (54)
-------- ------- -------- -------
NET CASH USED BY INVESTING ACTIVITIES......... (12,323) (2,459) (10,602) (4,791)
FINANCING ACTIVITIES
Net Change in Demand Deposits and Savings Accounts.... 10,648 (410) 432 (993)
Net Change in Time Deposits........................... 17,008 1,113 3,249 1,455
Increase in Other Borrowings.......................... (3,550) -- 4,550 --
Dividends Paid........................................ (214) (84) (155) --
Repurchase of Preferred and Common Stock.............. (80) (98) (98) --
Proceeds from Stock Offering -- Net................... -- 3,093 3,093 1,362
-------- ------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 23,812 3,614 11,071 1,824
-------- ------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 12,306 1,627 443 (3,015)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR........................................ 2,954 2,511 2,511 5,526
-------- ------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...... $ 15,260 $ 4,138 $ 2,954 $ 2,511
======== ======= ======== =======
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for Interest................ $ 1,398 $ 563 $ 870 $ 474
Cash Paid During the Year for Income Taxes............ $ 1 $ 1 $ 1 $ 1
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 123
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of First Coastal
Bancshares (the "Company") and its wholly-owned subsidiary, First Coastal Bank,
N.A. (the "Bank").
NATURE OF OPERATIONS
The Bank operates two branches in El Segundo and Marina Del Rey, California. The
Bank's primary source of revenue is providing loans to clients, who are
predominately small and middle-market businesses and individuals.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks and federal funds sold. Cash flows from loans,
deposits and federal funds sold are reported net.
The Company maintains amounts due from banks which exceed federally insured
limits. The Company has not experienced any losses in such accounts.
INVESTMENT SECURITIES AVAILABLE FOR SALE
Available-for-sale securities consist of bonds and certain equity securities not
classified as trading securities nor as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of capital until
realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
LOANS
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal
F-7
<PAGE> 124
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
balances reduced by any charge-offs, allowance for loan losses, and net of any
deferred fees or costs on originated loans, or unamortized premiums or discounts
on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
For impairment recognized in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
the entire change in the present value of expected cash flows is reported as
either provision for loan losses in the same manner in which impairment
initially was recognized, or as a reduction in the amount of provision for loan
losses that otherwise would be reported.
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
OTHER REAL ESTATE OWNED
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost, or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
PREMISES AND EQUIPMENT
Bank premises, furniture and equipment, and leasehold improvements are carried
at cost, less accumulated depreciation and amortization.
INCOME TAXES
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.
F-8
<PAGE> 125
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
EARNINGS PER SHARES (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.
RECLASSIFICATIONS
Certain reclassifications were made to prior year's presentation to conform to
the current year. These classifications are of a normal recurring nature.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This statement, which is effective for the year ending December 31, 1998,
establishes standards of disclosure and financial statement display for
reporting comprehensive income and its components.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the management approach) and also requires certain
related disclosures about products and services, geographic areas and major
customers. The disclosures are required for the year ending December 31, 1998.
F-9
<PAGE> 126
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE B -- INVESTMENT SECURITIES
Debt and equity securities have been classified in the balance sheets according
to management's intent. The carrying amount of securities and their approximate
fair values at December 31 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES DECEMBER 31,
1997:
U.S. Government and Agency Securities.... $ 4,139 $ 1 $ (1) $ 4,139
Mortgage-Backed Securities............... 5,870 7 (2) 5,875
Federal Reserve Stock.................... 169 -- -- 169
------- --- ---- -------
$10,178 $ 8 $ (3) $10,183
======= === ==== =======
AVAILABLE-FOR-SALE SECURITIES DECEMBER 31,
1996:
U.S. Government and Agency Securities.... $ 5,386 $-- $(23) $ 5,363
Mortgage-Backed Securities............... 1,488 -- (5) 1,483
Federal Reserve Stock.................... 88 -- -- 88
------- --- ---- -------
$ 6,962 $-- $(28) $ 6,934
======= === ==== =======
</TABLE>
Investment securities carried at $5,270 on December 31, 1997 were pledged to
secure public deposits and other purposes as required by law. During 1997,
investment securities totaling $1,349 were sold generating gross gains of $5.
The amortized cost and estimated fair value of all debt securities as of
December 31, 1997 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.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due from One Year to Five Years................... $ 2,000 $ 2,000
Over Five Years to Ten Years...................... 2,139 2,139
Mortgage-Backed Securities........................ 5,870 5,875
Federal Reserve Stock............................. 169 169
------- -------
$10,178 $10,183
======= =======
</TABLE>
NOTE C -- LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within Los
Angeles county. Although the Bank seeks to avoid concentrations of loans to a
single industry or based upon a single class of collateral, real estate and real
estate associated businesses are among the principal industries in the Bank's
market area and, as a result, the Bank's loan and collateral portfolios are, to
some degree, concentrated in those industries.
F-10
<PAGE> 127
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE C -- LOANS (CONTINUED)
The Bank also originates SBA loans which may be sold to institutional investors.
At December 31, 1997 and 1996 the Bank was servicing approximately $6,130 and
$5,434, respectively, in loans previously sold.
A summary of the changes in the allowance for loan losses as of December 31
follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Balance at Beginning of Year.......................... $ 382 $ 333
Additions to the Allowance Charged to Expense......... 25 39
Recoveries on Loans Charged Off....................... 38 163
Allowance on Loans Purchased from Marina Bank -- Note
L................................................... 376 --
----- -----
821 535
Less Loans Charged Off................................ (206) (153)
----- -----
$ 615 $ 382
===== =====
</TABLE>
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Recorded Investment in Impaired Loans................ $1,443 $1,068
====== ======
Related Allowance for Loan Losses.................... $ 207 $ 70
====== ======
Average Recorded Investment in Impaired Loans........ $1,318 $ 631
====== ======
Interest Income Recognized for Cash Payments......... $ 130 $ 76
====== ======
</TABLE>
Loans having carrying values of $197 were transferred to other real estate owned
in 1997 and loans totaling $183 were made to facilitate the sale of other real
estate owned.
In the ordinary course of business, the Bank has granted loans to certain
executive officers, directors and employees with which they are associated. In
the Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms, including interest rate and collateral, as those
prevailing at the time for comparable transactions with other persons.
The following is a summary of the activity in these loans:
<TABLE>
<CAPTION>
1997 1996
----- ----
<S> <C> <C>
Balance at Beginning of Year........................... $ 187 $213
Principal Repayments................................... (187) (26)
Advances............................................... 150 --
----- ----
Balance at End of Year................................. $ 150 $187
===== ====
</TABLE>
F-11
<PAGE> 128
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE D -- PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Leasehold Improvements.............................. $ 770 $ 355
Furniture, Fixtures, and Equipment................ 1,057 650
------- ------
1,827 1,005
Less Accumulated Depreciation and Amortization.... (1,372) (845)
------- ------
$ 455 $ 160
======= ======
</TABLE>
NOTE E -- DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
Within One Year....................... $14,632
One to Five Years..................... 1,881
-------
$16,513
=======
</TABLE>
NOTE F -- INCOME TAXES
The provisions for income taxes included in the consolidated statements of
operations consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current:
Federal........................ $-- $--
State.......................... 1 1
--- --
1 1
Deferred......................... 94 --
--- --
$95 $1
=== ==
</TABLE>
F-12
<PAGE> 129
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE F -- INCOME TAXES (CONTINUED)
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to significant portions of the
potential deferred tax asset at December 31 relate to the following:
<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses Due to Tax Limitations..... $128 $ 73
Premises and Equipment Due to Depreciation
Difference........................................ -- 7
Net Loss Carryforwards............................... 609 349
Other Assets......................................... 33 25
---- -----
770 454
Valuation Allowance.................................... (222) (384)
Deferred Tax Liabilities:
Cash Basis Reporting for Tax Purposes................ (148) (70)
---- -----
Net Deferred Taxes..................................... $400 $ --
==== =====
</TABLE>
The valuation allowance relates to unrecognized tax benefits acquired from
Marina Bank of $158 and unrecognized tax benefits present in the Company when it
completed the quasi-reorganization. Accordingly, these benefits, when, and if,
recognized will be credited to Goodwill for items related to Marina Bank and
Common Stock for items related to the Company.
During 1997, the Company adjusted the valuation allowance for $97 for items
related to Marina Bank (credited to Goodwill) and $250 for items related to the
Company (credited to Common Stock). As of December 31, 1997, the valuation
allowance was comprised of $61 relating to items acquired from Marina Bank and
$161 for items relating to the Company before the quasi-reorganization. If
recognized, these amounts will be credited to Goodwill and Common Stock,
respectively.
The Bank has net operating loss carryforwards of approximately $1,692 and $465
for federal income and state franchise tax purposes, respectively. Net operating
loss carryforwards, to the extent not used, will expire in varying amounts
through 2012.
Due to ownership changes that have occurred at the Bank, the net loss
carryforwards reported, and the related deferred tax assets, have been reduced
to those allowable under Internal Revenue Code Section 382.
F-13
<PAGE> 130
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE F -- INCOME TAXES (CONTINUED)
A comparison of the federal statutory income tax rates to the Company's
effective income tax rates follow:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
AMOUNT RATE AMOUNT RATE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Federal Tax Rate............................. $ 53 34.0% $(42) (34.0)%
California Franchise Taxes, Net of Federal
Tax Benefit................................ 17 11.0 (4) (3.3)
Change in Valuation Allowance................ 27 17.4 36 29.3
Nondeductible Goodwill Amortization.......... 24 15.5 -- --
Other Items -- Net........................... (26) (16.6) 11 8.8
---- ----- ---- -----
Company's Effective Rate..................... $ 95 61.3% $ 1 0.8%
==== ===== ==== =====
</TABLE>
NOTE G -- COMMITMENTS AND CONTINGENCIES
The Bank leases its El Segundo facility from a partnership which includes a
director of the Bank. The lease expires in 2003 and includes two five-year
options to renew. The rent through July of 1998 is $8,149 per month with a
provision calling for market rent thereafter.
At December 31, 1997, approximate future minimum annual rental payments under
noncancellable operating lease agreements are as follows:
<TABLE>
<CAPTION>
EL MARINA
SEGUNDO DEL REY TOTAL
------- ------- -----
<S> <C> <C> <C>
1998................................. $ 98 $ 66 $164
1999................................. 98 66 164
2000................................. 98 66 164
2001................................. 98 -- 98
2002................................. 98 -- 98
Thereafter........................... 41 -- 41
---- ---- ----
Total Minimum Payments Required...... $531 $198 $729
==== ==== ====
</TABLE>
Total rent expense included in the statements of operations is approximately
$133 for 1997 and $103 for 1996.
In the normal course of business, the Bank enters into financial commitments to
meet the financing needs of its customers. These financial commitments include
commitments to extend credit. Those instruments involve to varying degrees,
elements of credit and interest rate risk not recognized in the statement of
financial position.
The Bank's exposure to credit loss in the event of nonperformance on commitments
to extend credit is represented by the contractual amount of those instruments.
The Bank
F-14
<PAGE> 131
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE G -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
uses the same credit policies in making commitments as it does for loans
reflected in the financial statements.
As of December 31, 1997, the Bank had commitments to extend credit of $3,009
whose contractual amount represents credit risk.
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. Since many
of the commitments are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank is based on management's
credit evaluation of the customer.
The Bank is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, the disposition of such
pending litigation will not have a material effect on the Bank's financial
statements.
NOTE H -- STOCK OPTION PLAN
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan.
In 1984, the Bank adopted a stock option plan under which the Bank's common
shares may be issued to officers and key employees at not less than 100% of fair
market value at the date the options were granted. This plan expired in 1994.
During 1996, all outstanding options (10,000 at $27.50 per share) were
forfeited.
In 1996, the Bank adopted a stock option plan under which 85,000 of the common
shares may be issued to directors, officers and key employees at not less than
100% of fair market value at the date the options are granted. Upon formation of
the Company, this plan converted to the stock option plan of the Company.
During 1997, the Company granted options for 5,000 shares at an exercise price
of $5.75, of which 1,000 were exercisable at December 31, 1997. These options
expire in 2002. The fair value of these options was $1.40, estimated on the date
of grant using the Black-Scholes option pricing model and assuming a risk free
rate of 5.81%, disregarding any volatility and an expected life of 5 years. Had
compensation costs for these options been determined based on the fair value at
the grant dates consistent with the method of SFAS No. 123, pro forma 1997 net
income and basic earnings per share would have been $59,000 and $(0.15),
respectively, compared to actual 1997 income and basic earnings per share of
$60,000 and $(0.15), respectively.
NOTE I -- PREFERRED STOCK
During 1997, the Company issued 430,000 shares of Series A 10% Cumulative
Convertible Preferred Stock. The Preferred Stock is perpetual in duration and is
senior to the Common
F-15
<PAGE> 132
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE I -- PREFERRED STOCK (CONTINUED)
Stock with respect to dividends and upon liquidation, dissolution or winding-up.
The liquidation preference is $6.75 per share, plus any dividends accrued and
unpaid.
Holders of Preferred Stock have the right, at their option, to convert their
shares of Preferred Stock into shares of Common Stock at an exchange ratio of
one share of Common Stock per share of Preferred Stock. The Preferred Stock may
be redeemed by the Company after June 30, 1998. The redemption price is equal to
$6.89 until July 14, 2000, $6.82 until July 14, 2001 and $6.75 thereafter.
NOTE J -- PRIVATE PLACEMENT CAPITAL OFFERINGS
During 1995, the Bank entered into an Agreement for Stock Purchase with an
investor group to sell a maximum of 450,000 shares at a price of $5.00 per
share. The investor group purchased 166,000 of these shares in 1995 and 284,000
in 1996. The Bank also issued to the investor group warrants to purchase 225,000
shares at $5.00 per share. The warrants expire May 31, 1999 and are now
exercisable in the Common Stock of the Company.
NOTE K -- EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income (loss) and shares outstanding to
the income (loss) and weighted-average number of shares used to compute EPS:
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
INCOME SHARES INCOME SHARES
------ ------- ------ --------
<S> <C> <C> <C> <C>
Net Income as Reported........................ $ 60 -- $(124) --
Shares Outstanding at Year End................ -- 677,052 -- 585,196
Impact of Weighting Shares Issued and/or
Retired During the Year..................... -- (38,062) -- (185,813)
Dividends on Preferred Stock.................. (155) -- -- --
----- ------- ----- --------
Used in Basic EPS................... $ (95) 638,990 $(124) 399,383
===== ======= ===== ========
</TABLE>
The effect of outstanding warrants, options and conversion features of the
preferred stock were not included as their effect would be antidilutive due to
the loss used for basic EPS.
NOTE L -- MERGER WITH MARINA BANK
On June 26, 1997, the Company acquired 100% of the outstanding common stock of
Marina Bank (MB) for approximately $4,126 in cash (including transaction costs).
MB had total assets of approximately $20,864. The acquisition was accounted for
using the purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16. "Business Combinations". Under this method of accounting,
the purchase price was allocated to the assets acquired and deposits and
liabilities assumed based on their fair values as of the acquisition date, which
were not materially different from their book values. The financial statements
include the operations of MB from the date of the
F-16
<PAGE> 133
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE L -- MERGER WITH MARINA BANK (CONTINUED)
acquisition. Goodwill arising from the transaction totaled approximately $2,083
and is being amortized over fifteen years on a straight-line basis.
The following table sets forth selected unaudited pro forma combined financial
information of the Company and MB for the years ended December 31, 1997 and
1996. The pro forma operating data reflects the effect of the acquisition of MB
as if it was consummated at the beginning of each year presented. The pro forma
results are not necessarily indicative of the results that would have occurred
had the acquisition been in effect for the full years presented, nor are they
necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Interest and Noninterest Income...................... $4,472 $4,960
Net Loss............................................. $ (523) $ (177)
Net Loss Per Share -- Basic.......................... $(1.30) $(0.75)
</TABLE>
These proforma disclosures include adjustment to interest income from the
payment of the purchase price in cash, goodwill amortization and adjustments to
net income per share to reflect the issuance of preferred and common stock to
fund the purchase. No adjustments have been reflected in these amounts for the
expected cost savings to be derived from this merger.
NOTE M -- QUASI-REORGANIZATION AND HOLDING COMPANY FORMATION
With the consent of the Office of the Comptroller of the Currency (the "OCC")
and the Company's shareholders, the Company adjusted its capital accounts
through a quasi-reorganization. As of July 1, 1997, the Company eliminated its
accumulated deficit and unrecognized loss on available for sale securities
through a reduction of its capital account by the same amount.
F-17
<PAGE> 134
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE M -- QUASI-REORGANIZATION AND HOLDING COMPANY FORMATION (CONTINUED)
The results of operations of the Company for the periods before and after the
quasi-reorganization are summarized as follows:
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------------
JANUARY 1, 1997 JULY 1, 1997 FOR THE
THROUGH THROUGH YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1997 DECEMBER 31, 1997
--------------- ----------------- -----------------
<S> <C> <C> <C>
Interest Income.................. $1,127 $2,045 $3,172
Interest Expense................. 293 594 887
------ ------ ------
Net Interest Income.............. 834 1,451 2,285
Provision for Loan Losses........ 25 -- 25
------ ------ ------
Net Interest Income After
Provision for Loan Losses...... 809 1,451 2,260
Noninterest Income............... 70 175 245
Noninterest Expenses............. 966 1,384 2,350
------ ------ ------
Income (Loss) Before Income
Taxes.......................... (87) 242 155
Income Tax Provision............. 1 94 95
------ ------ ------
Net Income (Loss)................ $ (88) $ 148 $ 60
====== ====== ======
EPS -- Basic..................... $(0.15) $ -- $(0.15)
</TABLE>
On June 24, 1997, the shareholders of First Coastal Bank, N.A. exchanged their
outstanding common and preferred stock for 430,000 shares of preferred stock and
685,196 shares of common stock as First Coastal Bancshares, a newly formed bank
holding company. There was no change in ownership and no cash involved in this
transaction. The transaction was accounted for as a pooling of interest and the
consolidated financial statements contained herein have been restated to give
full affect to this reorganization.
F-18
<PAGE> 135
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE N -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
First Coastal Bancshares operates First Coastal Bank. The earnings of the
subsidiary are recognized on the equity method of accounting. Condensed
financial statements of the parent company only are presented below:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS:
Cash............................................ $ 163
Investment in First Coastal Bank, N.A........... 5,817
Other Assets.................................... 101
------
$6,081
======
LIABILITIES:
Other Liabilities............................... $ 71
------
TOTAL LIABILITIES....................... 71
SHAREHOLDERS' EQUITY............................ 6,010
------
$6,081
======
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997
------------
<S> <C>
INCOME:
Dividends from Subsidiary....................... $149
----
TOTAL INCOME............................ 149
EXPENSES:
Other........................................... 3
----
TOTAL EXPENSES.......................... 3
----
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARY...................................... 146
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY...... 2
----
NET INCOME.............................. $148
====
</TABLE>
F-19
<PAGE> 136
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE N -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................ $148
Noncash Items Included in Net Income:
Equity in Income of Subsidiary......................... (151)
Change in Other Assets and Liabilities................. (36)
----
NET CASH USED IN OPERATING ACTIVITIES............. (39)
CASH FLOWS FROM INVESTING ACTIVITY:
Dividends and Capital Infusion Received from Subsidiary... 384
----
NET CASH PROVIDED BY INVESTING ACTIVITIES......... 384
CASH FLOWS FROM FINANCING ACTIVITIES:
Shares Retired............................................ (98)
Dividends Paid............................................ (84)
----
NET CASH USED IN FINANCING ACTIVITIES............. (182)
----
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 163
CASH AND CASH EQUIVALENTS, AT BEGINNING OF YEAR............. --
----
CASH AND CASH EQUIVALENTS AT ENDING OF YEAR................. $163
====
</TABLE>
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax
F-20
<PAGE> 137
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE O -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
consequences related to the realization of the unrealized gains and losses can
have a potential effect on fair value estimates and have not been considered in
many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash and due from banks, federal funds sold and
interest-bearing deposits, are considered to approximate fair value due to the
short-term nature of these financial instruments. The fair values of investment
securities available for sale are generally based on quoted market prices. The
fair value of loans are estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices of similar
instruments where available.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand and other borrowed
funds are considered to approximate fair value due to the short-term nature of
these financial instruments. For fixed maturity deposits, fair value is
estimated by discounting estimated future cash flows using rates currently
offered for deposits of similar remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements. The fair value of these
financial instruments are not material.
The estimated fair value of financial instruments at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and Due From Banks............. $ 2,629 $ 2,629 $ 1,836 $ 1,836
Federal Funds Sold.................. $ 325 $ 325 $ 675 $ 675
Interest-Bearing Deposits........... $ -- $ -- $ 99 $ 99
Investment Securities............... $10,183 $10,183 $ 6,994 $ 6,994
Loans............................... $39,230 $39,277 $15,878 $15,783
FINANCIAL LIABILITIES:
Deposits............................ $45,265 $45,271 $22,948 $22,947
Repurchase Agreements............... $ 4,550 $ 4,550 $ -- $ --
</TABLE>
F-21
<PAGE> 138
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE P -- REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action (there are no conditions or
events since that notification that management believes have changed the Bank's
category). To be categorized as well-capitalized, the Bank must maintain minimum
ratios as set forth in the table below. The following table also sets forth the
Bank's actual capital amounts and ratios (dollar amounts in thousands):
<TABLE>
<CAPTION>
AMOUNT OF CAPITAL REQUIRED
-------------------------------
TO BE
ADEQUATELY TO BE WELL-
ACTUAL CAPITALIZED CAPITALIZED
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Capital (to Risk-Weighted
Assets)........................ $4,372 10.8% $3,240 8.0% $4,050 10.0%
Tier 1 Capital (to Risk-Weighted
Assets)........................ $3,864 9.5% $1,620 4.0% $2,430 6.0%
Tier 1 Capital (to Average
Assets)........................ $3,864 7.8% $1,994 4.0% $2,493 5.0%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk-Weighted
Assets)........................ $3,095 17.1% $1,451 8.0% $1,813 10.0%
Tier 1 Capital (to Risk-Weighted
Assets)........................ $2,866 15.8% $ 725 4.0% $1,088 6.0%
Tier 1 Capital (to Average
Assets)........................ $2,866 10.7% $1,069 4.0% $1,337 5.0%
</TABLE>
F-22
<PAGE> 139
FIRST COASTAL BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE P -- REGULATORY MATTERS (CONTINUED)
The Company is subject to similar requirements administered by its primary
regulator, the Federal Reserve Board. Its total capital to risk-weighted assets,
Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets was
11.3%, 6.2% and 5.0%, respectively, at December 31, 1997.
The Bank is restricted as to the amount of dividends which can be paid.
Dividends declared by national banks that exceed the net income (as defined) for
the current year plus retained net income for the preceding two years must be
approved by the OCC. The Bank may not pay dividends that would result in its
capital levels being reduced below the minimum requirements shown above.
Banking regulations require that all banks maintain a percentage of their
deposits in cash or as reserves at the Federal Reserve Bank. These reserve
requirements were approximately $770 and $785 at December 31, 1997 and 1996,
respectively.
NOTE Q -- SUBSEQUENT EVENTS
On August 3, 1998, the Company entered into an agreement to purchase American
Independent Bank, N.A. (AIB) for approximately $6.4 million. AIB had total
assets of $33.7 million, total deposits of $30.2 million and stockholders'
equity of $3.3 million as of December 31, 1997. The purchase is subject to AIB
shareholder approval as well as approval of the OCC and FRB.
During 1998, the Company's shareholders approved a one-for-five split of its
common stock. All per share data in these financial statements and notes has
been adjusted for this split.
NOTE R -- RELATED PARTY TRANSACTIONS
The Company's largest shareholder is California Community LLC. The President and
Chief Executive Officer of the Company is also the Chief Executive Officer and
Manager of California Community LLC. Several of the Company's other directors
also have ownership interests in California Community LLC.
The Bank has engaged Data Tech Management, Inc. to provide loan servicing and
computer hardware and software maintenance services. During 1997, the Bank paid
$33,292 for such services. Two of the Company's executive officers and directors
own Data Tech Management, Inc.
One of the Company's directors owns a 25% interest in the lessor of the
headquarters and main branch of the Bank. During 1997, the monthly rental
expense for this property was $8,149. See Note G for additional information on
the commitment related to this lease.
F-23
<PAGE> 140
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Independent Bank, N.A.
We have audited the accompanying balance sheet of American Independent Bank,
N.A. as of December 31, 1997, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Independent Bank, N.A.
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
VAVRINEK, TRINE, DAY & CO., LLP
January 29, 1998
Laguna Hills, California
F-24
<PAGE> 141
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
American Independent Bank, N.A.
Gardena, California
We have audited the accompanying balance sheet of American Independent Bank,
N.A. as of December 31, 1996, and the related statements of income,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Independent Bank, N.A.
as of December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
McGLADREY & PULLEN, LLP
Pasadena, California
January 24, 1997
F-25
<PAGE> 142
AMERICAN INDEPENDENT BANK, N.A.
BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 1997 1996
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks (Note 2)................... $ 4,181,972 $ 3,730,909 $ 3,585,311
Federal funds sold................................. 7,005,000 3,920,000 2,000,000
Interest-bearing deposits in other financial
institutions..................................... 693,000 396,000 495,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS................ 11,879,972 8,046,909 6,080,311
Securities held to maturity (Note 3)............... 4,000,000 3,500,000 4,200,000
Loans, net (Notes 4, 5, and 10).................... 20,716,025 20,913,707 18,980,786
Leasehold improvements and equipment, net (note
6)............................................... 376,944 361,441 212,796
Other real estate owned............................ 80,994 129,529 48,535
Accrued interest receivable........................ 225,946 237,521 181,009
Prepaid expenses and other assets (Notes 3 and
8)............................................... 314,148 510,323 416,501
----------- ----------- -----------
$37,594,029 $33,699,430 $30,119,938
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7):
Demand........................................ $13,908,467 $12,700,891 $12,877,298
Savings and NOW............................... 12,309,142 11,391,666 9,068,923
Other time.................................... 7,377,288 6,113,917 5,024,127
----------- ----------- -----------
TOTAL DEPOSITS........................... 33,594,897 30,206,474 26,970,348
Accrued interest payable and other liabilities
(Note 8)...................................... 488,099 182,823 153,425
----------- ----------- -----------
TOTAL LIABILITIES........................ 34,082,996 30,389,297 27,123,773
Commitments and Contingencies (Note 9)
Stockholders' Equity (Notes 11, 13 and 14)
Common stock, $1 par value; authorized 6,500,000
shares; issued and outstanding 890,689 shares
in 1997; and 885,048 shares in 1996........... 910,689 890,689 885,048
Surplus.......................................... 3,148,200 3,114,200 3,107,598
Accumulated deficit.............................. (547,856) (694,756) (996,481)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............... 3,511,033 3,310,133 2,996,165
----------- ----------- -----------
$37,594,029 $33,699,430 $30,119,938
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 143
AMERICAN INDEPENDENT BANK, N.A.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest and fees on loans........... $1,832,357 $1,726,095 $2,298,700 $1,952,969
Interest on investment securities and
deposits in other financial
institutions....................... 216,502 241,164 307,025 203,076
Interest on federal funds sold....... 185,581 83,642 162,133 229,102
---------- ---------- ---------- ----------
2,234,440 2,050,901 2,767,858 2,385,147
Interest expense on deposits......... 446,338 350,706 480,074 440,184
---------- ---------- ---------- ----------
NET INTEREST INCOME........ 1,788,102 1,700,195 2,287,784 1,944,963
Provision for loan losses (Note 5)... 92,500 -- -- 35,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN
LOSSES.................. 1,695,602 1,700,195 2,287,784 1,909,963
Other income:
Service charges and other fees..... 438,833 454,597 595,588 583,231
Other.............................. 64,460 38,654 54,798 134,260
---------- ---------- ---------- ----------
503,293 493,251 650,386 717,491
---------- ---------- ---------- ----------
Other expenses:
Salary, wages and employees
benefits........................ 792,166 814,755 1,068,293 992,507
Occupancy expenses (Note 9)........ 220,058 218,385 298,437 303,463
Data processing.................... 151,396 168,888 216,699 201,929
Equipment rentals, depreciation and
maintenance..................... 146,284 90,762 133,080 98,049
Professional fees.................. 162,057 163,169 208,642 133,107
Other.............................. 475,823 378,420 523,152 487,850
---------- ---------- ---------- ----------
1,947,784 1,834,379 2,448,303 2,216,905
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES................... 251,111 359,067 489,867 410,549
Income taxes (Note 8)................ 104,211 130,847 188,142 800
---------- ---------- ---------- ----------
NET INCOME................. $ 146,900 $ 228,220 $ 301,725 $ 409,749
========== ========== ========== ==========
PER SHARE DATA -- NOTE 12
Net income -- Basic................ $ 0.16 $ 0.26 $ 0.34 $ 0.47
Net income -- Diluted.............. $ 0.15 $ 0.26 $ 0.34 $ 0.47
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 144
AMERICAN INDEPENDENT BANK, N.A.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK SURPLUS DEFICIT TOTAL
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995........... $862,048 $3,061,598 $(1,406,230) $2,517,416
Exercise of warrants at $3.00 per
share (Note 14)............... 23,000 46,000 69,000
Net income....................... 409,749 409,749
-------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1996......... 885,048 3,107,598 (996,481) 2,996,165
Exercise of warrants at $3.50 per
share (Note 14)............... 641 1,602 2,243
Exercise of stock options........ 5,000 5,000 10,000
Net income....................... 301,725 301,725
-------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1997......... 890,689 3,114,200 (694,756) 3,310,133
Exercise of stock options........ 20,000 34,000 54,000
Net income....................... 146,900 146,900
-------- ---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1998........ $910,689 $3,148,200 $ (547,856) $3,511,033
======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 145
AMERICAN INDEPENDENT BANK, N.A.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................. $ 146,900 $ 228,220 $ 301,725 $ 409,749
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, amortization and
accretion.......................... 82,567 65,302 92,485 72,471
Provision for loan losses............ 92,500 -- -- 35,000
(Gain) loss on sale of other real
estate owned, net.................. 640 -- -- (25,895)
Increase (decrease) in unearned net
loan fees.......................... 9,675 (7,463) (11,605) 10,652
(Increase) decrease in accrued
interest receivable................ 11,575 (37,293) (56,512) (75,063)
(Increase) decrease in prepaid
expenses and other assets.......... 196,175 (106,899) (92,087) (41,089)
Increase in accrued interest payable
and other liabilities.............. 305,276 135,700 27,663 15,011
----------- ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.................... 845,308 277,567 261,669 400,836
Cash Flows from Investing Activities:
Net (increase) decrease in
interest-bearing deposits in other
financial institutions............... (297,000) 99,000 99,000 397,000
Net (increase) decrease in federal funds
sold................................. (3,085,000) (2,680,000) (1,920,000) 335,000
Purchase of securities held to
maturity............................. (3,000,000) (1,500,000) (2,000,000) (6,000,000)
Proceeds from maturities or calls of
securities held to maturity.......... 2,500,000 1,200,000 2,700,000 3,500,000
Net increase in loans................... 95,507 (520,606) (2,002,310) (2,205,309)
Proceeds from the sale of other real
estate owned......................... 47,895 -- -- 249,640
Purchase of leasehold improvements and
equipment............................ (98,070) (233,752) (241,130) (109,749)
Payments on other real estate
acquired............................. -- -- -- (57,730)
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES.................... (3,836,668) (3,635,358) (3,364,440) (3,891,148)
Cash Flows from Financing Activities:
Net increase in deposits................ 3,388,423 4,641,402 3,236,126 2,197,092
Proceeds from exercise of stock
options.............................. 54,000 10,000 10,000 --
Proceeds from exercise of warrants...... -- -- 2,243 69,000
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES.................... 3,442,423 4,651,402 3,248,369 2,266,092
INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS................ 451,063 1,293,611 145,598 (1,224,220)
Cash and Due From Banks
Beginning............................... 3,730,909 3,585,311 3,585,311 4,809,531
----------- ----------- ----------- -----------
Ending.................................. $ 4,181,972 $ 4,878,922 $ 3,730,909 $ 3,585,311
=========== =========== =========== ===========
Supplemental Schedule of Noncash Investing
and Financing Activities
Other real estate acquired in settlement
of loans................................ $ -- $ 80,994 $ 80,994 $ 45,296
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 146
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
American Independent Bank, N.A. provides a full range of banking services to its
commercial and consumer customers through two branches located in the cities of
Gardena and Burbank, California.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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 and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND DUE FROM BANKS
For the purposes of reporting cash flows, cash and due from banks includes cash
on hand and amounts due from banks (including cash items in the process of
clearing). Cash flows from loans originated by the Bank, deposits and federal
funds sold are reported net.
The Bank maintains amounts due from banks which exceed federally insured limits.
The Bank has not experienced any losses in such accounts.
During 1997 and 1996, the Bank paid interest and income taxes as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Interest................. $425,409 $421,251
Income taxes............. $100,800 $ 800
</TABLE>
SECURITIES HELD TO MATURITY
Securities held to maturity are those debt securities the Bank has both the
ability and intent to hold to maturity, regardless of changes in market
condition, liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
The sale of a security within three months of its maturity date or after at
least 85% of the principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure.
LOANS
Loans are stated at the amount of unpaid principal, reduced by unearned discount
and fees and an allowance for possible loan losses.
The allowance for loan losses is maintained at a level management considers
adequate to provide for losses that can be reasonable anticipated. The allowance
is increased, when required, by provisions charged to operating expense and
reduced by net charge-offs. The
F-30
<PAGE> 147
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bank makes continuous credit reviews of the loan portfolio and considers current
economic conditions, historical loan loss experience and other factors in
determining the adequacy of the allowance. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, the Office of
the Comptroller of the Currency (OCC), as an integral part of its examination
process, reviews the allowance for loans losses. This agency may require
additions to the allowance based on their judgment about information available
at the time of their examination.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. The
amount of impairment, if any, and any subsequent changes are included in the
allowance for loan losses.
INTEREST AND FEES ON LOANS
Interest on loans is accrued daily on the outstanding balances. Accrual of
interest on impaired loans is discontinued when, in management's opinion, the
borrower may be unable to meet payments as they become due. When the accrual of
interest is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are received.
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related loans'
yield. The Bank is generally amortizing these amounts over the contractual life
of the loan.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost less accumulated
depreciation. Depreciation of equipment is computed on the straight-line method
over the estimated useful lives of the assets.
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Furniture and equipment................ 5 - 10
Automobiles............................ 4 - 5
</TABLE>
Improvements to leased property are amortized over the lesser of the life of the
lease or life of the improvements.
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) represents acquired through foreclosure or other
proceedings. OREO is held for sale and is recorded at the lower of the recorded
amount of the loan or fair value of the properties less estimated costs of
disposal. Any write-down to
F-31
<PAGE> 148
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fair value at the time of transfer to OREO is charges to the allowance for loan
losses. Property is evaluated regularly to ensure the recorded amount is
supported by its current fair value. Valuation allowances to reduce the carrying
amount to fair value less estimated costs to dispose are recorded in other
expenses.
COST IN EXCESS OF NET ASSETS ACQUIRED
The cost in excess of the fair value of net assets acquired is being amortized
over a period of ten years. As of December 31, 1997 and 1996, the remaining
unamortized balance is approximately $44,000 and $50,000, respectively.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards. Deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
COMPREHENSIVE INCOME
The Bank has no items of other comprehensive income. Accordingly, total
comprehensive income is the same as net income and no separate statement of
comprehensive income is provided.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 specifies the disclosure of the estimated fair value of financial
instruments. The Bank's estimated fair value amounts are reflected in Note 15
and have been determined by the Bank using available market information and
appropriate valuation methodologies.
However, considerable judgment is required to develop the estimates of fair
value. Accordingly, the estimates presented in Note 15 are not necessarily
indicative of the amounts the Bank could have realized in a current market
exchange as of December 31, 1997 and 1996. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the balance sheet date
and, therefore, current estimates of fair value may differ significantly from
the amounts presented in the accompanying Notes.
F-32
<PAGE> 149
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARES (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' presentations to conform to
the current year. These reclassifications are of a normal recurring nature.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income". This statement, which is effective for the
year ending December 31, 1998, establishes standards of disclosure and financial
statement display for reporting comprehensive income and its components.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement changes current practice under SFAS 14 by establishing a new framework
on which to base segment reporting (referred to as the management approach) and
also requires certain related disclosures about products and services,
geographic areas and major customers. The disclosures are required for the year
ending December 31, 1998.
NOTE 2. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve balances in cash with the Federal
Reserve Bank of San Francisco. The total of those reserve balances was
approximately $100,000 and $139,000 at December 31, 1997 and 1996, respectively.
NOTE 3. SECURITIES HELD TO MATURITY
The amortized cost and fair value of securities being held to maturity as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government agencies (mature in
1998 - 2000)...................... $3,500,000 $319 $(1,875) $3,498,444
========== ==== ======= ==========
</TABLE>
F-33
<PAGE> 150
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SECURITIES HELD TO MATURITY (CONTINUED)
<TABLE>
<CAPTION>
1996
-------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government agencies (mature in
1998 - 2001)...................... $4,200,000 $844 $(21,036) $4,179,808
========== ==== ======== ==========
</TABLE>
Investment securities with an amortized cost of $600,000 at December 31, 1997
and 1996, respectively, are pledged as collateral or for other purposes as
required or permitted by law. Federal Reserve bank stock of $94,150 and $80,600
as of December 31, 1997 and 1996, respectively, is included in prepaid expenses
and other assets.
NOTE 4. LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within the
Los Angeles County area of Southern California. Although the Bank seeks to avoid
concentrations of loans to a single industry or based upon a single class of
collateral, real estate and real estate associated businesses are among the
principal industries in the Bank's market area and, as a result, the Bank's loan
and collateral portfolios are, to some degree, concentrated in those industries.
The composition of loans at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial.................................... $ 7,934,564 $ 4,881,022
Real estate -- construction................... 2,019,668 153,593
Real estate -- other.......................... 8,917,906 12,084,627
Consumer...................................... 2,320,605 2,196,236
----------- -----------
21,192,743 19,315,478
Less:
Allowance for loan losses................... (216,202) (260,253)
Unearned net loan fees...................... (62,834) (74,439)
----------- -----------
$20,913,707 $18,980,786
=========== ===========
</TABLE>
IMPAIRED LOANS
Information about impaired loans as of and for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Impaired loans..................................... $545,000 $525,000
======== ========
Related allowance for loan losses.................. $ 68,000 $ 28,000
======== ========
Average balance.................................... $422,000 $730,000
======== ========
Interest income recognized......................... None $ 79,000
======== ========
</TABLE>
F-34
<PAGE> 151
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LOANS (CONTINUED)
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
NOTE 5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Balance, beginning................................. $260,253 $318,701
Charge-offs, net................................. (44,051) (93,448)
Provision for loan losses........................ -- 35,000
-------- --------
Balance, ending.................................... $216,202 $260,253
======== ========
</TABLE>
NOTE 6. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
The major classes of leasehold improvements and equipment and the total
accumulated depreciation and amortization at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Leasehold improvement............................ $ 129,582 $ 115,187
Furniture and equipment.......................... 604,785 345,378
Automobiles...................................... 67,533 66,335
Construction in progress......................... -- 33,755
--------- ---------
801,900 560,655
Less accumulated depreciation and amortization... (440,459) (347,859)
--------- ---------
$ 361,441 $ 212,796
========= =========
</TABLE>
NOTE 7. DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
Due in one year............................................ $5,876,666
Due in one year or more.................................... 237,251
----------
$6,113,917
==========
</TABLE>
F-35
<PAGE> 152
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----
<S> <C> <C>
Current:
Federal.............................................. $ 9,142 $ --
State................................................ 15,000 800
-------- ----
24,142 800
Deferred............................................... 164,000 --
-------- ----
$188,142 $800
======== ====
</TABLE>
Net deferred tax assets (liabilities) consists of the following components as of
December 31:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax liability:
Cash basis of accounting........................ $(117,000) $(78,000)
Allowance for loan losses....................... (9,000) --
--------- --------
(126,000) (78,000)
Deferred tax assets:
Net operating loss and tax credit
carryforward................................. 36,000 122,000
Allowance for loan losses....................... -- 38,000
Valuation allowance for other real estate
owned........................................ 8,000 8,000
Other........................................... 30,000 22,000
--------- --------
74,000 190,000
--------- --------
Net deferred tax assets (liabilities)............. $ (52,000) $112,000
========= ========
</TABLE>
As of December 31, 1997, the Bank has federal tax net operating losses of
approximately $69,000 available to offset future taxable income expiring in
2006. The use of this net operating loss is restricted to approximately $7,000
per year until 2006, as it was acquired as part of the acquisition of Burbank
National Bank.
NOTE 9. COMMITMENTS AND CONTINGENCIES
CONTINGENCIES
In the normal course of business, the Bank is involved in various legal
proceedings. In the opinion of management, any liability resulting from such
proceedings would not have a material adverse effect on the financial
statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying
F-36
<PAGE> 153
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At December 31, 1997
and 1996, the Bank had firm loan commitments of $2,909,000 and $3,020,000,
respectively. In addition, the Bank had standby letters of credit of $349,000
outstanding as of December 31, 1997. The bank does not anticipate any material
losses as a result of these commitments.
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 some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held represents real estate
and certificates of deposit.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Bank deems necessary.
LEASE COMMITMENT AND RENT EXPENSE
The Bank leases office facilities under lease agreements which require monthly
rental payment of $19,728 plus normal repairs and maintenance, property taxes
and insurance. One of the facilities is leased from a director. The monthly
rental payments to the director are $9,381 ($112,572 per year) and the lease
expires in January 2004.
F-37
<PAGE> 154
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1997, the future lease rentals payable under noncancellable
lease commitments for land and buildings having an initial or remaining term of
more than one year are as follows:
<TABLE>
<CAPTION>
YEARS ENDING AMOUNT
------------ ----------
<S> <C>
1998............................... $ 222,000
1999............................... 222,000
2000............................... 222,000
2001............................... 223,000
2002............................... 237,000
Thereafter......................... 629,000
----------
$1,755,000
==========
</TABLE>
Total rent expense included in the statements of income is approximately
$227,400 and $236,700 for the years ended December 31, 1997 and 1996,
respectively.
NOTE 10. TRANSACTIONS WITH DIRECTORS AND OFFICERS
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which whey are
principal stockholders (commonly referred to as related parties). In
management's opinion, these loans and transactions were on the same terms as
those prevailing at the time for comparable loans and transactions with
nonrelated parties. Total loans to related parties were approximately $167,000
and $282,000 at December 31, 1997 and 1996, respectively. Non of these loans are
past due, nonaccrual or restructured to provide a reduction or deferral of
interest or principal because of a deterioration in the financial position of
the borrower. There were not loans to a related party that were considered
classified loans at December 31, 1997 and 1996.
F-38
<PAGE> 155
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK OPTIONS
The Bank has adopted a stock option plan for officers, directors and key
employees. Option prices may not be less than 100% of the fair market value at
the date of the grant. Options granted under the stock option plan expire not
more than ten years after the date of grant and must be fully paid when
exercised.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Options outstanding at January 1, 1995 issued at
$2.00 - $3.43 per share............................ 84,512 $2.87
Options granted at $3.00 per share................... 57,500 3.00
Options canceled..................................... (18,000) 3.00
-------
Options outstanding at December 31, 1996, issued at
$2.00 - $3.43 per share............................ 124,012 2.91
Options granted at $3.00 - $3.75 per share........... 20,000 3.32
Options exercised.................................... (5,000) 2.00
-------
Options outstanding at December 31, 1997 issued at
$2.70 - $3.75 per share............................ 139,012 3.00
=======
</TABLE>
All stock options outstanding at December 31, 1997 were exercisable with a
weighted-average remaining contractual life of 5.5 years.
The Bank applies APB Opinion 25, Accounting for Stock Issued to Employees, and
related Interpretation in accounting for its plans. Accordingly, no compensation
cost has been recognized. The Bank has elected not to adopt FASB Statement No.
123, "Accounting for Stock-Based Compensation". Had compensation cost for the
Bank's stock option plan been determined based on the fair value at the grant
dates for awards under this plan consistent with the method of Statement No.
123, the Bank's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C> <C>
Net income........................... As reported $301,725 $409,749
Pro forma 266,618 336,749
Per share data -- basic.............. As reported 0.34 0.47
Pro forma 0.30 0.39
Net income -- diluted................ As reported 0.34 0.47
Pro forma 0.30 0.38
</TABLE>
The pro forma compensation cost was recognized for the fair value of the stock
options granted, which was estimated using the Black-Scholes model with the
following assumptions: expected volatility of 25% and risk-free interest rate of
5.81% in 1997 and 5.78% in 1996. The weighted average fair value of these stock
options granted in 1997 and 1996 was $1.67 and $1.53, respectively.
F-39
<PAGE> 156
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. EARNINGS PER SHARE
The following is a reconciliation of net income and shares outstanding to the
income and number of share used to compute EPS (Amounts in thousands except
number of shares):
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
INCOME SHARES INCOME SHARES
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net Income as Reported.................... $301,725 $409,749
Shares Outstanding at Year End............ 890,689 885,048
Impact of Weighting Shares Purchased
During the Year......................... (2,483) (20,801)
-------- ------- -------- -------
USED IN BASIC EPS......................... 301,725 888,206 409,749 864,247
Dilutive Effect of Outstanding Stock
Options................................. 3,803 13,432
-------- ------- -------- -------
USED IN DILUTIVE EPS...................... $301,725 892,009 $409,749 877,679
======== ======= ======== =======
</TABLE>
Warrants to purchase 43,177 and 43,818 shares of common stock at $3.50 and $3.00
per share were outstanding during 1997 and 1996, respectively, but were not
included in the computation of diluted EPS because the exercise price was
greater than the average market price and considered antidilutive.
NOTE 13. RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY MATTERS
The Bank is restricted as to the amount of dividends which can be paid.
Dividends declared by national banks that exceed the net income (as defined) for
the current year plus retained net income for the preceding two years must be
approved by the Comptroller of the Currency. Regardless of formal regulatory
restriction, the Bank may not pay dividends that would result in its capital
levels being reduced below the minimum requirements shown below. Also, the Bank
is prohibited from paying dividends unless it has positive retained earnings.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirement can
initiate certain mandatory -- and possible additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve qualitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
F-40
<PAGE> 157
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. RESTRICTIONS ON RETAINED EARNINGS AND REGULATORY MATTERS (CONTINUED)
As of December 31, 1997, the most recent notification from the Comptroller of
the Currency categorized the Bank as well-capitalized under the regulatory
framework for prompt corrective action (there are no conditions or events since
that notification that management believes have changed the Bank's category). To
be categorized as well-capitalized, the Bank must maintain minimum ratios as set
forth in the table below. The following table also sets forth the Bank's actual
capital amounts and ratios:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
FOR CAPITAL PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISION
---------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
($000S) % ($000S) % ($000S) %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total Capital (to Risk
Weighted Assets)........ $3,478 14.7% $1,889 8.0% $2,361 10.0%
Tier 1 Capital (to Risk
Weighted Assets)........ $3,262 13.8% $ 944 4.0% $1,417 6.0%
Tier 1 Capital (to Average
Assets)................. $3,262 9.1% $1,435 4.0% $1,794 5.0%
AS OF DECEMBER 31, 1996
Total Capital (to Risk
Weighted Assets)........ $3,195 15.2% $1,684 8.0% $2,105 10.0%
Tier 1 Capital (to Risk
Weighted Assets)........ $2,946 14.0% $ 842 4.0% $1,263 6.0%
Tier 1 Capital (to Average
Assets)................. $2,946 9.4% $1,252 4.0% $1,565 5.0%
</TABLE>
NOTE 14. STOCK OFFERING AND WARRANTS
In September 1995, the Bank completed the sale of 66,818 shares of common stock
at $3.00 per share through a stock offering. The Bank's common stock has a $1.00
par value per share and the remaining proceeds are recorded as surplus net of
related costs. The Bank incurred $102,310 of costs associated with the offering,
net of interest earned on impounded funds.
Under terms of the offering, each share purchased entitles the stockholder to
one warrant to purchase one share of common stock. The warrant is exercisable
over a five-year period commencing upon the sale of the common stock with
exercise prices as follows: for the first year, from the completion of the sale
to the end of the first year, $3.00 per share; for the second year, $3.50 per
share; for the third year, $4.00 per share; for the fourth year, $4.50 per
share; and for the fifth year, $5.00 per share. During 1997, warrants were
exercised for 641 shares at $3.50. In 1996, warrants were exercised for 23,000
shares at
F-41
<PAGE> 158
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. STOCK OFFERING AND WARRANTS (CONTINUED)
$3.00 per share. As of December 31, 1997, warrants for 43,177 shares of common
stock are outstanding.
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
FINANCIAL ASSETS
The carrying amounts of cash, short term investments, due from customers on
acceptances, and Bank acceptances outstanding are considered to approximate fair
value. Short term investments include federal funds sold, securities purchased
under agreements to resell, and interest bearing deposits with Banks. The fair
values of investment securities, including available for sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
FINANCIAL LIABILITIES
The carrying amounts of deposit liabilities payable on demand, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed
maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long term debt is based on rates currently
available to the Bank for debt with similar terms and remaining maturities.
F-42
<PAGE> 159
AMERICAN INDEPENDENT BANK, N.A.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements. The
fair value of these financial instruments is not material.
The estimated fair value of the Bank's financial instruments at December 31,
1997 and 1996 is as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks................... $ 3,731 $ 3,731 $ 3,585 $ 3,585
Interest-bearing deposits in other
financial institutions................. 396 396 495 495
Federal funds sold........................ 3,920 3,920 2,000 2,000
Securities held to maturity............... 3,500 3,498 4,200 4,180
Loans, net................................ 20,914 20,956 18,981 18,878
Accrued interest receivable............... 238 238 181 181
Financial liabilities:
Deposits.................................. 30,206 30,206 26,970 26,970
Accrued interest payable.................. 87 87 95 95
</TABLE>
F-43
<PAGE> 160
- ---------------------------------------------------------
- ---------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR THAT WE
HAVE SPECIFICALLY REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 11
Use of Proceeds....................... 18
Accounting Treatment.................. 18
Capitalization........................ 19
Market Price of Common Stock and
Dividend Policy..................... 21
Management's Discussion and Analysis
of Results of Operations and
Financial Condition of First
Coastal............................. 22
Business of First Coastal............. 34
Directors, Officers and Significant
Employees........................... 45
Remuneration of Directors and
Officers............................ 48
Beneficial Ownership of Common
Stock............................... 50
Related Transactions.................. 53
The Proposed Acquisition of American
Independent Bank.................... 54
Unaudited Pro Forma Financial
Information......................... 55
Summary Historical Financial
Information of American Independent
Bank, N.A........................... 60
Management's Discussion and Analysis
of Results of Operations and
Financial Condition of American
Independent Bank, N.A............... 61
Supervision and Regulation............ 73
Description of Capital Stock.......... 76
Description of Units.................. 78
Description of Preferred Securities... 79
Description of Junior Subordinated
Debentures.......................... 91
Description of Guarantee and Expense
Agreements.......................... 100
Relationship Among Preferred
Securities, Junior Subordinated
Debentures, Guarantee Agreement and
Expense Agreement................... 103
Federal Income Tax Consequences....... 106
ERISA Considerations.................. 111
Underwriting.......................... 112
Validity of the Securities............ 115
Experts............................... 115
Where You Can Find More Information... 115
Index to Financial Statements......... F-1
</TABLE>
UNTIL MAY 27, 1999 ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
[FIRST COASTAL LOGO]
300,000 Units, each consisting of:
one share of
FIRST COASTAL BANCSHARES
Common Stock
and one
FIRST COASTAL CAPITAL TRUST
11 7/8% Cumulative Preferred Security
---------------
PROSPECTUS
---------------
PEACOCK, HISLOP, STALEY
& GIVEN, INC.
WEDBUSH MORGAN SECURITIES
FEBRUARY 26, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
